Private ruling: GST treatment of certain fees charged in relation to a financial supply
Date of advice: 28 August 2018
Published: October 2018
Date scheme commenced: The taxpayer commenced operations on 1 July 2018 and is registered for GST.

Ruling: Q1: Is each of the fees listed in the ruling application and described in the factoring facility agreement with guarantee (the factoring agreement) and the purchase order funding agreement that the taxpayer enters into with a client consideration for a financial supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Except for the accounting service fee and the debt collection fee, each of the fees listed in the ruling application forms part of the consideration for an input taxed financial supply under section 40-5 of the GST Act. In relation to the accounting service fee and the debt collection fee, each of the fees is consideration for a taxable supply that the taxpayer makes because all of the elements of section 9-5 of the GST Act are satisfied. Each of the accounting service fee and the debt collection fee is consideration for a supply that is not an input taxed financial supply pursuant to items 14 and 13 in the table in regulation 40-5.12 of the A New Tax System (Goods and Services Tax) Regulations 1999, respectively.

Relevant facts and circumstances: The taxpayer commenced operations on 1 July 2018 and is registered for GST. The taxpayer provides financial accommodation to Australian small and medium sized enterprises (clients) by purchasing the invoices rendered by these clients to their customers. Primarily, the taxpayer enters into a factoring agreement whereby its clients offer to sell to it all debts existing at the commencement date of the factoring agreement or which becomes owing to its clients in the future. A sample copy of the factoring agreement was provided as part of the taxpayer’s ruling application. Secondarily, on occasions the taxpayer provides additional financial accommodation to approved clients so as to enable the clients to fill customer purchase orders that are subsequently converted to sales invoices. This additional financial accommodation is pursuant to a purchase order funding agreement, a sample copy of which was provided as part of the taxpayer’s ruling application. In addition to paying interest, a client may be charged a fee as set out in the factoring agreement and the purchase order funding agreement. The ruling application listed certain fees and asked whether each of the fees is consideration for an input taxed financial 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 40-5 | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.09 | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 40-5.12

