Edited version of private ruling

Authorisation Number: 1011768144577

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Ruling

Subject: GST and reduced credit acquisitions related to DEVICES services

Issue 1

Question 1

Do the Services acquired by Entity A from Entity B constitute a 'reduced credit acquisition' under Item 6 in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Answer

No. Entity A's acquisition of Services from Entity B does not constitute a reduced credit acquisition under Item 6 in subregulation 70-5.02(2) of the GST Regulations.

Question 2

Do the Services acquired by Entity A from Entity B constitute a 'reduced credit acquisition' under item 27 in subregulation 70-5.02(2) of the GST Regulations?

Answer

No. Entity A's acquisition of Services from Entity B does not constitute a reduced credit acquisition under Item 27 in subregulation 70-5.02(2) of the GST Regulations.

Issue 2

Question 1

Should the fee payable for the Services by Entity A be treated as an 'enterprise cost'?

Answer

The fee directly relates to Entity A's supply of DEVICES services as contemplated in subregulation 40-5.09(4A) of the GST Regulations and is not an enterprise cost.

You have provided the following background facts and comments:

· Entity A operates and maintains devices('Devices') throughout Australia. The Devices may be at various locations. Entity A is not an Authorised Deposit-Taking Institution (ADI) DEVICES provider.

· The Devices allow Cardholders to make account enquiries and/or transactions from their personal accounts. DEVICES providers fall within two categories: providers who are ADIs and providers who are not-ADIs (non-ADI providers).

· The Consumer Electronic Clearing System (CECS) regulates and governs the DEVICES systems (and Electronic Funds Transfer at Point of Sale or EFTPOS system) in Australia. In summary, a 'consumer electronic transaction', such as an DEVICES transaction, includes the following entities:

o 'Acquirer' - an Acquirer is a body corporate which 'acquires' or 'facilitates' a Transaction from an DEVICES on behalf of an Issuer;

o 'Issuer' - the role of the Issuer is to provide the customer with a payment instrument (such as a debit card, prepaid card or credit card) that complies with the appropriate standards. An Issuer will also be responsible (among other things) for negotiating with Acquirer's for Card acceptance and appropriate Cardholder service;

o 'Cardholder' - the Cardholder is the ultimate customer of the system. The Cardholder is also the customer of the Issuer;

o 'Third Party Processor' - the role of Third Party Processors within the CECS system is to provide an outsourced facility for transaction processing and support to other participants; and

o 'Merchants' - a merchant is a person or body corporate which delivers goods or services to a Cardholder at a point of sale and which, in the normal course, is reimbursed by the Acquirer to which, from the Terminal that it operates, it electronically transmits that Transaction.

· Entity A is an 'Acquirer' in respect of DEVICES transactions. Entity A as the owner and operator of Devices will facilitate a transaction instigated by a Cardholder. The transaction may be an account balance enquiry or a transactions.

· From 3 March 2009, Entity A, as an Acquirer, has been entitled to charge an "DEVICES Operator Fee" directly to a Cardholder. The DEVICES Operator Fee is paid by a Cardholder to the operator of an DEVICES to effect a transaction through the Acquirer's Terminal.

· The DEVICES Operator Fee that is directly charged by Entity A to a Cardholder is treated as an input taxed financial supply in accordance with subregulation 40-5.09(4A) in the GST Regulations.

· You noted that subregulation 40-5.09(4A) of the GST Regulations was introduced to prevent any GST anomalies arising from the shift to direct charging for DEVICES services that occurred from 3 March 2009. You further noted that prior to the amendment, the GST tredevicesent of an DEVICES Operator Fee charged by non-ADIs, such as Entity A, would have been a taxable supply as the services provided by non-ADIs do not fall under any of the categories of financial supply under subregulation 40-5.09 of the GST Regulations. From a Cardholder's perspective, imposing GST on transactions from one type of DEVICES supplier would potentially complicate and distort their DEVICES choices. Accordingly, subregulation 40-5.09(4A) was introduced to ensure the same GST tredevicesent of DEVICES transaction charges regardless of the nature of the supplier.

· In order to effectively provide DEVICES services, Entity A must enter into an agreement with third parties (e.g. Entity B) to enable Entity A to install, operate and maintain Devices at Entity B's premises.

