GST issues registers
Primary production industry partnership1 Agency
Question
Do the provisions of Subdivision 153-B of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (dealing with arrangements under which intermediaries are treated as suppliers or acquirers) require you to treat all supplies or acquisitions made through an agent as separate supplies or acquisitions to or from that agent, or is there some choice?
Non-interpretative - straight application of the law
Answer
In order that supplies and/or acquisitions made through an agent can be treated as separate supplies to the agent or separate acquisitions from the agent, there must be a written agreement with the agent. The agreement must specify the kinds of supplies and/or acquisitions to which the agreement applies. If you do not wish to treat all kinds of supplies and/or acquisitions as being covered by the agreement, you should not specify those kinds of supply or acquisition in the agreement.
Explanation
The ability to specify particular kinds of supplies and/or acquisitions in the written agreement with the agent effectively allows a choice. For example, you could agree that only supplies and acquisitions of livestock were to be covered by the agreement. If this were the case, supplies and acquisitions through the agent of things other than livestock would not be treated as separate supplies and acquisitions to or from the agent.
The agreement could, for example, also specify that it only applied to supplies (or supplies of a particular kind) through the agent. In this case, all acquisitions (or supplies of some other kind) through the agent would not be treated as separate acquisitions or supplies from or to the agent.
If you make supplies and/or acquisitions through a number of agents, you may choose to enter into written agreements with only some of the agents and the kinds of supplies and/or acquisitions specified in each of those agreements do not have to be the same.
Also, where a written agreement specifies a particular kind or kinds of supply, but in relation to a particular supply of that kind you issue a tax invoice or adjustment note to the third party (recipient) in your own name, this overrides the agreement in relation to the particular supply.
You should note that the way in which you complete your business activity statements will be different depending upon whether or not your supplies and acquisitions are covered by agreements with your agents. The application of the attribution rules will also vary depending on whether particular transactions are covered by the agreements. This may also have an effect on the amounts included in your business activity statements for particular tax periods.
Subdivision 153-B has been amended to allow entities that facilitate the supplies or acquisitions of an enterprise carried on by another entity through acting as an intermediary to use Subdivision 153-B, irrespective of whether the intermediary can legally bind the principal by their acts. Billing and paying agents, among others, would be able to access these accounting procedures. The amendments will apply to supplies and acquisitions made by intermediaries on or after 1 July 2010.
1.1.2 - Agent acts as a Principal under Subdivision 153-B.
Question
Where an agent acts as a principal under Subdivision 153-B of the GST Act, does the agent collect and remit GST?
Non-interpretative - straight application of the law
Answer
Yes.
Explanation
Section 153-50 of the GST Act provides that entities may enter into an arrangement under which an intermediary will be treated as a separate supplier and/or acquirer. That is, the intermediary will be treated as a principal in its own right.
To enter this arrangement there must be a written agreement under which:
- •
- the intermediary arranges to make supplies and/or acquisitions to or from third parties on behalf of the principal
- •
- the kinds of supplies and/or acquisitions to which the arrangement applies are specified
- •
- the intermediary is treated for the purposes of GST law as a principal in making supplies or acquisitions
- •
- the intermediary will issue all tax invoices and adjustment notes relating to those supplies to third parties in the intermediary's name and the principal will not issue such documents
- •
- both parties must be registered.
The effect of entering into these arrangements is that the principal and the intermediary treat the supply of goods or services that the principal makes to third parties through the intermediary as two separate supplies, and that they are treated as acting between themselves as principal to principal for GST purposes.
A taxable supply made to a third party is taken to be a taxable supply made by the intermediary. In addition, the principal is taken to have made a taxable supply to the intermediary.
1.1.3 - Agent's GST turnover threshold
Question
Does an agent have to include this in their GST turnover threshold?
For the source of the ATO view, refer to paragraph 95 of GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law.
Answer
No.
Explanation
Paragraph 95 of GSTR 2000/37 provides:
Section 188-24 allows an intermediary the option of calculating their turnover as if the arrangement was not entered into. If the intermediary chooses not to use this basis of calculation, their turnover is calculated by using the value of the supplies they are taken to make under the arrangement as per sections 153-55 and 153-60.
Where the option available under section 188-24, of the GST Act, is exercised, provided the value of the taxable supply you make as an intermediary is the same amount as the creditable acquisition you make as an intermediary. The net effect will be nil.
