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Edited version of your written advice
Authorisation Number: 1051358844544
Date of advice: 6 April 2018
Ruling
Subject: Entitlement to reduced input tax credits
Question
Are you entitled to reduce input tax credits (RITCs) for acquisitions made under a distribution agreement?
Answer
Yes.
Relevant facts and circumstances
● You carry on enterprise that creates and sells products that are financial supplies.
● You entered into a distribution agreement with another entity, Entity B, to promote, market and sell your products that are financial supplies.
● The consideration under the distribution agreement is structured in the following way:
● you must pay Entity B a percentage of the value of the products that they sell; and
● you must pay Entity B a sum calculated on the value of products sold by Entity B as well as the value of existing products and products that have lapsed or expired.
Relevant legislative provisions
Reasons for decision
Subsection 70-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that specific acquisitions (referred to as reduced credit acquisitions) that relate to making input taxed financial supplies may attract a RITC, even though no input tax credit would ordinarily arise under Division 11 of the GST Act.
Division 70 of Part 4-2 of the A New Tax System (Goods and Services Tax) Regulation 1999 (the GST Regulations) provides an exhaustive list of items that are reduced credit acquisitions. Item 27 in subregulation 70-5.02(2) (hereafter referred to as Item 27) provides that supplies “for which financial supply facilitators are paid commission by financial supply providers” are reduced credit acquisitions.
For the acquisitions under the distribution agreement to qualify as a reduced credit acquisition under Item 27,
● the acquisitions must relate to making financial supplies
● you must be a financial supply provider of the financial supplies;
● Entity B must be a financial supply facilitator of the financial supplies; and
● the consideration for the acquisitions under the distribution agreement must be “commission”.
Financial supply
Subregulation 40-5.09(3) of the GST Regulations provides a list of items that are financial supplies. The acquisitions under the distribution agreement relate to the promotion, marketing and sale of financial supplies and therefore satisfy the requirement that the acquisitions must relate to making financial supplies.
Financial supply provider
Regulation 40-5.06 provides that an entity that supplies an interest that is created by the entity in making the supply is the financial supply provider. As you create the interest that is the financial supply, you satisfy the second requirement.
Financial supply facilitator
Regulation 40-5.07 provides that a 'financial supply facilitator', in relation to supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider. An entity 'facilitates' a supply when its activities have the effect of helping forward or assisting the relevant supply of an interest, rather than those that simply assist the financial supply provider. Under the distribution agreement, Entity B is required to promote, market and sell your products and therefore have the effect of helping to forward or assist in the supply of the financial supplies.
Whether the consideration under the distribution agreement is commission?
Our view on what constitutes a commission is outlined in the glossary in Goods and Services Tax Ruling GSTR 2002/2: GST treatment of financial supplies and related supplies and acquisitions.
The Ruling provides
Payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis, or on a sliding scale based on the value of the transaction.
Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions further explains
653. While the term commission may include corpus commission, income commission, trailing commission, and brokerage, not all of these are necessarily payments to a financial supply facilitator. Other fees, including those calculated on the value of work done, rather than a per- transaction or percentage of value based calculation, and retainers, are not commission.
The consideration calculated on the percentage of the products sold represents commission as it is a payment calculated on the percentage of a value of a transaction.
The consideration calculated on the value of the new and existing products and factoring in the value of the expiration of the products sold, is commission because it is a calculation based on the value of products sold.
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