If you engage in financial supplies, it is important that you actively report relevant information about these transactions on your Business Activity Statement (BAS).
This reporting includes disclosing the income you earned from selling financial supplies and the expenses you incurred or were liable to pay for purchases used in providing these financial services.
In this article
- What Are Financial Supplies
- Non-Financial Institutions Making Financial Supplies
- Claiming Input Tax Credits on Financial Supplies: Four Key Exceptions
- Apportionment for Mixed Supplies
- GST Record Keeping for Financial Suppliers
What Are Financial Supplies?
You must be aware that financial supplies include a range of specific activities listed in the GST regulations. Examples of these activities include:
- Providing lending or borrowing services, such as offering loans or credit facilities
- Offering goods on credit to your customers and charge a fee for this service
- Activities related to creating, maintaining, or closing your customers’ bank accounts
- Providing life insurance policies or related financial products
- Engaging in trading or dealing of debt, equity, unit trusts, partnership interests, or futures contracts
Thus, all these activities must be actively reported as financial supplies in your GST reporting.
Non-Financial Institutions Making Financial Supplies
You can make financial supplies even if you are not a financial institution.
For example, even though you operate a department store and are not classified as a financial institution, you have the capability to provide your customers with credit and charge interest on that credit.
These transactions are considered input-taxed financial supplies. In other words, even though you are not a specialized financial entity, you can still offer financial services like extending credit facilities, and these services are subject to specific tax treatment known as input-taxed supplies.
Claiming Input Tax Credits on Financial Supplies: Four Key Exceptions
When dealing with financial supplies, businesses have specific tax rules concerning GST credits.
Financial supplies are generally categorized as input taxed, meaning businesses do not pay GST on these supplies and cannot claim GST credits for the GST included in the purchase price of goods or services used for providing financial supplies.
However, there are four important exceptions that allow businesses to claim GST credits for certain purchases used in making financial supplies.
Exception 1: Conducting Business Outside Australia
If your business carries out financial supplies through a business operation or a part of a business located outside Australia, you can actively claim the GST credit on purchases used for these international financial supplies.
Exception 2: Financial Acquisitions Threshold
The financial acquisitions threshold plays a vital role in determining a business’s eligibility to claim GST credits on its financial acquisitions made within a 12-month period.
Two tests are these to evaluate this threshold, and either test can lead to exceeding the limit. Both tests focus on financial acquisitions related to making financial supplies, excluding borrowings.
The evaluation includes all financial acquisitions made over the past 12 months, including both current acquisitions and estimated future acquisitions.
Test 1: Current Financial Acquisitions
To assess whether a business surpasses the financial acquisitions threshold, this test takes into account the financial acquisitions made during the current month and the preceding 11 months.
These acquisitions should not be utilized for input-taxed sales or used partly for private or domestic purposes.
Test 2: Future Financial Acquisitions
The second test examines a business’s financial acquisitions for the current month and the subsequent 11 months.
Future financial acquisitions must be estimated. Similar to the first test, these acquisitions should not be used for input-taxed sales or utilized partly for private or domestic purposes.
Threshold Exceedance Criteria:
To determine if a business exceeds the financial acquisitions threshold in a given month, it must compare the GST credits eligible for both current and future financial acquisitions with the following criteria:
- Before 1st July 2012: The threshold amount is $50,000 in the relevant 12-month period.
- On and after 1st July 2012: The threshold amount is $150,000 in the relevant 12-month period.
Percentage of Total Input Tax Credits
- The business must calculate the GST credits it could claim for all purchases, including financial acquisitions, during the relevant 12-month period.
- If the amount of GST credits for current or future financial acquisitions exceeds 10% of the total GST credits from all purchases, the business has surpassed the threshold.
Exception 3: Purchases Related to Borrowing
Businesses can actively claim GST credits on purchases directly linked to making a financial supply that involves borrowing, as long as the borrowing is associated with supplies not considered input taxed.
This allows businesses to recover a portion of the GST paid on relevant expenses incurred during borrowing activities.
Concession Limitations for Australian Authorised Deposit Taking Institutions (ADIs):
As of 1st July 2012, a concession that previously allowed Australian authorised deposit-taking institutions (ADIs), such as banks, building societies, and credit unions, to claim GST credits on borrowing-related purchases is no longer applicable under specific circumstances.
Specifically, the concession does not apply if the ADI makes a financial supply consisting of a borrowing through a deposit account. In such cases, these ADIs are ineligible to claim GST credits on purchases associated with that particular borrowing.
