Edited version of private ruling

Authorisation Number: 1011883343507

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Ruling

Subject: GST and mixed supplies

Question

Will your supply of a particular item (Item A) included in a product you are to sell (Product) be subject to goods and services tax (GST)?

Answer

Yes, refer to the reasons for decision as to the amount of GST payable on Item A.

Relevant facts and circumstances

You are registered for GST.

· You are to supply by way of sale your Product consisting of the following items:

o food items

o Item A (not a food item) provided a certain number of Products are purchased.

· The Product is to be sold in the following manner:

o each item in the Product will be separately itemised and charged for on the invoice (including GST where applicable)

o a customer must buy a certain number of Products to obtain one Item A

o you will not charge for Item A, that is, it will be itemised on the invoice as having no value

o you consider Item A to be a free incentive to entice your customers to buy your Product

o Item A is a one-off offer, that is, if a customer purchases more of your Product they would not receive another Item A.

· Item A can be purchased separately.

Reasons for decision

Summary

The Product is a mixed supply with Item A having some value in that supply. It is therefore necessary to make an apportionment of the consideration received between all the different parts of the mixed supply to determine a value for Item A.

A method of apportionment has been provided.

Detailed reasoning

Mixed and composite supplies

The ATO's view on mixed and composite supplies is provided by the public ruling GSTR 2001/8 (available from the website www.ato.gov.au ). This ruling provides that a mixed supply is a supply that contains separately identifiable taxable and non-taxable parts.

A composite supply on the other hand is a supply that contains, or appears to contain, several parts that may objectively be treated as if they are simply a supply of a single thing. The terms used in GSTR 2001/8 in describing subordinate parts of a composite supply include 'incidental', 'integral', 'ancillary'. In other words, a composite supply is a supply of one dominant part that has other parts that are not treated as having a separate identity given they are only integral, ancillary or incidental to the dominant part of the supply.

In your case, you will treat your supply of your Product as a mixed supply given that you will separately itemise the items making up the Product. We agree that this is the appropriate treatment for this product given that the items making up the Product are separately identifiable and could be sold in their own right.

You will itemise Item A but will not give it a value (in effect, treating it similar to a free incentive).

This type of pricing scenario was examined in the case Food Supplier and Commissioner of Taxation [2007] AATA 1550 where President Downes made some comments about the use of the word 'free' at paragraph 12.

To my mind it is dangerous to equate modern use of the word "free" with the absence of consideration. The danger is compounded when the question is not whether "free" is the most appropriate word, but whether it is misleading.…..It follows, to my mind, that even if the use of "free" in connection with the promotion items in the present case is not misleading, it does not follow that, as a component of an overall package, they are provided without consideration.

It was argued in this case that because the total package is sold for the same price as the food product alone and the promotion item is labelled 'free', there is no consideration for the promotion item. President Downes said that this ignored the fact that the promotion item was only supplied if the food product was purchased as well.

We consider that the principle reached in this case applies to your situation, that is, Item A does have some value and that this value is included in the amount that will be paid for the Product.

GST payable

It becomes necessary for GST purposes, when making a mixed supply, to determine the value of each identifiable part. To do this, it is necessary to make an apportionment of the consideration received between all the different parts of the mixed supply. GSTR 2001/8 provides that any apportionment method used must be fair and reasonable.

In your case, we consider that the following example of an apportionment method would be fair and reasonable.

Apportionment method example

If you were to charge for Item A that is being supplied with the Product, the new asking price for your Product would be Product price + Price of Item A.

Next, calculate what percentage of the new asking price is represented by Item A (say A%) and apply this percentage to the actual asking price of your Product, that is, calculate

A% x Product price.

Lastly, calculate the GST payable using this value.