Edited version of your private ruling

Authorisation Number: 1012503048717

Ruling

Subject: GST and financial supplies

Questions

1. Is Entity A making a GST-free supply under Item 4(a) in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ('Item 4') when a customer uses the foreign exchange products listed below for trading or hedging purposes and the relevant funds are to be used for payment to an entity overseas:

a) an FX Spot;

b) an FX Forward that:

(i) is deliverable

(ii) can only be cash settled, or

(iii) is deliverable, but includes the right to cash settlement

c) an FX Option that is deliverable

d) a Margin FX

e) an FX Swap

2. (a) Does Entity A make an input taxed acquisition-supply under section 40-5 where it enters into the transactions in question 1?

(b) To the extent that acquisitions made by Entity A relate to the transactions listed in question 1, do they solely relate to the provision-supply by Entity A of the relevant product, rather than to both the provision-supply and the acquisition-supply identified in question 2(a), for the purpose of determining creditable purpose under paragraph 11-15(2)(a)?

3. Are brokerage services supplied by the Entity B GST group members for derivatives traded on foreign exchanges GST-free as a supply in relation to rights that are for use outside Australia under Item 4?

4. Are facilitation services supplied by Entity B GST group members in relation to overseas telegraphic transfers and overseas bank drafts to customers other than in relation to an account, GST-free as a supply in relation to rights that are for use outside Australia under Item 4?

5. (a) Is the provision by Entity A of the Cash Management Account (CMA) product to customers GST-free under Item 4 to the extent to which the account is used for overseas telegraphic transfers and overseas bank drafts?

(b) If the answer to (a) is 'no', is the supply by Entity A in relation to an overseas telegraphic transfer GST-free under Item 4 when it is provided to a CMA account holder in Australia?

(c) If the answer to (a) is 'no', is the supply by Entity A in relation to an overseas bank draft GST-free under Item 4 when it is provided to a CMA account holder in Australia?

Answers

1 When a customer uses the foreign exchange products in Question 1 for trading or hedging purposes and the relevant funds are to be used for payment to an entity overseas, Entity A's supply of:

(a) an FX Spot is GST-free under Item 4 to the extent that the customer intends to take delivery of the foreign currency supplied by way of a credit to the customer's nominated account held outside of Australia.

(b)(i) an FX Forward that is deliverable is GST-free under Item 4 to the extent that the customer intends to take delivery of the foreign currency supplied by way of a credit to the customer's nominated account held outside of Australia to the customer's nominated account held outside of Australia.

(ii) an FX Forward that can only be cash settled will not meet the requirements for Item 4, and the supply will be an input taxed financial supply.

(iii) an FX Forward contract that is deliverable, but includes the right to cash settlement will be GST-free under Item 4 to the extent that Entity A is able to ascertain that the customer's intention is to take delivery of the foreign currency by way of a credit to the customer's nominated account held outside of Australia.

(c) an FX Option will not be GST-free under item 4; however it will be GST-free under paragraph 9-30(1)(b) where the option provides the right to receive a supply of foreign currency that the customer intends to be credited to a bank account held outside Australia.

(d) a Margin FX will not meet the requirements of Item 4 and is not GST-free.

(e) an FX Swap is GST-free under Item 4 to the extent that the customer intends to take delivery of the currency supplied by Entity A under each leg of the swap by way of a credit to a nominated account held by the customer outside of Australia.

2 (a) FX Spot

Yes, Entity A does make an input taxed acquisition-supply under the FX Spot contract, but the acquisition-supply is GST-free under Item 4, to the extent that Entity A intends that the currency it receives is to be credited to an account it holds outside Australia.

FX Forward

Yes, Entity A does make an input taxed acquisition-supply under the FX Forward but the acquisition-supply is GST-free under Item 4 to the extent that Entity A intends that the currency it receives is to be credited to an account held by Entity A outside Australia.

FX Option

No, under the FX Option Entity A does not make an acquisition-supply.

Margin FX

Yes, under the Margin FX Entity A does make an input taxed acquisition-supply.

FX Swap

Yes, under the FX Swap Entity A does make an input taxed acquisition-supply, but the acquisition-supply is GST-free under Item 4 to the extent that Entity A intends that the currency it receives under each leg of the swap is to be credited to an account held by Entity A outside Australia.

(b) FX Spot:

Yes, acquisitions made by Entity A that relate to the deliverable FX Spot transactions solely relate to the provision-supply of the currency supplied by Entity A under the FX Spot in Q1, not the acquisition-supply (currency received by Entity A) identified in Q2(a), for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

FX Forward that is deliverable:

Yes, acquisitions made by Entity A that relate to the deliverable FX Forward transactions solely relate to the provision-supply of the currency supplied by Entity A under the FX Forward in Q1, not the acquisition-supply (currency received by Entity A) identified in Q2(a), for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

FX Forward that can only be cash settled:

As both the provision-supply and acquisition-supply by Entity A will be input taxed financial supplies, it is unnecessary to determine the extent to which acquisitions relate to each specific supply because it doesn't change the extent of creditable purpose.

Margin FX:

As both the provision and acquisition-supply by Entity A will be input taxed financial supplies, it is unnecessary to determine the extent to which acquisitions relate to each specific supply because it doesn't change the extent of creditable purpose.

FX Swap:

Yes, acquisitions made by Entity A that relate to the deliverable FX Swap transactions solely relate to the provision-supply of the FX Swap in Q1, not the acquisition-supply identified in Q2(a), for the purpose of determining creditable purpose under paragraph 11-15(2)(a), but only to the extent that the two currency amounts received by Entity A would have been solely consideration if they were provided by way of two separate FX Spot and forward transactions (or two forwards).

3 Yes, the supply of brokerage services in relation to derivatives traded on overseas exchanges is a supply made in relation to rights that are for use outside Australia and is GST-free under Item 4.

4 Yes, the facilitation service that Entity B supplies for non-account holders who need overseas telegraphic transfers and/or overseas bank drafts is GST-free under Item 4.

5 (a) No, the provision of Entity A's CMA is not a GST-free supply to any extent.

(b) Yes, the supply by Entity A in relation to an overseas telegraphic transfer is GST-free under Item 4 when it is provided to a CMA account holder in Australia.

(c) Yes, the supply by Entity A in relation to the overseas bank draft is GST-free under Item 4 when it is provided to a CMA account holder in Australia.

Relevant facts and circumstances

Entity B is registered for GST and is the representative member of the Entity B GST group. Entity A is a member of the Entity B GST group.

This ruling request concerns types of financial products provided by various members of the Entity B GST group:

· Entity B's foreign exchange products, including FX Spot and FX derivatives,

· brokerage services for derivatives traded on foreign exchanges,

· facilitation services in relation to telegraphic transfers,

· the Cash Management Account (CMA).

· Each product is described below.

Foreign Exchange transactions

Entity A provides various foreign exchange transactional services to clients, including FX Spot and FX derivatives.

Foreign exchange transactions at Entity A are typically governed by standard ISDA documentation.

In a small number of cases Entity A may trade with small Australian counterparties under an FX Master Agreement which is unique to Entity A and modelled off the ISDA documentation.

Specific commercial details for each trade are set out in a confirmation.

Payment of Australian dollars (AUD) can be via RTGS (real time gross settlement) which is the preferred method or internet banking, where funds are being paid in from other banks. There are no other means available to the customer to settle the transaction. Entity A does not accept cheque, notes or coins.

The foreign currency bought is delivered electronically. The customer needs to have a foreign currency account; however, there is no requirement for that account to be held with Entity A or another Australian ADI. Payment methods for foreign currencies are done electronically, though systems tend to differ in each country / currency.

If (or when) Entity A receives payments in foreign currency they will be credited to an account held by Entity A in an overseas country. For instance, if Entity A receives United States dollars (USD), they will be deposited into a United States (US) bank account held by Entity A in the US. Entity A can also settle against collateral held in Entity A accounts if the customer holds such accounts.

All of the FX Spot and FX derivative products are entered into by Entity A as principal. That is, the counterparty to all transactions with the customer is Entity A.

Entity A does not charge fees or commissions on the FX Spot and FX derivative products. It receives a margin in the form of an FX rate spread. Entity A may pass on third party costs, although in practice it rarely does so.

Entity A's customers generally use FX products either for hedging (i.e. to protect against FX movement risks), investment (i.e. to hold for the purpose deriving a return) or trading (i.e. to make payments to overseas entities) purposes. However, as part of this ruling application Entity B accept that FX products used for investment purposes are not 'for use outside Australia', and has not included them in their ruling application.

In most cases, Entity A possesses significant information about its customers that use its FX Spot and FX derivative products, including the nature of the customer and the reason why the customer uses the particular product. For example:

· Importers use FX Spot, FX Forwards and FX Options to pay suppliers in foreign currencies and FX Swaps, FX Forwards, FX Options and FX Margin to hedge unfavourable foreign exchange movements against future payments to suppliers which need to be made in foreign currencies.

· Exporters use FX Spot, FX Forwards and FX Options to convert foreign currency receipts from customers and to hedge against unfavourable foreign exchange movements against future receipts from customers.

· Fund managers (including Entity B funds) use FX Spot to buy or sell assets overseas (e.g. equities or bonds) and FX Swaps, FX Forwards, FX Options and FX Margin to hedge against future payments in respect of such transactions, as well as to protect the local currency value of foreign investments.

FX Spot

A Spot Contract is an agreement to exchange one currency for another at an agreed exchange rate, with settlement generally taking place two business days after the transaction is agreed. In a Spot Contract, the variables are:

(a) the denomination and amount of the currency being bought;

(b) the denomination and amount of the currency being sold; and

(c) the exchange rate.

The currency bought under Spot contracts is delivered electronically to the client.

FX Spot trades for the most part will physically settle (that is, one currency is exchanged for another).

FX Derivatives

Customers are able to enter into both buy and sell transactions for all derivatives. For example, a customer may enter into an FX Forward contract to buy USD or to sell USD.

Typically, an Entity A customer will cash settle FX derivative transactions in AUD. However, cash settlement can be in any currency the client wishes. For margin clients, this is most likely to be in the same currency or currencies that the clients hold their collateral in.

There are various types of FX derivatives offered by Entity A. The main types are described as follows.

FX Forwards

A forward contract is an agreement to buy and sell currency at a future date further ahead than the spot date (more than two days and up to a number of years after the trade date) for an agreed rate. Forward contracts can either be deliverable or non-deliverable and can be closed out by the customer before the maturity date. In their request for a private ruling Entity B states that "the parties have the option to cash settle the agreement".

Where customers use the FX Forwards for hedging purposes only, they generally cash settle the Forward and then acquire the currency using the FX Spot at the current exchange rate. They offset the cash settlement amount for the FX Forward against the FX Spot transaction.

FX Options

AN FX Option is an agreement that gives the customer the right, but not the obligation to enter into a foreign currency transaction at a pre-determined exchange rate on or before a pre-determined date in the future. The customer pays a Premium for the Option, but is not obligated to exercise the Option.

FX Options contracts will always be deliverable. However, the client may direct Entity A to cash settle before the FX Option expires. The way Entity A generally performs cash settlement of FX Options is to exercise them first (i.e. creating an underlying FX Spot trade) on behalf of the client (e.g. the client buys AUD/USD), and then close out the position for the client (client sells AUD/USD).

FX Swap

A forex swap (or FX Swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates. An FX Swap consists of two legs, which are executed simultaneously. Commonly, the two legs are an FX Spot transaction and an FX Forward transaction, although they can also be two FX Forward transactions with different forward dates. FX Swaps are deliverable; that is each entity delivers the specified currency for each 'leg' of the FX Swap.

Where the customer uses the FX Swap for hedging purposes, the position is similar to the use of the FX Forward for hedging purposes, described above.

Margin FX

Margin FX can be contrasted to the spot currency market. FX Spot trades for the most part, will physically settle (that is, one currency is exchanged for another). Margin FX trading products are derivatives.

With Margin FX trading, the customer gains exposure to price movements in forex markets without physically settling the transactions.

A net profit or loss is derived upon the close out of positions and where need be, this profit or loss is converted back into the collateral currency of the Margin FX trader. A relatively small collateral deposit ("initial margin") is required in order to initiate positions, the value of which depends on the movement of the exchange rates for a selected currency pair. Additional amounts ("variation margin") may be payable over the life of the transactions if, as a result of the market movements, the initial margin is insufficient to cover Entity A's exposure.

The customer acquires currency pairs in the relevant currencies to achieve the same outcome as with FX Forwards used for hedging purposes.

