Private ruling: GST and entitlement to input tax credits
Date of advice: 19 October 2017
Published: March 2018

Ruling: Q1: Is the amount paid by the Commonwealth to you as trustee of a fund (Fund) the provision of consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) . | A1: No, the amounts paid by the Commonwealth to you as trustee of the Fund is not consideration for a taxable supply under section 9-5 of the GST Act. | Q2: In determining whether you exceed the financial acquisitions threshold (FAT) as set out in Division 189 of the GST Act which of the following categories of acquisitions ‘relate to’ an input taxed financial supply? ● Category A – acquisitions such as asset management expenses incurred in activities that directly relate to the acquisition of financial supplies; ● Category B – acquisitions such as actuarial and legal expenses incurred in activities that directly relate to carrying out your statutory functions ● Category C – acquisitions such as director’s fees, office expenses and other overheads that relate to the activities of the Fund generally. | A2: In determining whether you exceed the FAT as set out in Division 189 of the GST Act, ● Category A acquisitions relate to an input taxed financial supply; ● Category B acquisitions do not relate to an input taxed financial supply; ● Category C acquisitions may to some extent indirectly relate to the making of input taxed financial supplies and may to some extent indirectly relate to making non input taxed financial supplies. | Q3: Where you exceed the FAT which of the following categories of acquisitions are for a creditable purpose? ● Category A – acquisitions such as asset management expenses incurred in activities that directly relate to acquisitions of input taxed financial products; ● Category B – acquisitions such as actuarial and legal expenses incurred in activities that directly relate to carrying out your statutory functions ● Category C – acquisitions such as director’s fees, office expenses and other overheads that relate to the activities of the Fund generally. | A3: Where you exceed the FAT: ● Category A acquisitions are for a non-creditable purpose as they relate to an input taxed financial supply; ● Category B acquisitions are for a creditable purpose as they do not relate to an input taxed financial supply; and ● Category C acquisitions are for a non-creditable purpose to the extent they indirectly relate to an input taxed financial supply and are for a creditable purpose to the extent they indirectly relate to activities that are not an input taxed financial supply. For the purposes of section 11-15 and Division 189 of the GST Act, you will need to allocate or apportion your Category C acquisitions between creditable and non-creditable purposes using an apportionment methodology that: ● is fair and reasonable ● reflects the intended use of that acquisition and ● is appropriately documented in your individual circumstances. This can include an estimation method that involves a detailed measure of the intended or actual use of the acquisition which is based on inherent characteristics of, or factor directly connected with, the acquisition where it gives a fair reflection of the use of the thing and provides an estimation of a direct link between the acquisition and its application.

Relevant facts and circumstances: You administer the Fund under a compensation regime whose core purpose is to provide compensation to meet certain types of claims. You may invest funds that are not immediately required for the purpose of meeting claims. You place funds under management with an external fund manager and the capital and earnings of these investments are used to meet compensation claims (portfolio earnings). Portfolio earnings have been the only source of income for the Fund to date. The supplies related to the management of the funds are input taxed financial supplies as they involve acquisition/supply of interests in or under a matter mentioned in item 10 of the table in subregulations 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) (Item 10).You make acquisitions that directly relate to this input taxed financial supply such as asset management expenses. You engage in a number of activities in undertaking your statutory functions including: ● determining claims, ● making payments to settle claims, ● making operating rules relating to the performance or exercise of your powers or duties, ● determining an amount to be a minimum amount in relation to the Fund, ● borrowing money in the interest of the sound financial management of the fund, ● keeping and administering the Fund, ● paying money out of the Fund to acquire financial products, ● entering into contracts of insurance or indemnity. Payments out of the Fund may only be made in the specified circumstances including: ● amounts, including costs, disbursements and interest, to be paid in connection with claims; ● all legal and other expenses incurred in investigating or defending claims or in relation to the fund; ● money payable out of the Fund under regulations; ● amounts to be paid to acquire financial products; ● expenses incurred in the administration of the fund, including the salaries and wages of persons employed by you in relation to the fund; ● any other money payable out of the