On 21 December 2011 the Commissioner issued the following Rulings and Determinations – in an unwelcome Christmas present for financial suppliers, the Commissioner’s draft view effectively halves entitlements to input tax credits for acquisitions made in respect of foreign currency transactions which were found to be GST-free by the High Court in Travelex.

GSTD 2011/D5 – Goods and services tax: Are acquisitions related to an entity’s retail foreign currency exchange transactions with customers in Australia made solely for a creditable purpose under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

• the draft Determination provides guidance on the creditable purpose of acquisitions relating to currency exchange transactions, in light of the decision of the High Court in Travelex Ltd v Commissioner of Taxation [2010] HCA 33.  I imagine that the draft Determination will cause much discussion because it effectively halves the input tax credit entitlement of suppliers.
• The Determination distinguishes between “outbound transactions” (where the the currency is intended for use outside Australia) and “inbound transactions” (where the currency is intended for use in Australia).  For both transactions, the entity is regarding has having made two supplies, being currency in exchange for currency (FX in exchange for AUD – outbound; AUD in exchange for FX – inbound) and also an input taxed financial supply (an acquisition supply) of the interest in the AUD and FX respectively
• For “outbound transactions”, acquisitions by the supplier relating to those transactions “relate equally” to the GST-free supply of the foreign currency and input taxed “acquisition supply” of the interest the AUD.  This acquisition supply is seen as a supply made in relation to rights, but that supply is not GST-free as the rights are for use in Australia
• The effect of this determination is that suppliers input tax recovery on foreign exchange transactions of the type considered in Travelex will be halved – the Commissioner acknowledges a number of alternative views (all of which result in a complete, or higher, input tax recovery) but rejects them in favour of his “preferred view” – the rejected alternative arguments include:

1. acquisitions relate more directly to the supply of the currency than the acquisition supply, as the acquisition supply is merely the means of payment or that is the purpose from the customer’s point of view;
2. there is no acquisition supply because there is no related ‘provision’ financial supply
3. the acquisition supply is part of a composite supply, being incidental to the supply of the FX
4. the acquisition supply is a supply in relation to the rights attaching to the FX and is GST-free
5. The fully of FX is always a supply in relation to rights for use outside Australia

GST Ruling GSTR 2002/2DA – Goods and services tax:  GST treatment of financial supplies and related supplies and acquisitions

• This draft addendum seeks to amend GSTR 2002/2 to reflect the decision of the High Court in Travelex

GST Ruling GSTR 2003/8A2 – Goods and services tax: supply of rights for use outside Australia – subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)

• This addendum amends GSTR 2003/8 to reflect the Commissioner’s view on the types of supplies that fall within the expression ‘a supply that is made in relation to rights’ in item 4 of the table in ss 38-190(1) of the GST Act.
• Following the decision in Travelex, the Commissioner considers  that Item 4 is capable of covering the following three categories of supplies:

1. supplies identified in paragraph 9-10(2)(e);
2. supplies of things that derive their value exclusively, or almost exclusively, from rights; and
3. supplies of services directly connected with rights.

• with regards to (3) above, notwithstanding the broad scope of the words “in relation to”, the Commissioner considers that a “direct connection” is required – this may be a controversial approach.  The basis for the Commissioner’s view appears to be that “the context and the broad policy to tax domestic consumption expenditure both suggest that a reasonably close relationship must exist between a service and a right for the service to be covered by Item 4.  If this were not the case, and a more remote connection were sufficient, services supplied between Australian residents that would ordinarily be thought of as being consumed in Australia could, because of the remote connection, be rendered GST-free.”