The Federal Government (Government) has now issued final Goods and Services Tax (GST) Regulations to reduce the RITC rate from 75% to 55% for certain services acquired by investment trusts (including superannuation funds) from trustees, responsible entities and third parties.
Under the new rules, affected trusts will be subject to two RITC rates (55% and 75%), which is likely to increase the net cost of GST for most affected trusts, as well as substantially increasing GST complexity and administration. The new rules represent the most significant GST reforms to the funds management industry since the introduction of GST in 2000. Despite this, the Government has given the industry just five weeks to implement the new rules and most trusts are likely to struggle to meet this timeframe. Trustees and responsible entities will quickly need to understand the impact of the new rules to prepare for the 1 July 2012 start date. Trustees and responsible entities should:
- Urgently consider the GST disclosures in their Product Disclosure Statements (PDSs) and Information Memoranda to ensure they are not adversely financially affected
- Determine the extent to which their funds will be entitled to claim 55% and 75% RITCs in accordance with the new rules from 1 July 2012.
In January 2012, we issued a GST Alert concerning the Exposure Draft Regulations (ED Regulations) released by Treasury proposing to implement the new rules. That update can be found here.
With some exceptions, the Regulations are broadly the same as the ED Regulations, despite relevant industry bodies lobbying for significant changes.
SUMMARY AND KEY ISSUES
A trust is treated as a separate entity for GST purposes (technically, the trustee acting in its capacity as trustee of the trust). This means that both the trust entity and the trustee (in its own right) are normally separately registered for GST. Many investment and superannuation trusts are not entitled to claim input tax credits on their expenses on the basis that they make financial supplies, such as trading in equities or financial derivatives, foreign currency transactions and the issue and redemption of interests in trusts to and from investors. While generally not entitled to claim full input tax credits on their costs related to these activities, such trusts are currently entitled to claim a 75% RITC on certain expenses, including trustee and responsible entity services. For example, investment trusts generally claim a 75% RITC on management fees charged by responsible entities.
Under the new rules, certain supplies provided on or after 1 July 2012 by trustees, responsible entities and third parties to a "recognised trust scheme" will be eligible for a reduced RITC rate of 55%, rather than 75%. A number of services will remain eligible for a RITC at the 75% rate, including:
- Brokerage services
- Investment portfolio management functions (excluding acting as a trustee or single responsible entity)
- Administrative functions in relation to investment funds (excluding compliance with industry regulatory requirements)
- Custodial services and master custody services
- Anti-Money Laundering (AML) monitoring and reporting services (other than taxation and auditing services).
These are broadly the same services as were listed under the ED Regulations (with the addition of the AML services). A "recognised trust scheme" broadly covers managed investment schemes under the Corporations Act 2001 (Cth) (Corporations Act) and a variety of superannuation funds, although securitisation and mortgage trusts are now excluded from the new rules (and hence continue to apply the current rules).
WHEN DO THE NEW RULES APPLY?
The new rules apply to supplies acquired by trusts from trustees, responsible entities and third parties from 1 July 2012, that is, the reduced 55% RITC rate will apply from this date. Crucially, there is no prescribed transitional relief in the new rules and hence these rules will impact on most trust arrangements from 1 July 2012, giving trustees and responsible entities just five weeks to implement these rules.
PRACTICAL GUIDANCE FOR TRUSTS
The proximity of the 1 July 2012 start date means trustees and responsible entities will want to urgently understand the impact of and prepare for the new rules. There are two immediate issues that they will need to consider.
First, trustees and responsible entities will need to consider what, if any, changes need to be made to fees and charges set out in existing trust disclosure documentation (such as management fees in Product Disclosure Statements and Information Memoranda). Where applicable, most trust disclosure documents disclose fees inclusive of GST and net of RITCs. The extent to which urgent changes need to be made to disclosure documents may depend on whether the impact of the new rules is a material change under the Corporations Act and the application of Australian Securities and Investments Commission (ASIC) Class Orders. Trustees and responsible entities that do not update their disclosure documents may be financially disadvantaged.
Second, trustees and responsible entities will need to determine the extent to which their funds will be entitled to claim 55% and 75% RITCs in accordance with the new rules from 1 July 2012. The new rules are likely to increase the net cost of GST for most affected trusts and substantially increase GST complexity and administration, given the need to apply two RITC rates. In order to conduct this exercise, trustees and responsible entities will need to identify individual components of the services acquired by their funds. For example, a responsible entity that charges a single management fee may need to unbundle its services into distinct components, including investment management, administrative services, trustee services, and compliance with AML and other regulatory requirements. There is little guidance in the Regulations as to how trusts should do this exercise and how far funds need to unbundle their acquisitions and it remains to be seen how the ATO will interpret the rules. Further, unbundling services provided by third party suppliers may be difficult where the supplier does not separately itemise its services.
We note some trusts may in fact be better off under the new rules on the basis that they will be entitled to claim 55% RITCs on expenses that are currently potentially ineligible for RITCs.
We recommend trustees and responsible entities seek their own advice on these issues. DLA Piper's tax practice is able to assist clients prepare for the new rules. For further information, please contact Jonathan Ackerman or a member of our Tax Team.
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