Edited version of private advice

Authorisation Number: 1051623500980

Date of advice: 12 February 2020

Ruling

Subject: GST and reduced input tax credits

Question

Is Entity A making a reduced credit acquisition for the purposes of section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it acquires superannuation related financial planning services provided to its Members which consist of:

a)     'General Advice - Personal',

b)     'Select Advice - Personal',

c)     'Comprehensive Advice - Personal' and

d)     'Review Advice - Personal'?

Answer

a)     General Advice falls within the scope of item 24 of the table in subsection 70-5.02(2) of the GST Regulations (item 24) as it can be viewed as part of the acquisition of administrative services from Entity B.

b), c) & d) Select Advice, Comprehensive Advice and Review Advice does not fall within items 23(a) and (e) of the table in subsection 70-5.02(2) of the GST Regulations (items 23(a) and (e)) and thus are not reduced credit acquisitions. Therefore Entity A is not eligible for a Reduced Input Tax Credits (RITCs) for the GST included in the fees.

Relevant facts and circumstances

Entity A is an Australian superannuation fund that manages the superannuation for employees.

Entity A is registered for Goods and Services Tax (GST) and is also a regulated superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993.

For the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the Trustee of Entity A in its own right (that is, in its corporate capacity) is not registered for GST and does not make any taxable supplies to Entity A.

Entity A offers an accumulation superannuation product. A copy of the product disclosure statement (PDS) of the accumulation product has been provided as part of this request. It explains that an accumulation Member has a range of investment options to choose from which consist of either a:

·        Pre-mixed menu - being a range of diversified options, each with its own mix of asset classes and weightings, performance objectives and risk profile.

·        Sector menu - being investment options which mainly invest in a particular asset class. A Member can create their own mix by choosing how much they want invested in each option class; or

·        Default investment option - which applies if the Member does not select a future contributions strategy.

Effectively upon becoming a Member of Entity A, a Member is able to change their investment option.

Entity B is a wholly owned subsidiary of Entity A. Entity B provides investment and administration services to Entity A under the Agreement. Entity B has an Australian Financial Services License (AFSL) and employs financial planners and provides financial planning services to Entity A's Members.

Both Entity A and Entity B have been registered for GST since 1 July 2000.

Pursuant to the Agreement, Entity B may provide comprehensive investment, administrative and management services to Entity A and its Members. The specific services to be provided by Entity B to Entity A are listed in detail in the Agreement and relevant to financial planning services broadly include the following categories of services:

1. Member Services including:

a.      Member financial education, planning and advice services (this includes both general financial advice and advice specific to superannuation and retirement planning).

b.       Provision of contact centre services for Members.

c.        Member Online Services.

d.       Member Administration Services.

2. Member Investment Services including:

a.     Investment option switching for Member's investment choices (including investment processing).

Based on the Financial Services Guide, Entity B is authorised under its AFSL to advise and deal in the following:

1.     Superannuation

2.     Retirement savings accounts

3.     Managed investment schemes (including investor directed portfolio services and separately managed accounts)

4.     Deposit product

5.     Government debentures, stocks and bonds

6.     Life insurance - investment and insurance risk-only products

7.     Securities

Per the Financial Services Guide, Entity B may provide financial planning services to Members in relation to the Member's superannuation fund investments and retirement planning (i.e. superannuation related services) and other matters not related to the Member's superannuation investments (i.e. non-superannuation related services).

For financial planning services that are superannuation related, as part of the Agreement with Entity A, Entity B will invoice Entity A and remit GST in relation to the services provided. Entity A will then undertake an internal allocation of the expense to the specific Member account. The scope of this private ruling is limited to financial planning services acquired that are superannuation related only.

For financial planning services that are non-superannuation related, and thereby not covered by the Agreement between Entity A and Entity B, Entity B will invoice the Member directly and remit GST in relation to the services provided. The Member will pay this amount directly to Entity B. The scope of this private ruling application does not extend to financial planning services that are non-superannuation related and hence these types of acquisitions are not covered under this private ruling.

Acquisition of advice

This private ruling is limited to considering whether the acquisition of the following superannuation related financial planning services are reduced credit acquisitions for the purposes of the GST Regulations:

·        General Advice - Personal (General Advice);

·        Select Advice - Personal (Select Advice),

·        Comprehensive Advice - Personal (Comprehensive Advice); and

·        Review Advice - Personal (Review Advice).

In respect of the four types of advice offered by Entity A each category is described as follows:

General Advice

This type of advice (which is also referred to as 'Entity A account information and general advice') is provided by an consultant/adviser face to face or over the phone. This forms part of the services for which the Standard Service fee is paid to Entity B. It is available to a fund Member and/or their partner at no additional cost. That is, this service is provided as part of fund membership and its cost is covered by the Member administration fees.

