Edited version of private advice

Authorisation Number: 1012625990109

Ruling

Subject: GST and EFTPOS surcharges

Question 1

Is GST payable under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 on the surcharge payable on a purchase only transaction using an EFTPOS terminal?

Answer

The EFTPOS surcharge is further consideration for the underlying supply. Therefore, if the purchase is of a taxable supply, then the surcharge is further consideration for that taxable supply.

Question 2

Is GST payable under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 on the surcharge payable on a purchase with cash-out transaction using an EFTPOS terminal?

Answer

The EFTPOS surcharge is further consideration for the underlying supply. Therefore, if the purchase is of a taxable supply, then the surcharge is further consideration for that taxable supply.

Question 3

Is GST payable under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 on the surcharge payable on a cash-out transaction using an EFTPOS?

Answer

Yes, the EFTPOS surcharge is consideration for the taxable supply of the access to the payment system.

Relevant facts and circumstances

The entity provides terminals connected to the EFTPOS payment system to retail merchants.

The EFTPOS payment system allows for the electronic transfer of funds used to pay for goods or services at the point of sale. There are four entities involved in an EFTPOS transaction:

• Cardholder - the customer making the purchase

• Issuer - the financial institution of the cardholder

• Merchant - the retail outlet providing the goods or services

• Acquirer - the financial institution of the merchant

The EFTPOS system allows instructions to be sent to the issuer to authorise payment to the merchant (via the acquirer) from the cardholder.

The EFTPOS system is essentially an assembly of contractual obligations entered into by the participants in the system. The EFTPOS system is governed by the EFTPOS Scheme Rules. Merchants and cardholders' obligations and entitlements are determined by their respective financial institution in accordance with the EFTPOS Scheme Rules (that is Terms & Conditions; Merchant Agreement, etcetera).

The entity is registered for GST and all transactions take place in Australia.

Merchants are registered for GST.

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 9-40

Reasons for decision

Question 1

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is only payable on taxable supplies that an entity makes. Section 9-5 of the GST Act provides that you make a taxable supply if:

• you make the supply for consideration; and

• the supply is made in the course or furtherance of an enterprise that you carry on; and

• the supply is connected with Australia; and

• you are registered or required to be registered.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

A supply is broadly defined by section 9-10 of the GST Act and includes a supply of goods, a supply of services the provision of advice or information, a financial supply, an entry in or release from an obligation, amongst others.

When a customer uses a debit card to pay for the purchase of goods and/or services provided by a merchant, the merchant is making two supplies. The first and most obvious is the underlying supply of the goods or services. The second supply is allowing the use of the EFTPOS system to process the transaction.

In Waverley Council v. Commissioner of Taxation [2009] AATA 442 (Waverley Council), the Administrative Appeals Tribunal agreed with the Commissioner that, in the circumstances presented, the credit card surcharge was additional consideration for the underlying supplies made by the council (eg rates, dog registration, parking permits, etcetera). Although the case related to supplies that are not subject to GST (ie Australian taxes, fees and charges) the principles from this case, which are discussed in detail in the ATO Interpretative Decision, GST and credit card surcharge for payment of an Australian tax, fee or charge (ATO ID 2008/116), apply equally to other supplies where a surcharge is imposed.

The underlying supply made by the merchant of the goods and/or services is the substance of the transaction and the merchant charges consideration for the supply. Where the merchant imposes an additional charge to pay using a debit card, the surcharge is additional consideration for the underlying supply of the goods or services. As stated in ATO ID 2008/116:

This view is consistent with the general principle that for United Kingdom VAT purposes, the taxable amount for a supply of goods or services includes all payments which the supplier requires the customer to make as a condition for receiving the supply. If, for example, a supplier of goods or services requires a customer to pay an additional charge above the price of the actual goods or services, for payment by debit or credit card, that charge is further consideration for the purchase of those goods or services and VAT is payable on that amount in accordance with the VAT treatment of the goods or services (see HM Revenue & Customs Business Brief BB18/06: 30 October 2006 and Business Brief BB17/1998-1: 7 August 1998).

This approach is consistent with a more recent decision by the European Court of Justice (ECJ) in Everything Everywhere Ltd (formerly T-Mobile UK Ltd) v. The Commissioners of Her Majesty's Revenue & Customs case C-276/09 (Everything Everywhere). In that case, Everything Everywhere imposed a surcharge of three Great British Pounds when a customer chose to pay a bill using a certain method (eg by cheque). At paragraph 28 of its judgement, the ECJ states:

… the receipt of a payment and the handling of that payment are intrinsically linked to any supply of services provided for consideration. It is inherent in such a supply that the provider should seek payment and make appropriate efforts to ensure that the customer can make effective payment in consideration for the service supplied. In principle, any method of payment for a supply of services involves the provider taking certain steps in the handling of the payment, even if the extent of those steps may vary from one method of payment to another.

When a merchant uses the entity's EFTPOS terminal to access the EFTPOS payment system, it is using this access to allow the cardholder to pay for the purchase of the goods or services supplied by the merchant. The 2% surcharge imposed is additional consideration for the supply.

