Edited version of private advice

Authorisation Number: 1051627278109

Date of advice: 23 March 2020

Ruling

Subject: Reduced input tax credits.

Question

Are you entitled to claim reduced input tax credits ( RITCs) under items 1 and 2 of the table in subsection 70-5.02(1) of the A New Tax System (Goods and Services Tax) Regulations 2019 in respect of the acquisition of services under an information technology (IT) contract.

Answer

Yes, you entitled to claim RITCs under items 1 and 2 of the table in subsection 70-5.02(1) of the A New Tax System (Goods and Services Tax) Regulations 2019 in respect of the acquisition of services under an IT contract.

Relevant facts and circumstances

·        You are currently registered for GST and have been registered for GST effective 1 July 2000.

·        Supplies made by you are solely to onshore customers, based in Australia.

·        You entered into an IT outsourcing arrangement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Regulations 2019:

Subsection 70-5.02(1)

A New Tax System (Goods and Services Tax) Act 1999:

Division 11

Subsection 70-5(1)

Reasons for decision

Subsection 70-5(1) of the GST Act provides that specific acquisitions (referred to as reduced credit acquisitions) that relate to making input taxed financial supplies may attract a RITC, even though no input tax credit would ordinarily arise under Division 11 of the GST Act.

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. Paragraph 15 of GSTR 2004/1 explains that subsection 70-5.02(1) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) is intended to be exhaustive.

The relevant reduced credit acquisitions in this case are items 1 and 2 in the table in subsection 70-5.02(1) of the GST Regulations (item 1 and item 2) which are grouped under the category of transaction banking and cash management services and specifically deals with:

1.     The service of opening, issuing, closing, operating, maintaining or performing a transaction in respect of an account by a financial supply facilitator, including by using the following facilities:

(a) telephone banking;

(b) internet banking;

(c) Bank@Post

2. Processing services in relation to account information for account providers, including:

(a)   archives storage, retrieval and destruction services; and

(b)   statement processing and bulk mailing; and

(c)   processing and manipulation of information relating to accounts, including information about transactions to which item 7 applies

Item 7 in the table in subsection 70-5.02(1) of the GST Regulations (item 7) is as follows:

Processing, settling, clearing and switching transactions of the following kinds:

(a)   direct credit and debit;

(b)   other credit and debit transactions;

(c)   charge, credit and debit card transactions;

(d)   cheque;

(e)   electronic funds transfer;

(f)     ATM;

(g)   B-pay;

(h)   Internet banking;

(i)     Bank@Post;

(j)     The SWIFT (Society for Worldwide Interbank Financial Telecommunications) Payment Delivery System

Item 1

In regard to item 1 paragraph 56 of GSTR 2004/1 provides:

56. An acquisition is a reduced credit acquisition under item 1 where it is the acquisition of the service of opening, issuing, closing, operating, maintaining, or performing a transaction that is:

˗        in respect of an account; and

˗        provided by a financial supply facilitator.

What is a financial supply facilitator?

In regard to what is a financial supply facilitator in for the purposes of subsection 70-5.02(1) of the GST Regulations GSTR 2004/1 provides at paragraph 35:

35. The term financial supply facilitator is specific to subregulation 70-5.02(2) and to those items listed in the subregulation. The term is defined in regulation 40-5.07. The services acquired from financial supply facilitators that are eligible for a reduced input tax credits are outlined in the relevant items in subregulation 70-5.02(2). For the purposes of these items, if a financial supply facilitator does not provide the specific service mentioned, the service is not a reduced credit acquisition. For example, an entity may be a financial supply facilitator in relation to the supply of an interest in an account, but the service it provides will not be a reduced credit acquisition unless it is the service of opening, issuing, closing, operating, maintaining, or performing a transaction in respect of, the account.¹³

(Please note GSTR 2004/1 contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019. Subregulation 70-5.02(2) of the GST Regulations 1999 is now subsection 70-5.02(1) of the GST Regulations 2019.

