Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 4 - Goods and services tax and vouchers - prepaid phone products
Outline of chapter
4.1 Schedule 4 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that prepaid phone cards or facilities are treated as vouchers for the purposes of Division 100 of that Act. Division 100 will also be amended to clarify that goods and services tax (GST) should be calculated on the stated monetary value of the voucher. A further amendment will also be made to Division 100 to include a rule which simplifies accounting for GST on commissions and similar payments on a supply of a voucher through a distribution chain.
4.2 In addition, this Bill will make an amendment to subsection 29-25(2) of the GST Act to provide an additional circumstance where the Commissioner of Taxation (Commissioner) can determine that GST, input tax credits and adjustments should be attributed to a particular tax period.
Context of amendments
4.3 Under Division 100 of the GST Act, the sale of certain vouchers is not subject to GST, but GST is payable when the voucher is redeemed. This provides an exception to the basic rules of the GST Act under which the sale of a non-Division 100 voucher is taxable, but supplies on redemption of that voucher are not taxable if no additional consideration is provided (paragraph 9-15(3)(a)).
4.4 Division 100 operates so that instead, GST is payable at the time the voucher is redeemed for goods or services. This treatment applies because generally the tax status of the underlying supplies is unknown at the time the voucher is issued and the supply of the underlying goods or services could be GST-free, input taxed or taxable. For example, a prepaid phone card or facility could be redeemed for both taxable and GST-free supplies.
4.5 The existing law is unclear on whether certain prepaid phone cards or facilities are eligible 'vouchers' for the purposes of Division 100. The Australian Taxation Office has expressed its view in GST Ruling 2003/5 on the existing law that not all prepaid phone products are eligible Division 100 vouchers.
4.6 When the GST was introduced it was intended that all prepaid phone cards be treated as vouchers. This is because the GST status of the underlying supply is not known until redemption of the card. If these products are not treated as eligible vouchers it would be necessary for suppliers to make adjustments if the product has been redeemed for supplies that are GST-free or input taxed. Suppliers and their distributors would incur additional compliance costs in maintaining a different accounting system for these products.
Amount of GST to be remitted on redemption of a voucher
4.7 Division 100 is intended to apply so that, on redemption of a voucher, the supplier of the goods or services is required to remit GST calculated on the stated monetary value on the voucher. The monetary value may be stated on the voucher or in documents accompanying the voucher. If, on redemption of the voucher, the supplier of the goods and services did not remit GST based on the stated monetary value, any value added by distributors of vouchers, initially supplied to them at an amount less than the value stated on the voucher, would not be subject to GST.
4.8 For example, an issuer of the voucher sells a voucher with a stated monetary value of $44.00 to a retailer for $33.00 and the retailer subsequently sells the voucher to the consumer for $44.00. On the basis that all supplies on redemption are taxable supplies, GST should be paid on the $44.00 worth of goods and services purchased by the consumer on redemption of the voucher (which is also the amount received by the retailer) rather than the $33.00 that has been received by the issuer. The entity making the taxable supply of the goods or services is liable for the GST. The difference between the monetary value ($44.00) and the amount paid by the retailer ($33.00) may represent either the mark-up by the retailer or a commission paid by the issuer of the voucher to the retailer.
4.9 Section 100-15 of the GST Act sets out the increasing adjustment that is required to account for GST that becomes payable on any voucher that is wholly or partly unredeemed. If GST is remitted on the monetary value stated on a voucher then any increasing adjustment that may be required on the unredeemed or partly redeemed voucher should be based on the monetary value stated on the voucher.
