Private ruling: Financial acquisitions threshold
Date of advice: 30 November 2021
Published: February 2022
Date scheme commenced: 3 December 20XX

Ruling: Q1: Is the entity's methodology for assessing whether it has exceeded the Financial Acquisitions Threshold (FAT) fair and reasonable, both on a retrospective and prospective basis? | A1: Yes.

Relevant facts and circumstances: A tertiary education entity developed a two-step methodology to determine each month whether they exceeded the FAT.

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 15-10 | A New Tax System (Goods and Services Tax) Act 1999 Division 189 | A New Tax System (Goods and Services Tax) Regulations 2019 regulation 40-5.09 | A New Tax System (Goods and Services Tax) Regulations 2019 regulation 40-5.10

Reasons for decision: Summary: Financial Acquisitions Threshold (FAT) The purpose of Division 189 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is to provide a threshold test for the application of subsections 11-15(4) and 15-10(4) of the GST Act. An entity will exceed the financial acquisitions threshold if either or both of the following would apply: • the amount of all the input tax credits to which the entity would be entitled for its financial acquisitions would exceed: - if determining whether the entity exceeds the financial acquisitions threshold at a time during June 2012 or an earlier month - $50,000; or - if determining whether the entity exceeds the financial acquisitions threshold at a time during July 2012 or a later month - $150,000 or such other amount specified in the regulations (first limb test); and • the amount of the input tax credits to which the entity would be entitled for its financial acquisitions would be more than 10% of the total amount of input tax credits to which it would be entitled for all its acquisitions and importations (including the financial acquisitions) during that 12 months (second limb test). 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. Goods and Services Tax Ruling GSTR 2003/9 Goods and services tax: financial acquisitions threshold provides the ATO view on determining both an entity's current and future acquisitions threshold. The effect of these provisions is that, where you do not exceed the FAT, you would be entitled to ITCs for acquisitions used or intended to be used solely or to some extent for the making of input taxed supply such as those directly or indirectly related with the acquisition of financial supplies associated with your investment activities. The term 'making a financial supply' means the provision, acquisition or disposal of an interest mentioned as a financial supply in regulation 40-5.09 or an incidental financial supply in regulation 40-5.10 of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) and would include acquiring financial products either as investment or for a purpose which involves the acquisition/supply of financial supplies mentioned in an Item in the table in subregulation 40-5.09 of the GST Regulations. The key issue to be determined is the extent to which particular acquisitions relate to the making of financial supplies and this requires an analysis of both direct and indirect costs. 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 your acquisitions or importations. Paragraph 44 states: 44. For the purpose of claiming input tax credits, you need to estimate the extent to which the acquisition or importation is for a creditable purpose. This means that at the time of acquisition or importation, 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: • records you already have available from a previous period; • records kept since you made the acquisition or importation, but before you lodge your BAS, including your actual use (full or partial) of the acquisition; • records kept for some other purpose of the enterprise, for example income tax, management accounting, profitability analysis, intra-entity transfer charging or cost accounting; • your previous experience concerning the usage of similar acquisitions; • your business plan; or • any other fair and reasonable basis.' The ruling referred to the High Court judgement in Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; AITR 236 and at paragraphs 73 and 74 noted the following in relation to apportionment: 73. Following the principles set out by the High Court, 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. 74. If you allocate or apportion acquisitions or importations using a method which meets all these principles, the Commissioner will not consider the fact that you choose the method that gives the most advantageous result to be, of itself, an arrangement to which Division 165 applies. Step 1 of your methodology assesses the extent that acquisitions relate to making financial supplies. You have used a direct methodology based on two cost centres, being the only cost centres within the entity which include the cost of acquisitions that relate to the making of financial supplies. You determined that 100% of one cost centre's operating expenses relate to the making of financial supplies. For the other cost centre, you use a staff numbers approach, where the activities of each individual staff member in FCT is analysed. The methodology then involves a manual assessment by the entity's tax manager for every month to identify those acquisitions coded to the code that do not relate to any extent to the particular team. The methodology ensures that full input tax credits are claimed for these acquisitions. In Step 2 of your methodology, the normal GST attribution rules are then applied to ensure that the acquisitions identified above are attributed to the correct month. The Commissioner is satisfied that the methodology described above and summarised in the spreadsheet is a fair and reasonable method for determining the extent to which acquisitions by the entity relate to the making of financial supplies. As the methodology applies the direct method approach preferred by the ATO and is detailed in reviewing specific acquisitions we agree the overall apportionment methodology can be used on both a retrospective and prospective basis.