1.1.4 - Agents bank charges that are charged to clients
Question
Agents charge their clients for bank charges incurred by the agent in operating the agents' business bank account. Is this a financial supply or is this part of the overhead costs of an enterprise being conducted by an agent?
Non-interpretative - straight application of the law
Answer
These are part of the overhead costs of operating an enterprise which are usually incorporated into the commission charged to the client.
Explanation
Recovery of bank charges.
Agents who on-charge bank charges to their clients are not making a financial supply of the bank charges; they are merely passing this cost on. The supply from the bank to the agent will be a financial supply and will be input taxed (Subdivision 40-A of the A New Tax System (Goods and Services Tax) Act 1999 as well as Division 40 of the A New Tax System (Goods and Services Tax) Regulations 2019). If the agent then chooses to pass this cost on to the client then this will form part of the cost of services provided. It is not a financial supply by the agent.
However, where the agent charges interest on overdue accounts, this will be a financial supply by the agent and will be input taxed. If agents make financial supplies themselves, they need to be aware of the special rules that apply to the making of financial supplies.
1.1.5 - Dealing through agents
Question
How does the GST law in relation to tax invoices apply to situations involving agents?
For the source of the ATO view, refer to:
- •
- GSTR 2013/1 - Goods and services tax: tax invoices
- •
- GSTR 2000/10 - Goods and services tax: recipient created tax invoices.
Answer
Under the GST legislation, input tax credits cannot be claimed for creditable acquisitions with a GST exclusive value of more than $75 unless you hold a tax invoice.
Subsection 29-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the information which a document must contain in order for it to be accepted as a tax invoice. All tax invoices must contain enough information to enable the identity and the ABN of the supplier to be clearly ascertained. If the GST inclusive amount payable for the supply or supplies to which a tax invoice relates is $1,000 or more, the tax invoice must also contain enough information to enable the identity or ABN of the recipient to be clearly ascertained.
The legislation also contains special rules in relation to agents (Division 153 of the GST Act). These rules enable you to claim input tax credits if either you or your agent holds a tax invoice. The rules also enable agents to issue tax invoices for supplies made on your behalf - but you and your agent must not both issue separate tax invoices for the same supply.
When you issue a tax invoice for a taxable supply, it must contain enough information to enable your identity or ABN to be clearly ascertained. If the GST inclusive amount payable for the supply or supplies to which the tax invoice relates is $1,000 or more, the tax invoice also needs to contain sufficient information to enable the identity or ABN of the recipient to be clearly ascertained.
When your agent issues a tax invoice for a taxable supply made on your behalf, it must contain sufficient information to enable your identity and ABN to be clearly ascertained. If the GST inclusive amount payable for the supply or supplies to which the tax invoice relates is $1,000 or more, the tax invoice also needs to contain sufficient information to enable the identity or ABN of the recipient to be clearly ascertained.
If you make creditable acquisitions through an agent, any tax invoice issued by the supplier or his or her agent, can be held by you or your agent if you have one. Any tax invoice held by you or your agent will need to contain sufficient information to enable your identity or ABN to be clearly ascertained.
There may be circumstances where a document contains the identity and/or ABN of the agent instead of the supplier's or recipient's identity and/or ABN. In this case, the document is not a valid tax invoice.
The Commissioner has made a determination under subsection 29-10(3) of the GST Act to waive the requirement in certain circumstances for a recipient to hold a tax invoice when attributing an input tax credit to a tax period. This instrument has a date of effect of 1 July 2010. See A New Tax System (Goods and Services Tax) Waiver of Tax Invoice Requirement (Acquisitions Under an Agency Relationship) Legislative Instrument 2013 for further details.
Recipient created tax invoices (RCTI)
The GST legislation also provides for recipients of taxable supplies to issue tax invoices in relation to those supplies. One common class of tax invoices which may be issued by recipients relates to supplies of agricultural products where the recipient determines the value of the supply subsequent to the supply taking place.
The information required on an RCTI is essentially the same as that for a normal tax invoice for supplies the GST inclusive amount payable for which is $1,000 or more and must also include the identity or ABN of the recipient.
If you make supplies through an agent for which the recipient issues a tax invoice, the RCTI held by you or your agent will need to contain sufficient information to enable the identity or ABN of the recipient, and your identity and ABN to be clearly ascertained.
