Private ruling: GST and currency exchange transactions and apportionment
Date of advice: 22 November 2017
Published: April 2018

Ruling: Q1: Is your supply of Australian currency to Australian clients, in exchange for foreign currency, input taxed under item 9 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)? | A1: Yes. Your supply of Australian currency to Australian clients, in exchange for foreign currency, is input taxed under item 9 in the table in subregulation 40-5.09(3) of the GST Regulations. | Q2: Is your supply of foreign currency to Australian clients: (a) GST-free under item 4(a) in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where you deposit the foreign currency to an account outside the indirect tax zone? (b) input taxed under item 9 in the table in subregulation 40-5.09(3) of the GST Regulations where that foreign currency is deposited into their Australian accounts? | A2: Yes. Your supply of foreign currency to Australian clients is: (a) GST-free under item 4(a) in the table in subsection 38-190(1) of the GST Act where you deposit the foreign currency to an account outside the indirect tax zone. (b) input taxed under item 9 in the table in subregulation 40-5.09(3) of the GST Regulations where that foreign currency is deposited into their Australian accounts. | Q3: Is your supply of Australian or foreign currency to non-resident clients, who are not in the indirect tax zone when the currency is deposited into those clients’ offshore accounts, GST-free under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2)? | A3: Yes. Your supply of Australian or foreign currency to non-resident clients, who are not in the indirect tax zone when the currency is deposited into those clients’ offshore accounts, is GST-free under Item 2 provided and to the extent: ● the supply is not directly connected with real property situated in the indirect tax zone, or ● the non-resident client acquires the currency in carrying on their enterprise but they are not registered or required to be registered for GST. | Q4: Is your supply of an option to buy and/or sell Australian and/or foreign currency: (a) input taxed under subsection 9-30(2)(b) of the GST Act to the extent it is for a supply described in Questions 1 or 2(b)? (b) GST-free under subsection 9-30(1)(b) of the GST Act to the extent it is for a supply described in Question 2(a)? | A4: Yes. Your supply of an option to buy and/or sell Australian and/or foreign currency is: (a) input taxed under subsection 9-30(2)(b) of the GST Act because, to the extent it is for a supply described in Questions 1 or 2(b), the supply of an option to buy and/or sell Australian and/or foreign currency is input taxed under Items 9 and 11 in the table to subregulation 40-5.09(3) of the GST Regulations. (b) GST-free under section 9-30(1)(b) of the GST Act to the extent it is for a supply described in Question 2(a). | Q5: Is the following methodology a fair and reasonable basis for estimating your input tax credit entitlement under sections 11-5 and 11-15 of the GST Act in respect of acquisitions you make? Number of foreign currency and Australian currency GST-free transactions Number of foreign currency and Australian currency GST-free and input taxed transactions | A5: Yes. Based on the information provided in this ruling and the specific circumstances of your business, we accept that using the number of transactions for the previous financial year (with the ‘transactions’ being as described in the Facts) is a fair and reasonable basis for estimating your input tax credit entitlement for the current financial year.

