ATO ID 2003/49: GST and supply of discounted credit
Date of decision: 13 November 2001
Business line: Indirect Tax

Issue
Is the entity, a finance company, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when in accordance with a general understanding with a seller of goods, it allows a reduction off the normal rate of interest on credit it provides to a purchaser of goods from that seller?

Decision
Yes, the entity is making a taxable supply under section 9-5 of the GST Act, when in accordance with a general understanding with a seller of goods, it allows a reduction off the normal rate of interest on credit it provides to a purchaser of goods from that seller.

Facts
The entity is a finance company. The entity has a general understanding with a seller of goods under which it will allow a reduction off the normal rate of interest on credit it provides to prospective purchasers of goods from that seller. In return for allowing a reduction off the normal rate of interest on credit provided to the purchaser, the seller of the goods pays to the entity an amount (known as a subsidy) equal to the difference between the agreed reduced interest rate and the market interest rate. When making a sale, the seller of goods advises the purchaser of the availability of credit from the entity at a reduced interest rate. The entity then provides the purchaser with credit at a reduced interest rate. This is a financial supply that is input taxed under subsection 40-5(1) of the GST Act. The general understanding between the entity and the seller of goods is informal and does not create any binding obligations between the parties. There is no written agreement between the entity and the seller or the purchaser of the goods regarding the subsidy payment. The entity is registered for goods and services tax (GST). The transaction between the entity and the seller of the goods is made in the course or furtherance of the entity's enterprise, and is connected with Australia.

Reasons for decision
Summary: Under section 9-5 of the GST Act, an entity makes a taxable supply if: However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. In this case, the entity is registered for GST, and the transaction between the entity and the seller of the goods is made for consideration, in the course or furtherance of the entity's enterprise and is connected with Australia. However, it remains necessary to determine whether the transaction amounts to a 'supply' as defined in the GST Act. Although the general understanding between the entity and the seller of goods is informal and does not create any binding obligations between the parties to provide discounted credit, it is not necessary that there is an entry into an obligation under the general understanding for there to be a supply. Under section 9-10 a supply is any form of supply whatsoever, including a supply of services. The entity is making a supply of a service to the seller of goods by allowing a reduction off the normal rate of interest on credit it provides to a purchaser of goods from that seller. The supply is not the actual provision of credit and is therefore not a financial supply that is an input taxed supply under subsection 40-5(1) of the GST Act. In addition, the supply is not input taxed under any of the other provisions in Division 40 of the GST Act nor is it GST-free under Division 38 of the GST Act. Accordingly, all of the requirements in section 9-5 of the GST Act are satisfied. Therefore, the entity is making a taxable supply under section 9-5 of the GST Act when it enters into an agreement with the seller of goods, to provide credit at a reduced interest rate to a prospective purchaser.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 subparagraph 9-10(2)(b) Division 38 Division 40 subsection 40-5(1)
Subject references: Goods & services tax GST supplies & acquisitions GST supply Taxable supply Input taxed supplies GST financial supplies