Reasons for decision: Summary: All legislative references below are to the A New Tax System (Goods and Services Tax) Act 1999 and all references to a regulation are to the A New Tax System (Goods and Services Tax) Regulations 1999. What is a taxable supply? Section 9-5 provides that 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, for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. What is a financial supply? Section 40-5 provides that a financial supply, which has the meaning given by the regulations, is input taxed. Regulation 40-5.08 provides that a supply is a financial supply if the supply is mentioned as: a) a financial supply in regulation 40-5.09; or b) an incidental financial supply in regulation 40-5.10. Subregulation 40-5.09(1) provides that the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or (4) is a financial supply if: a) the provision, acquisition or disposal is: (i) for consideration; and (ii) in the course or furtherance of an enterprise; and (iii) connected with the indirect tax zone; and b) the supplier is: (i) registered or required to be registered for GST; and (ii) a financial provider in relation to the supply of the interest. The table in subregulation 40-5.09(3) mentions ‘a debt, credit arrangement or right to credit, including a letter of credit’ at item 2. Paragraph 19 of GSTR 2004/4 (which is about assignment of payment streams including under a typical securitisation arrangement) states that provided the requirements of subregulation 40-5.09(1) are satisfied, the supply of the right to a payment stream by way of assignment is a financial supply as it is the provision, acquisition or disposal of an interest in a debt. There are various payment streams that may be the subject of an assignment. The right to a payment stream is property of a kind that fits the description of an interest in a matter mentioned in item 2 in the table in subregulation 40-5.09(3). Two such assignments are debt factoring and invoice discounting arrangements which commonly involve the assignment of debts by a business to a factor or discounter on a once off or regular basis for an immediate payment. (Paragraphs 70 and 88 of GSTR 2004/4) Regulation 40-5.10 provides that if something is supplied by an entity to a recipient directly in connection with a financial supply to the recipient by the entity, the thing is an incidental financial supply if: a) it is incidental to the financial supply; and b) it and the financial supply are supplied, at or about the same time, but not for separate consideration; and c) it is the usual practice of the entity to supply the thing, or similar things, and the financial supply together in the ordinary course of the entity’s enterprise. Paragraph 118 of GSTR 2002/2 (which sets out the Commissioner’s views on the GST treatment of financial supplies and related supplies and acquisitions) states that something is an incidental financial supply if it is: ● supplied by the same supplier to the same recipient as the original financial supply; and ● supplied directly in connection with a financial supply. Regulation 40-5.10 contemplates the supply of two things, one of which is a financial supply, for a single consideration. In making something an incidental financial supply, regulation 40-5.10 has the effect of treating something that is the supply of more than one thing as a composite supply. However, even if the conditions in regulation 40-5.10 are not met, the supply may still be a composite supply if, applying the principles in Goods and Services Tax Ruling GSTR 2001/8 Apportioning the consideration for a supply that includes taxable and non-taxable parts , it would be one. (Paragraphs 119 and 125 of GSTR 2002/2) A composite supply is essentially the supply of a single thing. Composite supplies contain one dominant part and also include something that is integral, ancillary or incidental to that dominant part. In contrast, a supply may contain separately identifiable taxable and non-taxable parts that need to be individually recognised. This type of supply is described as a 'mixed supply'. (Paragraph 16 of GSTR 2001/8) In determining whether a supply is a composite supply or a mixed supply, one needs to have regard to the essential character or features of the transactions (paragraphs 19A and 19B of GSTR 2001/8). Per paragraph 42 of GSTR 2001/8, the Commissioner's view is that a supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply. Paragraph 59 of GSTR 2001/8 states that having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where: ● you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or ● it represents a marginal proportion of the total value of the package compared to the dominant part; or ● it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or ● it contributes to the proper performance of the contract to supply the dominant part. What is not a financial supply? Regulation 40-5.12 provides that the supply of something or an interest in or under something that is mentioned in an item in the table in the regulation is not a financial supply. Relevantly, the table lists the following items: ● Item 13 – Debt collection services ● Item 14 – Sales accounting services under a factoring arrangement, or an arrangement having the same effect as a factoring arrangement. Application to the taxpayer’s case When the taxpayer enters into a factoring agreement and a purchase order funding agreement with its client, it creates and supplies an interest in a credit arrangement. Per paragraphs 70 and 88 of GSTR 2004/4, this is covered by item 2 in the table in subregulation 40-5.09(3). The taxpayer’s supply of the interest in the credit arrangement is an input taxed financial supply because all of the other requirements in subregulation 40-5.09(1) are satisfied. That is, the supply is for consideration, the taxpayer makes it in the course or furtherance of its enterprise, the supply is connected with the indirect tax zone, the taxpayer is registered for GST and it is the financial supply provider in relation to the supply. In terms of the fees listed in the ruling application, the issue is whether the relevant fee is consideration for the financial supply (including an incidental financial supply) or is consideration for a separately identifiable part that needs to be individually recognised. Except for the accounting service fee and the debt collection fee, each of the fees listed in the ruling application forms part of the consideration for the provision of a credit arrangement mentioned in item 2 in the table in subregulation 40-5.09(3), which is an input taxed supply under section 40-5 of the GST Act. For completeness, Schedule 2 of GSTR 2002/2 states the following: ● Line No. C37 – establishment fees and charges for receivables factoring and invoice financing accounts are input taxed under item 2 in regulation 40-5.09(3) ● Line No. C38 – settlement fees for receivable factoring and invoice financing accounts are input taxed under item 2 in regulation 40-5.09(3). In relation to the accounting service fee and the debt collection fee, each of the fees is consideration for a taxable supply that the taxpayer makes because all of the elements of section 9-5 of the GST Act are satisfied. Each of the accounting service fee and the debt collection fee is consideration for a supply that is not an input taxed financial supply pursuant to items 14 and 13 in the table in regulation 40-5.12 of the A New Tax System (Goods and Services Tax) Regulations 1999, respectively. For completeness, Line No. C33 in Schedule 2 of GSTR 2002/2 confirms that sales accounting services under a factoring arrangement is an input taxed supply.

This ruling applies for the following period: from 1 July 2018