Edited version of private advice

Authorisation Number: 1051551429370

Date of advice: 20 September 2019

Ruling

Subject: GST and apportionment of input tax credits

Question

Is the proposed apportionment methodology a fair and reasonable method to determine the extent of creditable purpose of the Entity's acquisitions under section 11-15 and subsection 70-20(2) of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the proposed apportionment methodology is a fair and reasonable method to determine the extent of creditable purpose of the Entity's acquisitions.

This ruling applies for the following periods

All tax periods ending on or after 20 September 2015.

Relevant facts and circumstances

The entity is registered for GST and, in the course of its banking business, provides home loans, personal loans, credit cards, transaction accounts, term deposits and referrals for insurance and financial planning. The supplies made by the entity may be taxable, GST-free or input taxed supplies and acquisitions made by the entity can relate directly and indirectly to any of these supplies or a combination of supplies.

The entity proposes to use an entity-based general method of apportionment that will calculate an extent of creditable purpose (ECP) that will be applied to all acquisitions that are taxable supplies made to the entity.

The single ECP rate is determined using the following process:

Step 1

A list of the suppliers used by the entity is created and the values of those supplies are totalled for each supplier. A proportion of suppliers with the highest aggregate value are then identified - the supplies made by these suppliers to the entity are known as the 'sample acquisitions'.

Each of the suppliers is then categorised into one of the following categories based on the type of supply made to the entity:

·       Occupancy;

·       IT;

·       ATM;

·       General.

The categorisation of the suppliers is based on the general type of supplies made to the entity. Even though a supplier may make supplies that could fit into more than one category, it is the totality of the supplies, when considered as a whole that is determinative of the category into which a supplier is allocated.

Occupancy includes suppliers which provide goods or services that are used generally by the entity in relation to the real property from which it runs its business. These supplies include rent of premises, utilities, maintenance, cleaning and fit-out of retail branches amongst others.

IT includes suppliers which provide goods and services that are supplies of information and/or technology in nature. Generally, these acquisitions are used by the entity to process transactions but this category also includes any other information and technology acquisitions made by the entity. However, any suppliers which provide goods or services which are directly related to the operation and installation of automated teller machines (ATMs) are not included in this category as these are allocated to more specific categories.

ATM includes suppliers which provide goods and services that directly relate to the installation and operation of the entity's network of ATMs. This includes installation; telecommunications supplies; rent and any suppliers which provide processing services directly related to ATM transactions.

General includes any suppliers which are not otherwise allocated into one of the other categories and may include legal; insurance; auditing and accounting; advertising; temporary staff; statement; printing and postage goods and/or service suppliers.

Step 2

An 'extent of creditable purpose' (ECP) rate is then determined for each of the five categories. These are based on an objective assessment of the data available to entity and consideration of how the acquisitions are used by the entity.

Occupancy

The entity uses a system to report activities (events) undertaken by staff at retail branches. A cumulative report is generated to provide the total number of each event undertaken by store staff. These reports are used by the entity in managing staff and business performance.

The events recorded by staff are divided into activities that relate to input taxed supplies and activities that relate to taxable and/or GST-free supplies.

Additionally, some events have been identified as relating to both input taxed and taxable and/or GST-free supplies.

Approximate times (in minutes) to undertake each event has been determined by the entity.

The number of events is then multiplied by the time for each event to determine the total time taken by staff for each event.

An ECP rate for this category is then determined by dividing the total time for events which are allocated to taxable and/or GST-free activities by the total time for all events.

IT

The entity makes taxable supplies of interchange services when customers use their debit or credit cards in certain circumstances. The entity has identified the transaction types which involve interchange services.

A transaction which involves an interchange supply also involves the supply of an account to the customer. Accordingly, the ECP rate for this category is determined by dividing half the number of transactions for these transaction types by the total number of transactions performed by the entity.

