Edited version of your private ruling

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Ruling

Subject: GST and the supply of ATM services

Questions

1. Are you entitled to reduced input tax credits (RITCs), under item 27 of the table in sub-regulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), for the acquisition from merchants of services (merchant services) related to ensuring the ongoing operability of your automatic teller machines (ATMs) located on those merchants' premises?

2. Are you entitled to RITCs under item 29 of the table in sub-regulation 70-5.02(2) of the GST Regulations, for the acquisition of merchant services related to ensuring the ongoing operability of your ATMs located on those merchants' premises?

3. Are you entitled to RITCs under item 6(c) of the table in sub-regulation 70-5.02(2) of the GST Regulations, for the acquisition of merchant services related to ensuring the ongoing operability of your ATMs located on those merchants' premises, on the basis that those ATMs form part of a payment system and that you and those merchants are all participants in that payment system?

Decisions

1. No, you are not entitled to RITCs under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations, for the acquisition of merchant services related to ensuring the ongoing operability of your ATMs located on those merchants' premises.

2. No, you are not entitled to RITCs under item 29 of the table in sub-regulation 70-5.02(2) of the GST Regulations, for the acquisition merchant services related to ensuring the ongoing operability of your ATMs located on those merchants' premises.

3. No, you are not entitled to RITCs under item 6(c) of the table in sub-regulation 70-5.02(2) of the GST Regulations, for the acquisition of merchant services related to ensuring the ongoing operability of your ATMs located on those merchants' premises, on the basis that those ATMs form part of a payment system and that you and those merchants are all participants in that payment system.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for goods and services tax (GST) and carries on an enterprise consisting of the operation of an ATM network and delivering services to merchants.

From a GST perspective, your enterprise provides a mix of taxable supplies such as supplies by way of licence of ATMs to retailers and hospitality businesses (merchants) and input taxed financial supplies such as supplies for a fee not exceeding $1,000 of ATM services listed in subregulation 40-5.09(4A) of the GST Regulations to patrons of merchants.

Although your enterprise makes various supplies involving ATMs, you are not an Australian Authorised Deposit-taking Institution (ADI), as you are not authorised by the Australian Prudential and Regulatory Authority to carry on a banking business.

Your ATMs can be divided broadly into two classes:

(i) 'Cash-serviced' ATMs (ATMs which are stocked with cash bailed to you under a bailment facility agreement with your financing partners and to which cash is delivered by contractors engaged to provide cash delivery services); and


(ii) 'Self-cashing ATMs (ATMs which are stocked with cash belonging to the merchant on whose premises the ATM is located and where that merchant takes responsibility for ensuring adequate cash is placed in the relevant ATM).

You have provided a template agreement reflecting the terms and conditions, under which you will typically arrange for your ATMs to be placed on the premises of different merchants (agreement).

The agreement provides that:

throughout the term, a merchant must pay without set off, counterclaim or deduction all fees into your nominated bank account, by direct debit, on or before the 20th day of each calendar month in respect of successful transactions, which occurred during the previous calendar month.

A merchant's obligations to pay all moneys due under this agreement is absolute and unconditional. Without limitation, the merchant's payment obligations will continue notwithstanding any defect in, breakdown or accident, loss, theft or damage to the equipment.

The various fees payable by the merchant to you are stipulated in the agreement under the term 'monthly fees'. The monthly fees consist of a maintenance fee, reporting fee, rental fee, insurance fee, telecommunication fee and if the merchant has selected the cash serviced option, a bailment fee.

Although the agreement enables merchants to select whether they want you to install a self-cashing ATM or a cash-serviced ATM, the ATMs installed on the premises of particular categories of merchants such as restaurants, hotels, convenience stores etc as opposed to in the atrium or concourse area of a shopping centre are almost always self-cashing. It is only those self-cashing ATMs that are the subject of this ruling.

Self-cashing ATMs

Where your self-cashing ATMs are located on the premises of a particular merchant, that merchant is responsible for ensuring that the relevant ATMs have sufficient cash levels to meet the demand. You do not arrange for the delivery of cash to these self-cashing ATMs.

