Edited version of your private ruling

Authorisation Number: 1012443996721

Ruling

Subject: GST and entitlement to input tax credits

Question 1

Is Entity ABC entitled to the input tax credits on its acquisitions set out in this ruling?

Answer

Entity ABC is entitled to the input tax credits on its acquisitions set out in this ruling if it does not exceed the financial acquisitions threshold (FAT).

If Entity ABC exceeds the FAT, it will not be entitled to the input tax credits on acquisitions to the extent that those acquisitions relate to the making of input taxed financial supplies. However, Entity ABC may still be entitled to a reduced input tax credit on such acquisitions made in relation to its input taxed financial supplies if such acquisitions are reduced credit acquisitions.

Relevant facts and circumstances

You (The trustee) act as the trustee for a charitable trust known as Entity ABC.

You carry out the following three primary functions:

· You act as the trustee for Entity ABC and are remunerated by way of a trustee fee directly paid from Entity ABC.

· You also act as the trustee for a number of other non-related entities. You also provide other services, across Australia. Your role in relation to Entity ABC is only a small part of your operations and responsibilities.

· You have, in your corporate capacity, established and maintained a number of investment vehicles in which a number of trusts invest their funds.

Accordingly, you act in the capacity as trustee for various trusts and also in your own corporate capacity. This ruling however, applies to you in your capacity as trustee for Entity ABC only and not any other capacity. To be free from any doubt, all further references to Entity ABC from this point are to you in your capacity as trustee for Entity ABC.

All further references to 'you' from this point are to you in your own corporate capacity.

Entity ABC is registered for goods and services tax.

Entity ABC has Deductible Gift Recipient (DGR) status.

Entity ABC was established and is maintained exclusively for any public charitable purpose within Australia that meets the criteria of the relevant tax legislation.

Entity ABC also offers members of the public the opportunity to establish a named gift fund within Entity ABC and to express wishes to make distributions from such gift funds to eligible organisations of their preference. The monies from these gift funds are pooled and invested, with the income derived being used to meet the charitable purposes of the individual gift funds.

The gift funds are also referred to as sub-accounts.

Entity ABC carries out two activities; the making of grants to eligible organisations (which Entity ABC considers to be out of scope for GST purposes) and investment activities (which Entity ABC considers would involve the making of input taxed financial supplies for GST purposes).

Grants

Entity ABC seeks applications annually from eligible organisations for Entity ABC's main funding round. This is done through an online application process or an expression of interest and interview process. Entity ABC assesses those applications and authorises payments to successful applicants.

To obtain funding, an eligible organisation needs to submit an application by the due date. If successful, they need to provide an acquittal report after 12 months that confirms how the funding was used and the outcomes of the project funded.

Entity ABC treats the grants and funding provided to eligible organisations as donations, thus GST is not incurred.

Investments

Entity ABC's investment activities are determined by an investment strategy. These investments are solely connected with Australia.

Income

· Income figures were provided to the ATO.

The grants program is funded from net income from the investment activities.

Entity ABC's acquisitions

The acquisitions of Entity ABC (that is, the acquisitions that are the subject of this ruling) mainly relate to its provision of grants and its investment activities.

In addition, the Foundation acquires investment management services from you. The overall size of such acquisition of investment management services is not known to us. Please refer to the discussion below about 'investments'.

This ruling does not cover the types of acquisitions which are not listed above.

Each of these types of acquisitions are discussed in greater detail as follows:

Trustee fee

The trustee fee is a management fee. As advised, trustee services acquired by Entity ABC for which it pays the trustee fee relates almost entirely to its provision of grants. Only a small percentage of the trustee fee applies to its investments. It is trustee who markets the grants programs, assesses the applications made by various entities for a grant, and administers the audit program to ensure the grants are used for the purposes for which they were provided. The trustee fee is paid to the trustee for those functions and as such relates mostly to Entity ABC's grant making activities.

The trustee offers two main services to Entity ABC, being:

1. Trusteeship; and

2. Investment management services.

The trusteeship activities were provided to the ATO.

Investment management services were provided to the ATO.

Entity ABC advises that the vast majority of the trustee's efforts are directed towards the grant making activities of the enterprise. Very little effort is directed towards the investment aspect of the enterprise. This is because the trustee acts as a trustee for many enterprises, and the decisions the trustee makes regarding investment strategies are therefore 'across the board'. As such, the trustee's efforts towards investment for Entity ABC in particular are, in the overall scheme, very minor.

Accounting fees

The accounting fees are for the annual compliance of the accounts, and are related to the grant making operations.

Consulting fees

These were paid to an external firm who was contracted to analyse the date of the distributions and the make-up of the various gift accounts. This acquisition relates solely to the grant making operations.

