Edited version of your private ruling

Authorisation Number: 1012591504906

Ruling

Subject: Goods and services tax (GST) and income tax and mortgage broker expenses

Question 1

Are you entitled to input tax credits on your purchase of gift cards, which you give to clients in order to keep your relationship with the client?

Answer

No.

Question 2

Are you entitled to input tax credits on your purchase of other gifts such as bottled wine or movie theatre tickets, which you give to clients as gifts in order to keep your relationship with the client?

Answer

You are entitled to input tax credits on your purchase of bottled wine under the circumstances you set out provided that the wine merchants you acquire wine from are registered or required to be registered for GST.

You are not entitled to input tax credits on your purchase of movie theatre tickets.

You will be entitled to input tax credits on your purchase of other non-gift card items where the supply to you is taxable supply and you are not denied an input tax credit by section 69-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 3

Are you entitled to an input tax credit where you pay an entity a referral fee for referring a new borrower to you?

Answer

You will be entitled to an input tax credit where you pay a referral fee provided that the following requirements are met:

· the referrer supplies their referral services to you in the course or furtherance of an enterprise that they carry on,

· the referrer performs their referral services in Australia or supplies these services through an enterprise that they carry on Australia, and

· the referrer is registered or required to be registered for GST

Question 4

Are you entitled to an input tax credit where you give a cash-back to a client?

Answer

No.

Question 5

What documentation is required to substantiate your input tax credits?

Answer

If you are entitled to an input tax credit on a purchase and the purchase price is over $82.50, you must hold a tax invoice.

If you are entitled to an input tax credit on a purchase and the purchase price is $82.50 or less, you need not to hold a tax invoice, but you must hold at least lesser documentary evidence, such as a receipt.

Question 6

When carrying on a business, are you entitled to income tax deductions for expenses such as retail store gift cards, other gift cards or bottled wines purchased as gifts for retail and industry business clients for business relationship building purposes?

Answer

Yes.

Question 7

When carrying on a business, are you entitled to income tax deductions for expenses such as movie theatre tickets purchased as gifts for retail and industry business clients for business relationship building purposes?

Answer

No.

Question 8

When carrying on a business, are you entitled to income tax deductions in relation to referral fees?

Answer

Yes.

Question 9

When carrying on a business, are you entitled to income tax deductions in relation to cash-backs?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST

You are a mortgage broker. You get all the supporting documentation from clients (entities that wish to borrow money) and submit the loan application to the bank for your clients.

You receive commissions from banks. You do not receive remuneration from clients (borrowers).

If clients discharge or refinance the loan within a certain time period, all or part of the commission would be call back. Therefore, it is really important to build long term relationships with existing clients.

In order to keep your relationship with existing clients, you will provide gift cards to them.

You may also provide movie theatre tickets or bottled wines or other gifts to your clients for their special occasions to keep your relationship with your clients.

In some cases, you will pay a cash-back to a client once a loan is settled because of the competition and to attract clients.

You may pay a referral fee to an entity as a reward for referring new business to you. The referrers include accountants.

The gift cards are exchangeable for goods or services.

Once the gift cards are redeemed, the right or entitlement to receive supplies of goods or services ceases to exist.

The gift cards have a single function. They cannot be re-loaded with value once the original value is used up.

Presentation of the gift card is integral to receiving supplies on redemption. Upon redemption the gift card holder is entitled to receive supplies.

The gift card holder has a choice as to what they can redeem the gift voucher for.

The gift card has a stated monetary value. The purchase price you pay for a gift card is equal to the monetary value stated on the card.

On redemption, the gift card holder is entitled to supplies up to its stated monetary value.

Redemption occurs either through presentation of the physical gift card or providing a unique number contained on the gift voucher by use of a computer or communications device.

You will purchase the wines from physical shops in Australia and you will pick up the wines from the shops.

Your industry clients are not 'associates' within the meaning in section 318 of the Income Tax Assessment Act 1936.

