Session 4A:

Issues in Financial

Services

Craig Klapdor, CBA

George Spathis, KPMG

Alex Affleck, ATO

Bitcoin – To tax or not to tax?

European Experience

Brief History

Current Treatment

Money

Bitcoin

Australian approach

ATO view

Industry submission

Options

Bitcoin

The future

Blockchain

The people of YAP

Your electricity bill

Peer to peer validation of payments

Introduction to Apportionment

Apportionment refers to the particular method or approach

used by a taxpayer to calculate its input tax credit

entitlement.

Developing and implementing a ‘fair and reasonable’

apportionment model can be a process that is filled with

opportunity and risk, which must be effectively managed

as part of a broader approach to proper GST governance.

Apportionment – Key concepts

There are two key parts to apportionment:

1. Relationship

2. Extent

These concepts are reflected in the words of the GST Act.

s11-15(2)(a) provides that an acquisition is not for a

creditable purpose to the extent that the acquisition

relates to making supplies that would be input taxed.

Apportionment - Relationship

Australian Approach

HP Mercantile Pty Limited v. Commissioner of Taxation Hill J: “the words 'relates to' are wide words signifying some connection

between 2 subject matters. The connection or association signified by

the words may be direct or indirect, substantial or real. It must be

relevant and usually a remote connection would not suffice.”

Rio Tinto Services Limited v. Commissioner of Taxation Full Federal Court decided that Rio Tinto was not entitled to input tax

credits for acquisitions it made that related to a supply of residential

accommodation to its mining workers that would be input taxed.

Apportionment - Relationship

ATO Position – GSTR 2008/1

A sufficient connection is established if, on an objective assessment of

the surrounding facts and circumstances, the acquisition is used, or

intended to be used, solely or to some extent for the making of supplies

that would be input taxed.

The ATO considered that the Rio Tinto decision confirmed the

Commissioner's views in GSTR 2008/1.

Apportionment - Relationship

UK Approach – direct and immediate relationship

BLP Group v Commissioners of Customs & Excise European Court of Justice found that a direct and immediate link with

the taxable transactions was required, such that a holding company

which sold one of its subsidiaries (by share sale) to alleviate financial

difficulty and allow the rest of the group to continue trading an otherwise

taxable business was unable to deduct.

Dial-a-Phone Limited v Commissioners of Customs &

Excise High Court held that advertising costs related to all of the supplies made

by a taxpayer (including taxable supplies and exempt commissions

related to insurance contracts), even where the exempt supplies of the

insurance commissions were a subsidiary source of income.

Apportionment - Extent

The words 'to the extent' create a requirement to apportion

input tax credit entitlement for acquisition which relate to

the making of supplies that would be input taxed as well

as supplies that would be taxable or GST-free.

The apportionment method chosen must be fair and

reasonable.

Apportionment – UK v Australia

Australian Approach

Onus on taxpayers to develop a

‘fair and reasonable’

apportionment methodology, that

reflects the intended or actual use

of its acquisitions.

Commissioner’s preference for

direct methods, however there is

recognition that these may not

always be possible or practicable.

ATO guidance provided in public

rulings and practical compliance

guides.

Evolution in the methodologies

used by taxpayers:

Costing methods.

Modified costing methods.

Methods based on pure GST

principles.

UK Approach

Two types of apportionment

methodologies;

1. Standard method (revenue

based method in the law); and

2. Special method (devised by

the taxpayer, with approval

from HM Revenue &

Customs).

Presumption that ‘standard

method’ will produce ‘fair and

reasonable’ result.

Onus on taxpayer to show that

‘special method’ is ‘fair and

reasonable’ if a departure from

the standard method is sought.

HM Revenue & Customs may

direct a taxpayer to use a

particular method.

Apportionment – Issues and Trends

How’s your method?

Industry trend towards sophisticated apportionment

models

Risk associated with increase in complexity needs to be

managed by taxpayers in light of increased ATO activity.

ATO reviews on apportionment

Increase in the number of ATO reviews of apportionment

methodologies that test the practical application of methods in

place (e.g. credit card questionnaire sent out by ATO).

Apportionment – Issues and Trends

How’s your method? (cont.)

Increased focus on transparency:

Consider Private Binding Rulings to confirm apportionment

methodologies are ‘fair and reasonable’.

Annual Compliance Arrangements (ACA).

Disclosure to the ATO.

ATMs - An overview

Financial institutions operate ATMs to service their own

cardholders, as well as ATM fees from other users.

Independent deployers are solely reliant on ATM direct

charge fees.

Change from Interchange Fees to direct charging in 2009

allowed ATM operators to set their own fees, influx of new

entrants.

Financial supply of ATM services

Subregulation 40-5.09(4A):

A supply by an entity for a fee of not more than $1 000 is

a financial supply if it is a supply of 1 or more of the

following ATM services:

(a) a withdrawal from an account;

(b) a deposit into an account;

(c) an electronic transfer from an account;

(d) advice of the balance of an account.

GSTR 2014/2 – clarified that an ATM service meant that

the device must use the ATM payment system.

ATM - Interchange Fees (pre 2009)

ATM Acquirer

Card Issuer

Interchan

ge

Fees

(RITC for

issuer)

Cas

h

ATM withdrawal fee

St. George customer

Cash Withdrawal

Interchange

Fees

(RITC for issuer)

Taxable supply of interchange

ATM – Financial Institutions

ATM Acquirer

Card Issuer

Reimbursement of direct charge

from cardholder’s account - No

Interchange fee

for

Cas

h

St. George customer

Input taxed ATM service

ATM direct charge

ATM – Independent Deployers

ATM Acquirer

Card Issuer

for

St. George customer

ATM Owner

ATM Deployer

Merchant

ATM fee

ATMs – Acquirer provides clearing and

settlement

ATM acquirer

Card Issuer

for

St. George customerATM Deployer

ATM fee

Taxable supply of

settlement and

clearing services

Input taxed ATM

service

Possible reduced input tax credits

Item 7(f) – processing, settling, clearing and switching

transactions for ATM.

Item 27 – supplies for which financial supply facilitators

are paid commission by financial supply providers.

Item 29(a) – trustee and custodial services including

transfer of cash without purchase, sale or transfer of

assets, excluding cash delivery and collection from

branches of Australian ADIs.

Thank youPlease remember to

complete your evaluation

forms via the App.

Hard copy forms please

return to the registration

desk.

© Craig Klapdor, Commonwealth Bank of Australia

George Spathis, KPMG

Alex Affleck, Australian Taxation Office

Disclaimer: The material and opinions in this paper are those of the author(s) and not those of The Tax Institute, CBA,

KPMG or the ATO. Neither the Tax Institute, CBA, KPMG nor the ATO reviewed the contents of this presentation

and have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional

advice and readers should rely on their own enquiries in making any decisions concerning their own interests.