Select Advice

This service covers advice on the Members investment in Entity A.

Comprehensive Advice and Review Advice

This financial advice to a Member can cover matters broader than Entity A. That is, the advice provided to the Member can cover matters outside the Members superannuation interest with the fund.

Entity B may provide financial planning services to Members in relation to their Entity A interest and in relation to other matters (relevant to comprehensive and review advice specifically):

·        To the extent the advice relates to the Member's Entity A interest, the advice is provided under the Agreement between the Entity B and Entity A. The fee is internally allocated to the Member's account.

·        To the extent that the advice relates to other matters, the advice is subject to a separate agreement between Entity B and the Member, for which the Member must pay a separate fee directly to Entity B.

The cost of Comprehensive Advice and Review Advice will vary depending on the work to be performed.

A sample copy of a Statement of Advice (SOA) for Select Advice has been provided as part of this private ruling request. It sets out the scope of the advice to be provided by Entity B to the Member and other relevant details.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

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

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

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

A New Tax System (Goods and Services Tax) Regulations 2019 section 70-5.02

Reasons for decision

Summary

The transaction between Entity B and Entity A under the Agreement is properly characterised as a mixed acquisition with separately identifiable parts (rather than a composite acquisition).

The supply of financial planning services for the Select Advice - Personal, Comprehensive Advice - Personal, and Review Advice - Personal products retains its own identity and should be recognised as a separate part of what is supplied.

Therefore, the character of the acquisition of financial planning services must be analysed to determine whether it is an RCA (as per Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: supplies (GSTR 2002/2) at paragraphs 228 to 250).

To be entitled to a RITC under items 23(a) and 23(e) of the table in subsection 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) (items 23(a) and (e)) the entity supplying the service is required to have control or authority over the thing being managed.

As the administrator of the fund, Entity B has the authority under the Agreement to implement or execute investment decisions made by clients which result from the provision of financial planning services. However, the control or authority over the client's asset portfolio must be a fundamental characteristic of a supply in order for the acquisition to fall under item 23(a) and (e). The fact that Entity B in its capacity as fund administrator routinely processes the investment choice switches of the member does not imbue the supply of financial planning services with the requisite character of control or authority over the client's asset portfolio.

In this case the Commissioner considers that the acquisition of the Select Advice, Comprehensive Advice and Review Advice are not eligible for RITCs under item 23(a) and/or item 23(e) as it has not been established that the supply is characterised by Entity B's exercise of control or authority over the client's asset portfolio in carrying out its obligations.

In respect of the supply of General Advice, the Commissioner accepts that the acquisition falls within the scope of a RCA under item 24 of the table in subsection 70-5.02(2) of the GST Regulations(item 24). As such a reduced input tax credit will arise.

Detailed reasoning

The basic rules of GST Act require an entity to consider whether it has made an acquisition in order to determine whether it will be entitled to claim an input tax credit.

Goods and Services Tax RulingGSTR 2006/9 Goods and services tax: Supplies (GSTR 2006/9) provides discussion regarding the meaning of the term 'supply' in the GST Act including its relevance to input tax credit entitlements. Relevantly Part 3 of GSTR 2006/9 discusses how to identify the recipient of a supply in more difficult tripartite arrangements.

In the tripartite arrangement between Entity A, Entity B and a Member, Entity A submits that it acquires financial planning services from Entity B under the terms of the Agreement. This forms the basis on which this private ruling is made.

Therefore what remains to be determined is whether Entity A is entitled to an input tax credit on the acquisition that has been made.

Section 11-20 of the GST Act states that an entity is entitled to an input tax credit (ITC) for any creditable acquisition.

Section 11-5 of the GST Act provides that one of the requirements for a creditable acquisition is that the entity must acquire the thing for a 'creditable purpose' (paragraph 11-5(a) of the GST Act). The meaning of 'creditable purpose' is given in section 11-15 of the GST Act which states:

Meaning of creditable purpose

(1)   You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2)   However, you do not acquire the thing for a creditable purpose to the extent that:

(a)   the acquisition relates to making supplies that would be * input taxed; or

(b)   the acquisition is of a private or domestic nature.

Entity A acquires taxable supplies under the Agreement in the course of carrying on its enterprise. The supplies consist of the bundle of services listed in the Agreement. In determining whether Entity A is entitled to an input tax credit, Entity A satisfies subsection 11-15(1) of the GST Act and it is making the acquisition in the course of carrying on its enterprise. However given that the enterprise being conducted by Entity A consists of making input taxed supplies, Entity A is denied an input tax credit under paragraph 11-15(2)(a) of the GST Act.