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-10(3)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-80(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 69-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 69-5(3)

A New Tax System (Goods and Services Tax) Act 1999 subsection 100-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 100-25(1)

Income Tax Assessment Act 1936 section 262A

Income Tax Assessment Act 1997 Division 8

Income Tax Assessment Act 1997 Division 32

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997 section 32-45

Income Tax Assessment Act 1997 section 318

Reasons for decisions

Question 1

Summary

You will not be entitled to input tax credits on your purchase of gift cards, because they are face value vouchers.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

Creditable acquisitions

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are *registered, or *required to be registered.

(* Denotes a term defined in section 195-1 of the GST Act.)

Acquisition for creditable purpose

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire a thing for a creditable purpose to the extent that :

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

Taxable supplies

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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.

Face value vouchers

Subsection 100-5(1) of the GST Act states:

A supply of a *voucher is not a *taxable supply if:

(a) on redemption of the voucher, the holder of the voucher is entitled to supplies up to the *stated monetary value of the voucher; and

(b) the *consideration for supply of the voucher does not exceed the stated monetary value of the voucher.

We refer to such vouchers as face value vouchers.

Subsection 100-25(1) of the GST Act states:

A voucher is any:

(a) voucher, token, stamp, coupon or similar article; or

(b) *prepaid phone card or facility

the redemption of which in accordance with its terms entitles the holder to receive supplies in accordance with its terms. However, a postage stamp is not a voucher.

Paragraphs 26C to 27 of Goods and Services Tax Ruling GSTR 2003/5 discuss the meaning of voucher etc. They state:

26C. As the GST Act does not define 'voucher', 'token', 'coupon', 'stamp' or 'article' these terms take their ordinary meaning.

26D. Some relevant dictionary definitions for voucher, token and coupon are listed in the table below:

27. These ordinary meanings share a common characteristic of referring to things that are exchangeable for goods or services. When they are redeemed, the right or entitlement to receive goods or services ceases to exist. These things have no further function, such as being able to be topped up.

Paragraph 26 of GSTR 2003/5 states:

26. For a voucher to fall within subsection 100-25(1):

* it must satisfy either paragraph 100-25(1)(a) or (b);

* the presentation of the voucher must be integral to supplies on redemption; and

* upon redemption, the voucher must entitle the holder to receive supplies.

Paragraph 29 of GSTR 2003/5 states:

29. A voucher that has more than one function is not a voucher within the meaning of paragraph 100-25(1)(a).

Paragraph 42 of GSTR 2003/5 states:

42. Redemption involves the contemporaneous provision of supplies in discharge of the obligation evidenced by a voucher. The making of those supplies must discharge the supplier from the obligation to make the supplies. Redemption may occur by:

· presentation of the physical voucher, including a printed electronic voucher; or

· providing a unique number or other information contained on the voucher by use of either telephone, computer or similar means.

Paragraph 56 of GSTR 2003/5 states:

56. The requirement for a FVV first to be a voucher as defined in section 100-25 is discussed at paragraphs 20 to 54. In the following paragraphs we discuss the following additional requirements of section 100-5 and their consequences:

· the supply of a voucher must otherwise be a taxable supply (discussed at paragraphs 57 to 67);

· the holder of the voucher is entitled' (discussed at paragraphs 68 to 73);

· upon redemption the voucher must entitle the holder to receive a reasonable choice and flexibility of supplies. (discussed at paragraphs 74 to 79);

· the voucher must have a stated monetary value (discussed at paragraphs 80 to 83F); and

· on redemption of the voucher the holder is entitled to supplies up to its stated monetary value (discussed at paragraphs 84 to 129).

The gift cards are vouchers for the purposes of Division 100 of the GST Act because:

· they are exchangeable for goods or services,

· when they are redeemed, the right or entitlement to receive goods or services ceases to exist,

· the gift cards have no further function, such as being able to be topped up,

· presentation of the gift cards is integral to receiving supplies on redemption, and

· upon redemption the gift card entitles the holder to receive supplies.

