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Ruling

Subject: GST and Subdivision 153-B arrangement

Questions

1. Are the taxable supplies that are made by the Principal to third parties through the Intermediary taken to be supplies that are taxable supplies made by the Intermediary and not by the Principal pursuant to subsection 153-55(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act),?

2. Is the Principal taken to make taxable supplies to the Intermediary of the same things that the Intermediary is taken to make pursuant to paragraph 153-55(2)(a) of the GST Act?

3. Under the new agreement will the taxable supplies that are taken to be made by the Principal to the Intermediary have a taxable value of nil pursuant to paragraphs 153-55(2)(b) and 153-55(3)(a) of the GST Act?

4. Under the new agreement will the supplies made by the Intermediary to the Principal and to which the Principal's payment relates not considered to be taxable supplies pursuant to paragraph 153-55(3)(b) of the GST Act?

Answers

1. Yes, the taxable supplies that are made by the Principal to third parties through the Intermediary are taken to be supplies that are taxable supplies made by the Intermediary and not by the Principal pursuant to subsection 153-55(1) of the GST Act.

2. Yes, the Principal is taken to make taxable supplies to the Intermediary of the same things that the Intermediary is taken to make pursuant to paragraph 153-55(2)(a) of the GST Act?

3. Yes, under the new agreement the taxable supplies that will be taken to be made by the Principal to the Intermediary do have a taxable value of nil pursuant to paragraphs 153-55(2)(b) and 153-55(3)(a) of the GST Act?

4. Yes, under the new agreement the supplies made by the Intermediary to the Principal and to which the Principal's payment relates will not considered to be taxable supplies pursuant to paragraph 153-55(3)(b) of the GST Act.

Relevant facts and circumstances

In a Subcontracting Agreement entered into between the Principal, the Intermediary and the guarantor for the Intermediary; the Principal appointed the Intermediary to perform its obligations under contracts which the Principal had entered into with its customers.

The services which the Principal is contracted to provide to its customers, and which it appointed the Intermediary to provide on its behalf under the Subcontracting Agreement, primarily consist of the service and repair of electronic devices.

Under the Subcontracting Agreement, the Intermediary is also required (at its own cost) to print and send invoices to the customers for all amounts due to the Principal for services performed and has been appointed as agent for the Principal to receive payments from the customers.

The Subcontracting Agreement also requires that invoices issued by the Intermediary state that the Intermediary is sending the invoice as agent for the Principal.

In consideration for the Intermediary providing the services to the customers, the Principal is required to pay to the Intermediary a service fee. The service fee is specified to be equal to payments received from the customers for the services provided to the customers. The Intermediary must set off against the service fee due from the Principal to the Intermediary any payments received from the customers.

The effect of this arrangement is that no amount is ever required to be paid by the Principal to the Intermediary because its obligation to pay the service fee is always satisfied in full when payments are received by the Intermediary from the customers. Similarly, there is no requirement for any amount to be paid by the Intermediary to the Principal under the Subcontracting Agreement because it effectively has the right to retain all monies that it receives from the customers.

The Principal and the Intermediary propose to amend the Subcontracting Agreement as follows:

· The service fee will be specified as being equal to amounts invoiced by the Intermediary to the customers (instead of payments received by the Intermediary from the customers);

· The Intermediary must set off against the service fee due from the Principal to the Intermediary any amounts invoiced by the Intermediary to the customers (instead of payments received by the Intermediary from the customers);

· The requirement that the Intermediary state on the invoices it issues that the invoices are sent as agent for the Principal will be removed;

The Principal and the Intermediary enter into an arrangement pursuant to section 153-50 of the GST Act under which:

· the supplies made under the Subcontracting Agreement by the Intermediary on behalf of the Principal will be treated as made by the Intermediary to the customers and the Principal will be treated as making corresponding supplies to the Intermediary;

· the Intermediary will in its own name issue to the customers tax invoices and adjustment notes relating to supplies made to the customers and the Principal will not issue any tax invoices or adjustment notes relating to those supplies; and that

· the arrangement will cease to have effect if either the Principal or the Intermediary ceases to be registered for GST.

You provided an example as follows:

If services were provided and invoiced by the Intermediary during a particular month for $110 (including GST) the Principal would account for GST on the basis that the value of its supplies to the Intermediary are nil. This is because under paragraph 153-55(2)(b) the value of the Principal's supply would prima facie be 10/11ths of $110 (ie. $100) but then reduced by the amount the Principal pays or is liable to pay to the Intermediary (being the service fee). As the service fee is specified to be equal to amounts invoiced by the Intermediary to the customers (instead of payments received by the Intermediary from the customers). This will have the effect that the value of the service fee payable to the Intermediary ($100 in this example) will always equate to the value of the supplies made to the customers in each tax period (also $100 in this example). This will in turn mean that the value of the Principal's supplies under subsections 153-55(2) & (3) will always be nil.

