Edited version of your private ruling

Authorisation Number: 1011972183799

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Ruling

Subject: Apportionment of costs in respect of home loans

Question

Under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), does the Commissioner consider that the following formula is a fair and reasonable method for determining the extent of creditable purpose (ECP) of your acquisitions (costs) relating to your home loans?

ECP = A/ (A+B) x 100

Where:

A - total net balance sheet value of securitised home loans

B - total net balance sheet value of securitised and non securitised home loans

Decision

Yes, the Commissioner accepts that the above formula is a fair and reasonable method of determining the ECP of your acquisitions in respect of your home loans.

Relevant Facts

Securitisation Program

You provide home loans to clients in Australia. As the originator of the home loans, you are responsible for the day to day servicing of the home loans. You perform this function through your loan processing centres.

Your loan processing centres manage all aspects of customer interaction through your branch, telephone and internet banking networks. This includes payment processing, statementing, managing changes to payments and loan amounts, partial loan security discharges, loan security substitutions, consents for subsequent mortgages, arrears management and other related functions.

In respect of your home loans, you operate a mortgage backed securitisation program. This program is broadly in line with the description of a typical securitisation program as provided in paragraphs 92-125 of Goods and Services Tax Ruling 2004/4 (GSTR 2004/4).

Your securitisation program involves setting up a number of trusts under a Master Trust Deed, which act as 'Special Purpose Vehicles' (SPV) in the securitised funding arrangements.

You assign an equitable interest in some of your Australian home loans to these trusts, which in turn issue securitised bonds to bondholders both offshore and in Australia.

You are appointed as the 'servicer' of the securitised home loans, which means you are responsible for the day to day servicing of the home loans. As with non securitised home loans, you perform this function through your loan processing centres.

In consideration for the servicer services you provide to the SPVs, you are paid a fee, payable monthly or quarterly in arrears, known as the 'servicer fee'.

As the servicer, you must pay from your own funds all costs incurred in connection with servicing the securitised home loans, except for certain specified costs.

In relation to your securitised and non securitised home loans, you incur the following costs on which goods and services tax (GST) is incurred:

(a) loan brokerage (initial and trail) and lender's mortgage insurance (LMI);

(b) collections;

(c) loan maintenance;

(d) customer support through call centres;

(e) issue of statements;

(f) arrears management;

(g) document and security retention;

(h) normal business operating costs such as contract staff, premises, information technology (IT) and other miscellaneous costs.

The costs that relate to the ongoing servicing of securitised home loans are all the costs identified above at (b) to (h). You do not argue that loan brokerage and lender's mortgage insurance costs relate to ongoing servicing of securitised home loans, as they are generally incurred before the debts are equitably assigned to the SPVs.

Reasons for the decision

Relevant GST provisions

Section 11-20 of the GST Act provides that an entity is entitled to an input tax credit for a creditable acquisition that it makes.

Section 11-5 of the GST Act sets out the meaning of a creditable acquisition and states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide or a liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

* denotes a term that is defined in the GST Act.

The first requirement for making a creditable acquisition is that the acquisition must be made for a creditable purpose. The meaning of creditable purpose is given under section 11-15 of the GST Act which states:

Meaning of creditable purpose

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

In this case, you make acquisitions which relate to carrying on your enterprise. Therefore, subsection 11-15(1) of the GST Act is satisfied. However, according to paragraph 11-15(2)(a) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that it relates to making supplies that are input taxed.

Division 40 of the GST Act lists the supplies that are input taxed and subsection 40-5(1) of the GST Act provides that a financial supply is input taxed.

It is recognised that the supplies that you make are:

§ input taxed financial supplies, being the home loans provided to clients in Australia, for which you are the originator of the loan, and

§ taxable supplies of servicer services, where you are appointed as the 'servicer' of a securitised loan.

As such, in respect of the acquisitions listed in the facts at items (b) through to (h), it is recognised that the acquisitions you make are both for a creditable purpose (for making taxable supplies) and an input taxed purpose (for making financial supplies). These acquisitions are therefore partly creditable.

In respect of such acquisitions, the amount of input tax credits to which you are entitled, depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act.

Subsection 11-30(3) of the GST Act requires that you should calculate the input tax credit by application of the following formula:

Full input tax credit x Extent of creditable purpose x Extent of consideration

Where:

extent of consideration is the extent to which you provide or liable to provide the consideration for the acquisition, expressed as a percentage of the total consideration for the acquisition.

extent of creditable purpose is the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition.

full input tax credit is what would have been the amount of the input tax credit for the acquisition, if it had been made solely for a creditable purpose and you had provided or had been liable to provide all of the consideration for the acquisition.

Application of GSTR 2006/3

Goods and Services Tax Ruling GSTR 2006/3 (GSTR 2006/3) refers to determining the extent of creditable purpose for providers of financial supplies and provides guidance on the methods that can be used to calculate the extent of creditable purpose.

Paragraph 27 of GSTR 2006/3 provides that to calculate the amount of your input tax credits, you will need to make a fair and reasonable estimate of the extent of creditable purpose for your acquisitions and importations. The requirement that your estimation is fair and reasonable is a prerequisite for any decision you make.

Paragraph 33 of GSTR 2006/3 provides that following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to be:

§ fair and reasonable;

§ reflects the intended use of that acquisition or in the case of an adjustment, the actual use; and

§ be appropriately documented in your individual circumstances.

Paragraph 35 of GSTR 2006/3 provides that if direct methods are available to you, the Commissioner's view is that they will best reflect the intended or actual use of your acquisitions for the purposes of this ruling. To the extent that it is not possible or practicable to use a direct method, you should use some other fair and reasonable basis, which might include an indirect estimation method.

Paragraph 102 of GSTR 2006/3 provides that indirect methods attempt to estimate the use of acquisitions and importations for creditable purposes by taking into account factors or characteristics that are not directly referable to the use of the particular acquisition. For this reason they may not give as accurate a measure of the creditable purpose of the acquisition or importation as direct methods.

Paragraph 104 of GSTR 2006/3 provides that the indirect estimation methods listed below and discussed in paragraphs 102-130 of this ruling are examples of indirect methods, which may be appropriate in your circumstances. They are not the only methods which can be used. The examples are:

§ an overall entity based formula, based on the proportion of input taxed and non-input taxed revenues of the entity as a whole;

§ revenue based formulas, which are more narrowly targeted than the entity based general formulas;

§ a combination of revenue based formulas with direct methods; and

§ non revenue based indirect estimation methods.

Paragraphs 117 and 118 of GSTR 2006/3 provide that if a revenue based formula is not suited to your particular business as a financial supply provider, then you may modify it to better reflect your activities. An acceptable alternative would be to use the basic revenue based formula in paragraph 109 of this ruling as a basis, but to use something other than dollar value in the formula.

Proposed formula

You have advised that in determining the extent of creditable purpose, you considered estimations using different bases such as time and revenue. However, it is your view that the proposed formula in question is the most appropriate method of estimating the ECP.

In this case, the proposed formula takes into account the proportion of the home loans that are securitised whilst also taking into account the value of the securitisation itself by adding the net balance sheet value of the securitised loans to the denominator.

Conclusion

In this case the acquisitions made by you relate to both supplying servicer services to SPVs and to the ongoing services to borrowers of the originating loans. As such your acquisitions have a duality of purpose and are required to be apportioned on a fair and reasonable basis.

In your circumstances we consider that the ECP method you have adopted incorporates the principles outlined and endorsed in GSTR 2006/3. Consequently, the formula in question is considered to provide a fair and reasonable basis of apportionment of input tax credits that are available to you in accordance with Division 11 of the GST Act.