Application of Division 70 of the GST Act and Section 70 of the GST Regulations

Subsection 70-5(1) of the GST Act establishes that Entity A may be entitled to a reduced input tax credit (RITC) where the acquisitions qualify as a reduced credit acquisition (RCA) listed in the GST Regulations.

For the purposes of subsection 70-5(1) of the GST Act, subsection 70-5.02(2) of the GST Regulations lists the RCAs which give rise to an entitlement to an RITC. Section 70-5.03 of the GST Regulations specifies that the percentage to which input tax credits are reduced is 75% for all RCAs other than those made by a 'recognised trust scheme' covered by item 32 of subsection 70-5.02(2) of the GST Regulations (item 32) (in which case the rate will be 55% unless an exclusion applies).

According to subsection 70-5.02(4) of the GST Regulations a recognised trust scheme means a trust that has the following features:

(a)   The entity that acts in the capacity as trustee or responsible entity of the trust, is carrying on, in its own capacity, an enterprise that includes making taxable supplies to the trust; ...

In this case, the Trustee of Entity A in its own capacity is not registered for GST and does not make any taxable supplies to Entity A. Accordingly Entity A does not qualify as a recognised trust scheme for the purposes of the definition in subsection 70-5.02(4) of the GST Regulations. As item 32 does not apply what now needs to be considered is whether the character of each category of advice falls within the scope of:

·        item 23 (in particular item 23(a) or (e)); and/or

·        one or more of the sub items listed under item 24 (in particular item 24(e))

Entity A submits that the acquisition of the financial planning services provided by Entity B to Entity A pursuant to the Agreement are in the nature of investment portfolio management functions, most relevantly those described in (a) and (e) of item 23. In this context Entity A considered that the acquisitions of the General Advice, Select Advice, Comprehensive Advice and Review Advice are entitled to a RITC at the rate of 75%.

However, in determining whether a financial supply provider is entitled to RITCs, it is fundamental to assess the character of an acquisition and whether what was acquired fits the description of any of the specified acquisitions in the GST Regulations.

Characterising the acquisition by Entity A

Mixed acquisition / composite acquisition

A composite acquisition is an acquisition of one dominant part which includes other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the acquisition. When an acquisition is a composite acquisition, it is essentially the acquisition of a single thing and will either be wholly a reduced credit acquisition or wholly not a reduced credit acquisition.

A mixed acquisition, on the other hand, is an acquisition which contains separately identifiable parts where no part is dominant and each part has a separate identity. These parts may need to be considered and treated separately.

Paragraph 234 of GSTR 2002/2 provides that In working out whether you are acquiring a mixed or composite acquisition, the key question is whether the acquisition has parts that should be regarded as being separately identifiable, or whether it is essentially an acquisition of one dominant part with other parts being integral, ancillary or incidental to that dominant part.

In this case, it is the Commissioner's view that the acquisition of financial planning services by Entity A is a mixed acquisition that contains separately identifiable parts having regard to the essential character of what is supplied. Relevantly, in the Commissioner's view, the Select Advice - Personal, Comprehensive Advice - Personal, and Review Advice - Personal products are separate identifiable parts that constitute separate aims of providing advice to members on their investments, rather than a means of better enjoying the administration and investment services under the Agreement. This is also supported by the fact that there is separate consideration provided for these services.

By contrast, the General Advice provided to members can be seen as being incidental or ancillary to the supply of administration services Entity B makes under the Agreement. This advice is limited in scope and is provided for no extra charge (that is, it is included in the Standard Service fee charged by Entity B to Entity A).

On this basis, the character of the relevant separately identifiable parts of the acquisition of financial planning services must be assessed separately to determine whether they are an RCA.

Item 24

Paragraph 540 of Goods and Services Tax RulingGSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides that in the context of funds management services, item 24 gives an exhaustive list of administrative functions in relation to investment funds (including superannuation schemes). An acquisition of a service that falls within items 24(a) to 24(i) is a reduced credit acquisition.

General Advice is provided to Members as incidental or ancillary to the supply of administration services Entity B makes under the Agreement. This service does not have a separate consideration and is provided 'free'. It forms part of the services for which the Standard Service fee is paid to Entity B. Notwithstanding this assertion, according to the PDS the cost of this service to the Member forms part of the Member administration fees

As such, the Commissioner considers that General Advice acquired by Entity A under the Agreement is part of its Member administrative functions and therefore falls within the scope of item 24 and is an RCA meaning it is eligible for a RITC.

