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A NEW TAX SYSTEM (GOODS AND SERVICES TAX) AMENDMENT REGULATIONS 2001 (NO. 1) 2001 NO. 48
EXPLANATORY STATEMENTSTATUTORY RULES 2001 No. 48
Issued by Authority of the Assistant Treasurer
A New Tax System (Goods and Services Tax) Act 1999
A New Tax System (Goods and Services Tax) Amendment Regulations 2001 (No. 1)
The Governor-General may make regulations under section 177-15 of the A New Tax System (Goods and Services Tax) Act 1999 (the Act) for the purposes of that Act.
These Regulations amend the A New Tax System (Goods and Services Tax) Regulations 1999 to specify additional acquisitions that are reduced credit acquisitions and therefore, give rise to reduced input tax credits. Section 70-5 of the Act permits the regulations to specify acquisitions that are reduced credit acquisitions.
Under Division 84 of the Act, a supply or transfer of anything other than goods or real property that is a supply not connected with Australia is a taxable supply, if among other things:
• the recipient acquires the supply solely or partly for the purpose of an enterprise the recipient carries on in Australia; and
• the recipient does not acquire the supply solely for a creditable purpose.
Therefore, the acquisition of a service that is not connected with Australia and that is used by the recipient for the purpose of making financial supplies in Australia, is subject to a GST reverse charge. The recipient will not be entitled to claim an input tax credit in relation to the acquisition, to the extent that it has not been acquired for a creditable purpose.
However, Division 70 of the Act provides that acquisitions of a specified kind that relate to making financial supplies can give rise to an entitlement to a reduced input tax credit. Acquisitions eligible for a reduced input tax credit, and the rate of the reduced input tax credit, are specified in Division 70 of the regulations. The regulations specify that the percentage of the input tax credit for each kind of reduced credit acquisition is 75%.
Non-resident entities making financial supplies in Australia through a branch or subsidiary entity, may provide internally generated management and support services to the Australian enterprises. As the services are supplied from outside Australia, the Australian enterprise will be subject to a GST reverse charge on the supply. The imposition of a GST reverse charge on these services may place the Australian enterprise of a non-resident financial institution at a competitive disadvantage when compared to the operations of resident financial institutions. Resident financial institutions will not incur a GST liability on management and support services that are undertaken wholly within the entity, or between GST grouped entities.
The amended Regulations address this disadvantage by specifying certain supplies of management and support services by a non-resident entity or offshore enterprise that, when acquired by a closely related Australian enterprise, are reduced credit acquisitions. The Australian enterprise will be able to claim a reduced input tax credit for specified management and support services used in the making of financial supplies, that are acquired from a closely related non-resident entity or offshore enterprise.
The Regulations also prescribe certain circumstances where an acquisition will not be regarded as a reduced credit acquisition.
Details of the Regulations are in the Attachment.
The Regulations are taken to have commenced on 1 July 2000.
Subsection 48(2) of the Acts Interpretation Act 1901 provides that regulations may not be expressed to take effect before the date of notification where a person would be adversely affected by the regulations. As the Regulations increase an entity's ability to claim input tax credits, no person, other than the Commonwealth, will be adversely affected by the Regulations.
ATTACHMENT
New Tax System (Goods and Services Tax) Act 1999
New Tax System (Goods and Services Tax) Amendment Regulations 2001 (No. 1)
Regulation 1 provides for the title of the Regulations. Regulation 2 provides that the Regulations commence on 1 July 2000.
Reduced Credit Acquisitions
The categories of services that will be reduced credit acquisitions under Regulation 70-5.02B include:
• senior executive management;
• human resources support;
• corporate marketing and communications;
• financial management;
• supply procurement and management;
• credit, operational and risk management;
• relationship management;
• in-house legal services;
• technology systems; and
• business services.
[Schedule 1, item 3, new Regulation 70-5.02B]
However, under Regulation 70-5.02A, acquisitions listed in Regulation 70-5.02B will only be reduced credit acquisitions where:
• the acquisition is of something, the supply or transfer of which, would be a taxable supply under section 84-5 of the Act [Schedule 1, item 3, new Paragraph 70-5.02A(1)(a)]; and
• the enterprise in Australia that is the recipient of the supply or transfer, is closely related to the supplying enterprise [Schedule 1, item 1, new Paragraph 70-5.02A (1) (b)].
In addition, the reduced credit acquisition does not include any component that is an unabsorbed contribution. [Schedule 1, item 3, new Subregulation 70-5.02A (2)]
An acquisition cannot be a reduced credit acquisition under both Regulation 70-5.02 and Regulation 70-5.02A. [Schedule 1, item 3, new Regulation 70-5.02D]
The heading for Regulation 70-5.02 is amended to distinguish the application of that Regulation, in respect to the general list of reduced credit acquisitions, from that of Regulation 70-5.02A, which applies only to acquisitions from offshore suppliers. [Schedule 1, item 2]
When are enterprises 'closely related'?