Accounting for GST on Division 100 vouchers
4.10 The GST law currently applies so that where a Division 100 voucher such as a prepaid phone card or facility is provided through a distribution network, retailers/distributors are required to remit GST on any commission or similar payment and the supplier of the voucher can claim a corresponding input tax credit. An arrangement under Subdivision 153-B of the GST Act which applies to simplify accounting for GST between principals and agents is not operative for Division 100 vouchers as the effect of the arrangements only applies to taxable supplies. In the example outlined in paragraph 4.8, where the difference represents a commission, a retailer/distributor is required to remit GST of $1.00 on the commission of $11.00 and the supplier of the voucher can claim a corresponding input tax credit of $1.00. This requirement can result in significant compliance costs, in particular where there are thousands of distributors and retailers of Division 100 vouchers.
4.11 Section 29-25 of the GST Act sets out circumstances when the Commissioner may determine special rules for when GST, input tax credits and adjustments should be attributed to a particular tax period.
Summary of new law
4.12 This Bill amends the GST law to ensure that prepaid phone cards or facilities are eligible 'vouchers' for the purposes of the GST Act and also to clarify that GST should be calculated on the monetary value stated on a voucher or in accompanying documents.
4.13 In addition, subsection 29-25(2) of the GST Act will be amended to provide a further circumstance where the Commissioner can make a determination that GST, input tax credits and adjustments should be attributed to a particular tax period.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Prepaid phone cards or facilities will be treated as eligible vouchers for the purpose of Division 100 of the GST Act. | It was intended that all prepaid phone cards or facilities be treated as eligible vouchers for the purpose of Division 100 of the GST Act. However, this outcome is uncertain. |
| This amendment clarifies rather than changes the existing law. Division 100 will be amended to put beyond doubt that GST is to be remitted on the stated monetary value of a voucher. | Division 100 is intended to apply so that when a voucher is redeemed, the supplier of the taxable goods or services is required to remit GST calculated on the stated monetary value stated on the voucher. |
| This amendment provides a rule which simplifies accounting for GST on commissions where Division 100 vouchers are provided through a distribution chain. | Retailers/distributors of Division 100 vouchers are required to remit GST on any commissions or similar payments made to them and suppliers can claim a corresponding input tax credit. |
| The Commissioner will be able to determine that GST, input tax credits and adjustments can be attributed to a particular tax period in a further circumstance. That is where a supply or acquisition is made but the GST status will be unknown until a later supply is made. | The GST attribution rules in section 29-25 of the GST Act set out circumstances when the Commissioner can make a determination that GST, input tax credits and adjustments should be attributed to a particular tax period. |
Detailed explanation of new law
4.14 The definition of 'voucher' contained in section 100-25 of the GST Act is amended to ensure prepaid phone products or facilities are included as eligible vouchers for the purposes of Division 100. [Schedule 4, item 14, subsection 100-25(1)]
4.15 A 'prepaid phone card or facility' is defined to include any article or facility that is supplied on a prepaid basis for the primary purpose of enabling the holder to use telephone or like services, or to make acquisitions that are facilitated by using telephone or like services [Schedule 4, item 14, subsection 100-25(2)] . 'Like services' are intended to include services such as mobile phone messaging services (short message service (SMS) or multimedia messaging service (MMS)), text, graphics, images, sound, video, information, software content and data transmission services (including email) and Internet access services.
Example 4.1
A prepaid phone card for a mobile phone includes a facility which allows soft drink products to be purchased through a vending machine by making a phone call. The cost of the soft drink is deducted from the prepaid phone card account. Even though the prepaid phone card may also be used to acquire supplies other than telephone or like services it is an eligible Division 100 voucher if its primary purpose is to enable the holder to use it on a prepaid basis to acquire telecommunications supplies.
4.16 The definition of 'prepaid phone card or facility' is intended to cover:
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- phone cards sold with an initial store of value for use on payphones or home phones, which may or may not be rechargeable or topped up; and
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- prepaid mobile phone cards which are sold with a subscriber identity module (SIM) card or as a bundled kit (eg, mobile handset and SIM card - although it is a mixed supply).
4.17 If a Division 100 voucher is supplied as part of a bundled kit (eg, a mobile handset, a SIM card and an entitlement to telephone or other supplies that are facilitated by the voucher), the supply of the kit is a mixed supply. This means that the consideration for the supply of the kit is apportioned between its taxable and non-taxable components.