Brokerage services for derivatives traded on foreign exchanges

Entity B carries on an enterprise in Australia and supplies facilitation/arranging services to clients that wish to trade in derivatives. Examples of products include futures, future options over index, interest and commodities (e.g. metals, gas and agricultural products) and single stock options. Examples of foreign exchanges on which these products are traded are:

· Norwegian Options & Futures Clearing House (NOS)

· Singapore Exchange (SGX)

· LCH.Clearnet (LCH)

· London Metal Exchange (LME)

· Hong Kong Futures Exchange (HKFE)

Entity B GST group members charge fees and commissions for these services. Entity B provides brokerage on the derivative products that can be grouped into the 3 categories described below.

Deliverable commodity futures

Futures contracts are standardised. Since all futures contracts for a given future month are exactly alike, obligations under futures contracts are easily transferred from one party to another. A client who holds a contract to buy may cancel this obligation by taking a new contract to sell in the same month, a process known as offsetting or closing out the contract. In the same way, the holder of a contract to sell can close out by taking a new contract to buy. In each case there will be a profit or loss equal to the difference between the buying and selling prices multiplied by the standard contract amount. In practice, the vast majority of contracts (some X%) are offset in this manner, the remainder being fulfilled by delivery or by mandatory cash settlement in those markets where no provision for delivery exists (where the futures can only be cash settled they fall into the non-deliverable derivatives description below).

The way that futures exchanges are structured means that Entity B enters into the futures contracts for its client as principal.

Entity B is required to enter into futures contracts as principal but at the same time acts as agent and takes instructions from their Australian client in relation to those contracts. Entity B states that it facilitates the clients' dealing in the relevant contracts.

In those cases where delivery of the commodity occurs, the contract terms do not specify that the place of delivery is outside Australia. However, in practice delivery is always made outside Australia and Entity A does not deliver in Australia.

Non-deliverable derivatives

Non-deliverable derivatives for which brokerage services are provided all have the following features:

· The derivatives are traded on the exchange and, subject to its rules, are executed and enforceable in a jurisdiction outside of Australia (where the exchange is located). The derivatives can only be traded (i.e. entered into or exited) via the relevant overseas exchange; it is not an over the counter product. For example, the only method of a customer exiting a position is via the exchange by selling the derivative, closing out the position by taking an opposite position, or cash settling on expiry.

· The nature of the derivative contract is that both parties exchange rights and obligations to make payment(s) depending on the movement of an underlying thing (e.g. a commodity, security, index or a rate), but there is no right or obligation to deliver or receive the underlying thing.

Options over shares listed on overseas exchanges and options over futures

Options over listed shares on overseas exchanges have the following features:

· The options are only traded on the relevant overseas exchange.

· On exercise, delivery of the share must occur via the relevant overseas exchange.

Brokerage services relating to options over futures are also provided.

Facilitation services in relation to telegraphic transfers and overseas bank drafts to non-account customers

In certain circumstances, members of the Entity B GST group provide forex services of the type described in relation to the CMA below, other than in relation to an account. That is, customers that do not have an account with Entity A use Entity B GST group members to facilitate overseas telegraphic transfers (OTT) and overseas bank drafts (OBD).

An example is for an investor in a superannuation fund which is managed by an Entity B entity. If such an investor wishes to convert the proceeds of its superannuation account to a foreign currency and transfer those funds to an overseas bank account (for example, if the investor is retiring overseas), it may request that Entity B assist with that request. If the investor does not have an Entity A bank account, an Entity B entity will facilitate this transaction for the investor without providing an account.

Whilst Entity B has not described in detail the type of 'facilitation services' that they supply, their request for a private ruling makes the following references to certain terminology used in their overseas telegraphic transfer and bank draft request form and states:

Entity B can arrange overseas telegraphic transfer and foreign currency bank drafts for its clients (referred to as the facility)

Entity B GST group members charge fees and commissions for these services. It is noted by Entity B that the counterparty to these transactions with the customer is OzForex, and that the Entity B GST group entity acts as agent / facilitator in relation to the transaction.

Entity B's website on international money transfers states that OzForex pays a 'referral fee' to Entity B if a customer uses OzForex services.

Therefore, the facilitation service supplied by Entity B is a referral service, which includes forwarding applications completed by clients, to OzForex and facilitating the services necessary to enable the customers to obtain OTT and/or OBD for which a referral fee is payable by OzForex.

Cash Management Account

Details of the CMA are set out in the Product Information Statement a copy of which has been provided as part of this ruling request.

The CMA is a deposit account provided by Entity A (an Australian ADI) to customers. The CMA is an interest bearing account and relevantly offers depositors OTTs and OBDs.

Entity A charges fees to customers for certain account features, including for cheque books, bank cheques and dishonoured payments. It also charges fee for OTTs and OBDs.

An OTT (or International Money Transfer) is an electronic transfer of funds to an overseas account at another financial institution. An OTT is in substance an agreement by the customer to purchase foreign currency from Entity A with the funds to be transmitted to the overseas account, rather than provided directly to the customer.

An OBD is a foreign currency Bank Cheque drawn on an overseas bank. An OBD is in substance an agreement by the customer to purchase foreign currency from Entity A with the funds to be used to fund the preparation of the bank draft, rather than provided directly to the customer.

OTTs and OBDs supplied to CMA depositors are facilitated through an FX services agreement with OzForex Pty Ltd (OzForex).

Under the FX Services Agreement, OzForex agrees to provide various services to Entity A, including:

(a) Processing foreign exchange transactions (for telegraphic transfers or in respect of bank drafts) on receipt of instructions from Entity A.

(b) Remit proceeds of converted transactions as Entity B directs.

(c) Arrange foreign exchange transactions (telegraphic transfers) on receipt of instructions from Entity B's specified clients (including CMA depositors).

OzForex charges fees for these services, being Y% of the amount of the transaction plus a dollar fee.

The Product Disclosure Statement (PDS) available through the Entity B website is one that is supplied by OzForex to the customer. According to the PDS, OzForex is the provider of the foreign exchange service to the customer. Therefore, the client enters into a separate agreement with OzForex in relation to the foreign exchange service.

Customers have two options in relation to an OTT and in both cases the fees set out in table 1 above are payable to Entity A as principal. These options are:

· customers can complete an Overseas Telegraphic Transfer and Bank Draft Request form which is faxed or mailed back to Entity B. Entity A then initiates the telegraphic transfer. In these circumstances, the relevant services in the FX Services Agreement are those described at (a) and (b) above.

· customers can register online with OzForex and initiate transfers from their CMA via Entity B's investor portal online. In these circumstances, the relevant services in the FX Services Agreement are those described at (c) above.

Customers must use the Overseas Telegraphic Transfer and Bank Draft Request form when applying for bank drafts.

In that form, for a telegraphic transfer, the customer lists the overseas bank account details and the currency details. For a bank draft, the customer lists the overseas addressee, the country in which the draft is to be presented and the currency details.

Under the conditions of use in the form, Entity B may utilise the services of any financial institution or foreign exchange service provider or their agents for the purposes of giving effect to the customer's instructions for the use of the overseas telegraphic transfer / foreign currency bank drafts services and for the provision of the foreign exchange services.

Entity B and members of the Entity B GST group:

· make supplies for consideration which are connected with Australia

· carry on an enterprise in Australia

Contracts entered into between Entity A and Australian customers in Australia are governed by Australian contract law.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-10

A New Tax System (Goods and Services Tax) Act 1999 9-30

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

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

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

Reasons for decision

Summary of submissions

Foreign Exchange transactions

Each of Entity A's FX Spot, FX Forwards, FX Options, FX Swap and Margin FX products are supplies in relation to rights under Item 4.

Where customers use FX Spot, FX Forwards, FX Options, FX Swaps and Margin FX products for trading or hedging purposes and the relevant funds are to be used for payment to an entity overseas, these rights are for use outside Australia.

Accordingly, where customers use FX Spot, FX Forwards, FX Options, FX Swaps and Margin FX for trading or hedging purposes and the relevant funds are to be used for payment to an entity overseas, these are supplies in relation to rights by Entity A for use outside Australia under Item 4. Such supplies are GST-free financial supplies.

Entity A does not make an input taxed acquisition-supply where it enters into FX Forwards, FX Options, FX Swap and Margin FX products.

Brokerage services for derivatives traded on foreign exchanges

Brokerage services supplied by Entity B GST group members for derivatives traded on foreign exchanges are GST-free as a supply in relation to rights that are for use outside Australia under Item 4.

Facilitation services in relation to telegraphic transfers and overseas bank drafts

Facilitation services supplied by Entity B GST group members in relation to OTTs and OBDs to customers other than in relation to an account are GST-free as a supply in relation to rights that are for use outside Australia under Item 4.

Cash Management Account

Entity A's financial supply involving the provision of an interest in the CMA to customers and specifically, OTTs and OBDs, constitutes a supply in relation to rights for the purpose of Item 4.

Where the funds which are the subject of the telegraphic transfer are deposited into an overseas bank account or the bank draft has an overseas addressee (and the country in which the draft is to be presented is not Australia), these rights are for use outside Australia.

OTTs and OBDs constitute supplies in relation to rights for use outside Australia under Item 4 and hence are GST-free financial supplies.

Background

1. The issues considered in this private ruling broadly revolve around the question of the GST character of the supply of certain financial products or services. In particular, whether the supply of those products is a GST-free supply or partly GST-free under Item 4. Under Item 4 a supply may be GST-free if it is a supply that is made in relation to rights and if the rights are for use outside Australia.

2. Supply is defined in subsection 9-10(1) to mean 'any form of supply whatsoever'. Subsection 9-10(2) states that 'without limiting subsection (1), supply includes any of these' and includes at paragraph (f) a financial supply. A financial supply is input taxed (section 40-5(1)) and 'financial supply' has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) (section 40-5(2)). The supply of various 'financial interests' (listed in subregulation 40-5.09(3)) will be a financial supply if certain requirements of the regulations are satisfied. These requirements, set out in subregulation 40-5.09(1), are that:

· the provision, acquisition or disposal of the interest is for consideration, in the course or furtherance of an enterprise and connected with Australia; and

· the supplier is registered or required to be registered, and a financial supply provider in relation to the supply of the interest.

3. Subsection 9-30(3) contemplates that a supply may be both GST-free and input taxed, and to the extent that a supply would otherwise have the character of both, provides that the supply is to that extent GST-free and not input taxed. Hence, to the extent that the supply of a particular financial product or service has the character of being both GST-free and input taxed, it will be GST-free.

4. Subsection 9-10(4) states that 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. This is sometimes referred to as a supply of 'money for money'. The relevance of this is that each supply of money will also be consideration for the other, and may give rise to acquisition-supplies.

Travelex and the ATO approach to applying Item 4

5. In Travelex Ltd v. Commissioner of Taxation [2010] HCA 33; 2010 ATC 20-214;76 ATR 329 (Travelex), the High Court found that the supply of foreign currency banknotes by an entity to a customer whose intention was to use the banknotes outside Australia is a GST-free supply under Item 4.

6. Following Travelex, the ATO modified its view of Item 4. Applying Item 4 to a supply is a two step process. First, determine if the supply is one that can be said to be 'made in relation to rights'. Then secondly, determine whether the relevant rights are for use outside Australia.

7. The ATO view is that the term 'supply that is made in relation to rights' in Item 4 is capable of covering the following three categories of supplies:

· Category 1 - supplies identified in paragraph 9-10(2)(e), i.e. the creation, grant, transfer, assignment or surrender of a right. A supply will only fit within Category 1 if the essential character or substance of the supply, or of a separately identifiable part of the supply, is one of rights; rights that are merely incidental or ancillary to the supply will not be sufficient.

· Category 2 - supplies of things that derive their value exclusively, or almost exclusively, from rights and through the supply, the supplier either supplies the rights to the recipient or surrenders the rights; the Fijian banknotes in Travelex is an example of this category; and

· Category 3 - supplies of services directly connected with rights. Under this category, the service facilitates a dealing in or exercise of the rights; or the service affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the rights. For example, share brokerage services.

8. In regard to the second step under Item 4, the relevant use is the intended use of the recipient, and will depend on the nature of the right in question. For example, a copyright or patent would be for use where the right is intended to be exploited. Alternatively, in some instances the intended use may be to prevent others from exploiting the copyright or patent.

What does this mean for financial products?

9. The matter before the High Court in Travelex involved a supply of foreign currency banknotes acquired for use outside Australia.

10. That case involved an exchange of Australian banknotes for foreign currency (Fijian) banknotes. Both the Australian banknotes and the Fijian banknotes were 'money'. This was an important (though in the facts of the case, self evident) point, as a supply of money is not a supply at all for GST purposes if it is not consideration for another supply that is also a supply of money.

