Edited version of your private ruling

Authorisation Number: 1012605691412

Ruling

Subject: GST & ATM

Question

Are you entitled to reduced input tax credits (RITCs), under item 27 of the table in sub-regulation 70-5.02(2) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) (item 27), for the acquisition from merchants of services (merchant services) related to ensuring the ongoing operability of your automatic teller machines (ATMs) located on the merchants' premises?

Answer

Yes, you are entitled to RITCs under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations for the acquisition of merchant services related to ensuring the ongoing operability of your ATMs located on the merchants' premises.

Relevant facts and circumstances

You, Entity A, are registered for goods and services tax (GST) and carries on an enterprise consisting of the operation of an ATM network and delivering services to retail outlets and financial institutions.

You carry on your enterprise as part of a group of different entities.

From a GST perspective, your enterprise provides a mix of taxable supplies and input taxed supplies. That is, supplies by way of licence of ATMs to retailers and hospitality businesses (merchants) and supplies for a fee not exceeding $1,000 of ATM services listed in subregulation 40-5.09(4A) of the GST Regulations.

Although your enterprise makes various supplies involving ATMs, you are not an Australian Authorised Deposit-taking Institution (ADI), as you are not authorised by the Australian Prudential and Regulatory Authority to carry on a banking business.

The ATMs in respect of which you make input taxed financial supplies are located in a variety of convenient locations such as sports stadiums, hotels, shopping centres, cafes, restaurants, convenience stores. None of the ATMs in respect of which you make input taxed financial supplies are located on premises that constitute a branch of an Australian ADI.

Your ATMs can be divided broadly into two classes:

(i) 'Cash-serviced' ATMs (ATMs which are stocked with cash bailed to you under a bailment facility agreement with your financing partners and to which cash is delivered by contractors engaged to provide cash delivery services); and

(ii) 'Self-cashing ATMs (ATMs which are stocked with cash belonging to the merchant on whose premises the ATM is located and where that merchant takes responsibility for ensuring adequate cash is placed in the relevant ATM).

You have provided a template agreement reflecting the terms and conditions, under which you will typically arrange for your ATMs to be placed on the premises of different merchants (Agreement).

The terms of the Agreement identify the nature of the underlying supplies and explains that:

- subject to the Merchant complying with its obligations you must supply, install and connect the Equipment to the Licensed Area.

- the Merchant agrees and acknowledges that the Agreement gives you the exclusive right to supply the Merchant with an ATM.

The Agreement also outlines the fee obligations of the merchants and explains that:

- throughout the term, the Merchant must pay without set off, counterclaim or deduction all Fees into your nominated bank account, by direct debit, on or before the 20^th day of each calendar month in respect of Successful Transactions which occurred during the previous calendar month.

- the Merchant's obligations to pay all moneys due under the Agreement is absolute and unconditional. Without limitation, the Merchant's payment obligations will continue notwithstanding any defect in, breakdown or accident, loss, theft or damage to the equipment.

The various fees payable by the merchant to you are stipulated in the Agreement under the term 'Monthly Fees'. The Monthly Fees consist of a Maintenance Fee, Reporting Fee, Rental Fee, Insurance Fee, Telecommunication Fee and if the Merchant has selected the Cash Serviced option, the Bailment Fee.

Although the Agreement enables merchants to select whether they want you to install a self-cashing ATM or a cash-serviced ATM, the ATMs installed on the premises of particular categories of merchants such as restaurants, hotels, convenience stores etc as opposed to in the atrium or concourse area of a shopping centre are almost always self-cashing. It is only those self-cashing ATMs that are the subject of this ruling.

Self-cashing ATMs

Where your self-cashing ATMs are located on the premises of a particular merchant, that merchant is almost always responsible for ensuring that the relevant ATMs have sufficient cash levels to meet the demand. You do not arrange for the delivery of cash to these self-cashing ATMs.

The merchant will generally make their own arrangements for stocking of the relevant ATMs. In this regard, the Agreement provides that Merchants must within 3 Business Days after installation of the Equipment, fill the Equipment, and keep the Equipment filled for the remainder of the Term with adequate amounts of cash, and in appropriate denominations.

When a patron makes a withdrawal from an ATM located on a merchant's premises, the following transactions will occur. The withdrawn amount will be debited to the patron's bank account. A corresponding amount will be credited to the merchant's bank account. The patron will also be charged a fee which will be debited to their account and electronically remitted to you.