ATM

The entity operates a network of ATMs and makes taxable supplies of interchange services when a certain non-member cardholder uses the entity's ATM to undertake a transaction. The entity also makes an input taxed supply when a non-member cardholder uses the entity's ATM.

The ECP rate for this category is determined by dividing the total number of ATM transactions which involve an interchange supply by the total number of transactions undertaken at the entity's ATMs.

General

The ECP rate for this category is determined by dividing the revenue earned by the entity from making taxable and GST-free supplies by the total revenue earned - using the net interest revenue earned.

Step 3

An ECP rate is assigned to the sample acquisitions (from Step 1) according to the category to which the supplier is allocated. A notional input tax credit (ITC) amount for each supplier is then calculated by multiplying the GST on the sample acquisitions by the ECP rate for the corresponding category.

These notional ITCs are added together to determine a notional total ITC amount for the suppliers.

The notional total ITC amount is then divided by the total GST on supplies from these suppliers to calculate a single ECP rate.

Step 4

The single ECP rate is subsequently applied to all acquisitions made by the entity which have GST included in the price to determine the amount of input tax credits to which the entity is entitled.

Data Collection

Generally, data that is used in the apportionment methodology is to be generated from the preceding year's activities. Full year (either financial or calendar year) data will be used where it is available. Where full year data is not available, data from a period of no less than 3 months which reasonably reflects the full year data will be used.

The ECP calculation will be undertaken at least once for each year. However, if the entity chooses to update the ECP rate more frequently, then the most current data available will be used.

Supplier data is to be taken from the accounts of the entity at the time that the ECP calculation is undertaken - Alternatively, the data may be taken from the most recent financial reports available.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-15.

Reasons for decision

Generally, an entity is entitled to input tax credits on any creditable acquisition that it makes. Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an acquisition is made for a creditable purpose to the extent that it is acquired in carrying on an enterprise. However, an acquisition is not a creditable acquisition to the extent that it relates to making input taxed supplies.

The Goods and Services Tax Ruling, Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) provides guidance on methods for calculating input tax credits by providers of financial supplies under the GST Act and states:

26. The input tax credits you claim have a direct effect on the net amount reported on your Business Activity Statement (BAS), and therefore on the amount payable by you to, or refundable to you by, the Australian Taxation Office for the relevant tax period. The fundamental requirement is that whatever method you adopt to calculate your input tax credits must be fair and reasonable, and appropriately reflect the intended use of your acquisitions (or in the case of an adjustment, the actual use) in calculating the net amount.

27. To calculate the amount of your input tax credits, you will need to make a fair and reasonable estimate of the extent of creditable purpose for your acquisitions and importations. The requirement that your estimation is fair and reasonable is a prerequisite for any decision you make.

In the course of its banking business, the entity provides a wide range of services which involves making supplies that may be input taxed, taxable, GST-free or a combination of these. Acquisitions made by the entity can relate directly and indirectly to any of these supplies or a combination of supplies. In order to determine its net amount, the entity must apportion its input taxed credits using a fair and reasonable method. GSTR 2006/3 explains that an apportionment method should aim to reflect the use of acquisitions within an enterprise to determine the amount of input tax credits:

75. The extent of your planned use of an acquisition for a creditable purpose must be established on a fair and reasonable basis having regard to the nature of the acquisition and the circumstances of your enterprise. Any apportionment method should aim to achieve an accurate reflection of the input tax credits available for acquisitions or importations acquired in carrying on your enterprise. The criteria used in relation to any expense must therefore recognise the nature of the underlying supply to be made.

