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Ruling

Subject: Travel Card

Question:

Is the supply of the Travel Card (TC) a supply that is partly GST-free pursuant to item 4 in section 38-190(1)?

Answer:

Yes, the supply of the TC is a supply that is partly GST-free pursuant to item 4 in section 38-190(1)

Relevant facts and circumstances:

The relevant Product Disclosure Statement ('PDS') states that the TC is a reloadable prepaid MasterCard suitable for anyone travelling overseas or in Australia for business or leisure and is issued by the Bank to a cardholder with the following features, services and conditions:

· Anyone may apply, whether or not they are existing customers of the Bank, and whether or not they are over 18, but they must pass an identification check.

· The cardholder decides which foreign currencies (up to a maximum of six) and amounts to purchase and 'load' on the TC.

· The initial purchase of the foreign currency must be paid for in AUD, at the exchange rate applying at the time of purchase. The payment can be in cash, direct debit from certain accounts with the Bank, or by way of cash advance from an accepted credit card.

· The cardholder has a 'personal access code' (PAC) to manage their facility, and a PIN number to make secure transactions.

· The cardholder can manage the facility by checking balances, increasing balances, or changing balance from one currency to another.

· The Bank can advance emergency funds if both cards are lost or stolen.

· Transaction and load limits apply.

· The cardholder can use the facility for purchases by mail order, telephone order and over the internet.

· A variety of fees apply, including:

o Card issue fee

o Loading and reloading fees

o Transaction fees

o Withdrawal fees

o Currency transfer fees

o Currency conversion fees

o Card inactivity fees

o Card replacement fees

o Emergency cash advance fees

o Closure fee.

(The PDS does not make clear which of these fees are charged by the Bank and which, if any, by MasterCard.)

· The cardholder earns no interest from the facility.

· The TC has a limited life of three years. After this time, the Bank closes the TC. Any balance remaining is forfeited by the cardholder.

· The cardholder can ask for the TC facility to be closed at any time. The Bank will pay the cardholder the remaining balance (less fees) in AUD, at the current exchange rate.

· The Bank is not liable if a merchant or financial institution refuses to accept the TC, and the card cannot be used for a number of purposes (listed in the PDS).

According to the PDS, when the cardholder uses the TC, the TC 'will be debited immediately with the amount of each cash withdrawal or purchase, … and the balance in your TC will be reduced accordingly'. There is no evidence that the cardholder's TC balance is stored on the card itself.

The Bank, an Australian ADI, is a member of MasterCard International Incorporated, and is responsible for settling all TC transactions.

Assumptions:

Bank is registered; the issue of the TC is in the course of carrying on its enterprise; Bank is a financial supply provider in relation to the TC.

Reasons for decision:

Summary:

In summary, we find that the supply of the TC facility is a financial supply of an interest in an account, and an interest in foreign currency. In our view the supply of the TC facility is a single composite supply of the interest in the foreign currency under Item 9. Subsection 38-190(1) applies to the supply under the TC facility of the interest in foreign currency, rendering this partially GST-free. This reasoning process is discussed in detail below.

Detailed reasoning:

Financial Supplies:

A supply is an input-taxed financial supply under section 40-5 of the GST Act when it meets the requirements set out in sub-regulation 40-5.09(1) of the GST Regulations. Under sub-regulation 40-5.09(1) of the GST Regulations, a financial supply includes the provision, acquisition or disposal of an interest mentioned in an item in the table in sub-regulation 40-5.09(3), where the requirements of the sub-regulation are met. 'Interest' is defined in regulation 40-5.02 as follows:

An interest is anything that is recognised at law or in equity as property in any form.

This is a broad definition. The ATO view (GSTR 2002/2, paragraph 79) is that the term 'interest' is given its

'broadest application so that an interest is as wide as the legal and equitable concept of property, including rights arising under a contract.'