To effectively provide ATM services, you rely on the merchants on whose premises ATMs are located, to provide a number of services related to ensuring the ongoing operability of your ATMs. These services include:

· depositing cash into the ATMs such that patrons are able to effectively make ATM withdrawals;

· enabling the connection of ATMs to the premises' electricity supply and ensuring that ATMs are switched on and functioning;

· acting as the first point of contact in the case that patrons require assistance with using an ATM (ie. addressing concerns that patrons may have in the instance that an ATM appears to be malfunctioning);

· liaising with your support staff to keep them informed of issues affecting your ATMs;

· attempting to resolve technical issues affecting your ATMs with the guidance of your help-desk support staff and keeping you appraised of any ongoing technical issues;

· immediately notifying you of damage to any of your ATMs;

· providing a well-lit, visible and secure-feeling environment, in which patrons will be inclined to attend in order to make use of an ATM;

· posting signs advertising the presence and location of your ATMs to the merchant's patrons; and

· cleaning ATMs and otherwise ensuring their presentation is likely to encourage patrons to use those ATMs.

Thus, where your ATMs are located on a particular merchant's premises, that merchant is generally responsible for depositing cash into those ATMs and ensuring that there is sufficient cash in those ATMs to meet patrons' requirements.

When a merchant transfers cash into one of your ATMs, title to that cash does not pass to you.

Where you have installed ATMs on a merchant's premises, that merchant is responsible for taking reasonable steps to ensure that harm does not come to those ATMs. In addition to this obligation, the merchant is required to obtain insurance for damage, loss or injury to your ATMs.

Licence fee and rebate

The Agreement provides that the merchant will pay you a total fee comprising of a maintenance fee, reporting fee and rental fee. These three fees are payable on a monthly basis. For convenience, the total fee is referred to as a 'licence fee'. However, the licence fee will be reduced by a 'rebate'. The amount of the rebate will be calculated by reference to the number of transactions made through the relevant ATM provided by you. Where the rebate exceeds the licence fee, you make a payment to the merchant for the excess rebate amount.

The Agreement provides for the rebate and explains that you must collect all transaction revenue from the usage of the Equipment and pay the Merchant the Rebate, and pay the Rebate to the Merchant in respect of Successful Transactions which occurred during the previous calendar month.

The rebate is typically calculated by reference to a minimum number of transactions which you and the merchant agree should ordinarily be processed through the ATM in a given period. Provided that the minimum number of transactions is achieved, the licence fee will never be payable.

The rebate is generally payable by you where the agreed minimum number of transactions to be processed through an ATM in a given period is exceeded. As noted above, that minimum number of transactions is almost always exceeded such that a rebate is almost always payable by you to the merchant. The net result of this arrangement is that you typically enter into an agreement for the provision of an ATM, expecting that you will pay the relevant merchant to facilitate the operation of the ATM.

The Agreement details the manner in which the fee and the rebate are calculated. Pursuant to the Agreement, the net amount of the rebate payable is calculated by reference to the number of transactions made through the relevant ATM.

Additional information on the rebates

You confirm that a merchant will prima facie be liable to pay you a total fee comprised of a number of items, including a maintenance fee, a reporting fee and a rental fee. The total fee (that is, the licence fee described above) will then be reduced by any rebate payable by you to the merchant.

The rebate payable by you varies in accordance with whether or not a threshold number of transactions are exceeded. The quantum of rebate payable by you does not vary directly with the number of transactions. Rather, the rebate is set as a fixed amount where a particular threshold is exceeded. Nonetheless, that fixed amount is generally calculated by the parties as the product of a certain amount per transaction and a particular number of transactions.

The amounts payable by the merchant and the potential rebates payable by you will be negotiated at arm's length between you and the merchant, taking into account a variety of factors such as the costs that you expect to incur in servicing the relevant ATM, the prominence of a given ATM's location, anticipated foot traffic, predicted number of transactions, proximity of competing ATMs, loyalty of the merchant etc.

The following example is provided to illustrate the interaction between the fees and the rebate.

Fees Payable by the merchant (GST inclusive):

Maintenance fee $x

Reporting fee $1x

Rental fee $2x

Total $3x

Rebate payable to the merchant (GST inclusive):

From 100 to 200 $y

From 200 to 500 $1y

More than 500 $2y

Recipient Created Tax Invoices

You have treated the merchant services as taxable supplies from the merchants. The rebates payable by you to the merchants have been treated as the consideration for the taxable supplies. Each month you have calculated the rebate payable to each merchant and issued recipient created tax invoices.