Where the supply of the gift card to you is not otherwise a taxable supply, it will meet the requirements of paragraph 56 of GSTR 2003/5 because:

· the supply of this voucher would have otherwise been a taxable supply,

· the holder of the voucher is entitled to supplies up to the monetary value stated on the voucher, and

· upon redemption the voucher entitles the holder to receive a reasonable choice and flexibility of supplies.

Under such circumstances, it will be a supply of a face value voucher and therefore would not be taxable by virtue of subsection 100-5(1) of the GST Act.

Hence, the supply of the voucher would either be not-taxable under section 9-5 of the GST Act or not taxable by virtue of subsection 100-5(1) of the GST Act. In either case, you would not be entitled to an input tax credit on your purchase of these vouchers because you will not meet the requirement of paragraph 11-5(b) of the GST Act.

Question 2

Summary

You will be entitled to input tax credits for your purchase of bottled wine where the wine merchant is registered or required to be registered for GST, as in such cases:

· you will acquire the wine for a creditable purpose,

· the supply of the wine to you will be a taxable supply,

· you will provide consideration for the supply of the wine, and

· you are registered for GST.

You are not entitled to an input tax credit for your purchase of movie theatre tickets because of an exclusion that applies to entertainment expenses.

Detailed reasoning

Wine

You will acquire the bottled wine in carrying on your enterprise. Your acquisition of the wine does not relate to making supplies that would be input taxed. Your acquisition of the wine is not of a private or domestic nature. Therefore, you will acquire the wine for a creditable purpose. Hence, you will meet the requirement of paragraph 11-5(a) of the GST Act.

The wine merchant will supply wine to you for consideration. Hence, the requirement of paragraph 9-5(a) of the GST Act will be met.

The wine merchant will supply the wine to you in the course or furtherance of an enterprise that they carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act will be met.

The supply of the wine will be connected with Australia. Hence, the requirement of paragraph 9-5(c) of the GST Act will be met.

The requirement of paragraph 9-5(d) of the GST Act will be met where the wine merchant is registered or required to be registered for GST.

The supply of the wine to you will not be GST-free or input taxed.

Therefore, the supply of the wine to you will be a taxable supply, and the requirement of paragraph 11-5(b) of the GST Act will be met, where the supplier is registered or required to be registered for GST.

You will provide consideration for the supply of the wine to you. Hence, you will meet the requirement of paragraph 11-5(c) of the GST Act.

You are registered for GST. Hence, you meet the requirement of paragraph 11-5(d) of the GST Act.

Therefore, where the wine merchant is registered or required to be registered for GST, you will be entitled to an input tax credit because all of the requirements of section 11-5 of the GST Act will be met.

Movie theatre tickets

Subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is a *non-deductible expense.

Subsection 69-5(3) of the GST Act provides that an acquisition is a non-deductible expense if it is not deductible under Division 8 of the Income Tax Assessment Act 1997 (ITAA 1997) because of, for example, Division 32 of the ITAA 1997 (entertainment expenses).

Your purchase of movie theatre tickets is not deductible under Division 8 of the ITAA 1997 because of Division 32 of the ITAA 1997.

Therefore, your acquisitions of movie theatre tickets are not creditable acquisitions. Hence, you are not entitled to an input tax credit on your purchase of movie ticket.

Other gifts that are not gift vouchers, movie theatre tickets or wine

You will be entitled to input tax credits on your purchase of such other things where the supply to you is a taxable supply and you are not denied an input tax credit by section 69-5 of the GST Act, because you would meet all of the requirements of section 11-5 of the GST Act under such circumstances and you would not be denied an input tax credit by section 69-5 of the GST Act.

