Edited version of your private ruling

Authorisation Number: 1012563811072

Ruling

Subject: Supplies to recognised trust schemes under Item 32

Reasons for Decision

Question 1

Can the Commissioner confirm that the fee charged by the Trustee to the Fund in a Multi-fee arrangement is covered by item 32 of the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), and to the extent that the fee is for:

a) trustee services, it is subject to a RITC rate of 55%; and

b) administration and management services, is covered under item 32(b)(ii), (iii) or (iv) of the GST Regulations and subject to a RITC rate of 75%?

Answer

The Commissioner confirms that the fee charged by the Trustee to the Fund in a Multi-fee arrangement is covered by item 32 of the table in subregulation 70-5.02(2) of GST Regulations, and to the extent that the fee is for:

a) trustee services, it is subject to a RITC rate of 55%; and

b) administration and management services, it is covered under item 32(b)(ii), (iii) or (iv) of the GST Regulations and subject to a RITC rate of 75%.

Question 2

Can the Commissioner confirm that where the Fund makes a mixed acquisition from the Trustee on or after 1 July 2012 for consideration, which consists of a single fee for the trustee services, administration, and management services, the 'bps benchmark rate method' of apportionment (set out in the facts) is fair and reasonable for the purpose of determining their entitlement to a RITC?

Answer

The Commissioner confirms that where the Fund makes a mixed acquisition from the Trustee on or after 1 July 2012 for consideration, which consists of a single fee for the trustee services, administration, and management services, the 'bps benchmark rate method' of apportionment (set out in the facts) is fair and reasonable for the purpose of determining their entitlement to a RITC.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A acts as the trustee (Trustee) for a trust (the Fund).

The Fund is a regulated superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 and is governed by the Trust Deed (Trust Deed or Deed). A copy of the Trust Deed has been provided as part of this ruling request.

The Fund is a recognised trust scheme for the purpose of item 32 of the table in subregulation 70-5.02(2) of the GST Regulations (Item 32).

The Trustee's role

In accordance with section 601FC of the Corporations Act 2001 regarding the duties of a responsible entity, the Trust Deed sets out the responsibility of the Trustee which includes to hold the assets of the Fund on trust for the Beneficiaries from time to time subject to the terms of the Deed.

The Trustee has absolute and uncontrolled discretion in the exercise of its powers under the Trust Deed.

The general powers of the Trustee under the Trust Deed allow the Trustee to have complete management and control of the Fund and may, without limitation, exercise all of the powers of a natural person in order to administer and maintain the Fund.

The Trustee also has the following administrative responsibilities under the Trust Deed:

· Accepts applications for membership

· Maintains an account and records for each Member

· Determines amount and manner of contributions and accepts contributions

· Transferring of fund assets

The Trust Deed provides that the Trustee has the specific power of investment in which the Trustee may invest the assets of the Fund in any investment and in any manner it thinks fit.

In respect of the payment of benefits to beneficiaries, the Trustee has the discretion to determine the amount of benefit, who is entitled to the benefit, and how the benefit is to be paid.

Under the Trust Deed, the Trustee may be indemnified from the Fund in respect of any liability (including a Fund Expense), incurred:

· in connection with, directly or indirectly, the Fund; or

· while acting as Trustee.

Under the terms of the Trust Deed, the Trustee has established two Plans known as Plan A and Plan B.

Plan A has a fee structure which is referred to as a "Single-fee arrangement". Plan B has a fee structure which is referred to as a "Multi-fee arrangement".

For the purposes of this request the product disclosure statement (PDS) for Plan A and Plan B has been provided.

Plan A (Single-fee arrangement)

The PDS for Plan A explains that members (also referred to as 'Investors') can choose to have the Trustee manage their money in one of two ways:

· Investing in the Fund whereby the Trustee assembles, manages and automatically adjusts the mix of assets at different stages of an Investors life; or

· By nominating the percentage of their funds which are invested in certain categories available to the Investor.

