Edited version of your written advice

Authorisation Number: 1013042733650

Date of advice: 26 August 2016

Ruling

Subject: GST and 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 when it acquires the Services from Entity B?

Answer

Yes, Entity A is making an RCA from Entity B to the extent that the Services involve the processing of cheques. Such services performed by Entity B qualify as an RCA under item 7(d) of the table in sub-regulation 70-05.02(2) of the A New Tax System (Goods and Services Tax) Regulations.

Relevant facts and circumstances

Entity A encompasses retail and business banking operations, including the operation of bank branches across the Indirect Tax Zone.

Entity A exceeds the financial acquisition threshold (FAT) at all relevant times.

Part of Entity A's business operations involves administering the processing of cheque payments and receipts, loan account applications (processing of which is outsourced to a third party), credit cards and other internal documents such as reports and memos as part of their business as a financial institution.

Entity A has entered into an Agreement with Entity B to acquire specified services (the Services). A copy of the Agreements has been provided as part of this ruling request.

Pursuant to the terms of the Agreement Entity A will provide consideration for the Services, being the 'Charges' or 'transportation services fee'.

All Services referred to in this ruling request are connected with the Indirect Tax Zone.

The Services acquired by Entity A are required for a number of functions. Relevantly, the collection of cheques/vouchers and mail bags from Entity A's branches, either on a daily or more frequent basis, are necessary to ensure that documents are delivered to their intended recipients in a timeframe that enables Entity A to meet its legal obligations and commercial requirements.

The Cheques Act 1986 regulates the 'presentment' of cheques. This can be effected directly between the institution receiving the cheque and the drawee, or 'at a place that is a designated exhibition place'. In practice, this means that presentment can take place via a central organisation.

There are two types of transportation 'runs' acquired by Entity A from Entity B. These are the 'fixed runs' and the 'ad hoc runs'.

Fixed runs relate to the scheduled morning and afternoon transportation of documents between bank branches, head office and third party locations, such as a designated exhibition place for the purposes of the Cheques Act 1986 (Cth), third party loan processing centres, and third party archiving suppliers. The ad hoc runs are those outside the scope of the fixed run.

Relevant legislative provisions

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

Reasons for decision

Section 70-5 of the GST Act provides that certain specified kinds of acquisitions, known as reduced credit acquisitions (RCA's), that relate to making financial supplies give rise to a reduced input tax credit.

The table in subregulation 70-5.02(2) of the GST Regulations provides a list of RCAs. Item 7(d) in the table in subregulation 70-5.02(2) of the GST Regulations (item 7(d)) establishes that the processing, settling, clearing and switching of cheque transactions qualifies as an RCA.

Paragraph 257 in Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) explains that the scope of item 7 depends on the meaning attributed to the expressions processing, settling, clearing, and switching the transactions described in items 7(a) to 7(j).

Furthermore, paragraph 258 of GSTR 2004/1 goes on to explain that item 7 deals with acquisitions of specialised services that facilitate the transfer of funds within a particular payment system, and that the acquirer of such services will usually be an entity (being a participant in a payment system) that offers payment services to its customers. However, paragraph 259 of GSTR 2004/1 clarifies that the acquisition of the means by which processing, settling, clearing or switching occurs is not an RCA covered by item 7 (citing the example of the purchase of a software license by a credit union being beyond the scope of item 7 where it merely provides the credit union with the means to process direct entry transactions).

Finally, paragraph 261 of GSTR 2004/1 confirms that, in this context, the expression processing means a systematic series of actions directed to some end, and that 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.

Being a participant in a payment system for customers who elect to take advantage of their cheque facility services the Services amount to an acquisition of specialised services that facilitate the transfer of funds within the cheque payment system (as referred to in paragraph 258 of GSTR 2004/1). That is, to the extent that the Services relate to cheque transactions, the activities performed by Entity B represent a systematic series of actions that assist the efficient movement of funds within the cheque payment system (as referred to in paragraph 261 of GSTR 2004/1).

Accordingly the Commissioner accepts that the Services, insofar as they deal with cheque transactions, represent a systematic series of actions that assist the efficient movement of funds within the cheque payment system (as referred to in paragraph 261 of GSTR 2004/1). Therefore, to that extent, the Commissioner considers that Entity A is making an RCA from Entity B under item 7(d) in the table in subregulation 70-5.02(2) of the GST Regulations as the activities performed by Entity A amount to a service of processing cheque transactions.