Fund in accordance with a provision of the compensation regime. If the amount in the Fund is less than the minimum amount applicable, the Commonwealth gives you a certain amount to ensure there is a sufficient amount to meet compensation claims. You make acquisitions that relate to undertaking your statutory activities/functions and other activities which you have determined fall into three broad categories: ● Category A – acquisitions such as asset management expenses, incurred in activities that directly relate to financial supplies; ● Category B – acquisitions such as actuarial and legal expenses or other expenses relating to activities that directly relate to carrying out your statutory functions ● Category C – acquisitions such as director’s fees, office expenses and other overheads that relate to the activities of the Fund generally. You have not claimed input tax credits (ITCs) for acquisitions made by you.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 Section 189-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 189-15 | A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(3)

Reasons for decision: Summary: Is there a supply? The definition of ‘supply’ provided by section 9-10 of the GST Act includes ‘any form of supply whatsoever’, such as the ‘supply of services’, or ‘an entry into, or release from, an obligation to do anything or refrain from an act or to tolerate an act or situation’ or any combination of any 2 or more of the matters referred to in subsection 9-10(2) the GST Act. The Commissioner of Taxation (Commissioner) examines the concept of ‘supply’ in Goods and Services Tax Ruling: supplies (GSTR 2006/9). Given the broad definition of ‘supply’, the activities undertaken by you in administering the compensation regime answer the definition of a supply under section 9-10 of the GST Act. However, unless there is a sufficient nexus between a payment and the supply, absent any other supplies for which the payment can be said to be consideration for, there is no taxable supply made by you under the arrangement on which GST is payable. Nexus between supply and consideration The term ‘consideration’ is defined in subsection 9-15(1) of the GST Act and includes any payment, or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything. In identifying the character of the connection, the word ‘for’ ensures that not every connection between supply and consideration meets the requirements for a taxable supply. That is, merely having any form of connection of any character between a supply and a payment of consideration is insufficient to constitute a taxable supply. Consideration is first given as to whether the amounts paid by the Commonwealth have a sufficient nexus to any of the supplies identified above to constitute consideration for those supplies. You have to date, undertaken your statutory functions which have given rise to the activities above including determining and paying claims as well as undertaking investment activities where you have acquired financial products. The activities you undertake are not contingent upon any payments made by the Commonwealth. The payment by the Commonwealth to you is not dependent on whether or not you undertake statutory functions and other activities. As such, there is not a sufficient nexus between undertaking your statutory and other activities and any amounts paid by the Commonwealth. For these reasons, there is no ‘supply for consideration’, made by you for which the amounts paid by the Commonwealth could be consideration for. It follows, that as an essential requirement for a taxable supply under paragraph 9-5(a) of the GST Act is not satisfied, the amount received by you from the Commonwealth is not consideration for taxable supplies made by you on which GST is payable. That is there is no GST implications associated with the amount paid to you by the Commonwealth. Question 2 Acquisitions that relate to input taxed financial supplies Under the GST Act, you are entitled to an ITC for any creditable acquisition you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if: ● you acquire anything solely or partly for a creditable purpose ● the supply of the thing to you is a taxable supply ● you provide, or are liable to provide, consideration for the supply, and ● you are registered, or required to be register for GST. The first requirement for a creditable acquisition involves acquiring ‘anything solely or partly for a creditable purpose’. Subsection 11-15(1) of the GST Act provides that you acquire things for a creditable purpose to the extent that you acquire it in carrying on an enterprise. Under subsection 11-15(2) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed (paragraph 11-15(2)(a) of the GST Act) or the acquisition is of a private or domestic nature (paragraph 11-15(2)(b) of the GST Act). Subsection 11-15(4) of the GST Act provides that an acquisition is not treated as relating to supplies that would be input taxed if: ● the only reason it would be treated as relating to input taxed supplies is because it relates to making financial supplies, and ● the entity does not exceed the FAT. As such, the treatment of acquisitions you make is essentially governed by the acquisitions’ relationship (if any) to making supplies that would be input taxed. In Goods and Services Tax Ruling GSTR 2008/1 the Commissioner notes at paragraph 42 that, unlike other jurisdictions, the Australian GST law has no requirement to: link an acquisition to the making of a taxable or GST-free supply for the acquisition to have a creditable purpose. If the acquisition is made in carrying on an entity’s enterprise it is for a creditable purpose, subject to the negative test in paragraph 11-15(2)(a). While a claim for ITCs on enterprise acquisitions may not require a positive link to taxable supplies, it does require a connection to the carrying on of an enterprise. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree. You make acquisitions which you have broadly categorised as: ● acquisitions that related directly to the acquisition of financial products (i.e. asset management expenses), ● acquisitions that relate directly to activities undertaken by you in order to carry out your statutory functions (i.e. legal expenses, and actuarial expenses), ● acquisitions that relate to your activities generally (i.e. director’s fees, office expenses and other overhead acquisitions) which are connected with the activities you undertake in administering and operating the Fund and the legislative regime as a whole and are accordingly acquired in carrying on an enterprise. If the acquisition ‘relates to’ supplies that would be input taxed, paragraph 11-15(2)(a) of the GST Act precludes it from being for a creditable purpose. The words ‘relates to’ are wide words signifying some connection between two subject matters. The connection signified by the words may be direct or indirect, substantial or real. There is a sufficient connection where the acquisition is used or intended to be used solely or to some extent for the making of an input taxed financial supply. The term ‘making a financial supply’ means the provision, acquisition or disposal of an interest mentioned as a financial supply in regulation 40-5.09 or an incidental financial supply in regulation 40-5.10 of the GST Regulations and would include acquiring financial products either as investment or for a purpose of the Fund which involve the acquisition/supply of financial supplies mentioned in Item 10 in the table in subregulation 40-5.09 of the GST Regulations (Item 10 securities). Acquisitions made in acquiring financial products which involve the acquisition/supply of an interest in a financial supply that fall within Item 10 of the GST Regulations ‘relate to’ an input taxed financial supply. The issue is whether those acquisitions relating to other activities undertaken by you in carrying out your other statutory functions are also acquisitions that ‘relate to’ making the input taxed financial supply. Financial Acquisitions Threshold (FAT) The purpose of Division 189 of the GST Act is to provide a threshold test for the application of subsections 11-15(4) and 15-10(4) of the GST Act. Subsection 11-15(4) of the GST Act provides that, for the purposes of paragraph 11-15(2)(a) of the GST Act, an acquisition that relates to making a financial supply is not treated as one that relates to making a supply that would be input taxed if the entity does not exceed the FAT. The effect of these provisions is that, where you do not exceed the FAT, you would be entitled to ITCs for acquisitions used or intended to be used solely or to some extent for the making of input taxed supply such as those directly or indirectly related with the acquisition of financial supplies associated with your investment activities. Where the acquisition is to be used for the making of a financial supply, it is a financial acquisition regardless of the ultimate purpose of the financial supply. For example, the cost of professional services acquired in connection with the supply of financial products for the purpose of the compensation regime would relate to a financial supply even if the ultimate purpose of the supply was that the financial supply was to fulfil the fund’s functions (see paragraph 28 of GSTR 2003/9). Notwithstanding that the earnings from investments in financial supplies are used to support compensation payments made from the Fund, this is an insufficient connection (either directly or indirectly) with the activities you undertake in carrying out your statutory functions to establish that the acquisitions by you in carrying out those statutory functions ‘relate to’ an input taxed financial supply associated with your investment activities. Acquisitions which relate to the making of financial supplies may be described as either direct or indirect. Indirect acquisitions may also be described as overheads. These overhead acquisitions may not be capable of a direct connection with the individual supplies made by you, however they relate to the making of those supplies. Accordingly, those acquisitions you refer to as relating to activities of the Fund generally may indirectly relate to both the input taxed supply and other supplies associated with you undertaking your statutory functions and would need to be allocated in accordance with your apportionment methodology. For the purposes of applying section 11-15 and Division 189 of the GST Act, you will need to allocate those overhead acquisitions in accordance with your apportionment methodology. Question 3 Extent of creditable purpose