Edited version of private advice

Authorisation Number: 1052278002692

Date of advice: 19 July 2024

Ruling

Subject: GST - financial supply provider

Question

Are you a financial supply provider under subsection 40-5.06(1) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations), in relation to the provision of credit arrangements (loans)?

Answer

Yes. You are a financial supply provider in relation to the provision of the loans.

This ruling applies for the following period:

DD July 20YY to DD July 20YY

The scheme commences on:

DD April 20YY

Relevant facts and circumstances

You are Entity X.

You are registered for GST.

You provide financial supplies in the form of loans (credit arrangements).

You carry out the process of administering loans from start to finish.

You use your own funds to provide the loans.

Your loan contract documents reflect only two parties, Entity X (you) and the borrower.

You do not have any agency agreements with third parties for the provision of credit arrangements.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Regulations 1999 subsection 40-5.06

A New Tax System (Goods and Services Tax) Regulations 1999 subsection 40-5.07

A New Tax System (Goods and Services Tax) Regulations 1999 subsection 40-5.09

Reasons for decision

To determine if you are a financial supply provider, we review subsection 40-5.06(1) of the GST Regulations:

Financial supply providers

(1)        An entity, in relation to the supply of an interest that was:

(a)          immediately before the supply, the property of the entity; or

(b)          created by the entity in making the supply;

is the financial supply provider of the interest.

A financial supply provider provides an interest. The interest in this case relates to the provision of loans.

Are you a financial supply provider or a financial supply facilitator of financial supplies? To examine this we look to GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) which outlines the difference between financial supply providers and financial supply facilitators.

Paragraphs 103 to 104 of GSTR 2002/2 states:

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).

Applied to the relevant facts, you create the interest when making the supply of the loan. An interest in a property did not exist before the supply, the supply only comes into existence when the contract for the loan is executed and you receive a security interest in the relevant asset and the customer receives an interest in the loan monies.

Paragraphs 105 of GSTR 2002/2 states:

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.

The borrower, by signing the contract, agrees to the terms, which acknowledges the creation of a mortgage as a security over property, and specifies that the secured money (loan) must be repaid when due with interest, and details that you will exercise enforcement powers in the event of a default occurring. The terms also require that the borrower must register your interest in the property under their insurance arrangements. It is clear that the interest is created between you and the borrower.

To understand if you are a financial supply facilitator, to avoid further doubt, we look to Paragraphs 107 to 108 of GSTR 2002/2 which states:

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.

Paragraph 107 specifies that in order to be considered a financial supply facilitator, in relation to an interest, the entity must facilitate the supply of an interest for a financial supply provider. We have established that the interest is created by you through the contract and establishment of a mortgage. There is no other party involved in the provision of the interest for you to facilitate. The example in paragraph 108 illustrates the need for three parties, one to create a supply, one to facilitate, and one to receive the supply; and in your case, you are simply providing to the party receiving.

Paragraphs 257 to 258 of GSTR 2002/2 states:

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.

Applied to the relevant facts, a financial supply facilitator helps forward or assists the supply. You carry out the administration of providing the loans. You create the interest rather than simply helping it forward in a facilitator role.

Paragraphs 259 to 260 of GSTR 2002/2 states:

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.

You are not acting in an agent-like capacity on behalf of a financial supply provider. These loans are not created before you create them. No agency arrangement connected to the supply of the loans can be established.

GSTR 2004/1 - Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides further guidance on agency and loans provided through a third party.

Paragraph 326 to 327 of GSTR 2004/1 states:

Loans made through a third party

326. Confusion about an entity's role in a loan transaction may result where a loan is provided to a borrower in a tripartite arrangement. Where the loan funds move from the lender to the entity's own accounts and then to the borrower, the entity may not be a financial supply facilitator, but may be a financial supply provider in its own right of an interest in a credit arrangement. The entity in this circumstance is not providing loan agency services when it on-lends the money.

327. Rather than there being a single financial supply of an interest in the credit arrangement from the lender to the borrower, there are two separate financial supplies of an interest in a credit arrangement from the lender to the entity and from the entity to the borrower. That is, one supply from the lender to the entity and another supply from the entity to the borrower.

Your funding is not a loan (interest) provided to you by another entity; nor is the funding a tripartite loan arrangement. Funds are simply supplied by you to the borrower, which is its own singular supply.

To clarify further you are not an agent in relation to the supply, paragraph 328 to 329 of GSTR 2004/1 states:

328. Whether the entity is an agent or a principal in relation to the supply and consequently whether it is the financial supply provider or financial supply facilitator, depends upon the circumstances of the transaction.

329. Some indicators of the existence of a loan agency (whereby the third party is a financial supply facilitator) arrangement are where:

•           a clear agency agreement is in place;

•           the third party does not lend its own funds;

•           if the borrower defaults on the loan, the original lender, rather than the third party will take action against the borrower;

•           the third party receives commission income from the original lender in respect of the loan; and

•           the security for the loan is held by the original lender.

Paragraph 329 of GSTR 2004/1 applied to the relevant facts:

•         No agency agreement is in place.

•         You lend using your own funds.

•         The loan contract details that in the event of a default occurring, you may exercise all your enforcement powers under the mortgage or conferred by law on mortgagees and are not required to give the customer any notice or wait for any period before exercising your rights. You are the original lender and can take action against the borrower.

•         You do not receive any commission for the provision of loans by any third parties.

•         You hold the security of the loan. The loan contract details that you have discretion to set the terms and conditions upon which the loan can be made.

In view of these facts we can conclude that you are not a financial supply facilitator, you are a financial supply provider.