Edited version of your private ruling

Authorisation Number: 1012333715383

Ruling

Subject: Supplies from a Recognised Trust Scheme and Apportionment

Question

Can the Commissioner confirm that where the Fund makes an acquisition of Trustee Services from Entity A on or after 1 July 2012 for consideration which includes a single fee with separately identifiable components, the 'cost base method' of apportionment (as set out in the facts) is fair and reasonable for determining the Funds entitlement to a reduced input tax credit?

Answer

The Commissioner confirms that where the Fund makes an acquisition of Trustee Services from Entity A on or after 1 July 2012 for consideration which includes a single fee with separately identifiable components, the 'cost base method' of apportionment (as set out in the facts) is fair and reasonable for determining the Funds entitlement to a reduced input tax credit.

Relevant facts and circumstances

Entity A is the trustee for the Fund.

The Fund was established under the terms of the Master Trust deed (Trust Deed). A copy of the Trust Deed has been provided as part of this private ruling request.

The Fund is a regulated superannuation fund (other than a self-managed fund) as defined in section 19 of the Superannuation Industry (Supervision) Act 1993 (Cth).

Entity A is registered with the Australian Prudential Regulation Authority as a Registrable Superannuation Entity and has an Australian Financial Services Licence issued by the Australian Securities and Investment Commission.

The Fund operates as a superannuation wrap product.

The trustee holds all investments on trust for members and the Fund, with all members having a beneficial interest in the Fund (although the ability of members to access the funds are subject to the superannuation preservation rules).

The relevant clauses of the Trust Deed provide that the Trustee has the power to do anything it considers appropriate to properly administer and maintain the Fund.

The Trust Deed explains that the Trustee is entitled to be remunerated for its services to the Fund as may be determined by the Trustee.

For the purposes of this ruling response, the services that Entity A provides to the Fund under the terms of the Trust Deed are called "Trustee Services". The Trustee Services include all services Entity A can provide to the Fund under the Trust Deed as well as general law. In this regard, the Trustee Services which Entity A supplies to the Fund comprise the following separately identifiable services:

(i). Custody services;

(ii). Adviser services;

(iii). Insurance Administrator services;

(iv). Management services

The fees that Entity A can charge the Fund for providing the Trustee Services are provided for in the relevant clause of the Trustee Deed and include an Administration Fee, Advisor Fee, Contribution Fee and such other fee as the Trustee, in its absolute discretion determines. All of these fees are consideration for the supply of Trustee Services to the Fund.

Entity A issues a monthly tax invoice to the Fund with a single fee for trustee administration services.

While the Trust Deed prescribes the fees that can be charged in relation to an investment in the Fund, the Product Disclosure Statement provides more detail in terms of the nature and quantum of the relevant fees that are intended to be charged. A copy of a Product Disclosure Statement (PDS) issued in relation to the Fund has been provided as part of this ruling request.

Entity A currently charges a consolidated fee to the Fund being a single trustee fee (Trustee fee) for all of the Trustee Services provided to the Fund. However, each individual fee is separately itemised on a member's statement.

Under the terms of the Trust Deed, Entity A can engage third parties to perform services that it is required to provide to the Fund. This includes the provision of Advisor, Custody and Management services.

Entity A has entered into contractual arrangements with a number of arms-length parties in order to distribute and promote the Fund ("Distributors'). The terms of the arrangement between the parties are detailed in agreements called Service Agreements.

Under a Service Agreement, a Distributor can procure the services of other persons such as financial advisers that are either contractors or employees of the Distributor.

Entity A is only liable to pay the Distributor for the services provided under a Service Agreement. The remuneration that the Distributor would then pay its representatives (i.e. financial advisers) would be subject to separate legal arrangements that each Distributor would have with its representatives.

As part of this ruling request an example of the standard terms of a Services Agreement that Entity A has entered into with a Distributor has been submitted. The Service Agreement is representative of the terms and conditions that each of the parties have agreed to be bound by including the remuneration structure.

Entity A engages each Distributor in its corporate capacity under a separate contractual arrangement that Entity A has with each Distributor and not as trustee of the Fund (i.e. it is not the Fund that acquires services from the Distributors).

Commissions that Entity A pays to Distributors are consideration for the facilitation of the "sale" of interests in the Fund to Members. It has been submitted that, to the extent that there was a sale of an interest in a Fund before 1 July 2012, any commission payable by Entity A to a Distributor in relation to this sale would be consideration for a supply made before 1 July 2012. It is further submit that, in turn, the corresponding Trustee Services provided by Entity A to the Fund were made and acquired by the Fund prior to 1 July 2012, even though the trustee fees relating to these Trustee Services may be paid after 30 June 2012. Therefore, it is submitted that item 32 of regulation 70- 5.02(2) would not apply to the acquisition of that part of the Trustee Services by the Fund that relates to commissions paid for the supply of an interest in the Fund before 1 July 2012. It is therefore submit that the Fund would be entitled to claim a 75% RITC in relation to those Trustee Services acquired from Entity A before 1 July 2012 notwithstanding that payment for those services in the form of commissions may continue to be made after 30 June 2012.

