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Ruling

Subject: GST and apportionment

Question 1

Is the revised apportionment methodology set out in the steps below, fair and reasonable for calculating the amount of input tax credits that Entity A is entitled to claim for the purpose of Division 11 of the A New Tax System (Goods And Services Tax) Act 1999 (GST Act)?

Advice/Answers

The Commissioner confirms that the apportionment methodology set out in Steps 1 to 3b below is fair and reasonable for calculating the amount of input tax credits that Entity A entitled to claim for the purposes of Division 11 of the GST Act.

Furthermore, the Commissioner confirms that the sectorised revenue method outlined in steps 3a and 3b below is a fair and reasonable method to calculate the amount of input tax credits that Entity A is entitled to for acquisitions relating to credit and debit card mixed acquisitions for the purpose of Division 11 of the GST Act.

However, a review of the methodology on a regular basis is required. While there is no prescriptive for how often a review of the process is necessary, any significant impact on the enterprise or a shift in the business of the enterprise may require a detailed review process.

Question 2

Can Entity A apply the revised apportionment methodology and claim input tax credits pursuant to the revised apportionment methodology from 1 July 2006 to 30 June 2011.

Advice/Answers

Yes, Entity A can apply the revised apportionment methodology and claim input tax credits pursuant to the revised apportionment methodology for the quarterly tax periods to 30 June 2011.

Relevant facts

· Entity A is registered for GST.

· Entity A has exceeded the financial acquisitions threshold.

· Its principle activities are offering a range of financial services to its members, including:

o loans,

o various accounts,

o credit cards,

o general insurance and

o financial advisory services.

· Entity A provides a range of accounts which it has classified as financial supplies.

· Entity A also provides lending services and it issues credit cards

· Entity A provides services including:

o selling insurance products offered by other entities to its members for a commission, and

o the sale of foreign currency as agents for providers of foreign currency to its own member base.

· Entity A also makes supplies in relation to its credit card operations, particularly through how it generates interchange revenues as well as merchant services fees

· Entity A provides supplies in the course of servicing loans, which Entity A assigned to securitisation arrangements including:

o debt collection services, and

o general management of outstanding receivables on behalf of the assignee of the loans.

· Entity A also makes supplies in relation to a product which provides entitlements to products on advantageous terms to Entity A's members who exceed a certain age.

· Entity A also provides various services to its members which includes those members who reside overseas and utilise their products.

· There is also a high percentage of overseas transactions as Entity A members use their Entity A accounts and various cards when travelling overseas.

Current Methodology

The methodology currently employed by Entity A involves a calculation which uses a revenue formula to calculate extent of creditable purpose (ECP). The formula is:

Revenue (other than revenue from input taxed supplies)

Total revenue (including revenue related to input taxed supplies)

The formula results in a fraction of acquisitions made for a creditable purpose. This method involved applying a direct estimation of use of some acquisitions to make taxable supplies and input taxed supplies.

The current methodology involves the division of acquisitions into 'Single' and 'Mixed' categories. The Single category refers to single purpose acquisitions of four kinds, being:

(a) those directly allocated wholly to the making of taxable supplies giving an ECP of 100%

(b) those directly allocated wholly to making of input taxed supplies, which do not constitute a reduced credit acquisitions (RCA), giving rise to an ECP of 0%

(c) those directly allocated wholly to the making of input taxed supplies which constitute an RCA, giving rise to an ECP of 75%

(d) those wholly of a private or domestic nature, giving rise to an ECP of 0%

The Mixed category consists of mixed purpose acquisitions of two kinds:

(a) those that were not a RCA and related to making both taxable supplies and input taxed supplies. This gives rise to a recovery equal to the relevant business ECP rate at the time of the acquisition.

(b) those that were a RCA and related to making both taxable supplies and input taxed supplies. This gives rise to a recovery rate equal to the RCA rate of 75% supplemented by the relevant business ECP rate at the time of the acquisition.

This mix of supplies has resulted in the need to apportion input tax credits on acquisitions relating to the making of these supplies.