Question 3

You will acquire the referral services in carrying on an enterprise. Your acquisition of the referral services will not relate to making supplies that would be input taxed. Your acquisition of the referral services will not be of a private or domestic nature. Therefore, you will acquire the referral services for a creditable purpose. Hence, you will meet the requirement of paragraph 11-5(a) of the GST Act.

The referral services will be supplied for consideration. Hence, the requirement of paragraph 9-5(a) of the GST Act will be met.

In accordance with subsection 9-25(5) of the GST Act, a supply of a service is connected with Australia if the service is performed in Australia or the supply is made through an enterprise that the supplier carries on in Australia.

The supply of a referral service will not be GST-free or input taxed.

Therefore, the supply of a referral service will be a taxable supply where:

· the referrer supplies their referral services to you in the course or furtherance of an enterprise that they carry on,

· the referrer performs their referral services in Australia or supplies these services through an enterprise that they carry on Australia, and

· the referrer is registered or required to be registered for GST.

Under such circumstances, you will meet the requirement of paragraph 11-5(b) of the GST Act.

You will provide consideration for the referral services. Hence, you will meet the requirement of paragraph 11-5(c) of the GST Act.

You are registered for GST. Hence, you will meet the requirement of paragraph 11-5(d) of the GST Act.

Therefore, you will meet all the requirements of section 11-5 of the GST Act where:

· the referrer supplies their referral services to you in the course or furtherance of an enterprise that they carry on,

· the referrer performs their referral services in Australia or they supply these services through an enterprise that they carry on Australia, and

· the referrer is registered for GST or required to be registered for GST

Under such circumstances, you would therefore be entitled to an input tax credit.

We consider that if an accountant or other business refers their client to you, they would supply this referral service in the course or furtherance of an enterprise that they carry on.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance of the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 can be relied on for GST purposes.

If an entity provides referral services to you and/or you and other entities on an ad hoc basis and on a very small scale as in example 20 of MT 2006/1 and the referral services are not connected with any enterprise the entity otherwise carries on, the entity's supply of a referral service to you will not be a supply made in the course or furtherance of an enterprise that they carry on.

Paragraphs 186 to 188 of MT 2006/1 states:

186. There are a range of activities that are of such a small scale that they do not amount to an enterprise. As explained in paragraph 180 of this Ruling, where activities are conducted on a small scale other indicators become more important in deciding whether they amount to an enterprise. While it is always a question of fact and degree in each particular case, it would be difficult to conclude that activities are an enterprise where they are of a very small size and scale, are carried on in an ad hoc manner, and there is little repetition or regularity.

Example 20 - ad hoc small scale activities that do not amount to an enterprise

187. Helena lives on a disability pension. As she is fluent in Polish she occasionally translates at a local area health service, for which she receives a small payment. She only performs this service occasionally, as required. Her payments total no more than $300 in any one year.

188. Helena is not entitled to an ABN. The scale and nature of her activities are not sufficient to be an enterprise. They are carried on in a very small way and in an ad hoc manner.

Question 4

You will not be entitled to an input tax credit where you give a cash-back to the borrower, as you will not acquire anything from the borrower in return for this payment.

Question 5

If you are entitled to an input tax credit on a purchase and the purchase price is over $82.50, you must hold a tax invoice (in accordance with subsection 29-10(3) of the GST Act. You must generally obtain this tax invoice from the supplier. However, if certain requirements are met, you can issue a Recipient Created Tax Invoice (RCTI) to a supplier of referral services, and this RCTI will be sufficient documentation for claiming the input tax credit on the acquisition of the referral service. See A New Tax System (Goods and Services Tax) Act 1999 Classes of Recipient Created Tax Invoice Determination (No. 23) 2000 enclosed.

If you are entitled to an input tax credit on a purchase and the purchase price is $82.50 or less, you do not need to hold a tax invoice (in accordance with subsection 29-80(1) of the GST Act), but you must hold at least lesser documentary evidence, such as a receipt.