The introduction of the Future of Financial Advice (FOFA) reforms from 1 July 2012 means that commissions can no longer be paid to financial advisers for the sale of an interest in a superannuation fund. While this ban came into place on 1 July 2012, product manufacturers have until 1 July 2013 to be fully compliant with the FOFA legislation.

Entity A has ceased paying commissions to Distributors to the extent that there is a sale of an interest in the Fund from 1 July 2012. Therefore, as there are no commissions paid in relation to a sale of an interest in the Fund from 1 July 2012, there is no need to consider in this ruling application the impact of item 32 of regulation 70-5.02(2) on commission arrangements entered into from 1 July 2012.

Entity A has outsourced most of its functions (including Management services) relating to the Fund to Entity B.

The specific outsourcing arrangement between Entity A and Entity B is detailed in the 'Administration Services Agreement'. A copy of the Administration Services Agreement has been provided as part of this ruling request.

The term "Management services" is not a specifically defined term in the Administration Services Agreement. As most of the Entity A's Trustee Services have been outsourced to Entity B under the Administration Services Agreement, the Management services are included as part of the Administration Services provided under the Administration Services Agreement.

Apportionment Methodology

The following is the proposed apportionment method to apply.
Step1

Apply a RITC rate of 75% to the Custody service component of the Trustee fee charged to the Fund. The costs relating to this service can be separately identified by Entity A in the single Trustee fee charged to the Fund.
Step 2

Apply a RITC rate of 75% to the Adviser service component of the Trustee fee charged to the Fund. The costs relating to this service can be separately identified by Entity A in the single Trustee fee charged to the Fund.

The Fund has excluded the cost of any commissions from this step which related to services which were acquired prior to 1 July 2012. This is on the basis that the corresponding Trustee Services to which the commissions relate cannot be a 'trust acquisition" within the meaning of item 32 of the regulations 70-5.02(2) if they were acquired prior to 1 July 2012.

Step 3

Apply a RITC rate of 75% to the Insurance Administration services. The costs related to these services can be separately identified by Entity A in the single Trustee fee charged to the Fund.

Step 4

Apply an apportioned RITC rate to the Management services components of the Trustee fee on the basis that the Management services include a mixture of services that are either eligible for an RITC rate of 55% (such as statutory reporting obligations) or 75% (such as superannuation administration services).

The calculation of the RITC rate in regard to the Management services is calculated by allocating an appropriate RITC rate to the cost centres of Entity A.

This ruling has not sought to determine whether Entity A and/or the Fund have correctly classified the supplies made under their agreements, such as Service Agreements.

This ruling is limited to determining whether the proposed apportionment method set out above is fair and reasonable according to the principles outlined in Goods and Services Tax Ruling GSTR 2001/8.

Relevant legislative provisions

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

Reasons for decision

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with entitlement to input tax credits. Section 11-20 provides that an entitlement to an input tax credit arises for any creditable acquisition made by an entity. The term creditable acquisition is defined by section 11-5 of the GST Act which 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.

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

Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Subsections 11-15(1) and (2) of the GST Act states:

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.

Accordingly, the Fund acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise.

The provision, acquisition or disposal of an interest in the Fund is a financial supply that would be input taxed under item 4 in the table of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Therefore on the understanding that the Fund has exceeded the financial acquisitions threshold provided for in subsection 11-15(4) of the GST Act, it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits. Subsection 70-5 of the GST Act refers to these acquisitions and states:

(1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions.

(2) ……

Regulation 70-5.02 of the GST Regulations refers to acquisitions that attract reduced input tax credit and states:

(1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit.

(2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions.

Item 32 in the table in subregulation 70-5.02(2) of the GST Regulations (item 32) is of particular relevance to this case. Item 32 states:

Supplies acquired by a recognised trust scheme, to the extent that:

(a) the supplies are acquired on or after 1 July 2012; and

(b) the supplies acquired are not:

(i) a supply by way of sale of goods or supply of real property made by:

(A) selling a freehold interest in land; or

(B) selling a stratum unit; or

(C) granting or selling a long-term lease; or

(ii) a brokerage service covered by item 9 or 21; or

(iii) a service covered by paragraph (a), (b) or (e) of item 23; or

(iv) a service covered by paragraph (a), (b), (c), (d), (e), (f), (g) or (i) of item 24; or

(v) a custodial service covered by item 29; or

(vi) a service covered by item 30; or

(vii) a service covered by item 33.

The application of item 32 therefore allows a recognised trust scheme (RTS) to be entitled to a RITC for acquisitions at the lower rate of 55% to the extent that the acquisitions are not excluded under item 32. A RITC at the rate of 75% is available to the extent that an acquisition is excluded from item 32 but falls within another item of the table in subregulation 70-5.02(2) of the GST Regulations. However, the RTS is not entitled to a RITC to the extent that the acquisition is excluded from item 32 and does not fall within another item of the table in subregulation 70-5.02(2) of the GST Regulations. It is therefore necessary to identify the components of the acquisition to determine the relevant RITC rate (or rates) which will apply.

