Private ruling: GST and incentive payments
Published: March 2014

Ruling: Q1: Do you make a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you make an 'Incentive Payment Type 1'or 'Incentive Payment Type 2' to a Client? | A1: Yes. You make a creditable acquisition under section 11-5 of the GST Act when you make an 'Incentive Payment Type 1'or 'Incentive Payment Type 2' to a Client? | Q2: Do you make a creditable acquisition under section 11-5 of the GST Act when you make an 'Incentive Payment Type 3' to a Client? | A2: Yes. You make a creditable acquisition under section 11-5 of the GST Act when you make an 'Incentive Payment Type 3' to a Client. | Q3: If the answer is 'no' to Question 1 or 2 (i.e. you do not make creditable acquisitions), do any of the payments give rise to an adjustment event under Division 19 of the GST Act? | A3: As the answers to Questions 1 and 2 are 'Yes', this question is no longer relevant. | Q4: If the answer is 'no' to Question 1 or 2 (i.e. the payments do not give rise to a creditable acquisition), will the Commissioner confirm that PS LA 2013/3 (GA) will apply to preserve the 'status quo' for the requested tax periods? | A4: As the answers to Questions 1 and 2 are 'Yes', this question is no longer relevant.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. · You are an entity registered for goods and services tax (GST) and have an Australian Business Number. · You engage various third party Clients to sell and promote your products and services to consumer and business customers across Australia. The terms and conditions by which you engage clients are set out under an Agreement. · Some Clients act as licensed stores that only sell and promote your products or as non-branded retailers who also may only sell and promote your products. All Clients are required under the Agreement to be registered for GST and have an ABN. · The overall business relationship between you and the Clients is described in the Agreement. This specifies the obligations of the Client under the Agreement. Specifically, the Agreement sets out the broad nature of this relationship. · The Agreement provides that the Client is appointed to promote your products and services and must do their best to procure customers to purchase the products and services and to extend your goodwill. · Under the Agreement, the Client must comply with your directions and any administrative procedures issued by you from time to time in performing the Client's obligations under the Agreement. The Client must acknowledge and agree that you will use a system to set performance targets (such as number of sales, customer service and other things you deem appropriate) for your activities under the Agreement, and to measure their performance against those targets . The Client must display your merchandising at their premises in accordance with your instructions. Any advertising or promotional material that the Client publishes complies with your approval. All media enquiries must be referred to you. The Client must always meet any customer service standards that you notify the Client. · Under the Agreement, the Client must not be (and the Client must ensure that their Key Personnel, Representatives and Associated Companies are not) involved directly or indirectly in the promotion or supply of any product or service that you reasonably believe competes with, or is a like or substitutable product or service for, industry products or services that you supply to customers unless, and only to the extent that, a Service Module provides otherwise. 'Promotion' in relation to a product or service includes: advertising or displaying merchandising material relating to, the product or service; or approaching, encouraging, assisting or facilitating a customer to connect to, or acquire, the product or service. The Client's obligation to comply with this clause is a material obligation, a breach of which is not capable of remedy. · The Client must use you exclusively as the supplier. · The Agreement provides that the Client is considered as an independent contractor. · The Agreement, the Client must follow the directions, processes and procedures, and use the systems that you specify, including in respect of: standards of customer service and information the Client receives from customers. · While the Clients will be remunerated for the specific sales they complete between you and the customer, some form of other financial incentives are required to ensure Clients meet the broader obligations, these being the high standards of customer service, promotion of your goodwill, and generation of customer advocacy. · The Agreement provides that you will pay the Client for performing their obligations under the Agreement for a particular Service in accordance with the module for that Service. You may also offer to pay the Client Incentive Payment Type 1 from time to time, as set out in the General Schedule - Incentive Payment Type 1 (if applicable). You will pay the Client on the basis of information contained in your systems. · Under the Agreement, you may pay Clients another Payment type for particular activities they undertake, and yet another Payment type for particular customer service