Edited version of your written advice

Authorisation Number: 1012668166883

Ruling

Subject: GST and Decreasing Adjustments for Third Party Payments under Division 134

Question 1

Are the cash back payments made by you to customers third party payments subject to decreasing adjustments under Division 134 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

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

• You are a large, importer/distributor into the Australian market, supplying a range of quality products.

• You supply certain-branded products to retailers at wholesale prices and retailers on supply these products to customers ("Third Parties") at retail value. Consideration is paid by the retailer to you for the supplies made to them. Consideration is also paid by the Third Party to the retailer for the supplies made to them.

• In relation to certain products, you participate in a "cash back" promotion whereby if a Third Party purchases a particular product from a retailer, they will be eligible to claim a cash back payment from you within a specified period.

• The process involved for the Third Party to claim the cash back payment is as follows :

• The Third Party purchases participating products from the retailer during a specified period;

• The Third Party visits a website and completes the online claim form and attaches the receipt with the claim form;

• Alternatively, the Third Party can download the claim form, or obtain a claim form in the retail store, and send the claim form and a copy of their receipt to your marketing agency; and

• Once the claim is validated the Third Party's bonus cash back payment will be transferred directly to their nominated bank account or sent via cheque.

• You currently have a marketing agency which manages the cash back promotion process on your behalf. When a cash back payment is required, you will pay the marketing agency and the marketing agency will forward the cash back payment to the Third Party on your behalf.

• The cash back payment that is made to the Third Party is made in the form of a payment transferred directly to the Third Party's nominated bank account or via cheque.

• You have appropriate procedures, codes and system processes in place to track all cash back payments that are made to Third Parties.

• You have identified that you have not reported a decreasing adjustment for cash back payments paid by you.

• You have not issued an adjustment note for these cash back payments.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Division 9

Division 134

Reasons for decision

Summary

In the circumstances described for your payments, the cash back payments are not consideration for a supply that the third party makes to you. It is a third party payment, and you will have a decreasing adjustment under Division 134.

Detailed reasoning

Division 134 was introduced to ensure that the correct amount of GST is collected and claimed in situations where there are payments between parties in a supply chain which indirectly alter the price paid or received by the parties for the things supplied. The new legislation created an adjustment to apply in situations where an entity (the payer) supplying things for re-sale makes a monetary payment to a third party (the payee) in connection with the payee's acquisition of those things. This adjustment occurs when the payer does not supply the things directly to the payee but rather through a supply chain, and Division 134 applies to payments made on or after 1 July 2010.

Subsection 134-5(1) of the GST Act states:

(1) You have a decreasing adjustment if:

(a) you make a payment to an entity (the payee) that acquires a thing that you supplied to another entity (whether or not that other entity supplies the thing to the payee); and

(b) your supply of the thing to the other entity:

(i) was a *taxable supply; or

(ii) would have been a taxable supply but for a reason to which subsection (3) applies; and

(c) the payment is in one or more of the following forms:

(i) a payment of money;

(ii) an offset of an amount of money that the payee owes to you;

(iii) a crediting of an amount of money to an account that the payee holds; and

(d) the payment is made in connection with, in response to or for the inducement of the payee's acquisition of the thing; and

(e) the payment is not *consideration for a supply to you.

In other words, the supply by the payer must be a taxable supply, the payment must have a connection with the payee's acquisition of the thing, and the payment must not be consideration for a separate supply to the payer.

In your instance the 'payee' is the Third Party (customer purchasing your appliance) and the 'other entity' is the retailer.

A third party (customer/payee) acquired your appliance that you supplied to another entity (a retailer). Under your cash back promotion, you make a monetary payment to the third party following the third party's acquisition.

Your supply of your appliances to the retailers was a taxable supply (134-5(1)(b)(i)).

You then make a cash back payment of money to the third party (134-5(1)(c)(i) or 134-5(1)(c)(iii)), and we consider that this payment is made in connection with, in response to or for the inducement of the third party's acquisition of your appliances (134-5(1)(d)). This requirement is met when the third party provides evidence of their purchase of your appliances in order to be eligible for the cash back payment.

The cash back payment you make to the third party is not consideration for any supply made by the third party (end purchaser).

The Commissioner's view on the meaning of 'supply' is set out in further detail in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies.

To make a supply an entity must do something (see proposition 5 of GSTR 2006/9). A supply cannot be made unless an entity engages in some kind of positive action. In your circumstances, the third party does not do anything in return for the cash back payment other than provide evidence of the purchase that they have already made. Therefore we consider that the cash back payment you make is not connected with or consideration for any supply made by the third party (purchaser). For the sake of completeness, nor is your payment of the money itself a supply for GST purposes.

Therefore the requirements of section 134-5(1) of the GST Act are all met, and you therefore have a decreasing adjustment when you make the payment to the third parties.

The amount of the decreasing adjustment is the difference between the GST payable on the original supply of your appliances to the retailer and the amount of GST that would have been payable on that supply if the consideration had been reduced by the amount of the third party payment.

Conclusion

Therefore the proposed payments will, when made in accordance with the above circumstances, be third party payments under Division 134 of the GST Act. This will apply to payments in relation to cash back payments you make after 1 July 2010.

Further matters

Where the acquisition of your appliances by the third party is a creditable acquisition and the payment to them is in connection with the acquisition of your appliances (and not consideration for a separate supply by the third party) the third party will have an increasing adjustment. This is the difference between the amount of credits they were entitled to originally and the amount of credits they would have been entitled to had the consideration for that acquisition been reduced by the amount of the third party payment.

Please note that under subsection 134-20 of the GST Act you must give a third party adjustment note to the third party within 28 days of a request, or if you become aware of the adjustment before an adjustment note is requested then you are normally required to give the document within 28 days (subject to subsections 134-20(3) to (7)). You do not have to issue a third party adjustment note where the cash back amount does not exceed $75.

The third party adjustment note must be created by you and given to the third party; it must set out your ABN, contain the relevant information and be in the approved form. Please refer to subsection 134-20(1) of the GST Act.

The Australian Taxation Office (ATO) publication correcting GST errors (fast search code QC 16233) available on the ATO website ato.gov.au, explains how to correct GST errors you made on an earlier activity statement. In particular, it explains when you can correct GST errors on a later activity statement, in accordance with Goods and Services Tax: Correcting GST Errors Determination 2013, which took effect from 10 May 2013.

You can correct a credit error on a later activity statement if all of the following conditions apply for each credit error:

• the credit error is within the credit error time limit

• you are not subject to a compliance activity

• you have not corrected the GST error in another reporting period.

Credit errors are not subject to value limits.