Additional information on tax invoices
Where an agent issues a tax invoice for his or her own services to a principal, the normal information requirements exist, that is, it must contain sufficient information to enable the identity and ABN of the agent (the supplier of the agency services) and, if the GST inclusive amount of the supplies to which the tax invoice relates is $1,000 or more, the identity or ABN of the recipient (the principal) to be clearly ascertained. However, there is no prohibition in relation to other additional information relevant to the agency arrangement being included on the tax invoice. Such additional information may include details of the supply made on behalf of the principal or the fact that an RCTI has been received from a purchaser and a reproduction of the details of that RCTI.
Examples of model tax invoices can be viewed at issues 4.3.1 (tax invoice), 4.1.4 (agent/vendor tax invoice) and 4.4.1 (recipient created tax invoice).
GST-free supplies
Where a GST-free supply is made by a farmer through an agent or to a farmer through the supplier's agent, either the supplier or their agent can issue an invoice. However, the invoice will not be a tax invoice because the supply is not a taxable supply.
Circumstances involving issuing invoices when only GST-free supplies are covered by the invoice are addressed at issue 4.5.1.
Agent as principal
Additionally the principal and an agent may agree in writing to treat supplies and acquisitions as though they were acting on a principal to principal basis.
Under these arrangements, the agent will be treated as making supplies to, or acquisitions from, the third party and the principal will be treated as making corresponding supplies to, or acquisitions from, the agent. In relation to supplies, the agent will issue tax invoices in the agent's own name to the third party and the principal will issue a tax invoice to the agent and not issue any tax invoice to the third party in relation to that supply. In relation to acquisitions, the agent will issue a tax invoice to the principal.
In calculating the value of supplies made by a principal to an agent, any amount payable by the agent to the principal in relation to the supply is taken to be reduced by the amount of any commission payable by the principal to the agent. The provision of services by the agent to the principal is taken not to be a taxable supply.
In calculating the value of supplies made by an agent to a principal, any amount payable by the principal to the agent in relation to the acquisition is taken to be increased by the amount of any commission payable by the principal to the agent. Again, the provision of services by the agent to the principal is taken not to be a taxable supply.
Where such arrangements are implemented, the options set out earlier about tax invoices issued by agents in relation to supplies made for principals will no longer be available, because the agent is taken to have made the supply in the agent's own name and will be solely responsible for issuing any tax invoices.
Additional information on this issue can be viewed at issue 1.1.1.
1.1.6 - Spotter's fee to another agent
Question
When an agent pays a spotters fee to another agent is this subject to GST?
Non-interpretative - straight application of the law
Answer
Yes.
Explanation
Where a selling agent pays a 1% 'rebate' to the buyer's agent for introducing his buyer to the selling agent, the payment of the 1% fee (which is in substance a 'spotters fee') by the selling agent to the buyers agent is a taxable supply, if both parties are registered for GST and all other provisions of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. The buyer's agent will be liable for GST on this transaction. The seller's agent will be able to claim an input tax credit (ITC) provided the provisions of Division 11 of the GST Act are met and he/she holds a valid tax invoice.
1.1.7 - 'Bulk billing' entities operates as an agent for a selling agent
Question
Where a 'bulk billing' entity operates as an agent for a selling agent what are the GST implications?
For the source of the ATO view, refer to:
- •
- Paragraphs 95 to 97 of - Goods and services tax: tax invoices
- •
- GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law.
Answer
Division 153 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) has application between the selling agent and the bulk billing agent.
Explanation
Where an agency situation exists Division 153 of the GST Act has special rules about agents and tax invoices. It reflects the position at common law that a supply or acquisition your agent makes on your behalf is no different from one that you make yourself.
Under Subdivision 153-A of the GST Act a principal's GST obligations are complied with if your agent issues a tax invoice and adjustment notes on your behalf. Therefore the 'bulk billing' entity can issue tax invoices as an agent for the selling agent to livestock purchasers.
If you are unsure as to whether an agency situation exists, see Goods and Services Taxation Ruling GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law which provides more information on this topic.
The services provided by the 'bulk billing' entity to the selling agent may be taxable supplies made to the selling agent.
For a supply to be taxable under section 9-5 of the GST Act the following requirements must be satisfied:
Section 9-5
You make a taxable supply if the following occurs:
- (a)
- you make the supply for consideration
- (b)
- the supply is made in the course or furtherance of an enterprise that you carry on
- (c)
- the supply is connected with Australia
- (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.
If the 'bulk billing' entity is making taxable supplies to the selling agent the services provided will be subject to GST. The 'bulk billing' entity may need to provide a tax invoice to the selling agent for the services provided.