4.18 Prepaid phone cards or facilities that have a credit facility (eg, attached to a bank account) are financial supplies and are input taxed under Chapter 3 of the GST Act. These are not eligible vouchers for the purpose of Division 100. As well, a stored value card [F7] linked to an account provided by an Australian authorised deposit-taking institution is not a voucher. Furthermore, a mobile phone account where the user pays a monthly access fee or rental fee in advance and call costs under a 'plan' are not covered by this measure.
GST is to be remitted on the basis of the stated monetary value of the voucher
4.19 This Bill clarifies that when a voucher is redeemed, the consideration is the stated monetary value on the voucher less any amounts refunded, plus any additional consideration provided for the supply on redemption. If the voucher is only partly redeemed, the consideration for the supply is the amount of the stated monetary value on the voucher that is redeemed when it is used to purchase goods and services plus any additional consideration provided. [Schedule 4, item 9, section 100-12 ]
Example 4.2
Michael uses a $20.00 voucher supplied by a retailer to purchase goods valued at $17.00. The retailer gives Michael change of $3.00. The consideration for the supply of goods to Michael is the stated monetary value on the voucher, $20.00, less the refund of $3.00. The retailer will remit GST of 1/11 of $17.00.
4.20 For this purpose, the 'stated monetary value' means the monetary value stated on the voucher, or documents accompanying the voucher when it is issued [Schedule 4, item 7, subsection 100-5(2A)] . If the voucher is a prepaid phone card or facility the stated monetary value is the monetary value stated on the voucher or in documents accompanying the voucher when supplied by the telecommunications provider. If the card is topped up, the stated monetary value includes the topped up amount that has not been redeemed. If a telecommunications supplier makes any bonus supplies such as extra credits, additional time and/or bonus or text messages, (ie, for no additional consideration) the value of these supplies are not included in the stated monetary value [Schedule 4, item 7, subsection 100-5(2B)] . The value of bonus supplies will be evident from documentation issued by telecommunications suppliers.
4.21 Where a prepaid phone card or facility can be topped up, the stated monetary value once topped up may not be the same amount as the stated monetary value of the voucher when it was issued.
Example 4.3
Jill purchases a rechargeable prepaid mobile phone card which has a stated monetary value of $100. Over the period of initial redemption of the card the supplier remits GST on $100. Once the card is fully redeemed Jill recharges the card to the value of $80.00 (the 'topped up' amount). The stated monetary value of the card is $80.00. In the relevant tax period, Jill uses the card to make calls within Australia to the value of $60.00. The supplier of the voucher (the telecommunications supplier) will remit GST on 1/11 of the $60.00. The unredeemed amount of the card is $20.00.
Example 4.4
Following from Example 4.3, in the next tax period Jill recharges the card by $60.00. The stated monetary value of the card is now $80.00, reflecting the remaining value of supplies that can be obtained under that card.
Example 4.5
A telecommunications supplier, as part of a marketing strategy, provides a customer with bonus credits valued at $250 if the customer tops up the card for $50.00. The customer accepts the offer. The stated monetary value of the voucher is $50.00, not $300. GST is not payable on redemption for the additional supplies provided by the telecommunications supplier.
4.22 The 'stated monetary value' means the monetary amount explicitly set out on or incorporated on the voucher or in documents accompanying the voucher. A voucher which exists partly in a physical form and partly in an electronic or machine readable form, can still satisfy this requirement. For example, if the voucher exists on a plastic card, the monetary value may be incorporated in a bar code or magnetic strip or on a database maintained by or for the supplier. The bar code, magnetic strip or database may also incorporate the unredeemed value remaining on the voucher including any recharge of that voucher.
