Edited version of private advice

Authorisation Number: 1052009055038

Date of advice: 23 August 2022

Ruling

Subject: GST - third party costs and incentives

Question 1

Is the recovery of third-party costs from the Government agencies for services provided under Contracts A and B by Entity A, consideration for the supply of services by Entity A to the Government agencies and subject to GST under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the recovery of third-party costs from the Government agencies for services provided under Contracts A and B by Entity A, forms part of the consideration for the supply of services by Entity A to the Government agencies and subject to GST under section 9-5 of the GST Act.

Question 2

If the answers to question 1 is no, is the Commissioner of the view that the arrangements contemplated under Contract A and Contract B, are of a kind where Entity A is acting as agent when incurring third-party costs?

Answer

Not applicable as the answer to Question 1 is yes.

Question 3

Is the on-charge of the incentives by the Subcontractor to Entity A and then to the Government agencies under Contracts A and B a supply to which Section 100-5 of the GST Act applies and therefore the supply can be treated as non-taxable?

Answer

No. Question 3 raises two instances of on-charge of the incentives costs, firstly the on-charge by the Subcontractors of their cost of acquisition of the gift cards/vouchers to Entity A and secondly the on-charge of these same costs by Entity A to the government agencies. In both instances the on-charge of the costs do not relate to non-taxable supplies but will represent consideration received for taxable supplies made by the parties.

Question 4

Is the supply made by the Subcontractors to Entity A, a single taxable supply of services or a mixed supply comprising of the taxable supply of services and a non-taxable component of incentives under Section 100-5 (or something else non-taxable)?

Answer

Yes, the supply made by the Subcontractors to Entity A will be a single taxable supply of services for reasons as discussed in Question 3.

This ruling applies for the following periods:

Year ending 30 June 20XX to Year ending 30 June 20XX

The scheme commences on:

23 August 20XX

Relevant facts and circumstances

The Representative Entity of Entity A is registered for GST.

Representative Entity is a market research and public relations company which collects and analyses data to provide insights and recommendations to help its clients understand people within their target audience.

Entity A (you) is a related entity of the Representative Entity and is registered for GST.

Representative Entity is the representative member of a GST Group, of which Entity A is a member.

Entity A supplies social research and consulting services within Australia, and employs specialist methodologists, research practitioners, evaluators, behaviour change experts and communications strategists for the primary purpose of providing insights on target populations to government entities.

The activities which form the basis of this private binding ruling request include services provided by Entity A to the Government agencies.

Contract A - Market Research Services, Brand Health and Strategic Research

Entity A was contracted to provide services to a Government agency for a set period under Contract A.

Entity A was contracted to conduct exploratory research through 24 focus groups from various locations throughout Australia, for the purpose of determining whether the marketing strategy currently implemented by the Government agency aligns with previous brand health projects and ultimately to position them for longer term capability achievement.

Entity A's deliverables under this contract were as follows:

• Developmental documentation (recruitment questionnaires, discussion protocols, survey instruments etc);
• Regular progress reports (via both email at agreed intervals and work-in-progress teleconferences);
• An initial two-page top-line report delivered within one week of fieldwork completion in PDF format;
• A full written report containing detail research findings with actionable recommendations as required in PFG format; and
• A final presentation and 'brand workshop' to the Government agency staff and stakeholders.

Pursuant to clause 6.1 of the contract, the contract price was $XX (including GST) which comprised of:

• $XX (including GST) for services;
• $XX (including GST) for reimbursable expenses; and
• $XX (GST free) for cash incentives.

Clause 7 of Contract A provides the following in relation to the recovery of costs by Entity A:

• The following expenses shall be reimbursed to Entity A if the Government agency has provided prior consent in writing:

-        Travel, accommodation and living expense up to the Government agency Travelling Allowance rates, which are updated from time to time; and

-        party costs associated with the delivery of the services (e.g. recruitment of participants, hire of external facilities).

Contract B - Developmental and Concept Testing Market Research

Entity A was contracted to provide services to the Government agency for a set period under Contract B.

