Private ruling: GST and apportioning input tax credits
Date of advice: 13 May 2016
Published: June 2016

Ruling: Q1: Can the entity use the proposed revenue based apportionment methodology to determine the extent of creditable purpose for the purposes of subsection 11-30(3) of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes, the proposed revenue based apportionment methodology is fair and reasonable way to determine the extent of creditable purpose of your acquisitions.

Relevant facts and circumstances: The entity buys and sells securities via the Australian Securities Exchange (ASX) and other exchanges around the world. The entity makes input taxed supplies in relation to trading activities undertaken on Australian exchanges and GST-free supplies in relation to trading activities undertaken on overseas exchanges. The entity exceeds the Financial Acquisitions Threshold and is therefore, not entitled to input tax credits to the extent that an acquisition relates to making input taxed supplies. The entity makes various acquisitions connected to its trading activities. The entity also makes various acquisitions that relate to its business generally. While some acquisitions made by the entity can be directly allocated to supplies made by the entity, many cannot as they relate to both supplies made on Australian exchanges and supplies made on overseas exchanges. The entity directly allocates an acquisition where it fully relates to a trade strategy which is either wholly onshore or wholly offshore. The entity proposes to apportion the input tax credits on a net revenue basis (after direct trading costs). That is, the percentage of net revenue for offshore trading activities is the extent of creditable purpose that will be applied to the acquisitions that are not directly allocated. The entity has proposed using net revenue for two reasons. First, these direct costs are deducted at the time of the trade, and are inseparable from the trading revenue. As the fee levels can differ materially between markets, it would not make commercial sense to analyse the profitability of trading on different markets without including the fees to ensure that comparison can be drawn. Having higher fees in one market would appear to make the profit made from that market higher than another if only the gross revenue was taken into account. Secondly, certain strategies employed by the entity rely upon rebates being applied in order to be profitable. Some exchanges give the entity rebates based upon the volume of certain products traded. Therefore, the entity takes these factors into account when considering which strategies to employ and, necessarily, where effort and acquisitions are directed. The entity has advised that this method reflects the drivers of the business. This type of method is currently used by the entity with regard to the Offshore Banking Unit regime and retrieval of the data is readily available. Furthermore, this method is also currently used by the entity in relation to determining the extent of creditable purpose in relation to acquisitions that are subject to the GST reverse charge rules. The entity has considered various other apportionment methodologies including time-based, transaction count, floor space, head-count and transaction value methodologies. In each case, collection of the data is problematic and the correlation to the actual supplies made is dubious. The entity will annually review its apportionment methodology to ensure a revenue based method continues to be fair and reasonable. Equally to the extent that the entity's business model changes the apportionment methodology will be reconsidered.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 11-30(3)

Reasons for decision: Summary: Subsection 11-30(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the amount of an input tax credit on an acquisition that is partly made partly for a creditable purpose is calculated as the full input tax credit multiplied by the 'extent of creditable purpose'. The extent of creditable purpose is expressed as a percentage. Under section 11-15 of the GST Act, you make an acquisition for a creditable purpose to the extent that you it in carrying on your enterprise. However, an acquisition is not made for a creditable purpose to the extent that 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 the goods and services tax ruling 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 105 of GSTR 2006/3 provides that an entity-based revenue method may be suitable to estimate the extent of creditable purpose of acquisitions and paragraph 109 of GSTR 2006/3 provides that net revenue may be appropriate where it better reflects the use of acquisitions:. 105. The entity-based general formula provides an estimate of the use (or intended use) of acquisitions or importations based on the proportion of revenues from non-input taxed activities of the enterprise, expressed as a percentage of total revenues of the enterprise. A decision taken to use this method should be based on a fair and reasonable expectation that the use of acquisitions or importations will be accurately reflected in the revenue flows (input taxed and non-input taxed) of the overall enterprise (or GST group). The formula to be used is that expressed in the revenue-based formulas section below, using entity-wide revenue figures. Based on the information provided, we accept the proposed apportionment methodology is a fair and reasonable basis to apportion acquisitions between input taxed and GST-free / taxable supplies. However, it should be noted that distorting factors may need to be excluded from the calculation as discussed at paragraph 132 of GSTR 2006/3: 132. To ensure that the apportionment method you use gives a fair and reasonable reflection of the relationship between your supplies and acquisitions you should exclude factors which may distort the results from the calculation, or modify them such that their inclusion is fair and reasonable. These may include extraordinary supplies, income items or acquisitions, for example substantial one-off capital acquisitions. Methods which have the effect of including (for example) the same supplies more than once in the factors used, would also produce a distorted result, and would not be fair and reasonable.