Edited version of your written advice

Authorisation Number: 1012769836222

Ruling

Subject: GST and failed payment fees

Question 1

Is the dishonour fee (a failed payment fee) charged by A to a customer consideration for a supply where the fee is imposed on the customer as a result of a failed payment by the customer following A attempting an authorised direct debit on the customer's credit card account?

Answer

No.

Relevant facts and circumstances

A is a supplier and makes supplies of services. A accepts a number of payment methods for these supplies including BPay, online payment, Post Billpay, cheque and direct debit.

In relation to payments by direct debit, customers have the option of linking their direct debit to either a bank account or credit card account. Regardless of whether the direct debit is linked to a customer's bank account or credit card account, payment by direct debit is governed by the same contract (Agreement).

The Agreement in part states the following:

It is your responsibility to ensure that there are sufficient funds available in your account to allow for a debit payment to be made.

If there are insufficient clear funds in your account

you may be charged a fee and/or interest by your financial institution;

you may also incur fees or charges imposed or incurred by us; and

you must arrange for the debit payment to be made by another method or arrange for sufficient clear funds to be in your account by an agreed time so we can process the debit payment.

You are responsible for checking that all billing information provided to you is correct before the associated direct debit transfer transaction occurs. You should also check your account statement to verify that amounts debited from your account are correct.

In relation to the paragraph 'you may also incur …' above, the charge imposed by A for these purposes is referred to as a 'dishonour fee'. This dishonour fee is shown in the relevant invoice issued to the customer. The amount is referred to as a dishonour fee regardless of whether the direct debit is linked to a customer's bank account or to a credit card account.

A uses banks and A's payment facilitator, B (together the financial institution) to facilitate payments from its customers. Under arrangements with the financial institutions A is charged a fee for failed payments.

When A is imposed the failed payment fee, A on charges this fee to the customer within a flat fee (plus GST) that is designed to recover costs and reimburse A for the detriment caused by the failed payment.

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 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-17

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

Reasons for decision

Summary

The dishonour fee charged by A to a customer is not consideration for a supply where the fee is imposed on the customer as a result of a failed payment by the customer following A attempting an authorised direct debit on the customer's credit card account.

Detailed reasoning

A supply is not subject to GST unless it is made for consideration. Consideration 'for a supply or acquisition' is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as any consideration, within the meaning given by sections 9-15 and 9-17 of the GST Act, that is 'in connection with the supply or acquisition'.

We consider that, in the context of the GST Act, the expression 'you make the supply for consideration' in paragraph 9-5(a) of the GST Act has a similar meaning to 'there is consideration for the supply that you make'.

The references in the GST Act to 'supply for consideration' and more commonly to 'consideration for a supply' underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply that will make the supply subject to GST.

In most cases we do not consider that there is a nexus between the payment of a failed payment fee and any relevant supply; this view is set out in the Goods and Services Tax Determination GSTD 2013/1. The Determination notes that the payment of a failed payment fee is not consideration for a supply in defined circumstances which are:

1. there is an attempt to make a payment for the underlying supply by way of the supplier presenting a cheque or the supplier attempting a direct debit on the recipient's bank account in accordance with the authority it has from the recipient;

2. the attempted payment is dishonoured or declined and the supplier's financial institution imposes an 'inward dishonour fee' on the supplier;

3. the supplier and recipient have agreed or would be taken to have agreed that in utilising direct debit or cheque payment methods the recipient will have available funds to make the payment of the initial consideration amount for the underlying supply (we accept that this would be the case in the absence of contrary arrangements between the supplier and recipient);

4. the supplier and the recipient have agreed that if the payment fails the recipient will be liable to pay a fee ('failed payment fee'). The obligation to pay the failed payment fee may be included in the agreement or contract for the underlying supply, or in the terms of the Direct Debit Authority for a direct debit, or because the supplier's ability to charge a failed payment fee is specified by statute;

5. the failed payment fee arises because the recipient of the underlying supply has not fulfilled its obligation to ensure funds were available to honour a cheque, or meet a direct debit request;

6. the recipient's failure to fulfil its payment obligations causes the supplier to incur additional costs, such as the inward dishonour fee charged by the supplier's financier, or to suffer other loss, such that the failed payment fee is characterised as compensatory for the additional costs or loss incurred; and

7. there is nothing in the agreement between supplier and recipient that describes the failed payment fee as part of the consideration for anything supplied by the supplier.

Under the first requirement above, the Determination excludes fees charged in respect of credit cards as the term 'bank account' is defined as referring to … any account with an Authorised Deposit-taking Institution (ADI) such as a bank, credit union or building society where a cheque facility is offered or direct debit can be used.'. However failed payment fees charged in respect of credit card payments may be included in GSTD 2013/1's coverage where all other requirements are met and in this specific case where the fee charged is a reasonable amount:

• in the context of the arrangement/s between A and its customers; and

• with respect to the initial fee charged by the relevant credit card provider to A.

With respect to requirements 1- 7, A's eligibility is established in the following way.

1. A's dishonour fee is imposed after A attempts a direct debit payment on the recipient's bank account (or credit card account) as authorised by the customer upon their acceptance of the Agreement.

2. A is charged a fee from its financial institution for the declined credit card payment that has been attempted.

3. As stated in the Agreement, it is the responsibility of the customer 'to ensure that there are sufficient funds available in your account to allow a debit payment to be made.'

4. The obligation to pay the dishonour fee (failed payment fee) is stated in the Agreement wherein it is specified that A may impose a charge if there are insufficient funds in the customer's account.

5. In accordance with the Agreement, A charges a dishonour fee where a customer has not met its responsibility of ensuring that there are sufficient clear funds in its bank account or credit card account to meet the debit request. A does not charge a dishonour fee in any other circumstances.

6. A is charged a fee by its financial institution. The dishonour fee charged by A is calculated to compensate A for this cost and other additional costs.

7. There is nothing in the Agreement that specifies that the failed payment fee is consideration for anything else supplied by A. The Agreement makes it clear that the dishonour fee imposed is as a result of the customer not meeting its obligation to ensure that there are sufficient funds in its bank account or credit card account for the authorised direct debit to be processed. It does not relate to any supply.

Accordingly we accept that A's fee (plus GST) per failed transaction does not represent consideration for any supply.