Edited version of your private ruling

Authorisation Number: 1012123083627

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Subject: GST enterprise costs and apportionment methodology

Question 1

Can the costs incurred by Entity A be categorised as on-going costs of the business that relate indirectly to all the activities of its enterprise and should therefore be treated as enterprise costs?

Answer

Yes, the costs incurred by Entity A can be categorised as on-going costs of the business that relate indirectly to all the activities of its enterprise and should therefore be treated as enterprise costs.

Question 2

Is it fair and reasonable to adopt the proposed apportionment methodology to calculate the amount of input tax credits that Entity A is entitled to in respect of these enterprise costs?

Answer

Yes, it is fair and reasonable to adopt the proposed apportionment methodology as set out in the facts of this ruling, to calculate the amount of input tax credits that Entity A is entitled to in respect of these enterprise costs subject to the following:

1. We would always expect some attribution of acquisitions towards unit holder interest even when there is no interest earned in the Australian bank account. In instances where no interest is earned in the Australian bank account, the above apportionment methodology will not provide a fair and reasonable basis for apportioning Entity A's acquisitions. In addition, where the level of activity for member interests increases, the above apportionment methodology may not be fair and reasonable.

2. If there was to be a significant change in the make up of acquisitions, the use of the proposed apportionment methodology may no longer be fair and reasonable. That is to say if the majority of the acquisitions being apportioned were acquisitions that were directed at administering the unit holders interests, the proposed apportionment methodology will no longer provide a fair and reasonable basis of apportionment of Entity A's acquisitions.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

· Entity A is a registered managed investment scheme located in Australia with a majority of its unit holders being Australian residents.

· Entity A is listed on the Australian Stock Exchange.

· Entity B is the responsible entity and trustee of Entity A.

· Entity A has 100% interest in a non-resident entity.

· The non-resident entity has a 75% interest in another non-resident entity.

· Entity A holds cash in Australian bank accounts on which it earns interest.

· Entity A has used derivative instruments to hedge income derived from the non-resident entity.

· The initial public offering (IPO) of units in Entity A was made in a year specified.

· Since the IPO, there has been no further issue of units in Entity A and no change in the composition of the units held by the various unit holders.

· Since the IPO, Entity A has only claimed reduced input tax credits (RlTCs) for GST incurred on its acquisitions, where available.

· As part of an ATO review, Entity A was advised that it may be entitled to claim more input tax credits on its acquisitions than are currently being claimed. As a result of these discussions, Entity A engaged its representative to review its input tax credit entitlement.

· Entity A has determined that it does exceed the Financial Acquisitions Threshold (FAT).

Entity A's Activities

Entity A's representative advised as follows:

· The income of Entity A is derived from the following sources:

o distributions received from the non-resident entity,

o cash held in Australian bank accounts and

o foreign exchange gains.

· Entity A confirmed that it only has derivative contracts with non-residents that have no presence in Australia.

Apportionment of Input Tax Credits

Entity A will be making a mixture of input taxed and non-input taxed supplies. Where Entity A makes acquisitions that relate partly to making input taxed supplies and partly to making non-input taxed supplies, the acquisitions (and the GST incurred on those acquisitions) needs to be apportioned to calculate Entity A's entitlement to input tax credits.

Entity A's acquisitions

Entity A submits that following the establishment of Entity A and the lPO, the majority of Entity A's acquisitions now consist of on-going costs of the business that no longer have a direct connection to the initial capitalisation of the fund or any other supplies made by Entity A. Entity A submits that these costs are enterprise costs that are related to the activities of the enterprise in general and do not have a direct connection with any input taxed supply made by Entity A.

Entity A's proposed apportionment methodology

In its initial ruling request Entity A submits that a revenues based approach is appropriate for apportioning its enterprise costs for the purpose of calculating its input tax credit entitlements. It proposed the use of the basic revenue-based formula as expressed at paragraph 109 of GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies.

