Practical Compliance Guideline

PCG 2019/8DC1 (Finalised)

ATO compliance approach to GST apportionment of acquisitions that relate to certain financial supplies

This document has been finalised by PCG 2019/8.

Table of Contents	Paragraph
What this Guideline is about	1
Who this Guideline applies to	12
Structure of this Guideline	19
Date of effect	22
Our compliance approach	25
The green zone limitations	26
When you will be in the white zone	27
When to self-assess your risk rating and report it to the ATO	28
Transitioning your arrangements	31
SCHEDULE 1 - Credit cards	35
DRAFT SCHEDULE 2 - Transaction accounts	58
Your comments	82

Relying on this Guideline

This is a draft consolidation outlining a proposed Schedule 2 to this Guideline dealing with transaction accounts.

The following preamble will apply to this Guideline when this draft update is finalised:

This Practical Compliance Guideline sets out practical administration approaches to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with these approaches.

What this Guideline is about

1. This Guideline outlines our compliance approach for GST apportionment of acquisitions that relate to certain financial supplies. This Guideline sets out the framework we use to assess the risk associated with methods to determine the extent of creditable purpose (ECP)^[1] of these acquisitions under the A New Tax System (Goods and Services Tax) Act 1999.^[2]

2. If this Guideline applies to you, it applies to acquisitions that relate to making the financial supplies covered by the Schedule^[3] in the ordinary course of business.

3. This Guideline reflects our expectations for the design of an apportionment method for these acquisitions. We recognise that flexibility is required in practice, as your individual circumstances (such as your business structure and how your cost allocation system operates) will affect how the principles are implemented.

4. We use the risk assessment framework in this Guideline and the accompanying Schedule to tailor our engagement with you having regard to your risk rating.

5. You can use this Guideline to:

•: obtain confidence about your approach by self-assessing the compliance risk associated with your apportionment method
•: understand the compliance approach we are likely to adopt given your position within our risk framework, and
•: work with us to mitigate the risk associated with your arrangements and to consider opportunities to reduce the likelihood that you will be subject to compliance activity.

6. We are committed to working with you to assist you to obtain confidence about your approach and minimise your compliance risk in this area. If you are unsure about how we would assess the risk associated with your approach or would like certainty in relation to your arrangements, you should contact us for assistance.

7. This Guideline is not intended to address every potential feature of an apportionment method or variation in individual circumstances noting, in particular:

•: Acquisitions made as part of a transformational or extraordinary change to the business (including to information technology systems) do not fall within the scope of this Guideline.
•: If your arrangements are under review, we are not limited to the matters covered in this Guideline.
•: Regardless of your risk zone, we may apply compliance resources to test risks that are beyond what is covered in this Guideline.^[4]

8. The apportionment methods set out in this Guideline are for risk assessment purposes only, and should not be taken as a requirement to use a specific method. Methods or examples provided in this Guideline must be considered in their entirety, as the absence of some elements or the presence of additional elements may change your risk rating.

9. This Guideline does not limit the operation of the law, and it does not replace, alter or affect our interpretation of the law in any way.^[5] It does not relieve you of your legal obligation to comply with all relevant tax laws.

10. In this Guideline, we refer to 'relevant support area costs in other business units'. These are acquisitions that are not allocated to the business unit that makes a financial supply (such as the credit card issuing business), but that are to some extent for use in making the supply.^[6] For example, in relation to Schedule 1, this includes acquisitions in other business units that relate to particular supplies in the credit card issuing business (for example, a proportion of marketing, technology or customer service costs), overheads that indirectly relate to all the supplies made in the credit card issuing business, or enterprise costs to the extent they relate to making supplies in the credit card issuing business.^[7]

11. This Guideline relates to determining the intended use of your acquisitions under Divisions 11, 15, 70, 72 and 84. While this Guideline does not address adjustments for the change in use of an acquisition under Division 129, we would expect you to use the same method that you used to determine intended use for these purposes.

Who this Guideline applies to

12. This Guideline applies to you if you make financial supplies that are covered by the accompanying Schedule.

13. This Guideline applies to you in relation to all acquisitions that relate to making these supplies (including relevant support area costs in other business units).

14. This Guideline will not address how you identify which acquisitions are subject to a particular Schedule (for example, how to determine the extent to which acquisitions are for use in making supplies in the credit card issuing business). We would expect your identification of these acquisitions to follow your natural cost allocation or accounting systems (for example, in identifying the proportion of support area costs in other business units that are for use in making supplies in the credit card issuing business). We would also expect that any changes in the way you allocate your costs would be in response to business changes. Changes in cost allocation for reasons unrelated to business changes are likely to be subject to compliance activity.

15. Consistent with GSTR 2006/3, we accept that you do not necessarily need to give specific consideration to the status of each individual acquisition. In this context, we accept that you can take an approach where you identify and analyse acquisitions of a particular type that have a similar intended use (for example, the part of your debt collection costs that relate to making particular financial supplies) and treat them in the same way.

16. This Guideline does not apply to you if you have little or no access to direct estimation methods, and as a consequence you do not use direct estimation methods to allocate or apportion any of your acquisitions to particular business units (for example, a credit card issuing business) or products and/or particular supplies.^[8]

17. For example, this Guideline does not apply to you if you are a smaller financial institution that uses an entity-based general formula for apportionment of all your acquisitions provided that this is in accordance with GSTR 2006/3.^[9]

18. If this Guideline does not apply to you, a review may be undertaken under our usual compliance programs in order to determine whether your method is fair and reasonable in accordance with GSTR 2006/3.

Structure of this Guideline

19. It is our intention to include additional Schedules to address other specific contexts in the future. We will consult publicly in respect of any additional Schedules.

20. This Guideline is structured as follows:

•: the main body explains the risk assessment framework that is relevant to the accompanying Schedule, and
•: the accompanying Schedule sets out the risk assessment framework for apportionment of acquisitions that relate to making the relevant financial supplies.

21. You will need to read the main body and Schedule in conjunction to determine your risk rating for the Schedule.

Date of effect

22. This Guideline has effect from the start of your first tax period commencing on or after 1 January 2020.^[10]

23. Each Schedule may have effect from a different date. Where this is the case, the date of effect will be stated in the relevant Schedule.