As the surcharge is further consideration for the underlying supply, if the underlying supply is taxable, then the surcharge will be subject to GST. If the underlying supply is GST-free (or not subject to GST as in Waverley Council), then the surcharge will not be subject to GST. If the underlying supply includes parts that are both GST-free and taxable, then the surcharge will need to be apportioned on the same basis as the consideration for the supply.

Example

Bob's Supermarket sells taxable and GST-free food and charges a flat $2 surcharge on EFTPOS transactions. Bill purchases $58 worth of GST-free items and $42 worth of taxable items. The percentage of taxable items is 42% of the total and the GST payable in relation to the surcharge is calculated as:

1/11^th of $2 x 42% = $0.0763

Question 2

When a customer uses a debit card to pay for a purchase and obtain cash out, the merchant uses the entity's EFTPOS terminal to access the EFTPOS system to process the transaction.

As discussed above, the merchant is providing a supply that may be described as 'allowing the cardholder to utilise the access to the EFTPOS system'. This is in addition to the underlying supply of the goods or services supplied by the merchant to the customer

Where the transaction involves a purchase only, the surcharge is additional consideration for that underlying supply. Therefore, it then needs to be determined whether the 2% surcharge is also consideration for the supply of allowing the cardholder to utilise the merchant's access to the EFTPOS system.

Goods and Services Tax Ruling GSTR 2001/8: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) discusses composite supplies, where a supply contains a dominant part and includes something that is integral, ancillary or incidental to that part and, at paragraph 20 states:

20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a commonsense approach.

Integral to the merchant's supply of goods or services is the acceptance of payment through a variety of means. Ordinarily, acceptance of payment does not require analysis to determine if a supply is made (and if so, whether that supply is a taxable supply) because there is normally no clear consideration provided for that supply.

Courts in other jurisdictions have considered the issue of supplies which are made up of a number of components. In Customs and Excise Commissioners v. Wellington Private Hospital Ltd [1997] BVC 251 at 266, Millett LJ states:

'The proper inquiry is whether one element of the transaction is so dominated by another element as to lose any separate identity as a supply for fiscal purposes, leaving the latter, the dominant element of the transaction, as the only supply. If the elements of the transaction are not in this relationship with each other, each remains as a supply in its own right with its own separate fiscal consequences.'

GSTR 2001/8 explains that parts which require individual recognition and retention as separate parts due to their relative significance in a supply are separately identifiable. The supply of allowing the cardholder to utilise the merchant's access to the EFTPOS system to process a purchase with cash out transaction is not significant in relation to the underlying supply of the goods or services. Paragraph 59 of GSTR 2001/8 provides some indicators that part of a supply may be incidental to the main supply, and states:

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

• you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

• it represents a marginal proportion of the total value of the package compared to the dominant part; or

• it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

• it contributes to the proper performance of the contract to supply the dominant part.

An objective assessment of the circumstances surrounding the payment of the 2% surcharge where the customer pays for goods or services and also obtains cash out results in the conclusion that the surcharge is consideration for the underlying supply only. The supply of allowing the cardholder to utilise the merchant's access to the EFTPOS system to process the transaction is integral to the underlying supply. This is also supported by comments of the EJC in Everything Everywhere which states:

23. Moreover, in certain circumstances, several formally distinct services, which could be supplied separately and thus give rise, in turn, to taxation or exemption, must be considered to be a single transaction when they are not independent.

24. That is so in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service.

Consequently, the surcharge is consideration for the underlying supply of the goods or services provided by the merchant and is therefore, subject to GST.

Question 3

When a customer uses a debit card to obtain cash out, the merchant uses its EFTPOS terminal to access the EFTPOS payment system to process the transaction.

Although the merchant provides cash to the cardholder, the provision of that cash is deemed not to be a supply because of the operation of subsection 9-10(4) of the GST Act. The 2% fee charged to the customer when the EFTPOS system is used to process the cash out transaction is not consideration for the supply of the cash. This is because the surcharge has no relationship to the amount of the transaction, it is merely an impost for using the system.

Subsection 9-10(2) of the GST Act defines 'supply' to include a 'supply of services' and 'an entry into an obligation to do anything'. Therefore, it must be determined whether a merchant makes any other supply in return for the 2% surcharge.

When a merchant uses the terminal to access the EFTPOS payment system, it is using this access to allow the cardholder to obtain cash from the merchant. The merchant allows this as it knows that the money will be reimbursed through the EFTPOS Scheme Rules. The supply made by the merchant to the cardholder may be described as 'allowing the cardholder to utilise the merchant's access to the EFTPOS system'. This is either a supply of services under paragraph 9-10(2)(b) of the GST Act or the entry into an obligation by the merchant to allow the use of the EFTPOS system to process the transaction which would be captured by paragraph 9 10(2)(g) of the GST Act.

As there are no other supplies made by the merchant and the 2% surcharge imposed by the merchant directly relates to allowing the cardholder to utilise its access to the EFTPOS system to process the cash out transaction, the surcharge is consideration for that supply.

As the supply made by the merchant is done in the course of its enterprise, is made in Australia, is neither GST-free nor input taxed and the merchant is registered for GST, the supply made in exchange for the 2% surcharge is a taxable supply under section 9-5 of the GST Act.