Edited version of your private ruling

Authorisation Number: 1012636303196

Ruling

Subject: Reduced input tax credits

Questions

1. Does ABC Pty Ltd as operator of the ABC Investor Directed Portfolio Service (hereafter referred to as the ABC IDPS entity) acquire brokerage services when ASX listed securities are bought or sold through ABC's IDPS platform?

2. Does the ABC IDPS entity pay for, or have a liability to pay for such brokerage services?

3. Is the ABC IDPS entity entitled to claim a reduced input tax credit (RITC) of 75% under Division 70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and Division 70 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) in respect of such brokerage services?

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

Answers

1. Yes, the ABC IDPS entity acquires brokerage services when ASX listed securities are bought or sold through its platform.

2. Yes, the ABC IDPS entity pays for such brokerage services.

3. Yes, the ABC entity is entitled to claim a RITC of 75% under Division 70 and Division 70 of the GST Regulations in respect of such brokerage services.

Relevant facts and circumstances

• The ABC IDPS entity is a platform that enables investors to consolidate all their investments together in one product. It also enables streamlined administration and maintenance of an investment portfolio.

• The ABC IDPS entity has been registered for GST purposes.

• Acquisitions made by the ABC IDPS entity are made in relation to the making of input taxed financial supplies. The financial supplies that are made by the ABC IDPS entity are the provision, acquisition or disposal of interests in an ADI account, and of interests in securities.

• For the purposes of this private ruling, the Commissioner has been asked to assume that the all activities of the ABC IDPS entity are input taxed.

• It is not contested that the ABC IDPS entity exceeds the financial acquisitions threshold (FAT).

• The legal terms of the ABC IDPS arrangement are primarily established under the Trust Deed.

• The Trust Deed provides for the establishment of an investment execution, administration, settlement and reporting service for the investment portfolios of clients and to provide a custody and bare trustee service in relation to these portfolios.

• The IDPS operator holds each investor's IDPS investment portfolio on trust for that investor and each investor is absolutely entitled to the assets of their portfolio.

• The Trust Deed allows the IDPS operator to authorise any person to act as its agent or delegate to hold any portfolio asset, perform any act or exercise any discretion within its power.

Under this authorisation, the IDPS operator has appointed XYZ as custodian of the ABC IDPS entity by way of a deed.

• The arrangements in this case are not ones to which Subdivision 153-B applies.

• Under the Deed, XYZ is agent of ABC Pty Ltd IDPS operator in relation to IDPS portfolio assets and agrees to hold this portfolio on trust for ABC Pty Ltd as IDPS operator. Additionally, XYZ is authorised under the Deed to effect or settle the acquisition or disposal of IDPS portfolio assets if XYZ has received instructions to that effect.

• The tax invoices from brokers are issued to XYZ.

• The terms of the Trust Deed enable ABC in its capacity as IDPS operator to provide different IDPS services to clients. The services are known by a variety of names and can include versions of these services badged with a different name. In this regard, ABC offers several IDPS services under the ABC name and also several services that are badged with the name of other entities (so-called 'white-label' arrangements).

• Under the Trust Deed, ABC in its capacity as IDPS operator must maintain a cash management account as the cash hub for the IDPS services. Investors in the ABC IDPS entity make their investment by paying contributions into the cash management account. ABC as IDPS operator uses the funds in the cash management account to settle the purchase of portfolio investments and uses the account to deposit income received in respect of portfolio investments.

• The cash management account is also used to pay expenses incurred by ABC in its capacity as operator and trustee of the ABC IDPS entity, including payments made to financial advisers and brokerage expenses for the purchase and sale of portfolio investments.

• The IDPS Guide provides information in relation to brokerage. Relevantly it explains that there may be a fee payable to an Investors broker in certain circumstances. This payment is calculated by the broker at the time of each transaction. The brokerage will then be added to the cost, or deducted from the proceeds of each transaction. It is noted that references to 'we' in the IDPS Guide are to the ABC Wrap which is the ABC IDPS entity operated by ABC.

• The IDPS Guide notes that XYZ is the agent of ABC as IDPS operator for the purpose of providing the custody service to the investor.

• The IDPS Guide also notes that investments made through the ABC IDPS entity are not identical to holding these investments in the investors' own right. Relevantly, it also notes that it is XYZ that is the legal owner of the assets and that, in relation to ASX listed securities, it is XYZ that instructs CHESS to settle transactions and controls the holdings of the securities on CHESS.

• There is a default broker, although investors may nominate a different broker.

• No formal contractual agreement exists between brokers and ABC as IDPS operator in relation to the provision of brokerage services.

