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These related parties need to ensure they are accurately reporting GST and claiming input tax credits under Division 72 of the GST Act.
In recent times, our GST team has undertaken a substantial number of reviews for entities making supplies to related financial supply providers. Overall, these reviews have indicated that these businesses do not understand, or are not aware of, the significant implications of Division 72 on their business.
Financial supply providers typically have restrictions on recovery of input tax credits. Due to the nature of the relationships between financial supply businesses, it would be possible for businesses to acquire supplies (such as marketing and IT services) from associated parties for little or no consideration. Specifically, the purpose of Division 72 is to ensure that these businesses cannot use their corporate relationships to reduce their GST liability.
Division 72 introduces the concept of a deemed supply – essentially bringing supplies into the GST regime that would otherwise be ignored due to no consideration being provided. The impact of this is that supplies between associates are treated as if they occurred at market value. This is irrespective of the consideration actually paid (which is often nil, or nominal). Therefore, where a taxable supply is made by an associate to a financial supply provider, GST is payable by the financial supply provider at 10% of the market value of that supply.
In addition, Division 72 stipulates that the financial supply provider can only recover the GST payable on this deemed supply in the same way as if it were any other acquisition, which in most cases will be restricted.
These rules do not apply to entities within the same GST group.
Division 72 applies to associates of financial supply providers that make supplies to those related parties for no, or less than market value, consideration. For example, a holding company providing marketing services to an associated financing entity.
Broadly, an associate is a business that either has control or significant influence over another business.
Due to the complexities of GST obligations for financial services businesses, this is an area of focus for the Australian Taxation Office (ATO). It is therefore essential that financial supply providers, and their associates, review and understand the implications of Division 72 of the GST Act on their businesses.
Entities that provide services to associated financial supply providers must identify these supplies and determine an appropriate market valuation method that is acceptable by the ATO. Financial supply providers acquiring such supplies must consider their entitlement to claim input tax credits on the deemed supply.
Division 72 is a complex area of GST law and we are experienced in determining and mitigating the implications on businesses. Should you have any queries on how Division 72 may impact you, or if you are interested in reviewing your existing GST position, please contact us.
