Edited version of your written advice

Authorisation Number: 1012821092200

Date of advice: 30 October 2015

Ruling

Subject: GST and reduced input tax credits

Question 1

Is the acquisition of trustee services by Fund A from Trustee A, which includes the functions performed, by entity X, a reduced credit acquisition?

Answer

Yes, the acquisition of trustee services by the Fund A, which includes the functions performed by entity X qualifies as a reduced credit acquisition under item 32 of the table in regulation 70-5.05(2) and to the extent that the acquisition:

(i) falls within one of the exclusions listed under item 32 a RITC of 75% will arise; and

(ii) does not fall into one of the exclusions listed in item 32 a RITC of 55% will arise.

Question 2

Is the acquisition by Fund B of the functions performed by entity X a reduced credit acquisition?

Answer

Yes, to the extent that the acquisition falls within item 24, Item 26 or item 33 a reduced credit acquisition is made and an input tax credit of 75% will arise.

Relevant facts and circumstances

Entity A is the trustee of Fund A.

Entity A (or Trustee A) entered into a 'Service Level Contract' (Agreement A) with entity X. This agreement governs the services carried out by entity X in relation to Fund A.

A copy of the Agreement has been provided as part of this ruling request.

Entity A is registered for GST and is carrying on, in its own capacity, an enterprise that included making taxable supplies of services to Fund A.

Entity A acquires the services of entity X in its capacity in carrying on an enterprise of providing trustee services.

In addition to the services performed by entity X, which form part of the trustee services supplied by Entity A, Entity A also provides other services (together the trustee services).

In consideration for the trustee services Entity A charges a monthly fee (trustee fee) to Fund A. This monthly fee includes the costs that Entity A incurs (e.g. the entity X services acquired by Entity A) in providing its trustee services.

Entity B is the trustee of Fund B.

Entity B in not registered for GST (in its own capacity) and is not making taxable supplies to Entity B.

Entity B and entity X have entered into a 'Service Level Contract' (Agreement B). This agreement governs the services carried out by entity X in relation to Fund B.

A copy of Agreement B has been provided as part of this ruling request.

This ruling response is based on the understanding that the acquisition of all services supplied to the Trustee for Fund A and Fund B is supplied on or after 1 July 2012.

For the purposes of this ruling response when referring to the term 'Agreement' it refers to the respective agreement the trustee has with entity X.

The Funds exceeds the financial acquisition threshold.

The Agreement

The Agreement setting out the services being performed by entity X is largely similar for Fund A and Fund B. As such a single consolidated list of the 'identified functional elements' of the services performed by entity X are set out in the ruling request.

In consideration for the services provided by entity X, the Trustee (i.e. Entity A or Entity B as relevant) provides an Administration Fee.

Reasons for decision

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 A New Tax System (Goods and Services Tax) Act 1999 (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, "you do not acquire a thing for a creditable purpose to the extent that it relates to making supplies that would be input taxed".

In this case it is not in contention that Fund A and Fund B makes supplies that are input taxed. Therefore the Funds acquisition of services (being performed by entity X) relates to making input taxed financial supplies. Further, the Funds exceed the FAT. On this basis, the acquisition by the Funds is not made for a creditable purpose under paragraph 11-15(2)(a) of the GST Act.

However, section 70-5 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 reduced input tax credit (RITC). The percentage of the RITC will depend upon the type of acquisition made and will be either 75% or 55%.

Of relevance in this case are 'item 24', 'item 26', 'item 32'and 'item 33' which are listed in the table in subregulation 70-5.02 of the GST Regulations. These items respectively state:

24 The following administrative functions in relation to investment funds, including those functions for superannuation schemes:

(a) maintaining member and employer and trust records and associated accounting;

(b) processing of application, contributions, benefits and distributions;

(c) processing transfer between funds and trusts;

(d) production and distribution of reports, statements and forms to members, employers and trustees;

(e) handling of enquiries and complaints made by members;

(f) archives storage, retrieval and destruction services;

(g) statement processing and bulk mailing;

(h) compliance with industry regulatory requirements, excluding taxation and auditing services;

(i) processing and assessing claims under life insurance policies carried out on or after 1 July 2012

26 The following life insurance administrative services provided for a life insurer:

(a) maintaining policyholder records and associated accounting;

(b) processing of premiums and benefits;

(c) processing and assessing claims under policies;

(d) production and distribution of reports, statements and forms to policyholders, including statement processing and bulk handling;

(e) handling of inquiries and complaints made by policyholders;

(f) archives storage, retrieval and destruction services;

(g) processing and assessing applications;

(h) compliance with industry regulatory requirements, excluding taxation and auditing services;

(i) managing reinsurance requirements

32 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) …

(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

33 Monitoring and reporting services (other than taxation and auditing services) that:

(a) are acquired on or after 1 July 2012; and

(b) are required for compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006

The Commissioner's views set out in paragraphs 223 to 256 of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) concerning the identification of 'mixed' and 'composite' acquisitions are also relevant in undertaking this analysis.

