Edited version of private advice

Authorisation Number: 1051767717509

Date of advice: 23 October 2020

Ruling

Subject: GST and supplies under a tripartite arrangement

Question 1

Is the acquisition of the goods from Entity B a creditable acquisition of the taxpayer under section 11-5?

Answer

Yes. The acquisition of the goods from Entity B is a creditable acquisition of the taxpayer under section 11-5 if the supply from Entity B is a taxable supply.

Question 2

Is the taxpayer's supply to Entity A of marketing services a taxable supply under section 9-5?

Answer

Yes. The taxpayer's supply to Entity A of marketing services is a taxable supply under section 9-5.

Question 3

Is the acquisition from Entity A of the right to receive the supply of, and market, goods a creditable acquisition of the taxpayer under section 11-5?

Answer

Yes. The acquisition of the right from Entity A to receive the supply of, and market, goods is a creditable acquisition of the taxpayer under section 11-5 if the supply from Entity A is a taxable supply.

Question 4

Can the taxpayer issue a recipient created tax invoice (RCTI) to Entity A in respect of its acquisition of the right to receive the supply of goods?

Answer

Yes. The taxpayer can issue an RCTI to Entity A in respect of its acquisition of the right if the supply of that right is a taxable supply.

Relevant facts and circumstances

The taxpayer carries on an enterprise, is registered for GST and has a GST turnover exceeding $XXX.

Under an agreement with another entity (Entity A), the taxpayer acquires a right to receive a supply of goods from a third entity (Entity B) and the taxpayer has agreed to market those goods. From the proceeds of the sale of those goods, the taxpayer pays an amount to Entity A.

Entity A has an agreement with Entity B under which Entity A supplies goods to Entity B and commits to supply a certain quantity of those goods to enable Entity B to make the supply to the taxpayer.

Pursuant to its agreement with Entity A, the taxpayer entered into an agreement with Entity B to acquire goods from Entity B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

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

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

A New Tax System (Goods and Services Tax) Act 1999subsection 29-70(3)

Reasons for decision

Questions 1 to 3

Summary

The acquisition by the taxpayer of the goods from Entity B and the acquisition of the right from entity A are creditable acquisitions if the supply of goods by Entity B or the supply of the right by Entity A is a taxable supply.

The taxpayer's supply marketing services to Entity A is a taxable supply.

Detailed reasoning

Taxable supply

Section 9-5 provides that you make a taxable supply if:

(a)    you make the supply for consideration

(b)    the supply is made in the course or furtherance of an enterprise that you carry on

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

(d)    you are registered, or required to be registered, for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Supply for consideration

The definition of a taxable supply in section 9-5 requires, among other things, that you make a supply for consideration. A 'supply for consideration' is a cornerstone of the GST regime. GST is not payable on a supply unless it is made for consideration.

The term 'supply' is defined broadly in subsection 9-10(1) as being any form of supply whatsoever. Subsection 9-10(2) provides a non-exhaustive list of things that are included as supplies. These include:

·         a supply of goods

·         a supply of services

·         a creation, grant, transfer, assignment or surrender of any right

·         a financial supply

·         an entry into, or release from, an obligation to do anything, refrain from an act or to tolerate an act or situation.

The meaning of 'supply' is examined in Goods and Services Tax Ruling GSTR 2006/9: supplies. Paragraph 22 of GSTR 2006/9 outlines a number of propositions useful for characterising supplies and analysing complex transactions. GSTR 2006/9 looks at how to identify and characterise supplies in the context of the transactions in which they are made.

The GST consequences turn on identifying:

·         one or more supplies

·         consideration

·         a nexus between the supply and the consideration, and

·         to whom the supply is made.

Proposition 16, explained at paragraphs 222 to 246 of GSTR 2006/9, provides that the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made.

However, paragraph 226 of GSTR 2006/9 states that in some instances the agreements will not represent the total fact situation. These circumstances include where the agreements:

·         are prepared within, or in accordance with, a particular statutory framework (the statutory framework will assist in determining the factual background)

·         are outcome focussed rather than looking to the supplies that are being made between the parties (an objective analysis of what is occurring to achieve those outcomes is necessary)

·         form part of a series of interrelated documents (a transaction should not be considered in isolation).

Paragraph 225 of GSTR 2006/9 explains that the GST consequences of a transaction are determined by the legal arrangements actually entered into, and the rights and duties they create, and not by any economic consequences.

The term 'consideration' is defined in section 195-1 to mean 'any consideration within the meaning given by sections 9-15 and 9-17, in connection with the supply'.

