Edited version of your private ruling

Authorisation Number: 1012033129338

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: GST and Trustee Services

Question 1

Are trustee and performance fees incurred by Entity A for the supply of trustee and investment management services subject to the Goods and Services Tax (GST)?

Answer

Yes, the trustee and performance fees are subject to GST.

Question 2

Is Entity A entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the acquisition of offshore investments from foreign vendors?
Answer

Yes, Entity A is entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions meet all the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 3

Is Entity A entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the acquisition of offshore investments from Australian resident vendors?

Answer

No, Entity A is not entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the acquisition of offshore investments from Australian resident vendors.

Question 4

Is Entity A entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the operation of an Australian bank account?

Answer

No, Entity A is not entitled to claim input tax credits for GST paid on acquisitions that relate to its operation of an Australian bank account.

Question 5

If the answer to Issue 4 is no, then:

(a) Is it correct to say that the trustee fee paid by Entity A does not relate directly or indirectly to, and has no connection with, the operation of Entity A's Australian bank account?

Answer

This is considered to be a pricing issue. The Commissioner of taxation (Commissioner) does not provide advice on how you should price your services.

(b) If the answer to Issue 5(a) is no, would the answer be different if the cash balance held in Entity A's Australian bank account was excluded from the definition of Asset used for the purposes of calculating the trustee fee?

Answer

This is considered to be a pricing issue. The Commissioner does not provide advice on how you should price your services.

(c) Is it correct to say that the performance fee does not relate directly or indirectly to, and has no connection with, the operation of Entity A's Australian bank account?

Answer

This is considered to be a pricing issue. The Commissioner does not provide advice on how you should price your services.

(d) If the answer to Issue 5(c) is no, would the answer be different if any interest income derived from Entity A's Australian bank account was excluded from the measure of distributions used for the purposes of calculating the performance fee?

Answer

This is considered to be a pricing issue. The Commissioner does not provide advice on how you should price your services.

(e) Is a revenue-based apportionment method which uses the interest income derived from Entity A's Australian bank account plus income derived on the interests in Foreign Funds acquired by Entity A from an Australian vendor as a percentage of the total income of the fund, fair and reasonable for the purpose of calculating Entity A's entitlement to input tax credits in relation to the acquisition of the performance fee component of Trustee Services?

Answer

Yes. The revenue-based apportionment is considered fair and reasonable for calculating Entity A's entitlement to input tax credits in relation to the performance fee component of Trustee Services.

Question 6

Where the trustee fee paid by Entity A relates directly or indirectly to both creditable and non-creditable purposes, is an asset-based apportionment using the reported asset value of the Assets a fair and reasonable apportionment method of the acquisition for the purpose of calculating Entity A's entitlement to input tax credits?

Answer

An asset-based approach may be appropriate depending on the circumstances that apply. To the extent that any asset-based method appropriately reflects the intended use of the relevant acquisition/s it will be considered to be fair and reasonable.

Question 7

Do the trustee fee and the performance fee paid by Entity A qualify as reduced credit acquisitions for the purposes of regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Answer

Yes, the trustee fee and the performance fee paid by Entity A qualify as reduced credit acquisitions for the purposes of regulation 70-5.02 of the GST Regulations.

Relevant facts and circumstances

Entity A is an Australian resident unlisted unit trust.

Entity A is registered for GST.

Entity B is the trustee for Entity A and is an Australian resident company registered for GST.

Entity A has a number of unit holders and applications for new units in the fund are now closed.

Entity A invests in a portfolio which consists of Foreign Funds whose managers are based overseas and whose illiquid assets are believed to be located overseas.

Entity A does not have direct ownership of any of the underlying assets of a Foreign Fund in which it has invested.

Entity A earns income from three main sources. These are:

o interest revenue earned on an Australian bank account

o income derived on the interests in Foreign Funds acquired from an Australian vendor; and

o income derived on the interests in Foreign Funds acquired from a foreign vendor.

