Edited version of your written advice

Authorisation Number: 1012891849235

NOTICE

This private ruling was revised following an issue. This edited version has therefore been replaced with the edited version of the private ruling with the authorisation number of 1052257141356.

Date of advice: 20 October 2015

Ruling

Subject: Adviser Services Fee and the availability of Reduced Input Tax Credits.

Question 1

Has X Ltd made an acquisition, for the purposes of section 11-5 of the GST Act, from Financial Advisers as agent for the Licensee in respect of the Advisor Service Fee (ASF) paid under the Service?

Answer

Yes. The Commissioner agrees that X Ltd is also the recipient of the supply made by the financial advisers to the clients and that supply is made for the payment of the ASF.

Question 2

If the Commissioner determines Question 1 in the affirmative, is X Ltd entitled to a reduced input tax credit, for the purposes of Division 70 of the GST Act, for the ASF?

Answer

Yes, X Ltd will be entitled to, reduced input tax credits for the ASF.

Relevant facts and circumstances

X Ltd provides a platform through which investors can access a range of investments and insurance options. This platform enables clients to buy, hold and sell managed, listed and fixed investments to build a tailored investment portfolio.

Clients invest by opening an account and maintaining a minimum amount in their account. An application for an account can only be made through a licensed Financial Adviser.

You provided a number of attachments in your ruling request that set out the framework within which each of the parties operates.

Agreement #1 governs the relationship between X Ltd and the Licensee and details the obligations of both the Licensee and X Ltd. The Licensee is required to provide financial services under its own Australian Financial Services Licence.

The Licensee and Authorised Representatives acknowledge that X Ltd will only make payment of the ASF where the client has duly authorised and directed X Ltd to make the payment.

Agreement #2 details the agreement between the Licensee and the Business. Under this agreement the Licensee must hold the relevant financial services licence; provide services as specified in the agreement; and primarily facilitate the provision of Financial Planning Services pursuant to the agreement.

The Business is required to:

• Procure Authorised Representatives via application.

• Act only within the Letter of Authority bounds.

• Procure financial planning services to clients on behalf of the Licensee.

• Comply with statutory requirements.

Agreement #2 provides for Remuneration and Business Fees.

Fees paid to the Business will be in accordance with Schedule AA of the Agreement #2

Letter of Authority provided by the Licensee to each Authorised Representative authorising them to provide financial services on behalf of the Licensee.

The Software Licence outlines the terms and conditions relating to how users may access software provided by X Ltd to manage a client's account. The software is used by advisers to provide advice to clients on financial products, prepare documents for clients and undertake transactions on the client account.

The Guide details the Advisor Service Support Fee, comprising of two parts:

an Advisor Service Fee:

a Facilitation Fee:

The client can provide written authority via their application form for each type of ASF to be deducted from their nominated account to pay the Financial Advisor.

Finally, the Deed states that X Ltd are entitled to deduct from the Member Account various charges and payments which includes "any other payment made in respect of the Member pursuant to the provisions of the Deed."

Another clause provides that X Ltd is entitled to be reimbursed for all costs as specified in Schedule 1 and any other costs properly incurred.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 11-5

Section 11-15

Section 70-5

A New Tax System (Goods and Services Tax) Regulations:

Subregulation 70-5.02.

Reasons for decision

Issue 1

Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) or the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)

Summary

The Commissioner considers that the one set of activities carried out by the financial advisers involves them making a supply of adviser services to both its client and to X Ltd. Further, the financial adviser makes the supply in order to obtain the payment of an ASF by X Ltd

Detailed reasoning

In order to determine the essential character of an ASF payment transaction, it is necessary to firstly identify who between X Ltd and the client is under a legal obligation to make an ASF payment to the financial advisers. It is not obvious from the cited documentation, who it is, that enters into that obligation to make the ASF payment.

Despite the impression given by the guide that it is the client which initially incurs the liability to pay the financial adviser the ASF, there is no specific agreement in evidence between the adviser and the client. In the absence of such evidence, it is relevant to consider the alternative proposition that the ASF liability is first and foremost incurred by X Ltd.

It may be argued that Agreement #1, together with the Guide, Agreement #2 and the Application form, create a framework for the negotiation, consent, recognition and payment of remuneration to the financial advisers insofar as it relates to their:

• distribution of X Ltd financial products; and/or

• performance of services in relation to a client's interest in an X Ltd financial product

That is, in offering and supplying its financial products, X Ltd contemplates the adviser/client relationship and brings it within the scope of its contractual framework. Furthermore, because the adviser/client relationship is critical to the effective and efficient operation of X Ltd's financial products, X Ltd agrees to remunerate the adviser on the terms that have been negotiated between the adviser and its client.

