ATO Interpretative Decision

ATO ID 2004/76

Goods and Services Tax

• This ATO ID contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019. This ATO ID continues to apply in relation to the remade Regulations.

  A comparison table which provides the replacement provisions in the A New Tax System (Goods and Services Tax) Regulations 2019 for regulations which are referenced in this ATO ID is available.

  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 The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts.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.

Issue

Is entity A, a commodity handling and marketing company, making an input taxed financial supply under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it:

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supplies a commodity to entity B, and

•

agrees to repurchase that commodity from entity B for an agreed price at a future date?

Decision

No, entity A is not making an input taxed financial supply under subsection 40-5(1) of the GST Act when it supplies a commodity to entity B and agrees to repurchase that commodity from entity B for an agreed price at a future date.

Entity A is making a taxable supply under section 9-5 of the GST Act.

Facts

Entity A is a commodity handling and marketing company. Entity B is a financial institution.

The entities enter into an agreement whereby entity A supplies a commodity to entity B. Included in the agreement is an undertaking from entity A to repurchase the commodity for an agreed price at a future date. Where entity A repurchases the commodity, the agreed price is equivalent to the original purchase price paid by entity B plus interest and holding costs borne by entity B.

Ownership and title in the commodity passes from entity A to entity B upon payment by entity B. When the repurchase occurs, ownership and title passes from entity B to entity A upon payment by entity A.

When entity B acquires ownership and title, entity B appoints entity A as its agent for the storage and insurance of the commodity. Possession of the commodity remains with entity A throughout the period of the arrangement.

The arrangement between entity A and entity B does not create a mortgage or charge over the commodity.

Entity A and entity B are registered for goods and services tax (GST). The transactions relate to carrying on their enterprises and the transactions take place in Australia.

Reasons for Decision

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that 'financial supply' is defined in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

(a)

the provision, acquisition or disposal of that interest is:

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for consideration

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in the course or furtherance of an enterprise

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connected with Australia, and

(b)

the supplier is:

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registered or required to be registered for GST, and

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a financial supply provider in relation to the supply of the interest.

Therefore, it is necessary to determine whether entity A is providing, acquiring or disposing of an interest in or under an item mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations when it supplies the commodity to entity B under the agreement.

Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit.

The entities enter into an agreement whereby entity A supplies a commodity to entity B. Included in the agreement is an undertaking from entity A to repurchase the commodity for an agreed price at a future date. Where entity A repurchases the commodity, the agreed price is equivalent to the original purchase price paid by entity B plus interest and holding costs borne by entity B.

The agreement merely provides for the sale and repurchase of goods and there is no creation of a debt, credit arrangement or right to credit, including a letter of credit. In addition, a mortgage or charge has not been created over the commodity. As such, the supply and repurchase of the commodity is not an interest in or under a debt, credit arrangement or right to credit, including a letter of credit. Therefore, the arrangement is not covered by Item 2.

Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 11) lists an interest in or under a derivative. The term 'derivative' is defined in the dictionary of the GST Regulations to mean 'an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate'. Item 3 of part 9 of Schedule 7 of the GST Regulations lists a 'reciprocal repurchase agreement' as an example of a derivative. A repurchase agreement, otherwise known as a 'Reciprocal repurchase agreement' is defined in Schedule 1 of GSTR 2002/2 as 'an agreement whereby securities are sold by one party to another party on the provision that the first party may repurchase them as at a specified price and time'. The agreement in the present situation is not a reciprocal repurchase agreement, because it does not deal with the sale and repurchase of securities, but a commodity.

Ownership and title in the commodity passes from entity A to entity B upon payment by entity B. When the repurchase occurs, ownership and title passes from entity B to entity A upon payment by entity A.

Although, the initial supply of the commodity by entity A to entity B and the future repurchase of that commodity by entity A from entity B could be viewed as a single arrangement which may have the characteristics of a derivative, the agreement involves two separate transactions. The initial transaction is a single supply of goods where ownership and title in the commodity passes from entity A to entity B even though possession of the commodity remains with entity A throughout the period of the arrangement. The second transaction is a repurchase of the commodity and is also a separate supply of goods where ownership and title passes from entity B to entity A. Accordingly, the agreement is not a derivative and is not covered by Item 11.

As the supply and repurchase of the commodity is not a financial supply under subregulation 40-5.09(1) of the GST Regulations, entity A is not making an input taxed supply under subsection 40-5(1) of the GST Act.

Entity A is registered for GST and the supply satisfies the other positive limbs of section 9-5 of the GST Act. Furthermore, the supply is neither GST-free under Division 38 of the GST Act nor input taxed under any other provisions in Division 40 of the GST Act. As such, entity A is making a taxable supply under section 9-5 of the GST Act when it supplies a commodity to entity B and agrees to repurchase that commodity from entity B for an agreed price at a future date.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   Division 38
   subsection 40-5(1)
   subsection 40-5(2)
   Division 40

Keywords
Goods and services tax
GST financial supplies
GST debt, loan and credit
GST derivates
Taxable supply

Siebel/TDMS Reference Number:  3077148

Business Line:  Indirect Tax

Date of publication:  23 January 2004

ISSN: 1445-2782