Edited version of your private ruling

Authorisation Number: 1012574555158

Ruling

Subject: Consideration

Question

Are you making taxable supplies to the Operators who make payments to you under a contract they have with the State Government?

Answer

No, you are not making taxable supplies to the Operators who make payments to you under a contract they have with the State Government. You, however, are making a taxable supply to the State Government, the consideration for which is the payments made to you by the Operators.

Relevant facts and circumstances

· You are an operator engaged in an enterprise of providing X services.

· You are registered for the goods and services tax (GST).

· You, together with two other entities, formed a company which, in turn, was awarded a contract by the State Government (hereinafter referred to as the Contract No.1), to operate X services in a designated area.

· The other two entities, like you, independently operate X companies (X operators).

· All three X operators had their own employees.

· One of the terms of the Contract No. 1 is that at the expiry of the contract, the State Government will secure employment on equal terms and conditions with the "successor operator" of the X services in the designated area for the employees of the three X operators. These employees, by extension, are the employees of the company that was formed by you and the other two X operators.

· In accordance with this term in Contract No. 1, each of the X operators is required to pay the State Government, or as directed by the State Government to the successor operator, an amount applicable in respect of the value of the leave entitlements (including annual leave, long service leave and applicable loadings thereon as governed by relevant industrial instruments) of all employees who accept the offer of continuing employment.

· This was to be calculated according to a formula stipulated in the Contract No. 1.

· The contract the three X operators had with the State Government (through the holding company they formed) expired at the end of the term stipulated in the contract.

· You were awarded a new contract (Contract No. 2) to operate the X services in the designated area (as the successor operator).

· The other two X operators (being part of the company which had Contract No. 1) became the Operator referred to in Contract No. 2.

· Under the terms of the Contract No. 2, you are required to make offers of employment to employees of any Operator, in accordance with the terms of any Preceding X Service Contract.

· Accordingly, the employees of the other two X operators (now the Operator) were offered employment with you.

· Also in terms of the Contract No. 1 the Operator paid you the value of the leave entitlements on behalf of the employees who took up employment with you.

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

Reasons for decision

Subsection 9-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that a supply is any form of supply whatsoever. Of specific interest in this case is paragraph 9-10(2)(g)(i) of the GST Act which states that a supply includes "an entry into, or release from, an obligation to do anything". The remaining subsections of section 9-10 of the GST provide further information as to what constitute a supply.

Is there a supply?

In this case you receive payments from the Operators. The amounts paid are calculated according to a formula given in the contract the Operators had with the State Government (Contract No.1). These payments equal the liabilities in respect of leave entitlements of employees of the Operators who accepted employment as continuing employees with you.

You have a contract with the State Government to supply X services (Contract No. 2). Under this contract, apart from supplying X services, you are also required to employ those employees of the Operators who accept your offer of employment. The payments you receive from the Operators is to undertake the liabilities of leave entitlements of the employees transferred to your employment.

You make a supply of X services and also a supply of entering into an obligation to undertake the liabilities for leave entitlement of the employees who take up employment with you. Thus, you are making two separate supplies or a single supply in which these two are incorporated under the contract you have with the State Government. Either way there is a supply, as per the meaning given in section 9-10 of the GST Act. The supply is (or supplies are) made to the State Government.

Is there a consideration?

Subsection 9-15 (1) of the GST Act states that 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 to or for the inducement of a supply of anything.

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

You receive payment from the Operators to make the supply as described above. This is the consideration for the supply. The fact that the supply is made to the State Government and you receive consideration from an entity other than the recipient of the supply does not negate the fact that there is consideration for the supply.

Further information on the Commissioner's views of supplies and consideration could be found in Goods and Services Tax Ruling (GSTR 2006/9).

Is it a taxable supply?

Section 9-5 of the GST Act states that you make a taxable supply if:

· you make a supply for consideration, and

· the supply is made in the course or furtherance of an enterprise you carry on, and

· the supply is connected with Australia, and

· you are registered or required to be registered.

It is established above that you make a supply for consideration. The supply you make is connected to Australia in the sense that the supply is made in Australia and you are registered for the GST. And, you are making the supply in the course of an enterprise you are carrying on.

As such the supply is a taxable supply you make to the State Government.

Your obligations under the GST Act

You are required to remit 1/11^th of the payments you receive from the Operators to the Australian Taxation Office as GST. You are required to issue a tax invoice to the State Government for the consideration you receive from Operators.