Private ruling: GST - request for the Commissioner to exercise discretion to refund overpaid GST
Date of advice: 27 February 2017
Published: August 2017

Ruling: Q1: Are the supplies by you in respect of outbound foreign currency (FX) transactions GST-free supplies, and consequently are the acquisitions made in relation to those supplies made solely for a creditable purpose? | A1: Yes, where the currency is for use outside of the indirect tax zone (Australia). | Q2: What does the Commissioner consider to be a fair and reasonable methodology to determine the input tax credits in respect of acquisitions relating to qualifying the foreign exchange (FX) outbound transactions? | A2: See reason for decision. | Q3: What does the Commissioner consider to be a fair and reasonable methodology to determine the percentage to make a proportionate claim of input tax credits in respect of retail FX transactions which are directly attributable to the GST-free outbound transactions (direct attribution)? | A3: See reason for decision. | Q4: What does the Commissioner consider to be a fair and reasonable methodology to determine the percentage to make a proportionate claim of input tax credits in respect of retail FX transactions which are indirectly related to qualifying outbound transactions, using a reasonable basis of apportionment (indirect apportionment)? | A4: See reason for decision. | Q5: What does the Commissioner consider the taxpayer may use for a periodic sampling exercise to determine their proportionate claim of GST input tax credits for their retail foreign exchange transactions which are directly and indirectly attributable to qualifying outbound transactions. Further, please stipulate an appropriate sampling interval for this purpose if required? | A5: See reason for decision.

Relevant facts and circumstances: You are registered for GST and operate a retail FX enterprise with service counters at various locations in Australia. Your core business is providing retail FX services. Some income is derived from subleasing underutilised parts of some of your retail space (you consider that the subleasing is immaterial). This service caters for both inbound and outbound customers i.e. customers arriving in Australia from overseas (inbound), and customers departing Australia to overseas (outbound). As part of the supply to outbound customers, you receive Australian dollars (AUD) for the supply of the FX. Conversely, you supply AUD to inbound customers and receive FX as consideration. In order to determine the proportion of sales undertaken to outbound customers obtaining FX in exchange for AUD, you have undertaken a sampling exercise across your Australian outlets nationwide for your outbound transactions. The sampling exercise involved the use of a Sales Survey which required a customer to indicate whether the currency was intended for use overseas or not. Your staff were instructed via internal memorandum to undertake this survey, with specific instructions to ascertain whether the currency was intended to be used overseas. Where the customer did not state the use of the currency unprompted, the staff member was strictly required to ask the customer the ultimate use of that currency. This data was then collated, and reconciled against sales data by internal accounting staff. Data samples were collected at multiple intervals. There are no costs periodically incurred by the entity that would be directly attributable to qualifying outbound transactions; however you have addressed directly attributable costs in the event they should arise. Determining the amount of qualifying outbound transactions will only provide the creditable portion of the outbound transactions and will not encompass all transactions of the entity. Therefore the creditable proportion of our indirectly related costs will need to be considered in view of the aggregated foreign exchange transactions. Furthermore, you do make acquisitions under Division 84 (the 'reverse charge' provision) of the GST Act. To the extent you are not able to claim an input tax credit, you report the GST to the ATO on behalf of the supplier. To the extent a reduced input tax credit can be claimed in respect of the GST, that portion of the reverse charge is not reported.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 11-5, | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1), and | A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(1).

