Explanatory MemorandumCirculated By the Authority of the Treasurer, the Hon Wayne Swan MP)
Chapter 3 - Agency provisions
Outline of chapter
3.1 Schedule 3 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to increase the range of entities entitled to act as a principal for goods and services tax (GST) accounting purposes.
3.2 All references in this chapter are to the GST Act unless otherwise specified.
Context of amendments
3.3 The amendments allow those acting for a principal who are not agents in the common law sense to access the simplified accounting procedures in Subdivision 153-B of the GST Act.
3.4 Under the general GST accounting rules, supplies and acquisitions made or facilitated through an agent are made by the principal. The principal must account for the GST on such transactions between the agent and the customer as part of the principal's own supplies and acquisitions. The principal and agent must also separately account for the GST and input tax credits on any commissions paid to the agent for their services by the principal.
3.5 However, Subdivision 153-B allows registered entities to agree in writing to treat the agent as a separate supplier and/or acquirer. The effect of this is that the principal and agent are treated as acting in a principal to principal relationship in relation to the supplies and acquisitions identified in the agreement. This simplifies the way principals and agents account for GST.
3.6 The Subdivision only applies to an entity that would qualify under the common law as an agent. This means that the agent must be authorised to act on behalf of the principal so as to create or affect legal relations between the principal and third parties. Representatives of the principal who are not agents under the common law (for example, paying agents, billing agents and commission agents) are not covered by the Subdivision.
3.7 For example, the Subdivision cannot be used by entities ('intermediaries') who make or receive payments on behalf of another entity (the 'principal') for supplies or acquisitions to or from third parties, but do not make those supplies or acquisitions on that other entity's behalf. Nor can certain other service providers who perform functions for the principal but fall short of the legal definition of an agent, use Subdivision 153-B.
3.8 The Board of Taxation in its Review of the Legal Framework for the Administration of the Goods and Services Tax recommended that the domestic agency provisions (broadly Subdivision 153-B) be broadened to include representatives that operate in a similar way to common law agents but do not amount to common law agents, and to consider simplifying the underlying principles.
3.9 The then Assistant Treasurer, in his Media Release No. 042 of 12 May 2009, accepted the recommendation. Allowing a wider range of intermediaries to use Subdivision 153-B is part of a package of measures designed to reduce the cost to businesses of complying with the GST.
Summary of new law
3.10 The amendments will allow entities who facilitate supplies or acquisitions for another to utilise the simplified accounting procedures in Subdivision 153-B, subject broadly to the principal and intermediary agreeing that the intermediary use these accounting procedures in relation to certain transactions.
3.11 Under these simplified accounting procedures, taxable supplies and acquisitions made by the principal to or from a third party will be taken, for GST purposes, to be taxable supplies or creditable acquisitions made by the intermediary to or from the third party. Amongst other things, this means that intermediaries entering into such arrangements will issue tax invoices for, and be liable for GST payable on taxable supplies they are taken to make to a third party. They also will be entitled to input tax credits for creditable acquisitions they are taken to make from a third party. These will be recorded on the intermediary's own Business Activity Statement. Under the simplified accounting procedures, principals will also be taken to either make or receive a supply to or from the intermediary.
3.12 The amendments will reduce the compliance costs of GST accounting where paying agents, billing agents and other transaction facilitators are used by an entity.
Comparison of key features of new law and current law
|New law||Current law|
|Intermediaries that are not common law agents will be able to enter into agreements with principals concerning the supplies and acquisitions that they facilitate and have certain of those supplies and acquisitions treated for GST purposes as taxable supplies and creditable acquisitions made by the intermediary to or from the principal.||Only intermediaries that are common law agents are able to enter into agreements with principals concerning the supplies and acquisitions that they make for principals and have certain of those supplies and acquisitions treated for GST purposes as taxable supplies and creditable acquisitions made by the agent to or from the principal.|
Detailed explanation of new law
3.13 The amendments allow entities that facilitate the supplies or acquisitions of an enterprise carried on by another entity through acting as an intermediary to use Subdivision 153-B, irrespective of whether the intermediary can legally bind the principal by their acts. Billing and paying agents, among others, would be able to access these accounting procedures. In short, the amendments permit those that would be considered 'transaction facilitators' but fall short of the requirements to be regarded as common law agents to use the same accounting procedures in Subdivision 153-B.
