A new Tax System (Goods and services Tax) Amendment Regulation 2012 No.1 was registered on the Federal Register of Legislative Instruments on 29 May 2012. The Regulation amends the percentage of GST that can be claimed by certain funds that make financial supplies from 1 July 2012. The final Regulation is essentially the same as the exposure draft of regulations which was released in January 2012 (refer to the Moore Stephens website Resources Section).
As expressed in our earlier release, the Amended Regulations are aimed at ensuring that taxpayers (such as managed funds) that were charged a "bundled fee" from the trustee or responsible entity of the fund would only be eligible to 55% of the reduced input tax credit (RITC) on these acquisitions (as opposed to the current 75%). The Government was concerned that certain taxpayers obtained an advantage where they were charged a bundled fee by the trustee or responsible entity as they were able to claim 75% of the GST paid. However, in contrast, if the trustee/responsible entity separately on-charged each cost/fee to the fund or the fund acquired these services directly, the fund may not be able to claim any GST on certain fees.
The Amended Regulations will have limited implications for the property funds industry who will continue to be able to claim 100% on such fees as these funds would by and large make taxable supplies (deriving rent). The main exception to this will be where they acquire services for capital raising which will constitute a financial supply or where they are not grouped for GST and derive trust distributions that are input taxed. It is investment and superannuation trusts which will be most affected by these Amended Regulations as they only make financial supplies and hence are only able to claim reduced input tax credits on certain acquisitions which are listed in the GST Regulations.
The Amended Regulations only apply to recognised trust schemes which include managed investment schemes and certain superannuation funds. It is noted that securitisation and mortgage trusts are no longer within the definition of recognised trust schemes and hence will not be affected by these changes. Under the Amended Regulations, these recognised trust schemes will only be eligible to claim 55% of the GST on acquisitions from trustee/responsible entity or third parties (as opposed to the current 75%). However, the following services acquired by these trust schemes will remain eligible for the 75% RITC claim:
- Brokerage services;
- Investment portfolio management functions including those functions for superannuation schemes excluding acting as a trustee or responsible entity (which will only be eligible for the 55% RITC);
- Administrative functions in relation to investment funds including those functions for superannuation schemes excluding compliance with industry regulation requirements (which will only be eligible for the 55% RITC);
- Trustee and custodial services and master custody services; and
- Monitoring and reporting services (other than taxation and auditing services) that are required for compliance with the anti-money laundering provisions.
The practical implications for affected Trust schemes are broadly as follows:
- Trustees and responsible entities would need to consider how fees are currently charged to the Trust. It would be important to ensure that going forward, the fees and charges are itemised so that the fund will continue to be able to claim 75% on the exceptions listed above (and 55% on other trustee and responsible entity fees). Where the fund acquires services from third parties directly, it would be prudent to request such itemisation from these parties as well.
- The internal processes and systems should be updated to ensure that the correct amount of GST is claimed based on these changes.
- Trustees and responsible entities will need to consider whether changes will need to be made to the fees and charges section of their PDS / Investment Memorandum. Generally, the GST inclusive amount of fees and charges are disclosed net of any RITC claim. As the amount of the RITC claim may differ as a result of these changes, the fees and charges will change. Presumably if such changes are not made to the PDS, the responsible entity would need to communicate the changes to fees and charges to their investors in some manner which complies with any regulatory requirements.
We recommend that trustees and responsible entities seek advice as soon as possible as to how to best implement these changes.
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