Edited version of your written advice

Authorisation Number: 1012878252941

Date of advice: 7 October 2015

Ruling

Subject: GST and reduced credit acquisitions

Question

Is the entity making a reduced credit acquisition under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it pays the commissions?

Answer

No, the entity is not making a reduced credit acquisition.

Relevant facts and circumstances

The entity provides loans.

The entity pays a commission to a third party.

Relevant legislative provisions

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

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

Reasons for decision

Section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that certain specified kinds of acquisitions (reduced credit acquisitions) which relate to making financial supplies give rise to a reduced input tax credit. The table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides a list of reduced credit acquisitions.

Relevantly, item 11(e) of the table in subregulation 70-5.02(2) of the GST Regulations provides that an acquisition of a loan service of 'introducing' by a financial supply facilitator is a reduced credit acquisition.

Also, item 27 of the table in subregulation 70-5.02(2) of the GST Regulations provides that the acquisition of a supply for which a financial supply facilitator is paid a commission is also a reduced credit acquisition.

Both item 11(e) and item 27 require the acquisition by the entity be from a 'financial supply facilitator'. Subregulation 40-5.07 of the GST Regulations defines 'financial supply facilitator':

A financial supply facilitator, in relation to supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider.

Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions elaborates on the meaning of 'financial supply facilitator' and, at paragraph 31 states:

31. … The facilitating of a supply refers to activities that help forward (assist) the supply, rather than those that simply assist the financial supply provider. An entity facilitates the supply of an interest where its activities have the effect of helping forward or assisting the supply, therefore, the activities must have a sufficient nexus with the supply of an interest by a financial supply provider.

As mentioned in the definition of 'financial supply facilitator' in subregulation 40-5.07 of the GST Regulations, the financial supply facilitator facilitates the specific financial supply. This is affirmed in paragraphs 32 and 33 of GSTR 2004/1 which state:

32. To have a sufficient nexus, the activities of the entity must have an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising, product design, market research or similar types of activities). The activities must relate to and assist a particular supply, not merely contemplated supplies. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of an interest.

33. An entity is a financial supply facilitator of a particular supply. … Being a financial supply facilitator is not a characteristic of an entity, but describes the entity's role in a particular transaction.

The third party would be a financial supply facilitator in relation to loans issued by the entity if it makes supplies to the entity which help forward the supply of the loan to the borrower. As stated in paragraph 32 of GSTR 2004/1, It is not sufficient that the supplies assist the entity to possibly provide loans to borrowers, there must be a connection to a specific supply.

The concept of 'supply' was considered by the High Court in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 which, at 34, noted:

34. The concept of supply employed in the GST Act is of wide import. Absent modification of the general operation of the GST Act through application of a special rule, there is a supply whenever one entity (the supplier) provides something of value to another entity (the recipient). Section 9-10(1), the amplitude of which is highlighted by ss9-10(2) and 9-10(3), serves to emphasise that the something can be anything and can be supplied by any means.

Whilst it is noted that the entity treats the payment of the commission to the third party in a similar manner to the way it treats payments of commissions to mortgage brokers, there are key differences in the acquisitions that it makes in return for those payments. A mortgage broker deals one-on-one with a borrower and the mortgage broker will assist the borrower directly with completion and submission of the loan application and associated documentation.

The third party is not involved in the lending process. The third party does not assist the loan provider in anything more than a very general sense. The third party is not involved at all in the loan process, nor does it provide the entity with potential borrowers' names and details.

Goods and Services Tax Determination GSTD 2007/1 Goods and services tax: is a credit card provider entitled to a reduced input tax credit under item 27 of the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 for the acquisition of services from a co-branding partner where it pays commission for those services? provides examples to demonstrate the application of item 27 of the table in subregulation 70-5.02(2) of the GST Regulations. Example 3 has similarities to the supplies made by the third party to the entity in that the supplier has a direct connection to the client base and directly approaches those clients to direct them towards the financial supply:

45. Tesoro Bank decides to release a new credit card product. It enters into an arrangement with Mercado Pty Ltd, a high profile company with a strong brand image, to undertake the marketing of the credit card product by means of direct mail, television and radio commercials and newspaper advertisements. The arrangement also provides for Mercado Pty Ltd to lend its name to the credit card product as a means of encouraging customer acceptance of the product. Mercado Pty Ltd agrees to accept payment by way of commission based upon the number of customers who take up the offer of the interest in the credit arrangement. Mercado Pty Ltd is not involved in the processing of the applications for the credit card product or in responding to cardholder enquiries in relation to the applications. Mercado Pty Ltd does not play any part in retaining cardholders as customers.

46. The activities of Mercado Pty Ltd in providing marketing services and lending its name and image to the credit card product do not have a substantial connection to the supply of the interest in the credit arrangement by Tesoro Bank. Mercado Pty Ltd is not a financial supply facilitator in relation to the supply by Tesoro Bank because there is insufficient nexus between the promotional services it provides and the financial supply of the interest in the credit arrangement by Tesoro Bank. The acquisition of Mercado Pty Ltd's services is not a reduced credit acquisition under item 27.

The third party does not supply the entity anything more than general access to potential borrowers.

Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions explains that a financial supply facilitator helps forward a specific financial supply:

258. A financial supply facilitator is defined in regulation 40-5.07 in relation to a supply of a particular interest, to be an entity facilitating the supply of that interest. The facilitating of a supply refers to activities that help forward (assist) the supply, rather than those that simply assist the financial supply provider. In determining whether an entity is facilitating the supply of the interest for a financial supply provider, the activities performed by the entity must have the effect of helping forward or assisting the supply and therefore must have a sufficient nexus with the supply of an interest by a financial supply provider.

The payment of the commission by the entity to the third party is not for an acquisition from a financial supply facilitator because the third party has only a general association with the financial supply of the loan to the borrower. Consequently, the entity is not making a reduced credit acquisition under section 70-5 of the GST Act when it pays the commissions to the third party.