Revised Methodology

Entity A has proposed a new apportionment methodology based on the measurement of the staff activity as evidenced by a series of staff activity reports. The proposed apportionment method uses costs of staff hours to indicate what staff members do and the cost of that reflects the usage of costs generally.

Entity A proposes a mix of both direct and indirect methods to produce a means of calculating ECP.

Step 1 - Direct allocation element

The direct allocation element corresponds, in part, to the breakdown in the current methodology of the 'Single' category of acquisitions. Thus it segregates these acquisitions as follows:

(a) those directly allocated wholly to making of taxable (and GST-free) supplies, giving an ECP of 100%

(b) those directly allocated wholly to the making of input taxed supplies, which do not constitute an RCA, giving rise to an ECP of 0%

(c) those directly allocated wholly to the making of input taxed supplies which constitute an RCA, giving rise to an ECP of 75%, and

(d) those wholly of a private or domestic nature, giving an ECP of 0%.

A similar methodology was used to identify and then segregate the acquisition in the 'Mixed' category in the current methodology to various activities. These activities were:

(a) credit card,

(b) debit cards,

(c) deposit-taking and

(d) residual.

The new methodology deals with all of the Mixed categories of acquisitions with a new indirect method as described below.

Step 2 - Indirect allocation element

Entity A drew upon detailed activity report results of business units which provided a historical analysis with ongoing application to the activities carried out by those units.

These activity reports were conducted for the 2006, 2007 and 2008 financial years and involved team leaders determining the time staff spent on various activities.

Step 2a - Activity report based ECP rates - over three financial years

The activity report based recovery rates were derived from an analysis of staff activity, drawing upon hours spent on activities. These figures then enabled the calculation of an overall business ECP.

The staff reports were conducted on the basis of attributing the amount of salary costs incurred in a specific business unit to particular activities. The business units involved were:

(a) Call centre functions

(b) Member service matters

(c) Funds Transfer and Cash Handling

(d) Insurance Brokerage

(e) Credit Advancement

Activities were correlated to making supplies that were:

· input taxed,

· GST-free and

· Taxable.

It was also possible to specify particular products which involved certain types of supplies. Therefore:

· Some activities were involved in making input taxed supplies.

· Some activities were involved in making of taxable supplies.

· Some activities were involved in making GST-free supplies.

Activities which involved both input taxed and taxable/GST-free supplies have been classified as 'Mixed' supplies.

The 'residual' of activities were also identified and classified as Mixed supplies. These involve the making, whether directly or indirectly, of a mixture of different supplies such as support and administration activities, where no immediately identifiable supplies (or products) are made.

The results for each of the activity reports were provided to us in the form of a detailed table.

Activity Report Based ECP Rates

To arrive at the ECP rate the following formula was used against each of the activity reports:

Total allocated staff costs incurred in making taxable and GST-free supplies

Total allocated staff costs incurred in making input taxed, taxable and GST-free supplies

The abovementioned ECP rates were applied to the Mixed category of Acquisitions. This provided new, net amounts (calculated on an annual basis) for the three financial years. A summary of the amounts now being claimed by Entity A as refunds were provided.

Step 2b - Averaged ECP rates - three financial years

Entity A proposes using an average of three financial years to arrive at a percentage. The average is calculated thus:

(year 1 % + year 2 % + year 3 %) = average %

3

Reviews of ECP rates.

Entity A propose to revise their methodology every 1-2 years by collecting and reviewing the staff activity reports at the end of a financial year.

A review will also be prompted in the event of a merger, demerger sale or acquisition of a substantial part of the business.

Step 3 - Additional Recovery Rates for Particular Mixed Category Acquisitions

Entity A submits that a 'sectorised revenue method' is also suitable for Mixed category acquisitions associated with supplies made in the course of:

· credit card related activities and

· debit card related activities.

Sectorised Revenue Method

Entity A is able to calculate an ECP based on revenues generated from its debit card and credit card activities.

