Edited version of private advice

Authorisation Number: 1051811550305

NOTICE

This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number 1051599323675

Date of advice: 11 March 2021

Ruling

Subject: Supplies of mobile handsets as part of bundle plans

Question

Are the taxable supplies of mobile handsets (handsets) as part of bundle plans made by you supplies to which paragraph 29-25(2)(e) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and PAR 2017/8 apply to vary the attribution of the GST to each monthly tax period in which you issue invoices for part consideration for the supply of the handsets?

Answer

No, the supplies of mobile handsets as part of bundled plans are not supplies to which paragraph 29-25(2)(e) of the GST Act and PAR 2017/8 apply, as you do know the total consideration for the supply of the mobile phone handset at the time you make the supply.

Under the basic attribution rules, you would have to attribute the total GST payable on the taxable supply of the mobile handset to the tax period in which either the first instalment under the Payment Plan is received by you, or an invoice is issued, whichever is earlier

Relevant facts and circumstances

You are a seller of mobile handsets, which is ancillary to your underlying business of connecting customers to it mobile telecommunications network.

You purchase handsets from suppliers and sell these to customers. The sales are either outright sales to customers who purchase handsets without contracting to your service plan or alternatively, to customers who purchase handsets as part of an eligible service plan ('bundled sale contracts). Bundled sale contracts allow customers to purchase handsets at a discounted price on condition that they agree to connect to your mobile network and remain connected as a subscriber for a minimum period, for a minimum monthly fee. Currently you attribute the GST payable of its taxable supplies of the handsets (on the discounted price) on the first monthly instalment payment.

This ruling request only concerns sales of handsets to customers on bundled sale contracts.

Mobile equipment payment plans

You offer mobile equipment payment plans to customers on bundled sale contracts, allowing them to pay for the cost of the handset over a set period. Customers are often allowed a handset credit for each month they are connected to the eligible mobile service plan. In a typical bundled sale contract the monthly handset credit is equal to or less than the monthly handset instalment and the customer is required to pay the net amount, providing they remain connected to the service plan.

You presented a signed contract (Contract) and explained how the consideration of the handset varies when customers exercised their right under the Contract to vary the terms of the Contract. The Contract indicates the minimum discount price of the handset when the Customer remains connected to the data plan on the Contract until expiry of the terms.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9-5

A New Tax System (Goods and Services Tax) Act 1999 Division 29

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-25(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 29-25(2)(e)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-25(3)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-25(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 195

Reasons for decision

Summary

The attribution of GST on supplies of mobile handsets as part of bundled plans

The supplies of of mobile handsets as part of bundle plans made by you are not supplies to which paragraph 29-25(2)(e) of the GST Act and PAR 2017/8 apply. For the purposes of the paragraph 29-25(2)(e) of the GST Act and PAR 2017/8, you do know the total consideration for the supply of the mobile phone handset at the time you make the supply. As you know the total consideration, the Commissioner cannot make a determination under section 29-25 of the GST Act for your circumstances.

Under the basic attribution rules, you would have to attribute the total GST payable on the taxable supply of the mobile handset to the tax period in which either the first instalment under the Payment Plan is received by you, or an invoice is issued, whichever is earlier.

Detailed reasoning

Basic attribution rules

In accordance with subsection 29-5(1) of the GST Act, an entity that accounts for GST on a non-cash basis must attribute the GST payable on a taxable supply that it makes:

(a)  to the tax period in which any of the consideration is received for the supply; or

(b)  if, before any of the consideration is received, an invoice is issued relating to the supply - the tax period in which the invoice is issued. (emphasis added)

Under the basic attribution rules, you would have to attribute the total GST payable on the taxable supply of the mobile handset to the tax period in which either the first instalment under the Payment Plan is received by you, or an invoice is issued, whichever is earlier.

Determination of particular attribution rules

Under subsection 29-25(1) of the GST Act the Commissioner may determine particular attribution rules in the circumstances described in subsection 29-25(2) of the GST Act.

These rules override the basic attribution rules in subsection 29-5(1) of the GST Act.

