ATO ID 2003/1061: GST and supply of a guaranteed fixed interest rate facility
Date of decision: 11 June 2003
Business line: Indirect Tax

Issue
Is the entity, a provider of financial products, making an input taxed supply under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it supplies a guaranteed fixed interest rate facility to a customer and the customer chooses to exit the facility?

Decision
Yes, the entity is making an input taxed supply under subsection 40-5(1) of the GST Act when it supplies a guaranteed fixed interest rate facility to a customer and the customer chooses to exit the facility.

Facts
The entity is a provider of financial products. One of the financial products that the entity offers to a customer is a guaranteed fixed interest rate facility. Under this facility, the customer enters into a contract to finance equipment (by way of a loan, a hire purchase, a finance lease or an operating lease) at a guaranteed fixed interest rate and at a future date. The guaranteed fixed interest rate will be used to calculate repayments if the customer enters into a loan, hire purchase, finance lease or operating lease at a future date. The contract allows the entity to charge a fee to the customer if, after entering into this facility, the customer decides to exit the facility. Changes in the interest rate subsequently prove to be unfavourable and the customer chooses to exit the facility. The entity then charges the customer the fee for exiting the facility. The entity is a financial supply provider as defined under regulation 40-5.06 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). The supply is for consideration. The supply is made in the course of the entity's enterprise and is connected with Australia. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that financial supply has the meaning given by the GST Regulations. Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if: Therefore, it is necessary to determine whether the entity is providing, acquiring or disposing of an interest in or under an item mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations when it supplies the guaranteed fixed interest rate facility. Item 2 and Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2 and Item 11) are the relevant items that need to be considered in this case. Item 2 lists 'an interest in or under a debt, credit arrangement or right to credit, including a letter of credit'. Goods and Services Tax Ruling GSTR 2002/2 defines a debt as an amount due from one entity to another or a presently existing obligation to pay an ascertainable amount at a future time. A credit arrangement is an arrangement under which an entity lends money on terms that include deferred repayment, or an agreement under which payment of a debt, owed by one entity to another, is deferred or time is allowed to pay. Although an interest rate is usually connected with a debt or a credit arrangement and is used to calculate repayments under these transactions, the interest rate itself is not a debt or a credit arrangement and as such, the supply of a guaranteed interest rate facility is not a financial supply under Item 2. Item 11 lists 'a derivative'. Regulation 3 of the GST Regulations defines derivative as 'an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate'. Schedule 1 of GSTR 2002/2 further provides that a derivative includes financial instruments such as options, forwards, futures, swaps and whose value is tied to or derived from an underlying security, commodity, currency, liability or index. Entities usually use derivatives to hedge against changes in interest rates and foreign exchange risks or to minimise business risks. Under the entity's guaranteed fixed interest rate facility, the customer enters into a contract to finance equipment (by way of a loan, a hire purchase, a finance lease or an operating lease) at a guaranteed fixed interest rate and at a future date. The value of a guaranteed fixed interest rate facility is derived from the value of a current interest rate and therefore, the guaranteed fixed interest rate facility is a derivative for the purposes of Item 11. The derivative is used by the customer to hedge against changes in interest rates at a future date. As such, the entity is providing an interest, as mentioned under subregulation 40-5.09(3) of the GST Regulations, when it provides a guaranteed fixed interest rate facility. The entity charges a fee to the customer when the customer exits the facility. This fee is consideration for the entity's supply of the facility. The supply is made in the course of the entity's enterprise and is connected with Australia. In addition, the entity is registered for GST and is a financial supply provider in relation to the supply of the guaranteed interest rate facility. Accordingly, the supply satisfies the requirements of subregulation 40-5.09(1) of the GST Regulations and the entity is making an input taxed supply under subsection 40-5(1) of the GST Act when it supplies a guaranteed interest rate facility to a customer and the customer chooses to exit the facility.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(1) subsection 40-5(2)
Related public rulings and determinations: GSTR 2002/2
Subject references: Goods and services tax Input taxed supplies GST financial supplies GST debt, loan and credit GST derivatives