gst on financial service
TRANSCRIPT
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The Applica t ion of
Goods and Services Tax
to F ina ncial Services
Consultation Document
Circulat ed by
The H onour able Pet er Costello, M.P.
Treasu rer of th e Comm onwealth of Austr alia
August 1999
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Comm onwealth of Austr alia 1999
ISBN 0 642 74014 3
This work is copyright . Apar t from a ny use as per mitt ed un der th e
Copyright Act 1968, no par t m ay be repr oduced by any process withoutprior writt en perm ission from th e Comm onwealth available from
AusInfo. Requests an d inqu iries concerning repr oduction an d r ight s
should be addr essed to the Ma na ger, Legislat ive Services, AusI nfo,
GPO Box 1920, Can berr a ACT 2601.
Comm ent on t he proposals in t his docum ent is invited a nd sh ould be
sent by Friday 17 September 1999 to:
Mr Blair Comley
Mana ger (Specialist)
Indirect Tax a nd P ayment Design Division
Department of the Treasur y
Par kes Place
PARKES ACT 2600
Fa csimile: 02 6263 4320
A copy of th is docum ent a ppear s on th e Trea sur y Website. The
Treasu ry Website address is: http:/ / www .treasury.gov.au
Pr inted by AGPS, Print ing Division of Can Pr int Comm un icat ionsPt y Limited.
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iii
Table of Contents
The applicat ion of GST t o fina ncial s ervices ...................................1
Pr oposed t reat men t of su pplies un der th e GST ..............................5
Appendix A: The reduced input tax credit.....................................18
The self-supply bias................................................................18
The r edu ced inpu t tax cred it ..................................................18
Which inputs will not at tr act a reduced
input tax credit?................................................................21
J oint su pplies ..........................................................................22
Rate(s) of the r edu ced input t ax credit ..................................22
Pr actical opera tion of the r educed in put ta x credit ..............24
Appendix B: List of supplies eligible for a reduced
inpu t tax cred it ..........................................................................25
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The application of GST to Financial Services 1
THE APPLICATION OFGST
TO FINANCIAL SERVICES
The Government announced in its August 1998 policy document A New
Tax S ystem , tha t u nder th e goods an d services ta x (GST) some fina ncial
services would be inpu t t axed in line with in tern at ional pra ctice. That
is, for t hese ser vices, no GST would be pa yable on th e supp ly, but no
input ta x credits would be allowed for a ny GST paid on pu rchases u sed
to ma ke th e supply. The A N ew Tax S ystem document noted that t he
precise ra nge of services th at would be ta xed or in put ta xed would be
determ ined in consult at ion with indust ry.
The Governm ent intr oduced legislation into Par liam ent on
2 December 1998. The A New Ta x S ystem (Goods and S ervices Tax)
Act 1999 (GST Act) was given Royal Assent on 8 J uly 1999. The
GST Act cont ain s provision for regula tions to provide grea ter clar ity
regar ding th e tax treat ment of finan cial services. The Govern ment h as
been un derta king ta rgeted consu ltat ions with t he fina ncial services
industry since December 1998.
This paper reflects inform at ion gat hered from these consult at ions a nd
seeks t o provide a focus for broader in dust ry a nd comm un ity feedback
on th e application of th e GST to fina ncial services. This feedback willbe taken int o account when fina lising the regulations tha t relat e to
fina ncial ser vices.
Input taxation of financial services
Fina ncial ser vices a re genera lly input ta xed in overseas jurisdictions
due t o th e difficulty of ident ifying, for individual t ra nsa ctions, th e value
added in a fina ncial interm ediarys mar gin. Inpu t t axat ion does not
require the valuation of a financial service.
Int ern at iona l practice is to also input ta x ma ny explicit fees or
comm issions r elat ed to th e provision of fina ncial services (even wher e
th ese fees and comm issions can be read ily valu ed). These fees and
comm issions a re often input ta xed to avoid biases tha t would be caused
by different ta x treat ment s applying to similar services tha t h appen t o
be cha rged for differen tly.
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2 The application of GST to Financial Services
The t rea tm ent of specific fina ncial services var ies consider ably between
coun tr ies. For exam ple, in New Zealand genera l insur an ce is ta xable,
wherea s in the United Kingdom genera l insur an ce is input t axed.
Differences in t reat ment reflect a num ber of considerat ions including
when t he par ticular ta x was intr oduced, th e stru ctu re of th e relevan t
financial sector and economy, and revenue considerations.
The Governm ent pr oposes tha t a key guiding principle be tha t financial
services th at ar e norma lly cha rged for by way of a ma rgin will be input
ta xed. In t he GST Act, inpu t t axed finan cial services ar e referred t o as
financial suppl ies . Exa mples of fina ncial supplies include lending,
ta king deposits, ma king cont ra cts for life insu ra nce investm ent
products a nd investing super an nu at ion fund m embers cont ributions.
The Governm ent pr oposes tha t for m an y oth er services tha t a re not
cha rged for in a mar gin, the normal ta xable tr eatm ent will apply. Forexam ple, th e pr ovision of fina ncial a dvice, fina ncial a ccount ing ser vices
an d th e provision of ban king ser vices as an agent, would be t axa ble.
The Govern ment is proposing th at a broader ra nge of finan cial services
will be taxable tha n is the case in man y inter na tiona l jur isdictions. In
particular, the Government proposes that two categories of services
should be ta xable that ar e often input ta xed in overseas r egimes.
First , man y overseas jurisdictions h ave input ta xed a r an ge of fee or
comm ission ba sed fina ncial services th at could feasibly be taxa ble.This is part icular ly th e case wher e th e services ar e not directly
fina ncial sup plies but involve ar ra nging fina ncial su pplies.