The choice of apportionment method is a decision for the acquirer and paragraph 36 of GSTR 2006/3 states that an entity may use any method provided that it is fair and reasonable. Direct methods of apportionment, where a method seeks to identify a direct connection between acquisitions and supplies or activities undertaken in an enterprise are preferred as stated in paragraph 35 of GSTR 2006/3:

35. The use of direct methods of allocating or apportioning the intended or actual use of acquisitions to the activities of an enterprise, such as direct estimation (see paragraphs 92 to 101 of this Ruling), best accords with the basic principles explained in paragraph 33 of this Ruling. If direct methods are available to you, the Commissioner's view is that they will best reflect the intended or actual use of your acquisitions for the purposes of this Ruling. To the extent that it is not possible or practicable to use a direct method, you should use some other fair and reasonable basis, which might include an indirect estimation method.

The nature of the supplies and acquisitions made by the entity in the course of carrying on its enterprise mean that very few acquisitions (if any) solely relate to a single supply (or even a single type of supply). Therefore, direct methods of apportionment are not available. Paragraphs 92 - 101 of GSTR 2006/3 discuss 'direct estimation' methods of apportionment which use a direct connection between acquisitions and their intended use or application. The examples given in paragraph 94 of GSTR 2006/3 show that methods of apportionment may be available where the practical use of acquisitions is measured in a way that demonstrates how the use of the acquisitions are split between the various supplies made. Paragraph 100 of GSTR 2006/3 states:

100. If a direct estimation method is available to you, the Commissioner considers this will reflect most accurately the actual or intended use of the acquisition...

The method proposed by the entity uses a combination of methods to arrive at a single rate that is applied to all acquisitions which are taxable supplies (or are subject to the reverse charge rules in Division 84 of the GST Act). Some of these involve direct apportionment methods and some are indirect estimation methods. GSTR 2006/3 states:

89. A combination of different methods might be required for the various acquisitions or importations made by an entity. For example, an entity might be carrying on a number of different businesses or making supplies in different areas...

The method involves identifying a number of the entity's suppliers with the highest aggregate value of supplies made to the entity. This sample size is appropriate because it represents a high proportion of the total acquisitions made by the entity in a year and it is reasonable to assume that expanding the sample size would not significantly alter the results.

Categorising these suppliers into one of the categories is reasonable because each of the categories represent significant classes or groups of acquisitions. The determination of the general type of supplies made to the entity by each supplier is not distortive because it is performed in an objective manner without a view to the consequences of the categorisation within the apportionment method. Furthermore, in general, the suppliers will provide the types of supplies to the entity that readily fit into one of the categories. Although more categories could have been chosen, it is likely that many would have resulted in using similar (if not the same) apportionment models which would have negated the need to create more categories.

The methods used for determining an 'extent of creditable purpose' (ECP) rate for each category must be fair and reasonable and must make sense in the context of the enterprise without producing significant distortions as explained in GSTR 2006/3. Paragraphs 117 - 119 of GSTR 2006/3 explain that indirect estimation methods of apportionment that are not based on revenue may be used to better reflect the activities of the enterprise:

119. In circumstances such as these, some indirect measure other than revenue may provide a fair and reasonable outcome. The following measures may be appropriate:

·       number of transactions;

·       floor space;

·       profit; or

·       hours.

If more than one of these indirect measures is available you should select the one which most accurately reflects the relationship between the activities of your enterprise and your acquisitions or importations.

The type of supplies made by suppliers allocated to the Occupancy category are all related to the premises from which the entity operates its enterprise. The use of an apportionment method which relies on staff activities is appropriate because those identified activities are referrable to supplies made by the entity which may be either taxable and/or GST-free or input taxed. The method utilises the actual number of activities undertaken by staff which is collected by the entity for management purposes. An analysis of the time taken to perform each activity has been performed. The results of the analysis and the number of activities results in identification of the time taken by staff to perform the activities which relate to supplies made by the entity. As the acquisitions in the Occupancy category have a direct connection to the activities undertaken by staff, this method of apportionment results in a measurement of the use of those acquisitions.