· The agreement entered into between Entity A and Entity B outlines the terms and conditions in which Entity A agrees to install Devices at Entity B's premises. Entity B agrees to provide the following (collectively referred to as "the Services"):

o A licence to use areas to install Devices;

o Telephone cables;

o Single phase G.P.O.'s (i.e. power supply); and

o Modem and security alarm housing.

· Entity B may also agree to provide for the packing of DEVICES cassettes for use in the Devices as advised by Entity A.

· Entity A agrees to pay a fee to Entity B that is linked to the number of DEVICES transactions processed. Entity B receives an agreed percentage of the DEVICES Operator Fee that Entity A directly charges a Cardholder who uses an DEVICES (i.e. Fee = agreed % transaction fee x number of transactions per month).

Reasons for decision

Issue 1 Question 1

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit 'for any creditable acquisition that you make'. For an acquisition to qualify as a creditable acquisition it must, among other things, be acquired 'solely or partly for a creditable purpose' (section 11-5 of the GST Act).

Under subsection 11-15(1) of the GST Act, a thing is acquired for a creditable purpose to the extent that 'you acquire it in carrying on your enterprise'. Under paragraph 11-15(2)(a) of the GST Act, a thing acquired in carrying on an enterprise is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Section 40-5 of the GST Act provides that a financial supply, as defined in the GST Regulations, is input taxed.

Subregulation 40-5.09(4A) of the GST Regulations provide that an entity makes a financial supply when it provides (for a fee of not more than $1 000) a supply of 1 or more of the following DEVICES services:

(a) a transactions from an account

(b) a deposit into an account

(c) an electronic transfer from an account

(d) advice of the balance of an account.

We consider that Entity A is making a financial supply consisting of the DEVICES services contemplated in Subregulation 40-5.09(4A) of the GST Regulations which will be input taxed under section 40-5 of the GST Act to the extent that none of the GST-free provisions contained in the GST Act apply to Entity A's supply.

Notwithstanding that an acquisition relates to making financial supplies, section 70-5 of the GST Act indicates that you may be entitled to a reduced input tax credit on reduced credit acquisitions that are provided for in the GST Regulations to the extent that you are not already entitled to an input tax credit for that acquisition.

The Further Supplementary Explanatory Memorandum, which explains the amendments to the A New Tax System (Goods and Services Tax) Bill 1998 (the Bill) that introduced Division 70 in the GST Act, confirms that the reason for introducing reduced credit acquisitions was to remove the bias towards in-sourcing of the prescribed services.

Subregulation 70-5.02(2) of the GST Regulations provides an exhaustive list of those acquisitions that are reduced credit acquisitions.

In relation to your ruling request, your first contention is that the Services acquired from Entity B is a reduced credit acquisition listed under item 6(c) of subregulation 70-5.02(2) of the GST Regulations being 'charges charged between participants in a payment system'.

We note that item 6 of subregulation 70-5.02(2) of the GST Regulations (Item 6) lists the following acquisitions of supplies to which a payment system fee relates:

Supplies to which the following payment system charges relate:

(d) charges charged by the operator of a payment system to a participant in the system;

(e) charges charged by a participant in a payment system to a third party in relation to access to the system;

(f) charges charged between participants in a payment system

The dictionary section of the GST Regulations defines 'payment system' and 'participant' as follows:

· payment system means a funds transfer system that facilitates the circulation of money including any procedures that relate to the system.

· participant, in a payment system, means a person who is a participant in the system in accordance with the rules governing the operations of the system.

Paragraph 246 of Goods and Services Tax Ruling GSTR 2004/1: Goods and services tax: reduced credit acquisitions (GSTR 2004/1) lists one of the examples of what the Commissioner of Taxation (Commissioner) accepts to be a 'payment system', being a system or network that facilitates the transfer of funds through 'devices (DEVICES) transactions'.

You mainly contend that Entity B is a participant in a payment system for the following reasons as stated in your ruling request:

· The approach taken by the Full Federal Court in Federal Commissioner of Taxation v. American Express Wholesale Currency Services Pty Ltd & Anor [2010] FCAFC 122 (Amex Case) in its construction of the GST Regulations and the phrase 'payment system' supports a conclusion that Entity B should also be treated as a 'participant in a payment system'; and

· You submit that, given the Full Federal Court's conclusion in the Amex Case that a merchant is a participant in a payment system by virtue of its right to receive payment from Amex in accordance with the procedures governing the system, Entity B should also be a participant in a payment system as Entity B has an interest in the DEVICES Operator Fee which it is entitled to receive as a consequence of permitting an DEVICES to operate at its location.