On this basis, we consider that the ASF liability is incurred by X Ltd and arises from a combination of the operation of the terms and conditions of Agreement #1, together with the Guide, Agreement #2 and the Application form. It follows from this view that the ASF liability is not incurred as a consequence of X Ltd assuming the liability from the client.

In your application, you have made reference to the effect of the decision in Federal Commissioner of Taxation v. Secretary to the Department of Transport (Vic) [2010] FCAFC 84 (Department of Transport), where the activity undertaken by the taxi operator of transporting the eligible passenger resulted in two distinct supplies being made:

(i) supply of transport to the passenger; and

(ii) supply to the Department of Y of transporting the eligible passenger.

While there was no indication on the facts in Department of Transport that there was a binding obligation between the Department and the taxi operator for the latter to provide transport to the eligible passenger, the Full Federal Court concluded that there was a supply of Y of transport of the eligible passenger by the taxi operator to the Department.

That is, Department of Transport is an example of a supply being made to the payer under a tripartite arrangement that also involves a supply by the supplier to the customer, even where there is no binding obligation between the payer and the supplier to make the supply to the customer. In practice, whether a similar supply can be identified in a different arrangement will require careful consideration of all the relevant facts and circumstances.

In this regard, the Commissioner considers that the following factors, in combination, may point to a supply being made by the supplier to the payer under a tripartite arrangement:

(a) there is a pre-existing framework or arrangement between the payer and the supplier which contemplates that the parties act in a particular manner in respect of supplies by the supplier to particular third parties or a class of third parties;

(b) the pre-existing framework or arrangement:

(i) identifies a mechanism by which the particular third parties or the class of third parties are to be identified so that the supplies made to them come within the scope of the framework or arrangement; and

(ii) specifies that the payer is under an obligation to pay the supplier if there is a relevant supply by the supplier to a third party and also sets out a mechanism by which such payment is authorised;

(c) the framework or arrangement and the mechanism for authorising the payment are in existence before the supply by the supplier to the third party (that is, the supplier knows in advance that the payer is obliged to pay some or all of the consideration in the event of the supply to the third party);

(d) the supplier makes the supply to the third party in conformity with the pre-existing framework or arrangement between the parties; and

(e) the obligation of the payer to make payment pursuant to the pre-existing framework or arrangement is not merely an administrative mechanism or direction to pay on behalf of the third party for a liability owed by the third party to the supplier. Rather, once the supply becomes a supply to which the framework or arrangement applies, the framework or arrangement establishes a liability owed by the payer (not the third party) to the supplier in the event that there is a supply by the supplier to the third party.

Therefore, it is necessary to consider the arrangement (governed by an interlocking set of relationships/contracts) in light of the abovementioned factors to determine whether or not X Ltd is the recipient of a supply of adviser services from the financial advisers. In doing so the Commissioner considers that:

• there is a pre-existing framework (established by the combined operation of Agreement #1, Guide, Agreement #2 and the Application form) which contemplates the manner in which X Ltd and the financial advisers act in respect of the supply of adviser services to a client who acquires an interest in X Ltd's financial product;

• a client who acquires an interest in X Ltd's financial product (through the mechanism of an Application Form) is identified so that the supply of adviser services to that client comes within the scope of and is governed by the 'pre-existing' framework;

• the terms of Agreement #1, Guide, Agreement #2 and the Application form make X Ltd liable to pay an ASF to the financial advisers which is effectively authorised by the mechanism of the acceptance of the client's Application Form to acquire an interest in X Ltd's financial product;

• the framework and mechanism for authorising payment of the ASF is in existence before the financial adviser makes a supply of adviser services to a client (that is the financial adviser knows in advance that X Ltd will pay all of the consideration in the event that the financial adviser makes a supply of adviser services to the client);

• the financial adviser makes the supply of adviser services in conformity with the pre-existing framework (the ASF only compensates the financial advisers for actively managing the client's investment strategy that is being implemented through X Ltd's product platform); and

• when viewed in light of all the surrounding circumstances, X Ltd's obligation to make a payment of an ASF arises from the supply of adviser services under the framework and not from X Ltd assuming a ASF liability owed by the client to the financial advisers established outside the framework.

Consequently, the Commissioner considers that the factors mentioned, when viewed in combination, show that the one set of activities carried out by the financial advisers involves them making a supply of adviser services to both its client and to X Ltd. Further, the financial adviser makes the supply in order to obtain the payment of an ASF by X Ltd, as defined in the above paragraphs.

That is, while the financial adviser is furnishing the client with adviser services when they manage the client's interest in X Ltd's financial product (for an ASF that is negotiated between these parties), X Ltd is also deriving a benefit from the supply of these services through the administration of its products. This is because the ongoing involvement of the financial adviser is a fundamental design feature of the operation of a financial product offered by X Ltd.

