Edited version of your private ruling

Authorisation Number: 1012469030977

Ruling

Subject: GST and consideration for a supply

Question 1

Is the facility fee paid by a merchant to ABC Pty Ltd consideration for an input taxed supply made by ABC Pty Ltd to the customer?

Answer

Yes, the facility fee is consideration for an input taxed financial supply.

Relevant facts and circumstances

· ABC Pty Ltd (ABC) is engaged in the provision of finance and lines of credit directly to individuals.

· ABC also supplies credit protection products.

· ABC enters into agreements with approved merchants whereby ABC agrees to provide interest free credit to a merchant's customers, which is then utilised by the customer to purchase the merchant's products.

· The contract for the supply of credit is between ABC and the customer.

· ABC offers customers credit with a fixed interest-free period. The customer is only required to pay interest to ABC should there be an outstanding balance on their account at the expiration of the interest-free term.

· ABC receives a payment from the merchant for each contract it enters into with its customers for a line of credit. This is known as a 'facility fee'. The merchant is not an agent of ABC when offering the credit facility to the customers.

· The facility fee is calculated as a function of the interest cost that ABC bears during the interest free period.

· In the contract between the customer and ABC, there is no mention of the facility fee (which is paid by the merchant). There is also no mention of the amount being additional consideration from the merchant in respect of the provision of the loan.

· ABC has treated the payment received from the merchant (the facility fee) as consideration for an input taxed supply, with reliance on advice given to the previous owners of the business. They have not changed the practices since. This advice stated that the facility fee was additional consideration for the loan, notwithstanding that the payment was made by the merchant and not by the customer.

· Following a review, ABC has decided to seek clarification on this and the GST treatment of the facility fee.

Relevant legislative provisions

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

Section 9-5

Section 9-15

Section 40-5

A New Tax System (Goods and Services Tax) Regulations 1999

Regulation 40-5.09

Reasons for decision

Summary

The facility fee is consideration for an input taxed financial supply of credit.

Detailed reasoning

GST is payable on taxable supplies. However, a supply is not a taxable supply to the extent that it is input taxed.

Input taxed supplies are provided for in Division 40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). If a supply is input taxed, then no GST is payable on the supply, and there is no entitlement to an input tax credit for anything acquired or imported to make the supply.

Section 40-5 of the GST Act provides that financial supplies are input taxed, and that the term 'financial supply' has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subdivision 40-A of the GST Regulations provides that the provision, disposal or acquisition of an interest by a financial supply provider is a financial supply.

Regulations 40-5.09 of the GST Regulations defines what supplies are financial supplies. Subregulation 40-5.09(1) states:

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

In this particular case, ABC provides loans to individuals to allow them to purchase products from selected merchants. The loans are interest free loans for a certain introductory period. Any outstanding balance on the loan at the expiration of the introductory period results in interest being paid on that balance until the entire loan balance is extinguished.

We therefore know that the provision of the loan facility is made in the course or furtherance of an enterprise that ABC conducts, it is connected with Australia, ABC is registered for GST and is a financial supply provider. We will limit our discussion to sub-regulation 40-5(1)(a)(i), which deals with consideration.

Consideration is provided for in section 9-15 of the GST Act. Relevantly, paragraph 9-15(1)(a) states that consideration includes 'any payment, or any act or forbearance, in connection with the supply of anything'.

Subsection 9-15(2) of the GST Act provides that it does not matter whether the payment was voluntary, or whether it was by the recipient of the supply.

The Commissioner's views on consideration are outlined in Goods and Services Tax Ruling GSTR 20036/9 Goods and services tax: supplies (GSTR 2006/9). Paragraph 180 provides that there must be sufficient nexus between the supply and the consideration.

In this particular case, ABC provides a credit arrangement to an individual. The individual uses this credit arrangement to purchase goods from certain merchants.

In order for a merchant and an individual to use the service provided by ABC, the merchant who sells the goods to the individual must provide the procedure to allow the credit arrangement to be provided. As such, the merchant will provide the application forms, for example. However, the merchant is not acting as an agent for ABC.

The merchant pays a 'facility fee' to ABC. The facility fee varies, and reflects the interest cost that ABC bears during the interest free period. The merchant pays the facility fee to induce the customer into buying products.

The Commissioner has considered similar arrangements at paragraphs 177 to 180 of GSTR 2006/9, which state:

177. Subsection 9-15(1) provides that the consideration for a supply includes any payment 'in connection with', 'in response to' or 'for the inducement of a supply of anything. Subsection 9-15(2) provides that the payment does not have to come from the recipient of the supply.

177A. For example in the Full Federal Court decision in TT-Line Company Pty Ltd v. Federal Commissioner of Taxation52B the Court observed that the payments made by the government entity formed part of the consideration for the supply of transport made by the ferry operator to the eligible passengers.F52C

178. Similar to section 9-15, section 2 of the NZ GST Act states that consideration in relation to a supply to anyone includes any payment made 'by any other person'. The New Zealand case of Turakina Maori Girls College Board of Trustees & Ors v. C of IR (1993) 15 NZTC 10,032 provides further support that a third party may pay for a supply but not be the recipient of the supply. That case considered whether attendance dues paid by parents and guardians were consideration for supplies made by the proprietors of the school property. In its decision the NZ Court of Appeal stated (at 10,036) that the NZ GST Act 'does not require that the supply be to the person who pays the consideration' and went on to say (at 10,036) that 'the identity of the recipient is not significant, as long as there is a supply and the provision by some person of consideration in respect of it'.

179. It makes no difference to the GST liability of the supplier which entity provides the consideration, though there are clear ramifications for the recipient of the supply in determining whether they have made a creditable acquisition.

Sufficient nexus

180. In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act.F53 In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

· the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

· regard needs to be had to the true character of the transaction; and

· an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

This is known as proposition 14, which discusses a third party may pay for a supply but not be the recipient of the supply.

Therefore, the facility fee, which is paid by the merchant, allows the individual customer to enter into a credit arrangement with ABC. Once the credit arrangement is entered into, the customer has to make suitable repayments to ABC. The merchant sells the products to the customer, and then withdraws from the transaction.

In our view, there is a nexus between the supply of the credit to the individual customer and the facility fee paid by the merchant. As such, it is consideration for an input taxed supply.