activities they undertake, and/or an Incentive Payment Type 3 for specific activities identified by you in certain campaigns. · Under Defined Terms in the Agreement , Total Remuneration means the total remuneration payable to the Client under the Agreement that your systems indicate are payable to the Client in a calendar month. · Incentive Payment Type 1 and Incentive Payment Type 2 are explained in the General Schedule to the Agreement. Both payments will be made when the Clients meet certain requirements in accordance with their respective Schedules. Incentive Payment Type 1: From the extracts supplied, we note the following: o 1.2 Our offer to you to pay you Incentive Payment Type 1 and your achievement of …Targets in order to receive Incentive Payment Type 1 does not affect any entitlement you may have to remuneration under this Agreement. o 2.1 What is Incentive Payment Type 1? Incentive Payment Type 1 is amounts we …may… will…pay you if you meet or exceed specified targets in accordance with this Schedule… o 2.2 Calculating the Incentive Payment Type 1: …The Quarterly Incentive Payment Type 1 will be based certain criteria…. o 2.3 Quarterly targets: In determining your entitlement to a Quarterly Incentive Payment Type 1, we will select four of the following Quarterly measures that will apply to you each Quarter: (a) (b) (c) (d) (e) (f) (g) o We will also set a target that will apply to each Measure in each month of a Quarter. We reserve the right to set a different Target for a Measure for each month of a Quarter. o 2.9 Assessment of records for Incentive Payment Type 1: For the purpose of assessing whether you have achieved your …Measures and Targets…Quarterly Targets …(and subsequently your entitlement to a Quarterly Incentive Payment Type 1), we will only consider your performance according to records at that time…. …………………………………… o 6.1 Written notice of dispute by you: If you wish to dispute the amount we consider you are entitled to be paid under this Schedule, you must give us a written notice within 6 months of the event you consider gives rise to your entitlement. Incentive Payment Type 2 o Excerpts from the Agreement: o 1.2 Our offer to you to pay you Incentive Payment Type 2 and your achievement of targets in order to receive Incentive Payment Type 2 does not affect any entitlement you may have to remuneration under this Agreement. o 2.1 What is Incentive Payment Type 2? Incentive Payment Type 2 is monthly amounts we will pay you if you meet certain requirements in accordance with this Schedule. …………………………………………….. o 6.1 Written notice of dispute by you: If you wish to dispute the amount we consider you are entitled to be paid under this Schedule, you must give us a written notice within 6 months of the event you consider gives rise to your entitlement. Incentive Payment Type 2 is made based upon the level of customer advocacy provided to customers by each Client each month. The purpose of the Incentive Payment Type 2 is to remunerate Clients for promoting and driving customer advocacy of your brand. Customer advocacy is a key strategic driver for your operations, particularly in the retail market where there is high competition and consumer opinion of one brand compared to another can result in significant impacts regarding the success of that business. The Incentive Payment Type 2 is driven by how the Client interacts with the customer and how satisfied that customer is with that interaction. The measurement of the customer advocacy is done by way of a survey of the customer as determined by you. Incentive Payment Type 3 Clients are entitled to 'Incentive Payment Type 3' under the Agreement. This provides: 1 Incentive Payment Type 3 : We may, in our sole discretion from time to time, pay you an Incentive Payment Type 3 for specific activities identified by us. We will notify you in writing of any Incentive Payment Type 3 scheme and the terms applying to such payments. At any time by written notice to you, we may vary the amount of any Incentive Payment Type 3 and/or the circumstances in, or terms on, which we pay an Incentive Payment Type 3. Incentive Payment Type 3 is similar in nature to Incentive Payment Type 1 in that they are paid to Clients to drive specific outcomes and achieve specific targets. A key difference being, however, that the payments are more short term in nature, being based on your short term strategic objectives from time to time. An example of such a scenario maybe where you release a new product and you have a strategic objective of driving customer take-up and increase market share of the product. You will offer Clients a specific payment for reaching a specified target. Where the target is met, the Client would be paid their Incentive Payment Type 3 based on the number of products sold. The Incentive Payment Type 3 is there to drive your overall strategic objective, as determined by you from time to time. Consideration is given to such things as internal business drivers, overall market trends and competitor positioning. Any increase in the number of your customers, and therefore market share, drives demand for Client services, additional products, stronger branding and more contact with customers.

