Edited version of private advice

Authorisation Number: 1052141209041

Date of advice: 12 July 2023

Ruling

Subject: GST and reduced credit acquisitions made by a Managed Discretionary Account (MDA) service

Question 1

Is the Managed Discretionary Account (MDA) service that is provided by you to clients an 'entity' for the purposes of Division 184 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Do the activities of the MDA service amount to an 'enterprise' for the purposes of section 9-20 of the GST Act?

Answer

Yes.

Question 3

In your capacity as the provider of the MDA service, are you entitled to register for GST under Division 23 of the GST Act?

Answer

Yes.

Question 4

Are you able to register for GST under Division 23 of the GST Act from 12 October 20xx?

Answer

No.

Question 5

Do the following fees payable by the MDA service to you relate to 'reduced credit acquisitions' made by the MDA service under section 70-5 of the GST Act:

•                     Portfolio Management Fee

•                     Cash Account Fee; and

•                     Brokerage Fee?

Answer

Yes.

This ruling applies for the following period:

xx July 20xx to xx July 20xx

The scheme commenced on:

xx February 20xx

Relevant facts and circumstances

You are an Australian unlisted public company.

You are registered for GST.

You hold an Australian financial services (AFS) licence authorising you to provide a Managed Discretionary Account (MDA) service.

You are responsible for the operation of the Individually Managed Account (IMA) service, which is an MDA service within the meaning of the ASIC Corporations (Managed Discretionary Accounts) Instrument 2016/968 (ASIC Instrument 2016/968).

You are an MDA Provider within the meaning of ASIC Instrument 2016/968.

You enter into a standard MDA Contract with clients that sets out the terms and conditions on which you act as the MDA Provider for the MDA service.

In support of your private ruling application, you have provided a copy of the standard MDA Contract dated xx May 20xx. The MDA Contract contains a contemporaneous Investment Programs booklet and Financial Services Guide

The scheme covered by this private ruling is limited to your provision of custodial services to clients through the MDA service.

In respect of the MDA service, you provide investment, custody, and administration services to clients. In performance of these services, you carry out the following activities:

•                     Managing applications and receipt of funds and assets to invest in the MDA;

•                     Managing withdrawals from the MDA;

•                     Managing and investing the assets of the MDA;

•                     Collecting, calculating and distributing income;

•                     Maintaining and managing the investment omnibus accounts;

•                     Responding to corporate actions arising from securities held in the MDA; and

•                     Managing the MDA.

You offer a range of Investment Programs that provide different underlying asset exposures depending on the broad investment objectives of each. You manage the Investment Programs at your own discretion. However, you must not implement any material changes to existing Investment Programs without the client's written agreement or acknowledgement.

The MDA Contract provides that you will manage the client's investment according to their nominated Investment Program. You are authorised to trade financial products on behalf of the client within the parameters and guidelines of their nominated Investment Program.

You hold the investments on trust for the client under the MDA service in accordance with applicable laws as the registered holder of the investments.

In accordance with ASIC Instrument 2016/968, you hold client investments made through the MDA service on trust individually rather than through a pooled trust. Relevantly, subsection 912AEC(1) of ASIC Instrument 2016/968 requires that an MDA Provider:

...must ensure that client portfolio assets of a client are not pooled with any other property to enable an investment to be made or made on more favourable terms.

However, ASIC Instrument 2016/968 does not prohibit the pooling of client portfolio assets for administrative cost savings in certain circumstances. Paragraph 179.38 of ASIC Regulatory Guide 179: Managed discretionary accounts clarifies that:

...an MDA provider will typically carry out some transactional and other functions relating to client portfolios on a collective basis (e.g. placing bulk orders or conducting research into financial products in which portfolio assets are to be invested). ASIC Corporations (Managed Discretionary Account Services) Instrument 2016/968 does not prohibit this. Where this occurs, there may be pooling for administrative cost savings that are to be passed on to clients, which would satisfy s 9(a)(ii) of the definition of a managed investment scheme.

Consistent with these regulatory provisions, the MDA Contract authorises you to enter into arrangements on terms which provide for netting of payments, set-off by the services provider, or aggregation.

For the sake of administrative efficiency, you process all client cash contributions through a single trust bank account.

The MDA Contract authorises you to deduct fees for the MDA service from the client's investment monthly in arrears and remit these fees as appropriate. If there are insufficient funds to cover the accrued fees, the MDA Contract provides that the accrued fees will become immediately due and payable.

The FSG relevantly outlines the following fees that you charge to clients in relation to your management of the MDA service:

•                     Portfolio Management Fee

•                     Cash Account Fee

•                     Brokerage Fee

You charge the Portfolio Management Fee to clients for the provision of the MDA service and the management of their investment.

