In general terms acquisitions that relate to making input taxed supplies are not made for a creditable purpose and therefore the entity making the acquisition is not entitled to an input tax credit for the GST imposed on the supply. Accordingly, a managed investment fund that only makes input taxed financial supplies, would not be entitled to input tax credits for the acquisitions it makes of supplies made by the relevant responsible entity in administering the fund in accordance with the fund’s Constitution and PDS.

However in certain circumstances, the person making the acquisition is entitled to a Reduced Input Tax Credits (RITC) for certain types of acquisitions as specified in the regulations. The percentage to which the input tax credit is reduced is generally 75%. However for certain supplies acquired by a recognised trust scheme the percentage to which the input tax credit is reduced is 55% (“Item 32 Supplies”).

This may raise a question of what is the correct RITC where there is a lump sum fee charged for supplies to a recognised trust scheme.

The Commissioner has issued a draft determination to deal with this problem. In the determination the Commissioner says that in calculating its entitlement to a RITC, it is necessary for the managed investment fund to determine the extent to which its acquisition is covered by the Item 32 Supplies (in which case the percentage of the RITC is 55%) and the extent to which its acquisition is covered by other RITC items (in which case the percentage of the reduced input tax credit is 75%). The fund can apply any fair and reasonable methodology to determine the value of the part to which Item 32 Supplies applies and the value of any other part to which other RITC items apply.

The Commissioner also says that the ‘deductive benchmarking methodology” is a fair and reasonable methodology where it reasonably approximates the respective values of the parts of the acquisition. Under this methodology, the arm’s length value of these parts is calculated by reference to the market rates of providing the services to a broadly comparable managed investment fund (with respect to the type of fund and portfolio risk).

These market rates are typically expressed as a number of basis points which are applied against the total asset value of the managed investment fund. Once these amounts are deducted from the single fee, the remainder of the fee is allocated to the part of the acquisition that is covered by the Item 32 Supplies.

The Commissioner is also of the view that a methodology that involves benchmarking the value of the part of the acquisition to which the Item 32 Supplies applies by reference to the fees charged for what is commonly referred to as an “‘RE for hire” service to a broadly comparable managed investment fund (with respect to the type of fund and portfolio risk) also can form the basis of a fair and reasonable methodology where the part of the acquisition to which Item 32 Supplies applies reasonably approximates the services provided by the RE for hire.