The Trustee provides annual statements, notifications and information to Investors through its web platform.

For Plan A, the Trust Deed entitles the Trustee to be paid out of the Plan trustee fees, administration fees, fees relating to the transfer of assets; and such other fees as the Trustee determines. The Trustee also has the discretion to charge a fee to any investor based on criteria that it determines is appropriate and to pay commissions or other payments to a person.

As explained in the PDS for Plan A, the Trustee charges two types of management costs. These are fees and costs for managing the member investment and are:

I. an "Administration fee", which is a monthly charge; and

II. a "Management fee", which is a % of a members account balance (or funds under management).

Plan B (Multi-fee arrangement)

Plan B is a superannuation product divided into two categories.

Plan B is an 'advised' product in that all members must have an adviser to have an account in Plan B. It is a condition of access to the product features.

The Trustee can divide a category into one or more "Sub-plans" and may determine the fees that apply to a Sub-plan.

Under the Trust Deed for Plan B the Trustee is entitled to the following fees:

· a trustee fee of a set % per annum of the value of each portfolio of assets and liabilities that are maintained within the Plan.

· Entry fee in respect of each contribution and transfer to the Plan, equal to a set % of the contribution or transfer.

· A range of ongoing administration fees. These administration fees are set out in detail but in majority relate to the management of the portfolio. Examples of these administration fees include a proportion of the value of the investors' portfolio, fees for the distribution of income, fees relating to the acquisition and disposal of the investors assets.

Under the PDS for Plan B the Trustee in practice charges the following fees to the Fund:

· Account Keeping fee which is calculated on a tiered basis.

· Issuer Fee based on a set % pa of the average of the opening and closing balance of the Beneficiary's account.

· "Investment costs" - made up of an Investment Manager fee and a Cash Account fee.

Interfunding

Interfunding refers to a process whereby investment monies from one trust are invested into a second trust (rather than directly in assets). This process can extend to a chain of trusts. In these structures fees are initially applicable at each trust level however, to ensure that fees are not charged multiple times in relation to the same initial investment, a process of fee rebates is used.

Under a Master Relationship Agreement and Investment Management Agreement with Entity B, the Trustee and other related trustee entities, agree to rebate responsible entity and issuer (trustee) fees charged in respect of interfunding into each other's trusts. This is achieved by calculating the applicable fees on the net FUM only once, rather than calculating the applicable fee each time the FUM is invested in an underlying fund.

In this way, the fee received by the trustee entities in respect of RE and trustee activities is net of interfunding rebates. The apportionment methodologies set out in this ruling request use net FUM and fees net of interfunding rebates to calculate the consideration received for RE and trustee services.

Proposed apportionment method

Multi-fee arrangements

To determine the Fund's entitlement to RITC you have contended that the description of the fees charged is indicative of the services that have been provided and that therefore on the basis of the fees charged, the Fund will apply the following apportionment:

1. The Account Keeping fee is charged to maintain and operate the beneficiaries account by the Trustee. This fee is separately identified and relates to the ongoing administration of Plan B. Therefore the Fund will claim a RITC rate of 75% on this component of the charge.

2. The Issuer fee charged by the Trustee is the Trustee Fee authorised under the Trust Deed. This fee is separately identified and relates to the supply of trustee services. Therefore the Fund will claim a RITC of 55% in respect of the Issuer fee.

3. The Investment manager fee is payable to the investment manager who is responsible for the management of the Beneficiary's investment in underlying funds. This fee is separately identifiable and the Fund will claim a RITC of 75% in respect of the Investment manager fee.

4. The Cash account fee is charged by the Trustee as part of their administrative functions under the Trust Deed. It is a separately identifiable fee and the Fund will claim a RITC of 75% in respect of the Cash account fee.

Single-fee arrangement

It is proposed that apportionment will apply to the single 'Management fee' to identify the consideration for the component supplied by the Trustee. To calculate the proportion of the Management fee that is subject to a 55% RITC rate, the Fund will quantify the proportion of the Management fee that relates to the trustee services by using a bps benchmark rate.

