Edited version of your private ruling

Authorisation Number: 1012440080904

Ruling

Subject: GST and return of empty containers

Question 1

Are you able to treat some drum deposits relating to particular drums and supply arrangements as security deposits under Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), while you treat other drum deposits relating to different drums and supply arrangements as taxable supplies?

Advice/Answers

No, the drum deposits are not security deposits.

Question 2

When you receive a drum deposit, are you able to validly treat the drum deposit as a security deposit under Division 99 of the GST Act?

Advice/Answers

No, the drum deposits are not security deposits.

Question 3

If the Commissioner agrees that you are able to treat these drum deposits as security deposits, will the Commissioner exercise his power of general administration and allow you to correct this issue moving forward?

Advice/Answers

Not necessary to answer as the drum deposits are not security deposits.

Question 4

If the Commissioner concludes that these drum deposits are taxable and not security deposits, will the Commissioner exercise his power of general administration to allow you to offset underpaid GST on drum deposits treated as security deposits received from farmers against under claimed GST input tax credits on drum deposits treated as security deposits paid to suppliers?

Advice/Answers

Division 17 of the GST Act specifies that your net amount for each tax period is calculated using the formula GST (being all your GST liabilities for the tax period) less input tax credits (being all your input tax credits for the tax period). The Commissioner is unable to provide you with a private ruling that states otherwise.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 99

A New Tax System (Goods and Services Tax) Act 1999 Division 66

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

A New Tax System (Goods and Services Tax) Act 1999 section 29-80

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

Relevant facts

You are registered for GST.

You purchase and sell a range of chemicals, sprays or fertilisers ('the product') that are stored in plastic drums,

You purchase the product from a number of different suppliers ('the suppliers'). There are a number of suppliers in the industry, and many of them use the same type of drums to store the product. Consequently, these particular drums are in wide circulation across the industry.

When purchasing the product from suppliers, you are charged a drum deposit by the supplier. Typically a tax invoice from suppliers will record the cost of the product and a separate charge for the drum deposit.

You on-sell the product to the purchaser. You also charge the farmer a drum deposit equivalent to the drum deposit you previously paid. You do not make any margin on drum deposits. Again, the tax invoice issued to the farmer will record the cost of the product and a separate charge for the drum deposit.

The drums that are used are used widely in the industry to supply the relevant products. The purpose of the drum deposit is to encourage the return of the drum in such a condition that it may be reused. When a drum is returned to you, if it is in such a condition that it can be re-used (undamaged) the purchaser will receive the drum deposit back from you. This is achieved by reversing a drum deposit charge from a previous tax invoice.

You are able to track which drums are outstanding, as this information is recorded in your accounting system as each drum deposit is listed on tax invoices issued. The majority of drums are returned by farmers. Only approximately xx% of drums have not been returned in the last Z years.

Generally, farmers are unable to refill the drums themselves or use the drums for other purposes. This is because it is difficult to remove the chemical residues left in the drums, the drums have a special valve which prevents refilling and the drums can only be safely used following a professional clean.

When the farmer returns a drum to you, you also return the drum to your supplier. The drums are then provided to a company for a professional clean. The drums are then able to be refilled by the supplier and used to sell product once again.

The deposit amount for the drums varies, depending on the particular supplier. Industry practice is to set the amount at an amount that encourages the drums return. As a result, the drum deposit is usually around Z% of the price of the product sold and definitely higher than Z% of the cost of replacing the drum,

There are no contractual terms or agreements between you and the farmer concerning the drum deposit. However, despite there being no formal contractual agreements in place, when a farmer buys the product stored in the drum from you, there is an implied understanding based on long running industry standard practice that the drum deposits will be refunded where a drum is returned in good condition.

A farmer can return a drum, at any time and receive a refund of a drum deposit, provided there is a drum deposit charge (on a tax invoice) that can be reversed. There is not a time limit on returning the drum by the farmers to you, although some of your suppliers do have a time limit for returning drums.

You are unable to accept drums which have been returned damaged and unusable. The farmers deposit is forfeited where they cannot return a drum in a suitable condition.

You advised that your treatment of drum deposits accords with standard industry practice. Similar arrangements are in place with other vendors like you.

As is the case across the industry, the GST treatment adopted by you with respect to these drum deposits follows the GST treatment applied by your supplier. That is, when you are charged GST on a drum deposit, you treat it as a creditable acquisition and account for the GST by claiming an input tax credit. When you charge a drum to a farmer you also add GST to the drum deposit and remit this GST to the Australian Taxation Office (ATO). However, where you are charged a drum deposit without GST by your supplier, you treat the drum deposit as a security deposit and do not claim an input tax credit. When you charge this type of drum deposit to a farmer you will also treat it as a security deposit for GST purposes and not add an amount of GST.

