5.8.1 Overview
A goods and services tax (GST) was introduced into Australia on 1 July 2000. GST is imposed on supplies including the provision of goods, services, rights or information. A supply may be outside the scope of GST because the supply is not connected with Australia or because the supply is made by an entity that is not registered or required to be registered for GST purposes. Other supplies may not give rise to a GST liability because the supply belongs to a class of supply that is identified by the GST law as being excluded from the definition of “taxable supplies”. 5.8.2 Input tax credits
As is typical of GST and VAT systems, under the Australian GST system, registered GST entities may claim a credit for the GST included in the price paid for goods and services acquired for the business purposes of that entity. Such credits are known as input tax credits. No input tax credit may be claimed to the extent that the acquisition is made for a private or domestic purpose of the entity. As discussed below, further limitations exist on the ability of an entity to claim input tax credits to the extent an acquisition relates to input taxed supplies (such as financial supplies) being made by the entity.
5.8.3 Types of supplies
A number of different types of supplies are specifically identified in the Australian GST system. There are three principal
categories of supplies that are identified: • taxable supplies;
• GST-free supplies; and • input taxed supplies.
Taxable supplies
GST is payable by a registered GST entity on the taxable supplies made by that entity. A supply will constitute a taxable supply if the following requirements in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) are satisfied:
“(a) the supply is made for consideration;
(b) the supply is made in the course or furtherance of an enterprise that the supplier carries on;
(c) the supply is connected with Australia; and
(d) the supplier is registered or required to be registered.”
All such supplies will be taxable except to the extent that the supply is identified by the GST law as either GST-free or input taxed.
GST-free supplies
GST is not payable on supplies that are GST-free. Most supplies in the context of securitisations will be supplies of “things” other than goods or real property. Such supplies would include services and most debt instruments (other than the mortgages
themselves). Such supplies will be GST-free if the following requirements are satisfied:
(a) the supply is made to a non-resident who is not “in Australia” when the thing supplied is done, and either: (i) the supply is neither a supply of work physically
performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or
(ii) the non-resident acquires the thing in carrying on its enterprise, but is not registered or required to be registered (refer Item 2 of section 38-190(1) of the GST Act); or
(b) the supply is made to a recipient who is not “in Australia” when the thing supplied is done and the effective use and enjoyment of the supply takes place outside Australia other than a supply directly connected with real property situated in Australia (refer Item 3 of section 38-190(1) of the GST Act).
Therefore, a determination of whether or not an entity is “in Australia” will be critical in determining wether or not a supply is to a non-resident will be GST-free. Detailed guidance of the Australian Taxation Office’s views are set out in GST Ruling GSTR 2004/7.
Entities that make GST-free supplies will be entitled to input tax credits for the GST components included in the cost of their acquisitions that relate to the making of those supplies.
Input taxed supplies
GST is not payable on supplies that are input taxed. The distinction between input taxed supplies and GST-free supplies (discussed above) is that an entity may be restricted in its ability to claim input tax credits because of the input taxed supplies made by that entity.
There are two main types of input taxed supplies, namely input taxed financial supplies and other input taxed supplies (such as the leasing of residential premises). Generally, an entity will be unable to claim any input tax credits for acquisitions, to the extent they relate to the making of input taxed supplies. However, there are three important exceptions in relation to input taxed financial supplies.
First, a reduced input tax credit may be claimed for reduced credit acquisitions which relate to making financial supplies.
The reduced input tax credit is a credit equal to 75 percent of the GST included in the consideration provided by the entity for that acquisition. Reduced input tax credits are only available for the reduced credit acquisitions that are exhaustively listed in the GST law.
Secondly, an entity will not be precluded from claiming an input tax credit for an acquisition to the extent the acquisition relates to the making of financial supplies and the entity making the acquisition does not exceed the financial acquisitions threshold. An entity will exceed the financial acquisitions threshold if either:
“(a) the amount of all input tax credits to which that entity would be entitled for ‘financial acquisitions’ would exceed $50,000; or (b) the amount of input tax credits to which that entity would be entitled for ‘financial acquisitions’ would exceed 10% of the total amount of the input tax credits to which the entity would be entitled for acquisitions and importations during that 12 month period.”
