Edited version of your private ruling

Authorisation Number: 1012581614031

Ruling

Subject: Reduced credit acquisitions

Question

Is ABC Pty Ltd entitled to a reduced input tax credit (RITC) under regulation 70-05.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999, for the acquisition of secure transport services used to transport cheques, vouchers or similar documents from their branch network to the processing centres?

Answer

ABC Pty Ltd is not entitled to a RITC for the acquisition of secure transport services used to transport cheques, vouchers or similar documents from the branch network to the processing centres.

Relevant facts and circumstances

ABC Pty Ltd, an Authorised Deposit Taking Institution (ADI), operates a number of branches. Those branches conduct a broad range of banking services including taking deposits, processing withdrawals, processing applications, collating information regarding customers' accounts etc. Consequently, these branches hold cheques, vouchers, account details and other documentation relating to the customer's accounts.

ABC Pty Ltd has Transaction Processing Centres (TPCs).

The ABC Pty Ltd managed TPCs process the cheques, vouchers and other documents so that the customers' accounts are debited or credited or have their details changed amongst other things.

ABC Pty Ltd uses a third party to collect, transport and deliver the cheques, vouchers etc between the branches and the TPCs.

The Arrangement

ABC Pty Ltd has entered into an agreement with XYZ Pty Ltd, (the 'Agreement'), for the acquisition of certain services. These include the secure delivery of vouchers and mail articles and mail bag runs.

The Agreement provides services that must be provided by XYZ Pty Ltd.

The term 'article' is defined.

ABC Pty Ltd is registered for Goods and Services Tax (GST) and exceeds the Financial Acquisition Threshold under Division 189 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

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 40-5

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 70-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 70-10(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 189

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 40-5.09(1) and (3)

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 70-5.02(2)

Reasons for decision

Claiming Input Tax or Reduced Input Taxed Credits

In order to be entitled to an input tax credit, an entity must make a creditable acquisition. To be a creditable acquisition under section 11-5 of the GST Act, the thing must be acquired, solely or partly, for a creditable purpose.

Subsection 11-15(1) of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it is acquired in carrying on its enterprise. However, under paragraph 11-15(2)(a) of the GST Act, a thing is not acquired for a creditable purpose to the extent that it relates to making supplies that would be input taxed.

Input Taxed Financial Supplies

Subsection 40-5(1) of the GST Act provides that a financial supply is input taxed.

The provision, acquisition or disposal of something is a financial supply where it satisfies the relevant requirements of regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

The table in subregulation 40-5.09(3) of the GST Regulations contains eleven categories of interest, the provision, acquisition or disposal of which constitutes a financial supply where the requirements of subregulation 40-5.09(1) are satisfied. It is not in contention that ABC Pty Ltd, as an ADI carrying on a banking business, makes input taxed supplies to which the acquisition of the secure transport services relates. Further, ABC Pty Ltd exceeds the Financial Acquisitions Threshold in Division 189 of the GST Act. Therefore, the acquisition of the respective services from XYZ Pty Ltd is not made for a creditable purpose under paragraph 11-15(2)(a) of the GST Act subject to Division 70 of the GST Act.

Subsection 70-5(1) of the GST Act provides that specified acquisitions that relate to making input taxed financial supplies, known as reduced credit acquisitions (RCAs), can give rise to a RITC. Subsection 70-10(1) provides that the fact that a reduced credit acquisition relates to making financial supplies does not stop it being for a creditable purpose, to the extent that it relates to making financial supplies. The percentage of the reduced input tax credit is 75% or 55% depending on the relevant item in the table in regulation 70-5.02(2) of the GST Regulations.

Subregulation 70-5.02(2) of the GST Regulations provides a table of 33 items. The acquisition by an entity of something that is covered by an item in this table is a RCA for which a RITC may be available.

ABC Pty Ltd contends that it is entitled to a RITC for the secure transport services it acquires from XYZ Pty Ltd under items 2, 7 and 29 of the table in subregulation 70-.5.02(2) of the GST Regulations. For ease of reference these items are referred to as item 2, item 7 and item 29.

Item 2

ABC Pty Ltd refers to paragraph 88 of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1), which notes that the term 'processing services' as it appears in item 2 means 'services performed by an entity that have the character of being steps or actions directed towards achieving a specific processing outcome.' It is ABC Pty Ltd's submission that the acquisition of the services from XYZ Pty Ltd of securely transporting account information from the branches to the TPC falls within the scope of a "specific processing outcome" and is thus covered by item 2.

Item 2 covers:

Processing services in relation to account information for account providers, including:

(a) loan archives storage, retrieval and destruction services; and

(b) statement processing and bulk mailing; and

(c) processing and manipulation of information relating to accounts, including information about transactions to which item 7 applies

The Commissioner's view on RCAs is set out in GSTR 2004/1.

