Private ruling: Creditable purpose of acquisitions made that relate to an interest supplied pre July 2000
Date of advice: 6 July 2017
Published: November 2017

Ruling: Q1: Are 'pre 1 July 2000 member acquisitions’ acquired by you acquired for a creditable purpose under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, 'pre 1 July 2000 member acquisitions’ acquired by you are not acquired for a creditable purpose under section 11-15 of the GST Act.

Relevant facts and circumstances: The Trust Deed which has been provided to the ATO forms part of the scheme of this Ruling. In the course of carrying on your enterprise, you provide individuals with a financial interest (financial interest) that falls within one of the items in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). You also make various other categories of supplies, including taxable supplies, GST-free supplies and input taxed supplies. Upon being admitted to your entity, every member will be deemed to have approved of and shall be bound by all of the provisions of the Trust Deed. Pursuant to a Clause of the Trust Deed a person will become a member once they satisfy certain criteria and a payment is received by you . You have supplied the financial interest to a number of your current members before 1 July 2000. The supply of the financial interest is connected with the indirect tax zone. You have been registered for GST at all times since 1 July 2000. You exceeded the Financial Acquisitions Threshold (FAT) (as explained in subsection 11-15(4) of the GST Act) at all times since 1 July 2000. Subsections 11-15(3) and (5) of the GST Act do not apply to the 'pre 1 July 2000 member acquisitions’. In carrying on your enterprise you make acquisitions which broadly fall into three categories: Category 1 - Acquisitions directly related to your investment activities. These acquisitions solely relate to your investment activities, which include you making financial supplies such as investments in securities. Category 1 acquisitions are not being ruled upon in this ruling. Category 2 - Acquisitions directly related to your dealings with members These acquisitions solely relate to your dealings with members, not to your investment activities. Category 3 - Overhead acquisitions related to your dealings with members and to its investment activities. An example acquisition is commercial office space leased by you (which is a taxable supply). Not all of your functions are outsourced. You have employees (including your Executive team) who perform many functions “in-house”. In this ruling 'pre 1 July 2000 member acquisitions’ are those acquisitions that fall into categories 2 and 3 above, but only to the extent they relate to you providing and managing the financial interest issued to members prior to 1 July 2000.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 40-5 | A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09

Reasons for decision: Detailed Reasoning - Primary view: The supply of the 'interest in or under a superannuation fund’ to a member that joined prior to 1 July 2000 is a supply that is considered to be a supply that would be input taxed for the purposes of paragraph 11-15(2)(a) of the GST Act. This view applies regardless of whether or not this supply of an 'interest in or under a superannuation fund’ is: ● a 'point-in-time supply’ that is completed before 1 July 2000 (the commencement date of the GST Act); or ● a periodic or progressive supply that completed before 1 July 2000 (the commencement date of the GST Act); or ● a periodic or progressive supply that spans 1 July 2000 (section 12 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (the GST Transition Act)) with particular regard to the period prior to 1 July 2000. There is no entitlement to input tax credits for 'pre 1 July 2000 member acquisitions’ (acquired in a current tax period) that relate to this supply of the financial interest because this supply is a 'supply that would be input taxed’. | Detailed Reasoning - Supporting view: The supply of the financial interest to a member prior to 1 July 2000 is a supply that spans 1 July 2000 under section 12 of the GST Transition Act. Accordingly none of the acquisitions that relate to this interest is considered as being acquired for a creditable purpose (whether or not these acquisitions relate to the pre or post 1 July 2000 part of the supply). For the pre 1 July 2000 part of the supply, there is no entitlement to input tax credits for acquisitions (acquired in a current tax period) that relate to the financial interest because 'pre 1 July 2000 member acquisitions’ relate to supplies that would be input taxed for the following reasons: ● the current acquisitions relate to the current part of the supply (rather than the pre 1 July 2000 part of the supply). The current part of the supply will be an input taxed financial supply; or alternatively ● the would be analysis can be applied to the supply of the financial interest as outlined in the primary view above, which will treat the pre 1July 2000 part of the supply as a supply that would be input taxed. For post 1 July 2000 part of the supply, there is no entitlement to input tax credits for acquisitions (acquired in a current tax period) because these acquisitions relate to the making of an input taxed financial supply. | Detailed Reasoning - Primary view: a pre 2000 supply is a supply that would be input taxed: 1. Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) governs the entitlement to input tax credits. An entity is entitled to input tax credits for any creditable acquisition that it makes (section 11-20 of the GST Act). Section 11-5 provides that the entity makes a creditable acquisition where: ● the entity acquires anything for a creditable purpose; ● the supply to the entity is a taxable supply; ● the entity provides or is liable to provide consideration for the supply; and ● the entity is registered or required to be registered. 2. Of relevance to this case is whether or not the 'pre 1 July 2000 member acquisitions’ by you are for a creditable purpose. 3. Section 11-15 of the GST Act defines creditable purpose. Subsection 11-15(1) provides that a thing is acquired for a creditable purpose to the extent that it is acquired by an entity in carrying on its enterprise. You satisfy this requirement as your 'pre 1 July 2000 acquisitions’ are acquired in carrying on your enterprise. 4. However, this is subject to paragraph 11-15(2)(a) of the GST Act which provides that a thing is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. 5. You contend that the term ' would be ’ refers to a hypothetical supply rather than one that has already been made and accordingly, given that the financial interest is made pre July 2000, the supply cannot be considered a supply that 'would be’ input taxed. However, we consider that term 'would be’ can be applied to supplies made before 1 July 2000. Therefore, we consider that the better view of the restriction in paragraph 11-15(2)(a) of the GST Act is that a supply should not be denied the character of an input taxed supply just because it was made before 1 July 2000. 6. Hill J in HP Mercantile Pty Ltd v Federal Commissioner of Taxation considered the meaning of 'making supplies that would be input taxed’ as it appears in paragraph 11-15(2)(a) of the GST Act. At paragraph 41 of his judgment, his Honour noted: It is true that the word "would" could suggest futurity just as the word might suggest conditionality. Indeed, it could suggest both. But to say that is not to solve the construction issue, merely to suggest that more than one alternative is open. It suffices to say that one meaning of the word "would" is conditionality. While the 42nd meaning in the Oxford English Dictionary quoted by the tribunal refers to conditionality, the Macquarie Dictionary (3rd ed), gives as its first meaning (used to form conditional)". 7. Further support for this conditionality aspect of s.11-15 can be found in HP Mercantile where Hill J stated (Stone and Allsop JJ agreeing): 46. The language of s 11-15 would suggest that it was not intended that there be a tracing between the subject matter of an acquisition and an actual supply. Such a tracing would be necessary were the language of s 11-15(2)(a) to operate to disallow a credit where there was a relationship between the acquisition and an actual supply which was input taxed. That no doubt explains why the relationship which negates the input tax credit was expressed as being between the acquisition and the making of input taxed supplies, rather than between the acquisition and actual input taxed supplies. However, while it is true that the GST Act does not mandate a system of tracing acquisitions to actual supplies, it does not follow that an entity which has embarked upon an enterprise which consists of the making of input taxed supplies, but in fact makes no supplies, will be entitled to obtain input tax credits. Whether it is will depend upon whether the acquisitions are related to supplies which, if made, would be input taxed. If the acquisitions do not, then a credit will be available. 