Private ruling: GST, apportionment methodology and reduced credit acquisitions
Date of advice: 3 October 2018
Published: March 2019

Ruling: Q1: Is your revenue-based GST apportionment methodology formula below considered by the Commissioner of Taxation to be a fair and reasonable basis for calculating the extent of creditable purpose of your overhead expenses under sections 11-15 and 11-30 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Revenue from Offshore Transactions Total Revenue from both Onshore and Offshore Transactions (x100) (%) | A1: Yes, the Commissioner considers your proposed revenue-based apportionment methodology formula to be a fair and reasonable basis for calculating the extent of creditable purpose of your overhead expenses under sections 11-15 and 11-30 of the GST Act. | Q2: Where you exceed the financial acquisition threshold (FAT), are you entitled to reduced input tax credits (RITC) for the Head Office costs from your overseas parent entity? | A2: Yes, where you exceed the FAT, you are entitled to RITC to the extent the Head Office costs from your overseas parent entity are mentioned in an item in Regulation 70-5.02B of the A New Tax System (Goods and Services Tax) Regulations 1999 (the GST Regulations) and the other requirements of Regulation 70-5.02A of the GST Regulations are satisfied.

Relevant facts and circumstances: You are a branch of an overseas bank and financial services provider with global branches. You are registered for GST from 1 July 2000. You hold an Australian Financial Services License and are listed as a foreign Authorised Deposit-taking Institution (“ADI”) on the Australian Prudential Regulation Authority (“APRA”) website. You provide your wholesale clients with debt and risk management products and services and access, correspondent banking, rates, cash management and trade finance platforms. You provide online international money transfer services to retail clients for an FX margin and a commission. You do not have ATM facilities. You derive income from the following categories of transactions in carrying on your enterprise (the “Services”): ● Interest ● Commission fees ● Syndicated loan fees ● Foreign exchange ● Income from investments You supply the above services to Australian resident customers, to other associated entities based overseas, non-resident customers and corporate clients domiciled in other foreign countries. You make both input taxed and GST-free supplies, and a small number of taxable supplies. You make acquisitions in carrying on your enterprise which are attributable to making input taxed, GST-free, and/or taxable supplies. There is no accounting allocation methodology in place that breaks down the costs into the various business units of your overseas parent entity. You incur the following overhead expenses in carrying on your enterprise as a whole and it relates indirectly to all supplies you make: ● travelling expense ● employee transportation expense ● employee food expense ● employee allowance ● stationary, postage, administration ● audit fees ● insurance ● telephone expenses ● law charges ● rent on office premises ● office repairs and maintenance ● repairs of employee residence ● computer maintenance ● charges of computer expense ● head office costs from overseas parent entity Head Office costs incurred from your overseas parent entity are of a broad nature which fall into the category of Reduced Credit Acquisitions under Regulation 70-5.02B of the A New Tax System (Goods and Services Tax) Regulations 1999 . Given the nature of these overhead expenses, the planned extent of creditable purpose is less than 100% (but greater than zero) and is therefore partly creditable. You propose to use a revenue classification methodology based on your income accounts to identify your input tax credit entitlement in respect of creditable acquisitions that relate to the above listed Services: Revenue from Offshore Transactions Total Revenue from both Onshore and Offshore Transactions (x100) (%) In carrying on your enterprise, you make GST-free supplies to entities not resident in Australia for tax purposes, taxable supplies to Australian resident entities for tax purposes and input taxed supplies to Australian resident entities for tax purposes. For the purposes of your apportionment formula, ● ‘Revenue from Offshore Transactions’ means the revenue from GST-free supplies to entities not resident in Australia for tax purposes and revenue from taxable supplies to Australian residents for tax purposes; and ● ‘Onshore transactions’ means revenue from input taxed supplies to Australian resident entities for tax purposes.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 11 | A New Tax System (Goods and Services Tax) Act 1999 Section 189-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 189-15 | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09. | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5.02B.

