Ruling Compendium

What happens if a rebate is given to the dealer but no discount is provided to the customer?

A rebate may still be third party consideration even if no discount is passed onto the customer - this will depend on the facts and circumstances surrounding the payment.

Note that the ruling is lengthy, but prefer to retain the examples rather than delete to make shorter.

The suggestion to confine the AP Group decision to the transactions, parties and tax periods considered in the decision raises significant difficulties, both administrative and practical. For example, this would create an uneven playing field across industry, where equivalent payments made by some manufacturers or distributors would be treated differently to payments made by others, even where the payments are essentially the same.

The advancement of the third party consideration argument in AP Group might be regarded as unfortunate as it significantly complicates the administration of GST in a franchisee franchisor relationship.

To adopt the third party argument will only serve to complicate the efficient and proper operation of the GST system.

It seems the ATO agrees through the 'one sided Division 134 adjustment' sought to ameliorate the 'inappropriate GST outcome'.

In addition, the concept of third party consideration is not novel - the GST Act is clear that GST liabilities can arise from third party consideration. This is expressly provided for by subsection 9-15(2) and confirmed by the Full Federal Court in TT-Line.

The 'one sided Division 134 adjustment' is not used to ameliorate any 'inappropriate GST outcomes'. We consider that the terms of section 134-5 do not preclude a decreasing adjustment from arising where the payment is third party consideration for a supply made by the payee - paragraph 134-5(1)(e) only precludes a decreasing adjustment from arising if a supply for consideration has been made to the payer.

The critical point is what the payment is for. The payment is not for the performance of franchisee services generally, the payment is for the sale of the car to the customer. Simply performing services generally does not entitle a dealer to the payment of a fleet rebate or run-out model support payment - it is the sale of the car to a customer that the payment is made for.

The approach taken in the draft ruling is inappropriate and does not support the GST system

Given the evolving nature of the payments, paragraph 18 of the draft ruling was intended to give taxpayers certainty where they have attempted, in good faith, to classify a payment and there is no economic difference. The paragraph should not be construed as saying the Commissioner will not enforce the ruling or in any way lacks confidence in administering the view.

This pragmatic approach is now reflected in paragraphs 318 and 321 of the final Ruling.

The ATO has consulted extensively with key stakeholders in the industry to address implementation issues following the AP Group decision, including:

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allowing the industry time (until 1 May 2014) to implement the decision, including making changes to their systems and documentation

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making a legislative instrument, which in practical terms means that dealers don't need to change their existing invoices or reveal third party incentive payments^**

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ongoing dialogue with industry in developing and finalising the Ruling.

The examples are designed to provide industry with a practical way to implement the decision and comply with the law.

The incentive by incentive approach seeks to establish a principle and extend that principle to 'groups of payments' based on the findings of fact of the AAT in AP Group.

It would be impossible to rule exhaustively on every single permutation of facts. The 'groups' identified are factual patterns which would likely point towards one characterisation or another, and are included to assist taxpayers in characterising their own payments.

Saga Holidays was referred to by the Full Federal Court in AP Group at [42] to support the proposition that 'all aspects of the arrangements between the dealer, the manufacturer and the customer had to be considered'.

The distinction is unlikely to be capable of adoption by the parties. It is likely that the parties will continue the previously accepted practice of treating the payments as taxable to avoid the risk of underpayments.

On the other hand, Example 9 dealt with a situation where the dealer has no obligation to build a showroom. The payment was made whether or not the dealer builds the showroom, therefore, the payment cannot be said to be for a supply the dealer makes. As the example did not illustrate the point being discussed in that section of the draft Ruling, the example has been deleted from the final Ruling.

Drawing this distinction is not felt to be construing the legislation in a 'narrow and technical way'. The distinction is highlighted by the differences in how and why a payment is made in practice. A payment made for a dealer doing something specific, is not the same as a payment made irrespective of whether a dealer does something specific.

In light of the Full Federal Court decision in AP Group (and our earlier responses on being bound by it), we do not agree that the parties can continue their previous practice.

Performance by the franchisee of its 'services' are of critical importance to the franchisor - failure to represent the franchisor and its products and services in accordance with the franchisor's market strategy and program will impact on the franchisor's reputation and brand for all of its outlets.

Support for the views in the Ruling, including the distinction suggested by the authors, may be found in the text of not only the AP Group decision, but also other key GST cases on supply and consideration.

On the other hand, where the dealer's conduct can be characterised as being for its own benefit and thus something the dealer would be likely to do anyway without an incentive payment, the dealer is unlikely to have made a supply to the manufacturer for that payment.

The correct classification of the performance of these requirements is of the 'supply of services', which is a single supply and should not be broken into different aspects of the types of things 'done' to achieve the broad aims of the franchise agreements.

Disagree with the draft Ruling seeking to identify particular supplies for different incentive payments.

The Court made many statements of law in its decision that are not confined to nor restricted by the AAT's description of facts. In particular, the Court stated at [33] that 'not every connection between the giving of consideration and the provision satisfy the first condition of making a taxable supply' and ultimately concluded that none of the payments were for any supplies by the manufacturer to the dealer.

The Court also specifically noted at [43] that 'selection of the appropriate level of generality or particularity at which the assessment is to be carried out is fact-dependent. The critical facts include the nature of the supply said to be involved.'

There is nothing in the Division nor the extraneous material, which support a view that Division 134 is not intended to apply where the payee has made the relevant acquisition for a creditable purpose. It is only a payment for a supply from the payee to the payer that negates the adjustments under the Division.

If the legislature had intended the word 'by' in paragraph 134-10(1)(e), it would have chosen it. The word 'from' is not used anywhere else in the GST to describe a supply 'by' a supplier.

It is clear from the context of the provision that an increasing adjustment does not arise if the payee has made a supply - so much is clear from the language 'the payment is not consideration for a supply from you'. A supply from an entity can only be a supply made by the entity - we do not consider there being any other available interpretations for this phrase.

Further, we do not agree that adjustments under the Division can be generally negated by conflating the words of paragraphs 134-5(1)(e) and 134-10(1)(e), which are two different provisions.

Further, subsections 134-15(2) and 134-20(3) provide that a decreasing adjustment note is not required to be issued for an adjustment of an amount lower than provided for under subsection 29-20(2) ($75).

The only difference between the two sets of requirements is that an adjustment note under section 29-75 does not need to contain the recipient's identity if the adjustment relates to a tax invoice where the price of the supply is less than $1,000. As third party adjustments under Division 134 do not relate to invoices, there is no need for an equivalent exception.

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the possession, dispositive power and risk over the vehicles; and

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the title to the vehicle.

There is strong authority that the acquisition referred to in the draft Ruling by the franchisee is not of 'the same thing' that is supplied by the franchisor to the financier.

Contend that the supply by the dealer to the customer is a single supply of 'servicing' and includes the free transport to and from the dealership and not 'two supplies'. The franchisee has performed the servicing in accordance with the quality requirements of the franchise agreement and consideration is payable for the franchise services in general.

In the alternative it could be argued that the free transport is part of the supply of the servicing. In which case, the payment by the manufacturer to the dealer would be third party consideration for a supply by the dealer to the customer. This wouldn't be our preferred view.