Edited version of your private ruling

Authorisation Number: 1012516994960

Ruling

Subject: GST and Reduced Input Tax Credits and an Apportionment Methodology for Item 32

Questions

Can the Commissioner confirm that where Entity A acquires services from Entity B on or after 1 July 2012 for consideration which includes a single Management Fee, the single fee is:

(i) consideration for a supply of Trustee, Investment Management, Administration and Custodial Services by Entity B to Entity A; and

(ii) fairly and reasonably apportioned between item 32 in the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) which will attract a 55% reduced input tax credit and those services which are covered by paragraphs (32)(b) (ii) - (vii) in item 32 (and which will attract a 75% reduced input tax credit) using the benchmark methodology set out in the facts to calculate the input tax credit entitlement on the Management Fee.

Answers

The Commissioner confirms that where the Entity A acquires services from Entity B on or after 1 July 2012 for consideration which includes a single Management Fee, the single fee is:

(i) consideration for a supply of Trustee, Investment Management, Administration and Custodial services by Entity B to Entity A; and

(ii) fairly and reasonably apportioned between those services which are covered by Item 32 which will attract a 55% reduced input tax credit and those services which are covered by paragraphs (32)(b) (ii) - (vii) in item 32 (which will attract a 75% reduced input tax credit) by using the proposed benchmark methodology.

Relevant facts and circumstances

The Responsible Entity's role

In accordance with section 601FC of the Corporations Act 2001 (Corporations Act) regarding the duties of a responsible entity, the Original Trust Deed sets out that the assets of the Trust are vested in Entity B and "…held on trust for Members."

Entity B has all the powers in connection with the Trust that it is possible under the law to confer on a Trustee and as though it were the absolute owners of the Assets and acting in its personal capacity.

In respect of the investment powers conferred on Entity B by the Trust Deed, Entity B may invest in, dispose of or otherwise deal with property and rights in its absolute discretion.

Entity B has the power to delegate its responsibilities as RE and may authorise any person to act as its agent or delegate (in the case of a joint appointment, jointly and severally) to hold title to any Asset, perform any act or exercise any discretion within its power, including the power to appoint in turn its own agent or delegate.

Entity B also has the following administrative responsibilities under the Trust Deed:

· Receiving applications for Units and application money from applicants.

· Reviewing and considering applications received from applicants.

· Calculating the Application Price of the Units and determining the number of Units issued.

· Setting a minimum application amount and a minimum holding for the Trust.

· Updating the Register in relation to the issue of Units and issuing confirmations to the Member.

In relation to the transfer of Units by Members, Entity B is responsible for:

· Approving Members requests for the transfer of Units;

· Updating the Register in relation to the transfer of Units; and

· Issuing confirmation to the Member of the Units transferred.

· Determining the price of Units redeemed by a Member.

· Receiving and processing of requests for the redemption of Units.

· Responding to complaints received from Members in relation to Entity B.

Entity B has the discretion to determine the Distributable Income of the Trust for each Financial Year.

Entity B also has the discretion to distribute any amount of capital or income to Members calculated according to the number of Units held, at any time.

Entity B may be indemnified from the Assets of the Trust in respect of any liability in connection with carrying out its duties as responsible entity of the Trust.

Entity B provides account balances, statements, notifications and other information to Members through its web based platforms.

Entity B also provides the following information to Members:

· Distribution statements;

· Transaction statements;

· Annual taxation statements;

· Audited financial reports;

· Capital gains tax statements;

· Confirmations of transactions; and

· Performance information.

Entity B can engage third parties to perform services that it is required to provide to Entity A. This includes the provision of Investment Management and Custodial services which are, for example, provided to Entity B by external parties.

Entity B has also entered into contractual arrangements with arm's length parties (Distributors) operating under their own Australian Financial Services Licence or the licence of a dealer group in order to distribute and promote the nominated MISs. Distributors are appointed by Entity B (in its personal capacity) pursuant to a standard Product Issuer Agreement. In consideration for the Distributors providing distribution services to Entity B, Entity B will pay the relevant remuneration, including commission to the Distributor. There is no additional charge to, or expense recovery from, the MISs for the Distributors' services to Entity B, so all commissions paid to Distributors are funded by the Management Fees that Entity B charges the MISs for the provision of its services.