24. The use and application of this Guideline will be under review following its finalisation. Any revisions will be made at the end of an initial three-year review period or on an 'as necessary' basis. In particular, where a particular ECP rate is used as part of our risk assessment framework, we will review this rate regularly in line with industry developments. We will consult with impacted stakeholders in relation to proposed material changes.

Our compliance approach

25. The risk assessment framework in this Guideline is made up of five zones. Where this Guideline applies, you can expect the following engagement from us depending on your risk zone:

Risk zone	Risk level	Our compliance approach
White	Self-assessment of risk level unnecessary	No review other than to confirm ongoing consistency with the agreed/determined approach.
Green	Low risk	We will generally only apply compliance resources to confirm you meet the requirements for this risk rating.
Blue	Low to moderate risk	Low to moderate priority for review. We may undertake compliance activity to gain assurance that you fall within this zone or to address exceptional circumstances.
Yellow	Moderate risk	Moderate priority for review. We may undertake compliance activity to review or test your approach. We will work with you to understand and resolve any areas of difference.
Red	High risk	High priority for review. Reviews are likely to be commenced as a matter of priority.

The green zone limitations

26. Where the risk assessment framework in a Schedule provides that you will be in the green zone if you do not exceed a particular ECP rate (as a weighted average across all of the relevant acquisitions), this is subject to the following limitations:

•: If your weighted average ECP rate for the relevant acquisitions was below the relevant rate prior to the date of effect of the Schedule, you cannot automatically uplift your results to claim this rate. If we identify such uplift, we may seek to understand your relevant circumstances further.^[11]
•: If your ECP rate is in the green zone, this does not necessarily mean that the method you used to determine your rate is itself low risk. As such, if the results of the method exceed the rate to be in the green zone in another period and you apply that higher rate, you will no longer be in the green zone and our compliance approach may change according to your new risk rating.
•: If you subsequently lodge amendments to your business activity statements and these changes would result in your arrangement being outside of the green zone, you will be taken to not have been in the green zone and we may apply compliance resources to assess your methodology.

When you will be in the white zone

27. You will be in the white zone and do not need to consider your risk rating where either:

•

you are applying the rate in PCG 2017/15 in accordance with that Guideline in the relevant period, or

•

you meet the requirements in paragraphs 31 to 34 of this Guideline in respect of the transitional period relevant to a Schedule^[12], or

•

you satisfy both of the following requirements

-

any of the following apply to your approach under a Schedule in the relevant period

o: a settlement agreement between you and us for the relevant period
o: a court decision to which you are a party
o: a current private ruling on which you are relying
o: we have conducted a review in the last two years of a period following the date of effect of this Guideline and provided you with a low risk or high assurance rating for your approach

AND

-

there has not been a material change in your factual circumstances, including in the design or implementation of your methodology, since the time of the agreement, decision or review, or when compared to the scheme described in your private ruling.

When to self-assess your risk rating and report it to the ATO

28. You are able to self-assess your risk rating on an annual basis if there have been no changes in your apportionment methodology during the year. For Schedules that commence on 1 January 2020, we would expect you to self-assess your risk rating for the period 1 January 2020 to 31 December 2020. For Schedules that commence on 1 October 2020, we would expect you to self-assess your risk rating for the period 1 October 2020 to 31 December 2020, and then to continue to do so on an annual basis.

29. If there have been changes in your apportionment methodology during the year, you will need to self-assess the relevant periods separately. If you self-assess as being in the green zone at the start of the year, you will need to self-assess the tax periods where your rate exceeds the green zone rate separately.

30. We may ask you to tell us in writing whether you have reviewed your risk rating under this Guideline and which risk zone your arrangements fall within. If you are in an annual compliance arrangement, we will expect you to notify us of your risk rating on an annual basis. We will also ask you to tell us your ECP rate relevant to applicable Schedules and whether there have been changes to your methodology during the year.

Transitioning your arrangements

31. We encourage willing and cooperative compliance and recognise that the publication of this Guideline may prompt you to review your apportionment methods. This may cause you to adjust your apportionment methods to come within our green zone prospectively.

32. For the first six months following the date of effect of a Schedule, you will be in the white zone for that period if:

•: you are actively engaging with us by the date of effect of the relevant Schedule to transition your arrangements to the green zone
•: by the end of the six-month period, you have made a voluntary disclosure to amend your business activity statements for the periods from the relevant date of effect to achieve an outcome in the green zone, and
•: for the remainder of the year, your approach will result in your arrangements being in the green zone.

33. We will confirm with you whether you meet the requirements to be in the white zone for this transitional period.

34. If you meet the requirements set out in paragraph 32 of this Guideline, then in respect of the six-month transitional period, we will remit any general interest charge to the base rate and, if any shortfall penalties are imposed, remit those penalties to nil.

Commissioner of Taxation
18 December 2019

SCHEDULE 1 - Credit cards

Table of Contents	Paragraph
Scope of this Schedule	35
Our risk assessment framework	38
Examples	39
Example 1 - green zone	39
Example 2 - blue zone	43
Example 3 - blue zone	50
Date of effect	57

Scope of this Schedule

35. This Schedule applies to you if you issue credit cards or charge cards in a four-party (open loop) payment system.^[13]

36. This Schedule applies to all acquisitions that are for use or partly for use in making supplies in the credit card issuing business, regardless of where they are allocated in your cost allocation system.

37. The Commissioner's views on the application of paragraph 11-15(2)(a) to acquisitions that relate to making these supplies are set out in GSTR 2019/2.

