Private ruling: Goods and services tax (GST) and payroll services
Date of advice: 25 October 2016
Published: February 2017

Ruling: Q1: Are you entitled to claim an input tax credit (ITC) for GST charged by X where X pays the salaries to your employees pursuant to the Relevant Agreement (Agreement) and charges GST on the salary amounts? | A1: No.

Relevant facts and circumstances: You are a XXX company with a significant number of employees. You are using the services of an unrelated company X to provide you with administration support and payroll management. The Agreement sets out the terms and conditions of the arrangement, which is summarised as follows: ● At all times you are the employer of the employees; ● X provides a fully automated payroll function for you; ● Your employees interact with X via an on-line portal through which they update their hours worked and leave taken etc; ● All of the information for new employees, including their banking and personal details, are required to be provided by you to X; ● X uses this information from the on-line portal for your employees to calculate your fortnightly payroll obligations; ● X provides an invoice to you that includes the total value of the payroll that is owed to your employees, plus a fee of $x per employee per pay-run as an administration charge; ● X has, and intends to continue to charge GST on the full value of your own payroll as well as the per employee administration charge; ● Upon receipt of the invoice for its own payroll you are required to deposit the required funds to a designated Payroll Account operated by X for your payroll; ● Only when the funds from you have cleared can you authorise X to disburse the funds to your employees; ● The same process occurs for your superannuation. X always uses cleared funds provided by you then disburse your payroll obligations and superannuation; ● Your Pay as you go withholding (PAYGW) is paid via your instalment activity statement (IAS), this payment is made directly to the ATO by you; ● The Agreement contains the following relevant clauses: a) Authorisation - you authorise X to utilise funds credited to the designated payroll account to disburse the employee's net pay, payroll deductions and superannuation together with fees charged by X to the employees' nominated bank account or to the relevant party (i.e. superannuation funds etc); b) Corrective Entries - you authorise X to make corrective reversal entries in circumstances that include when there is insufficient funds in the designated payroll account to ensure that X is not out of pocket any funds. In other words, X will only ever disburse the funds advanced by you; c) Remedies - The agreement contains provisions that ensures that X is not to be held liable for any failure by you to comply with Federal or State laws including employment law; d) Independent Organisations - A clause states that X and you act independently of one another, are not joint venturers and that neither is an agent of the other. You have not been claiming ITCs on the GST charged in the salary amounts as you believe these are not subject to GST. You have been informed that X has, and intends to continue to charge GST on the full value of your payroll as well as the per employee administration charge in the belief they are making a taxable supply.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision: Summary: Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the ITC for any creditable acquisition that you make. Section 11-5 of the GST Act states that: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered. *denotes a defined term in the GST Act Under subsection 11-5(b) of the GST Act, the supply of payroll service under the Agreement must be a taxable supply. A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply *is connected with the indirect tax zone; and (d) you are *registered or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. If X is making a supply to you when it pays the salaries to your employees, it may be a taxable supply for which you can claim an ITC. However if it is making this supply on your behalf, it cannot be a taxable supply to you because it is you who is making this supply and if so, you are not making a creditable acquisition and cannot claim ITCs. The Agreement contains an Independent Organisations clause stating that you and X are 'acting independently of the other, are not joint venturers and that neither is an agent of the other.' However, the Agreement makes reference in the Electronic transfers clause that: The Client [you] shall use EFT to deposit payroll funds in the Payroll Account…..Should an Employee's financial institution for any reason be unable to or unwilling to complete the transaction, X shall have the right to hold the Client's money until all payments made by X on behalf of the Client [highlighted] have cleared and will then return the unprocessed funds to the client'. GSTR 2000/37 Goods and services tax: agency relationships and the application of the law provides guidance on whether agency relationships exist for GST purposes including where there are express references to such relationships existing or not existing. Paragraphs 32 to 34 state: 32. Consequently, the relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. However, should there be any doubt about the position of the parties in a transaction; an agreement may contain descriptions that clarify the relationship. 33. Nevertheless, an agency relationship can arise even where the contract governing a relationship specifically precludes it from being an agency. In the New Zealand case of Case R34 (1994) 16 NZTC 6,190, which dealt with GST, the distributor of motor vehicles entered into an agreement that authorised a dealer to sell its vehicles. The agreement expressly stated that the dealer was not an agent of the distributor. When the dealer sold a motor vehicle it had to give the purchaser a repair warranty. It was held that the dealer gave the repair warranty to each customer as an agent for the distributor and that the agreement could not displace the agency relationship which clearly applied in practice. 34. A clause in an agreement which states that an agency relationship exists must be considered with all the other terms of the agreement. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole; the parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label (see Potter and Anor v. Customs and Excise Comrs [1985] STC 45). As Gray J stated in Re Porter; Re Transport Workers Union of Australia: 'Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.' However, the parties may use such a clause to overcome any ambiguity as to the true nature of the relationship. In your scenario, you pay the funds into a designated account and when cleared, X pays those funds to your employees, their superannuation funds and the Office of State Revenue. X is doing this as part of its payroll service as the vehicle for payment on your behalf. That is, it is not paying these monies from its own funds whereupon it on-charges this cost to you as part of its payroll service. If this was the case, the salaries and superannuation would lose their characters and become part of the overall taxable supply. While no separate formal agency agreement exists, it is clear that X's role with regard to the transfer of your funds as salaries, is as your agent. Therefore X is not making any supply to you of the payment of these funds as it is you who are supplying the funds to your employees. Therefore, X cannot be making taxable supplies for the payment of these funds. Where X charges GST on the salary amounts as part of its service supply to you, this is incorrect as no GST applies. You are not therefore entitled to claim ITCs for these GST amounts.