Therefore, the question of whether or not an entity exceeds the financial acquisitions threshold turns not on the value of financial supplies made by that entity but rather, the value of the
acquisitions made by that entity that are attributable to those financial supplies.
Finally, an entity will not be denied an input tax credit for acquisitions that are made in the course of making a financial
supply consisting of a borrowing, provided that the borrowing is not for the purpose of making input taxed financial supplies. Further, such acquisitions will not be counted in determining whether or not the entity making the acquisition exceeds the financial acquisitions threshold.
Financial supplies
Of the categories of input taxed supplies, the most significant in the context of securitisations are the input taxed financial supplies. The Australian GST system only provides input taxed treatment for financial supplies that involve the provision, acquisition or disposal of various interests. Services relating to the making of financial supplies, such as arranging services, are not provided with input taxed treatment and will generally be taxable.
Regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (the “GST Regulations”) defines the scope of financial supplies. Pursuant to subparagraph (1) of that regulation, the provision, acquisition or disposal of an interest mentioned in subparagraph (3) or (4) is a financial supply if:
“(a) the provision, acquisition or disposal [of the interest] is: (i) for consideration;
(ii) in the course or furtherance of an enterprise; and (iii) connected with Australia; and
(b) the supplier is:
(i) registered or required to be registered; and
(ii) a financial supply provider in relation to the supply of the interest.”
Because financial supplies are input taxed, entities that make financial supplies are not liable to remit GST on the value of those supplies. Subject to the exceptions identified above, entities will be restricted in their ability to claim input tax credits for acquisitions relating to the making of financial supplies. Regulation 40-5.12 of the GST Regulations sets out a table of supplies that are specifically identified as not being input taxed financial supplies. These supplies will be taxable provided that they are not incidental financial supplies (discussed below) and provided that the general requirements of a taxable supply are satisfied.
In the event of any conflict between regulations 40-5.09 and 40- 5.12, regulation 40-5.12 will prevail – that is, the supply not be an input taxed financial supply.
Incidental financial supplies
Pursuant to regulation 40-5.10 of the GST Regulations, even if a supply is not a financial supply pursuant to regulation 40-5.12, it may be input taxed as an incidental financial supply where it is supplied directly in connection with a financial supply.
In order for a taxable supply to be supplied directly in connection with a financial supply, the taxable supply must be:
• incidental to the financial supply;
• supplied, at or about the same time as the financial supply, but not for separate consideration; and
• usually supplied together with the financial supply in the ordinary course of the supplier’s enterprise.
The Australian Taxation Office has provided detailed guidance on its views on many issues relating to financial supplies in a public ruling, GSTR 2002/2, including:
• those supplies that will be input taxed financial supplies;
• those supplies that will be excluded from being input taxed financial supplies under regulation 40-5.12;
• those acquisitions that will be reduced credit acquisitions; and
• the requirements for a supply to be an incidental financial supply.
5.8.4 Reverse charging
In most cases, it is the entity making the supply that will be liable to remit any GST payable on that supply. However, the GST law provides that in some cases the recipient may choose to assume the supplier’s GST liability and in other cases, the GST law imposes a liability to remit GST on the recipient. The latter case is particularly relevant for securitisations in which services are provided from entities outside Australia. Under Division 84 of the GST Act, an entity that is registered for GST purposes in Australia may be liable to remit GST on supplies that it receives where:
• the supply that is made to that entity is not connected with Australia; and
• the supply would not have been GST-free or input taxed if it had been connected with Australia; and
• the entity acquires the supply solely or partly for the purpose of an enterprise that it carries on in Australia, but not solely for a creditable purpose; and
• the supply is for consideration.
Where these conditions are met, the recipient will be liable to GST equal to 10 percent of the amount paid for the relevant acquisition.
Notably, this liability may also be imposed on transfers (not amounting to supplies) between branches of the same entity – such as the provision of broking services to an Australian branch by a branch of the same entity in another country.