8. We consider that the conditionality aspect discussed by Hill J extends to supplies made prior to the commencement of the GST Act. That is, a supply made prior to the commencement of the GST Act, that would otherwise satisfy the conditions of an input taxed supply if made after 1 July 2000, is a supply 'that would be input taxed’ for purposes of paragraph 11-15(2)(a) of the GST Act. 9. Furthermore, attributing an input taxed character to a supply made in its entirety prior to 1 July 2000 would have had no GST consequences prior to the commencement of the GST Act. An input taxed supply is conceptually one (A) for which an entity making the supply is not liable for GST payable; and (B) which has the effect of denying an input tax credit to the entity making acquisitions which relate to the supply. To ask whether supplies made before 1 July 2000 were 'input taxed’ is simply to ask whether they ought to be regarded as having this latter effect (the exemption from liability for GST payable being in any event specifically dealt with by section 7 of the Transition Act). In our view, the fact that effect (A) has no need to operate in the case of a pre-GST supply does not demonstrate that effect (B) should also be regarded as not operating. 10. In our view, it would be inconsistent with the policy of the GST Act that full input tax credits are denied under paragraph 11-15(2)(a) of the GST Act for acquisitions relating to financial supplies made on or after 1 July 2000, but are allowable for acquisitions relating to identical supplies made before that date. This is particularly the case where the supply to which the acquisitions relate is arguably, on a literal reading of the terms of the GST Act and Regulations, an input taxed financial supply even though it was made prior to 1 July 2000. 11. Taking into account the statutory scheme and the legislative context and purpose of paragraph 11-15(2)(a) of the GST Act, we consider that a supply should not be denied the character of an input taxed supply just because it was made before 1 July 2000. 12. Subsection 40-5(1) of the GST Act provides that a financial supply is input taxed. | Detailed Reasoning - What is a financial supply?: 13. Under Regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), the provision, acquisition or disposal of an interest in subregulation (3) or (4) is a financial supply where the provision, acquisition or disposal of that interest is: ● for consideration; ● in the course or furtherance of an enterprise; ● connected with the Indirect Tax Zone; ● the supplier is registered or required to be registered; and ● is a financial supply provider in relation to the supply of that interest. | Detailed Reasoning - Interest in or under a superannuation fund: 14. An interest in or under a regulated superannuation fund is a financial interest mentioned in item 4 of the table in subregulation 40-5.09(3) of the GST Regulations. 15. An 'interest’ is defined widely to be '... anything that is recognised at law or in equity as property in any form ’. This concept of interest is to be distinguished from the concept of a 'superannuation interest’ as defined for income tax purposes. 16. The Commissioner has provided guidance on the interpretation of the term 'interest’ in relation to a financial supply. The term should be “given its broadest application so that an interest is as wide as the legal and equitable concept of property, including rights arising under a contract”, and “...the fact that a right is not assignable does not mean that it cannot be a proprietary right”. 17. It is clear in this case that you are providing a 'financial interest’ for the purposes of regulation 40-5.09 of the GST Regulations. | Detailed Reasoning - Consideration requirement: 18. The granting of financial interest would only be an input taxed financial supply if the provision of the interest is made for consideration. In Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions , the Commissioner takes the view that contributions made to an entity such as you are consideration for an input taxed financial supply. 19. The notion that a contribution increases the capital of the fund was considered in Hills Industries Ltd & Anor v Commissioner of State Taxation & Anor : 20. The observations in Cook (as trustee of the property of Benson) v Benson and Others (2003) 198 ALR 218 at 33 are also relevant in this respect: In the present case, the payments in question were made pursuant to arm's-length, commercial transactions. The payments, at the direction of the first respondent, out of the funds due to him under the ISAS superannuation scheme, by way of contributions to other, commercially marketed, superannuation schemes, were made in return for the obligations, undertaken by the trustees of those schemes, to provide him with the rights and benefits to which he would in due course become entitled under the rules of each scheme. Those rights and benefits constituted substantial and valuable consideration for the contributions of the first respondent. 21. There is consideration, in the form of at least the initial contribution payment, made for the entry into the member’s plan. 22. It is noted that the Trust Deed does not specify a specific amount that is required to be paid. The contributions that are required to be paid by members are contained in certain clauses of the Trust Deed. In summary, the member can make contributions to the fund of such amounts and at such times as the member selects and may with the consent of the Trustee increase or reduce the amount of contributions and vary the dates. 