The ATO has for some time been unhappy with the manner in which many trusts have been claiming 75% reduced input tax credits (RITCs) for GST incurred on services acquired through their trustee or responsible entity by “inappropriate bundling”. The Government announced in the May 2010 Budget that the law would be changed from 1 July 2012, and the proposed changes to the GST regulations were released on 13 January 2012 in an Exposure Draft (link).
Investment trusts are generally unable to claim input tax credits for GST incurred as they make input taxed financial supplies, although they can claim RITCs for 75% of the GST incurred on acquisitions listed in items in regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999. Many trusts have been claiming RITCs of 75% of the GST on every cost they incur, on the basis that they are part of “trustee services” within item 29 or “single responsible entity services” within item 31. Trusts can of course also claim normal input tax credits to the extent costs relate to their making taxable or GST-free supplies (if any).
While a trust is not a legal entity, it is effectively treated as an entity for GST purposes, being the trustee acting in its capacity as trustee of the trust (ie separate to its corporate/individual capacity). The trustee therefore acts in two separate capacities for GST purposes, and may make supplies and acquisitions in either of those two capacities.
Remuneration for trustees for their services and cost recovery arrangements can take many different forms depending upon the precise wording of the trust deed and associated documents. This could include:
- reimbursement out of the trust fund for expenses incurred, with or without an additional specific trustee fee
- trustee remuneration on a full cost recovery basis, with or without a mark-up
- a single amount (eg a fixed fee or a percentage of funds under management) covering both recovery of expenses and trustee remuneration.
What is the consideration for the acquisition of RITC-eligible “trustee services” by the trust in these scenarios? In which of the two capacities is the trustee incurring external costs?
In the first scenario only the specific trustee fee would likely be consideration for supplying trustee services and covered by item 29, and the individual expenses would need to be separately examined for RITC-eligibility pursuant to other items in regulation 70-5.02(2). Some of these expenses, eg advertising, tax compliance and audit expenses, would not by themselves be RITC-eligible.
However, arguably the expenses in the second and third scenarios above are effectively bundled into the trustee’s consideration for supplying RITC-eligible trustee services and so become RITC-eligible for the trust. This is the distortion the proposed amendments are trying to redress.
The initial Government announcement was that the law would be changed to “unbundle” the trustee acquisitions in the bundled scenarios referred to above. The Exposure Draft legislation now released however proposes an alternative option “favoured for simplicity and clarity” which introduces a new lower 55% RITC rate for trustee services.
New item 32 is proposed to be inserted into regulation 70-5.02(2) for services acquired by a “recognised trust scheme”, to the extent the services are performed on or after 1 July 2012. The services covered by item 32 are the acquisitions qualifying for the 55% RITCs.
Item 32 will only apply if the trustee carries on an enterprise in its own capacity that includes making taxable supplies to the recognised trust scheme, eg it will not apply where the trustee is not GST-registered in its corporate capacity. It also may not then apply if the trustee does not itself receive any remuneration for trustee services, eg in the first scenario above but where there is no specific trustee fee.
Also, specified services covered by other items will remain eligible for 75% RITCs, including:
- brokerage services
- investment portfolio management functions
- certain administrative functions, and
- custody services.
The 55% RITCs would appear to be available to the trust regardless of which of the two capacities the trustee originally incurred external costs in, although the need to determine the capacity in which the trustee incurs a cost is not completely removed by these proposals. For example, the trustee needs to know what to report on the Business Activity Statements prepared in its corporate capacity. Also, when a cost is incurred from overseas, the capacity in which the trustee incurs the cost may dictate whether the trust needs to reverse charge GST or the trustee needs to charge GST to the trust instead.
The result should then be that all GST-bearing services acquired the trust are eligible for either 75% or 55% RITCs, but there will still be some work to do to allocate costs between these two GST recovery buckets.
Note also that proposed item 32 only applies to a “recognised trust scheme”. This is defined to be a managed investment scheme under section 9 of the Corporations Act 2001, or an approved deposit fund, pooled superannuation trust, public sector superannuation scheme or regulated superannuation fund (other than a self managed superannuation fund) within the meaning of the Superannuation Industry (Supervision) Act 1993. Other types of trusts will still be subject to the existing rules.
While it will cover unregistered managed investment schemes as well as registered ones, there could be an issue as to whether all of the trusts (eg sub-trusts) in an investment trust hierarchy satisfy the Corporations Act definition and are therefore covered by item 32 as currently drafted.
Comments on these proposals close on 24 February 2012. Investment funds should closely examine the impact of these proposals, including how particular acquisitions would be classified from 1 July 2012 under these proposals, the potential financial impact, what system changes would be needed, and whether they wish to participate in the consultation process.
