Edited version of your private ruling

Authorisation Number: 1012627375431

Ruling

Subject: Extent of creditable purpose

Question

Does the Commissioner consider that your apportionment methodology set out in this private ruling (the methodology) is fair and reasonable for claiming input tax credits for the purposes of section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

(All further legislative references will be to the A New Tax System (Goods and Services Tax) Act 1999 unless stated otherwise)

Answer

Yes, based on your overall circumstances set out in this private ruling, the Commissioner considers that your apportionment methodology is fair and reasonable for claiming input tax credits on your acquisitions that are subject to apportionment for the purposes of section 11-15 of the GST Act.

Relevant facts and circumstances

You are registered for GST.

You are a financial institution, offering financial services and products, including loans, various accounts, credit/debit cards, general insurance and financial advisory services. These activities have given rise to both input taxed financial supplies, especially as they concern loans, but also taxable supplies, as well as GST-free supplies when they involve international dealings. That mixture of supplies has given rise to the need to apportion input tax credits on acquisitions relating to the making of those supplies.

The advice in this private ruling does not cover any issues to do with whether an acquisition is a reduced credit acquisition or the percentage to which input tax credits are reduced under the special rules of the GST Act.

Some of your acquisitions, based on an objective assessment of surrounding facts and circumstances, are made wholly and directly in relation to a particular supply or particular supplies. That is, the acquisitions are directly attributable to particular supplies. Therefore these acquisitions are not required to be apportioned under the methodology as a direct connection between such acquisitions and supplies of the enterprise is identifiable.

You have advised that direct attribution rarely occurs. Where practical, you will directly attribute acquisitions to the making of particular supplies and does not apply its proposed methodology to such acquisitions that are directly attributable. This approach is in accordance with the Tax Office's view contained 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) which provides that the use of direct methods of allocating or apportioning the intended or actual use of the acquisitions to the activities of an enterprise, such as direct estimation, best accords with the basic principles of apportionment found in the High Court decision in Ronpibon Tin NL v. FC of T.

Your proposed methodology will be applied against all its acquisitions that require apportionment. That is, all acquisitions that require apportionment will apply the 'Overall Yearly ECP' calculated at Step 3 of the proposed methodology outlined below.

The scope of advice in this private ruling will not cover the GST classification of your financial products or supplies as this ruling is specifically concerned with the fairness and reasonableness of selected proxies for the purposes of GST apportionment. For the purposes of this ruling, the GST classification of your financial products and supplies are taken as given, as determined and presented to the Tax Office by you.

Current methodology

The methodology currently employed by you for the purpose of determining your entitlements to input tax credits on acquisitions that you make in carrying on your business involves the utilisation of a revenue based formula. That is, in calculating the extent to which an acquisition is made for a creditable purpose, independently of Division 70, which deals with reduced credit acquisitions, you applied, and continue to apply, the following formula in GSTR 2006/3:

Revenue (other than revenue from input taxed supplies) .
Total Revenue (Including revenue relating to input taxed supplies)

To date, this has given the extent, as a fraction/percentage, to which acquisitions were made for a creditable purpose, leaving aside any impact of Division 70. The formula was applied to acquisitions generally.

Proposed methodology

You propose to use a revised methodology to determine your entitlements to input tax credits on all GST bearing acquisitions that you make in carrying on your enterprise, that is, your ECP for the acquisitions. It has drawn upon activity report results from your various business units, which provided a time based indication of the activities carried out by those units.

Activity report based ECP rates

Activity report based recovery rates are derived from an analysis of staff activity, drawing upon an indirect measure other than revenue, being in this case, "hours"' spent on activities quantified in terms of staff costs for these hours.

Staff hours and staff costs were central in deriving an overall business ECP, for particular financial years, in a process involving essentially three steps which are:

1. There is the generation of activity reports and ECP profiles for key, representative staff members (Step 1).

2. Those results are related to business areas/departments in which each particular staff member worked, enabling the determination of an ECP profile for the area/department (Step 2).

