Edited version of your private ruling

Authorisation Number: 1012374159245

Ruling

Subject: GST & the supply of Promotional Goods

Question 1

Is the supply of a Promotional Good, under a Repayment Option (RO), by Entity A to Entity B, a taxable supply?

Answer

Yes

Question 2

Will subdivision 153-B of the GST Act apply to the supply of a Promotional Good by Entity A to Entity B under a RO?

Answer

No

Question 3

Will the Commissioner apply his discretion under subsection 153-65 of the GST Act, to determine that the supply of a promotional good by Entity A to Entity B, is taken to be a supply of a kind referred to in section 153-50?

Answer

No

Relevant facts and circumstances

Entity A (You) entered into an Agreement with Entity B.

You were appointed to promote promotional goods and services upon the terms of the Agreement.

You are an independent contractor except to the extent other relationships are expressly created under the Agreement.

You must not represent that you are an agent of Entity B except to the extent that you are expressly authorised to do so under the Agreement.

You supply a promotional good as part of a particular plan. These promotional goods are provided pursuant to the terms of the Agreement and are governed by specific terms.

The specific terms are in addition to the General Terms.

You were appointed to promote services in Australia under Promotional Offers made available to you by Entity B .

You were appointed as an agent to sell Promotional Goods to customers as part of a Promotional Offer.

You must sell each Promotional Good to Entity B immediately before selling it to a customer and title in the goods will pass to Entity B immediately prior to the sale of the goods to the customer. In that instance, the Promotional Good is bought from you by Entity B for the Entity B Purchase Price (being the price for Promotional Goods as set out in the relevant Promotional Schedule).

The General Terms provide that you must not issue a Tax Invoice in respect of any supply made to Entity B under the Agreement unless Entity B notifies you in writing.

The General Terms also provide that if Entity B authorises you to act as its agent under the Agreement, you acknowledge that Subdivision 153-B of the GST Act applies to supplies made by you to a customer in your capacity as an agent of Entity B.

The General Terms provide further that Entity B will issue an RCTI in respect of any supply made by you to Entity B and a Tax Invoice for any supply made by Entity B to you.

You currently claim input tax credits on all acquisitions of Promotional Goods from Entity B.

Where a promotional good is sold as part of a plan -

(a) You would, pursuant to the Agreement, sell the Promotional Good to Entity B prior to its sale to the customer. Entity B would pay for the Promotional Good at a price determined in accordance with a table:

i. Where the sale occurs as part of a plan that includes a Promotional Good at no separate or additional cost to the customer, then Entity B would pay you for the Promotional Good at a price which includes a separate amount on account of GST.

ii. Where the sale occurs as part of a plan that comprises a charge plus a separate charge for the Promotional Good (this is called a Repayment Option {RO}), then Entity B would pay you for the Promotional Good at a price which does not include a separate amount on account of GST.

In both instances, you are paid in a single lump sum rather than progressively. You have provided an RCTI that shows the manner in which Entity B treated the respective payments.

(b) In both instances:

i. The Promotional Good is sold to the customer by you as an agent for Entity B;

ii. Entity B charges the customer the relevant monthly fee - depending on the plan and issues a tax invoice to the customer directly by way of a monthly bill;

iii. You do not issue a tax invoice to the customer in respect of the repayment plan.

(c) In the relevant tax periods, you treated the payment from Entity B (in respect of the RO) as a GST-free receipt and prepared the BAS accordingly.

You have included an example of a RO plan.

You are registered for GST.

A request for further information was sent to your representative. The following clarification was provided regarding the arrangement between Entity A and Entity B:

The RO option forms a part of different plans depending on the market and what Entity B wishes to promote. It simply means that the particular plan that includes an RO option would permit the periodic repayment of the promotional good as part of the plan such that the tax invoice issued would include a promotional good component and a use component.

The RO option would normally come within and be governed by the Service Terms. These terms govern arrangements for periodic payments by customers for the promotional good and use of services.

You were also asked whether Entity B issues the customer with a monthly tax invoice for the promotional good and plan selected.

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 195-1,

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 153-B,

A New Tax System (Goods and Services Tax) Act 1999 Subsection 153-50 and

A New Tax System (Goods and Services Tax) Act 1999 Subsection 153-65.

Reasons for decision

Question 1

Is the supply of a Promotional Good, under the Repayment Option (RO) by Entity A to Entity B, a taxable supply?

Goods and Services Tax (GST) is payable on a taxable supply that the supplier makes. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

Entity A (You) entered into an Agreement with Entity B.

Pursuant to the terms of this Agreement, you supply Promotional Goods to customers as part of a service plan. This arrangement is governed by the Service Terms (ST).

You are appointed to promote services in Australia under the Promotional Offers which Entity B makes available to you.

You are appointed as an agent to sell Promotional Goods to customers as part of a Promotional Offer.

Where a Promotional Good is sold as part of a plan under a Promotional Offer and you have title in the Promotional Good which is to be sold as part of a Promotional Offer, you are obliged to sell the Promotional Good to Entity B prior to its sale to the customer.

When title in the Promotional Good passes to Entity B, the Promotional Good is bought from you by Entity B for the Entity B Purchase Price.

You have advised that there are two types of plan available to customers:

(1) A plan that includes a Promotional Good at no separate or additional cost to the customer. In this case, Entity B would pay you for the promotional good at a price (which price includes a separate amount on account of GST).

This arrangement between you and Entity B is not in dispute and has been included for the sake of completeness.

(2) A plan that comprises a service access charge plus a separate charge for the promotional good (this is called a repayment option or RO). In this instance, Entity B would pay you for the Promotional Good at a price (which price does not include a separate amount on account of GST).