It is proposed that the ECP will be calculated as follows:

Revenue from taxable and GST-free supplies covered by the activity

Total Revenue from input taxed, taxable and GST-free supplies covered by the activity

Step 3a -Credit Card Activity Mixed Category Acquisitions

The revenue earned on credit card activities is:

· Commissions received as revenue from taxable supplies

· Net interest and fees associated with overseas transactions (GST-free)

· Net interest from local credit card transactions and all other fees (input taxed)

Step 3b -Debit Card Activity Mixed Category Acquisitions

The revenue earned on certain debit card activities is:

· Commissions received as revenue from taxable supplies

· Fees associated with overseas transactions (GST-free)

· Fees charged for local transaction. (input taxed)

Step 3c - Deposit Activity Mixed Category Acquisitions

Entity A has not recovered any input tax credits (aside from RITCs in connection with these acquisitions) since 1 July 2000. This was on the basis that there was an exclusive relationship with making an input taxed financial supply, being the making available of a deposit account.

The fact that Entity A relies practically exclusively for its funding on deposit accounts leads Entity A to suggest that it apply to the deposit related acquisitions under consideration its general rates. If this is unacceptable to the Commissioner, Entity A proposes to put this matter on hold.

Relevant legislative provisions

Schedule 1 to the Taxation Administration Act 1953

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5.

Section 9-30.

Section 11-15.

Section 11-5 .

Section 11-20.

Section 38-190.

Section 40-5

A New Tax System (Goods and Services Tax) Regulations 1999.

Sub regulation 40-5.09(1)

Item 1, 2, 3 of sub regulation 40-5.09(3)

Regulation 40-5.12.

Reasons for decision

Question 1

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes.

An entity makes a creditable acquisition under section 11-5 of the GST Act when that entity:

(a) acquires anything solely or partly for a creditable purpose; and

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

(c) the entity provides, or is liable to provide, consideration for the supply; and

(d) the entity is registered or required to be registered.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Under subsection 11-15(2) of the GST Act 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.

Accordingly, to the extent that acquisitions made by Entity A relate to making supplies that would be input taxed, they are not acquired for a creditable purpose. Therefore, such acquisitions are not, to that extent, creditable acquisitions and Entity A is not entitled to input tax credits.

The exceptions to this general rule as provided for in section 11-15 of the GST Act are considered for the purpose of the proposed new methodology. Entity A has exceeded the financial acquisitions threshold provided for in subsection 11-15(4) of the GST Act. In this connection, the acquisition that relates to making financial supplies may attract a reduced input tax credit under Division 70 even though no input tax credit would arise under Division 11.

Goods and Services Tax Ruling GSTR 2006/3: Goods and Services Tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of your acquisitions or importations.

Paragraph 44 states that:

44. For the purpose of claiming input tax credits, you need to estimate the extent to which the acquisition or importation is for a creditable purpose. This means that at the time of acquisition or importation, it is your planned use of the acquisition for a creditable purpose that is relevant in working out your input tax credit. You may estimate the planned use of the acquisition or importation based on:

· records you already have available from a previous period;

· records kept since you made the acquisition or importation, but before you lodge your BAS, including your actual use (full or partial) of the acquisition;

· records kept for some other purpose of the enterprise, for example income tax, management accounting, profitability analysis, intra-entity transfer charging or cost accounting;

· your previous experience concerning the usage of similar acquisitions;

· your business plan; or

· any other fair and reasonable basis.'

GSTR 2006/3 referred to the High Court judgement in Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; AITR 236 and at paragraphs 73 and 74 noted the following in relation to apportionment:

73. 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;

· reflect the intended use of that acquisition (or in the case of an adjustment, the actual use), and

· be appropriately documented in your individual circumstances.

74. If you allocate or apportion acquisitions or importations using a method which meets all these principles, the Commissioner will not consider the fact that you choose the method that gives the most advantageous result to be, of itself, an arrangement to which Division 165 applies.