PAR 2017/8 provides attribution rules for supplies as described in paragraph 29-25(2)(e) of the GST Act which occur before the supplier knows the total consideration. PAR 2017/8 will apply to change your attribution of GST payable, where during the tax period in which the taxable supply of bundled handsets are supplied the supplies are those described in paragraph 29-25(2)(e) of the GST Act.

PAR 2017/8 at Clause 5 attributes the GST on the taxable supply to the extent of the amount invoiced each month or the amount of the consideration received each month if the consideration received is more than the amount invoiced.

Where no invoice is issued the GST payable on the taxable supply is the amount of the consideration received in that tax period (if any).

Application to your facts:

As outlined in the Contract, the total amount payable for the handset is paid in monthly installments over XX months.

Under the Contract the customer has the right to vary the Contract, which will vary the consideration for the handset.

You contend that in the tax period the mobile handset is supplied, you cannot ascertain the total consideration of the handset due to customers' right to vary the Contract, which results in the variation of the consideration of the handset. You have no control over whether customers choose to exercise their rights under the Contract to vary the Contract terms.

We have considered your contentions, however, we consider that for the purposes of the paragraph 29-25(2)(e) of the GST Act and PAR 2017/8, you do know the total consideration for the supply of the mobile phone handset at the time you make the supply. As you know the total consideration, the Commissioner cannot make a determination under section 29-25 of the GST Act for your circumstances.

Meaning of 'supplier knows' in section 29-25 of the GST Act

For the Commissioner to have the power to make a determination under paragraph 29-25(2)(e) of the GST Act, or to be covered by PAR 2017/8 the phone plan must involve 'a supply or acquisition occurring before the supplier or recipient knows the total *consideration'.

You contend that at the beginning of the arrangement, you do not know what the final outcome will be in the sense that a large proportion of customers exercise options and make choices that are available under the plan to change the arrangement. This necessarily affects to 'total consideration' you will ultimately receive. You contend you cannot predict the choices that customer will make nor what is in their mind when they enter into the phone plan agreement.

Paragraph 29-25(2)(e) is not a 'looking into the future' kind of provision. Paragraph 29-25(2)(e) requires an assessment of what the supplier 'knows' when the arrangement is entered into by reference to the terms of the arrangement made.

Context and gradations

The word 'knows' is an ordinary English word having a variety of senses or meanings. Ordinary words are normally subject to gradations of meaning, something which is recognised specifically in relation to the word 'know' by the High Court in a hit-and-run case, Vines v Djordjevich[1]. The context there was that the victim give notice to the nominal defendant as soon as possible 'after he knew that the identity of the motor vehicle could not be established'[2]. The court said:

The word "know" is used in the provision in an ordinary sense, without any intention that it should be analyzed or refined upon. But of course there are gradations of knowledge or belief upon such a matter. The gradations extend from a slight inclination of opinion to complete assurance. Here it seems to amount to an awareness or consciousness that no reasonable probability exists of ascertaining the identity of the car satisfactorily or with any certainty. Complete assurance is by no means necessary.

This notion is explored further in an article titled Proof and Suspicion as follows[3]:

There can be no denying (in law anyhow) that there are degrees of positiveness of persuasion that the human mind can reach. One may be persuaded of the existence or otherwise of a fact absolutely or barely. The probability of its existence may decline from the highest degree 'by an infinite number of gradations, until it produces in the mind nothing more than a mere preponderance of assent in favour of [it]'. There is nothing essentially incongruous about a state of mind which, while having reservations or doubts, is persuaded on balance about a fact.

The precise meaning the word 'knows' takes in paragraph 29-25(2)(e) depends on context considered in the 'widest sense'. That context includes the immediate attribution provisions in Division 29, the GST law as a whole and its scheme of operation. Context also extends, where it is relevant, to extrinsic materials, legislative history and the mischief to which the provisions in question are addressed.

