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Ruling

Subject: GST and credit card annual fees

Question

Does the credit card annual fee represent consideration for a supply that is in part input taxed (under sub-regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), and in part GST-free (under item 4 of sub-section 38-190(1) A New Tax System (Goods and Services Tax) Act 1999) (GST Act)?
Answer

Yes, the credit card annual fee is consideration for a supply that is an input taxed financial supply under sub-regulation 40-5.09 of the GST Regulations, but may be partly GST-free under subsection 38-190(1) of the GST Act.

Relevant facts and circumstances

The Bank issues various types of credit cards, which enable it's customers to make purchases at certain merchants or make cash advances.

Credit card annual fees are charged by the Bank to the majority of credit card customers, as payment for the issue of the credit card. Payment of the annual fees enable the customer to use the credit card, but do not in themselves involve the provision of any credit to the customer. Credit is only advanced to the customer after the use of the card for store purchases or cash advances (i.e. assuming a debit balance).

Credit cards may be used at third-party retailers and financial institutions around the world.

The rate of credit card annual fees varies markedly from product to product, from 'low fee' or no fee cards, to cards with higher fees that offer other benefits to cardholders, such as loyalty schemes and shopping insurance. These additional features included are not for separate consideration. These additional features are linked to card usage and are offered to make the card more attractive and primarily to encourage cardholders to spend more on the card. For example travel insurance is only covered if you buy air tickets using card. In terms of additional features the attractiveness of the credit cards is overwhelmingly in the loyalty program

A credit card (that is, the plastic card) is issued as part of what we refer to in this ruling as the credit card facility, with this facility encompassing the various features, services and conditions set out in the Conditions of Use of the card.

Reasons for decision

Summary

We do not accept that the reasoning of the High Court in Travelex has direct application to the credit card facility, that is, on the basis that a physical credit card is directly analogous to physical currency.

In our view, the credit card annual fee is consideration for a supply that is input-taxed as a financial supply under sub-regulation 40-5.09(3) Item 1 (an account made available by an Australian ADI) and Item 2 (a debt, credit arrangement or right to credit), but may be partly GST-free under paragraph (a) of item 4 of section 38-190(1) of the GST Act.
Your contentions

Your primary argument is that the findings of the court in Travelex Ltd v Commissioner of Taxation [2010] HCA 33; 2010 ATC 20-214; 76 ATR 329 (Travelex) should be extended to credit card annual fees. In Travelex, the foreign exchange of banknotes was found to be a supply 'in relation to rights' within the terms of item 4 of sub-section 38-190(1) of the GST Act.

The supply of banknotes was found to be 'in relation to rights' because it is the rights attaching to the physical banknotes that give them their value. You argue that this principle applies equally to credit cards, because they, too, have a physical aspect of negligible value without the attached rights (i.e., the plastic card).

You also contend that the example at paragraph 159 of Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) supports the application of item 4 of subsection 38-190(1) of the GST Act to the credit card facility.

Your final contention is that whilst the payment of an annual fee by customers to the Bank is for the issue of the credit card, the annual fee is not consideration for the provision of an interest in or under a credit arrangement. Rather, you argue that what the customer obtains when paying an annual fee is the right to use the credit card, which is a right to credit. You contend that this supply of a right to credit is GST-free under item 4(a) of subsection 38-190(1) of the GST Act.

Detailed Reasoning for our decision

When an Authorised deposit taking institution (ADI) provides a customer with a credit card, they typically charge an annual fee. These fees may be consideration for a number of supplies that the ADI makes to the customer. We consider the dominant supplies associated with the supply of a credit card facility to be:

· The provision of an interest in an account (under Item 1 of sub-regulation 40-5.09(3) of the GST Regulations),

· The provision of an interest in a credit arrangement or a right to credit (under Item 2 of the same sub-regulation). We consider that in the credit card context this encompasses the provision of the right to tender the card as payment, and the right to defer repayment of the debt to the card issuer.

Under the credit card facility a number of other benefits and features are provided such as loyalty program membership, travel insurance, etc. These are not provided for separate consideration, and we consider the current ATO view in GSTR 2002/2 Schedule 2, lines B46 and B48 applies, making these items incidental financial supplies or an incidental part of a single composite supply.

