ATO ID 2004/76: GST and agreement for the supply and repurchase of a commodity
Date of decision: 12 August 2002
Business line: Indirect Tax

Issue
Is entity A, a commodity handling and marketing company, making an input taxed financial supply under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it:

Decision
No, entity A is not making an input taxed financial supply under subsection 40-5(1) of the GST Act when it supplies a commodity to entity B and agrees to repurchase that commodity from entity B for an agreed price at a future date. Entity A is making a taxable supply under section 9-5 of the GST Act.

Facts
Entity A is a commodity handling and marketing company. Entity B is a financial institution. The entities enter into an agreement whereby entity A supplies a commodity to entity B. Included in the agreement is an undertaking from entity A to repurchase the commodity for an agreed price at a future date. Where entity A repurchases the commodity, the agreed price is equivalent to the original purchase price paid by entity B plus interest and holding costs borne by entity B. Ownership and title in the commodity passes from entity A to entity B upon payment by entity B. When the repurchase occurs, ownership and title passes from entity B to entity A upon payment by entity A. When entity B acquires ownership and title, entity B appoints entity A as its agent for the storage and insurance of the commodity. Possession of the commodity remains with entity A throughout the period of the arrangement. The arrangement between entity A and entity B does not create a mortgage or charge over the commodity. Entity A and entity B are registered for goods and services tax (GST). The transactions relate to carrying on their enterprises and the transactions take place in Australia.

Reasons for decision
Summary: Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that 'financial supply' is defined in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if: Therefore, it is necessary to determine whether entity A is providing, acquiring or disposing of an interest in or under an item mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations when it supplies the commodity to entity B under the agreement. Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit. The entities enter into an agreement whereby entity A supplies a commodity to entity B. Included in the agreement is an undertaking from entity A to repurchase the commodity for an agreed price at a future date. Where entity A repurchases the commodity, the agreed price is equivalent to the original purchase price paid by entity B plus interest and holding costs borne by entity B. The agreement merely provides for the sale and repurchase of goods and there is no creation of a debt, credit arrangement or right to credit, including a letter of credit. In addition, a mortgage or charge has not been created over the commodity. As such, the supply and repurchase of the commodity is not an interest in or under a debt, credit arrangement or right to credit, including a letter of credit. Therefore, the arrangement is not covered by Item 2. Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 11) lists an interest in or under a derivative. The term 'derivative' is defined in the dictionary of the GST Regulations to mean 'an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate'. Item 3 of part 9 of Schedule 7 of the GST Regulations lists a 'reciprocal repurchase agreement' as an example of a derivative. A repurchase agreement, otherwise known as a 'Reciprocal repurchase agreement' is defined in Schedule 1 of GSTR 2002/2 as 'an agreement whereby securities are sold by one party to another party on the provision that the first party may repurchase them as at a specified price and time'. The agreement in the present situation is not a reciprocal repurchase agreement, because it does not deal with the sale and repurchase of securities, but a commodity. Ownership and title in the commodity passes from entity A to entity B upon payment by entity B. When the repurchase occurs, ownership and title passes from entity B to entity A upon payment by entity A. Although, the initial supply of the commodity by entity A to entity B and the future repurchase of that commodity by entity A from entity B could be viewed as a single arrangement which may have the characteristics of a derivative, the agreement involves two separate transactions. The initial transaction is a single supply of goods where ownership and title in the commodity passes from entity A to entity B even though possession of the commodity remains with entity A throughout the period of the arrangement. The second transaction is a repurchase of the commodity and is also a separate supply of goods where ownership and title passes from entity B to entity A. Accordingly, the agreement is not a derivative and is not covered by Item 11. As the supply and repurchase of the commodity is not a financial supply under subregulation 40-5.09(1) of the GST Regulations, entity A is not making an input taxed supply under subsection 40-5(1) of the GST Act. Entity A is registered for GST and the supply satisfies the other positive limbs of section 9-5 of the GST Act. Furthermore, the supply is neither GST-free under Division 38 of the GST Act nor input taxed under any other provisions in Division 40 of the GST Act. As such, entity A is making a taxable supply under section 9-5 of the GST Act when it supplies a commodity to entity B and agrees to repurchase that commodity from entity B for an agreed price at a future date.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 Division 38 subsection 40-5(1) subsection 40-5(2) Division 40
Subject references: Goods and services tax GST financial supplies GST debt, loan and credit GST derivates Taxable supply