Entity A was established with a view to purchasing its investments from vendors domiciled overseas. It will generally use brokers that are also based overseas.

The non-resident vendors are not based in Australia at the time the Foreign Fund interests are acquired by Entity A and, as far as Entity A or Entity B is aware, the non-resident vendors are not registered, or required to be registered, for Australian GST purposes.

Entity A acquisition of the portfolio in Foreign Funds from an Australian resident vendor is minor. Entity A does not expect to make any further acquisitions from Australian resident vendors.

Entity B will remit to unit holders any distributions received from the Foreign Funds it has acquired and settled as soon as practicable once those distributions have been remitted to its bank account.

Entity B, in its capacity as trustee for Entity A is responsible for managing and selecting investments for Entity A, as well as providing administration services to Entity A. These services are referred to as Trustee Services.

Entity B levies a 'trustee fee' for its ongoing monitoring and general management of the unit trust and provision of Trustee Services.

Entity B levies a 'performance fee' only after the required performance hurdle has been met.

For the purposes of determining the reported asset value of the fund the assets (Assets) consists of:

o the reported asset value of the interests in Foreign Funds acquired from foreign vendors,

o the reported asset value of the interests in Foreign Funds acquired from an Australian vendor; and

o the cash balance held in Entity A's Australian bank account.

For GST purposes Entity A will exceed the financial acquisition threshold.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-15(1) & (2)

A New Tax System (Goods and Services Tax) Act 1999 Section 40-5

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190(1)

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 40-5.09(3)

A New Tax System (Goods and Services Tax) Regulations 1999 Schedule 7

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 70-5.02(2)

Reasons for decision

Question 1

Are trustee and performance fees incurred by Entity A for the supply of trustee and investment management services subject to GST?

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states as follows:

You make a taxable supply if:

you make the supply for *consideration; and

the supply is made in the course or furtherance of an *enterprise that you *carry on; and

the supply is *connected with Australia; and

you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

* denotes a term defined in section 195-1 of the GST Act.

In order for there to be a taxable supply all the requirements of section 9-5 of the GST Act must be satisfied.

Entity A has advised that the requirements of section 9-5 of the GST Act are met.

Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) explains that the supply of acting as the trustee of an entity is not a financial supply and will constitute a taxable supply provided the requirements of section 9-5 of the GST Act are met.

Accordingly, the supply of Trustee Services by Entity B is a taxable supply to the extent that these services are provided By Entity B in its capacity as trustee for Entity A. To this extent, the trustee and performance fees in relation to Trustee Services will be subject to GST.

Question 2

Is Entity A entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the acquisition of offshore investments from foreign vendors?

Detailed reasoning

Section 11-5 of the GST Act 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 are liable to provide, *consideration for the supply; and
(d) you are *registered, or *required to be registered.

Subsections 11-15(1) and (2) of the GST Act defines creditable purpose as follows:

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

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.

Section 40-5 of the GST Act provides that a financial supply is input taxed.

Entity A invests in a portfolio of Foreign Funds. Item 10 of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides that the provision, acquisition or disposal of an interest in Securities will be a financial supply. Furthermore, Part 8 of schedule 7 to the GST Regulations includes "interests in a partnership" as an example of item 10 of subregulation 40-5.09(3).

As such the acquisition-supply of Foreign Funds from foreign vendors by Entity A would constitute an input taxed financial supply.

Section 38-190(1) of the GST Act sets out supplies that are GST-free. Item 2 in particular provides that supplies are GST-free to the extent that the supply is made to a non-resident who is not in Australia when the thing supplied is done and the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

It has been submitted by Entity A that by acquiring interests in Foreign Funds from non-resident vendors, it is making a supply to a non-resident:

· that does not involve the supply of work physically performed on goods and is not a supply directly connected with real property situated in Australia; and

· where the non-resident is carrying on an enterprise but is not registered or required to be registered for GST.