Perspective from the Lender
From the lender’s standpoint, purchases related to the loans they provide are considered financial acquisitions. As financial acquisitions, these purchases are eligible for claiming GST credits, subject to any applicable GST rules and regulations.
Exception 4: Reduced Credit Acquisitions
Under this arrangement, businesses can generally claim 75% of the GST included in the purchase price of reduced credit acquisitions.
Categories of Reduced Credit Acquisitions
Reduced credit acquisitions include various categories, each aligned with distinct financial services, enabling businesses to claim a partial GST credit for eligible items used in financial supplies. The list is as follows:
- financial services related to managing accounts and processing transactions, facilitating efficient cash flow and banking operations.
- payment processing and secure fund transfers, ensuring smooth financial transactions.
- services related to securities transactions and unit registry, ensuring accurate record-keeping and management.
- financial services related to borrowing and lending, facilitating the smooth flow of funds through loan arrangements.
- financial services provided by credit unions, offering specialized financial products and services to their members.
- debt collection services aim to recover outstanding debts on behalf of businesses.
- financial services that utilize assets as collateral for obtaining funds, enabling efficient asset-based financing.
- trade finance services that support businesses engaged in international trade.
- purchases linked to capital markets and financial instruments services, including derivatives.
- reduced credit acquisitions related to funds management services.
- insurance services, including brokerage, qualify as reduced credit acquisitions.
- trustee and custodial services that ensure the secure holding and management of assets and investments on behalf of beneficiaries.
- supplies made to recognised trust schemes, providing essential financial services within a regulated framework.
- monitoring services that involve the supervision and oversight of financial activities to ensure compliance and optimal performance.
Apportionment for Mixed Supplies
To ensure equitable allocation of GST credits, you should follow fair and reasonable apportionment principles. This involves establishing a methodology that justifiably distributes GST credits between input taxed and non-input taxed supplies while considering the specific characteristics of your financial operations.
Develop an Effective Decision-Making Methodology
You need to create a clear decision-making methodology to accurately allocate GST credits. This methodology should include comprehensive guidelines and criteria to determine the direct relation of acquisitions and expenses to input taxed supplies or non-input taxed supplies.
To implement a robust decision-making methodology, consider various criteria such as
- the nature of the financial supply
- customer agreements
- the intended use of acquisitions
For instance, acquisitions directly linked to providing input taxed services, like life insurance, would not be eligible for GST credit claims.
Conversely, acquisitions related to services like transaction banking, unrelated to input taxed supplies, are eligible for GST credit claims.
Ensure Regular Review and Documentation
Regularly reviewing and documenting your apportionment decisions are important. This practice ensures transparency and compliance with GST regulations, providing evidence to support the allocation of GST credits and justifying the reported figures in your BAS.
GST Record Keeping for Financial Suppliers
As financial suppliers, you must prioritize the accuracy of your GST reporting. Maintaining good records is essential for instilling confidence in your reporting practices and allowing a thorough assessment of your compliance.
The GST Financial Services and Insurance strategy outlines specific priority issues where you need to meet clear expectations regarding record-keeping. These are discussed below:
1. Determine the Extent of Creditable Purpose
One of the priority issues involves accurately determining the extent of creditable purpose for your GST credit claims.
You must maintain detailed records that clearly demonstrate how and to what extent your acquisitions relate to making taxable supplies, as these impact the GST credits you can claim.
2. Address Reduced Credit Acquisitions
Recording reduced credit acquisitions is equally important for you as financial suppliers. By keeping comprehensive records of these acquisitions, you can claim a partial GST credit and ensure compliance with GST regulations.
3. Understand the Reverse Charge for Cross-Border Supplies
As financial suppliers involved in cross-border transactions, you must maintain well-documented records regarding the reverse charge mechanism. This is necessary to correctly report GST payable and claim GST credits for these transactions.
4. Properly Classify Your Supplies
Accurate classification of supplies is another priority issue. You must maintain precise records to correctly categorize your supplies as taxable, GST free, or input taxed, ensuring accurate reporting and GST treatment.
5. Handle Significant or Unusual Transactions
You should meticulously document significant or unusual transactions to facilitate transparent reporting and address any potential compliance concerns. Robust records offer insights into the specific nature and circumstances of these transactions.
Thus, by addressing these concerns, you can proactively address compliance concerns and contribute to a transparent and efficient GST reporting process.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.