Edited version of private advice

Authorisation Number: 1052218774228

Date of advice: 5 February 2024

Ruling

Subject: GST - financial supplies

Question

Are the supplies made by XXXX (You) to XXXX, XXXX, XXXX & XXXX (Funders) input taxed financial supplies under section 40-5 of the of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

No. The supplies made by you to the Funders are not input taxed financial supplies under section 40-5 of the GST Act and are therefore considered to be taxable supplies under 9-5 of the GST Act.

This ruling applies for the following periods:

1 July 2023 to 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You act as a fund manager for two key funding entities, namely, XXXX & XXXX. XXXX & XXXX are also funding entities that you refer loan applications to (all four entities are referred to as funder in the PBR).

You are registered for GST, as are XXXX, XXXX & XXXX. XXXX however, is currently not registered for GST.

The process is that you receive and consider the merit of loan applications that are provided to you. If you assess that the loan application has merit, you will prepare a due diligence report that you provide to the Funders. These entities are lenders and if they accept the proposed loan application, they agree to provide funds to borrowers as per the funding agreements.

XXXX (Broker) is an unrelated entity who is an introducer/broker that refers loan applicants/applications to you.

Funding Agreements

An example of a funding agreement that you have provided contains the following clauses. Funder refers to any of the four funding entities mentioned above and Manager refers to you:

4 Loan Funding Procedure

4.1 Loan Assessment by The Manager

a)    Upon receipt of a Loan Application, The Manager will consider whether a Loan Application has merit in accordance with its normal business practices.

b)    Where The Manager considers that a Loan Application has merit, it will issue an indicative letter of offer to a prospective Borrower.

c)    Upon acceptance by a prospective Borrower of an indicative letter of offer from The Manager, The Manager will prepare a Due Diligence Report.

4.2 Referral to the Funder

a)    The Manager will provide to the Funder a Due Diligence Report and Instructions in respect of a Proposed Loan via email, and as soon as reasonably practicable after an email has been sent to the Funder, contact the Funder via telephone to confirm the sending of the email (Notice Time).

b)    Within 2 Working Hours of the Notice Time, the Funder must notify The Manager of its approval or rejection of the Proposed Loan. For the avoidance of doubt, if the Funder fails to notify The Manager of its approval or rejection of a Proposed Loan within 2 Working Hours of the Notice Time, the Funder will be deemed to have rejected that Proposed Loan.

c)    If the Funder approves a Proposed Loan in accordance with clause 4.2(b), immediately after its notification to The Manager it must sign and fax the Instructions

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5 Duties of the parties

5.1 Duties of the Funder

Without limiting or restricting any other duties of The Manager under this Agreement, The Manager

must ensure that it:

a)    make itself and its advisers available on Business Days during normal business hours to assess any Proposed Loan;

b)    otherwise comply with its obligations under this Agreement in a timely manner; and

c)    not pool any amounts advanced by the Funder under this Agreement with any amounts advanced by any other party, including (without limitation) other funders that The Manager refers Proposed Loans to.

5.2 Duties of The Manager

Without limiting or restricting any other duties of The Manager under this Agreement, The Manager must ensure that it:

a)    exercises due care, skill and judgment at all times;

b)    carries out the activities contemplated by this Agreement to the best of its ability; and

c)    complies with all laws and all rules of professional conduct applicable to The Manager.

6 Interest Proceeds

6.1 The Interest Proceeds will be divided between the Funder and The Manager as set out below.

6.2 The Funder is entitled to be paid the Funder's Interest Rate on the Funder's Contribution to a Settled Loan. Save on a month in which the Borrower has failed to pay the same, this interest will be paid by to the Funder monthly in advance on the same day that it is paid by the Borrower.

6.3 Any interest paid by a Borrower in excess of the Funder's Interest Rate will be paid to The Manager on the day that the Borrower pays the same.

6.4 In the event of any delay or default in the payment by the Borrower of interest, the satisfaction of the parties entitlements to the interest proceeds must await the subsequent payment of the interest in question and/or subsequent success in recovery proceedings.

7 Default of Settled Loans

7.1 If a Borrower defaults in the repayment of a Settled Loan, The Manager will use its own lawyers to bring recovery proceedings in relation to any defaulted Settled Loans.

The Manager will initially bear the cost of so doing, together with any other Recovery Costs, but is entitled to a full indemnity for the Recovery Costs.

This indemnity shall be met first out of any monies recovered through enforcement of the Settled Loan. If there are costs that cannot be met from those proceeds, the Funder will pay the Manager the remainder from the Funder's own money.

7.2 The Manager is not liable to make good or indemnify the Funder for any financial shortfall of Loan funds in the event of non-recovery or a shortfall after recovery proceedings have been finalised.

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11 Relationship with Borrowers

11.1 The parties acknowledge that to the extent there is any intellectual property associated with the relationship between the parties and any Borrower, that intellectual property belongs solely to The Manager.

11.2 The parties agree that the particulars of each Borrower is information confidential to The Manager, and

that the Funder will not pass to any third party or otherwise utilise that information save as otherwise permitted by this Agreement.

11.3 The parties agree that all dealings with any Borrower or Prospective Borrower on the part of the Funder will be conducted by The Manager, and that the Funder will not contact any Borrower directly.

When invoicing, you retain a portion of the interest and establishment fees of the loan facility.