The type of supplies made by suppliers allocated to the IT category are all related to the IT operations of the entity. In essence, this involves transactions of all kinds performed by the entity in relation to all account types provided by the entity to customers. As the entity makes taxable supplies of interchange services when customers initiate certain transactions, the entity makes both an input taxed supply (of a bank account) and a taxable supply (of interchange services) for which the entity make acquisitions. As a single transaction relates to two supplies equally, transactions which involve interchange supplies must be halved to account for the fact that the transaction relates to an input taxed supply of an account. The apportionment method for this category uses the number of transactions performed on the entity's accounts which is a measurement of the use of the IT acquisitions made by the entity.

As with the IT category, the apportionment method for the ATM category uses transactions numbers. This is because, similarly to the IT category, the entity makes taxable supplies when customers undertake certain transactions on the entity's ATM network. It is reasonable to separate this category from the IT category because the IT category involves transactions performed by the entity in relation to all types of accounts (including loans, transaction accounts, term deposits and credit cards) whereas the ATM category is limited to ATM transactions only. Including the ATM transactions in the IT category would likely be distortive as the taxable supplies made through the ATM network are not likely to relate to other IT acquisitions. The transactions performed is a measurement of the use of the ATM acquisitions.

The apportionment method used in the General category necessarily involves all supplies made by the entity. It is recognised that revenue is not normally an accurate measurement of the use of acquisitions. This is because a revenue based apportionment method is based on an assumption that the costs to derive income are equally split between the supplies made. A revenue based method of apportionment is used for this category because it is not feasible to determine the use of acquisitions that are used generally by the entity in carrying on its enterprise. The use of a revenue based apportionment method is appropriate as it is not biased towards taxable and/or GST-free supplies and is free from manipulation.

Given that the calculation of the ECP rates for each of the categories is reasonable, the calculation of the overall ECP rate is also appropriate and reasonable. This is because the calculation merely determines a 'notional input credit' for each of the suppliers which are then added together to determine a notional total ITC amount which can then be used to determine an ECP rate to apply to all acquisitions. This part of the apportionment method is merely an arithmetic step and is completely objective and free from distortion.

Applying the ECP rate determined in Step 3 of the apportionment method to all acquisitions made by the entity is reasonable for a number of reasons. First, the single ECP rate has been determined by reference to the suppliers which account for a high proportion of the total acquisitions made by the entity. This means that there is little likelihood of there being a bias towards one type of supply (eg taxable and/or GST-free supplies). Secondly, section 11-15 of the GST Act requires the entity to determine an extent of creditable purpose to which an acquisition is intended to apply. Paragraph 33 GSTR 2006/3 states:

33. Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

·       be fair and reasonable;

·       reflect the intended use of that acquisition (or in the case of an adjustment, the actual use); and

·       be appropriately documented in your individual circumstances.

Given that the ECP rate is applied to all acquisitions which have GST included in the price, an analysis of each acquisition separately would inevitably show that some acquisitions have a creditable purpose less than the single ECP rate while others will have a greater ECP rate. Applying the single rate indifferently to all acquisitions reduces the likelihood of errors whilst significantly reducing compliance costs.

The data used in the various steps of the apportionment method generally represents reasonable sample sizes which would remove possible distortions. Where full year data is not used, a sample size of data of not less than three months is reasonable because the size of the sample is so large that it will generally reflect the data for the full year. For example, the data used in the ATM category involves all transactions undertaken using the entity's ATM network. There is no reason to believe that the mix of transactions for a full year would differ significantly from a three month period. Consequently, the data collection element of the apportionment method is reasonable and is not distortive.

When considered in full, the apportionment methodology attempts to reflect the way in which the various acquisitions are used by the entity in carrying on its enterprise. Paragraph 73 of GSTR 2006/3 states:

73. Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

·       be fair and reasonable;

·       reflect the intended use of that acquisition (or in the case of an adjustment, the actual use); and

·       be appropriately documented in your individual circumstances.

Consequently, the apportionment method chosen is a fair and reasonable method to determine the extent of creditable purpose acquisitions made by the entity.