Fundraising expenses

These comprise of a variety of registration fees and expenses.

Other expenses

These are sundry items that generally relate to the grant making activities.

Entity ABC receives income distributions in its own right. These income distributions come from a variety of investment vehicles that are managed by the trustee.

Investments

The various 'investment vehicles' are Funds which Entity ABC has invested in.

Information was provided to the ATO as to how you are paid for your supply of trustee services.

With regard to investment decisions, a management group sets the investment strategies to be adopted across all entities that the trustee acts for.

The overall investment strategy is a conservative strategy, although it is designed to consider both income and capital returns.

Neither the foundation nor you are charged a fee for the work of the group investment board sub-committee.

Relevant legislative provisions

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

Section 9-5

Section 11-5

Section 11-15

Section 40-5

Section 189-5

Reasons for decision

Question 1

Summary

Entity ABC is entitled to the input tax credits on its acquisitions set out in this ruling if it does not exceed the FAT.

If Entity ABC exceeds the FAT, it will not be entitled to the input tax credits on acquisitions to the extent that those acquisitions relate to the making of input taxed financial supplies. However, the foundation may still be entitled to a reduced input tax credit on such acquisitions made in relation to its input taxed financial supplies if such acquisitions are reduced credit acquisitions.

Detailed reasoning

An entity who is registered for GST is required to charge GST on any taxable supply that it makes. A taxable supply is defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which provides that an entity makes a taxable supply if the supply it makes is for consideration, the supply is made in the course or furtherance of an enterprise that the entity carries on, the supply is connected with Australia and the entity is registered or required to be registered. However, the supply is not a taxable supply if it is a GST-free supply or it is input taxed.

Entity ABC has self-assessed and has advised that its grant making activities are out of scope from the GST system and that its investment activities involve the making of input taxed financial supplies. As such, the correctness of how Entity ABC's supplies made in relation to its grant making and investment activities are characterised for GST purposes has not been tested. This ruling is made on the basis that the Foundation's provision of grants involve the making of supplies that are out of scope of the GST system and that its investment activities involve the making of input taxed financial supplies.

Under the basic rules of the GST Act an entity is entitled to input tax credits for any creditable acquisition it makes. 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.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Creditable purpose is defined in section 11-15 of the GST Act as:

(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.

As such, an acquisition made by an entity will be for a creditable purpose to the extent that it is acquired in the course of the entity's enterprise and is not, to any extent, acquired in relation to the making of supplies that would be input taxed or of a private or domestic nature. Relevantly, to the extent that an acquisition relates to the making of supplies that would be input taxed, the acquisition is not for a creditable purpose and is not considered to be a creditable acquisition to that extent. Accordingly, to that extent, the entity is not entitled to claim any input tax credits on such acquisitions.

Entity ABC's acquisitions

Donations by Entity ABC to charities were not considered by Entity ABC to be consideration for taxable supplies made to Entity ABC and therefore no GST were charged on the donations. Therefore no creditable acquisitions were made by Entity ABC on the making of donations to charities and no input tax credits are available to Entity ABC on the making of such donations.

With regard to Entity ABC's other acquisitions, those acquisitions were taxable supplies when they were supplied to Entity ABC. Entity ABC provided consideration for the supplies and they are registered for GST. The requirements at paragraphs 11-5(b), (c) and (d) of the GST Act are therefore satisfied.

The discussion below is now focussed on whether these acquisitions were acquired for a creditable purpose as required under paragraph 11-5(a) of the GST Act.

In this case, Entity ABC advises that its investment activities involve the making of input taxed financial supplies. Therefore, to the extent that Entity ABC's acquisitions relate to the making of its input taxed financial supplies they will be denied creditable purpose under paragraph 11-15(2)(a) of the GST Act. From what we are advised, Entity ABC's acquisition of trustee services and fundraising expenses are acquired, to some extent, in relation to its making of input taxed financial supplies. Therefore, to the extent that those acquisitions are related to Entity ABC's input taxed financial supplies they will be denied creditable purpose and Entity ABC will not be entitled to the input taxed credits to such extent. Entity ABC's acquisition of investment management services is solely acquired in relation to its input taxed financial supplies and therefore Entity ABC is not entitled to any input tax credits on that acquisition.

Financial acquisitions threshold

An exception rule exists under section 11-15(4) of the GST Act which provides that an acquisition is not treated as relating to making supplies that would be input taxed, if the only reason it would be input taxed is because it relates to making financial supplies and the entity does not exceed the FAT.

The purpose of the FAT is to allow entities that make a relatively small amount of financial supplies, as compared to their taxable supplies or GST free supplies, to claim full input tax credits on acquisitions they make in relation to the making of their input taxed financial supplies.