3.14 To use Subdivision 153-B, the principal and the intermediary have to enter into an agreement in writing that the intermediary will facilitate supplies to third parties, acquisitions from third parties or both on behalf of the principal. The agreement also needs to specify the other matters required in section 153-50, such as the kinds of supplies and acquisitions to which the agreement will apply and the requirement for the intermediary to issue tax invoices to third parties instead of the principal. The intermediary and principal will have to be registered for GST purposes. [Schedule 3, items 6 to 10, section 153-50]
3.15 If such an agreement is made, the principal and intermediary will be taken, for GST purposes, as acting as separate suppliers and acquirers in relation to the supplies and acquisitions covered by the agreement. If the principal makes an acquisition that is covered by the agreement from a third party and the intermediary pays an amount on behalf of the principal to the third party supplier, the intermediary will be taken as having made a creditable acquisition. Additionally, the intermediary will be taken to make a taxable supply of the same thing to the principal. Any commission payable by the principal to the intermediary for the intermediary's services is taken to be included in the value of the taxable supply made by the intermediary to the principal. GST is payable on one eleventh of this (increased) value. This acquisition by the principal from the intermediary will be a creditable acquisition by the principal if the acquisition of the goods or services by the principal directly from the third party would have been a creditable acquisition. [Schedule 3, items 18 to 24, section 153-60]
Example 3.1 Patrick is a paying agent for Melissa (but not a common law agent). Patrick and Melissa have entered into an arrangement for the purposes of Subdivision 153-B. As part of carrying on her enterprise, Melissa orders $110 worth of goods (including GST) from Jonathan, which he agrees to supply. Patrick pays Jonathan $110 and takes delivery of the goods from him which he forwards to Melissa. Patrick is entitled to a $22 commission (including GST) from Melissa for his services. Patrick has made a creditable acquisition of goods for $110 from Jonathan and makes a taxable supply of the same thing for $132 (including GST) to Melissa. Patrick is entitled to a $10 input tax credit for the acquisition he is taken to make from Jonathan and is liable to pay $12 GST on the supply he is taken to make to Melissa. Melissa is also entitled to an input tax credit of $12 as the acquisition would have been a creditable acquisition had it been acquired directly from Jonathan.
3.16 If a principal makes a taxable supply to a third party that is covered by a Subdivision 153-B arrangement, and the intermediary bills an amount to the third party customer on behalf of the principal, then the provision of the goods or services to the customer is taken to be a taxable supply by the intermediary to the customer. Additionally, the principal is taken to make a taxable supply to the intermediary of the same thing. Any commission payable by the principal to the intermediary for the intermediary's services is accounted for in the value of the taxable supply made by the principal to the intermediary. GST is payable by the principal on one eleventh of this (reduced) value. The intermediary will be entitled to an input tax credit of an equivalent amount. [Schedule 3, items 11 to 17, section 153-55]
3.17 Under the amendments the Commissioner of Taxation (Commissioner) has the same power to issue determinations that separate party accounting applies to certain arrangements between principals and intermediaries as he does with respect to principals and common law agents. Principals and intermediaries will have the same capacity to opt out of these determinations as principals and agents. [Schedule 3, items 25 to 28, section 153-65]
3.18 The amendments are not intended to affect the existing operation of Subdivision 153-B with respect to common law agents.
Application and transitional provisions
3.19 The amendments will apply to supplies and acquisitions made by intermediaries on or after 1 July 2010. A pre-existing written agreement may be used as long as it meets the conditions in section 153-50.
3.20 This Bill also makes certain consequential amendments to the GST Act. Broadly, the amendments will allow an intermediary to treat the value of any taxable supply that they are taken to make under Subdivision 153-B, as being an amount equal to the 'value' of the commission or similar payment that the principal is liable to pay to them for their services relating to that supply. If an intermediary chooses to work out their GST turnover in this manner, their GST turnover would be equal to the amount that would have been their GST turnover, had they not entered into a Subdivision 153-B arrangement. [Schedule 3, item 29, section 188-24]
3.21 There is a further consequential amendment to the Taxation Administration Act 1953 (TAA 1953), which requires a record of the arrangement between the intermediary and principal to be kept by the principal. The amendment clarifies that a record of the arrangement does not have to be kept by the intermediary. [Schedule 3, item 30, subsection 382-5(5) of the TAA 1953]