11. The banknotes were also 'currency', again a self evident point. The High Court found that though the banknotes were tangible things, they had no value aside from the rights that attached to them. These rights were said by the Court to be statutory rights, under the laws of Fiji, and the rights attaching to the banknotes were used when the banknotes themselves were used (either spent or otherwise disposed of).

12. However, while the subject matter of the supply in Travelex was foreign currency banknotes, it is the relevant rights attaching to them that was important. This is the approach to be taken to other supplies, including financial products and services.

13. In Travelex, Heydon J said that the answers to the questions of 'was there a supply?' and if so 'was the supply made in relation to rights?' depended on 'the legal nature of the bank notes'. If follows that we need to consider the legal nature of each supply. This is done further below under the reasons for decision for each transaction or product. However, it may be useful to firstly consider the legal nature of currency, bank accounts and bank transfers.

What is 'currency' and does it matter when characterising a supply?

14. For GST purposes, 'money' includes 'currency (whether of Australia or of any other country)' but does not include 'currency the market value of which exceeds its stated value as legal tender in the country of issue'.

15. The term 'currency' is not defined in the GST Act or GST Regulations. It appears at Item 9 in the table to subregulation 40-5.09(3) as a financial interest in or under 'Australian currency, the currency of a foreign country, or an agreement to buy or sell currency of either kind'.

16. Part 7 of Schedule 7 to the GST Regulations provides examples of Item 9 financial interests. The first example listed in Part 7 is 'foreign currency in cash form'. This may suggest that for the purpose of the regulations, currency can exist in a non-cash form. Examples listed at Items 5 to 8 are not of currency per se, but of 'an agreement to buy or sell currency of either kind'. However, foreign currency drafts (Item 2), travellers cheques (Item 3) and international cheques (Item 4) are the result of an exchange having already occurred, rather than being an agreement to exchange, and so in terms of Schedule 7 are examples of non-cash currency for the purposes of the regulations.

17. To some degree the nature of physical currency as examined in Travelex is unique because it is dealing with physical currency that is legal tender. The holder has certain statutory rights that attach to the physical tokens by virtue of the law of the country of issue.

18. However, in isolation little if anything turns on whether an instrument can be said to be 'currency'. For the purposes of Item 4, what matters is the identification of rights, if any, that attach to the supply of the particular instrument. The mere fact that a product, service or transaction is denominated in terms of a foreign currency has little bearing on the rights, if any, which are the subject of the supply.

19. This means that other supplies of money need to be assessed on a case by case basis to determine whether the supply is made in relation to rights and, if so, whether those 'rights are for use outside of Australia. It follows that determining that a supply is an Item 9 interest in currency, may not mean that the application of Item 4 will be applied in the same way as it was in Travelex. The difference between notes and coins on the one hand, and other forms of money such as bank deposits are highlighted in the discussion below.

Terminology

· 'Currency' will be used in a non technical sense from this point, for example a foreign currency spot transaction will refer to a transaction involving no physical banknotes but settlement via bank account funds.

· 'Physical currency' will be used when referring to physical banknotes or coin.

· 'Bank' is used in a non technical sense to refer to entities that are ADIs in Australia offering accounts as well as similar overseas equivalent financial institutions.

· 'Bank money' refers to a customer's credit balance held in a bank account.

The banker/customer relationship and the nature of a bank account

20. The issues raised in this private ruling also require a consideration of the banker/customer relationship, the nature of bank accounts and transfers to and from accounts.

21. The relationship of banker to customer is essentially one of contract. This consists of the general contract between the bank and its customer and "special contracts" which relate to specific transactions or banking services.

22. It is settled law that the holder of a bank account with a credit balance has a debt owed by the bank, rather than an interest in specific money held by the bank. This was explained by the High Court in Croton v R:

The subject matter of the instant charges was money, in each case expressed as a number of dollars, that is, paper money, or coin to the stated face value. ... But, though in a popular sense it may be said that a depositor with a bank has "money in the bank ", in law he has but a chose in action, a right to recover from the bank the balance standing to his credit in account with the bank at the date of his demand, or the commencement of action. That recovery will be effected by an action for debt.

23. There are other usual incidents of the banker/customer relationship, for example the bank will not cease to do business with the customer except on reasonable notice. Terms of the relationship may vary depending on the specific contract. However, the key aspect for the current purpose appears to be the creditor/debtor relationship and the account holder's right to recover the amount of a credit balance in an account.

24. It is also settled law that when a bank receives money from a customer, or receives money from some third party for the account of a customer, the bank does so as borrower.

25. While physical currency may be legal tender, for practical and commercial purposes funds in bank accounts (bank money) are readily accepted as a means of payment. Also, funds held in bank accounts could be said to be economically and functionally equivalent to currency as a medium of exchange and store of value. At a practical level, payments made by banknotes and coin as a percentage of total payments made in the modern commercial world would be very small. These points were noted in the High Court Bank of NSW v Commonwealth ("Bank Nationalisation case") [1948] HCA 7; (1948) 76 CLR 1 per Rich and Williams JJ at 46 (emphasis added):

It is true that in a modern community, as the evidence in the present cases proves and as Lord Wright pointed out in the Trinidad Case (1945) AC1 , the principal means of payment and exchange is not legal tender in the shape of notes and coin but bank credit or bank money as it has been called, and that payment by bank money is a matter of book entries involving a debit in one bank to the account of the debtor and a credit in the same or another bank to the account of the payer. But as Duff C.J. said in Reference re Alberta Statutes (1938) SCR (Can) 100, at p 116 money as commonly understood is not necessarily legal tender. Any medium which by practice fulfills the function of money and which everybody will accept in payment of a debt is money in the ordinary sense of the word even although it may not be legal tender.

26. The account holder's rights in bank money lie in the chose in action or debt owed by the bank that give the right to repayment either to the customer in physical currency or by payment to a third party on the demand of the customer (each of which is a way of effecting repayment of the debt owed). The money deposited into the account, giving rise to the account holder's bank money, is in fact the bank's money to use as it pleases. In return, the bank owes the account holder a debt.

The legal nature of electronic transfers to a bank account

27. When a customer 'transfers money' from their account to another bank account (either with the same bank or another bank), there is no actual movement of physical money. This was discussed by Lord Millett in Foskett v McKeown (the Foskett case) as follows:

We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. ... We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked.

28. Lord Browne-Wilkinson, in agreeing with this statement, made it clear in his decision that the reference to 'money at the bank' in the statement above meant physical cash:

On a proper analysis, there are 'no moneys in the account' in the sense of physical cash. Immediately before the improper mixture, the trustee had a chose in action being his right against the bank to demand a payment of the credit balance on his account. Immediately after the mixture, the trustee had the same chose in action (i.e. the right of action against the bank) but its value reflected in part the amount of the beneficiaries' moneys wrongly paid in.

29. On depositing cash into a bank account, a customer relinquishes proprietary interest in that specific physical currency. In return, a bank debt owing to the customer is created or increased.

30. The debits and credits referred to by Lord Millett in the Foskett case merely reflect the changes in the liability between the various parties to the transfer. That is, between the payer and its bank, between the payee and its bank, and between the payer and the payees banks and any intermediaries acting on either bank's behalf. Alan Tyree in his book Banking Law in Australia describes what happens as a "change in institutional liabilities".

31. One explanation of the basis for payments through a payment system is provided in the following terms:

In modern commercial practice payment is commonly made through the transfer of funds from the bank account of the debtor to that of the creditor at the same or with another bank. In such cases the creditor agrees to accept a claim against his bank in substitution for his claim against his original debtor. The creditor's claim against his bank stems from the basic principle that the relationship between banker and customer, as far as pecuniary dealings are concerned is that of debtor and creditor.

32. In R v Preddy, the House of Lords considered the nature of a credit to a bank account in the context of 'whether the debiting of a bank account and the corresponding credit of another's bank account … amounts to the obtaining of property'. In that case, loans had been obtained from a building society based on false representations. Lord Goff stated that (emphasis added):

The question remains, however, whether the debiting of the lending institution's bank account, and the corresponding crediting of the bank account of the defendant or his solicitor, constitutes obtaining of that property. The difficulty in the way of that conclusion is simply that, when the bank account of the defendant (or his solicitor) is credited, he does not obtain the lending institution's chose in action. On the contrary, that chose in action is extinguished or reduced pro tanto, and a chose in action is brought into existence representing a debt in an equivalent sum owed by a different bank to the defendant or his solicitor.

He went on to say that:

In truth, the property which the defendant has obtained is the new chose in action constituted by the debt now owed to him by his bank, and represented by the credit entry in his own bank account. This did not come into existence until the debt so created was owed to him by his bank, and so never belonged to anyone else. True, it corresponded to the debit entered in the lending institution's bank account; but it does not follow that the property which the defendant acquired can be identified with the property which the lending institution lost when its account was debited.

33. In summary the above analysis highlights the following:

· Legally, a holder of a bank account with a credit balance has a debt owed by the bank, rather than an interest in specific money held by the bank. The customer has a chose in action being the right to repayment of the debt.

· Transfers from one account to another do not involve the transfer of physical currency or the transfer of ownership of a chose in action (right). Rather they involve the extinguishment (or reduction in value) of one chose in action, and the creation (or increase in value) of another, represented by the relevant accounting entries.

This highlights that there are essential differences in the legal nature of physical currency and bank money (and other payment instruments).

Detailed reasoning

Question 1

34. Our background information explains the general principles regarding supplies. Therefore, what now needs to be considered is how these principles apply to each foreign exchange product provided by Entity A. We set out our views in respect of each product as follows:

(a) FX Spot

Supply of money

35. Under the FX Spot contract Entity A agrees to supply the 'foreign currency' in return for another currency (usually Australian dollars). Entity A 'delivers' the amount payable to the customer by transmitting it electronically to an account nominated by the customer that is denominated in foreign currency (foreign currency account).

36. The result of Entity A's supply is that the customer's foreign currency account is credited with the contracted amount. This falls within paragraph (e)(ii) of the definition of 'money' under section 195-1, being 'whatever is supplied as payment by way of' crediting an account. The consideration provided by the Spot customer is paid electronically through RTGS, internet banking, or from collateral held by the customer in an Entity A account (usually in Australian dollars). That payment also comes within paragraph (e)(ii) of the definition of money. Consequently, Entity A is making a supply of money for money in accordance with subsection 9-10(4).

37. The significance of this is that such a supply may be further characterised as a financial supply and a supply that is made in relation to rights.

Financial supplies in foreign currency transactions

38. A financial supply arises where the requirements of subregulation 40-5.09(1) are satisfied in relation to a provision, acquisition or disposal of an interest mentioned in the table in subregulation 40-5.09(3) (a financial interest). Item 9 of the table refers to an interest in or under Australian currency, the currency of a foreign country, or an agreement to buy or sell currency of either kind.

39. As an FX Spot contract is 'an agreement to buy or sell currency' within Item 9, and the requirements of subregulation 40-5-09(1) are satisfied, Entity A 's supply of that interest is a financial supply. A financial supply will be input taxed to the extent that it is not GST-free.

Application of Item 4

40. We explained that, under the FX Spot contract, Entity A makes a supply of money for money in accordance with subsection 9-10(4). However, characterising the supply as 'a supply of money' and financial supply is not in itself sufficient to identify the relevant rights (if any) to which the supply relates and hence answer the question of whether Item 4 applies.

41. In the 'Background' to this private ruling, we concluded that banknotes as per Travelex, other forms of payment such as bank money and other payment instruments, may in a practical sense perform similar functions. This is consistent with many of these supplies being money and/or a financial supply of an interest in currency under Item 9. However Item 4 requires characterising the supply by reference to the rights to which it relates. The nature of the rights may differ depending on the legal nature of the particular supply involved. This approach is aptly illustrated by Travelex as it was held that the characterisation of the supply of bank notes as money or a financial supply was not sufficient when considering whether Item 4 applies.

42. Contractually an FX Spot transaction involves two parties - Entity A and the customer. At a broad level Entity A has contracted with the customer to supply the 'foreign currency' in return for consideration in another currency.

43. Entity A's supply of money under the FX Spot transaction is made by way of crediting the customer's foreign currency account. While under the FX Spot contract there will be contractual rights that arise, these do not represent the dominant part of the supply. The thing that gives the supply value and represents the essential character or substance of the supply (paragraph 65 of Goods and Services Tax Ruling GSTR 2003/8 Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8)) is that the customer wants to acquire the foreign currency they nominate in the form of bank money (deposited into their nominated account). As such, in characterising what rights may relate to the supply under the FX Spot, it is necessary to identify the nature of the rights involved in this foreign currency in the form of bank money. Therefore, we need to analyse the supply in the context of the legal nature of bank accounts and bank transfers as set out in the background.

