Edited version of your private ruling

Authorisation Number: 1012530416061

Ruling

Subject: GST and the payment of loyalty rebates

Question

Are the loyalty rebate payments made by you consideration for taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, the loyalty rebate payments made by you are not consideration for taxable supplies.

Relevant facts and circumstances

You are a co-operative of dairy farmers formed for the purpose of collecting and delivering milk from dairy farmers to Entity X which is a processor.

You are registered for GST.

The dairy farmers are registered for GST.

You receive income from processors such as Entity X for transportation of milk based on the amount of milk you deliver to Entity X.

Dairy farmers are paid directly by Entity X based on the amount of milk which each dairy farmer supplies.

An agreement was entered into by you and Entity X. The agreement requires you to collect bulk milk from all milk suppliers on a pre-determined list of milk suppliers ('run') and transport the milk to the designated factory for processing. You are remunerated based on a cents per litre basis for milk transported to Entity X.

Each year you make a 'loyalty rebate' payment to each dairy farmer member. The payment is based on the amount of milk collected from each dairy farmer and delivered by you.

The loyalty rebate payment is described by you as a 'thank you' to the dairy farmers for their continued support.

The dairy farmers are not obliged to provide you with anything in return for the loyalty rebate payment.

Payment of the loyalty rebate is at the discretion of your board of directors and, depending upon the circumstances, may not be paid in a particular year or years.

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

Reasons for decision

The payment of a rebate by you to your members is only subject to GST if it is consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-5 of the GST Act 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.

The first requirement for a taxable supply is that there must be a supply. 'Supply is defined by section 9-10 of the GST Act:

9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) (ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(3) …

(4) However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

The meaning of supply is intended to be wide and captures any type of supply whatsoever. However the supply of money is specifically excluded from the definition of supply. Therefore, you are not making a supply when you make the loyalty rebate payments to your members. Nevertheless, you may be the recipient of supplies made by the dairy farmers when they make the loyalty rebate payments.

Goods and Services Tax Ruling GSTR 2006/9 explains the ATO view of 'supply' and lists ten propositions that are relevant in analysing a transaction to identify any supplies made in that transaction:

· Proposition 1 For every supply there is a supplier

· Proposition 2 Generally, for every supply there is a recipient and an acquisition

· Proposition 3 A supply may be mixed, composite or neither

· Proposition 4 A transaction may involve two or more supplies

· Proposition 5 To 'make a supply' an entity must do something

· Proposition 6 'Supply' usually, but not necessarily, requires something to be passed from one entity to another

· Proposition 7 An entity cannot make a supply to itself

· Proposition 8 A supply cannot be made by more than one entity

· Proposition 9 Creation of expectations alone does not establish a supply

· Proposition 10 It is necessary to analyse the transaction that occurs, not a transaction that might have occurred

The suppliers (if there is a supply) are the dairy famers who receive the loyalty rebate payments from you. These dairy farmers supply milk to Entity X and separately, Entity X contracts with you (of whom the dairy farmers are members) to collect the milk and deliver it to the destination determined by Entity X. The amount of the loyalty rebate payment paid by you to each dairy farmer is determined with reference to the amount of milk supplied to Entity X (and other processors) with which you have a contract for delivery.

There is no agreement for the dairy farmers to supply anything to you in return for the loyalty rebate payments. Paragraphs 71 to 79 of GSTR 2006/9 explain that the supplier must do something to cause a supply to occur. Although the dairy farmers supply milk to Entity X, based on the information provided, they do not 'do anything' in response to or return for the loyalty rebate payments. In this regard, there are similarities to Example 3 in GSTR 2006/9 (from paragraph 125) which explains that some loyalty payments are not consideration for supplies as there is no legal obligation to make a supply in return for the payment.

The payment of the loyalty rebate by you to your members is similar to the payment of a dividend by a company to its shareholders. The shareholders receive the dividends as profit distributed to the 'owners', not because the 'owners' make any supply to the company. Based on the information provided, the loyalty rebate payments appear to be a similar distribution of your profits.

As neither you, nor the dairy famers are making any supplies in connection with the loyalty rebate payments, there are no GST consequences arising from the payments.