Private ruling: Goods and services tax (GST) and fine or penalty
Published: December 2013

Ruling: Q1: Is a penalty fare a taxable supply under section 9-5 of the A New Tax System (Goods and Services) Act 1999 and subject to goods and services tax? | A1: No.

Relevant facts and circumstances: You are a government entity and are registered for GST. You are seeking a ruling in relation to a penalty fare.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 and | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40.

Reasons for decision: Summary: In this ruling, please note: · All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise. · All terms marked by *asterisk are a defined term in the GST Act unless stated otherwise. Goods and services tax (GST) is payable on taxable supplies. 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 (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. In your case, before we can examine if the payment of the penalty fare gives rise to a taxable supply we must first be satisfied that there is a supply. Generally, a statutory fine or penalty is not subject to GST as there is no supply made in relation to the payment. Goods and Services Tax Determination Goods and services tax: does a club, association, trade union, society or co-operative ('association') make a supply when it imposes a non-statutory fine or penalty ('fine or penalty') on a member for a breach of the association's membership rules? (GSTD 2005/6), is of some relevance to your circumstances to the extent that it analyses whether a fine or penalty is for a supply. In particular, paragraph 19 of GSTD 2005/6 states: 19. In our view, there is no supply made by, or adjustment event arising for, an association if: · the fine or penalty is imposed by the association on a member because of the member's non-compliant behaviour with the membership rules of the association; · the fine or penalty is primarily intended as a punishment and/or to act as a deterrent; and · upon payment of the fine or penalty the member receives no additional rights, benefits or privileges to those rights, benefits or privileges to which the member was already entitled, by virtue of membership of that association, immediately prior to the imposition of the fine or penalty. In your case, a penalty fare is offered to a fare evader who can choose to deal with their fare evasion by immediate payment of the penalty fare of a reduced amount or alternatively be issued with a notice which may result in the issuing of an infringement notice and a penalty of a greater amount. The penalty fare is intended to reduce fare evasion and have a punitive and deterrent effect. Upon payment of the penalty fare the passenger is issued with a penalty ticket entitling the passenger to use or to have used a public transport service. In this case, we consider that while the penalty fare is offered to a passenger due to the passengers non-compliant behaviour of fare evasion and is intended as a punishment and deterrent, the passenger does receive the right to use or to have used the public transport system. Therefore, you are making a supply of travel in response to a portion of the payment of the penalty fare. Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides the Commissioners view on how you can identify whether a supply includes taxable and non-taxable parts under the GST Act. The ruling describes the characteristics of a supply that contains taxable and non-taxable parts. It refers to such a supply as a mixed supply. The ruling also describes the characteristics of a supply that appears to have more than one part but is essentially a supply of one thing. This type of supply is referred to as a 'composite' supply. In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts. Paragraphs 19 to 20 of GSTR 2001/8 state: 19. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act. 19A. An identification of the essential character of what is supplied may inform whether (and to which extent) a particular transaction falls within the terms of a specific statutory provision. You must consider all of the circumstances of the transaction to ascertain its essential character. … 19B. Having regard to the essential character and with regard to the statutory provision in issue, you can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part. 20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a commonsense approach. In your case, it must be determined if the payment of the penalty fare is for a mixed supply or for a composite supply. Paragraphs 55 and 59 of GSTR 2001/8 state: 55. Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing. 59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. … 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. While it could be argued that payment of the penalty fare allows passengers to finish their journey, it would not constitute an aim in itself for them. They would pay the penalty fare because it is lower than the current fine and payment finalises enforcement. For some passengers, the amount payable might be substantially higher than a regular fare, further reinforcing the fact that is it aimed at having a deterrent effect. Allowing passengers to complete their current journey contributes to the supply as a whole, but cannot be identified as the dominant part of the supply. In conclusion, the payment of the penalty fare for a penalty ticket is considered a composite supply, the dominant part of which is not taxable as it has the essential character of a penalty. Consequently, the payment received for a penalty fare will not have to be apportioned between a supply of transport and a penalty for non-compliant behaviour. As such, the amount payable would not be subject to GST.