3. The results for particular areas/departments are combined to determine an overall entity wide ECP (Step 3).

Each of these steps is outlined in more detail below.

Critical assumptions in relation to activity reports

This private ruling is provided on the basis that:

• staff activity surveys are not be created primarily for GST purposes;

• staff activity surveys are representative of the team's activities including the activities of subordinates;

• staff activity surveys reflect activities carried out on a typical representative day of work; and

• activities captured in staff activity surveys are relatively constant over 12 months (the tax periods which the surveys will be applied) given the consistency of your operating environment, organisational structure and products/services on offer throughout those tax periods.

Step 1 - Generating representative staff activity reports

Representative staff activity reports are conducted on the basis of the amount of time spent in specific business areas, on particular activities, by certain representative staff members.

Note the following with regard to representative staff activity reports:

• Representative staff activity reports are generated every 12 months.

• As advised, activity reports are based on what activities the team leader/branch manager spends their time doing. It also includes an estimation of what others within that person's scope of activities do.

• Staff surveys must total 100% of their time such that all time of staff are captured.

• All staff members work in one of your branches for which a team leader/branch manager was surveyed.

• You outsource a lot of your functions. However, activities related to outsourced functions are not captured in activity reports given that the methodology is to measure internal effort as opposed to effort of third parties.

To generate representative staff activity reports team leaders (and branch managers) are asked to outline activities undertaken and time spent on each activity. Activities identified are those that correlate to making supplies that are input taxed (such as deposit accounts, home loans, other loans and other accounts), GST-free (international matters) and taxable (general insurance, club benefits, financial planning, and rent income concerning commercial property leased by you).

Through the specification of activities that staff are engaged in, it is possible to identify particular products which involved certain types of supplies.

In this way, specific activities involving making both input taxed and taxable/GST-free supplies, that is, a mixture of supplies, are also identified.

The ECP in respect of these categories that involve mixed supplies is determined simply by adopting the ECP of in respect of all the other categories that involve activities directly correlated to either taxable/GST-free supplies or input taxed supplies. The results enable a calculation of the ECP for an individual team leader, by ascertaining the time spent on making taxable or GST-free supplies and dividing this by the total time spent on making taxable supplies, GST-free supplies and input taxed supplies. The following formula is applied: 

Time spent making identifiable taxable and GST-free supplies .
Time spent making identifiable input taxed, taxable and GST-free supplies

This approach gives the activity profile for a team leader ("Team Leader ECP Profile"). Each Team Leader ECP Profile is then related to various business areas/departments, for a particular year, as per step 2 below.

Step 2 - Relating Team Leader ECP Profiles to areas/departments

The business areas/departments, the subject of the methodology are identified. They are constituted by the following:

• branches;

• lending;

• insurance;

• member matters;

• relief staff;

• business development;

• administration/information technology ("IT"); and

• IT development functions.

An ECP profile for each particular area/department ("Unit EP Profile") is determined. This involves doing the following:

(i) allocating the salary cost for an individual team leader, for a particular year to an area/department;

(ii) obtaining the weighting of the team leader for that area/department by dividing the salary of that team leader allocated to the area/department (that is, the figure in (i)) by all the salaries of the team leaders allocated to that area/department. This is required as an area/department may have multiple team leaders; and

(iii) calculating an ECP contribution for a particular team leader, in relation to that area/department ("Team Leader Unit ECP Profile"), by multiplying the proportion of salary costs of the team leader (that is, the figure in (ii), for a particular year, allocated to that area, by the Team leader ECP Profile (that is, the ECP profile figure from Step (1)); and

(iv) ultimately determining a weighted salary cost ECP profile for the area/department (that is, the Unit ECP Profile), by adding the Team Leader Unit ECP Profile of each team leader allocated to the area/department (that is, the figures in (iii), for each team leader active in that area/ department).

The above working formula is subject to the qualification that the lending and insurance areas were each given ECP profiles of 0% and 100% respectively. You clarified that this is because the 100% recovery refers to general insurance (that is, the making of taxable supplies) and that 0% recovery is for loan matters (in relation to the making of input taxed financial supplies).