Accordingly it is submitted that the supply of acquiring interests in the Foreign Funds from a non-resident vendor meets the requirements under Item 2 of Section 38-190(1) of the GST Act and the acquisition supply will constitute a GST-free supply. As such, Entity A will be entitled to claim an input tax credit to the extent it relates to the GST-free supply.

In this case the Commissioner agrees that Entity A will be entitled to claim an input tax credit on acquisitions to the extent they relate to making GST-free supplies.

Where a supply is both GST-free and input taxed, the supply is treated as being GST-free pursuant to section 9-30(3) of the GST Act and acquisitions in relation to these supplies will be creditable acquisitions to the extent that they meet the requirements of section 11-5 of the GST Act.

Subsection 11-5(b) of the GST Act requires that the supply of the thing to you needs to be a taxable supply. Question 1 established that the provision of Trustee Services to Entity A is a taxable supply to the extent that these services are provided by Entity B in its capacity as trustee for Entity A.

As such, Entity A will be entitled to claim input tax credits for GST paid on acquisitions to the extent those acquisitions, including the acquisitions of Trustee Services, meet all the requirements of section 11-5 of the GST Act.

Question 3

Is Entity A entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the acquisition of offshore investments from Australian resident vendors?

Detailed reasoning

Goods and Services Tax Ruling GSTR 2004/7 examines when a supply is made to a 'non-resident' or other 'recipient' of a supply who is 'not in Australia when the thing supplied is done' for the purposes of item 2 and 3 in the table in subsection 38-190(1) of the GST Act.

On occasion Entity A acquired a portfolio of investments in Foreign Funds from an Australian resident vendor. Whilst Entity A make a financial supply by acquiring interests in Foreign Funds, the recipient of the supply is an Australian resident vendor, and the vendor is in Australia in relation to the supply. As such the acquisition supply is made to an Australian resident.

Based on this, Entity A submit that the acquisition of interests in Foreign Funds from Australian resident vendors by Entity A are not GST-free supplies and Entity A is not entitled to claim input tax credits in relation to GST paid on these acquisitions.

In this case, the Commissioner agrees with the submission that Entity A will not be entitled to claim the input tax credit on acquisitions to the extent the acquisition supply is made to an Australian resident vendor. That is, Entity A will be making acquisitions which relate to making supplies that are input taxed and paragraph 11-15(2)(a) of the GST Act is satisfied. Therefore Entity A does not make a creditable acquisition according to section 11-5 of the GST Act.

Question 4

Is Entity A entitled to claim input tax credits for GST paid on acquisitions to the extent that those acquisitions relate to the operation of an Australian bank account?

Detailed reasoning

It is submitted that Entity A will not be entitled to claim an input tax credit for GST on acquisition, including acquisition of Trustee Services from Entity B, to the extent that those acquisitions relate to the operation of an Australian bank account. This is on the basis that Entity A will not be making the acquisitions for a creditable purpose.

Based on the facts, the Commissioner agrees with the submission that Entity A will not be entitled to claim an input tax credit for acquisition made in relation to the operation on an Australian bank account.

As outlined in question 2, the first requirement of a creditable acquisition is that you acquire anything solely of partly for a creditable purpose. Further according to 11-15(2)(a) of the GST Act you do not acquire a thing for a creditable purpose to the extent that it related to making supplies that would be input taxed.

Item 1 of subregulation 40-5.09(3) of the GST Regulations provides that the provision, acquisition or disposal of an interest in an account made available by an Australian ADI in the course of its banking business is an input taxed financial supply by the Australian ADI.

Following from this, any acquisitions that Entity A makes in relation to this input taxed financial supply to it of an Australian bank account will be in relation to its input taxed supply and according to paragraph 11-15(2)(a), is not for a creditable purpose.

In some instances, an acquisition is not treated, for the purposes of paragraph 11-15(2)(a), as relating to making supplies that would be input taxed. In particular, where an entity satisfies subsection 11-15(4) of the GST Act it may make an acquisition for a creditable purpose even though it is relating to an input taxed supply. However, based on the facts in this case, Entity A exceeds the relevant financial acquisitions threshold and will therefore not satisfy the necessary requirements to fall within subsection 11-15(4) of the GST Act.