The principal items that we consider relevant in this case are:

Item 1 in the table at sub-regulation 40-5.09(3) (Item 1) lists an interest in or under:

An account made available by an Australian ADI (authorised deposit taking institution) in the course of:

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

(b) its State banking business

Item 9 in the table at sub-regulation 40-5.09(3) (Item 9) lists an interest in or under:

Australian currency, the currency of a foreign country or an agreement to buy or sell currency of either kind

Item 1 - interest in an account

In our view, the Bank is making a financial supply of an interest in an account to the card holder.

The PDS states that the credit balance of a TC facility 'does not amount to a deposit with us'. In our view, this assertion does not prevent the monitoring and recording of the card transactions from being properly characterised as the provision of an interest in an account, as mentioned at Item 1.

The TC facility has similar features to the prepaid card facility by an Australian ADI considered by the Commissioner in ATOID 2010/225.

In the facts of that ATOID, value is 'loaded onto' the card, which may be used to purchase goods or services from merchants, by swiping the card through the merchants' payment system terminals. The ATOID also makes the point that 'the value loaded onto the facility by the customer is not loaded onto the card itself'. Rather, the customer loads value onto the facility.

The ATOID applies to prepaid card facilities with differing terms and conditions, such as:

· expiry period;

· whether the unused value upon expiration of the prepaid card facility is forfeited;

· whether the unused value on any lost or stolen prepaid card facilities is forfeited;

· the ability of the cardholder to withdraw cash from Automatic Teller Machines (ATMs); and

· the ability of the cardholder to reload value onto the prepaid card facility.

ATOID 2010/225 states our view that the prepaid card facility is an 'account'. This decision is based on a plain reading of the definition of account in the GST Regulations, particularly paragraph (b) of the definition of account, which lists the rights that an account holder has in relation to an 'account', all of which are present in a prepaid card facility.

The ATOID also finds that the prepaid card facility is 'made available' and is made available in the course of the ADI's 'banking business'. The ATOID concludes, therefore, that provision of the facility is the provision of an interest under Item 1.

For the same reasons as given in ATOID 2010/225, we consider that provision of the TC facility should be characterised as the provision of an Item 1 interest.

The prepaid card facility considered in the ATOID does not allow value to be 'loaded' onto the facility in foreign currency. However, we do not consider that the availability of funds in foreign currency is a sufficiently material distinction to justify a different GST characterisation for the TMC facility.

The examples for Item 1 which are found in Part 1 of Schedule 7 of the GST Regulations include a number of items that are directly relevant to the operation of the TMC facility. These include:

1. Opening, keeping, operating, maintaining and closing of cheque, debit card, deposit and savings accounts for account holders.

3. ATM, electronic and telephone operation of accounts.

5. Supply of debit and smart cards.

13. Making information about accounts available.

17. Electronic funds transfer

In our view, these are consistent with our characterisation of the TC facility as an interest in an account under Item 1. As the other requirements of sub-regulation 40-5.09(1) are met, this will be a financial supply.

Item 9 - interest in currency

In our view, the Bank is making a financial supply of an interest in foreign currency under Item 9.

When a customer acquires a TC facility, they also purchase foreign currencies that are to be 'loaded' into the facility (that is, the cardholder will have a credit balance in the facility). These two transactions occur virtually at the same time, and one cannot occur without the other. Nevertheless, the purchase of the foreign currency can be seen as a separate supply, even though the customer's purchase is credited to the facility rather than being paid in bank notes or some other form.

Subsection 9-10(4) states that a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

The customer pays cash to the Bank (or, if they are an existing bank customer, they may have an account debited), and receives a credit on the TC with the agreed value of their selected currencies. The crediting or debiting of an account by way of payment, is included under the definition of money at paragraph (e)(iii) in section 195-1. Because these are supplies covered by section 9-10(4)-a supply of money as consideration for money-they can be considered as supplies.

