Edited version of your private ruling

Authorisation Number: 1012454414461

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Ruling

Subject: Division GST treatment of securities forfeited

Question 1

Whether the forfeited securities imposed under a non-tax related legislation constitute consideration for a supply?

Answer

No, the forfeited securities do not constitute consideration for a supply.

Relevant facts and circumstances

You are an Australian government agency.

You imposed securities and forfeit the securities in certain circumstances pursuant to an Australian law. Otherwise, the securities must be returned.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-39

A New Tax System (Goods and Services Tax) Act 1999 Section9-40

A New Tax System (Goods and Services Tax) Act 1999 Division 81

A New Tax System (Goods and Services Tax) Act 1999 Section 81-5

A New Tax System (Goods and Services Tax) Act 1999 Section 81-10

A New Tax System (Goods and Services Tax) Act 1999 Subsection 81-10(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 81-10(4)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 81-10(5)

A New Tax System (Goods and Services Tax) Act 1999 Section 81-15

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

A New Tax System (Goods and Services Tax) Regulations 1999 Subregulation 81-15.01(1)

A New Tax System (Goods and Services Tax) Regulations 1999 Paragraph 81-15.01(1)(f)

Income Tax Assessment Act 1997 Section 995-1

ATO view documents

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration

Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation

Other references (non ATO view, such as court cases)

Roy Morgan Research Pty Ltd v CMR of Taxation [2011] HCA 35

Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 26

A New Tax System (Goods and Services Tax) Amendment Regulation 2012 (No.2)

Reasons for decision

Summary

The forfeited securities do not constitute consideration for a supply.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST) Act provides that you must pay the GST payable on any taxable supply that you make.

Section 9-5 of the GST Act states:

9-5 Taxable supplies

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.

(* Asterisked terms are defined in the Dictionary in section 195-1 of the GST Act)

Section 9-39 of the GST Act provides special rules in relation to making taxable supplies. In particular, item 8 in the table in section 9-39 of the GST Act provides that where there is a payment of taxes, fees and charges, the special rules in Division 81 of the GST Act may apply.

From 1 July 2013, all government charges may be subject to GST if they:

· do not fall within the exemptions provided under the amended Division 81 of the GST Act and the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), and

· satisfy the requirements of a taxable supply.

Division 81 of the GST Act

Tax

Section 81-5 of the GST Act considers the effect of the payment of a tax. It states:

81-5 Effect of payment of tax

Australian tax not consideration

1. A payment, or the discharging of a liability to make a payment, is not the provision of *consideration to the extent the payment is an *Australian tax.

Regulations may provide for exceptions

2. However, a payment you make, or a discharging of your liability to make a payment, is treated as the provision of *consideration to the extent the payment is an *Australian tax that is, or is of a kind, prescribed by the regulations.

3. For the purposes of subsection (2), the *consideration is taken to be provided to the entity to which the tax is payable, for a supply that the entity makes to you.

'An Australian tax' is defined in section 195-1 of the GST Act as 'a tax (however described) imposed under an Australian law'. 'An Australian law' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean 'a Commonwealth law, a State law or a Territory law'.

The usual description of a tax, as cited in the High Court case of Roy Morgan Research Pty Ltd v CMR of Taxation [2011] HCA 35 (Roy Morgan's case), as per Latham CJ in Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 26, is:

... a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered …

We do not consider that payments of the securities satisfy the usual description of a 'tax' as cited by the High Court in Roy Morgan's case. They are not compulsory exactions of money as not all applicants are required to lodge a security. The securities are returnable to the relevant party which departs from the normal concept of a tax as a compulsory exaction.

Fees or Charges

Sections 81-10 and 81-15 of the GST Act consider the effect of certain fees and charges and state:

81-10 Effect of payment of certain fees and charges

Certain fees and charges not consideration

1. A payment, or the discharging of a liability to make a payment, is not the provision of *consideration to the extent the payment is an *Australian fee or charge that is of a kind covered by subsection (4) or (5).

Prescribed fees and charges treated as consideration

2. However, a payment you make, or a discharging of your liability to make a payment, is treated as the provision of consideration to the extent the payment is an *Australian fee or charge that is, or is of a kind, prescribed by the regulations.

3. For the purposes of subsection (2), the consideration is taken to be provided to the entity to which the fee or charge is payable, for a supply that the entity makes to you.

Fees or charges paid for permissions etc.

4. This subsection covers a fee or charge if the fee or charge:

(a) relates to; or

(b) relates to an application for;

the provision, retention, or amendment, under an *Australian law, of a permission, exemption, authority or licence (however described).

Fees or charges relating to information and record-keeping etc.

5. This subsection covers a fee or charge paid to an *Australian government agency if the fee or charge relates to the agency doing any of the following:

(a) recording information;

(b) copying information;

(c) modifying information;

(d) allowing access to information;

(e) receiving information;

(f) processing information;

(g) searching for information.

81-15 Other fees and charges that do not constitute consideration

The regulations may provide that the payment of a prescribed *Australian fee or charge, or of an Australian fee or charge of a prescribed kind, or the discharging of a liability to make such a payment, is not the provision of *consideration.