Su bdivision 40-A of the GST Act,and in pa rt icular item 13 in section
40-5(2), adopts sim ilar concepts. Often th is has been done part ly in an
at tempt t o address th e self-supply bias tha t a rises when a n input taxed
finan cial service provider uses inpu ts t ha t would norma lly be ta xable.
In other words, ma ny overseas jurisdictions have at tempt ed to
am eliorat e th e problems of input ta xation by extending th e scope of
input ta xation upst ream to another layer of suppliers. A disadvant age
of this ap proach is t hat it increases th e compliance burden of suppliersto fina ncial inst itut ions.
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The application of GST to Financial Services 3
With t he int roduction of the redu ced in pu t tax creditat Division 70 of
th e GST Act (which is un ique to th e Aust ra lian GST), th e self-supply
issue can be addr essed without t he need to exten d input t axat ion to
th ose services tha t can feasibly be valued. In other words, the
Governmen t pr oposes th at th e self-supply bias be addressed by
allowing reduced input ta x credits ra th er t ha n extending th e scope of
input ta xation. This approach can deliver a similar t ax out come to
broader input ta xation (ie revenu e neut ra l) but a t a lower compliance
cost for certa in suppliers to finan cial institut ions. The appr oach also
reduces other potential self-supply biases as fewer suppliers are subject
to input t axation.
The pr oposed appr oach is also likely to provide a m ore cert ain outcome
for indu str y par ticipant s. Int ern at iona l experience indicat es th at th e
concept of a rr angin g is difficult t o legislat ively define a nd t he refore
leads t o disput es an d litigation as t o the pr ecise scope of inpu t t axat ion.
Appendix A provides more det ail on t he r educed input ta x credit.
Second, m an y overseas jurisdictions input ta x cert ain services provided
by agent s where th ere are no part icular valu at ion difficulties. The
Government proposes that most services provided by agents will be
ta xable. Where similar ser vices are supplied by an en terpr ise acting as
a principal, then t hese services will be inpu t t axed. Comm on law
definitions of principal a nd a gent will be used in dra wing th is
distinction.
The pr oposed appr oach enh an ces th e integrity of th e ta xation of
imp orted services. Division 84 of the GST Actprovides tha t a reverse
char ge of GST applies to services imported by ent erpr ises th at ar e not
ent itled to inpu t ta x cred its. This provision places domest ic sup pliers
to fina ncial inst itut ions on an equal footing with overseas su ppliers.
However, Division 84 does not app ly to input ta xed services. The
proposed approach redu ces an y tax-based incentive for fina ncial
institu tions to use overseas ra th er th an domestic suppliers by limiting
th e scope of inpu t t axed ser vices.
In line with int erna tional practice, some supplies tha t would norm ally
be ta xable are sometimes pr ovided as a n incidenta l item in conn ection
with fina ncial supplies. The Governmen t pr oposes tha t t hese will be
considered as incident al supplies and would be input ta xed. For
example, where a finan cial institu tion providing a h ousing loan values
a house an d charges a fee to the borrower, this would be incident al t o
the loan and input t axed, notwithstanding th at valuation services are
norma lly ta xable.
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4 The application of GST to Financial Services
Table 1 of this docum ent out lines the proposed tr eatm ent of individual
services. The fina l regu lat ions ma y use slightly differen t descriptions if
th e feedback from t he indust ry indicat es tha t alt ern at ive wording
would provide greater clarity.
The Governm ent welcomes comm ent s on th ese proposals. The
Government requests t ha t a ny suggested changes should clearly
describe th e par ticular product and preferred tr eatm ent. The
Governmen t is a lso interest ed in an y inform at ion a bout th e cost
str uctur e of services on t he redu ced input t ax credit list. In par ticular
th e breakdown between labour costs, profits an d other pu rchased
input s would be helpful in determ ining the a ppropriate redu ced input
tax credit r ate.
It is expected th at the Governmen t will condu ct regular reviews of both
th e list of services qua lifying for a redu ced inpu t t ax credit an d
applicable rat e(s). Chan ges to th e regulations will th en be
recomm ended to Governmen t, based on observation a nd t he
recomm enda tions of th e fina ncial sector itself. As chan ges to th e
regulat ions will affect th e GST base th e Comm onwealth will need to
consu lt with th e Stat es and Terr itories in accorda nce with t he
Int ergovernm enta l Agreement on t he Reform of Comm onwealth -Sta te
Fina ncial Relat ions.