The Commissioner at paragraphs 83-88 of GSTR 2004/1 outlines key criteria on how item 2 should be construed. To this end, the term processing services is to be read as a single term, rather than as two separate and distinct words. Accordingly, it is important to note that processing services is to be read differently from "processing" on its own.

Paragraph 85 of GSTR 2004/1 notes that the meaning of processing services is determined by reference to the ordinary or general understanding of the expression and the context in which it is used.

Paragraph 88 of GSTR 2004/1 states:

In the context of item 2, processing services means services performed by an entity that have the character of being steps or actions directed towards achieving a specific processing outcome in relation to account information for an account provider.

We therefore take the view that item 2 covers an acquisition of services that achieve a specific processing outcome achieved by the entity making the supply. It is not sufficient that the thing acquired can be viewed by the acquirer as being a step or action directed towards achieving a processing outcome achieved by the acquirer.

The discussion at paragraph 178 of GSTR 2004/1 around what constitutes 'processing' for purposes of paragraph (c) in item 2 is also relevant in regard to this issue as it refers to the ordinary meaning of 'processing':

178. In the context of item 2 the words processing and manipulation are to be read as processing and manipulation services. The words processing and manipulation take their ordinary meanings, and respectively refer to the doing of 'a systematic series of actions directed to some end', and 'skilful or artful handling, management, or use.(emphasis added)

In view of the above, the relevant secure cheque transportation services of XYZ Pty Ltd in this particular case would need to be 'a systematic series of actions directed to some end' to achieve a processing outcome undertaken by XYZ Pty Ltd in order to be a processing service covered by item 2.

Beyond the general descriptor of 'transportation' or 'delivery' services, we consider that it would be difficult to break down, in any relevant sense, the services supplied by XYZ Pty Ltd such that they could be viewed as 'a systematic series of actions directed at some end'.

Further, we do not accept that ABC Pty Ltd's acquisition of transportation services from XYZ Pty Ltd achieves a specific processing outcome. This is on the basis that XYZ Pty Ltd is engaged to merely transport documents from one location to another. In itself, an acquisition of transportation, which allows for the movement of documents, such as vouchers or cheques, or any other physical object, does not achieve a specific processing outcome supplied by XYZ Pty Ltd. Rather it brings the relevant cheques or vouchers into a position whereby such processing might occur.

Whilst it may be arguable that the relevant processing in relation to cheques and vouchers etc undertaken by the TPC might not occur without the services of XYZ Pty Ltd, as stated above, it is necessary to determine whether the service that is acquired in itself achieves a specific processing outcome and not whether ABC Pty Ltd utilises the service in achieving a processing outcome in its own capacity.

Additionally, paragraph 87 of GSTR 2004/1 explains that the acquisition of capacity (for example, acquisitions of use of computer based infrastructure) is not within the ambit of item 2 as this item contemplates the acquisition of processing services, rather than the mere acquisition of processing or processing capability.

Additional submission

In an additional submission, ABC Pty Ltd submitted that the secure transport services for mailbags provided by XYZ Pty Ltd to ABC Pty Ltd would qualify as an RCA under Item 2(b) because:

(a) the information contained in the mailbags include paperwork used by ABC Pty Ltd to process the vouchers as well as other relevant account information, such as deposits and withdrawals, the opening and closing of accounts and other customer account information;

(b) ABC Pty Ltd is an account provider for the purposes of item 2 in the table of regulation 70-5.02(2); and

(c) the services acquired by ABC Pty Ltd from XYZ Pty Ltd are under an arrangement where mail delivery services are provided for large quantities of account information. XYZ Pty Ltd is the "mail service provider", as it provides the service of collecting mail, in bulk, from ABC Pty Ltd and delivering that mail to the necessary location.

However, we do not agree that this service qualifies as an RCA under item 2(b). Item 2(b) specifically includes 'statement bulk mailing' within 'processing services' covered by item 2. The Commissioner's views on what constitutes statement bulk billing services is set out at paragraphs 156 to 174 of GSTR 2004/1 and refers to both a range of services directed at preparing a large number of statements for posting, and an arrangement under which mail delivery services are applied to large quantities of statements. A statement bulk mailing service arrangement usually involves an entity taking on the responsibility for distributing account statements to customers of the contracting account provider. This entails the service provider engaging in a range of activities which include, but are not limited to:

· the printing, collating, folding, trimming, and enveloping of statements;

· complying with the requirements for entitlements to discounts; and

· addressing, bar-coding, sorting and lodging mail items.

The service provider may also provide mail delivery services with respect to the statements.

The service provided by XYZ Pty Ltd to ABC Pty Ltd does not include statement bulk mailing services as described above. XYZ Pty Ltd supplies secure transport services of vouchers primarily consisting of cheques and mail. As such, the secure transport services provided by XYZ Pty Ltd to ABC Pty Ltd do not qualify as an RCA under item 2(b) in the table in regulation 70-5.02(2).