The Trust and its Members

Members who invest in the Trust can be either:

· Direct investors who apply personally to the Trust to become a member; or

· Indirect investors who apply for membership to the Trust through a Service Operator (such as the operator of an Investor Directed Portfolio Service) which assists the investor with acquiring and disposing of the investments in the Trust.

Members are issued with Units in the Trust which represent the Members' proportionate share of the Trust.

The price of the Members' Units varies according to the fluctuation of the value of the Assets of the Trust.

The Fee Arrangements

In consideration for providing services to the Entity A, Entity B is entitled to receive the following fees:

· Application Fee;

· Management Fee; and

· Redemption Fee.

Entity B is entitled to be reimbursed for expenses incurred in relation to acting as RE including:

· The acquisition, disposal, insurance, custody and any other dealing with Assets

· Any proposed acquisition, disposal or other dealing with an investment

· The administration or management of the Trust or its Assets and Liabilities

The Management Fee is described as the fees and costs for managing your investment.

Entity B does not, in practice, charge the Application Fee or Redemption Fee, but notifies Members that it has the right to charge these fees under the Trust Deed.

Explanation of the Proposed Apportionment Methodology

Consistent with the views mentioned in Draft Goods and Services Tax Determination, Goods and Services Tax: Whether item 32 of the table in subregulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulation 1999 applies to some extent in respect of an acquisition for a single fee by a managed investment fund that is a recognised trust scheme from a Responsible Entity and the Q&A Update submitted to the National Tax Liaison Group on item 32 (Q&A Update), Entity B proposes to apportion the consideration it receives as a single Management Fee into services that are included and excluded under item 32. These services fall within the four main heads of Trustee, Investment Management, Administration and Custodial services.

To this end, your approach has been to quantify a "benchmark" for each of the Trustee, Investment Management, Administrative and Custodial services based on an analysis of the market price of each of the services. This is achieved by Entity B, in most cases, using the existing arm's length arrangements with third parties for providing these services and the negotiated rates charged by these third parties.

The expertise of experts were sought to determine the benchmark rate for Trustee services. These rates have been determined based on industry experience as a subject matter expert as well as discussions with external sources familiar with market rates for those services.

The following table demonstrates Entity B's proposal to calculate the benchmark for each of the services provided to the Entity A which will be used to determine the proportion of its Management Fee that relates to each service:

	Component service supplied by Entity B	Basis for determining benchmark (as a basis points (bps) percentage of Entity B funds under management)	RITC rate
1	Trustee services	Based on research conducted of Trustee services and obtained knowledge of the Trustee services rates charged by these external providers.	55%
2	Custody services	Actual arm's length fees for custody services acquired by Entity B in relation to the MISs for which it is RE.	75%
3	Investment management services	Actual arm's length fees charged by external managers across the portfolio of MISs for which Entity B is RE.	75%
4	Administration services	Based on the management expenses actually recovered by Entity B across the MISs for which it is RE, plus its profit less the proportion for Trustee services calculated above.	75%

Whilst a lower rate for Trustee services may be obtained in any competitive tender process for the funds, Entity B proposes to conservatively use a rate that is in the middle of the range of Trustee rates charged.

Entity B expect that the fee for Trustee services charged by Trustees of investment funds would be lower than the fee charged by trustees of superannuation funds. This is because trustees of superannuation funds have, in general, higher compliance obligations associated with their role as trustee. For example, they must meet a greater range of regulatory requirements and address member protection issues. These additional functions translate into higher trustee fees charged by trustees of superannuation funds.

In practice, the Management expenses and profit would also cover all the inputs to the Trustee services as well as the Administration services that are supplied by Entity B to the Entity A. However, for the purposes of item 32, the Trustee services have been separately carved out using the basis set out in the above table, and the relevant basis points (bps) has therefore, been subtracted from the Management expenses and profit bps to arrive at the Administration Services benchmark.

The benchmark bps percentages are based on information that applies across all MISs for which Entity B acts as RE (not just the Entity A). Accordingly, it is proposed to apply this benchmark methodology to all these MISs.

The benchmarks calculated using the above methodology will be reviewed and updated by Entity B on an annual basis to account for any change in the market price of the services.