Enterprises are closely related where:
• both the recipient and supplier enterprises are carried on by the same entity;
• one enterprise is carried on by a 100% subsidiary of the entity that carries on the other enterprise;
• both enterprises are carried on by 100% subsidiaries of the same entity.
[Schedule 1, item 1, new Regulation 70-5.01A].
The definition of 100% subsidiary has the same meaning as that contained within the Act. [Schedule 1, item 4]
Example 1
A is a non-resident enterprise. B is a non-resident 100% subsidiary company of A, C is a nonresident 100% subsidiary of B. Enterprises A, B and C will be .closely related to D, an Australian branch of A.
What is an 'Unabsorbed Contribution'?
An acquisition is not a reduced credit acquisition to the extent that it is the acquisition of something, the supply or transfer of which involves the performance by a third party on behalf of the supplying enterprise, of all or part of the relevant supply. The price of the supply or transfer is reduced by the amount paid by the supplier to the third party for its performance. However, the reduction in price, representing the unabsorbed contribution by the third party to the relevant supply or transfer, will only arise where:
• an amount paid, or payable, by the supplying enterprise to the third party is passed onto the recipient as part of the price of the relevant supply or transfer;
• the third party is not closely related to the supplier; and
• the thing performed or provided by the third party retains the substance and character it had at the time of its first purchase by the supplier or a related enterprise of the supplier.
[Schedule 1, item 3, new Regulation 70-5.02C]
Example 2
FrancCo is an international bank with its head office based in Paris, France. It trades throughout the world, including through an Australian branch located in Alice Springs. The Alice Springs branch trades as AustFranc. FrancCo charges AustFranc for management and support services it supplies to AustFranc as part of its worldwide operations. It charges the Alice Springs branch for the following supplies:
(a) training assistance and advice provided by the Paris based training bureau, a division of FrancCo, to the Australian branch;
(b) remuneration for the services of the chief executive officer of FrancCo, including secretarial services provided in respect of those services, located in Paris;
(c) provision of legal advice by FrancCo's legal division located in Denmark to the head office in Paris;
(d) cost of providing computer programming services by the FrancCo branch in Singapore to the head office in Paris.,
(e) costs of advertisement services conducted in the USA, acquired by FrancCo from Addman USA, and directly on-charged to the Alice Springs branch as advertisement services;
(f) a share of the cost of acquiring telecommunication services from Telecom France and provided by FrancCo to the Alice Springs branch as telecommunication services;
(g) part of the cost of salaries paid by FrancCo to staff engaged at the FrancCo computer disaster recovery site in India; and
(h) part of the costs associated with FrancCo's centralised payroll division, which is performed by PayCo, a 100% subsidiary of FrancCo, located in Italy.
FrancCo's Alice Springs branch will be subject to a GST reverse charge on all of the supplies of services made by FrancCo. The Alice Springs branch will be entitled to a reduced input tax credit on the services noted as (a), (b), (c), (d) and (g) as these services fall. within the list of acquisitions specified at Regulation 70-5.02B and are internally generated and provided from FrancCo.
The Alice Springs branch will also be entitled to claim a reduced input tax credit on that part of the supply by FrancCo that is performed by PayCo, (h), the cost of which is on-charged by FrancCo to AustRanc: as PayCo is closely related to FrancCo.
Those services listed at (e) and (f) will not be reduced credit acquisitions as:
• they are performed by an entity not being FrancCo or a closely related enterprise to FrancCo;
• the cost of the performance by the third party forms part of the price of the supply by FrancCo to AustRanc (on-charged cost); and
• the third party supply forms part of the supply by FrancCo to AustFranc, and retains the same substance and character that it had when acquired by FrancCo from the third party.
Example 3
A reduced credit acquisition does not include the unabsorbed contribution of a supply. Therefore, the calculation of the reduced input tax credit under subsection 70-20(2) of the Act does not apply to the unabsorbed contribution.
Master Ltd is a 100% subsidiary of Primary Ltd, USA. Master Ltd acquires $100 in property management services from Primary Ltd, of which $30 is an unabsorbed contribution. Master Ltd uses 50% of the management services for making financial supplies and 50% for making taxable supplies. Master Ltd's entitlement to an input tax credit is calculated as follows:
(a) the unabsorbed contribution component of the supply is $30. GST applicable to this is 10% of the supply which is $3;
(b) Master Ltd is entitled to claim an input tax credit applicable to that part of the unabsorbed component of the supply that relates to the making of taxable supplies;
50% x $3 = $1.50
(c) the component of the: supply that is a reduced credit acquisition is the $100 supply less the unabsorbed contribution, that is, $70. GST applicable to the reduced credit acquisition is 10% of the supply which is $7;
(d) the amount of input tax credit that Master Ltd can claim in relation to the reduced credit acquisition is calculated in accordance with the formula in subsection 70-20(2) of the Act:
GST x ( extent of creditable + [ extent of division 70 x percentage
credit ] )
Purpose creditable purpose reduction
$7 x (50% + [50% x 75%]) = $6.12
(e) the total input tax credit available for Master Ltd is the combined amounts calculated al., (b) and (d):
$1.50 + $6.12 = $7.62