Private ruling: GST and entitlement to Reduced Input Tax Credits (RITCs) on debt collection services
Date of advice: 8 February 2019
Published: May 2019
Ruling period: The ruling has commenced

Ruling: Q1: Are the individual service components listed below able to be reduced credit acquisitions (RCAs) under regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)? (a) Acquisitions of the following services supplied by Entity 1: ● Secured Field Calls ● Non-Secured Field Calls ● Process Serving (b) Acquisitions of the following services supplied by Entity 2: ● Risk Management ● Debt Recovery ● Document Service (c) Acquisitions of the following services supplied by Entity 3: ● Court Orders to enter private property ● Field Calls ● Process Serving | A1: The acquisitions of services listed in (a), (b) and (c), with the exception of Risk Management services in (b), are RCAs under regulation 70-5.02(2) of the GST Regulations. As a result, you would be entitled to RITC for those acquisitions. | Q2: Are the individual service components listed below able to be RCAs under regulation 70-5.02(2) of the GST Regulations? (a) Acquisitions of Repossessions and Skip Tracing Services supplied by Entity 1 (b) Acquisitions of Repossessions and Skip Tracing services supplied by Entity 2 (c) Acquisition of the following services supplied by Entity 3: ● Repossessions ● FOI Search ● Skip Tracing | A2: The acquisitions of the individual service components listed in (a), (b) and (c) are not RCAs under regulation 70-5.02(2) of the GST Regulations. As a result, you would not be entitled to RITC for those acquisitions.

Relevant facts and circumstances: You are registered for GST. You are a provider of vehicle finance and loan products in Australia and hold an Australian Credit Licence. All of your customers are located within Australia. You provided customers with a number of motor vehicle, leasing and hire purchase arrangements including novated vehicle leases. You stopped writing new lease contracts, although rental income is still being received for ongoing leases. You enter into Consumer Loan Contracts with its customers for the provision of vehicle loans. Under the Consumer Loan Contracts, you are defined as the ‘Lender’ and treats the Consumer Loan Contract as an offer being regulated by the National Credit Code. Further, you enter into the Consumer Loan Contract with the customer defined as a ‘Borrower/Mortgagor’. Under the Consumer Loan Contracts, your customers are liable for certain ‘debt collection expenses’ which are payable when, following unredressed default, you have a cause to recover any expense incurred in enforcing its rights under the contract. You assessed that you breached the financial acquisitions threshold (FAT) since June 20XX as a result of the change in the mix of products sold to customers, namely a decrease in vehicle sales due to the closure of the dealership network. You contractually engage with three entities for the provision of services relating to enforcement rights held by you under the Consumer Loan Contracts. Schedule Y of the agreement 1 outlines the following types of services that are supplied by Entity 1 to you: ● Repossessions ● Secured field calls ● Process Serving ● Skip Tracing ● Non-Secured Field Calls Clause X of Agreement 1 outlines that you will fees that are outlined in Schedule X for each of the individual services listed in Schedule Y. Under agreement 2, clause x provides that you engage Entity 2 to provide the following types of services: ● Risk Management ● Debt Recovery ● Skip Tracing ● Repossession ● Document Service Under agreement 3 (no longer in effect), Schedule X provides that you acquire the following types of services: ● Repossession ● FOI Search ● Court orders to enter private property ● Field Calls ● Process Serving ● Skip Tracing You do not currently claim any RITC for GST on the debt collection fees charged entities (however, you do claim full ITCs on debt collection fees charged with respect to taxable revenue from leasing contracts). When you on-charge these fees to your customers, it includes the full amount of the fees (GST included) as debt collection fees under the Consumer Loan Contracts. However, you currently treat the on-charged amount as part of the total consideration for an input taxed financial supply (i.e. you do not apply GST to these on-charges).

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 70-5.02 | A New Tax System (Goods and Services Tax) Act 1999 Division 70

Reasons for decision: Summary: The relevant acquisitions of services under Question 2 are Repossession, Skip Tracing and FOI Search. As per the reasoning in Question 1, under the GST Regulations only certain types of debt recovery services are RCAs under item 17 of regulation 70-5.02(2). The services that are captured in item 17 are explained in detail under Question 1. Repossessions, Skip Tracing and FOI services are not the types of standalone services that are captured under item 17. As a result, these services are not RCAs for which an RITC would arise.