In determining whether a RTS has made a mixed or composite acquisition, the key question, as stated in paragraph 234 of GSTR 2002/2:

…is whether the acquisition has parts that should be regarded as being separately

identifiable, or whether it is essentially an acquisition of one dominant part with other

parts being integral, ancillary or incidental to that dominant part.

According to paragraph 235 of GSTR 2002/2, it will be a matter of fact and degree whether the parts of an acquisition made by an RTS are separately identifiable and retain their own identity.

It follows that, if an RTS makes a mixed acquisition and the separately identifiable parts qualify as RCAs subject to RITCs (at either 55% and 75%), the amount of the RITCs to which the RTS is entitled will be based on the extent to which the consideration provided (inclusive of GST) relates to each part of the acquisition.

In this case, as the acquisition of Trustee Services consists of a single fee that relates to the identifiable components (or parts), the Fund is required to apportion the consideration for the supply to determine its entitlement to any reduced input tax credits. In this context it is proposed by Entity A that the Trustee Services acquired by the Fund consists of four separately identifiable parts being Custody, Advisor Services, Insurance Administration Services and Management Services. In respect of each part the Fund will then apply the relevant rate of 75% and/or 55%.

In accordance with the principle set out in 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), it is Entity A's submission that their proposed method of apportionment set out in the facts is fair and reasonable. In particular Entity A refers to paragraph 103 which states:

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.

Apportionment Methodology

Goods and Services Tax Ruling GSTR 2001/8, Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Commissioner view on the apportionment of mixed supplies and at paragraph 91 to 95 states:

Taxation Office view

91. We are of the view that the GST Act inherently requires that the parts of a mixed supply be identified and that the consideration be apportioned where a sufficient nexus between the supply and its consideration is established. This approach gives practical effect to the intention of the GST Act and is consistent with a commonsense and equitable outcome.

Reasonable methods of apportionment

92. Where, as in the case of supplies covered by section 9-75, there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense.^51A

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case.⁵² In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.⁵³

Application of the GST Law to the circumstances

Based on the facts, Entity A has advised that they can clearly identify the extent to which the Trustee fee is consideration (by way of the outsourced cost to Entity A), for Custody Services, Advisor Services and Insurance Administration services. This is outlined in step 1, step 2 and step 3 of the proposed methodology. Accordingly, on the basis that these services fall within the exclusionary items set out in item 32(b)(ii) to (vii), the Fund is entitled to a RITC at the rate of 75%.

However the bundle of services provided by Entity A to the Fund under the category of Management services consists of a range of services. These services are separately identifiable components which are described in the Administrational Services Agreement and can be characterised as administrative, portfolio management, operational (adviser and product development) or fiduciary (risk or compliance) in nature.

Accordingly, consistent with paragraphs 92 to 95 of GSTR 2001/8, in these circumstances the Fund may use any reasonable method of apportioning the consideration for the mixed supply to which the relevant RITC rate can be applied.

In step 4 it is proposed by Entity A that the acquisition of the Management services from Entity B, which is subsequently acquired by the Fund, will be apportioned by applying the relevant RITC rate of 55% or 75% on the basis of Entity A's internal cost centres. Each cost centre performs specific activities and it is these activities that form the basis of the relevant RITC that will be applied by the Fund.

Where a cost centre has a fiduciary role, such as risk or compliance, the acquisition by the Fund will fall within the scope of item 32. Therefore Entity A will allocate a recovery rate of 55%. For cost centres that relate to administration, operations (such as adviser and product development) or portfolio management, an allocated recovery of 75% will apply. This is on the basis that the acquisition is excluded from item 32.

Based on the facts and circumstances in this case, the Commissioner agrees that the proposed methodology used by the Fund to apportion the acquisition of Trustee Services is fair and reasonable. That is, we consider that the theoretical aspect of the Funds GST apportionment method identifies the consideration for the identified parts of the mixed acquisitions in their circumstances. Therefore, provided the practical application does not result in a distortive outcome, we consider the method used by the Fund falls within the ambit of being fair and reasonable in accordance with GSTR 2001/8.

Our acceptance of the apportionment methodology is based on the facts presented to us. However, if those circumstances change, the Fund may be required to review this methodology to determine if it remains fair and reasonable and accurately reflects the consideration for relevant parts of the mixed acquisition of Trustee Services.

Additional information:

The ruling request by Entity A includes a number of submissions which go towards characterising the arrangements between Entity A and/or the Fund and third party providers, such as Distributors.

This ruling request has not sought to determine whether Entity A as trustee of the Fund has correctly characterised the supplies made under these agreements.

This ruling is limited to determining whether the proposed apportionment method set out above is fair and reasonable according to the principles outlined in GSTR 2001/8.