Relevant facts and circumstances: You carry on an enterprise that supplies foreign and Australian currency to Australian and offshore customers. You do not make any other supplies. You do not supply physical foreign or Australian currency. Rather, your supplies are made electronically. That is, the foreign or Australian currency is transferred to and from bank accounts electronically. Your clients are primarily in the global import/export business. For example, importers need to buy foreign currency to pay for overseas supplies. You supply the foreign currency to the client and typically make the payment on the client’s behalf to their supplier’s overseas account. You also supply foreign and Australian currency to a range of other clients that need to exchange currency for various business needs. For example, a client who buys property overseas and needs to buy foreign currency to settle the property purchase with the overseas vendor. You offer the following types of products to your clients: ● Spot Contracts: you supply foreign or Australian currency to the client for execution that always occurs within three business days after entering into the contract. ● Forward Contracts: you supply foreign or Australian currency to the client at an agreed exchange rate, where execution occurs at an agreed future point in time. ● Options Contracts: you supply to your clients the right, but not the obligation, to exchange foreign or Australian currency at an agreed exchange rate at (or by) a future point in time. Where the client exercises the option, execution occurs at that time. For the supply of foreign exchange spots, foreign exchange forwards or the exercise of foreign exchange options, in the majority of cases, the foreign currency supplied is deposited into an overseas account at the instruction of the client. For the remaining cases, the foreign exchange spots, foreign exchange forwards or the exercise of foreign exchange options result in a deposit to an Australian account. You provided a list of the categories of expenses you incur: ● rent ● information technology ● telecommunications ● marketing ● professional service fees ● small office equipment ● head office recharges (subject to reverse charge), and ● other miscellaneous expenses. None of the expenses relate exclusively to GST-free or input taxed supplies. Where you do not have, or have insufficient, currency of the country that your client requires, you cover your client’s trade with counterparty banks in the market that can be Australian banks or non-Australian banks. Your business is relatively stable from year to year in terms of the number and type of transactions. The formula you propose to use to estimate your input tax credit entitlement in respect of creditable acquisitions that relate to the above listed products is: Number of foreign currency and Australian currency GST-free transactions Number of foreign currency and Australian currency GST-free and input taxed transactions You will conduct this calculation on a periodic in arrears basis and do the calculation at a minimum annually ie you will apply last year’s transactions to calculate this year’s extent of creditable purpose. For the purposes of the transaction count in your proposed apportionment methodology formula, you calculate the transactions in the following manner: ● unexpired options at the end of a financial year are counted as input taxed or GST-free depending on the GST status of the currency exchange transaction that would have resulted if and when the option is exercised ● exercised options are counted as input taxed or GST-free depending on the GST status of the currency exchange transaction that resulted from the exercise of the option ● expired options that have not been exercised will be included as input taxed or GST-free depending on the GST status of the currency exchange transaction that would have resulted if the options had been exercised ● your supplies of Australian currency, in exchange for foreign currency, with a counterparty Australian bank are counted as input taxed ● your supplies of Australian currency, in exchange for foreign currency, with a counterparty non-Australian bank are counted as GST-free ● the transactions described in Questions 1, 2 and 3 are counted as GST-free or input taxed as shown in those questions, and ● none of your acquisition-supplies are included.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-10 | A New Tax System (Goods and Services Tax) Act 1999 9-30 | A New Tax System (Goods and Services Tax) Act 1999 11-5 | A New Tax System (Goods and Services Tax) Act 1999 40-5 | A New Tax System (Goods and Services Tax) Act 1999 38-190 | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 40-5.09

Reasons for decision: Summary: Is your supply of Australian currency to Australian clients, in exchange for foreign currency, input taxed under item 9 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)? The term ‘supply’ is defined in subsection 9-10(1) of the GST Act to mean ‘any form of supply whatsoever’. Subsection 9-10(2) states that ‘without limiting subsection (1), supply includes any of these’ and includes, at paragraph (f), a financial supply. A financial supply is input taxed (subsection 40-5(1)) and ‘financial supply’ has the meaning given by the GST Regulations (subsection 40-5(2)). The supply of various ‘financial interests’ (listed in subregulation 40-5.09(3)) will be a financial supply if certain requirements of the regulations are met. These requirements, set out in subregulation 40-5.09(1), are: ● the provision, acquisition or disposal of the interest is for consideration, in the course or furtherance of an enterprise and connected with the indirect tax zone, and ● the supplier is registered or required