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Edited version of your private ruling
Authorisation Number: 1012443161966
Ruling
Subject: GST and on charging
Question 1
When invoicing on an on charge or cost recovery basis is GST added to the original GST inclusive amount?
Answer
No. As you will be able to claim a GST credit for the GST component of the expenses, you will need to deduct the GST portion before on charging. GST is then added to the GST exclusive amount.
Relevant facts and circumstances
§ Your clients use their own merchant facility to provide a secure payment method between the bank and the consumer.
§ One client has chosen to use your merchant facility rather than their own to provide a secure payment method between the bank and the consumer
§ Your merchant facility invoices you for the use of the merchant facility
§ The amount of the invoice is inclusive of GST
§ You will on charge the amount on the invoice to your client to cover the costs of your client's use of your merchant facility.
§ No additional costs will be added to the on charge amount.
§ You provided the following example in your private ruling application
For example if we are invoiced $1,100 (incl GST) and we want to recover this cost from our client do we invoice our client $1,100 (incl GST) or do we invoice our client $1,100 plus GST?
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999, section 7-1
A New Tax System (Goods and Services Tax) Act 1999, section 7-5
A New Tax System (Goods and Services Tax) Act 1999, section 9-5
A New Tax System (Goods and Services Tax) Act 1999, section 11-5
Reasons for decision
Summary
As you will be able to claim a GST credit for the GST component of the expenses, you will need to deduct the GST portion before on charging. GST is then added to the GST exclusive amount.
Detailed reasoning
Generally, businesses and other organisations registered for Goods and Services Tax (GST) will:
§ include GST in the price of sales to their customers
§ claim credits for the GST included in the price of their business purchases.
So while GST is paid at each step in the supply chain, businesses (other than those making input taxed supplies) do not actually bear the economic cost of the tax. The cost of GST is borne by the final consumer, who can't claim GST credits.
In your example, you are invoiced $1,100 (inclusive of GST) from an online merchant facility. Under the general rules, you are entitled to a GST credit for any creditable acquisitions that you make. According to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a creditable acquisition if:
(a) you acquire anything solely or partly for a creditable purpose; and
(b) the supply of the thing to you is a taxable supply; and
(c) you provide, or are liable to provide, consideration for the supply; and
(d) you are registered or required to be registered.
Provided that the above conditions are met, you will be entitled to claim a GST credit for any GST included in the price you paid for things for your business. That is, you will be entitled to claim a GST credit for an amount of 1/11th of the consideration you paid, being $100.
As you will be able to claim a GST credit for the GST component of the expenses, you will need to deduct the GST portion before on charging.
In your example, where you are on charging expenses of $1,100 (GST-inclusive), the correct method of invoicing and calculating your GST liability is as follows:
Expenses on charged: $1,000 ($1,100 minus GST credit of $100)
GST (10 per cent): $100
Price: $1,100
In the transaction above, your GST liability would be $100. After claiming your GST credit of $100, the net amount you would be required to remit to the Australian Taxation Office would be $0.00