Reasons for decision: Division 70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that in some cases acquisitions that relate to financial supplies can attract a reduced input tax credit, even though no input tax credit could arise under the basic rules. | These acquisitions are RCAs and are listed in regulation 70-5.02 of the GST Regulations. | An acquisition is not an RCA to the extent that an entity would be entitled to an input tax credit for the acquisition outside of Division 70 of the GST Act. | Item 17 of regulation 70-5.02 of the GST Regulations deals with certain specified debt collection services. Debt collection services are those directed specifically towards collection of a debt or debts. Before the acquisition of a particular service can be an RCA mentioned in item 17, the service must do more than merely relate or contribute, to the service mentioned. | Item 17 of regulation 70-5.02 of the GST Regulations lists the following debt collection services as RCAs: | (c) lodgment of documents | (d) by financial supply facilitator, managing the recovery of sums due by borrowers. | Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) at paragraph 425 explains that item 17 provides an exhaustive list of debt collection services which may be RCAs under that item. Debt collection in this context refers to taking action to recover overdue debts. The acquisition of services not mentioned in items 17(a) to 17(d) is not an RCA unless it is covered by another item in subregulation 70-5.02(2). | Where an entity makes an acquisition that is an RCA listed in item 17 of regulation 70-5.02(2), an entity may be entitled to claim a RITC of 75% of the total GST included in the acquisition. | Item 17(a) debt recovery services | Paragraph 429 of GSTR 2004/1 explains that the acquisition of services that are intrinsic or relevant to recovering a debt is an RCA. The services must more than merely relate to debt recovery in some way. | Where the acquired service is directed towards recovery of a debt, the acquisition of that service is an RCA under item 17(a). Examples of activities performed in recovering debt include field calls to debtors and the preparation and the mail-out of letters demanding payment (paragraph 430 of GSTR 2004/1). | The acquisitions of Field Calls (Secured Field Call and Non-Secured Field calls) and Debt Recovery services are relevant for consideration under item 17(a). | As per paragraph 430 of GSTR 2004/1, field calls to debtors are examples of debt recovery services for the purposes of item 17(a). As a result, your acquisition of those services is considered to be an RCA under the item and you will be entitled to an RITC of 75% in respect of these acquisitions. | Debt Recovery Services acquired under agreement 2 are also considered to be RCAs under item 17(a) for which you are entitled to claim RITCs. | Acquisition of litigation services that make up the litigation process for the purposes of debt collection are RCAs. GSTR 2004/1 at paragraph 436 explains that it is not enough that the acquisition relates to litigation in some way, or that the activity is preliminary to, or follows from, litigation. Specifically, the litigation must be directed towards the collection of a debt. | GSTR 2004/1 at paragraph 437 gives examples of activities that make up the litigation process. These include the preparation and filing of claims for a debt in court, serving summonses, and the litigation services of solicitors or barristers in conducting legal proceedings (for example court appearances). Paragraph 438 clarifies that the actual activities carried out to enforce a judgment are not part of the litigation process but are debt recovery services. | Under the agreements (as per the facts above) acquisitions of Process Serving and Court Orders to enter private property and Document Services are relevant for consideration under item 17(b). | Where the acquisition of Process Serving is directed toward collection of debts, for example serving of summonses, the acquisition will be an RCA under the item. | If the acquisition of Court Orders to enter private property is directed towards collection of a debt the acquisition of those services will be RCAs under item 17(b). | Where the acquisition of services of Court Orders to enter private property is an enforcement of a judgment, those services are not part of the litigation process but are considered to be debt recovery services and may be RCAs under item 17(a). | Document services will be RCAs under item 17(b) to the extent that those services directly relate to litigation that is directed toward collection of a debt, for example serving of summonses. Document services could also be RCAs under other sub items in item 17, if they are services that are directly connected to the collection of the debt. | Question 1(b) asks if the acquisitions of Risk Management services are RCAs under regulation 70-05.02(2). Clause x of agreement 2 explains that a dedicated risk management officer for you to perform the following functions: | ● explore strategies to assess susceptibility to risk; | ● through risk analysis, minimise adverse impacts of Operational risk, Market risk and Credit risk on the client’s resources, earnings and cash flow; | ● enable the client to realise business goals; and | ● assist the client to reduce costs and increase staff productivity. | In your private ruling submission, you state that the acquisition of Risk Management services would be an RCA under item 14(d) to the extent that the ‘Risk management’ fee charged by entity 2 to you is for credit reference and credit scoring analysis. | Item 14(d) is one of services listed as an RCA in relation to loan application, management and processing services. Under item 14(d) credit reference assessment and credit scoring analysis are listed as RCAs. | GSTR 2004/1 discusses item 14 at paragraphs 371 to 406, and paragraph 371 explains that item 14 ‘contains an exhaustive list of loan application, management and processing services, and is primarily concerned with the establishment and discharge of loans’. As a result, in the context of Risk Management services acquired under the agreement 2, the acquisition of Risk management services would only be an RCA under Item 14 (d) where the credit reference assessment and credit scoring analysis are in relation to either loan application, management and processing services. | The acquisition of Risk management services by you is not in relation to loan application, management and processing services and as a result it is not an RCA under item 14(d). None of the other items in regulation 70-5.02(2) are relevant.