Edited version of your private ruling

Authorisation Number: 1012515069442

Ruling

Subject: GST and supply of services to the conversion of foreign currency

Question 1

Does an Australian entity (you) make a supply to a non-resident entity (NR) which is GST-free pursuant to item 2(a) in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you introduce to NR your Australian client who wishes to acquire foreign exchange services from NR for which you are paid a commission?

Answer

No.

Question 2

Is the supply of services made by you in relation to the conversion of an amount held by your Australian client in an investment account with NR either from Australian dollars (AUD) into a foreign currency or from a foreign currency into AUD a GST-free supply pursuant to item 4(a) in subsection 38-190(1) of the GST Act?

Answer

Yes.

Relevant facts and circumstances

Applicant:

You are a privately owned Australian company which provides investment advisory services and comprehensive wealth management solutions for private clients, institutions and corporations.

Ruling request:

You provide international wealth management services which enable your Australian clients to hold and transact in international securities listed in several countries. You also provide other services to your clients include foreign exchange, interest rate securities, global managed funds and foreign currency margin lending.

You generally charge your Australian clients either per transaction, a portfolio management and administration fee based on the market value of the client's portfolio, or a combination of both.

Some of the services supplied by you to your Australian clients are facilitated by a non-resident entity (NR), whose head office is located outside Australia. NR has an Australian Financial Services Licence and an affiliate of NR, NR-Aus, is incorporated in Australia. You engage NR to facilitate international execution, clearing, custody and margin lending facilities on behalf of your Australian clients.

If your Australian client wishes to trade foreign listed securities you open an investment account in the client's name with NR in accordance with NR's account opening procedures.

Your Australian client may fund that NR investment account by either depositing a sum of money in advance of undertaking any foreign listed securities transactions or funding each foreign listed securities transaction as and when that transaction is settled.

Your Australian client may transfer to and hold funds in the client's NR investment account in any currency. Where your Australian client deposits AUD into the client's NR investment account, the AUD may be converted to a foreign currency to facilitate specific investments in foreign listed securities and you assist the client with that conversion as outlined in further detail below.

Your Investment Advisers execute foreign listed securities transactions on NR's electronic trading platform in accordance with instructions from your Australian client. Settlement is required on the date specified by the relevant exchange in the currency of the market on which the transactions are executed.

You also undertake transactions for clients which involve over-the-counter interest rate securities (i.e. bonds) denominated in foreign currencies. These transactions are required to be settled in the security's denominated currency.

There are a number of settlement options available to your Australian client in relation to the purchase of foreign listed securities:

Your client may use funds already held in the client's NR investment account. If those funds are not held in the currency required for settlement, you can facilitate conversion of the funds into the required foreign currency;

Your client may transfer the AUD equivalent of the settlement amount to the client's NR investment account. Upon receipt, you can facilitate conversion of the AUD into the required foreign currency;

Your client may transfer the settlement amount in the required foreign currency into the NR investment account from foreign currency reserves held by your client at another financial institution (for example, an Australian bank); or

Your client may use funding available through a margin lending facility which has been arranged with NR.

Following a sale of foreign listed securities by your Australian client, the sale proceeds are deposited into the client's NR investment account in the currency of the market on which the sale was executed.

From time to time, your Australian client may wish to withdraw funds from that client's NR investment account. This generally occurs in one of two ways:

· Your client may convert foreign currency held the client's NR investment account into AUD and transfer the AUD to the client's bank account in Australia, or

· Your client may transfer the foreign currency held in the client's NR investment account to a foreign currency account held by the client at another financial institution (for example, transfer Euros from the client's NR investment account to an account held by the client at a bank in Paris).

The majority of foreign currency transactions undertaken by your Australian clients are for the purposes of acquiring and disposing of foreign listed securities, and not for the purpose of speculative trading of foreign currency.

You do not exchange funds for clients using your own foreign currency reserves.

