Edited version of your private ruling

Authorisation Number: 1012579143830

Ruling

Subject: GST and creditable acquisitions and value of taxable supplies

Question

Are you making a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when contractors on-charge a levy as part of the fee for services they supply to you?

Answer

Yes, you are making a creditable acquisition under section 11-5 of the GST Act when the contractors on-charge the levy as part of the fee for services they supply to you.

Relevant facts and circumstances

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

You procure services from contractors. The contractors have to pay a levy to a public authority if the value of the services exceeds a certain amount.

When the contractors pay the levy, they on-charge it to you, that is, they include it as part of the fee for services. It is identified separately in the tax invoices.

The levy component of the fee for the services is currently being treated as the reimbursement of a non-taxable part of the supply of the services and as such, not subject to GST.

The contractors are registered for GST.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-75

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision

Under section 11-20 of the GST Act you are entitled to input tax credits for any creditable acquisition you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply (paragraph 11-5(b) of the GST Act)

· you provide, or are liable to provide, consideration for the supply, and

· you are registered, or required to be registered for GST.

On the facts provided, you are registered for GST and in carrying on your enterprise you acquire services from contractors who are also registered for GST. You provide consideration to the contractors for the services that they provide.

Included in the payment you make for the services is the levy that the contractors pay to the public authority if the value of the services exceeds a certain amount and then on-charge to you.

The issue that arises in this case under section 11-5 of the GST Act is whether the levy forms part of the consideration for a taxable supply made to you such that paragraph 11-5(b) of the GST Act would be satisfied.

If the payment of the levy is not consideration for a taxable supply made to you, all of the requirements of a creditable acquisition will not be satisfied and you will not be entitled to an input tax credit in respect of that payment.

Paragraph 9-15(1)(a) of the GST Act provides that 'consideration' includes any payment in connection with a supply of anything. In this case, you pay an amount to the contractors for their supplies of services and the amount includes the levy.

The payment of the levy to the public authority is excluded from GST under Division 81 of the GST Act.

However, it is necessary to determine whether you are, in fact, paying the levy to the public authority when the contractors on-charge it to you (that is, when you reimburse them).

The treatment of disbursements and reimbursements is considered in Goods and Services Tax Ruling GSTR 2000/37 which deals with agency relationships and the application of the law. Paragraph 49 of GSTR 2000/37 states:

If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods and services to which the disbursement relates are supplied to the client, not to the solicitor by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

It is, therefore, considered that taxes, fees and charges incurred by a supplier (in this case, the contractors) in the course of its enterprise are 'business costs'. When a supplier on-charges a business cost to its customers, the business cost loses its character as a distinct and separate expense item and instead becomes part of the price of the service provided. Therefore, in this case, when the contractors on-charge the levy to you, you are no longer paying a levy to the public authority but rather you are paying for a business cost of the contractors. The levy loses its character as a tax, fee or charge and does not come within the scope of Division 81 of the GST Act.

As such, your payment of the levy amounts to consideration under paragraph 9-15(1)(a) of the GST Act for a taxable supply made to you. Consequently, all of the requirements of a creditable acquisition are satisfied and you are entitled to an input tax credit.

Under section 9-75 of the GST Act, the 'price' of a supply is the total amount payable for the supply which, in this case, includes the services fee and any amount on-charged for the levy incurred (whether or not identified separately). Accordingly, the GST payable on the supply is 10% of the 'value' of the taxable supply which is calculated by multiplying the 'price' of the taxable supply (the total amount paid by you) by 10/11.