Edited version of your private ruling

Authorisation Number: 1012557592017

Ruling

Subject: GST and the receipt of trailing commissions by a liquidator

Question

Is the liquidator of the company liable for GST under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 in relation to the trailing commissions received during the course of the appointment?

Answer

No, the liquidator of the company is not liable for GST under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 in relation to the trailing commissions received during the course of the appointment.

Relevant facts and circumstances

The company operated a financial broking business and had an Australian Financial Services Licence (AFSL).

In carrying on its enterprise, the company brokered insurance policies which are underwritten by a third party.

The agreement between the company and the third party provides that the company would facilitate the introduction of its customers to the third party for the purpose of broking the issue of policies. In return, the third party will pay an initial commission in relation to each new policy sold and a trailing commission in relation to each policy that a customer of the company continues to hold.

Under the agreement, the company was required to notify the third party if its AFSL was cancelled or it became insolvent or a liquidator was appointed.

There is no obligation that the company must perform any other functions to either the policy holder or to the third party in order to be entitled to the trailing commissions.

When the liquidator was appointed, the company had already ceased trading.

The AFSL of the company was cancelled.

Despite the above, the third party continued to pay the trailing commissions in relation to the company's customers who continued to hold policies.

The company is registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 58-10.

Reasons for decision

A representative of an incapacitated entity is liable for the GST payable on taxable supplies in certain circumstances under section 58-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

58-10 Circumstances in which representatives have GST-related liabilities and entitlements

General rule

(1) A representative of an incapacitated entity:

(a) is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a taxable supply or a taxable importation; and

(b) is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a creditable acquisition or a creditable importation; and

(c) has any adjustment that the incapacitated entity would, but for this section or section 48-50, have;

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The liquidator of the company is liable to pay the GST on any taxable supplies and is entitled to the input tax credits on any creditable acquisitions made within the scope of the appointment.

The commissions paid by the third party are consideration for supplies made in relation to the broking business operated by the company prior to the appointment of the liquidator. The agreement between the company and the third party provides that the company would provide the services of facilitating the introduction of customers to the third party for the purpose of broking the issue of policies. As the company ceased trading prior to the appointment of the liquidator, these supplies were all made before the appointment and the GST liability for these taxable supplies remains with the incapacitated entity (the company).

In the context of supplies which spanned the introduction of the GST, Goods and Services Tax Ruling GSTR 2000/5 discusses the payment of fees and commissions to insurance brokers. Paragraphs 9 and 10 of GSTR 2000/5 state:

9. A non-refundable fee paid to a broker or an agent for services is consideration for a one-off supply. It is not for a supply made for the period of insurance cover or made progressively throughout the period of the insurance cover. This is the case unless an agreement with the insurance intermediary indicates otherwise.

10. Also, a non-refundable commission paid to a broker or an agent for arranging a policy is consideration for a one-off supply. It is not for a supply made for the period of insurance cover or progressively throughout the period of the insurance cover. This is the case unless an agreement with the insurance intermediary indicates otherwise.

The trailing commissions may relate to the 'facilitation' services provided to the third party or they may be consideration for some other supplies made to the third party. Goods and Services Tax Ruling GSTR 2006/9 discusses the principles of a supply in the context of the GST and provides a range of 'propositions'. Paragraph 222 of GSTR 2006/9 states:

Proposition 16: the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

The agreement between the third party and the company provides the starting point to determine what supplies are made in return for the trailing commissions. The agreement provides that trailing commissions will be paid by the third party in relation to policies held by customers of the company. There is no obligation that the company must perform any function to either the policy holder or to the third party in order to be entitled to the trailing commissions. It may be expected that the company, as the broker, would provide customer service or 'maintain' the relationship between the third party and the policy holder but this is not enforceable and does not necessarily result in any supply being made to the third party.

Therefore, there is no new or ongoing supply being made to the third party in return for payment of the trailing commissions. The supply made in return for the trailing commissions is the same 'facilitation' supply as made in return for the initial commission. The making of that supply is not within the scope of the liquidator's responsibility or authority for managing the company's affairs but is a supply that was made by the company prior to the appointment of the liquidator.

Consequently, the liability for the GST payable on the supply remains with the company as a pre-appointment debt and the liquidator is not personally liable for this amount.

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