Edited version of your written advice

Authorisation Number: 1051233448984

Date of advice: 5 June 2017

Ruling

Subject: GST and contribution fee

Question 1

Is the issue of units to investors by the XYZ Limited in its capacity as the responsible entity for the JKL Fund (subsequently referred to as the Fund in this ruling) an input taxed supply in accordance with section 40-5 of the A New System (Goods and Services Tax) Act 1999 (GST Act) and item 10 in the table to subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

All further legislative references are to the GST Act unless specified otherwise.

Answer

Yes. The issue of units to investors by the Fund is an input taxed supply in accordance with section 40-5 and item 10 in the table to subregulation 40-5.09(3) of the GST Regulations?

Question 2

Does the Contribution Fee deducted from investment funds constitute consideration for an input taxed supply when it is received by XYZ Limited in its own corporate capacity (subsequently referred to as XYZ in this ruling) and is not subject to GST?

Answer

No. The Contribution Fee deducted from investment funds forms consideration for XYZ’s taxable supply of responsible entity (RE) services when the Contribution Fee is received by XYZ and is therefore subject to GST.

Relevant facts and circumstances

● This private ruling is sought by both XYZ and the Fund. Both XYZ and the Fund are agreeable to the receipt of a joint private ruling that will divulge information relating to their respective circumstances to one another.

The Fund

● The Fund is an unlisted public unit trust that operates as a managed investment scheme.

● The Fund is a property scheme that brings together investors for the purpose of investing in an overseas commercial property market.

● XYZ acts as the RE for the Fund in accordance with Part 5C.2 of the Corporations Act 2001 (Corporations Act).

● XYZ provides management and related services to the Fund for which it receives fees.

● Pursuant to the Corporations Act, an RE is entitled to be renumerated from scheme property provided that the Fund's constitution allows for such.

● The definition of ‘scheme property’ in the Corporations Act includes contributions of money etc. to the scheme.

● A product disclosure statement (PDS) is issued by the Fund from time to time to raise funds for further investment activities. Copies of the relevant PDS, supplementary PDS, and the Fund’s constitution (the Constitution) have been provided to the Tax Office.

● References to the RE in the Constitution, PDS and supplementary PDS are to XYZ and not the Fund.

● References to the Fund in the Constitution, PDS and supplementary PDS are to the Fund and not XYZ.

● The Constitution provides that successful investors into the Fund are required to pay a Contribution Fee of up to X% from application moneys as determined by XYZ. The PDS consistently provides that the Contribution Fee is paid to XYZ out of application moneys. The Contribution Fee is deducted from the application moneys once all the relevant benchmarks have been satisfied.

● In accordance with the Constitution, the Contribution Fee falls within a broader suite of fees that represent the “Remuneration and Expenses of Responsible Entity”. As the RE of the Fund, XYZ has a number of obligations that it must perform in its role as RE of the Fund. 

● The Constitution provides that XYZ is entitled to a management fee determined by XYZ of up to Y% per annum payable out of the ‘Assets’ of the Fund.

● As advised, in practice, as per the PDS, the Contribution fee was set at a lower rate that may be on offer. 

● Based on the PDS, the Contribution Fee is equal to some % of the application moneys. Therefore, for example, if the application amount (also known as the subscription amount) is $50,000, the Contribution Fee will be $1,980. The investor pays $50,000 in total.  $1,980 is deducted as a contribution fee and the balance ($48,020) is applied to purchasing units.

● The Contribution Fee is not an amount payable to the RE for third party costs incurred by the RE on the investor’s behalf. That is, the Contribution Fee is not for reimbursing the RE for third party costs that it has incurred as an agent of the investor.

● The Contribution Fee is ultimately recorded by XYZ as its revenue in its own capacity (and not as RE of the Fund).

● The Constitution provides that the RE shall identify the Assets as property of the Fund and hold Assets separately from assets of the RE.

● ‘Assets’ is defined in the Constitution to mean “real property, cash, investments, rights, income and other property of the Fund from time to time”.

● The Constitution provides that all payments or transfers of property received for an application for units must be made out to the RE.

Additional information

● The issue of the units to investors is made for consideration. The supply of units is made in the course or furtherance of the enterprise that is carried on by the Fund and the supply is connected with the indirect tax zone.

● XYZ has treated the Contribution Fee as consideration for an input taxed supply of the units to investors and not subject to GST on the basis that the Contribution Fee is paid out of 'scheme property' being investors' application moneys.

