Edited version of your written advice

Authorisation Number: 1012918882027

Date of advice: 31 March 2016

Ruling

Subject: Reduced input tax credits

Question

Is Entity A making a reduced credit acquisition (RCA) under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for their acquisition of services from Entity B?

Answer

Yes. Entity A makes a 'mixed acquisition' of services from Entity B under the Agreement. The 'mixed acquisition' consists of separately identifiable parts that qualify as RCAs under items 7(f), 27 and 29(a) and other separately identifiable parts that are not listed as RCAs.

Accordingly, to the extent that the fees payable by Entity A to Entity B is consideration for the acquisition of services covered by items 7(f), 27 and 29(a), Entity A will be entitled to a reduced input tax credit (RITC).

Relevant facts and circumstances

In early 20XX the Commissioner of Taxation (Commissioner) provided a private ruling response to Entity A. This private ruling response provided a decision on Entity A's entitlement to a reduced input tax credit under item 7 of the table in subregulation 70-5.02(2) of the GST Regulations (item 7) and item 29 of the table in subregulation 70-5.02(2) of the GST Regulations (item 29) for their acquisition of services from Entity B.

In late 20XX Entity A requested a private ruling regarding their entitlement to a reduced input tax credit under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations (item 27).

Following the request for a private ruling by Entity A the Commissioner is replacing the 20XX private ruling and the view as set out in this response applies.

Entity A is registered for GST.

Entity A is the operator of retail stores (the Stores).

Entity A has installed and operates on its Store premises ATM's.

The ATM Agreement

Entity A entered into an agreement (the Agreement) with Entity B. A copy of the Agreement remains in place and has been provided as part of this ruling request.

Entity A has made and continues to make acquisitions from Entity B pursuant to the terms of the Agreement.

The Agreement provides that Entity B have committed to supply Entity A with a comprehensive, managed network solution which will enable Entity A to make financial supplies of services through machines located in the Stores.

The Agreement provides that Entity A will appoint Entity B to provide managed services to Entity A, to enable Entity A to provide transaction services to cardholders.

Entity A make input taxed financial supplies of services to users through the machines located in Stores pursuant to subregulation 40-5.09(4A) of the GST Regulations.

At all relevant times since entering into the Agreement Entity A has exceeded the GST Financial Acquisitions Threshold.

The Services provided under the Agreement are:

• the supply, installation, connection, operation and removal of a machine and signage by Entity B in the Stores and

• the supply of managed services by Entity B to Entity A which include:

• Installing signage and displays;

• Regularly servicing the relevant machines;

• Keeping the machines in working order;

• Carrying out necessary repairs;

• Undertaking transaction reconciliation and balancing;

• Managing the network;

• Providing a help-desk;

• Investigating and resolving customer complaints.

• Providing cash funding services i.e. obtaining the cash to be loaded into machines;

• Providing cash replenishment services;

• Providing and installing necessary consumables;

• Performing transaction processing and transaction settlement services; and

• Fitting micro security cameras to machines.

As consideration for the services performed by Entity B, Entity A pays Entity B:

• "Fixed Fees", being the fees paid by Entity A per machine per month, as set out under the terms of the Agreement

• "Variable Fees", being the fees payable by Entity A per transaction, as set out in the terms of the Agreement.

Pursuant to the terms of the Agreement, the fees payable by Entity A (i.e. the Fixed Fees and the Variable Fees are deducted from the Transaction Fees that Entity B collects (e.g. from users) and remits to Entity A on a monthly basis.

The expression "Transaction Fees" is equivalent to "Transaction Charges". The expression "Transaction Charges" means the fees paid by cardholders for conducting transactions as set out under the terms of the Agreement.

Entity B invoices the Fixed Fees and the Variable Fees to Entity A on a monthly basis. The amounts invoiced by Entity B are treated as subject to GST.

Relevant legislative provisions

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999

Paragraph 11-15(2)(a) of the A New Tax System (Goods and Services Tax) Act 1999

Division 70 of the A New Tax System (Goods and Services Tax) Act 1999

Subregulation 40-5.09(4A) of the A New Tax System (Goods and Services Tax) Regulations

Regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations

Reasons for decision

Division 11 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides the basic rules for claiming an input tax credit. Section 11-20 of the GST Act states that an entity is entitled to an input tax credit for any creditable acquisition that it makes. An entity makes a creditable acquisition where the requirements under section 11-5 of the GST Act are satisfied. For an acquisition to be a creditable acquisition, amongst other things, it must be made solely or partly for a creditable purpose.