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The application of GST to Financial Services 5
Table 1: Proposed treatment of supplies under the GST
Service GST Treatment RITC eligible
Transaction banking/ ca sh management/ savings, cheque or deposit accounts
As principal, creating, keeping or closing a savings,
c heq ue or dep osit ac c ount: interest ma rgins and feesc harged to a c c ount holders, including
Transac tion fe esAcc ount keep ing feesClosure o f ac c ount feesBalanc e b elow minimum fees
Teller withd rawal fee sBank che que fee sDeposit fee sReplacement card, book, PIN feesElec tronic fund s transfer fee sATM sta tem ent enq uiry fees
ATM w ithdrawal feesATM stop c ard fe esSales of sta nd ard c heq ue books/ dep osit bo oksFees for cheques dep osited but returned unpa idFees for po st-da ted c heq uesCashing cheques/clearance fees
State ment c hargesDishonoured c heq ue feesUnauthorised ove rdraft feesTerm d ep osit p rep ayme nt fee sPhone ba nking fees
Input taxed
Cash sorting for ac c ount holders Input taxedAudit c onfirma tion of c ustomer s ac c ount Taxab le Y
As agent, c rea ting, issuing o r closing a sa vings, che queor de po sit ac c ount
Agenc y fees
Taxab le Y
Proc essing o f ac c ount ho lders c heq ue transac tions onbe half of ac c ount provide rs
Taxab le Y
Proc essing o f ac c ount informa tion on be ha lf ofac co unt providers
Fee s for sto rage o f a rchives and ret rieva l services
Fee s for sta teme nt p roc essing
Fee s for bulk ma iling of sta teme nts
Taxab le Y
Fees for cheq ue fo rms/ boo ks or de posit forms/ b oo ksc harged to a cc ount provide r
Taxab le N
Cha rge for overprinting standard forms or printing toc ustom ers ow n req uirem ents
Taxab le N
Prod uction and enc od ing of p lastic c ards for ac c ountproviders
Taxab le Y
Processing debit/credit card applications for card
issuer
Taxab le Y
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6 The application of GST to Financial Services
Service GST Treatment RITC eligible
Payment/ funds transfers
Money t ransfer servic es for ac c ount holde rs
Automa tic transfers be twe en a c c ounts
Direc t c red itsDirect debits (including B-pay transactions)
Input taxed
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The application of GST to Financial Services 7
Table 1: Proposed treatment of supplies under the GST (continued)
Service GST Treatment RITC eligible
Foreign c urrenc y d ra fts
Charges on e nca shment
Input taxed
Foreign exchange
Provision o f c urrenc y or trave llers c heq ues
Input taxed
Credit/d ebit ca rd m ercha nt fees
Fees/ d isc ounts co llec ted from me rc hants for sa lesproc essed by credit and d eb it ca rdsJoining/ esta blishme nt feesService fee sMerchant annual fees
Mercha nt transac tion fee sMerchant monthly processing feesImp rinter and c ard terminal renta l
Fees for insta lla tion and ma nage me nt ofterminalsCharges to me rc hant for telec omm unic at ionsline renta lMerchant establishment fees
Taxab le N
EFT and c red it/ de bit c ard interc hang e fe es
Fee s c ha rged b y an EFT te rminal netw ork ow nerto a c ard issuer for ac c ess to and use o f the
terminal network
Taxab le Y
On b eha lf of ca rd issuers, set tling and c learingtransactions initiated via
ATMsEFTPOSCredit and d ebit ca rds
Taxab le Y
Interchange and transaction processing fees chargedto c a rdholde rs by c a rd issuers
Input taxed
Securities transactions
As p rinc ipa l, purchasing o r se lling equit y securit ies Input t axed
Investme nt c omp anies
Ca pital c ontributions
Input taxed
As age nt, arranging the p urc hase o r sa le o f eq uitysecurities
Fees for orde r plac eme nt a nd trad e e xec utionFees for settlement of tradesFees for ma nage me nt o f the issue o f eq uitysec urities, inc luding rights issues and bonus issuesFee s for a rrang ing flota tions or p riva tisa tionsFees for arranging mergers and acquisitionsFees for arranging ta keover b ids
Taxab le Y
Underwriting the issue of eq uity sec urities Taxab le Y
Sec urities lend ing as p rinc ipa l Input taxed
As p rinc ip a l, p urc ha sing o r se lling d eb t se curitie s Inp ut ta xe d
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8 The application of GST to Financial Services
Service GST Treatment RITC eligible
As age nt, arranging the purchase or sa le o f deb tsecurities
Fees for manage me nt of the issue o f de btsecurities
Taxab le Y
Underwriting the issue of debt sec urities Taxab le Y
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The application of GST to Financial Services 9
Table 1: Proposed treatment of supplies under the GST (continued)
Service GST Treatment RITC eligible
As p rinc ipa l, purcha sing o r selling inte rests in, or right s to
or und er a unit trust
Input taxed
As agent , arrang ing the purcha se o r sa le of interests in,or rights to or und er a unit trust
Taxab le Y
Share/ unit reg istry servic es to issuer Taxab le Y
Loans
As p rinc ipa l, ma king loa ns and a dvanc es, inc lud ingoverdrafts, credit c ard lend ing, m ortgag e loa ns,sec uritised loa ns and foreign c urrenc y loans
Interest
DiscountLate p ayment c hargesFees for early repaymentApp lic ation feesComm itment feesOther loa n-related fees c harged by lender toborrower
Input taxed
As ag ent, arrang ing o r ma nag ing a loa n
Agenc y feesFac ility feesMortga ge b roking feesFee s for arranging syndica ted loa nsIntroducer/broker fees
Taxab le Y
Aud it c onfirmations Taxab le Y
Lenders mortgage insuranc e p remiums Taxab le Y
Lend ers mo rtg ag e insuranc e
Loa n risk fee c ha rge d b y lend er to borrow er
Input taxed
Loa n ap p lica tion and p roc essing servic es p rovide d tolender
Loa n o rigination/b rokerag e feesFee s for sett lem ent/ d isc ha rge of loa n, includingdoc ument prepa rationFees for reg istration o f loan d oc umentsFee s for c red it refe renc e a ssessme nts and c red itscoring analysis
