Edited version of private advice

Authorisation Number: 1012649682648

Ruling

Subject: GST and supply of management services

Questions

1. Is the supply of management services made by the Manager to the Owner in relation to the Centre pursuant to the Management Agreement a taxable supply?

2. Does the authority of the Manager to access the Centre Account in order to provide the management services constitute consideration for the supply of management services by the Manager?

Answers

1. Yes, the supply of management services by the Manager to the Owner in relation to the Centre pursuant to the Management Agreement is a taxable supply.

2. No, the authority of the Manager to access the Centre Account in order to provide the management services does not constitute consideration for the supply of management services made by the Manager.

Relevant facts and circumstances

The Manager is registered for goods and services tax (GST) in Australia.

The Owner is the owner of the Centre.

The Manager and the Owner entered into a Management Agreement.

The Agreement recites that the Owner selected the Manager to operate the Centre and that the Manager has agreed to provide services on the basis set forth in the Management Agreement.

The Management Agreement states that the Owner appoints the Manager as the manager of the Centre and that the Manager accepts that appointment and agrees with the terms and conditions of the Management Agreement.

The Management Agreement sets out the Manager's responsibilities for management (including marketing and administration) of the Centre and requires the Manager to promote the Centre, enter into arrangements with third parties to attract custom to the Centre and attend to day to day management and operation of the Centre (including purchasing Operating Supplies and Assets necessary for the proper operation of the Centre) and paying all expenses when due, although the Manager is prohibited from debiting any bank account to which the Manager has access in relation to any Obligation which is not authorised under an Approved Business Plan and Budget. In consideration of the services rendered by the Manager, the Owner will pay the Management Fee.

The Management Agreement states that all Employees, including Executive Staff, shall be employed by the Manager and that all Compensation shall be paid by the Manager from the Centre Account. The Management Agreement states that all replacement, repairs and maintenance to the Centre are the Manager's responsibility and carried out in accordance with an Approved Business Plan and Budget.

The Management Agreement obliges the Owner to provide sufficient funds to assure the uninterrupted and efficient operation of the Centre. All funds received by the Manager in the operation of the Centre will be deposited in a bank account opened in the Owner's name and that the Owner is responsible for all Operating Expenses incurred by the Manager pursuant to an approved Business Plan. The Manager shall be entitled to immediate reimbursement from the Centre Account for any expenditure which constitutes Operating Expenses incurred by the Manager pursuant to an approved Business Plan and Budget or otherwise approved by the Owner.

The Management Agreement defines Operating Expenses as all costs and expenses of maintaining, conducting, and supervising the operation of the Centre incurred by the Owner or the Manager including all Compensation for the Employees, the cost of replacing any Operating Supplies, but does not include the Manager's corporate overheads including directors' remuneration.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d).

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1:

1. The supply of management services by the Manager to the Owner satisfies all the requirements for a taxable supply set out in paragraphs (a) to (d) of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) because:

a) The Manager makes the supply of management services to the Owner for consideration, being the Management Fee payable to the Manager pursuant to the Management Agreement.

b) The Manager makes the supply of management services in the course or furtherance of an enterprise carried on by the Manager.

c) The supply of management services is connected with Australia pursuant to subsection 9-25(5) of the GST Act.

d) The Manager is registered for GST.

Further, the supply of management services by the Manager to the Owner is neither GST-free nor input taxed. Consequently that supply is a taxable supply.

Question 2:

To enable the Manager to provide the management services the Owner has granted to the Manager the entitlement to immediate reimbursement from the Centre Account for any Operating Expenses (defined to include all costs and expenses of maintaining, conducting and supervising the operation of the Centre) incurred by the Manager.

We do not consider that the grant of that right is additional non-monetary consideration for the supply of management services made by the Manager to the Owner.

Paragraph 12 of Goods and Services Tax Ruling (GSTR) 2001/6 states that 'payment' in section 9-15 of the GST Act (i.e. 'consideration' includes any payment, or any act or forbearance, in connection with a supply) includes the grant of a right. However, paragraph 56 of GSTR 2001/6 states that it is not sufficient for there to be a supply and a payment, there must be a sufficient nexus between the supply and the payment. The Management Agreement clearly states that the owner agrees to pay the Management Fee to the Manager 'in consideration of the services rendered by the Manager in accordance with this Agreement'. We therefore consider that the Management Fee, rather than the right granted to the Manager under the Management Agreement, has the required nexus with the supply of Management Services.

Further, paragraphs 80 and 81 of GSTR 2001/6 state:

Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.

For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. Whether this requirement is satisfied will usually be demonstrated by the parties to an arrangement assigning a specific or separate value to the thing. However, the assigning of a value by the parties is not necessary for a thing to have economic value.

We do not consider that the right granted to the Manager under the Management Agreement has the economic value or independent identity required by GSTR 2001/6. In our view that right merely reflects the fact that, as the Owner is responsible for all Operating Expenses (per the Management Agreement), the Manager is entitled to immediate reimbursement of any Operating Expenses incurred by the Manager.