As mentioned in the ruling request, the Principal has prepared its business activity statements on the basis that the taxable supplies that have been made to customers by the Intermediary under the Subcontracting Agreement have been taken to be made by the Principal to the Intermediary and have a taxable value of nil. Therefore, the Principal has not included any value in its business activity statements for these supplies. In addition, the Intermediary has advised that it has accounted to the Commissioner for the GST payable on the supplies it has made to the customers.

You also confirmed that the service fee is a 'commission or similar payment' of the type referred to in subsection 153-55(3) of the GST Act.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 153-50(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 153-55(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 153-55(2)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 153-55(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 153-55(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 subsection 153-55(3)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 153-55(3)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 153-55(3)(b)

Reasons for decision

Are the taxable supplies that are made by the Principal to third parties through the Intermediary taken to be supplies that are taxable supplies made by the Intermediary and not by the Principal pursuant to subsection 153-55(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act),?

Subsection 153-50(1) of the GST Act provides that an entity (the principal) may, in writing, enter into an arrangement with another entity (the intermediary).

Paragraph 76 of Goods and Services Tax Ruling GSTR 2000/37 (GSTR 2000/37) provides that to enter this arrangement there must be a written agreement under which:

· the agent arranges to make supplies and/or acquisitions to or from third parties on behalf of the principal;

· the kinds of supplies and/or acquisitions to which the arrangement applies are specified;

· the agent is treated for the purposes of the GST legislation as a principal in making supplies or acquisitions;

· the agent will issue all tax invoices and adjustment notes relating to those supplies to third parties in the agent's name and the principal will not issue such documents; and

· both parties must be registered.

Under the general principles of agency, a thing done by an agent for the principal is a thing actually done by the principal. However, Subdivision 153-B of the GST Act allows principals and agents to enter into written agreements under which the principal and agent treat the supply of goods and services as two separate supplies or acquisitions as though principal and agent were acting as principal to principal.

Subsection 153-55(1) of the GST Act states:

(1) A *taxable supply that the principal makes to a third party through the intermediary is taken to be a supply that is a taxable supply made by the intermediary to the third party, and not by the principal if:

(a) the supply is of a kind to which the arrangement applies; and

(b) the supply is made in accordance with the arrangement; and

(c) both the principal and the agent are *registered.

*The asterisk denotes a defined term in the GST Act.

GSTR 2000/37 discusses, amongst other things, the effect of a Subdivision 153-B arrangement has on taxable supplies at paragraphs 77 and 78:

77. The effect of entering into these arrangements is that the principal and the agent treat the taxable supply of goods or services that the principal makes to third parties through the agent as two separate supplies, and that they are treated as acting between themselves as principal to principal for GST purposes.

78. A taxable supply made to a third party is taken to be a taxable supply made by the agent. …

Therefore, in your case, the taxable supplies that are made by the Principal to third parties through the Intermediary are taken to be supplies that are taxable supplies made by the Intermediary and not by the Principal pursuant to subsection 153-55(1) of the GST Act.

Is the Principal taken to make taxable supplies to the Intermediary of the same things that the Intermediary is taken to make pursuant to paragraph 153-55(2)(a) of the GST Act?

Subsection 153-55(2) of the GST Act states:

(2)In addition, the principal is taken to make a supply that is a *taxable supply to the intermediary. This supply is taken:

· to be a supply of the same thing as is supplied in the taxable supply (the intermediary's supply) that the intermediary is taken to make; and

· to have a *value equal to 10/11 of the amount that is payable to the principal by the intermediary in respect of the intermediary's supply.

The intermediary is taken to make a corresponding *creditable acquisition from the principal.

Paragraph 78 of GSTR 2000/37 states:

78. … In addition, the principal is taken to have made a taxable supply to the agent of the same thing that the agent is taken to supply. …

Accordingly, in this case, the Principal is taken to make taxable supplies to the Intermediary of the same things that the Intermediary is taken to make pursuant to paragraph 153-55(2)(a) of the GST Act.

Under the new agreement will the taxable supplies that are taken to be made by the Principal to the Intermediary have a taxable value of nil pursuant to paragraphs 153-55(2)(b) and 153-55(3)(a) of the GST Act?

Paragraph 153-55(2)(b) provides that the supply made by the principal to the intermediary is taken to have a value of 10/11 of the amount that is payable to the principal by the intermediary in respect to the intermediary's supply (see above at question 2).

Subsection 153-55(3) of the GST Act states:

If the principal pays, or is liable to pay, an amount, as a commission or similar payment, to the intermediary for the intermediary's supply to the third party:

· for the purpose of paragraph (2)(b), the amount payable by the intermediary to the principal is taken to be reduced by the amount the principal pays, or is liable to pay, to the intermediary; and

· the supply by the intermediary to the principal, to which the principal's payment or liability relates, is not a *taxable supply.

