Private ruling: GST and an apportionment methodology
Published: September 2012

Ruling: Q1: Is your proposed methodology for apportioning the consideration you receive for your mixed supplies fair and reasonable for the purposes of determining the taxable portion pursuant to section 9-80 of A New Tax System (Goods and Services Tax) 1999 ? | A1: Yes.

Relevant facts and circumstances: You are registered for goods and services tax (GST). You carry on an enterprise of supplying particular items. Customers can purchase each item individually or a group of particular items (group). When a customer purchases a group a discount is given on the total price. A customer when purchasing a group can substitute certain items in the group for other items. However, the same group discount is given even though the substituted items are more expensive for you to supply. It is accepted from a previous private ruling issued to you that in certain circumstances you are making a mixed supply when you supply a group that includes the substituted items (herein we will assume that these circumstances are satisfied). You have also been issued with a private ruling stating that your current apportionment method is reasonable (this method apportions the discount over all the items in the group). You have proposed an apportionment methodology where the discount is not apportioned over the substituted items in the group. You want to introduce the new apportionment methodology as the group price does not change to reflect the more expensive items. Consequently, under the current apportionment methodology you are providing a further discount to the more expensive items in the group. You consider the proposed methodology will more fairly reflect the true commercial position of the pricing of a group that is, there should be no further discount given on the more expensive items. There are strong commercial imperatives for you not to further discount further the more expensive items in the group. In your marketing, you propose to contractually agree with your customers that the substituted items will not be discounted further when they are sold as part of a group. This will be achieved by showing the discounted price of a group on the in-store information panels and in addition, the discounted prices will be clearly marked so as to refer customers to your website for the full terms and conditions of the discount.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) 1999 (GST Act): Section 9-80.

Reasons for decision: Summary: The ATO view on mixed supplies and apportionment is provided by the Goods and Services Tax Ruling GSTR 2001/8 (a public ruling for the purposes of GST). Paragraph 25 of GSTR 2001/8 provides that in the case of a mixed supply it is necessary to apportion the consideration received between the taxable and non taxable parts to find the consideration paid for each. Further, paragraph 26 of GSTR 2001/8 provides that any reasonable basis to apportion the consideration can be used but the basis must be supportable in the particular circumstances. In your case, the supply of a group is a mixed supply. You currently use an apportionment method that is reasonable (a method that apportions the group discount over all the items in the group). However, you have proposed an apportionment methodology where the discount will not be apportioned over the substituted items in the group. | Detailed Reasoning - Luxottica: Your proposed method is similar to an apportionment method which was the subject of an appeal to the Administrative Appeals Tribunal (AAT) ; Commissioner of Taxation v Luxottica Retail Australia Pty Ltd , and which was later heard in the Federal Court as Commissioner of Taxation v Luxottica Retail Australia Pty Ltd (Luxottica). In Luxottica, the supply was a pair of spectacles (lenses and frames) where Luxottica offered a discount on the frames provided the customer also purchased the lenses. The apportionment method they used applied their discount only to the frames. Your method is similar in that you are apportioning your discount only on part of the group which by coincidence are the taxable parts of the group (in Luxottica the frames were the taxable part and the lenses were the GST-free part). In Luxottica's AAT decision, it was determined that what was being held out to a customer were discounted frames (it was recognised that frames had become a fashion accessory and this had commercial significance in Luxottica's sales approach to selling spectacles). Hence Luxottica and the customer agreed that what the customer would pay is the full cost of the lenses and the discounted frame price. Further to this, the AAT considered the apportionment methodology to be reasonable as: · there were sound commercial reasons for the discounting of frames · there was no commercial imperative for the discounting of lenses, and · there was nothing contrived or artificial about the pricing methodology adopted by the Applicant in its promotional arrangements. The AAT added that the fact the discounted price was conditional on the purchase of the lenses did not undermine the reasonableness of the calculation of the taxable proportion in this way. In the case of the Court's decision, it was determined that although the supply was a supply of a single thing (spectacles) it was also a mixed supply with the value of the frames being determined under section 9-80 of a New Tax System (Goods and Services Tax) Act 1999 . It also confirmed that the apportionment method used was reasonable in the particular circumstances. In its decision, the Court said that: Promotions that offer lower prices or greater value subject to conditions are common practice in many, if not every, arena of retail sale. The offer may be 'two for the price of one', or 'buy one, get one free', or, as here, a reduction in the price of the frame on condition that the lenses are purchased at the same time. How a promotion is structured is a matter for the commercial judgment of the seller. In the present case it has clearly been decided that the discount offered should be applied to the price of the frames rather than the lenses. This decision is in contrast with the AAT decision in Re Food Supplier and Commissioner of Taxation (Food Supplier). Here, the mixed supply was a jar of coffee and a coffee mug. Luxottica's AAT decision referred to the Food Supplier decision and said: In Food Supplier there were two items sold for one composite price. The distinction between Food Supplier and this case is that in this case there were two items or components and in respect of each of those components there was an agreed price which was in no way artificial or contrived. By contrast, in Food Supplier there was one undissected price in respect of the supply of two items. It follows that Food Supplier is distinguishable. | Detailed Reasoning - Proposed apportionment methodology: All the parts of a group have an individual price and hence some value within the group. Also, no part of a group is marketed as being 'free'. Consequently, your group discount is not similar to those promotions illustrated by Food Supplier where there is generally one price and the promotional item is marketed as being 'free' with the main purchase. You keep a group price fixed even though a customer may substitute more expensive items. Hence, we accept that when a customer makes a substitution, under the current apportionment methodology you are providing a further discount to an item which is more expensive for you to supply. Given this, we accept there is a strong commercial imperative for you not to have to discount further the more expensive items in the group. In the case of Luxottica, it is clear that a discount was offered on the frames to entice people to make a whole purchase of spectacles (frames being a desirable fashion accessory). As in the case of Luxottica, you offer a discount on a group to entice people to buy your products. For your marketing of the new apportionment methodology, you propose to contractually agree with your customers that the substituted items will not be discounted further when they are sold as part of a group. This will be achieved by showing the discounted price of a group on the in-store information panels and in addition, the discounted prices will be clearly marked so as to refer customers to your website for the full terms and conditions of the discount. Following the guidance provided by Luxottica's AAT and Court decisions, it is clear to your customers what discount they are expected to receive on the purchase of a group. You also have sound commercial reasons for not discounting further the more expensive items in the group and there is nothing contrived or artificial about the proposed methodology (you are prepared to offer a discount on a group but not a further discount on the substituted items given they are more expensive for you to supply). Finally, it would be reasonable to conclude that generally a customer would not be concerned as to what parts of the group are being discounted. A customer purchasing a group would only be concerned that the discount they receive is the same regardless of what they substitute into the group. Therefore, we consider that referring a customer to your website is sufficient to provide them with information on the discount given. Consequently, your apportionment method is reasonable in the circumstances and can be used to calculate the taxable portion for section 9-80 of the GST Act.