Relevant legislative provisions: A New Tax System (goods and Services Tax) Act 1999 Section 11-5 | Section 9-5 | Section 195-1

Reasons for decision: Detailed Reasoning - Detailed Reasoning: We consider that an Incentive Payment Type 3 is consideration for a supply of services ( for specific activities identified by you in campaigns). You have provided the following example: Where you release a new product you have a strategic objective of driving customer take-up and increased market share of the product. You will offer an Incentive Payment Type 3 for reaching a specified target. Our view is that this payment provides a specific benefit to you by way of maximising sales of the new product. In effect the Client is making commercially valuable promotion services available to you for consideration. The supply of these services by the Client is made for consideration equal to the amount of the Incentive Payment Type 3. As the supply is made for consideration and all the other requirements of section 9-5 are satisfied, the Client is making a taxable supply to you. The supply of these services is neither input taxed nor GST-free. It follows that you satisfy all the requirements of section 11-5 and are making a creditable acquisition of services when you make a Incentive Payment Type 3 to a Client. | Detailed Reasoning - Additional Information: The above payments are distinguishable from the incentive payments considered by the Full Federal Court in AP Group Limited v Commissioner of Taxation [2013] FCAFC 105 (AP case). In the AP case, certain incentive payments (retail and wholesale target incentives) made to the taxpayer by various motor vehicle manufacturers under the relevant dealership Agreements were held not to be consideration for any supply made by the taxpayer to the manufacturers. This was because the activities of the taxpayer for which those incentive payments were made were 'nothing more than the encouragement of an overall business relationship between the manufacturer and the dealer to the mutual benefit of both'. Unlike your Agreement with the Clients, there was nothing in the relevant dealership Agreements in the AP case that specifically provided that the manufacturers had contracted to pay AP Group those particular incentive amounts as remuneration for the performance of certain obligations for any particular service. In your Agreement with the Clients you will pay the Clients for performing their obligations under the Agreement for a particular service, and that you will also offer to pay them other amounts ('Incentive Payment Type 1', 'Incentive Payment Type 2') when or if certain conditions are met. The overall business relationship between you and the Client is described in the Agreement. This specifies the obligations of the Client under the Agreement. Specifically the Agreement sets out the broad nature of this relationship: o Tthe Agreement provides that the Client is appointed to promote your products and services and must do their best to procure customers to purchase the products and services and to extend your goodwill. o Under the Agreement, the Client must comply with your directions and any administrative procedures issued by you from time to time in performing the Client's obligations under the Agreement. The Client must acknowledge and agree that you will use a system to set performance targets (such as number of sales, customer service and other things you deem appropriate) for your activities under the Agreement, and to measure their performance against those targets . The Client must display your merchandising at their premises in accordance with your instructions. Any advertising or promotional material that the Client publishes complies with your approval. All media enquiries must be referred to you. The Client must always meet any customer service standards that you notify the Client. o Under the Agreement, the Client must not be (and the Client must ensure that their Key Personnel, Representatives and Associated Companies are not) involved directly or indirectly in the promotion or supply of any product or service that you reasonably believe competes with, or is a like or substitutable product or service for, telecommunications products or services that you supply to customers unless, and only to the extent that, a module provides otherwise. 'Promotion' in relation to a product or service includes: advertising or displaying merchandising material relating to, the product or service; or approaching, encouraging, assisting or facilitating a customer to acquire, the product or service. The Client's obligation to comply with this clause is a material obligation, a breach of which is not capable of remedy. o The Client must use you exclusively as the supplier. o The Agreement provides that the Client is considered as an independent contractor. o Under the Agreement, the Client must follow the directions, processes and procedures, and use the systems that you specify, including in respect of: standards of customer service and information the Client receives from customers. From the above, it can be seen that the overall business relationship between you and the Client is not the same as in the AP case. A Client is required to provide