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Ruling

Subject: GST and reimbursements

Question 1

Are you entitled to claim an input tax credit for the medical services acquired by the Consultant?

Answer

No.

Question 2

In relation to the reimbursement of expenses by you to the Consultant under the Agreement, is your input tax credit entitlement on the reimbursement equal to the GST payable by the Consultant on the reimbursement based on a value equal to the GST-exclusive amount of the expenses incurred by the Consultant?

Answer

Your input tax credit entitlement on the reimbursement is an amount equal to the GST payable by the Consultant on the reimbursement.

Question 3

In relation to the on-charging of expenses by the Consultant to you under the Agreement, does the GST legislation require the Consultant to calculate the GST payable on the reimbursement based on the GST-inclusive cost of the relevant expense where the Consultant is entitled to an input tax credit for the relevant expense?

Answer

There are no provisions in the GST legislation that require the supplier to calculate the GST payable on the reimbursement based either on the GST-inclusive or the GST-exclusive cost of the relevant expense. This is a business decision and a contractual matter between the parties.

Relevant facts and circumstances

You are registered for GST.

You and the Consultant have entered into an agreement (the Agreement) with effect from a specified date.

You have provided a copy of the unexecuted Agreement.

The Agreement provides that the Consultant is to provide human resources and recruitment services expertise as described in the Agreement.

The Agreement sets out the responsibilities of the Consultant which include, amongst other things, managing third party vendors including medicals and drug screens for newly appointed employees. As directed by you, the Consultant is to make appointments/place orders to third party vendors and pay their invoices. All invoices from the third party suppliers are to be sent and paid by the Consultant. The Consultant is to collect all invoices and create a new invoice for you. These invoices will be reimbursed by you following the conclusion of each recruitment.

The Agreement provides that:

Subject to the proper supply of the services, you will pay to the Consultant a specified amount as set out in the Agreement.

The specified amount cannot be varied without the parties prior written agreement.

The Consultant agrees that the specified amount is the only remuneration or financial benefits to which the Consultant is or may become entitled.

On satisfactory proof of payment, the Consultant will be reimbursed all out-of-pocket expenses reasonably and properly incurred in providing the services and that are incurred with your prior consent.

The Agreement provides that the relationship of the parties is that of independent contractors and the Consultant is not your agent for any purpose. The Consultant is not authorised to do business in your name or to bind you in any way, or hold itself out as having the capacity to do so except and only to the extent where permission has expressly been given by you in writing.

You confirmed that under the Agreement the Consultant is not acting as your agent when the Consultant incurs costs for acquisitions that it makes from third parties.

There is no dispute between you and the Consultant in respect of your relationship. You are both in agreement that the Consultant is not acting as your agent when making acquisitions from third parties.

Some of the expenses incurred by the Consultant are in relation to the medical examinations of your job candidates. In these cases, a medical practitioner examines your job candidates and prepares a report for the Consultant. The medical practitioner charges GST on the supply of the report. The Consultant claims the GST component of the price as an input tax credit. There is no dispute between the medical practitioner and the Consultant in respect of the GST status of these supplies.

In relation to the reimbursements paid by you to the Consultant under the Agreement, the Consultant has been recovering or seeking to recover reimbursements from you on the basis of the GST-inclusive amount of the expense in circumstances where the Consultant is also entitled to claim an input tax credit in relation to the relevant expense.

In relation to on-charging of the expenses, the Consultant is also grossing up the GST-inclusive cost of the relevant expense by an additional amount in respect of GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-25

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question 1

Summary

You are not entitled to claim an input tax credit for the medical services that the Consultant acquires from third parties in its own right.

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 the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

(* denotes a term defined in section 195-1 of the GST Act)

For an acquisition to be a creditable acquisition all the requirements of section 11-5 of the GST Act must be met.

Under paragraph 11-5(a) of the GST Act, an entity makes a creditable acquisition if the entity acquires a thing solely or partly for a creditable purpose.

For the purposes of paragraph 11-5(a) of the GST Act, firstly we must consider which entity is acquiring the medical services from the third parties. In order to do that, we must determine whether the Consultant is acquiring the medical services in its own right as a principal, or on your behalf as your agent.

Goods and Services Tax Ruling GSTR 2000/37 deals with agency relationships and the application of the law.

