Edited version of private ruling

Authorisation Number: 1011694405816

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Ruling

Subject: GST and supply of prepaid gift cards

Question 1

Is the supply of the gift card by XYZ Pty Ltd (XYZ) to its customers the supply of an interest in or under an "account" in accordance with item 1 of the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) and therefore input taxed in accordance with section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Yes, the supply of the gift card by XYZ to its customers is the supply of an interest in or under an account in accordance with item 1 of the table in subregulation 40-5.09(3) of the GST Regulations and is therefore input taxed in accordance with section 40-5.

Question 2

Are the fees charged by XYZ to customers in relation to the supply of the gift card represent consideration for the input taxed financial supply the gift card?

The fees charged by XYZ in relation to the gift card (namely, the issue fees and usage fees) represent consideration for the gift card which is input taxed.

Question 3

Is the loading of funds onto the gift card, consideration for a supply made by XYZ?

The loading or transfer of funds onto the gift card is not consideration for any supply made by XYZ.

Question 4

On expiration of the gift card, does the forfeiture of any unused balance to XYZ represent further consideration for the input taxed financial supply of the gift card?

The funds forfeited to XYZ on expiration of the gift card forms consideration for the input taxed supply of the gift card and as such no GST applies on the forfeiture of funds.

(All legislative references are to the GST Act unless stated otherwise)

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

XYZ is a corporation to which paragraph 51(xx) of the Commonwealth of Australia Constitution Act 1901 (the Constitution) applies and is an authorised deposit-taking institution (ADI) that carries on its enterprise of taking deposits and making advances of money in Australia.

XYZ is an Australian ADI in accordance with section 9 of the Corporations Act 2001.

XYZ is the issuer of the gift card.

The gift cards are denominated in Australian dollars and may be used for purchases worldwide where they are accepted.

When using a gift card at merchant terminals, the "Credit" option must be chosen by the customer in order for the transaction to be processed.

The gift cards are available for specific round-dollar preset load amounts.

When a gift card is purchased by a customer (that is, the load value and issue fees are paid) a unique "virtual" account is set up in XYZ's cards system. The account is a "virtual" account as the value of funds initially available for use on the card (that is, the "load value") is not actually "deposited" into the account set up in the cards system. The funds are held (along with all of the other load value amounts paid by customers for other such gift cards) in a single "pool" deposit account by XYZ.

The funds held in the pool account are used to ultimately settle the purchases made by a gift card customer with merchants (that is, XYZ uses the funds held in the pool account to settle amounts with acquirers that provide the card acceptance or merchant services to the merchant).

The virtual account allows a gift card's running balance to be tracked in XYZ's cards system.

In essence the virtual account operates and is processed the same way as any other credit card account within XYZ's card system. That is, when the transaction is switched to XYZ, XYZ must either authorise or decline the transaction. Authorisation (or decline) is dependent upon there being a sufficient remaining balance in the account to fund the transaction.

Cash withdrawals are not currently available on the gift card.

The load value is not recorded on the gift card itself. The magnetic strip on the back of the card holds the necessary information to link the physical card to the virtual account set up in XYZ's card system.

In addition, the load value is not printed or otherwise specified on the physical card.

If any funds remain on the card when the card expires (a stipulated amount of time from the date of purchase) the balance is forfeited to XYZ and not refunded to the customer.

The gift card is not a personalised card. It simply has a card account number as a unique identifier. However the card must be signed by the customer before it may be used.

A Personal Access Code (PAC) and security question/answer must be provided by the customer when they apply for a card.

The PAC, security question/answer information is required by the customer to activate the card, make enquiries about the card or dispute transactions.

After the gift card has been issued by XYZ, customers are not able to load further funds onto the card.

In addition to the funds loaded onto the card, XYZ currently intends to apply various fees to the gift card.

These fees can be broadly split into "Issuing fees" and "Usage fees".

Issuing fees

"Issuing fees" apply when the card is first issued to the customer and are payable in addition to the load amount.

The following are issuing fees relating to the gift card.

· card issue fee which is charged for the issue and posting (by standard post) of the card and establishment of the card account.

