Private ruling: GST and contributory mortgage schemes.
Date of advice: 1 November 2018
Published: February 2019

Ruling: Q1: Is the “establishment fee” consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 made by the entity to the borrower? | A1: No. The “establishment fee” received by the entity is not consideration for a taxable supply made to the borrower. It is consideration for a taxable supply made to the special purpose vehicle. | Q2: Is the “management fee” consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 made by the entity to the borrower? | A2: No. The “management fee” received by the entity is not consideration for a taxable supply made to the borrower. It is consideration for a taxable supply made to the special purpose vehicle.

Relevant facts and circumstances: The facts and circumstances of the scheme include information contained in the private ruling application and further documentation provided. The entity operates a contributory mortgage scheme and has been registered for GST since XX. Generally, in relation to the contributory mortgage scheme, the entity receives the initial request for finance and assesses it. The entity undertakes preliminary discussions with the prospective borrower and, through a committee decides whether the finance request should progress through to sourcing the funding. This includes considering the loan amount and purpose, collateral of the borrower, available guarantees, valuation of any available secured property, interest rates and terms of the loan, fees payable and any other terms of the loan. The entity, as responsible entity for the unregistered managed investment scheme, identifies suitable investors for the loan and prepares an information memorandum for potential investors and a letter of offer for potential borrowers. The entity arranges for a special purpose vehicle (a unit trust) to be created with the trustee being a related entity. The trust is created to issue units to investors and to hold the mortgage over the secured property. The entity arranges for the loan contract for all other relevant contracts to be created and executed. A separate special purpose vehicle (unit trust) is created for each loan. Letter of Offer A letter of offer was forwarded to the borrower after an application for finance was received by the entity. The letter included the following information about the proposed loan including: ● Interest (a) Interest rate – An Agreed Rate of XX% per annum. (b) Interest payments – Interest is payable quarterly in advance … AA% of the XX% rate will be retained by the entity as management and collection fee. ● Costs to be paid by the Borrower: (a) Establishment Fee – An establishment fee (including GST) is payable to the entity. (b) Management Fee – A management fee of AA% (plus GST) is to be paid to the entity and will be deducted from the principal sum at settlement. Loan Agreement A loan agreement was entered into between the special purpose vehicle and the borrower. The loan agreement defines the ‘Establishment Fee’ as ‘the fee payable by the Borrower to the Lender or its lawyers agreed in the Letter of Offer’. The loan agreement defines the ‘Management Fee’ as ‘the management fee payable by the Borrower to the Manager pursuant to the Management Fee Agreement …’. The Manager is stated as the entity. The loan agreement defines ‘Secured Money’ as ‘the aggregate of all moneys, which each Transaction Party (whether alone or with another person) is, or at any time may become actually or contingently liable to pay to or for the account of the Lender (whether alone or with another person) for any reason whatsoever. It includes money by way of principle, interest, fees (including the Management Fee), costs …’. The loan agreement states the ‘Borrower must pay the Establishment Fee to the Lender on or before the Drawdown Date… ‘ and the ‘Borrower must pay the Management Fee in accordance with the Management Fee Agreement’. Management Fee Agreement A management fee agreement was entered into between the entity and the borrower. The background to the management fee agreement provides that the lender has appointed the manager to manage the facility and the borrower has agreed to pay the management fee. The management fee agreement does not further explain what is required by the entity in order to manage the facility. Information Memorandum An information memorandum was issued by the entity to provide information to prospective investors in the contributory mortgage scheme. It provides details of the information provided in the loan agreement.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

