Under GST law, input tax credits are only available where they relate to acquisitions that are made for a ‘creditable purpose’. Acquisitions that relate to making ‘input taxed supplies’ are not made for a creditable purpose. This is a GST key issue in the financial services industry due to the number of ‘financial supplies’ which are recognised as input taxed. The practical impact of this can be seen in the case of a managed investment fund that only makes input taxed financial supplies, that is, the fund would not be entitled to input tax credits for the acquisition it makes of supplies made by the relevant RE in administering the fund.
There are specific rules in the GST Act that provide for an entitlement to ‘reduced input tax credits’ (RITC) for suppliers of certain input taxed financial supplies (reduced credit acquisitions). Under these rules, the RITC is generally reflected at the reduced rate of 75%, however for certain supplies acquired by a ‘recognised trust scheme’ the RITC percentage is reduced to 55%.
In May 2013, the Commissioner of Taxation released a draft tax determination, GSTD 2013/D1, outlining how lump sum fees are to be recognised for the purposes of determining which RITC rate is to be applied in the case of recognised trust schemes.
In GSTD 2013/D1, the Commissioner proposes adopting a fair reasonable method for determining the proportion of acquisitions subject to the 75% RITC versus the 55% RITC. This is because a single RE fee is typically recognised as consideration for a ‘mixed supply’ of both managing investments and administration (75%) and ‘governance of the fund’ (55%) by a RE.
The Commissioner states further that what is known as the ‘deductive benchmarking methodology” is a fair and reasonable methodology to adopt. In broad terms, the deductive benchmarking methodology uses arm’s length values for each component of a single RE Fee, determined by reference to the market rates of providing such services to a broadly comparable managed investment fund (with comparable fund type and portfolio risk).
Whilst most trusts and funds will have already undertaken some analysis of their acquisitions for the purposes of allocating between the 55% and 75% RITC, it is advised that such analysis be revised in light of the Commissioner’s comments in the draft determination.
Furthermore, care should be taken with other non-MIS trusts, that is, whilst the draft determination is only stated to apply to MISs, these principles could subsequently be applied to non-MIS trusts, unregistered MISs and superannuation funds in the future.
It is noted that the draft Determination is yet to be finalised, and will be open to public comment up until 5 June 2013.
For further information
To read the draft determination, click the following link.