Edited version of your written advice

Authorisation Number: 1012666900016

Ruling

Subject: GST and termination of asset management agreement

Question 1

Is GST applicable (and to what extent) on the Asset Management Fees payable?

Answer

GST is applicable to the component of the Asset Management Fees attributable to management of the assets within Australia held by the resident trust on behalf of M.

Question 2

Is GST applicable (and to what extent) on the Termination Fee payable under the Asset Management Agreement?

Answer

No, this is a GST-free supply.

Relevant facts and circumstances

W is an Australian resident corporation with an ABN and is registered for GST.

In 2010, W entered into an Asset Management Agreement (AMA) with M a non-resident corporation. The AMA was subject to the governing laws of New South Wales. Apart from a resident trust holding assets (see below) M has no presence in Australia.

Under the AMA W was engaged to manage and advise on the entire portfolio of assets held by M. W's services under the AMA were delivered to M both locally and offshore. Under the AMA, W advised on a broad range of assets which was predominantly held in overseas.

In consideration for providing these AMA services, W was entitled to be remunerated on the following basis:

a) Performance fee of a percentage of the Return if the Return in the relevant year exceeds the Performance Benchmark.

b) Asset management fee at a fixed percentage rate per annum of the gross portfolio value.

In addition, the AMA provided that W was entitled to receive a termination fee calculated for the period commencing from the termination date up until the AMA expiry date; based upon the value of the portfolio on the termination date.

The AMA was terminated at sometime between November 2011 and January 2012.

W seeks confirmation of the GST treatment for:

a) any performance and asset management fees payable to W for services delivered under the AMA prior to termination; and

b) any AMA termination fee payable to W.

Relevant legislative provisions

A New Tax System (Goods and Service Tax) Act 1999 section 38-190

A New Tax System (Goods and Service Tax) Act 1999 section 9-10

A New Tax System (Goods and Service Tax) Act 1999 section 9-5

A New Tax System (Goods and Service Tax) Regulations regulation 40-5.12

Reasons for decision

Summary

GST is applicable to the component of the Asset Management Fees attributable to management of the AMA assets within Australia held by the resident trust on behalf of M. The remainder of these fees are consideration for a GST-free supply made to a non-resident by W.

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

a) you make the supply for *consideration; and

b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

c) the supply is *connected with Australia; and

d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free

or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

You meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act because:

• you supply asset management services for consideration;

• you supply the asset management services in the course or furtherance of an enterprise that you carry on;

• these supplies are connected with Australia; and

• you are registered for GST.

There are no provisions in the GST Act under which your supplies of asset management services are input taxed; asset management services are specifically excluded from being financial supplies by the A New Tax System (Goods and Services Tax) Regulations 1999.

Therefore what remains to be determined is whether your supplies of the asset management services are GST-free.

GST-free supplies to non-residents

In accordance with subsection 38-190(1) of the GST Act, supplies of things other than goods or real property to entities which are outside Australia may be GST-free.

Item 2 in the table in subsection 38-190(1) of the GST Act (item 2) provides that a supply of something other than goods or real property to a non-resident who is not in Australia when the thing supplied is done is GST-free if:

a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or

b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST.

Paragraph 31 of Goods and Services Tax Ruling GSTR 2004/7 states:

31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done.

We accept that your asset management services in respect of overseas assets held directly in name of M were provided to a non-resident who was not in Australia in relation to your supply. Therefore this supply is a GST-free supply under item 2.

Your asset management services supplied for M's Australian based assets will be subject to GST. The assets were held by a resident trust on behalf of M which carried out its activities on behalf of M in Australia. We consider that M, through the trust was in Australia in relation to your supply and therefore this component of your supply is excluded from the GST-free status afforded by item 2.

This outcome is supported by the Commissioner view as espoused in the Goods and Services Tax Ruling GSTR 2004/7:

Trust in Australia in relation to the supply (item 3)

77. A trust (irrespective of its residency status as determined in accordance with this Ruling) is in Australia if a trustee of that trust, acting in its capacity as trustee, carries on business (or in the case of a trustee that does not carry on business, carries on the trust's activities) in Australia:

(a) at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b) through an agent at a fixed and definite place for a sufficiently substantial period of time.

78. A trust is in Australia in relation to the supply if the supply is solely or partly for the purposes of the Australian presence of that trust. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the trust is in Australia in relation to the supply, except where the only involvement is minor.

Apportionment of taxable and non-taxable supplies

You have indicated that a percentage the assets managed may attract a taxable supply and the remainder may attract a GST-free supply based on the domicile of the assets. It may be possible, for example, that the GST-free supply should be afforded a larger (or smaller) portion than that proposed of the total as it requires you more (or less) effort etc. to manage overseas assets.

The Goods and Services Tax Ruling GSTR 2001/8 provides methods and examples that you may use to help you work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts. However we do note that fees receivable are calculated mathematically as a percentage of annual returns (if exceeding benchmark) and of gross portfolio value.

In this case, the proportions appear straight forward you have the means of calculating the two components. That is:

Can the X% performance fee be calculated in two components, that is

• X% of the excessive return of the overseas portfolio];

• plus [10% of the excessive return of the Australian portfolio]?

Similarly can the asset management fee can be calculated directly as two amounts:

• [V.0% pa X overseas component of gross portfolio value];

• plus [V.0% pa X Australian component of gross portfolio value]?

If the fee charged directly relates to a particular component of the supply, it is fair and reasonable that to say that this is the value (or price if GST inclusive) placed on each component of the supply.

Question 2

Summary

This supply is characterised as a GST-free 'release supply' made to a non-resident by W.

Detailed reasoning

We consider that the Termination Fee is the consideration paid by M for a release supply. A release supply can be made where a customer who has entered into a contract may not wish to, or may be unable to complete the contract. A term in the original contract may grant to the customer the right to terminate the contract upon payment of a cancellation fee in these circumstances.

In these cases the customer may terminate the agreement pursuant to a right set out in the terms of the arrangement. The termination is not a breach of the contract. The customer exercises their contractual right, for which they agree to pay a cancellation fee as consideration.

Without limiting subsection 9-10(1) of the GST Act which states that 'a supply is any form of supply whatsoever', a supply includes the supply of services, the creation or surrender of any right and the release from an obligation under paragraphs 9-10(2)(b), 9-10(2)(e) and 9-10(2)(g) of the GST Act respectively. In the context of the broad definition of supply, and having regard to the things included as supplies as set out in subsection 9-10(2) of the GST Act, the Commissioner's view is that, if it is not consideration for any other supply, a cancellation fee may be consideration for the creation or surrender of rights and/or a release supply that occurs when an arrangement is cancelled, and/or a combination of these supplies under paragraph 9-10(2)(h) of the GST Act.

The GST status of the release supply is not determined by the GST status of the intended supply; it is determined at the transactional level. Therefore W is making a release supply to M, a non-resident not in Australia in relation to the supply (note that W is not making a release supply to the Trust entity in Australia).

The release supply is not a supply of goods or real property so it may be assessed against the provisions of section 38-190 of the GST Act. As discussed above, item 2 can apply to supplies other than those of goods or real property when they are made to M's overseas presence alone; as such W is making a GST-free release supply to M.