Edited version of your written advice

Authorisation Number: 1012829423216

Date of advice: 26 June 2015

Ruling

Subject: GST and decreasing adjustments

Question 1

Are you entitled to make a decreasing adjustment, equal to the amount of goods and services tax (GST) paid on the original supply, pursuant to section 134-5 of the A New Tax System (Goods and Services Tax) Act 1999 in respect of third party payments, made by you to third parties who have acquired products that you have supplied to another entity?

Answer

Yes.

Relevant facts and circumstances

• You are registered for GST.

• You are a supplier of a range of quality products.

• You supply products to other entities and they in turn supply these products to third parties.

• The third party pays consideration to the other entity for the product.

• You participate in a promotion offering payments to third parties who have acquired participating products from the other entities that you have supplied to.

• The payments made by you to third parties are equal to the prices paid by third parties when acquiring the products which are subject to the promotion.

• Neither the supply of goods by you, nor the supply of the goods by the other entities, is GST-free.

• The supply of goods is connected with Australia.

• The Commissioner is not required to make a payment to the third party under the tourist refund scheme pursuant to Division 168 of the GST Act.

Marketing Agency

• You engage a marketing agency to administer the promotion on your behalf.

• The marketing agency acts as your agent and you have a formal agency agreement.

Participating promotion products

• You offer three types of payments as part of the promotion.

• A payment is available to a third party who:

• is an Australian resident aged 18 years and over;

• purchases a product participating in the promotion during the specified time of the promotion.

• uses the product in the recommended manner for the specified period of time stated under the Terms & Conditions

• complies with the Terms & Conditions associated with the payment promotion.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Division 19

Division 134

Reasons for decision

Summary

You have a decreasing adjustment as section 134-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to the arrangement.

In particular the payment is not consideration for a supply to you as required by paragraph 134-5(1)(e) of the GST Act.

Detailed reasoning

All Legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

Division 134 was inserted into the GST Act and is applicable to payments made on or after 1 July 2010.

The Division was inserted to ensure that the appropriate amount of GST is collected and the appropriate amount of input tax credit is claimed in situations where manufacturers' rebates, which in effect change the price of a transaction, result in adjustments for the payer and the third party. .

As held in Electrical Goods Importer v Commissioner of Taxation, an adjustment event pursuant to Division 19, for the changing of the consideration for a supply or acquisition, will not apply to third party payments where the change in consideration is not connected with a supply.

Subsection 134-5(1) of the GST Act states:

(1) You have a decreasing adjustment if:

(a) you make a payment to an entity (the payee) that acquires a thing that you supplied to another entity (whether or not that other entity supplies the thing to the payee); and

(b) your supply of the thing to the other entity:

(i) was a *taxable supply; or

(ii) would have been a taxable supply but for a reason to which subsection (3) applies; and

(c) the payment is in one or more of the following forms:

(i) a payment of money;

(ii) an offset of an amount of money that the payee owes to you;

(iii) a crediting of an amount of money to an account that the payee holds; and

(d) the payment is made in connection with, in response to or for the inducement of the payee's acquisition of the thing; and

(e) the payment is not *consideration for a supply to you.

In other words, the supply by the payer must be a taxable supply, the payment must have a connection with the payee's acquisition of the thing, and the payment must not be consideration for a separate supply to the payer.

In your instance the 'payee' is the third party purchasing your appliance and the 'other entity' is the supplier of the appliance to the third party.

A third party (payee) acquired your appliance that you supplied to another entity. Under your promotion, you make a payment to the third party following the third partys acquisition of your appliance where they met the terms and conditions of the promotion.

Your supply of your appliances was a taxable supply (134-5(1)(b)(i)).

You then make a payment of money to the third party (134-5(1)(c)(i) or 134-5(1)(c)(iii)), and we consider that this payment is made in connection with, in response to or for the inducement of the third party's acquisition of your appliances (134-5(1)(d)). This requirement is met when the third party provides evidence of their purchase of your appliances in order to be eligible for the payment.

Paragraph 134-5(1)(e)

It is considered that the payment made to the third party is not a payment for consideration for a supply to you for the following reasons.

The term 'consideration' in paragraph 134-5(1)(e) is defined in section 195-1 as:

consideration, for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.

There are a number of supplies in this arrangement, however for paragraph 134-5(1)(e) to apply to the arrangement it needs to be determined which supply the consideration (being the payment) is for.

In AP Group Limited v Commissioner of Taxation Edmonds and Jagot JJ held in identifying the character of the connection between the consideration and the supply, the word 'for' ensures that not every connection between a supply and consideration meets the requirements for a taxable supply. As also held in Electrical Goods Importer v Commissioner of Taxation the words "in connection with" in the definition of consideration, must be construed by reference to a supply.

The nature of the connection between consideration and supply was considered by the High Court in Commissioner of Taxation v. Reliance Carpet Co Pty Ltd, where it was found that the same conduct may be directed to a number of purposes or objectives or it may provide a service or benefit to more than one person. In that context it is essential to bear in mind that the relevant question is not whether the conduct was for consideration but whether the particular supply which arose from the conduct was for consideration.

While the application submitted by the third party, their agreement to provide further evidence in support of their claim (among other actions), met the statutory definition of a ' supply', these supplies are not the reason for which the payment was made.

Rather the payments were made in order to encourage and facilitate the purchase of the promotional products. The provision of evidence in support of the claim does not have a sufficient nexus with the payment and is merely incidental to it.

Paragraph (1A)

Paragraph (1A) provides

(1A) However, subsection (1) does not apply if:

(a) the supply of the thing to the payee is a GST-free supply, or is not connected with Australia; or

(b) the Commissioner is required to make a payment to the payee, under Division 168 (about the tourist refund scheme), related to the payee's acquisition of the thing;

and you know, or have reasonable grounds to suspect, that the supply of the thing to the payee is a GST-free supply or is not connected with Australia, or that the Commissioner is so required.

As your arrangement meets the requirements in this section, subsection 134-5(1A) will not exclude the application of subsection 134-5(1).

Amount of decreasing adjustment

Subsection 134-5(2) provides that the decreasing adjustment is the difference between:

• the amount of GST payable on the original supply to the other entity (taking into account any other adjustments relating to the supply) ; and

• the amount of GST that would have been payable on that supply if the consideration for that supply had been reduced by the amount of the third party payment (and taking into account any other adjustments relating to the supply) .

The amount of the GST adjustment cannot be more than the GST paid by you.

Given the payment is a full rebate of the consideration paid by the third party, the amount of GST that would have been payable on the supply to the third party is nil.

Therefore you are entitled to make a decreasing adjustment equal to the amount of GST paid by you on the original supply.

Marketing agency

You carry out the promotion through a marketing agency. The marketing agency acts as your agent and you have a formal agency agreement in place.

Paragraph 20 of Goods and Services Tax Ruling GSTR 2000/37 confirms that the decreasing adjustment in an agency relationship is attributable to the principal as follows:

Where a principal makes a taxable supply or a creditable acquisition through an agent, the GST payable by the principal or the input tax credit to which the principal is entitled would be attributable according to the basic attribution rules set out in sections 29-5 and 29-10 unless a special attribution rule applies. Similarly, the principal would attribute a decreasing adjustment according to the basic attribution rules set out in section 29-20 unless a special attribution rule applies.

It is noted that where the marketing agency was not acting as your agent, section 134-5(1)(a) may not apply to the arrangement to allow a decreasing adjustment. That is it would be the marketing agency making the payment to the third party, rather than you for the purpose of this section.

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