The merchants have treated the rebate amount as consideration for their taxable supply of merchant services and remitted the GST component to the Commissioner.

Relevant legislative provisions

Sections 11-5 of the GST Act 1999.

Section 11-20 of the GST Act 1999.

Section 40-5 of the GST Act 1999.

Section 70-5 of the GST Act 1999.

Sections 11-15 of the GST Act 1999.

Subregulation 40-5.06(1) of the GST Regulations.

Subregulation 40-5.09(4A) of the GST Regulations.

Subregulation 70-5.02(2) of the GST Regulations.

Reasons for decision

It is your contention that you are entitled to RITCs under item 27 of the table in sub-regulation 70-5.02(2) of the GST Regulations for the acquisition from merchants of merchant services relating to ensuring the ongoing operability of your ATMs, as you fulfilled all the requirements of that item.

Before discussing this contention, it is first necessary to ascertain whether the supply of the merchant services comprises a taxable supply for GST purposes.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to taxable supplies and 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.

* Denotes a term defined in the GST Act.

The only requirement of a 'taxable supply' that is in issue here is whether the provision of the services by the merchants falls within the meaning of supply. In our earlier private ruling, we have concluded that the 'Merchant Services' are merely terms and conditions of the Agreement and are not separate supplies.

Taking into account the nature of the services provided by the merchants as set out in the facts above, it is now our view that the services taken as a whole are to increase the usage of ATMs by the patrons of the merchants. Obviously, you will derive an increase in revenue from an increase in usage of the ATMs by patrons. The merchants in turn will derive an increase in rebate payments from you from an increase in the number of transactions processed through your ATMs.

In our view, the services provided by the merchants are collateral to the ATM location and placement arrangements entered into between you and the merchants and amount to separate supplies. The monthly rebates paid by you to the merchants are the consideration for the services supplied by the merchants.

Accordingly, as the requirements of a taxable supply are met, the supply of the Merchant Services is a taxable supply.

Financial supplies

Subregulation 40-5.09(4A) of the GST Regulations provides that, a supply by an entity for a fee of not more than $1,000 is a financial supply, if it is a supply of one or more of the following ATM services:

(a) a withdrawal from an account;

(b) a deposit into an account;

(c) an electronic transfer from an account;

(d) advice on the balance of an account.

It is accepted that you provide one or more of the above services for a fee of not more than $1,000 to patrons of the merchants (patrons), who use the ATMs located in their premises. Therefore, you make financial supplies to patrons and pursuant to subsection 40-5(1) of the GST Act, these supplies are input taxed.

Entitlements to input tax credits

As a general rule, under paragraph 11-15(2)(a) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. Therefore, to the extent that the services from the merchants to whom you pay rebates, relate to the making of ATM services, the acquisition of those services will not be fully creditable.

Reduced credit acquisitions

However, certain acquisitions that relate to making financial supplies may entitle you to reduced input tax credits.

Subsection 70-5 of the GST Act refers to these acquisitions and states:

(1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions.

(2) ……

Regulation 70-5.02 of the GST Regulations refers to acquisitions that attract reduced input tax credit and states:

(1) For subsection 70-5(1) of the Act, an acquisition mentioned in subregulation (2) that relates to making financial supplies gives rise to an entitlement to a reduced input tax credit.

(2) The following acquisitions (within the meaning of subsection 70-5(1) of the Act) are reduced credit acquisitions.

………

In this case, you consider that you are eligible to claim reduced input tax credits (RITCs) under item 27 of the table in subregulation 70-5.02(2) of the GST Regulations.

Item 27 of the table in subregulation 70-5.02(2) of GST Regulations states:

Supplies for which financial supply facilitators are paid commissions by financial supply providers.

Therefore, in order to claim RITCs under item 27 of the table in subregulation 70-5.02(2) of GST regulations, there must be a financial supply provider, a financial supply facilitator and a payment of commissions. It is to these requirements that we now address.

Financial supply providers' and 'financial supply facilitators

Turning to the first two requirements, the Dictionary to the GST regulations provides that the expressions 'financial supply provider' and 'financial supply facilitator' have the following meanings given respectively by regulations 40-5.06 and 40-5.07:

40-5.06 Financial supply providers

(1) An entity, in relation to the supply of an interest that was:

(a) immediately before the supply, the property of the entity; or

(b) created by the entity in making the supply;

….

is the financial supply provider of the interest.

(2) The entity that acquires that interest is also the financial supply provider of the interest

40-5.07 Financial supply facilitators

A financial supply facilitator, in relation to supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider.

