Private ruling: GST and Managed Discretionary Accounts
Date of advice: 6 October 2016
Published: March 2017

Ruling: Q1: Is the entity in its capacity as operator of the Managed Discretionary Account service entitled to be registered for GST under section 23-10 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes, the entity is entitled to be registered for GST in its capacity as operator of the Managed Discretionary Account service. | Q2: Is the entity, in its capacity as operator of the Managed Discretionary Account service making reduced credit acquisitions under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 when the entity, in its corporate capacity: (a) provides investment portfolio management services; (b) provides administrative and reporting services relating to maintaining the records of the investors' accounts; (c) arranges for the investment decisions to be implemented (ie arranging for the execution of trades); (d) acts as custodian of the investors' assets? | A2: Yes, the services provided by the entity in its corporate capacity are reduced credit acquisitions.

Relevant facts and circumstances: The relevant facts include the circumstances described in the materials provided in the private ruling application, the Investment Mandate and the ASIC Class Order [CO 04/194]. The entity is an Australian company that is registered for GST. The entity holds an Australian Financial Services Licence pursuant to section 913B of the Corporations Act 2001 . Pursuant to the licence, the entity is permitted to provide a Managed Discretionary Account service in accordance with ASIC Class Order 04/194. The entity enters into an agreement with its client (investor) setting out all of the terms of its services to the investor. This covers accounts of various types, so there is a single account relationship with each investor for all of the entity's services provided to the investor, though there may be different sub-accounts maintained for that relationship. Each sub-account is referred to as an 'MDA' or a 'managed account'. In order for the investor to have a particular MDA provided by the entity, the entity enters into an agreement with the investor pursuant to an Investment Mandate. The investments held for a particular investor's MDA are managed together with the investments of all other MDA investors of the entity. The investors authorise the entity to hold their assets with the assets of other investors in collective accounts, resulting in the individual investors holding an entitlement to an amount of securities of the same class and denomination equivalent to the assets held for the respective investor. The MDA enables the investor to delegate the day-to-day investment decisions of their managed account to the entity, as MDA operator, who is advised by the respective Program Adviser. The Program Adviser maybe an affiliate of the entity or a third party entity who advises on the investment strategy pursuant to the Investment Mandate and approves the portfolios available for investment. The Program Adviser responsibilities include, but are not limited to advising on the initial asset allocations for a particular Model Portfolio and to instruct the entity, as MDA operator, of any changes to the portfolio in accordance with defined investment parameters and philosophies expressed within the Investment Mandate. The entity is licensed by the Australian Securities and Investments Commission to provide custodial services to clients. The investor retains beneficial ownership of all assets acquired for them, whether for managed accounts or for self-directed accounts. The MDA operator is appointed as custodian of the investor's assets. The entity's responsibilities as MDA operator as described in the Investment Mandate includes: ● establishing the investor's managed account ● maintaining records of investments in the investor's portfolio and providing the investor reporting; ● implementing transactions in accordance with: ● the investor's instructions or delegated authority ● changes to the portfolio as instructed by the relevant Program Adviser ● implementing corporate actions in response to Program Adviser advice ● arranging the settlement of investments in the investor's portfolio ● recording income on investments held in the investor's portfolio and crediting the cash account ● supervising compliance of the portfolio managed by the Programme Adviser. The entity, in its corporate capacity, charges the investor fees for the provision of services. All these services are taxable supplies and include: ● portfolio management (including devising and implementing the investment strategy advised by the Program Adviser); ● administration and custody services; ● account management services; ● transaction services relating to equity and fund transactions - the entity, in its corporate capacity, will engage third parties (eg brokers) to execute trades. In addition, the investors may incur adviser fees which are subject to GST and paid direct to the investor's adviser. All the fees charged by the entity in its corporate capacity are subject to GST. The amounts payable by the investors will be deducted from the cash holdings of the relevant investor's accounts (or deducted from the returns on investments).