For example, for a $100,000 loan facility, the funding entity invoices

•     $5,000 (Lender Establishment Fee)

•     $1,000 (1 Month of Interest)

•     $100 (Lender research fee)

•     $800 (Solicitor Fees)

•     $500 (Brokerage Fee) - Invoiced by third party.

Of this, you would invoice for:

•     50% of the establishment fees: ($2,500 of $5,000)

•     20% of the interest rate ($200 of $1,000)

•     50% of the research fee ($50 of $100)

•     Total first invoice ($2,750)

•     Followed by monthly invoices of $200 for the interest during the term of the loan.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

Reasons for decision

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make.

GST is payable on any taxable supply you make. Under section 9-5, you make a taxable supply if:

a)    you make the supply for consideration; and

b)    the supply is made in the course or furtherance of an enterprise that you carry on; and

c)    the supply is connected with the indirect tax zone (Australia); and

d)    you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is *GST-free or *input taxed.

Under section 40-5 of the GST Act, financial supplies are input-taxed sales and do not have GST in their price.

You generally make a financial supply when you do any of the following:

•     Lend or borrow money

•     grant credit to a customer

•     buy or sell shares or other securities

•     create, transfer, assign or receive an interest in, or a right under, a superannuation fund

•     provide or receive credit under a hire purchase agreement entered into before 1 July 2012, if the credit is provided for a separate charge that is disclosed to the purchaser. (For hire purchase agreements entered into after 30 June 2012, the provision of credit is taxable.)

In special cases, you may be entitled to claim a GST credit for a purchase that you use to make a financial supply if any of the following applies:

•     you do not exceed the 'financial acquisitions threshold'

•     your purchase relates to an amount you borrowed and used to make a non-input-taxed supply

•     your purchase qualifies as a 'reduced credit acquisition' - you will be entitled to a reduced input tax credit.

GSTR 2002/2 Goods and services tax: when a GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/5) outlines the difference between financial supply providers and financial supply facilitators.

Paragraphs 103-108 and 257-260 of GSTR 2002/2 state:

Financial supply provider or financial supply facilitator

103. The GST regulations distinguish between a financial supply provider and a financial supply facilitator. These definitions are used to avoid confusion between the provision of the actual financial supply and another supply made in connection with it (such as agency services).

Financial supply provider

104. An entity is the financial supply provider of an interest if:

•     the interest was the entity's property immediately before the supply (for example, an entity sells a debenture that it owns);

•     the entity created the interest when making the supply (for example, an entity issues a debenture); or

•     the entity acquires the interest supplied (for example, an entity acquires a debenture).

105. Whether or not an entity is a financial supply provider in relation to an interest will depend on the facts. For example, when an entity provides a mortgage over real property to a bank it creates an interest in a mortgage and is a financial supply provider of that interest. The bank acquires the interest in the mortgage created by the entity and is a financial supply provider in relation to that acquisition-supply.

106. Section 40-5.06 gives an acquirer of a financial interest the status of a financial supply provider. However, the acquisition-supply is only a financial supply if the other conditions of subsection 40-5.09(1) are met.

106A. Where the financial supply does not involve the supply of an interest, the ordinary meaning of 'financial supply provider' applies. The financial supply provider is the entity that makes the financial supply.

Financial supply facilitator

107. A financial supply facilitator, in relation to a supply of an interest, is an entity that facilitates the supply of the interest for the financial supply provider. The supply by a financial supply facilitator, in that capacity, is not a financial supply. A supply by a facilitator will be a taxable supply, unless it is not taxable under another provision of the GST Act (for example, it is GST-free or input taxed). Only the financial supply provider in relation to a particular supply can make a financial supply of that thing, as only the provider can satisfy the requirements of subparagraph 40-5.09(1)(b)(ii).

108. For example, if Alpha sells shares to Beta but does so through Xanthe, a broker, Alpha is making the financial supply of the shares to Beta and Xanthe is making the supply of brokerage services. The financial supply is input taxed, whilst the brokerage services are taxable.

What is a financial supply facilitator?

257. In terms of what is and what is not a financial supply, the GST regulations distinguish between a supply made by a financial supply facilitator and one made by a financial supply provider. As discussed in paragraph 103 of this Ruling, these definitions principally serve to avoid confusion between the provision of the actual financial supply and another supply made in connection with it.

258. A financial supply facilitator is defined in section 40-5.07 in relation to a supply of a particular interest, to be an entity facilitating the supply of that interest. The facilitating of a supply refers to activities that help forward (assist) the supply, rather than those that simply assist the financial supply provider. In determining whether an entity is facilitating the supply of the interest for a financial supply provider, the activities performed by the entity must have the effect of helping forward or assisting the supply and therefore must have a sufficient nexus with the supply of an interest by a financial supply provider.

259. A sufficient nexus in these circumstances requires that the activities of the entity have an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related. The activities must relate to and assist a particular supply.

260. As a general rule, acting in an agent-like capacity on behalf of a financial supply provider indicates an identifiable association with the supply of an interest, as the activities of the agent are substantially connected with the supply of an interest. However, acting in an agent-like capacity is not the only way in which the activities of an entity may have an identifiable association with the making of a financial supply. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of the interest.

We consider that You are not a financial supply provider as you are not the providing the loan amount to the Borrower. You are simply operating in an agent-like capacity and there is a sufficient nexus that displays you have an identifiable association with the supply. This means that we consider you to be a financial supply facilitator as you are an entity that facilitates in helping forward the supply.

Your supplies tothe Funderswould therefore be taxable supplies under section 9-5 of the GST Act.