Paragraph 109 of GSTR 2006/3 states as follows:

109. The basic revenue-based formula (also applicable to the entity-based general formula above) 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

Applying this formula to Entity A's case, the numerator would consist of revenues from distributions received from the non-resident entity and the realised foreign exchange gains and the denominator will consist of all three revenue streams, which are, distributions received from the non-resident entity, the realised foreign exchange gains and interest on cash held in Australian bank accounts.

Expressed as a formula this would be represented as:

Revenue from non-resident + Foreign Exchange gains / Total Revenue ( Revenue from non-resident + Foreign Exchange gain + Interest Revenue)

Entity A's modified apportionment methodology

After discussions with the ATO, Entity A modified its apportionment methodology to include some additional steps as follows:

Step 1

Work out the percentage credit allowed as determined by the said revenue-based formula:

Revenue from non-resident + Foreign Exchange gains / Total Revenue (Revenue from non-resident + Foreign Exchange gain + Interest Revenue)

Paragraph 109 of GSTR 2006/3 requires the revenue-based method to use either net revenue or gross revenue but not a mix of both.

Step 2

No input tax credits will be claimed in respect of those acquisitions that are estimated to relate to the supply of the initial issue of units (subject to Entity A exceeding the FAT).

The amount of these acquisitions would be determined by using the calculation in step 1 as a proxy for estimating the extent to which the acquisition incurred by Entity A continue to relate to the original issue of units.

The percentage determined in step 1 will be applied to all acquisitions to determine the amount that relates to the original issue of units.

Step 3

Entity A would then apply the revenue formula in step 1 to calculate the extent of creditable purpose to apply to the enterprise costs as determined in step 2.

Relevant legislative provisions

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

New Tax System (Goods and Services Tax) Act 1999 section 11-15(1), 11-15(2)

New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

Question 1

Can the costs incurred by Entity A be categorised as on-going costs of the business that relate indirectly to all the activities of its enterprise and should therefore be treated as enterprise costs?

Entity A has requested the Commissioner to confirm that the costs referred to in Appendix A can be categorised as enterprise costs, being costs of acquisitions made in carrying on an enterprise, but which are not directly linked to making particular supplies.

Goods and Services Tax Ruling 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) explains the concept of enterprise costs. Paragraph 53 of GSTR 2006/3 states:

 53. Carrying on an enterprise includes those activities that you undertake in actually managing or conducting that enterprise. Certain acquisitions or importations relate to the carrying on of the enterprise as a whole and are not directly linked to the making of supplies but nonetheless they relate indirectly to all activities of the enterprise. These may be referred to as enterprise costs and may include costs such as compliance costs for meeting Australian Securities and Investments Commission (ASIC), GST or income tax obligations, directors' fees or maintaining a register of shareholders. These may still be creditable acquisitions provided you made them in carrying on your enterprise. However, if you make input taxed supplies as well as taxable supplies or GST free supplies, you will still need to establish the extent of creditable purpose relating to these acquisitions and importations.

Entity A has submitted that following the establishment of Entity A and the IPO, the majority of Entity A's acquisitions now consist of on-going costs of the business that no longer have a direct connection to the initial capitalisation of the fund or any other supplies made by Entity A. These costs relate to the activities of the enterprise in general and are not directly linked to making particular supplies and should therefore be viewed as enterprise costs.

Based on the facts as listed above and an examination of the type of costs incurred by Entity A, we agree with your contention that the acquisitions can be categorised as on-going costs of the business that relate indirectly to all the activities of Entity A's enterprise and should therefore be treated as enterprise costs.

Question 2

Is it fair and reasonable to adopt the proposed apportionment methodology to calculate the amount of input tax credits that Entity A is entitled to in respect of these enterprise costs?

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (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 under the general rule.

The exceptions to this general rule as provided for in section 11-15 of the GST Act are considered for the purpose of the methodology noted above. Where Entity A has exceeded the FAT provided for in subsection 11-15(4) of the GST Act, 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.

