Edited version of private ruling

Authorisation Number: 1011926185978

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Ruling

Subject: entitlement to input tax credits

Issue 1

Question 1

Are you entitled to input tax credits for payments made to private sector service providers for outsourced specified services?

Advice/Answers

Yes.

Relevant facts

· You are a government entity. You are registered for GST.

· You offer eligible clients the choice of receiving services from either you or certain private sector service providers (the Contractors).

· Contractors agree to provide services to eligible clients, and you agree to pay the Contractors the cost of those services, in accordance with the terms of your agreement with them.

· There is a Service Agreement (Agreement) between you and the Contractor.

· Eligible clients are issued with specified documentation which is valid for a certain period.

· The Contractor can only provide a service to a client with the relevant documentation or by obtaining authorisation from one of your service facilities prior to receiving the service.

· If services are provided by the Contractor to a client then you will pay the Fee to the Contractor.

· The Agreement states that if the Contractor elects to provide Services under the Agreement, such services are provided to clients, and not to you as your role is that of a third party payer only.

· A ruling was previously issued to you on this matter and you seek review of this ruling.

Reasons for decision

Issue 1

Question 1

Summary

You are entitled to input tax credits for payments made to Contractors for outsourced specified services.

We consider that the reasoning in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84 (Department of Transport case) applies to the facts in these particular circumstances.

Detailed reasoning

A previous ruling issued to you provided that you were not entitled to an input tax credit in respect of payments made to Contactors. This decision was made on the basis that your payments were third party payments for a GST-free supply of services to the client.

Paragraph 183 of Goods and Services Tax Ruling GSTR 2006/9 outlines our view on a third party payer's entitlement to an input tax credit. This paragraph states:

If you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to in this Ruling as a 'third party payer'. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

Prior to the Department of Transport decision we would have accepted the description of your role in the Agreement which refers to you as 'only a third party payer' for the supply of services to the eligible client. Therefore we would not have considered you to be the recipient of a supply, or a taxable supply, as required by paragraph 11-5(b) of the GST Act.

The decision in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84 (Department of Transport case) and the subsequent issue of draft addendum GSTR 2006/9DA necessitates a review of the analysis of supplies made under various tripartite arrangements.

Where a Contractor is considered to be making a supply to you under the Agreement it will have GST implications for both you and the Contractor as:

· The supply to you will be a taxable supply rather than a GST-free supply of a service. The Contractor will therefore have a GST liability on the payment; and

· You will be the recipient of a taxable supply under the Agreement and therefore entitled to input tax credits.

As stated in the draft addendum GSTR 2006/9DA, the Commissioner considers that the following factors, in combination, may point to a supply being made by the supplier to the payer in a tripartite arrangement that involves a supplier providing a service or goods to the customer, and where there is no binding obligation between the payer and the supplier for the supplier to provide the service or goods to the customer:

· There is a pre-existing framework or agreement between the payer and the supplier which contemplates that the parties act in a particular manner in respect of supplies that are to be provided by the supplier to particular third parties or a class of third parties.

· The pre-existing framework or agreement identifies a mechanism by which the particular third parties or the class of third parties are to be identified such that the supplies provided to them come within the scope of the framework.

· The pre-existing framework or agreement specifies that the payer is under an obligation to pay the supplier if the supplier provides a relevant supply to a third party and also sets out a mechanism by which such payment is authorised.

· The framework or agreement and the mechanism for authorising the payment are in existence before the supplier provides the supply to the third party (ie the supplier knows in advance that the payer is obliged to pay some or all of the consideration where that supply is provided to the third party)

· The supplier provides the supply to the third party in conformity with the pre-existing framework or agreement between the parties; and

· The obligation of the payer to make payment pursuant to the pre-existing framework or agreement is not an administrative arrangement to pay on behalf of the third party for a liability owed by the third party to the supplier. Rather, once the supply becomes a supply to which the framework or agreement applies, the framework or agreement establishes a liability owed by the payer (not the third party) to the supplier in the event that the supplier provides the relevant supply to the third party.

Where the above conditions are met there may be two supplies. These are the supply of service to the client and the supply to you of the service to the client.

Pre existing framework for the supplier to act in a particular manner

There is an Agreement between you and the Contractors which provides the framework for the scheme.

The Agreement sets out the terms and conditions governing the parties and requires the Contractors to act in a particular manner in respect of supplies provided to clients. Specifically, the Agreement requires Contractors to not charge any amount for services supplied to eligible clients.

Mechanism for identifying eligible recipients

The requirement that there be a mechanism for identifying eligible recipients is also satisfied in these circumstances. For a service to be covered by the Agreement either relevant documentation is issued by you to eligible clients or a Contractor must obtain advance authorisation from a Services Facility operated by you. These measures provide authorisation from you that the client is entitled to services that are covered by the Agreement.

Where the services are covered by the Agreement, you assume liability to make payments to the Contractor under the Agreement. In this circumstance, you acquire from the Contractor a service, being the supply of services to the eligible client.

Requirement to pay the supplier and an established mechanism for making payment

The Agreement specifically provides that if services are provided by the Contractor to an eligible client then you will pay the fee to the Contractor.

Supplier knows that where the supply is made to the eligible client that you will pay

The Contractor knows that if the supply of services is made to an eligible client that you are obliged to pay the fee. This is a liability owed by you and is established by the terms of the Agreement.

Liability is owed by you

A supply will not be made to you in circumstances where the services have been provided to the client before the Contractor has established that they are an eligible client. Under the terms of the Agreement this is unlikely to occur as a client will only be an eligible client where they present the relevant documentation or the Contractor obtains authorisation from your Services Facility.

A supply would not been made to you if there was merely an arrangement to pay on behalf of the third party for a liability already owed by the third party.

Supplier provides the supply in accordance with the pre-existing framework or agreement

Where the requirements of the Agreement between you and the Contractors are followed there will be a supply to you where the Contractor provides the services to an eligible client.

The supply by the Contractors to you will be taxable supplies because they have provided a supply for consideration in the course of their enterprise, the supply is connected with Australia and they are registered for GST (section 9-5 of the GST Act).

It is important to note that the supply by the Contractor to you will not be a GST-free supply of the specified service. The Contractors may need to change their GST treatment of these payments to reflect the view expressed in the draft addendum GSTR 2006/9DA.

As the supplies to you are taxable supplies, you have provided consideration and are registered for GST this meets all the requirements of section 11-5 of the GST Act.

You have made creditable acquisitions as you have acquired the service in carrying out your enterprise and it is not in relation to making supplies that are input taxed or private or domestic (section 11-15 GST Act). You have acquired the service as part of your enterprise, as an enterprise includes an activity or series of activities done by the Commonwealth, a State or a Territory (section 9-20 GST Act).

Therefore, you are entitled to input tax credits.

You have requested that this treatment be applied prospectively. We agree that this is the most appropriate basis on which to proceed.

Historically, and in accordance with the view expressed in GSTR 2006/9, the Contractors presumably treated payments received from you for services provided to eligible clients as consideration for the GST-free supply of services to the eligible clients. If that is the case, the Contractor would not have paid GST on these payments.

Under the heading 'Proposed transitional arrangements' in draft addendum GSTR 2006/9DA it states:

…. If an affected supplier relies or has relied on GSTR 2006/9 to determine that they did not make a taxable supply then no GST is payable on that supply. This means that the recipient cannot claim an input tax credit.

Input tax credits can be claimed for future taxable supplies of the nature described where you receive a tax invoice from the Contractor.