JOINT SUBMISSION BY. We refer to Draft Goods & Services Tax Ruling GSTR 2001/D9 and note as follows:

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1 JOINT SUBMISSION BY The Taxation Institute of Australia, The Institute of Chartered Accountants in Australia, CPA Australia and The National Institute of Accountants Draft Taxation Ruling GSTR 2001/D9 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions We refer to Draft Goods & Services Tax Ruling GSTR 2001/D9 and note as follows: 1. Concept of Acquisition Supply The Draft Ruling discusses the implications flowing from use of the word acquisition within the definition of financial supply (as contained in Regulation ) and develops the concept of an acquisition supply. For reasons noted below, we doubt whether this concept is consistent with the scheme of the legislation considered as a whole. (b) The term supply would not ordinarily extend to the acquisition of anything and is probably inconsistent with that concept (because it is the very opposite of it). The concept of acquisition supply is developed entirely on the basis of an interpretation of the regulations for Division 40. It is doubtful whether the Regulations can properly add transactions to the definition of supply which are not consistent with the principles contained in the Act itself. (c) If the Regulations for Division 40 are viewed in isolation, it is probably correct to say that (read as a whole) they do show an intention to treat the acquisition of a relevantly defined interest as a (fictional) financial supply. This is particularly evident from the definition of financial supply provider which includes the entity that acquires that interest. However, the purposes for which this fiction is intended to operate, the implications flowing from it, and the reconciliation with the rest of the Act are far from clear (and remain obscure despite the ruling). (d) Given the fictional nature of the supply, it is not easy to identify the consideration provided for an acquisition supply. The scheme within the Act itself contemplates that consideration is received by the supplier. This is evident (for example) from the way in which tax is calculated by reference to the consideration (section 9-75). The example at paragraph 36 considers an acquisition of shares for $2,000 paid by the acquirer (McCulloch). It concludes that the consideration for the acquisition supply is the sum of $2,000 paid by McCulloch. That is to say, it suggests that consideration for an acquisition supply moves from the supplier. It is doubtful whether this reconciles with the scheme of the Act as a whole. (e) By way of further example, when applying the financial acquisitions threshold (in Division 189), what acquisitions are to be regarded as relating to making of the (fictional) financial supply? Can you say that because the supply is fictional, there are no acquisitions which in

2 (f) fact relate to the making of the supply? Alternatively, is it necessary to say (for example) that the consideration provided by the acquisition supplier is to be analysed for this purpose? Because the Draft Ruling treats many transactions as giving rise to two or four financial supplies (paragraph 37), the latter view (noted in paragraph (e)) appears to have potential to lead to a more rapid erosion of the threshold than might be expected from a common sense or substantive approach. (g) The concept of connection with Australia (discussed in paragraph 2) provides a further example of the difficulties in meshing the concept of an acquisition supply with the rest of the Act. (h) The exclusion of financial supplies consisting of borrowing (in section ) seems intended to mitigate the consequences of such analyses in relation to borrowings (in combination with provision for credits in section 11-15(5) where borrowings are used to make taxable supplies). However, the problem is wider than borrowings. For example, there are questions whether certain kinds of bill facility (where the party receiving funds is not the issuer of the note) can fall within the definition of borrowing. 2. Concept of Connection with Australia A further question (canvassed in the Draft Ruling) concerns the way in which one analyses whether an acquisition supply is relevantly connected with Australia for the purposes of section 9-25(5). This provides that a supply of anything other than goods or real property is connected with Australia if either: (b) the thing is done in Australia; or the supplier makes the supply through an enterprise that the supplier carries on in Australia. As the Draft Ruling itself recognises (paragraph 41), the acquisition of a financial interest might never be connected with Australia and might therefore never be a financial supply (since such a connection is required by Regulation ). It is not easy to see how the acquisition itself is to be characterised as the thing supplied for the purpose of section 9-25(5). 3. Concept of Interest The Draft Ruling discusses the concept of interest in relation to a financial supply (paragraphs 72 onwards). It is necessary to identify an interest in or under one of the listed items in order to find a financial supply. The definition of interest (in Regulation ) defines the meaning of interest as anything that is recognised in law or in equity as property in any form. It thus confines the meaning of interest to rights in the nature of property. (b) Although the primary list of subject matter of a financial supply (in ) largely focuses on items which could have a proprietary character (at least if viewed from one side of the transaction but even then often not from the other side), the secondary list in Schedule 7

