Private ruling: GST and financial supplies
Date of advice: 21 December 2018
Published: April 2019
Ruling period: Starting on 1 June 20XX and ending on 31 May 20XX

Ruling: Q1: Is the acquisition by the Fund of shares listed on an overseas securities exchange (excluding Australia) (the Shares), a GST-free acquisition-supply under item 2 in the table to subsection 38-190(1) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (Item 2)? | A1: Yes, the Fund’s acquisition of the Shares is a GST-free acquisition-supply under Item 2. | Q2: Is the subsequent sale of the Shares a GST-free supply under Item 2 or Item 4 in the table to subsection 38-190(1) of the GST Act (Item 4) ? | A2: Yes, the Fund’s subsequent sale of the Shares is a GST-free supply under Item 2 or Item 4. | Q3: Is the Fund entitled to claim input tax credits (ITCs) for the fees charged by the Responsible Entity (RE) in respect of the its acquisition of RE’s management and administration service? | A3: The Fund is entitled to claim full ITCs in respect of its acquisition of management service to which the investment management fee and performance fee is consideration for that acquisition provided those fees solely relate to making its GST-free acquisition-supply of the Shares. However, the fees in respect of the RE’s administration services relates to making both the GST-free acquisition-supply of the Shares and the input taxed supply of units to the Fund’s unitholders. This means the administration fee is made partly for a creditable purpose. As such, the Fund is only entitled to claim full ITCs to the extent that the portion of the administration fee relates to making the GST-free acquisition-supply of the Shares. To the extent that the administration fee relates to making an input taxed supply of units, the Fund is not making creditable acquisition and is not entitled to claim ITCs unless the Fund does not exceed the financial acquisitions threshold (FAT). Where the Fund exceeds the FAT, the Fund may be entitled to claim reduced input tax credits if the acquisition is a reduced credit acquisition listed in the table to subregulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Relevant facts and circumstances: The Fund is an Australian registered Managed Investment Scheme (MIS) and unit trust that is registered for GST. Units of the Fund are quoted on the Australian Stock Exchange (ASX). The Fund’s unit holders are all Australian residents and the Fund’s supply of units to Australian resident investors is an input taxed supply. The Fund aims to establish an investment portfolio of securities acquired either on a securities exchange located outside of Australia or listed in a jurisdiction that is outside of Australia. The Fund will not invest in Australian securities but predominantly in global listed equities and cash. The Fund’s portfolio may be held in cash and cash equivalent securities from time to time. The Fund appointed a Responsible Entity (RE) and its role is to oversee the operation and management of the Fund. The Fund acquired the services of the RE to which the RE charges some fees. Units in the Fund are offered and issued by the RE. The RE also appointed an Investment Manager (located overseas) to be responsible for managing the Fund’s overseas investment portfolio. The Fund, including acquisitions relating to making its GST-free supplies, may exceed the financial acquisitions threshold (FAT).

