Private ruling: Commission payments
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the company be required to withhold from commission payments made to an overseas tour leader under section 12-190 of Schedule 1 to the Tax Administration Act 1953 ? | A1: The company will be required to withhold from commission payments made to an overseas tour leader under section 12-190 if the payment for a supply exceeds $75 and is not exempt from taxation in Australia.

Relevant facts and circumstances: 1. The company operates a retail store in Australia. 2. The company provides incentives to overseas tour leaders to accompany their tour group to the company's store. 3. A cash commission is paid to the tour leader calculated as a set percentage of the total purchases of their tour group. 4. The tour leaders are employees of various foreign tour companies. 5. The tour leaders do not engage in actual commercial sales of products on behalf of the company. The individual tourists determine their own purchases. The tour leaders are not expected to have relevant product knowledge nor do they advertise the company's products or sell those products on behalf of the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | Tax Administration Act 1953 Section 12-190 of Schedule 1 | Tax Administration Act 1953 Subsection 12-190(1) of Schedule 1 | Tax Administration Act 1953 Paragraph 12-190(1)(a) of Schedule 1 | Tax Administration Act 1953 Paragraph 12-190(1)(b) of Schedule 1 | Tax Administration Act 1953 Subsection 12-190(4) of Schedule 1 | Tax Administration Act 1953 Paragraph 12-190(4)(a) of Schedule 1 | Tax Administration Act 1953 Paragraph 12-190(4)(b) of Schedule 1 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-10 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1) | A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2) | A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(3) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(a) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(1)(c) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(a) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(b) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(c) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(d) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(3)(a) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(3)(b) | A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-80(1) | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 29.80.01

Reasons for decision: Summary: The company will be required to withhold from commission payments made to an overseas tour leader under section 12-190 of Schedule 1 to the Tax Administration Act 1953 if the payment for a supply exceeds $75 and is not exempt from taxation in Australia. The commission payments to the tour leaders are not made for the purpose of meeting their out of pocket expenses but are commercial payments to induce them to bring their tour party into the company's store. Because the commission payments give rise to a profit or gain to the tour leaders, and the tour leaders have an intention and reasonable expectation of making a profit, the arrangement between the company and the tour leaders constitutes the carrying on of an enterprise by the tour leaders. Further, it cannot reasonably be said that the activity by the tour leader is of a private or domestic nature, or is a private recreational pursuit or a hobby. | Detailed Reasoning - No ABN Withholding: Section 12-190 of Schedule 1 to the Tax Administration Act 1953 ("TAA 1953") requires an entity to withhold tax from a payment it makes to another entity for a supply if the payment is made in the course or furtherance of an enterprise which the other entity carries on in Australia. The relevant subsections of section 12-190 of the TAA 1953 are reproduced below. " SECTION 12-190 RECIPIENT DOES NOT QUOTE ABN 12-190(1) An entity (the payer) must withhold an amount from a payment it makes to another entity if: (a) the payment is for a *supply that the other entity has made, or proposes to make, to the payer in the course or furtherance of an *enterprise *carried on in Australia by the other entity; and (b) none of the exceptions in this section applies……. No need to quote ABN 12-190(4) The payer need not withhold an amount under this section if: (a) The payment is made otherwise than in the course or furtherance of an enterprise carried on in Australia by the payer; or (b) The payment (disregarding so much of it as relates to GST payable on the supply) or, if the payer has also made, or propose to make, one or more other payments to the other entity for the supply, the total of all the payments (disregarding so much of them as relates to GST payable on the supply) does not exceed $50 or such higher amount as is specified in regulations in force for the purpose of subsection 29-80(1) of the GST Act;...... " The amount specified for subsection 29-80(1) of the A New Tax System (Goods and Services Tax) Act 1999 ("GST" Act") is currently $75; Regulation 29.80.01 of the A New Tax System (Goods and Services Tax) Regulations 1999. Section 12-190 of the TAA 1953 therefore requires the company to withhold an amount from a payment it makes to a tour leader if the payment is for a supply that the tour leader has made, or proposes to make, to the company in the course or furtherance of an enterprise carried on in Australia by the tour leader, unless an exception applies. | Detailed Reasoning - Exceptions: The company need not withhold an amount under section 12-190 of the TAA 1953 from a payment it makes to a tour leader if: (a) The payment is made otherwise than in the course or furtherance of an enterprise carried on in Australia by the company - paragraph 12-190(4)(a) (b) The payment for the supply does not exceed $75 - paragraph 12-190(4)(b); or (c) The payment is exempt income in the hands of the tour leader - section 12-1. The exception in paragraph 12-190(4)(a) will not apply as the company makes the commission payments in the course or furtherance of and enterprise it carries on in Australia. The exception in paragraph 12-190(4)(b) will apply to a commission payment made by the company to a tour leader for a supply if the payment does not exceed $75. The exception in section 12-1 may apply to a commission payment made by the company to a tour leader for a supply if the tour leader is a resident of a country that has entered into a Double Tax Agreement with Australia for the avoidance of double taxation, and where that Agreement provides that the payments shall be taxable only in that other country and not Australia. | Detailed Reasoning - Making a supply: "Supply" is defined in section 9-10 of the GST Act to include a supply of services. | Detailed Reasoning - Carrying on an enterprise: "Enterprise" is defined in section 9-20 of the GST Act as follows: "9-20(1) Enterprises An enterprise is an activity, or series of activities, done: (a) in the form of a business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; .... 