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Ruling

Subject: GST and fees for breach of standpipe hire conditions

Question 1

Are fees charged for a breach of standpipe hire conditions an Australian fee or charge, and therefore not consideration for a supply under Division 81 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. Division 81 does not apply to these fees, and therefore payments are consideration for a supply.

Question 2

Is the fee charged for a breach of standpipe hire conditions consideration for a GST- free supply of water?

Answer

No. The fee is not sufficiently connected to the GST-free supply of water. The fee is consideration for a taxable supply.

Relevant facts and circumstances

You are registered for GST.

You are a statutory state owned corporation.

You are authorised to determine charges, levies and rates under your enabling legislation.

You hire standpipes as part of your enterprise. A standpipe is a vertical pipe which can be connected directly into a water supplier's infrastructure to access a water supply.

All standpipes used in your area of operations must be metered and hired from you.

You require customers to obtain a licence to use a standpipe. A standpipe application fee is required to be paid when lodging an application.

Once an application has been approved customers are required to pay a Standpipe Hire Security Bond prior to the standpipe being issued.

A charge is levied when a customer breaches the conditions of their hire of a standpipe.

Circumstances where the charge applies include where a customer breaks, damages or does not return the hired standpipe.

There are escalating fees for each breach of the conditions.

You have stated that you collect this fee to offset the expense of either replacing or repairing the original standpipe.

A number of charges that you levy are currently specified as exempt under the A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2011 (No. 1) (the determination).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 81-10,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 38-285 and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Summary

Fees charged for a breach of standpipe hire conditions are not an Australian fee or charge. Therefore Division 81 of the GST Act does not exempt these payments from being consideration for a supply.

Detailed reasoning

When the GST was introduced the Commonwealth, states and territories agreed that the GST would apply to the commercial activities of government at all levels, but that the non-commercial activities of government would be outside the scope of the GST.

Until 1 July 2011, various exemptions were set out in detail in the A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2011 (No. 1) (the determination). As a transitional measure, fees and charges listed in the Treasurer's determination as at 30 June 2011 remain exempt until 1 July 2012.

Division 81 of the GST Act was introduced on 1 July 2011. It is legislation to enact the intention that regulatory charges that do not relate to particular goods or services will be exempt from GST, including licences, permits and certifications that are required by government prior to undertaking a general activity.

In this context, Division 81 of the GST Act allows entities to self assess the GST treatment of a payment of an Australian fee or charge in accordance with certain principles. Specifically, section 81-10 of the GST Act considers the effect of payment of certain Australian fees and charges.

An Australian fee or charge is a fee or charge (however described), other than an Australian tax, imposed under an Australian law and payable to an Australian government agency (section 195-1 GST Act). An Australian law means a Commonwealth, state or territory law, and Australian government agency means the Commonwealth, a state or territory, or an authority of the Commonwealth or of a state or territory (section 195-1 GST Act, as defined by reference to section 995-1, Income Tax Assessment Act 1997).

In your circumstances you have imposed certain fees under an agreement for standpipe hire. You are authorised under your enabling legislation to specify charges, levies and rates to customers. You are a statutory state owned corporation and are therefore considered to be an Australian government agency. This satisfies the above requirements for the amounts to be considered an Australian fee or charge.

Australian fees or charges are no longer treated as the provision of consideration for a supply at first instance where they are of the nature described in subsections 81-10(4) or (5) of the GST Act. If a payment is not consideration for a supply, then the supply will not be a taxable supply under section 9-5 of the GST Act.

Subsection 81-10(4) of the GST Act considers relevant fees or charges. A payment is not the provision of consideration to the extent that the fee or charge relates to, or relates to an application for, the provision, retention, or amendment, under an Australian law, of a permission, exemption, authority or licence (however described).

The fee for breach of hire conditions is not of a type covered in subsection 81-10(4) or 81-10(5). In particular, it does not relate to permission, exemptions, authorities or licences as described in subsection (4). Nor does it relate to information types as specified in subsection (5).

The breach of standpipe hire conditions does not constitute a licence to use water or to use a standpipe. Licences to use a standpipe, and to use water, fall under separate arrangements and charges that you have with clients.

The fact that the breach fee escalates in accordance with the number of breaches supports the view that the fee is not in relation to a permission, exemption, authority or licence.

As this fee is not of the type covered by Division 81 the fee will be consideration for a supply.

Question 2

Summary

The fee charged for a breach of standpipe hire conditions is not consideration for a GST-free supply of water. The fee is not sufficiently connected to the GST-free supply of water, and is instead consideration for a taxable supply.

Detailed reasoning

As considered at Question 1, this fee is not exempted from being consideration under Division 81 of the GST Act and is therefore consideration for a supply. It is therefore necessary to determine whether it is consideration for a taxable supply.

Suppliers of water services impose various fees and charges as consideration for or in connection with supplies that they make. These fees and charges may be for, or in connection with, the GST-free supplies of water as referred to in Subdivision 38-I or for, or in connection with, separate supplies that are not GST-free.

The description of the fee or charge, by itself, may not be conclusive in determining the nature of any particular supply. However, the method of fee calculation can provide positive guidance in some situations as to whether or not a fee or charge is consideration for a GST-free supply.

GSTR 2000/25 considers GST-free supplies of water. Appendix 2 of this ruling specifically lists standpipe charges as being charges for supplies of water that are GST-free under Subdivision 38-I.

In this instance the fee is not a necessary cost of the supply of a standpipe. Therefore it cannot be characterised as for a GST-free supply of a standpipe. The fee is for a breach of contract and designed to recover costs for breaks, damages, or unreturned standpipes, and is incurred as a result of particular customer behaviour. The fee increases for the number of breaches incurred by a customer. Therefore the fee is not properly characterised as being for the supply of water.

This fee is considered to be in relation to a separate supply of administrative services and is intended to recoup your administrative costs of providing services to customers. These services are commercial activities and are taxable.