Edited version of your private ruling

Authorisation Number: 1012519390397

Ruling

Subject: GST & Security bonds

Question

Is the forfeiture of a security bond consideration for a supply?

Answer

No

Relevant facts and circumstances

You are a government entity and are registered for GST.

You are seeking a ruling in relation to the forfeiture of security bonds

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 Section 9-40

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

Reasons for decision

In this ruling, please note that, unless otherwise stated:

· all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

· all reference materials referred to are available on the Australian Taxation Office website, www.ato.gov.au

· asterisked terms are defined in the Dictionary in section 195-1 of the GST Act

Detailed reasoning

Section 9-40 provides that you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if it meets the requirements of section 9-5. This section 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.

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

Division 81

Section 81-5 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.

Currently, for the purpose of section 81-5 there are no regulations made in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

'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 …

Paragraph 4.22 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (2011 Measures No. 2) Act 2011 provides examples of Australian taxes imposed under an Australian law to include: income tax, stamp duty, fringe benefits tax, payroll tax, the Medicare Levy, local government 'ordinary rates' and various industry levies.

In your case, the particular act gives discretion to a delegate to forfeit a security if a document holder has not complied with one or more document conditions. Once the decision to forfeit is made, you enforce payment of the amount of money stated in the security and the persons who have executed the security have a liability to pay the amount to you. The payment is a compulsory exaction of money.

Paragraph 6 of the judgement in Air Caledonie International v Commonwealth (1988) 165 CLR 462 provides further guidance on what is 'a tax':

…an example of various special types of exaction which may not be taxes even though the positive attributes mentioned by Latham C.J. are all present. Thus, … a fine or penalty imposed for … breach of statutory obligation are other examples of special types of exactions of money which are unlikely to be properly characterised as a tax notwithstanding that they exhibit those positive attributes.

Paragraph 4.19 of the EM accompanying the Tax Laws Amendment (2011 Measures No. 2) Bill 2011 provides further guidance:

It is not intended that the payment of a fine or penalty imposed under an Australian law and payable to an Australian government agency be subject to GST. Application of the GST basic rules should ensure that such payments are not subject to GST. Therefore they are not addressed by these amendments.

The fine or penalty discussed above is not subject to GST because there is no supply made by the agency for receiving the fine or penalty although the other requirements of section 9-5 may be satisfied.

The terms 'fine' and 'penalty' are not defined in the GST law and take their ordinary meaning having regard to the context in which each appears.

The Macquarie Dictionary defines:

fine² n 1. a sum of money exacted as a penalty for an offence or dereliction.

penalty n 1. a punishment imposed or incurred for a violation of law or rule. 2. a loss or forfeiture to which one subjects oneself by non-fulfilment of an obligation. 3. that which is forfeited, as a sum of money.

In your case, the procedures manual states that a mandatory condition applies to the particular document.

The purpose of this condition is to enable a delegate to consider the forfeiture of a security if the document holder breaches the condition applicable to the document. If a document holder does not comply with the document condition, any security lodged in respect of that document may be forfeited.

Although the exercise of the power is discretionary, under policy, generally a security will be forfeited if the document holder has not complied with a document condition.

The forfeiture is a sanction imposed on the document holder for failing to observe conditions of the document.

On the basis of the above comments, we consider that the forfeiture of a security in the circumstances discussed is 'a fine or penalty imposed for the breach of a statutory obligation'. The document conditions are imposed pursuant to the law and specify the statutory obligations the document holder is required to fulfil. Therefore, the forfeiture of the security cannot be characterised as a tax, as the circumstances in which it is exacted (ie as a penalty or sanction for breaching the conditions of the document) preclude its characterisation as 'taxation'.

Fees or Charges

Sections 81-10 and 81-15 of the GST Act consider the effect of payment 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. We have already determined that the forfeited security is not a tax, because the forfeiture of a security in the circumstances discussed is 'a fine or penalty imposed for breach of statutory obligation'

The terms 'fee', 'charge' and 'security' are not defined in the GST law and take their ordinary meaning having regard to the context in which each appears.

(2) The Macquarie Dictionary defines:

charge n 29. expense or cost: improvements made at a tenant's own charge. 30. a sum or price charged: a charge of $2 for admission. 31. a pecuniary burden, encumbrance, tax, or lien; cost; expense; liability to pay.

fee n 1. a payment for services: a doctor's fee. 2. a sum paid for a privilege: an admission fee. 3. a charge allowed by law for the service of a public officer.

security n 6. Law a.  something given or deposited as surety for the fulfilment of a promise or an obligation, the payment of a debt, etc.

As a security is something given or deposited as surety for the fulfilment of a promise or an obligation, the security holder cannot use the security (or spend a cash-security) for its purposes before the security provider has failed to perform the obligation. Therefore, we consider that a payment of a security, the liability to make the payment, or the security itself is not an Australian fee or charge.

On the basis of the above comments, we consider that a fine or penalty is not an Australian fee or charge for the purposes of the GST Act. Further, as the forfeiture of a security in the circumstances described is a fine or penalty, the forfeiture is not an Australian fee or charge.

Section 9-5: 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.

Hence, consideration for a supply is defined as being any consideration in connection with a supply. Consideration in section 9-15 relevantly means:

(1) Consideration includes

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response

'(2) It does not matter whether the payment, act or forbearance was voluntary…

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 of Goods and Services Tax Ruling GSTR 2001/6, Goods and services tax: non-monetary consideration (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 of GSTR 2001/6).

The payment of the security prior to granting the visa does not render it a payment in connection with the granting of that document.

Although the non-payment of the security is a ground for refusing to issue the document, it is paid on the condition that it will be returned when the document holder complies with the conditions of the document. Its aim is to deter the document holder from committing any breach of conditions attached to their document. It is not being paid with the understanding that it forms part of the 'payment' for the grant of document or to secure rights (whether conditional or not) to a further supply.

The forfeiture of the security is a sanction imposed on the document holder for failing to observe the conditions of the document. You are not making a supply to the document holder when the security is forfeited.

Support for this view can be found in paragraph 4.7 of the EM to the Tax Laws Amendment (2011 Measures no. 2) Act 2011 which provides that compulsory charges by way of fines or penalties will be exempt from GST. This is because the imposition of a penalty does not amount to a supply.

Accordingly, it is considered that you are not making a supply for consideration under paragraph 9-5(a) 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.