Sections 9-15 and 9-17 extends the meaning of consideration beyond payments to include such things as acts and forbearances.

Under subsection 9-15(2), consideration can include payments made voluntarily, and payments made by persons other than the recipient of a supply. Section 9-15 provides that a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply.

Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.

It follows that there are two elements to the definition of consideration. The first is the payment, act or forbearance by one entity to another. The second element is the nexus that must be established between the payment, act or forbearance and a supply. It is not sufficient for there to be a supply and a payment, act or forbearance. There must be a sufficient nexus between a particular payment, act or forbearance and a particular supply for the payment to be consideration for that supply.[1]

Determining whether there is a sufficient nexus is an objective test and regard needs to be given to the true nature of the transaction.[2]

Creditable acquisition

Section 11-5 provides that you make a creditable acquisition if:

(a)    you acquire anything solely or partly for a creditable purpose

(b)    the supply of the thing to you is a taxable supply

(c)    you provide, or are liable to provide, consideration for the supply, and

(d)    you are registered, or required to be registered, for GST.

Subsection 11-15(1) states that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

Subsection 11-15(2) states that you do not acquire the thing for a creditable purpose to the extent that:

(a)    the acquisition relates to making supplies that would be input taxed, or

(b)    the acquisition is of a private or domestic nature.

The phrase 'to the extent that' in section 11-15 means that an apportionment is necessary if an acquisition is made in carrying on your enterprise and the acquisition relates partly to making supplies that would be input taxed.[3]

Determining whether an acquisition relates to making supplies that would be input taxed requires an objective assessment of the surrounding facts and circumstances. If an objective assessment of the facts and circumstances shows that an acquisition has a direct relationship with the making of both input taxed supplies and other taxable or GST-free supplies made in the course of carrying on an enterprise, the acquisition is a partly creditable acquisition.[4]

The words 'relates to' in paragraph 11-15(2)(a) are wide words signifying some connection between two subject matters. There must be a connection between an acquisition and the making of input taxed supplies. The connection or association signified by the words may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. For the purposes of paragraph 11-15(2)(a), a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.[5]

However, an acquisition that relates solely to the making of supplies that would be input taxed is not to be apportioned merely because that supply may serve some broader commercial objective of the supplier. The words in section 11-15 require that there be a factual identification of the acquisitions in question and a factual inquiry into the extent to which those acquisitions relate to the making of supplies that would be input taxed. The relevant inquiry called for by paragraph 11-15(2)(a) is not into the relationship between the acquisition and the enterprise more broadly.[6]

Application of the law to the facts

In this case, there are various documents that set out the terms and conditions of the transactions.

Acquisition of the goods by the taxpayer from Entity B

Pursuant to their agreement, the taxpayer agrees to buy, and Entity B agrees to sell, the goods in accordance with the terms and conditions of the agreement.

The taxpayer carries on an enterprise that includes marketing the goods it acquires from Entity B. Therefore, the taxpayer's acquisition is in carrying on its enterprise. The taxpayer provides consideration for the goods and it is registered for GST. Provided the supply of the goods from Entity B is a taxable supply, the taxpayer's acquisition of the goods is a creditable acquisition.

Supply of marketing services by the taxpayer to Entity A

Under the terms of their agreement, the taxpayer has an obligation to perform pricing and marketing activities in respect of the goods it would acquire from Entity B. In accordance with the definition of supply in section 9-10, the taxpayer's entry into the obligation is a supply.

Under the agreement between Entity A and Entity B, Entity A must make an irrevocable direction to Entity B to pay the taxpayer the payments for the goods it supplies to Entity B. On an objective view, the redirected payment is in connection with the taxpayer's entry into the obligation to supply marketing services to Entity A. That is, there is a sufficient nexus between the redirected payments and the supply of services by the taxpayer. Consequently, there is a supply for consideration. Since the other requirements of section 9-5 are satisfied and the supply is not GST-free or input taxed, the supply by the taxpayer to Entity A is a taxable supply.

Acquisition of Entity A's supply to the taxpayer of a right to receive a supply of, and market, goods

In line with Proposition 16 of GSTR 2006/9, the individual agreements form part of a series of interrelated documents and should not be considered isolation.

The total fact situation must be examined to determine the nature of the transactions under the arrangement. The GST consequences of the arrangement will be determined by the legal arrangements actually entered into, and the rights and duties they create, and not by any economic consequences.[7]

Under their agreement, Entity A committed to supply a certain quantity of goods to Entity B ensuring that it supplies sufficient goods to Entity B so that the latter can supply the relevant quantity of goods to the taxpayer. Without Entity A performing these acts, the taxpayer will not be supplied the goods from Entity B.

