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GST and Customer Owned Banking Institutions

GST and Customer Owned Banking Institutions

Rod Dunn discusses the recent Practical Compliance Guideline released by the ATO that aims to minimise compliance costs for Customer Owned Banking Institutions.

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Senior Manager, Tax

KPMG Australia

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On 8 September 2017, the Australian Taxation Office (ATO) published Practical Compliance Guideline 2017/15 (PCG).

The PCG applies to Customer Owned Banking Institutions (COBIs) and provides that the Commissioner of Taxation (Commissioner), will accept, as a matter of practical administration, that COBIs can use a ‘safe harbor’ rate of 18 percent to recover the Goods and Services Tax (GST) incurred on:

  • all of its partly creditable costs (being costs that don’t solely relate to making taxable, GST-free or input taxed supplies) or
  • all of its costs (other than those costs where GST credits may otherwise be denied), but only where it is not possible for the COBI to identify costs that solely relate to making taxable, GST-free or input taxed supplies.

It is important to note that the 18 percent safe harbor rate cannot be used on costs where an input tax credit is not otherwise available. For example, typically no input tax credit is available for GST on legal costs associated with home loan applications.

Reduced Input Tax Credits (RITC) will continue to be available for costs that qualify under the GST regulations.

The stated purpose and intent of the PCG is to remove the complexity and minimise compliance costs for COBIs. Consequently where the 18 percent GST recovery rate is used in accordance with the PCG, the Commissioner will not devote compliance resources to review GST credit claims. However, the Commissioner reserves the right to verify whether the COBI has applied the rate in accordance with the Guideline and to verify whether the COBI has complied with other requirements specified under the GST law.

It is important to note that the use of the 18 percent GST recovery rate is not mandatory for COBIs, and only applies to eligible costs incurred in tax periods beginning 1 July 2017 onwards.

Consequently, COBIs can continue to use their existing apportionment method(s) or apply a fair and reasonable alternative method both prospectively and retrospectively (within the four time limit) to calculate their GST recovery rate.

It should also be noted that the PCG does not permit COBIs to adopt a selective approach of apportioning one class of eligible / partly creditable costs on the basis of the safe harbor rate and another class on the basis of the continued use of an existing apportionment method. Rather, if the 18 percent GST recovery rate option is chosen, the COBI must apply that rate to all of its eligible / partly creditable costs.

We recommend that COBIs consider the benefit of applying the 18 percent GST recovery rate in light of their particular circumstances taking note that COBIs:

  • may be entitled to recover GST at a rate higher than 18 pecent because of the nature of their enterprise activities
  • cannot use the safe harbor rate to calculate GST credits for costs incurred in tax periods prior to its use and 
  • will continue to be subject to ATO verification activities due to the contentious nature of determining whether costs are incurred solely or partly for the purpose of making input taxed supplies.

© 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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