Issue
Is the entity, a supplier of goods, 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 acquires credit from a client and pays 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 acquires credit from a client and pays interest.
Facts
The entity is a supplier of goods in Australia and is registered for goods and services tax (GST). As part of its enterprise, the entity allows a client to deposit money with it, which the client can use at a later stage to purchase goods from the entity. The entity has use of the money until the client requires it. The entity pays interest to the client on any credit balance.
The client is registered for GST and is carrying on an enterprise in Australia.
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'. Under Part 2 of Schedule 7 of the GST Regulations, borrowing and lending, including establishing, maintaining and discharging loans are examples of financial supplies that are relevant to Item 2.
In this case, the entity acquires an interest in a debt when the client deposits money with it because the entity has an obligation to repay these amounts at a later stage. This acquisition of an interest in a debt is covered by Item 2. The interest paid by the entity to the client is consideration for the acquisition of this debt.
In addition, the acquisition 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 was the property of the client immediately before the supply, the client is a financial supply provider in relation to that interest.
Subregulation 40-5.06(2) of the GST Regulations provides that an entity that acquires the interest is also a financial supply provider of the interest. Therefore, in this case, the entity would also be a financial supply provider because it acquired the interest in the debt from the client.
As all of the requirements of subregulation 40-5.09(1) of the GST Regulations have been satisfied, the acquisition of an interest in a 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 acquires credit from a client and pays interest.