Edited version of private advice

Authorisation Number: 1052238973756

Date of advice: 7 May 2024

Ruling

Subject: GST - financial supplies

Question One

Does the spread achieved by Entity A when making supplies of foreign currency to its clients, being the difference between the retail currency exchange rate charged to clients and the wholesale exchange rate paid by Entity A, form part of the consideration for those supplies for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the consideration for the supply of Foreign currency to retail clients is the retail currency exchange rate. The wholesale exchange rate paid by Entity A relates to a different supply.However, in the sense that the spread achieved by Entity A is priced into the retail currency exchange rate, it does form part of the consideration for the supply of Foreign currency to retail clients.

Question Two

Is the supply by Entity A of foreign currency to a recipient intending to use the foreign currency outside Australia a supply of a right that is GST-free under item 4(a) of the table in subsection 38-190(1) of the GST Act?

Answer

Yes.

Question Three

If the answer to Question 2 is 'yes', is the proposed methodology to be used in calculating the extent to which the supplies by Entity A of foreign currency are intended to be used outside Australia acceptable to the Commissioner?

Answer

Yes, provided the methodology does not produce large variations between intended use and actual use which are not explicable by an unforeseen change in circumstances.

Question Four

Do the account management fees, payment processing fees, and the lender referral fees charged or intended to be charged by Entity A to its clients represent consideration for an input taxed supply under section 40-5 of the GST Act or a taxable supply under section 9-5 of the GST Act?

Answer

The fixed account management fee charged as an account set-up fee represents consideration for a taxable supply. The variable account management fees charged as periodic account maintenance fees represent consideration for input taxed supplies. The payment processing fees are consideration for input taxed supplies. The lender referral fees are consideration for taxable supplies.

Question Five

Following on from Question Four, where a client of Entity A is a non-resident and the supply otherwise satisfies the requirements of item 2 and/or item 3 of subsection 38-190(1) of the GST Act, do the account management fees, payment processing fees, lender referral fees and transaction processing fees charged or intended to be charged by Entity A to its clients represent consideration for GST-free supplies under the GST Act?

Answer

Yes.

Question Six

Does section 84-5 of the GST Act (the reverse charge rule) apply to the services supplied to Entity A by the Non-resident Entity under the agreement?

Answer

Yes, the Foreign currency Ancillary Services are subject to reverse charge under section 84-5 of the GST Act. However, the Foreign currency Services are not.

This ruling applies for the following period:

xx May 20xx to xx May 20xx

The scheme commenced on:

xx April 20xx

Relevant facts and circumstances

Entity A is an Australian resident company. It is a wholly owned subsidiary of the Non-resident Entity.

Entity A is registered for GST. It carries on the business previously carried on by the Non-resident Entity in Australia through a branch operation. The Non-resident Entity no longer has any physical presence in Australia.

Following the cessation of the Non-resident Entity's branch operations in Australia and the commencement of that business by Entity A, the two companies entered into two agreements regarding services to be provided to Entity A.

The primary business of Entity A is that of providing clients with foreign currency exchange services. For that purpose, Entity A is authorised by the Australian Securities and Investments Commission (ASIC) to provide financial services under Australian Financial Services License (AFSL) Number xxxxxx.

Access to those services is via an 'Account' each client is required to establish with Entity A. The 'Account' is a virtual account. Funds 'deposited' in it are transferred to an actual bank account of Entity A and funds 'withdrawn' from it are similarly transferred from an actual bank account of Entity A.

A key purpose of Entity A's Account is to facilitate the overseas activities and business transactions of its clients, all of whom are retail clients.

Once established, an Account enables a client to:

(a)          make payments to third parties in foreign currency using Australian dollar funds 'loaded onto' the Account; and

(b)          enter into Spot Contracts, Forward Contracts or any other foreign currency exchange trades.

Relationship Agreement

The terms and conditions of the relationship between Entity A and each of its clients are set out in a standard-form agreement (the Relationship Agreement).

Financial Services Guide (FSG)

Entity A is authorised to provide financial services to both retail and wholesale clients in relation to foreign exchange products.

Entity A generates revenue from its 'spreads', which is the difference between the wholesale exchange rate and the exchange rate offered to clients.

