On 25 February 2004, the Australian Taxation Office ("ATO") released GSTR 2004/1 titled " Reduced Credit Acquisitions". This ruling has significant implications for providers of financial supplies in Australia, both when services are acquired in Australia and from abroad.

The special treatment of financial supplies is not peculiar to Australia. Most countries apply special rules to financial supplies when it comes to value added taxation, in Australia broadly known as Goods and Services Tax ("GST").

Financial supplies are classified as input taxed supplies. Classification as input taxed supplies has 2 consequences: the supplier is not required to remit GST in respect of the consideration received in supplying financial supplies and the supplier is not entitled to input tax credits on acquisitions made to make the financial supplies.

Definition of financial supplies

Financial supplies are defined in the GST Act and include in broad terms:

  • An account made available by an Australian Approved Deposit taking Institution ("ADI")
  • A debit or credit arrangement
  • A charge or mortgage over property;
  • A regulated superannuation fund;
  • Annuity or pension business;
  • Life assurance business;
  • Guarantees and indemnities;
  • Certain credit under hire purchase;
  • Currency (including agreements to buy and sell currencies)

Reduced input tax credits ("RITCs")

Under the general rules of GST, no credits would arise if the acquisition were to make financial supplies, since financial supplies are input taxed1.

However in order to reduce the burden on financial supplies providers, Subsection 70(5) (1) of the GST Act was introduced into the law so that certain acquisitions that may not result in ITC in normal circumstances may be treated as reduced ITC. The current rate of ITC available on reduced credit acquisitions is 75%. The table in sub-regulation 70-5.02 contains acquisitions that are entitled to RITC, provide they are not excluded under Sub Section 70-5(1A). These acquisitions are referred to as "reduced credit acquisitions".

The Ruling examines each of the 31 items listed in Sub-Regulation 70-5.02 and provides guidance on determining which items provide the financial supply provider with RITC.

The following are the broad categories of items listed as items allowing RITC.

  • Transaction banking and cash management services
  • Payment and fund transfers services
  • Securities transactions services
  • Loans services
  • Credit union services
  • Asset based finance services
  • Trade finance services
  • Capital markets and financial instruments services
  • Funds management services
  • Insurance services
  • Services remunerated by commission and franchise fees
  • Trustee and custodial services

Acquisitions used to produce reduced credit acquisitions are not themselves reduced credit acquisitions2. It is only the reduced credit acquisitions listed in the regulations that qualify for RITC.

Footnotes

1 Section 11-20 reads as follows:

"You are entitled to input tax credit for any creditable acquisition that you make."

Section 11-5 states that:
"You make a creditable acquisition if:

you acquire anything solely or partly for a "creditable purpose: and
  1. the supply of the thing to you is ataxable supply; and
  2. you provide or liable to provide "consideration" for the supply; and
  3. you are registered or required to be registered."

Section 11-15 states that:
(1) You acquire a thing for a creditable purpose to the extent you acquire it in carrying on your enterprise.
(2) However you do not acquire the thing for a creditable purpose to the extent that:
(a) the acquisition relates to making supplies that would be input taxed; or
(b) the acquisition is of a private or domestic nature.
(1) an acquisition is not treated, for the purposes of paragraph 2(a) as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise or part of an enterprise that you carry on outside Australia."

2 Sub-Regulation 70-5.02(3) reads as follows:

"(3) However something that is used in making a reduced credit acquisition is not, for that reason, a reduced credit acquisition."

Examples for Subregulation (3)
1. Information technology services used for brokerage services
2. labour hire services used for life insurance administration services

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.