Private ruling: GST and supply of services
Date of advice: 21 November 2017
Published: April 2018

Ruling: Q1: Is the service fee received by Entity A from individuals outside Australia GST-free under subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: The service fee charged to the individuals is not for a supply made by Entity A to the individuals. When collected and retained by Entity A from the visa applicants, the service fee forms part of the consideration for the supplies made by Entity A to Entity B. As there is no supply made by Entity A to the individuals, there is no GST implication for Entity A when it collects the service fee from the individuals. | Q2: Is Entity A required to issue a tax invoice in respect of GST-free supplies? | A2: No. Entity A would not be required to issue a tax invoice when the individuals request it. Any document or invoice issued to the individuals should not include GST. | Q3: Can Entity A alter the way GST charges to Entity B are calculated in relation to monthly offsets on a prospective basis and issue adjustment notes accordingly? | A3: No. The manner in which Entity A calculates GST on the gross charges before deducting the monthly offset is correct. | Q4: Can Entity A’s treatment of all historic transactions remain as they are in accordance with accepted ATO guidance? | A4: Yes. The treatment of historic transactions in relation to the monthly offsets is correct. | Q5: Can Entity A issue combined adjustment notes in respect of monthly offsets and tax invoices in respect of its charges to Entity B? | A5: The monthly offsets are not an adjustment event; thus, adjustment notes are not required.

Relevant facts and circumstances: Entity A is an Australian private company which specialises in the provision of information technology solutions and service. Entity A provides information technology solutions and services to Entity B under an agreement. The agreement specifies the charges payable by Entity B to Entity A in respect of the services. These include a monthly transaction processing charge for the services. The services comprise the provision, operation and support of systems for the processing of particular transactions initiated by individuals overseas. Individuals deal with Entity B online through a website developed and operated by Entity A on behalf of Entity B. The website is in Entity B’s name. A service fee is collected by Entity A when individuals go to the website to deal with Entity B. Entity B advises the individuals that the service fee is paid to another entity. Entity B has granted Entity A the right to charge the service fee to the individuals. This right is provided by Entity B for no monetary consideration, nor for identifiable non-monetary consideration. The right was granted at the commencement of the term of the Agreement and endures for that term. The agreement provides that: ● the service fee is retained by Entity A in its own right as part of the transaction between Entity A and each individual. ● the service fee is charged by Entity A as principal and not as an agent of Entity B. Entity A does not charge or hold the service fee on behalf of Entity B. The agreement provides for a corresponding “monthly offset’ (i.e. equal in amount to the monthly service fee collected by Entity A) to be credited by Entity A to Entity B in the current month. After each billing period, Entity A must provide a monthly offset to Entity B. The monthly offset is deducted from and reduces the total charges payable by Entity B to Entity A for the provision of services for the current month. Where the monthly offset exceeds the charges payable in a billing period, the excess credit is rolled forward to and applied in the following billing period. Neither Entity A nor Entity B has accounted for any GST on the monthly offset adjustments for the value of the service fees charged to the individuals. Entity A accounts for GST on the gross charges payable by Entity B under the contract, before deducting the monthly offset; thus, GST is imposed on the charges payable prior to the monthly offset being applied. Entity A does not charge GST on the service fee on the basis that the service fee qualifies as GST-free being made to a non-resident who is not in Australia at the time of supply. Previously, the practice was such that Entity A would raise an invoice to Entity B for the provision of services rendered with GST included on the full value of the invoice. Subsequently to raising the tax invoice to Entity B, Entity A would issue a credit note which reduced the amount payable by Entity B. The credit note was equivalent to the value of service fees collected by Entity A, and the credit note did not include GST. Thus the GST position as a result was the same.

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 19-10 | A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Reasons for decision: Summary: 1. GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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. Before we consider whether the service fee received by Entity A from individuals is subject to GST, we must determine the nature of the transaction, the entity that makes the supply and the recipient of the supply. Goods and Services Tax Ruling GSTR 2006/9 provides that where the parties to a transaction have reduced their understanding of the transaction in writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes. Australian courts have held that an arrangement between the parties will be characterised not merely by the description the parties give to the arrangement, but by looking at the transaction entered into and the circumstances in which the transactions are made. The agreement between Entity A and Entity B specifies that: ● the service fee is retained by Entity A in its own right as part of the transaction between Entity A and each individual. ● the service fee is charged by Entity A as principal and not as an agent of Entity B. Entity A does not charge or hold the service fee on behalf of Entity B. We do not agree that the service fee collected by Entity A is for a supply made by Entity A to the individuals overseas for the following reasons: ● Entity B advises individuals to go to the website for them to deal with Entity B. While the individuals can go through other entities, Entity B makes available this website to the individuals. ● The website was developed and is operated by Entity A on behalf of Entity B. The website bears Entity B’s name rather than that of Entity A. There is nothing on the website which indicates that an individual is dealing with Entity A and not Entity B or that the service is provided by Entity A. ● While applicants are advised that the service fee is paid to a third party, it is not conclusive that the third party supplied the services, even if that third party has its own website providing the same services. It is submitted in the ruling application that Entity A makes a supply of services to Entity B which includes the provision, operation and support of systems. This further supports our view that Entity A does not supply the service to the individuals; rather, it is Entity B that supplies the services to the individuals through the website that Entity A developed and operates on behalf of Entity B. The fees collected from the individuals are for the supplies of the service to them. However, when Entity A retains the service fee collected from the individuals, the amount becomes part of the consideration for its supplies of services to Entity B. The supply of services made by Entity A to Entity B satisfies the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act; and thus, is a taxable supply. The supply is not GST-free under subsection 38-190(1) of the GST Act as Entity B, being the recipient of the supply, is in the indirect tax zone at the time of supply. 2. The supplier of a taxable supply is required to give the recipient a tax invoice when the recipient requests it. A tax invoice is generally issued for a taxable supply and is obtained by the recipient for the purpose of claiming an input tax credit. Where the supply for which the tax invoice is issued is partly taxable or is not taxable at all, it must be clearly indicated in the tax invoice. Entity A is not required to issue a tax invoice when the individuals request it. Any document or invoice issued to the individuals should not include GST in the service fee charged. 3. Entity A treats its supply of services to Entity B as a taxable supply and calculates the GST on the total charges before the monthly offset is deducted. Our view is that Entity A calculates the GST on the supply correctly in this manner. The monthly offset does not alter the consideration for the supply made by Entity A to Entity B. It is merely a mechanism to account for the amounts already received by Entity A equivalent to the service fees collected from the individuals; thereby reducing the amount payable by Entity B for the billing period. 4. As discussed above, the manner in which Entity A calculated GST on its supply to Entity B is correct and should not be changed. 5. An adjustment note is issued for an adjustment event. Subsection 19-10(1) of the GST Act defines an ‘adjustment event’ as an event which has the effect of: a. cancelling a supply or acquisition; or b. changing the consideration for a supply or acquisition; or c. causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition. We do not agree that the monthly offset alters the value of Entity A’s supply to Entity B. We consider it as a payment arrangement between the parties. It does not change the consideration for the supply; and thus, there is no adjustment event for which Entity A must issue an adjustment note in respect of the monthly offset.

NOTICE: This is an edited version of a revised private ruling. It replaces to an extent the edited version of the private ruling with authorisation number 77169.