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Ruling

Subject: Entitlement to input tax credits - incentive scheme

Question 1

Are you entitled to input tax credits for payments made to drivers for incentives under your incentive scheme (the scheme)?

Answer

Yes, where drivers are registered and a tax invoice is provided by the driver to you.

Relevant facts and circumstances

· You are registered for GST.

· You administer the incentive scheme to provide financial assistance to an eligible person (member) who has a chronic disability that prevents them using public transport to access the community.

· Assistance is provided in the form of a payment that is intended to be payable to the driver rather than the operator.

· The incentive is an amount per trip to a driver of a Multiple Purpose Taxi (MPT) to compensate the driver for the time in loading and unloading members in a wheelchair.

· The incentive cannot be used to pay any part of a taxi fare and is not transferable or redeemable by the member for cash.

· To be eligible for payment of the incentive, drivers are required to submit a payment details form to you which includes the driver's nominated bank account to which payments are to be made.

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

· The member's allocation of incentives per year is loaded on the card each year.

· The card stores the member number, card number, membership start and expiry dates. The available incentive balance is also stored on the card and updated after each trip.

· Members must provide their card to the taxi driver before the commencement of the journey. The card reader validates the membership, provides the member's incentive balance and allows the incentive to be recorded if accepted by the driver.

· It is a requirement under a Code of Conduct that all drivers operate that they must accept the card when offered by a member. A driver who contravenes the code is guilty of an offence under State or Territory law. Penalties for these offences include fines and restrictions on the driver's ability to carry passengers.

· A driver may choose to charge waiting time rather than accept the incentive, or where the member does not have sufficient incentive credit left.

· Payment of the incentive is made by you directly to the driver's nominated bank account.

· The driver may claim the incentive when driving in different capacities, for example, as an employee of the licensee or another driver under a bailment arrangement. The amount of the incentive is the same for the driver in each case.

Reasons for decision

You have made creditable acquisitions in respect of incentive payments to registered drivers and are entitled to input tax credits where a tax invoice is provided.

As outlined below, a significant factor in determining the GST treatment of the incentive payment will be the capacity in which the driver is operating the vehicle at the time of undertaking the activity that gives rise to the incentive payment. This is important as the capacity in which the driver is operating will affect whether they are registered (or required to be registered) for GST. It is therefore necessary to determine whether the activity is undertaken by the driver as an employee, when driving under a bailment arrangement or as licensee (operator).

Goods and Services Tax Ruling GSTR 2001/8 outlines the Tax Office view of whether a supply is mixed (its parts are separately recognisable or have an aim in themselves) or composite (it contains several parts that may objectively be treated as if they are simply a supply of a single thing). GSTR 2001/8 lists the following factors as relevant in determining whether part of a supply is integral, ancillary or incidental to the dominant part of the supply and therefore part of a composite supply:

· You would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

· It represents a marginal proportion of the total value of the package compared to the dominant part; or

· It is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

· It contributes to the proper performance of the contract to supply the dominant part.

We consider that as the incentive is designed to compensate the driver for the additional time in loading and unloading members in a wheel chair where the driver chooses not to charge waiting time that the incentive is part of the consideration for the supply of the transport services where the entity providing the transport services is the same as the entity that provides the service for which the incentive is paid. In these circumstances, the supply, by the driver for which the incentive is paid is integral, ancillary or incidental to the dominant part of the supply, which is the supply of the transport services.

However, as the driver (rather than the operator) of a MPT is paid the incentive there may be some instances where the supplier of the services for which the incentive is paid is made by a different supplier than the supplier of the transport services. In these circumstances, we will need to determine the GST treatment of the incentive and the transport services separately.

The GST treatment of the incentive may therefore differ depending upon the capacity in which the driver is operating at the time they make the supply of services for which the incentive is paid. This difference will result from the GST registration status of the driver.

A driver cannot make a taxable supply unless the driver is registered (or required to be registered) for GST. All drivers will not necessarily be registered for GST.

The following considers the various capacities under which drivers may operate and their GST registration status:

Employee

Division 144 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) requires every entity that supplies taxi travel in carrying on their enterprise to be registered for GST.

