Issue
Is the entity, a business operator, making a financial supply that is input taxed under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it provides credit to a financial institution and receives interest?
Decision
Yes, the entity is making a financial supply that is input taxed under subsection 40-5(1) of the GST Act when it provides credit to a financial institution and receives interest.
Facts
The entity is a business operator in Australia. The entity has a bank account with a credit balance with a financial institution. The entity receives interest on the funds held in the bank account.
The entity is registered for goods and services tax (GST).
The financial institution is an Australian ADI (authorised deposit-taking institution). The financial institution is carrying on an enterprise of providing banking services in Australia and is registered for GST.
Reasons for Decision
Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).
Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if: • the provision, acquisition or disposal is: - for consideration; - in the course or furtherance of an enterprise; - connected with Australia; and • the supplier is: - registered or required to be registered for GST; and - a financial supply provider in relation to the supply of the interest.
Firstly, it is necessary to determine whether the entity is providing, acquiring or disposing of an interest in or under an item mentioned in subregulation 40-5.09(3) or (4) of the GST Regulations.
Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists 'a debt, credit arrangement or right to credit, including a letter of credit'.
Schedule 7 to the GST Regulations provides examples of financial supplies for the purposes of Item 2. Under Part 2 of Schedule 7 to the GST Regulations, borrowing and lending, including establishing, maintaining and discharging loans are examples of financial supplies for the purposes of Item 2.
The entity operates a bank account made available by a financial institution that is an Australian ADI (authorised deposit-taking institution). The entity's act of depositing amounts into the bank account has created an interest in a debt (being the loan of the money deposited). This provision of an interest in a debt would be covered by Item 2. The interest received by the entity would be consideration for the provision of an interest in the debt.
In addition, the provision of this interest is made in the course or furtherance of an enterprise, it is connected with Australia and the supplier, the entity, is registered for GST. Therefore, it is only necessary to determine if the supplier is a 'financial supply provider' in relation to the supply of the interest.
A financial supply provider is defined under subregulation 40-5.06(1) of the GST Regulations as an entity in relation to the supply of an interest that was: • immediately before the supply, the property of the entity; or • created by the entity in making the supply.
As the interest in the debt (being the loan of the money deposited) was the property of the entity immediately before the supply, the entity is a financial supply provider in relation to that interest.
Therefore, as all of the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied, the provision of an interest in the debt by the entity is a financial supply.
As such, the entity is making a financial supply that is input taxed under subsection 40-5(1) of the GST Act when it provides credit to a financial institution and receives interest.