3 (c) (d) (e) is of a different character. Many of the examples of a Financial Supply listed in Schedule 7 appear to involve the provision of services rather than creation of a proprietary right. Paragraphs 73 and 81 appear to suggest that all rights arising under a contract are interests in the relevant sense. Although that will generally be the case, it is far from clear that there is any universal rule to that effect, particularly given the absence of specific references to choses in action or other rights (or other relevant words) extending the concept of property as are found in the CGT legislation. In Case X47 90 ATC 382, the Commissioner successfully argued that a loss incurred on certain futures transactions was not a capital loss available under the CGT regime on the basis that the contractual rights to call payment under the futures transaction involved no acquisition or disposal of an asset in the relevant proprietary sense (cf. X85 90 ATC 615 reaching an opposite conclusion having regard to the chose in action wording) whether or not this decision was correctly decided, it illustrates some of the difficulties involved. The analysis of a Bank Account at paragraph 83 appears to assume that the rights in respect of a Bank Account include contractual rights against a Bank and also some proprietary right in respect of the account. However, it is likely that the only rights are contractual rights arising out of a debtor/creditor relationship. If the Regulations are to have the width contemplated by the Ruling (or perhaps intended by the Regulation), it is probable that the definition of interest needs to be expanded. This drafting issue is probably related to the drafting issue canvassed in paragraph Concept of Money for Money (b) The Ruling discusses the circumstances in which there is a supply of money (namely where it is supplied for a supply that is a supply of money) (paragraph 93). In this context, it makes the point that acquisition of a money order (for cash involves a money for money (as defined) exchange and analyses the matter as involving two supplies. For the purposes of this analysis, there is no discussion of the extent to which there are also concurrent acquisition supplies and (if so) what consideration is to be treated as having been received for the making of the acquisition supply. 5. Listing of Reduced Credit Acquisitions (b) Paragraphs 192 onwards deal with the way in which the Regulations defining reduced credit acquisitions are to be interpreted, and particularly the effect of the word including. The Ruling recognises that such wording may or may not (depending on context) list items which enlarge the meaning of the term. However, it goes on to conclude in effect that all uses of the word including within the list in section have no enlarging effect.

4 (c) It is doubtful whether such a universal construction should be applied throughout this particular Regulation. Thus (for example) if you consider item 9, the opening words may be limited to arrangements by a financial supply facilitator of provision, acquisition or disposal of interests in a security which are completed or consummated. However, consideration of the inclusory wording would lead to the conclusion that the making of orders or the arranging of a bid gives rise to a reduced input tax credit whether or not it leads to a consummated transaction. 6. Financial Supply Facilitators That the draft ruling takes a restrictive view of a financial supply facilitator (paragraphs 237 to 243), which is clearly important for RITC reasons. The regulations refer only to the facilitation of a financial supply. The draft ruling requires a close nexus where either the supply is made through an entity or the entity direct assists in the supply. There is little basis on which to restrict the concept as discussed in the draft ruling. 7. General Comments Annexed to this Submission are additional comments of a more general nature largely directed to the value of the draft as an explanation of the Rules. 8. Other Matters There is a range of matters in relation to financial supplies which are not dealt with in the Draft Ruling. For example: there are questions concerning the way in which the provisions dealing with partnership interests interface with the rest of the Act; (b) there are questions concerning the extent to which a dealing in the capital of a trust is input taxed (cf. item 10(d) in Regulation (3)); (c) there are questions concerning the extent to which the definition of financial supply presuppose a bipartite analysis (eg. if A contracts with B to procure the allotment of shares by C, is the supply by B a financial supply?).

5 Annexure 1 General Comments The first sentence in paragraph 12 appears to be incorrect and the second sentence attempts to correct this error. It is recommended that paragraph 12 be re-written to eliminate any confusion, e.g. by deleting the first sentence. Paragraph 15 contains a convoluted explanation of when reduced input tax credits are available. It is recommended that this paragraph be re-expressed as follows :- If you do not exceed the financial acquisitions threshold, you cannot claim reduced input tax credits. You may however, be entitled to input tax credits under Division 11. If you exceed the financial acquisitions threshold, a reduced input tax credit is available to the extent that the acquisition is for a creditable purpose. Specific Comments An early ruling which contains a number of comments in relation to financial supplies, especially supplies of the kinds which businesses other than financial institutions are likely to make, is GSTR 2000/19. It is recommended that this ruling should be listed at paragraph 5. Example 8 in paragraph 83 requires further explanation as to why the supply of a monthly bank statement for a fee is not a separate supply, especially when the service is so often optional these days. Having raised the issue of money orders at paragraph 95 it would be helpful if the ATO compared or contrasted the situation with vouchers of the kind covered by Section In particular, does the ATO consider the sale of such vouchers to be a financial supply? Clarity is required. In the unnumbered example referred to at paragraphs 109 to 110 an explanation of exactly what Wink Pty Ltd supplies to Nudge Pty Ltd would be useful. Also, paragraph 111 does not appear to flow logically from the preceding paragraphs. Example 16 at paragraph 127 contains a reference to the manner in which the invitations are made available to the general public. Is this crucial to the outcome? If so, than clarity is required. It would appear that Example 18 is not an example of separate consideration, given the conclusion which may be reached on a closer analysis. Clarity is required on this issue. Paragraphs 141 to 172 cover exports of financial supplies. It is recommended that a separate ruling for this topic would be ideal and then to cross-reference

6 the general ruling on financial supplies to the separate ruling?