Edited version of private ruling

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Ruling

Subject: Third party payments

Question 1

From your perspective, are payments that you make to retailers out of scope for GST purposes?

Answer

Yes.

Question 2

From your perspective, do the provisions in Division 134 of the GST Act apply to bring the payments made on or after 1 July 2010 within the scope of GST?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You have stated that you supply the service to Entity A of altering goods and invoice Entity A directly for this service.

The service that you supply would also involve supplying goods to Entity A.

Entity A's goods are typically sold under an arrangement, whereby title to goods passes from Entity A to a finance company and the retailer is granted physical possession of the goods. When the retailer finds a customer for the goods, title to the goods passes from the finance company to the retailer immediately before the retailer supplies the goods to the customer.

When the retailer sells Entity A's goods that have been altered by you to a customer, you make a payment to the retailer.

The payment is a fixed amount for every altered good that is sold by the retailer. The fixed amount has varied over time.

The payment is triggered when an altered good is sold by the retailer to a customer.

You make these payments to the retailers to enable them to maintain healthy margins and hence remain competitive with market forces.

You have stated that the payments are not mentioned in an agreement, nor is there any other agreement or correspondence between you and the retailers which documents the terms and conditions of the payments and why they are made.

You currently treat these payments as though they are not subject to GST.

For a period of time, the goods alterations were supplied by you directly to the retailers, rather than to Entity A. At that time, an amount plus GST was paid by you to the retailers for each altered good sold to a customer.

The retailer is required to enter into an agreement with you in order to sell goods that have been altered by you.

The retailer must comply with certain obligations under the agreement.

You make other incentive payments to the retailers with respect to the sale of altered goods. You treat these payments as being subject to GST.

You have provide the following description of the goods alteration process:

1. Entity A places an order with you.

2. The goods are delivered by Entity A to your site.

3. You make certain alterations to the goods.

Relevant legislative provisions

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

Division 7

Division 9

Division 19

Division 134

Question 1

Summary

The payment that you make is not consideration for an acquisition you make. As there is no nexus between the payment you make and a supply that is made to you, there is no taxable supply to you according to Division 9 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides the requirements necessary for a supply to be taxable and states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input-taxed.

Note: *asterisk denotes a term defined in the GST Act.

For the payments to be considered out of scope for GST, it is necessary to determine whether the payment is consideration for a supply made to you by the retailer.

Supplies

The meaning of supply for GST purposes is provided by section 9-10 of the GST Act. The Tax Office view on supplies is contained in GST Ruling GSTR 2006/9 (GSTR 2006/9). Paragraph 33 of GSTR 2006/9 confirms that the concept of supply as provided by subsection 9-10(1) of the GST Act is intended to encompass supplies as widely as possible. Subsection 9-10(2) of the GST Act provides a list of things that are included as supplies. This list includes a supply of services and the entry into, or release from, an obligation to do anything. According to paragraph 76 of GSTR 2006/9, a supply requires some act of provision, furnishment, conferral or giving of some thing.

Consideration

A supply is a taxable supply, if, amongst other things, it is made for consideration. Section 9-15 of the GST Act states:

(1) Consideration includes:

(a) any payment, or any act of forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

A payment will be consideration for a supply if the payment is in connection with a supply or if it is in response to or for the inducement of a supply. Therefore, there must be sufficient nexus between the supply and payment for there to be a supply for consideration.

According to the information you have provided, we consider that the payment that you make to retailers is not consideration for or in connection with any supply that the retailers make to you. The retailer is not required to do anything more than sell a good that has been altered by you to trigger the payment.

As a result, the payment that you make to the retailer is not consideration for an acquisition you make.

Question 2

Summary

You will have decreasing adjustments for payments that you make on or after 1 July 2010, as the conditions of subsection 134-5(1) of the GST Act are met.

Detailed reasoning

For payments made after 1 July 2010, the GST Act was amended with the intention that the correct amount of GST is paid and claimed in situations where consideration is paid by an entity in the supply chain to a payee where that payment effectively alters the consideration paid.