Entity A may also charge other fees associated with client transactions.

Intra-group Agreements

Entity A entered into two agreements with the Non-resident Entity.

The parties agreed that Entity A requires certain services which, if not provided by the Non-resident Entity, would have to be sourced from a third party.

The Non-resident Entity intends to provide foreign exchange currency services and bought-in currency and foreign exchange services from its banking partners and, under the terms of the Agreement, mark-up and sell the same to Entity A at an arm's length price.

The services to be provided by the Non-resident Entity to Entity A comprise 'Foreign currency Services' and 'Foreign currency Ancillary Services'.

•         'Foreign currency Services' are defined to mean currency and foreign exchange products and services.

•         'Foreign currency Ancillary Services' are defined to mean the Foreign currency-connected services as outlined in the Schedule to the Agreement.

The Schedule to the Agreement provides that the Foreign currency Ancillary Services to be provided to Entity A shall include the following services:

•         Transactional operations,

•         Banking operations,

•         Regulatory operations,

•         Product development,

•         Risk management services,

•         Legal advice,

•         Technology support,

•         Compliance monitoring,

•         Relationship management, building and maintaining client relationships.

Other Facts and Circumstances

Entity A does not currently charge its clients account management fees, but would amend both the Agreement and the FSG if it introduces such fees in the future.

Entity A intends to charge its clients account management fees in the following manner:

•         a one-time, fixed, account set-up fee upon the establishment of an Account that allows the client to receive funds in a particular currency; and

•         a variable, monthly commission based on the value of all transactions processed through a client's Account during the month, termed an account maintenance fee.

Entity A does not currently charge its clients a payment processing fee. However, it intends to introduce such a fee in circumstance whereby a client directs Entity A to make a payment in a particular foreign currency but the client's Account either does not contain that currency or a sufficient amount of that currency.

Entity A charges some clients a lender referral fee as compensation for the submission of loan applications on behalf of the client, to third party lenders, including making available to such lenders information they require in relation to such an application.

The lender referral fee is only payable in the event the client accepts a loan from a lender to which the client was introduced by Entity A. In this circumstance, Entity A would not be a credit provider and would only act in the capacity of an intermediary. To date, lender referral fees have only been charged to Australian lenders.

All clients of Entity A have some level of business activity outside Australia.

All retail clients of Entity A are residents of Australia.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-10,

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-15

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-30

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 38-190

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 84-5

A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) section 40-5.09

Reasons for decisions

Question One

Does the spread achieved by Entity A when making supplies of Foreign currency to its clients, being the difference between the retail currency exchange rate charged to clients and the wholesale exchange rate paid by Entity A, form part of the consideration for those supplies for the purposes of the GST Act?

Detailed Reasoning

The difference between the retail currency exchange rate charged to clients and the wholesale exchange rate paid by Entity A, termed 'the spread', is effectively Entity A's profit margin on the transaction, being the supply of Foreign currency by Entity A. The consideration for the supply of Foreign currency to retail clients is the retail currency exchange rate. The wholesale exchange rate paid by Entity A relates to a different supply.

Question Two

Is the supply by Entity A of foreign currency to a recipient intending to use the foreign currency outside Australia a supply of a right that is GST-free, under item 4(a) of the table in subsection 38-190(1) of the GST Act?

Detailed Reasoning

Pursuant to item 4(a) of the table in subsection 38-190(1), a supply that is made in relation to rights is GST-free if the rights are for use outside the indirect tax zone, i.e., outside Australia.

In Travelex Ltd v FCT [2010] HCA 33 (Travelex), the High Court, by a 3-2 majority decision, ruled that the supply of physical Fijian currency to an individual travelling to Fiji on the departure side of the Customs barrier at Sydney International Airport was a supply made in relation to rights for the purposes of item 4(a) of subsection 38-190(1) of the GST Act and, accordingly, was a GST-free supply.

In the process of reaching that decision, two of the majority, being French CJ and Hayne J, noted in their joint judgment, at [5], that the Fijian currency notes were for use outside Australia. Their Honours also stated, at [35], that:

[w]here it is evident that the currency is to be used overseas, the rights that attach to the currency are for use outside Australia.