Fees for valuations p rovide d a s pa rt of m ortga geapplicationFee s for sea rche s for p roperty titleFee s for reg istrat ion/ c ertific a tion o f titleFees for mortga ge va ria tions inc luding c hange sof namesFees for proc essing (ad ding/ de leting) c ave ats
Taxab le Y
Loa n ma nag eme nt servic es to lend er
Fees for processing of repayments
Fees for sta tem ent p rep a rat ionFee s for filing/ requisitioning of loa n file rec ords
Taxab le Y
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10 The application of GST to Financial Services
Service GST Treatment RITC eligible
Deb t collec tion servic es
Debt reco very feesLitigation feesFees for lod ge ment of d oc uments
Taxab le Y
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The application of GST to Financial Services 11
Table 1: Proposed treatment of supplies under the GST (continued)
Service GST Treatment RITC eligible
As p rinc ipa l, purc hasing or selling a loan Input taxed
Asset based finance
Hire purcha se
Financ e c harge whe re sep arately ide ntified andd isc losed to the rec ip ient
Input taxed
Hire p urc hase w here no sep ara tely identified financ echarge
Taxab le N
Opera ting and financ e leases Taxab le N
As agent, a rrang ing a lease or hire purc ha se Taxab le Y
Trade Finance
Let ters of c red it provision o f c red itInterest/discount
Input taxed
Let ters of c red it
rrang ing/ c ollec tion fees
Fee s for c redit risk protec tion
Taxab le N
Export c red it loa ns
InterestServic e c ha rge s
Input taxed
Trad e financ e p rocessing
Transac tion proc essing and rec ord ing
Rem itta nc e servic es
Taxab le Y
Inventory/ receivables Finance
Fac toring provision o f c red it/ assignm ent or p urc haseof book debts
Interest/discount
Input taxed
Factoring
Arrang ing/ c ollec tion fee sFee s for c red it risk protec tionCollateral asset valuationFee s for sa les ac c ounting services
Taxab le N
Capital markets/ financial instruments
Foreign excha nge c ontrac ts
As p rinc ipa l, c ontrac ting to sell an am ount o f one
c urrenc y for another on a spe c ified de livery da teat a price ag reed at the o utset
Input taxed
As agent, a rrang ing a foreign exc hange c ontrac t Taxab le Y
Financ ia l futures cont rac ts
As p rinc ipa l, se lling a financ ia l futures cont rac t Input t axed
As ag ent, a rranging the sa le o f a financ ia l futurescontract
Taxab le Y
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12 The application of GST to Financial Services
Table 1: Proposed treatment of supplies under the GST (continued)
Service GST Treatment RITC eligible
Com mod ity futures c ontrac ts
As princ ipal, selling a c ommodity futures contract Input taxed
As ag ent, arrang ing the sale of a c omm od ityfutures contract
Taxab le Y
Comm odity forwa rd co ntrac ts
As princ ipa l, selling a deliverab le c ontrac t Taxab le N
As ag ent, a rranging fo r the sa le o f a d eliverab lecontract
Taxab le Y
As p rinc ipa l, se lling a non-de live rab le cont rac t Input taxed
As ag ent, a rrang ing for the sale o f anon-deliverab le c ontract
Taxab le Y
Forward rate a greeme nts
Contrac ting a s one o f the c ounterparties to aforward rate agreement
Input taxed
As agent, a rrang ing a forward ra te agreement Taxab le Y
Interest rate swaps
Contrac ting a s one o f the c ounterparties to a ninterest rat e swa p a greem ent
Input taxed
As ag ent, a rranging an interest rate swa p
agreement
Taxab le Y
Currenc y swa ps
Contrac ting a s one of the c ounterparties to ac urrenc y swa p
Input taxed
As agent, a rrang ing a c urrenc y swap Taxab le Y
Comm odity swa ps
Contrac ting a s one o f the c ounterparties to aco mmod ity swa p
Input taxed
As agent, a rrang ing a c ommod ity swap Taxab le Y
Fina nc ia l op tions
Sa le of a financ ia l op tion, as p rinc ipa l Input taxed
As ag ent, a rranging fo r the p urc hase o r sa le o fan op tion
Taxab le Y
Interest rate c aps, floo rs or c olla rs
As princ ipa l, g ranting or selling an interest ratec ap , floor or co llar
Input taxed
Ac ting as an a ge nt in respec t of a n interest rate
c ap , floor or co llar
Taxab le Y
Sec urities/ Foreign Excha nge/ Deriva tive trad ing
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The application of GST to Financial Services 13
Service GST Treatment RITC eligible
Transac tion proce ssing , ac c ount ma intena nc eand report gene rat ion servic es provided totraders
Taxab le Y
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14 The application of GST to Financial Services
Table 1: Proposed treatment of supplies under the GST (continued)
Service GST Treatment RITC eligible
Trading system and clearing and settling services
Stoc k excha nge servic es
Fee s fo r rights of ac c ess to or rights to use:
A system for the trad ing of q uote dsecurities; or
Taxab le N
Fac ilities for c learing and set tling transac tionstha t result from trad ing in quo ted sec urities inthat system
Futures exc ha nge service s
Fee s fo r rights of a c c ess to or rights to use:
A trad ing system that has be en a pp roved ordeemed to have been approved under
sec tion 1126 of the Corpo rations Law; or
Clearing house fa c ilities p rovide d by a personthat has bee n app roved o r dee med to havebe en a pp roved under sec tion 1131 of theCorporations Law
Taxab le N
Funds management
Unit trusts
Ca pital c ontributions
Input taxed
Investme nt p ortfolio m ana ge ment
Fee s or com mission fo r mana g ing a c lien t s assetportfolioFees c ha rge d to a supe rannua tion entity ortrustee for ma naging the entitys investme ntportfolioFee s or c om mission fo r ac ting as a trustee o f atrust o r supe rannua tion entity that ow ns theportfolioFee s for a c ting as a single responsible e ntity
Taxab le Y
Investment portfolio administration
Fees c ha rge d to the owne r of the p ortfolio
Taxab le Y
Superannuation
