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Ruling

Subject: GST and fee rebates

Questions:

1. Is the management fee rebate (Fee Rebate") payment made by Entity A directly to an Investor deemed to be consideration for a separate supply made by the Investor in pursuit of its investment in the trust?

2. Does Division 134 of the A New Tax System (Goods And Services Tax) Act 1999 (Cth) ("GST Act") apply to the Fee Rebate arrangements such that Entity A is required to make a decreasing adjustment upon payment of the Fee Rebate to an Investor?

Answers:

1. No, the management Fee Rebate paid by Entity A to an Investor is not deemed to be consideration for a separate supply made by the Investor.

2. No, Division 134 of the GST Act does not apply to the Fee Rebate arrangements.

Relevant facts and circumstances

An Australian resident trust was established as an unregistered managed Investment scheme for the purposes of the Corporations Act 2001 (Cth);

The trust is registered for GST;

The trustee for the trust is Entity A. Entity A is an Australian resident company registered for GST;

In its capacity as trustee, Entity A is responsible for selecting investments for the trust's portfolio, as well as providing administration and trustee services;

Pursuant to a clause of the trust deed, Entity A levies a trustee fee on the trust in return for its ongoing monitoring and general management of the trust and the provision of trustee services.

Pursuant to a clause in the trust deed, Entity A levies a 'performance fee' on the trust only after the required performance hurdle has been met by the trust.

The supply of the trustee and funds management services by Entity A to the trust is a taxable supply and therefore, the trustee fee and performance fees charged by Entity A are subject to GST;

The trust deed also provides Entity A with the discretion to rebate some or all of its trustee fee and/or performance fee (respectively) to certain Investors.

An Investor does not provide any services, or agree to do anything in return, for any Fee Rebates paid to it by Entity A;

Any Fee Rebates will be directly received by an Investor on a periodic basis as a cash payment made by Entity A.

Relevant legislative provisions

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

Section 7-1

Section 9-5

Section 9-10

Section 9-15

Section 9-40

Section 134-5

Reasons for decision

Question 1

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on a taxable supply. Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supply that the entity makes.

As Entity A is proposing to make a Fee Rebate to the Investors, it must be determined if this payment constitutes consideration for a supply and thus a taxable supply made by the Investor.

Section 9-5 of the GST Act defines a taxable supply as follows:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

(d) 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.

(Terms marked with an *asterisk are defined at section 195-1 of the GST Act).

Paragraph 9-5(a) of the GST Act requires an entity to make a supply for consideration.

Section 9-10 of the GST Act defines a supply as any form of supply whatsoever.

Subsection 9-10(2) of the GST Act provides a non-exhaustive list of things that are included as supplies. However, subsection 9-10(4) of the GST Act provides that the payment of money does not constitute a supply for GST purposes. Section 9-10(4) states:

However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

The Commissioner's view on the meaning of 'supply' is set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9).

GSTR 2006/9 sets out a number of propositions to assist in analysing a transaction to identify a supply. Paragraph 222 of GSTR 2006/9 relevantly states:

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

Accordingly, in determining whether or not the Fee Rebate is consideration for a separate supply made by the Investor it is pertinent that the Trust Deed be examined. In doing so, the Trust Deed provide that there is no binding obligation placed on the Trustee to make a Fee Rebate to the Investor. Furthermore, there is nothing to suggest that the Investor has entered into a binding obligation to do something and take up this Fee Rebate.

Proposition 2 of GSTR 2006/9 provides that generally, for every supply there is a recipient and an acquisition. Of the propositions considered in GSTR 2006/9, Proposition 5 is particularly relevant.

Paragraphs 71 to 73 of GSTR 2006/9 states:

Proposition 5: to 'make a supply' an entity must do something

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'. (Emphasis added.)

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.

Consideration is defined in section 9-15 of the GST Act. It includes any payment, or any act or forbearance in connection with a supply. The Fee Rebate is a payment and it will constitute consideration. Accordingly, the key issue so to determine if the Investor made a supply for which the Fee Rebate was consideration.

It follows from the above paragraphs in GSTR 2006/9 and the judicial authority of Shaw that a supply cannot be made unless the supplier engages in some kind of positive action. In applying these principles to the Investor's circumstances, it is evident that the Investor did not engage in such positive action when it received the Fee Rebate. The Fee Rebate was made entirely at the discretion of Entity A and does not require any action by the Investors to cause the Fee Rebate to be made. The only action taken by the Investors is to invest in the trust in the first instant. There is no agreement or contractual obligation by which the Investor makes any form of supply to Entity A.

We, agree with your submission that while Entity A is in receipt of payment for its provision of trustee and funds management services to the Fund, Entity A does not provide these services to the Investors. We therefore, agree that the recipient of the services is always the Fund and Entity A is not a recipient of any thing provided by an Investor.

The term 'supply' in the GST Act covers not only the subject of the transaction (that is, the thing that passes), but also includes the action by which the thing passes from one entity to another. In addition, by the use of the word 'make' in the phrase 'you make the supply' in paragraph 9-5(a) of the GST Act, there is a requirement for a supplier to take some action to cause a supply to be made.

The Fee Rebate has no nexus with any supply the Investor has made. It follows that the Fee Rebate cannot be consideration for a supply, but rather is a supply of money.

In reaching this conclusion, paragraph 9-5(a) of the GST Act has not been satisfied. It is therefore, not necessary to consider the remainder of section 9-5. Accordingly, there is no taxable supply being made by the Investor when it receives this Fee Rebate.

Question 2

Subsection 134-5(1) of the GST Act states:

134-5 Decreasing adjustments for payments made to third parties  

(1) You have a decreasing adjustment if:

(a) you make a payment to an entity (the payee) that acquires a thing that you supplied to another entity (whether or not that other entity supplies the thing to the payee); and

(b) your supply of the thing to the other entity:

(i) was a *taxable supply; or

(ii) would have been a taxable supply but for a reason to which subsection (3) applies; and

(c) the payment is in one or more of the following forms:

(i) a payment of money;

(ii) an offset of an amount of money that the payee owes to you;

(iii) a crediting of an amount of money to an account that the payee holds; and

(d) the payment is made in connection with, in response to or for the inducement of the payee's acquisition of the thing; and

(e) the payment is not *consideration for a supply to you.

We agree with your submission that there is no decreasing adjustment under Division 134 of the GST Act.

Paragraph 134-5(1)(a) of the GST Act

Paragraph 134-5(1)(a) of the GST Act is not made out in these circumstances because Entity A's Fee Rebate or payment is not made to an entity that acquired a thing from Entity A, which was subsequently supplied to another entity. As reasoned in question 1, the relevant supply and acquisition made between Entity A and the trust has no relationship with the Fee Rebate made to the Investors.

Therefore, as, paragraph 134-5(1)(a) of the GST Act is not satisfied it is not necessary to consider the rest of the paragraphs in sub section 134-5(1) of the GST Act.

Conclusion

The Commissioner agrees that Entity A does not satisfy the requirements of sub section 134-5(1) of the GST Act and therefore, a decreasing adjustment is not required.