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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.