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | 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 subregulations 70-5.02(2)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 9-5 provides that a supply is a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. Note: the asterisk * denotes a defined term in section 195-1 of the GST Act. Indirect tax zone means Australia. | Detailed Reasoning - Input taxed financial supply: Section 40-5 provides that a financial supply is input taxed. Financial supply has the meaning given by regulation 40-5.09 of the GST Regulations which includes the ‘provision, acquisition or disposal of an interest’ mentioned in subregulations 40-5.09(3) or (4) for consideration in the course or furtherance of an enterprise connected with Australia. Item 10 of subregulation 40-5.09(3) (Item 10) specifies that ‘interest’ includes an interest in securities. Therefore, a single transaction between two parties can involve two financial supplies: ● the provision or disposal of an interest for consideration, and ● the acquisition of an interest for consideration (acquisition-supply). As such, the acquisition of shares from an overseas securities exchange is prima facie an input taxed financial supply (acquisition-supply) under Item 10. Subsection 9-30(3) states that to the extent that a supply is both GST-free and input taxed, the supply is GST-free and not input taxed unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed. It is therefore necessary to determine whether the acquisition-supply of Shares is GST-free under Division 38. | Detailed Reasoning - GST-free supply: Item 2 of subsection 38-190(1) of the GST Act (Item 2) also provides that a supply is GST-free if it is made to a non-resident who is not in Australia 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. Accordingly, where the provisions of either (a) or (b) above are met, the supply will be GST-free if the non-resident is not in Australia when the thing supplied is done. However, to the extent that a supply, covered by any of items 1 to 5 in the table to subsection 38-190(1), satisfies the circumstances described under subsections 38-190(2), (2A) or (3), the supply would not be GST-free. Those circumstances include where: ● the supply is of a right or option to acquire something, the supply of which would be connected with Australia and would not be GST-free ● the acquisition of the supply relates to making an input taxed supply of real property situated in Australia ● the supply is under an agreement with a non-resident and is provided to another entity in Australia; and for a supply other than an input taxed supply, none of the following applies: ● the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it ● the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it, or ● the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient’s acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense. Goods and Services Tax Ruling GSTR 2002/2: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) provides an example where a resident in Australia acquires shares from a non-resident company. Paragraph 150 of GSTR 2002/2 states: Example 22: GST-free supply of a financial supply 150. Australian Enterprises is a share-trader resident in Australia with all its activities being in Australia. Therefore, supplies that it makes are connected with Australia. It acquires shares from American Inc. a company that is located in the United States and is not in Australia in relation to the supply. The GST regulations and GST Act operate so that in acquiring the shares, Australian Enterprises makes a financial supply (an acquisition-supply) to American Inc. The acquisition-supply to American Inc satisfies the requirements of subsection 38-190(1), item 2 and is GST-free. To the extent that anything acquired or imported by Australian Enterprises relates to making that financial supply (that is, acquiring the shares) it is for a creditable purpose. Similarly in this case, the Fund is acquiring shares either on a securities exchange located outside of Australia or listed in a jurisdiction that is outside of Australia which are likely to be shares of non-resident companies. Accordingly, the Fund will be making an acquisition-supply under Item 2 to the extent that the supplying companies: 1. are non-residents for the purpose of the GST Act 2. are not in Australia when the thing supplied is done 3. acquire the thing in carrying on their enterprise, and 4. are not registered or required to be registered for GST. Based on the facts provided, the Fund’s acquisition-supply of Shares satisfies all requirements under Item 2 and therefore is GST-free. There is also no information indicating that the Fund’s acquisition-supply falls within the exclusion in subsection 38-190(2), (2A) and (3). However, the onus is on the Fund to assess on a case by case basis whether each of the acquisition-supply of the Shares meets all of the requirements under Item 2. Being a GST-free acquisition-supply, no GST is payable on the acquisition-supply and the Fund is entitled to claim ITCs for creditable acquisitions to the extent that the acquisition solely relate to making the Fund’s GST-free acquisition-supply of Shares. Where an acquisition relates to making both the Fund’s input taxed