Edited version of your written advice

Authorisation Number: 1012769067818

Date of advice: 20 February 2015

Ruling

Subject: GST and loans

Question 1

Are loans granted by Entity AAA (AAA) under its Funding Program to retail customers (Customers) for the purchase of a particular type of good input taxed financial supplies?

Answer

Yes. Loans granted by AAA under its Funding Program to Customers for the purchase of a particular type of good are input taxed financial supplies.

Financial supplies are defined in section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by reference to regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Listed in the table in subregulation 40-5.09(3) of the GST Regulations is item 2 (item 2) which concerns interests in or under a debt, credit arrangement or a right to credit, including a letter of credit.

Item 1 of Part 2 of Schedule 7 of the GST Regulations lists ‘borrowing and lending’ as an example for item 2 in the table in subregulation 40-5.09(3) of the GST regulations.

In this case, loans granted by AAA involve the provision of an interest in item 2 for consideration which are connected with Australia and are provided in the course or furtherance of AAA’s enterprise. AAA is also registered for GST and is the financial supply provider in respect of the loans granted.

The loans granted by AAA under its Funding Program to Customers for the purchase of a particular type of good are therefore input taxed financial supplies.

If AAA is not registered for GST and is not required to be registered for GST, the loans granted by AAA as an entity that is not registered for GST and not required to be registered for GST will not be input taxed financial supplies. In that case, there should be no GST consequences for AAA in respect of the loans it grants to Customers.

Question 2

Does the Standard Interest Charge (SIC), which is payable by participating Suppliers to AAA, wholly and solely represent consideration for the input taxed financial supply of the loan referred to at Question 1 and therefore does not trigger a GST liability for AAA?

Answer

Yes. The SIC, which is payable by participating Suppliers to AAA, wholly and solely represents third party consideration provided by the Supplier for the input taxed financial supply of the loan referred to at Question 1 and therefore does not trigger a GST liability for AAA (paragraphs 177 to 183 of Goods and Service Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9)).

Support for this is found in the agreement between the Supplier and AAA.

Question 3

Does the Default Interest, which in certain circumstances becomes payable by a Customer to AAA, wholly and solely represent consideration for the input taxed financial supply of the loan referred to at Question 1 and therefore does not trigger a GST liability for AAA?

Answer

Yes. The Default Interest, which in certain circumstances becomes payable by a Customer to AAA, wholly and solely represent consideration for the input taxed financial supply of the loan referred to at Question 1 and therefore does not trigger a GST liability for AAA (Line No. B5 and B21 in the table to Schedule 2 of Goods and Service Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2)).

Question 4

Will the direct debit processing fee, the credit card processing fee and dishonour fee, which in certain circumstances become payable by a Customer, each trigger any GST liabilities for AAA?

Answer

No. The direct debit processing fee, the credit card processing fee and dishonour fee, which in certain circumstances become payable by a Customer, each will not trigger GST liabilities for AAA.

The direct debit processing fee and the credit card processing fee are charged by AAA on the Customer for the recovery of debit card and credit card acceptance costs. There is a sufficient nexus between these fees paid by the Customer and the supply of the loan made by AAA for these fees to be regarded as forming part of the consideration for the loan made by AAA (paragraphs 8, 29, 60 to 65 and 75 of Goods and Service Tax Ruling GSTR 2014/2 Goods and services tax: treatment of ATM service fees, credit card surcharges and debit card surcharges (GSTR 2014/2)).

In the circumstances of this case the dishonour fee will not be consideration for a supply (paragraphs 1 to 5 of Goods and Services Tax Determination GSTD 2013/1 Goods and services tax: when a payment for a supply fails, is a failed payment fee charged by the supplier consideration for a supply? (GSTD 2013/1).

Relevant facts and circumstances

● AAA is an Australian-based company in the business of providing finance (in the form of loans) to facilitate the retail purchase of a particular type good.

● Loans provided by AAA to Customers are connected with Australia.

● AAA is registered for GST. AAA contemplates that it may deregister for GST in the future especially if it is not required to be registered for GST.

● AAA is not an authorised deposit-taking institution (ADI).

The background to how the arrangement between AAA, the Suppliers and Customers operates is as follows:

● AAA will be entering into business arrangements with certain participating Suppliers, which will each be a party to an agreement (Supplier Agreement).

● Broadly, under these arrangements, the Suppliers offer a particular type of good for sale for a price (the sticker price) to Customers, with AAA providing a loan to the Customers for part of the sticker price.