With reference to paragraph 103 of Goods and Services Tax Ruling (GSTR) 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2), the Commissioner explains that the GST Regulations distinguish between a 'financial supply provider' and a 'financial supply facilitator'. Further, paragraph 103 references the Explanatory Statement to the A New Tax System (Goods and Services) Regulations 1999 (Explanatory Statement) to confirm that these definitions serve to avoid confusion between the provision of an actual financial supply and another supply made in connection with it (such as agency services).

Turning to the text of each definition, a common feature is the requirement for there to be a relationship between an entity and the supply of an 'interest' in order for an entity to qualify as either a 'financial supply provider 'or financial supply facilitator.

Relevantly, for the purposes of the GST Regulations, the term 'interest' is both defined by regulation 40-5.02 (to be anything that is recognised at law or in equity as property in any form) and identified by reference to the 'interests' mentioned in subregulation 40-5.09(3) or (4). Consequently, by way of subregulation 40-5.09(1) of the GST Regulations, the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or (4) of the GST Regulations will be a financial supply if the requirements of subregulation 40-5.09(1)(a) and (b) of the GST Regulations are satisfied.

By contrast, the supply of an ATM service covered by subregulation 40-5.09(4A) of the GST Regulations is designated to be a financial supply. This means that in providing ATM services the supplier is neither obliged to satisfy the requirements of subregulation 40-5.09(1) of the GST Regulations nor treated as having satisfied those requirements.

Therefore, the issues arises in respect of the application of item 27 and whether an entity that makes a financial supply is entitled to a RITC where they are not strictly a supplier of an 'interest'.

It is our view applying a statutory construction to the matter at hand, a plain reading of the text of regulations 40-5.06 and 40-5.07 of the GST Regulations (taking into account the ordinary and grammatical sense of the statutory words used) suggests that the statutory definitions of 'financial supply provider' and 'financial supply facilitator' are not exhaustive, and are only intended to take effect in circumstances involving the provision, acquisition or disposal of an interest. That is, the prefacing words 'in relation to supply of an interest' serve to extend the ordinary meaning of the terms, rather than restrict, the application of the definitions. Therefore, on a literal reading of these statutory definitions, a 'financial supply provider' or 'financial supply facilitator' can also be an entity who makes or facilitates a supply that is not in relation to an interest.

Also, as can be ascertained from the Explanatory Statement, there is nothing in the policy behind the introduction of the RITC regime which suggests that entities designated to be making financial supplies should be excluded from obtaining RITC relief. On the contrary, it would appear to raise an anomaly if an ADI is able to qualify as 'financial supply provider' by reason of it supplying an interest in an item 1 account (which include making supplies of ATM services) and a non-ADI is excluded because it's supply of ATM services doesn't involve a supply in relation to an interest.

On this basis, the Commissioner accepts that the statutory definitions of 'financial supply provider' and 'financial supply facilitator' (specified by regulations 40-5.06 and 40-5.07 of the GST Regulations) should be read as only taking effect in circumstances involving an entity making a financial supply that is a supply of an 'interest'.

Consequently, in the absence of the regulations 40-5.06 and 40-5.07 of the GST Regulations being applicable (that is, in the case of supplies of ATM services designated to be financial supplies by reason of the application of subregulation 40-5.09(4a) of the GST Regulations), it falls that an entity will need to satisfy the ordinary meanings of the expressions 'financial supply provider' and 'financial supply facilitator' when considering the application of item 27.

Ordinary meaning of 'financial supply provider'

Having regard to the context in which it is found, the composite expression 'financial supply provider' takes its ordinary meaning from a combination of:

· the meaning attributable to the words 'financial supply' as defined by operation of regulation 40-5.09(1) of the GST Regulations (which establishes that a 'financial supply' is the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) & (4) of the GST Regulations) where the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied, and the supply of ATM services covered by subregulation 40-5.09(4A)) of the GST Regulations; and

· the ordinary meaning of the word 'provider' (which by reference to its derivative 'provide' is defined by the Macquarie Dictionary Online (Macmillan Publishers Australia 2014) to mean 'someone who furnishes or supplies').

On this basis, the Commissioner considers that the ordinary meaning of the composite expression 'financial supply provider' refers to an entity that furnishes a financial supply determined as such by application of the GST regulations. This includes an entity that makes a financial supply of ATM services under subregulation 40-5.09(4A) of the GST Regulations.

