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Ruling

Subject: GST and reduced input tax credits

Question 1

Are you entitled to reduced input tax credits (RITCs), under item 27 of the table in subregulation 70-05.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), for the acquisition from merchants of services (merchant services) related to ensuring the ongoing operability of your automatic teller machines (ATMs) located on those merchants' premises where the merchant takes responsibility for ensuring adequate cash is placed in the relevant ATMs?

Answer

No, you are not entitled to RITCs under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations for the acquisition of merchant services related to ensuring the ongoing operability of your ATMs located on those merchants' premises.

Relevant facts and circumstances

You are registered for goods and services tax (GST) and carry on an enterprise consisting of the operation of an ATM network in Australia.

From a GST perspective, your enterprise consists of making input taxed financial supplies, in particular, supplies for a fee not exceeding $1,000 of the ATM services listed in subregulation 40-5.09(4A) of the GST Regulations.

Although your enterprise makes various supplies involving ATMs, you are not an Australian Authorised Deposit-taking Institution (ADI) and you are not authorised by the Australian Prudential and Regulatory Authority to carry on a banking business.

The ATMs in respect of which you make input taxed financial supplies are located in a variety of locations. None of the ATMs in respect of which you make input taxed financial supplies are located on premises that constitute a branch of an Australian ADI.

You have provided a template agreement reflecting the terms and conditions under which you will typically arrange for your ATMs to be placed on the premises of different merchants (the Agreement).

The Agreement enables merchants to select what type of ATM they want installed on their premises.

When a patron makes a withdrawal from an ATM located on a merchant's premises, the withdrawn amount will be debited to the patron's bank account and a corresponding amount will be credited to the merchant's bank account. The patron will also be charged a fee that will be debited to their account and electronically remitted to you.

To effectively provide ATM services you rely on the merchants on whose premises ATMs are located to provide, what you consider to be, a number of commitments and services related to ensuring the ongoing operability of your ATMs.

Fees payable to the merchant

The Agreement provides that you are to pay the merchant a withdrawal transaction fee.

The amount of the fee is based upon the number of transactions in excess of the Minimum Transaction Commitment and it may either be a tiered payment structure of a fixed payment structure.

The Minimum Transaction Commitment is generally set at such a level that the minimum commitment is almost always exceeded. The net result of this arrangement is that you typically enter into an agreement for the provision of ATMs expecting that you will pay the merchant to facilitate the operation of the ATM.

The Agreement provides that where the merchant does not meet the Minimum Transaction Commitment, the merchant must pay you a 'Shortfall Payment'.

Relevant legislative provisions

Section 9-5 of the GST ACT

Section 11-5 of the GST ACT

Section 11-20 of the GST ACT

Section 40-6 of the GST ACT

Section 70-5 of the GST ACT

Section 11-15 of the GST ACT

Subregulation 40-5.06(1) of the GST Regulations

Subregulation 40-5.09(4A) of the GST Regulations

Subregulation 70-5.02(2) of the GST Regulations

Reasons for decision

It is your contention that you are entitled to RITCs under item 27 of the table in sub-regulation 70-5.02(2) of the GST Regulations for the acquisition from merchants of merchant services relating to ensuring the ongoing operability of your ATMs as you fulfilled all the requirements of that item.

Before discussing this contention, it is first necessary to ascertain whether the supply of the merchant services comprises a taxable supply for GST purposes.

Relevantly section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to taxable supplies and states:

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.

* Denotes a term defined in the GST Act.

The only requirement of a 'taxable supply' that is in issue here is whether the provision of what you consider to be 'services' by the merchants falls within the meaning of supply.

The obligations mentioned in the Agreement are considered by you to amount to services supplied by the merchants. Taking into account the nature of the obligations, it is our view that the obligations taken as a whole are to increase the usage of ATMs by the patrons of the merchants. Obviously, you will derive an increase in revenue from an increase in usage of the ATMs by patrons. The merchants in turn will derive an increase in rebate payments from you from an increase in the number of transactions processed through your ATMs. It follows, in our view, that the merchants have provided to you a supply of promoting the usage of the ATMs.

We do not consider that each of the obligations amounts to individual supplies. Instead there is a single supply of promoting the usage of the ATMs consisting of the bundle of obligations.

The monthly fee paid by you to the merchants is the consideration for the supply of promoting the usage of the ATMs by the merchants.

Accordingly, as all the requirements of a taxable supply are met, the supply of the merchant services is a taxable supply.

Financial Supplies

Subregulation 40-5.09(4A) of the GST Regulations provides that a supply by an entity for a fee of not more than $1,000 is a financial supply if it is a supply of one or more of the following ATM services:

(a) a withdrawal from an account;

(b) a deposit into an account;

(c) an electronic transfer from an account;

(d) advice on the balance of an account.

It is accepted that you provide one or more of the above services for a fee of not more than $1,000 to patrons of the merchants (patrons), who use the ATMs located in their premises. Therefore, you make financial supplies to patrons and pursuant to subsection 40-5(1) of the GST Act, these supplies are input taxed.

