ATO Interpretative Decision
ATO ID 2003/49
Goods and Services Tax
GST and supply of discounted creditFOI status: may be released
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With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the entity, a finance company, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when in accordance with a general understanding with a seller of goods, it allows a reduction off the normal rate of interest on credit it provides to a purchaser of goods from that seller?
Decision
Yes, the entity is making a taxable supply under section 9-5 of the GST Act, when in accordance with a general understanding with a seller of goods, it allows a reduction off the normal rate of interest on credit it provides to a purchaser of goods from that seller.
Facts
The entity is a finance company. The entity has a general understanding with a seller of goods under which it will allow a reduction off the normal rate of interest on credit it provides to prospective purchasers of goods from that seller.
In return for allowing a reduction off the normal rate of interest on credit provided to the purchaser, the seller of the goods pays to the entity an amount (known as a subsidy) equal to the difference between the agreed reduced interest rate and the market interest rate.
When making a sale, the seller of goods advises the purchaser of the availability of credit from the entity at a reduced interest rate. The entity then provides the purchaser with credit at a reduced interest rate. This is a financial supply that is input taxed under subsection 40-5(1) of the GST Act.
The general understanding between the entity and the seller of goods is informal and does not create any binding obligations between the parties.
There is no written agreement between the entity and the seller or the purchaser of the goods regarding the subsidy payment.
The entity is registered for goods and services tax (GST). The transaction between the entity and the seller of the goods is made in the course or furtherance of the entity's enterprise, and is connected with Australia.
Reasons for Decision
Under section 9-5 of the GST Act, an entity makes a taxable supply if:
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- it makes the supply for consideration,
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- the supply is made in the course or furtherance of an enterprise that the entity carries on,
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- the supply is connected with Australia, and
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- the entity is registered or required to be registered for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
In this case, the entity is registered for GST, and the transaction between the entity and the seller of the goods is made for consideration, in the course or furtherance of the entity's enterprise and is connected with Australia. However, it remains necessary to determine whether the transaction amounts to a 'supply' as defined in the GST Act.
Although the general understanding between the entity and the seller of goods is informal and does not create any binding obligations between the parties to provide discounted credit, it is not necessary that there is an entry into an obligation under the general understanding for there to be a supply.
Under section 9-10 a supply is any form of supply whatsoever, including a supply of services. The entity is making a supply of a service to the seller of goods by allowing a reduction off the normal rate of interest on credit it provides to a purchaser of goods from that seller.
The supply is not the actual provision of credit and is therefore not a financial supply that is an input taxed supply under subsection 40-5(1) of the GST Act. In addition, the supply is not input taxed under any of the other provisions in Division 40 of the GST Act nor is it GST-free under Division 38 of the GST Act. Accordingly, all of the requirements in section 9-5 of the GST Act are satisfied.
Therefore, the entity is making a taxable supply under section 9-5 of the GST Act when it enters into an agreement with the seller of goods, to provide credit at a reduced interest rate to a prospective purchaser.
Date of decision: 13 November 2001
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
subparagraph 9-10(2)(b)
Division 38
Division 40
subsection 40-5(1)
Keywords
Goods & services tax
GST supplies & acquisitions
GST supply
Taxable supply
Input taxed supplies
GST financial supplies
ISSN: 1445-2782