Paragraphs 78 to 83 of GSTR 2000/37 state:

78. ... The value of that second supply is determined by reference to the amount the agent is actually required to pay the principal. This amount is the price charged and paid by the third party for the supply, less the amount the agent is permitted (under the contract with the principal) to keep as a commission or similar remuneration for the agency services. In these circumstances, the agent's supply of services is not a taxable supply and the principal is not entitled to claim input tax credits relating to the commission or similar payment.

79. As the supply by the principal to the agent is a taxable supply under the arrangement, the principal is required to account for the amount of GST payable on the supply, being 10% of the value discussed in the previous paragraph, to the ATO. The agent can claim 10% of the value as an input tax credit.

80. In some cases, the agreement may require that the agent pay the principal the entire amount the third party is charged for the supply. Then, in a separate transaction, the principal pays the agent a commission or similar payment for the agency services. If this situation occurs, subsection 153-55(3) provides that the amount the agent has already been required to pay is reduced by the amount of the commission or similar payment for the agency services. In these circumstances, the agent's supply of services is not a taxable supply and the principal is not entitled to claim input tax credits relating to the payment of the commission or similar payment.

81. The meaning of 'a commission or similar payment' in subsection 153-55(3) cannot be read in isolation as these payments arise out of the principal's liability to pay the agent for the provision of the agent's services. That is, there is a direct relationship between the payments made by the principal and the services provided by the agent. Hence, regardless of their description (for example, as management fees), they are made to the agent by the principal in respect of services rendered by the agent for making the taxable supplies, taxable importations, creditable acquisitions or creditable importations for which the agency relationship was created.

Example 11

82. The House of Robert (principal) supplies perfume at a price of $143 (GST inclusive) to Heather (third party) through Baxters (agent). Baxters is entitled to receive a commission of $33 (GST inclusive) from The House of Robert for the selling service. The House of Robert and Baxters have entered into a Subdivision 153-B arrangement.

83. The House of Robert is taken to have made a taxable supply to Baxters with the value of 10/11 of the amount payable to The House of Robert which equals the price to Heather less the commission to Baxters (i.e., value = 10/11 x ($143- 33) = $100). The House of Robert is liable to pay the GST of $10 on the taxable supply to Baxters (i.e., 10% of the $100). Baxters makes a taxable supply to Heather having a price of $143 including GST payable of $13 (1/11 x $143). Baxters is entitled to an input tax credit of $10 for the GST included in his acquisition from The House of Robert.

You provided the following example:

If services were provided and invoiced by the Intermediary during a particular month for $110 (including GST) the Principal would account for GST on the basis that the value of its supplies to the Intermediary are nil.  This is because under paragraph 153-55(2)(b) the value of the Principal's supply would prima facie be 10/11ths of $110 (ie. $100) but then reduced by the amount the Principal pays or is liable to pay to the Intermediary (being the service fee).  As stated in the ruling request, it is proposed that with effect from the Commencement Date the service fee be specified to be equal to amounts invoiced by the Intermediary to the customers (instead of payments received by the Intermediary from the customers).  This will have the effect that the value of the service fee payable to the Intermediary ($100 in this example) will always equate to the value of the supplies made to the customers in each tax period (also $100 in this example).  This will in turn mean that the value of the Principal's supplies under subsections 153-55(2) & (3) will always be nil.

According to the example provided, price charged to the customer is $110 (inclusive of GST). Commission to the Intermediary is $100.

You informed that under the new agreement, the service fee will be specified as being equal to amounts invoiced by the Intermediary to the customers and the Intermediary must set off against the service fee due from the Principal to the Intermediary any amounts invoiced by the Intermediary to the customers.

Therefore, under the new agreement and the example provided the value of the service fee payable to the Intermediary ($100 in this example) will always equate to the value of the supplies made to the customers.

As such, under the new agreement, the value of the taxable supplies that are taken to be made by the Principal to the Intermediary do have a value of nil pursuant to paragraphs 153-55(2)(b) and 153-55(3)(a) of the GST Act.

Under the new agreement will the supplies made by the Intermediary to the Principal and to which the Principal's payment relates not considered to be taxable supplies pursuant to paragraph 153-55(3)(b) of the GST Act?

Subsection 153-55(3) of the GST Act states:

If the principal pays, or is liable to pay, an amount, as a commission or similar payment, to the intermediary for the intermediary's supply to the third party:

…, and

the supply by the intermediary to the principal, to which the principal's payment or liability relates, is not a *taxable supply.

Paragraph 78 of the GSTR 2000/37 confirms that:

78. ... In these circumstances, the agent's supply of services is not a taxable supply and the principal is not entitled to claim input tax credits relating to the commission or similar payment.

Consequently, the supplies made by the Intermediary to the Principal are not taxable supplies pursuant to paragraph 153-55(3)(b) of the GST Act.