In your case, we consider that there are two supplies which are taking place under the RO plan:

1) The supply of the promotional good by you to Entity B; and

2) The supply of the promotional good by you to the customer as agent for Entity B, in effecting the contractual sale between Entity B and the customer.

Once the supply has been identified, for the supply to be a taxable supply, there must also be consideration and a sufficient nexus between the supply and the consideration.

The definition of consideration in section 195-1 states:

consideration, for a supply or acquisition, means any consideration within the meaning given by section 9-15, in connection with the supply or acquisition.

Consideration, in section 9-15 of the GST Act, means:

Consideration includes:

a) any payment, or any act or forbearance, in connection with a supply of anything; and

b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. it does not matter whether the payment, act or forbearance was voluntary…

Paragraph 180 of GSTR 2006/9 provides that in determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a 'supply for consideration':

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

In Berry v FC of T (1953) 89 CLR 653 Kitto J noted that consideration will be in connection with property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'. ……

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

· an arrangement between the 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 this case, the payment that you receive from Entity B is in connection with the supply of the Promotional Good to Entity B. The payment has a substantial relation, in a practical business sense, to the supply of the promotional good.

The Service Terms are clear and unambiguous and stipulate that the Promotional Good must be sold to Entity B immediately prior to the sale of the Promotional Good to the customer.

The Purchase Price, for the purchase of the Promotional Good from you, is also predefined and can be adjusted by Entity B other than in accordance with the terms of the relevant Promotional Offer.

As the supply of the Promotional Good to Entity B is for consideration, is made in the course or furtherance of your enterprise, is connected with Australia and you are registered for GST, we consider that you have made a taxable supply of the Promotional Good to Entity B.

Question 2

Will subdivision 153-B of the GST Act apply to the supply of Promotional Goods by Entity A to Entity B, prior to their supply to the customer as an agent of Entity B, under a RO plan?

Goods and Services Tax Ruling GSTR 2000/37, Goods and services tax: agency relationships and the application of the law (GSTR 2000/37), describes what is meant by principle/agent relationships ('agency relationships') and explains the operation of Subdivision 153B.

Paragraph 11 of GSTR 20000/37 explains that for commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties. The principal is bound by the acts of an agent as a result of the authority given to the agent.

Paragraph 24 further explains that subdivision 153-B simplifies the way you can account for GST by allowing an option for entities to enter into an arrangement under which an agent is treated as a separate supplier and/or acquirer. The general effect of entering into these arrangements in respect of both supplies and acquisitions is that the principal and its agent are treated as acting as between a principal and another principal.

The factors that indicate an agency relationship are explored in paragraph 28 of GSTR 2000/37. 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. The following factors may show that you are an agent under an agency relationship, although no single factor 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 which you might sell to third parties.

In your case, the Service Terms provide that Entity B appoints you as it's agent to sell Promotional Goods to customers as part of a Promotional Offer. The RO arrangement comes within and is governed by the ST.

Paragraphs 74 to 76 of GSTR 2000/37 discuss the position with regard to principals and agents as separate suppliers and/or acquirers under Subdivision 153-B. Section 153-50 provides that entities may enter into an arrangement under which an agent is treated as a separate supplier and/or acquirer. That is, the agent is treated as a principal in its own right.

To enter this arrangement there must be a written agreement under which:

· the agent arranges to make supplies and/or acquisitions to or from third parties on behalf of the principal;

· the kinds of supplies and/or acquisitions to which the arrangement applies are specified;

· the agent is treated for the purposes of GST law as a principal in making supplies or acquisitions;

· the agent will issue all tax invoices and adjustment notes relating to those supplies to third parties in the agent's name and the principal will not issue such documents; and

· both parties must be registered.

The effect of entering into these arrangements is that the principal and the agent treat the taxable supply of goods or services that the principal makes to third parties through the agent as two separate supplies, and they are treated as acting between themselves as principal to principal for GST purposes (GSTR 2000/37, paragraph 77).

Paragraph 78 of GSTR 2000/37 provides that a taxable supply made to a third party is taken to be a taxable supply made by the agent. In addition, the principal is taken to have made a taxable supply to the agent of the same thing that the agent is taken to supply. The value of that second supply is determined by reference to the amount the agent is actually required to pay the principal.

In your case, the Agreement governs the basis on which you are appointed to promote the sale of products and services.

You have advised that the RO is governed by the Service Terms. These terms govern arrangements for periodic payments by customers for the Promotional Good and use of services.

Further, the Agreement outlines the GST obligations between the parties. In particular, that you must not issue a Tax Invoice in respect of any supply by you to Entity B under the Agreement unless Entity B notifies you in writing.

Based on the information contained in the Service Terms, you are considered to be an agent of Entity B for the purposes of marketing the RO. However, subdivision 153-B of the GST Act will not apply to the supply of promotional goods by you to Entity B under the RO as:

· you are not treated for the purposes of the GST law as a principal in making the supplies. The Agreement provides that if you have title in a Promotional Good which is to be sold to a customer as part of a Promotional Offer, you must sell each Promotional Good to Entity B immediately before selling it to a customer. Title in the Promotional Good passes to Entity B immediately prior to the sale of the Promotional Good to the customer.

The contractual arrangement is then effected between Entity B and the Customer by you as agent.

· you do not issue tax invoices and adjustment notes relating to these supplies to customers in your own name.

Consequently section 153-B does not apply in your circumstances.

Question 3

Will the Commissioner apply his discretion in subsection 153-65 to determine that the supply of a Promotional Good by Entity A to Entity B is taken to be a supply of a kind referred to in section 153-50?

No. For the reasons outlined above, the Agreement between Entity A and Entity B does not create an arrangement which complies with the requirements outlined under section 153-50 of the GST Act.

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