Entity A's deliverables under Contract B are as follows:

• Top-line findings report including presentation of the report, slide deck and a verbal debrief (either in person or by telephone); and a
• Full written report.
• The reports must be presented as written drafts and then final reports (with accompanying slide deck), including:

-        an executive summary

-        information about methodology including:

o   number of groups

o   all research instruments (e.g. questionnaire, discussion guides)

o   a summary of the research methodology

o   dates for when the fieldwork was conducted

o   profiles of the research participants

o   location of groups

-        analysis and interpretation of research results, clearly linked to the research objectives

-        findings and conclusions/recommendations.

• Entity B may also be required to present developmental research findings to a range of expert committees. These may be held in person or by teleconference, as agreed.

As an approved supplier on the panel, Entity A (Supplier) may incur third-party costs which can be on-charged to the Government agency (Customer) under the agreed contract price. The terms on which third-party costs are incurred and on-charged are set out below:

Third-party costs

• Any third-party costs payable by a Customer must be specified in the Contract. Only the third-party costs specified in, or determined in accordance with, a Contract are payable by the Customer.
• All invoices for third-party costs must itemise all third-party costs payable by the Customer.
• The Supplier must not apply, or charge the Customer for, any mark-up of the third-party costs.
• The Supplier must, if requested by the Customer, before incurring any third-party costs, supply three quotes for major production elements and other major third-party costs to the Customer. In instances where the Supplier recommends the use of its own related entity or in-house capability, a further two quotes must be sought from external production companies.
• The Lead Customer or Customer may request a sample of third-party invoices for third-party costs bi-annually in order to conduct any audit required by the Lead Customer or the Customer.

As per the contract, Entity A disclosed the following Subcontractors, which may be used to provide the services under Contract B:

• XX to provide qualitative recruitment.
• YY to provide recruitment and moderation services
• ZZ to provide online data collection and recruitment for the qualitative component.

The maximum contract price is stated as "not to exceed $XX inclusive of GST and all taxes and charges".

Incentives

It is common for Entity A to engage third party agencies (Subcontractors) to undertake the market research services component of the agreed scope of services for Contract A and Contract B. In undertaking this market research, the Subcontractors will provide incentives to the participants of market research, to encourage participants to partake in the market research. These incentives normally take the form of gift cards/vouchers, however, in rare circumstances may be provided by way of cash payment.

Entity A engages directly with the Subcontractor in relation to the provision of these marketing services.

Relevantly, the agreement between Entity A and the Subcontractors set out the terms and conditions with respect to the provision of incentives as part of the services provided under the agreement as follows:

"As at XX, the Contractor will be fully responsible for payment of incentives to participating on-specification recruits or respondents...

Payments to participating recruited on-specification recruits or respondents may be via whatever method the Contractor deems appropriate ... However, the value will be as agreed with Entity A on a per project basis.

Entity A will not be liable for incorrect payments made by the Contractor to recruits or respondent. Entity A will not be liable or responsible for incorrect payments made by the Contractor to recruits or, for reimbursements made by the Contractor, to any respondent.

When the incentive payment service has been provided by the Contractor on any given project, the Contractor will provide to Entity A all related respondent signature sheets together with the invoice.

The Contractor will charge Entity A an administration fee of $X per recruit\respondent. This amount will be invoiced to Entity A together with the invoice for incentives. But clearly itemised."

Upon completing services provided under the SLA, the Subcontractors will issue a tax invoice to Entity A, including itemised amounts in respect of incentives provided.

By email dated XX, you have confirmed that the gift cards/vouchers are purchased by the Subcontractors and supplied directly to the participants. You have also confirmed that Question 3 is not about determining if the gift cards/vouchers meet the requirements of section 100-5 of the GST Act but rather if the on-charge of costs of the incentives can be treated as non-taxable.

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 Section 100-5

Reasons for decision

Question 1

Section 9-5 of the GST Act provides that an entity makes a taxable supply where the supply is made for consideration, the supply is made in the course of furtherance of an enterprise carried on by the entity, the supply is connected with the Indirect Tax Zone and the entity is registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) describes what is meant by principal/agent relationships. Paragraphs 48 to 54 describe agency relationships and disbursements.