Item 7

ABC Pty Ltd has contended that the relevant services acquired from XYZ Pty Ltd may also fall within item 7. Item 7 relevantly covers:

Processing, settling, clearing and switching transactions of the following kinds:

(a) direct credit and debit;

(b) other credit and debit transactions;

(c) charge, credit and debit card transactions;

(d) cheque;

(e) electronic funds transfer;

(f) ……

(g) ……

(h) ……

(i) ……

(j) ……

ABC Pty Ltd refers to paragraphs 258 and 261 of GSTR 2004/1 in support of the proposition that the XYZ Pty Ltd services are covered under this item and submits the following:

While not using the same terminology, the ruling indicates strongly that there needs to be a "specific processing outcome" resulting from the services acquired. This outcome needs to assist in the efficient movement of transactions that impact on ABC Pty Ltd's customers' accounts.

ABC Pty Ltd considers that without the secure transport services it would not be possible to complete the transactions that impact on the accounts held by its customers.

The respective branches sort the cheques, vouchers or similar documents and place them into bags or containers for the TPC to conduct and/or assist in the processing functions. XYZ Pty Ltd collects these bags or containers and delivers them to the TPC.

XYZ Pty Ltd has no direct involvement with the debiting or crediting of accounts, transferring funds in and out of accounts or clearing cheques etc. The actual debiting or crediting of accounts and cheque clearing etc is carried out by the TPC and not XYZ Pty Ltd, who merely transports these documents to the TPC.

Example 33 in GSTR 2004/1 provides an illustration of a processing service covered by item 7:

262. FareCharge pays Dixieland Cabs a fee for sorting, collating and batching Farecharge charge-card vouchers that are collected from taxi companies that participate in the Dixieland network. The taxi companies receive the vouchers as payment for taxi services. Farecharge requires Dixieland to provide these services so that its clearing and settlement functions can operate efficiently.

263. In this instance, FareCharge has made an acquisition of a service of processing of charge card transactions, which is a reduced credit acquisition under item 7.

In this example it is Dixieland that does the sorting, collating and batching so that FareCharge's clearing and settlement functions can operate efficiently. The services carried out by Dixieland are more analogous to those carried out by the TPC. By contrast, XYZ Pty Ltd supplies, in essence, a stand alone delivery service so that another entity, namely the ABC Pty Ltd managed TPC or the TPC managed by a third party, can undertake the processing function. We do not consider that this service is a service of processing that is covered by item 7.

The Commissioner at paragraph 259 of GSTR 2004/1 emphasises that the means by which processing, settling, clearing or switching occurs is not a RCA under item 7. To that end the Commissioner, by way of example, illustrates that "the purchase of a software licence (and related support services) that provides a credit union with the means to process direct entry transactions is beyond the scope of item 7".

Item 29

Item 29 covers:

Trustee and custodial services

Trustee and custodial services (except safe custody of money, documents and other things), including:

(a) transfer of cash without purchase, sale or transfer of assets, excluding cash delivery and collection from branches of Australian ADIs; and

(b) undertaking and settling of securities transactions by a financial supply facilitator; and

(c) collecting income and other payments; and

(d) registration of interests and rights; and

(e) proxy voting; and

(f) exercise of options and warrants; and

(g) opening and maintaining accounts with Australian ADIs;

(h) nominee services in relation to financial supplies

ABC Pty Ltd contends that given the logic in paragraph 688 which provides that an acquisition of a secure cash transport service is an acquisition of a custodial service under item 29, the secure transport services acquired by ABC Pty Ltd from XYZ Pty Ltd should also be viewed as custodial services for purposes of item 29.

Further, ABC Pty Ltd submits that item 29 specifically excludes "safe custody of money, documents and other things" and ABC Pty Ltd considers that this exclusion refers to the normal usage of the term "safe custody" services. That is, in ABC Pty Ltd's view these services are provided by banks (and sometimes outsourced to third parties) and refer to a service whereby account holders can store their personal possessions in lockers under dual custody within the bank's vaults or safe deposit box facilities. Accordingly, ABC Pty Ltd contends that XYZ Pty Ltd's services do not fall within the scope of safe custody and are thus not specifically excluded.

ABC Pty Ltd concludes that the secure transport services acquired from XYZ Pty Ltd are 'custodial services' in the same way as the cash transport services referred to in paragraph 688 of GSTR 2004/1 are, with the exception being that there is no exclusion in respect of the requirement that the secure cash transport services not be related to branches of ADIs.

