Edited version of your written advice

Authorisation Number: 1012953817682

Date of advice: 11 February 2016

Ruling

Subject: GST and negative price transactions

Question:

In a physical commodity transaction with a negative price, is the payment consideration for a supply for goods and services tax (GST) purposes?

Answer:

Yes, the payment made by a producer who offers a negative price on the exchange to a participant, is consideration for a supply. By accepting the transaction, the participant makes a supply of services to take the producer's unwanted/excess goods in return for the payment (negative price) offered by the producer. This supply is taxable if all the other requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied by the participant.

Relevant facts and circumstances

Operator

An Australian Operator manages particular commodity markets.

X Supply Hub (XSH)

The Operator implemented a X {a particular commodity} Supply Hub market to enhance transparency and reliability of a certain supply of X products.

The XSH is a voluntary market for the trading of physical, short-term X products.

The XSH provides a centralised trading, settlement, and clearing facility through an online portal (referred to as the 'Exchange') and enables participants to manage their daily and future requirements.

The Exchange provides a more efficient platform for short term trading. The Exchange continues to operate alongside the existing forms of bilateral trading arrangements.

Various laws and rules, and the Exchange Agreement

The Rules require the Operator to make an X trading exchange agreement relating to participation in, and the operation and administration of, the Exchange (Exchange Agreement).

Participation in the Exchange is voluntary.

GSH settlement

Currently financial settlement occurs monthly, and involves netting off the participant's aggregate entitlement (earned by the participant as a seller) to be paid by the Operator against the participant's aggregate obligations (incurred as a buyer) to pay the Operator.

The settlement calculation is made by reference to the matched trades brokered for each participant at the relevant transaction prices determined by the participant's orders.

The amount payable by or to a trading exchange member in respect of a product traded on the Exchange must give effect to the terms of an order submitted by the relevant trading exchange member in accordance with the Exchange Agreement.

The Exchange Agreement deals with settlement, billing and payment.

Application of GST under the Exchange Agreement

The Exchange Agreement confirms that for the purposes of Subdivision 153-B of the GST Act, the Exchange Agreement constitutes an arrangement under which, on behalf of Market Participants, the Operator is facilitating supply and acquisition of X and related products and services to and from other Market Participants, including by receiving and making payments on its own account as provided for in this agreement. The Market Participants and the Operator agree that market participants (who are sellers) will be treated under the GST Law as making supplies to the Operator in respect those supplies, and the Operator will be treated under the GST Law as making supplies to the market participants (who are buyers).

Nothing in the Exchange Agreement constitutes the Operator as the agent of any Market Participant for the purposes of this agreement.

The current Exchange Agreement also provides (amongst other things):

Definition:

Seller, in relation to a Transaction, means (where the Commodity is a good) the person with an obligation to make a quantity of Commodity available for delivery or (where the Commodity is service, including capacity), to make the service available for use.

Buyer, in relation to a Transaction, means (where the Commodity is a good) the person with an obligation to accept a quantity of Commodity made available for delivery or (where the Commodity is service, including capacity), the person with an obligation to accept the transfer of the right to use the service.

Order means a Bid and/or an Offer as the context requires. Where Bid means an offer to enter into a Transaction as a Buyer; and Offer means an offer to enter into a Transaction as a Seller.

Transaction Price means, for a Physical X Transaction, the price applicable to that Transaction, as determined under clause Y.

Clause Y state:

(a) A Transaction is formed where a Bid and an Offer match and are accepted…

…

Clause Z covers delivery netting.

Negative Prices

Pursuant to the specifications for products in the Exchange Agreement, XSH transaction prices are currently limited by the minimum price of $0/x and the maximum price of $X.

However, it is proposed to allow participants to specify a negative price for some or all products.

A negative transaction price represents a payment from the producer to the gas buyer to take delivery of physical X product. This could occur when there is excess production.

Excess production resulting in negative prices is expected to be a rare event.

What is the reason for negative transaction prices?

A producer may offer to sell X at a negative price in the event of excess production.

In the event of excess production, a producer could sell X (potentially at a negative price), flare X or store X products.

A producer may prefer to sell X products at a negative price for various reasons including:

• The producer may have regulatory and corporate limits.

• Under the carbon tax/emissions trading scheme a producer may incur a carbon cost.