Ordinary meaning of 'financial supply facilitator'

Having regard to the context in which it is found the composite expression 'financial supply facilitator' takes its ordinary meaning from a combination of:

· the meaning attributable to the words 'financial supply' as defined by operation of regulation 40-5.09(1) of the GST Regulations (as described in the first dot point of paragraph 35); and

· the ordinary meaning of the word 'facilitator' (which by reference to its derivative 'facilitate' is defined by the Macquarie Dictionary Online (Macmillan Publishers Australia 2014) to mean 'someone who or something that makes easier or less difficult or helps forward (an action or process')).

On this basis, the Commissioner considers that the ordinary meaning of the composite expression 'financial supply facilitator' refers to an entity that helps forward (assists) the supply of a financial supply determined as such by application of the GST regulations (including a financial supply of ATM services under subregulation 40-5.09(4A) of the GST Regulations)).

The Commissioner further considers that the guidance provided in paragraphs 31 to 35 of Goods and Services Tax Ruling (GSTR) 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1)(albeit referencing the specific application of regulation 40-5.07 of the GST Regulations) applies equally in determining whether an entity is a financial supply facilitator according to its ordinary meaning.

On this basis, and with reference to the facts of this case, the Commissioner accepts that you qualify as a 'financial supply provider' for the purposes of the application of item 27.

As discussed above, whether a merchant qualifies as a 'financial supply facilitator' (under the ordinary meaning of that term) is dependent on the facts supporting that the merchant's activities (for which it is paid a commission) have the effect of helping forward or assisting your supply of ATM services. That is, the activities must have a sufficient nexus with the supply of ATM Services by you.

As stated in paragraph 32 of GSTR 2004/1 to have a sufficient nexus:

"…the activities of the entity must have an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising, product design, market research or similar types of activities. The activities must relate to and assist a particular supply, not merely contemplated supplies…"

With regard to the merchant services, when viewed objectively, these activities evidence that the merchant effectively plays an intermediating role in bringing together you and the merchant's patrons for the purposes of you supplying ATM services. Therefore, the merchant's activities have the requisite nexus to your supply of ATM services.

On this basis, the Commissioner accepts that a merchant (in providing you with 'merchant services') qualifies as a 'financial supply facilitator' (within the ordinary meaning of that term) for the purposes of the application of item 27.

Commission requirement

Finally, in order to fully satisfy the requirements of item 27, it is necessary to establish that the remuneration payable by you to a merchant for the supply of 'merchant services' falls within the scope of being a 'commission'.

It is your submission that a Cash Withdrawal Transaction Fee described under clause 3.1 of the Agreement is a 'commission' paid for the supply of merchant services. This is on the basis that a merchant falls within the description of an 'agent or similar entity'.

The term 'commission' is not defined in the GST Regulations. Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) discusses 'commission' in the context of item 27 in the table of subregulation 70-5.02(2) of the GST Regulations in the following terms:

652. Commission, as defined in GSTR 2002/2 is: payment to an agent or similar entity or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis or on a sliding scale based on the value of the transaction. For the purposes of item 27, the services are not those provided by an employee.

653. While the term commission may include corpus commission, income commission, trailing commission and brokerage, not all of these are necessarily payments to a financial supply facilitator. Other fees, including those calculated on the value of work done, rather than a per-transaction or percentage of value based calculation and retainers are not commission.

As outlined above, the Commissioner considers that a 'merchant', in carrying out the merchant services is performing an intermediation role that effectively brings together you and the merchants' patrons for the purposes of you making supplies of ATM services. Therefore, and consistent with paragraph 652 of GSTR 2004/1, we consider that the 'merchant' acts in a similar capacity to an agent in the broad sense of the term.

As described in the facts section of this response, a rebate payable to a merchant is based on the achievement of certain target numbers of transactions through a particular ATM located on the merchant's premises. This falls within the scope of the type of payments mentioned in paragraph 652 of GSTR 2004/1. On this basis, we consider that such a payment does bear the character of being a 'commission' for the purposes of the application of item 27.

Conclusion

Based on the abovementioned facts and analysis, we consider that the requirements of item 27 in the table in subregulation 70-5.02(2) of the GST Regulations are satisfied. That is, the acquisition of 'merchant services' by you qualifies as a reduced credit acquisition. Consequently, by reason of the application of subsections 70-5(2) and 70-15(1) of the GST Act, you are entitled to an RITC equal to the GST payable on the supply of 'merchant services' reduced to 75% (being the percentage specified by subregulation 70-5.03(c) of the GST Regulations).