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 section 40-5

A New Tax System (Goods and Services Tax) Act 1999 section 184-1

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(3)

Reasons for decision

Question 1

Is the issue of units to investors by the Fund an input taxed supply in accordance with section 40-5 and item 10 in the table to subregulation 40-5.09(3) of the GST Regulations?

Taxable supplies

Section 9-5 provides that you make a taxable supply if you make the supply for consideration, in the course or furtherance of an enterprise that you carry on, the supply is connected with the indirect tax zone, and you are registered, or required to be registered.

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

Input taxed supplies

Section 40-5 provides that financial supplies are input taxed.

Financial supplies are defined in regulation 40-5.09 of the GST Regulations which provide that the provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if it is:

● for consideration; and

● in the course or furtherance of an enterprise; and

● connected with the indirect tax zone; and

the supplier is:

● registered or required to be registered; and

● a financial supply provider in relation to supply of the interest.

The issuing of interests in a managed investment scheme

Item 10 in the table in subregulation 40-5.09(3) of the GST Regulations (item 10) includes ‘Securities…’.

Securities take the meaning given in subsection 92(1) of the Corporations Act. This meaning includes interest in a managed investment scheme. Therefore, the provision, acquisition or disposal of an interest in a managed investment scheme will be a financial supply subject to meeting all other relevant requirements under regulation 40-5.09 of the GST Regulations. Specifically, the table to Part 8 of Schedule 7 of the GST Regulations provides that ‘Units in a unit trust’ is an example for item 10. Line D16 in Schedule 2 in 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) also provides that ‘Interests in a trust’ are input taxed by virtue of item 10(d) of subregulation 40-5.09(3) of the GST Regulations.

As such, in the circumstances of this case, the issue of units to investors by the Fund is an input taxed supply in accordance with section 40-5 and item 10.

Question 2

Does the Contribution Fee deducted from investment funds constitute consideration for an input taxed supply when it is received by XYZ and is not subject to GST?

Paragraph 669 of Goods and Services Tax Ruling GSTR 2004/1 Goods and Services tax: reduced credit acquisitions (GSTR 2004/1) discusses the concepts of a legal person acting in a number of capacities and provide that:

669. Under subsection 184-1(3) of the GST Act, a legal person may act in a number of different capacities, and in each of those capacities the person is taken to be a different entity. The trustee of a trust may therefore be registered in its capacity as trustee of a trust, and also in its own right. Acquisitions made by a trustee in the course of administering a trust are normally made in the trustee's capacity as trustee of the trust, and are therefore acquisitions of the trust.

These principles are equally applicable in the context of the provision of services such that an RE or trustee can also act in its own corporate capacity when it provides services to a trust or managed investment scheme. This is illustrated at paragraphs 666 and 711 in GSTR 2004/1 which discuss the provision of trustee services and the provision of single responsible entity services respectively. These paragraphs are not reproduced here.

Further, line L50 in Schedule 2 in GSTR 2002/2 also lists trustee fees as consideration for a taxable supply.

As such, it is important to distinguish between the different capacities in which XYZ is acting and to treat XYZ acting in such capacities as distinct separate entities for GST purposes.

In this case, XYZ acts in both the capacity as RE for the Fund (who we have referred to as the Fund in this ruling) and also in its own corporate capacity who supplies RE services (who we have referred to as XYZ in this ruling). Therefore, for GST purposes the Fund and XYZ will be taken to be separate entities.

XYZ provides RE services to the Fund in accordance with the Constitution. When XYZ provides such services to the Fund it is acting in its corporate capacity. For the provision of such RE services, XYZ receives remuneration as per clause 15 of the Constitution which includes the Contribution Fee and the Management Fee. This is supported by the fact that the Contribution Fee (as well as the Management Fee) is provided for under clause 15 of the Constitution which concerns ‘Remuneration and Expenses of Responsible Entity’.

Furthermore, the Contribution Fee is not for reimbursing the RE for third party costs that it has incurred as an agent of the investor/unit holders, which further supports the view that the Contribution Fee is part of the RE’s remuneration as opposed to being for recoupment of expenses under clause 15. Also in accordance with this view is the fact that the Contribution Fee is recorded by XYZ as its own revenue as per its obligation under clause 2.2 of the Constitution to ‘clearly identify the Assets as property of the Fund and hold Assets separately from the assets of the Responsible Entity and any other managed investment scheme’.

In light of the above and that ‘all payments or transfers of property received for an application for Units must be made out to the Responsible Entity or its nominated custodial agent’ in accordance with clause 5.8 of the Constitution, we are of the view that the Contribution Fee deducted from investment funds forms consideration for XYZ’s taxable supply of RE services when the Contribution Fee is received by XYZ and is therefore subject to GST.