Example 3 in GSTR 2004/1 illustrates when an internet banking facility is a reduced credit acquisition.

Example 3 - Internet banking facility: reduced credit acquisition

68. The Core Bank website provides customers with access to CoreNet, a full-service Internet banking facility. Through CoreNet, account-holders can view their account balances and transaction history, transfer funds between linked Core Bank accounts and to accounts held at other financial institutions and use B-pay services. The CoreNet Internet banking facility is operated and maintained by Digerinet Solutions (Digerinet). Through the use of the CoreNet facility, Digerinet facilitates the operation and maintenance of Core Bank's accounts together with the performance of account transactions.

69. Core Bank acquires a service of operating, maintaining and performing transactions in respect of an account through the use of an Internet banking facility. Digerinet's service is provided as a financial supply facilitator and involves activities that satisfy the requirements of item 1. The acquisition of those services is a reduced credit acquisition by Core Bank. To the extent that Core Bank also acquires the service of setting up the internet facility from Digerinet, it has not made a reduced credit acquisition under item 1.

Item 2

Under item 2, the processing services must be in relation to the account information for account providers. It should also be noted that items 2(a), (b) and (c) are specific inclusions that adds to the meaning of 'processing services' but only to the extent of these specific inclusions.

Paragraphs 85 to 88 of GST 2004/1 discusses the meaning of term 'processing services' and states that:

85. The meaning of processing services is determined by reference to:

·        the ordinary or general understanding of the expression; and

·        the context in which it is used.

86. The word services, when interpreted in conjunction with the word processing, is more than an alternative to supply. It implies responsibility for processing functions. The fact that an entity with responsibility for the processing functions in relation to account information sub-contracts the performance of processing activities to a third party, does not alter the conclusion that an acquisition of processing services has been made from the principal entity.

87. The acquisition of capacity (for example, acquisition of the use of computer based infrastructure) is not within the ambit of item 2 as this item contemplates the acquisition of processing services, rather than the mere acquisition of processing or processing capability.

88. In the context of item 2, processing services means services performed by an entity that have the character of being steps or actions directed towards achieving a specific processing outcome in relation to account information for an account provider.

In regard to information technology (IT) outsourcing agreements the Commissioner at paragraphs 94 and 95 of GSTR 2004/1 discusses processing services and processing capacity.

Paragraphs 94 and 95 of GSTR 2004/1 state:

94. An IT outsourcing agreement may involve the transfer of equipment or infrastructure by the financial supply provider to an IT provider. This entity then provides computer time or computing capacity to the financial supply provider, but the financial supply provider remains responsible for and controls the processing. In this case, the acquisition is not one of processing services to which item 2 applies.

95. In other cases, the IT outsourcing agreement may involve the handing over of some or all, of the financial supply provider's processing functions to the IT provider, such that the IT provider is responsible for and controls the particular processing function. In this situation, the financial supply provider is acquiring a processing service from the IT provider. The acquisition of this processing service is a reduced credit acquisition under item 2 to the extent that it is the processing of account information for an account provider.

Whether an entity is acquiring processing services under item 2 of the GST Regulations ultimately is a question of fact in each case, with reference to the written agreement and the surrounding context, including the practical application of the agreement.

At paragraph 101 of GSTR 2004/1, there is a "Processing Services table" which assists taxpayers in making the distinction between the acquisition of processing services or the acquisition of capacity. The table lists the functions expected to be performed by an IT Provider in providing processing services and states that the presence or absence of a single feature is not necessarily conclusive. The distinction between an acquisition of computing time or capacity and an acquisition of processing services is one of fact and degree.

You have provided a copy of this table with the functions provided by your IT provider.

In summary:

In accordance with the view set out in GSTR 2004/1, 'processing services' is one which implies responsibility for and having control over particular processing functions.

In this case, we consider that your IT agreements with your IT services supplier meet the requirements of items 1 and 2 of the GST Regulations and you will be entitled to RITCs on these acquisitions.