Changes to GST Regulations - treatment
of trustee services and hire purchase
Commonwealth Treasury has proposed
changes to the A New Tax System
(Goods and Services Tax) Regulations
1999 (GST Regulations) which would
fundamentally alter the tax treatment
of routine commercial transactions as
well as providing clarification on some
contentious areas of GST and financial
supplies.
The proposed change to the ability of
entities to claim reduced input tax credits
(RITCs) for the acquisition of trustee
services will not only change the “net
cost” of acquiring those services but
will also affect disclosure documents
issued to investors and the economics of
finely tuned financial products. Instead
of a 75% RITC, certain trustee services
will now only be eligible for a 55% RITC
– introducing further complexity and
compliance costs.
On the other hand, the proposed changes
to the treatment of hire purchases
will finally resolve one of the nagging
anomalies within the GST law by
eradicating the unnecessary distinction
between the hire purchase of goods
with a disclosed credit charge (which
is partially input taxed) and the hire
purchase of goods without a disclosed
credit charge (which would be wholly
taxable). The proposed amendments will
treat all supplies of goods by way of hire
purchase as taxable supplies, removing
the complexity and compliance costs
associated with the partial denial of input
tax credits under the current rules.
Other minor changes seek to resolve
uncertainty regarding the GST treatment
of:
• guarantees and indemnities;
• lenders mortgage reinsurance; and
• monitoring services.
The proposed amendments are intended
to take effect from 1 July 2012. Treasury
is engaging in a consultation process
regarding the detail of the proposals
and is accepting submissions until 24
February.
The proposed amendments to the
treatment of hire purchase arrangements
should be uncontroversial as they provide
much needed clarity and simplification.
However, the changes to the RITC regime
for trustee services are likely to be
complex in their implementation, will
increase costs and are likely to be met
with some resistance.
Read on for further detail regarding the
proposed amendments.
Changes to the scope of
financial supplies
The A New Tax System (Goods and
Services Tax) Act 1999 (GST Act) treats
certain supplies as being “input taxed”.
No GST is payable on the making of
input taxed supplies, although the
entity making the supply is restricted in
its ability to claim input tax credits for
acquisitions relating to the making of
input taxed supplies. The GST Act does
not define “financial supplies”. This task
was instead left to the GST Regulations in
the hope that the definition might be more
flexible and easily amended. A financial
supply is the “provision, acquisition or
disposal” of an “interest in or under” one
of the various items listed in reg 405.09(3).
Guarantees and indemnities
Item 7 currently refers to:
“A guarantee, including an indemnity
(except a warranty for goods or a contract
of insurance or reinsurance)”
The precise scope of this item has been the source of significant
contention, requiring the Commissioner to issue a public ruling
(GSTR 2006/1) setting out his views as to the commercial
arrangements that fall within the scope of Item 7. At paragraph
24 of that ruling, the Commissioner states that:
“A guarantee is an agreement under which one entity (the
surety) agrees to be liable for the obligations of another (the
principal) if the principal defaults. An indemnity is an obligation
to an entity (the creditor) assumed by another (the surety), under
which the surety agrees to keep the creditor harmless from risks
arising from dealings with a third party”.
In essence, the Commissioner’s view is that both guarantees and
indemnities always involve tripartite contractual arrangements.
This is not a view that has always been accepted by taxpayers,
who have argued in favour of a broader definition of both terms.
The proposed amendments will remove existing Item 7,
effectively splitting it into 2 separate Items. New Item 7 will
simply refer to “a guarantee” and a new Item 7A will refer to:
“An indemnity that holds a person harmless from any loss as a
result of a transaction the person enters with a third party”
The proposed amendments will therefore entrench the role of
the “third party” within the terms of the regulations themselves,
bolstering the interpretation preferred by the Commissioner. The
striking similarity between the proposed wording for Item 7A and
the Commissioner’s statements in paragraph 24 of GSTR 2006/1
serves to emphasise that the intention of the amendment is to
“clarify the existing treatment”.
should not be able to claim a full input tax credit for its
acquisition of the goods. This places the financier under a hire
purchase arrangement in a worse position than a lessor under
a finance lease and a vendor under a terms sale contract. The
extent of the denied credit has long been the subject of ongoing
negotiations with the finance industry.
The proposed amendments to the GST Regulations will eliminate
this problem from 1 July 2012. From that date, the whole of
the supply by the financier will be treated as a taxable supply
– even where there is a separately disclosed credit charge.
Consequently, the financier will be entitled to full input tax
credits for the acquisitions it makes relating to the hire purchase
arrangement, including the hired goods and other goods and
services relating to the hire purchase activities of the financier.
This will result in significant benefits for financiers entering
into new hire purchase agreements from 1 July 2012. Where
the hirer is registered for GST purposes, the new treatment will
reduce the hirer’s net costs. Previously, the denial of input tax
credits to the financier resulted in “embedded GST” for which no
credit would be available to the hirer. By allowing full input tax
credits to financier, the embedded GST is eliminated. Consumers
who are not entitled to input tax credits however will be worse
off under the new arrangements; an increase in cost will arise
from GST being added to the whole of the charges levied by the
financier.
Overall, the proposed amendments should provide significant
benefits to the finance industry and provide greater consistency
in GST treatment between hire purchase arrangements and other
common financing arrangements such as finance leases.
Hire purchase agreements
Changes to the scope of RITCs
By contrast, the changes to Item 8 dealing with “hire purchase
agreements” are specifically intended to change the existing
treatment. The Australian GST was specifically designed to
ensure that the provision of credit was afforded input taxed
treatment. As such, the provision of a loan to enable the
purchase of equipment would be an input taxed supply under
Item 2 of reg 40-5.09(3). The Explanatory Memorandum to the
original GST legislation states that the motivation for input
taxing the separately disclosed credit component of a hire
purchase arrangement was because it was “akin to a loan”.
The GST Regulations define the scope of certain “reduced credit
acquisitions”. These provide an exception to the general rule
that input tax credits are not available for acquisitions relating
to the making of financial supplies. In broad terms, an input
tax credit equal to 75% of the GST payable on the supply of the
reduced credit acquisition will be available when the acquisition
relates to the making of input taxed financial supplies. The
amendments currently proposed by Treasury will alter a number
of these reduced credit acquisitions and introduce a new RITC
rate of 55% for certain acquisitions.
This treatment has been the source of ongoing controversy. A
hire purchase arrangement typically involves the hirer of the
goods sourcing and selecting the goods that will become the
subject of the hire. Unlike a loan arrangement, the financier
takes title to the goods for the period of the hire purchase
and the hirer will have a right to take title to the goods upon
payment of the final instalment. As such, in practical terms
a hire purchase arrangement is more similar to a ‘terms sale’
arrangement with title passing at the end.
Trustee services
The input taxed treatment of the separately disclosed credit
charge has led to the Commissioner arguing that the financier
An inevitable distortion arises between those acquisitions which
are listed as “reduced credit acquisitions” and those which are
not. One of the most controversial aspects of this distortion
in recent years has been the “bundling” of non-RITC eligible
acquisitions into eligible ones. For example, an acquisition
of audit services would not give rise to an RITC. However, an
acquisition of trustee services does give rise to an RITC. If
the responsibilities of the trustee are expanded to cover the
provision of audit services, it is argued that an RITC would be
available for the whole of the services being provided by the
Trustee - now encompassing the audit services that would have
been ineligible for an RITC on their own.
The purpose of the proposed amendment is to eliminate the
advantages associated with bundling different services into a
single acquisition of trustee services “to ensure neutrality in
the RITC provisions”. Rather than seeking to achieve neutrality
through the “unbundling” of trustee services, the proposed
amendments substitute a lower rate of RITCs for certain trustee
services.
Whilst the operation of the exclusions is an important means
of ensuring that the full RITC rate is available for many ‘core’
trustee services, the changes will introduce a substantial degree
of complexity, increasing compliance costs for trustees and
recognised trust scheme. One important area in which this will
manifest itself is in the preparation of disclosure documents.
• managed investment schemes;
It is a requirement that these documents show the “net cost” to
an investment fund of the charges that will be levied. That is,
charges need to be disclosed on a “GST inc less RITC” basis. In
the past, the level of RITCs for trustee services was able to be
easily identified. However, the proposed amendments will give
rise to a need to be able to identify from the outset the extent
to which the trustee’s services will fall within Item 32 and then
adjust the level of RITC accordingly.
• approved deposit funds;
Other changes
Firstly, the proposed amendments will only apply to trustee
services that are acquired by a “recognised trust scheme”. This
new term will be defined to include:
• pooled superannuation trusts;
• public sector superannuation schemes; and
• regulated (though non self managed) superannuation funds.
Other minor changes are proposed to the RITC regime, including:
• making specific provision for the eligibility of lender’s
mortgage reinsurance for RITCs (in new Item 12A);
Secondly, the proposed amendments will introduce a new
Item 32 within the list of eligible reduced credit acquisitions,
specifically covering taxable supplies made by a trustee (in
its own capacity) to the recognised trust scheme. Where the
supplies being made by the trustee fall within Item 32, RITCs will
only be available in accordance with that Item – even though one
of the other Items of reduced credit acquisitions might also have
applied.
• including a new Item to provide RITC eligibility for processing
and assessing claims under life insurance policies from 1 July
2012; and
Thirdly, there are a number of services which are excluded from
Item 32. Because these services are excluded from Item 32,
normal RITCs will be available for those services notwithstanding
the fact that they are acquired by a “recognised trust scheme”
from a trustee. The services for which normal RITCs should still
be available to the trust are:
The proposed amendments to the treatment of hire purchase
arrangements should be uncontroversial as they provide much
needed clarity and simplification. However, the changes to the
RITC regime for trustee services are likely to be complex in their
implementation, will increase costs and are likely to be met with
some resistance.
• brokerage services (under Item 9 or Item 21);
• funds management services (under various subparagraphs
of Item 23) such as the management of a client’s asset
portfolio, management of an investment portfolio for a trust or
superannuation fund or asset allocation services;
• administrative services for investment funds (covered by Item
24) except compliance with regulatory requirements which
apply when acting as a trustee of a trust or superannuation
fund or acting as a single responsible entity;
• custodial services (covered by Item 29); and
• master custody services (covered by Item 30).
Finally, where reg 70-5.03 currently stipulates a percentage
of 75% as the rate for all reduced credit acquisitions, this will
now provide that the rate of 55% applies for reduced credit
acquisitions under Item 32 and a rate of 75% applies for all other
types of reduced credit acquisitions.
• proving RITCs for monitoring and reporting services in
compliance with the Anti-Money Laundering and CounterTerrorism Financing Act 2006, from 1 July 2012.
Conclusion
Contacts
Sydney
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Sydney NSW 2000
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Tax
Allan Blaikie
Partner
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Mark Friezer
Partner
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Philip Bisset
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Robyn Schofield
Partner
T +61 2 9353 4649
rschofield@claytonutz.com
David Cominos
Partner
T +61 7 3292 7026
dcominos@claytonutz.com
Andrew Sommer
Head of Taxation
T +61 2 9353 4837
asommer@claytonutz.com
Jonathan Donald
Partner
T +61 2 9353 4160
jdonald@claytonutz.com
Niv Tadmore
Partner
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ntadmore@claytonutz.com
Kirsten Fish
Partner
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kfish@claytonutz.com
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Canberra ACT 2600
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Darwin NT 0800
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constitute legal advice and should not be relied upon as such. © Clayton Utz 2012
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