Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 4 - Agents
4.1 This Chapter describes arrangements that entities involved in transactions on the basis of principal and agent may enter to simplify the way they account for GST in relation to both supplies to, and acquisitions from, third parties.
What are the arrangements under which agents are treated as suppliers or acquirers?
4.2 New section 153-50 provides thatentities may enter into an arrangement under which an agent will be treated as a supplier or acquirer (i.e. they will be treated as though they were a principal in their own right). To enter this arrangement there must be a written agreement under which:
- the agent agrees that they are making supplies and/or acquisitions on behalf of the principal [new paragraph 153-50(a)] ;
- the kinds of supplies and/or acquisitions to which the arrangement applies are specified [new paragraph 153-50(b)] ;
- the agent will be treated as a principal in making supplies or acquisitions [new paragraph 153-50(c)] ;
- the agent will issue tax invoices and adjustment notes to third parties in the agent's name and the principal will not issue such documents [paragraph 153-50(d)] ; and
- both parties have to be registered or else the arrangement ceases to have effect [paragraph 153-50(e)] .
4.3 This Subdivision is not restricted to applying only to principals and agents who make supplies in simple arrangements involving one principal, one agent and one third party. It may be accessed by those in more complex arrangements involving, for example, a number of sub-agents. However, the arrangements will only apply to entities which agree to adopt the arrangements or who do not opt out of them in the case of the application of the Commissioner's determination under new section 153-65 .
4.4 The general effect of entering into a new Subdivision 153-B arrangement in respect of supplies is that the principal and agent treat the supply of goods or services as 2 separate supplies as though they were acting as principal to principal.
4.5 Under an arrangement, the principal will be taken to have made a taxable supply to the agent [new subsection 153-55(2)] . The value of that supply is determined by reference to the amount the agent is actually required to pay the principal [new paragraph 153-55(2)(b)] . Usually this amount will be the amount the third party is charged for the supply less the amount the agent is permitted, under the contract with the principal, to keep as a commission or similar payment for agency services.
4.6 As the supply by the principal to the agent would be considered a taxable supply under the arrangement, the principal will be required to remit 1/11 of the price of the supply to the ATO. The agent will be able to claim 1/11 of that amount as an input tax credit.
4.7 In some cases, the principal will require the agent to pay the principal the entire amount the third party is charged for the supply but then, in a separate transaction, pays the agent a commission or similar payment for agency services. If this situation occurs, new subsection 153-55(3) provides that the amount the agent has already been required to pay will be reduced by the amount of the commission or similar payment for agency services. The agent's supply of services is then not considered to be a taxable supply in its own right.
4.8 When the agent sells the goods to the third party, the supply is a taxable supply made by the agent and the agent will be required to remit to the ATO 1/11 of the price they charged the third party. [New subsection 153-55(1)]
4.9 The normal attribution rules would then apply to the supply from the principal to the agent and agent to the third party.
Before making a Subdivision 153B arrangementWithout an agreement to adopt the arrangements provided under
new Subdivision 153-55
, The House of Robert supplies perfume priced at $143 (GST inclusive) to Heather through an agent, Baxters. The House of Robert delivers the perfume to Baxters with an invoice that states that if Baxters sells the goods, they must pay the House of Robert $100 plus $13 to cover the GST which is payable on the supply to Heather. Baxters is entitled to receive a commission from the House of Robert for the selling service of $33 (GST inclusive).After making a Subdivision 153B arrangementAs the diagram below shows, if the House of Robert and Baxters enter into an agreement that the
new Subdivision 153-B
arrangements apply, Baxters will pay the House of Robert $110 (as the supply by the House of Robert to Baxters will be considered a taxable supply the price of the supply is the amount Baxters is obliged to pay, i.e. $100 plus GST). The House of Robert will be required to remit $10 to the ATO when they delivered the perfume with an invoice to Baxters. Baxters will be able to claim $10 as an input tax credit.When Baxters sells the perfume to Heather, the supply will be a taxable supply so Baxters will be required to remit $13 to the ATO.
What are the effects of the arrangements on acquisitions?
4.10 The general effect of entering into a new Subdivision 153-B arrangement in respect of acquisitions is that the principal and agent treat acquisitions as 2 separate acquisitions as though they were acting as principal to principal.
4.11 Under the arrangements, when an agent makes an acquisition from a third party on behalf of the principal it will be taken to have made an acquisition in its own right. The agent will be entitled to claim input tax credits on that acquisition. [New subsection 153-60(1)]
4.12 The agent will then be taken to have made a taxable supply to the principal [new subsection 153-60(2)] . The value of that acquisition is determined by reference to the amount that the principal is required to pay the agent [new paragraph 153-60(2)(b)] . Usually this amount will be the amount the third party charged for the supply plus the amount the agent is permitted, under the contract with the principal, to charge as a commission or similar payment for agency services.
4.13 As the supply by the agent to the principal would be considered a taxable supply under the arrangement, the agent will be required to remit 1/11 of the price of the supply to the ATO. The principal will be able to claim 1/11 of that amount as an input tax credit if they would have otherwise been making a creditable acquisition from the third party had new Subdivision 153-B not applied.
