Private ruling: GST and reduced input tax credits for an IDPS
Published: October 2014

Ruling: Q1: Is the Investor Directed Portfolio Service an entity for the purposes of section 184-1 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes, the Investor Directed Portfolio Service is treated as an entity. | Q2: Is the Investor Directed Portfolio Service carrying on an enterprise pursuant to section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A2: Yes, the Investor Directed Portfolio Service is carrying on an enterprise. | Q3: Is the Investor Directed Portfolio Service entitled to be registered for GST under section 23-10 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A3: Yes, the Investor Directed Portfolio Service is entitled to be registered for GST. | Q4: Is the Investor Directed Portfolio Service entitled to credits under either section 11-20 or section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 for acquisitions it makes? | A4: Yes, the Investor Directed Portfolio Service is entitled to reduced input tax credits under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 . | Q5: Is the Investor Directed Portfolio Service entitled to reduced input tax credits at the rate 75% under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 in relation to acquisitions made for which the following fees are payable: • Administration fee; • Investment management fee; • Investment performance fee; • Managed fund transaction fees; • Listed securities transaction fee; • Term deposit transaction fee; • Exchange traded option transaction fee; • Contribution fee; • Ongoing advice fee; • One-off advice fee; • Advisor brokerage; • Licensee fee? | A5: Yes, the Investor Directed Portfolio Service is entitled to reduced input tax credits at the rate 75% in relation to acquisitions made for the fees. | Q6: Is the Investor Directed Portfolio Service entitled to reduced input tax credits at the rate 55% under section 70-5 of the A New Tax System (Goods and Services Tax) Act 1999 in relation to acquisitions made for which the following fees are payable: • Managed fund in-specie transaction fee; • Listed securities in-specie transaction fee; • Term deposit break fee; • Reconstruction fee; • Dishonour fee; • Insurance administration fee; • Account keeping fee? | A6: Yes, the Investor Directed Portfolio Service is entitled to reduced input tax credits at the rate 55% in relation to acquisitions made for the fees.

Relevant facts and circumstances: The relevant facts include all documents and materials provided in the private ruling application. An entity operates the Investor Directed Portfolio Service (IDPS). The IDPS is a managed investment scheme under the Corporations Act 2001 . The IDPS exceeds the financial acquisitions threshold In operating the IDPS, the entity makes supplies to the IDPS. In addition, the entity makes acquisitions from third parties including advisors. Clients of the IDPS are charged various fees in relation to the operation of the IDPS. The fees are paid from the IPDS account to the entity. Each fee represents consideration for an acquisition made by the IDPS. Practically, the entity holds a bank account where all of the clients funds are placed and funds are withdrawn to pay third parties or the entity for acquisitions. The fees payable are explained in the Investor Directed Portfolio Service (IDPS) Guide . The separate account keeping fee is in relation to complying with industry regulatory requirements. Any fees due to the advisor are in return for the advisor providing management of the client's investment asset portfolio. Furthermore, these services are provided to the entity and are then passed onto the IDPS. Assumption All acquisitions of the IDPS relate to the making of financial supplies being either the acquisition or disposal of an interest in the IDPS or the actual investments into other financial products that themselves constitute financial supplies.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 184-1. | 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 11-20. | A New Tax System (Goods and Services Tax) Act 1999 section 11-15. | A New Tax System (Goods and Services Tax) Act 1999 section 40-5. | A New Tax System (Goods and Services Tax) Act 1999 section 70-5. | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09. | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5.02.