44. As noted in the facts, the customer's foreign currency account may be held with Entity A or another bank either in Australia or overseas. In the situation where the account is not held with Entity A, the process of crediting the customer's account will involve other parties. Consequently we will discuss each situation separately.

Payment to a foreign currency account held with Entity A

45. We explained in the background that the legal nature of what the customer receives with a credit to a bank account is a debt owed by the bank to the account holder. This debt is a chose in action. The predominant right inherent in the chose in action is the right to repayment of the debt. Consequently, when under the FX Spot Entity A credits the customer's account held at Entity A, it can be said to be supplying a debt owed to the customer which encompasses the right to repayment.

Payment to a foreign currency account held with another bank

46. Where the customer's foreign currency account is not held with Entity A, there would be at least one other bank involved, and for international transfers there could be a number of intermediaries.

47. For Entity A to meet its obligations under the FX Spot contract it must supply the 'foreign currency' by electronic delivery to the nominated account held with another bank. Entity A would initiate the transfer to this account through various payment systems. The exact arrangements will differ according to the particular banks and other intermediaries and countries involved. Through this system, the customer's account is credited with the agreed amount denominated in foreign currency.

48. The cases discussed in the background indicate that a transfer of funds between banks through a payment system does not involve any actual physical flow of money (that is, cash). Instead, the transfer in value is achieved by a series of debits and credits. The legal effect is that rights between the banks (or intermediaries) are extinguished or created.

49. The credit to the customer's account represents a chose in action that is created by the customer's bank (the beneficiary bank) based on instructions from the originating bank in the form of electronic messages. The amount of this chose in action increases the amount of the debt owed to the customer by the beneficiary bank. As explained by Lord Goff in the Preddy case, the property obtained by the customer (described in that case as the transferee) is 'the new chose in action constituted by the debt now owed … by his bank, and represented by the credit entry in his own bank account.'

50. Therefore, while Entity A is the supplier of the foreign currency amount which is ultimately credited to the customer's account, legally Entity A's rights in the foreign currency bank money are extinguished when the 'transfer' is commenced. A separate chose in action is then created by the beneficiary bank and is a debt owed by that bank to the FX Spot customer. The question becomes how to characterise the supply for GST purposes in the situation where multiple parties are involved in effecting the transaction.

51. The operation of agency principles in the context of funds transfers may go some way to explain what occurs in these situations. There is some support in the literature and cases for the concept that due to the operation of agency relationships between the originating bank and the various intermediary banks, a funds transfer could be seen as being between two principals, being the originating bank (or its customer) and the final beneficiary of the funds. However, this outcome is not conclusive, particularly given the fact that the final credit to the account, which completes the transaction, is a debt (chose in action) between two principals, being the final beneficiary (FX Spot customer) and their bank. Therefore, we consider the better view is based on the case law considered in the background that characterises how bank money is transferred - the analysis below reflects that approach.

52. Situations similar to this which involve multi-party arrangements are considered in Part 3 of GSTR 2006/9. Proposition 16 suggests that in such instances 'The total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply'. Example 7 of Proposition 13 could be considered broadly analogous in the sense that in the FX Spot transaction there is a contractual supply from Entity A to the customer, but foreign currency that gives the supply value is in fact a chose in action provided by another party, being the beneficiary bank. It is inherent in the transfer process that the last step in completing the FX Spot is the crediting of the customer's account which in this case involves a third party - the beneficiary bank.

53. In conclusion, we consider that for the purposes of Item 4, when there is a supply of money under an FX Spot, the relevant rights are the chose in action the customer obtains from their 'beneficiary bank', by the crediting of their account with the beneficiary bank.

Application of Travelex case

54. In Travelex, Heydon J at [42] said that the answer to 'was the supply made in relation to rights?' depended on 'the legal nature of the bank notes'. The majority recognised that rights attaching to the tokens (banknotes) are the rights created by the central bank issuing the notes at [32 & 45].

55. In our view, the law relating to bank accounts and transfers, makes it clear that 'money in the bank' does not have the same legal nature as bank notes, and more specifically doesn't involve the same rights as holding physical notes that are legal tender. Physical currency is tangible and has value through the statutory rights that arise from its country of issue (Fiji in the Travelex case). In contrast, the 'money' the customer receives under the FX Spot, is not physical currency but 'bank money' being a contractual right to repayment of a debt owed by the customer's beneficiary bank. The rights in relation to the account are contractual rights against the relevant bank rather than statutory rights created by a central bank that attach to a physical thing being the physical currency. While physical currency and bank money may have similar practical functions this doesn't necessarily characterise the relevant rights or the use of those rights.

56. Our conclusion is that the relevant right is the chose in action against the bank with which the account is held by the FX Spot customer, whether this is Entity A or another bank. Consequently, in the context of whether the relevant supply is made in relation to rights, we consider that the answer to this question should be the same regardless of the bank with which the foreign currency account is held.

Is the supply made 'in relation to rights'?

57. Having identified the rights above, the question is then to determine if a supply is made in relation to rights, GSTR 2003/8 requires such a supply to fall within one of the three categories set out in the ruling. Paragraph 27A states that a supply of a thing is a 'supply that is made in relation to rights' if it fits within one of three categories. These are:

Category 1 supplies identified in paragraph 9-10(2)(e)

Category 2 supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights.

Category 3 supplies of services directly connected with rights.

Category 1

58. Category 1 applies to supplies identified in paragraph 9-10(2)(e), which includes a supply taking the form of a creation, grant, transfer, assignment or surrender of any right. For category 1 to apply, the essential character or substance of the supply, or the dominant part of a composite supply, is of rights.

59. In the situation where the nominated account is held with Entity A, the supply comes within category 1. However, where the nominated account is held with another bank, the customer receives the money as a chose in action provided by the beneficiary bank.

60. Where the nominated account is not held with Entity A, when viewed from the recipient's perspective, the chose in action received by the FX Spot customer is not the exact same right that is provided by Entity A. Instead, the right is created by the customer's bank (the beneficiary bank). As suchEntity A is not supplying a right that falls into the description in Category 1.

Category 2

61. Paragraph 27E of GSTR 2003/8 states that a supply comes within category 2 if:

· the thing supplied derives its value exclusively, or almost exclusively, from those rights; and

· through the supply, the supplier either supplies the rights to the recipient or surrenders the rights.

62. In terms of the first dot point, the supply of the foreign currency in the form of a transfer to a nominated account takes its value from the rights that are acquired by the customer when the amount is credited to its account held at the beneficiary bank.

63. The second dot point requires that the supplier supplies (or surrenders) the rights to the recipient. Entity A does not create the rights in the customer (the recipient) under paragraph 9-10(2)(e) where the account is held with another bank. While Entity A as the supplier doesn't strictly supply the customer with rights that it holds, it does transfer the value in the rights it held to the customer by way of the supply of foreign currency. We recognise the particular circumstances of a transfer of bank money are equivalent in effect to the second dot point in paragraph 27E of GSTR 2003/8. Therefore the supply under the FX Spot can be considered to be a Category 2 supply where the account is held with another bank.

64. Consequently, we consider that the supply under the FX Spot by Entity A is a supply in relation to rights. The supply will be GST-free if these rights are for use outside Australia.

Determining the use of the rights

65. The predominant right inherent in the chose in action acquired by the customer is the right to repayment of the debt. Prior to considering the use of this right, we think it useful to consider the High Court's analysis of the use of physical currency in Travelex.

Use of rights in physical currency - Travelex

66. In the Travelex case, French CJ and Hayne J described how the notes could be used at paragraph 26:

By the supply which is constituted by the sale and delivery of the foreign currency, the supplier supplies to the acquirer the rights that attach to the tokens (be they notes or coins) that are the foreign currency. The supply (by sale) is not sufficiently described as a sale of the particular tokens. Those tokens are valuable because they are currency in at least the country or area of issue. Because the tokens are currency, the holder of the tokens can use them as a medium of exchange and as a store of economic value. Currency has value only because of the rights that attach to it. (emphasis added)

67. French CJ and Hayne J also stated at paragraph 35 that:

Where it is evident that the currency is to be used overseas, the rights that attach to the currency are for use outside Australia.

Similarly, Heydon J stated at paragraph 56 that:

…the rights evidenced by the currency were for use outside Australia: Mr Urquhart acquired the currency with the intention of spending it in Fiji, and that intention was confirmed by the fact that he did spend it there.

68. That is, the use of the rights is not restricted to enforcing the status as legal tender or redemption at the relevant central bank. The position adopted in paragraph 116A of GSTR 2003/8, based on the above quote, is that the use of the rights aligns to the use of the currency itself.

69. The majority in the Travelex case recognised that the rights in the physical notes allowed the notes to be used as negotiable instruments. For example, French CJ Hayne J at [31] '… that rights attach to currency, and pass upon negotiation of the currency by delivery' (see also [32] and Heydon J at [45]. This means that because physical currency is negotiable the rights that attach can generally be passed by a change in physical possession by delivery to another person, as occurred in Travelex. Given that the rights have transferred, it can be concluded that they have been used at that point by the original holder.

Use of the rights in the debt or chose in action

70. In the supply of the FX Spot the relevant right is the chose in action the FX Spot customer has against their bank. The use of that right will be exercising the chose in action to obtain repayment of the debt.

71. It is recognised that in exercising this right, the customer may have the debt repaid in a number of ways:

· Making a withdrawal of physical currency from the bank at a branch or ATM.

· Issuing a payment instruction to the bank to debit the account in favour of a third party (which could take the form of, for example, internet or phone banking). Or it may involve the customer acquiring a separate payment instrument such as a cheque or telegraphic transfer.

72. The exercising of the right to repayment is the relevant use. The subsequent use of the withdrawn amount is not a use of the right as that right has been exercised and extinguished. Any subsequent use of the withdrawn amount is a subsequent step that is too remote from the FX Spot supply.

73. For example once the right to repayment is exercised, the subsequent use of the funds might be to acquire a bank draft or telegraphic transfer ('wire'). The acquisition of such a foreign currency payment instrument can be separately characterised as a supply (which may itself be in relation to rights). However, characterising the 'use' of that subsequent supply is too remote from the rights that relate to the FX Spot supply.

74. For completeness, we note paragraph 102 of the private ruling application states that the FX Spot is a supply in relation to rights, 'being the right to use foreign currency in electronic form' and that 'the transaction is identical to that considered by the High Court in Travelex, with the exception that the foreign currency is transmitted in electronic form, rather than physical form.' The rights in currency are described as being that 'the holder of the tokens can use them as a medium of exchange and as a store of economic value' and 'the rights that attach to …the ability to use the currency' as per French CJ and Hayne J in Travelex.

75. In our view it does not necessarily follow that the approach taken to 'use' in the case of the rights in physical currency applies equally to the rights in foreign currency in the form of bank money, because the nature of the rights and their use are different. For instance, because bank money is intangible, the concept of a change of physical possession that occurs with physical currency is not relevant.

76. Another relevant distinction is that the supply of banknotes by delivery is exploiting the rights in the notes (Travelex at [31]), without requiring direct exercise or enforcement of the rights in the notes. However, with 'bank money', once the FX Spot customer has received the rights which are a chose in action against its bank, the use of the right must involve exercising the right to repayment against the bank (except holding the credit as a store of value).

77. In conclusion, the relevant rights are used by the account holder, through the exercise of their right to repayment of the debt owed by the beneficiary bank (or Entity A where it holds the nominated account).

Where are the rights for use and when will this be outside Australia?

78. The ATO view on the use of rights that fall within Item 4 is largely contained in GSTR 2003/8, especially from paragraph 116A. It is the intended use of the recipient that determines the question of where the relevant rights are for use. The Ruling provides examples of different rights and where they are for use. For example, the supply in Australia of foreign currency to another entity for the purpose of on-supplying in Australia to outbound travellers is a use of the rights within Australia (the use being the supply of the bank notes themselves). ATO ID 2012/1 also provides a view on where rights in relation to a supply of shares may be for use.

79. Our view is that the right under the FX Spot transaction is for use by the customer through the exercise of their right to repayment of the debt. ATO ID 2012/1 takes the view that the relevant rights in shares are 'for use' where the rights are recognised or able to be enforced. This is consistent with many other rights mentioned in GSTR 2003/8. So, with respect to a bank account, we need to identify where the right to repayment of the debt is recognised or able to be enforced.