Our risk assessment framework

38. Our risk assessment framework is set out as follows:

Risk zone	Your approach
Green	You are in the green zone if you apply an ECP rate of no more than 35% as a weighted average across all acquisitions to the extent they are for use in making supplies in your credit card issuing business (including relevant support area costs in other business units). If you are in the green zone, we will generally only apply compliance resources to confirm you meet the requirements for this risk rating. This means we will not apply compliance resources to consider whether the apportionment method used is fair and reasonable, unless there are exceptional circumstances.
Blue	You are in the blue zone if your ECP rate exceeds the rate stipulated in the green zone, and your method meets all of the following requirements: 1. You determine the extent to which the supply of the credit card facility is GST-free as follows: A. The method you use to determine the extent of GST-free use is in accordance with Goods and Services Tax Determination GSTD 2017/1 Goods and services tax: when is the supply of a credit card facility GST-free under paragraph (a) of Item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?^[14] B. You apply the resulting GST-free percentage consistently across all acquisitions in reflecting the extent they relate to the supply of the credit card facility. For example, you do not treat some acquisitions as relating only to the GST-free use of the credit card facility. C. Your method recognises that the consideration for the supply of the credit card facility includes any amounts the cardholder pays as a result of their obligations under the credit card facility contract. For example, you do not treat overseas transaction fees as consideration for a separate GST-free supply.^[15] 2. Your apportionment method reflects an analysis of your acquisitions, in accordance with GSTR 2019/2, to determine how they relate to your supplies. This analysis extends to relevant support area costs in other business units. Your apportionment method reflects whether these acquisitions relate to particular supplies (for example, a proportion of branch network, call centre, and certain technology and marketing costs, which only relate to the supply of the credit card facility), or are instead remaining overheads that indirectly relate to all the supplies made in the credit card issuing business or enterprise costs that you identify as relating to some extent to the credit card issuing business (for example, a proportion of rental costs for head office premises). 3. As part of this analysis, you identify: A. Acquisitions that only relate to the financial supply of the credit card facility.^[16] These acquisitions have an ECP equal to the extent that this supply is GST-free. B. Acquisitions that relate to both the financial supply of the credit card facility and the taxable supply of interchange services.^[17] You treat all of these acquisitions (excluding acquisitions that are overheads that indirectly relate to all the supplies made in the credit card issuing business, or enterprise costs^[18]) as being equally intended for use in making both supplies. This means apportionment on a 50/50 basis between the supplies (including adjusting for the extent to which the supply of the credit card facility is GST-free) to determine the ECP. However, if there are 'on-us' transactions where you are both the issuer and acquirer, you do not make supplies of interchange services in relation to these transactions. To take this into account, you treat these acquisitions as only relating to the supply of the credit card facility, to the extent that cardholders' transactions are 'on-us'. C. Acquisitions that are overheads that indirectly relate to all the supplies made in the credit card issuing business or enterprise costs that you identify as relating to some extent to the credit card issuing business. You determine the ECP of these remaining acquisitions using an input based indirect method based on a weighted average of the ECP of the acquisitions you have directly allocated at the steps listed for this zone.^[19] 4. For acquisitions of information technology and processing services, you recognise situations where parts of the acquisition are to manage and operate credit card facility accounts (which only relate to the supply of the credit card facility), when compared to other parts that are to process credit card transactions (which relate to both the supply of the credit card facility and the supply of interchange services).^[20] 5. If you make other supplies in your credit card issuing business, you analyse the extent (if any) to which your acquisitions relate to that supply, and integrate this into the steps listed for this zone.^[21] Your method does not assume that all acquisitions relate to all supplies made in the credit card issuing business or that the acquisitions that relate to taxable supplies of interchange services will necessarily also relate to other taxable supplies you make. 6. You identify and adjust for substantial one-off acquisitions or supplies to address any resulting distortion. 7. In reflecting each of these steps in your method, you may either A. apply separate ECP rates to the different acquisitions, or B. determine a weighted average ECP that reflects all of the acquisitions to the extent they are for use in making supplies in the credit card issuing business (including the analysis of relevant support area costs in other business units), which is applied to all relevant acquisitions. 8. You review and update the relevant inputs into your method both annually, and if material changes occur. 9. Your apportionment method is documented and supported by an appropriate tax governance framework.^[22] Note: If you are in the red zone, you will not be in the blue zone.
Yellow	You are in the yellow zone if your rate exceeds the rate stipulated in the green zone and you are not in either the blue or red zone.
Red	You are in the red zone if your rate exceeds the rate stipulated in the green zone and any of the following apply: 1. Where your method recognises the extent to which the supply of the credit card facility is GST-free, you do not determine the GST-free percentage or reflect this in your method in the way set out in the blue zone. 2. Your apportionment method does not take into account that some acquisitions only relate to the financial supply of the credit card facility, in accordance with the ATO view in GSTR 2019/2. 3. You use a method that allocates acquisitions between transactors (broadly, cardholders that do not pay interest) and revolvers (broadly, cardholders that do pay interest) and applies separate revenue methods to each pool of cardholders, which are then blended to determine an ECP rate. 4. Your apportionment method treats some acquisitions as having a closer relationship to the supply of interchange services than to the supply of the credit card facility. 5. If you have an acquiring business, your apportionment method treats acquisitions in your credit card issuing business as partly relating to taxable supplies made in relation to 'on-us' transactions. 6. You do not identify and adjust for substantial one-off acquisitions or supplies to address any resulting distortion. 7. You do not review and update the relevant inputs into your method annually, or when material changes occur. 8. Your apportionment method is not documented and supported by an appropriate tax governance framework.^[23]

Examples

Example 1 - green zone

39. Verdant Bank's ECP rate is no more than 35%, as a weighted average, which is applied to:

•: acquisitions in the business unit for its credit card issuing business, and
•: acquisitions in relevant support areas in other business units, to the extent that they are for use in the credit card issuing business. This includes a proportion of its branch network, call centre, technology, and marketing costs which are in other business units, and a proportion of its overheads that indirectly relate to all the supplies made in the credit card issuing business or enterprise costs that it identifies as being for use in the credit card issuing business.

40. As the ECP rate used is no more than 35% as a weighted average for all acquisitions to the extent they are for use in making supplies in the credit card issuing business (including acquisitions in relevant support areas in other business units), Verdant Bank is in the green zone.

41. As Verdant Bank is in the green zone we will not apply compliance resources to assess if the apportionment methodology is fair and reasonable.

42. In addition, Verdant Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so.

Example 2 - blue zone

43. Cyan Bank undertakes an analysis of the acquisitions that are for use or partly for use in making supplies in the credit card issuing business (including in relevant support areas in other business units) over the previous 12 months.

