Private ruling: GST Apportionment for a Retail Credit Card Business
Published: June 2013

Ruling: A1: The Commissioner considers that the revised apportionment methodology for the retail credit card business of Entity A is likely to provide a fair and reasonable basis for calculating the amount of input tax credits it is entitled to for its acquisitions for the purposes of Division 11 and Division 15 of the GST Act. However, this ruling will not cover Entity A's revised methodology to the extent that the revised methodology includes interest revenue arising from the overseas usage of credit cards as GST-free supply revenues. | Q1: Can Entity A calculate and apply the revised apportionment methodology on an annual basis? | A2: Yes, Entity A can calculate and apply the revised apportionment methodology on an annual basis, provided this does not result in a distortion of the outcome. It is noted that this ruling will not cover Entity A's revised methodology to the extent that the revised methodology includes interest revenue arising from the overseas usage of credit cards as GST-free supply revenues. | Q2: Can Entity A implement its revised apportionment methodology with effect from 1 January 200X? | A3: With the exception of the monthly tax period, notification of which was not received within time, Entity A can implement its revised apportionment methodology with effect from 1 January 200X provided all normal requirements of the ATO in relation to substantiation of the revised methodology are met. It is noted that this ruling will not cover Entity A's revised methodology to the extent that the revised methodology includes interest revenue arising from the overseas usage of credit cards as GST-free supply revenues.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Entity A is an authorised deposit-taking institution offering an array of financial services including its retail credit card business. This ruling application concerns its retail credit card business. Entity A's retail credit card business generates input taxed financial supplies (such as the provision of credit to cardholders), GST-free financial supplies (such as the provision of credit to cardholders located outside Australia) and taxable supplies (such as the provision of interchange service to acquirers). This mixture of supplies has given rise to the need for Entity A to apportion input tax credits on its acquisitions that relate to the making of those supplies. Entity A has devised a new apportionment methodology for its retail credit card business. The proposed apportionment methodology for determining a recovery rate (independently of the effect of Division 70) is based on the identification of two customer pools namely transactors and revolvers steps. A description of the steps was provided. Entity A maintains that due to the similarity in the overall recovery rate using card spend or transaction numbers, either would be an appropriate driver. However, Entity A maintains that an overall rate derived from an allocation based on actual monthly card spend split between revolvers and transactors is the most reasonable estimate for credit card acquisitions. The steps provided are best illustrated by the use of the formula as set out below.The overall recovery rate, aside from the effect of Division 70, is the result of the following formula: Overall Recovery Rate = (transactor weighting x transactor rate) + (revolver weighting x revolver rate) Where: Transactor weighting = transactor spend Total spend Revolver weighting = revolver spend Total spend Transactor rate = transactor taxable supply revenues + GST-free supply* revenues Total transactor revenues Revolver rate = revolver taxable supply revenues + GST-free supply* revenues Total revolver revenues (including total net interest) * "GST-free supply" revenues do not include net interest. Annualised recovery rate Entity A proposes to apply an annualised recovery rate to the apportionable GST on cards business costs in the following financial year to determine the input tax credit entitlement. However, to ensure precision in its retrospective application of the revised methodology, it proposes to use the rates for each year to make alterations to its GST returns for that particular year. Retrospective claims Entity A has sought to preserve its entitlement to input tax credits in relation to its revised apportionment methodology by submitting notifications of refund entitlements under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA).