You have advised us that the amounts for Custody Services and Investment Management Services are ascertained from tax invoices. The amount for Trustee services is determined by way of Industry Benchmark. The balance by default is then included as Administration Services.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

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

A New Tax System (Goods and Services Tax) Act 1999 section 70-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 70-5

Reasons for decision

The Entity A and Entity B are also referred to as Trust and Trustee respectively.

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

You make a creditable acquisition if:

a) you acquire anything solely or partly for a *creditable purpose; and

b) the supply of the thing to you is a *taxable supply; and

c) you provide, or are liable to provide, *consideration for the supply; and

d) you are *registered or *required to be registered.

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

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

1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

2) However, you do not acquire the thing for a creditable purpose to the extent that:

a) the acquisition relates to making supplies that would be *input taxed; or

b) the acquisition is of a private or domestic nature.

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

The provision, acquisition or disposal of an interest in the Trust is a financial supply that would be input taxed under item 10 (item 10) in the table of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Briefly, item 10, amongst other things, deals with Managed Investment Schemes similar to this Trust.

On the understanding that the Trust has exceeded the financial acquisitions threshold provided for in subsection 11-15(4) of the GST Act, it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed - financial supplies. However, certain acquisitions that relate to making financial supplies may entitle you to Reduced Input Tax Credits (RITC). Subsection 70-5 of the GST Act refers to these acquisitions and states:

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

(2) ……

Regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) refers to acquisitions that attract RITC and states:

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

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

This ruling concerns item 32 in the table listed under regulation 70-5.02 of the GST Regulations. Item 32 states:

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

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

(b) the supplies acquired are not:

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

(A) selling a freehold interest in land; or

(B) selling a stratum unit; or

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

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

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

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

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

(vi) a service covered by item 30; or

(vii) a service covered by item 33.

Under regulation 70-5.03 the percentage to which input tax credits are reduced for those reduced credit acquisitions which are covered by item 32 is 55% rather than 75%.

The Commissioner has released draft guidance on item 32 and the acquisition of relevant services by a recognised trust scheme for a single fee in Draft Goods and Services Tax Determination, Goods and Services Tax: Whether item 32 of the table in subregulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulation 1999 applies to some extent in respect of an acquisition for a single fee by a managed investment fund that is a recognised trust scheme from a Responsible Entity (GSTD 2013/D1).

GSTD 2013/D1 provides affirmative guidance to the question posed in the title and also suggests that a 'deductive benchmarking methodology' is a fair and reasonable means of apportioning a single fee between two different RITC percentages. That is, the application of item 32, allows a recognised trust scheme (RTS) to be entitled to a RITC for acquisitions at the lower rate of 55% to the extent that the acquisitions are not excluded under item 32. A RITC at the rate of 75% is available to the extent that an acquisition is excluded from item 32 but falls within another item of the table in subregulation 70-5.02(2) of the GST Regulations.

However, the RTS is not entitled to a RITC to the extent that the acquisition is excluded from item 32 and does not fall within another item of the table in subregulation 70-5.02(2) of the GST Regulations. It is therefore, necessary to identify the components of the acquisition to determine the relevant RITC rate (or rates) which will apply.

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

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

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

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

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

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

In this case, as the acquisition of Trustee services by the Trust is remunerated by way of a single Management Fee, the Trust is required to apportion this single Fee (consideration) to determine its entitlement to any RITC. In this context you contend that the Trustee services acquired by the Trust can be seen as consisting of four separately identifiable parts being Trustee, Investment Management, Administration and Custodial services. In respect of each part the Trust will then apply the relevant rate of 75% and/or 55%. We agree with this proposal.

Apportionment Methodology

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

Taxation Office view

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

Reasonable methods of apportionment

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

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

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

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

Application of the item 32 Apportionment Principles to the Factual Circumstances

You submit that the approach taken, whereby the respective proportions of the supplies which are remunerated by way of the single Management Fee are derived by using arms length market rates, is similar to the approach taken in the example provided by the ATO in Question 11 of its Q&A Update on item 32 and is also consistent with the views expressed in GSTD 2013/D1.

Further, you submit that this method accords with the principles outlined in Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3). That is, GSTR 2006/3 directs that whatever method is chosen, that method must be fair and reasonable in the context of the respective enterprise.