44. In this case, Cyan Bank only has a few bank branches, so a higher proportion of its acquisitions relate to both the supply of the credit card facility and the supply of interchange services.

45. Cyan Bank's analysis is as follows:

*Acquisitions*	*Analysis*
Acquisitions that only relate to the supply of the credit card facility. These acquisitions include a proportion of branch network costs and call centre costs, debt collection costs, costs to prepare credit card statements, credit check services, services to facilitate the introduction of new cardholders, and advertising services to sign up new cardholders.^[24] Some of these acquisitions are in the business unit for the credit card issuing business, and some are relevant support area costs in other business units.	These acquisitions have an ECP equal to the extent that this supply is GST-free. Cyan Bank determines these acquisitions have an ECP rate of 4% by reference to the past usage patterns of its cardholders in accordance with GSTD 2017/1.
Acquisitions that relate to both the supply of the credit card facility and the supply of interchange services. These acquisitions include loyalty reward costs, issuer scheme services and credit card production services.^[25]	Cyan Bank treats all of these acquisitions as being equally intended for use in making both supplies, with apportionment on a 50/50 basis between the supplies. If Cyan Bank made supplies of interchange services in relation to all transactions undertaken by cardholders, this would result in an ECP rate for these acquisitions of 52% (as the supply of the credit card facility is 4% GST-free). However, in this example, Cyan Bank has an acquiring business, and it determines that 25% of its cardholders' transactions are 'on-us' transactions where it does not make supplies of interchange services. As such, only 75% of these acquisitions would attract the 52% ECP rate. Therefore Cyan Bank determines the ECP rate of the acquisitions is 40% ((75% × 52%) + (25% × 4%)).
Acquisitions that are processing services used in the credit card issuing business. These acquisitions are partly to manage and operate the credit card facility account (which only relate to the supply of the credit card facility), and partly to process credit card transactions via the payment system (which relate to both supplies).^[26]	Cyan Bank undertakes an objective assessment of its acquisitions of processing services to determine the parts that only relate to the supply of the credit card facility, and the parts which relate to both supplies. By undertaking an objective assessment of the relevant functions of the applications involved, Cyan Bank determines that 60% of the acquisitions only relate to the supply of the credit card facility and the remaining 40% relate to both supplies. Using the ECP rates of 4% and 40% from the two steps listed, Cyan Bank determines the ECP rate of the acquisitions is 18.4% ((60% × 4%) + (40% × 40%)).

46. To reflect this analysis in its apportionment method, Cyan Bank decides to use separate coding mechanisms to reflect the relevant ECP rate for each of the categories of acquisitions. It will review these coding mechanisms every 12 months (or if material changes occur in its business).

47. Cyan Bank also has acquisitions that are overheads that indirectly relate to all the supplies made in its credit card issuing business or that are enterprise costs (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of entity) that are identified as being to some extent for use in the credit card issuing business. Using an input based indirect method, Cyan Bank calculates a weighted average ECP of 35.51% based on the acquisitions it has analysed, which it applies to these relevant overheads or enterprise costs. Cyan Bank also treats the small number of relevant acquisitions that it has not analysed in the same way.^[27]

48. When calculated across all of the relevant acquisitions, Cyan Bank's method results in a weighted average ECP rate that is above the rate to be in the green zone. However, as Cyan Bank is using a method that meets all of the requirements to be low to moderate risk (this includes that it adjusts for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone.

49. In addition, Cyan Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so.

Example 3 - blue zone

50. As in Example 2, Cyan Bank undertakes an analysis of acquisitions that are for use or partly for use in making supplies in the credit card issuing business (including acquisitions in relevant support areas in other business units) over the previous 12 months.

51. However, in this Example, Cyan Bank decides to use only one ECP rate across all of the relevant acquisitions. Cyan Bank determines a weighted average ECP rate that reflects the analysis of its acquisitions.

52. This analysis can be summarised as follows:

*Acquisitions*	*GST incurred*	*ECP*
Acquisitions that only relate to the supply of the credit card facility	$1.2m	4%
Acquisitions that relate to both the supply of the credit card facility and the supply of interchange services	$13m	40%
Acquisitions that are processing services used in the credit card issuing business	$1.2m	18.4%
*Total / weighted average*	$15.4m	35.51%

53. Cyan Bank applies the weighted average ECP rate of 35.51% to all of the acquisitions to the extent they are for use in making supplies in the credit card issuing business (including acquisitions in relevant support area costs in other business units). It also applies this rate to acquisitions that are overheads that indirectly relate to all the supplies made in the credit card issuing business or that are enterprise costs which it identifies are to some extent for use in the credit card issuing business (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of entity).

54. Cyan Bank uses this rate for the next 12-month period before re-testing it to determine a new weighted average ECP rate (assuming no material changes occur in the meantime). Cyan Bank applies this method consistently, using the analysis of the previous 12 months to determine the intended use for the next 12-month period.

55. Cyan Bank's method results in a weighted average ECP rate across all of the relevant acquisitions that are above the rate to be in the green zone. However, as Cyan Bank is using a method that meets all of the requirements to be low to moderate risk (this includes that it adjusts for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone.

56. In addition, Cyan Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so.

Date of effect

57. This Schedule has effect from the start of your first tax period commencing on or after 1 January 2020.

This Schedule published

18 December 2019

DRAFT SCHEDULE 2 - Transaction accounts

Table of Contents	Paragraph
Scope of this Schedule	58
Our risk assessment framework	65
Examples	66
Example 4 - green zone	66
Example 5 - blue zone	71
Date of effect	81
Your comments	82

Scope of this Schedule

58. This draft Schedule^[28] applies to you if you are an Australian authorised deposit-taking institution (ADI) that supplies an interest in or under an account covered by table item 1 in subsection 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations). This includes accounts such as everyday, savings, cheque, deposit or transaction accounts, including online savings accounts and term deposits, and accounts that also have overdraft facilities or that have become overdrawn.^[29]

59. However, this Schedule does not apply to you if you do not make taxable supplies of interchange services in relation to scheme debit, EFTPOS or BPAY transactions under any of the transaction accounts you provide. If you do make taxable supplies of interchange services in relation to some or all of your accounts, then this Schedule applies to all of your transaction accounts (including those that do not involve you making supplies of interchange services).