to be registered, and a financial supply provider in relation to the supply of the interest. Subsection 9-10(4) of the GST Act provides that a supply does not include a supply of money (defined in section 195-1) unless the money is provided as consideration for a supply that is a supply of money (that is, a supply of ‘money for money’). The definition of ‘money’ in section 195-1 of the GST Act includes ‘currency (whether of Australia or of any other country)’. Item 9 in the table in subregulation 40-5.09(3) (Item 9) lists Australian currency, the currency of a foreign country, or an agreement to buy or sell currency of either kind. Therefore, your supply of Australian currency, in exchange for foreign currency, to Australian clients is input taxed under Item 9. (a) Is your supply of foreign currency to Australian clients GST-free under item 4(a) in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where you deposit the foreign currency to an account outside the indirect tax zone? Subsection 9-30(3) of the GST Act contemplates that to the extent a supply may be both GST-free and input taxed, it is GST-free. Hence, to the extent that a supply of a particular financial product has the character of being both GST-free and input taxed, it will be GST-free. Section 38-190 of the GST Act deals with the supplies of things, other than goods or real property, for consumption outside the indirect tax zone. Item 4(a) in the table in subsection 38-190(1) of the GST Act provides that a supply is GST-free if it is a supply that is made in relation to rights if the rights are for use outside the indirect tax zone. | Detailed Reasoning - Identification of the rights: In Travelex Ltd v. Commissioner of Taxation [2010] HCA 33; 2010 ATC 20-214; 76 ATR 329 ( Travelex ), the High Court found that the supply of foreign currency banknotes by an entity to a customer whose intention was to use the banknotes outside Australia is a GST-free supply under Item 4. The supply was GST-free because: ● it was a supply that was made in relation to rights, and ● the rights were for use outside Australia. Following Travelex , the ATO modified its view of applying Item 4 to a supply. First, determine if the supply is one that can be said to be ‘made in relation to rights’. Secondly, determine whether the relevant rights are for use outside the indirect tax zone. In regard to this second step, the relevant use is the intended use of the recipient and will depend on the nature of the right in question. While the subject matter of the supply in Travelex was foreign currency banknotes (ie physical currency), it is the relevant rights attaching to them that was important. This is the approach to be taken to other supplies including currency exchange products. That is, the type of financial supply is not determinative of how Item 4 applies. Item 4 requires characterising the supply by reference to the rights (if any) to which it relates. Your Spot and Forward Contracts are agreements to buy or sell Australian or foreign currency. All your supplies are made electronically. There is no actual movement of physical money. Your supplies of money under these transactions are made by wire or electronic fund transfer, that is, they are made by way of crediting the client’s account. The essential character of a supply of a wire transfer or electronic fund transfer is to transfer money to the bank account of a third party (the payee). What is referred to as a ‘transfer’ from one account to another via the banking system does not involve the actual transfer of physical currency or the transfer or assignment of ownership of a chose in action (a right). Rather, it involves the extinguishment (or reduction in value) of one chose in action (the payer’s), and the creation (or increase in value) of another (the payee’s), represented by the relevant accounting entries. While the rights held by the payer are extinguished during the transfer process, it is accepted there is a dealing in rights, being the effective transfer of the value in the rights from the payer to the payee. Therefore, the essential character of the supply of the wire transfer or electronic fund transfer is to facilitate a dealing in rights. In this context, the relevant right is the chose in action represented by the deposit into the payee’s account (rather than the extinguished chose in action of the payer, or the payer’s contractual rights under the terms of the underlying agreement). That is, the right relates to the payee’s account and where it is held. | Detailed Reasoning - Supply made in relation to rights: Having identified the rights, it must be determined if a supply is made in relation to rights. Goods and Services Tax Ruling GSTR 2003/8 requires such a supply to fall within one of three categories set out in the ruling: Category 1 supplies identified in paragraph 9-10(2)(e) of the GST Act Category 2 supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights. Category 3 supplies of services directly connected with rights. Paragraph 27E of GSTR 2003/8 states that a supply comes within Category 2 if: ● the thing supplied derives its value exclusively, or almost exclusively, from those rights; and ● through the supply, the supplier either supplies the rights to the recipient or surrenders the rights. In terms of the first dot point, your supply of the foreign currency in the form of a transfer to the payee’s account takes its value from the rights that are acquired by the payee when the amount is credited to its account. In terms of the second dot point, you transfer the value in the rights you held to the client by way of the supply of foreign currency. Therefore, your supplies can be considered to be a Category 2 supply. | Detailed Reasoning - Rights for use outside