Edited version of your written advice

Authorisation Number: 1013084719183

Date of advice: 6 September 2016

Ruling

Subject: Apportionment method for RITCs

Question 1

Is the proposed apportionment methodology fair and reasonable?

Answer

Yes, the proposed apportionment methodology is considered fair and reasonable.

Relevant facts and circumstances

• Each of the Funds is registered for GST and is a 'recognised trust scheme' for GST purposes on the basis that:

• the Trustee/Responsible Entity of each Fund in its corporate capacity makes taxable supplies to each Fund;

• Each Fund is a managed investment scheme and is not a securitisation entity or a mortgage scheme; and

• For the purposes of this ruling, the members and investors who hold interests in the Funds are assumed to be all Australian residents. While there may be a small number of non-Australian resident members/investors in some or all Funds, the numbers are considered immaterial and therefore you have not sought to reflect this in the GST apportionment method proposed.

• The Funds make supplies, consisting only of input taxed financial supplies, of investing in Australian trusts and supplying interests in the Funds to members/investors.

• The Funds exceed the Financial Acquisitions Threshold (FAT).

• Each Fund is not, and has not at this point been, a member of a GST group.

• The trustee is registered for GST.

• The trustee, in its corporate capacity, provides services to each of the Funds. The nature of the services provided to each Fund does not materially differ amongst the Funds. The services provided by the trustee to the Funds include, but are not limited to, providing investment portfolio management services and asset allocation services (e.g. determining how the Funds will invest their funds) and fund administration services as well as performing governance functions in the Trustee/RE role (Trustee/RE Services).

• The trustee periodically charges a single consolidated fee to each Fund, being a Trustee fee to the investment funds, as consideration for all the services provided to the Funds ("Single Trustee/RE Fee").

• The Trust Deed between each Fund and the trustee states that the Trustee shall manage and administer the Fund (including the Assets and Liabilities of each Fund) with full power to delegate. Further, the Trust deed also provides that the trustee is entitled to be remunerated for managing and administering the relevant Fund and that the trustee fee is calculated based on a percentage of the "Net Asset Value of the Fund" (a copy of a sample Trust Deed between a Fund and the trustee was included in your application for private ruling).

• The agreements with the Funds provide that the maximum single Trustee/RE Fee that the trustee is entitled to recover from the Funds is based on a percentage of the amount invested in the relevant Fund. This fee limit is stated on an inclusive of GST and net of any RITC that the Fund is entitled to basis.

• In providing services to the Funds, The trustee acquires certain fund administration services from a third party which the trustee pays for directly.

Costs incurred by the trustee

• For management accounting purposes, the trustee allocates its total operating costs to its Regional Offices and to each of its Head Office support functions.

• The proposed GST apportionment method utilises a 'cost base method'. For these purposes, only expenses that relate to the trustee providing services to the Funds are included.

Advisor services

• Investment management and 'advice' services are provided to the Funds' investors and members by financial planners who are all employees of the trustee (i.e. the trustee does not engage third party financial planners to provide services).

• Under the arrangement between the trustee and the Funds, the trustee' employees provide various 'advisor' services to investors and members. The advice services relate solely to the member/investor's investment in the Funds, i.e. they do not advise on any matters apart from investment in the Funds. The nature of the services provided to members/investors include asset allocation advice, investment strategy, management of individual portfolios and advice on performance of investments.

• The Advisor Services provided by the trustee to each Fund are provided by the trustee in its corporate capacity, i.e. not in the trustee' capacity as Trustee/RE of the Funds.

• The Funds are charged the fees for the Advisor Services through the Single RE/Trustee Fee arrangement. Individual members/investors are not charged directly for the Advisor Services.

• Where a member elects to receive advice only (separate from any investment that the member/investor may make), an "Advice only Fee" is charged directly to the member/investor. These services and the costs that relate to providing these services are also excluded from the proposed GST apportionment model.

Proposed GST apportionment methodology

In summary:

• A number of different categories/types of services have been identified, based on the nature of activities undertaken by the trustee, as representing the total services supplied by the trustee for which it charges the Trustee/RE fees.

• The trustee' cost allocations for the purposes of its management accounts for the financial year (i.e. reflecting the trustee' costs of providing each category of service to the Funds) have been used as a basis to apportion/weight the single fee that the trustee' charges to each type of service that the trustee supplies to the Funds.

• A 75% RITC rate or 55% RITC rate is assigned to each category/type of service supplied by the trustee.

• The trustee has taken a conservative approach in 'weighting' the value of each category of services. In this regard, a number of costs that arguably relate to providing services that qualify for the 75% RITC rate (or at least equally relate to providing these services) have been treated in the model as overheads. This approach results in a lower 'weighting' for the component of the trustee' services in the model that are treated as giving rise to a 75% RITC, than would otherwise be applicable.

• Costs that relate to services provided through the Regional Offices (other than a small allocation of costs to services that give rise to a RITC rate of 55% under Step 1 below) are split for weighting purposes in the model between services that give rise to the RITC rate of 75% and overheads based on a ratio of the staff costs of client facing financial planners (75%) and support staff/non-client facing staff (overheads) in these functions.

• The cost allocation 'weighting' described above is multiplied by the relevant RITC rate applicable to each type of service. These calculations produce a 'blended' RITC rate for the 2015 financial year of 69.89%.

The above calculations are described in further detail as follows:

Step 1

Costs incurred by the trustee that relate to Marketing, Audit, Tax, Trustee/RE services account for the weighting applicable to the 55% components of the trustee' services. The costs that directly relate to these services are separately identified based on allocations for management accounting purposes and is used to determine the weighting that applies to these services in the calculation.