80. European Bank Ltd v Citibank Ltd [2004] NSWCA 76 dealt with an entity transferring US$ funds from an account it held at a New York Bank to an Australian bank. The Australian Bank had an account at a US bank that was in credit by the amount of the deposit. The funds held to the credit of the Australian bank at the US bank were seized on the basis that it was the entity's money. The court held in paragraphs 49 and 50 that the only debt was that between the appellant and the Australian bank governed by the law of NSW.

The party indebted to European Bank Ltd was Citibank and the debt was situated in Sydney. …..The debt owed to European Bank in Sydney, as an item of property, was governed by the lex situs.

81. This case supports the view that the debt owed by a bank is enforceable in the jurisdiction where the account is held and this is where the right is exercised. From that, our view is that the right under the debt is 'for use' where the account is held.

82. The relevant right is the right to repayment of a debt on demand against the beneficiary bank. In some cases, the intended use might be exercising the right to repayment of the debt by making a withdrawal. Or it might be exploiting the right in the sense of keeping funds on deposit. In either case the use of that right occurs where the account is held.

83. Therefore, the supply of an FX Spot by Entity A is GST-free under Item 4 to the extent that the customer intends to take delivery of the foreign currency supplied by way of a credit to the customer's nominated account held outside of Australia.

(b)(i) FX Forwards that are deliverable

Is there a supply made by Entity A, and if so, what is the nature of the supply?

84. The GST treatment of a deliverable forward contract should be the same as for an FX Spot contract. Essentially, both contracts involve the sale of 'foreign currency' which Entity A 'delivers' by electronic transfer to a foreign currency account nominated by the customer. The main difference is the length of time before settlement of the contract.

85. We do not think that paragraph 9-30(1)(b) applies to either FX Spot or FX Forward contracts. This is because the rights under these contracts are executory. Under the contract, there is a supply of money (expressed in a foreign currency), rather than the supply of a right to receive a supply of money.

86. As with the FX Spot transaction, the payment to the foreign currency account is a supply, as it is a supply of money for money in accordance with subsection 9-10(4).

87. An interest in an FX Forward contract comes within subregulation 40-5.09(3) as it is both 'an agreement to buy or sell currency' under Item 9 and a derivative under Item 11. Schedule 7 to the GST regulations includes forward contracts to buy or sell foreign currency as an example in Part 7 of an Item 9 interest, while forward contracts where the value depends on or is derived from foreign exchange or currency values are included as examples of a derivative in Part 9. As the requirements of subregulation 40-5.09(1) are met, Entity A is making a financial supply when it provides an interest in an FX Forward contract.

88. It is then a question of whether the supply is GST-free under Item 4 as a supply that is made in relation to rights that are for use outside Australia.

Is the supply made 'in relation to rights'?

89. The FX Spot reasoning concludes that Entity A makes a supply of money that relates to a chose in action, being the debt owed by the bank (whether Entity A or another bank) to the customer. As the supply of money is provided in the same manner under an FX Forward contract, the relevant rights will be the same as for the FX Spot.

90. Consequently, we consider that the supply by Entity A is a supply in relation to rights. If the nominated account is held with Entity A, the supply will come within category 1 of GSTR 2003/8. If the account is held with another bank, the supply will come within category 2 of that ruling. The supply will be GST-free if these rights are for use outside Australia.

Determining that the rights are for use outside Australia

91. The position on this will be the same as for an FX Spot transaction. That is, the relevant rights are used by the account holder through the exercise of their right to repayment of the debt owed by the relevant bank. We concluded that the account holder's right to repayment occurs where the right is recognised or able to be enforced.

92. The question of where the rights are used is discussed in GSTR 2003/8. Paragraphs 36 and 108 of that ruling state that the requirement that 'the rights are for use outside Australia' is an intention test.

93. The view adopted in FX Spot is that the right under the debt is for use where the nominated account is held, and we think this is equally applicable to the deliverable forward. Therefore, FX Forwards that are deliverable are GST-free under Item 4 to the extent that the customer intends to take delivery of the foreign currency supplied by Entity A by way of a credit to the customer's a nominated account held outside of Australia.

(b)(ii) FX Forwards that can only be cash settled

Is there a supply made by Entity A, and if so, what is the nature of the supply?

94. FX Forwards that can only be cash settled are referred to as non-deliverable forwards (NDFs). An interest in an FX Forward contract which derives its value from foreign currency comes under Item 11 of the table in subregulation 40-5.09(3), and is listed as an example in Item 1(b) of Part 9 to Schedule 7.

95. When Entity A and the customer enter into the NDF, each supplies the other with an interest in a derivative. As explained in ATO ID 2010/156, when entities provide each other with an interest in a derivative, they are providing each other with non-monetary consideration. As the other requirements of subregulation 40-5.09 are met, Entity A is making a financial supply when it enters into an NDF.

96. The nature of NDF contracts is discussed in a non-GST context in ATO ID 2011/27. This ATO ID addresses the issue of whether such contracts constitute 'trading in currency' or 'rights in respect of currency'. The reasons for the decision state that 'NDFs are called 'forward' contracts but are not agreements under which different types of currencies are agreed to be delivered or exchanged.' They are described as 'contracts satisfied by a financial receivable or payable'.

97. In the same way, the cash settled FX Forwards supplied by Entity A are also contracts that are satisfied by a financial receivable or payable. There is an exchange of rights and obligations. There is no electronic exchange of an amount of Australian currency for foreign currency as there is with an FX Spot or a deliverable FX Forward contract. Therefore, in an NDF there is no supply of money for money, and only one of the parties pays a cash settlement amount. It follows that the cash settlement payment is not a supply in accordance with subsection 9-10(4).

98. In conclusion while a deliverable FX Forward is a supply of money, an NDF is not. Therefore, the characterisation for Item 4 purposes needs to be separately considered.

Is the supply made 'in relation to rights'?

99. As explained above, an NDF is not an agreement under which currencies are agreed to be delivered or exchanged. In this regard, the general characterisation of the NDF is not materially different from other derivatives where there is no delivery of the underlying thing. For example, GSTD 2005/3 explains contracts for difference (CFDs) in relation to equities. Paraphrasing the description in paragraph 26:

On entering into an (NDF) in relation to (foreign exchange rates) the investor enters into an obligation to make a payment to (Entity A) if the (currency exchange rate) underlying the contract moves in a particular direction. Similarly Entity A enters into an obligation to make a payment to the customer if the (currency exchange rate) underlying the contract moves in the opposite direction.

100. Paragraph 93 of GSTR 2006/9 explains that a supply that is 'an entry into an obligation' is mirrored by an acquisition that is 'an acquisition of a right'. The obligation remains with the supplier, while the 'right' is created in the hands of the recipient.

101. Therefore, while GSTD 2005/3 explains CFDs in the context of the obligations entered into by each party, it can also be described as each party making a supply of a right to the other party to receive a payment if the currency exchange rate moves in particular direction. The creation of a right is a supply under paragraph 9-10(2)(e).

102. Consequently the supply under an NDF would be a category 1 supply 'in relation to rights' for the purposes of Item 4 as described in paragraph 64 of GSTR 2003/8. The question is then whether these rights are for use outside Australia.

Determining that the rights are for use outside Australia - cash settled derivative

103. Rights under a contract are choses in action in the same way as an account holder with a bank has a chose in action against the bank.

104. Which entity will actually be able to exercise the right to receive a payment upon cash settlement is unknown at the time of entry, because of the future movement of the underlying exchange rate.

105. It is the close out that triggers the exercise of this right, so it can be considered the relevant use in the context of a derivative contract. A non-deliverable FX Forward may expire at a set date, rather than one party triggering the end of the contract. In this case the expiry will result in one party exercising its rights to repayment.

Physical location of parties on exercise is not relevant

106. Neither of the party's physical location at the time of cash settlement is integral to the use of the rights. The nature of the contract is not to provide a right where a material feature of exercising or exploiting the right is that it can be undertaken in different locations. For example, the fact that the customer may be located outside of Australia at the time of closing out the position doesn't have the character of exploiting the rights outside of Australia.

Physical location of underlying thing is not relevant

107. Furthermore, the location or character of the underlying thing is not relevant to characterising the right in an NDF contract. For example, while the contract may give exposure to changes in the USD/AUD exchange rate and exposure to the USD, or relate to the price movements of overseas share indices, or Australian electricity prices, there is no 'right' to acquire an interest in these underlying things. With a non-deliverable contract the underlying thing is simply the means to calculate the payment obligations when cash settlement of the contract occurs. This is in contrast to a right where on exercise there is a further supply at a specific location or for intellectual property rights where the exploitation of the right will be in a particular jurisdiction.

108. As the use of the rights relates directly to the contract entered into between Entity A and the FX Forward customer, rather than some other application or exploitation of rights, we consider that the rights are for use where the contractual rights are recognised or able to be enforced.

109. Where the contract is executed in Australia and the relevant jurisdiction governing the contract is Australia, the rights under the contract will be for use in Australia. As we have assumed that contracts entered into between Entity A and Australian customers in Australia are governed by Australian contract law, the rights are for use in Australia. Therefore the supply of a cash settled FX Forward will not meet the requirements for Item 4, and the supply will be an input taxed financial supply.

(b)(iii) FX Forward contracts that are deliverable, but include the right to cash settlement

Is there a supply that is made in relation to rights for use outside Australia?

110. With this type of FX Forward contract, Entity A provides the customer with two rights, the right to electronic delivery of 'foreign currency', as well as the right to cash settle the contract. This causes difficulty in characterising the supply when it cannot be known for certain at the outset whether delivery will occur.

111. From our analysis of the types of FX Forward contracts discussed above, we know that there is a supply in relation to rights. If the FX Forward contract proceeds to delivery, the rights to which the supply relates is the chose in action acquired by the customer in relation to the bank account. If instead, the contract is cash settled, the supply relates to the exchange of contractual rights as described above for cash settled forwards.

112. Transactions that comprise a bundle of features and acts are considered in GSTR 2001/8. In particular, the ruling differentiates between mixed supplies that contain separately identifiable taxable and non-taxable parts, and composite supplies where the supply contains a dominant part and includes something that is integral, ancillary or incidental to that part. A composite supply is treated as a supply of a single thing whose GST treatment is determined by the GST character of the dominant part.

113. The supply under consideration is not a mixed supply because it does not contain taxable and non-taxable parts. Unlike a mixed supply, it does not have identifiable parts that have different GST treatment. The supply will be either GST-free or input taxed, not a mixture of both.

114. The type of transaction we are considering does not appear to fit within the usual scenarios for composite supplies. Under the contract, the customer has the right to electronic delivery of money, as well as the option to cash settle. Neither right fits neatly within the description of a right that is integral, ancillary or incidental, nor do they meet the indicators set out in paragraph 59 of that ruling. Consequently, the supply under this type of FX Forward does not appear to be a composite supply where one of the rights is dominant.

115. As we identified above, at the time of entry into this type of FX Forward contract, there are two key sets of rights to which the supply may relate:

· The supply of money on delivery to the customer is a supply in relation to the account (a chose in action).

· For cash settlement, there is a bundle of two rights that are equally important.

o The supply of a right by Entity A to the customer if the currency moves in a certain direction (also the entry into an obligation by Entity A);

o The supply of a right by the customer to Entity A if the currency moves in another direction.

116. Arguably, these rights are mutually exclusive. If the right to cash settle is exercised, there will be no right to electronic delivery of 'foreign currency' (and no subsequent supply of money for money). Alternatively, if the contract proceeds to delivery, the right to cash settlement will expire. GSTR 2003/8 does not specifically address this situation.

117. Given that Entity A possesses significant information about its customers that use its FX derivative products, including the reason why they use the particular product, Entity A appears to be in a position to know at the outset whether the FX Forward contract is likely to be delivered or cash settled.

118. For the purposes of Item 4, if intention can be ascertained in the above way, it can be deduced that one particular set of rights will be used. The other set of rights can then be ignored because there is no intended 'use' of those rights and they will be extinguished when the 'other' rights are exercised.

119. Therefore, where Entity A is able to ascertain that the customer's intention is to receive the supply of money (i.e. take delivery of the foreign currency), the supply relates to the right that is acquired by the customer when the nominated account is credited. As with the deliverable FX Forward, the supply will be GST-free if the customer nominates an account that is held outside Australia.

120. On the other hand, where the circumstances indicate that the customer's intention is to cash settle, the supply would relate to the contractual rights against Entity A (and the rights Entity A has against the customer). The determination of whether these rights are for use inside or outside Australia will be the same as for cash settled FX Forwards explained above.