Having regard to the broad definition of supply in the GST Act and the total fact situation, it is considered that Entity A is making a supply to the taxpayer of the right to receive and market goods from Entity B.

Under their agreement, the taxpayer will perform marketing activities for Entity A once the latter makes a direction to Entity B to pay the payments to the taxpayer.

The term 'consideration' is defined in section 195-1 to mean any consideration within the meaning given by sections 9-15 and 9-17. Subsection 9-15(1) provides that, a payment will be consideration for a supply, if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. That is, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. Whether a sufficient nexus exists is an objective test, determined by having regard to the true nature of the transaction.[8]

In Berry v. FC of T (1953) 89 CLR 653, Kitto J held that 'in connection with' was a broader test than 'for'. At 659, his Honour stated:

Consideration will be in connection with property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

That is, where there is a substantial relation between the consideration and a supply, there will be a 'supply for consideration'.

In this case, the payments made by the taxpayer to Entity A have a substantial relation to Entity A's supply of the right to the taxpayer to market the goods. Without the supply of this right from Entity A to the taxpayer, Entity B would not be required to enter into an agreement with the taxpayer to sell goods to the taxpayer.

Therefore, there is a substantial relation between the consideration, being the payment made by the taxpayer to Entity A and the supply of the right by Entity A to the taxpayer.

For this reason, there is a sufficient nexus between the payment to Entity A and the supply for the payment to be consideration for a supply. Accordingly, where Entity A is registered or required to be registered for GST, the supply of the right from Entity A to the taxpayer would be a taxable supply.

The taxpayer carries on an enterprise that includes marketing of goods. Its acquisition of the right to market the goods is in carrying on its enterprise.

The taxpayer provides consideration for that acquisition and it is registered for GST. Provided the supply from Entity A is a taxable supply, the taxpayer's acquisition is a creditable acquisition.

Question 4

Summary

The taxpayer can issue an RCTI to Entity A in respect of its acquisition of the right to market the goods if the supply of the right is a taxable supply by Entity A.

Detailed reasoning

Subsection 29-70(3) defines a recipient created tax invoice (RCTI) as a tax invoice belonging to a class of tax invoices that the Commissioner has determined in writing may be issued by the recipient of a taxable supply.

Pursuant to subsection 29-70(3), the Commissioner made the determination known as Goods and Services Tax: Recipient Created Tax Invoice Determination 2017 for Agricultural Products, Government Related Entities and Large Business Entities (the RCTI Determination), which was registered in the Federal Register of Legislative Instruments on 30 March 2017 bearing the registration number F2017L00348.

The RCTI Determination applies to a recipient that is a large business entity, which it defines as an entity that has a GST turnover of $20 million and over.

A large business entity that is a recipient of a taxable supply may issue an RCTI for the taxable supply if it satisfies the requirements set out in paragraph 8 of the RCTI Determination, which are as follows:

(a)    be registered for GST

(b)    set out the ABN of the supplier on the RCTI

(c)    issue the original or a copy of the RCTI to the supplier within 28 days of making, or determining, the value of a taxable supply and retain the original or the copy

(d)    issue the original or a copy of an adjustment note to the supplier within 28 days of any adjustment and must retain the original or the copy

(e)    reasonably comply with its obligations under the taxation laws, and

(f)     have either a written agreement with the supplier that meets the requirements of paragraph 9 of the RCTI Determination, or a written agreement embedded in the RCTI that meets the requirements of paragraph 10 of the RCTI Determination.

If Entity A's supply to the taxpayer of a right for the taxpayer to market the goods is a taxable supply and provided the taxpayer satisfies the requirements of paragraph 8 of the RCTI Determination, the taxpayer can issue an RCTI to Entity A in respect of its acquisition of the right to market the goods.

[1] Goods and Services Tax Ruling GSTR 2001/6: non-monetary consideration, at paragraphs 12, 50, 51 and 56

[2] Ibid, at paragraphs 71 and 72

[3] Goods and Services Tax Ruling GSTR 2006/4: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose, at paragraph 53

[4] Decision Impact Statement: Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCAFC 117

[5] Goods and Services Tax Ruling GSTR 2008/1: when do you acquire anything or import goods solely or partly for a creditable purpose?, at paragraphs 118 and 119

[6] Rio Tinto Services Ltd v Federal Commissioner of Taxation [2015] FCAFC 117 at [7]

[7] Goods and Services Tax Ruling GSTR 2006/9: supplies, at paragraph 225

[8] Goods and Services Tax Ruling GSTR 2001/6: non-monetary consideration, at paragraphs 71 and 72