Your accounting treatment with respect to the drum deposits is as follows:

· When you initially purchase the product in the drums from the supplier, you are charged a deposit amount by the supplier. This drum deposit is recorded by you as a separate stock item. That is, it is treated as a separate item to the product and as an expense.

· When you sell product to a farmer and receive a drum deposit from a purchaser, it is recognised as revenue in your accounts.

· When you return a drum deposit to a farmer following return of an empty drum, you process an adjustment to the original sale. A credit note is issued.

· Where the original drum deposit payment has been treated as a taxable supply by you, the return of the drum deposit will also include a GST amount.

· Where the original drum deposit payment has been treated as a security deposit by you (no GST), the return of the drum deposit will not include a GST amount.

· The return of the drum deposit to the purchaser is recognised as negative revenue in the accounts. In other words, the transaction is "reversed out" following the return of a drum.

Your agent states that your arrangement is akin to a hire arrangement as described in Goods and Services Tax Ruling GSTR 2006/2: deposits held as security for the performance of an obligation. (GSTR 2006/2)

Reasons for decision

Questions 1 and 2

Under Division 99 of the GST Act, a deposit which is held to secure the performance of an obligation will not be treated as consideration nor attributed until such time as it is either forfeited or is applied as consideration.

Under the GST general rules, where the payment of a deposit forms part of the consideration for a taxable supply, the GST payable on the taxable supply is subject to the general GST attribution rules. The term 'supply' includes among other things a supply of goods or services and an entry into an obligation. Division 99 of the GST Act will only operate if the payment received by the supplier is a deposit.

Paragraph 20 of Goods and Services Tax Ruling GSTR 2006/2 deposits held as security for the performance of an obligation (GSTR 2006/2) explains that for a payment to be considered a 'security deposit' it should have the following characteristics:-

· be held as a security for the performance of an obligation

· the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit

· be at risk of forfeiture upon failure to perform the obligation; and

· be a reasonable amount.

Paragraph 27 of GSTR 2006/2 further explains that security deposit is held to secure the performance of the recipient's obligations under a contract. The nature of the obligations is usually dependent upon the intentions of the parties, as evidenced by the terms and conditions (express or implied) of a contract and the conduct of the parties.

In your dealings with your customers, there are two transactions taking place between you and the customer.

The first transaction takes place when you supply the product in a drum. This is a supply of goods. In addition you promise to buy back the empty drum.

This supply of goods is taxable, as it meets all conditions of section 9-5 of the GST Act. Consideration for this supply is the full price, including what you charge for the drum.

While there is an expectation between the parties that the customer will return the drum, and it is likely that customers will return the empty drums in order to get the money back, the customer is not obliged to return the empty drum. Ownership for both the product in the drum and the drum passes to the customer after the customer has paid for the product in the drum. The customer can deal with the drum in any way they wish.

This is to be distinguished from a customer who hires machinery and pays a deposit. The business holds the deposit as a security in the event that the customer does not return, or damages, the machinery. In this case the customer is obliged to bring back the machinery. Further, it is likely that the equipment owner will seek restitution in the event that the equipment is not returned, or is returned in a damaged condition.

In this transaction, the special rules of Division 99 do not apply.

The second transaction takes place when the customer returns the empty drums to you for a refund.

The supply made by your customer to you is taxable, if they are registered or required to be registered for GST and they satisfy all the other conditions of section 9-5 of the GST Act. You make a creditable acquisition if all the conditions of section 11-5 of the GST Act are met. If each purchase of drums is for less than $75 excluding GST, or less than $82.50 including GST, then you do not need a tax invoice from the customer (section 29-80 of the GST Act).

If the customer is an entity that is not registered for GST, then this entity cannot make a taxable supply. Without the special rules of Division 66 of the GST Act you could not claim any input tax credits.

The special rules in Division 66 allow for claiming of input tax credits in certain circumstances when second hand goods are purchased from a non-registered entity. The used drums are second hand goods.

Question 3

Not necessary to answer as the drum deposits are not security deposits.

Question 4

You advised that the GST treatment adopted by you with respect to these drum deposits follows the GST treatment applied by your supplier. That is, when you are charged GST on a drum deposit, you treat the acquisition of the drum as a creditable acquisition and account for the GST by claiming an input tax credit. When you charge a drum deposit to a farmer you also add GST to the drum deposit and account for the GST to the ATO. However, where you are charged a drum deposit without GST by your supplier, you treat the drum deposit as a security deposit and do not claim an input tax credit. When you in turn charge the drum deposit to a farmer, you will also treat it as a security deposit for GST purposes and will not add an amount of GST

On this basis, for every understatement of your GST liability, there would have already been a corresponding understatement of your entitlement to input tax credits. You stated that in the longer term these two amounts will offset each other.

Division 17 of the GST Act specifies that your net amount for each tax period is calculated using the formula GST (being all your GST liabilities for the tax period) less input tax credits (being all your input tax credits for the tax period).. The Commissioner is unable to provide you with a private ruling that states otherwise.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).