(c) FX Option

121. An option contract, the value of which depends on or is derived from foreign exchange or currency values, is listed as an example of a derivative in Item 1(b) of Part 9 of Schedule 7 to the GST regulations. A derivative is listed as an interest in Item 11 of the table to subregulation 40-5.09(3). The FX Option is provided for consideration, as Entity A receives a premium from the customer when it enters into the contract. As the other requirements of subsection 40-5.09(1) are satisfied, Entity A is making a financial supply when it enters into an FX Option contract.

122. An FX Option provides the customer with the right, but not the obligation to receive an amount of money (by way of crediting the nominated foreign currency account). The payment of a premium by the customer is consideration for the supply of the right provided by Entity A.

123. Entity A's supply of this right comes under paragraph 9-10(2)(e) and is therefore a category 1 supply in relation to rights as explained in paragraph 27B of GSTR 2003/8. However, as the FX Option contract is entered into in Australia, the relevant rights are for use in Australia. Therefore, Entity A's supply of the FX Option is not GST-free under Item 4. However, the supply of the FX Option may be GST-free under paragraph 9-30(1)(b).

124. If the customer exercises the FX Option, Entity A makes a separate supply of money for money under subsection 9-10(4) (a supply of currency such as an FX Spot) that may be GST-free under Item 4. If this supply of money would be GST-free, the supply of the right to receive it under the FX Option is also GST-free under paragraph 9-30(1)(b).

125. As we have concluded for the other FX products discussed above:

· the supply of money made by way of crediting an account is a supply that is made in relation to rights, being the chose in action acquired by the customer in relation to the nominated bank account

· where the customer's intention is for the payment to be credited to an account held outside Australia, the right will be 'for use outside Australia'; and

· in these circumstances the supply of the money will be GST-free under Item 4.

126. Consequently, an FX Option supplied by Entity A will be GST-free under paragraph 9-30(1)(b) where it provides the right to receive a supply of money that the customer intends to have credited to a bank account held outside Australia.

127. Where the FX Option provides a right to receive a supply of foreign currency that the customer intends will be credited to an account held in Australia, the supply of the option does not relate to a GST-free supply. In this case, the supply of the FX Option is an input taxed financial supply.

(d) Margin FX

128. A Margin FX contract provides an interest in or under a derivative mentioned in Item 11 of the table in subregulation 40-5.09(3). A derivative is defined in the dictionary of the GST Regulations to mean 'an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate'. Margin contracts come within this definition because their value depends on and is derived from the movement in value of the currency pairs from the date the contracts are entered into to the date they are closed out. Therefore, Entity A's supply under a Margin FX contract is a financial supply.

129. For the reasons explained above in relation to other cash settled FX products, there is no supply of money for money when Entity A is required to pay an amount under the contract.

Is the supply made 'in relation to rights'?

130. As with the cash-settled derivatives described above, the essential character or substance of a Margin FX is one of an exchange of contractual rights and obligations between the parties. The Margin FX customer has no interest or right to receive the relevant currency pairs.

131. Under a Margin FX contract, both Entity A and the customer enter into obligations to make a payment depending on the movement in the relevant currency in that exchange rate. However, as we explained above, the supply of an entry into an obligation by each party also involves the creation of a right in the hands of the other party, in this case to receive a payment if the currency exchange rate moves in particular direction.

132. The creation of rights is a supply under paragraph 9-10(2)(e). Consequently the supply under a Margin FX contract is a category 1 supply 'in relation to rights' for the purposes of Item 4 as described in paragraph 64 of GSTR 2003/8. The question is then whether these rights are for use outside Australia.

Determining whether the rights are for use outside Australia

133. In the case of a Margin FX, the category 1 rights are created when Entity A and the customer enter into a contract, which is in Australia. As the use of the rights relates directly to the contract entered into with a specific counter party, rather than some other application or exploitation of rights, we consider that the rights are for use where the rights under the contract are recognised or able to be enforced.

134. Where the contract is executed in Australia and the relevant jurisdiction governing the contract is Australia, the rights under the contract will be for use in Australia. On the basis that contracts entered into between Entity A and Australian customers in Australia are governed by the Australian contract law, the rights are for use in Australia. Therefore, the supply of the Margin FX will not meet the requirements for Item 4.

(e) FX Swap

Nature of Entity A's supplies under an FX Swap

135. In an FX Swap there is a single agreement entered into between Entity A and the customer. Paragraph 112 of the application describes the FX Swap as being 'a combination of an FX Spot and an FX Forward, or two FX Forwards'.

136. Where both legs of the FX Swap are deliverable, there are two supplies of money for money under subsection 9-10(4), as explained above in relation to FX Spot and FX Forward transactions.

137. However, more specifically the FX Swap is a supply of a derivative. Paragraph 83 of GSTR 2002/2 establishes a number of key points regarding the characterisation of interest rate swaps, that apply equally to FX Swaps:

· Each party provides the other party with the right to receive a series of cash flows (2 in this case).

· The proper characterisation of the supply of each party's property is the provision of an interest under an FX Swap (derivative) contract.

· Each party will also make a supply of the acquisition (the acquisition-supply) of an interest under an FX Swap (derivative) contract. Acquisition-supplies are discussed below.

Footnote 43 to that paragraph explains that 'this may mean the transaction gives rise to four supplies - two 'provision' financial supplies and two acquisition-supplies'.

138. A swap contract is included as an example of a derivative in Part 9 of Schedule 7 of the GST Regulations. As subregulation 40-5.09 is satisfied, Entity A is making a financial supply of a derivative when it enters into an FX Swap contract.

Is the supply made in relation to rights for use outside Australia?

139. Whilst the FX Swap is a financial supply of an interest in a derivative, the relevant rights need to be considered for Item 4 purposes. The FX Swap in this case consists of two legs - an FX Spot and an FX Forward, or two FX Forwards. It is not a situation where the rights provided under each leg can be considered to be incidental to the other. Therefore, for Item 4 purposes the rights that relate to the supply of the FX Swap are the rights identified in each 'leg' of the swap transaction.

140. Therefore, the rights to which the supply relates for Item 4 are the same as for individual FX Spot and FX Forward transactions. The view reached for these products is that the relevant right is the chose in action, being the debt owed by Entity A or the beneficiary bank, depending on the account nominated. The use (or exercise) of the right is where the customer's bank account is held, as this is where the debt is recognised or able to be enforced.

141. This means that a supply of an FX Swap by Entity A is GST-free to the extent that the customer intends to take delivery of the currency supplied by Entity A under each leg of the FX Swap by way of a credit to an account nominated by the customer that is held outside of Australia.

142. Two accounts are relevant in this case, as the customer will receive two currencies into two separate accounts under the two legs of the FX Swap, which may have different locations. Consequently, Entity A's financial supply of the FX Swap will be GST-free under Item 4 to the extent that payments to the customer under the FX Swap are intended to be credited to an account held outside of Australia. For example, Entity A may pay USD to an overseas account in the spot leg of the transaction and pay AUD to an Australian account in the forward leg - Entity A's supply of the FX Swap will be Z% GST-free.

Question 2

(a) Acquisition-supplies of FX derivatives

143. For the purposes of the GST Regulations and the GST Act, a supply includes a financial supply and a financial supply includes the acquisition of a financial interest (an acquisition-supply).

144. GSTD 2012/5 explains how a GST registered entity acquiring Australian currency banknotes for consideration as part of an enterprise it carries on in Australia is making a separate financial supply (acquisition-supply) from the financial supply of the foreign currency banknotes it supplies in exchange.

145. The situation in GSTD 2012/5 where there are two financial supplies and two acquisition-supplies in the one transaction will arise where there is a financial supply provided as consideration for another financial supply. In the context of a supply of money, this will occur in a money for money supply in accordance with subsection 9-10(4).

146. This situation, where each financial supply is consideration for the other, can also occur with some derivatives when there is simply an exchange of rights and obligations - see GSTD 2005/3.

FX Spot

147. Our analysis of an FX Spot contract concluded that there was a supply of money for money as Entity A agrees to supply the 'foreign currency' by way of crediting the customer's nominated account in return for payment of another currency (usually Australian dollars).

148. The consideration received by Entity A, whether in Australian dollars or a foreign currency, is an interest in or under currency under Item 9 of the table in subregulation 40-5.09(3). This acquisition-supply by Entity A will be an input taxed financial supply if the other requirements of subregulation 40-5.09 are satisfied, and the supply is not GST-free.

149. The payment received by Entity A will be via RTGS, collateral held in a customer's account with Entity A, or similar method. In each case, any movement in Entity A's favour will be a change in Entity A's rights under those accounts. Where Entity A intends the payment to be credited to an account held in Australia, the relevant rights are for use in Australia. Consequently, the acquisition-supply by Entity A will not be a supply made in relation to rights for use outside Australia. However, where Entity A intends the payment to be credited to an account held outside Australia, the rights will be for use outside Australia. In this case, the acquisition-supply by Entity A will be GST-free and not input taxed.

FX Forwards

150. A deliverable FX Forward contract is essentially an FX Spot contract with a longer maturity date. Therefore, the acquisition-supply analysis provided above for the FX Spot contract will also apply to a deliverable Forward contract.

Cash settled FX Forwards

151. Where an FX Forward contract is to be cash settled, there is no supply of money for money. As explained above in relation to the analysis of non-deliverable forwards, each party supplies the other with an interest in a derivative under Item 11 of the table in subregulation 40-5.09(3). The interest provided is also non-monetary consideration for the acquisition of the interest in the derivative from the other party.

152. Accordingly, under a cash settled FX Forward, Entity A and the customer each acquire an interest in a derivative under Item 11 of the table in subregulation 40-5.09(3). The acquisition-supply by Entity A will be an input taxed financial supply if the other requirements of subregulation 40-5.09 are satisfied and the supply is not GST-free.

153. As the contract is entered into in Australia, the rights are for use in Australia and the acquisition-supply will not be GST-free under Item 4. Therefore, Entity A's acquisition-supply of the interest in a derivative is an input taxed financial supply.

FX Options

154. The initial entry into an FX Option contract requires payment by the customer of a premium for the provision by Entity A of an interest in a derivative.

155. The supply of an FX Option contract, therefore, does not involve an acquisition-supply by Entity A as the payment of the premium is not a supply of money for money (and, therefore, not a supply under subsection 9-10(4)). This outcome applies whether the contract is a put or call option.

156. If an FX Option contract is deliverable and the option is exercised, the resulting supply of money is a separate supply and is treated in the same way as an FX spot (above). If the option is not exercised (or expires), there are no further consequences.

Margin FX

157. A Margin FX involves both the acquisition and disposal of interests in a derivative by Entity A and the customer at the time of entry into the contract. That is, each party provides an interest in a derivative that is also non-monetary consideration for the acquisition of an interest in the derivative from the other party. The acquisition-supply by Entity A will be an input taxed financial supply if the other requirements of subregulation 40-5.09 are satisfied and the supply is not GST-free.

158. As the Margin FX contract is entered into in Australia the relevant rights are for use in Australia, the acquisition-supply will not be GST-free under Item 4. Therefore, Entity A's acquisition-supply of the interest in a derivative is an input taxed financial supply.

FX Swap

159. As explained above in relation to the supply of the FX Swap, each party to the swap provides an interest in a derivative to the other party. Also, each party receives consideration in the form of the interest in a derivative. Therefore, Entity A makes a supply of an interest in a derivative and also makes an acquisition-supply of an interest in a derivative. The acquisition-supply by Entity A will be an input taxed financial supply if the other requirements of subregulation 40-5.09 are satisfied, and the supply is not GST-free.

160. Applying our analysis of the FX Swap, the rights to which the acquisition-supply of the FX Swap relates are the rights identified in each 'leg' of the swap transaction. Following on from the acquisition-supply analysis for FX Spot above, payment is made by the customer into various accounts. Any movement in Entity A's favour will be a change in Entity A's rights under those accounts. Where Entity A intends the payment to be credited to an account held by Entity A in Australia, the relevant rights are for use in Australia and Item 4 would not apply. However, where Entity A intends the payment to be credited to an account held by Entity A outside Australia, the acquisition-supply will be GST-free under Item 4 to that extent.

(b) Creditable purpose

161. Section 11-15 is about creditable purpose. Paragraph 11-15(2)(a) provides that a thing acquired in carrying on your enterprise is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

162. GSTD 2012/5 at paragraph 37 to 40, explains the principles that are relevant to determining creditable purpose where one transaction gives rise to an entity making two financial supplies, one of which is an acquisition-supply and concludes that:

41. However, where in a particular transaction, an entity both provides and acquires a financial supply, acquisitions relating to the transaction won't necessarily have a sufficient connection to both financial supplies. A relevant, real or substantial connection between the acquisition and each supply needs to be established for the paragraph 11-15(2)(a) relationship to be recognised.