Where your Australian client wants to undertake a foreign currency conversion, you assist as follows:

· You obtain a market exchange rate quote from NR for the relevant foreign exchange transaction;

· The exchange rate quoted includes a fee or 'margin' for facilitating the transaction (discussed below);

Generally, your client authorises your Investment Adviser to execute the foreign exchange transaction at the 'going rate'. In some cases, however, your client may wish to be advised of the rate prior to authorising the foreign exchange transaction;

Following acceptance of the quoted exchange rate by your client, your Investment Adviser will instruct NR to execute the foreign exchange transaction via either the foreign exchange desk or the electronic trading platform;

The settlement date of the foreign exchange transaction is nominated at the time that transaction is entered into and usually occurs two business days after the value date of the transaction. The amount payable by your client in order to purchase the foreign currency should be deposited into the client's investment account with NR by the settlement date; and

NR issues a confirmation of the foreign exchange transaction directly to your client and provides a copy to you. The confirmation does not separately disclose the margin for facilitating the foreign exchange transaction.

NR and your entity share the margin as per an agreed commission grid.

Further submissions made in the ruling request:

In relation to Question 1 (whether you make a GST-free supply to NR when you introduce your Australian clients to NR) it was submitted that the relevant supply consists of you introducing your Australian clients to NR for consideration in the form of a share of the margin applied to the foreign exchange transaction by NR and that that supply was a supply of services made to a non-resident who is not in Australia at the time of the supply within the meaning of item 2(a) in subsection
38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

In relation to Question 2 (whether the supply by you in relation to the facilitation and execution of foreign exchange transactions by NR is GST-free) it was submitted, in relation to the conversion of AUD into foreign currency, that there is a supply of services that is directly connected with rights per Category 3 in Goods and Services Tax Ruling GSTR 2003/8 and therefore made in relation to rights for the purposes of item 4 in subsection 38-190(1) of the GST Act and those rights are for use outside Australia on the basis that the foreign currency is to be used to trade in foreign securities. In relation to services supplied by you in relation to the conversion of foreign currency into AUD it was submitted that there was also a supply that is made in relation to rights that are for use outside Australia 'on the basis that NR performs the foreign currency conversion outside Australia, and uses the Australian currency to provide to your clients outside Australia'.

NR's Obligations

NR is subject to restrictions in relation to the use of your clients' funds while those funds are held in an investment account with NR. NR is required to maintain sufficient cash reserves to satisfy any amounts it owes to your clients and to make those funds available promptly.

In the event that NR becomes insolvent, securities and cash owned by your clients and custodied at NR would be distributed and, in the event of any shortfall, your client would be reimbursed (up to a limit) under the laws of the country where NR's head office is located and then under any excess insurance policy maintained by NR.

NR makes no reference to a debtor/creditor relationship in relation to securities and cash owned by your clients and custodied at NR, and NR confirmed that NR has a custodian/beneficiary relationship with your clients.

You advised that the arrangements between NR, you and your clients are supported by back-to-back agreements, which you provided after lodging the ruling request. You contract directly with your client to provide services to your client and you also contract with NR for NR to provide services to you.

You further clarified that while NR is legally contracted to provide services to you, in practice many services are in fact provided directly by NR to your client through the client's investment account with NR, though the agreement between you and NR states that NR does not owe any fiduciary duty to your clients in respect of NR's custodial role (although you submitted that NR merely disclaimed any fiduciary relationship which might arise as a result of NR dealing directly with your client and that NR did not disclaim any fiduciary relationship which may arise as a result of NR having custody of funds or securities which belong to your client).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

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

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

Reasons for decisions

Question 1

Submission made in the ruling request:

You submitted that you make a supply to NR which consists of you introducing your Australian clients, who wish to exchange currency, to NR, for consideration in the form of a share of the margin applied to the foreign exchange transactions by NR.

Goods and Services Tax Ruling GSTR 2006/9 deals with supplies and states:

Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply

119. Examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom.

You have an agreement with each client, which sets out the terms and conditions in relation to the transactions which you execute on behalf of that client. You are permitted to appoint an agent, or otherwise engage a person, to do anything that it is authorised to do in accordance with that agreement.

In our view you engage NR to do things that you are authorised to do by the agreement with your client, including convert AUD deposited into a NR investment account by your client into foreign currency in order to facilitate investments by your client in foreign listed securities.