Whilst physical bank notes are currency, the scope of the term 'an interest in or under …currency' when considered with the examples in Part 7 of Schedule 7 to the GST Regulations, clearly also covers interests in currency other than physical legal tender such as bank notes). The supply of foreign currency in exchange for the Australian dollars comes within Item 9 of sub-regulation 40-5.09(3). The examples for item 9 include conversion of Australian currency into foreign currency and conversion of foreign currency into Australian currency (see item 8 of Part 7 of Schedule 7 to the regulations). This example refers to currency rather than, as in item 1 of this example, currency in cash form. Our view is that this example is, therefore, broad enough to cover the conversion of the customer's Australian dollars into foreign currency in electronic form.

Given that the Bank receives consideration for this supply, it is making an input taxed financial supply to the card holder, consisting of the provision of an interest in one or more foreign currencies.

The TC facility consists of the supplies of [at least] two interests under sub-regulation 40-5.09(3): an interest in an account under Item 1, and an interest in currency under Item 9. The TC facility is specifically designed to provide intending overseas travellers with a way of conveniently acquiring foreign currency at a fixed exchange rate and securely holding it until it is required. The supply of the item 1 account, and the various services the bank performs for customers, is integral to the design of the TC facility as a whole.

In the context of mixed and composite supplies, paragraph 55 of Public Ruling GSTR 2001/8 explains:

Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing

We consider that, while the provision of the account is necessary to and contributes to the supply as a whole, it cannot be identified as the dominant part of the supply. It is a means of better enjoying the dominant thing supplied, that is, the interest in currency under Item 9, and contributes to the proper performance of the contract to supply that interest.

While some of the fees and charges associated with the TC facility might be seen as being more relevant to the mechanics of providing the account facility than to the provision of rights attached to the foreign currency, the total value of the package is dominated by the value of the foreign currency acquired.

Consequently, in our view the supply of the TC facility, though comprising different input taxed elements, may be considered analogous to a composite supply in that the interest in the foreign currency under Item 9 (encompassing the provision of rights attached to the foreign currency) is the dominant element. As the other requirements of sub-regulation 40-5.09(1) are met, this will be an input taxed financial supply.

GST-free supplies:

The GST Act recognises that a supply may be both input taxed and GST-free. Subsection 9-30(3) states that where, but for that subsection, a supply would be both input taxed and GST-free, the supply is (relevantly) to be treated as GST-free and not input taxed. A supply that is made in relation to rights is GST-free under paragraph (a) of item 4 to the extent that the rights were intended to be used outside Australia.

In summary, we consider that the supply of the interest in foreign currency under the TC facility can be a supply that is GST-free under item 4 in the table in subsection 38-190(1) (Item 4). A supply of Australian currency is not GST-free, and nor is a supply of an interest in foreign currency where the TC facility is to be used in Australia to purchase goods or services from abroad via the internet, phone, or mail-order.

As explained earlier, the currency exchange can be considered as a supply because of subsection 9-10(4), which deals with supplies of money. We have already determined that the conversion of Australian dollars to foreign currency is the supply of a financial interest under Item 9.

Is the supply under the TC facility a supply that is made in relation to rights?

We have already established that the bank supplies an interest in foreign currency to the card holder within the terms of the GST Regulations.

To begin this analysis, we must establish whether the supply of foreign exchange by the bank is a supply in relation to rights. Travelex Ltd v Commissioner of Taxation [2010] HCA 33; 2010 ATC 20-214; 76 ATR 329 (Travelex) is relevant here. In Travelex, providing foreign currency banknotes in exchange for Australian dollars was found to be a supply 'made in relation to rights' within the terms of item 4 of sub-section 38-190(1) of the GST Act.

Application of the Travelex finding in this case, however, is complicated by the fact that the currency on at least one side of the transaction is electronic rather than physical cash. Travelex discusses currency only as rights attaching to, or embodied in, tokens (that is, banknotes). In the present case, however, there is no such embodiment at the time of the exchange.

We do not consider the TC (that is, the plastic card) to be a form of embodied cash for a number of reasons: it is merely a method of accessing the account, or giving instructions to the issuer, and is not a stored-value card (not that this alone would necessarily change the outcome). TC operates on an account-based payment system, namely, MasterCard. The currency exchange is related to, but separate from the issue of the card, which, moreover, is never transferred legally to the cardholder.