· an optional express post fee

Usage fees

"Usage Fees" are charged when the card is used to make purchases, when the customer accesses the internet or help desk to enquire on the balance remaining on the card, or uses the card for an overseas purchase

Usage fees are deducted from the balance of the card account

The following are usage fees relating to the gift card:

· fees relating to balance and transaction enquiries via various communication channels

· international transaction fee (currency conversion required) which is deducted from the card balance when the gift card is used to purchase goods/services from a Merchant where the purchase is denominated in non-AUD currency.

· international transaction fee (no currency conversion) which is deducted from the card balance when the gift card is used to purchase goods/services from an overseas Merchant denominated in AUD.

Reasons for decision

Question 1

Is the supply of the gift card by XYZ to its customers the supply of an interest in or under an "account" in accordance with item 1 of the table in subregulation 40-5.09(3) of the GST Regulations and therefore input taxed in accordance with section 40-5 of the GST Act?

Section 9-5 of the GST Act states that:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you carry on; and

(c) the supply is *connected with Australia; and

(d) you are registered, or *required to be registered.

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

(Terms denoted by asterisks are defined in section 195-1 of the GST Act.)

Subsection 40-5(1) provides that a financial supply is input taxed and subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given by the GST Regulations. Amongst other things, 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.

Paragraph (a) of item 1 of the table in sub-regulation 40-5.09(3) of the GST Regulations refers to an interest in or under an account made available by an Australian ADI in the course of its banking business within the meaning of the Banking Act 1959.

Account

The dictionary to the GST Regulations defines an account as follows.

account:

(a) means an account mentioned in item 1 in the table in regulation 40-5.09; and

(b) includes an account in relation to which the account holder (the customer) has the right:

i) to have the account maintained by the account provider (the provider); and

ii) to repayment of the amount credited to the account by the provider; and

iii) to require the provider to act on directions by the customer that are in accordance with the arrangements, or any agreement, between the provider and the customer in relation to operation of the account.

The term 'account' in paragraph (a) of the above definition is not defined further in the GST Regulations.

Paragraphs 202-206 of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) provides some explanation about the definition of 'account' contained in the GST Regulations and states that:

202. The Dictionary to the GST regulations defines account by way of a 'means and includes' definition. For the purposes of item 1 of subregulation 40-5.09(3) and subregulation 40-5.09(4), 'account' means an account made available by an Australian ADI within the meaning of section 9 of the Corporations Act. This is the combined effect of both the item and the 'means' definition within paragraph (a) of that defined term.

203. As illustrated in example 9, the supply or acquisition-supply of an interest in or under a debt may include account-like facilities with a non-ADI. Provided that the other elements of regulation 40-5.09(3) are satisfied, the financial interest in these circumstances will be a financial supply that includes the provision of the account-like facilities. The account-like facility in these circumstances is not dependent on coming within paragraph (a) of the definition of account.

204. This includes account-like facilities that may arise as part of the provision, acquisition or disposal of an interest in or under one of the table items in regulation 40-5.09(3). The definition of account in the GST regulations therefore includes savings/transaction accounts, cheque accounts, term deposits, loan accounts and credit card accounts.

205. Paragraph (b) of the definition extends the meaning of account to include accounts with institutions other than ADIs. This is of most relevance to regulation 70-5.02 in that items referring to accounts (such as items 1 to 5 and item 8) are not limited to Australian ADI accounts. It includes accounts that have characteristics whereby the account holder has the right to:

· have the account maintained by the account provider (the provider);

· repayment of the amount credited to the account by the provider; and

· require the provider to act on directions by the account holder that are in accordance with the arrangements, or any agreement, between the provider and the account holder in relation to operation of the account.

206. While paragraph (b) of the definition extends the meaning of account to include accounts with institutions other than ADIs the term must still be read in the context in which it appears. While definitions of account in general dictionaries may extend the meaning to include 'any periodically rendered reckoning', the context of an item in the GST regulations narrows it to transactions involving a sum of money. Therefore, the meaning of account as used in the GST regulations does not extend to an 'account' that records non-monetary balances such as reward/loyalty point and 'frequent flyer' point balances. (These accounts are further excluded from the scope of the GST regulations as they do not give 'account holders' the right to repayment of an amount credited.) This meaning of 'account' is specific to the GST regulations and it is not necessarily interpreted in the same way for the purpose of the GST Act.