For the purpose of determining the bps benchmark the Fund will apply the following method to calculate its entitlement to RITC in a Single-fee arrangement

1. The benchmark rate will be calculated using the average fee for trustee services in a Multi-fee arrangement. Therefore the Multi-fee apportionment method is intrinsic to the calculation of the proposed bps benchmark rate.

2. The benchmark rate derived in 1 is applied to the single fee, net of interfunding rebates, to determine the proportion of fee for trustee services recovered at 55%.

3. The remaining part of the single fee will be treated as consideration for administration and management services subject to a RITC rate of 75%.

4. The benchmark rate will be reviewed on an annual basis.

Relevant legislative provisions

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

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

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

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

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 70-5.02

Reasons for decision

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 Fund 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 Fund is a financial supply that would be input taxed under item 4 in the table of subregulation 40-5.09(3) of the GST Regulations. Therefore on the understanding that the Fund 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.

However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits. 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 GST Regulations refers to acquisitions that attract reduced input tax credit (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.

Item 32 in the table in subregulation 70-5.02(2) of the GST Regulations (item 32) is of particular relevance to this case. 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.

The application of item 32 therefore 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, there are two fee structures that the Fund operates, being the "Multi-fee" arrangement and "Single-fee" arrangements. In each of these fee structures, as the acquisition of trustee services consists of a single fee that relates to identifiable components (or parts), the Fund is required to apportion the consideration for the supply to determine its entitlement to any reduced input tax credits.

In this context it is proposed by the Fund that for Multi-fee arrangements it acquires trustee services which consist of five separately identifiable parts being the Account Keeping fee, Issuer fee, Investment manager fee, Cash account fee and the Adviser Fee. In respect of each part the Fund will then apply the relevant rate of 75% and/or 55%. In the case of a Single-fee arrangement the Fund proposes to apply a 'bps benchmark method' using the average fee for trustee services in the Multi-fee apportionment method. Accordingly, in respect of each part the Fund will then apply the relevant rate of 75% and/or 55%.

In this case, subject to the qualification made below in respect of the capacity in which a Trustee makes payment for the Adviser Services in these kinds of arrangements, we agree that the methodology proposed for apportioning the fees between those parts of item 32 which attract a 55% RITC and those parts which attract a 75% RITC is fair and reasonable. Our reasons are set out as follows:

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 common sense.

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. 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.

In the Q&A Update submitted to the National Tax Liaison Group on item 32 (Q&A Update), at Question 11 the Commissioner accepts that a 'benchmarking' method of apportionment may be used to calculate its entitlement to a RITC. It states:

The ATO considers that the 'benchmarking' method of apportionment outlined below is a fair and reasonable methodology for apportioning the fee.

The benchmarking methodology requires the RTS to identify arm's length rates or charges for each component of the services acquired (i.e. the component that qualifies under item 32 as well as parts that qualify under other items specifically excluded from item 32) that may be made to a trust that is broadly comparable to the RTS in respect to the type of trust and portfolio risk. Identifying a trust that is broadly comparable to the RTS does not require an exact match of circumstances.

Further, the Commissioner provides discussion on item 32 and the acquisition of relevant services by a recognised trust scheme for a single fee. This is set out in 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 2013/3). Relevantly at paragraph 4 it states:

4. A 'deductive benchmarking methodology' is fair and reasonable where it reasonably approximates the respective values of the parts of the acquisition. Under this methodology, the arm's length value of these parts is calculated by reference to the market rates of providing the services to a broadly comparable managed investment fund (with respect to the type of fund and portfolio risk).³ These market rates are typically expressed as a number of basis points⁴ which are applied against the total asset value of the managed investment fund. Once these amounts are deducted from the single fee, the remainder of the fee is allocated to the part of the acquisition that is covered by item 32.