60. This Schedule does not apply to the following accounts that are covered by table item 1 in subsection 40-5.09(3) of the GST Regulations:

•: accounts that are primarily also a supply of a credit arrangement or right to credit by the account provider, which are covered by table item 2 in subsection 40-5.09(3) of the GST Regulations, such as a credit card account (which is instead covered by Schedule 1 of this Guideline) or a loan account
•: purchased payment facilities including prepaid cards or facilities that use the scheme debit or EFTPOS payment system, such as prepaid gift cards, prepaid travel cards or similar cards, or
•: accounts denominated in foreign currencies.

61. The supply of an interest in or under an account that this Schedule applies to will be referred to as the supply of a 'transaction account'.

62. This Schedule applies to all acquisitions that are for use, or partly for use, in making supplies of transaction accounts, regardless of where they are allocated in your cost allocation system.

63. However, acquisitions that relate to automatic teller machines (ATMs) are excluded from this Schedule. The only exception to this is where you decide to treat these acquisitions as being within scope of this Schedule for the purposes of the green zone. In all other cases, your apportionment of these acquisitions (including any specific apportionment methodology applied to the ATM acquisitions) may be subject to review to determine if the method used is fair and reasonable.

64. The Commissioner's draft views on the application of paragraph 11-15(2)(a) to acquisitions that relate to making these supplies are set out in draft Goods and Services Tax Ruling GSTR 2019/D1 Goods and services tax: determining the creditable purpose of acquisitions in relation to transaction accounts.

Our risk assessment framework

65. Our risk assessment framework is set out as follows:

Risk zone	Your approach
Green	You are in the green zone if you apply an ECP rate of no more than 20% as a weighted average across all acquisitions to the extent they are for use in making supplies in your transaction accounts business (including relevant support area costs in other business units). This weighted average applies across all acquisitions including those that relate to accounts that involve the making of supplies of interchange services (such as everyday accounts) and those that relate to accounts that do not involve supplies of interchange services (such as online savings accounts and term deposits). This is the case regardless of whether your natural cost allocation or accounting systems separately identify the costs to provide different types of account.^[30] If you are in the green zone, we will generally only apply compliance resources to confirm you meet the requirements for this risk rating. This means we will not apply compliance resources to consider whether the apportionment method used is fair and reasonable, unless there are exceptional circumstances. You can choose to treat acquisitions that relate to ATMs as though they are within the scope of this Schedule for the purposes of the green zone. However, you are not eligible to use the green zone if more than 50% of the total number of transaction accounts you provide do not involve you making any taxable supplies of interchange services.
Blue	You are in the blue zone if your ECP rate exceeds the rate stated in the green zone, and your method meets all of the following requirements: 1. You identify the acquisitions that fall within this Schedule, which include both acquisitions to provide transaction accounts that involve supplies of interchange services (for example, everyday accounts) and transaction accounts that do not involve supplies of interchange services (for example, online savings accounts and term deposits). 2. You determine the extent to which the supply of transaction accounts are GST-free as follows: A. You use the following formula to determine the extent of GST-free use of the transaction accounts: Where: • account transactions reflecting GST-free use is the sum of the following transactions: - scheme debit transactions which are 'account holder present transactions'^[31], such as purchase transactions where the account holder physically presents their card or device at a merchant overseas, or overseas ATM transactions, and - outward international money transfer or international cheque transactions.^[32] • total account transactions includes all credit and debit transactions on the account. This step accords with draft Goods and Services Tax Determination GSTD 2020/D1, which has also been published for public consultation. B. Your method for calculating the GST-free percentage also takes into account the extent that supplies are made to non-resident account holders within the meaning of table item 2 of subsection 38-190(1). To avoid double counting, you adjust for any overlap between Step 2A and Step 2B. For example, if 2% of your account holders are non-residents, but they account for 20% of the offshore use, you only count 80% of the offshore use (in addition to the 2%) to determine the overall GST-free percentage. You apply the resulting GST-free percentage from Step 2C consistently across all acquisitions in reflecting the extent they relate to the supply of transaction accounts. For example, you do not treat some acquisitions as relating only to the GST-free use of the account. You do not treat overseas transaction fees you charge account holders as consideration for a separate GST-free supply. 3. Your apportionment method reflects an analysis of your acquisitions, in accordance with GSTR 2019/D1, to determine how they relate to your supplies. This analysis extends to relevant support area costs in other business units. Your apportionment method reflects whether these acquisitions relate to particular supplies (for example, a proportion of branch network, call centre, and certain technology and marketing costs, which only relate to the supply of transaction accounts), or are instead remaining overheads that indirectly relate to all the supplies made in the transaction accounts business or enterprise costs that you identify as relating to some extent to the transaction accounts business.^[33] 4. As part of this analysis, you identify: A. Acquisitions that only relate to the financial supply of transaction accounts.^[34] These acquisitions have an ECP equal to the extent that this supply is GST-free, as determined at Step 2. This includes scheme services to the extent that they relate to EFTPOS cash-out withdrawals. It also includes information technology and processing costs, to the extent they are used to: • manage and operate transaction accounts, or • process transactions that do not involve supplies of interchange services (for example, EFTPOS cash-out withdrawals, direct debits and credits, transfers between accounts, deposits and withdrawals).^[35] B. Acquisitions that relate to both the financial supply of transaction accounts and the taxable supply of interchange services and which are specified as follows: • scheme services (excluding those for EFTPOS cash-out withdrawals) • mobile payment services • card production services, and • information technology and processing costs, to the extent they are used to process scheme debit, EFTPOS purchase or BPAY transactions.^[36] C. You treat all of these acquisitions as being equally intended for use in making both supplies. This means apportionment on a 50/50 basis between the supplies (including adjusting for the extent to which the supply of the transaction account is GST free) to determine the ECP. D. However, if there are 'on-us' transactions where you are both the issuer and acquirer, you do not make supplies of interchange services in relation to these transactions. To take this into account, you treat these acquisitions as only relating to the supply of the transaction account, to the extent that cardholders' scheme debit, EFTPOS and BPAY transactions are on-us. E. For any remaining acquisitions that relate to both the financial supply of transaction accounts and the taxable supply of interchange services (excluding acquisitions that are overheads that indirectly relate to all the supplies made in the transaction accounts business, or enterprise costs), you use the formula below to determine the ECP for these acquisitions: Where: • A is the extent to which the supplies of transaction accounts are GST-free, expressed as a percentage. • B is the number of account transactions that involve you making taxable supplies of interchange services (such as scheme debit, EFTPOS purchase transactions and BPAY transactions). This does not include on-us transactions where you are both the account provider and the acquirer (or Biller's financial institution for BPAY), for which you do not make taxable supplies of interchange services. • C is the total number of account transactions. For example, this includes direct debits and credits, transfers between accounts, deposits, withdrawals, fees and interest, EFTPOS cash-out withdrawals, payments to other accounts that do not involve supplies of interchange services, scheme debit, EFTPOS purchase transactions and BPAY transactions (including on-us transactions).^[37] F. Acquisitions that are overheads that indirectly relate to all the supplies made in the transaction accounts business or enterprise costs that you identify as relating to some extent to the transaction accounts business. You determine the ECP of these remaining acquisitions using an input based indirect method based on a weighted average ECP rate of the acquisitions you have directly allocated at Step 4.^[38] 5. If you make any other supplies in your transaction account business, you analyse the extent (if any) to which your acquisitions relate to that supply, and integrate this into this method.^[39] Your method does not assume that all acquisitions relate to all supplies made in the transaction account business or that the acquisitions that relate to taxable supplies of interchange services will necessarily also relate to other taxable supplies you make. 6. You identify and adjust for any substantial one-off acquisitions or supplies to address any resulting distortion. 7. In reflecting each of these steps in your method, you may either: A. Apply separate ECP rates to the different acquisitions. B. Determine a weighted average ECP rate using your method that reflects all of the acquisitions to the extent they are for use in making supplies in the transaction accounts business (including the analysis of relevant support area costs in other business units), and apply that rate to all relevant acquisitions.^[40] C. If your natural cost allocation and accounting systems separately identify acquisitions to provide different types of accounts (for example, into different cost centres), you have a further option of determining a different weighted average ECP rate for each type of account you identify, by separately applying the steps in this method to each set of acquisitions. If you choose this option and the acquisitions to provide accounts that do not involve you making taxable supplies of interchange (for example, online savings accounts and term deposits accounts) are separately identified, the ECP applied to those acquisitions will be equal to the extent those supplies of transaction accounts are GST-free (if any). 8. You review and update the relevant inputs into your method both annually, and if material changes occur. 9. Your apportionment method is documented and supported by an appropriate tax governance framework.^[41] Note: If you are in the red zone, you will not be in the blue zone.
Yellow	You are in the yellow zone if your rate exceeds the rate stipulated in the green zone and you are not in either the blue or red zone.
Red	You are in the red zone if your rate exceeds the rate stipulated in the green zone and any of the following apply: • where your method recognises the extent to which supplies of transaction accounts are GST-free, you do not determine the GST-free percentage and reflect it in your method in the way set out in the blue zone • your apportionment method does not take into account that some acquisitions only relate to the financial supply of transaction accounts, in accordance with the ATO's view in GSTR 2019/D1 • you use a revenue-based apportionment method to determine the ECP of acquisitions in your transaction accounts business • your apportionment method treats some acquisitions as having a closer relationship to the supply of interchange services than to the supply of the transaction account • if you have an acquiring business for scheme debit or EFTPOS purchase transactions or are the biller financial institution for BPAY transactions, your apportionment method treats acquisitions in your transaction accounts business as partly relating to taxable supplies made in relation to on-us transactions^[42] • you do not identify and adjust for substantial one-off acquisitions or supplies to address any resulting distortion. • you do not review and update the relevant inputs into your method annually, or when material changes occur. • your apportionment method is not documented and supported by an appropriate tax governance framework.^[43]