4.14 In some cases, the agent will be paid the entire amount the third party charged for the supply but then, in a separate transaction, the principal will pay the agent a commission or similar payment for agency services. If this situation occurs, new subsection 153-60(3) provides that the amount the principal has already been required to pay will be increased by the amount of the commission or similar payment for agency services. The agent's supply of services is then not considered to be a taxable supply in its own right.
4.15 The normal attribution rules would then apply to the supply from the third party to the agent and agent to the principal.
Limitations of the scope of the arrangements
4.16 The arrangements provided for under new Subdivision 153-B do not impact the application of other taxation laws except where specifically noted. Nor do the arrangements impact upon other laws or contractual arrangements between the parties. They merely simplify the way in which agents and principals may account for GST.
4.17 The Commissioner has a discretion in relation to the application of the arrangements to certain industries. The discretion will allow the Commissioner to make a determination that agents and principals in a particular industry would be considered to have agreed to adopt the arrangements unless one or both notify the other that they do not wish to be a part of the arrangements. [New section 153-65]
4.18 It is intended that this discretion may be used by the Commissioner in relation to industries which have one or more of the following features:
- a significant number of agents, for example, the newsagency and hair care industries;
- a significant number of principals, for example, sectors of the tourism industry involving wholesale travel agents; and
- other difficulties in obtaining written agreements, for example, industries in which the agents and principals involved are geographically isolated.
Example 4.2 The Commissioner may make a determination in relation to agents and principals involved in making supplies of hair care products through hairdressing salons. This determination will mean that all the agents and principals involved in that industry will be considered to have agreed to adopt the arrangements in Subdivision 153-B and so they will account for GST on a principal to principal basis. However, if any hairdressing salon or hair care product supplier is not satisfied that the arrangement is appropriate for their business, they can notify the other party in writing that they do not want to continue under the arrangement and therefore both parties will have to account on the agent to principal basis required under the general GST law.
4.19 New section 188-24 gives the agent the option of calculating their turnover with reference to their turnover before they entered the arrangements or with reference to their turnover after they entered the arrangements. In this way, choosing to enter the arrangements will not disadvantage the agent in relation to their turnover.
Example 4.3 Usha carries on a large newsagency business. She and her principals have agreed to account for GST under the new Subdivision 153-B arrangements. If Usha wanted to, she could work out her turnover by including the supplies she makes as a principal under the arrangements. However, in Usha's case including all those supplies would mean her turnover was too large to continue to account on a cash basis. So Usha can choose to work out her turnover by ignoring the effects of new Subdivision 153-B and referring to what would have otherwise been included in her turnover.
4.20 The TAA 1953is amended by the insertion of 2 new subsections to provide for record keeping responsibilities for those involved in new Subdivision 153-B arrangements. The principal involved in such an arrangement by agreement will be required to keep the written agreement [new subsection 70(1AA)] , however in the situation where a party opts out of an arrangement which had applied as the result of a Commissioner's determination, both parties will be required to keep that notice [new subsection 70(1AB)] .
4.21 The Government's policy objective is to ensure goods and services sold to and sold by entities acting as agents are subject to the correct level of GST and eligible for input tax credits whilst ensuring compliance costs are kept to a minimum.
4.22 It has come to the Government's attention that the provisions for agents in the GST Act may not recognise some of the agency arrangements that are in place between businesses. As a result, affected entities may have higher than necessary compliance costs, in absence of any action by the Government. In some cases, these higher compliance costs would arise due to the business having to separate out the supplies they make as principals and those they make as agents. For a large number of retailers this could be a significant problem.
4.23 As there are no administrative solutions to cover the range of agency arrangements that have come to light, the only practicable option to provide greater flexibility is to amend the legislation to allow entities to enter into an arrangement under which an agent can elect to be treated as a supplier or acquirer (i.e. they will be treated as though they were a principal in their own right).
4.24 To enter this arrangement there must be a written agreement under which:
- the agent agrees that they are making supplies and/or acquisitions on behalf of the principal;
- the kinds of supplies and/or acquisitions to which the arrangement applies are specified;
- the agent will be treated as a principal in making supplies or acquisitions;
- the agent will issue tax invoices and adjustment notes to third parties in the agent's name and the principal will not issue such documents; and
- both parties have to be registered.
4.25 It would also be possible to treat all agency arrangements in this fashion, but the Government recognises that the current rules actually benefit some agency arrangements and so it considered an option was the appropriate method.
Assessment of impacts
4.26 The changes to the agency provisions will only impact on entities that choose to enter into the above arrangements. The general effect of entering into these arrangements in respect of both supplies and acquisitions is that the principal and agent treat them as though they were acting as principal to principal. Due to the nature of the measure, the Government is not able to quantify how many agency arrangements will utilise the proposed option.
Costs and benefits
4.27 Given that this measure provides an option for businesses to enter into agreements, the Government expects that only those entities that gain from entering into the arrangements will do so. Accordingly, the Government expects that the amendments to the agency provisions will lead to a reduction in compliance costs for the businesses that use these arrangements. Compliance costs will be reduced for these entities because they will not face the situation where they would need to identify which sales they make as agents and which they make as principal.
4.28 Administration costs of the GST remain unaltered and there is no impact on revenue.
4.29 There has been widespread industry consultation and the Government anticipates that the proposed solution will be acceptable.
Conclusion and recommended option
4.30 The Government has decided to amend the GST Act to enable principals and agents to enter into arrangements to simplify the way they account for the GST.
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