Reasons for decision: Summary: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply when: ● you make a supply for consideration; and’ ● the supply is made in the course or furtherance of an enterprise that you carry on; and ● the supply is connected with the indirect tax zone (Australia}); and ● you are registered, or required to be registered; and ● the supply is neither GST-free nor input taxed. The activities undertaken by the entity are done in the course of operating the contributory mortgage scheme. Many of the activities are supplies made by the entity to other entities. All supplies made by the entity are connected with the indirect tax zone because they are done in Australia. The entity is registered for GST and the supplies provided by the entity are neither GST-free nor input taxed. The borrower has not entered into any contracts with the entity to be provided with anything. The borrower entered into a loan contract with the special purpose vehicle. It is this agreement which requires the borrower to pay the management fee and establishment fee. The entity is not a party to this agreement. The loan agreement provides that the borrower must pay the establishment fee on or before the drawdown date and that the borrower must pay the management fee in accordance with the management fee agreement. The management fee agreement does not require the entity to perform any services or provide any goods to the borrower in return for payment of the management fees, nor does it recognise any previous supplies that the entity provided to the borrower. The fact that the agreement has been executed as a deed supports the assertion that the entity has not provided anything to the borrower. The background to the management fee agreement provides that the lender (the special purpose vehicle) has appointed the entity manage the loan facility and the borrower has agreed to pay the management fee. The entity is not contractually obliged to provide the borrower with anything. The borrower has entered into a contract with the special purpose vehicle to borrow money and, under that loan agreement, the borrower must pay the management fee and the establishment fee. It has been suggested that the entity has provided a service to the borrower of introducing the borrower to a suitable lender and that the establishment fee is payment for that service. Whilst it is possible that a borrower may pay a fee to an entity such as a broker to source a suitable lender, the entity has not provided this service. It is noted that the borrower has directed payments described as ‘procurement fees’ to an unrelated third party. It is suggested that these payments are for services of identifying and introducing a potential lender to the borrower. The entity, as responsible entity for the unregistered managed investment scheme received the initial request for finance and assessed it. The entity undertook discussions with the borrower and, once the committee had approved the borrower, progressed the application through to sourcing the funding. None of these activities are services supplied to the borrower. These services, including assessing the purpose of the loan, collateral of the borrower, available guarantees, valuation of any available secured property and preparing documentation are provided by the entity to the lender, the special purpose vehicle. Although there is no contract between the entity and the special purpose vehicle which requires the entity supply these services, there doesn’t need to be as both entities are controlled by the same individuals. The entity is the responsible entity for the unregistered managed investment scheme and has provided the special purpose vehicle with the various services that the special purpose vehicle needs in order to provide a loan to the borrower. Without the entity providing these things to the special purpose vehicle, it would not be capable of providing the loan. The various documents lead to a conclusion that the borrower was required to pay the special purpose vehicle the establishment fee and the management fee and that the special purpose vehicle has directed those payments be made to the entity. This is further supported by the fact that the management fee is identified in the loan agreement as included in the interest payable on the loan. The loan agreement provides that interest is payable by the borrower on the advance at a rate that includes the amount that is identified as the management fee. The management fee agreement itself states that the management fee is ‘XX% of the agreed percentage rate. The information memorandum provided to investors provides an overview of the scheme and stipulates that the interest payable by the borrower is XX% with a ‘Net investor return of XX-AA%. The memorandum further states that the total interest payable is to be deposited into an account. This amount is equal to the AA% of the total amount loaned. Further support comes from the loan agreement defining ‘Secured Money’ as ‘the aggregate of all moneys, which each Transaction Party (whether alone or with another person) is, or at any time may become actually or contingently liable to pay to or for the account of the Lender (whether alone or with another person) for any reason whatsoever. It includes money by way of principle, interest, fees (including the Management Fee), costs …’. If the management fee or establishment fee were due and payable by the borrower to the entity, they would not form part of the amount owed to the special purpose vehicle (lender). As mentioned above, the entity has supplied services to the special purpose vehicle. Those supplies include the preliminary activities undertaken prior to the settlement of the loan such as assessment of the borrower, loan, guarantees and securities offered as well as ongoing supplies by the entity of managing the loan for the special purpose vehicle. The special purpose vehicle has directed the payment that it is owed (by the borrower) to the entity. The payments received by the entity are consideration for its taxable supplies made to the special purpose vehicle.