Examples

Example 4 - green zone

66. Piccolo Bank is an Australian ADI who supplies transaction accounts, including everyday accounts (which involve it making supplies of interchange services) and online savings accounts (which do not involve it making supplies of interchange services).

67. More than 50% of the total number of transaction accounts that Piccolo Bank provides involve it making taxable supplies of interchange services (because these accounts have linked debit cards that are used for scheme debit and EFTPOS transactions, as well as access to BPAY).

68. Piccolo Bank's ECP rate is no more than 20%, as a weighted average, which is applied to acquisitions in:

•: the business unit for its transaction accounts business, and
•: relevant support areas in other business units, to the extent that they are for use in the transaction accounts business. This includes a proportion of its branch network, call centre, technology and marketing costs that are in other business units, and a proportion of its overheads that indirectly relate to all the supplies made in the transaction accounts business or enterprise costs that it identifies as relating to the transaction accounts business.

69. As the ECP rate used is no more than 20% as a weighted average for all acquisitions to the extent they are for use in making supplies in the transaction accounts business (including acquisitions in relevant support areas in other business units) and it meets the other requirements of the green zone, Piccolo Bank is in the green zone.

70. In addition, Piccolo Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so.

Example 5 - blue zone

71. Saxon Bank is an Australian ADI who supplies transaction accounts. Saxon Bank undertakes an analysis of the acquisitions that are for use or partly for use in making supplies in the transaction accounts business (including in relevant support areas in other business units) over the previous 12 months.

72. Saxon Bank's natural accounting or cost allocation systems do not separately identify acquisitions to provide accounts that involve them making supplies of interchange services (such as everyday accounts), when compared to other accounts where it does not make supplies of interchange services (such as online savings accounts or term deposits).

73. Saxon Bank's analysis is as follows:

Acquisitions

Analysis

Acquisitions that only relate to the financial supply of transaction accounts.

Some of these acquisitions are in the business unit for the transaction accounts business, and some are relevant support area costs in other business units.