Travelex (at paragraph 26 of the judgment) discusses cash (physical notes and coins that are legal tender) as a 'medium of exchange' and 'store of economic value' that has value 'only because of the rights that attach to it'.

At paragraph 27, the majority in Travelex make a strong connexion between the supply of 'property in the currency' and a supply 'in relation to' the rights which are the essence of the currency's value:

When the supplier sells the foreign currency to the acquirer, the acquirer obtains the rights that attach to, or are constituted by, the ability to use the currency. Because the supply is a supply of property in the currency, the supply is a supply "in relation to" the rights that attach to the currency, without which property in the currency would be worthless.

In this context we do not think it is necessary to consider in detail whether the foreign currency in electronic form has exactly the same features as physical currency that is legal tender. Despite this, however, there may be similarities in how the rights in electronic and physical currency are utilised.

In the context of the TC the customer has the right to access the interest in foreign currency in electronic form to withdraw cash or pay for purchases when in Australia or overseas (subject to the limitations set out in the PDS). This affords the cardholder payment functionality that is similar to foreign bank notes.

A supply of a thing is a 'supply that is made in relation to rights' for the purposes of item 4 of subsection 38-190(1) if:

· the thing supplied derives its value solely from rights; and

· through the supply, the supplier either supplies these rights to the recipient or surrenders these rights for consideration provided by the recipient.

The supply of the TC facility only has value because of the rights that attach to it, and through the supply these rights are supplied to the cardholder. Therefore, in our view the supply is made in relation to rights.

Are the rights 'for use outside Australia'?

To be GST-free under item 4(a) of sub-section 38-190(1), a supply must, in addition to being 'in relation to rights', 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.

The relevant right under the TC facility is the right to access the interest in foreign currency in electronic form to withdraw cash or pay for purchases. In our view this right is for use by the cardholder where that person is physically located when the right is used. The use of the card by the cardholder while physically outside Australia to pay a foreign merchant or withdraw cash from a foreign ATM is use outside Australia. The use of the TC facility by a cardholder while in Australia is not 'use outside Australia'. This includes a cardholder using the TC facility from within Australia to purchase goods or services from abroad via the internet, phone, or mail-order.

Based on this, with some exceptions discussed below, we agree that, prima facie, the intention of supplying foreign currency in electronic form to travellers is for them to use it when they travel abroad. We see the circumstances surrounding the foreign currency conversion, therefore, as evidence of an intention to use those rights or interests in foreign currency outside Australia.

There are exceptions, however. It is also possible to 'load' Australian dollars onto the card. We see this as an account-related supply, more properly considered as a part of the financial interest supplied under item 1. Further, we view any transaction resulting in a balance in Australian dollars on the TC as not being GST-free under item 4 of sub-section 38-190(1) as any associated rights are not prima facie for use outside Australia.

Where a customer purchases foreign currency, but does not have the intention of using it outside Australia (for example, they want to use it to make internet, phone, or mail order purchases), the associated rights are not for use outside Australia. Consequently, item 4 of sub-section 38-190 does not apply to this extent and the supply of the exchange is input taxed under sub-regulation 40-5.09(1).

As noted above, a supply may be both input taxed and GST-free. Subsection 9-30(3) 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. To the extent that a customer acquiring a supply of the TC facility has the intention of using it outside Australia, the supply is both GST-free and input taxed and is consequently GST-free in line with subsection 9-30(3). To the extent that a customer acquiring such a supply does not have the intention of using it outside Australia, the supply remains an input taxed financial supply.

Conclusion:

We conclude that the supply of the interest in foreign currency for travellers to use on their TC outside Australia is GST-free. This does not apply to Australian dollars 'loaded' on the card, or to any supply where the cardholder intends to use the currency to make overseas purchases while they are physically in Australia.