5.8.5 Registration under the GST Act
In order for an entity to make taxable supplies, financial supplies and creditable acquisitions, the entity must be registered or required to be registered under the GST Act. Pursuant to section 23-5 of the GST Act, an entity is required to be registered if it makes supplies which are connected with Australia in the course of carrying on its enterprise and its annual turnover as defined in section 188-10(1) of the GST Act, is or exceeds the registration turnover threshold of $50,000.
However, notably the value of any input taxed supplies made by the entity are excluded from its turnover for the purposes of this calculation.
Provided that an entity is carrying on an enterprise, it may elect to register if its turnover is below the mandatory registration threshold. Failure to register an entity within 21 days of the entity becoming required to be registered is an offence, liable to an administrative penalty under section 228-40 of Schedule 1 to the Taxation Administration Act .
Relevant definitions
There are a number of important definitions to be considered in determining whether or not an entity is entitled to be registered under the GST Act:
• “ connected with Australia” is specifically defined in section 9- 25 of the GST Act and depends on whether the supply is of goods, real property or anything else (eg. a supply of anything other than goods or real property is connected with Australia if either the thing is done in Australia, or the supplier makes the supply through an enterprise that the supplier carries on in Australia);
• “ entity” is defined in section 184-1 of the GST Act and includes all kinds of legal persons, as well as legal constructs such as trusts and partnerships;
• “ carrying on” an enterprise is defined in section 195-1 of the GST Act to include the doing of anything in the course of the commencement or termination of the enterprise;
• “ enterprise” is defined in section 9-20(1) of the GST Act to include an activity, or series of activities, done in the form of a business, or in the form of an adventure or concern in the nature of trade; and
• “ annual turnover” in relation to meeting the annual turnover threshold is specifically defined in section 188-10(1) of the GST Act in terms of “current annual turnover” and “projected annual turnover”. Current annual turnover is the sum of the value of all the supplies the entity has made, or is likely to make, during the 12 months ending at the end of a particular month, and projected annual turnover is the sum of the value of all of the supplies the entity has made, or is likely to make, during a particular month and the next 11 months. However, supplies that are input taxed, not made for consideration, not made in connection with an enterprise that the entity carries on, and not connected with Australia are disregarded in those calculations.
Registration of a securitisation trust
Where a trust structure is used as the securitisation vehicle, the trust will generally constitute an entity that carries on an enterprise for the purposes of registration under the GST Act. This is despite the fact that such a trust usually would not have independent resources other than assets being securitised which are dedicated to the financial requirements of the relevant securities. However, the trust will have been created for commercial reasons, and subscriptions to the trust, usually in the form of marketable securities, are sold via marketing activity to attract funds. Those characteristics are indicators of commerciality which together entitle the trust to register under the GST Act. It should also be borne in mind that a trust and a trustee (in its capacity of trustee of the trust) are considered to be separate entities for GST purposes, and therefore the trustee is able to make supplies to the trust.
5.8.6 Typical GST outcomes in a securitisation structure Set out below are the general GST implications of typical transactions which are made by entities involved in a securitisation structure:
• management services: a taxable supply
• the creation and servicing of a mortgage: a financial supply • the issue of a debt security: a financial supply
• the transfer of a debt or an interest in a debt: a financial supply
• the issue of units in a trust: a financial supply.
However, it should be borne in mind that each transaction document should be specifically analysed to determine the GST implications of supplies which will be made pursuant to that document. The Australian Taxation Office has published its views on some of the GST consequences arising under a typical securitisation arrangement (including the availability of any Reduced Input Tax Credits) in GSTR 2004/4 Goods and Services tax: assignment of payment streams including under a
securitisation arrangement. 5.8.7 Conclusion
As a transaction tax, management of GST is critical within the securitisation structure. This will include:
• appropriate classification of the supplies that are being made;
• a determination of whether input tax credits or reduced input tax credits will be available for the acquisition of any taxable supplies; and
• ensuring entities within the structure are entitled to be registered for GST purposes.