The merchant will generally make their own arrangements for stocking of the relevant ATMs. In this regard, the agreement provides:

"the merchant must within 3 business days after installation of the ATM, fill the ATM and keep the ATM filled for the remainder of the term, with:

i. adequate amounts of cash; and

ii. in appropriate denominations . ."

When a patron makes a withdrawal from an ATM located on a merchant's premises, the following transactions will occur. The withdrawn amount will be debited to the patron's bank account. A corresponding amount will be credited to the merchant's bank account. The patron will also be charged a fee which will be debited to their account and electronically remitted to you.

To effectively provide ATM services, you rely on the merchants on whose premises ATMs are located, to provide a number of services related to ensuring the ongoing operability of your ATMs. These services include:

· depositing cash into the ATMs such that patrons are able to effectively make ATM withdrawals;

· enabling the connection of ATMs to the premises' electricity supply and ensuring that ATMs are switched on and functioning;

· acting as the first point of contact in the case that patrons require assistance with using an ATM (ie. addressing concerns that patrons may have in the instance that an ATM appears to be malfunctioning);

· liaising with your support staff to keep them informed of issues affecting your ATMs;

· attempting to resolve technical issues affecting your ATMs with the guidance of your help-desk support staff and keeping you appraised of any ongoing technical issues;

· immediately notifying you of damage to any of your ATMs;

· providing a well-lit, visible and secure-feeling environment, in which patrons will be inclined to attend in order to make use of an ATM;

· posting signs advertising the presence and location of your ATMs to the merchant's patrons; and

· cleaning ATMs and otherwise ensuring their presentation is likely to encourage patrons to use those ATMs.

Thus, where your ATMs are located on a particular merchant's premises, that merchant is generally responsible for depositing cash into those ATMs and ensuring that there is sufficient cash in those ATMs to meet patrons' requirements.

When a merchant transfers cash into one of your ATMs, title in that cash does not pass to you.

Where you have installed ATMs on a merchant's premises, that merchant is responsible for taking reasonable steps to ensure that harm does not come to those ATMs. In addition to this obligation, the merchant is required to obtain insurance for damage, loss or injury to your ATMs.

Licence fee and rebate
The agreement provides that the merchant will pay you a total fee comprising of a maintenance fee, reporting fee and rental fee. These three fees are payable on a monthly basis. For convenience, the total fee will be referred to as a 'licence fee'. However, the licence fee will be reduced by a 'rebate'. The amount of the rebate will be calculated by reference to the number of transactions made through the relevant ATM provided by you. Where the rebate exceeds the licence fee, you make a payment to the merchant for the excess rebate amount.

The rebate is typically calculated by reference to a minimum number of transactions which you and the merchant agree should ordinarily be processed through the ATM in a given month. Provided that the minimum number of transactions is achieved, the licence fee will never be payable.

The rebate is generally payable by you where the agreed minimum number of transactions to be processed through an ATM in a given month is exceeded. That minimum number of transaction is almost always exceeded such that a rebate is almost always payable by you to the merchant. The net result of this arrangement is that you typically enter into an agreement for the provision of an ATM, expecting that you will pay the relevant merchant to facilitate the operation of the ATM.

The rebate payable by you varies in accordance with whether or not a threshold number of transactions are exceeded. The quantum of rebate payable by you does not vary directly with the number of transactions. Rather, the rebate is set as a fixed amount where a particular threshold is exceeded. Nonetheless, that fixed amount is generally calculated by the parties as the product of a certain amount per transaction and a particular number of transactions.

The amounts payable by the merchant and the potential rebates payable by you will be negotiated at arm's length between you and the merchant, taking into account a variety of factors such as the costs that you expect to incur in servicing the relevant ATM, the prominence of a given ATM's location, anticipated foot traffic, predicted number of transactions, proximity of competing ATMs, loyalty of the merchant etc.

The following example is provided to illustrate the interaction between the fees and the rebate.