certain services for which it is paid remuneration. In the AP case, the business relationship between the car manufacturer and the AP Group was not one which AP group was specifically required to provide any specific services to the manufacturer for the incentive payments in question. It was a relationship where the manufacturer sold motor vehicles wholesale to AP Group under a bailment arrangement. AP Group then sold the motor vehicles at the retail level to end users. Paragraph 12 of AP case states: 12. The primary facts were not in dispute before the Tribunal. At [12]-[15] the Tribunal recorded that: 12. The Applicant does not acquire motor vehicles direct from the manufacturer. Instead, it acquires them under bailment arrangements, by which the Applicant, on behalf of an independent finance company, orders new vehicles from the manufacturer. The vehicles are sold by the manufacturer to the finance company but they are shipped direct to the dealership to be used as trading stock. 13. The finance company owns the vehicles until the Applicant finds a customer for the vehicle. Immediately prior to the sale of the vehicle to the Applicant's customer, title in the vehicle passes from the finance company to the Applicant. In this way, the Applicant is able to pass on good title in the vehicle. 14. These arrangements apply to all new vehicles, whether purchased by the Applicant for its floor stock or purchased to meet a specific customer order. During the bailment period the finance company charges bailment fees to the Applicant for the right to display the goods for sale. These charges are treated as consideration for taxable supplies made by the finance company to the Applicant. 15. ……… Paragraph 53 of AP case provides: ……………The fact that the dealer receives a payment as an incentive when certain thresholds associated with running the business in this way does not mean that the dealer is supplying a service to the manufacturer for consideration. If the incentive payments were not available there is no basis to infer that the dealer would not behave in the same way for free……………….. In contrast, the Client supplies promotion and procurement services to you for consideration (Remuneration includes Incentive Payment Type 1 and Incentive Payment Type 2) and supplies promotion services (in accordance with clause 6.12 of the Agreement for specific activities identified by you in campaigns) for consideration (consideration being the Incentive Payment Type 3).

Reasons for decision: Unless otherwise stated, all legislative references in the following Reasons for Decision are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | 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 section 195-1) | As you would satisfy paragraphs (a), (c) and (d) of section 11-5, the issue of whether you are making a creditable acquisition depends on whether paragraph 11-5(b) is satisfied as well. That is, whether the supply of the thing to you is a taxable supply under section 9-5. Section 9-5 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 Australia; and | However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. | The Clients are required to be registered for GST and are assumed to satisfy paragraphs 9-5(b) and 9-5(c). Therefore the issue is whether the Clients are making a supply for consideration under paragraph 9-5(a) when they receive an 'Incentive Payment Type 1' or an 'Incentive Payment Type 2' from you. | Section 9-15 provides that a payment is consideration for a supply if the payment is 'in connection with' a supply and 'in response to' or 'for the inducement' of a supply. Thus, there must be a sufficient nexus between a particular supply and a particular payment provided for that supply for there to be a supply for consideration. Furthermore, the GST Act provides that it does not matter whether the payment is voluntary or not. | We consider that the Incentive Payment Type 1 and Incentive Payment Type 2 are specifically made for the supply of promotion and procurement services for promoting your products and services and procuring customers to purchase the products and services. This is because they have a direct and immediate connection with the supply of promotion and procurement services made by the Clients under the Agreement they have with you. You make these payments to the Clients because of your obligation under the Agreement. There is nothing in the Agreement to suggest that these types of payments are excluded from the remuneration payable by you to your Clients. | The Incentive Payment Type 1 and Incentive Payment Type 2 form part of the total remuneration payable to a Client for the promotion and procurement services. | Therefore paragraph 9-5(a) is satisfied. Paragraphs 9-5 (b) to (d) are also satisfied. The supply of promotion and procurement services is neither input taxed nor GST-free. Therefore, a Client is making a taxable supply to you for consideration that includes an Incentive Payment Type 1 or an Incentive Payment Type 2. | It follows that you satisfy all the requirements of section 11-5 and are making a creditable acquisition of promotion and procurement services when you make an Incentive Payment Type 1 or an Incentive Payment Type 2 to a Client.