Note the following with regard to Step 2:

• Staff/departments that are not related to making any supplies (either taxable or input taxed) (i.e. as HR department and the Senior Managers) are omitted. Their activities and therefore the costs these departments incur will be apportionable according to the general recovery rate.

Step 3 - Determining the overall entity wide ECP rate

An overall ECP rate, for a particular year ("Overall Yearly ECP"), is then obtained. It is calculated by first multiplying the Unit ECP Profile (that is, the ECP profile for each area/department) by the entity wide salary weighting of the area for that year, and then adding the results of all the areas/departments. This involves:

(i) determining a salary weighting for an area/department, by dividing, for a particular year, the total full time equivalent ("FTE") staff numbers for the area /department by the total of all the FTE staff numbers allocated to all the areas under examination;

(ii) multiplying the Unit ECP Profile and the area/department salary weighting (that is, the figure in (i)) to give the ECP contribution of a particular area/department ("Weighted Unit ECP Profile"); and

(iii) adding the Weighted Unit ECP Profile of each particular area/department
(that is, the figure in (ii) for each area/department), to give the Overall Yearly ECP.

The Overall Yearly ECP rate under the methodology is recalculated (reset) every 12 months for each financial year based on newly available data (including staff activity data from staff activity surveys). This will be consistently adhered to over time.

All acquisitions that require apportionment will apply the Overall Yearly ECP to determine ECP on those acquisitions.

Note that FTE per branch and department figures are calculated by your Finance team, using data sourced from its internal payroll system or from records provided by its outsourced payroll provider depending on the period.

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 11-15

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

Reasons for decision

Division 11 of the GST Act deals with entitlement to input tax credits. Section 11-20 provides that an entitlement to an input tax credit arises for any 'creditable acquisition' made by an entity. Section 11-5 states that an entity makes a creditable acquisition if:

• it acquires anything solely or partly for a creditable purpose; and

• the supply to it is a taxable supply; and

• it provides, or is liable to provide, consideration for the supply; and

• it is registered or required to be registered for GST.

Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act provides:

(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; …

Accordingly, you acquire a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. As you exceed the financial acquisitions threshold (FAT) referred to in subsection 11-15(4), the FAT exception to subsection 11-15(2) does not apply.

The types of supplies made by you include:

• financial supplies that are input taxed;

• taxable supplies; and

• GST-free supplies.

Where acquisitions made by you are used, or intended to be used, only for a creditable purpose, such acquisitions are fully creditable and do not require apportionment. Similarly, where acquisitions made by you are used, or intended to be used, only for a non-creditable purpose, these acquisitions are not creditable and you are not entitled to claim input tax credits in relation to these acquisitions except to the extent that reduced input tax credits are available.

However, there are acquisitions made by you that are both for a creditable purpose (making GST-free or taxable supplies) and an input taxed purpose (making or intending to make financial supplies). These acquisitions are partly creditable and the amount of input tax credits to which you are entitled depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act.

The phrase 'extent of creditable purpose' is defined in subsection 11-30(3) 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'. On this basis, an apportionment of these acquisitions would need to be made by you to determine the extent of creditable purpose.

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

Specifically, paragraphs 33 and 73 of GSTR 2006/3 provide that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purposes needs to satisfy the following requirements which are founded on the principles established in the High Court case of Ronpibon Tin NL v. FC of T:

• it must be fair and reasonable;

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

• it must be appropriately documented in your individual circumstances.

Importantly, the Commissioner considers that the use of direct methods, including direct estimation, best accords with the principles from which the above requirements were founded. Further, the Commissioner considers that if it is not possible or practicable to use a direct method, an entity may use some other fair and reasonable basis, including an indirect estimation method.

Paragraph 90 to 91 of GSTR 2006/3 discusses the use of direct methods and provides that:

Direct methods

90. Direct methods seek to identify, on a fair and reasonable basis, a direct connection between acquisitions or importations and supplies or other activities of the enterprise. This may result in a decision that acquisitions or importations are solely (or not at all) for a creditable purpose. In other cases, the intended use may be considered to be partly for a creditable purpose.