You charge the Cash Account Fee for the management of cash within the pooled cash account, which includes the following functions:

•                     processing of cash transactions for the purchase and sale of investments within the MDA service;

•                     processing/allocation of cash income received from investments held within the MDA service; and

•                     facilitating cash payments to/from clients with respect to the MDA service.

You charge a Brokerage Fee to clients for each listed or unlisted security that is bought or sold within the MDA service. Brokerage is charged directly to the client at the time of each transaction.

Relevant legislative provisions

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

Division 23

Division 184

Section 9-20

Section 25-10

Section 70-5

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

Section 70-5.02

Reasons for decision

Question 1

Detailed reasoning

Subsection 184(1) of the GST Act defines a trust as an entity for GST purposes.

In Miscellaneous Taxation Ruling 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) the Commissioner clarifies at paragraph 68 that:

'Trust' is not a defined term. It can be described as:

An obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes.

The MDA service satisfies these fundamental elements of a trust as it places an equitable obligation on the MDA Provider to hold investments on behalf of the client, and deal with those investments for the benefit of the client by advancing objectives defined under the client's nominated Investment Program.

The MDA Provider is the registered holder of the client's investment and has the discretion to manage the daily operation of the MDA service within the parameters and guidelines of the client's nominated Investment Program.

The MDA service could be viewed as a collection of individual trusts in form, as in accordance with the applicable regulation you hold client investments made through the MDA service on trust individually rather than through a pooled trust.

However, in substance client investments are pooled within the MDA service for administrative cost savings in certain circumstances, which gives rise to a single overall trust.

Accordingly, the MDA service is a single entity in the form of a trust for the purposes of the GST Act.

Question 2

Detailed reasoning

Subsection 9-20(1) relevantly defines an enterprise as an activity, or series of activities, done:

(a)          in the form of a business; or

(b)          in the form of an adventure or concern in the nature of trade ...

In your case, the MDA service carries on a financial services business that involves significant commercial activity with an intention to derive profits on behalf of its clients. The activities of the MDA service are of a reasonable size and scale and are sufficiently systemic and organised to comply with strict financial licensing requirements (paragraph 178 of MT 2006/1).

It is considered that the activities of the MDA service amount to an 'enterprise' for the purposes of section 9-20 of the GST Act.

Question 3

Detailed reasoning

Subsection 184-1(2) of the GST Act provides that the trustee of a trust at any given time is taken to be the trust entity.

Following on from Question 1, it is considered that you are the current trustee for the MDA service as the current MDA Custodian.

You are therefore taken to be the MDA service for the purposes of the GST Act.

Subsection 184-1(3) of the GST Act relevantly provides that you are taken to be a different entity for each of the capacities in which you do things.

As you are carrying on an enterprise in your capacity as the provider of the MDA service separate to your corporate capacity, you are entitled to register for GST as trustee for the MDA service under subsection 23-10(1) of the GST Act.

Question 4

Detailed reasoning

No, under subsection 25-10(1A) of the GST Act the Commissioner may only backdate the effect of a decision to register you for GST by four years from the day of the decision.

Question 5

Detailed reasoning

Under subsection 70-5(1) of the GST Act, a reduced credit acquisition is an acquisition of a kind specified in the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) that relates to making financial supplies and gives rise to an entitlement to a reduced input tax credit.

For the fees to relate to reduced credit acquisitions, it is therefore necessary that they relate to financial supplies made by you to the MDA service.

The Commissioner's statement at paragraph 98 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) clarifies that:

...a company that is the trustee of a trading trust acts in a different capacity when it supplies administrative services to the trust. Because the entity is a different entity in relation to each capacity in which it acts, the provision of trustee services by the company to itself as trustee of the trust is a supply between two entities, the company and the trustee/trust.

In respect of the identified fees, it is considered that they relate to financial supplies made by you to the MDA service. It is therefore necessary to characterise these financial supplies made between yourself in your corporate capacity and yourself in your capacity as trustee of the MDA service to determine whether they give rise to a reduced credit acquisition.

It is considered that the relevant fees payable by the MDA service to you relate to the following reduced credit acquisitions mentioned in the table in subsection 70-5.02(1) of the GST Regulations:

•                     Portfolio Management Fee (table item 23(b) relating to the management of an investment portfolio for a trust)

•                     Cash Account Fee (table item 23(b) relating to the management of an investment portfolio for a trust)

•                     Brokerage Fee (table item 9 relating to the provision, acquisition, or disposal of an interest in a security)