Edited version of private ruling

Authorisation Number: 1011501647662

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Ruling

Subject: on-charging of expenses

Question:

Are you liable for the goods and services tax (GST) when you on-charge a business expense to your customers?

Answer: Yes

Relevant facts:

You are registered for GST.

You pay for a business expense as part of carrying on your enterprise.

You pass on the expense to your customers by taking the expense into account in setting your price for your supply in your invoice.

You provide a tax invoice to your customer and GST is included in your price.

Reasons for decision

Summary

Under section 9-40 of the GST Act you must pay GST on your taxable supplies.

You make a taxable supply if your supply satisfies all the criteria in section 9-5 of the GST Act.

If the supply is taxable, GST is payable on the value of the supply. The value of a supply is equal to the GST-exclusive consideration for the supply. Therefore GST will apply to the outgoings.

Detailed reasoning

Under section 9-40 of the GST Act you must pay GST on your taxable supplies. You make a taxable supply under section on 9-5 of the GST Act if:

· you make the supply for consideration

· the supply is made in the course or furtherance of your enterprise

· the supply is connected with Australia and

· you are registered or required to be registered.

However, the supply will not be taxable to the extent that it is GST-free or input taxed.

You make a supply for consideration in the course of your enterprise. Your supply is connected with Australia and you are registered for GST. Your supply is neither GST free under neither Division 38 nor input taxed under Division 40 of the GST Act. Therefore you are liable for GST under 9-40 of the GST Act for your taxable supply.

On-charging of expenses

In the course of carrying on your enterprise, you incur expenses which you on-charge to your customers.

We now need to consider whether the on-charging of your business expenses forms part of the consideration for your supply.

The GST implications of on-charging of business expenses are considered in Goods and Service Tax Determination GSTD 2000/10.

Paragraphs 8, 25 and 26 of GSTD 2000/10 provide examples of how an Australian tax, fee, or charge specified in the Treasurers Determination are subject to GST, when on-charged in a subsequent supply and state:

8. Payment by the landlord of local council rates, land tax or water charges may not be subject to GST because of the operation of Division 81. If the tenant is required under the terms of the lease to reimburse the landlord's expenditure on an 'Australian tax, fee or charge'listed in the determination made by the Treasurer under subsection 81-5(2) of the GST Act, this is not the 'payment of [an] Australian tax, fee or charge' by the tenant and Division 81 does not apply to the tenant's reimbursement of the rates, land tax or other charges.

25. On 1 July 2000 Annette leases commercial premises to Matthew. The consideration under the lease agreement consists of $ 1, 000 base rent per month plus reimbursement of Annette's expenses for the property including rates. Under the agreement Annette can recoup from Matthew any GST payable by her in relation to the lease.

26. Annette pays the local authority $ 220 for rates for July. The rates are a ' tax, fee or charge' specified in the Division 81 Determination made by the Treasurer. Therefore the payment of the rates is not consideration for a supply that the local authority makes to Annette and the local authority does not make a taxable supply to Annette. She is not entitled to an input tax credit in relation to the rates. Annette provides a tax invoice to Matthew for $ 1, 342. This amount is made up of $ 1, 000 base rent, $ 220 outgoings and $ 122 GST.

The on-charging of council rates that is listed in the Treasurers Determination will not be covered by Division 81 and will be subject to GST as it is now part of the consideration for the supply of commercial premises. The rates in this example that are on-charged to the tenant have lost their character as a tax or fee and have become part of the price of the subsequent supply of commercial premises.

Although the example is in relation to on-charging of rates under a lease of a commercial premise, the principle applying to on-charging of a business expense is the same.

That is if a payment for services provided to a tenant is part of the supply of the premises, the on-charging of the expense by the landlord will be consideration for the supply of premise. Where the supply of the premises is a taxable supply, the landlord is liable for GST on the on-charging of these expenses.

You advise that you on-charge your business expense to your customers by taking the expense into account in setting the price for your supply and including the expense in your tax invoice. Therefore, the on-charge of the expense will be part of the consideration for your supply.

As explained above you are liable for GST under 9-40 of the GST Act for your taxable supply. Therefore you will also be liable for GST on the on-charge of your expense to your customers. The on-charge of the expense become part of the price for your supply.

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