9-20(2) However, enterprise does not include an activity, or series of activities, done: (a) by a person as an employee or in connection with earning withholding payments covered by subsection (4) (unless the activity or series is done in supplying services as the holder of an office that the person has accepted in the course of or in connection with an activity or series of activities of a kind mentioned in subsection (1)); or Note: Acts done as mentioned in paragraph (a) will still form part of the activities of the enterprise to which the person provides work or services. (b) as a private recreational pursuit or hobby; or (c) by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or (d) as a member of a local governing body established by or under a State law or Territory law (except a local governing body to which paragraph 12-45(1)(e) in Schedule 1 to the Taxation Administration Act 1953 applies). 9-20(3) For the avoidance of doubt, the fact that activities of an entity are limited to making supplies to members of the entity does not prevent those activities: (a) being in the form of a business within the meaning of paragraph (1)(a); or (b) being in the form of an adventure or concern in the nature of trade within the meaning of paragraph (1)(b). 9-20(4) This subsection covers a withholding payment covered by any of the provisions in Schedule 1 to the Taxation Administration Act 1953 listed in the table." | Detailed Reasoning - An activity, or series of activities, done in the form of a business: ATO rulings The word "business" is defined in section 995-1 of the Income Tax Assessment Act 1997 as "Any profession, trade, employment, vocation or calling but does not include occupation as an employee". Further guidance as to its meaning is provided by the common law and the question of whether a taxpayer is carrying on a business is a question of fact looking at the overall affairs of the taxpayer concerned; Crow v FCT 88 ATC 4620 at 4626 per Lockhart J. The relevant factors in determining whether an activity constitutes the carrying on of a business are identified in Taxation Ruling TR 97/11. These factors are further explained in Taxation Ruling TR 2003/4. Paragraphs 68 and 70 of TR 2003/4 provide that in order to demonstrate that an activity amounts to the carrying on of a business, a taxpayer needs to show that the activity is carried on with the intention and a reasonable expectation of making a profit. As explained at paragraph 16 of TR 2003/4 this factor is the essential test and all other tests serve as evidence of that intention. Paragraph 16 states the following: "This indicator [intention and a reasonable expectation of making a profit] generally covers aspects of all the other indicators……" Paragraphs 182 to 190 of Miscellaneous Taxation Ruling MT 2006/1 provide four examples in assisting in determining if small scale activities amount to an enterprise. These examples are reproduced below: "Example 18 - regular activities done on a small scale that amount to an enterprise 182. Omar is a self-funded retiree. To keep active he has agreed to clean windows on a regular basis at some local shops. He has purchased his own window cleaning equipment. Over the course of a year he expects to earn approximately $3,500 and incur $800 in expenses. The shopkeepers have requested an ABN from Omar as he is not an employee. 183. Omar is entitled to an ABN. Although his activities are on a small scale, he has an expectation of making a profit and the activities are regular and repetitive. Further, the window cleaning activities are not a private recreational pursuit or hobby. Example 19 - one-off activities done on a small scale that amount to an enterprise 184. Jenna is a maths lecturer at university. She is engaged under contract to edit a maths text book for a publisher. The contract is to deliver a result for a set price of $3,000. Jenna is not an employee of the publisher, nor is she under their direction or control. 63 Only minimal expenses are incurred. 185. Jenna is entitled to an ABN. Jenna has exercised her professional skill to undertake the task and she has an expectation of making a profit or gain. The editing work is not done as a private recreational pursuit or hobby……… Example 20 - ad hoc small scale activities that do not amount to an enterprise 187. Helena lives on a disability pension. As she is fluent in Polish she occasionally translates at a local area health service, for which she receives a small payment. She only performs this service occasionally, as required. Her payments total no more than $300 in any one year. 188. Helena is not entitled to an ABN. The scale and nature of her activities are not sufficient to be an enterprise. They are carried on in a very small way and in an ad hoc manner. Example 21 - regular small scale activities that do not amount to an enterprise 189. Geoffrey is a retired electrician who receives the Age Pension. He lives close to the local community hall. Geoffrey enjoys gardening and in summer he volunteers to help out the hall committee by mowing the grounds of the hall and doing light gardening. The hall committee gives Geoffrey approximately $650 per year to help cover his out of pocket expenses. 