Item 23(a)

Under the heading of funds management services and the sub-heading of investment portfolio management functions, item 23(a) lists as a RCA the management of a client's asset portfolio. Paragraph 483 of GSTR 2004/1, explains that the scope of item 23(a) is determined by the meaning given to the expressions management and asset portfolio and the overall context of the item.

In this context, paragraph 484 and 485 of GSTR 2004/1 explain that:

·        'management' refers both to the act or manner of managing and to the person or persons managing an institutions, business, etc. Also the derivative 'managing' implies the existence of control or authority over the thing managed.

·        'asset portfolio' relates to the composition (into particular classes or sectors within a particular class) of physical and intangible resources owned by a particular entity and is synonymous with the term 'investment portfolio'

Consequently, item 23(a) involves the ongoing services of professional management of an entity's investment portfolio to maximise return, and is characterised by the control exercised by the supplying entity over the asset portfolio in carrying out its obligations. By itself the mere provision of advice to be acted upon by a client is not covered by item 23(a).

On page 14 of the private ruling request Entity A has submitted that example 58 in GSTR 2004/1 closely aligns to the commercial and contractual arrangements in place between Entity A and Entity B.

The Commissioner does not agree with the above submission for the following reasons.

Example 58 in GSTR 2004/1 provides the following example.

487. Templar Ltd is the trustee of the Knight Trust (Knight) which manages the assets of the Benedict Superannuation Fund (Benedict). In the course of managing the asset portfolio, Templar Ltd advises Benedict on its investment strategy.

488. As the investment advice is provided in the context of the control and management of the portfolio, the acquisition of the advice is a reduced credit acquisition under item 23(a).

In this example, the investment advice is provided in the context or in the course of managing the asset portfolio. It is noted that the example above does not consider situations where the advice is acquired by the fund (i.e. Benedict) under arrangements where the member of the fund engages the manager of the asset (i.e. Templar/Knight) for advice on the member's investment strategy. This example does not address the factual situation in this case.

The nature of the superannuation product offered by Entity A, which is administered by Entity B, is that the Member has control over where their contributions are invested in order to generate and maximise their retirement benefits. Entity A (through Entity B) provides the Member with the option to efficiently and effectively make investment decisions according to whatever strategy the Member has developed. It does so by providing various level of advice to Members, which are acquired by Entity A under the Agreement.

In the case of Select Advice, Comprehensive Advice and Review Advice, the Member engages the adviser (Entity B) to review the Members existing position and/or make recommendations for strategies to assist the Member to meet their financial goals. However under this engagement Entity B does not exercise control or authority such that the activity of providing the advice falls within the meaning of 'management of a client's asset portfolio'. That is, the supply being made by Entity B is merely advice and does not extend to any activity of 'managing' the Members portfolio.

Although it is accepted that Entity B (as administrator) is able to later implement the Members strategy should the client choose to act on a recommendation or otherwise, this is independent of the advice that has been acquired.

Item 23(e)

GSTR 2002/2 at paragraph 212 explains that to give each RCA item its correct context, each paragraph needs to be read with reference to the commencing words of the item. Therefore, the commentary above about whether Entity B exercises control or authority over the investment portfolio in making the supply of financial planning services is also relevant to item 23(e).

Item 23(e) covers asset allocation services. In this context GSTR 2004/1 at paragraph 530 explains that asset allocation services are a class of specialised services directed towards the provision of strategic advice in respect of the weighting of assets among different asset classes within an investment portfolio.

Paragraphs 533 to 539 in GSTR 2004/1 provide two examples that consider the character of services that fall within the scope of item 24(e). Relevantly example 65 of GSTR 2004/1 states:

Example 65 - not an asset allocation service

538. The Pat & Bob Partnership (Pat & Bob) engages the services of Interdependent Financial Planners (Interdependent) to provide the partnership with a financial plan in respect of its investment portfolio. Interdependent makes recommendations primarily in relation to the acquisition and disposal of particular investments in line with Pat & Bob's investment strategy.

539. The character of the service provided to Pat & Bob falls outside the scope of asset allocation services. This is because Interdependent is supplying advice relating to particular investments, rather than advice that focuses on the relative weightings of asset classes within the investment portfolio. Consequently, the acquisition made by Pat & Bob is not a reduced credit acquisition under item 23(e).

According to the representative SOA, it explains that the purpose of the SOA is to provide an overview of the existing position and make appropriate recommendations for strategies that will assist the member to meet their personal financial goals and objectives.

Given the above scope of advice, we consider that consistent with example 65 of GSTR 2004/1 the acquisition does not have the character of an asset allocation service and accordingly is not within the scope of item 23(e).

Therefore, Select Advice, Comprehensive Advice and Review Advice do not fall within item 23(a) and (e) and therefore is not an RCA, meaning it is not eligible for a RITC.