Mixed Acquisitions

In determining there has been 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 are separately identifiable and retain their own identity.

In summarising the established case law with regard to identifying mixed supplies, paragraph 245 of GSTR 2002/2 acknowledges that these principles equally apply to acquisitions and further states that an acquisition has separately identifiable parts:

..where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply.

It follows that, if an entity 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 entity is entitled will be based on the extent to which the consideration provided (inclusive of GST) relates to each part of the acquisition.

Composite Acquisitions

Alternatively, an entity is not required to identify parts of an acquisition where it is characterised as a 'composite' acquisition. As stated in paragraph 247 of GSTR 2002/2, in a composite acquisition:

…subordinate parts complement and accompany the dominant part of the acquisition. Such an acquisition is essentially the acquisition of a single thing. It need not be broken down, unbundled or dissected further. A composite acquisition may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.

Further, paragraph 250 of GSTR 2002/2 establishes that:

No single factor by itself will provide the sole test as to whether a part of an acquisition is integral, ancillary or incidental to the dominant part of the acquisition. Having regard to all the circumstances, indicators that a part may be integral, ancillary or incidental include where:

• it represents a marginal proportion of the total value of the package compared to the dominant part;

• it is necessary or contributes to the acquisition as a whole, but cannot be identified as the dominant part of the acquisition;

• it contributes to the proper performance of the contract to acquire the dominant part; or

• an acquirer would reasonably conclude that it does not constitute for customers an aim in itself, but is a means of better enjoying the dominant thing acquired.

On this basis, where an entity makes an acquisition of a thing which has subordinate parts which complement and accompany the dominant part, this will be treated as an acquisition of one thing. That is, the acquisition by an entity which has identifiable parts which are integral, ancillary or incidental to the dominant part is a composite acquisition of that thing. Further, in the case where the composite acquisition qualifies as a RCA it will be subject to a RITC (at either 55% or 75%) and will not require apportionment.

In this case Fund A and Fund B have made submissions regarding the relevant rate of RITC that arises for their acquisition. These submissions are set out in their application for a private ruling.

Based on the facts, the Funds acquire services under two different circumstances. That is, for Fund A, the acquisition of services arises from supplies made by Trustee A. However, in the case of Fund B, Fund B acquires their services from entity X. This difference arises because Trustee A carries on an enterprise of providing 'trustee services'. This can be contrasted from Trustee B where such a supply is not being made.

Given the above difference our response considers how the RITC's apply to each circumstance.

Application of law to Fund A

Item 32 of the table in subregulation 70-5.02 of the GST Regulations applies to acquisitions made by certain trusts and in this case covers Fund A. Essentially, item 32 operates to provide a RITC of 55% for acquisitions made by the funds, except certain types of acquisitions which receive a RITC of 75% under a different item in the table. Of relevance in this case are item 24 and item 33.

In their request for a private ruling Fund A make a number of submissions regarding the relevant RITC item that applies to the acquisition of trustee services (which includes the activities performed by entity X) from Trustee A. In raising these submissions it is recognised that Fund A's acquisition from Trustee A consists of a 'mixed acquisition'.

The Commissioner agrees with the approach taken by Fund A in treating the acquisition made from Trustee A, which includes the activities performed by entity X, as a mixed acquisition. Further the Commissioner accepts the submissions presented in the ruling request such that we agree with the proposed rates.

We note that this request only consider the services provided by Trustee A to Fund A which are performed by entity X. That is, it does not cover the remaining services that are also provided by Trustee A to Fund A. Accordingly this response has not considered these other services which are acquired by Fund A and to which item 32 will apply.

Application of law to Fund B

Item 32 does not apply to Fund B. Accordingly where the acquisition by Fund B is not a RCA under another item in the table in regulation 70-5.02(2), no reduced input tax credit is available.

In this case Fund B provides the Administration Fee as consideration for the services provided by entity X.

It is submitted by Fund B that in respect of the acquisition of services from entity X item 24, item 26 and items 33 are relevant. Further as part of their submissions Fund B set out which of the particular items (i.e. item 24, item 26 or item 33) applies to the identified function (or service) acquired from entity X.

In this case the Commissioner agrees with the submissions such that we accept Fund B will be entitled to a RITC at the relevant rates proposed.

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

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

A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09

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