the indirect tax zone: A supply that is made in relation to rights is GST-free under item 4(a) 'if the rights are for use outside the indirect tax zone’. The ATO view on the use of rights that fall within Item 4 is largely contained in GSTR 2003/8. Paragraph 116A advises it is the intended use of the recipient that determines the question of where the relevant rights are for use. Paragraph 124 of GSTR 2003/8 advises that a supply that is made in relation to rights is GST-free under item 4(a) to the extent that the rights were intended, at the time they were created, granted, transferred, assigned or surrendered, to be used outside the indirect tax zone. In your case, your wire transfer or electronic fund transfer are the facilitation (or effective transfer) of the rights to an overseas bank account. This is done in order for your clients to make payments to overseas suppliers in order to extinguish their liabilities with those suppliers. On the facts provided, it is accepted these rights are for use outside the indirect tax zone. (b) Is your supply of foreign currency to Australian clients input taxed under item 9 in the table in subregulation 40-5.09(3) of the GST Regulations where that foreign currency is deposited into their Australian accounts? In some instances, your Australian clients want to buy foreign currency and deposit it into their Australian accounts for future use. Where you supply foreign currency to Australian clients and that foreign currency is deposited into their Australian accounts rather than transferred overseas, these supplies will be input taxed under Item 9 for the same reasons as those set out under Question 1. | Detailed Reasoning - Question 3: Is your supply of Australian or foreign currency to non-resident clients, who are not in the indirect tax zone when the currency is deposited into those clients’ offshore accounts, GST-free under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2)? Item 2 provides that a supply is GST-free if it is a supply that is made to a non-resident who is not in the indirect tax zone when the thing supplied is done, and: (a) the supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done nor a supply directly connected with real property situated in the indirect tax zone, or (b) the non-resident acquires the thing in carrying on the non-resident’s enterprise, but is not registered or required to be registered for GST. You contract directly with non-resident clients and supply Australian or foreign currency to those clients by depositing the currency directly to their offshore bank accounts. These clients are not in the indirect tax zone when the currency is deposited into their offshore accounts. These supplies are not work physically performed on goods situated in the indirect tax zone when the work is done. Where these supplies are not directly connected with real property situated in the indirect tax zone, or the non-resident client acquires the currency in carrying on their enterprise but is not registered or required to be registered for GST, the supplies fall under paragraph (a) of Item 2 and are GST-free to that extent. In addition, as explained in the reasons under Question 2a, your supply can be considered to be a Category 2 supply. As the supply is made in relation to rights and the recipient is not an Australian resident and the non-resident is outside the indirect tax zone when the thing supplied is done, the supply is also GST-free under item 4(b) in the table in subsection 38-190(1) of the GST Act. | Detailed Reasoning - Question 4: (a) Is your supply of an option to buy and/or sell Australian and/or foreign currency input taxed under subsection 9-30(2)(b) of the GST Act to the extent it is for a supply described in Questions 1 or 2(b)? Subsection 9-30(2)(b) of the GST Act provides that a supply is input taxed if it is a supply of a right to receive a supply that would be input taxed. An option contract provides your client the right to buy or sell currency. If the option is exercised in circumstances described in both Questions 1 and 2(b), the supply of the currency will be input taxed. Therefore, as the option is a supply of a right to receive a supply that would be input taxed, the supply of the option itself is also input taxed under subsection 9-30(2)(b) of the GST Act. In any event, the supply of an option to buy and/or sell Australian and/or foreign currency is a financial supply and is input taxed under subsection 40-5(1) of the GST Act because such an option is covered by Items 9 and 11 of subregulation 40-5.09(3). Part 7 of Schedule 7 to the GST Regulations lists examples for Item 9 in the table in subregulation 40-5.09(3) and lists ‘Options to buy or sell foreign currency’ at item 7 as an example. In addition, an option contract, the value of which depends on or is derived from foreign exchange or currency values, is listed as an example of a derivative in Item 1(b) of Part 9 of Schedule 7 to the GST regulations. A derivative is listed in Item 11 of the table in subregulation 40-5.09(3). At Line no. F9 in Schedule 2 of Goods and Services Tax Ruling GSTR 2002/2: GST treatment of financial supplies and related supplies and acquisitions , ‘options to buy or sell foreign currency’ is described as input taxed under Items 9 and 11 of subregulation 40-5.09(3). Your option contracts are provided for consideration. As the other requirements of subregulation 40-5.09(1) are met, you are making an input taxed financial supply under Items 9 and 11 of subregulation 40-5.09(3) when you enter into the option contract. This applies in the circumstances described in both Questions 1 and 2(b) as in both cases the currency (Australian or foreign) is deposited to the client’s Australian account. (b) Is your supply of an option