The current ATO view on the annual credit card fee is contained in line B41 of Schedule 2 of GSTR 2002/2, which states that the fee is consideration for an input taxed supply under items 1 and 2 of sub-regulation 40-5.09(3) of the GST Regulations.

Application of reasoning of the High Court in Travelex

You have submitted that the finding of the High Court in Travelex supports the view that the supply of the credit card facility by you is a supply that is made in relation to rights for the purpose of item 4 of subsection 38-190(1) of the GST Act.

Travelex is about a supply of foreign currency banknotes and the decision of the High Court means that a supply of those bank notes may be characterised as a supply that is made 'in relation to rights' for the purposes of item 4 of subsection 38-190(1) of the GST Act. You contend that the same treatment should be given to the supply of the physical credit card.

The credit card is primarily a means of accessing the credit card facility. The cardholder acquires no proprietary interest in the card itself, as the card remains the property of the bank. The card is much less of a token of value and rights than banknotes and coin, because it is not, of itself, a negotiable instrument. That is, the card itself has no rights attached to it, and is not money in any form, though 'money' as defined at section 195-1 of the GST Act includes:

…what is supplied as payment by way of credit or debit card…

A card-of itself-cannot be supplied 'as payment'. It is merely the means of issuing instructions to the bank via the payment system (for example phone and online transactions are executed without presentation of the physical card).The card may be tendered as payment, but it is by the operation of the payment system and acceptance by the merchant that payment is effected.

In our view the plastic card is clearly distinguishable from the foreign currency banknotes that were the subject of the Travelex case.

The characterisation of the supply of the credit card facility under the credit card contract is further examined in the following discussion of item 1 and item 2 of sub-regulation 40-5.09(3) of the GST Regulations. Subregulation 40-5.09(1) of the GST Regulations provides that a supply mentioned under item 1 or item 2 is a financial supply if it meets the requirements set out in subregulation 40-5.09(1). If the supply of the credit card facility is such a supply, we do not consider the other requirements of subregulation 40-5.09(1) to be in contention.

Item 1: An account made available by an Australian ADI

Item 1 of the table in sub-regulation 40-5.09(3) of GST Regulations lists:

An account made available by an Australian ADI … in the course of:

(a) its banking business within the meaning of the Banking Act 1959; or

(b) its State banking business

Account is defined in the GST Regulations. We consider that this definition covers a variety of accounts, not merely typical transaction accounts that the account-holder usually holds in credit balance. Where Schedule 1 of GSTR 2002/2 (the glossary of terms) discusses our interpretation of 'account', it expressly includes credit card accounts. In addition, as mentioned above, Schedule 2 of GSTR 2002/2 lists the fees for various supplies relating to credit cards as input taxed as financial supplies under both items 1 and 2 of sub-regulation 40-5.09(3) of the GST Regulations (see lines B31 to B43).

Under the Conditions of Use in the Banks' credit card contract, the card account (or credit card account) plays a central role in the credit card facility. For example, the card is used to access the account. It is the card account to which repayable amounts, including purchases are debited. And one or more cards may be issued, but all are linked to one card account with a single credit limit.

Under Part 7 of Schedule 7 of the GST Regulations, opening and maintaining an account is given as an example for a financial interest under item 1. When a customer and Bank enter into an agreement to open a credit card facility, therefore, one of the things supplied is an interest in an account.

Item 2: credit arrangement or right to credit

In addition to being the supply of an account, providing a credit card facility is a supply under Item 2 of sub-regulation 40-5.09(3) of the GST Regulations. This consists of an interest in or under credit arrangement or right to credit. We do not think it meaningful in the case of the supply of a credit card facility to separate the concept credit arrangement from right to credit. In a similar context, the majority judgement in Amex also discussed item 2 as a single term, finding it unnecessary to divide it into separate concepts.

These terms form one element of the list in item 2, and are consistent with what is supplied to a cardholder under the credit card agreement, being:

· the right to tender the card as payment, and

· the right to defer repayment of the debt to the card issuer.

In Amex (at paragraph148 of the judgment), it was accepted that the supply of a credit card facility included the rights described above.

Therefore the supply of the credit card facility is a supply that may be additionally characterised as a supply of the rights shown above.

The annual fee is therefore consideration for an input taxed financial supply, except to the extent that the supply is GST-free as a supply to which subsection 38-190(1) of the GST Act applies.
Is the supply in relation to rights for use outside Australia?

