Under current law it is possible for trustees to have single fee trustee arrangements that include the cost of services of other service providers. According to the Government this has led to some unintended GST consequences on the basis it advantages certain payment arrangements over others. This is because of the different input tax recovery rate that may apply depending on whether services are included as part of one fee arrangement or invoiced separately.
Under the proposed rules, certain services acquired by a "recognised trust entity" (for instance, trustee services) will not be eligible for a RITC at the full rate of 75%. This change may impact the net cost of fees incurred in certain trusts and fund arrangements.
The amending regulations also introduces changes relating to hire purchase arrangements, minor changes to the RITC provisions and clarify language used in relation to guarantees and indemnities.
Reduction in RITC rate for acquisitions made to recognised trust entities
Under the current law, trustee services acquired by a trust are eligible for an RITC at a rate of 75%. As at 1 July 2012, there will be a new category of RITC specifically for acquisitions made to a "recognised trust scheme". This category will apply to supplies acquired on or after 1 July 2012.
Under the new RITC category, supplies by certain trustees, responsible entities and other parties to a recognised trust scheme will only be eligible for a RITC at a rate of 55%. The definition of a recognised trust scheme includes a managed investment scheme, approved deposit fund, pooled superannuation trust, public sector and regulated superannuation funds (other than a self-managed superannuation fund) as defined by relevant law.
In some cases, the 55% rate may not apply to the extent individual components of the acquisition can be identified that satisfy certain excepted categories such as brokerage, monitoring and reporting, investment portfolio management and custodial services.
The new rule will not apply if the trustee entity only acts in that trustee capacity, and is not separately registered for GST in any personal capacity, for instance as an enterprise making taxable supplies to the trust. In that case the trust cannot claim a RITC for the trustee services supplied.
Securitisation trusts and mortgage trusts are also excluded, meaning no RITC can be claimed. However, RITCs may still be available for other services to those trusts in the usual way.
The effective net cost of trustee fees may increase as a result of the reduction in the effective RITC rate. Trustees and responsible entities will need to consider whether any amendments need to be made to trust or disclosure documentation and in relation to their fees.
A trust will need to determine whether it is eligible to claim an RITC under the new category. It will also need to account for two types of RITC rates when preparing Business Activity Statements (BAS).This is an added complexity, especially where a trust is already implementing a complex apportionment methodology.
Other changes introduced
Certain other minor changes were introduced:
- All components of hire purchase transactions will now be treated as taxation supplies;
- A RITC will now be available for supplies relating to life insurance, lenders mortgage insurance and transaction fraud monitoring services; and
- Clarification of the existing treatment for warranties, guarantees and indemnities under the GST Act.