Step 2

Costs incurred by the trustee that relate to Fund Administration, Investment Management and Advisor Services account for the weighting applicable to the 75% components of the trustee' services. The costs that directly relate to these services are separately identified based on allocations for management accounting purposes and is used to determine the weighting that applies to these services in the calculation.

Step 3

Determine a 'blended' RITC rate by multiplying 55% by the cost weighting in Step 1 and multiplying 75% by the cost weighting in Step 2. The sum of these two produces the 'blended' RITC rate.

The 'blended' RITC rate is applied to the Single Trustee/RE Fee charged by the trustee.

Alternate methods considered

Head count and floor space

The trustee' employees, with the exception of its financial planners, generally undertake activities that relate to more than one function. Further, there is no immediate link between the services the trustee supplies to the Funds and its staff numbers. On this basis, an apportionment based on head count was not considered reasonable or simple to apply. For similar reasons, an apportionment method based on floor areas was also not considered reasonable.

Additionally, Regional Offices are costed internally based on office size, whereas Head Office costs are function based. The trustee believe the bulk of the services supplied by the Regional Offices relate to investment management and advisor services and fund administration services. Therefore, the use of a staff cost ratio to split the weighting of the trustee' Regional Offices costs to services that give rise to the RITC rate of 75% (other than a small allocation of costs to services that give rise to a RITC rate of 55% under Step 1 above) and also to overheads is a conservative approach. The approach also has the advantage of reducing compliance costs associated with other methods that were considered.

Employee time

The trustee' employees do not currently record their time spent on activities or tasks. Further, there is no immediate link between the services the trustee supplies to the Funds and its staff numbers. As such, an apportionment methodology based on employee timesheets was not considered to be feasible or reasonable.

Other

Apportionment methodologies based on other factors such as transaction count and profit would not be reasonable in the trustee' circumstances on the basis that there is insufficient information and no direct link to an entitlement to claim RITCs.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Div 70.

Reasons for decision

Regulation 70-5.02 of the GST Regulations includes a list of RCAs that give rise to an entitlement to an RITC. Item 32 of the table in sub-regulation 70-5.02(2) of the GST Regulations states:

Supplies acquired by a recognised trust scheme, to the extent that:

(a) the supplies are acquired on or after 1 July 2012; and

(b) the supplies are not:

(i) a supply by way of sale of goods or supply of real property made by:

(A) selling a freehold interest in land; or

(B) selling a stratum unit; or

(C) granting or selling a long-term lease; or

(ii) a brokerage service covered by item 9 or 21; or

(iii) a service covered by paragraph (a), (b) or (e) of item 23; or

(iv) a service covered by paragraph (a), (b), (c), (d), (e), (f), (g) or (i) of item 24; or

(v) a custodial service covered by item 29; or

(vi) a service covered by item 30; or

(vii) a service covered by item 33.

It is accepted that each of the Funds is registered for GST and is a 'recognised trust scheme' for GST purposes and that the trustee (i.e. the Trustee/Responsible Entity of each Fund) in its corporate capacity makes taxable supplies to each Fund.

The Trustee/RE Services acquired by the Funds consist of several identifiable parts which can be categorised as follows:

• Funds administration services;

• Funds investment management services;

• Trustee/RE services;

• Other services (including arranging audit, tax, and marketing (and other activities where professional services advice is obtained such as Legal); and

• Advisor Services.

The detail of each component of the acquisition is described in the facts set out above.

The consideration for the Funds' acquisition of Trustee/RE Services from the trustee is a single fee. Given that the Trustee/RE Services consist of the services listed above, it is appropriate for the Funds to apportion the Trustee/RE fee to determine the extent of their entitlement to RITCs.

Paragraph 70-5.03(b) of the GST Regulations provides that the percentage credit reduction for a reduced credit acquisition covered by item 32 and one or more other items of the table in subregulation 70-5.02(2) is:

(i) to the extent that the acquisition is covered by item 32 - 55%; and

(ii) to the extent that the acquisition is not covered by item 32 - 75%.

In calculating the reduced input tax credit available for each part of the acquisition made by each fund from the trustee, the consideration for the acquisition (that is, the single fee) needs to be apportioned to the different parts according to their respective value. This should be done on a fair and reasonable basis.

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 (GSTR 2001/8) provides the Commissioner view on the apportionment of mixed supplies and at paragraph 91 to 95 states:

Taxation Office view

91. We are of the view that the GST Act inherently requires that the parts of a mixed supply be identified and that the consideration be apportioned where a sufficient nexus between the supply and its consideration is established. This approach gives practical effect to the intention of the GST Act and is consistent with a common-sense and equitable outcome.

Reasonable methods of apportionment

92. Where, as in the case of supplies covered by section 9-75, there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical common-sense.

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.

The methodology set out in the facts is based upon the cost allocation information available to the trustee business. Where possible, the weightings between the different components of the supplies made to the funds have been allocated directly.

There appears to be nothing within the methodology that is distortive and there is no evidence that another methodology would better reflect the extent of entitlement to RITCs without considerable compliance cost.

Conclusion

Where the funds listed in Table A acquire services from the trustee for consideration which includes a single Management Fee, the single fee is:

(i) consideration for a supply of services by the trustee to the funds; and

(ii) fairly and reasonably apportioned between those services which are covered by Item 32 which will attract a 55% reduced input tax credit and those services which are covered by paragraphs (32)(b) (ii) - (vii) in item 32 (which will attract a 75% reduced input tax credit) by using the proposed apportionment methodology.