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Ruling

Subject: GST and a share of profits

Question

Is the profit share paid to an entity (Entity) a payment that is subject to goods and services tax (GST)?

Answer

No. The payment is consideration for a supply from the Entity, a supply that is GST-free.

Relevant facts and circumstances

You are registered for GST.

You purchase a product (Product) from the Entity.

You and the Entity have a written agreement in place (Agreement).

The Agreement provides that the Entity has agreed to supply the Product to you and you have agreed to purchase the Product from the Entity.

A clause of the Agreement provides that the price of the Product in certain circumstances is determined by you returning a share of the profits to the Entity.

The profit share is not in the form of money.

The supply of the Product is GST-free under Division 38 of the A New Tax System (Goods and Services Tax) Act 1999.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 9-15

Division 38

Reasons for decision

In accordance with the Agreement, the Entity is to receive a profit share.

Therefore, the question raised is whether this is an arrangement involving the supply of a right to share in the net profits (Profit Share Arrangement) or whether the payment is simply consideration paid by you for the acquisition of the Entity's Product. Generally the supply of a right is taxable under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Profit Share Arrangement

In a Profit Sharing Arrangement, it is generally the case that one entity will contribute money to another entity with the clear intention to obtain a right to share in the profits of the entity's business. This intention is normally expressed under the terms of the arrangement between the parties.

Using the term 'profit share' in the Agreement, although accurate, tends to imply there is a Profit Share Arrangement in place. However, it is clear from the terms of the Agreement that the foremost purpose of this Agreement is the successful acquisition and sale of the Product to various markets and not a Profit Sharing Arrangement.

Consideration

The method adopted by transacting parties to calculate consideration for a supply is normally a contractual matter between the parties. There must also be a sufficient nexus between a payment and a supply for the payment to be treated as consideration for that supply.

The Agreement contains the term 'profit share' and is one of several methods you and the Entity have adopted under the Agreement to calculate the consideration payable on the supply of the Product.

It is unambiguous from the terms of the Agreement that there is a clear nexus between the profit share and the supply of the Product for the profit share to be treated as consideration for the Entity's Product.

Consequently, as the supply of Product is GST-free under the GST Act, the profit share paid to the Entity is not subject to GST.

Also note that the decision to pay the Entity by a means other than money does not alter this decision. Under section 9-15 of the GST Act, consideration includes any payment in connection with a supply.