supply of units to Australian resident investors and the GST-free acquisition-supply of Shares, apportionment is required to determine the Fund’s entitlement to ITC based on the extent of creditable purpose of that acquisition. Where the Fund’s acquisition-supply of Shares does not meet all of the requirements specified above, the acquisition-supply of the Shares is input taxed under Item 10 rather than GST-free under Item 2. | Detailed Reasoning - Item 2: The subsequent sale of the Shares on an overseas securities exchange is also a GST-free supply where all the requirements under Item 2 are met and none of the circumstances under subsection 38-190(2), (2A) and (3) apply: 1. the supply is made to a non-resident recipient 2. the non-resident recipient is not in Australia when the thing supplied is done 3. the non-resident recipient acquires the thing in carrying on the non-resident’s enterprise, and 4. the non-resident recipient is not registered or required to be registered. If it is a supply to non-resident recipient in carrying on the non-resident recipient’s enterprise and the non-resident is not in Australia when the Shares are supplied nor are they registered or required to be registered, the subsequent sale of the Shares on the overseas securities exchange is also a GST-free supply under Item 2. Alternatively, if the requirements under Item 2 are not satisfied, the subsequent sale of the Shares may still be GST-free under Item 4. | Detailed Reasoning - Item 4 of subsection 38-190(1) states:: A supply in relation to rights is GST-free if: (a) the rights are for use outside the indirect tax zone; or (b) the supply is to an entity that is not an *Australian resident and is outside the indirect tax zone when the thing supplied is done. However, under subsection 38-190(2), a supply covered by any of items 1 to 5 is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free. Paragraphs 27E and 29 of Goods and Services Tax Ruling GSTR 2003/8: supply of rights for use outside Australia – subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8) provided that a supply of a thing is a ‘supply that is made in relation to rights’ if it fits within one of the following three categories: Category 2 – Supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights 27E. A supply of a thing which comprises a bundle of rights is a supply that is made in relation to rights for the purposes of item 4 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. … 29. Examples of supplies that fit within the three categories outlined at paragraphs 27B to 28 of this Ruling include supplies of intellectual property rights (category 1), supplies of shares (category 2) and supplies of brokerage services in relation to shares (category 3). The rights must also be for use outside Australia. That is, it must be established that the intention is that the rights will be used outside Australia. The actual use of the rights is not relevant, other than as evidence of the intended use. Paragraph 116A of GSTR 2003/8 states ‘where it is evident that the currency is to be used overseas, the rights that attached to the currency are for use outside Australia…the intention of the purchaser of the currency being relevant in determining if the rights were for use outside Australia…’. Similarly, the sale of the Shares on an overseas securities exchange is a ‘supply that is made in relation to rights’ for the purposes of Item 4. The intention of the purchaser of the shares is to be used and transacted on the overseas securities exchange; the rights attached to the shares are for use outside Australia. As such, the supply of the Shares is GST-free under Item 4. Where the requirements under either Item 2 or Item 4 are met, the sale of the Shares is GST-free. The sale of those shares is not subject to GST but the Fund is still entitled to claim ITCs for its creditable acquisition. If the requirements under either Item 2 or Item 4 are not met, the sale of the Shares is an input taxed financial supply under Item 10. This means, the sale is not subject to GST and the Fund is also not entitled to claim any ITCs unless the Fund does not exceed FAT. Where the Fund exceeds the FAT, the Fund may be entitled to claim RITCs if the acquisition is a reduced credit acquisition under Division 70 (refer to Question 3 for more detail). | Detailed Reasoning - Detailed reasoning: Section 11-20 states that an entity is entitled to an ITC for creditable acquisitions that it makes. A creditable acquisition is made in the circumstances set out in section 11-5. One of the requirements of that section is that the acquisition must be ‘solely or partly for a creditable purpose’. Section 11-15 provides the meaning of ‘creditable purpose’: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. (2) 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. … (4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if: (a) the only reason it would (apart from this subsection) be so treated is because it relates to making *financial supplies; and (b) you do not *exceed the financial acquisitions threshold. This means, if the Fund does not exceed the FAT under Division 189, acquisitions incurred may be fully creditable even if they relate (directly or indirectly) to making input taxed supplies. Where the Fund exceeds