Subsection 134-5(1) of the GST Act states:

(1) You have a decreasing adjustment if:

(a) you make a payment to an entity (the payee) that acquires a thing that you supplied to another entity (whether or not that other entity supplies the thing to the payee); and

(b) your supply of the thing to the other entity:

(i) was a *taxable supply; or

(ii) would have been a taxable supply but for a reason to which subsection (3) applies; and

(c) the payment is in one or more of the following forms:

(i) a payment of money;

(ii) an offset of an amount of money that the payee owes to you;

(iii) a crediting of an amount of money to an account that the payee holds; and

(d) the payment is made in connection with, in response to or for the inducement of the payee's acquisition of the thing; and

(e) the payment is not *consideration for a supply to you.

Paragraph 1.6 of the Explanatory Memorandum that accompanied the Tax Laws Amendment (2010 GST Administration Measures No.1) Bill 2010 confirms that an adjustment under Division 134 of the GST Act will arise even if there are several interposed entities in the supply chain.

The supply that you make to Entity A is a taxable supply. You make the payment by transferring funds directly to the retailers bank account. As explained in Question 1, the payment is not consideration for a supply to you. Therefore, we consider that paragraphs 134-5(1)(b), (c), and (e) of the GST Act are clearly satisfied.

Paragraph 134-5(1)(a) requires that you make a payment to an entity that acquires a thing that you supplied to another entity. In your case, you make a payment to the retailer who has acquired a altered good from Entity A via a finance company.

Paragraph 1.8 of the Explanatory Memorandum states:

The term thing is defined in section 195-1 of the GST Act as 'anything that can be supplied or imported'. Accordingly, the adjustment may arise for any type of supply, including supplies of rights or services. It is necessary though for what the payee acquires to be the same thing that the payer supplies. There may be some alteration of the thing through the supply chain, or incorporation of the thing into a broader supply (for example, the thing may be packaged with other goods or services). But for the adjustment to apply, the thing supplied by the payer must be capable of being identified as something acquired by the payee.

You have described the supply that you make to Entity A as an alteration service, however it seems clear that this would also involve the provision of goods.

The alterations that you make to the goods are incorporated into the broader supply of an altered good. The retailer acquires the altered good from Entity A via the finance company. The goods acquired by the retailer have been altered by you and as such it is considered that paragraph 134-5(1)(a) of the GST Act is satisfied.

Paragraph 134-5(1)(d) of the GST Act requires that the payment that you make is in connection with, in response to or for the inducement of the payee's acquisition of the thing.

You alter goods for Entity A, who supplies the altered goods to a finance company, who supplies the altered goods to the retailer. These transactions all occur prior to the retailer selling the altered goods to a customer, which triggers the payment that you make. The retailer cannot receive the payment from you without having first acquired the goods and therefore it is considered that the payment is made in connection with the retailer's acquisition of the altered good.

While the payment that you make to the retailer is triggered by the retailer selling the altered goods to a customer, you have stated that the principal purpose of the payment is to maintain the profit margin of the retailers on the sale of the goods to enable them to remain a viable business. In general terms, the profit margin on the goods is the difference between the cost to the retailer of acquiring the goods and the price at which the retailer sells the goods.

Division 134 of the GST Act does not stipulate when a payment must be made in relation to the payee's acquisition of the thing. It is sufficient if the payment does relate to the acquisition of the thing.

Upon receipt of the payment from you, the retailer has in economic terms paid less for the acquisition of the goods than would otherwise have been the case. The payment is tied to particular goods that have been altered by you. There is a clear nexus between the payment being made and the fact that the retailer has acquired the altered goods. It is considered that paragraph 134-5(1)(d) of the GST Act is satisfied.

Therefore, all of the requirements of subsection 134-5(1) of the GST Act are met and you will have a decreasing adjustment when you make the payment to retailers.