Entitlements to input tax credits

As a general rule, under paragraph 11-15(2)(a) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. Therefore, to the extent that the services from the merchants to whom you pay fees relate to the making of the ATM services, the acquisition of those services will not be fully creditable.

Reduced credit acquisitions

However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits.

Subsection 70-5 of the GST Act refers to these acquisitions and states:

(1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions.

(2) ……

Regulation 70-5.02 of the GST Regulations refer to acquisitions that attract reduced input tax credit and states:

(1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit.

(2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions.

In this case, you consider that you are eligible to claim reduced input tax credits (RITCs) under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations. Therefore, to the extent that the service of promoting the usage of the ATMs from the merchants to whom you pay fees relates to the making of the ATM services, the acquisition of those services will not be fully creditable.

Item 27 of the table in subregulation 70-5.02(2) of GST Regulations states:

Supplies for which financial supply facilitators are paid commissions by financial supply providers.

Therefore, in order to claim RITCs under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations, there must be a financial supply provider, a financial supply facilitator and a payment of commissions. We will now address these requirements.

Financial supply provider

Subregulation 40-5.06(1) of the GST Regulations refers to financial supply providers and states:

(1) An entity, in relation to the supply of an interest that was:

(a) immediately before the supply, the property of the entity; or

(b) created by the entity in making the supply;

is the financial supply provider of the interest.

It is your view that you are a financial supply provider in respect of the financial supply you make under subregulation 40-5.09(4A). This is based on your submission that the term 'financial supply provider' in relation to the supply of ATM services should be constructed as 'the entity that makes a financial supply'. As such, as you are an entity that makes financial supplies, it follows that you are a financial supply provider of those supplies.

You also submit that the term financial supply provider is not defined in the GST Act or the GST Regulations. Further, reference to financial supply provider in subregulation 40-5.06(1) is only in relation to the supply of an 'interest' and therefore does not limit the ordinary use of the term. As such you submit that you are still a financial supply provider even if you do not provide a supply of an 'interest'.

In this case we do not agree with your submission that the use of the term 'financial supply provider' should be constructed as 'an entity that makes financial supplies'. The meaning of the words financial supply provider given in the GST Regulations do not suggest that this term should apply differently to what is outlined in subregulation 40-5.06(1). On this basis it is our view that to be a financial supply provider, a supplier must supply an interest that is set out in subregulation 40-5.09(3) of the GST Regulations.

The ATM services you supply are not an item of interest that is set out in subregulation 40-5.09(3). They are listed in subregulation 40-5.09(4A).

Therefore, we consider that in supplying the ATM services to patrons, you do not supply an interest. Instead, you supply services. Accordingly, you do not satisfy the requirements of subregulation 40-5.06(1) of the GST Regulations to be considered a financial supply provider.

Financial supply facilitator

You assert that the merchants facilitate the financial supplies that you make through the ATMs. This is based on your submission that the ordinary meaning of 'financial supply facilitator' is 'an entity that facilitates the making of financial supplies'.

You also submit that the expression financial supply facilitator is not defined in the GST Act or GST Regulations, and that the reference in regulation 40-5.07 of the GST Regulations to financial supply facilitator is only in relation to the 'supply of an interest'. Therefore, similar to your opinions expressed above you consider that the expression financial supply facilitator includes the situation where a financial supply is made under subregulation 40-5.09(4A) but no interest is supplied.

In this case, we do not agree with your submission. Similar to our explanation above it is our view that the meaning given to the words financial supply facilitator in the GST Regulations does not suggest that this term should apply differently to what is outlined in regulation 40-5.07 of the GST Regulations.

Regulation 40-5.07 of GST Regulations provides that a financial supply facilitator in relation to the supply of an interest is an entity facilitating the supply of the interest for a financial supply provider. Therefore it is our view that to be a financial supply facilitator, an entity must facilitate a supply of an interest.

As mentioned above, in supplying ATM services to patrons, you do not supply an interest. Therefore, the merchants in facilitating your financial supplies do not facilitate the supply of an interest. Accordingly, the merchants are not financial supply facilitators.

Commissions

In order to satisfy item 27, you have to remunerate the merchants with 'commissions'. Therefore, it is necessary to ascertain whether you pay any commissions to the merchants for the merchant services supplied.

It is your submission that the fee you pay to the merchants under the Agreement is a commission. This is on the basis that the merchants fall within the description of an 'agent or similar entity'.

The term 'commission' is not defined in the GST Regulations.

Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) discusses 'commission' in the context of item 27 in the table of subregulation 70-5.02(2) of the GST Regulations in the following terms:

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 fees, 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.

Consistent with paragraph 652 we consider that the payment must be to an agent or similar entity, however based on the facts in this case we do not consider that you pay a commission to the merchants in respect of the services acquired from them. This is because the contractual arrangement entered into between you and a merchant does not evidence an arrangement whereby the merchant acts as your agent or in a similar capacity.

As mentioned above, the fee payable to a merchant is based on achieving certain target numbers of transactions through a particular ATM. We consider that it does not bear the character of a commission. It is merely a method of determining the consideration payable to a merchant for the services supplied in a given month.

Conclusion

Based on the above facts and arguments, we consider that you are not entitled to claim RITCs under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations for the services acquired from the merchants.

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