the FAT, to the extent that its acquisitions relate to making input taxed financial supplies, they are not for creditable purpose and therefore not creditable acquisitions giving rise to an entitlement to ITCs. The Fund will not be entitled to ITCs for acquisitions to the extent that it relates to making supplies that would be input taxed. However, the Fund may be entitled to RITCs if the acquisition is a reduced credit acquisition specifically listed under section 70-5. In this case, the Fund acquired management services of the RE for the RE to oversee the operation and management of the Fund. In return for the provision of RE’s management service, the Fund is required to pay the RE some fees. All these fees are acquired in carrying on the Fund’s enterprise for the continual operation and maintenance of the Fund. The issue is therefore whether acquisitions in question relate to making supplies that would be input taxed, making the acquisition by the Company non-creditable, and giving rise to no entitlement to ITCs where the Fund exceeds the FAT and is not entitled to any RITCs. | Detailed Reasoning - Acquisition relates to making supplies that would be input taxed: Paragraph 11-15(2)(a) of the GST Act focuses on the relationship between an acquisition and the making of supplies and requires some form of connection to the supplies that the entity makes, made or intends to make. Paragraph 118 of Goods and Services Tax Ruling GSTR 2008/1: when do you acquire anything or import goods solely or partly for a creditable purpose (GSTR 2008/1) provides principles established by the decision in HP Mercantile Pty Limited v Commissioner of Taxation [2005] FCAC 126: | Detailed Reasoning - Principles established by HP Mercantile: 118. The decision in HP Mercantile established the following principles that should be applied in determining whether an acquisition relates to making supplies that would be input taxed : ● The language of section 11-15 suggests that it was not intended that there be a tracing between the acquisition and the actual supply. However, it does not follow that an entity which has embarked on an enterprise which consists of the making of input taxed supplies, but in fact makes no supplies, is entitled to input tax credits. Whether it is depends on whether the acquisitions are related to supplies which, if made, would be input taxed. 54 ● There is no requirement for an acquisition to precede a supply before it can be said that the acquisition is connected to the making of that supply. 55 Therefore an acquisition can relate to the entity making past, current or future supplies. ● The words ' relates to ' are wide words signifying some connection between two subject matters. There must be a connection between an acquisition and the making of input taxed supplies . The connection or association signified by the words may be direct, or indirect, substantial or real . It must be relevant and usually a remote connection would not suffice . 56 ● The requirement of apportionment can be found in the words 'to the extent that' which indicate that an acquisition may relate to the making of supplies that are input taxed as well as supplies that are taxable as would be the case with undifferentiated general overhead outgoings of an entity making both input taxed and taxable supplies (Ronpibon Tin NL & Tongkah Compound NL v. FC of T (1949) 78 CLR 47 at 55-56 (Ronpibon )). Accordingly, when determining the extent of creditable purpose of an acquisition, one must consider the purpose of the entity in making the acquisition and the connection between an acquisition and the making of an input taxed supply. To the extent that the purpose for which the Fund makes an acquisition solely relates to making a GST-free supply, such acquisition is solely for a creditable purpose. It is a creditable acquisition by the Fund giving rise to an entitlement to recover full ITC for its acquisition on the portion that relate to making its GST-free acquisition-supply of Shares and the subsequent sale of the Shares. Where an acquisition has dual purposes that it is partly connected to making its input taxed supply of units to its unitholders and partly relates to making its GST-free supplies, such acquisition is acquired partly for a creditable purpose. Apportionment is required to determine its extent of creditable purpose where it relates to making supplies that are input taxed as well as supplies that are GST-free. As such, the Fund is not entitled to ITC for that portion of the acquisition that relates to the Fund making its input taxed supplies unless the Fund does not exceed the FAT under Division 189 or is not entitled to any RITCs. This private ruling does not deal with apportionment of your acquisitions. Please refer to Goods and Services Tax GSTR 2006/3: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) for information about apportionment. | Detailed Reasoning - Financial Acquisitions Threshold (FAT): If the Fund does not exceed the FAT under Division 189, acquisitions incurred may be fully creditable even if it relates (directly or indirectly) to making input taxed supplies. Division 189 provides a test based on current acquisitions and a separate test based on future acquisitions to determine whether an entity exceeds the FAT at a particular time. An