Creat ion of a right or interest und er a supe rannua tionfund, ap proved de po sit fund or poo led supe rannua tiontrust
Contributed ca pital and related fees
Input taxed
Supe rannua tion fund administration
Fees for ac ting a s a trustee of a supe rannua tionentityFees c ha rge d to a supe rannua tion entity ortrustee for ma inta ining m em ber rec ords andassoc iate d a c c ounting
Fees c ha rge d to a supe rannua tion entity ortrustee for the paymen t of b ene fits or the
Taxab le Y
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The application of GST to Financial Services 15
Service GST Treatment RITC eligible
processing of member contributionsFees c ha rge d to a supe rannua tion entity ortrustee for transfers between funds
InsuranceGeneral insurance
Insuranc e or gua ran tee of a ny kind aga inst loss,dama ge, injury or risk of a ny kind
Taxab le N
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16 The application of GST to Financial Services
Table 1: Proposed treatment of supplies under the GST (continued)
Service GST Treatment RITC eligible
Life insuranc e
Prem iums for investme nt a nd dea th a nd
pe rma nent d isab ility c over co mp onents (andothe r risk co mp one nts below a de minimusthreshold)
Input taxed
Prem iums for risk co ver (not inc luding d ea th a ndperma nent d isab ility c ove r)
Taxab le N
Brokerage
Fees for arranging a sale o f gene ral a nd / or lifeinsurance
Taxab le Y
Life insuranc e administrat ion
Fee s c ha rged to a life insurer for ma inta ining
po lic yholde r rec ords and assoc iate d ac c ountingFee s c ha rged to a life insurer for proc essingpremiums and the pa yment of be nefits
Taxab le Y
Annuities and pensions
Annuities and pensions
Contributed ca pital and related fees Input taxed
Financial advisory services
Financial planning
Fee s or commissions Taxab le Y
Taxation advic e, inc lud ing p repara tion of returns Taxab le N
Trustee / custodial services
Co re custody service s, inc luding
Clean p ayme nts movem ent of c ash withoutpurcha se, sa le o r transfer of assetsSet tling a nd und erta king o f sec urities transac tions
(as ag ent)Collec ting income and other paymentsReg istrat ion o f inte rests and rightsProxy voting
Exercising of options and warrantsSafe c ustod y of c ash or do c umentsOpe ning a nd ma intaining b ank ac co unts
Taxab le Y
Y
Y
Y
Y
Y
N
Y
Ma ste r custody services, inc luding
Maintenanc e of ac co unting rec ordsTaxation reportingMa nda te monitoringTrade exec ution monitoringPortfolio performa nc e ana lysisRisk ma na ge me nt rep orting
Taxab le Y
Sing le responsib le entity servic es Taxab le Y
Trustee servic es Taxab le Y
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The application of GST to Financial Services 17
Service GST Treatment RITC eligible
Fee s for ac ting as trustee o f a trust o rsuperannua tion entity
Fee s for ac ting a s trustee o f a set tlement, or willtrust unde r deeds of c ovenant, ma rriage (or
othe r) sett lement s
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18 The application of GST to Financial Services
Appendix A
Reduced Input Tax Credits
Division 70 of th e GST Act pr ovides for a r educed inpu t t ax credit t oap ply to th e pur chase of qua lifying services used t o ma ke fina ncial
supplies. This provision h as foun d broad support within t he fina ncial
services indu str y.
The self-supply bias
Inpu t t axing finan cial supplies mea ns t ha t financial service providers
ha ve an insourcing or self-supply bias for bu siness inp ut s used t o
ma ke fina ncial supplies. For examp le, if a fina ncial service providerinsour ces its a ccount ing services, th ese services would not be su bject t o
GST. However, if th e fina ncial service provider out sources these
services, in t he a bsence of special ru les, GST would be pa yable on th e
full valu e of tha t ser vice an d th e fina ncial service provider would not be
ent itled to an inpu t t ax credit.
A higher effective ta x burden would be faced by sma ller fina ncial
sup ply providers wh o outsour ce proportionat ely more of th eir busin ess
input s. Larger mar ket part icipant s generally ha ve a great er ability to
insour ce services. For example, sma ller fina ncial service providers,such a s credit u nions or building societies, would h ave less scope to
insour ce mortgage valuat ion services th an would a large bank .
Therefore, input ta xing fina ncial supplies has import an t implicat ions
for t he r elat ive compet itiveness of different s egment s of th e fina ncial
sector.
The reduced input tax credit
The reduced input t ax credit ha s been int roduced to addr ess thepoten tial bias to insource pa rt icular services.
Therefore, the size of the reduced input tax credit should be calculated
by referen ce to th e value ad ded by the last sup plier of a ser vice into a
finan cial service provider. The reduced inpu t t ax credit reimbur ses the
pu rcha ser for t he GST effectively applied to th e wages an d profits of
th e supplying firm.
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The application of GST to Financial Services 19
The reduced input ta x credit mea ns t ha t a finan cial instit ut ion will not
face a t ax incentive to insour ce a ser vice. Moreover, allowing a red uced
input ta x credit r esults in t he sam e ta x effect a s would be the case if
th e service being provided was input ta xed rat her th an t axed. The
nu mer ical example in Box 1 illust rat es this point.
Box 1
How the reduced input tax credit removes the bias to insource
Take an e xamp le where ABC Cred it Union need s to p urc hase o r undertakemo rtgage va lua tions in orde r to p rovide hom e loans. ABC Cred it Union
c an either undertake the va lua tion in-house, or they c an contrac t with XYZValuations. Both ABC Cred it Union and XYZ Va luations ha ve ident ic a l c oststruc tures.