These acquisitions include:

•: a proportion of branch network and call centre acquisitions, acquisitions to prepare account statements, acquisitions of interchange services and scheme services for EFTPOS cash-out withdrawals, cheque printing, processing and clearing, and advertising services to sign up new cardholders^[44]
•: information technology and processing costs, to the extent they are used to manage and operate transaction accounts, or to process transactions that do not involve supplies of interchange services (for example, EFTPOS cash-out withdrawals, direct debits and credits, transfers between accounts, deposits and withdrawals)^[45], and
•: acquisitions to the extent they are to provide transaction accounts that do not involve the supply of interchange services (for example, online savings accounts or term deposits).^[46]

These acquisitions are identified under Step 4A and have an ECP equal to the extent that the supply of the transaction account is GST-free.

Saxon Bank determines these acquisitions have an ECP rate of 1%, using a method which meets the requirements in Step 2 in the blue zone.

Acquisitions that relate to both the financial supply of transaction accounts and the taxable supply of interchange services, being:

•: scheme services (excluding those for EFTPOS cash-out withdrawals)
•: mobile payment services
•: card production services, and
•: information technology and processing costs, to the extent they are used to process scheme debit, EFTPOS purchase or BPAY transactions.

As these acquisitions are specified in Step 4B of the blue zone, Saxon Bank treats all of these acquisitions as being equally intended for use in making both supplies, with apportionment on a 50/50 basis between the supplies. If Saxon Bank made supplies of interchange services in relation to all transactions undertaken by account holders, this would result in an ECP rate for these acquisitions of 50.5% (as the supply of transaction accounts is 1% GST-free).

However, in this Example, Saxon Bank has an acquiring business, and it determines that 25% of its account holders' transactions are 'on-us' transactions where it does not make supplies of interchange services. As such, only 75% of these acquisitions would attract the 50.5% ECP rate.

Therefore for these specific acquisitions, in accordance with Step 4B of the blue zone, Saxon Bank determines that the ECP rate of the acquisitions is 38.13% ((25% × 1%) + (75% × 50.5%)).

Saxon Bank has not identified any other acquisitions it has that relate to both the supply of the transaction account and the supply of interchange services (except for overheads or enterprise costs), so it does not need to apply Step 4C of the blue zone.

74. Saxon Bank also has acquisitions that are overheads that indirectly relate to all the supplies made in its transaction accounts business or that are enterprise costs (for example, a proportion of rental costs for head office premises or a proportion of marketing costs to promote awareness of the brand of the entity) that are identified as being to some extent for use in the transaction accounts business.

75. To reflect the analysis of its acquisitions in its apportionment method, Saxon Bank decides to determine a weighted average ECP rate, which it will then use across all of the relevant acquisitions.^[47]

76. This analysis can be summarised as follows:

*Acquisitions*	*GST incurred*	*ECP*
Acquisitions that only relate to the supply of the transaction account	$4.2 million	1%
Specified acquisitions that relate to both the financial supply of transaction accounts and the taxable supply of interchange services	$5.4 million	38.13%
*Total / Weighted average*	$9.6 million	21.89%

77. Saxon Bank applies the weighted average ECP rate of 21.89% to all of the acquisitions to the extent they are for use in making supplies in the transaction accounts business (including acquisitions in relevant support area costs in other business units). It also applies this rate to acquisitions that are overheads that indirectly relate to all the supplies made in the transaction accounts business or that are enterprise costs which it identifies are to some extent for use in the transaction accounts business.

78. Saxon Bank uses this rate for the next 12-month period before retesting it to determine a new weighted average ECP rate (assuming no material changes occur in the meantime). Saxon Bank applies this method consistently, using the analysis of the previous 12 months to determine the intended use for the next 12-month period.

79. Saxon Bank's method results in a weighted average ECP rate across all of the relevant acquisitions that is above the rate to be in the green zone. However, as Saxon Bank is using a method that meets all of the requirements to be low to moderate risk (including adjusting for any substantial one-off acquisitions or supplies, and that the apportionment method is documented and supported by an appropriate tax governance framework), it is in the blue zone.

80. In addition, Saxon Bank also claims reduced input tax credits on the relevant acquisitions to the extent it is entitled to do so.

Date of effect

81. When finalised, this Schedule will have effect from the start of your first tax period commencing on or after 1 October 2020.

Your comments

82. You are invited to comment on Schedule 2 of this draft update to PCG 2019/8, including the proposed date of effect. Please forward your comments to the contact officer by the due date.

83. A compendium of comments is prepared when finalising this Guideline, and an edited version (with names and identifying information removed) is published to the Legal database on ato.gov.au. Please advise if you do not want your comments included in the edited version of the compendium.

Draft update published:	3 June 2020
Due date:	3 July 2020
Contact officer details have been removed following publication of the final guideline.

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

[1]

This Guideline does not address whether acquisitions are reduced credit acquisitions or your entitlement to reduced input tax credits. However if you are entitled to reduced input tax credits this Guideline applies to the 'extent of creditable purpose' percentage in subsection 70-20(2) of the A New Tax System (Goods and Services Tax) Act 1999. Your 'extent of Division 70 creditable purpose' under subsection 70-20(2) will be in addition to the ECP that is discussed in this Guideline.

[2]

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise indicated.

[3]

Additional Schedules may be included to address other specific contexts in the future. See paragraphs 19 to 21 of this Guideline.

[4]

Examples of risks we may test include whether you have correctly identified whether an acquisition is a reduced credit acquisition, whether you have correctly identified an obligation to apply the reverse charge provisions, or your approach where you make supplies that are not addressed in this Guideline (such as taxable supplies of loyalty program membership).

[5]

The Commissioner's views on determining the ECP for financial supply providers are set out in Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies.

[6]

Note that in this Guideline, a reference to an acquisition includes a reference to a part of an acquisition (where applicable).

[7]

See paragraphs 136 to 148 of Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? for an explanation of overheads and enterprise costs.

[8]

Note that in situations where you are applying the rate in Practical Compliance Guideline PCG 2017/15 GST and Customer Owned Banking Institutions in accordance with that Guideline, you will be in the white zone as per paragraph 27 of this Guideline.