As a general rule, section 11-15 of the GST Act establishes that an entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. However, paragraph 11-15(2)(a) of the GST Act provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Under section 40-5 of the GST Act, a financial supply (having the meaning given by the GST Regulations) is input taxed and no GST is payable on the supply. Pursuant to paragraph 11-15(2)(a) of the GST Act, to the extent that an acquisition relates to the making of an input taxed financial supply it is not made for a creditable purpose and does not give rise to an input tax credit entitlement.

Subregulation 40-5.09(4A) of the GST Regulations provides that a supply by an entity for a fee of not more than $1,000 is a financial supply if it is a supply of one or more of the following services:

(a) a withdrawal from an account;

(b) a deposit into an account;

(c) an electronic transfer from an account;

(d) advice on the balance of an account.

Entity A has advised that they provide one or more of the above services for a fee of not more than $1,000 to ATM cardholders in respect of ATMs located in the Stores. Therefore, pursuant to subsection 40-5(1) of the GST Act, Entity A makes an input taxed financial supply to cardholders.

Accordingly when Entity A makes an acquisition of services supplied by Entity B under the terms of Agreement, the acquisition is not made for a creditable purpose as it wholly relates to Entity A making an input taxed financial supply of services to cardholders. Consequently, Entity A is not entitled to an input tax credit for these acquisitions under section 11-20 of the GST Act.

However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits (RITCs). Section 70-5 of the GST Act refers to these acquisitions and states:

(1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions.

(2) …

Regulation 70-5.02 of the GST Regulations refers to acquisitions that attract RITCs and states:

(1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit.

(2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions.

Relevantly, the list of acquisitions that qualify as RCAs includes the following items:

7 Processing, settling, clearing and switching transaction of the following kinds

…

(f) ATM

…

27 Supplies for which financial supply facilitators are paid commission by financial supply providers

…

29 Trustee and custodial services (except safe custody of money, documents and other things), including

(a) transfer of cash without purchase, sale or transfer of assets, excluding cash delivery and collection from branches of Australian ADIs;…

Mixed acquisition or composite acquisition

Where something that is listed as a RCA is acquired together with something that is not listed as a RCA, the parts will need to be treated separately if the acquisition is characterised as a 'mixed acquisition'. In such a case, only those parts listed in the table in regulation 70-5.02 of the GST Regulations will be eligible as a RCA.

Where the acquisition is characterised as a 'composite acquisition', there will only be a RCA if the dominant part is listed as a RCA.

The Commissioner provides guidance on determining whether an acquisition is mixed or composite in paragraphs 228 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). In particular paragraphs 232 and 233 of GSTR 2002/2 state that:

232. A mixed acquisition contains separately identifiable parts where one or more of the parts is a reduced credit acquisition and one or more of the parts is not a reduced credit acquisition. In a mixed acquisition, no part is dominant, and each part has a separate identity.

233. On the other hand, a composite acquisition is an acquisition of one dominant part and includes other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the acquisition. Where an acquisition is a composite acquisition, then it is essentially the acquisition of a single thing, and will be either wholly a reduced credit acquisition or wholly not a reduced credit acquisition.

Further, in determining whether you are acquiring a mixed or composite acquisition, paragraph 234 of GSTR 2002/2 states that: 

234. In working out whether you are acquiring a mixed or composite acquisition, the key question 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. This is discussed in paragraphs 235 to 256.

Consistent with paragraph 250 of GSTR 2002/2, it is the Commissioner's view 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. However, paragraph 250 goes on to mention that, having regard to all the circumstances, the 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 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.

Having regard to the facts of the matter at hand, it is firstly necessary to determine whether any of the services supplied by Entity B under the terms of the Agreement fall within the scope of one or more of the RCA items listed in the table in subregulation 70-5.02(2) of the GST Regulations.

In this respect, the Agreement defines the term "Services" and contemplates what is being supplied in a number or relevant clauses.

Based on this analysis of the ATM Agreement, it is relevant to consider whether the services supplied by Entity B fall within the scope of items 7(f), 27 or 29(a) of the table to subregulation 70-5.02(2) of the GST Regulations.

Item 7

Item 7 in the table to subregulation 70-5.02(2) of the GST Regulations (item 7) provides that processing, settling, clearing and switching transaction of one or more of the transactions in items 7(a) to 7(j) are RCAs. Specifically item 7(f) deals with processing, settling, clearing and switching transaction of ATMs.