If ABC C red it Union outsource s the mo rtg ag e va luat ion:
XYZ Valuations c an p rovide a servic e b y purcha sing a c om p uterand other eq uipment for a G ST-inc lusive p ric e o f $33,000;
As XYZ Va luations is a ta xab le b usiness the y a re entitled to an inputta x cred it o f $3,000;
XYZ Valua tions the n a dds $70,000 of va lue (which c om prises$50,000 of lab our c osts and $20,000 of p rofit);
XYZ Va luations sells the servic e to ABC Cred it Union for a GST
inc lusive va lue o f $110,000;
XYZ Va luations is req uired to remit $10,000 of G ST to the Austra lianTaxation Office (ATO);
ABC Cred it Union would no t norma lly be en titled to a n input taxc red it as it is a fina nc ial institution tha t only ma kes financ ial
supplies;How eve r, ABC Cred it Union is a llow ed a red uc ed input ta x c red itof $7,000 (which is 70 pe r c ent the p erce nta ge of va lue a dde d of the $10,000 GST on the purcha se); a nd
The to ta l c ost of ac quiring the mo rtgage va lua tion servic e is$103,000.
If ABC Cred it Union insource s the m ortg age va luation service :
ABC Credit Union w ill need to p urc hase the c omp uter and other
eq uipment for a GST-inc lusive p ric e of $33,000.
ABC Cred it Union is not en titled to an input t ax c red it for the $3,000
GST in the purcha se.
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20 The application of GST to Financial Services
ABC Cred it Union a dds $70,000 of va lue within the o rga nisa tion b y
emp loying staff to undertake m ortgag e valuations.
The to ta l c ost of a c quiring the mortga ge va luat ion servic e is
$103,000.
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The application of GST to Financial Services 21
Ma king a service taxable and eligible for a reduced input tax
credit is equivalent to input taxing the service
The a bo ve exam ple indica tes that the ta x/ red uce d input ta x c red it
approa c h results in a tota l c ost of $103,000.
The tota l co st w ould a lso be $103,000 if the mo rtgage valuat ion servic e
wa s an input taxed servic e.
XYZ Valuations wo uld buy the c om pute r and other eq uipm ent for
$33,000.
In this c ase XYZ Valuations wo uld not be e ntitled to an input ta x
credit.
XYZ Va luations the n a dds $70,000 of va lue.
The to ta l cost o f p rovision b y XYZ Va luations is $103,000.No GST is app lied to the sa le from XYZ Va luations to ABC Cred it
Union.
Therefo re the to ta l co st to XYZ Va luations of a c quiring the serviceis$103,000.
In effect, th e reduced input ta x credit r etur ns t o the fina ncial service
provider the GST th at is borne on th at port ion of th e business input
th at would otherwise be insour ced.
In oth er words, a service used a s a business input to a finan cial service
provider ha s th e sam e effective tax r at e wheth er it is pr oduced in-
house, or fully ta xed but eligible for a redu ced inpu t t ax credit.
Since sma ller fina ncial service providers out-sour ce proport iona tely
more of th eir business input s, it is expected t ha t th ey should benefit
proport ionat ely more from t he r educed input ta x credit.
Which inputs will not attract a reduced input tax credit?Reduced input ta x credits will not a pply to real pr operty or to the lease
of goods or rea l property. Services rela ted t o th e ma int ena nce of goods
or r eal propert y will also not a tt ra ct a reduced input t ax credit.
Similarly, th e reduced input ta x credit will not apply to services th at
ar e difficult t o insour ce for r easons unr elated to their t ax tr eatm ent.
For exam ple, stock exchan ge services cann ot feasibly be insourced.
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22 The application of GST to Financial Services
Joint supplies
Wher e a supp ly eligible for a r educed input ta x credit is supplied joint ly
with a noth er type of supp ly, th e value of th e supply for which a r educedinput ta x credit a pplies needs to be separat ely identified.
For example, suppose th at as pa rt of an out sour cing cont ra ct,
investment fun d ma na gement a dvice is provided with legal advice. For
th e pur chasin g fina ncial service provider to be eligible for a redu ced
input ta x credit for th e investm ent fund m an agement advice, the value
of th is supply (an d hen ce th e GST paid), would need to be separ at ely
identified.
Rate(s) of the reduced input tax credit
How the rate(s) will be calculated?
The r at e for t he r educed inpu t t ax credit for a specific service should
equal t he percenta ge of value a dded at th e fina l sta ge of the pr oduction
pr ocess. The precise ra te of credit requ ired to achieve this resu lt will
var y for differen t services. However, th e indu str y ha s expr essed a
pr eferen ce for a single ra te of redu ced inpu t t ax credit for a ll eligible
services for th e pur poses of simplicity. The Govern men t is also inclined
to support a single rat e for t he sam e reasons.
The Governmen t is comm itted to setting th e reduced credit ra te at a
ra te t ha t, on avera ge, corr ectly reflects t he pr oportion of value a dded of
th e outsourced supplier. The Governmen t ha s no inten tion to bias the
ra te downwar ds for revenue reasons. In sett ing th e ra te, th e
Government intends t o err on th e side of a h igher, ra th er th an a lower
ra te .
Since those th ings on t he r educed credit list ar e all services, it is likely
th at th ey will all cont ain a significan t pr oport ion of labour costs,
indicat ing a higher reduced credit ra te.
