Edited version of private ruling

Authorisation Number: 1011871067409

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Ruling

Subject: GST and supplies relating to linked electronic devices

Questions

1. Is Entity A entitled to a reduced input tax credit (RITC), under item 27 of the table in sub-regulation 70-05.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), for the acquisition related to ensuring the ongoing operability of linked electronic devices located on those clients' premises?

2. Is Entity A entitled to a RITC, under item 29 of the table in sub-regulation 70-05.02(2) of the GST Regulations, for the acquisition from clients of services related to overseeing and ensuring the ongoing operability of Entity As' linked electronic devices located on those clients' premises.

3. Is Entity A entitled to a RITC, under item 6(c) of the table in sub-regulation 70-05.02(2) of the GST Regulations, for the acquisition from clients of services related to overseeing and ensuring the ongoing operability of Entity As' linked electronic devices located on those clients' premises, on the basis that those linked electronic devices form part of a payment system and that Entity A and those clients are all participants in that payment system?

Answer

1. No, Entity A is not entitled to a reduced input tax credit (RITC), under item 27 of the table in sub-regulation 70-05.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations.

2. No, Entity A is not entitled to a RITC, under item 29 of the table in sub-regulation 70-05.02(2) of the GST Regulations.

3. No, Entity A is not entitled to a RITC, under item 6(c) of the table in sub-regulation 70-05.02(2) of the GST Regulations.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A is registered for GST and carries on an enterprise consisting of the operation of linked electronic devices network.

Entity A carries on its enterprise as part of a group of different entities. For the purposes of this submission, these entitles are referred to collectively as Entity A.

From a GST perspective, Entity As' enterprise consists principally of a mix of taxable financial supplies (e.g. supplies by way of licence of linked electronic device infrastructure to their clients and input taxed financial supplies.

The linked electronic devices in respect of which Entity As makes input taxed financial supplies are located in a variety of convenient locations. None of the linked electronic devices in respect of which Entity As makes input taxed financial supplies are located on premises that constitute an X.

Entity As' linked electronic devices can be divided broadly into two classes:

1. Type A linked electronic devices (i.e. linked electronic devices bailed to Entity As under a bailment facility agreement with its partners and to which case is delivered by contractors engaged); and

2. Type B linked electronic devices (i.e. linked electronic devices belonging to the client on whose premises the linked electronic device is located and where that client takes responsibility for ensuring adequate supply levels are met).

We have been provided with a template agreement reflecting the terms and conditions under which Entity A will typically arrange for its linked electronic devices to be placed on clients' premises ("the Agreement").

Certain clauses of the Agreement are about the nature of the underlying supply. Other clauses outline the fee obligations of the clients.

The various fees payable by the clients to Entity As are stipulated in the Agreement and are paid monthly. The monthly fee consists of a variety of fees.

Linked electronic devices installed on the premises of particular categories of clients are almost always Type B. It is only those Type B linked electronic devices which are the subject of this ruling request.

Where Entity As' linked electronic devices are located on the premises of a particular client, that client is almost always responsible for ensuring that the relevant linked electronic devices have sufficient supply levels to meet demand; Entity As does not arrange for the delivery of supplies to these Type B linked electronic devices.

Where linked electronic devices are located on the premises of a particular client, that client will take responsibility for ensuring that there are adequate levels of supplies in those linked electronic devices to meet demand.

The client will generally make their own arrangements for stocking of the relevant linked electronic devices.

When a patron uses a linked electronic device located on a client's premises, the patrons' account will be debited and the client's account credit accordingly, inclusive of relevant fees.

To effectively provide linked electronic device services, Entity A relies on clients on whose premises linked electronic devices are located to provide a number of services related to ensuring the ongoing operability of Entity As' linked electronic devices. These services are likely to include, among other aspects:

· replenishing supplies into the linked electronic device such that patrons are able to effectively utilise linked electronic devices;

· enabling the connection of linked electronic devices to the premises' electricity supply and ensuring that linked electronic devices are switched on and functioning;

· acting as the first point of contact in the case that patrons require assistance with using the linked electronic device (e.g. addressing concerns that patrons may have in the instance that an linked electronic device appears to be malfunctioning);

· liaising with Entity As' support staff to keep them informed of issues affecting Entity As' linked electronic devices;

· attempting to resolve technical issues affecting Entity As' linked electronic devices with the guidance of Entity As' help-desk support staff and keeping Entity A appraised of any ongoing technical issues;

· immediately notifying Entity A of damage to any of its linked electronic devices;

· advertising the presence and location of Entity As' linked electronic devices to the client's patrons; and

· cleaning linked electronic devices.

