Edited version of private advice

Authorisation Number: 1051562278729

Date of advice: 7 August 2019

Ruling

Subject: GST and reduced credit acquisitions

Question

Did the trustee for the trust make a reduced credit acquisition under item 23 of the table in subregulation 70-5.02(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 when it paid the manager the termination fee?

Answer

Yes, the payment of the termination fee was consideration for the reduced credit acquisition of investment portfolio management services under item 23.

Relevant facts and circumstances

The relevant scheme includes facts included in documents and materials provided with the private ruling application including the trust deed.

The trust is a 'recognised trust scheme' within the meaning given by subregulation 196-1.01 of the A New Tax System (Goods and Services Tax) Regulations 1999 and the trustee is registered for GST in its capacity as trustee of the trust.

The trust carries on an enterprise, generally investing in assets. In the course of its enterprise, the trust makes input taxed financial supplies for the purposes of the A New Tax System (Goods and Services Tax) Act 1999.

In accordance with the trust deed, the trustee engaged a manager to manage the funds invested by unit holders. The trust deed provides that the manager will arrange for a wide range of activities to be done in regard to purchasing, holding and selling assets.

The trust deed provides the method which is used to calculate the remuneration of the manager, including the fees payable on termination of the manager.

The trust deed provides that the manager will be paid fees for its services and specifies the manager's entitlement to specific remuneration when the manager ceases to act as manager.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 70-5.

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 70-5.02(2).

Reasons for decision

Generally, section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 provides that an entity which makes financial supplies is entitled to a reduced input tax credit when it makes a reduced credit acquisition and the table in subregulation 70-5.02(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides a list of reduced credit acquisitions.

Item 32 of the table in subregulation 70-5.02(1) of the GST Regulations provides that an acquisition made by a 'recognised trust scheme' is a reduced credit acquisition which gives rise to a reduced input tax credit of 55% of the GST on the acquisition. However, an acquisition that is also an acquisition to which paragraph (a), (b) or (e) of item 23 of the table applies is excluded from Item 32 and consequently, gives rise to a reduced input tax credit of 75% of the GST on the acquisition.

Item 23 of the table in subregulation 70-5.02(1) of the GST Regulations states that the 'following investment portfolio management functions, including those functions for superannuation schemes' are reduced credit acquisitions:

·         management of a client's asset portfolio;

·         management of an investment portfolio for a trust or superannuation fund;

·         acting as a trustee of a trust or superannuation fund;

·         acting as a single responsible entity;

·         asset allocation services

The Goods and Services Tax Ruling, Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides an explanation of the various reduced credit acquisitions and, in relation to Item 23 states:

486. An acquisition of management of a client's asset portfolio involves the ongoing services of professional management of an entity's investment portfolio to maximise return. A fundamental characteristic of this service is that the entity supplying the investment management services exercises control or authority over the asset portfolio in carrying out its obligations. This service involves more than the mere provision of advice to be acted upon by the client. An acquisition of advice, by itself, is not a reduced credit acquisition under item 23(a).

In relation to the term 'management', GSTR 2004/1 states that it 'refers to the professional administration of business concerns, public and similar undertakings' and that the 'word managing implies the existence of control or authority over the thing being managed'

The trust deed provides the range of powers granted to the manager which also includes the authority to arrange for the trustee to enter into any contract that is necessary in relation to investments.

Generally, the structure of the trust deed provides that the manager will determine the investment decisions and arrange for those decisions to be carried out in the name of the trustee. That is, the manager effectively controls the investments held by the trustee of the trust.

Under the trust deed, the manager is engaged to manage all of the investments of the trust and consequently, the services provided by the manager to the trustee of the trust are reduced credit acquisitions under item 23 of the table in subregulation 70-5.02(1) of the GST Regulations.

The trust deed provides that the manager is paid various amounts including a management fee; a performance fee and a termination fee.

Each of these amounts is paid to the manager solely because it has provided services under the trust deed. All amounts payable to the manager under the trust deed are consideration for the manager's supply of management services.

The payment of a termination fee is additional consideration for the manager's supply of management services and consequently, is payment for a reduced credit acquisition under item 23 of the table in subregulation 70-5.02(1) of the GST Regulations.