You have a separate agreement with NR pursuant to which NR agrees to supply services to you. Where the service comprises converting an amount into a foreign currency, the consideration for the supply which you make to your Australian client is the margin and the consideration for the supply made by NR to you is the portion of the margin NR receives as per an agreed commission grid between you and NR.

GSTR 2006/9 distinguishes between a subcontracting arrangement and an arranging service:

260. The Commissioner agrees there is a distinction between a subcontracting arrangement and an arranging service. The Commissioner also agrees with the analysis of a subcontracting arrangement in Plantiflor. In a subcontracting arrangement, a supplier contracts with a customer for the supply of something. The first supplier then contracts with a second supplier (the subcontractor) for the provision of the thing to the customer. (Note: See ruling for diagram which illustrates a subcontracting arrangement):

261. However, the Commissioner considers a supply can only be a supply of arranging for a supply to be made to the customer (or another entity) if that is what the first supplier has been contracted to supply. If the first supplier arranges for a second supplier to contract with the customer to supply the required thing, the first supplier is responsible for arranging for the second supplier to supply that thing. This was not the case in Plantiflor. (Note :see diagram which illustrates an arrangement with the supply of arranging and the supply of the thing arranged):

262. Further, if the first supplier arranges for a second supplier to supply a particular thing to a customer, the customer typically has no legal recourse against the first supplier for the second supplier's failure to supply the thing. If the second supplier fails to supply that thing, the customer usually only has legal recourse in respect of that failure against the second supplier. If the first supplier promises to arrange for the supply of a thing and that promise is not carried out, the customer then usually has legal recourse against the first supplier for breach of its promise to arrange for the supply by the other supplier.

Your agreement with NR states that you shall enter into appropriate contractual arrangements with your clients and that such agreements shall make you, and not NR, responsible to those clients for the provision of services.

In our view this indicates that you do not arrange for NR to contract with your Australian clients to supply the service (per the discussion in paragraph 261 of GSTR 2006/9). It is clear from your agreement with NR that you and NR have not agreed that NR is responsible for the supply of services to your Australian clients. This is also relevant to the legal recourse test discussed in paragraph 262 of GSTR 2006/9, i.e. if you were arranging for NR to contract with your clients to supply the services then your clients would have no legal recourse against you if NR failed to supply those services. Your agreement with NR provides that your clients shall have recourse against you and not against NR.

We therefore consider that you and NR have entered into a subcontracting arrangement rather than you supplying an arranging service (i.e. arranging for NR to make the supply to your Australian clients). GSTR 2006/9 adopts the reasoning in Customs and Excise Commissioners v. Plantiflor Ltd [2002] UKHL 33 that, for GST purposes, a subcontract arrangement involves two supplies (Para 259):

If Plantiflor had undertaken to deliver the goods itself, using Parcelforce as its subcontractor to make the actual delivery, the tax position would be straightforward. There would be two supplies: (i) a supply by Parcelforce to Plantiflor of the service (as its subcontractor) of delivering the customer's goods to the addressee and (ii) a supply by Plantiflor to the customer of the service of delivering his goods to the addressee (performed through its subcontractor). Consideration would pass from the customer to Plantiflor and from Plantiflor to Parcelforce.

Applying the Plantiflor analysis to the present case, we consider that there are two supplies:

· pursuant to your agreement, with your clients, you supply services to your Australian clients; and

· pursuant to your agreement with NR, NR supplies services to you.

For the reasons set out above we do not agree with the submission made in the ruling request that the share of the margin retained by you is consideration for a supply which you make to NR of the service of introducing your Australian clients to NR.

Question 2

Submission made in the ruling request:

In relation to the conversion of AUD into foreign currency it was submitted that there is a supply of services that is directly connected with rights per Category 3 in Goods and Services Tax Ruling GSTR 2003/8 and therefore made in relation to rights for the purposes of item 4 in subsection
38-190(1) of the GST Act and those rights are for use outside Australia on the basis that the foreign currency is to be used to trade in foreign securities.

In regard to services supplied by you in relation to the conversion of foreign currency into AUD it was submitted that there was also a supply that is made in relation to rights that are for use outside Australia 'on the basis that NR performs the foreign currency conversion outside Australia, and uses the Australian currency to provide to your clients outside Australia'.