entity exceeds the FAT at a time in a particular month if, assuming that all the financial acquisition it has made, or is likely to make, during the 12 months ending at the end of that month were made solely for a creditable purpose, either or both of the following would apply (sections 189-5 and 189-10): (a) the amount of all the input tax credits to which the entity would be entitled for its financial acquisitions would exceed $150,000 or such other amount specified in the GST regulations; and (b) 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 the input tax credits to which the entity would be entitled for all its acquisitions and importations (including the financial acquisitions) during either of the periods referred to in this paragraph (paragraph 14 of Goods and Services Tax Ruling GSTR 2002/2: GST treatment of financial supplies and related supplies and acquisitions ). Paragraphs 58 and 73 to 75 of the Goods and Services Tax Ruling GSTR 2003/9: financial acquisitions threshold (GSTR 2003/9) state: 58. A financial supply includes an acquisition-supply. 18 An acquisition-supply is a supply which is the acquisition of a financial interest. Acquisitions that relate to the making of acquisition-supplies are also financial acquisitions . … 73. To the extent acquisitions are used for the making of financial supplies that are also GST-free supplies (e.g. exported financial supplies) they are financial acquisitions for Division 189 purposes . They are taken into account in determining whether an entity exceeds the financial acquisitions threshold . 74. Section 189-15 provides that a financial acquisition is an acquisition that relates to the making of a financial supply. Financial supply is defined in section 195-1 as having the meaning given by the GST regulations. Subsection 9-30(3) deals with supplies that are both GST-free and input taxed, and applies to make such supplies GST-free and not input taxed. 24 The GST regulations do not exclude from financial supplies those supplies which are also GST-free by operation of subsection 9-30(3). 75. An acquisition does not need to relate to the making of an 'input taxed' financial supply to be a financial acquisition . Division 189 applies to an acquisition that relates to the making of a supply that is a financial supply under the GST regulations, notwithstanding that the GST-free treatment of the supply (for example, an exported supply) may override its input taxed status. 25 As such, for the purpose of determining whether the Fund exceeds the FAT under paragraph (a) above, it is irrelevant whether the financial supply is taxable, GST-free or input taxed. The amount taking into account in the $150,000 FAT includes all the ITCs to which the entity would be entitled for its financial acquisitions. In this case, the Fund has advised that it may exceed the FAT therefore to the extent that acquisitions relate to making supplies that would be input taxed, the acquisition is not acquired for a creditable purpose and giving rise to no entitlement to ITC unless, the Fund is entitled to RITCs for its reduced credit acquisitions listed in the table to subregulation 70-5.02(2) of the GST Regulations. | Detailed Reasoning - Reduced credit acquisition and RITCs: The list of acquisitions in the table is intended to be exhaustive pursuant to the language under subregulations 70-5.02(1) and (2). Something is a reduced credit acquisition if it is specified as an item within the table. If an acquisition is not specified as an item within the table, it is not a reduced credit acquisition. As such, to the extent that an acquisition by the Fund relates to making input taxed financial supplies, the Fund may be entitled to RITCs if it is a reduced credit acquisition that is listed under subregulations 70-5.02(2) of the GST Regulation. But only those parts that are reduced credit acquisitions give rise to RITCs (para 26 of GSTR 2004/1). For the purposes of subsection 70-5(2), the GST Regulations specify that the percentage of the ITC for a reduced credit acquisition is either 55% for a reduced credit acquisition covered by item 32 (supplies to recognised trust schemes) or 75% for all other kinds of reduced credit acquisitions. If a reduced credit acquisition is covered by both item 32 and one or more other items in the table in subregulation 70-5.02 of the GST Regulations, the percentage of the ITC will be 55% to the extent the reduced credit acquisition is covered by item 32 and 75% to the extent the reduced credit acquisition is not covered by item 32. For more information about reduced credit acquisitions and RITCs, refer to Goods and Services Tax Ruling GSTR 2004/1: reduced credit acquisitions . Of relevance, where the acqusition is a kind of reduced credit acquisition listed under any items in the table to subregulations 70-5.02(2), the Fund is entitled to recover 75% of the RITCs (except if the acquisition relates to item 32 where the recovery rate is 55%. Where the acquisition is not a reduced credit acquisition under subregulations 70-5.02(2), the Company is not entitled to any ITCs or RITCs for that acquisition that relates to making its input taxed supplies unless it does not exceed FAT.

Reasons for decision: All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) unless otherwise stated.