Private ruling: Goods and services tax (GST) and customer pre-payments
Published: May 2013

Ruling: Q1: Should GST be included on credit balances (pre-payments from customers) you receive from the vendor of the new business (vendor) as a condition of the contract for your purchase of the new business? | A1: You will have a GST liability to the Australian Taxation Office (ATO) on the credit balances (pre-payments from customers) that the vendor pays you. However, do not issue tax invoices to the vendor. Your GST liability is on a supply you make to the customer. See reasons for decisions for information on how to calculate the GST liability. | Q2: Should you issue tax invoices including GST to the vendor for customer credit balances (pre-payments from customers) you receive from the vendor of the business? | A2: No. | Q3: When do you report your GST liability on your supplies of pick up services to a particular customer if the charge is pre-paid? | A3: You report your GST liability on your supplies of pick-up services to a particular customer who pre-pays in the activity statement for the tax period in which you receive the pre-payment. This is the case even if you do not supply services to the customer in that particular tax period.

Relevant facts and circumstances: You are registered for GST. You account for GST on a cash basis. You are carrying on an enterprise of picking up containers. Our records show that your business is located in Australia. On a certain date, you purchased a container round going concern to add to your pre-existing container round business. Your pre-existing customers pay after you have picked up their container. The new business customers pay in advance. The standard service cost is a certain amount (inc. GST) per container per pick-up (for the new business). The new business customers pay either a certain number of months or a certain number of months in advance (eg. a certain number of months @ a certain rate = a certain amount; a certain number of months @ a certain rate = a certain amount of money). Upon purchase of the new business, the vendor had credit balances (advance/pre-payments from customers) totalling a certain amount of money, which were transferred to you. In return, the vendor required you to provide it with a tax invoice - including a certain rate of GST (a certain amount of money). It was believed that this was necessary as the vendor wanted to claim back GST that it had paid on these credit balances on its activity statements. The vendor continued to receive customer payments (for invoices they had previously sent out before the sale of the business) in a certain month of a certain year, a certain month of a certain year and a certain month of a certain year and the vendor insisted on you supplying a tax invoice (inc. GST) before it would transfer the funds to your bank account. The credit balances (customer pre-payments) you receive from the vendor are a condition of the contract for your purchase of the new business.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-10 | A New Tax System (Goods and Services Tax) Act 1999 section 9-15 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 9-70 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1) | A New Tax System (Goods and Services Tax) Act 1999 Division 19 | A New Tax System (Goods and Services Tax) Act 1999 section 29-5(2) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 29-5(2)(a) | A New Tax System (Goods and Services Tax) Act 1999 subsection 29-70(2)

