Although more than six years has passed since the introduction of GST, there is still considerable confusion regarding borrower fees, particularly where mortgage managers are involved.
Normally GST is relatively simple for businesses - they obtain an input tax credit for GST paid when purchasing supplies and charge GST when they sell supplies.
The situation is more complicated for financiers because financial supplies are input taxed – this means there is no GST payable by the person acquiring the supply (usually the borrower). The supplier (the lender) is entitled to either no input tax credit or a reduced input tax credit (RITC) depending on the type of supply purchased.
An RITC is 75% of a full input tax credit and is available for many but not all supplies which the lender outsources.
Borrower pays an application fee of $400 to lender. The application fee is paid in connection with the financial supply and so is input taxed (ie no GST).
A lender pays a broker an introduction fee of $300 plus $30 GST. The broker is a financial supply facilitator and so is subject to GST in the ordinary way. The lender only obtains an RITC for the payment, and so it will obtain an input tax credit of 75% of the $30 GST it paid to the broker.
Mortgage managers undertake a much more active role than brokers in arranging and managing loans. Often mortgage managers will collect a fee from the borrower to cover application and valuation fees.
This is the area in which there is great inconsistency. The better view is that the only supply being acquired by the borrower who pays the valuation and application fee is the financial supply (ie the loan of money) which will be provided by the lender. Accordingly, the manager has collected the application and valuation fees on behalf of the lender and so that payment is input taxed even though the money was actually paid to the manager.
Even though the valuation and application fee is collected by the manager, from a GST perspective the flow of transaction is:
the provision of a financial supply (the loan) by the lender to the borrower; and
the supply of management services by the manager to the lender.
The manager collects $615 from the borrower to cover valuation and application fees. Because this relates to a financial supply by the lender, there is no GST on this payment. The manager has simply collected this amount on behalf of the lender.
The lender has notionally paid the manager a management fee of $600 plus $60 GST which is funded by $615 collected from the borrower plus $45 RITC.
However, there will be some circumstances where payments to mortgage managers are subject to GST. If the mortgage manager or broker makes a charge to the borrower for arranging the loan, this will be subject to GST in the ordinary way.
In addition to receiving a commission from the lender, the broker charges the borrower a service fee of $1,100. This fee is not for a financial supply and so is not input taxed. Rather, it is a charge by what the GST Act calls a financial supply facilitator and will comprise $1,000 fee plus $100 GST.
If GST is charged on payments to managers that are really lender fees, there is a significant risk that upon an ATO audit the GST may have to be repaid to the borrowers. Alternatively, borrowers could complain that there has been misleading and deceptive conduct because the manager has represented that GST is payable when it is not. By Jon Denovan
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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