In the Commissioner's view it would be incorrect to distinguish the supplier's circumstances in Travelex from Entity A's circumstances merely on the basis that one involved physical currency and the other - Entity A's - involves electronic currency. They both comprise the same bundle of rights, and it is consistent with the reasoning in the High Court's majority decision in Travelex to accept that Entity A's supply of foreign currency in electronic form is equally capable of being treated as GST-free under item 4(a) of the table in subsection 38-190(1), where the foreign currency is for use outside Australia. It is also to be noted that whilst Line No. A78 in schedule 2 to GSTR 2002/2 applies to an ADI supplier, we make there no distinction between an international money transfer and a delivery of physical currency.

Question Three

If the answer to Question 2 is 'yes', is the proposed methodology to be used in calculating the extent to which the supplies by Entity A of foreign currency are intended to be used outside Australia acceptable to the Commissioner?

Detailed Reasoning

The proposed methodology has been submitted as a reasonable basis of apportionment, and we accept that submission.

In particular, we note the following points, as discussed by the Commissioner in GSTR 2003/8:

a)            Pursuant to paragraph 108A, and following on from paragraph 37, a supply does not fall within Item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within Item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.

b)            A large variation between intended use and actual use can indicate a particular methodology may not be reasonable if the variation is not explicable by an unforeseen change in circumstances. In the absence of a variation being large, the difference between the intended use and the actual use does not affect the extent to which the supply is taxable or GST-free (paragraphs 122 and 123).

Question Four

Do the account management fees, payment processing fees, and the lender referral fees charged or intended to be charged by Entity A to its clients represent consideration for an input taxed supply under section 40-5 of the GST Act or a taxable supply under section 9-5 of the GST Act?

Detailed Reasoning

Account management fees

Entity A does not actually (currently) charge account management fees, but we accept that their introduction is seriously contemplated. Furthermore, we accept that Entity A intends to introduce two types of account management fees: a one-time account set-up fee and a variable monthly fee, on the following terms:

•         Entity A intends to charge the client a one-time, fixed, account set-up fee upon the establishment of an Account, on behalf of a client, that allows the client to receive funds in a particular currency.

•         Entity A intends to charge the client a variable, monthly commission based on the value of all transactions processed through the client's Account during the month, termed an account maintenance fee.

In relation to the proposed one-time account set-up fee, account management services provided by a non-ADI do not constitute financial supplies under section 40-5.09 of the GST Regulations. Although section 40-5.12 is only relevant to supplies treated as financial supplies by section 40-5.09, we agree that Item 12 of the table in section 40-5.12 would otherwise treat such a service as a taxable supply.

In relation to the proposed monthly account maintenance fee, we consider that the processing of transactions through an Account on behalf of a client should be characterised as part of the consideration for a supply of foreign currency (by way of conversion of AUS or Foreign currency into the relevant currency, or by way of conversion of the relevant currency into AUD or a different Foreign currency). The correct characterisation of the supply for which the monthly account maintenance fee is consideration, is that of an input taxed supply.

Payment processing fees

Entity A also does not actually (currently) charge payment processing fees, but we accept their introduction is seriously contemplated, on the following terms:

•         Entity A intends to charge a payment processing fee in the circumstance whereby a client directs Entity A to make a payment in a particular currency but the client's Account either does not contain that currency or a sufficient amount of that currency. Payment processing fees will not be charged in respect of payments made in AUD.

We have been asked to confirm the view that payment processing fees are consideration for input taxed supplies, on the basis that the fees can be characterised as either consideration for the supply of an option to buy foreign currency from Entity A, so that the client can make payments to third parties in a particular currency, or part of the consideration for a supply of that currency by Entity A to the client.

Provided Entity A introduces payment processing fees in the manner described above, we agree they will represent consideration for input taxed supplies.

Lender referral fees

Entity A recently began charging clients a lender referral fee as compensation for the submission of loan applications on behalf of the client, to third party lenders, including making available to such lenders information they require in relation to such an application.

The lender referral fee is payable in the event the client accepts a loan from a lender to which the client was introduced by Entity A. In this circumstance, Entity A would not be a credit provider and would only act in the capacity of an intermediary.

