Edited version of private advice

Authorisation Number: 1051989032878

Date of advice: 1 September 2022

Ruling

Subject: GST and apportioning the consideration for a supply

Question

Is your proposed methodology for apportioning the consideration you receive for your mixed supplies fair and reasonable for the purposes of determining the taxable portion pursuant to section 9-80 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Relevant facts and circumstances

You carry on an enterprise of supplying particular items.

Customers can purchase each item individually or a group of particular items (group).

When a customer purchases a group, a discount is given on the total price.

The customer can substitute certain items for other items in the group. However, the same discounted price is paid by the customer even if the substituted items are more expensive.

You have proposed an apportionment methodology where the discount is not apportioned over the substituted items in the group.

You want to adopt the new apportionment methodology as the group price does not change to reflect the more expensive items. You believe that under the current apportionment methodology you are providing a further discount to the more expensive items in the group.

You consider the proposed methodology will more fairly reflect the true commercial position of the pricing of a group; that is, there should be no further discount given on the more expensive items.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

Reasons for decision

Summary

Your proposed apportionment method is not reasonable and therefore cannot be used to calculate the taxable portion for the purposes of section 9-80 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

The ATO view on mixed supplies and apportionment is provided by the Goods and Services Tax Ruling GSTR 2001/8 (a public ruling for the purposes of GST). Paragraph 25 of GSTR 2001/8 provides that in the case of a mixed supply it is necessary to apportion the consideration received between the taxable and non-taxable parts to find the consideration paid for each. Further, paragraph 26 of GSTR 2001/8 provides that any reasonable basis to apportion the consideration can be used but the basis must be supportable in particular circumstances.

In your case, the supply of the group is a mixed supply when consumed away from your premises with the non-taxable parts being the more expensive substituted items.

You currently use an apportionment method that is reasonable (a method that apportions the combo meal discount over all the food products in the combo meal). However, you proposed an apportionment methodology where the discount will not be apportioned over the more expensive items when these are substituted into the group.

The application of section 9-80 was central to the matter before the Full Federal Court in Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20 (Luxottica) which dealt with the question of how discounts offered upon the sale of spectacles (comprising a taxable frame and GST-free lenses) were to be apportioned, and the manner in which the GST payable should be calculated.

In Luxottica, the apportionment methodology used was to apply the discount only to the frames. It was determined that what was being held out to a customer were discounted frames. It was recognised that frames had become a fashion accessory, and this had commercial significance in the sales approach to selling spectacles. Therefore, Luxottica and the customer agreed that what the customer would pay is the full cost of the lenses and the discounted frame price. The court considered the apportionment methodology to be reasonable as:

•                    there were sound commercial reasons for discounting the frames,

•                    there was no commercial imperative for the discounting of lenses, and

•                    there was nothing contrived or artificial about the pricing methodology adopted by Luxottica in its promotional arrangements.

The court added that the fact the discounted price was conditional on the purchase of the lenses did not undermine the reasonableness of the calculation of the taxable proportion in this way.

You advised that you are effectively discounting the substituted items when they are sold as part of a group and that the proposed methodology will ensure that you are not applying further discount to more expensive items. You consider that there are strong commercial imperatives for not further discounting the price of the more expensive items when these are substituted for other items in the group. You submitted that the apportionment of the discount reflects the true commercial position as between the consideration and the things supplied.

In our view, your circumstances can be distinguished from Luxottica on the basis that the facts are materially different and there are fundamental differences in how the deal is struck with customers. In Luxottica the discount to the frames (but not the lenses) were explicitly stated to customers. The 2 components are added to arrive at the final price for the completed spectacles, with the price of the frame being conditional on the purchase of the lens. In contrast, you offer a group at a set price irrespective of any substitutions.

We do not consider the reasoning that you provided sufficient to support your view that the proposed methodology is fair and reasonable. There is no substantiating commercial evidence (for example, any relevant accounting standards, retail costing principles, industry-specific factors) provided by you to support your position that there are strong commercial imperatives for not further discounting the price of the more expensive items when they are substituted for other items in the group.