to buy and/or sell Australian and/or foreign currency GST-free under subsection 9-30(1)(b) of the GST Act to the extent it is for a supply described in Question 2(a)? An option contract provides your client with the right, but not the obligation, to buy an amount of money (by way of crediting the nominated currency account). The payment of a premium or other form of consideration by your client is consideration for the supply of the right you provide. Your supply of this right comes under paragraph 9-10(2)(e) of the GST Act and is therefore a Category 1 supply in relation to rights as explained in paragraph 27B of GSTR 2003/8. However, as the option contract is entered into in Australia, the relevant rights are for use in Australia. Therefore, your supply of the option is not GST-free under Item 4. However, the supply of the option may be GST-free under paragraph 9-30(1)(b) of the GST Act. Subsection 9-30(1) provides that a supply is GST-free if: a. it is GST-free under Division 38 or under a provision of another Act, or b. it is a supply of a right to receive a supply that would be GST-free under paragraph (a). If your client exercises the option, you make a separate supply of money for money under subsection 9-10(4) of the GST Act that may be GST-free under Item 4. If this supply of money would be GST-free, the supply of the right to receive it under the option is also GST-free under paragraph 9-30(1)(b) of the GST Act. As concluded for the Spot and Forward products discussed above: ● the supply of money made by way of crediting an account is a supply that is made in relation to rights, being the chose in action acquired by the client in relation to the nominated bank account ● where the client’s intention, for example, as evidenced by the payment being credited to an account held outside Australia, the right will be ‘for use outside the indirect tax zone’ and ● in these circumstances, the supply of the money will be GST-free under Item 4. Consequently, an option supplied by you will be GST-free under paragraph 9-30(1)(b) of the GST Act where it provides the right to receive a supply of money that the client intends to have credited to a bank account held outside Australia. However, where the option provides a right to receive a supply of currency that the client intends will be credited to an account held in Australia, the supply of the option is not a supply of a right to receive a supply that would be GST-free. As such, the supply of the option is an input taxed financial supply. | Detailed Reasoning - Question 5: Is the following methodology a fair and reasonable basis for estimating your input tax credit entitlement under sections 11-5 and 11-15 of the GST Act in respect of acquisitions you make? | Detailed Reasoning - Number of foreign currency and Australian currency GST-free and input taxed transactions: Under sections 11-5 and 11-20 of the GST Act, you are entitled to an input tax credit where you make a creditable acquisition. 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. Goods and Services Tax Ruling GSTR 2006/3 provides guidance on methods that can be used for calculating input tax credits for providers of financial supplies under the GST Act including the extent of creditable purpose. Paragraph 33 of GSTR 2006/3 provides that the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to: ● be fair and reasonable, ● reflect the intended use of that acquisition (or in the case of an adjustment, the actual use), and ● be appropriately documented in your individual circumstances. Paragraph 35 of GSTR 2006/3 advises that the use of direct methods of allocating or apportioning the intended or actual use of acquisitions to the activities of an enterprise, such as direct estimation, best accords with the basic principles in paragraph 33. If direct methods are available to you, the Commissioner’s view is that they will best reflect the intended or actual use of your acquisitions for the purposes of GSTR 2006/3. Paragraph 44 of GSTR 2006/3 advises that to estimate the extent to which the acquisition or importation is for a creditable purpose, it is your planned use of the acquisition for a creditable purpose that is relevant in working out your input tax credit. You may estimate the planned use of the acquisition or importation based on, among other things, records you already have available from a previous period. Paragraph 93 of GSTR 2006/3 advises that direct estimation methods are preferable to indirect estimation methods, particularly if the direct estimation method used involves a detailed measure of the intended (or actual) use of the acquisition or importation. Measures based on inherent characteristics of, or factors directly connected with, the acquisition usually give a fair reflection of the use of the thing. Paragraph 94 of GSTR 2006/3 advises that the use of such characteristics or factors provides an estimation of a direct link between the acquisition or importation and its (or its intended) application. Examples of these factors and characteristics include volume (for example, numbers of financial transactions of particular types). The method chosen as fair and reasonable would express the relevant use of the acquisition or importation as a percentage of total application (or intended application). You provided a list of the categories of expenses you incur. All expenses relate to both GST-free and input taxed supplies. Based on the information provided in this ruling and the specific circumstances of your business, we accept that using the number of transactions for the previous financial year (with the ‘transactions’ being as described in the Facts) is a fair and reasonable basis for estimating your input tax credit entitlement for the current financial year.