Private ruling: GST and Financial Supplies

Ruling: Q1: Are you entitled to claim an input tax credit for the GST included in brokerage fees incurred by you? Advice/Answer Yes, provided you do not exceed the financial acquisitions threshold (FAT) in a particular month, you are entitled to claim an input tax credit on the brokerage fees incurred by you. If you exceed the FAT, you will be entitled to a reduced input tax credit of 75% of the GST paid on the brokerage fees.




Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: · You derive primary production income and have been registered for GST from 1 July 2000 on a quarterly reporting cycle. | · You own shares individually as well as jointly. In a particular year, one of the partners commenced a new enterprise of trading in options on the shares held by him and received a private ruling which permitted him to claim an input tax credit for the GST included in the cost of brokerage fees incurred. | · You have recently sold a property and intend to apply part of the proceeds of this sale to trading in options. | · You have applied for a new trading account for the purpose of trading in options with the intention of making a profit. | · You will be using the services of an on-line broker to reduce the costs incurred in the trading of options. | Ruling: Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make. | Section 11-5 of the GST Act sets out the following requirements that must be satisfied for an acquisition to be a creditable acquisition: | · you acquire anything solely or partly for a creditable purpose; and | · the supply of the thing to you is a taxable supply; and | · you provide, or are liable to provide, consideration for the supply; and | · you are registered, or required to be registered. | In your case, the supply of the brokerage services is a taxable supply from the broker to you. You provide consideration for the supply and you are registered for GST. Therefore, the requirements of paragraphs 11-5(b) - (d) are satisfied. | However, it is necessary to ascertain whether you acquire the brokerage services partly or solely for a creditable purpose and therefore satisfy paragraph 11-5(a) of the GST Act. | Section 11-15 of the GST Act refers to the meaning of 'creditable purpose' and advises, in part, that: | · You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. | · However, you do not acquire the thing for a creditable purpose to the extent that: | · the acquisition relates to making supplies that would be input taxed; or | · the acquisition is of a private or domestic nature. | Enterprise: In order to ascertain whether you acquire the brokerage services for a creditable purpose, it is necessary to establish whether you are carrying on an enterprise of trading in share options. Enterprise is defined in paragraph 9-20(1) of the GST Act to include an activity, or series of activities, done: | · in the form of a business; or | · in the form of an adventure or concern in the nature of trade.. | Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides guidance on the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN). | As stated in Goods and Services Tax Determination GSTD 2006/6, MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. | Paragraph 177 of MT 2006/1 states that in order to determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. | Paragraph 178 of MT 2006/1 advises that Taxation Ruling, TR 97/11 (TR 97/11), discusses the main indicators of carrying on a business. Some indicators are: | · a significant commercial activity; | · a purpose and intention of the taxpayer to engage in commercial activity; | · an intention to make a profit from the activity; | · the activity is or will be profitable; | · the recurrent or regular nature of the activity; | · the activity is carried on in a similar manner to that of other businesses in the same or similar trade; | · activity is systematic, organised and carried on in a businesslike manner and records are kept; | · the activity is of a reasonable size and scale; | · a business plan exists; | · commercial sales of product; and | · the entity has relevant knowledge or skill. | Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. | Paragraph 12 of TR 97/11 states that, 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. | In your case, you have a purpose and the intention to engage in a commercial activity of trading in share options. You intend to commence this activity as soon as you are advised that the new trading account is operational. | Your intention is to make a profit from the activity. Your options trading activity will be of a recurrent or regular nature. The activity will be carried on in a similar manner to that of other businesses in the same trade. In general, options trading activities are conducted through a competent broker. In this case you have decided to use the services of an on-line broker to reduce costs. | You intend to carry on the activity in a systematic, organised and a businesslike manner, and are aware that you must keep proper records of your transactions. It is intended that the activity will grow to a reasonable size, although until the trading account is operational there is currently no activity by you in the trading of options. | There is a commercial sale of product in that you will exercise your options on your shares, which could result in either a profit or a loss. The principal has previously attended a workshop on options trading and gained the relevant knowledge and skills for options trading. Therefore you will have the skills to conduct options trading through the internet using an online broker, thus saving a substantial part of the normal, off-line brokerage fees. | As per the above analysis, it can be concluded that your intention is to carry on an enterprise of trading in share options as soon as you are able to apply the proceeds of the property sale to the new trading account. | Financial supplies are input taxed. What constitutes financial supplies is set out in the table in sub-regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). | Under item 11 in the table in sub-regulation 40-5.09(3), the provision, acquisition or disposal of an interest in or