Paragraph 45 of GSTR 2000/37 provides that a transaction is considered to be made by the principal through the agent, if the agent is authorised to undertake the transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction.

The relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. Paragraph 28 of GSTR 2000/37 outlines the factors that indicate that an agency relationship exists. This paragraph states:

28. In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

Paragraph 29 of GSTR 2000/37 states:

29. In some situations, these factors may be difficult to establish. For example, situations may arise where:

· the existence of a principal is disclosed but not named; or

· the existence of a principal is not disclosed to third parties.

However, documents used by the parties and the conduct of the parties may still indicate the existence of an agency relationship.

Where the principal makes a taxable supply or a taxable importation through the agent, the principal is the entity that is liable for GST under section 9-40 or section 13-15 of the GST Act. Likewise, where the principal makes a creditable acquisition or a creditable importation through the agent, the principal is the entity that is entitled to the input tax credit under section 11-20 or section 15-15 of the GST Act. This is consistent with the general law of agency. The acts of an agent are the acts of the principal, and the principal is bound to the legal effects of the transaction.

You have entered into the Agreement with the Consultant. As part of its responsibilities, the Consultant is required to make certain acquisitions from third parties for which it will receive reimbursements.

The Agreement specifies that the relationship of the parties is that of independent contractors and that the consultant is not authorised to do business in your name or to bind you in any way or hold itself out as having the capacity to do so except where you have given permission in writing.

You advised that both you and the Consultant agree that the Consultant is not acting as your agent when it makes acquisitions from third parties. The Consultant is making the acquisitions in its own right as a principal.

As you are not the entity that acquires the medical services from the third parties either directly or through the Consultant as your agent, the requirements of paragraph 11-5(a) of the GST Act are not met. Consequently, you are not making a creditable acquisition under section 11-5 of the GST Act and therefore are not entitled to an input tax credit under section 11-20 of the GST Act.

Question 2

Summary

In accordance with section 11-25 of the GST Act, your input tax credit entitlement on the reimbursement is equal to the GST payable by the Consultant on the reimbursement.

Detailed reasoning

As you have not authorised the Consultant to act on your behalf when making acquisitions from the third parties, the Consultant is making the acquisitions from the third parties in its own right as a principal. These acquisitions therefore are the Consultant's business expenses.

When you reimburse the Consultant's business expenses you are providing further consideration for the Consultant's services. That is, the reimbursements form part of the consideration for the services that the Consultant supplies to you.

The services that the Consultant supplies to you are taxable supplies as they meet all the requirements of Section 9-5 of the GST Act.

Section 9-5 of the GST Act provides that a supplier makes a taxable supply if:

(a) the supplier makes the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that the supplier carries on

(c) the supply is connected with Australia, and

(d) the supplier is 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.

As the supply of the consultant's services to you is a taxable supply the requirement of paragraph 11-5(b) of the GST Act is met. Your acquisition of the Consultant's services also meets the other requirements of section 11-5 of the GST Act. Therefore, you are entitled to an input tax credit under section 11-20 of the GST Act for the acquisition of these services.

Section 11-25 of the GST Act sets out the rules for working out the amount of the input tax credits that a recipient can claim for a creditable acquisition. Section 11-25 of the GST Act states:

The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount of the input tax credit is reduced if the acquisition is only *partly creditable.

Basically, the GST Act provides that the input tax credit entitlement of the recipient of the supply depends on the GST payable by the supplier on that supply. Accordingly, the input tax credit that you can claim is equal to the GST that the Consultant is liable to pay on the reimbursement.

Whilst the GST Act defines the terms value, price and consideration for GST purposes (sections

9-75 and 9-15 of the GST Act), it does not deal with how a supplier should determine the consideration for a taxable supply that they make.

Whether the reimbursement is to be made based on the GST-inclusive or GST-exclusive value of the business acquisition of the Consultant is a pricing issue and a contractual matter between you and the Consultant.

Question 3

Summary

There are no provisions in the GST Act that deal with how a supplier should determine the price when on-charging a business expense. This is a contractual matter between the parties.

Detailed reasoning

Whether or not the consultant can charge an additional 10% on the GST-inclusive price of its business acquisitions when it on-charges its expenses, is a pricing issue.

The Australian Taxation Office cannot comment on pricing issues. A pricing dispute should be resolved either by negotiation between the two parties or through normal commercial law processes.

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