An important contextual factor is that the GST law expressly recognises that consideration will often change over the life of a commercial arrangement (for reasons which include party choices), and that suppliers are to deal with these events in their attribution of adjustments at the time the change occurs.[4]

Ordinary meaning

The first Macquarie meaning of the word 'know' is 'to perceive or understand as fact or truth, or apprehend with clearness and certainty'.[5] In our view there is nothing in the statutory context or anywhere else which would incline a court to adopt some other meaning. Mere suspicion would not be enough, but neither would complete assurance be necessary. In the end, a commercial party as a supplier having GST reporting obligations will be taken to know that what an orthodox and informed interpretation of its own arrangements produces.

Paragraph 29-25(2)(e) does not require you to 'know' something which will, may or may not occur in the future. What is required before a determination can be made is that, at the time the arrangement is entered into with a customer and by reference to its terms, you do not clearly understand as a matter of fact the total amount the customer is legally obliged to pay over the term of the arrangement. It is our view, an orthodox and informed interpretation of the present arrangements is that customers contract on the basis of a sum certain price. That certain sum price is the total of the monthly amount for the number of months specified in the contract.

As stated in paragraph 169 of GSTR 2000/29:

It is not accepted that you do not know the consideration for a supply simply because there is a possibility that the amount of the consideration for the supply may change.

Objective exercise

The supplier that paragraph 29-25(2)(e) is addressed is a 'reasonable supplier' in the sense of looking at the arrangement objectively from a business perspective. Paragraph 29-25(2)(e) cannot be satisfied in a blinkered manner or by reference to subjective notions concerning either the scope of the provisions or the arrangement in place.

It is considered the meaning you contend should be ascribed to the term 'knows' is one in which the consideration payments are fixed forever and incapable of being changed. This is not the statutory test. The phrase 'knows the total consideration' involves a supplier understanding as a matter of fact that it will receive the aggregated amount under the arrangement unless some change is made by the customer.

In support of your position you have also stated that you have no way of knowing what is in the mind of the customer when the arrangement is entered into. We do not consider that paragraph 29-25(2)(e) envisages an enquiry of this nature. Whatever intention a customer may have regarding available options and choices within the plan they have purchased is irrelevant to the present issue. More generally, whatever is in the mind of a party when they contract or afterwards is irrelevant to interpretation.[6]

Characterisation

You characterised the arrangement made with customers as the customer purchasing 'access to a range of open-ended possibilities' rather than buying a phone plan. If this was correct, it may be doubted the arrangement would be legally enforceable (for example, against a customer defaulting on payments). For a contract to be valid and enforceable, the essential undertakings of each party must be certain. One of the things which must be certain for a contract to be binding is the consideration or price to be paid.

If your characterisation of the arrangement was correct, being 'access to a range of open-ended possibilities', a serious question-mark would hang over the validity of the arrangements. It is more than clear, however, that the courts act on the basis that arrangements of this kind create binding and enforceable contracts (just as they are intended to, and commercial imperatives dictate)[7]. In our view, your mobile phone handset purchase arrangements are legally binding and the consideration or price to be paid is certain.

Practical business tax

You have argued that the GST law is to be interpreted and applied as a 'practical business tax'. This is taken to mean that paragraph 29-25(2)(e) is to be read in a way which facilitates progressive attribution as this is more practical for compliance. While the GST has been described as a practical business tax[8], and this notion is part of the wider context, that in itself is not sufficient to force a meaning on the provision at odds with what an orthodox application would produce.

In Saga Holidays[9], Stone J stated:

This and other aspects of the tax legitimately form part of the context in which the language of the Act is interpreted and explains, at least in part, why the description ' a practical business tax ' seems to be appropriate. This does not mean, however, that there is some special canon of construction that should be applied when interpreting the GST Act. The purposive approach to interpretation, of its nature, takes account of the context of the Act and the phrase, ' a practical business tax ' is a reference to that context, which as the Full Federal Court observed in Chaudhri v Federal Commissioner of Taxation (2001) 109 FCR 416 at [ 6 ]:

' ... has the wide meaning which extends to the legislative history, the Parliamentary intention and the mischief to which a particular provision has been directed as well as the narrower meaning which would dictate reading the words to be construed by reference to the immediately surrounding or otherwise related provisions.'