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The application of GST to Financial Services 23
The indust ry ha s expressed some concern th at , even with a generous
average rate, significant distortions could remain for individual
services. The Governmen t believes tha t t hese concerns ma y be
overst at ed for th e following reason. The redu ced inpu t ta x credit is
designed to add ress a bias to insour ce. However, th e bias to insour ce
only has practical effect when the cost structures of outsourcing and
insourcing are similar. In th e absence of an y reduced input t ax credit
th e bias is only opera tive if the outsourced supplier ha s a cost st ru ctu re
(without GST) th at is with in 10 per cent of the cost st ructu re th at
would exist if th e service were insourced. For exam ple, if before th e
GST, the outsourced supplier ha s a 15 per cent lower cost st ructu re,
th en a fter th e intr oduction of the GST t he outsourced supplier will still
ha ve at least a 5 per cent lower cost st ru ctu re even allowing for t he
GST.
The introduction of a reduced input tax credit lessens the likelihood
th at an operat ive bias will exist. For example, consider th e case where
th e average ra te of th e reduced input ta x credit is set at 70 per cent ,
but th e correct ra te for a p ar ticular service is 60 per cent . This would
leave a bias in favour of outsour cing th e service. However, the bias is
not opera tive unless the int erna l cost st ru ctu re is within 1 per cent of
th e cost str uctur e of th e outsourced provider.
Progress to date
The consu ltin g period following t he r elease of th is docum ent will allow
for t he collection a nd a na lysis of inform at ion from a ra nge of fina ncial
sector part icipant s. Exam inat ion of industr y cost dat a will enable the
calculation of th e appropriate reduced inpu t ta x credit ra te. Some dat a
ha s a lready been provided but more complete da ta is required before a
final ra te can be determ ined. The Governmen t inten ds to consult with
th e industr y about th e appr opriat e meth odology for esta blishing th e
reduced input t ax credit rat e
The limited inform at ion r eceived to dat e supports a generalisedredu ced input ta x credit r at e of somewhere in th e order of 70 per cent.
However, th e eventu al genera l ra te could differ from t his, an d will
depend on t he results of fur th er consult at ion a nd a na lysis.
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24 The application of GST to Financial Services
Possibility of spec ial ra tes of c red it
Some fina ncial sector groups h ave pres ent ed cases to deviat e from ageneralised rat e for a sma ll num ber of specific products t ha t m ay ha ve
a h igher or lower ra te of value added at th e final sta ge. However, oth er
finan cial sector pa rt icipant s h ave expressed a preference to ha ve only a
single ra te of reduced credit for ea se of complian ce.
To move from a sin gle redu ced credit ra te for a p ar ticular product, or
group of products, th e Governm ent would need to be convinced th at a
generous single avera ge ra te is not suitable an d tha t th e administra tive
costs are acceptable.
Practical operation of the reduced input tax credit
The legisla tion a nd reg ula tions
The det ail on both t he list of qua lifying supplies for a redu ced inpu t t ax
credit, a nd th e ra tes for which t hese a re eligible, will be cont ained in
regu lat ions u nder Division 70 of th e GST Act .
The qu alifying list of services is t o be spelt out in t he pr oposed
regulation. Table 1 in this document includes information on which
services ar e eligible for a r educed input ta x credit, but not th e ra tes of
th e credit. For ea se of use, a consolidated list of services qualifying for
a r educed input t ax credit ha s been provided at Appendix B .
Changes to the o pe ra tion of the red uce d input taxcredit
It is expected th at the Governmen t will condu ct regular reviews of both
th e list of services qua lifying for a redu ced inpu t t ax credit an d
ap plicable ra tes. Recomm enda tions of th e fina ncial sector will be
consider ed in t he r eview process.
Any claim s for special ra tes to be a pplied t o specific services or gr oups
of services will also be assess ed in t his cont ext.
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25 The application of GST to Financial Services
Appendix B
Table 2: List of supplies eligible for a reduced input tax credit
Service
Transaction banking/ cash management/ savings, cheque or deposit acc ounts
Audit co nfirma tion o f c ustome rs ac c ount
As ag ent, c rea ting, issuing or closing a sa vings, che que or de p osit ac c ount
Agenc y fees
Processing of account holders cheque transactions on behalf of account providers
Proc essing of a c c ount information on b eha lf of a c c ount p rovide rs
Fee s for sto rage o f a rchives and retrieva l services
Fee s for sta teme nt proc essing
Fee s for bulk ma iling of sta teme nts
Prod uction a nd e nc od ing o f plastic c ards for ac c ount p rovidersProc essing d eb it/ c red it c a rd app lic at ions for ca rd issuer
Payment/ funds transfers
EFT and c red it/ de bit c ard interc hang e fees
Fee s c ha rged b y an EFT te rminal netw ork owner to a c a rd issuer for ac c ess to and useof the te rminal netwo rk
Proc essing B-pa y transac tions on b eha lf of a c c ount p rovide rs
EFT and c red it/d eb it c a rd transac tion p roc essing
Fee s paid by c a rd issuers for the provision of EFT and c red it c a rd ac c ount da ta
processing
On behalf of card issuers, settling and clearing transactions initiated via
ATMs
EFTPOSCredit and d ebit ca rds
Securities transactions
As age nt, arranging the purc ha se o r sa le of eq uity sec urities
Fees for orde r plac eme nt and trad e e xec utionFees for settlement of tradesFee s for mana gem ent of the issue of eq uity sec urities, inc luding rights issues and
