Edited version of private ruling

Authorisation Number: 1011736388125

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Ruling

Subject: GST and financial supplies

Question 1

Is the fee charged by Entity A to Entity B for rights to receive discounts consideration for an input taxed supply?

Answer

Yes. Entity A makes an input taxed supply of rights to receive an input taxed supply under paragraph 9-30(2)(b) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Entity A charges Entity B a fee which entitles Entity B to receive a discount on supplies it makes to the Entity B.

Entity A's supplies to Entity B may consist of both taxable and input taxed supplies.

It is a condition of the supply of the rights that Entity B must have acquired first an input taxed supply (the main supply) from Entity A.

The discounts apply to supplies made by Entity A to Entity B for a period, as well as future supplies should Entity B choose to acquire those future supplies.

Where Entity B has pre paid consideration for existing supplies made for a period, Entity A will reimburse Entity B for a portion of the prepaid consideration.

If Entity B ceases to satisfy the condition above, all discounts cease to apply.

The cost of the discount by far outweighs any costs of the discount that may apply to any taxable supplies that may be made.

Summary

The payment received in respect of Entity A's supply is consideration for a composite supply of a right to receive an input taxed supply and will be input taxed under paragraph 9-30(2)(b) of the GST Act.

Detailed reasoning

In characterising supplies it is necessary to determine what in substance and reality is supplied in return for the payment. The characterisation of the supply does not depend on what Entity B subjectively paid the fee for.

The Commissioner has stated in Goods and Services Tax Ruling GSTR 2006/9: supplies (GSTR 2006/9), that one of the propositions for characterising and analysing supplies as the need to analyse the transaction that occurs, not a transaction that might have occurred. Specifically, GSTR 2006/9 states at paragraph 112:

"There may be a number of different ways by which an entity could achieve a desired end result. In addition, parties to an arrangement may contemplate an entity making a supply of a particular kind but, as events transpire, a different supply may actually be made by the entity. In determining whether the entity has made a supply, and the true character of any supply it has made, what is relevant is what the entity actually did, rather than what it might have done.^45A"

In this particular circumstance, Entity A provides Entity B with an entitlement to receive discounts on Entity A's supplies.

The Commissioner views the supply made by Entity A to Entity B as a supply of rights.

In relation to the supply of rights, paragraph 9-30(2)(b) of the GST Act states that a supply of a right to receive a supply that would be input taxed is also input taxed. Hill J in HP Mercantile Pty Limited v. Commissioner of Taxation [2005] FCAFC 126, in considering the phrase ``[R]elates to making supplies that would be input taxed'' in the context of paragraph 11-15(2)(b) of the GST Act, said at paragraph 34 of the judgement:

"There is nothing in the language used which requires the words ``relates to making supplies that would be input taxed'' to be read as referring only to the making of supplies which, if made at all, would be made at some future time, that time being after the acquisitions which are claimed to give rise to input tax credits."

Hill J further comments in paragraph 41 of the judgement that:

"It may be hoped that concentration upon linguistic analysis by engaging in a syntactical enquiry into the meaning of the word ``would'' when used in conjunction with ``making'' would not be the correct approach to the present issue of interpretation. Nor is it particularly helpful to engage in a discussion as to whether the word ``making'' is a present participle or a gerundive. It is true that the word ``would'' could suggest futurity just as the word might suggest conditionality. Indeed, it could suggest both. But to say that is not to solve the construction issue, merely to suggest that more than one alternative is open. It suffices to say that one meaning of the word ``would'' is conditionality. While the 42nd meaning in the Oxford English Dictionary quoted by the Tribunal refers to conditionality, the Macquarie Dictionary, (3d ed), gives as its first meaning ``1. (used to form conditional)''."

The Commissioner, in considering HP Mercantile, accepts in Goods and Services Tax Ruling GSTR 2008/1 - when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) the views by Hill J that the reference to 'supplies that would be input taxed' is not limited to future supplies, but also to past and current supplies. We consider that the same rationale can be applied in the context of paragraph 9-30(2)(b) of the GST Act when considering the phrase "receive a supply that would be input taxed". Based on this view, a supply of a right to receive a supply that would be input taxed would also include a supply of further rights in relation to receiving those input taxed supplies that has been supplied, is still being supplied or would be supplied.

The GST Law (Division 156 of the GST Act and section 12 of A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act)) acknowledges that some supplies, for example a single supply of a right, are capable of being made for a period, and as such, may be impacted by those provisions. (Note that section 156-17 of GST Act was inserted for clarification and section 12 of the GST Transition Act is not specific to taxable supplies). Given that the granting of an interest in a credit arrangement for the term of the loan has a specific start and end date it will be a supply that is made for a period.

Although both section 156-22 of the GST Act and subsection 12(6) of the GST Transition Act contain particular deeming provisions to deem supplies by way of lease, hire or similar arrangements as either being periodic or progressive, the Commissioner considers that Division 156 of the GST Act and section 12 of the GST Transition Act would not prevent an input taxed supply to be "a supply for a period".

As such, we consider that part of the fee paid for the rights is for Entity A's supply of a right to receive Entity A's input taxed supply that is supplied for a period.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Commissioner's view on how to determine whether parts in a supply should be separately recognised for GST purposes or in fact whether they are integral, ancillary and incidental to a dominant supply.

Paragraphs 19 and 20 of the GSTR 2001/8, state:

19. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. You also need to consider the effect the GST Act has on the supply or any of its individual parts. You can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a commonsense approach.'

Paragraphs 55 to 63 of GSTR 2001/8 further explain what integral, ancillary or incidental parts are.

In paragraph 55 of GSTR 2001/8, it states that:

'Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.'

After considering two European cases that determined whether particular parts are integral, ancillary or incidental to a dominant part, GSTR 2001/8 provides guidelines adopting the principles in those two cases in paragraph 58 and 59 where it states:

58. You will need to consider all of the facts to determine whether the supply that you make has any parts that are integral, ancillary or incidental.

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, indicators that a part may be integral, ancillary or incidental include where:

· you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for Entity Bs an aim in itself; or

· it represents a marginal proportion of the total value of the package compared to the dominant part; or

· it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

· it contributes to the proper performance of the contract to supply the dominant part.

That is, we consider that a part of a supply will be integral, ancillary or incidental where it is insignificant in value or function, or merely contributes to or complements the use or enjoyment of the dominant part of the supply. It is a question of fact and degree whether a supply is mixed or composite.

Applying the principles provided in GSTR 2001/8 to the current circumstances, we consider that the dominant purpose for the supply of the rights is to receive the discount on the input taxed supply. The other benefits that flow from the supply of rights do not appear to constitute the main objective for Entity B or is being sought for its own sake, and it represents a marginal proportion of the total value of all the benefits received under the supply of rights.

On this basis, it is our view that the fee charged by Entity A is consideration for a composite input taxed supply under paragraph 9-30(2)(b) of the GST Act consisting of a right to receive a supply that is input taxed.