Where Entity As' linked electronic devices are located on a particular client's premises, that client is generally responsible for replenishing supplies into those linked electronic devices and ensuring that there sufficient supplies in those linked electronic devices to meet patrons' requirements.

When a client transfers supplies into one of Entity As' linked electronic devices, title in that supplies does not pass to Entity A.

Where Entity A has installed linked electronic devices on a client's premises, that client is responsible for taking reasonable steps to ensure that harm does not come to those linked electronic devices. In addition to this obligation, the client is required to obtain insurance for damage, loss or injury to Entity As' linked electronic devices.

The Rebate

Entity A and the client into an arrangement which provides that the client will pay to Entity A a nominal licence fee for the provision by Entity A of the linked electronic devices. However, the licence fee will be reduced by a "rebate". The amount of the rebate will be calculated by reference to the number of transaction made through the relevant linked electronic devices provided by Entity A. Where the rebate exceeds the licence fee, Entity As makes a payment to the client for the excess rebate amount.

The licence fee is typically calculated by reference to a minimum number of transaction which Entity A and the client agree should ordinarily be processed through the linked electronic device in a given period. Provided that the minimum number of transactions is achieved, the licence fee will never be payable.

The licence fees are set at such a level that an amount is only payable by the client to Entity A where the agreed minimum number of transactions to be processed through a linked electronic device in a given period is not achieved. However, the threshold level of transactions is generally set at such a level that the threshold is almost always exceeded.

The licence fee rebate is generally payable by Entity A where the agreed minimum number of transactions to be processed through a linked electronic device in a given period is exceeded. As noted above, that minimum number of transaction is almost always exceeded such that a rebate is almost always payable by Entity A to the client. The net result of this arrangement is that Entity A typically enters an agreement for the provision of the linked electronic devices expecting that it will pay the relevant client to have the client facilitate the operation of those linked electronic devices.

The Agreement details the manner in which the rebate is calculated.

A client will prima facie be liable to pay to Entity A a total fee comprised of a number of items, including a maintenance fee, a reporting fee and a rental fee. The total fee will then be reduced by any rebate payable by Entity A to the client.

The rebate payable by Entity A varies in accordance with whether or not a threshold number of transactions are exceeded. The quantum of the rebate payable by Entity A does not vary directly with the number of the transactions. Rather, the quantum of the rebate payable by Entity A is set as a fixed amount where a particular threshold is exceeded. Nonetheless, that fixed amount is generally calculated by the parties as the product of a certain amount per transaction and a particular number of transactions.

The amounts payable by the client and the potential rebates payable by Entity A will be negotiated at arm's length between Entity A and the client, taking into account a variety of factors that were provided.

The fees and rebates can be illustrated by way an example provided.

We note that this explanation is in contrast to the Agreement which prevents any set off. However, we do not believe that this will have any impact on our decision.

We have been provided with copies of Recipient Created Tax Invoices issued by Entity A for the payment of "rebates" to clients on whose premises Entity As' linked electronic devices have been installed.

Reasons for Decision

You submit that, in order to provide linked electronic device services, Entity A relies on the clients on whose premises linked electronic devices are located to provide a number of services related to ensuring the ongoing operability of Entity As' linked electronic devices. In consideration for these services you contend that Entity A pays the clients a rebate. You have termed these services as 'Client Services' and stated that they are likely to include, among other aspects:

· replenishing supplies into the linked electronic device such that patrons are able to effectively make linked electronic device withdrawals;

· enabling the connection of linked electronic devices to the premises' electricity supply and ensuring that linked electronic devices are switched on and functioning;

· acting as the first point of contact in the case that patrons require assistance with using the linked electronic device (e.g. addressing concerns that patrons may have in the instance that an linked electronic device appears to be malfunctioning);

· liaising with Entity As' support staff to keep them informed of issues affecting Entity As' linked electronic devices;

· attempting to resolve technical issues afflicting Entity As' linked electronic devices with the guidance of Entity As' help-desk support staff and keeping Entity A appraised of any ongoing technical issues'

· immediately notifying Entity A of damage to any of its linked electronic devices;

· advertising the presence and location of Entity As' linked electronic devices to the client's patrons; and

· cleaning linked electronic devices

You contend that you are entitled to a RITC for the GST you have included in the rebate you paid the clients.