If an entity does not exceed the FAT, it will be entitled to full input tax credits for its acquisitions relating to making financial supplies.

An entity exceeds the FAT if it makes, or is likely to make, financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of either:

· $50,000, or such other amount specified in the Regulations (first limb test), or

· 10% of the total amount of input tax credits to which the entity would be entitled (second limb test).

Please note that the first limb test was increased from $50,000 to $150,000 with effect from 1 July 2012.

If either or both of these levels are exceeded, it will have exceeded the FAT.

As per subsection 189-15 of the GST Act, a 'financial acquisition' is an acquisition that relates to the making of a financial supply (other than a financial supply consisting of a borrowing).

To determine whether an entity exceeds the FAT in a given month it will need to consider its acquisitions in:

· that month and the previous 11 months (current acquisitions), and

· that month and the next 11 months (future acquisitions).

Subsection 189-5(1) of the GST Act states:

(1) You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during the 12 months ending at the end of that month were made solely for a *creditable purpose, either or both of the following would apply:

(a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $50,000 or such other amount specified in the regulations;

(b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during that 12 months (including the financial acquisitions).

Subsection 189-10(1) of the GST Act states:

(1) You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during that month and the next 11 months were made solely for a *creditable purpose, either or both of the following would apply:

(a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $50,000 or such other amount specified in the regulations;

(b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during those months (including the financial acquisitions).

(*Please note that the references to $50,000 in the above sections was increased to $150,000 with effect from 1 July 2012).

If after having considered its current acquisitions under the first and second limbs tests and also its future acquisitions under the first and second limb tests results in the entity not exceeding the FAT, it will be entitled to full input tax credits on its financial acquisitions.

However, if after having considered its current acquisitions under the first and second limbs tests and also its future acquisitions under the first and second limb tests results in the entity exceeding the FAT, it will not be entitled to the input tax credits on its acquisitions to the extent that the acquisitions relate to the making of input taxed financial supplies.

In this case, Entity ABC will need to determine whether it exceeds the FAT taking into account all relevant financial acquisitions and the size of the input tax credits on such acquisitions.

Entity ABC will be entitled to the input tax credits on its acquisitions (including its financial acquisitions) set out in this ruling if it does not exceed the FAT.

If Entity ABC exceeds the FAT, it will not be entitled to the input tax credits on acquisitions to the extent that those acquisitions relate to the making of input taxed financial supplies.

Reduced Input Tax Credits

If an entity exceeds the FAT, it will not be entitled to the input tax credits on its acquisitions to the extent that the acquisitions relate to the making of input taxed financial supplies. However, a special rule under Division 70 of the GST Act provides that certain specific acquisitions relating to the making of financial supplies can attract a reduced input tax credit even though no input tax credit could arise under the basic rules. Those acquisitions are referred to as reduced credit acquisitions and are listed in the table in subregulation 70-5.02(2) of the GST Regulations.

Listed in the table in subregulation 70-5.02(2) of the GST Regulations are items 23 and 24 which concern funds management services. Specifically items 23 and 24 relate to:

23. The following investment portfolio management functions, including those functions for superannuation schemes:

(a)   management of a client's asset portfolio;

(b)   management of an investment portfolio for a trust or superannuation fund;

(c)   acting as a trustee of a trust or superannuation fund;

(d)   acting as a single responsible entity;

(e)   asset allocation services

24. The following administrative functions in relation to investment funds, including those functions for superannuation schemes:

(a)   maintaining member and employer and trustee records and associated accounting;

(b)   processing of applications, contributions, benefits and distributions;

(c)   processing transfer between funds and trusts;

(d)   production and distribution of reports, statements and forms to members, employers and trustees;

(e)   handling of inquiries and complaints made by members;

(f)   archives storage, retrieval and destruction services;

(g)  statement processing and bulk mailing;

(h)  compliance with industry regulatory requirements, excluding taxation and auditing services

It should be noted that Regulation 70-5.03 of the GST Regulations specifies that the percentage of the input tax credit for each kind of reduced credit acquisition is 75%.

In addition, subsection 70-5(1A) of the GST Act also provides that:

However, an acquisition is not a reduced credit acquisition to the extent (if any) that, without this Division applying, an entity is entitled to an input tax credit for the acquisition.

Therefore, an entity will be entitled to a reduced input tax credit on an acquisition that is a reduced credit acquisition to the extent that the entity is not already entitled to full input tax credits on that acquisition.

Where Entity ABC makes an acquisition that is a reduced credit acquisition (for example, an acquisition that falls within item 23 or 24), the Foundation will be entitled to a reduced input tax credit on that acquisition to the extent that the Foundation is not already entitled to full input tax credits on that acquisition.

The Commissioner's views on reduced credit acquisitions are contained in Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1).