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Ruling

Subject: GST and entitlement to input tax credits

Question 1

Are you making creditable acquisitions in respect of purchases made as part of your open options customer loyalty program?

Answer

No.

Question 2

Will the Commissioner use his discretion to accept documentation retained by you as valid tax invoices for the purposes of supporting an input tax credit claim?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You operate a customer rewards program for eligible members.

Members complete an application form and enter into an agreement to be part of the program.

You engage an independent third party (manager) to manage the rewards program under a service agreement. You have advised that they do not operate as your agent.

Members accrue rewards points for eligible purchases.

A member may convert the rewards points accrued into rewards.

The points may be redeemed for either 'Merchandise' or for rewards under an open option. Your ruling request only relates to the open option.

Under the open option a member may choose any item they want, from any retailer. The only restriction is that the supplier of the item must agree to receive payment from you.

The member identifies the item and you (through your manager) pay for this in exchange for redemption of reward points.

The manager is authorised to use your corporate credit card and accounts to pay for products chosen.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 195-1

Section 11-5

Reasons for decision

Question 1

Summary

This arrangement is a third party payment arrangement. You are not the recipient of a supply, and therefore you are not entitled to input tax credits.

Detailed reasoning

As the loyalty program operator (operator), you are responsible for the operation of the loyalty program and you have the agreements with members. In your case you outsource the administration to a third party (manager).

It is the nature of the open rewards option that members can choose any product they want from any supplier they want. You do not arrange for each individual supply yourself. Members choose the product, arrange a quote and send this to Impact. Impact then pay for the purchase using your corporate card or account.

It is necessary to determine whether you are a recipient of a supply when you make a payment to a retailer under this arrangement with your members. To make an acquisition (or a creditable acquisition) you must be the recipient of the supply of the thing you are acquiring. Recipient is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the entity to which the supply is made. If a supply is not made to you then you will not have made a creditable acquisition, even if you provide consideration.

Public ruling GSTR 2006/9 examines the meaning of 'supply' in the GST Act. Following recent developments, including the decision in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) 2010 FCAFC 84, the ruling has been updated and amended as detailed in the draft Addendum GSTR 2006/9DA.

As discussed in the original (and amended) version of the ruling, where you do not have an agreement that binds you and the supplier no supply is established unless there is something else, such as goods, passing between you. In your case you do not have a binding obligation with suppliers. You do not enter into contracts, or have pre-existing arrangements, with suppliers to provide rewards (directly or via the operator) to members in return for payments. You do not physically receive the goods, nor do you receive tax invoices for the purchases as the members receive these (and all warranty rights). We consider that your circumstances are covered by proposition 12 of GSTR 2006/9, which explains that there is no contractual or actual flow that results in a supply being made to you.

However, even where there is no binding obligation some factors may, in combination, still point to a supply being made by the supplier to you (the payer) in an arrangement where goods are provided to a customer (see paragraph 221B GSTR 2006/9DA). These include:

· 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.

Considering the above factors, you do not have a pre-existing framework with suppliers before a member approaches them. There is no pre-existing arrangement with suppliers by which to identify the eligible members or any benefits that they are entitled to. While you can identify eligible members under the scheme, your open option rewards scheme is not known and will have no meaning to suppliers. Suppliers regard members as normal everyday customers.

There is also no pre-existing framework with suppliers specifying that you are under an obligation to pay the supplier if the supplier provides a relevant supply to a third party. Under the open options scheme a supply is not made to you as there is merely an administrative arrangement to pay on behalf of the third party. Payment is made to the supplier on behalf of the member.

Therefore the factors that may point to a supply being made to a payer (you) where a supply is provided to a third party are not present in your case. Rather, a single supply is made and provided to the member.

As you provide consideration for a supply but are not the recipient of the supply, you are considered to be a 'third party payer' (GSTR 2006/9DA). As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5.

Question 2

Summary

It is not necessary for the Commissioner to consider using his discretion to accept documentation retained by you as part of the loyalty program as valid tax invoices.

Detailed reasoning

You are not the recipient of a supply, and so are not entitled to a tax invoice or input tax credits for these supplies.