bonus issue sFee s for a rrang ing flota tions or p riva tisa tions
Fees for arranging mergers and acquisitionsFee s for arrang ing ta keove r bids
Und erwriting the issue of eq uity sec urities
As age nt, arranging the p urc hase o r sa le o f de b t sec urities
Fee s for ma nage me nt o f the issue o f deb t sec urities
Und erwriting the issue o f deb t sec urities
As agent, arrang ing the p urcha se o r sa le of inte rests in, or rights to or und er a unit trust
Sha re/ unit reg istry services to asset issue r
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26 The application of GST to Financial Services
Table 2: List of supplies eligible for a reduced input tax credit (continued)
Service
Loans
As ag ent, arrang ing o r ma nag ing a loa n
Agenc y feesFac ility feesMortga ge b roking feesFee s for arranging syndica ted loa ns
Introducer/broker fees
Audit c onfirma tions
Lend ers mo rtgage insuranc e p rem iums
Loa n app lic a tion and p roc essing servic es to lend er
Loa n o rigination/b rokerag e feesFees for settlement/discharge of loan, including document preparation
Fees for reg istration o f loa n d oc umentsFee s for c red it refe renc e a ssessme nts and c red it sc oring ana lysisFee s for va luat ions p rovide d a s part of mortga ge ap p lic a tionFee s for sea rc hes for p rop erty t itleFee s for reg istrat ion/ c ertific a tion o f titleFee s for mortga ge va ria tions inc lud ing c hange s of na me sFees for processing (adding/deleting) caveats
Loa n m ana ge me nt servic es to lend er
Fee s for proc essing o f rep ayme ntsFees for sta tem ent prep a ra tionFee s for filing/ requisition ing o f loan file rec ords
Deb t collec tion servic es
Debt reco very feesLitigation feesFees for lod ge ment o f do c uments
Asset based finance
As age nt, arranging a lea se o r hire p urc ha se
Trade finance
Trad e financ e p roc essing
Transac tion proc essing and rec ord ingRem ittanc e servic es
Capital markets/ financial instruments
Foreign exchang e c ontrac ts
As ag ent, arrang ing a foreign exc hang e c ontract
Financ ia l futures cont rac ts
As age nt, arranging the sa le o f a financ ia l futures c ontrac t
Com mod ity futures c ontrac ts
As ag ent, arrang ing the sale of a c omm od ity futures c ontrac t
Comm odity forwa rd co ntrac tsAs ag ent, arrang ing for the sale of a de liverab le c ontrac t
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The application of GST to Financial Services 27
Service
As age nt, arranging for the sa le of a non-de liverab le contrac t
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28 The application of GST to Financial Services
Table 2: List of supplies eligible for a reduced input tax credit (continued)
Service
Forward rate a greeme nts
As ag ent, arrang ing a forwa rd rate ag reem ent
Interest rate swapsAs age nt, arranging a n interest rat e swa p a greeme nt
Currenc y swa ps
As age nt, arranging a c urrenc y swa p
Comm odity swa ps
As ag ent, arrang ing a c omm od ity swa p
Options
As age nt, arranging fo r the p urc hase o r sa le o f an o p tion
Inte rest rate c aps, floo rs or c ollars
Ac ting as an ag ent in respec t of a n interest rate c ap , floo r or co llar
Sec urities/ Foreign Excha nge/ Deriva tive trad ing
Transac tion proce ssing, ac c ount ma intena nc e and report gene rat ion servic esprovide d to trade rs
Funds management
Investme nt p ortfolio m ana ge ment
Fee s or com mission for ma na g ing a c lient s asset portfo lioFee s c ha rge d to a supe rannua tion entity or trustee for ma naging the entitysinvestment portfolioFee s or co mm ission for ac ting a s a t rustee o f a t rust o r sup erannua tion entity tha t
ow ns the po rtfolioFee s for a c ting as a single responsible entity
Investment portfolio administration
Fees c harged to the o wner of the po rtfolio
Superannuation
Supe rannuat ion fund administration
Fee s for ac ting a s a trustee of a supe rannuat ion entityFee s c ha rge d to supe rannua tion entity or trustee for ma inta ining memb er rec ordsand associated accountingFee s c ha rge d t o supe rannua tion entity or trustee for the payment of b ene fits or the
proc essing o f mem ber cont ributionsFee s c ha rge d to supe rannua tion ent ity or trustee for transfers be twee n funds
Insurance
Brokerage
Fee s for arranging a sa le of ge neral and / or life insuranc e
Life insuranc e administrat ion
Fee s c ha rge d to a life insurer for ma intaining po lic yholder reco rds and assoc ia ted
accounting
Fee s c ha rge d to a life insurer for proce ssing p rem iums and the paym ent of b ene fits
Financial advisory services
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The application of GST to Financial Services 29
Service
Financial planning
Fee s or c ommissions
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Table 2: List of supplies eligible for a reduced input tax credit (continued)
Service
Trustee / custodial services
Core c ustody services, inc luding
Clean payments move me nt o f cash w ithout p urc hase, sa le o r transfer of assets
Set tling a nd und erta king o f sec urities transac tions (as agent)
Collec ting income and other payments
Reg istrat ion of interests and rights
Proxy vo ting
Exercising of options and warrants
Ope ning a nd ma intaining b ank ac co unts
But not sa fe c ustod y of ca sh or doc uments
Ma ster custody service s, inc luding
Maintenanc e of ac co unting rec ordsTaxation reporting
Ma nda te monitoring
Trade exec ution m onitoring
Portfolio pe rformanc e ana lysis
Risk ma nage me nt rep orting
Single responsible e ntity services
Truste e services
Fee s for ac ting a s a trustee o f a t rust or sup erannua tion entity
Fee s for ac ting a s a trustee of a sett lem ent, or w ill trust und er de ed s of c ove nant,
ma rriage (or other) sett lem ents