Explanation of a similar effect to that in the above paragraphs of GSTR 2002/2 are also contained at paragraphs 51-54 of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1).

In this case, XYZ maintains an electronic record of issued gift cards in its operating account as well as the initial value of each gift card and the balance of the gift card after the initial value has been debited or reduced by relevant transactions between cardholders and merchants.

Consistent with the discussion in the above mentioned paragraphs in GSTR 2002 and GSTR 2004/1, we are of the view that the gift card facility is an account for the purposes of paragraph (a) of item 1 of the table in subregulation 40-5.09(3) of the GST Regulations.

Made available

In this case, a cardholder can ascertain the balance of funds available on the gift card over the internet, or (for a fee) by calling an information line. Additionally, a gift card's balance in the operating account is used for the purposes of authorising future transactions between the cardholder and merchants. Therefore, our view is that the gift card facility in this case is an account 'made available' to the cardholder for the purposes of item 1 of the table in subregulation 40-5.09(3) of the GST Regulations.

Banking business

'Banking business' is defined in subsection 5(1) of the Banking Act 1959 as:

· a business that consists of banking within the meaning of paragraph 51(xiii) of the Constitution; or

· a business that is carried on by a corporation to which paragraph 51(xx) of the Constitution applies and that consists, to any extent, of:

· both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money; or

· other financial activities prescribed by the regulations for the purposes of this definition.

'Banking' in paragraph 51(xiii) of the Constitution is not defined in the Constitution. The leading High Court authority on the meaning of 'banking' is Commissioner of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457. There, Isaacs J at 470 - 1 described the essential characteristics of a banking business as:

… the collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilization of the money so collected by lending it again in such sums as are required. These are the essential functions of a bank as an instrument of society. It is, in effect, a financial reservoir receiving streams of currency in every direction, and from which there issue outflowing streams where and as required to sustain and fructify or assist commercial industrial or other enterprises or adventures.

In consideration of the circumstances in this case as well as the principles found in the judgement of Isaac J, our view is that provision of the gift card facility by XYZ is characterised as falling within XYZ's business that consists of banking for the purposes of paragraph (a) of the definition of banking business.

It is also considered that the provision of the gift card facility by XYZ will satisfy the requirement of paragraph (b) of the definition of banking business. This is because the entity, being a corporation to which paragraph 51(xx) of the Constitution applies, is carrying on a business that consists, to any extent, of both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money.

In light of the analysis above, our view is that for the purposes of item 1 of the table in subregulation 40-5.09(3) of the GST Regulations, the provision of the gift card by XYZ is a provision of an interest in an account made available by XYZ in the course of its banking business within the meaning of the Banking Act 1959 (Banking Act).

We note the contention put forth by XYZ surrounding Division 100 (which is about vouchers and stored value cards) and confirm that the gift card is an account facility that is linked to accounts provided by an Australian ADI and is therefore, not a face value voucher (FVV) as per paragraph 67 of Goods and Service Tax Ruling GSTR 2003/5 Goods and services tax: vouchers (GSTR 2003/5). Accordingly, the gift card also does not fall within item 5 of regulation 40-5.12 of the GST Regulations which concerns stored value facility cards and prepayments not linked to accounts provided by an Australian ADI in connection with an account mentioned in item 1 of the table in regulation 40-5.09 of the GST Regulations.

As such, the supply of the gift card by XYZ is an input taxed financial supply where all the other relevant requirements of regulation 40-5.09 are satisfied.

Question 2

Are the fees charged by XYZ to customers in relation to the supply of the gift card represent consideration for the input taxed financial supply the gift card?