[9]

See paragraphs 92 to 101A of GSTR 2006/3 for an explanation of direct estimation methods, and paragraphs 105 to 108 in relation to the use of an entity-based general formula.

[10]

If you are applying the rate in PCG 2017/15 prior to the date of effect of this Guideline and you choose to stop applying that rate in order to fall within this Guideline from its date of effect, paragraph 17 of PCG 2017/15 will not prevent you from applying the 18% rate for the first part of your financial year.

[11]

If you transition from applying the rate in PCG 2017/15 into the green zone of a Schedule, this will not in itself attract our attention. However, as part of this transition we would expect that you revisit the methods you apply to all of your other relevant acquisitions, on the basis that PCG 2017/15 would no longer apply to you.

[12]

Following the transitional period, you will need to self-assess your risk rating against the framework in the relevant Schedule.

[13]

This Schedule does not cover acquisitions in a credit card issuing business in a three-party (closed loop) scheme, or in a credit card acquiring business. The four-party (open loop) payment system is summarised in paragraph 15 of Goods and Services Tax Ruling GSTR 2019/2 Goods and services tax: determining the creditable purpose of acquisitions in a credit card issuing business, with further explanation and an explanation of a three-party (closed loop) payment system provided in paragraphs 246A to 246C of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions. Any reference to the supply of a credit card facility includes a reference to the supply of a charge card facility.

[14]

Note that paragraph 10 of GSTR 2019/2 provides our view that table item 4 has a broader application than table item 3 in subsection 38-190(1) in this context, meaning that it is unnecessary to consider the application of table item 3.

[15]

See paragraph 11 and 12 of GSTR 2019/2.

[16]

This includes acquisitions in Examples 1 to 7 and 14 of GSTR 2019/2.

[17]

This includes acquisitions in Examples 9 to 13 of GSTR 2019/2.

[18]

See paragraphs 136 to 148 of GSTR 2008/1.

[19]

See paragraphs 125 to 130 of GSTR 2006/3 for an explanation of an input based indirect method and Example 2 of this Schedule for an illustration in this context.

[20]

See Example 13 and 14 of GSTR 2019/2.

[21]

For example, supplies you make to a payment scheme operator in exchange for scheme incentive payments, where you have determined that these are separate supplies you make (rather than an adjustment to the consideration for a supply made by the payment scheme operator).

[22]

For further information, see paragraphs 145 to 150 of GSTR 2006/3 and our guidance on GST governance and record keeping on ato.gov.au.

[23]

For further information, see paragraphs 145 to 150 of GSTR 2006/3 and GST governance and record keeping on ato.gov.au.

[24]

See Examples 1 to 7 of GSTR 2019/2.

[25]

See Examples 9 to 12 of GSTR 2019/2.

[26]

See Examples 13 and 14 of GSTR 2019/2.

[27]

See paragraphs 125 to 130 of GSTR 2006/3.

[28]

All further references to 'this Schedule' will refer to the Schedule as it will read when this Schedule is finalised. Note that the updates to this Schedule will not take effect until finalised.

[29]

This includes where such accounts are used as a loan or mortgage offset account.

[30]

Note that you cannot apply the green zone to some types of accounts and use another method for other types of accounts - the green zone applies as a weighted average across relevant acquisitions for all transaction accounts.

[31]

The term 'account holder present transactions' is explained in draft Goods and Services Tax Determination GSTD 2020/D1 Goods and services tax: when is the supply of a transaction account GST free under table item 3 or table item 4(a) of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?.

[32]

Depending on the facts, there may be circumstances where an account provider makes additional supplies in their transaction accounts business, such as for international money transfers or international cheques. We will accept that you may either identify if they are a separate supply and apply Step 5 to identify related acquisitions, or you may include these transactions as part of the overall GST-free percentage in Step 2.

[33]

See paragraphs 136 to 148 of GSTR 2008/1.

[34]

See Examples 1 to 6, 8 and 12 of GSTR 2019/D1.

[35]

See Example 12 of GSTR 2019/D1. Where an acquisition of information technology and processing services contains parts that only relate to supplies of transaction accounts, and parts that relate to both supplies, an objective assessment must be used to split the acquisitions between Steps 4A and 4B.

[36]

See Examples 7 (except for scheme services for EFTPOS cash-out withdrawals, which are covered in Example 3), 9, 10 and 13 of GSTR 2019/D1.

[37]

If you are applying a separate method for acquisitions to provide accounts that do not involve you making taxable supplies of interchange services (as per Step 7C), the transactions for these accounts may be excluded from this method.

[38]

See paragraphs 125 to 130 of GSTR 2006/3 for an explanation of an input based indirect method and Example 5 of this Guideline for an illustration in this context.

[39]

For example, you may use this step for acquisitions you make as a BPAY biller financial institution, where these acquisitions relate to your taxable supplies of merchant services.

[40]

Example 6 of this Guideline illustrates how the weighted average ECP rate is calculated.

[41]

See paragraphs 145 to 150 of GSTR 2006/3 for further information and our web guidance on GST governance and record keeping on ato.gov.au.

[42]

See paragraph 17 of GSTR 2019/D1.

[43]

See paragraphs 145 to 150 of GSTR 2006/3 for further information and GST governance and record keeping on ato.gov.au.

[44]

See Examples 2 to 6 of GSTR 2019/D1.

[45]

See Example 12 of GSTR 2019/D1. Where an acquisition of information technology and processing services contains parts that only relate to supplies of transaction accounts, and parts that relate to both supplies, an objective assessment is used to split the acquisitions between Step 4A and 4B.

[46]

See Example 1 of GSTR 2019/D1.

[47]

Note that there are other options set out in Step 7 of the blue zone, including to apply separate ECP rates to separate acquisitions (which is illustrated in the context of Example 2 of this Guideline).

ATO references: File 1-I17UAM4

ISSN: 2209-1297

Business Line: PGI

Related Rulings/Determinations:
GSTD 2017/1
GSTR 2019/D1
GSTD 2020/D1
GSTR 2004/1
GSTR 2006/3
GSTR 2008/1
GSTR 2019/2
PCG 2017/15