Edited version of your written advice

Authorisation Number: 1012997529085

Date of advice: 13 April 2016

Ruling

Subject: Input tax credits and on-payment of commission

Question 1

Are you entitled to claim input tax credits for the on-payment of commission to your client?

Answer

No, you are not entitled to claim input tax credits for the on-payment of commission to your client as your client is not registered or required to be registered for good and services tax (GST).

Relevant facts and circumstances

You provide financial planning services on a fee for service basis and you are registered for GST.

The fees charged for your services are usually paid from the client's fund.

When a client takes out an insurance product, you receive upfront and ongoing trail commissions from the insurer via your aggregator X.

You are an authorised representative of X and you have entered into an Authorised Representative Agreement with X where you act as an independent contractor of X.

As a representative of X you do not receive any payments for your services directly from the clients. All remunerations are paid to X who then pays you 100% of all fees and commissions received.

You pay X a fixed licensee fee.

X provides weekly recipient created tax invoices and reconciliation reports showing the breakdown of each payment component.

All payments (fees and commissions) received by you from X are inclusive of GST.

If a client's insurance policy is cancelled or amended during the first 12 months then X reduces your weekly payment accordingly.

As an incentive for the client to continue with their insurance policy you agree to on-pay the full amount of commission inclusive of GST, that you received from the insurer, to client. The full amount of commission inclusive of GST, that you on-pay the client is calculated and pay at the end of each year.

If the client cancels their insurance product at any time during the year, you retain any commission received and report the GST liability for that commission.

You entered into an agreement with the client for the on-payment of the full commission.

The clients that purchased the insurance products are not registered or required to be 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 paragraph 9-10(2)(g)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-25(5)(a)

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is entitled to input tax credits for their creditable acquisitions.

Under section 11-5 of the GST Act an entity makes a creditable acquisition if:

a) it acquires anything solely or partly for a creditable purpose; and

b) the supply of the thing to you is a taxable supply; and

c) it provides, or are liable to provide, consideration for the supply; and

d) it is registered, or required to be registered.

Subsection 11-15(1) states that an entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise.

In your case you carry on an enterprise of providing financial planning and advice and you are registered for GST.

As an incentive for your client to continue with their insurance policy, you enter into a written agreement with them to on-pay them the full commission that you receive from the insurer.

This agreement of on-paying the full commission is based on a separate supply from your supply of financial services. This is because paragraph 9-10(2)(g) of the GST Act states that a supply includes an entry into an obligation to do anything. The agreement between you and the client for the on-payment of the commission is an entry into an obligation by the client to continue with the insurance policy and thus satisfies paragraph 9-10(2)(g) of the GST Act.

The on-payment of the full commission by you is consideration that you provide for this supply and you acquire this supply in carrying on your enterprise, which is registered for GST. This means the supply would be a creditable acquisition for you if the supply is a taxable supply.

Section 9-5 of the GST Act provides that a supply is a taxable supply if:

(a) the supply is for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(c) the supply is connected with the indirect tax zone; and

(d) the entity is registered, or required to be registered.

As discussed above, there is consideration for the supply which is the on-payment of the full commission.

As the supply is done in Australia the supply is connected with the indirect tax zone. This is because paragraph 9-25(5)(a) provides that a supply of anything other than goods or real property is connected with the indirect tax zone if the thing is done in the indirect tax zone and section 195-1 of the GST Act defines 'indirect tax zone' to mean Australia.

However, you have advised that the majority of your clients that entered into this kind of agreement with you for the on-payment of the full commission are not registered or required to be registered for GST. Therefore, the agreement between you and the unregistered client for the on-payment of the full commission does not contain a taxable supply from them as all the criteria under section 9-5 of the GST Act are not satisfied.

This means the on-payment of the full commission by you to the client is not consideration for a taxable supply and as a result you have not made a creditable acquisition to be entitled to claim input credit under section 11-5 of the GST Act.