Investing directly offshore rather than indirectly through Australian Funds will provide a more favourable GST outcome
The decision by the Federal Court in AXA Asia Pacific Holdings Limited v Commissioner limits the availability of input tax credits on acquisitions related to interests held in Australian funds which invest wholly overseas.
AXA is the representative member of a GST group of entities including The National Mutual Life Association of Australasia Limited (NMLA), National Mutual Assets Management Limited (NMAM) and National Mutual Funds Management Limited (NMFM).
NMLA's retail activities comprise both life insurance and non-life insurance business. The life insurance business is conducted within one or more separate statutory funds. The statutory funds hold varying interests in unit trusts. Most of the unit trusts have NMAM or NMFM as their trustees (both entities are incorporated in Australia). The trustees have invested the trust funds wholly or substantially overseas.
NMLA incurred several general management expenses ("GME") which consisted of salaries, travel, accommodation, training, rent, telephone, postage and advertising which AXA claimed were incapable of being directly attributable to particular supplies. The key question considered was to what extent the GME were related to the making of supplies that would be input taxed. In determining this, the court had to consider whether the acquisition of units in a unit trust that invested wholly or substantially overseas was an input taxed supply. Another issue considered in the case was whether the Trusts were part of the GST Group and the implications of this.
AXA contended that a 'look through' approach is appropriate and hence NMLA should be treated as having made the investments directly overseas (and hence the supplies were not input taxed as they would be GST-free exports). They argued that the unit trusts were just a "formal mechanism" used by NMLA to make its investments overseas.
The Federal Court considered the 'look through' approach to be inconsistent with the application of the GST Act. The court held that the GST Act requires an entity to first determine the extent to which acquisitions are made in the carrying on of the entity's enterprise and then determine the extent to which the acquisitions related, directly or indirectly, to the making of any input taxed supplies. In this case, the acquisitions made were indirectly related to the making of input taxed supplies (the acquisition of units). The subjective intention of NMLA (i.e. to invest in overseas funds) or the activities of the trustees of the unit trusts (applying the trust funds to invest overseas) is not determinative of the above questions.
Another argument put forward by AXA was that the trusts were part of the GST Group in which NMLA is also a member. This argument was based on the fact that NMAM and NMFM were trustees of most of the unit trusts and these entities were members of the GST Group. Hence as acquisitions and supplies between members of a GST Group are to be ignored, even if the acquisition of units in the unit trust is a financial supply, it should be ignored for the purposes of working out entitlements to input tax credits. The court held that the entities were not members of the GST Group in their capacity as trustees of the various trusts and hence the Trusts were not members of the GST Group.
Furthermore, the court held that even if the NMAM and NMFM were part of the GST Group as trustees for the unit trusts, the acquisitions made by NMLA (the GME) did not exhibit a sufficient relatedness to the GST-free supplies made by NMAM or NMFM as trustee of any of the unit trusts. Whilst obiter, this comment is contrary to the view that general management expenses incurred by one entity that is part of a GST group would show sufficient relatedness to the GST-free supplies and taxable supplies made by the group where the only input taxed supplies made by the group relate to intra-group transactions.
The decision by the Federal Court provides an incentive for entities to invest overseas directly rather than by setting up an Australian investment vehicle to invest overseas as this will provide a more favourable GST outcome.
Furthermore, we will be seeking further clarification from the ATO on the GST Grouping issue. In particular, we would hope that the ATO will determine that in situations where the entities are grouped for GST purposes, the entity incurring GME could claim the input tax credits if the only external supplies made by the Group are either taxable supplies or GST-free supplies.
The case will return to court to determine the correct apportionment methodology that should be used to calculate the input tax credits on GME that are indirectly related to input taxed supplies. However, the obiter comments that may have the greatest impact on the Funds Management Industry are not likely to be reconsidered.
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