gst on financial service

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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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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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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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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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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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Table 1: Proposed treatment of supplies under the GST (continued)


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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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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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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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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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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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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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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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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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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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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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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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 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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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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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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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 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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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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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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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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Service

As age nt, arranging for the sa le of a non-de liverab le contrac t


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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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Service

Financial planning

Fee s or c ommissions


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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

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