NR is a custodian:

Pursuant to your agreement, you make a number of supplies to your clients, including:

· brokerage services;

· financial product advice;

· placing orders for market transactions; and

· facilitating foreign currency exchange.

It is the service of facilitating foreign currency exchange that is relevant to Question 2.

From the information provided, your client deposits AUD into the client's investment account with NR, which is a representation of the client's beneficial interest in a group or omnibus account held by NR (as nominee).

Our understanding of the description provided by you of the group or omnibus accounts held by NR is that they are accounts where all of the cash and securities of your clients (and all of NR's other clients) are held in aggregate but accounted for separately in each client's investment account.

We consider that the relationship between NR and your client is a custodial arrangement.

This view is supported by your agreement with NR, which states that NR shall perform cashiering functions for accounts introduced by you which include receipt and delivery of securities, receipt and payment of funds owed by or to customers, and provision of custody for securities and funds. In addition, the agreement makes NR responsible for safekeeping of all money and securities received by them.

Goods and Services Tax Ruling GSTR 2002/2 defines a custodian as:

An entity or person holding assets and safeguarding property on behalf of another. Unlike a trustee, a custodian does not hold legal title in the property.

Based on the material set out above, we consider that your client has a legal claim to the funds held in the client's investment account with NR, which represents a chose in action. While the funds in the investment account may be denominated in a particular currency, in our view the rights of your client are not the same rights as the holder of physical bank notes in that currency (c.f. Travelex Ltd v Commissioner of Taxation [2010] HCA 33 where it was held that although Fijian banknotes were tangible, they had no value aside from the rights that attached to them; that those rights were statutory rights under the laws of Fiji; and that those rights were used when the banknotes were used). Your clients may have various contractual rights in regard to the services provided by you, but the only right your clients have in regard to an investment account with NR is a legal right to be repaid.

What supply do you make?

In the ruling request you submitted (in relation to Question 1):

The foreign exchange transaction occurs between NR and the client as principals. Our clients accept the rate and authorises us to execute transactions on their behalf with NR.

However, you provided additional information confirming the existence of a clause in your agreement with NR, which states that NR provides services to you and you shall then enter into appropriate contractual arrangements with your clients.

We consider that your role in relation to a foreign exchange transaction is that of facilitator.

Is the supply of services made by you to your clients made in relation to rights?

GSTR 2003/8 states (Para 27A) that a supply of a thing is a 'supply that is made in relation to rights' if it fits within one of three categories. As the supply made by you to your client is a supply of services, it falls for consideration under Category 3. The relevant parts of GSTR 2003/8 are paragraphs 28, 28A and 75-80 which state that a supply of services satisfies Category 3 if it has a direct connection with rights and that the connection is reasonably close (as opposed to remote). Generally this connection will be present if:

· 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.

As discussed above, you, on behalf of your client, instruct NR to execute the foreign exchange transaction. It is NR that executes the transaction. In this case you provide instructions to NR and you are one step removed from the key supply. However, your services are necessary in order for the foreign exchange transaction to occur. You forward instructions received from your client to NR and this facilitates the conversion of funds deposited in the client's investment account at NR into a different currency. We consider that a supply of a service is made in relation to rights if the service is directly connected with rights. The facilitation service provided by you has a direct connection with rights because it facilitates a dealing in or exercise of those rights. We therefore consider that the better view is that the services supplied by you to your client do have the connection required to satisfy Category 3.

Where are the relevant rights for use?

In our view, the right of your client to repayment of the funds held in the client's investment account with NR outside Australia is the relevant right. The right to repayment would be enforceable in the country where NR has its head office. We take the view, therefore, that the right to repayment is for use outside Australia.

Our view is that the services supplied by you do have the necessary connection to satisfy Category 3, that the relevant right is the right to repayment, and that this right is for use outside Australia. Consequently, the services supplied by you to your clients are GST-free under item 4(a) of subsection 38-190(1) both in the case of foreign exchange transactions involving the conversion of AUD to foreign currency and foreign exchange transactions involving the conversion of foreign currency into AUD.