91. An assessment that an acquisition or importation is intended to be (or has been) used solely (100%), not at all (0%), or partly in connection with one or more particular supplies or activities of the enterprise could, at the most simple level, be made by considering each acquisition or importation individually. In many cases, however, it may not be practical for such an individual process to be applied. In those cases, an estimation on some fair and reasonable basis may be appropriate.

In this case, there are acquisitions which, based on an objective assessment of surrounding facts and circumstances, are made wholly and directly in relation to a particular supply or particular supplies (that is, the acquisitions are directly attributable to particular supplies) and thus are not required to be apportioned under the methodology as a direct connection between such acquisitions and supplies of the enterprise is identifiable. Where practical, you directly attribute acquisitions using direct methods referred to at paragraphs 90 and 91 of GSTR 2006/3, to the making of particular supplies.

Your methodology will be applied to work out the extent of creditable purpose of creditable acquisitions that are made partly for a creditable purpose where such acquisitions are not directly attributable to particular supplies.

Paragraphs 92 to 130 of GSTR 2006/3 discuss the use of direct and indirect estimation methods. Those paragraphs are not reproduced in full here. However, paragraphs 92 and 93 and paragraphs100 to 103 are worth noting. These paragraphs relevantly provide that:

92. If an estimate of the connection between acquisitions and the activities of an enterprise is required for the purposes of determining the planned or actual uses of those acquisitions, this may be effected via an automated or semi-automated system such as discussed in 'Direct estimation' below. The estimation method chosen should result in a fair and reasonable approximation of the intended or actual usage of acquisitions in your enterprise. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make.

93. Direct estimation methods are preferable to indirect estimation methods (see paragraphs 102 to 130 of this Ruling), particularly if the direct estimation method used involves a detailed measure of the intended (or actual) use of the acquisition or importation. Measures based on inherent characteristics of, or factors directly connected with, the acquisition usually give a fair reflection of the use of the thing. These factors are sometimes referred to in management accounting and costing systems as 'drivers'.

…

100. If a direct estimation method is available to you, the Commissioner considers this will reflect most accurately the actual or intended use of the acquisition. If your accounts satisfy Australian Accounting Standards, or prudential requirements of equivalent rigor, the Commissioner considers that they may provide an appropriate foundation for applying the direct estimation method, subject to that application being fair and reasonable in your individual circumstances.

101. The Commissioner recognises that, from a practical point of view, it may be difficult to fully attribute individual costs via existing direct estimation systems in many organisations. If financial supply providers are unable to match individual acquisitions with individual revenue streams, other apportionment methods (including combinations of direct and indirect methods) may need to be used.

Indirect estimation methods

102. Indirect methods attempt to estimate the use of acquisitions and importations for creditable purposes by taking into account factors or characteristics that are not directly referable to the use of the particular acquisition. For this reason they may not give as accurate a measure of the creditable purpose of the acquisition or importation as direct methods. …

103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Under any circumstances, the methodology adopted by you must be fair and reasonable in the circumstances of its enterprise activities and must appropriately reflect the intended or actual use of its acquisitions or importations.

We note that you are of the view that VISA debit/credit card activities and Redipos/merchant activities involve the making of both input taxed and taxable (interchange) supplies. In this regard, we expect that in principle, any chosen proxy that seeks to measure extent of creditable purpose will provide an appropriate reflection of how acquisitions (subject to apportionment across these types of activities) are used.

In this case, we consider, on the basis of the information provided; your overall circumstances; the materiality of the results produced under the methodology, and the assumptions made in the facts section of this private ruling, that your methodology is likely to provide a fair and reasonable basis of apportionment of GST on its acquisitions which are not directly attributable to particular supplies.

The decision that your methodology is considered to be fair and reasonable is based on the information submitted and circumstances applicable at the time of issuing this ruling which are set out fully in the facts section of this private ruling. If those circumstances should change, you may be required to review the methodology to determine if it remains fair and reasonable.