Also, it may be cheaper for a producer to sell X at a negative price from time to time rather than investing and developing additional storage capacity.

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, Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999, Section 9-10

A New Tax System (Goods and Services Tax) Act 1999, Section 9-15

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

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

Reasons for decision

As the Operator of the XSH/exchange will need to determine any GST liabilities it has in transactions under the Subdivision 153-B of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) arrangements, we will address the underlying supply in a physical X (products) negative transaction.

A supply is taxable where all the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the 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 the indirect tax zone; 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 defined term under section 195-1 of the GST Act)

For readability and other reasons, where the term 'Australia' is used in this ruling, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

The Operator has established a trading exchange known as the X supply hub (XSH). The XSH is a voluntary market for the trading of physical, short-term X products.

The XSH provides a centralised trading, settlement, and clearing facility through an online portal (referred to as the Exchange) which enables participants to manage their daily and future requirements.

The Operator proposes to allow participants to specify a negative price for some or all products. A negative transaction price represents a payment from the producer to the buyer (the participant that accepts the transaction). The buyer/participant is then obligated to take delivery of the physical X products. The buyer/participant does not make any monetary consideration to the producer for the X products. A negative transaction could occur when the producer have excess production.

The Operator explains that a producer may prefer to sell X at a negative price for various reasons including: regulatory and corporate limits; a producer may incur a carbon cost; and it may be cheaper for a producer to sell X at a negative price from time to time rather than them investing and developing additional storage capacity.

For there to be a taxable supply, we must first determine if the payment made by the producer to the buyer/participant is consideration for a supply.

Supply

In accordance with paragraph 9-5(a) of the GST Act, there must be a supply, consideration and a sufficient nexus between the supply and the consideration.

The meaning of a supply is given in section 9-10 of the GST Act, which states:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

…

(g) an entry into, or release from, an obligation:

(i) to do anything;

(ii) to refrain from an act;

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling GSTR 2006/9 covers supplies, and states:

Subsection 9-10(1)

33. The words 'A supply is any form of supply whatsoever' in subsection 9-10(1) cover all supplies regardless of whether they concern goods or services. This obvious breadth of the concept of supply is confirmed by the EM, which states (in reference to subsection 9-10(1)):

This is defined broadly and is intended to encompass supplies as widely as possible.

Subsection 9-10(2)

34. The intended scope of subsection 9-10(1) is more fully illustrated in subsection 9-10(2), of which the EM states:

[It] provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in subsection 9-10(1).

35. Subsection 9-10(2) does not limit subsection 9-10(1). Something that is not listed in subsection 9-10(2) but falls within subsection 9-10(1) will be a supply.

The facts indicate that in a negative transaction, the producer offers the X product at a negative price. If an offer is accepted, the producer is required to make a payment to the buyer/participant (that is, the entity that has agreed to accept this transaction), as well as deliver the physical X product. The buyer/participant is not required to make any payments to the producer for the X product. However, by accepting the negative transaction, the buyer/participant is required to take delivery of X product.

We consider that the buyer/participant is required to do something for the producer. The producer needs to dispose of its unwanted/excess X product. A buyer/participant that accepts the offer agrees to provide a service of taking the unwanted/excess X product. The buyer/participant is required to take delivery of the excess X product and be responsible for its disposal in return for the payment. Accordingly, there is a supply of a service by the buyer/participant to the producer.

Consideration

Once the supply has been characterised it is then necessary to consider if the supply is made for consideration. That is, it is necessary to determine whether a payment received in relation to a supply is consideration for that supply.

Subsection 9-15(1) of the GST Act provides that 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.

Goods and Services Tax Ruling GSTR 2003/12 states

13. The dictionary to the GST Act defines 'consideration, for a supply or acquisition' as 'any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition'.

14. Section 9-15 expands on the meaning of 'consideration for a supply'. Consideration includes any payment, act or forbearance in connection with, in response to, or for the inducement of, a supply of anything. Consideration may be provided voluntarily, or by someone other than the recipient of the supply.

As discussed above, in a negative transaction (when the producer offers its excess X product at a negative price), the producer is required to make a payment to the buyer/participant who has agreed to provide a service for the producer to dispose of the unwanted/excess X product. The payment made by the producer to the buyer/participant is consideration for this supply.

