Edited version of your written advice

Authorisation Number: 1051418967079

Date of advice: 10 September 2018

Ruling

Subject: GST and recipient created tax invoices

Question

Can you issue recipient created tax invoices (RCTI) for the commissions paid to independent contractors in relation to the supply of referrals made by the independent contractors to you?

Answer

Yes, provided you satisfy all the requirements set out in A New Tax System (Goods and Services Tax) Act 1999 Classes of Recipient Created Tax Invoices Determination (No. 11) 2016 (RCTI 2016/11).

Relevant facts and circumstances

You are currently not registered for GST but are in the process of becoming registered. Your estimated annual GST turnover will be less than $20 million.

You intend to conduct a business which involves providers to end users (Customers).

A typical business process would involve:

1. A provider appoints you as its agent to promote their service with the aim of directing potential Customers to the provider. The providers will pay you a commission equal to a percentage of the total amount they receive from the Customers.

2. You then engage an independent contractor to promote the provider’s services with the aim of directing potential Customers to the providers. The independent contractors assess the Customers’ needs, identify the required technology solution and then refer Customers solicited to you.

You will pay the independent contractors a commission equal to a percentage of the total amount you received from the providers under paragraph 1 for the independent contractor’s referral service. The value will be established using a calculation process that involves applying total sales per independent contractor against the agreed percentage of commission.

3. After the independent contractors refer Customers solicited to you, you will identify the most suitable provider(s) for the Customer and introduce the independent contractor to the provider and together they will design a solution for the Customer.

However, although the independent contractors and providers necessarily communicate with each other as part of sales process, they do not transact or act on behalf of each other.

4. The Customers will contract directly with the providers and pay the providers directly for their service.

In the above process, the independent contractors will all be registered for GST and their supplies are considered to be taxable supplies provided all the other requirements under section 9-5 of the GST Act are met.

However, you consider there will be significant impracticalities for the independent contractors to issue tax invoices for their supplies to you. This is because you will be the only entity in receipt of the information necessary to calculate and determine the value of the commission required to be paid to the independent contractors. You would only be able to calculate the independent contractors’ commission after receiving your commission from the providers. The independent contractors do not know the value of the supplies until advised by you.

As such, you are seeking Commissioner’s ruling on whether you are entitled to issue RCTIs to the independent contractors for their commission in relation to the supplies made by them to you.

You advised that the proposed RCTIs will:

● set out the Australian Business Number (ABN) of the Partners

● be issued by you to the Partners within 28 days of making, or determining the value of, the Subject Supply and you will retain copies of the issued RCTI

● contain a written agreement embedded in the RCTIs that states:

‘The recipient and the supplier declare that this agreement applies to supplies to which this tax invoice relates. The recipient can issue tax invoices in respect of these supplies. The supplier will not issue tax invoices in respect of these supplies. The supplier acknowledges that it is registered for GST and that it will notify the recipient if it ceases to be registered. The recipient acknowledges that it is registered for GST and that it will notify the supplier if it ceases to be registered for GST. Acceptance of this RCTI constitutes acceptance of the terms of this written agreement.

Both parties to this supply agree that they are parties to an RCTI agreement. The supplier agrees to notify the recipient if the supplier does not wish to accept the proposed agreement within 21 days of receiving this document.’

● you will issue an adjustment note to independent contractors within 28 days of any adjustment to the value of a supply being made and you will retain a copy of the issued adjustment note, and

● you will reasonably comply with your obligations under the taxation law.

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 29-70(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-70(3)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Paragraph 29-70(1)(a) of the GST Act provides that a tax invoice must be issued by the supplier for a taxable supply unless it is an RCTI (in which case it must be issued by the recipient).

Subsection 29-70(3) of the GST Act defines an RCTI as a tax invoice belonging to a class of tax invoices that the Commissioner has determined in writing may be issued by the recipient of a taxable supply.

In this case, the independent contractors are supplying a service of referring Customers to you when they solicit a sale in return for consideration. This is a taxable supply on the basis that all the requirements under section 9-5 of the GST Act are satisfied. You are, therefore, the recipient of a taxable supply.

Paragraph 10 of Goods and Services Tax Ruling GSTR 2000/10 Goods and services tax: recipient created tax invoices (GSTR 2000/10) provide:

10. The determination describes three classes of tax invoices that may be issued by a recipient of a taxable supply. These classes are:

(a) tax invoices for taxable supplies of agricultural products made to registered recipients who:

(i) satisfy the requirements for issuing RCTIs, and

(ii) determine the value of the agricultural products (and any by-products) subsequent to, and dependent upon, quantitative or qualitative analysis of the supply being undertaken (see paragraphs 22 to 24 of this Ruling);

(b) tax invoices for taxable supplies made to registered government related entities that satisfy the requirements for issuing RCTIs (see paragraphs 25 to 27 of this Ruling); and

(c) tax invoices for taxable supplies made to registered recipients that satisfy the requirements for issuing RCTIs and that:

(i) have a GST turnover (including input taxed supplies) of at least $20 million annually; or

(ii) are members of a group of companies, partnerships or trusts, or a joint venture operator, in which one or more other members of that group or participants in that joint venture have such a GST turnover.