It is now settled that description of GST as a 'practical business tax' is merely part of the wider context. However, 'practical business tax' cannot sanction the disregard of legal analysis, something already pointed out in the income tax sphere.[10]

Customer confusion

You have explained the difficulties you experience in managing this issue with retail customers.

You gave an example of a Contract, where the customer's general expectation is that they will pay $X a month including GST of 10% over the term of the arrangement, for example AA months, giving aggregate charges of $Y (inclusive of $Z GST). When many retail customers are faced with a first payment of $X with the invoice stating GST of $B, they typically react with astonishment, confusion and complaints.

Management of these issues is no doubt a compliance headache, requiring ongoing resources to a GST outcome you advise is costly, absurd and counterintuitive. You state you need a 'common sense solution' to the problem. While we understand the compliance or management burden which you face, this does not provide a legal basis for reading paragraph 29-25(2)(e) in a way with deals with these issues. There is no other option but to give the phrase 'knows the total consideration' its ordinary meaning within the statutory context we have. The notion that GST is a 'practical business tax' does not produce a different answer or another way to read the provision.

It is true that the original amount may change before the arrangement has run its course. But the GST law takes account of this routine commercial fact in the 'adjustment event' regime within Division 19. We acknowledge that you do not agree that a customer exercising options or making choices under the arrangement involves any 'adjustment event'. However, it appears that the reason for your view is based on your position that the consideration is not known and therefore you cannot change what is not yet known.

Sugar industry analogy

You have argued that your situation is similar to the sugar industry example in GSTR 2000/29[11]. In this example, farmers do not know what they will get for their sugar cane crop until sometime after it is delivered into the pool. This is due to the final price being dependent on external factors.

In the sugar industry, Queensland Sugar Corporation (QSC) is the marketing body for all sugar produced in Queensland. Proceeds from the sale of raw sugar are pooled for payment purposes. The QSC distributes the proceeds to millers, who then distribute payments to the growers.

Paragraph 151 of GSTR 2000/29 states:

The price paid to the farmer for sugar cane is based on a number of factors, such as the proportion of sugar contributed by the mill, the recoverable sugar content of the cane provided by the grower, the rate of recovery of Commercial Cane Sugar (CCS) by the mill, the region that the cane was grown in, and the total pooled proceeds from the marketing of the sugar.

The formula used to calculate sugar payments not only requires analysis of the quality and quantity of the cane, and market conditions, but also comparisons with the quality and quantity of production from other millers and growers[12].

It is not a case of the farmer merely not knowing what is in the mind of the mill or QSC. The price is not determined by either the farmer or the miller. The price is ultimately determined by QSC after taking into account many factors that are generally unknown and not in the control of any party, for example, market conditions.

We do not accept that this situation is analogous to your circumstances. We agree that there are possibilities allowed in the Contract, however, the Contract contains the amount payable per month and the contract term. Considered objectively, the Contract is one under which the customer is agreeing to pay the monthly amount for the identified number of months. The supplier is capable of mathematically determining the aggregate amount of these payments. At that time, this aggregate amount is the amount the customer is contractually agreeing to pay, and the supplier is agreeing to accept for the supply of the mobile handset. Therefore, it cannot be said that the supplier does 'not know' the consideration.

Further, as stated earlier, that there is no need to know what is in customers' minds at the time of entering the contract. The characterisation of the supply, and the consideration of the contract, is objective.

Options or variations contemplated in contracts

You have contended that your arrangements are unique and adoption of a view that the consideration is not known would not have wider impacts than your arrangement. While your arrangement to sell an asset under an instalment contract with no interest component and with your specific options for change may be unique, it is not uncommon for a contract to contain specific clauses that outline the variations and changes allowable under the contract. These can include changes to services, timing, delivery and price. These clauses may also detail the process to be followed for parties to take up these options or variations.

Therefore, we consider that accepting that clauses that allowed for options or variations means that the supplier did not know the total consideration at the time of making the supply would have broader impacts. As stated above, when considered objectively, the contract for the sale of the mobile phone is for the identified monthly payment for the identified number of months. If a customer takes advantage of the clauses to alter the arrangement, this is an adjustment event.

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