Therefore, recognising X Ltd as also being the acquirer of adviser services reflects the commercial reality of an ASF payment transaction and, by extension, is not a misapplication of the 'Redrow' principle. It follows, that the facts do not support the characterisation of the ASF payment transaction as giving effect to an administrative arrangement between the client and X Ltd for X Ltd to pay on behalf of the client a liability that the client owes to the financial adviser.

Issue 2

Summary

The supplies made by the financial advisers, for which the ASF is paid by X Ltd, are reduced credit acquisitions for the purposes of Division 70 of the GST Act.

Detailed reasoning

The acquisition of services from financial advisers relates to making input taxed financial supplies. Therefore, the acquisition of these services does not have a creditable purpose.

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 (RCA), can give rise to a reduced input tax credit. The percentage of the reduced input tax credit is 75%. Subregulation 70-5.02(2) of the GST Regulations provides a table of 31 items. The acquisition of something that is covered by an item in this table will be a reduced credit acquisition and you will be entitled to a reduced input tax credit accordingly.

Item 23

Under the heading of funds management services and the sub-heading of investment portfolio management functions, item 23(a) in the table in subregulation 70-5.02(2) of the GST Regulations (item 23(a)) lists as an RCA the management of a client's asset portfolio.

Goods and Services Tax Ruling GSTR 2004/1 Goods and Services Tax: reduced credit acquisitions explains at paragraph 483 that the scope of item 23(a) is determined by the meaning given to the expressions management and asset portfolio and the overall context of the item.

In this context, paragraph 484 and 485 of GSTR 2004/1 explain that:

• 'management' refers both to the act or manner of managing and to the person or persons managing an institutions business, etc. Also the derivative 'managing' implies the existence of control or authority over the thing managed.

• 'asset portfolio' relates to the composition (into particular classes or sectors within a particular class) of physical and intangible resources owned by a particular entity and is synonymous with the term 'investment portfolio'

Consequently, item 23(a) involves the ongoing services of professional management of an entity's investment portfolio to maximise return and is characterised by the control exercised by the supplying entity over the asset portfolio in carrying out its obligations. By itself, it may be conceded the mere provision of advice to be acted upon by a client is not covered by item 23(a).

The nature of the financial services products offered by X Ltd is that the client has control over where their contributions are invested in order to generate and maximise their investment. That is, X Ltd provides the client with the means to efficiently and effectively make those investment decisions according to whatever strategy the client has developed.

X Ltd do not directly employ a fund manager. This role is effectively being performed by the client acting through their financial adviser in accordance with the Guide.

Where a client becomes a member on this basis, the financial adviser becomes responsible for the implementation and management of the client's investment strategy through the use of the software product. The financial adviser is effectively engaging in the management of the client's asset portfolio, as evidenced by the client's agreement with X Ltd for an ASF to be deducted from their account and paid by X Ltd to the financial advisers.

Accordingly, the Commissioner considers that the acquisition of 'adviser services' by X Ltd qualifies as a RCA under item 23(a) in the table in subregulation 70-5.02(2).

You also contend that X Ltd will be entitled to an RITC under item 23(e), to the extent that the financial adviser is specifically providing advice on the weighing of assets among different asset classes. The Commissioner accepts that X Ltd is making an RCA to the extent provided in the facts set out above.

Item 24

Item 24 in the table in subregulation 70-5.02(2) of the GST Regulations (item 24) provides an exhaustive list of Funds management services. Item 24 states:

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

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

(b) processing of applications, 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 inquiries 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.

Paragraph 541 of GSTR 2004/1 explains that the 'construction of Item 24 permits discrete acquisitions mentioned in items 24(a) to 24(h) to be reduced credit acquisitions. However, an entity usually acquires a number of the listed functions as part of a global administrative service'.

GSTR 2004/1 then goes on to state that it is 'not necessary to apportion the consideration according to its component functions, as they are reduced credit acquisitions' at paragraph 542.

A further point is made at paragraph 543 which states that 'if the administrative service includes elements not listed in item 24, these elements should be examined to determine whether they are ancillary, incidental or integral to one of the listed functions'.

In your submission, you have only sought confirmation in relation to item 24(d)&(e). As the relevant services are of the administrative functions listed in item 24, X Ltd will be entitled to a reduced input tax credit for the acquisition of administration services from the financial advisers under at item 24 in the table in subregulation 70.5.02(2) of the GST regulations.

ATO view documents

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)

Goods and Services Tax Ruling GSTR 2004/1 Goods and Services Tax: reduced credit acquisitions (GSTR 2004/1)