We consider the submission of loan applications on behalf of the client to third party lenders can be described as broking services as per Item 11 of section 40-5.12 of the GST Regulations, and therefore would not be a financial supply. Furthermore, we consider that you are acting as a financial supply facilitator in relation to you submitting of loan applications on behalf of clients within the meaning of section 40-5.07. Supplies made by financial supply facilitators are not themselves financial supplies by virtue of section 40-5.09 (specifically, subparagraph 40-5.09(1)(b)(ii)). Your circumstances here are similar to those discussed in paragraphs 107 and 108 of GSTR 2002/2.

Paragraphs 107 and 108 of GSTR 2002/2 state:

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).

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

Accordingly, the fees charged for your submission of loan applications on behalf of clients to third party lenders will not be consideration for a financial supply that is input taxed under section 40-5 of the GST Act.

Under section 9-5 of the GST Act, a supply is a taxable supply if:

(a)          the supply is made for consideration; and

(b)          the supply is made in the course or furtherance of an enterprise carried on by the supplier; and

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

(d)          the supplier is 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.

The supplies made by Entity A are for consideration and are made in the course of its enterprise. The supplies are connected with the indirect tax zone as Entity A makes the supplies through an enterprise it carries on in the indirect tax zone. Furthermore, Entity A is registered for GST.

As the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act are met, the supplies made by Entity A for which it charges the account management fees, payment processing fees, and the lender referral fees are taxable supplies unless they are GST-free or input taxed.

Question Five

Following on from Question Four, where a client of Entity A is a non-resident and the supply otherwise satisfies the requirements of item 2 and/or item 3 of subsection 38-190(1) of the GST Act, do the account management fees, payment processing fees, lender referral fees and transaction processing fees charged or intended to be charged by Entity A to its clients represent consideration for GST-free supplies under the GST Act?

Detailed Reasoning

The facts and circumstances surrounding the charging of account management fees, payment processing fees, and lender referral fees are as discussed in relation to Question Four above.

We understand that transaction processing fees charged by Entity A fall into one of three categories: electronic transfer fees, cancellation fees, and third party charges and interest.

All such categories of fees represent consideration for a supply of services and/or rights in relation to foreign currency and, provided Entity A can demonstrate that a client is a non-resident and not in Australia at the time of the supply, all such services are GST-free under items 2 or 3 of subsection 38-190(1).

Question Six

Does section 84-5 of the GST Act (the reverse charge rule) apply to the services supplied to Entity A by the Non-resident Entity under the Intra-group Agreements?

Detailed Reasoning

Section 84-5 treats certain, listed, 'offshore supplies' made to registered recipients as taxable supplies.

However, by virtue of subsection 84-5(1), that deeming rule applies 'except to the extent that it is GST-free or input taxed.' Thus, any given supply that is covered by the third column of one of table items 1 to 5 in section 84-5 will nevertheless not be treated as a taxable supply to the extent it is GST-free or input taxed.

In practical terms therefore, it is not necessary to determine whether or not any given supply is covered by one of those items if the supply is GST-free or input taxed.

Two broad categories of supplies are made to Entity A by the Non-resident Entity under the terms of the Agreement: 'Foreign currency Services' and 'Foreign currency Ancillary Services'. 'Foreign currency Services' are defined to mean currency and foreign exchange products and services. 'Foreign currency Ancillary Services' are defined to mean the Foreign currency-connected services as outlined in the Schedule to the Agreement.

It is accepted that the Foreign currency Services provided to Entity A under the terms of the Agreement are input taxed supplies under section 40-5, notwithstanding the fact that the supplies are not connected with Australia and the Non-resident Entity is not registered (by virtue of subsection 40-5.09(2) of the GST Regulations). On behalf of Entity A, it has been argued that the same outcome applies to the Foreign currency Ancillary Services provided to Entity A under the terms of the Agreement. The basis for this argument is that the Foreign currency Ancillary Services are 'integral, ancillary or incidental' to the supply of the Foreign currency Services and therefore should not be considered to be separate supplies to those Foreign currency Services. This argument relies on the terms of the Commissioner's views as expressed in GSTR 2001/8, in relation to composite supplies.