• In practical terms, when an investor wishes to buy or sell ASX listed securities via the ABC IDPS service, the following sequence of events takes place. Firstly, the investor (usually through their financial advisor) will instruct XYZ to purchase the security. XYZ sends trades through a computer system, and will receive a confirmation that the trade has been successfully settled. The security is purchased in XYZ's name, which XYZ holds on trust for ABC. Next, ABC will pay XYZ for the brokerage on the transaction and will be reimbursed for this expense by withdrawing funds from the investor's cash management account to cover the cost of the security and the cost of brokerage. Finally, XYZ will issue a tax invoice.

• XYZ does not provide any payment or consideration, in any form, for the supply of brokerage services and therefore does not need to seek reimbursement from ABC in relation to brokerage services.

• As advised, XYZ does not incur the cost of brokerage and therefore such costs are not treated as 'Expenses'.

Assumption(s)

The Commissioner has been asked to assume that:

• the ABC IDPS entity is entitled to register for GST, and

• all the activities of the ABC IDPS entity are input taxed.

Relevant legislative provisions

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

Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999

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

Section 70-10 of the A New Tax System (Goods and Services Tax) Act 1999

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

Regulation 70-5.03 of the A New Tax System (Goods and Services Tax) Regulations 1999

Reasons for decision

1. Does the ABC IDPS entity acquire brokerage services when ASX listed securities are bought or sold through ABC's IDPS platform?

GST treatment of an IDPS entity

The Commissioner's view on whether an IDPS is an entity for GST purposes and whether an IDPS entity is carrying on an enterprise within the meaning given by the GST Act is set out at questions 13.3 and 13.4 of the ATO's Goods and Services Tax Financial Services: Questions and Answers respectively. The answers to those questions (which are not reproduced here in full) essentially provide that, a typical IDPS is considered to be a managed investment scheme as well as a collection of individual trusts.

In an overall practical sense, the relationship between an IDPS (in its managed investment scheme guise) and its operator, can be viewed as one that satisfies the fundamental elements of a trust so as to be recognised as an entity for the purposes of the GST Act. In form, an IDPS can be characterised as a collection of separately declared trusts, each of which is likely to be an entity for the purposes of the GST Act. However, in substance, these trusts co-exist with an overall trust relationship that practically facilitates the IDPS's managed investment scheme ambitions (that is also likely to be an entity for the purposes of the GST Act).

Additionally, in respect of the overall trust relationship, that practically facilitates the managed investment scheme aspect of an IDPS, the Commissioner considers that the associated activities of the operator typically correlate with the activities performed by a single responsible entity of a public unit trust. Where this is found to be the case, the activities performed by the operator will have a distinct commercial flavour such that they can be viewed to constitute activities carried out in the form of a business.

Consequently, on the basis that features of the ABC IDPS entity are materially identical to that described in the answers to questions 13.3 and 13.4 of the ATO's Goods and Services Tax Financial Services: Questions and Answers, we are of the view that the ABC IDPS entity is an entity for GST purposes and that it is carrying on an enterprise within the meaning given by the GST Act.

A recipient's entitlement to input tax credits

The GST Act provides that you are entitled to the input tax credits for any creditable acquisitions that you make.

Of relevance to question 1 is that entitlement to input tax credits on the making of a creditable acquisition rests with the entity that makes the creditable acquisition.

In this case, the arrangement between XYZ and ABC as the operator of the ABC IDPS (the ABC IDPS entity) is governed by the terms of a Trust Deed. The deed permits the ABC IDPS entity to authorise any person to act as its agent or delegate to hold any portfolio assets, perform any act or exercise any discretion within its power and it is under this authorisation that the ABC IDPS entity has appointed XYZ as agent in relation to IDPS portfolio assets to be held on trust for the ABC IDPS entity.

Relevantly, XYZ is authorised under the Deed to effect or settle the acquisition or disposal of IDPS portfolio assets upon receipt of instructions to that effect. The arrangement between XYZ and the ABC IDPS entity is therefore one that involves an agent (XYZ) who is authorised expressly by a principal (the ABC IDPS entity) to act for the principal so as to create or affect legal relations between the principal and third parties.

With regard to the special GST rules that apply to agents and insurance brokers under Subdivision 153-A, paragraph 55 of Goods and Service Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) provides that:

55. If you are an agent at general law, you are an agent for GST purposes unless Subdivision 153-B applies. Accordingly, if you are an agent (where taxable supplies are made through you), the principal is liable for any GST payable on the supplies. Also, if you are an agent (where creditable acquisitions are made through you), the principal is entitled to any input tax credits.¹³

The arrangements in this case are not ones to which Subdivision 153-B applies. Therefore, when ABC makes an acquisition of brokerage services from a broker under the powers granted by the terms of the Deed when ASX listed securities are bought or sold, the acquisition will be acquired by XYZ as an agent of the ABC IDPS entity. Accordingly such acquisitions would be acquisitions of the ABC IDPS entity and if an entitlement to input tax credits arose; it would be the ABC IDPS entity that would be entitled to the credits.