163. As indicated in the question, the relevant acquisitions have already been identified as relating to the particular transactions (in the same way that acquisitions related to transactions in GSTD 2012/5). Therefore, where we have identified in question 2(a) that a particular transaction results in Entity A making a financial supply of a provision or disposal of an interest (a provision-supply) and an acquisition-supply, the issue in contention is whether the acquisitions relate solely to the provision-supply. This becomes material for determining creditable purpose if the provision and acquisition-supplies have different GST treatment (input taxed and GST-free).

164. GSTD 2012/5 addresses a similar issue in the context of a retail foreign exchange transaction involving foreign currency bank notes, for example an outbound transaction where the entity supplies foreign currency in return for AUD:

43. To the extent that acquisitions relate to outbound transactions, they are acquired in carrying on the entity's enterprise and are, prima facie, acquired for a creditable purpose. Under paragraph 11-15(2)(a), creditable purpose would then be denied to the extent the acquisition relates to making acquisition-supplies of AUD.

44. The Commissioner considers that in the facts of the outbound transactions, there is not a sufficient connection between such acquisitions and the acquisition-supply.

45. The AUD paid by the customer is received by the entity solely as consideration for the FX it supplies to the customer. While the entity's receipt of the AUD as consideration gives rise to an acquisition-supply, in the context of the transaction, its only significance is as consideration for the supply of the FX. Acquisitions by the entity could not be said to have a relevant, real or substantial connection to the acquisition-supply that arises from the mere receipt of the consideration.

46. Accordingly, to the extent that an acquisition relates to an outbound transaction, it relates solely to the GST-free supply of the FX. The acquisition-supply of the AUD does not lead to any denial of creditable purpose. …

165. GSTD 2012/5 then goes on to discuss other circumstances involving acquisition-supplies:

51. The ruling in this GST Determination only applies to acquisitions made by an entity carrying on a retail currency exchange enterprise in Australia. Whether there will be a sufficient connection between acquisitions and an acquisition-supply in other contexts will depend on the facts of a particular case.

54. In the transactions discussed in this GSTD, the currency acquired is acquired solely as consideration for a supply made, in the context of these particular transactions. However, in other types of transactions involving the acquisition of financial interests as consideration for a supply, the acquisition may have a significance that is greater, in the context of the transaction, than solely as consideration received. Shares acquired as consideration for a supply of goods, or scrip for scrip transactions would be examples of this.

55. In such transactions, it needs to be established whether a relevant, real or substantial relationship exists between acquisitions and the input taxed acquisition-supply. Establishment of such a relationship would lead to a denial, or reduction in the extent, of creditable purpose of the acquisition.

166. Therefore, if in a specific context it can be concluded that the acquisition-supply is acquired solely as consideration for a supply made, a similar rationale to that set out in GSTD 2012/5 may apply.

167. Entity B has indicated that it has detailed information about its customers and can therefore indentify the purposes for which Entity A and its customers enter into the relevant FX products. In particular, the facts specify that the ruling is only in regard to the use of FX products by Entity A's customers for the following purposes:

· hedging (i.e. to protect against FX movement risks), or

· trading (i.e. to make payments to overseas entities) purposes.

168. The use of FX products for 'investment (i.e. to hold for the purpose deriving a return)' is specifically excluded from the facts and not addressed in this ruling. These factors provide the relevant context for determining if the acquisition-supplies are solely consideration for the supply made.

FX Spot

169. As discussed in Question 1, there are material differences between banknotes and FX Spot transactions as to how they are characterised for Item 4 purposes. Furthermore, the context in which retail foreign exchange transactions may be provided to individuals may differ from FX products used for commercial purposes.

170. However, on balance the 'outbound' transaction of the supply of foreign currency banknotes to the customer, where the AUD is received by the supplier solely as consideration, is broadly analogous to Entity B supplying a customer foreign currency by way of an FX Spot for the purposes of then making a payment overseas. That is, considering the overall transaction, the receipt of AUD by Entity A is solely consideration for the foreign currency that Entity A supplies to the customer.

171. The facts in the ruling application also refer to exporters converting foreign currency receipts from customers. This is considered analogous to the inbound transaction in GSTD 2012/5. That is, the payment of foreign currency by the customer is solely as consideration for the supply of AUD from Entity A.

172. In the context of customers entering into an FX Spot transaction to hedge against foreign currency movement risks (rather than for 'investment' - to derive a return), it is also accepted that currency received by Entity A is solely consideration for the currency that Entity A supplies to its customer.

173. Therefore, to the extent that acquisitions made by Entity A relate to the deliverable FX Spot transactions, those acquisitions solely relate to the provision-supply of the currency supplied by Entity A, rather than to both the provision-supply and the acquisition-supply (currency received by Entity A) identified in Q2(a), for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

FX Forwards

174. The same reasoning as discussed for FX Spot also applies to deliverable FX Forwards, because the only difference is the future delivery date for the relevant currencies. For example, an importer still requires foreign currency to make an overseas payment but they prefer the certainty of effectively setting the exchange rate in advance.

175. Therefore, to the extent that acquisitions made by Entity A relate to the deliverable FX Forward transactions, those acquisitions solely relate to the provision-supply of the currency by Entity A, rather than to both the provision-supply and the acquisition-supply (currency received by Entity A) identified in Q2(a), for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

Cash settled FX Forwards

176. For a cash settled FX Forward, both the provision-supply and acquisition-supply by Entity A are input taxed financial supplies, therefore the acquisitions solely relate to supplies that would be input taxed for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

177. Paragraph 11-15(2)(a), specifically the words 'to the extent that', contemplate apportionment of an acquisition but only when it doesn't solely relate to supplies that are input taxed (4^th dot point in paragraph 118 of GSTR 2008/1). In this case, as neither of the supplies arising from a cash settled FX Forward are GST-free to any extent, it is not necessary to then further consider the extent to which the acquisitions specifically relate to the one or the other of the two supplies. The application of paragraph 11-15(2)(a) has already been ascertained.

FX Swap

178. As discussed in question 1(e), swaps involve each party providing an interest in a derivative consisting of providing the other party with the right to receive a series of cash flows (in the case of an FX Swap the payment of two currencies). Specifically, these FX Swaps consist of an FX Spot and an FX Forward (or two FX Forwards), involving the delivery of the nominated currencies by each party.

179. Therefore, the acquisition-supply by Entity A of the FX Swap is an acquisition of an interest in a derivative consisting of the right to receive payment of two currencies from the customer (one in each leg of the FX Swap), for example:

· The FX Spot leg - currency A that the customer pays to Entity A

· The FX Forward leg - currency B that the customer pays to Entity A.

180. In relation to these specific FX Swaps it is open to conclude that Entity A's acquisition-supply under the FX Swap, consisting of the right to receive payment of two currencies, is solely consideration for its provision-supply, provided that the two amounts of currency received by Entity A would have been treated as solely consideration for provision-supplies by Entity A, if they were separately provided by way of an FX Spot or FX Forward (instead of as part of the FX Swap).

181. Assessing whether the two amounts of currencies received would have been solely consideration under separate FX Spot and Forward transactions can be ascertained from the discussion above under the headings 'FX Spot' and 'FX Forward'.

182. If the abovementioned requirements are met, when Entity A enters into an FX Swap and provides an interest in a derivative to the customer, the acquisition-supply (being the interest in the derivative acquired by Entity A consisting of the right to receive the two payments of currency), is solely consideration for the provision-supply made by Entity A.

183. Therefore, to the extent that acquisitions made by Entity A relate to a deliverable FX Swap transaction where the requirement in paragraph 180 is met, those acquisitions solely relate to the provision-supply of the FX Swap by Entity A for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

Margin FX

184. For a Margin FX, the reasoning for cash settled FX Forwards applies. Both the provision-supply and acquisition-supply of an interest in a derivative by Entity A will be input taxed financial supplies, therefore the acquisitions relate to input taxed supplies for the purpose of determining creditable purpose under paragraph 11-15(2)(a).

Question 3

185. Brokerage services provided to clients to trade in derivatives on an overseas exchange will be GST-free under Item 4 if:

· the supply of brokerage services is a supply made in relation to rights; and

· the rights are for use outside of Australia.

186. For a supply of brokerage services to fall within Item 4, the supply of brokerage must be directly connected with rights, for example if the services facilitate a dealing in or exercise of the rights. It is accepted that if a dealing in a particular derivative on an overseas exchange is one of rights, then the brokerage service that facilitates the dealing is directly connected to those rights in the same way as brokerage services in relation to the sale of shares at paragraph 79A of GSTR 2003/8. The supply of brokerage services will be GST-free under Item 4 if the rights are for use outside Australia.

Deliverable commodity futures

187. As set out in paragraph 78 of GSTR 2003/8, the trading in the deliverable commodity futures facilitated by the broker must be one where 'the essential character or substance of the dealing is one of rights'. It follows that the threshold question is whether the essential nature of a deliverable commodity futures contract is a dealing in rights, or a supply of the goods by delivery that the contract specifies.

188. In this regard, a Category 3 supply will often be a dealing in a Category 1 supply of rights where the essential character or substance of the supply is one of rights (paragraph 65 of GSTR 2003/8). Paragraphs 66 to 72 of GSTR 2003/8 provide guidance in determining if the relevant rights are merely incidental to the supply or constitute the essential character or substance of the supply. Of particular relevance is paragraph 70 of GSTR 2003/8 which states that 'Rights are created under executory contracts and although the creation of such rights is supported by valuable consideration…the rights [may] contribute to the supply as a whole but cannot be identified as the dominant part of the supply.' Based on paragraphs 70 and 71 of GSTR 2003/8, when there is a typical contract for the sale of goods or land, the rights under the relevant contract are incidental to the supply of goods or land.

189. The question is whether the nature of a deliverable commodity futures contract is sufficiently different from a typical sale of goods, so that the rights in the futures contract are separately identifiable or represent the dominant part of the supply, rather than a supply of goods.

The nature of deliverable commodity futures

190. It is recognised that there are specific financial supplies provisions that apply to futures that separate the rights and obligations to make or take delivery of goods and the subsequent supply made as a result of the rights and obligations (Items 7 & 8 in the table in Regulation 40-5.12). However, these are not determinative for the purposes of Item 4 and the nature of these contracts needs to be assessed more generally.

191. In Commissioner for Corporate Affairs v Shintoh Shohin Pty Ltd (1987) Aust Sec Law Cases 76-134 (SC(Vic), Nathan J) it was said (at 85,310) that

A futures contract, as commonly understood, is an agreement to buy a given quantity of a basic commodity at a fixed price at a future time

and that

In essence, a market has developed in trading in the contracts themselves, rather than the commodities involved, and it is only in a very few and limited number of circumstances that the actual goods change hands.

192. While case law has adopted a consistent definition of the legal nature of futures contracts, being an agreement to buy or sell the underlying goods, there is equally a recognition of the purpose of the futures market as trading in the contracts themselves. In the GST context, taking into account the commercial reality and purpose of the futures market is supported by the comments of Bennett J in ATS Pacific Pty Ltd v. Commissioner of Taxation, that the proper characterisation of a supply 'is not always answered by a mere contractual analysis and must be addressed having regard to the substance, purpose and commercial reality of the transactions'.

193. A futures contract can be distinguished from other contracts for the sale of goods. This goes further than looking at the subjective intent of those that enter into the contracts (the vast majority of which close out), rather it can be ascertained from the structure and rules and practices of the relevant exchange. When the contract and the exchange rules and practices are taken into account (as required under Entity B's brokerage agreements), the client enters into rights and obligations to make or take delivery of goods when opening a futures contract position; however the futures exchange provides the specific ability to 'close out' and reverse the effect of an open futures contract so that delivery will not occur. This is supported by the case law referenced above when they refer to the nature of the market 'as trading in the contracts' themselves rather than the underlying commodities.

194. In light of the above, the factors in GSTR 2001/8 for determining if something is an incidental or dominant part of a supply need to be applied.

195. Lockhart J points out in Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd the 'delivery' aspect provides the means of ensuring that the price of the futures contract reflects the physical market to allow trading in the contracts. This supports a conclusion that the contract requiring 'delivery' of the goods is a means of better enjoying the dominant thing supplied, being the rights in the contract, rather than constituting for customers an aim in itself. Therefore, a conclusion that the dominant part of a futures contract is the rights and obligations in the contract itself reflects the 'social and economic reality' of the futures contracts (Saga Holidays v Commissioner of Taxation).

196. This can be distinguished from a situation where there is a contract for sale of goods or real property where it is clear from the contract and the surrounding circumstances that the aim of the parties on entry into the contract is the supply of the underlying asset, not the contractual rights.