Additional information

Receiving a tax invoice from a supplier that shows a non-zero GST component is one way of determining that a supply to you is subject to GST.

Questions 6 and 7

Summary

You are entitled to income tax deductions for your purchase of gifts such as gift cards and bottles of wine because these expenses are in the nature of expenditure incurred to promote your business.

However, you are not entitled to income tax deductions for the purchase of things such as movie theatre tickets because of an exclusion relating to entertainment expenses.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for that purpose.

Losses or outgoings are incurred in gaining or producing assessable income where they are 'incidental and relevant to that end' (Ronpibon Tin NL and Tongkah Compound NL .v Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 (the Ronpibon Case )). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' ( Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 ( Snowden & Willson's Case )). This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276 when the Court stated:

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred.

However, losses or outgoings will be not deductible under section 8-1 of the ITAA 1997 where another provision prevents it (paragraph 8-1(2)(d) of the ITAA 1997).

For example, section 32-5 of the ITAA 1997 provides that to the extent that you incur a loss or outgoing in respect of providing entertainment you cannot deduct it under section 8-1.

For promotion and advertising expenses, section 32-45 of the ITAA 1997 provides exemptions to the general non-deductibility provision in section 32-5. However, these exemptions only apply for gifts given under contract (for example, the offer of a free holiday with the purchase of a car) or due to advertising to the public at large (for example, entertainment provided at a shopping centre).

Taxation Determination TD 94/55 is about when providing an item of property constitutes the provision of entertainment. It states:

Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period.

Hence, these items of property do not generally constitute provision of entertainment.

Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Hence, these items of property would generally constitute provision of entertainment.

In your case, you intend to provide gifts to build a long term relationship with existing clients. This is important because if clients discharge or refinance the loan within a certain period, you may have to pay back part or all of the commission you received from the bank. Therefore, you intend to provide gifts on the expectation that the gifts would generate future business from clients. If you have no other purpose in providing the gift then it is considered that your expenditure on gifts will have the nature of business promotion, which will qualify for general deductibility under section 8-1 of the ITAA 1997, subject to the exclusions in section 32-5.

However, since the exemptions in section 32-45 do not apply to your case, the Commissioner's view in Taxation Determination TD 94/55 results in client gifts such as gift cards or bottled wines as being deductible; and client gifts such as movie theatre tickets being not deductible. This is because gifts such as movie theatre tickets have the nature of not lasting beyond initial consumption and thus qualifying as the provision of entertainment.

Question 8

Summary

You will be entitled to income tax deductions for referral fees because this expenditure is necessarily incurred in carrying on your business.

Detailed reasoning

To qualify for deduction under section 8-1 of the ITAA 1997, a loss or outgoing must have been 'incurred'. The word 'incurred' is discussed in Taxation Ruling TR 97/7: 'Income tax: subsection 51(1) - meaning of 'incurred' - timing of deductions'.

For a loss or outgoing to be incurred there needs to be a presently existing liability of a pecuniary character (Nilsen Development Laboratories Pty Ltd v. FC of T 144 CLR 616 at 624). To be deductible, the liability must be 'more than impending, threatened or expected' (New Zealand Flax Investments Ltd v. FC of T (1938) 61 CLR 179 at 207).

In your case, you will be entitled to an income tax deduction in relation to referral fees paid to either retail clients or business associates at the time the referral is made (rather than at the time the referral fee is paid). This is because it will be expenditure necessarily incurred in carrying on your business and because a presently existing liability of a pecuniary character will arise at the time the referral is made.

Question 9

You are entitled to income tax deductions for your payment of cash-backs because this expenditure is necessarily incurred in carrying on your business.

Additional information

Records evidencing the transactions are required to be kept for the statutory period in terms of section 262A of the Income Tax Assessment Act 1936.

For information about record keeping, you may refer to Taxation Ruling TR 96/7 or, more simply, the following internet link: http://www.ato.gov.au/Business/Record-keeping/