Guidance for reduced input tax credits for managed investment schemes
Banking on Tax, Issue 11
On 1 July 2012, new rules were introduced that modified the way in which the reduced input tax credit (RITC) rules apply to a variety of “recognised trust schemes”, including managed investment schemes (MIS). However, little practical guidance was made available to taxpayers to assist them in navigating these rules. Recently, the Commissioner of Taxation released some new information that should assist taxpayers in applying these rules.
New RITC rules
Under the pre-July 2012 rules, an MIS that only makes input-taxed financial supplies was entitled to a 75 per cent RITC on certain qualifying expenses, including single responsible entity (RE) services, trustee services and administrative and investment portfolio management services. From 1 July 2012, the recoverable RITC percentage has been reduced to 55 per cent, but would now encompass a much larger range of supplies acquired by the MIS. The 75 per cent RITC would still be available, but only “to the extent” that it related to certain types of services, including certain investment portfolio management (IPM) functions, certain administrative functions and the provision of a custodial service.
From 1 July 2012, an MIS has been required to analyse its acquisitions in greater detail to correctly determine its input tax credit entitlement. There is also added complexity where a service may encompass different elements: a part that would be eligible for the 55 per cent RITC and a part that would be eligible for a 75 per cent RITC. While the new rules allow the taxpayer to apportion such acquisitions to calculate its entitlement, until now, there has been little guidance on what would constitute an acceptable methodology.
The methodology in GSTD 2013/3
The Commissioner issued GST Determination GSTD 2013/3 on 25 September 2013, with an effective date of 1 July 2012 (this document was previously released in draft on 8 May 2013 as GSTD 2013/D1 and has been finalised without amendment). GSTD 2013/3 examines the scenario where an RE receives a single fee, but its duties comprise some activities that would be eligible for the 55 per cent RITC and other activities that would be eligible for the 75 per cent RITC. In GSTD 2013/3, the Commissioner proposes a “deductive benchmarking methodology” as a fair and reasonable method of apportioning this fee.
The methodology involves a three-step process:
- Determine the benchmark market value (in basis points) of the particular service eligible for the 75 per cent RITC (e.g. IPM)
- Use the benchmark market value to calculate a percentage of the total basis points of the fee and apply that proportion to the single fee to calculate the amount eligible for the 75 per cent RITC
- A 75 per cent RITC is claimed on the calculated amount, while a 55 per cent RITC is claimed on the remainder of the fee.
Actions in light of these developments
Due to the retrospective application of GSTD 2013/3, managed investment schemes should review processes and recovery calculations to ensure that the approach taken to calculate the fund’s entitlement to the 55/75 per cent RITC is consistent with GSTD 2013/3. If a more conservative approach than the approach outlined in TD 2013/3 has been taken, there may be an opportunity to increase the RITCs claimed over historical and future periods.
The ATO has also highlighted in a number of recent presentations to large business taxpayers and tax professionals that the area of ‘recognised trust schemes’ will be one of the key focus areas of their compliance plan for the 2014-15 year and, as a consequence, this issue will need to be monitored.