Fees Payable by the merchant (GST inclusive):

Maintenance fee $100

Reporting fee $100

Rental fee $100

Total $300

Rebate payable to the merchant (GST inclusive):

From 100 to 200 $150

From 200 to 500 $250

More than 500 $375

Therefore, if the number of transactions in a given month was 750, the net amount payable by you to the merchant would be $75. That is, the total rebate of $375 payable to the merchant less the total fee of $300 payable by the merchant.

Recipient Created Tax Invoices

You have treated the merchant services as taxable supplies from the merchants. The rebates payable by you to the merchants have been treated as the consideration for the taxable supplies. Each month you have calculated the rebate payable to each merchant and issued recipient created tax invoices.

The merchants have treated the rebate amount as consideration for their taxable supply of merchant services and remitted the GST component to the Commissioner.

Reasons for the decisions

Decision 1

It is your contention that you are entitled to RITCs under item 27 of the table in sub-regulation 70-5.02(2) of the GST Regulations for the acquisition of merchant services relating to ensuring the ongoing operability of your ATMs, as you fulfilled all the requirements of that item.

Before discussing this contention, it is first necessary to ascertain whether the supply of the merchant services comprises a taxable supply for GST purposes.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to taxable supplies and states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST free or *input taxed.

* Denotes a term defined in the GST Act.

The only requirement of a 'taxable supply' that is in issue here is whether the provision of the services by the merchants falls within the meaning of supply.

Taking into account the nature of the services provided by the merchants as set out in the facts above, it is our view that the services taken as a whole are to increase the usage of ATMs by the patrons of the merchants. Obviously, you will derive an increase in revenue from an increase in usage of the ATMs by patrons. The merchants in turn will derive an increase in rebate payments from you from an increase in the number of transactions processed through your ATMs. In our view, the services provided by the merchants are collateral to the ATM location and placement arrangements entered into between you and the merchants and amount to separate supplies. The monthly rebates paid by you to the merchants are the consideration for the services supplied by the merchants.

Accordingly, as all the requirements of a taxable supply are met, the supply of the merchant services is a taxable supply.

Financial supplies

Subregulation 40-5.09(4A) of the GST Regulations provides that, a supply by an entity for a fee of not more than $1,000 is a financial supply, if it is a supply of one or more of the following ATM services:

(a) a withdrawal from an account;

(b) a deposit into an account;

(c) an electronic transfer from an account;

(d) advice on the balance of an account.

It is accepted that you provide one or more of the above services for a fee of not more than $1,000 to patrons of the merchants (patrons), who use the ATMs located in their premises. Therefore, you make financial supplies to patrons and pursuant to subsection 40-5(1) of the GST Act, these supplies are input taxed.

Entitlements to input tax credits

As a general rule, under paragraph 11-15(2)(a) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. Therefore, to the extent that the services from the merchants relate to the making of ATM services, the acquisition of those services will not be fully creditable.

Reduced credit acquisitions

However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits.

Subsection 70-5 of the GST Act refers to these acquisitions and states:

(1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions.

(2) ……

Regulation 70-5.02 of the GST Regulations refer to acquisitions that attract reduced input tax credits and states:

(1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit.

(2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions.

………

Item 27 of the table in subregulation 70-5.02(2) of GST Regulations states:

Supplies for which financial supply facilitators are paid commissions by financial supply providers.

Therefore, in order to claim RITCs under item 27 of the table in subregulation 70-5.02(2) of GST regulations, there must be a financial supply provider, a financial supply facilitator and a payment of commissions. It is to these requirements that we now address.

Financial supply provider

Subregulation 40-5.06(1) of GST Regulations refers to financial supply providers and states:

(1) An entity, in relation to the supply of an interest that was:

(a) immediately before the supply, the property of the entity; or

(b) created by the entity in making the supply;

is the financial supply provider of the interest.

To be a financial supply provider, a supplier must supply an interest that is set out in subregulation 40-5.09(3) of the GST Regulations. The ATM services are not an item of interest that is set out in subregulation 40-5.09(3). They are listed in subregulation 40-5.09(4A). Therefore, we consider that in supplying the ATM services to patrons, you do not supply an interest. Instead, you supply services. Therefore, you do not satisfy the requirements of subregulation 40-5.06(1) of GST regulations to be considered as a financial supply provider.

