Financial Supplies
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Overview
On 19th December 2001, the Australian Taxation Office released GSTR 2001/D9 . This draft ruling represents an attempt to clarify the interpretation of the Goods and Services Tax (“GST”) legislation dealing with the treatment of financial supplies, which is found in Division 40 of A New Tax System (Goods & Services Tax) Act 1999 (“GSTA99″). While financial supplies are given input-taxed status under the Australian GST regime, in certain cases the supply of such a good or service may be classified as a GST-free supply under subdivision 38-E . The GST-free treatment of a financial supply opens up a series of avenues in which taxpayers may be able to plan more effectively with regards to maximizing the extent to which they are able to claim input tax credits in respect of the provision of a financial supply.
This paper represents a clarification of the rules and regulations governing financial supply providers and facilitators, and the current treatment of financial supplies under GSTA99. It also expands on existing legislation to provide an analysis which includes the guidance contained within GSTR 2001/D9 , and analyses the criteria which must be satisfied in order to be able to treat a financial supply as GST-free.
Financial Supplies
The term, Financial Supplies is defined by s.40-5 of GSTA99, as
A financial supply is input taxed.
Financial supply has meaning given by the regulations.”
The definition given by the A New Tax System (Goods & Services Tax) Regulations 1999 (“GSTREG99”), collectively refer to a financial supply as “the provision, acquisition or disposal of an interest” . This provision, acquisition or disposal must satisfy the criteria found in Reg.40-5.09(1)(a), that
“the provision, acquisition or disposal is
for consideration, and
in the course or furtherance of an enterprise, and
(iii)
connected with Australia”
Subject to the above concept, the term provision “includes allotment, creation, grant and issue of the interest” , disposal the “assignment, cancellation, redemption, transfer of the interest” ; and acquisition “in relation to the provision or disposal of an interest, includes acceptance and receipt of the interest” .
The classification of a Financial Supply as being input taxed, under subdivision 40-A , has the following implications with regards to its treatment, and the treatment of acquisitions made by the taxpayer in the course of providing the financial supply. In addition to the input taxed treatment, a concession exists in respect of specific acquisitions under Division 70 of GSTA99 to allow a reduced input tax credit (“RITC”) under certain conditions.
Input Taxed
An input taxed supply is not a supply as defined by s.9-5 of GSTA99. It arises where there is “no GST payable on the supply” , and where the supply is not included in the definition of a GST-free supply in Division 38 of GSTA99. An acquisition made by an enterprise for the purpose of making an input taxed supply is not an acquisition for a creditable purpose, this is supported by s.11-15 and s.15-10 of GSTA99. Where the supply of goods and/or services does not have GST included in the price, and it is included in the list of financial supplies at Reg.40-5.09, then the taxpayer is denied any entitlement to an input tax credit (“ITC”) in respect of creditable acquisitions .
The operation of s.11-15 , supports the treatment of creditable acquisitions made in the course of making a financial supply, where you are not deemed to have acquired a thing for a creditable purpose where “the acquisition relates to making supplies that would be input taxed” . The treatment of input tax credits arising from the acquisition of a creditable importation in the course of making the input-taxed supply, is similar in that a full input tax credit is denied under s.15-10 where the importation “relates to making supplies that would be input taxed” .
Reduced Input Tax Credits
While an input-taxed financial supply is defined by s.40-5 and Reg.40-5.09 , an exception to this basic rule exists under Division.70 of GSTA99, which allows financial supply providers a reduced credit claim in respect of specific acquisitions. Section.70-1 of GSTA99 outlines that:
“In some cases, acquisitions relating to financial supplies can attract a reduced input tax credit, even though no input tax credit could arise under the basic rules”.
Consequently a reduced credit acquisition may be available to the financial supply provider, contingent upon the criteria in Reg.40-5.01 and in Reg.40.5.03 being met. Where a financial supply is made by a financial supply provider , and
that entity has made creditable acquisition and/or creditable importation, collectively referred to as a reduced credit acquisition, in the course of making the input taxed financial supply; and
the financial supply to which the reduced credit acquisition relates is one specified by Reg.40-5.09 or Reg.40-5.10 ;
then, the entity will be entitled to claim a reduced input tax in respect of those acquisitions made. The amount by which an entity is able to claim a reduced input tax credit (hereafter referred to as an “RITC”) is specific to the type of financial supply connected to the reduced credit acquisition, as specified by the regulations. While the Reg.40-5.09 and Reg.40-5.10 do not provide a unique RITC claim for each different type of financial supply, Schedule 7 does provide an extensive summary of the types of financial supplies whereby a financial supply provider is entitled to an RITC for creditable acquisitions and/or creditable importations in relation thereto.
While financial supply providers are entitled to a RITC of 75% in respect of input taxed financial supplies made which fall into either Reg.40-5.09 or Reg.40-5.10, the operation of Division 70 is not as mechanical on the inside as it so appears. Where an entity, a financial supply provider, makes both taxable supplies and input taxed [financial] supplies (commonly referred to as mixed supplies), creditable acquisitions