Deliverable futures contracts that are not closed out

197. It is recognised that in some cases, a client may actually enter into a futures contract with the intention of not closing it out and making or taking delivery of the relevant goods. In this case, the essential character of the futures contract as a dealing in rights remains the same, it merely changes the intended use of the rights in the futures contract. That is, the client intends to use the rights to then be a supplier or recipient of the subsequent supply of goods.

198. This is consistent with Items 6 and 7 in the table in regulation 40-5.12 of the GST Regulations which distinguishes between the supply of the rights and obligation to make or receive a supply (on entry into the contract), and the subsequent supply of goods made as a result.

Deliverable commodity futures that have a cash settlement option

199. In some cases, deliverable commodity futures also provide a further alternative of an option for the parties to cash settle. This simply provides an additional right to those existing rights discussed above and the essential nature of trading in the contract remains a dealing in rights.

Conclusion regarding deliverable commodities futures

200. The entry into deliverable futures contracts, regardless of whether the client intends to close out, cash settle, or make or take delivery of the goods, is a dealing in rights for the purposes of Item 4. Similarly, when a client has an open futures contract and acquires brokerage to close out that position, they do not acquire any rights or enter into any obligations in relation to a sale or purchase of goods, they are reversing or extinguishing rights or obligations in relation to the contract. This is also a dealing in rights.

201. Therefore, the supply of brokerage for opening and closing out these futures contracts is a supply in relation to rights.

Are the rights for use outside of Australia?

202. It is recognised that the way that some exchanges, notably futures exchanges, are structured means that Entity B enters into the derivative contracts for its client as principal.

203. Therefore, in characterising if the brokerage service is a supply in relation to rights, the relevant rights are those constituted in the futures contracts that are dealt with outside Australia, on the relevant overseas futures exchange.

204. When a client intends to close out (or cash settle when that option is available) the deliverable commodity futures contract, the client's intended use of the rights in the contract is to enter into another transaction that is reflected in the futures contracts on the overseas exchange. Therefore, the rights are for use outside Australia and the brokerage supply will be GST-free under Item 4.

205. When a client's intended use of the rights in the futures contract at the time of opening the futures contract is not to close out but to make or take delivery of the goods, the facts are that the subsequent delivery of the goods is always at a location outside Australia.

206. In these circumstances, the rights in the contract are intended for use outside Australia when the supply of goods under the terms of a futures contract require that the goods are to be located at specified delivery point and that is outside Australia, or where this is not specified, the client intends that the delivery point will be outside of Australia. Therefore, based on the facts in the ruling that delivery only occurs outside Australia, the rights are for use outside Australia and the brokerage supply will be GST-free.

Non-deliverable derivatives

207. As discussed above, to the extent that Entity B enters into the derivative contracts for its client as principal, in characterising if the brokerage service is a supply in relation to rights, the relevant rights are those constituted in the futures contracts that are dealt with outside Australia on the relevant overseas futures exchange.

208. In the case of non-deliverable derivatives (including non-deliverable futures which must be cash settled), the nature of the derivatives is an exchange of rights and obligations by each party and there is no option, right or obligation to provide or receive the underlying thing.

209. The creation of a right is a supply under paragraph 9-10(2)(e). Therefore, a supply of a non-deliverable derivative contract is a supply of rights, and the essential character of the supply is of rights.

210. The brokerage services have a direct connection with rights because they facilitate the acquisition or sale of the non-deliverable derivative that occurs on the overseas exchange, which results in a dealing or exercise of rights.

211. Therefore, the supply of brokerage services in relation to non-deliverable derivatives on an overseas exchange is a supply made in relation to rights.

Are the rights for use outside of Australia?

212. It is the intended use of the rights attached to the non-deliverable derivative contracts that is relevant in assessing the application of Item 4 to the supply of the brokerage services to trade in those derivatives.

213. The non-deliverable derivative contracts in question are standardised contracts that are only traded via the relevant exchange, rather than traded outside the exchange like over the counter derivatives. It follows that in the case of non-deliverable derivative contracts, the intended use of the rights aligns with the way in which the contracts can be traded on the relevant exchange. That is, the non-deliverable derivative contracts can, for example, be bought, sold, cash settled or closed-out (by entering into an equal but opposite position) via the exchange.

214. When the client issues instructions to trade in the contracts and Entity B acts as described above in providing its brokerage service, the rights are for use where the relevant exchange is located.

215. Therefore, the supply of brokerage services to trade in non-deliverable derivative contracts on an overseas exchange is a supply that is made in relation to rights that are for use outside Australia. Accordingly, the supply is GST-free under Item 4.

Options over futures and Single stock options

216. Options over futures provide the customer with the right, but not the obligation, to purchase a future (over index, interest or commodities) at a fixed exercise price until expiry. Single stock options provide the customer with the right, but not the obligation, to purchase a security (a share in a company) at a fixed exercise price until expiry. The value of an option is, by definition, found in the rights that attach to the option. Therefore, the essential nature of any trading or exercise of these options is a dealing in rights. As the options are only traded via the relevant overseas exchange, and if exercised, the delivery of the shares or futures contracts must occur via the relevant overseas exchange, for the purposes of Item 4 the relevant rights are for use outside Australia.

217. Therefore, the supply of brokerage services to trade or exercise options over shares, or options over futures, on an overseas exchange, is a supply that is made in relation to rights that are for use outside Australia. Accordingly, the supply is GST-free under Item 4.

Question 4

218. What must be determined is whether the facilitation services supplied by Entity B to customers who do not hold an account with Entity B and who request an OTT and/or OBD can be considered a service that falls under category 3 in the Addendum to GSTR 2003/8.

219. Accordingly, it needs to be determined, whether the OTT and OBD are GST-free under Item 4.

Overseas telegraphic transfer

220. It is not explained in the private ruling request whether the beneficiary of the OTT accesses the money through a bank account. However, based on the way these transfers operate it can be reasonably assumed that when a Entity B customer purchases an OTT the money is transferred to a payee's overseas account.

221. The payee under an OTT acquires the right to be repaid the amount of the credit balance in the account with their beneficiary bank. The essence of the OTT is as a means of payment and the way this is achieved is by way of payment in 'bank money'. As such, the successful payment by way of bank money will always result in the payee acquiring the right to repayment against their beneficiary bank. Consequently, the OTT is a category 2 supply where the money is transferred to an overseas bank account of a payee who is overseas and thus falls under Item 4.

Overseas bank draft

222. An OBD, as a cheque, will fall within the meaning of 'money' being a bill of exchange or negotiable instrument. As the supply of the cheque is supplied for consideration which is also money (being the payment by the customer), the supply is 'money for money', and a supply for GST purposes under section 9-10(4).

223. The essential character of a supply of the OBD is that it is a chose in action against the drawee. The value in the draft is the right to require the drawee to provide the funds on presentation of the draft. In terms of GSTR 2003/8, this would place the supply of the OBD within category 2 of supplies made in relation to rights.

Facilitation services

224. According to paragraph 75 of GSTR 2003/8, in order for a service to be a supply under category 3, the supply of the relevant services should have a direct connection with the right that is identified for the purpose of Item 4.

225. In this regard, ATO ID 2012/1 states the brokerage services have a direct connection with rights supplied under shares because, through the acquisition of the share, the recipient of the brokerage services acquires the rights that are attached to the share.

226. We agree with Entity B's analysis that the facilitation service they provide to customers who do not have accounts but who wish to purchase OTT and/or OBD through OzForex is analogous to the brokerage services mentioned in ATO ID 2012/1.

227. Therefore, as provided in paragraph 77 of the Addendum to GSTR 2003/8 and consistent with the view reached in ATO ID 2012/1, the services supplied by Entity B are services that facilitate a dealing in the exercise of the rights under the OTT and OBD that can be considered as a category 3 supply.

228. Consequently, the facilitation service that Entity B supplies for non-account holders who request OTT and/or OBD is GST-free under Item 4.

Question 5

229. Entity B contends that:

"...the OTT and overseas bank drafts are properly characterised as part of a bundle of rights that is provided to customers in the CMA products as an interest in or under an account in Item 1 of subregulation 40-5.09(3).

230. What needs to be determined is whether the CMA, which is an account that is input taxed under subsection 40-5(1), is also partly GST-free under subsection 38-190(1).

231. This is because, pursuant to subsection 9-30(3), to the extent a supply would be both GST-free and input taxed it is GST-free (unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed).

232. Accordingly, if the CMA is not GST-free to any extent then the supply of the CMA is fully an input taxed supply.

233. The CMA is "an account made available by an Australian ADI" for the purposes of Item 1 in the table in subregulation 40-5.09(3) of the GST Regulations, and is an input taxed financial supply if the other requirements of subregulation 40-5.09(1) are met. However, that in itself does not help us characterise the supply for the purpose of Item 4. The supply must satisfy one of the categories set out above in GSTR 2003/8.

234. Entity B has used the following paragraph from the Explanatory Statement to argue their point that OTT and the OBD facility is a supply of a right.

The interests in an account include not only the right to repayment of money, but also rights to services in connection with the right to repayment of the money, including the right to instruct the ADI to make payments from the account and to provide access to information in respect of the account. For example, Bill Pay (B-Pay).

235. In our view, the above paragraph merely states what can be taken into the ambit of the term 'an interest in an account' under Item 1 of subregulation 40-5.09(3). Clearly the examples for Items 1 and 2 in the table of subregulation 40-5.09(3) given in Parts 1 and 2 of Schedule 7 to the Regulations include things that are services.

236. According to banking law and principles, an account creates a debtor/creditor relationship between the banker and its customers which is a contractual relationship. Central to that relationship is the customers' right to repayment of the funds in the account. This is also acknowledged by Entity B at paragraph 58 of their ruling request.

237. In our view, for the purposes of Item 4, the right to repayment to the account holder is considered to represent the essential character and substance of the supply of the CMA account and is therefore a supply in relation to rights.

238. Any supply, whether it is a bank account or supply of goods/services, will have rights attached to it. GSTR 2006/9 states:

137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.

239. We consider that the contractual rights to access, and more relevantly, the actual provision of such services in relation to the CMA contribute to the supply of the CMA as a whole but cannot be identified as a dominant part of the supply.

240. In our view, a service/feature that enables a customer to access the funds in an account can be considered to be an integral feature/service of the supply of the account and not the supply of separate rights that have an aim in themselves. Examples of this may be some of the methods offered to account holders to access their funds (exercise their right to repayment) such as internet banking, Bpay, etc.

241. Under the terms and conditions of the CMA, the OTT and the OBD are listed as methods of withdrawing funds from the account. Therefore, a question arises as to whether those withdrawal facilities are part of the predominant supply made under the CMA or supplies that have an aim in themselves and are therefore separate from the supply of the CMA.

242. In this regard, goods and services tax ruling GSTR 2001/8 which outlines the Commissioners' views on mixed and composite supplies states the following:

40. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act.

40A……

41. By having regard to the essential character or features of the transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of one thing. It is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

243. To be consistent with what has been stated in GSTR 2001/8, it needs to be determined whether the OTT and the OBD that are supplied to a Entity B customer are supplied as part of a composite supply of the CMA that forms part of the relationship created under the 'account' or whether they are separate supplies that have an aim in themselves and therefore should be considered separately.

244. In this regard we agree with Entity B's contention that the OTT and OBD are separate supplies from the supply of the CMA for the following reasons:

· Whilst Entity B may 'release' the funds needed for the OTT and/or the OBD (thereby honouring the right of repayment provided under the CMA), the actual supply of the OTT and/or the OBD is provided under a separate agreement. For example, a customer has to fill out a separate application to access OTT and/or OBD.

· OTT and OBD are commonly available as stand alone products to non-account holders, in comparison to some other means of account access which interpedently requires the existence of an account (such as ATM and cheque books).

· Whilst not determinative, the relative cost of these products compared with other payment methods available in relation to the CMA (such as cheque books) is substantial enough to indicate that they have an aim in themselves.

· Means of access that the CMA may provide to access funds or make payments within Australia are more likely to be integral to the supply of the CMA account; in contrast the OTT and OBD have specific purpose of making a payment to a specific entity overseas.

245. Therefore, even though we do not agree with Entity B's contention that the supply of the OTT and OBD are a supply of a right under the CMA, we nonetheless agree with their contention that they are separate supplies that have an aim in themselves.

246. Consequently, although a CMA customer is entitled to request an OTT and OBD, Entity B does not make those supplies as an integral part of the CMA. Therefore, the supply of the CMA is not a GST-free supply to any extent.