Relevantly, GSTR 2004/1 notes at paragraph 247 the following as to who is an operator of a payment system:

247. As the expression operator of a payment system is not defined in the GST Act or regulations, its meaning is derived from the context in which it is used. In the context of item 6, operator of a payment system is taken to mean any entity engaged in a business of providing a payment system. Generally, such an entity establishes the rules and procedures of the system, markets the system and acts as guarantor for the payment obligations entered into by those entities who are granted access to participate in the system. [Emphasis added]

GSTR 2004/1 also notes at paragraph 250 the following in relation participants in a payment system:

250. Entities that are not granted access to a payment system but benefit from a relationship with a participant (for example, entities that enter into co-branding arrangements or provide participants with sales or third party processing services) are also not participants in a payment system for the purposes of item 6. [Emphasis added]

As you have mentioned in the facts supplied, the DEVICES system is designated as a payment system pursuant to Section 11 of the Payment Systems (Regulation) Act 1998 and is governed by the rules set out in the CECS manual for the Consumer Electronic Clearing System.

Part 11 of the CECS manual contains the rules and standards that must be followed by Acquirers who acquire Transactions involving an DEVICES Operator Fee and also provides for Acquirers to directly charge Cardholders an DEVICES Operator Fee from 3 March 2009.

We consider that Entity B is not granted access to participate in the payment system.

Although Entity B has a contractual right to be paid a fee for its supply of Services to Entity A as Acquirer and operator of the Devices, the reference to the Operator's fee in determining the fee for the Services is merely method of calculating the consideration for the supply of the Services.

This is in contrast to the situation discussed in Amex in which a merchant had a right to receive payment from Amex in accordance with the rules governing the system. In this sense, whilst Entity B may have an enforceable interest in a share of the DEVICES Operator fee, that interest does not arise under the terms of the procedures governing the system. Entity B is in no better position to enforce its right to the rebate under the terms of the 'procedures governing the system' than the cardholders referred to in Amex were to enforce the procedures which ultimately resulted in payment to the merchant. Refer the following extract from the judgement of Kenny and Middleton JJ:

A merchant who agrees with Amex Intl to accept its cards as payment from customers has a right to receive payment from Amex Intl in accordance with the procedures governing the system. It was not suggested that a cardholder has any legal right to enforce the procedures which ultimately result in payment to the merchant……..(at 181).

We further consider that the nature of the Services acquired by Entity A is not of a type that a financial supply provider would ordinarily in-source as envisaged by the scheme of Division 70 of the GST Act.

Therefore, we consider that Entity B is not a participant in a payment system. As such, the acquisition of the Services by Entity A from Entity B does not fall within those acquisitions listed in Item 6(c) in subregulation 70-5.02(2) of the GST Regulations.

Issue 1 Question 2

Summary

No. Entity A's acquisition of Services from Entity B does not constitute a reduced credit acquisition under Item 27 in subregulation 70-5.02(2) of the GST Regulations as Entity A is not a financial supply provider, Entity B is not a financial supply facilitator and the payment of the fee does not represent commission.

Detailed reasoning

In relation to your ruling request, your second contention is that the Services acquired from Entity Bs are reduced credit acquisitions listed under item 27 of subregulation 70-5.02(2) of the GST Regulations (Item 27) being 'supplies for which financial supply facilitators are paid commission by financial supply providers'.

For Item 27 to be met, there must be:

· A financial supply provider;

· A financial supply facilitator; and

· Commission.

Financial supply provider

Subregulation 40-5.06(1) of the GST Regulations provides that an entity, in relation to the supply of an interest that was immediately before the supply, the property of the entity or created by the entity in making the supply, is the financial supply provider of the interest.

To be a financial supply provider, the supplier must supply an interest. Under the current circumstances, we consider that in making the supplies of DEVICES services as listed in subregulation 40-5.09(4A) of the GST Regulations, Entity A does not supply an interest, but are merely supplying services. As such, Entity A is not a financial supply provider as Entity A does not supply an interest as required by subregulation 40-5.06(1) of the GST Regulations.

Financial supply facilitator

A financial supply facilitator is defined in regulation 40-5.07 of the GST Regulations as an entity facilitating the supply of an interest for a financial supply provider.

To be a financial supply facilitator, an entity must facilitate a supply of an interest. Under the current circumstances, given that the supplies of DEVICES services as listed in to subregulation 40-5.09(4A) of the GST Regulations do not involve a supply of an interest, Entity B is not a financial supply facilitator in relation to the Services being supplied.