1. Does the ABC IDPS entity pay for, or have a liability to pay for such brokerage services?

The ABC IDPS entity has submitted that payments from a trust entity for GST purposes will encompass any payments out of trust property that are authorised by the relevant trust deed. The ABC IDPS entity further submits that the equivalent treatment in this case would be where payments are made out of IDPS portfolio assets (including cash in the cash management account) that are authorised by the Trust Deed.

Based on the terms set out in the Trust Deed, we agree that the ABC IDPS entity pays for the brokerage services in respect of ASX listed securities that are bought or sold through its platform.

2. Is the ABC IDPS entity entitled to claim a RITC of 75% under Division 70 of the GST Act and Division 70 of the GST Regulations in respect of such brokerage services?

A recipient's entitlement to input tax credits

The definition of a creditable acquisition is provided under section 11-5 which states that:

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.

The meaning of creditable purpose is provided at section 11-15:

(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.

In this case, the ABC IDPS entity pays for the brokerage services; is registered for GST and it is not contested that the supply of brokerage services by brokers are taxable supplies. Further, the requirement in subsection 11-15(1) will be satisfied where brokerage services are acquired by the ABC IDPS entity in carrying on its enterprise which is comprised of the operator's activities.

On the assumption that all activities of the ABC IDPS entity are input taxed, any acquisitions made will not be for a creditable purpose under section 11-15. However some acquisitions relating to financial supplies may attract a reduced input tax credit under Division 70 where the relevant requirements are satisfied.

Entitlement to reduced input taxed credits on acquisitions related to making financial supplies

With regard to acquisitions that attract a reduced credit and the extended meaning of creditable purpose, sections 70-5 and 70-10 provide that:

70-5 Acquisitions that attract the reduced credit

(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.

(1A) However, an acquisition is not a reduced credit acquisition to the extent (if any) that, without this Division applying, an entity is entitled to an input tax credit for the acquisition.

70-10 Extended meaning of creditable purpose

(1) 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.

(2) The fact that you *apply a *reduced credit acquisition in making *financial supplies does not stop it being applied for a *creditable purpose, to the extent that it relates to making financial supplies.

(3) This section has effect despite sections 11-15 and 129-50 (which are about the meaning of creditable purpose).

The percentage to which input tax credits are reduced is provided at subsection 70-5(2) by reference to regulation 70-5.03 of the GST Regulations which states:

For subsection 70-5(2) of the Act, the percentage to which the input tax credit is reduced is as follows:

(a) for a reduced credit acquisition covered by item 32 of the table in subregulation 70-5.02(2) - 55%;

(b) for a reduced credit acquisition covered by item 32 and one or more other items of the table in subregulation 70-5.02(2):

(i) to the extent that the acquisition is covered by item 32 - 55%; and

(ii) to the extent that the acquisition is not covered by item 32 - 75%;

(c) for all other kinds of reduced credit acquisitions - 75%.

The table in subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are reduced credit acquisitions within the meaning of subsection 70-5(1).

Securities transactions services

Item 9 in the table in subregulation 70-5.02(2) of the GST Regulations (item 9) deals with arrangement services provided by a financial supply facilitator in respect of the provision, acquisition or disposal of an interest in a security. Specifically, item 9 is in the following terms:

Arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, including the following:

(a) order placement and trade execution;

(b) clearance and settlement of trades;

(c) management of the issue of securities, including rights and bonus
issues;

(d) arranging flotations and privatisations;

(e) arranging mergers and acquisitions;

(f) arranging takeover bids;

(g) performing a settlement, including issue of drafts and
encashment;

(h) other securities transactions, including lodgment, withdrawal
and exchange control;

(i) underwriting, except a matter that is described in the table in
regulation 40-5.09

In this case, the acquisition of brokerage services for the purchase and sale of ASX listed securities would likely involve an arrangement by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security. As such, we consider that such acquisitions of brokerage services will fall within item 9.

We note that the acquisition of brokerage services in this case is not covered by item 32 in the table in subregulation 70-5.02(2) of the GST Regulations as brokerage services covered by item 9 are excluded under paragraph (b)(ii) of item 32. Therefore, the ABC IDPS entity is entitled to claim a RITC of 75% under Division 70 of the GST Act in respect of the acquisition of brokerage services when ASX listed securities are bought or sold through its platform.