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Ruling

Subject: entitlement to input tax credits - subsidy scheme

Question 1

Are you entitled to input tax credits for payments made to subsidise travel for members of a travel subsidy scheme (the scheme)?

Answer

Yes, other than in those circumstances where the member applies to you for reimbursement of the fare.

Relevant facts and circumstances

· You are that is registered for GST.

· You administer the travel subsidy scheme to provide assistance to eligible persons (members).

· Assistance is provided in the form of a subsidy paid to the travel supplier.

· The amount of the subsidy is limited to a percentage of the fare capped to the member's annual entitlement.

· An eligible member is provided with a card with photographic identification.

· The member's benefit entitlement is loaded on the card each year.

· The card stores the member number, card number, membership start and expiry dates and the available subsidy balance (which is updated after each trip).

· Members must provide their card to the supplier before the commencement of the travel for validation.

· It is a requirement under relevant Code of Conduct that all suppliers must accept the card when offered by a member. A driver who contravenes the code is guilty of an offence and subject to penalties under State or Territory law.

· The member pays their share of the fare and the subsidy payable by you is transmitted electronically to the supplier.

· You are provided with a weekly report and tax invoice claiming the subsidy inclusive of GST.

· Where there are problems with the electronic system, the supplier may use a specific voucher to record the trip and claim payment.

· These vouchers can not be used for faulty or damaged cards. In these circumstances, the member is required to pay the supplier for the full amount of the fare. The member may then apply to you for a reimbursement of the fare provided the member submits a receipt for the trip and has sufficient credit on their card.

Reasons for decision

Summary

You have made creditable acquisitions in respect of the subsidy payments (other than where they are paid by way of reimbursement to the member) and are therefore entitled to input tax credits.

Detailed reasoning

You make a creditable acquisition if you acquire something solely or partly for a creditable purpose, the supply of the thing to you is a taxable supply, you provide or are liable to provide consideration for the supply, and you are registered or required to be registered (section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)).

It is first necessary to determine whether the suppliers have made taxable supplies to you.

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 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 the transport to the member and the supply to you of the service of transporting the member.

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

In your circumstances there is a pre-existing framework in place governing the operation of the scheme. It is a requirement under the industry Code of Conduct that all suppliers must accept the card when offered by a member. A supplier who contravenes the Code is guilty of an offence under the relevant laws of the State or Territory. Once the card has been offered the obligations of the scheme must be carried out by both the supplier and you. These obligations require that the supplier act in a particular manner in respect of supplies made to members, and specifically the framework requires that the supplier charge a lower amount to members.

Mechanism for identifying eligible recipients

Presentation of the card authorises the supply of transport as a supply under the scheme. The supplier obtains authorisation in the form of the card before providing the transport. The card itself is advance authorisation from you that the member is entitled to the benefits under the scheme.

A member presents the card to the supplier before the supply of transport. It is at this point that it becomes a supply of transport under the scheme and you assume liability to make payments under the scheme.

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

At the end of the journey the member pays their amount and the GST attributable, and you pay the rest and the GST attributable to that amount.

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

The supplier operates on the basis that when the card is presented you will pay the subsidy amount. Licence conditions for the suppliers require that they must charge members a lower amount and accept the card as part-payment for a journey, and that the corresponding amount will be paid by you in accordance with your obligations under the scheme.

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

Accepting and validating the card means that the supplier is acting in accordance with the pre-existing arrangement, and is bound to provide the relevant services in accordance with the pre-existing framework.

Liability is owed by you

When the card is presented the supply becomes a supply of transport under the scheme and you assume liability to make payments under the scheme. You owe the amount of the subsidy to the suppliers under the scheme.

Conclusion

In considering the above factors in combination, we accept that a supply has been made to you.

The supply by the supplier is a taxable supply where the supplier has 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). The supply to you is a taxable supply, you have provided consideration and you 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 of the 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 of the GST Act).

Therefore, you are entitled to input tax credits.

Situations where the member applies to you for reimbursement

In those circumstances where the supplier can not process the fare electronically or manually by a voucher, the member is required to pay the full amount of the supplier. The member can submit a receipt for the trip with you and provided the member has sufficient credit on their card, they will be reimbursed the specified percentage of the fare under the scheme.

In these situations we do not consider that you have entitlement to an input tax credit as you are not the recipient of a supply.

Paragraph 221B of draft addendum 2006/9DA lists the factors to be considered in determining whether a supply is made to the payer under a tripartite arrangement that involves the supplier providing goods or services to a customer. Included in this list is that the pre-existing framework specifies that the payer is under an obligation to pay the supplier if the supplier provides a relevant supply to a third party.

Even if the member presents their card, if the trip can not be authorised by the supplier as a trip that falls within the framework of the scheme, the trip will not be the subject of a tripartite arrangement as you will not be a party to the transaction. This is because at the time of the supply, the member is liable for the full amount of the fare and you are not obliged to pay the supplier any of the consideration. The issue of reimbursement is one between the member and you.