Edited version of your written advice

Authorisation Number: 1012890061993

Date of advice: 7 October 2015

Ruling

Subject: GST and reduced credit acquisitions

Question 1

Is the entity making input taxed financial supplies under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it issues cards?

Answer

Yes, supplies of the cards are input taxed.

Question 2

Is the entity making taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it supplies services?

Answer

Yes, the supplies are taxable supplies.

Question 3

Is the entity making reduced credit acquisitions under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it pays the co-brand partner?

Answer

Yes, the entity is making reduced credit acquisitions from the co-brand partner.

Relevant facts and circumstances

The entity is an authorised deposit-taking institution.

The entity has entered into an arrangement with a co-brand partner whereby the entity will issue specifically branded cards.

Under the arrangement:

• The entity is responsible for management of customer accounts, customer relations, settlement of card transactions, regulatory compliance and fraud management;

• The co-brand partner is responsible for sales, marketing and distribution strategies as well as maintaining relationships with merchant acquiring banks and maintaining the settlement account and settling load and purchase transactions;

• The entity is entitled to all cardholder fees, interchange income and breakage;

• The co-brand partner is paid a commission amount by the entity that is effectively the cardholder fees, breakage, interchange income and part of the interest earned on the accounts less various costs.

Under the arrangement, the entity will issue three types of pre-paid cards:

The arrangement also provides that the co-brand partner may request from time to time that the entity provide it with services for which the entity is paid separately.

The entity is registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 40-5

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

Reasons for decision

Question 1

Section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a financial supply, as defined by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) is input taxed.

Generally, the provision, acquisition or disposal of an interest or under a thing mentioned in the table in subregulation 40-5.09(3) of the GST Regulations is a financial supply if it is made in the course or furtherance of an enterprise, is connected with the indirect tax zone, is supplied by a financial supply provider that is registered or required to be registered for GST and is for consideration.

Paragraph (a) of item 1 in the table in subregulation 40-5.09(3) of the GST Regulations refers to an interest in or under an account made available by an Australian ADI (authorised deposit-taking institution) in the course of its banking business within the meaning of the Banking Act 1959.

'Account' is defined in the GST Regulation to include an account in relation to which the account holder (the customer) has the right:

• to have the account maintained by the account provider (the provider); and

• to repayment of the amount credited to the account by the provider; and

• to require the provider to act on directions by the customer that are in accordance with the arrangements, or any agreement, between the provider and the customer in relation to operation of the account.

As discussed in ATO Interpretative Decision ATO ID 2010/225 Goods and services tax - GST and provision of a prepaid card facility by an Australian authorised deposit-taking institution, cards such as those issued by the entity satisfy the definition of account for the purposes of the GST Regulations because formal records of the card facilities are maintained.

The agreement provides that the entity is entitled to any fees payable by a cardholder for use of the card and any fees paid to the entity as the issuer of the card by an acquirer (interchange income). The amounts to which the entity is entitled is the consideration for the entity's financial supplies of the cards.

Consequently, the entity supplies of cards satisfy the definition of financial supply under regulation 40-5.09 of the GST Regulations and are therefore, input taxed under section 40-5 of the GST Act.

Question 2

The agreement provides that the co-brand partner may request that the entity provide certain services separately. A supply of such services by the entity will be a taxable supply if the requirements of section 9-5 of the GST Act are met:

9-5 Taxable supplies

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 the indirect tax zone; 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.

Terms with an asterisk are defined under section 195-1 of the GST Act.

The services are not mentioned in the table in subregulation 40-5.09(3) of the GST Regulations and, as such are not input taxed. The supplies are also not GST-free under any of the provisions in Division 38 of the GST Act.

The consideration for the services is referred to separately in the agreement. As the services are made in the course of the entity's enterprise, are made in the indirect tax zone (within Australia) and the entity is registered for GST, the supply of the service to the co-brand partner is a taxable supply under section 9-5 of the GST Act.

Question 3

Section 70-5 of the GST Act provides that certain kinds of acquisitions specified in the GST Regulations are 'reduced credit acquisitions' which give rise to reduced input tax credits.

The table in subregulation 70-5.02(2) of the GST Regulations provides a list of reduced credit acquisitions. Item 27 of the table provides that 'supplies for which financial supply facilitators are paid commission by financial supply providers' are reduced credit acquisitions.

Under the agreement, the co-brand partner will undertake many of the activities that are required in order for the entity to be in a position to issue the cards to cardholders. The co-brand partner is responsible for the following (amongst others):

• Development of a sales and distribution strategy;

• Analysing data and process data to propose innovations and new functionality;

• Setting cardholder fees;

• Setting card limits;

• Setting product features including use limitations, transaction limits;

• Develop, designing and undertaking the marketing;

• Selling the cards;

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? (GSTD 2007/1) explains that a co-brand partner in a co-branded credit card may undertake activities that, when considered as a whole, constitute supplies made by a financial supply facilitator. Paragraph 25 of GSTD 2007/1 explains that although each separate activity may not be a reduced credit acquisition, they need to be considered in the context in which they are undertaken:

25. However, these activities may be provided as part of a package which includes, for example, sourcing and introducing customers, providing a telephone application facility and follow up activities where application forms have not been correctly completed. Such a package of services, when looked at as a whole, is indicative of the co-branding partner playing an active role in forwarding and assisting the supply of the interest in the credit arrangement. The acquisition of such a package of services would be considered to have a substantial connection with the supply of the interest in the credit arrangement and, consequently, the co-branding partner would be considered a financial supply facilitator in relation to that supply.

The activities undertaken by the co-brand partner under the agreement are directly connected to each supply of a card that the entity makes to a cardholder and are significantly related to the operation of the entire scheme. As such, the co-brand partner is acting as a financial supply facilitator when Indue issues the prepaid cards.

Paragraph 27 of GSTD 2007/1 explains the meaning of 'commission' for the purposes of the GST Regulations:

27. The term 'commission' is not defined in the GST Regulations for the purposes of item 27 in subregulation 70-5.02. The Commissioner considers that the term 'commission' for these purposes means:

Payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis, or on a sliding scale based on the value of the transaction.

The amounts payable to the co-brand partner by the entity under the agreement are commission payments for the purposes of the GST Regulations.

Consequently, the activities undertaken by the co-brand partner under the agreement are 'supplies for which financial supply facilitators are paid commission' and, as the entity is the financial supply provider, the entity is making a reduced credit acquisition under section 70-5 of the GST in relation to those activities.