Edited version of your private ruling

Authorisation Number: 1012524867585

Ruling

Subject: GST Apportionment for a Retail Credit Card Business

Is the revised apportionment methodology for Entity A's retail credit card business, fair and reasonable for calculating the amount of input tax credits it is entitled to for its acquisitions, for the purposes of Division 11 and Division 15 of the A New Tax System (Goods And Services Tax) Act 1999 (the GST Act)?

Answer

The Commissioner considers that the revised apportionment methodology for the retail credit card business of Entity A is likely to provide a fair and reasonable basis for calculating the amount of input tax credits it is entitled to for its acquisitions for the purposes of Division 11 and Division 15 of the GST Act.

Relevant facts and circumstances

Entity A is an authorised deposit-taking institution offering an array of financial services including its retail credit card business. This ruling application concerns its retail credit card business.

Entity A's retail credit card business generates input taxed financial supplies (such as the provision of credit to cardholders), GST-free financial supplies (such as the provision of credit to cardholders located outside Australia) and taxable supplies (such as the provision of interchange service to acquirers). This mixture of supplies has given rise to the need for Entity A to apportion input tax credits on its acquisitions that relate to the making of those supplies.

Entity A has devised a new apportionment methodology for its retail credit card business. The proposed apportionment methodology for determining a recovery rate (independently of the effect of Division 70) is based on the identification of two customer pools namely transactors and revolvers followed by four steps.

The four steps are:

Step 1: Involves the allocation of GST bearing costs between transactors and revolvers. This allocation is done on the basis of gross spend on purchases of each of these two customer pools.

Step 2: A revenue based method is used to calculate the extent of creditable purpose (ECP) of acquisitions allocated to each of the two customer pools. This involves deriving rates for the two customer pools based on the revenues generated by each.

Step 3: A weighted average recovery rate is calculated for each of the two customer pools using the values obtained from Steps 1 and 2.

Step 4: The weighted average recovery rates of the two customer pools are added to give a blended overall recovery rate for the retail credit card business as a whole.

Entity A maintains that due to the similarity in the overall recovery rate using card spend or transaction numbers, either would be an appropriate driver. However, Entity A maintains that an overall rate derived from an allocation based on actual monthly card spend split between revolvers and transactors is the most reasonable estimate for credit card acquisitions.

Steps 1 to 4 is best illustrated by the use of the formula as set out below.The overall recovery rate, aside from the effect of Division 70, is the result of the following formula:

Overall Recovery Rate =

(transactor weighting x transactor rate) + (revolver weighting x revolver rate)

Where:

Transactor weighting = transactor spend

Total spend

Revolver weighting = revolver spend

Total spend

Transactor rate = transactor taxable supply revenues + GST-free supply* revenues

Total transactor revenues

Revolver rate = revolver taxable supply revenues + GST-free supply* revenues

Total revolver revenues (including total net interest)

* "GST-free supply" revenues do not include net interest.

Relevant legislative provisions

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

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 11-30

Reasons for decision

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes.

An entity makes a creditable acquisition under section 11-5 of the GST Act when that entity:

(a) acquires anything solely or partly for a creditable purpose; and

(b) the supply of the thing to the entity is a taxable supply; and

(c) the entity provides, or is liable to provide, consideration for the supply; and

(d) the entity is registered or required to be registered.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Under subsection 11-15(2) of the GST Act 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, to the extent that acquisitions made by Entity A relate to making supplies that would be input taxed, they are not acquired for a creditable purpose. Therefore, such acquisitions are not, to that extent, creditable acquisitions and Entity A is not entitled to input tax credits. The exceptions to subsection 11-15(2) of the GST Act outlined in subsections (3), (4) or (5) of the GST Act have are not relevant for present purposes.

Section 11-25 of the GST Act provides that the amount of input tax credit is equal to the GST payable on the supply of the thing acquired (unless the acquisition made is partly creditable).

Entity A makes taxable, GST-free and input taxed supplies. Entity A's acquisitions are treated as being made for both a creditable purpose and non-creditable purpose as provided for in section 11-30 of the GST Act. Entity A has provided the ATO with an apportionment methodology that consists of direct and indirect methods for acquisitions made by it in order to separate such acquisitions that are used either wholly for a creditable purpose or a non-creditable purpose.

Acquisitions that are partly creditable are defined in subsection 11-30(3) of the GST Act to mean 'the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition.' Consequently, an apportionment of these acquisitions is necessary to determine the extent of creditable purpose.

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) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations.

Paragraphs 33 and 73 of GSTR 2006/3 make it clear that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to:

· be fair and reasonable;

· reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and

· be appropriately documented in your individual circumstances.

Methods of calculating the extent of creditable purpose are discussed in paragraphs 80 and 81 of GSTR 2006/3:

80. To calculate the amount of your input tax credits, you need to adopt a method of estimating the extent of creditable purpose of your acquisitions and importations. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make.

81. The Commissioner considers that the use of direct methods, including direct estimation (see paragraphs 92 to 101 of this Ruling) best accords with the basic principles explained above (see paragraph 73). If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method.

Therefore, the apportionment method adopted by Entity A must be fair and reasonable in the circumstances and must appropriately reflect the intended or actual use of its acquisitions or importations.

Entity A has conducted a detailed analysis of its acquisitions and have come to the conclusion that the most appropriate driver for allocating costs between transactors and revolvers is on the basis of the proportion of expenditure undertaken by each of the two customer pools (that is card spend). This conclusion is based on the following two lines of reasoning:

1. Factual analysis of the GST bearing acquisitions of the card portfolio show that card spend in most cases adequately reflects the extent to which those acquisitions are ultimately devoted to the making of supplies between the two customer pools. Further, analysis of the largest GST bearing acquisition, being the loyalty/affinity costs and other significant acquisitions, show that card spend is the best basis of allocating these acquisitions to the two customer pools.

2. There is a close correlation between relative rates of expenditure and transaction numbers making one driver substitutable for the other. That is, the use of card spend and transaction numbers as drivers produces essentially identical results making allocations based on either driver interchangeable.

Entity A provided the ATO with attachments consisting of the various acquisition costs and revenues for a particular period.

In regard to the inclusion of interest on overseas card usage in the revenue formula applying to revolvers, we confirm that the Commissioner considers such card usage off-shore to be GST free under item 4 in section 38-190. Further the Commissioner considers that the best proxy of overseas use of the credit card by the cardholder is transaction count. However, Entity A determines the relevant interest figure for inclusion in the revenue formula based on a dissection of domestic versus international spend and maintains that its ultimate overall recovery rates applying this approach are "essentially statistically the same" as they would be if a transaction count approach were adopted.

Given that this is the case and on the basis of the information and analysis provided, the methodology submitted by Entity A is likely to provide a fair and reasonable basis for calculating the extent of creditable purpose for acquisitions of Entity A's retail credit card business. If those circumstances should change Entity A may be required to review this methodology to determine if it remains fair and reasonable.