Commission

The term 'commission' is not defined in the GST Regulations for the purposes of Item 27.

The Commissioner has defined 'commission' in Goods and Services Tax Ruling GSTR 2002/2: Goods and services tax: financial supplies (GSTR 2002/2), which is referred to in GSTR 2004/1 in the context of Item 27 as follows:

652. Commission, as defined in GSTR 2002/2 is:

payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis, or on a sliding scale based on the value of the transaction.

For the purposes of item 27, the services are not those provided by an employee.

653. While the term commission may include corpus commission, income commission, trailing commission, and brokerage, not all of these are necessarily payments to a financial supply facilitator. Other charges, including those calculated on the value of work done, rather than a per-transaction or percentage of value based calculation, and retainers, are not commission.

Relevantly, we consider that the payment must be made 'to an agent or similar entity'.

You contend that the payment made by Entity A satisfies the meaning of 'commission' for the purposes of Item 27.

We do not consider Entity B is paid a commission by Entity A in respect of the Services acquired by Entity A.

This is because the contractual arrangements entered into between Entity A and Entity B does not evidence an arrangement where Entity B acts as an agent or in a similar capacity. Although the fee paid to Entity B which is based on a fixed percentage of DEVICES Operator fee, we consider it merely as a method of calculating the consideration payable for the Services provided by Entity B.

Issue 2 Question

Summary

The Services fee directly relates to Entity A's supply of DEVICES services as contemplated in subregulation 40-5.09(4A) of the GST Regulations and is not an 'enterprise cost'.

Detailed reasoning

Section 11-20 of GST Act provides that you are entitled to an input tax credit 'for any creditable acquisition that you make'. For an acquisition to qualify as a creditable acquisition it must, among other things, be acquired 'solely or partly for a creditable purpose' (section 11-5 of the GST Act).

Under subsection 11-15(1) of the GST Act, a thing is acquired for a creditable purpose to the extent that 'you acquire it in carrying on your enterprise'. Under paragraph 11-15(2)(a) of the GST Act, a thing acquired in carrying on an enterprise is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

As mentioned above, we agree that Entity A is making input taxed financial supplies of DEVICES services.

You contend that the fee payable by Entity A should be treated as an 'enterprise cost' and should not directly relate to the making of an input taxed financial supply of DEVICES services. You further contend that the fee Entity A pays is one of a number of costs incurred by Entity A in carrying on Entity A's enterprise, which includes the installation and maintenance of its network of Devices across Australia. As such, you argue that the Services, although it relates to Entity A's enterprise, is not directly linked to the making of any supply.

The Commissioner notes in Goods and Services Tax Ruling GSTR 2006/3: Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) at paragraph 70 that:

If you establish that you have made an acquisition, or class of acquisitions, partly for creditable and partly for non-creditable purposes, apportionment of the input tax credit for that acquisition between the uses to which it is either intended or actually put is required. In practice, this will usually involve an initial decision as to whether the acquisition is to be allocated solely to a particular purpose (in which case apportionment is not required).

GSTR 2006/3 further considers the methods of calculating the extent of creditable purpose and notes that the use of direct methods best accords with the basic principles set out by the High Court in Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47 where the High Court considered both the allocation of distinct expenditure to specific activities, as well as apportionment.

GSTR 2006/3 notes at paragraph 90 that:

Direct methods seek to identify, on a fair and reasonable basis, a direct connection between acquisitions or importations and supplies or other activities of the enterprise. This may result in a decision that acquisitions or importations are solely (or not at all) for a creditable purpose. In other cases, the intended use may be considered to be partly for a creditable purpose.

As noted by you, GSTR 2006/3 also considers those acquisitions that, although relating to the carrying on of an enterprise as a whole, are not directly linked to the making of supplies (referred to as 'enterprise costs') and may require an apportionment across all activities of that enterprise.

We consider that the nature of the Services acquired for which the Services is payable has a direct link to the supply of Entity A's DEVICES services, rather than indirectly to all the supplies made by Entity A in Entity A's enterprise. That is, it directly relates to Entity A's activities as an 'Acquirer' in respect of the DEVICES transactions for which Entity A charge a Cardholder an DEVICES Operator Fee. As such, we consider that the Services are not an enterprise cost as it specifically relates to a particular supply Entity A makes.

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