4.23 This Bill inserts the word 'fully' into paragraph 100-15(1)(c). This clarifies the intention to apply the section not only where a voucher has not been redeemed at all, but also where a voucher has been partly redeemed. [Schedule 4, item 11 ]
4.24 This Bill also ensures that any increasing adjustment to account for the GST that becomes payable on unredeemed vouchers (or partly redeemed vouchers) is calculated on the stated monetary value of the voucher [Schedule 4, item 12, subsection 100-15(2)] . A voucher is considered fully redeemed upon redemption of the stated monetary value of the voucher or top up. (See Example 4.5 - once the customer utilises the first $50.00 of services available the voucher is considered fully redeemed.)
Example 4.6
Caf é Piazza sells a $100 voucher to Patrick in March 2005. The voucher is valid for 12 months from the date of issue. Patrick uses the voucher to acquire goods to a total cost of $67.00 before it expires in March 2006. When Caf é Piazza writes back the unused credit of $33 to current income, there is an increasing adjustment of $3.00 for GST purposes, that is, 1/11 of $33.00.
Arrangement to simplify accounting for GST
4.25 This Bill inserts section 100-18 into Division 100 which allows suppliers of Division 100 vouchers and their distributors to voluntarily enter into an arrangement to simplify the accounting for GST. The arrangement will apply so that where a supplier of a voucher enters into an arrangement with a distributor of the voucher, the supply of commission services is not a taxable supply. That is, any commission or similar payment made or payable to the retailer or distributor will not be for a taxable supply. [Schedule 4, item 13, section 100-18 ]
4.26 The effect of treating a commission or similar payment as not being consideration for a taxable supply is that it is not necessary for the distributor or retailer in a distribution chain to remit GST on the services for which the commission or similar payment is consideration, and the supplier of the voucher cannot claim the corresponding input tax credit. The correct amount of GST will be paid as the supplier of the underlying supplies is required to remit GST on the stated monetary value of the voucher. In the example in paragraph 4.8, where the difference represents a commission, the retailer or distributor will not be required to remit GST of $1.00 on the commission of $11.00 and the supplier of the voucher will not be able to claim a corresponding input tax credit of $1.00.
4.27 This arrangement is only available where a voucher is supplied through a distribution chain and the supplier of the voucher is liable to pay a commission or similar payment for on-supplying the voucher. This may include, for example, where under an agreement between the supplier of the voucher and its distributor, the commission is offset against the payment made by the distributor to the supplier where the distributor sells the voucher on behalf of the supplier.
4.28 This Bill amends subsection 29-25(2) to provide a further circumstance whereby the Commissioner can determine when GST, input tax credits and adjustments should be attributed to a particular tax period. The Commissioner will be able to make such a determination where a supply or acquisition is made but the GST treatment will be unknown until a later supply is made [Schedule 4, item 1, paragraph 29-25(2 )( h)] . This circumstance will include where a supply is made through a distribution chain.
Application and transitional provisions
4.29 Items 1, 13 and 18 apply from the date of Royal Assent. [Schedule 4, subitem 20(1)]
4.30 Items 2 to 8, 10, 14, 16, 17 and 19 apply from 1 July 2000, the commencement date of the GST. These amendments clarify the operation of the regime and are beneficial to taxpayers. [Schedule 4, subitem 20(2)]
4.31 Items 9, 11, 12 and 15 apply to supplies made from 11 May 2005. [Schedule 4, subitem 20(3)]
4.32 A transitional rule applies which ensures that suppliers and distributors of Division 100 vouchers who have entered into an agreement (under Subdivision 153-B) that is operative on the date of Royal Assent will be effective or valid in relation to supplies of vouchers made after the date of Royal Assent. [Schedule 4, item 21 ]
Consequential amendments
4.33 Items 2 to 6, 8 and 10 update references to ensure consistency of terminology in Division 100 as a result of the amendments. [Schedule 4, items 2 to 6, 8 and 10 ]
4.34 Items 14 to 19 insert new definitions and update an existing definition in section 195-1 of the GST Act. [Schedule 4, items 15 to 19 ]