Nexus between the supply and consideration

There needs to be a sufficient nexus between the supply and the payment, act or forbearance.

Goods and Services Tax Ruling GSTR 2001/6 states:

71. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

72. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

The facts indicate that in the event of excess production, a producer could sell X product (potentially at a negative price), flare X or store X. The producer may choose to offer X at a negative price (make payment to the buyer/participant) in the event of excess production for various reasons including:

• The producer may have regulatory and corporate limits.

• Under the carbon tax/emissions trading scheme a producer may incur a carbon cost.

Also, it may be cheaper for a producer to sell X product at a negative price from time to time rather than them investing and developing additional storage capacity.

The producer offers a payment in order to dispose of its unwanted/excess X product. Under the Exchange Agreement, the buyer/participant that accepts the negative transaction (payment) enters into an obligation to accept a quantity of X. The buyer/participant becomes responsible for the disposal (or use) of the excess X product. Accordingly, there is a sufficient nexus between the underlying supply of the services to dispose of the excess X product by the buyer/participant and the payment that the buyer/participant receives from the producer.

In summary, paragraph 9-5(a) of the GST Act is satisfied as there is a supply for consideration made by the buyer/participant to the producer. This supply will be taxable where the buyer/participant satisfies all the other requirements of section 9-5 of the GST Act. The other requirements of section 9-5 of the GST Act would be satisfied where the supply is made in the course or furtherance of an enterprise (business), the supply is connected with Australia (as the supply is done in the Australia), the buyer/participant is registered for GST (or required to be), and the supply is not GST-free or input taxed. This will depend on each buyer/participant's circumstances.

Creditable acquisitions

For completeness, a producer will be entitled to claim input tax credits in relation to the payment for the supply of services by the buyer/participant where the producer satisfies all the requirements of a creditable acquisition under section 11-5 of the GST Act, which states:

You make a creditable acquisition if:

(a)    you acquire anything solely or partly for a ^*creditable purpose; and

(b)    the supply of the thing to you is a ^*taxable supply; and

(c)    you provide, or are liable to provide, ^*consideration for the supply; and

(d)    you are ^*registered, or ^*required to be registered.

(* denotes a defined term under the GST Act)

A producer will acquire the services for a creditable purpose to the extent that it acquires the services in carrying on its enterprise, and not for making supplies that would be input taxed (such as, financial supplies and the sale and rental of residential properties), or is of a private or domestic nature.

Setting off prices

Price offsetting is addressed in Goods and Services Tax Determination GSTD 2004/4, which states:

Set-off

11. For the doctrine of set-off to apply there have to be mutual liabilities of amounts presently payable between two parties. If the liability of the first party to the second party is greater than that of the second to the first, the excess amount may be discharged by transferring money or providing non-monetary consideration. In addition, there must be a binding agreement between the parties to use the set-off method of payment of debts. The agreement must be to discharge the liabilities and may be express or implied. The agreement is the legal basis for discharging the liabilities between the parties.

..

13. If mutual liabilities to pay for supplies are set off against each other, each of the supplies (some of which may be GST-free or input taxed) are separate supplies with separate consideration. It is the liabilities to pay for the supplies that are set off against each other; the supplies themselves are not set off. The GST Act does not allow the price for one supply to be reduced by the price of another in calculating each party's GST liability. The GST on each supply must be included in the calculation of the net amount by each supplier and each recipient may claim input tax credits for that tax to the extent allowed by the GST Act…

No setting off of prices is also expressed in GSTR 2001/6 (paragraph 125), which states that where there are mutual supplies for consideration, the GST law does not allow the price for one supply to be reduced by the price of another. This view is also confirmed in the GST and Small-scale Renewable Energy Scheme issues log, and Goods and Services Tax Ruling GSTR 2000/10 (paragraph 51) which states:

Set-off

…

51. Even though there is a close connection between the supply to the recipient and the supply made by that recipient, each is a separate supply and the GST law does not allow the price for one supply to be reduced by the price of another. The GST included in the price of each supply must be included in the calculation of the net amount by each supplier and each recipient can then claim input tax credits for that tax.

Accordingly for GST purposes, the GST consequences of each transaction have to be accounted for separately. There is no provision to 'net off' sales and apply GST to the net figure only.

The no price offsetting applies to transactions in this market as well as other transactions.

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).