The supply satisfies the requirements of Item 1 and Item 2 of subregulation 40-5.09(3) of the GST Regulations. However for the purposes of applying subsection 38-190(1) of the GST Act the substance of the supply under the credit card facility is the interest in the credit arrangement or right to credit, rather than the existence of an Item 1 account. Consequently, when assessing the extent to which the supply under the credit card facility falls within subsection 38-190(1), the whole supply of the credit card facility is assessed on the basis that it is an interest in a credit arrangement or right to credit.

The supply of an interest in a credit arrangement or right to credit is a supply that can be tested against Item 4 of sub-section 38-190(1) because rights are, in part, its subject matter. A credit arrangement or right to credit can be regarded as a supply that is made in relation to rights. We do not consider it necessary to apply the reasoning from Travelex in relation to physical currency, to the use of a plastic credit card because, as explained above, the credit card itself is not currency and the manner in which rights form part of the supply of the credit card facility is considerably different to that relating to an exchange of currency.

Item 4 of subsection 38-190(1) of the GST Act has two limbs: paragraph (a) deals with supplies in relation to rights for use outside Australia, while paragraph (b) deals with supplies made to non-resident entities which are outside Australia when the thing supplied is done. GSTR 2002/2 provides an example of our interpretation of paragraph (b) of Item 4 at paragraph 159, in which a non-resident entity acquires a financial interest in an overdraft facility for use offshore. While this example gives clear guidance on our interpretation of paragraph (b) of item 4, the relevance of paragraph (a) in the decision is not clear. As paragraph (a) is our primary concern for annual fees charged to Australian resident card-holders, we consider the question from first principles.

Assuming that the subject matter of the provision of a credit card facility involves rights, paragraph (a) of item 4 specifies that the rights are to be for use outside Australia.

GSTR 2003/8 makes it clear that, in the context of section 38-190, 'for use' is an intention test:

36. The requirement that 'the rights are for use outside Australia' in paragraph (a) of item 4 is an intention test. That is, to be covered by this paragraph, it must be established that the intention is that the rights will be used outside Australia.

37. The actual use of the rights is not relevant, other than as evidence of the intended use.

For the annual fee to be consideration for a supply that is partly GST-free, therefore, it would have to be shown that the credit arrangement or right to credit, for which the annual fee is partly consideration, is specifically intended to be used outside Australia. To determine whether this is the case with a credit card, we must examine the arrangement and use of the card more closely.

When a cardholder tenders their card in payment to a merchant, they do not enter a credit arrangement with, nor receive credit from, the merchant. When the merchant accepts the card, the cardholder's obligation to them is discharged (see, Re Charge Card Services Ltd.). The cardholder, therefore, has no debt to the merchant and no time allowed to pay, or credit extended by the merchant. The provision of credit occurs at the other end of the transaction: by the card-issuing bank, which, under the credit arrangement of the credit card facility, allows the cardholder time to pay the debt incurred (with the bank) from the purchase they made.

Nevertheless, in our view, the rights of the cardholder (to present the card as payment and to defer payment under the credit arrangement or right to credit) are exercised when and where the credit card facility is physically used by the cardholder. If this occurs outside Australia, paragraph (a) of item 4 of subsection 38-190(1) of the GST Act will be met and to that extent the annual fee is consideration for a GST-free supply. For example, if the cardholder uses the facility when outside Australia, the rights are for use outside Australia. If the cardholder uses the facility to make purchases on-line (or via other methods) from an overseas merchant while in Australia, the rights are for use in Australia.

The GST Act recognises that a supply may be both input taxed and GST-free. Subsection 9-30(3) of the GST Act states that to the extent that a supply would, apart from that subsection, be both GST-free and input taxed, the supply is (relevantly) to be treated as GST-free and not input taxed. The supply in this case is both an input taxed financial supply and a supply that is made in relation to rights. To the extent that the rights are intended to be used outside Australia, the supply is also GST-free under paragraph (a) of item 4.¹ To that extent therefore, the supply is both GST-free and input taxed, and is consequently GST-free in line with subsection 9-30(3).
Conclusion

Consequently, in our view, the annual fee is consideration for the supply of the credit card facility, which is an input taxed financial supply, though it may be partly GST-free under item 4 of subsection 38-190(1) of the GST Act if, and to the extent to which, the cardholder intends using the credit card facility outside Australia.