The issue in this instance is whether or not the fees charged by XYZ to the customers in relation to the gift card represents consideration for the input taxed supply of the gift card or for a separate supply that has an aim in itself. The AustralianTax Office's view on supplies is contained in Goods and Services Tax Ruling GSTR 2006/9: supplies (GSTR 2006/9) and paragraph 180 states:

Sufficient nexus

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

· the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

· regard needs to be had to the true character of the transaction; and

· an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made

In applying the principles in paragraph 180 of GSTR 2006/9, it is extremely difficult to find a sufficient nexus between the respective fees charged by XYZ and any other supply other than for the supply of the gift card. The true character of the arrangement under this program is one of which where XYZ issues a gift card to the cardholder and charges it fees for the costs it incurs. Therefore, in our view the fees charged to the cardholder solely arise as a consequence of opening, keeping, maintaining operating and closing an account and accordingly, forms part of the consideration for providing the gift card under item 1 of 40-5.09(3) of the GST Regulations. Paragraph 284 of GSTR 2002/2 lends additional support and states that:

Schedule 2

284. Schedule 2 of this Ruling sets out the GST treatment of supplies and fees commonly provided by financial supply providers. Many of these are expressed by reference to the consideration provided for the supply of the services.

…………

Please note:

Fees, charges and payments received or charged for a supply are generally regarded as consideration (or part of the consideration) for a financial supply rather than a financial supply themselves. For example, interest payable on money loaned or deposited is generally regarded as part of the consideration for the use of money (a debt).

In this table the listed fees, charges and payments are given a GST status which technically corresponds to the supply for which they are given as consideration. For example, fees paid as part of the consideration for a loan is categorised as 'input taxed'. Where consideration is listed in the second column, the item (or legislative provision) that relates to it is listed in the third column

Question 3

Is the loading of funds onto the gift card, consideration for a supply made by XYZ?

Loading of value onto the gift card

Paragraphs 49-51 of GSTR 2003/5 deal with vouchers and customer accounts and states that:

Vouchers and customer accounts

49. A credit to an account, by transferring money to the account, where that money is to be used for future supplies, is not a supply. This is the case even though a card or thing resembling a voucher may be given to create the credit or enable access or use of the credit in the account.

50. The supplier of the facility for the account is not supplying a voucher, nor is it making a supply of money. The supplier of the facility for the account is not making a taxable supply; and it is not providing consideration for a taxable supply.

51. The entity establishing the credit to the account is not acquiring a voucher nor is it making a payment for the credit in the account; rather, the entity is transferring credit into the account as provision for the acquisition of future supplies. The transfer of funds is not a taxable supply; and it is not consideration for a taxable supply. However, where an unused amount in an account is forfeited, for example on a particular expiry date, the amount forfeited is consideration for use of the facility. The use of the facility is a supply which is taxable if the requirements of section 9-5 are met. The relevant GST is attributable on forfeiture.

When XYZ issues the gift card to customers, a value as selected by the customer is loaded onto the gift card. The payment by the customer will cover the principal value that is loaded together with any fees charged by XYZ. The card is signed by the customer and may then be used to make purchases from merchants where the gift cards are accepted. Based on these facts, we consider that the payment by the cardholder that represents the principal value to be loaded onto the gift card supplied by XYZ is credit to an account. Therefore, the amount provided by the customer when acquiring the gift card with a preloaded value is not a supply and is not consideration for any supply to the extent of the amount loaded onto the gift card. The loading of value on the gift card is thus not subject to GST.

When the customer uses the card for the purchase of goods and services from various merchants, the value on the card is depleted. It is our view that at this point in time the customer pays for the services and the supplier receives the consideration for the supply. The consideration is the amount by which the value on the card is depleted.

Question 4

On expiration of the gift card, does the forfeiture of any unused balance to XYZ represent further consideration for the input taxed financial supply of the gift card?

It is part of the terms and conditions for the use of the gift card that any balance of the unused funds after the expiry date will be forfeited.

As referred to above, paragraph 51 of GSTR 2003/5 relevantly provides that where an unused amount in an account is forfeited on a particular expiry date, the amount forfeited is consideration for use of the facility.

As the gift card facility is input taxed, the forfeiture of the balance of any unused funds after the expiry of the gift card forms consideration for the input taxed supply of the gift card and as such no GST applies on the forfeiture of funds.

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