and exceeding the FAT If you do not exceed the FAT, your acquisitions may be fully creditable even if they relate (directly or indirectly) to making input taxed supplies. This is not the case where you exceed the FAT, whereby you are not entitled to ITCs for acquisitions (goods, services or anything else) to the extent that they relate (directly or indirectly) to making input taxed supplies such as financial supplies. However, you may be entitled to reduced input tax credits, if the acquisitions are specified as reduced credit acquisitions in regulation 70-5.02 of the GST Regulations. Acquisition that directly relate to financial supplies Where you exceed the FAT, acquisitions, such as asset management expenses, incurred in activities that directly relate to the acquisition/supply of a financial supply, are for a non-creditable purpose as they relate to an input taxed financial supply as mentioned in Item 10 of the GST Regulations. This is the case where your estimate of the extent of creditable purpose is zero (that is, the acquisition is allocated not at all for a creditable purpose). Acquisitions that directly relate to undertaking statutory functions Where you exceed the FAT, acquisitions such as actuarial expenses or legal expenses, incurred in activities that directly relate to carrying out your statutory functions (that do not involve the acquisition/supply of financial supplies) are for a creditable purpose as they do not relate to an input taxed financial supply. This is the case where your estimate of the extent of creditable purpose is 100% of the total purpose (that is, the acquisition is allocated solely for a creditable purpose). Undertaking your statutory functions include acquisitions in: ● the managing and accessing claims, ● the governance and regulatory matters of the Fund. Acquisitions that indirectly relate to making financial supplies and undertaking statutory functions Where you exceed the FAT, acquisitions that relate to your activities generally such as director’s fees, office expenses and other overheads are for a non-creditable purpose to the extent they indirectly relate to an input taxed financial supply such as the acquisition of financial product and are for a creditable purpose to the extent they indirectly relate to activities that are not an input taxed financial supply such as acquisitions relating to carrying out your statutory functions. The requirement of apportionment can be found in the words ‘to the extent that’ in section 11-15 of the GST Act which indicate that an acquisition may relate to the making of supplies that are input taxed as well as supplies that are not input taxed as would be the case with undifferentiated general overhead outgoings. Apportionment methodology for extent of creditable purpose Goods and Services Tax Ruling GSTR 2006/3 provides guidance on methods that can be used for calculating ITCs and adjustments for change in use by providers of financial supplies including the extent of creditable purpose and the actual application. You are not required to use direct and indirect methods in the manner set out in GSTR 2006/3 and may use any alternative method provided that whatever method you use is fair and reasonable having regard to the principles set out in paragraph 34 of the ruling. For the purposes of section 11-15 and Division 189 of the GST Act, you will need to allocate or apportion your acquisitions between creditable and non-creditable purposes using an apportionment methodology that: ● is fair and reasonable ● reflects the intended use of that acquisition and ● is appropriately documented in your individual circumstances. This can include an estimation method that involves a detailed measure of the intended or actual use of the acquisition which is based on inherent characteristics of, or factor directly connected with, the acquisition where it gives a fair reflection of the use of the thing and provides an estimation of a direct link between the acquisition and its application.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | Reasons for decision: You make a taxable supply on which you must pay the GST payable pursuant to section 9-5 of the GST Act if: | ● you make the supply for consideration | ● the supply is made in the course or furtherance of an enterprise that you carry on | ● the supply is connected with the indirect tax zone, and | ● you are registered, or required to be registered for GST. | However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. | You are registered for GST and any supplies made by you under the compensation regime are in the course or furtherance of an enterprise that you carry on, are connected with the indirect tax zone and are not, other than your activities related to the acquisitions of financial products, supplies that are GST-free or input taxed. | The issue that arises under section 9-5 of the GST Act, in the present case, is whether the amounts paid by the Commonwealth to you involve a ‘supply for consideration’ made by you in satisfaction of paragraph 9-5(a) of the GST Act. | The GST liability in relation to such amounts turns on identifying: | ● one or more supplies made by you | ● amounts that are consideration (a payment, act or forbearance), and | ● a sufficient nexus between the amount paid and the supply.