Although the GST Act does not specifically recognise the concept of a composite supply, or for that matter a mixed supply, the courts have broadly supported those views and the distinctions made in GSTR 2001/8 between a composite supply and a mixed supply.

At paragraphs 40 to 44, 45 and 52 of GSTR 2001/8, the Commissioner states:

Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act.

An identification of the essential character of what is supplied may inform whether a particular transaction falls within the terms of a specific statutory provision, and whether it does so wholly or only to some extent. You must consider all of the circumstances of the transaction to ascertain its essential character. However, that does not mean that an economic substance over legal form approach is endorsed for working out the essential character of what is supplied. For more guidance on how to characterise a supply, go to paragraphs 222 to 246 of Goods and Services Tax Ruling GSTR 2006/9.

By having regard to the essential character or features of the transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable parts or is a composite supply of one thing. It is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

In this Ruling, we use the words integral, ancillary and incidental to assist in determining whether or not a part of a supply needs to be individually recognised or separately identified.

A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.

In many circumstances, it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity.

The Commissioner's view is that a supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply. This view applies where the supply is comprised of a mix of separate things, such as various combinations of goods and services, including the provision of advice.

In relation to financial supplies, the Commissioner has also discussed the concepts applying to mixed supplies and composite supplies at paragraphs 91 to 98 of GSTR 2002/2, noting that the word 'incidental' in the context of composite supplies is not to be confused with the term when used in connection with an incidental financial supply.

Having regard to the terms of the Agreement, the Foreign currency Ancillary Services are separately identifiable to the Foreign currency Services. While the Foreign currency Ancillary Services may support Entity A in the operation of its foreign currency exchange business, through the provision of management and support services (such as legal/regulatory compliance services, risk management services, technology systems, etc.), the Foreign currency Ancillary Services are not integral, ancillary, or incidental to those supplies of Foreign currency Services. The Foreign currency Ancillary Services are separate supplies altogether.

Consequently, the supply of Foreign currency Ancillary Services are not an input taxed financial supply under section 40-5.

Application of section 84-5 of the GST Act

A supply is a taxable supply under subsection 84-5(1) of the GST Act (except to the extent that it is GST-free or input taxed) if:

(a)          the supply is for consideration; and

(b)          the recipient of the supply is registered or required to be registered; and

(c)          the supply is covered by the third column in the table in subsection 84-5(1).

Item 1 of the table in subsection 84-5(1) covers a supply of anything, other than goods or real property, that is not connected with the indirect tax zone and the recipient of the supply satisfies the purpose test in subsection 84-5(1A). The purpose test referred to in Item 1 is that:

(a)          the recipient of the supply acquires the thing supplied solely or partly for the purpose of an enterprise that the recipient carries on in the indirect tax zone; and

(b)          the recipient does not acquire the thing supplied solely for a creditable purpose.

Entity A acquires the Foreign currency Ancillary Services from the Non-resident Entity solely for the purpose of its enterprise carried on in the indirect tax zone and its acquisition of the supply is not solely for a creditable purpose. The purpose test in subsection 84-5(1A) is satisfied. Additionally, the supply is not connected with the indirect tax zone under section 9-26 of the GST Act; thus, the requirement in paragraph 84-5(1)(c) is met.

The requirements in paragraphs 84-5(1)(a) and 84-5(1)(b) are also satisfied as the supply of the Foreign currency Ancillary Services is for consideration and Entity A is registered for GST. Therefore, the supply is a taxable supply under subsection 84-5. Accordingly, the GST on the supply is payable by Entity A under section 84-10 of the GST Act.

We note that the Schedule to the Agreement prescribes the terms of all fees and payments to be made by Entity A in respect of the supplies made to it under the Agreement, and that those terms make no distinction between the Foreign currency Services and the Foreign currency Ancillary Services. In other words, the recipient and the supplier have no agreement to separate the consideration for the supply of the Foreign currency Services from the consideration for the supply of the Foreign currency Ancillary Services. In that case, Entity A must use a reasonable method of apportionment to calculate the GST it must pay on the supply of the Foreign currency Ancillary Services.