You also submit that the following relevant percentages apply for RITC entitlements under item 32 for the various components of the services remunerated by way of the single fee:

· Trustee services - As explained above, the portion of the Management Fee that relates to the provision of Trustee services is not excluded under item 32(b). The Entity A should be entitled to a RITC of 55% in respect of the portion of the Management Fee that relates to Trustee services.

· Investment management services - The proportion of the Management Fee that relates to the provision of investment management services by Entity B relates to item 23(b) in respect of the management of Member's portfolio. These services are excluded under item 32(b)(iii) and should be subject to a 75% RITC.

· Administration services - The proportion of the Management Fee that relates to the provision of administration services relates to administration services supplied by Entity B which should fall under items 24 (a), (b), (c), (d), (e) or (g) of subregulation 70-5.02(2). These services are excluded under item 32(b)(iv) and should be subject to a 75% RITC.

· Custodial services - The proportion of the Management Fee that relates to the provision of custodial services relates to custodial services supplied by Entity B which should fall under items 29(c) and (d) of subregulation 70-5.02(2). These services are excluded under item 32(b)(vi) and should be subject to a 75% RITC.

You have summarised the above and submitted the following table together with an example:

Component service supplied by Entity B	Reduced credit acquisition item of subregulation 70-5.02(2)	RITC
Trustee services	Item 32	55%
Custodial Services	Item 29 (c) and (d)	75%
Investment management services	Item 23(b)	75%
Administration services	Item 24 (a), (b), (c), (d), (e) or (g)	75%

You note that by applying the proportions of the Management Fee related to each component service identified above with the above RITC rates, Entity B will calculate a blended reduced input tax recovery rate (BRITRR) that will be used to calculate the recovery of input tax credits on the Management Fee incurred by the Entity A and the nominated MISs in Entity B's portfolio.

The components of the single Management Fee are deduced by using a deductive benchmark methodology similar to the example outlined in GSTD 2013/D1 (and to be reviewed/updated on an annual basis).

You have provided the following example illustrating how the benchmark rates calculated by Entity B for a sample year are applied against the RITC rate for each component service to derive the BRITRR of the Management Fee. For the avoidance of doubt you have advised us that you do not seek a ruling on the example BRITRR itself.

You advise that the benchmark rates in the table below are representative of the arm's length market rates that Entity B charges for the four components of the service it provides across its entire portfolio of MISs. You advised the ATO that the benchmark rates for Trustee services have been determined based on research and expertise and as well as discussions with external sources familiar with market rates for those services.

Component service supplied by Entity B	Fee benchmark for component service
Trustee services	5 bps
Custody services	2 bps
Investment management services	16 bps
Administration services	61 bps
Total	84 bps

Based on the criteria set out above, the example below highlights how the apportionment method would work using the benchmark rates for each of the services provided to Entity A and the nominated MISs.

Applying the above example benchmark proportions and the RITC rates set out above the BRITRR is set out in the following table.

Component service supplied by Entity B	Benchmark proportion of Management Fee	Reduced credit acquisition item of subregulation 70-5.02(2)	RITC	Recovery
Trustee services	5.95% (5 bps / 84 bps)	Item 32	55%	3.27%
Custodial Services	2.38% (2 bps / 84 bps)	item 29 (c) and (d)	75%	1.79%
Investment management services	19.05% (16 bps / 84 bps)	Item 23(a)	75%	14.29%
Administration services	72.62% (61 bps / 84 bps)	Item 24 (a), (b), (c), (d), (e) or (g)	75%	54.46%
Blended reduced input tax recovery rate				73.81%

In the example above, the combination of the recovery rates of both types of supplies (i.e. those that are eligible for an RITC at 75% and those that are eligible for an RITC at 55%) would result in an overall RITC recovery rate of 73.80% on the Management Fee charged by Entity B.

Conclusion

Where the Entity A and the other nominated MIS acquire services from Entity B on or after 1 July 2012 for consideration which includes a single Management Fee, the single fee is:

(i) consideration for a supply of Trustee, Investment Management, Administration and Custodial services by Entity B to Entity A; and

(ii) fairly and reasonably apportioned between those services which are covered by Item 32 which will attract a 55% reduced input tax credit and those services which are covered by paragraphs (32)(b) (ii) - (vii) in item 32 (which will attract a 75% reduced input tax credit) by using the proposed benchmark methodology.