Consequently, the acquisitions made by Entity A in relation to the Australian bank account is treated as an input taxed financial supply and is not made for a creditable purpose according to section 11-15 of the GST Act. This is irrespective of the balance held in the account. Therefore, acquisitions in relation to the operation of the Australian bank account will not be creditable acquisitions and Entity A will not be able to claim input tax credits in relation to those acquisitions.

Question 5

If the answer to Issue 4 is no, then:

Is it correct to say that the trustee fee paid by Entity A does not relate directly or indirectly to, and has no connection with, the operation of Entity A's Australian bank account?

Detailed reasoning

The expression "trustee" as defined in the glossary to GSTR 2002/2 is "a person who holds the legal title to property for the benefit of another or others".

Paragraphs 512 and 513 of Goods and Services Tax Ruling, GSTR 2004/1, Goods and services tax: reduced credit acquisitions (2004/1) state as follows:

512. The duties of the trustee of a trust or superannuation fund are the fiduciary obligations owed by an entity as trustee to beneficiaries or members as a consequence of having trust property vested in them.

513. A trustee may act in a number of capacities (such as, fund manager, administrator, trustee). The services of the trustee acting in each of these capacities may be acquired as a separate and distinct service. In reality, in providing a single supply of services, a trustee may act in all of these capacities.

The extent to which a trustee is required to perform its duties is a commercial decision between the parties involved. For instance a trustee may only perform duties associated with the administration of the trust. Alternatively, it may undertake fund management and investment services as well as administration services for the trust.

Entity A has advised that the trustee fee is paid by Entity A as consideration for the Trustee Services provided by Entity B in relation to the acquisition of the funds interest in Foreign Funds and the ongoing monitoring and management of those services.

How these trustee services are priced, that is the parameters used to determine the quantum of trustee fees, is a commercial decision made by the parties involved. As such, a decision to include (or not to include) services provided in relation to the opening and maintaining of a bank account as trustee services and then to charge a fee (or not) directly or indirectly for these services, is a commercial decision to be made by the parties involved.

The Commissioner does not provide advice on how Entity B should price their services.

If the answer to Issue 5(a) is no, would the answer be different if the cash balance held in Entity A's Australian bank account was excluded from the definition of Asset used for the purposes of calculating the trustee fee?

Detailed reasoning

As per 5(a) any pricing decision for a service, in this case trustee fees for Trustee Services provided, is a commercial decision undertaken by the parties involved. The Commissioner does not provide advice on how you should price your services and therefore what should be included or excluded from the calculation of a fee for a service performed.

Is it correct to say that the performance fee does not relate directly or indirectly to, and has no connection with, the operation of Entity A's Australian bank account?

Detailed reasoning

Entity A has advised the performance fee is an additional amount that may be paid by Entity A to Entity B as consideration for the Trustee Services provided by Entity B in circumstances where the unit holder return exceeds the specified hurdle return. As such the performance fee is another component of the fees charged by Entity B for Trustee Services it provides to Entity A. The same arguments that apply to trustee fee as discussed in 5(a) above will apply to performance fees. The factors used to determine the quantum of the performance fees is a commercial decision.

The Commissioner does not provide advice on how to price services.

If the answer to Issue 5(c) is no, would the answer be different if any interest income derived from Entity A's Australian bank account was excluded from the measure of distributions used for the purposes of calculating the performance fee?

Detailed reasoning

As per part (c) any pricing decision for a service, in this case performance fees for Trustee Services provided, is a commercial decision to be undertaken by the parties involved. The Commissioner does not provide advice on how Entity B should price their services and therefore what should be included or excluded from the calculation of a fee for a service performed.