under a derivate is a financial supply, provided all the requirements under sub-regulation 40-5.09(1) are satisfied. Examples for derivatives include option contracts, the value of which depends on, or is derived from, the share or stock prices or equity index values (item 1 of Part 9 of Schedule 7 of the GST Regulations). | In your case, you will be making financial supplies in the course of your new enterprise once you commence trading in share options. You will acquire brokerage services in the course of these activities. As such, the acquisition of brokerage services is not made for a creditable purpose, as it relates to making financial supplies that would be input taxed. Therefore, paragraph 11-5(a) of the GST Act is not satisfied and you will not be entitled to an ITC for acquisition of brokerage services under the basic rules. | Under section 189-1 of the GST Act, you can be entitled to ITCs for your acquisitions relating to financial supplies (even though financial supplies are input taxed) if you do not exceed the FAT. | The purpose of the FAT is to allow entities that make a relatively small amount of financial supplies, as compared to their taxable supplies or GST free supplies, to claim full input tax credits relating to those financial acquisitions. If you do not exceed the FAT, you will be entitled to full ITCs for your acquisitions relating to making financial supplies. | As per subsection 189-15 of the GST Act, a financial acquisition is an acquisition that relates to the making of a financial supply (other than a financial supply consisting of a borrowing). | Subsection 11-15(4) of the GST Act provides that an acquisition is not treated as relating to making supplies that would be input taxed, if the only reason it would be input taxed is because it relates to making financial supplies and you do not exceed the FAT. | Under Division 189 of the GST Act, you exceed the FAT where you have made, or are likely to make financial acquisitions where the ITCs related to making those acquisitions would exceed either or both tests: | · $50,000 or such other amount specified in the GST Regulations | [paragraphs 189-5(1)(a) and 189-10(1)(a) of the GST Act] (first limb test), or | · 10% of the total amount of the ITCs to which you would be entitled for all your acquisitions and importations including financial acquisitions [paragraphs 189-5(1)(b) and 189-10(1)(b) of the GST Act] (second limb test). | You determine whether you exceed the FAT in a given month based on your acquisitions in: | · that month and the previous 11 months [subsection 189-5(1) of the GST Act] (current acquisitions), and | · that month and the next 11 months [subsection 189-10(1) of the GST Act (future acquisitions)]. | The acquisition of brokerage services is a financial acquisition because it is an acquisition that relates to making a financial supply being the provision, acquisition or disposal of an interest in derivatives. | In relation to the first limb, you need to calculate the ITCs for financial acquisitions that you have made or are likely to make in the current period (i.e. the given month and the previous 11 months) and the future period (i.e. the given month and the next 11 months). | You exceed the FAT under the first limb test if you make or are likely to make financial acquisitions where the ITCs related to making those acquisitions would exceed $50,000 under either the current acquisitions or future acquisitions test, assuming the acquisitions were solely for a creditable purpose. | In relation to the second limb test, you also need to calculate the total amount of ITCs to which you would be entitled for all your acquisitions and importations (including financial acquisitions) that you have made, or are likely to make, in the current period (i.e. the given month and the previous 11 months) and the future period (i.e. the given month and the next 11 months). | You exceed the FAT under either the current acquisitions or future acquisitions test where your financial acquisitions (i.e. the amount calculated under the first limb test) exceeds 10% of 'the total amount of ITCs to which you would be entitled' for all of your acquisitions and importations (including financial acquisitions) assuming that all your financial acquisitions were solely for a creditable purpose (the second limb test). | Examples of these FAT calculations can be found in the Financial Services Industry Issues Register, (Financial services -questions and answers), in particular issue 7.3 and 7.5. | Therefore, if you do not exceed the FAT in a particular month, you will be entitled to a full ITC for the brokerage services relating to the making of financial supplies. | Reduced Input Tax Credits: If you exceed the FAT, you are not entitled to claim full ITCs for the acquisition of brokerage services. However, you may be entitled to claim a reduced ITC for a reduced credit acquisition under Division 70 of the GST Act. | Under Division 70 of the GST Act, some acquisitions relating to financial supplies can attract a reduced ITC, even though no ITC could arise under the basic rules. | The acquisitions that attract the reduced credit are listed in the table in sub-regulation 70-5.02(2) of the GST Regulations. An acquisition is a reduced credit acquisition under table item 21(a) in sub-regulation 70-5.02(2) of the GST Regulations where it is an acquisition of an arrangement by a financial supply facilitator of the supply of a derivative. We consider that the acquisition of brokerage services on share options trading is a reduced credit acquisition under item 21 in the table in sub-regulation 70-5.02(2) of the GST Regulations. | Sub-regulation 70-5.03 of the GST Regulations specifies that the percentage of the ITC for each kind of reduced credit acquisition is 75%. | Therefore, you will be entitled to claim a reduced ITC on brokerage fees incurred, in relation to the reduced credit acquisition of brokerage services under section 70-5(1) of the GST Act. | Consequently, if you do not exceed the FAT, you will be entitled to an ITC on the GST paid on the brokerage fees. | However, if you exceed the FAT, you will be entitled to a reduced ITC of 75% of the GST paid on the brokerage fees incurred.