In relation to the scope of item 7, GSTR 2004/1 provides the Commissioner's view regarding whether an acquisition is a RCA under item 7. In particular paragraph 258 and 259 states:

258. Item 7 deals with the acquisition of specialised services that facilitate the transfer of funds within a particular payment system. The acquirer of such services is usually an entity that offers payment services to its customers. The means by which a relevant service is performed has no effect on whether the acquisition is a reduced credit acquisition under item 7.

259. However, the acquisition of the means by which processing, settling, clearing or switching occurs is not a reduced credit acquisition under item 7. For example, the purchase of a software licence (and related support services) that provides a credit union the means to process direct entry transactions is beyond the scope of item 7.

In relation to processing paragraph 261 to 263 state:

261. In this context, the expression processing means a systematic series of actions directed to some end. Item 7 contemplates acquisitions that involve a systematic series of actions that assist the efficient movement of transactions listed in items 7(a) to 7(j) within a payment system.

Example 33 - processing services

262. FareCharge pays Dixieland Cabs a fee for sorting, collating and batching Farecharge charge-card vouchers that are collected from taxi companies that participate in the Dixieland network. The taxi companies receive the vouchers as payment for taxi services. Farecharge requires Dixieland to provide these services so that its clearing and settlement functions can operate efficiently.

263. In this instance, Farecharge has made an acquisition of a service of processing of charge card transactions, which is a reduced credit acquisition under item 7.

Further, in respect of switching paragraph 273 of GSTR 2004/1 states:

Switching

273. For the purposes of item 7, the expression switching takes its meaning from the context of a payment system and refers to the routing of payment transactions to a participant in an open loop payment system via a facility. While a facility in this context includes the manual routing of transactions, it is more likely to involve the performance of this task through automated means. Switching, in this context, also includes incidences where authorisations are sought before a transaction is approved and the authorisation request is switched to the relevant participant in a payment system.

With particular reference to the activities described in the Agreement, and consistent with the guidance provided in paragraphs 261 and 273 of GSTR 2004/1, the Commissioner considers that part of the services supplied by Entity B involves the processing and settling of transactions for Entity A. Accordingly, to this extent, the service acquired from Entity B qualifies as an RCA under item 7(f).

Item 27

Item 27 in the table to subregulation 70-5.02(2) of the GST Regulations (item 27) provides that supplies for which financial supply facilitators are paid commission by financial supply providers are a RCA.

Financial supply provider and Financial supply facilitator

Paragraphs 651A and 651B of Goods and Services Tax GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) explains that when considering the application of item 27 to an acquisition in relation to a financial supply that does not involve the supply of an interest, the terms 'financial supply facilitator' and 'financial supply provider' have their ordinary meanings.

With regard to the ordinary meaning of these terms, the Commissioner accepts that, in relation to an ATM service, Entity A is the 'financial supply provider' and Entity B is a 'financial supply facilitator' for the purposes of item 27. Relevantly, we consider Entity B to be a financial supply facilitator as there is a sufficient connection between the performance of Entity B's obligations owed to Entity A under the terms of the agreement and Entity A providing services to cardholders.

However, whether the entirety of what Entity B provides to Entity A qualifies as an RCA covered by item 27 is dependent upon whether the remuneration provided by Entity A falls within the meaning of the term 'commission' as used in item 27

Commission

At paragraph 651 of GSTR 2004/1, the Commissioner explains that the application of item 27 is confined to acquisitions by a financial supply provider that relate to a particular transaction for which they pay commission to a financial supply facilitator. The term 'commission' is not defined in the GST Act or GST Regulations.

In view of this, the Commissioner, at paragraph 652, defines the term 'commission' as a:

'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 Commissioner then goes on to mention at paragraph 653 that:

653. While the term commission may include corpus commission, income commission, trailing commission, and brokerage, not all of these are necessarily payments to a financial supply facilitator. Other fees, including those calculated on the value of work done, rather than a per-transaction or percentage of value based calculation, and retainers, are not commissions.

With regards to the facts, Entity B is remunerated for the performance of the obligations owed to Entity A under the terms of Agreement. In particular, Entity A is made liable to pay either a 'Fixed Fee' or 'Variable Fee', depending on the activities performed by Entity B.