Paragraph 663 of GSTR 2004/1 states:

Items 29, 30 and 31 are grouped under trustee and custodial services, and deal with the services provided by trustees, custodians and single responsible entities. The services dealt with under these items are provided by entities that have obligations and responsibilities in relation to property either equitably or legally owned by another entity

The expression 'trustee and custodial services' as referred to in item 29 contemplate services which are provided by trustees and custodians.

Further, paragraph 664 of GSTR 2004/1 notes that:

The examples listed in items 29(a) to 29(h) indicate that item 29 is directed specifically at custodial and related functions in connection with the holding of a member's (in the case of a superannuation scheme) or an investor's (in the case of a managed investment scheme) assets. ……..

The term 'Custodial services' is further explained at paragraph 668 of GSTR 2004/1, which states:

Custodial services are recognized as services provided by an entity that holds and safeguards financial assets, such as cash or securities, on behalf of other parties.⁹³ These services are normally provided by a custodian, and usually include the provision of administrative and accounting functions in relation to the holding of the relevant financial assets.

While item 29(a) specifically includes the transfer of cash without purchase, sale or transfer of assets within the meaning of a custodial service, it excludes cash delivery and collection from branches of Australian ADIs. As noted in paragraph 688 of GSTR 2004/1, an acquisition of a secure cash transport service is an acquisition of a custodial service under item 29 even though such an acquisition would not normally be provided by a trustee or a custodian. Further, paragraph 687 of GSTR 2004/1 observes that 'cash' for the purposes of item 29(a) means money in a tangible form, banknotes and coin, but excludes cash equivalents such as cheques, orders, etc.

ABC Pty Ltd has not contended that XYZ Pty Ltd is charged with any of the responsibilities and obligations which would normally be expected of a custodial services provider.

The terms of the Agreement requires XYZ Pty Ltd to exercise at all times proper care to ensure that the Article remains protected from the elements, secure and free from any tampering whatsoever while in its possession.

These obligations are imposed in the context of XYZ Pty Ltd providing a secure transport service. We do not consider that a secure transport service of itself is sufficient to be regarded as a custodial service. The text of item 29(a) indicates that a secure transport service is not otherwise covered by 'trustee and custodial services' as it specifically limits the types of secure transport services that are covered by the item.

We consider that XYZ Pty Ltd is, in essence, providing ABC Pty Ltd with a secure transport service of its cheques and other documents. The secure holding of these items in transit within the confines of XYZ Pty Ltd's transport vehicle is a fundamental requirement implicit in any form of delivery service. For example, implicit in any courier service is the expectation that the courier will take proper care of the thing being transported in order to maintain its state upon delivery. However, this of itself, is not sufficient to be a custodial service covered by item 29.

In conclusion we therefore do not consider that the services acquire by ABC Pty Ltd from XYZ Pty Ltd are covered by item 29.

In an additional submission, ABC Pty Ltd submitted that the secure transport services for mailbags provided by XYZ Pty Ltd to ABC Pty Ltd would qualify as an RCA under Item 29(c). ABC Pty Ltd submitted that the secure transport services are a service for the collection of other payments, and would qualify as an RCA under item 29(c). This is because:

· the transportation of the vouchers for ABC Pty Ltd involves the collection of the vouchers from a particular location by XYZ Pty Ltd. This action of collecting the vouchers is specifically stated in section X of the Agreement;

· the term 'payment' is not defined and therefore takes its ordinary meaning. The Macquarie Dictionary includes 'the act of paying' and 'that which is paid'. The ordinary meaning of 'payment' should be used to determine whether the vouchers collected by XYZ Pty Ltd involve the collection of 'other payments';

· the vouchers collected by XYZ Pty Ltd are primarily cheques. The provision of a cheque by a customer to ABC Pty Ltd to either satisfy a debt due to ABC Pty Ltd or create a debt from ABC Pty Ltd to the customer falls within the category of 'other payments'. It is also possible that some of the cheques received by ABC Pty Ltd that are collected and transported by XYZ Pty Ltd would be 'income' of ABC Pty Ltd;

· as the secure transport service for the transport of vouchers provided by XYZ Pty Ltd to ABC Pty Ltd is a service for the collection of other payments, it falls within the category listed in item 29(c).

We do not consider that that XYZ Pty Ltd collects other payments as a custodian for ABC Pty Ltd when it takes possession of cheques that have previously been provided to ABC Pty Ltd through its branches. An entity performing a custodial role of collecting income or other payments for ABC Pty Ltd in the context of item 29(c) would involve action on the part of that entity to collect payments from customers of ABC Pty Ltd. In this case, ABC Pty Ltd has previously collected these payments from its customers. As noted, the Agreement, the voucher bags are packed inside the mailbags by the branches. XYZ Pty Ltd takes possession of the mail and voucher bag for the purpose of transporting the bag to the delivery location (as per the Agreement). This service does not fall within the scope of item 29(c) and therefore does not qualify as an RCA.