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 23-10 | A New Tax System (Goods and Services Tax) Act 1999 section 70-5 | A New Tax System (Goods and Services Tax) Act 1999 section 184-1 | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5

Reasons for decision: Summary: Section 23-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity which is carrying on an enterprise is entitled to be registered for GST. An 'entity' for GST purposes is defined by section 184-1 of the GST Act and includes a trust. While the terms 'trust' and 'trustee' are not defined in the GST Act, a trust exists where the following elements are evident in a particular relationship: ● there is an intention to create a trust; ● there is a beneficiary; ● there is a trustee; ● there is property capable of being held on trust, and ● there is a personal obligation on the trustee annexed to particular property. The entity, as operator, holds assets on trust for the investors. The current terms of service agreed by each investor expressly provides for a trust relationship for the investor's entire account relationship with the entity. Each investor has a beneficial entitlement to the assets held on trust, notwithstanding that the entity, as MDA operator, holds legal title to the assets. Therefore, we accept that the entity, in its capacity as MDA operator is an entity for the purposes of the GST Act. This trust relationship involves the entity, as MDA operator, undertaking the activities set out in the Investment Mandate including making investment decisions (as advised by the Program Adviser), acquiring and disposing of investments, management of the investments and other administrative tasks for each investor in relation to that investor's assets but also, critically, for all investors with the same Investment Mandate. Section 9-20 of the GST Act explains that an enterprise includes, amongst others, an activity or series of activities done in the form of a business. Collectively, the activities of the entity as MDA operator are done in the form of a business. As the entity, in its capacity as MDA operator is considered to be an entity that is carrying on an enterprise for GST purposes, it is entitled to be registered under section 23-10 of the GST Act. Generally, an entity is not entitled to an input tax credit on an acquisition which relates to making input taxed supplies. However, section 70-5 of the GST Act provides that certain acquisitions which are specified in the regulations can give rise to a reduced input tax credit. These are called reduced credit acquisitions. Regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provides a list of acquisitions that are reduced credit acquisitions. The entity, as MDA operator, makes acquisitions in the course of carrying on the enterprise. These services are supplied by the entity in its corporate capacity and include: ● portfolio management (including devising and implementing the investment strategy advised by the Program Adviser); ● administration and custody services; ● account management services; ● transaction services relating to equity and fund transactions - the entity, in its corporate capacity, will engage third parties (eg brokers) to execute trades. Goods and Services Tax Ruling: Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides explanation of each of the specified reduced credit -acquisitions listed in regulation 70-5.02 of the GST Regulations. Item 9 of the table in subregulation 70-5.02 of the GST Regulation provides that the services of arranging for the provision, acquisition or disposal of an interest in a security by a financial supply facilitator are reduced credit acquisitions. Paragraph 286 of GSTR 2004/1 states: … The acquisition of the services is a reduced credit acquisition where an entity acquires the services of a financial supply facilitator to facilitate the provision, acquisition or disposal of an interest in a security… Item 23 of the table in subregulation 70-5.02 of the GST Regulation provides that the 'management of an investment portfolio for a trust' is a reduced credit acquisition. Paragraphs 492 - 493 of GSTR 2004/1 explain: 492. For the purposes of [item 23], investment management services include, but are not limited to, the following services: ● the establishment of a financial plan or investment strategy together with the ongoing implementation, execution, or refinement of that plan or strategy; and ● the ongoing implementation or execution of a given investment mandate; and ● the provision of ancillary reports or statements to clients. 493. While implementing, executing, or refining a particular plan or strategy, the manager may undertake such activities as collating information, monitoring investment performance, reviewing external consultant reports, and issuing instructions to brokers and custodians. Item 24 of the table in subregulation 70-5.02 of the GST Regulation provides that certain administrative functions in relation to investment funds are reduced credit acquisitions. These administrative functions include maintaining member and trustee records; processing of applications, contributions, benefits and distributions; and statement processing and bulk mailing. GSTR 2004/1 explains that a member refers to any entity with an interest in an investment fund, it also states: 553. The acquisition of the service of maintaining member and employer and trustee records and associated accounting, where acquired in relation to investment funds (including superannuation schemes), is a reduced credit acquisition under item 24(a). … 558. For members of investment funds other than superannuation schemes, the relevant records to be maintained also include accounts recording investment contributions and balances, correspondence from unit holders, applications for variations to holdings and records of instructions to dispose of assets. Item 30 of the table in subregulation 70-5.02 of the GST Regulation provides that certain specified master custody services are reduced credit acquisitions. These include maintenance of accounting records; taxation reporting; mandate monitoring; trade execution monitoring; and portfolio performance analysis. The services supplied by the entity in its corporate capacity are reduced credit acquisitions of the entity in its capacity as MDA operator.