● The Customers will not in the ordinary course of events be liable to pay interest on the loan. Instead a single amount (referred to as the SIC) will be paid by the Suppliers to AAA.

Further detail on the loan arrangements is as follows:

● The Supplier may be selling the good to the Customers on its own account, or perhaps more frequently as agent or otherwise on behalf of a third party owner of the art work (e.g. under a consignment arrangement).

● Under the loan arrangements, the Customer will pay an initial deposit directly to the relevant Supplier for the purchase of the good.

● AAA will provide qualifying Customers with the loan in an amount equal to the sticker price for the art, less the initial deposit (also referred to as the Loan Amount).

● AAA will pay Loan Amount directly to the Supplier, after deducting from that amount the SIC. The SIC is expressed in the Supplier Agreement an amount that the Customers would otherwise have been liable to pay AAA had the terms of the loan included an interest charge and the Customer had only made the regular minimum repayments and not any early repayments.

● The SIC does not represent, in any way, a reduction in the consideration for the good purchased.

● The Customer would take possession and ownership of the good on completion of the sale transaction.

The core loan arrangements have been represented in a diagram outlined in the ruling.

AAA’s credit arrangement with the Customer

● AAA provides the loan to Customers under the terms of its Credit Contract.

● The Credit Contract provides for repayments of the Loan Amount, on a monthly instalment basis, to AAA.

● In the event that the Customer defaults on his or her repayment obligations under the loan, a charge (Default Interest) becomes payable by the Customer. The Default Interest charge is separate and in addition to the SIC payable by the Supplier.

● The following fees may also be payable by the Customer to AAA:

− A direct debit processing fee (applicable when AAA debits the Customer’s account for a repayment);

− A credit card processing fee (applicable when AAA debits the Customer’s credit card account for a repayment);

− A dishonour fee (applicable when a payment to AAA is dishonoured, or an attempt is made to debit the Customer’s account and there are insufficient funds).

● The direct debit processing fee and the credit card processing fee are charged on the Customer for the recovery of debit card and credit card acceptance costs borne by AAA although the fees charged and the costs borne may not precisely correlate.

● The following circumstances apply when a dishonour fee is payable:

− There is an attempt to make a payment in relation to the loan by way of AAA attempting a direct debit on the Customer's bank account in accordance with the authority it has from the Customer;

− the attempted payment is dishonoured or declined and AAA’s financial institution imposes a fee/charge on AAA as a result;

− AAA and the Customer have agreed that in utilising direct debit the recipient will have available funds to make the payment;

− AAA and the Customer have agreed that if the payment fails the Customer will be liable to pay a dishonour fee.

− the dishonour fee arises because the Customer has not fulfilled its obligation to ensure funds were available to meet a direct debit request;

− the Customer's failure to fulfil its payment obligations causes AAA to incur additional costs, such as any fees/charges charged by AAA's financier, or to suffer other loss, such that the dishonour fee is characterised as compensatory for the additional costs or loss incurred; and

− there is nothing in the agreements between AAA and the Customer that describes the dishonour fee as part of the consideration for anything supplied by the AAA.

AAA’s arrangements with the supplier

● As noted above, Suppliers that wish to participate in AAA’s Funding Program enter into an agreement with AAA in the form of the Supplier Agreement.

● The suppliers’ imperative is to make sales of goods and in doing so to either sell the goods at a profit, or to generate a commission payment from sales (in the case where there is a Consignor). From the Suppliers’ perspective, the SIC is a cost of making a sale. Although it is up to the individual supplier to determine, it might ordinarily be expected that the profit margin on sale/commission would exceed the SIC payable.

● The Supplier Agreement provides that the loan provided to a Customer will be an interest free loan. In consideration for AAA making available the Funding Program to its customer, so as to increase the availability of potential sales of goods, the Supplier agrees to pay to AAA certain interest charges (excluding default interest) payable by a Customer (that makes a purchase from them) on each settled loan.

● The Supplier is liable for the SIC.

Arrangements involving a consignor

● In cases involving a consignor, the entitlement to the proceeds on sale of goods would generally be the consignor’s (rather than the Suppliers’), although may be collected in the first instance by the Supplier. In those circumstances, the Suppliers would generally be paid a commission on sale (which may be deducted from the sale proceeds, with the residue being passed to the consignor).

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 40-5