Is a revenue-based apportionment method which uses the interest income derived from Entity A's Australian bank account plus income derived on the interests in Foreign Funds acquired by Entity A from an Australian vendor as a percentage of the total income of the fund, fair and reasonable for the purpose of calculating Entity A's entitlement to input tax credits in relation to the acquisition of the performance fee component of Trustee Services?

Detailed reasoning

As discussed in question 4, any acquisitions in relation to the establishment and maintenance of Entity A's Australian bank account will be input taxed. If Entity A decide that a part of performance fees relates to this activity, then apportionment to determine the extent of creditable purpose of the performance fee will be required.

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), provides guidance on methods that can be used to determine the extent of creditable purpose for acquisitions. The ruling provides that any method used in calculating creditable purpose must be fair and reasonable in the circumstances of the conduct of the entity's enterprise.

Paragraphs 26 and 27 of GSTR 2006/3 state:

26. The input tax credits you claim have a direct effect on the net amount reported on your Business Activity Statement (BAS), and therefore on the amount payable by you to, or refundable to you by, the Australian Taxation Office for the relevant tax period. The fundamental requirement is that whatever method you adopt to calculate your input tax credits must be fair and reasonable, and appropriately reflect the intended use of your acquisitions (or in the case of an adjustment, the actual use) in calculating the net amount.

27. 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.

The Commissioner's view is that the use of direct methods of allocating or apportioning the intended or actual use of acquisitions to the activities of an enterprise will best reflect the intended or actual use of the acquisition. However 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 109 of GSTR 2006/3 provides that the basic revenue-based formula can be expressed as follows:

Percentage credit allowed

[Revenue* (other than revenue from input taxed supplies) / Total Revenue* (including revenue relating to input taxed supplies)] x 100

In this case, Entity A is proposing to use a revenue based formula to calculate the extent of creditable purpose on the acquisition of the performance fee. According to Entity A's submission the non-creditable elements of the performance fee would be reflected by the interest revenue derived from cash held in the Australian bank account and the income derived on the interests in Foreign Funds acquired by Entity A from an Australian vendor. The creditable element will consist of the income generated in the relevant period on the interests in Foreign Funds acquired by Entity A from a foreign vendor.

In GSTR 2006/3 the Commissioner explains that an apportionment method can be used where the principles outlined in paragraph 33 are met. Paragraph 33 states:

33. 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.

In this case, the Commissioner accepts that the revenue-based apportionment methodology outlined above is fair and reasonable for calculating Entity A's entitlement to input tax credits in relation to the performance fee component of Trustee Services.

Question 6

Where the trustee fee paid by Entity A relates directly or indirectly to both creditable and non-creditable purposes, is an asset-based apportionment using the reported asset value of the Assets a fair and reasonable apportionment method of the acquisition for the purpose of calculating Entity A's entitlement to input tax credits?

Detailed reasoning

GSTR 2006/3 provides guidance on methods that can be used to determine the extent of creditable purpose for acquisitions. The ruling provides that any method used in calculating creditable purpose must be fair and reasonable in the circumstances of the conduct of the entity's enterprise.

In addition to paragraphs 26, 27 and 33 discussed at 5(e), paragraphs 34, 35, 131 and 132 of GSTR 2006/3 state:

34. 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.

35. The use of direct methods of allocating or apportioning the intended or actual use of acquisitions to the activities of an enterprise, such as direct estimation (see paragraphs 92 to 101of this Ruling), best accords with the basic principles explained in paragraph 33 of this Ruling. 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.

131. The basis of apportionment or allocation needs to make sense in the context of the enterprise and should not produce significant distortions. Any method to allocate indirect costs must be consistently followed and there should not be any manipulation that produces an inappropriate loading of expenses to particular intended or actual uses. If different types of costs are being allocated, it may be appropriate to use different apportionment or allocation criteria.