Reasons for decision: Detailed Reasoning - Detailed reasoning: Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to input tax credits for any creditable acquisition you make. Section 11-5 of the GST Act provides that you make a creditable acquisition where, among other things, you acquire a thing for a creditable purpose. Under section 11-15 of the GST Act, 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, among other things, the acquisition relates to making supplies that would be input taxed. The Commissioner’s views on apportionment and the methods of calculating the extent of creditable purpose of an entity’s acquisitions or importations are outlined in Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3). Paragraph 33 of GSTR 2006/3 requires any method chosen to apportion acquisitions must: ● be fair and reasonable; and ● reflect the intended use of that acquisition; and ● be appropriately documented. Although an apportionment methodology which uses a direct method of allocating acquisitions to the activities of the enterprise is favoured, paragraph 35 of GSTR 2006/3 explains that: [t]o the extent that it is not possible or practicable to use a direct method, you should use some other fair and reasonable basis, which might include an indirect estimation method. Paragraph 100 of GSTR 2006/3 explains that business records used in the course of business may be a reasonable basis of apportionment: 100. If a direct estimation method is available to you, the Commissioner considers this will reflect most accurately the actual or intended use of the acquisition. If your accounts satisfy Australian Accounting Standards, or prudential requirements of equivalent rigor, the Commissioner considers that they may provide an appropriate foundation for applying the direct estimation method, subject to that application being fair and reasonable in your individual circumstances. Paragraph 103 of GSTR 2006/3 clarifies when the use of an indirect estimation method of apportionment may be used: 103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise. Paragraph 109 of GSTR 2006/3 provides a basic revenue-based formula that can be expressed as follows: | Detailed Reasoning - Percentage credit allowed: [Revenue* (other than revenue from input taxed supplies) / Total Revenue* (including revenue relating to input taxed supplies)] x 100 *'Revenue' may be either net revenue or gross revenue depending on which provides the more appropriate reflection of the use of acquisitions in your circumstances. In any case, a consistent approach (gross or net) should be used for the same revenues occurring in both the numerator and denominator. If net revenue is used, it should ignore income tax. That is, do not reduce your revenue in the formula by the amount of the income tax deductions to which you may be entitled. The value of non-monetary consideration should also be included in revenue. You provided a list of the overhead expenses you incur in carrying on your enterprise which are listed in the ‘Relevant facts and circumstances’ section of the ruling. We accept that your proposed revenue-based apportionment methodology is a fair and reasonable basis for calculating the extent of creditable purpose of your overhead expenses. Note: This ruling only considers whether the apportionment methodology provided by you is fair and reasonable and does not deal with the GST treatment of the supplies you make. | Detailed Reasoning - Detailed reasoning: Subsection 11-15(4) of the GST Act provides that, for the purposes of paragraph 11-15(2)(a) of the GST Act, an acquisition that relates to making a financial supply is not treated as one that relates to making a supply that would be input taxed if the entity does not exceed the FAT. If you do not exceed the FAT, your Head office costs incurred may be fully creditable even if they relate (directly or indirectly) to making input taxed supplies. Where you exceed the FAT, you are not entitled to an input tax credit for your Head Office costs incurred from your overseas parent entity to the extent that they relate to making supplies that would be input taxed. However, you may be entitled to reduced input tax credits if the acquisition is a reduced credit acquisition under section 70-5 of the GST Act. Regulation 70-5.02A of the A New Tax System (Goods and Services Tax) Regulations 1999 provides that an acquisition mentioned in regulation 70-5.02B that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit (is a reduced credit acquisition) if: a) the supply or transfer that gives rise to the acquisition (i) consists in: (A) the transfer of something to an enterprise in the indirect tax zone (the receiving enterprise) from an enterprise outside the indirect tax zone (the supplying enterprise); or (B) the doing of something for the receiving enterprise by the supplying enterprise; and (ii) is a taxable supply because of section 84-5 of the GST Act (including supply that is not connected to the indirect tax zone because of section 84-15 of the Act); and b) the receiving enterprise and the supplying enterprise are closely related. Where you exceed the FAT, you are entitled to a reduced input tax credit to the extent the Head Office costs from your overseas parent entity are mentioned in an item in Regulation 70-5.02B of the A New Tax System (Goods and Services Tax) Regulations 1999 (the GST Regulations) and the other requirements of Regulation 70-5.02A of the GST Regulations are satisfied.