Reasons for decision: Summary: An 'entity' for GST purposes is defined by section 184-1 of the A New Tax System (Goods and Services Tax) Act 1999 (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 beneficiary • there is a trustee • there is property capable of being held on trust, and • there is a person obligation on the trustee annexed to particular property. As a managed investment scheme, the Investor Directed Portfolio Service (IDPS), through the activities of the entity, obtains contributions from clients in exchange for clients acquiring an interest in benefits produced by the IDPS. The client contributions are pooled to produce the benefits (financial or otherwise) and the clients don't have day-to-day control over the operation of the IDPS (in producing the benefits). While the nature of the structure through which a managed investment scheme is operated is not prescribed by the Australian Securities and Investment Commission (ASIC), generally such a scheme operates through some form of trust relationship. This is due, by and large, to the pooling characteristic, which is necessarily accommodated through the adoption of a trust relationship. Although the Investor Directed Portfolio Service (IDPS) Guide does not include a clause that specifically declares a trust over all client contributions, the entity is required to pay all client contributions into a trust account held with an Australian authorised deposit-taking institution (ADI). Consequently, in an overall practical sense, the relationship between the IDPS (in its managed investment scheme guise) and the entity, can be viewed as one that satisfies the fundamental elements of a trust so as to be recognised as an entity for the purposes of the GST Act. An enterprise is defined by section 9-20 of the GST Act as 'an activity or series of activities done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade; or (c) … Miscellaneous Taxation Ruling MT 2006/1 explains that an activity or series of activities is essentially any act or series of acts that an entity chooses to do. The acts can range from a single transaction to groups of related transactions or to entire operations of the entity. MT 2006/1 also explains that the words 'in the form of' have the effect of extending the meaning of enterprise beyond entities carrying on a business. Accordingly, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria of being regarded as a business, have the appearance or characteristics of business activities. In respect of this overall trust relationship (that practically facilitates the managed investment scheme aspect of an IDPS), the Commissioner considers that the associated activities of the entity typically correlate with the activities performed by a single responsible entity of public unit trust. The activities performed by the entity have a distinct commercial flavour that permits a view that they constitute activities carried out in the form of a business. As such, the IDPS, through the activities of the entity as quasi-trustee, is an enterprise for the purposes of the GST Act. Section 23-10 of the GST Act provides that any entity which is carrying on an enterprise can choose to be registered for GST. As the IDPS is considered an entity which is carrying on an enterprise, it is entitled to be registered for GST. Section 11-20 of the GST Act provides that an entity is entitled to input tax credits on any creditable acquisition that it makes. A creditable acquisition is defined by section 11-5 of the GST Act: 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. The IDPS is not yet registered for GST, however on the understanding that such registration takes place the following response would apply to any acquisitions made Subsection 11-15(2)(a) of the GST Act provides that an entity does not make an acquisition for a creditable purpose to the extent that 'the acquisition relates to making supplies that would be input taxed'. The supply of an interest in a managed investment scheme is listed at item 10 of the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) as a supply which is a financial supply. Section 40-5 of the GST Act provides that financial supplies are input taxed. Therefore, the IDPS makes input taxed financial supplies as it provides interests in a managed investment scheme. Consequently, the IPDS is not entitled to input tax credits under section 11-20 on acquisitions it makes that relate to financial supplies made by the IDPS. However, section 70-5 of the GST Act provides that acquisitions of a kind that are specified in the table in regulation 70-5.02 of the GST Regulations give rise to an entitlement to a reduced input tax credit. Generally, reduced input tax credits are 75% of the input tax credit although some certain acquisitions are 55% of the input tax credit. Item 32 of the table in subregulation 70-5.02 of the GST Regulations applies to acquisitions made by certain trusts and covers the IDPS. Item 32 operates to provide a reduced input tax credit of 55% for acquisitions made by the trust except certain types of acquisitions which receive a reduced input tax credit of 75% under a different item in the table. Item 32 states: Supplies acquired by a recognised trust scheme, to the extent that: (a) the supplies are acquired on or after 1 July 2012; and (b) the supplies acquired are not: (i) a supply by way of sale of goods or supply of real property made by: (A) … (ii) a brokerage service covered by item 9 or 21; or (iii) a service covered by paragraph (a), (b) or (e) of item 23; or (iv) a service covered by paragraph (a), (b), (c), (d), (e), (f), (g) or (i) of item 24; or (v) a custodial service covered by item 29; or (vi) a service covered by item 30; or (vii) a service covered by item 33 Essentially, the IDPS will be entitled to reduced input tax credits of 55% for acquisition it makes from the entity except the following types of acquisitions which are mentioned in other items in the table in subregulation 70-5.02 of the GST Regulations: • Brokerage services - Item 9 For the 'provision, acquisition or disposal of an interest in a security' including order placement and trade execution and clearance and settlement of trades; • Investment Management services - Item 23 Services involving the management of assets or a portfolio of assets. • Administration services - Item 24 Services including processing applications, contributions, transfers and distributions; preparing reports, statements and forms for clients; and managing enquiries and complaints. • Custodial services - Item 29 General custodial services including the sale or transfer of assets; undertaking and settling of securities transactions; registration of interests and rights; and operating bank accounts. • Master custody services - Item 30 Services involving the maintenance of accounting and taxation records; monitoring; portfolio performance analysis and risk management reporting. • Monitoring services - Item 33 Services involving the monitoring and reporting that is specifically required for compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 . Further explanation of each of these items is provided in the Goods and Services Tax Ruling GSTR 2004/1. From the information provided it is reasonable to conclude that the following fees payable by clients are payment for services provided by the entity to the IDPS which result in an entitlement to a reduced input tax credit of 75% for the IDPS: • Administration fee - an administration service covered by paragraph (b)(iv) of item 32. • Investment management fee - an administration service covered by paragraph (b)(iv) of item 32. • Investment performance fee - an administration service covered by paragraph (b)(iv) of item 32. • Managed fund transaction fees - may be a brokerage service covered by paragraph (b)(ii) of item 32 or an investment portfolio management services covered by (b)(iii) of item 32. However, this does not include the in-specie transaction fees. • Listed securities transaction fee - may be a brokerage service covered by paragraph (b)(ii) of item 32 or an investment portfolio management services covered by (b)(iii) of item 32. However, this does not include the in-specie transaction fees. • Term deposit transaction fee - an administration service covered by paragraph (b)(iv) of item 32. • Exchange traded option transaction fee - a brokerage service covered by paragraph (b)(ii) of item 32. • Contribution fee - an investment portfolio management service covered by (b)(iii) of item 32 • Ongoing advice fee - an investment portfolio management service covered by (b)(iii) of item 32 • One-off advice fee - an investment portfolio management service covered by (b)(iii) of item 32 • Advisor brokerage - a brokerage service covered by paragraph (b)(ii) of item 32. • Licensee fee - an investment portfolio management service covered by (b)(iii) of item 32 As mentioned above, Item 32 of the table in subregulation 70-5.02 of the GST Regulations applies to acquisitions made by the IDPS. Any fees or charges incurred by the IDPS that are not covered by one of the exemptions in item 32 result in a reduced input tax credit of 55%. From the information provided it is reasonable to conclude that the following fees payable by clients are payment for services provided by the entity to the IDPS which result in an entitlement to a reduced input tax credit of 55% for the IDPS: • Managed fund in-specie transaction fee; • Listed securities in-specie transaction fee; • Term deposit break fee; • Reconstruction fee; • Dishonour fee; • Insurance administration fee; • Account keeping fee - not covered by paragraph (b)(iv) of item 32 as it relates to complying with industry regulatory standards.