Private ruling: Reduced input tax credits (RITCs)
Published: May 2014

Ruling: Q1: Is the Fund entitled to claim a RITC under item 24(e) of the table in regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Act Regulations 1999 (GST Regulations)(item 24(e)) for services acquired from Entity A under the terms of the Agreement? | A1: Yes, to the extent the acquisition of services acquired from Entity A under the terms of the Agreement falls within the scope of item 24(e) the Fund is entitled to claim a RITC.

Relevant facts and circumstances: Trustee X is the trustee of the Fund. Entity A and Trustee X in its capacity as trustee of the Fund entered into an Agreement. A copy of the Agreement has been provided as part of this private ruling request. Entity A provides services (Financial Services) to the Fund under the terms of the Agreement in return for a fee. The Financial Services acquired by the Fund are defined under the terms of the Agreement to mean the service in Schedule A. Under the terms of the Agreement the services in Schedule A are summarised as: • Delivery of general seminars, workshops, development of education material, follow-up with Fund members after seminars, analysing feedback of seminars (Type A) • Handling enquiries, complains, providing telephone support during peak periods (for example when statements are issued) (Type B). The Fund is registered for GST and currently exceeds the Financial Acquisition Threshold.

Relevant legislative provisions: A New Tax System (Goods and services Tax) Act 1999 11-15 | A New Tax System (Goods and services Tax) Act 1999 70-5.