Methods of calculating the extent of creditable purpose are discussed in paragraphs 80 and 81 of GSTR 2006/3:

80. To calculate the amount of your input tax credits, you need to adopt a method of estimating the extent of creditable purpose of your acquisitions and importations. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make.

81. The Commissioner considers that the use of direct methods, including direct estimation … best accords with the basic principles explained above (see paragraph 73). If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method.

The ruling discusses the direct estimation methods at paragraphs 93 and 94:

93. Direct estimation methods are preferable to indirect estimation methods ………… particularly if the direct estimation method used involves a detailed measure of the intended (or actual) use of the acquisition or importation. Measures based on inherent characteristics of, or factors directly connected with, the acquisition usually give a fair reflection of the use of the thing. These factors are sometimes referred to in management accounting and costing systems as 'drivers'.

94. The use of such characteristics or factors provides an estimation of a direct link between the acquisition or importation and its (or its intended) application. Some examples of these factors and characteristics are (relevantly):

· distance…

· time…

· volume…

· space…

· staff numbers (for example, measuring the actual use of acquisitions by identified staff).

Entity A may choose its own apportionment method, but the method it chooses needs to be fair and reasonable in the circumstances of the enterprise and must appropriately reflect the intended or actual use of its acquisitions or importations.

In this regard the Commissioner will accept any basis of apportionment of acquisitions which are applied indifferently to all supplies made, provided it is fair and reasonable in the given circumstances. In Entity A's circumstances, the ATO considers that on the basis of the information provided, the new methodology that it proposes to use which incorporates direct methods and indirect methods as outlined in GSTR 2006/3, provides a fair and reasonable basis for calculating the extent of creditable purpose for Entity A's acquisitions under Division 11 of the GST Act.

The new methodology employing steps 1 to 3c is considered to be fair and reasonable applying at the time of issuing this ruling.

If your circumstances should change, or an economic event occurs which results in a distortion of the percentages they will need to be excluded from the formula and you may be required to review this methodology to determine if it remains fair and reasonable.

However, you are required to review your methodology on a regular basis. While there is no prescriptive for how often a review of the process is necessary, any significant impact on the enterprise or a shift in the business of the enterprise may require a detailed review process.

Question 2

Detailed reasoning

On the basis of the information Entity A has submitted we accept that the revised methodology as described above provides a fair and reasonable basis for determining the extent of creditable purpose of Entity A's acquisitions.

ATO Interpretive Decision ATO ID 2008/75 - GST and a retrospective application of a changed apportionment method under Division 11 (ATO ID 2008/75) provides that an entity can change its apportionment method, and revise an earlier net amount, by applying a new apportionment method which is also fair and reasonable. The entity must notify the Commissioner of this change within four years after the end of the original tax period under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Section 93-5 of the GST Act provides a time limit on an entitlement to an input tax credit. Section 93-5 of the GST Act provides that an entity ceases to be entitled to an input tax credit for a creditable acquisition to the extent that it has not taken into account in working out its net amount for:

· The tax period to which the input tax credit would be attributable under subsection 29-10(1) or (2) of the GST Act or

· Any other tax period for which you give to the Commissioner a GST return during the period of 4 years after the day on which you were required to give to the Commissioner a GST return for the tax period referred to above.

Where the entity does not take an input tax credit into account in this time period, it generally ceases to be entitled to the credit.

There are however exceptions as set out in section 93-10 of the GST Act to the time limit on entitlement to input tax credits. Subsection 93-10(3) of the GST Act relevantly provides that you do not cease under section 93-5 of the GST Act to be entitled to an input tax credit to the extent an entity notifies the Commissioner of their entitlement under subsection 105-55(1) in Schedule 1 to the Taxation Administration Act 1953.

Entity A notified the Commissioner of its entitlement to input tax credits on the 24 September 2010. The Commissioner therefore confirms that Entity A can apply the revised apportionment methodology and claim input tax credits where appropriate pursuant to this revised apportionment methodology for the quarterly tax periods from 1 July 2006.