Applicable law

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit 'for any creditable acquisition that you make'. For an acquisition to qualify as a creditable acquisition it must, among other things, be acquired 'solely or partly for a creditable purpose' (section 11-5 of the GST Act).

Under subsection 11-15(1) of the GST Act, a thing is acquired for a creditable purpose to the extent that 'you acquire it in carrying on your enterprise'. Under paragraph 11-15(2)(a) of the GST Act, a thing acquired in carrying on an enterprise is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. Therefore, under this general provision of the GST Act, an entity that is making an acquisition that relates to making an input taxed supply, such as a financial supply, is not entitled to claim input tax credits. However, pursuant to subsection 70-5(1) of the GST Act, acquisitions of a specified kind that relate to making financial supplies can give rise to an entitlement to a reduced input tax credit. These acquisitions are referred to as 'reduced credit acquisitions'.

Therefore, we must determine whether Entity A is making a financial supply and if so, whether the relevant client services come within the meaning of a reduced credit acquisition which will allow you to claim a RITC.

Financial supply

Section 40-5 of the GST Act provides that a financial supply, as defined in the GST Regulations, is input taxed.

According to subregulation 40-5.09 (4A) of the GST Regulations a supply of one or more of the following linked electronic device services for a fee of not more than $1 000 is a financial supply. The relevant linked electronic device services were provided.

We consider that Entity A is making a financial supply consisting of the linked electronic device services contemplated in Subregulation 40-5.09(4A) of the GST Regulations which will be input taxed under section 40-5 of the GST Act to the extent that none of the GST-free provisions contained in the GST Act apply to their supply.

Reduced credit acquisition

Before deciding whether something is a reduced credit acquisition, what must be determined first is whether or not the relevant entity has in fact acquired the thing/service in question.

The issue therefore is, deciding whether Entity A has acquired the relevant client services from the clients (or in other words whether a supply has been made by the clients to Entity A). If so, then, whether that acquisition is a reduced credit acquisition.

Supply and acquisition

The Commissioner's view on the meaning of 'supply' and its consequences are set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9). At paragraphs 222 and 223 of GSTR 2006/9 the Commissioner outlines the relevant principles that ought to be used when parties reduce their understanding to a written agreement and also how that agreement must be construed. These paragraphs state:

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

223. Australian courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transactions entered into and the circumstances in which the transactions are made. This was made clear by McTiernan J in Radaich v. Smith (1959) 101 CLR 209 at 214:

…the parties cannot by the mere words of their contract turn it into something else. Their relationship is determined by the law and not by the label they choose to put on it.

and by Gray J in Re Porter; Re Transport Workers Union of Australia (1989) 34 I R 179 at 184:

A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. …the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

Applying these principles to Entity As' circumstances the Agreement provided to us must be the starting point to analyse the transaction between Entity A and the clients. When viewed objectively, we are of the view that the supply under this Agreement is for Entity A to supply the clients with the supply of linked electronic devices. Support for this conclusion is drawn from the Agreement. The relevant client services you have outlined and submitted as separate supplies, in our view, are merely terms and conditions of the Agreement. They are obligations placed on the clients to provide business efficacy to the Agreement and have no aim by themselves. The Commissioner in Goods and Services Tax Ruling GSTR 2001/6 Goods and Services tax: non-monetary consideration (GSTR 2001/6) at paragraph 96 illustrates the concept that actual or implied obligations under a commercial agreement cannot be viewed in isolation. Paragraph 96 of GSTR 2001/6 states:

96. For example, if a tenant did not have an actual or implied obligation under a lease to keep the leased premises in good repair, it is likely that the landlord would require the tenant to make higher lease payments. However, if the tenant agrees to such an obligation, it is not consideration for the supply of the premises as it is not provided as compensation or value for the supply of the premises.

Therefore, based on the above we are of the view that the relevant client services are not separate supplies for GST purposes. Accordingly, Entity A is not making any acquisitions from the clients. Therefore, there cannot be any creditable or reduced credit acquisitions for which input tax credits or RITCs are available.

For completeness, we advise that even if there were any supplies stemming from the clients to Entity A, we are not of the opinion that those supplies would have any nexus to the rebate payable by Entity A. The rebate in our view is not consideration for separate supply and arises as a result of certain threshold being met. In analysing the method in which the rebate is calculated and/or determined we are of the view that it is akin to a revenue and/or profit distribution which has no GST consequences.