Financial supply facilitator

Regulation 40-5.07 of GST Regulations provides that a financial supply facilitator in relation to the supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider.

Therefore, to be a financial supply facilitator, an entity must facilitate a supply of an interest. As mentioned above, in supplying ATM services to patrons, you do not supply an interest. Therefore, the merchants in facilitating your financial supplies do not facilitate the supply of an interest. Accordingly, the merchants are not financial supply facilitators.

Commissions

In order to satisfy item 27, you have to remunerate the merchants with 'commissions'. It is necessary to ascertain whether you pay any commissions to the merchants for the merchant services supplied.

The term 'commission' is not defined in the GST Regulations.

Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) discusses 'commission' in the context of item 27 in the table of subregulation 70-5.02(2) of GST Regulations in the following terms:

652. Commission, as defined in GSTR 2002/2 is:

payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis or on a sliding scale based on the value of the transaction.

For the purposes of item 27, the services are not those provided by an employee.

653. While the term commission may include corpus commission, income commission, trailing commission and brokerage, not all of these are necessarily payments to a financial supply facilitator. Other fees, including those calculated on the value of work done, rather than a per-transaction or percentage of value based calculation and retainers are not commission.

Accordingly, we consider that the payment must be to an agent or similar entity. We do not consider that you pay a commission to the merchants in respect of the merchant services acquired from them. This is because the contractual arrangement entered into between you and a merchant does not evidence an arrangement, whereby the merchant acts as your agent or in a similar capacity.

As mentioned above, the rebate payable to a merchant is based on achieving certain target numbers of transactions through a particular ATM. We consider that it does not bear the character of a commission. It is merely a method of determining the consideration payable to a merchant for the services supplied in given month.

Based on the above facts and arguments, we consider that you are not entitled to claim RITCs under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations for the services acquired from the merchants.

Decision 2

You also contend that you are entitled to RITCs under item 29(a) of the table in subregulation 70-5.02(2) of the GST Act, on the basis that the merchants are providing cash delivery services to you in that, their stocking of the ATMs with cash constitutes 'a transfer of cash without purchase, sale or transfer'.

Item 29(a) is in the following terms:

Trustee and custodial services (except safe custody of money, documents, and other things), including:

a. transfer of cash without purchase, sale or transfer of assets, excluding cash delivery and collection from branches of Australian ADIs; …

You contend that the ATO has previously ruled that cash delivery services acquired by you from your cash delivery services contractors fell within item 29(a). You contend that the facts that formed the basis of that ruling are unchanged in the circumstances of this current ruling.

We do not agree with your contention. The prior ruling was predicated on the fact that the services concerned were cash delivery services where cash was picked up from one location and delivered to another location. In this case, the services provided by the merchants as set out in the agreement are not cash delivery services as such, but instead involve the merchants filling the ATMs with adequate amounts of cash in the correct denominations.

You also contend that you are entitled to RITCs as the services provided to you by the merchants fall within the opening words of item 29, that is, 'trustee and custodial services (except safe custody of money, documents and other things)'.

Reference is made to the Glossary in Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions, wherein a custodian is defined to be an 'entity or person holding assets and safeguarding property on behalf of another. Unlike a trustee, a custodian does not hold legal title in the property'.

You contend that as title to the ATMs remains with you and the merchants on whose premises your ATMs are located in fulfilling their obligations under the agreement are 'safeguarding' the ATMs, these merchants are providing a custodial service to you.

We take the view that the term 'custodial services' should be read in the context of its collocation with the word 'trustee' in item 29. When so read, it is our view that the term 'custodial services' refers to services provided by an entity that safely maintained the assets of collective investment vehicles where the assets are held on trusts by a trustee on behalf of beneficiaries. Typically these collective investment vehicles would include managed investment schemes and superannuation funds.

Obviously, the services provided by the merchants to you with respect to the ATMs would not fall be those services and would not fall within the term 'custodial services' in item 29 and accordingly RITCs would not be available.