Based on the information provided, you do not fall into any of these three broad classes. However, the Commissioner has also issued a number of specific determinations under subsection 29-70(3) of the GST Act for certain classes of tax invoices that may be issued by a recipient of a taxable supply that are not listed in GSTR 2000/10.

Of relevance, RCTI 2016/11 permits the recipient of a taxable supply of referral services to issue a tax invoice for that taxable supply. Specifically, Clauses 6 and 7 of the RCTI 2016/11 state:

6. The recipient of a taxable supply of a referral, may issue a tax invoice called a recipient created tax invoice (RCTI) for the taxable supply if the recipient:

(a) establishes the value after the supply is made using a calculation process; and

(b) satisfies the requirements set out in Clause 7.

Requirements that must be satisfied by the recipient of a taxable supply

7. A recipient must satisfy the following requirements when issuing a RCTI under this determination:

(a) be registered for GST;

(b) set out the ABN of the supplier on the RCTI;

(c) issue the original or a copy of the RCTI to the supplier within 28 days of making, or determining, the value of a taxable supply and retain the original or the copy;

(d) the recipient must issue the original or a copy of an adjustment note to the supplier within 28 days of any adjustment and must retain the original or the copy;

(e) reasonably comply with its obligations under the taxation laws; and

(f) have either a written agreement with the supplier that meets the requirements of Clause 8, or a written agreement embedded in the RCTI that meets the requirements of Clause 9.

The following expressions are defined in Clause 10 of RCTI 2016/11:

calculation process means any process used by the recipient to calculate the commission or payment to the service provider.

referrals means the activity of publicising and promoting an entity and/or the goods and services of that entity with the aim of directing potential clients to that entity. This includes but is not restricted to services such as direct referrals, the display of promotional pamphlets and the inclusion of a hyperlink on a website.

service provider means the entity providing referrals to the recipient.

Based on the facts given, we consider that the supply of the independent contractors in return for the commission paid to them meet the definition of referrals, and that the independent contractors satisfy the meaning of service provider for the purposes of RCTI 2016/11. This is because the independent contractors refer Customers to you. You are the recipient of that referral service and you calculate the commission to be paid to the independent contractors based on set criteria (that is, a calculation process).

There will be significant impracticalities for the independent contractors to issue tax invoices for the referral service. Further, you will be the only entity that can calculate and determine the value of the referral service after receiving your commission from the providers.

Accordingly, you are entitled to issue RCTIs to the independent contractors for their supply of referral services made to you under RCTI 2016/11, provided you follow all the other requirements set out in Clause 7 to 9 of RCTI 2016/11 (refer to ‘for your information’ for details).

For your information

If you are entitled to issue RCTI under RCTI 2016/11, you must also follow the other requirements set out in Clause 7 to 9 of RCTI 2016/11:

Requirements that must be satisfied by the recipient under this determination

7. A recipient must satisfy the following requirements when issuing a RCTI under this determination:

(a) be registered for GST;

(b) set out the ABN of the supplier on the RCTI;

(c) issue the original or a copy of the RCTI to the supplier within 28 days of making, or determining, the value of a taxable supply and retain the original or the copy;

(d) the recipient must issue the original or a copy of an adjustment note to the supplier within 28 days of any adjustment and must retain the original or the copy;

(e) reasonably comply with its obligations under the taxation laws; and

(f) have either a written agreement with the supplier that meets the requirements of Clause 8, or a written agreement embedded in the RCTI that meets the requirements of Clause 9.

Requirements of a written agreement with the supplier

8. The written agreement the recipient has with the supplier must:

(a) specify the supplies to which it relates;

(b) be current and effective when the RCTI is issued; and

(c) have the following conditions:

(i) the recipient can issue RCTIs in respect of the supplies;

(ii) the supplier will not issue tax invoices in respect of the supplies;

(iii) the supplier acknowledges that it is registered for GST when it enters into the agreement and that it will notify the recipient if it ceases to be registered for GST; and

(iv) the recipient acknowledges that it is registered for GST when it enters into the agreement and that will notify the supplier if it ceases to be registered for GST.

Requirements of a written agreement embedded in the RCTI

9. The embedded agreement in the RCTI that the recipient has with the supplier must contain the following statement:

The recipient and the supplier declare that this agreement applies to supplies to which this tax invoice relates. The recipient can issue tax invoices in respect of these supplies. The supplier will not issue tax invoices in respect of these supplies. The supplier acknowledges that it is registered for GST and that it will notify the recipient if it ceases to be registered. The recipient acknowledges that it is registered for GST and that it will notify the supplier if it ceases to be registered for GST. Acceptance of this RCTI constitutes acceptance of the terms of this written agreement.

Both parties to this supply agree that they are parties to a RCTI agreement. The supplier must notify the recipient within 21 days of receiving this document if the supplier does not wish to accept the proposed agreement.

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