132. To ensure that the apportionment method you use gives a fair and reasonable reflection of the relationship between your supplies and acquisitions you should exclude factors which may distort the results from the calculation, or modify them such that their inclusion is fair and reasonable. These may include extraordinary supplies, income items or acquisitions, for example substantial one-off capital acquisitions. Methods which have the effect of including (for example) the same supplies more than once in the factors used, would also produce a distorted result, and would not be fair and reasonable

It is noted by Entity A that it is required to estimate the extent of creditable purpose in relation to the trustee fee as it makes GST-free and input taxed supplies. The trustee fee is calculated by reference to the lower of Class Unit Value or of the Cumulative Invested Capital.

Entity A has proposed that it use an asset-based apportionment methodology to determine the extent of creditable purpose in relation to trustee fee incurred. The creditable element of the trustee fees incurred will consist of the reported asset value of the interests in Foreign Funds acquired from foreign vendors. The non-creditable element of the trustee fee would be reflected by:

· The reported asset value of the interests in Foreign Funds acquired by Entity A from an Australian vendor; and

· the cash balance held in Entity A's Australian bank account.

In accordance with paragraph 33 of GSTR 2006/3, the Commissioner considers that an asset value method may be fair and reasonable depending on the individual circumstances that apply.

In this case, Entity A has advised that the trustee fee is 'consideration for the Trustee Services provided by Entity B in relation to the acquisition of the funds interest in Foreign Funds and the ongoing monitoring and management of those investments'. As such it is clear that part of the payment of the trustee fee is directed to the ongoing management of the investments on behalf of the unit holders.

The proposed method expressed by Entity A above does not recognise that the trustee fee may, to some extent, relate to the allocation and management of the units held by the unit holder. Therefore on this basis the Commissioner considers that the asset-based method would not be fair and reasonable.

However where an asset-based method used by Entity A does not unnecessarily distort the resultant ratio, and there is an appropriate reflection of the intended use for the relevant acquisition, the Commissioner considers that the asset based method may be fair and reasonable.

Question 7

Do the trustee fee and the performance fee paid by Entity A qualify as reduced credit acquisitions for the purposes of regulation 70-5.02 of the GST Regulations?

Detailed reasoning

The general rule under Division 11 of the GST Act is that no entitlement to input tax credits would arise for acquisitions that relate to the making of financial supplies. However, one of the exceptions to the general rule is where the acquisitions are reduced credit acquisitions (RCAs). Subsection 70-5(1) of the GST Act states that an entitlement to a reduced input taxed credit may arise for acquisitions of a specified kind relating to making financial supplies known as reduced credit acquisitions.

Subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are RCAs within the meaning of subsection 70-5(1).

Item 23 of the table in subregulation 70-5.02(2) of the GST Regulations provides that certain investment portfolio management functions will qualify as reduced credit acquisitions. These functions include:

· Management of a client's asset portfolio;

· Management of an investment portfolio for a trust or superannuation fund;

· Acting as a trustee of a trust or superannuation fund;

· Acting as a single responsible entity;

· Asset allocation services

Paragraphs 481 to 539 of GSTR 2004/1 on reduced credit acquisitions, provides guidance on which acquisitions are reduced credit acquisitions under item 23. In particular paragraphs 508 to 519 deal with acting as a trustee for a trust or superannuation fund.

Entity A have advised the trustee fee and the performance fee paid by it to Entity B are payable in respect of the investment selection, ongoing monitoring of the portfolio of interests in Foreign Funds, and the general management of the fund. Entity B exercises control and management of Entity A's investment portfolio in carrying out its obligations. The scope of the services provided by Entity B to Entity A does not extend beyond funds management, administration and Trustee Services.

Alternatively, items 29 and 30 of the table in subregulation 70-5.02(2) of the GST Regulations provide that certain trustee and custodial services will also qualify as reduced credit acquisitions. These services include opening and maintaining Australian bank accounts, undertaking and settling of securities

Based on the facts of your ruling request, the trustee fee and the performance fee paid by Entity A to Entity B will qualify as reduced credit acquisitions for the purposes of regulation 70-5.02 of the GST Regulations.