Decision 3

You further submit that the services acquired by you from the merchants in consideration for the payment of a rebate constitute a reduced credit acquisition under item 6(c) of the table in subregulation 70-5.02(2) of the GST Regulations, on the basis that those payments fall within the phrase 'fees charged between participants in a payment system'. Therefore, you contend that you are entitled to claim RITCs for the GST included in the payments to the merchants.

Item 6 of the table in subregulation 70-5.02(2) of GST Regulations is in the following terms:

Supplies to which the following payment system fees relate:

(a) …

(b) …

(c) fees charged between participants in a payment system

You took the view that both you and the merchants are participants in the payment system for the following reasons:

(i) your ATM network constitutes a payment system;

(ii) you are a participant in the payment system;

(iii) the merchants are also participants in the payment system.

In relation to point (iii) above, you rely on the observation of Kenny and Middleton JJ in Commissioner of Taxation v American Express Wholesale Currency Services Pty Ltd [2010] FCAFC 122 at paragraph 181 that '… a merchant … can rightly be described as a participant in the system' where that merchant … 'has a right to receive payment … in accordance with the procedures governing the system.'

In your view the merchants on whose premises your ATMs are located also have contractual rights (arising from the agreement) to receive the payment of the rebates and these payments, you contended, are associated with your ATM network in accordance with the rules and procedures governing the system. As such, you reasoned, that those merchants are participants in the payment system.

Payment system

The Dictionary to the GST Regulations defines 'payment system' as 'a funds transfer system that facilitates the circulation of money, including any procedures that relate to the system'.

'Participant' in a payment system is defined in the Dictionary to mean 'a person who is a participant in the system in accordance with the rules governing the operations of the system'.

We note that in paragraph 246 of GSTR 2004/1, the Commissioner accepts that a system or network that facilitates the transfer of funds through automated teller machine (ATM) transactions is a payment system for the purposes of item 6. Therefore in accordance with the Commissioner's view, we accept that your ATM network is a payment system for the purposes of item 6.

It is our understanding that your ATM network is governed by the rules set out in Part 11 of the Manual for the Consumer Electronic Clearing System (CECS Manual).

Under those rules, you would be regarded as an acquirer. An acquirer is defined in the CECS Manual to mean a body corporate that in connection with an ATM transaction under arrangement with and on behalf of a card issuer, discharges the obligations owed by that card issuer to the relevant cardholder.

Under those rules, you would be regarded as an acquirer in respect of an ATM transaction. That is, in a cash deposit, cash withdrawal, electronic fund transfer or a balance enquiry effected by a cardholder at an ATM, you would discharge the obligations owed by the card issuer to the cardholder. You are a participant in the payment system constituted by your ATM network.

What is important to note is that for item 6(c) to apply, the merchants must also be participants in the payment system constituted by your ATM network and in respect of the ATM services. In this respect, it is our view that they are not. The merchants are not parties to the cash deposit, cash withdrawal, electronic transfer of funds or a balance enquiry effected by a cardholder and they do not acquire any reciprocal rights or obligations in respect of these ATM services. The provision of services by the merchants to enable the ATM network to function does not result in them acquiring any reciprocal rights or obligations in respect of those ATM services. They are not granted access to the payment system under the rules governing the ATM network. In this respect, paragraph 250 of GSTR 2004/1 is relevant. It is in these terms:

250. Entities that are not granted access to a payment system but benefit from a relationship with a participant (for example, entities that enter into co-branding arrangements or provide participants with sales or third party processing services) are also not participants in a payment system for the purposes of item 6. (Emphasis added)

It is our view that the merchants benefit from a relationship with you but they are not participants in the payment system for the purposes of item 6.

The merchants' entitlement to the rebate does not arise from the ATM network that constitutes the payment system. Instead, the entitlement to the rebate arises from the terms of the agreement.

Accordingly, the merchants are not participants in a payment system and it follows that the acquisition of the services from the merchants, does not fall within the acquisitions listed in item 6(c) in subregulation 70-5.02(2) of the GST Regulations.