The Treasury has released a consultation draft of the regulations which will amend the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). The proposed amendments will implement a number of the Government’s previously announced changes to the GST treatment of some types of financial supplies.
This alert focuses on two of the proposed changes: limiting access to reduced input tax credits (RITC’s) for the acquisition of trustee services and making supplies under hire purchase agreements fully taxable.
These amendments (with others) were recommended to the Government in The Treasury’s Review of the GST Financial Supply Provisions. In the 2010-2011 Budget, the Government announced that it would implement the recommended reforms. The draft regulations are now open to consultation with submissions due by 24 February 2012. The draft regulations and Explanatory Memorandum can be found here.
RITC’s and trustee services
The GST Regulations are proposed to be amended so that services acquired by “recognised trust schemes” will attract a RITC of only 55% of the GST on the relevant taxable supply where the trustee carries on an enterprise in its own capacity which makes taxable supplies to the trust entity. It is proposed that the amendments will apply to services provided on or after 1 July 2012, including under existing arrangements. The purpose of these amendments is to discourage the structuring of trust payment arrangements by bundling third party expenditure into a single fee payable to the trustee as part of the trustee’s remuneration.
The following will be “recognised trust schemes”:
managed investment schemes (note that registered and unregistered schemes seem to be captured);
approved deposit funds;
pooled superannuation trusts;
public sector superannuation schemes;
regulated superannuation schemes (other than self-managed superannuation funds).
Although the intention appears to be that the 55% RITC rate will apply only to services acquired from the trustee of the recognised trust scheme, this is not clearly expressed in the draft regulations. Exceptions to the 55% RITC rate will apply for the following kinds of services acquired from trustees of recognised trust schemes:
brokerage services;
managing client asset or investment portfolios and asset allocation services;
certain administrative functions in relation to investment funds;
services relating to compliance with industry regulatory requirements (excluding services which relate to compliance with industry regulatory requirements which apply when acting as a trustee or responsible entity);
custody services; and
certain reporting and analysis services relating to custody arrangements.
Although the new rules are intended to remove the financial incentive to “bundle” services into a trustee’s fee, the incentive may not be removed in all cases. Where the value of the bundled service is high compared to the trustee’s personal remuneration, “bundling” could still result in a better outcome than if the service were acquired by the separate trust entity.
Making supplies under hire purchase agreements fully taxable
The draft regulations also propose to amend the current rules so that supplies under hire purchase agreements entered into on or after 1 July 2012 will be fully taxable supplies. For these agreements, the supply of credit will be a taxable supply instead of being input taxed.
This will improve the ability of suppliers under hire purchase agreements to recover input tax credits in relation to their overheads. However for lessees under hire purchase agreements who are not registered for GST, hire purchase agreements will become a more expensive form of finance, because the credit charges will start to be subject to GST. For these customers, other forms of finance (such as chattel mortgages) will be more attractive from 1 July 2012.
Lessors will need to apportion their input tax credits on overhead costs between hire purchase agreements entered into before and after 1 July 2012.
The changes will not have an impact on pre-1 July 2012 hire purchase agreements unless those agreements are amended in such a way that a new agreement is formed.