In mid August, the Treasurer released a consultative paper on the application of the GST to financial services. Funds managers, life and general insurers, trustees of super funds and financial planners are now responding to this proposals which are planned to come into force on 1 July 2000.
In mid August, the Treasurer released a consultative paper on the application of the GST to financial services. Funds managers, life and general insurers, trustees of super funds and financial planners are now responding to this proposals which are planned to come into force on 1 July 2000.
What is important is that the process will need to be decisive, market sensitive and expeditious, otherwise the financial services will not be in a state of readiness come the GST start-date.
The GST was first announced in the weeks leading up to the 1998 election in the A New Tax System (ANTS) document. At that time, the Government indicated that in line with overseas practices financial services would be input taxed because of the difficulties in taxing the value added by way of a financial intermediaries margin. However, the ANTS document did signal the possibility of full taxation of transac-tions involving explicit fees. For reasons of simplicity, certainty and lower compli-ance costs, IFSA has maintained that input taxing should apply to all financial serv-ices transactions.
It is useful to briefly outline the three taxing regimes in the Government’s latest pa-per, namely:
? Input taxed
? Taxable with reduced input tax credit
? Taxable without reduced input tax credit
Under the input taxed approach, the financial institution does not include a GST in the final price, nor is there an opportunity to claim a credit for any GST paid on the inputs — hence the name input taxed. In this case, the shareholders of the financial institution wear the cost of any GST paid, rather than the consumer, unless the service provider decides to pass on some of these costs to customers through increased charges. How-ever, any exploitative passing on of GST costs is likely to by reviewed by the ACCC.
Under the Government’s current paper, life insurance premiums for investment prod-ucts with death and permanent disability cover components (below a yet to be defined ‘de minimus threshold’) would be input taxed. Similarly, the capital contributions for unit trusts and creation of a right or interest under a superannuation fund will also be input taxed.
The second option, taxable with reduced input tax credit, requires the financial insti-tution to include GST in the final price. In addition, there are two types of credits against such a GST liability — a tax credit available to the supplier where GST is paid on inputs (calculated as 1/11 of the purchase price) and a reduced input tax credit (RITC), which applies to the purchaser of qualifying financial services.
Financial planning fees or commissions are classified as taxable with RITC, as are life insurance premiums for risk cover. Investment portfolio management will also be taxed under this method. Effectively, this brings the management of wholesale and retail unit trusts under the full GST with RITC regime.
According to the consultation paper, the RITC has been introduced to address the po-tential bias against outsourcing of particular services. Accordingly, the rate for the RITC for certain financial supplies will be set at a rate that most closely approximates the percentage of value add in the final stage of the production process. The calcula-tions in the paper are based on a 70 per cent RITC.
Of course, using a single crediting rate will ultimately favour some businesses over others, but simplicity probably leads you to the single rate solution. For this reason, it is essential that the final rate proposed be one that treats as many businesses as possi-ble, fairly; and in this respect, IFSA is working with its members to ascertain what an appropriate RITC percentage should be.
Ther third type, taxable without reduced input tax credit, in effect means fully GST taxable. Under this regime, the full GST is included in the final price to the consumer and the financial institution claims a credit on all GST paid on inputs to produce the financial service. The purchase of risk cover on a car or house is an example of a fully GST taxable service.
Currently, the IFSA GST implementation team, under the leadership of Michael Brown from BT Financial Group, is developing a detailed response to the Treasurer’s paper. The IFSA response will no doubt canvas IFSA’s preference to travel down the input taxing route, as under this arrangement there would be only two regimes to ad-minister, not three. Furthermore, the IFSA approach avoids having to set a possibly artificial RITC rate. It would also deliver lower compliance cost outcomes and largely avoid the somewhat arbitrary approach to classifying the various supplies.
IFSA will also be calling for all life insurance products with a savings and investment element, regardless of the size of their risk component, to be treated as input taxed. Additionally, the submission will identify those products and services which have been treated in such a way as to give other products a competitive advantage eg wrap accounts have been given a different treatment to master funds, notwithstanding the fact that their market and intended regulatory characteristics are similar.
The Government paper can be found at http://www.treasury.gov.au
Richard Gilbert is the deputy chief executive officer of the Investment and Financial Services Association.