Reasons for decision: Summary: You make a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if: (a) you acquire anything solely or party for a creditable purpose; and (b) the supply of the thing to you is a taxable supply; and (c) you provide, or are liable to provide, consideration for the supply, and (d) you are registered or required to be registered. Where the acquisition is a taxable supply to you, you provide, or are liable to provide consideration for the supply and are registered for GST paragraphs 11-5 (b), (c) and (d) of the GST Act are satisfied. It remains for us to consider the application of paragraph 11-5(a) of the GST Act. Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, paragraph 11-15(2)(a) provides that you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, in this case part of the enterprises' activities relate to making input taxed supplies. The use of the terms 'extent' and 'to the extent' in the context of input tax credits recoverability in the GST law contemplates the apportionment of acquisitions between multiple uses, as well as exclusive allocation to specific uses. The requirement of subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) that the supplier be a 'financial supply provider' is satisfied in relation to an acquirer of a financial interest by virtue of subregulation 40-5.06(2), which extends the meaning of 'financial supply provider' where an interest is supplied, to also apply to the acquirer of that interest. An acquisition of a thing is not a supply according to ordinary concepts. However, subregulation 40-5.09(1) of the GST Regulations is applied independently to both the provision and the acquisition. It follows that a GST registered entity acquiring currency banknotes for consideration as part of an enterprise it carries on in Australia is making a separate financial supply to the financial supply of the currency banknotes it supplies in exchange. That is the amount provided to them for consideration is also referred to as an acquisition-supply and is therefore a 'supply' under paragraph 9-10(2)(f) of the GST Act. Generally, the ATO view differentiates between claiming input tax credits for acquisitions that are for supplies that are GST-free and for acquisition-supplies that are input taxed. However, in regard to FX transactions the ATO view is that an acquisition that relates to an acquisition-supply is to be disregarded. Therefore, an acquisition that relates to the supply of a FX transaction in Australia to a customer whose intention is to use the currency outside of Australia will be solely creditable as the supply is made in relation to rights for the purposes of item 4 of the table in subsection 38-190(1) of the GST Act and is GST-free. Hence, you will be entitled to claim input tax credits where the acquisition is in respect of a FX outbound transaction that is GST-free, as paragraph 11-5(a) of the GST Act is satisfied. The extent of your planned use of an acquisition for a creditable purpose must be established on a fair and reasonable basis having regard to the nature of the acquisition and the circumstances of your enterprise. Any apportionment method should aim to achieve an accurate reflection of the input tax credits available for acquisitions acquired in carrying on your enterprise. The criteria used in relation to any expense must therefore recognise the nature of the underlying supply to be made. The method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes need 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. You may calculate the planned use of the acquisition in accordance with paragraph 44 of Goods and Services Tax Ruling titled Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) some of which are as following: ● records you already have available from a previous period, ● records kept since you made the acquisition, before you lodged you BAS, including actual use (full or partial) of the acquisition, ● records kept for some other purpose of the enterprise, or ● any other fair and reasonable basis. This calculation will need to include all the supplies of the enterprise, inbound, outbound and the proportion of outbound supplies that are GST-free and input taxed, for the methodology to the reasonably assessed where required. Please note that if 'the' actual extent of use for a creditable purpose later turns out to be different from your planned use, you may need to make an adjustment under Division 129 of the GST Act' that provides for a change in the extent of creditable purpose. The direct method of attribution seeks to identify a direct connection between acquisitions and supplies of the enterprise. Where the acquisition intended for use is solely for a creditable purpose the amount of the input tax credit is fully creditable, otherwise apportionment is required. However, it may not be appropriate for such a method to be applied as you have stated that there are no acquisitions of this nature at present. There are some examples of the use of characteristics or factors that provide an estimated direct link of an acquisitions intended application or actual application in paragraph 44 of GSTR 2006/3. This process will need to include all the supplies of the enterprise, inbound, outbound and the proportion of outbound that is GST-free and input taxed, for the methodology to the reasonably assessed where required. The indirect method attempts to estimate the use of acquisitions for creditable purposes by taking into account factors or characteristics that are not directly referable to the use of the particular acquisition. For this reason they may not provide as accurate a measure of the creditable purpose of the acquisition as the direct method. 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 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 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. There are a number of indirect estimation methods listed in paragraph 104 of GSTR 2006/3. Some examples are as follows: ● Entity-based general formula, ● Revenue based formula, and ● Non-revenue-based indirect estimate methods. It is important that the method used provides a fair and reasonable basis, in that you chose the method that most accurately reflects the relationship between the activities of your enterprise and your acquisitions. As per our previous discussion, the ATO suggested that in your circumstances a non-revenue basis of the number of transactions is more likely to produce a fair and reasonable outcome as opposed to a revenue based formula for all your enterprise's supplies. The ATO considers that a transaction count method is more representative of your costs and less likely to produce distortions in the outcome. This is because the cost of undertaking one transaction is not in our view related to the value of the transaction. For example we consider that in circumstances where one person purchases $US 1000 and the next person purchases $US 10,000 the costs of each transaction will be similar. More importantly the cost of the second transaction, if using a revenue basis, would be suggested as 10 times the cost of the first transaction but we have no indication or evidence that costs are driven in the main by the value of a transaction. Accordingly we consider that the use of a revenue method may lead to distortions, whereas this would be unlikely with a transaction count method. For the same reasons we consider a transaction count method should be adopted for both determining the number of out bound and inbound transactions, in addition to the number of GST-free and input taxed transactions in the outbound transactions. In considering if the method of the sampling to determine the proportion of input tax credits that would produce a fair and reasonable basis and if the sample size reflects the use of the FX in this circumstance paragraph 164 of GSTR 2006/3 provides guidance on sample procedures as follows: 164. The sample should cover a continuous representative period of at least 3 months. To ensure the integrity of the sample, it should be recalculated periodically having regard to the frequency with which source date is refreshed or recalculated within the enterprise. Periodic recalculations will be necessary, the frequency of which will depend on the source data and system involved. If the nature of the enterprise changes significantly (for example, ceasing or commencing to trade in certain contracts), any revenue-based formula utilising a sample based on data prior to the change must be immediately recalculated. It is expected that the sample will be current in relation to the transactions under consideration, that it continues for a period of at least 3 months, and that it be recalculated periodically, to ensure accuracy. Regarding the copy of the survey and approach in sampling you provided to the ATO for your apportionment of outbound FX supplies between GST-free and input taxed, the ATO agrees with the approach. As previously mentioned you will need to include all the supplies of the enterprise, inbound, outbound and the proportion of outbound that is GST-free and input taxed, for the methodology to be reasonably assessed where required. Furthermore, it is expected that the supplies that you consider to be immaterial, including subleasing and the issuing of Travellers Cheques along with any other transactions, will need to be recalculated if there is a change in the nature of the enterprise.