Entity A submits that both the 'Fixed Fees' and 'Variable Fees' paid to Entity B fall within the meaning of 'commission' because the key determining factor as to whether a payment qualifies as a commission is whether or not the payment is made to an entity acting in a role similar to an ''agent'. Further Entity A submits that it is the presence of an agency or a quasi-agency relationship which causes a payment to qualify as a commission. Therefore, where such a relationship exists, a payment for services rendered pursuant to that relationship should be regarded as a commission. Lastly, Entity A submits that the 'Fixed Fees' are akin to a 'trailing commission', particularly given Entity A's opinion that Entity B is acting in an "agent-like" capacity.

In determining whether the payment of the fees in question is in the nature of a 'commission', regard needs to be had to the true character of the transaction.

In this circumstance the Commissioner accepts that the Variable Fee paid by Entity A to Entity b falls within the meaning of the term 'commission' as used in the context of item 27. This is because the method of calculation demonstrates a link between the payment to Entity B and the supply of services by Entity A to the cardholder.

However, the same cannot be said for the payment of the Fixed Fees. Relevantly, the Fixed Fees compensate Entity B for the ongoing use of the machines and the performance of related activities, which are independent of the supply of services by Entity A to cardholders. Therefore Entity A does not pay a 'commission' for the service provided by Entity B as a financial supply facilitator to the extent of the 'Fixed Fees' paid.

On this basis, Entity A only makes a RCA under item 27 to the extent that the service supplied by Entity B under the terms of the Agreement is remunerated by paying the Variable Fees.

Item 29

Item 29 in the table in subregulation 70-5.02(2) of the GST Regulations (item 29) under the heading 'trustee and custodial services', deals with services provided by trustees, custodians and single responsible entities.

At paragraphs 687 and 688 of GSTR 2004/1 the Commissioner discusses the scope of item 29(a) by stating that:

687. Cash means money in a tangible form, banknotes and coin, but excludes cash equivalents such as cheques, orders, etc. The transfer of cash referred to in item 29(a) is the transfer of cash in the physical sense. Where there is an element of safe custody in an acquisition of the transfer of cash by a trustee or custodial services provider, the acquisition of that element will not be a reduced credit acquisition. This is because safe custody is specifically excluded from being a reduced credit acquisition under item 29.

688. An acquisition of a secure cash transport service is an acquisition of a custodial service under item 29 even though such an acquisition would not normally be provided by a trustee or a custodian. The words without purchase, sale or transfer of assets are included to restrict the acquisition of such secure transport services to those cases where the service is provided for a fee, rather than where the cash is actually purchased by the secure cash transport service.

It is evident from the terms of Agreement that Entity B is placed under obligation to Entity A to ensure that the machines are operational such that Entity A is able to provide services to cardholders. Consequently where the performance of those obligations involves Entity B (or its subcontractor) undertaking cash replenishment activities in respect of machines located in the premises of Entity A, that part of the service supplied by Entity B to Entity A will qualify as an RCA under item 29(a).

However, for the avoidance of doubt, the Commissioner does not consider that the scope of item 29(a) extends to the performance of activities necessary to source and fund the cash to be placed into a machine. Accordingly, the payment of any cash funding or cash sourcing fees in accordance with the terms of the Agreement should not be treated as consideration given for that part of the service supplied by Entity B that qualifies as an RCA under item 29(a).

Conclusion

The Commissioner considers that in performance of its obligations owed under the terms of the Agreement (in particular those obligations covered by the meaning of the term 'Services' and by the further description of the 'Service' components), Entity B supplies Entity A with a service that contains parts that qualify as RCAs under items 7(f), 27 and 29(a) and parts that do not qualify as RCAs.

Further, the Commissioner considers that Entity A's acquisition from Entity B is properly characterised as a 'mixed acquisition' as the parts are regarded to be separately identifiable.

On this basis, the 'mixed acquisition' made by Entity A of the service supplied by Entity B consists of separately identifiable parts that qualify as RCA under items 7(f), 27 and 29(a) and other separately identifiable parts that are not listed as RCAs.

Accordingly, to the extent that the fees payable by Entity A to Entity B is consideration for the acquisition of those parts of the service covered by items 7(f), 27 and 29(a), Entity A will be entitled to a reduced input tax credit (RITC) amount equal to 75% of the GST so incurred.

Apportionment of Consideration

As a consequence of the conclusion that Entity A makes a 'mixed acquisition' of the service supplied by Entity B under the terms of the Agreement, Entity A will need to apportion the consideration it provides to Entity B to determine the amount of its RITC entitlement.. To this end, the Commissioner provides guidance on this topic in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts.