GST: Change to RITC recovery for managed investment schemes and superannuation funds
Latest news: ATO guidance issued
On 2 July 2012 the ATO released some written guidance (via the National Tax Liaison Group forum) on the practical application of the new rules: Changes to the GST Regulations impacting on the 'trustee services' provisions effective from 1 July 2012.
Many of the views expressed in the guidance document relate to transitional issues, in relation to which the proposed approach is to consider services based on the time that services are performed. That is, in simple terms, if the services span 1 July 2012 then some form of pro-rata should be applied.
However, some of the wider, and ongoing, issues are also dealt with. In relation to whether the trustee is making a mixed or composite supply the views expressed are generally helpful. In essence, where the charge by the trustee or responsible entity to the recognised trust scheme is for a mixed supply (i.e. a charge for a service which is made up of separately identifiable supplies), then the new rules are applied having regard to the extent to which the trustee or responsible entity fee relates to the acquisition of each separate supply.
Where, however, the fee charged by the trustee or responsible entity is for a composite supply (i.e. a single supply with subordinate parts which simply accompany and compliment the supply), it is the acquisition of the dominant part of the supply which needs to be considered under the new rules.
In relation to an acquisition of a mixed supply, normal commercial records (i.e. details from the trust deed or other agreements between the trust and the trustee or responsible entity, or information from the product disclosure statement or other investor communications), and the details from the invoice issued to the trust, can be used to substantiate the split.
Where there is a single fee for the mixture of services, this can be apportioned and the guidance document outlines a ‘benchmarking’ methodology that the ATO regards as offering a fair and reasonable way of apportioning the fee.
What is the change?
The Government has amended the GST regulations, altering the GST input tax recovery entitlements of some managed investment schemes and superannuation funds. The changes take effect from 1 July 2012 and seek to address the perceived GST advantage that the Government thought was being enjoyed by entities using single fee trustee arrangements.
Specifically, the changes alter the reduced input tax credit (RITC) rules applicable to the costs of certain managed investment schemes and superannuation funds. Broadly, the change seeks to reduce the RITC to 55% (rather than the normal 75% level) for the GST incurred by affected entities on business costs. All acquisitions are potentially affected, not just those supplied by an entity’s trustee or responsible entity.
Who is affected?
The new rule will apply in relation to supplies acquired by a ‘recognised trust scheme’. A trust will be a ‘recognised trust scheme’ if it has both of the following features:
- The trustee or responsible entity of the trust is carrying on, in its own capacity, an enterprise which includes making taxable supplies to the trust
- The trust is one of the following:
- A managed investment scheme (or part of one), other than a ‘securitisation entity’ or a ‘mortgage scheme’
- An approved deposit fund
- A pooled superannuation trust
- A public sector superannuation scheme
- A regulated superannuation fund (other than a self-managed superannuation fund).
The new 55% RITC rule will not apply to managed investment schemes that are ‘mortgage schemes’ (i.e. a scheme that has at least 50% of its non-cash assets invested in mortgage loans or mortgage schemes) or ‘securitisation entities’ (i.e. a trust established for the purpose of managing some or all of the economic risk associated with assets, liabilities or investments where the total value of the debt interests in the trust is at least 50% of the trust’s assets and the trust is an insolvency-remote special purpose entity according to the criteria of an internationally recognised rating agency).
Mortgage schemes and securitisation entities will be able to claim 75% RITCs where their acquisitions qualify under the other RITC rules.
What acquisitions will the 55% RITC apply to?
Subject to the specified exceptions, the lower 55% RITC rate will apply to all things acquired by a recognised trust scheme on or after 1 July 2012. The 55% RITC will apply regardless of whether acquisitions are acquired from the trustee or responsible entity or are acquired from another supplier. By including acquisitions from other suppliers within the scope of the new RITC rule, acquisitions for which RITCs are not currently allowed may be eligible for a 55% RITC if acquired after 30 June 2012.
Certain acquisitions that will otherwise qualify for an RITC under the other RITC rules are expressly excluded from the application of the 55% RITC rate (i.e. the standard 75% RITC rate should apply). These include some brokerage services, investment portfolio management, administrative functions in relation to investment funds, custodial services, master custody services and anti-money laundering-related monitoring and reporting services. In all other cases, acquisitions qualifying for an RITC at both the 75% rate and the 55% rate will be subject to the 55% rate.
The new rules exclude the 55% RITC rate applying to goods or real property purchased by recognised trust schemes. This is designed to ensure that acquisitions of this kind continue not to qualify for RITCs.
You should review the impact of the introduction of the new 55% RITC rate on your recognised trust scheme’s level of input tax credit recovery and consider what changes to your current arrangements, systems or processes may be needed, or appropriate, by 1 July 2012.
For example, if you have single fee trustee arrangements in place that include supplies that are expressly excluded from the 55% RITC rate (i.e. the 75% rate could apply), it will be necessary to ensure that individual components of the trustee’s supply can be readily identified and the fee can be apportioned on a fair and reasonable basis.
Please contact a Deloitte Indirect Tax adviser to discuss the application of the changes in more detail.