23. Accordingly, it is our view that the provision of a member’s interest is for consideration and subparagraph 40-5.09(1)(a)(i) of the GST Regulations is met. | Detailed Reasoning - Other requirements of Regulation 40-5.09 of the GST Regulations: 24. The other requirements of Regulation 40-5.09 of the GST Regulations are met (see separate discussion regarding registration below), as you made the supply in the course of your enterprise, these supplies are connected with the Indirect Tax Zone, and you are the financial supply provider in respect of the supply of provision of the financial interest. | Detailed Reasoning - Registration requirement: 25. Included at subparagraph 40-5.09(1)(b)(i) of the GST Regulations is the requirement that the supplier of a financial interest be registered or required to be registered for GST. 26. It is acknowledged that this registration requirement is not at issue for periods post 1 July 2000 because you were registered from 1 July 2000. 27. It may be contended that the grant of supply of membership before 1 July 2000 is not a financial supply as you were not (and could not be) registered or required to be registered (subparagraph 40-5.09(1)(b)(i)) at that time. You were only registered for GST from 1 July 2000. It follows that whilst a supply of a financial interest was made it was not a financial supply. 28. The same argument would apply to any supply made in consideration for the contributions made prior to 1 July 2000. Furthermore, to the extent the contributions made post 1 July 2000 are consideration for a single supply of membership, arguably, there is no financial supply. 29. We consider firstly that the inclusion of this registration requirement needs to be placed in context. The GST Regulations dealing with financial supplies are not concerned with transitional matters and in our view are not intended to restrict the operation of paragraph 30. 11-15(2)(a) of the GST Act based on the time a supply was made. 31. Financial supplies (subdivision 40-A of the GST Act) are the only supplies among the six categories of input taxed supplies dealt with in Division 40 of the GST Act, that requires the entity making the supply (inter alia) to be registered or required to be registered for the supply to be input taxed. It would seem curious if the GST Act and Regulations intended that creditable purpose be denied in respect of acquisitions acquired on or after 1 July 2000, where the acquisition relates to a supply of (for example) residential rent made before 1 July 2000, but not denied where the acquisition relates to a supply of a financial interest. 32. In any event, under subsection 9(2) of the GST Transition Act, the registration requirement is met in relation to supplies made on or after 1 June 2000, and would have been met earlier where the supplier registered, by choice, prior to that date. 33. We consider that it was possible, within the terms of the GST Regulations and the GST Transition Act, for the requirements of subregulation 40-5.09(1) of the GST Regulations to be met in relation to a supply made before the commencement of the GST Act. 34. As such, it is arguable that the GST Act and GST Regulations contemplated the making of input taxed financial supplies prior to the date of commencement of the GST Act (irrespective of an entity’s GST registration status). As noted above, this characterisation would have no GST effect prior to the commencement of the GST Act, but would result in acquisitions on or after 1 July 2000 that relate to such supplies being denied creditable purpose under Division 11 of the GST Act. As such member interests provided prior to 1 July 2000 are financial supplies made by you as all the requirements of regulations 40-5.09 of the GST Regulations are satisfied. 35. In addition, based on Hill J’s comments regarding the meaning of 'would be input taxed’ in paragraph 11-15(2)(a) of the GST Act it is our view that the memberships issued prior to 1 July 2000 that would otherwise meet the requirements of a financial supply if made after 1 July 2000 are supplies that would be input taxed. Accordingly, given that you were registered at all times since 1 July 2000, memberships issued prior to 1 July 2000 are supplies that would be input taxed under paragraph 11-15(2)(a) of the GST Act. 36. Therefore, 'pre 1 July 2000 member acquisitions’ are not acquired for a creditable purpose under paragraph 11-15(2)(a) of the GST Act regardless of when the supply of the financial interest was made. This is because all of the 'pre 1 July 2000 member acquisitions’ have either a direct or indirect relationship to the provision of the financial interest. The acquisitions relate to supplies that would be input taxed under paragraph 11-15(2)(a). The acquisitions are not acquired for a creditable purpose. 