Entity A has advised that it makes a mixture of input taxed and non-input taxed supplies. Where Entity A makes an acquisition that relates partly to making input taxed supplies and partly to making non-input taxed supplies, the acquisition (and the GST incurred on that acquisition) needs to be apportioned to calculate Entity A's entitlement to input tax credits.

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:

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.'

The ruling 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.

Paragraph 75 of GSTR 2006/3 states the following in relation to a "fair and reasonable method":

75. The extent of your planned use of an acquisition for a creditable purpose must be established on a fair and reasonable basis having regard to the nature of the acquisition and the circumstances of your enterprise. Any apportionment method should aim to achieve an accurate reflection of the input tax credits available for acquisitions or importations acquired in carrying on your enterprise. The criteria used in relation to any expense must therefore recognise the nature of the underlying supply to be made.

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.

Paragraph 103 of GSTR 2006/3 states the following of indirect estimation methods:

103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Paragraph 109 of GSTR 2006/3 states the following of revenue-based formulas:

109. The basic revenue-based formula (also applicable to the entity-based general formula above) 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

*'Revenue' may be either net revenue or gross revenue depending on which provides the more appropriate reflection of the use of acquisitions in your circumstances. In any case, a consistent approach (gross or net) should be used for the same revenues occurring in both the numerator and denominator.

If net revenue is used, it should ignore income tax. That is, do not reduce your revenue in the formula by the amount of the income tax deductions to which you may be entitled. The value of non-monetary consideration should also be included in revenue.

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.

Entity A has proposed a three step apportionment methodology with a revenue-based formula applied both as a proxy for estimating the extent to which the acquisitions incurred by Entity A continue to relate to the original issue of units and therefore are input taxed and to determine the extent of creditable purpose of the remaining enterprise costs.

Paragraph 109 of GSTR 2006/3 would require this revenue-based formula to use either net revenue or gross revenue but not a mix of both.

Based on our understanding of the facts as listed above and Entity A's particular circumstances as presented to us including that the level of activity relating to member interests is absolutely minimal, we accept that the methodology proposed which will apportion the acquisitions in Appendix A (subject to the two exceptions listed under 'Relevant facts') in accordance with the three step apportionment methodology discussed above, will provide a fair and reasonable basis for apportioning those acquisitions.

However, this is subject to the following:

1. We would always expect some attribution of acquisitions towards unit holder interest even when there is no interest earned in the Australian bank account. In instances where no interest is earned in the Australian bank account, the above apportionment methodology will not provide a fair and reasonable basis for apportioning Entity A's acquisitions. In addition, where the level of activity for member interests increases, the above apportionment methodology may not be fair and reasonable.

2. If there was to be a significant change in the make up of acquisitions to which the apportionment methodology is to apply, the use of the proposed apportionment methodology may no longer be fair and reasonable. That is to say if the majority of the acquisitions being apportioned were acquisitions that were directed at administering the unit holders interests, the proposed apportionment methodology will no longer provide a fair and reasonable basis of apportionment of Entity A's acquisitions.

Further issues for you to consider

We have identified that Entity A is registered on the Australian Business Register (ABR) and registered for GST. Paragraph 69 of Goods and Services Tax Ruling GSTR 2011/D1 states that:

69. Although an entity is defined to include a trust, a trust has no legal personality and so will not be registered in its own right on the ABR. Rather, the trustee of the trust will be registered and will be issued with an ABN in its capacity as trustee. The legal name of the entity will be identified on the register as the trustee for the particular trust.

This draft Ruling replaced GSTR 2000/17 which contained a similar paragraph (refer paragraph 59).

On this basis, we consider that Entity A should not be registered on the ABR nor registered for GST in its own right. More correctly, it is the trustee for Entity A that should be registered in its capacity as trustee for Entity A.

Please amend.