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Edited version of private ruling
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Ruling
Subject: GST and on-charging of repair costs
Question
Is GST payable when you on-charge the container repair cost to your customers?
Advice/Answer
No, GST is not payable when you on-charge the container repair cost to your customers.
Relevant facts
You are a shipping company and registered for GST.
You provide international transport services. The customer contracts you to transport their goods either from a specified location within Australia to a specified overseas destination or vice versa.
The supply of your international transport services including the provision of the container is made under one contract between you and the customer. This supply is GST-free.
Under your agreement with the customer, you make an empty container available to your customer. Your customer has to return to you the container in a good condition after unloading. There are times when this does not happen.
You arrange for the container to be repaired.
You invoice the container repair cost and sometimes an admin fee to your customer. You have been including GST on this invoice.
Under the terms and conditions of the shipment, the customer is liable to pay additional amounts for any loss, damage or expense you incur as a result of their failure to return the container in a good condition.
Reasons for decision
Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements that must be met for an entity to make a taxable supply. One of the requirements for a taxable supply is that 'you make the supply for consideration' (paragraph 9-5(a) of the GST Act).
In your case, it needs to be determined whether the amount you receive from the customer to cover the container repair cost is consideration for a supply that you make.
The term 'supply' is defined in section 9-10 of the GST Act as any form of supply whatsoever.
Paragraphs 71 to 73 of Goods and Services Tax Ruling GSTR 2001/4 discuss some circumstances where a payment may not relate to a supply:
71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.
72. When such a dispute arises, the aggrieved party will often assert its rights to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.
73. The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.
Under your agreement, the customer is liable to pay for any expense you incur as a result of their failure to return the container in a sound condition.
We consider that the payment you receive from the customer to cover the container repair cost is for damages. This is because they have not met their obligations under the contract. As the substance of the claim for payment is damages, which in itself is not a supply under section 9-10 of the GST Act, you have not made a supply for consideration.
Therefore, as all the requirements of section 9-5 of the GST Act are not satisfied, you have not made a taxable supply. Hence, GST is not payable when you receive payment for the container repair cost.
In addition, GST is not payable on the admin fee you charge your customer in this instance.
Correcting GST mistakes
Where you have incorrectly calculated your GST payable, you have to correct this mistake in your activity statement. For further information refer to the fact sheet Correcting GST Mistakes which is available from our website www.ato.gov.au
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