Edited version of your written advice

Authorisation Number: 1051191548852

Date of advice: 16 February 2017

Ruling

Subject: GST and supply of an interest to a derivative to a non-resident

Question 1

Are you making GST-free supplies under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you enter into a hedge contract with the non-resident company at or around the same time you issue your Financial Products to your clients?

Advice

Yes, you are making GST-free supplies under item 4 in the table in subsection 38-190(1) of the GST Act when you enter into a hedge contract with the non-resident company at or around the same time you issue your Financial Products to your clients.

Relevant facts

You are an Australian company and registered for the goods and services tax (GST).

You are an Australian Investment Firm that facilitates mainly in over-the-counter currency derivatives (Forex) and contract for difference (CFD's) transactions with your clients as principal by receiving and transmitting clients' orders and wishes to arrange for the execution of your client orders as well as for hedging clients' orders with the non-resident Liquidity Provider (non-resident).

You set up trading accounts for clients (Australians and non-residents) to make trades through the platform of the non-resident. All financial products are traded on the non-resident terminal and are over-the-counter-derivative financial products issued by you and are not exchange-traded financial products. You operate the platform under a licence from the non-resident who supplies and maintains the platform.

Each financial product which is agreed and entered into with you will be entered into by you as principal. You make a market in your products since you regularly state the price at which you are prepared to deal with a client as principal.

You make hedge contracts at or around the same time as you issue the financial product to your client by placing a corresponding hedge contract with your Hedge Counterparty, being the non-resident. The Hedge Counterparty may hedge directly into the market or it may make a market itself in its hedge contract made with you.

The non-resident is a company incorporated outside Australia and it has entered into an Agreement with you. Under the Agreement you will receive compensation in respect of all trades that were hedged with the non-resident via the Main Account from the non-resident and the non-resident grants to you a non-exclusive transferable royalty free licence to use its platform for the duration of this Agreement. At the same time you enter into an obligation to make a payment to the non-resident upon request from the non-resident to meet the margin requirements.

You are not an agent of the non-resident. The non-resident does not carry on an enterprise in Australia. The non-resident is not required to be registered for GST and does not have any representative or third party in Australia that is involved with the supply you make to it.

Your supply is only made to the non-resident. The non-resident does not directly reimburse you for your cost of accommodation and/or staff. The non-resident does not exercise any control over the running of your business. You do not reserve part of your staff or accommodation for the conducting of your business to the non-resident. You do not display the name of the non-resident at your premises or on stationery. You do not make contracts with clients or other third parties in the name of the non-resident in such a manner to bind the non-resident.

Relevant legislative provisions

A New Tax system (Goods and Services Tax) Act 1999 section 9-5

A New Tax system (Goods and Services Tax) Act 1999 subsection 9-30(3)

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

A New Tax system (Goods and Services Tax) Act 1999 section 38-190

A New Tax System (Goods and Services Tax) Regulations1999 Regulation 40-5.09

Reasons for decision

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Detailed reasoning

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

(a) the supply is made for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(c) the supply is connected with Australia; and

(d) the entity is registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the facts given, you enter into a hedge contract with the non-resident at the time you issue the financial products to your clients. The traded financial products are over the counter derivative financial products issued by you and are not exchange traded financial products. The hedge contract gives you a right to receive a payment under a derivative from the non-resident and at the same time you enter into an obligation to make a payment to the non-resident upon request from the non-resident to meet the margin requirements. In this instance, we consider you are making a supply of interest in derivatives to the non-resident under the hedge contract.

From the facts received, your supply under the hedge contract satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) you make the supply for consideration;

b) the supply is made in the course of an enterprise (business) that you carry on;

c) the supply is connected with Australia as you make the supply through a business that you carry on in Australia; and

d) you are registered for GST.

However your supply is not a taxable supply to the extent that it is input taxed or GST-free.

Input taxed supply

A financial supply is input taxed under subsection 40-5(1) of the GST Act.

Under subsection 40-5(2) of the GST Act a financial supply is defined to have the meaning of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Regulations 40-5.09 of the GST Regulations sets out supplies that are financial supplies. A supply is a financial supply if there is the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or (4), and the other requirements in paragraphs 40-5.09(1)(a) and (b) are satisfied.

Subregulation 40-5.09(1) of the GST Regulations states:

1) The provision, acquisition or disposal of an interest mentioned in subregulations (3) or (4) is a financial supply if:

a) The provision, acquisition or disposal is:

i. For consideration; and

ii. In the course or furtherance of an enterprise; and

iii. Connected with the indirect tax zone; and

b) The supplier is:

i. Registered or required to be registered; and

ii. A financial supply provider in relation to supply of the interest.

Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (item 11) mentions an interest in or under a derivative.

Part 9 of Schedule 7 of the GST Regulations (part 9) provides examples for item 11. Included in the examples listed in part 9 are 'commodity derivatives that involve no option, right or obligation to delivery of the commodity, such as electricity derivatives' and 'Cash settlement of a derivative over the counter or on the exchange rather than the physical delivery of the underlying taxable assets'.

Under the hedge contract no commodity will be delivered and cash settlement is to occur. Your supply of interest in a derivative to the non-resident therefore falls within the ambit of item 11.

Further from the facts given, under the hedge contract with the non-resident you have made a financial supply under subregulation 40-5.09(1) of the GST Regulations as:

● you make the supply for consideration and in the course of a business that you carry on;

● the supply is connected with Australia as it is made through a business that you carry on in Australia;

● you are registered for GST; and

● you are the creator of the interest in a derivative under item 11 under the hedge contract and therefore satisfy the definition of a financial supply provider under regulation 40-5.06 of the GST Regulations.

Accordingly, you have made an input taxed supply under subsection 40-5(1) of the GST Act when you supply an interest in derivatives under the hedge contract with the non-resident.

However, since the hedge contract is with a non-resident it is relevant to consider whether the supply is GST-free under subsection 38-190(1) of the GST Act.

GST-free supply

Paragraph 14 in Goods and Services Tax Determination GSTD 2015/1 provides that non-deliverable cash settled derivatives (for example, futures contracts over share price indexes or interest rates and listed contracts for difference) are an exchange of rights and obligations and any dealing in this financial product is considered to be in rights.

Further under category 2 in Goods and Services Tax Ruling GSTR 2003/8, supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights is a 'supply that is made in relation to rights'.

For category 2 in GSTR 2003/8 paragraphs 27E and 27F in GSTR 2003/8 state:

Category 2 - Supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights

27E. A supply of a thing which comprises a bundle of rights is a supply that is made in relation to rights for the purposes of item 4 if:

• the thing supplied derives its value exclusively, or almost exclusively, from those rights; and

• through the supply, the supplier either supplies the rights to the recipient or surrenders the rights.

27F. In order to fit within category 2, a supply of a thing need not be properly characterised as a supply of rights for GST purposes, nor must it be a supply under paragraph 9-10(2)(e). The supply must, however, encompass rights and the value of the supply must be in the rights. For this to occur, any tangible thing that passes between supplier and recipient which evidences the rights (such as a bank note) must, without those rights, be worthless or of incidental worth.

Accordingly, your supply of interest in derivatives is a supply that is made in relation to rights. Of relevance to your supply is item 4 in the table in subsection 38-190(1) of the GST Act (item 4).

Under item 4, a supply that is made in relation to rights is GT-free if

a) the rights are for use outside Australia; or

b) the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

From the facts given you satisfy paragraph (b) of item 4 as your supply of interest in derivatives is made to a non-resident who is located outside Australia when the supply of interest in derivatives is done.

However, the supply is not GST-free if subsection 38-190(2) or 38-190(2A) applies to the supply.

Subsection 38-190(2) of the GST Act

Subsection 38-190(2) of the GST Act provides that a supply covered by any of the items 1 to 5 in the table in subsection 38-190(1) of the GST Act is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

Subsection 38-190(2) of the GST Act is not applicable to your supply since under the hedge contract cash settlement occurs between you and the non-resident and there is no option, right or obligation to deliver the commodity.

Subsection 38-190(2A) of the GST Act

Under subsection 38-190(2A) of the GST Act  a supply covered by any items 2 to 4 in the table in subsection 38-190(1) of the GST Act is not GST-free if the acquisitions of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of residential real property situated in Australia

From the facts given subsection 38-190(2A) of the GST Act is not applicable to your supply.

Summary

Your supply to the non-resident is GST-free under item 4.

Supply that is both Input taxed and GST-free

As discussed above, your supply to the non-resident is an input taxed supply and GST-free supply

Subsection 9-30(3) of the GST Act refers to a supply that may be both GST-free and input taxed and provides to the extent that a supply would otherwise have the character of both, the supply is to that extent GST-free and not input taxed.

In this instance your supply under the hedge contract is GST-free under item 4 by virtue of subsection 9-30(3) of the GST Act.