Reasons for decision: Summary: Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with entitlement to input tax credits. Section 11-20 of the GST Act provides that an entitlement to an input tax credit arises for any creditable acquisition made by an entity. The term creditable acquisition is defined by section 11-5 of the GST Act which states: You make a creditable acquisition if: (a) you acquire anything solely or partly 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. * denotes a term defined in section 195-1 of the GST Act. Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Subsections 11-15(1) and (2) of the GST Act states: 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. Accordingly, the Fund acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. In this case we accept that the Fund primarily makes supplies of an interest in a superannuation fund to members. The provision, acquisition or disposal of an interest in the Fund is a financial supply that would be input taxed under item 4 (item 4) in the table of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). As the Fund has exceeded the financial acquisitions threshold in subsection 11-15(4) of the GST Act, it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed financial supplies. However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits (RITC). Subsection 70-5 of the GST Act refers to these acquisitions and states: (1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions . (2) …… Regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) refers to acquisitions that attract RITC's and states: (1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit. (2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions. | Detailed Reasoning - Reduced input tax credits: It is submitted by the Fund that they are partly entitled to a RITC under item 24(e) of the table in regulation 70-5.02 of the GST Regulations (item 24(e)). Relevantly this item states: The Following administrative functions in relation to investment funds, including those functions for superannuation schemes: … (a) Handling of inquiries and complaints made by member; Good and services Tax Ruling, GSTR 2004/1 explains the scope of item 24(e) and at paragraphs 576 to 580 states: | Detailed Reasoning - Item 24(e) - handling of inquiries and complaints made by members: 576. The scope of item 24(e) depends on the meanings of the expressions handling and members and the overall context of the item. | Detailed Reasoning - Handling: 577. In item 24(e), the expression handling is given a wide meaning, and refers to the management of, or dealing with, member inquiries or complaints. Accordingly, a messaging service that relays member inquiries or complaints to contacts within an investment fund is an example of handling for the purposes of item 24(e). It is not necessary that a particular member inquiry or complaint be fully dealt with by one entity in order for an acquisition to be a reduced credit acquisition under this item. | Detailed Reasoning - Members: 578. In item 24(e), members refers to any entity with an interest in an investment fund. Members, in this context, may include, but is not limited to: • unit-holders of a unit trust; • members of a superannuation fund; and • clients of an IDPS. 579. It does not include shareholders of companies, and beneficiaries of discretionary or fixed trusts. 580. The acquisition of services to manage or deal with member inquiries or complaints is a reduced credit acquisition under item 24(e). Where the acquisition involves the handling of inquiries from potential new members, or other non-member inquiries, this part need not be apportioned where it is a sufficiently minor part of total enquiries or complaints handled. In raising their submission the Fund considers that the services acquired from Entity A are a mixed acquisition. Accordingly in respect of part of the services acquired under the Agreement the Fund submits that item 24(e) applies. | Detailed Reasoning - Mixed acquisition and composite acquisition: The Commissioner's views on mixed and composite supplies and acquisitions are contained in Goods and Services Tax Ruling GSTR 2002/2 (GSTR 2002/2). Relevantly paragraphs 232 and 233 of GSTR 2002/2 state that: 232. A mixed acquisition contains separately identifiable parts where one or more of the parts is a reduced credit acquisition and one or more of the parts is not a reduced credit acquisition. In a mixed acquisition, no part is dominant, and each part has a separate identity. 233. On the other hand, a composite acquisition is an acquisition of one dominant part and includes other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the acquisition. Where an acquisition is a composite acquisition, then it is essentially the acquisition of a single thing, and will be either wholly a reduced credit acquisition or wholly not a reduced credit acquisition Accordingly, in determining whether the Fund has made a mixed or composite acquisition, the key question, as stated in paragraph 234 of GSTR 2002/2: …is whether the acquisition has parts that should be regarded as being separately identifiable, or whether it is essentially an acquisition of one dominant part with other parts being integral, ancillary or incidental to that dominant part. According to paragraph 235 of GSTR 2002/2, it will be a matter of fact and degree whether the parts of an acquisition are separately identifiable and retain their own identity. In summarising the established case law with regard to identifying mixed supplies, paragraph 245 of GSTR 2002/2 acknowledges that these principles equally apply to acquisitions and further states that an acquisition has separately identifiable parts: ..where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply. The Fund would not be required to identify parts of an acquisition where it is characterised as a 'composite' acquisition. As stated in paragraph 247 of GSTR 2002/2, in a composite acquisition: …subordinate parts complement and accompany the dominant part of the acquisition. Such an acquisition is essentially the acquisition of a single thing. It need not be broken down, unbundled or dissected further. A composite acquisition may appear, at first, to have more than one part, but is treated as if it is the supply of one thing. Further, paragraph 250 of GSTR 2002/2 establishes that: No single factor by itself will provide the sole test as to whether a part of an acquisition is integral, ancillary or incidental to the dominant part of the acquisition. Having regard to all the circumstances, indicators that a part may be integral, ancillary or incidental include where: • it represents a marginal proportion of the total value of the package compared to the dominant part; • it is necessary or contributes to the acquisition as a whole, but cannot be identified as the dominant part of the acquisition; • it contributes to the proper performance of the contract to acquire the dominant part; or • an acquirer would reasonably conclude that it does not constitute for customers an aim in itself, but is a means of better enjoying the dominant thing acquired. | Detailed Reasoning - Application of GST law to the Agreement: In this case we agree that the acquisition by the Fund under the Agreement with Entity A consists of a mixed acquisition. That is, it is evident that some services acquired by the Fund from Entity A have separate identity and an aim in themselves. However we do not consider that an approach which dissects each and every service or task reflects the true character of the acquisition made in this circumstance. That is, we do not view every single service listed in Schedule A as an independent part that has an aim in itself. Rather, the substance of the Agreement shows that a number of the activities are relegated to be viewed as incidental, integral or ancillary to dominant aspects of the Agreement. In these terms the Agreements identifies a dominant supply being that of preparation, delivery and review of seminars and other education material for Fund members. Therefore any components that accompany the dominant part of the acquisition are essentially the acquisition of a single thing. That is, they would not be treated as having a separate identity. Based on the facts and circumstances in this case the Commissioner accepts that the acquisition consists of a mixed supply. Relevantly the Type A and Type B services acquired by the Fund meet the tests of being separately identifiable. On this basis the parts of the acquisition by the Fund that are identified as those within Type A do not represent an acquisition that falls within the scope of item 24(e). However the Type B acquisitions are functions (or activities) that relate to handling an enquiry or complaint regarding the Fund. Accordingly the Type B acquisitions are considered reduced credit acquisitions that fall within the scope of item 24(e). | Detailed Reasoning - Conclusion: The Commissioner considers that for the acquisition of services by the Fund from Entity A under the Agreement which is Type B fall within the scope of a reduced credit acquisition under item 24(e). Accordingly the Fund is entitled to claim a RITC of 75%. However, the remaining services (Type A) acquired by the Fund are not reduced credit acquisition and accordingly these will not be considered creditable acquisitions.