37. That is the case, whether the supply is: ● a 'point-in-time supply’ that is completed before 1 July 2000 (the commencement date of the GST Act); or ● a periodic or progressive supply that completed before 1 July 2000 (the commencement date of the GST Act); or ● a periodic or progressive supply that spans 1 July 2000 (s.12 of the Transition Act) with particular regard to the period prior to 1 July 2000. | Detailed Reasoning - Supporting view: Section 12 of the GST Transition Act: 38. Under subsection 6(5) of the GST Transition Act, the time of supply for the supply of any other thing (other than goods, services and real property) is when the thing is done or performed. Accordingly, for the purposes of the GST Transition Act , the supply of a right is 'done’ when it is granted (or more relevantly when the contract is entered into granting that right). If it is correct to say that the supply is the creation of one financial interest under subregulation 40-5.09(3) of the GST Regulations, then this 'interest’ is a financial supply when the requirements of subregulation 40-5.09(1) are met. 39. Section 12 of the GST Transition Act applies because the supply under the agreement is supplied for a period or progressively over a period from a period prior to 1 July 2000 to an end date after 1 July 2000. Paragraph 29 of Goods and Services Tax Ruling GSTR 2000/7 Goods and Services Tax: transitional arrangements - supplies, including supplies of rights, made before 1July 2000 and the extent to which such supplies are taken to be made on or after 1 July 2000 refers to the supply being made over a specified period of time or portion of time that concludes after 1 July 2000. 40. In the context of a membership interest such as in this case, the supply is clearly for a period. Whilst the end of the period is not specified by date or a particular time period it is indicated instead by particular events that will occur in the future, for example, cessation of membership occurring due to various reasons as per the Trust Deed. 41. An entity like you has an on-going obligation to provide real monetary benefits, or benefits of a monetary value to members. 42. The member has an ability to make contributions of such amounts and at such times as the member selects. Therefore, a fundamental feature of the members’ interest in the fund is the ongoing ability to make contributions over a period of time to increase their member balance, which represents their interest. The notion that the provision of an interest may encompass an ongoing supply over a period of time, is illustrated by the Examples in the GST Regulations (Schedule 7 of the GST Regulations). For example an interest in an ADI account (Item 1) and a credit card account (Item 2), where the provision of those interests encompasses the ongoing activities of 'opening, keeping, operating, maintaining, and closing…’ of accounts or charge and credit card facilities. An interest in an entity like you encompasses similar ongoing activities to those illustrated in these examples. 43. This means that the supply that spans 1 July 2000 is classified in accordance with the categories of supplies that are contained in the GST Act. The supply post 1 July 2000 would meet the requirements of an input taxed financial supply. 44. Section 13(5) of the GST Transition Act does not apply because there is a review opportunity offered under this product. | Detailed Reasoning - Creditable purpose: 45. 'Pre 1 July 2000 member acquisitions’ relating to a financial interest such as the one made in this case before 1 July 2000 are not made for a creditable purpose. This is because under subsection 12(2) of the GST Transition Act the supply of the interest is taken to be made continuously throughout the period and any 'pre 1 July 2000 member acquisition’ made in a current tax period relates to the current supply made under this view and not to that part of the supply that is made prior to 1 July 2000. Alternatively it can be also said that given that the supplies made pre-1 July 2000 are supplies that would be input taxed, these acquisitions are not made for a creditable purpose. 46. In the context of 'pre 1 July 2000 member acquisitions’ made in current periods (for example, in 2017), it is considered that they would relate to the making of the periodic and progressive supply that is being made in the current periods (for example, in 2017). Under this view, no part of the acquisition is referable to that part of the supply that was made in a period occurring prior to 1 July 2000. Given that the current supplies are input taxed financial supplies, 'pre 1 July 2000 member acquisitions’ related to supplies that would be input taxed and are not acquired for a creditable purpose.