190. Geoffrey is not entitled to an ABN. Even though there is some regularity to his activities they are carried on in a very small way. The nature and scale of his activities do not amount to an enterprise. Further, he does not have a reasonable expectation of profit or gain. See paragraphs 378 to 405 of this Ruling for further information on this requirement." All four examples highlight the importance of having a reasonable expectation of profit or gain. In the case of Geoffrey, the payments received for his services are to cover his out of pocket expenses. In the case of Helena, she only receives $300 over the whole year. They have no reasonable expectation of making a profit or gain. Case law (i) Enterprise In Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402 the Federal Court considered whether the Administrative Appeals Tribunal ("the Tribunal") had correctly determined that Swansea Services Pty Ltd ("the taxpayer") was carrying on an enterprise for the purposes of GST. Before the Tribunal, the taxpayer argued that during the relevant periods it had carried on an enterprise of investing in antiques and artworks. However, the Commissioner contended that the activities carried out by the taxpayer were hobbies of the taxpayer's officeholder and, therefore, that the acquisitions were made as a consumer and not in the course of carrying on an enterprise. The Commissioner relied heavily on the argument that the transaction of the taxpayer was isolated and there was no repetition or regularity of sales. The Tribunal found, however, that there was no doubt that, in the GST context, the activities of the taxpayer constituted the activities of a business, and that the sale of a single asset could be an enterprise for GST purposes. The Federal Court was of the opinion that the Tribunal, based on the totality of the evidence before it, could hold that the taxpayer was carrying on an enterprise. As a matter of interpretation the Federal Court was of the opinion that the words " in the form of " in the definition of "enterprise" in section 9-20 of the GST Act extended the impact of "enterprise" to activities which are in the form of a business but would not, in the ordinary meaning of "business", be considered as such. McKerracher J stated, at 99: " But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for an entity simply be a private recreational pursuit of hobby. " (ii) Profit motive In Federal Commissioner of Taxation v Murry [1998] HCA 42 the High Court (Gaudron, McHugh, Gummow and Hayne JJ) said at 54: "A business is … a course of conduct carried on for the purpose of profit…" In Federal Commissioner of Taxation v Stone 2005 ATC 4234 the High Court (Gleeson CJ, Gummow, Hayne and Heydon JJ) said at 4243: "If a taxpayer has a view to profit, the conclusion that the taxpayer is engaged in business may easily be reached." In Stone v Federal Commissioner of Taxation 2002 ATC 5085 Hill J said at 5096: "Two different taxpayers may carry on the same activity (for example, carpentry) and both may sell the product of their activity on just the one occasion, yet the one may be carrying on a business and the other merely selling the product of a hobby. What must differentiate the two cases is the purpose for which the activity is carried on. Generally …… the profit motive is important in leading to the conclusion that the activity undertaken is a business." In Ell v Federal Commissioner of Taxation 2006 ATC 4098 Emmett J said at 4123-4124 : " If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. ……. A business may be carried on even though it is not profitable or economical (see Tweedle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see FCT v Stone (2005) ATC 4234 at 4243)" (iii) S ingle transaction In Toyama Pty Ltd v Landmark Building Developments Pty Ltd 2006 ATC 4160 White J noted at 4171: "Section 9-20(1)(a) does not require for there to be an enterprise that there be repeated or continuous activities. One activity done in the form of a business can be an enterprise…." In London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 15 ALR 203 Jacobs J said at 219: "It must be made quite clear that frequency of an activity is not synonymous with business. There may be no business despite frequency and on the other hand there may be a business where the activity is an isolated one." In Inglis v Federal Commissioner of Taxation 80 ATC 4001 Brennan J said at 4004: "…the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. Little activity may suffice for carrying on a business which does not call for much activity…….. business is not confined to being busy; in many businesses long intervals of inactivity occur…" In Fairway Estates Pty Ltd v Federal Commissioner of Taxation 70 ATC 4061 Barwick CJ said at 4069: "…there can be a course of business although as yet there is nothing more than an intention to carry on the business and a single transaction carried out in pursuance of that intention." | Detailed Reasoning - An activity, or series of activities, done in the form of an adventure or concern in the nature of trade: There is no definition of "in the form of an adventure or concern in the nature of trade" in the ABN Act. As explained at paragraph 234 of MT 2006/1 the term "business" would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. | Detailed Reasoning - Application of law to facts: The supply made by a tour leader is by way of their services in accompanying their tour group to the company's store to allow the company greater access to those tour group customers, ie the supply of services refers to the tour leader's accompaniment of their tour group to spend additional time in the company's store. The question is whether the tour leaders are carrying on an enterprise being an activity or series of activities, done in the form of a business, or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (under subsection 9-20(1) of the GST Act). The tour leaders do not meet any of the enterprise exceptions under section 9-20(2), (3) and (4) of the GST Act as the tour leaders do not conduct the tour activities by way of private recreational pursuit or hobby, nor are they employees to which other withholding payments provisions are covered, nor are they without reasonable expectations of profit or gain. The commission payments to the tour leaders are not made for the purpose of meeting their out of pocket expenses but are commercial payments to induce them to bring their tour party into the company's store. Because the commission payments give rise to a profit or gain to the tour leaders, and the tour leaders have an intention and reasonable expectation of making a profit, the arrangement between the company and the tour leaders constitutes the carrying on of an enterprise by the tour leaders. As a result of the above, the company is required to withhold from a commission payment to an overseas tour leader where the total payment for a supply exceeds $75 and the payment is not exempt from taxation in Australia. This will be the case irrespective of the number of supplies made by a tour leader during the year.

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