'An Australian fee or charge' is defined in section 195-1 of the GST Act to mean 'a fee or charge (however described), other than an Australian tax, imposed under an *Australian law and payable to an *Australian government agency'.

'An Australian government agency' is defined in section 995-1 of the ITAA 1997 to mean 'a Commonwealth, a State or a Territory or an authority of the Commonwealth or of a State or a Territory'.

You are an Australian government agency and the security is imposed and forfeited pursuant to an Australian law.

Australian fee or charge under subsection 81-10(1) of the GST Act?

Subsection 81-10(1) of the GST Act provides that a payment, or the discharging of a liability to make a payment, is not the provision of consideration to the extent the payment is an Australian fee or charge that is of a kind covered by subsections 81-10(4) or (5) of the GST Act.

As shown above, subsection 81-10(4) of the GST Act is about permissions, exemptions, authorities and licences and subsection 81-10(5) of the GST Act is in relation to government supplies and information.

Of relevance to you is subsection 81-10(4) of the GST Act.

Therefore, the forfeited deposit will be treated as a consideration for services provided by you if there is a sufficient nexus between the receipt of the forfeited security and the provision of the services by you.

The decision to impose a security is discretionary and is dependant on the facts surrounding each case. Its main aim is to deter breaching of conditions.

Although you do not provide the services if the required security is not lodged, the security is paid with the condition that it must be returned to the relevant party upon compliance of conditions.

This differs to the normal concept of 'fee or charge' which is usually applied consistently across the same types of services and is non-refundable.

Accordingly, we consider that there is not a sufficient nexus between the receipt of the forfeited security and the provision of services by you. The security when forfeited does not constitute a fee or charge for the provision of a permission, exemption, authority or licence (however described) pursuant to subsection 81-10(4) of the GST Act. It follows that subsection 81-10(1) of the GST Act is not satisfied.

GST Regulations

Sub regulation 18-15.01(1) of the GST Regulations sets out those fees and charges that are prescribed for section 81-15 of the GST Act and which do not constitute consideration. Of relevant to your case is sub regulation 81-15.01(1)(f) which refers to 'a fee or charge for a supply of a regulatory nature made by an Australian government agency'.

The explanatory statement to the A New Tax System (Goods and Services Tax) Amendment Regulation 2012 (No.2) (ES) provides that this paragraph ensures that fees and charges that relate to activities of government that are regulatory in nature are not treated as the provision of consideration and therefore do not give rise to taxable supplies. The ES provides the following examples:

· emergency response charges

· fees associated with the adoption of children

· developer contribution fees, including contributions required to be paid under planning agreements and local infrastructure contributions

· probate online advertising system application fees

· fees for valuation services where the valuation will form part of a land register or where the valuation is required for rating, taxing or other related regulatory purposes

· a fee paid for a licence to operate a childcare centre

· fees for determining accurate land boundaries to be included in land registers, and

· fees imposed for examining of documents prior to lodgement to ensure compliance with legislative requirements.

Like other fees and charges, the examples provided in the ES are fees and charges that are imposed with no intention of being returned to the payer.

Furthermore, as discussed above, we consider that there is no nexus between the forfeiture of the security and the provision of services by you.

Therefore, it is not considered that the forfeiture of the security falls within the ambit of sub regulation 81-15.01(f) of the GST Regulations.

Section 9-5 of the GST Act: making a supply for consideration? 

GST is not payable on a supply unless it is made for consideration, and all of the other requirements of section 9-5 of the GST Act are satisfied.

The term 'supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes amongst other things, a supply of goods, a supply of services, a provision of advice or information, an entry into, or release from, an obligation to do anything, to refrain from an act or to tolerate an act or situation.

'Consideration' is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15 of the GST Act, in connection with the supply'. A payment will be a consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply (subsection 9-15(1) of the GST Act). It does not matter if the payment, act or forbearance was voluntary, or if it was made by the recipient of the supply (subsection 9-15(2) of the GST Act).

Thus, in determining whether a payment is consideration under subsection 9-15(1) of the GST Act, the test is whether there is a sufficient nexus between the supply and the payment made. The test is an objective test. The motive of the supplier and the recipient may also be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive (paragraph 72 GSTR 2001/6).

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between the parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made (paragraph 71 GSTR 2001/6).

As discussed earlier, the payment of the security does not render the security a fee or charge for the services provided by you.

Although the non-payment of the security is a ground for you to refuse to provide the services, it is paid on the condition that it will be returned the conditions of the services are met. It is not being paid with the understanding that it forms part of the 'payment' for the services or to secure rights (whether conditional or not) to a further supply.

The payment of the security, and hence the forfeiture of the security, is not consideration for the supply of the services as it is not provided as compensation or value for the supply of the services. There is not a sufficient nexus between the payment of the security and the services provided by you.

Similarly, as previously discussed, the exercise of the forfeiture rights does not lead to a separate supply being made by you You are not making a separate supply when the security is forfeited.

Accordingly, it is considered that you are not making a supply for consideration when you exercise your rights and the security is forfeited. As you are not making a supply for consideration, you are not making a taxable supply and you are not liable for GST.