For this mandatory requirement to register to apply, the taxi travel must be supplied in carrying on an enterprise. An enterprise does not include an activity or series of activities done by a person as an employee (paragraph 9-20((2)(a) of the GST Act). Therefore, although the taxi operator is required to be registered, a person who is merely employed as a driver by the operator at an hourly or weekly rate is not carrying on an enterprise and is not required to register.

As incentive payments are payable directly to the driver, GST will not be payable where the driver is an employee and the driver's terms of employment allow them to retain the incentives paid to them. In these circumstances, there is no requirement to issue a tax invoice, and there will be no entitlement to input tax credits for the recipient of the supply.

This, however, may be impacted upon by the arrangement in place between the operator and the driver (employee). As the incentive is paid in lieu of charging for waiting time (which is charged to the customer as part of the fare), the arrangement may require the driver to pay all incentives received by them over to the taxi operator as part of the total fares charged. If this is the case, the incentive would be regarded as consideration for the composite supply of transport services by the taxi operator.

Driver under bailment arrangement

Where the driver is acting under a bailment arrangement with the licence owner and takes a share of the takings, the driver may not be considered to be an employee and may be required to separately register for GST.

The Tax Office considers most drivers are operating under a bailment arrangement and therefore are individually required to be registered for GST.

As the incentive payment is intended to compensate drivers for the additional time it takes for a MPT passenger to embark and disembark when drivers do not charge for loading time (even though they are permitted to do so), the incentive is consideration for the supply of transport services by the driver.

Where these drivers are registered (or required to be registered) the incentive will therefore be subject to GST.

Licensee (operator)

Taxi operators must be registered for GST regardless of their turnover. Where the taxi operator or licensee is the driver, this is a similar scenario to drivers under bailment arrangements. The incentive will be consideration for the supply of transport services and will be subject to GST.

Recipient of the supply or supplies

In those circumstances where the recipient of the incentive is making a taxable supply it is necessary to determine who the recipient of the supply or supplies is as this will impact upon whether you have an entitlement to claim an input tax credit.

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 GST Act).

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

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

A driver of a multiple purpose taxi (MPT) must not refuse a request for hire entailing the carriage of a wheelchair. However, a driver is not required to participate in the incentive scheme and may choose to charge waiting time in lieu of claiming the incentive, or not charge for waiting time and not claim the incentive. As part of this scheme, the driver is required by their Code of Conduct to accept the scheme card if offered to as payment of the fare or service covered by the incentive.

While they are not obliged to participate in the incentive scheme, once a driver elects to participate in the scheme they are bound by the obligations and requirements in the scheme. These obligations require that drivers act in a particular manner in respect of supplies made to members, for example, where the incentive is to be claimed for a trip, the driver is not permitted to charge for the waiting time associated with the member loading and unloading. Therefore, once this option is chosen, the other indicators of whether a supply is made to you must be considered.

Mechanism for identifying eligible recipients

A member presents their card to the driver before the supply of transport, and the driver chooses whether to claim the incentive under the scheme or to charge for waiting time instead.

Presentation of the card authorises that the supply of transport services will also attract an incentive under the scheme. The supplier obtains advance authorisation in the form of the card before providing the transport. The card itself is authorisation from you that the member is entitled to the benefits under the scheme.

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

When the driver chooses to accept the incentive it is at this point that it becomes a supply of transport services under the scheme and you assume liability to make payments under the scheme. This transaction links the incentive to the driver so that you can pay them directly.

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

Where the requirements of the agreement are followed there will be a supply to you where the driver provides the transport service to the eligible member. In providing this service in accordance with the scheme, the driver provides the service to you of transporting the member.

Liability is owed by you

In this circumstance, you acquire from the driver a service, being the supply of transport services to the member. You sought this supply when the presentation of the card authorised the supply as a supply under the scheme.

Conclusion

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

The supply by the driver is a taxable supply where 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).

Where the supply made by the driver is a taxable supply the driver will be liable for GST equal to 1/11^th of the consideration.

You have made a creditable acquisition 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 for taxable supplies you have received under the incentive scheme.