ATO releases draft GST ruling on securitisation

By Andrew Sommer.

Key Points:
GSTR 2003/D6 indicates that the ATO is in broad agreement with industry practice.

The complexity and number of transactions that take place within a securitisation structure are guaranteed to lead to complex GST consequences. It would be wrong to pretend otherwise. However, in the more than three years since the implementation of the GST, the securitisation industry has learned to live with the GST. Now, the Australian Taxation Office has issued a draft GST ruling, GSTR 2003/D6, specifically addressing the GST consequences of the assignment of income streams in the securitisation context.

In many ways, the draft ruling is unremarkable in its content. For the large part, it confirms what has been observed to be standard industry practice - that is, that the assignment of an income stream is an input taxed financial supply. However, the value of confirmation that the basic premises on which the industry has proceeded conform to the ATO's views should not be underestimated.

In addition, the draft ruling provides some indication of areas in which the ATO will adopt a broad, purposive interpretation of the legislation and regulations - for example, the definition of "debt".

Of course, GSTR 2003/D6 is only in draft form. It is subject to change and is not a "ruling" on which taxpayers are entitled to rely. We will have to wait a little while yet for a concrete statement of the ATO's views.

Relevant provisions

The principal concern of the draft ruling is the interpretation of Item 3 of sub-regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999. Pursuant to Item 3, the provision, acquisition or disposal of an interest in or under a "debt, credit arrangement or right to credit including a letter of credit" will be capable of being a financial supply. In the context of securitisation arrangements, the question that arises is whether the assignment of an income stream will give rise to the provision acquisition or disposal of an interest in or under a debt.

Definition of a debt

The ATO adopts a very broad view of the circumstances that will give rise to the provision of interests in or under a debt. Notably, the ATO states that "the expression "interest in or under a debt" includes proprietary interests in present, contingent or future debts". The ATO goes on to consider these three categories of debts, which may be summarised as:

• Present debts - a presently existing right to be paid an ascertainable amount, whether or not that right is able to be exercised immediately. The eventual exercise of that right (barring repudiation) is certain;
• Contingent debts - a presently existing right that will become exercisable following the happening of another event. The eventual exercise of the right is not certain. The ascertainment of the amount of the debt may also be deferred until the happening of the event; and
• Future debts - these do not arise from any presently existing rights. The rights themselves may arise in the future. As such, they are future property. A right to future property is specifically identified as being an "interest": regulation 40-5.02.

- a presently existing right to be paid an ascertainable amount, whether or not that right is able to be exercised immediately. The eventual exercise of that right (barring repudiation) is certain;a presently existing right that will become exercisable following the happening of another event. The eventual exercise of the right is not certain. The ascertainment of the amount of the debt may also be deferred until the happening of the event; and - these do not arise from any presently existing rights. The rights themselves may arise in the future. As such, they are future property. A right to future property is specifically identified as being an "interest": regulation 40-5.02.

Characterisation of transactions

The approach taken by the ATO to common issues arising from the assignment of income streams is discussed in paragraphs 38 to 77 of the draft ruling. In summary:

• the assignment of the income stream will be an input taxed financial supply;
• the supply by the assignor of ancillary rights under the original transaction (including title to the underlying assets) in connection with the assignment of the income stream will constitute a composite supply and no GST will be payable on the supply of those ancillary rights;
• liability to remit any GST associated with the original transaction remains with the assignor and the assignor must ensure that it retains sufficient funds to enable it to meet that liability;
• where the assignor is liable to remit GST on the original transaction, the assignor continues to be under an obligation to provide tax invoices to the recipient. Further, the attribution of the assignor's GST liability on the original transaction is unaffected by the assignment;
• no bad debt adjustment is available to the assignor where the assignee writes off the whole or part of the debt assigned.

Description of securitisation transactions

The ATO goes to significant lengths to outline the various elements of a securitisation structure in paragraphs 99 to 128. A table summarising the GST consequences of these transactions is set out at Schedule 1 to the draft.

One interesting aspect of these descriptions arises in the context of services provided by an originating servicer. In such a case, it is the servicer that will have made the input taxed assignment of the income stream to the SPV. The servicer continues to have obligations to its customers under the terms of the original supply and is often paid a fee by the SPV for doing so. The ATO considers that where:

"… the servicer (originator) is still obligated to perform some functions as the supplier, either itself or under an outsourcing arrangement, it will incur costs that it would normally have recovered from the income stream it has now assigned. Part of the servicer fee is therefore to reimburse the servicer for the income foregone as a consequence of the assignment. It is not consideration for any supply that the servicer provides to the SPV. We consider that this part of the servicer fee is additional consideration for the assignment of the rights to the income streams."

Apart from the fact that the last two sentences are mutually inconsistent, it appears that the ATO is suggesting that there are many circumstances in which a servicer will not be obliged to remit GST on the servicer fee it receives from the SPV. Such amounts will be seen not as consideration for services supplied by the servicer, but rather will be viewed as consideration for the input taxed assignment of the debt.

Registration of the SPV?

Although brief reference is made to the vexed issue of whether or not the SPV will be seen to be carrying on an enterprise and thus capable of registration for GST purposes, no useful guidance is provided. It is suggested that this is an important issue that should be actively considered in the establishment of securitisation structures.

Conclusion

Draft rulings are subject to change, are often significantly amended prior to finalisation and provide no legal comfort to taxpayers. However, GSTR 2003/D6 indicates that the ATO is in broad agreement with industry practice. If finalised in its present form, GSTR 2003/D6 will provide important clarification on what the ATO will accept as an interest in or under a debt. However, many other issues are not significantly addressed by the draft ruling. The industry will need to forge its own path with many of these complex issues.

For further information, please contact Andrew Sommer.