Application of the item 32 Apportionment Principles to the Factual Circumstances

Multi-fee arrangements

Consistent with paragraphs 92 to 95 of GSTR 2001/8, in these circumstances the Fund may use any reasonable method of apportioning the consideration for the mixed supply to which the relevant RITC rate can be applied.

The Fund have submitted that the fees charged by the Trustee to the Fund are indicative of the type of service that has been supplied to the Fund by the Trustee in its role as RE. Accordingly it is a reasonable basis on which the services of the Trustee as RE can be characterised for item 32 purposes. On this basis the Fund will apply the RITC rates as outlined in the proposed methodology.

In determining the RITC rate which is applied to each part of the acquisition of trustee services it is submitted by the Fund that the:

1. Account Keeping fee relates to the supply by the Trustee of the administration of Plan B, including 'maintaining member and employer and trustee records and associated accounting' under item 24(a) of subregulation 70-5.02(2). Therefore it is specifically excluded from item 32 and the Fund is entitled to a RITC of 75%,

2. Issuer fee relates to the supply of 'trustee services' and is not excluded under item 32(b). Therefore the Fund will claim a RITC of 55% in respect of the Issuer fee,

3. Investment manager fee relates to the provision of investment management services by the investment manager and qualifies as the 'management of an investment portfolio for a trust or superannuation fund' under item 23(b) of subregulation 70-5.02(2). Therefore it is specifically excluded from item 32 and the Fund is entitled to a RITC of 75%,

4. Cash account fee relates to further consideration for the supply by the Trustee of administrative services such as 'maintaining member or employer and trustee records and associated accounting' under item 24(a) of subregulation 70-5.02(2). Therefore it is specifically excluded from item 32 and the Fund will claim a RITC of 75%.

In this case we agree that the description of the fees charged by the Trustee to the Fund is a reasonable basis for determining the character of the components of the services acquired by the Fund. Further, we accept the submissions set out in 1 - 4 above. Accordingly, consistent with GSTR 2001/8 we consider that the proposed Multi-fee apportionment method as set out is fair and reasonable.

Single-fee arrangement

Under Plan A, the Trustee charges a single Management fee to the Fund. Assuming that services supplied by the Trustee in a Single-fee arrangement are substantially similar to those supplies in Multi-fee arrangements, the Fund will calculate the proportion of the Management fee subject to a 55% RITC rate using the proposed 'bps benchmark rate'.

The Multi-fee apportionment method is intrinsic to the calculation of the proposed bps benchmark rate, as the data used to arrive at the relevant benchmark is calculated using the average fees in a Multi-fee arrangement. Further, the average fee data is derived by the Fund using information of other Multi-fee funds for which the Trustee acts as RE.

The benchmark rate derived by the Fund will be applied to the single Management fee (net of any interfunding rebates) to arrive at the proportion of the fee which is for trustee services. To the extent the amount paid by the Fund is payment for the trustee service it is not excluded under item 32(b) of the GST Regulations and therefore the Fund will claim a RITC at 55%.

Accordingly, the remaining part of the single Management fee (i.e. after subtracting the trustee service) relates to investment management and administration services. As these service are excluded under item 32(b)(iv) the Fund will claim a RITC of 75%.

At the time of this ruling request the Fund has conservatively estimated that the market price for 'trustee services' for funds the size of the Fund is approximately 6 bps of the net FUM, however the Fund has advised that they will annually review the benchmark rate.

In this case, consistent with the principles set out in GSTD 2013/3 and the guidance provided by the ATO in Question 11 of its Q&A Update we accept that the 'bps benchmark rate' method is fair and reasonable.

Conclusion

Based on the facts and circumstances in this case and subject to the qualifications mentioned regarding Adviser fees, the Commissioner agrees that the proposed methodology used by the Fund to apportion the acquisition of trustee services is fair and reasonable.

Our acceptance of the apportionment methodology is based on the facts presented to us. However, if those circumstances change, the Fund may be required to review this methodology to determine if it remains fair and reasonable and accurately reflects the consideration for relevant parts of the mixed acquisition of trustee services.