Edited version of your private ruling

Authorisation Number: 1012111577829

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Ruling

Subject: Income tax treatment of products sold on the web site

Question 1

Will the taxpayer need to include the income from the sale of products from their website as part of their assessable income?

Answer

No.

Question 2

Will the suppliers need to include the income from the sale of products from the website as part of their assessable income?

Answer

Unable to rule.

This ruling applies for the following period<s>:

Year ended 30 June 2012.

The scheme commences on:

Year ended 30 June 2012.

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.

The taxpayer was recently established for the purpose of providing an on line shopping portal for the sale of quality products. The target market is interstate and overseas consumers, although it is expected that locals will also shop on the site. The underlying goal of the venture is to increase employment and business opportunities for the local population.

The taxpayer is in the process of developing a website on which suppliers can list products for sale free of charge. Consumers will order a product and an e-mail will be sent to the supplier for despatch of the goods. The price will be GST inclusive. On top of the price, the consumer will be charged postage based on the destination of the goods, which can be either in Australia or overseas.

The taxpayer will also sell advertising space on the website to entities that may or may not be suppliers.

The taxpayer will collect the sale price plus postage. A percentage commission on the purchase price for marketing and administration, plus other costs (e.g. credit card fees or PayPal fees) will be deducted from the sum payable to the supplier. The taxpayer then will remit the balance to the supplier on a regular basis.

The taxpayer wants to do the right thing and ensure that they comply with tax laws and that their suppliers do likewise.

The director was contacted on how the postage and handling fee was to be paid to the supplier. The director said that this will be done at the same time as the main payment for the goods.

The director advised that another ruling had issued on the basis that the taxpayer was an intermediary only and so the taxpayer does not have possession or ownership of the stock sold on the web site at any time. The director has requested that the same approach should be used here so that the two replies are consistent.

As a result, the director's preference is to calculate the commission up front and then include the commission as the gross income. The second option is the easier one accounting wise, which is to include the total receipts excluding GST, and then claim all payments made to the suppliers as tax deductions. Both options will end up with the same result.

Additional clarification was requested on how the sales will take place. The director said that the supplier will list their products on the web site, the customer orders a product, the supplier is advised of the receipt of the order, and the supplier is responsible for shipping the product to the customer. Therefore the taxpayer plays no part in the supply of any product displayed on their website.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 17-5

Income Tax Assessment Act 1997 Section 27-5

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The assessable income will include the commission received from the suppliers as the taxpayer is only providing a medium for them to sell their products. The allowable deductions will include the credit card and PayPal fees.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes ordinary income as part of an entity's assessable income. Business receipts are considered to be ordinary income.

Section 17-5 of the ITAA 1997 excludes the GST payable on a taxable supply from being counted as assessable income.

Section 8-1 of the ITAA 1997 allows a deduction for expenditure incurred in earning assessable income, unless the expenditure is:

- capital or capital in nature,
- private or domestic in nature,
- incurred to earn an amount that is exempt income.

Section 27-5 of the ITAA 1997 excludes any GST input tax credits from being included as an allowable deduction.

In this case, the director has advised that the business is operated as an intermediary between the supplier, who is the actual seller of the goods, and the purchaser. The director has also advised that the taxpayer never take possession of the goods sold on the website, and is not responsible for the postage, packaging and handling of the goods for delivery to the customer.

As a result, the taxpayer's assessable income will include the commission withheld by the taxpayer from the supplier for the use of the website. The taxpayer's assessable income will also include any advertising fees paid. Note that the taxpayer's assessable income will not include any GST payable on those amounts received (if any).

Expenses incurred to earn that income include the credit card fees and PayPal fees that the taxpayer mentioned in their ruling request:

This should leave the taxpayer's net income to include the net commissions retained after paying the credit card/PayPal fees, profits on postage and handling (if any), and the advertising fees. As the taxpayer hasn't mentioned all of the possible expenses of the business, the net income will be reduced by these other allowable deductions as well.

Question 2

Summary

The ATO is unable to rule on this issue.

Detailed reasoning

The ATO is unable to provide a ruling on how the suppliers should be taxed in relation to this arrangement, as none of the taxpayer's suppliers are a party to the private ruling request.

The suppliers are entitled to make their own ruling request based on their own particular circumstances.

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