Reasons for decision: Summary: Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. An entity makes a creditable acquisition under section 11-5 of the GST Act when that entity: (a) acquires anything solely or partly for a creditable purpose; and (b) the supply of the thing to the entity is a taxable supply; and (c) the entity provides, or is liable to provide, consideration for the supply; and (d) the entity is registered or required to be registered. Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Under subsection 11-15(2) of the GST Act however, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. Accordingly, to the extent that acquisitions made by Entity A relate to making supplies that would be input taxed, they are not acquired for a creditable purpose. Therefore, such acquisitions are not, to that extent, creditable acquisitions and Entity A is not entitled to input tax credits. The exceptions to subsection 11-15(2) of the GST Act outlined in subsections (3), (4) or (5) of the GST Act have are not relevant for present purposes. Section 11-25 of the GST Act provides that the amount of input tax credit is equal to the GST payable on the supply of the thing acquired (unless the acquisition made is partly creditable). Entity A makes taxable, GST-free and input taxed supplies. Entity A's acquisitions are treated as being made for both a creditable purpose and non-creditable purpose as provided for in section 11-30 of the GST Act. Entity A has provided the ATO with an apportionment methodology that consists of direct and indirect methods for acquisitions made by it in order to separate such acquisitions that are used either wholly for a creditable purpose or a non-creditable purpose. Acquisitions that are partly creditable are defined in subsection 11-30(3) of the GST Act to mean 'the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition.' Consequently, an apportionment of these acquisitions is necessary to determine the extent of creditable purpose. 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) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations. Paragraphs 33 and 73 of GSTR 2006/3 make it clear that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to: · be fair and reasonable; · reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and · be appropriately documented in your individual circumstances. Methods of calculating the extent of creditable purpose are discussed in paragraphs 80 and 81 of GSTR 2006/3: 80. To calculate the amount of your input tax credits, you need to adopt a method of estimating the extent of creditable purpose of your acquisitions and importations. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make. 81. The Commissioner considers that the use of direct methods, including direct estimation (see paragraphs 92 to 101 of this Ruling) best accords with the basic principles explained above (see paragraph 73). If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method. Therefore, the apportionment method adopted by Entity A must be fair and reasonable in the circumstances and must appropriately reflect the intended or actual use of its acquisitions or importations. Entity A has conducted a detailed analysis of its acquisitions and have come to the conclusion that the most appropriate driver for allocating costs between transactors and revolvers is on the basis of the proportion of expenditure undertaken by each of the two customer pools (that is card spend). This conclusion is based on the following two lines of reasoning: 1. Factual analysis of the GST bearing acquisitions of the card portfolio show that card spend in most cases adequately reflects the extent to which those acquisitions are ultimately devoted to the making of supplies between the two customer pools. Further, analysis of the largest GST bearing acquisition, being the loyalty/affinity costs and other significant acquisitions, show that card spend is the best basis of allocating these acquisitions to the two customer pools. 2. There is a close correlation between relative rates of expenditure and transaction numbers making one driver substitutable for the other. That is, the use of card spend and transaction numbers as drivers produces essentially identical results making allocations based on either driver interchangeable. Entity A provided the ATO with attachments consisting of the various acquisition costs and revenues for a particular period. The Commissioner considers that on the basis of the information and analysis provided, the methodology submitted is likely to provide a fair and reasonable basis for calculating the extent of creditable purpose for acquisitions of Entity A's retail credit card business. However, this ruling will not cover Entity A's revised methodology to the extent that the revised methodology includes interest revenue arising from the overseas usage of credit cards as GST-free supply revenues. As advised to the Australian Bankers Association (ABA) at an ABA/ATO GST Committee meeting on 16 May 2013, the issue of interest revenues from the overseas usage of credit cards in the context of a credit card apportionment methodology is currently under consideration by the ATO. The methodology, subject to the caveat above, is considered to be fair and reasonable in the circumstances applying at the time of issuing this ruling. If those circumstances should change Entity A may be required to review this methodology to determine if it remains fair and reasonable. For the retrospective application of its revised methodology, Entity A proposes to apply an annualised overall recovery rate for each year to make alterations to its GST returns for that year. Going forward, Entity A proposes to apply an annualised overall recovery rate determined in one financial year to the apportionable GST on the retail credit card business costs in the following financial year to determine the input tax credit entitlement for that financial year. It is considered that Entity A can calculate and apply the revised apportionment methodology on an annual basis provided the practical application of this methodology does not result in a distortive outcome. ATO Interpretative Decision ATO ID 2008/75 Goods and Services Tax GST and retrospective application of a changed apportionment method under Division 11 (ATO ID 2008/75) provides guidance in relation to retrospective changes due to a change in the apportionment method. ATO ID 2008/75 provides that an entity can change its apportionment method and revise an earlier net amount by applying a new apportionment method which is also fair and reasonable. However the entity must notify the Commissioner of the change within four years after the end of the original tax period. Entity A lodged notifications with ATO in relation to refund claims resulting from the proposed apportionment methodology for its past periods. The ATO has acknowledged that the notifications for all these claims were lodged within time with the exception of one monthly tax period which was not lodged within time. Therefore, with the exception of that monthly tax period Entity A can implement its revised apportionment methodology provided all normal requirements of the ATO in relation to substantiation of the revised methodology are met.

Subject: GST Apportionment for a Retail Credit Card Business: Is the revised apportionment methodology for Entity A's retail credit card business, fair and reasonable for calculating the amount of input tax credits it is entitled to for its acquisitions, for the purposes of Division 11 and Division 15 of the A New Tax System (Goods And Services Tax) Act 1999 (the GST Act)?