In particular paragraph 49 of GSTR 2000/37 states:

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

In your case, you submit that no formal written agency relationship exists either implied or expressed between Entity A and the Government agencies. Entity A contracts with the Government agencies under Contracts A and B to supply services to the Government agencies as set out in the Statement of Work clauses in the said contracts. In suppling these services to the Government agencies, Entity A make acquisitions directly from third-party Subcontractors which enable Entity A to full fill its obligations under the broader arrangements set out under Contracts A and B. These third-party costs are incurred by Entity A as principal.

You submit, and we agree, that Entity A seeks to recover these third-party costs from the Government agency as part of the overall fee it charges the Government agency for the supply it makes to the Government agency under each of Contract A and Contract B. Where the third-party costs include a non-taxable element, these costs will lose their non-taxable status when they are on-charged to the Government agency.

The supply of services by Entity A to the Government agency under Contacts A and B, meets all the requirements of Section 9-5 of the GST Act to be taxable supplies. Accordingly, GST is payable by Entity A on all of the fee it receives which will include any reimbursement by the Government agency of third-party costs incurred in providing the services, whether the reimbursement is separately itemised or included as part of Entity A's overall fee. This is because the reimbursement forms part of the consideration payable by the Government agencies for the overall taxable services supplied to it by Entity A under Contracts A and B.

Question 2

Not applicable as the answer to Question 1 is yes.

Question 3

Question 3 contemplates two instances of on-charge of the incentives costs, firstly the on-charge by the Subcontractors of its cost of acquisition of the gift cards/vouchers to Entity A and secondly the on-charge of these same costs by Entity A to the Commonwealth. In both instances the on-charge of the costs do not relate to non-taxable supplies but will represent consideration received for taxable supplies made by the parties.

Section 100-5 of the GST Act is about supplies of vouchers with a stated monetary value. Subsection 100-5(1) of the GST Act provides that a supply of a voucher is not a taxable supply under the circumstances set out in paragraphs (a) and (b) of subsection 100-5(1) of the GST Act.

By email dated XX, you have confirmed that the gift cards/vouchers are purchased by the Subcontractors and supplied directly to the participants. You have also confirmed that Question 3 is not about determining if the gift cards/vouchers meet the requirements of section 100-5 of the GST Act but rather if the on-charge of the costs of the incentives can be treated as non-taxable.

Entity A engages Subcontractors to undertake the market research services component that it is required to conduct for the Government agencies under Contracts A and B. Entity A enters into an Agreement with the Subcontractors under which the Subcontractors undertake the market research services.

In undertaking this market research, the Subcontractors will provide incentives to participants to encourage participation in the market research. The incentives usually take the form of gift cards or vouchers.

The Agreement between Entity A and the Subcontractors provide that the Subcontractors are fully responsible for the payment of any incentives and that Entity A is not liable for any incorrect payments made to the participants.

The supply that the Subcontractors makes to Entity A is the single supply of market research services in accordance with the Statement of Work set out in Schedule 1 of the Agreement. This supply of market research services by the Subcontractors to Entity A will be taxable supplies where the requirements of section 9-5 of the GST Act are met.

The Subcontractors incur the incentives costs directly to enable them to perform market research services for Entity A under the Agreement. These incentive costs are incurred by the Subcontractors as principals.

Where the incentives costs incurred by the Subcontractors are on-charged to Entity A, the reimbursement of these costs by Entity A will form part of the Subcontractors' consideration for the overall supply of market research services to Entity A.

Accordingly, GST is payable by the Subcontractors on any reimbursement of the incentive costs by Entity A whether these costs are separately itemised or included as part of the Subcontractors overall fee.

Similarly, the on-charge of the incentives costs by Entity A to the Government agency and the reimbursement of these costs by the Commonwealth will form consideration for the overall taxable supply of services by Entity A to the Government agencies. Therefore, GST will be payable by Entity A for the reimbursement of the incentive costs by the Government agencies.

Question 4

Yes, the supply made by the Subcontractors to Entity A will be a single taxable supply of services for reasons as discussed in Question 3.

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