Reasons for decision: Summary: GST is payable by you on the credit balances (pre-payments) you receive from the vendor because these are consideration for taxable supplies of pick-up services you make to the customers. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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. (*Denotes a term defined in section 195-1 of the GST Act) You are not supplying goods or services or anything else to the vendor. However, you are making supplies of container pick-up services to the customers. Consideration is defined in section 9-15 of the GST Act. Subsection 9-15(1) of the GST Act provides that consideration includes: (a) any payment in connection with a supply of anything, and (b) any payment in response to or for the inducements of a supply of anything. Paragraph 180 of Goods and Services Tax Ruling GSTR 2006/9 provides guidance on determining whether there is consideration for a supply. In determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a 'supply for consideration' we take the view that: · the test is whether there is a sufficient nexus between the supply and the · payment made; this test is objective; · regard needs to be had to the true character of the transaction; and · an arrangement between parties will be characterised not merely by the · description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. At the time you receive the pre-payments, there is a sufficient nexus between those payments and your supplies of pick-up services as: · the pick-up charges, which are pre-paid, are the reward for your supply of the pick-up services, and · there is a clear relationship between the pre-payments and clearly identifiable and quantifiable supplies. Therefore, the amounts the vendor pays you are consideration for your supplies to the customers at the time these amounts are paid to you (at least to some extent). Hence, the requirement of paragraph 9-5(a) of the GST Act is satisfied. You satisfy the requirements of paragraph 9-5(b) to 9-5(d) of the GST Act. This is because: · your supply of a pick-up service is a supply you make in the course or furtherance of an enterprise that you carry on · your supplies of these services are connected with Australia, and · you are registered for GST. There are no provisions in the GST Act under which your supplies of the pick-up services are GST-free or input taxed. As all of the requirements of section 9-5 of the GST Act are satisfied, you make taxable supplies in return for the credit balances (customer pre-payments) you receive from the vendor (at least to some extent). You make these taxable supplies to the customers; not to the vendor. Therefore, GST is payable by you on the credit balances (customer pre-payments) you receive from the vendor. The pre-payment will include GST at the time it is paid. Where a credit balance (customer pre-payment) represents the charge for pick-ups you do only, your GST liability will be 1/11 th of the total charge paid by the relevant customer. Where a credit balance (customer pre-payment) the vendor pays you is the total charge for pick-up services to be supplied to the customer for a certain period of time or certain period of time that began before the date of sale of the business and ended/will end after that date, the payment to you will only be consideration for your taxable supplies to the extent that it represents the charge for picks-ups done by you. In such cases, your GST liability should be calculated as follows: Step 1: Divide the number of containers you pick up under the relevant customer contract by the total number of containers picked up under that contract for the entire six month or twelve month period. Step 2: Multiply the result of the calculation at Step 1 by the total charge for the certain period or certain period. Step 3: Divide the result of the calculation at Step 2 by 11. | Summary: You should not issue tax invoices including GST to the vendor for credit balances (customer pre-payments) you receive from the vendor because these payments are not consideration for any taxable supply you make to the vendor. | Detailed Reasoning - Detailed reasoning: Subsection 29-70(2) of the GST Act provides that the supplier of a taxable supply must give the recipient of the taxable supply a tax invoice if the recipient of the taxable supply requests it. The payments you receive from the vendor are consideration for a supply you make to the customers of pick up services (at least to some extent). These payments you receive are not consideration for a supply you make to the vendor. Therefore, you are not making a taxable supply to the vendor. Hence, you are not required to issue tax invoices with GST to the vendor. You should not issue tax invoices to the vendor. | Summary: You will report the GST on a supply you make to a new customer in the activity statement for the tax period in which you receive the customer pre-payment because that is the tax period in which you receive the consideration for the supply. | Detailed Reasoning - Detailed reasoning: Subsection 29-5(2) of the GST Act sets out the rules for the timing of reporting GST on taxable supplies where the supplier accounts for GST on a cash basis. You account for GST on a cash basis. Paragraph 29-5(2)(a) of the GST Act provides that if you account for GST on a cash basis, then if, in a tax period, all of the consideration is received for a taxable supply, GST on the supply is attributable to that tax period. Therefore, you will report the GST on a supply you make to a new customer in the activity statement for the tax period in which you receive the pre-payment, as that is the tax period in which you receive the consideration for the supply. There is no requirement in the GST Act that you must have already supplied the service before the GST is required to be reported. You will not report GST twice on the same supply. You will not report the GST on a supply in the activity statement for the tax period in which you do a pick-up for the relevant customer unless you received the pre-payment in that tax period. | Detailed Reasoning - Additional information: If you receive a pre-payment in a particular tax period and the supplies that were originally intended to be made are cancelled in a subsequent tax period, you will reverse the GST liability by making a decreasing adjustment at label 1B of the activity statement for the subsequent tax period (in accordance with Division 19 of the GST Act) provided that you hold an adjustment note (if required) when you lodge the activity statement for the subsequent tax period. Where the amount of the decreasing adjustment is more than $75, you will need to issue an adjustment note to the customer in order to claim the decreasing adjustment. Where you are required to issue an adjustment note, you will claim the decreasing adjustment in the activity statement for a given tax period if you hold the adjustment note when you lodge the activity statement for that tax period. See Goods and Services Tax Ruling GSTR 2000/1 for guidelines on adjustment notes. This can be found on the ATO website www.ato.gov.au or on an internet search engine. We recommend that the vendor seek advice from the ATO on whether it can reverse any of its GST liabilities by making decreasing adjustments.