An example of where a 'bulk billing' entity operates as an agent for selling agent in a livestock scenario is as follows:
There are several regional livestock markets throughout the country where selling agents have contracted with 'bulk billing' entities, which carry out a number of services as agent for their member selling agents.
Each selling agent enters a written agreement with the entity. The agreement appoints the entity to act as an agent for the selling agent and for the entity to provide a number of services to the selling agent such as:
- •
- providing labour to weigh and transport cattle
- •
- bulk billing of livestock sales
- •
- collection and remitting of payments from purchasers to vendors
- •
- the provision of computer and software facilities to selling agents to conduct livestock sales etc.
1.1.8 - On charging Financial Institutions Duty
Question
Agents charge their clients for Financial Institutions Duty (FID) incurred by the agent in operating the agents' business bank account. Is this a financial supply or is this part of the overhead costs of an enterprise being conducted by an agent?
Non-interpretative - straight application of the law
Answer
These are not financial supplies but are part of the overhead costs of operating an enterprise, which are often incorporated into the commission charged to the client.
Explanation
Agents who on-charge FID charges to their clients are not making a financial supply of the FID charges; they are merely passing this cost on. The supply from the bank to the agent will be a financial supply and will be input taxed (Subdivision 40-A of the A New Tax System (Goods and Services Tax) Act 1999 as well as Division 40 of the A New Tax System (Goods and Services Tax) Regulations 2019). If the agent then chooses to pass this cost on to the client then this will form part of the cost of services provided by the agent. It is not a financial supply by the agent.
However, where the agent charges interest on overdue accounts, this will be a financial supply by the agent and will be input taxed. If agents make financial supplies themselves, they need to be aware of the special rules that apply to the making of financial supplies.
For further information on bank charges, please refer to issue 1.1.4
Question
Where an agent acts on behalf of transport carriers (that is, livestock or timber carriers) what are the GST implications?
Non-interpretative - other references (see refer to GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law)
Answer
The GST implications for agents in these types of industries are no different to any other industry where an agency relationship exists between the parties.
For detailed analyses of GST and agency relationships see Goods and Services Tax Ruling GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law.
Explanation
Under the basic GST rules about tax invoices and adjustment notes, a tax invoice for a taxable supply or an adjustment note must be issued by a principal who makes supplies through an agent. However Subdivision 153-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the principal's obligations are complied with if the agent issues tax invoices and adjustment notes on behalf of the principal for those supplies made by the principal through the agent. Therefore either the principal or his agent (but not both), may issue a tax invoice to the recipient of a supply, see sections 153-15 and 153-20 of the GST Act respectively.
Where an agent acts on behalf of a principal, such as a livestock or timber carrier, the following GST consequences may flow:
- •
- The carrier (principal) or his agent but not both, can issue a tax invoice to the owner of the product being the recipient of the carrier services.
- •
- In addition if the agent charges the carrier a fee (which may be described as a collection fee, administration fee etc) for acting as the carrier's agent, this will be a supply of services by the agent to the carrier which will be subject to GST where all other requirements of section 9-5 of the GST Act are met.
- •
- The agent will need to issue a tax invoice to the carrier for these services when requested, so long as no tax invoice has been issued by the principal.
The above situation can be contrasted with a scenario where an agent acts on behalf of a timber or livestock producer and organises transportation and other services on their behalf.
1.1.10 - Vendor initially not registered, post sale is registered
Non-interpretative - other references (see GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law)
Question
An agent sells goods for a vendor at an auction on the basis that the vendor is not registered for GST, however, after the sale the vendor informs the agent that they are registered for GST. What are the GST implications?
Answer:
A GST registered vendor has a liability to remit 1/11th of the sale proceeds to the ATO irrespective of whether GST was stated to be included in the sale price.
Explanation:
For commercial law purposes, an agent is a person who is authorised, either expressly or by implication, by a principal, to act for that principal so as to create or affect legal relations between the principal and third parties. The principal is bound by the acts of an agent as a result of the authority given to the agent.
Pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) you must pay the GST payable on any taxable supply that you make.
When a GST registered vendor makes supplies through an agent which are subject to GST then the vendor has a liability to pay GST in relation to the sale proceeds regardless of whether GST was stated by the agent to be included in the sale price. The amount of GST payable is 1/11th of the consideration. (Please refer to section 9-75 of the GST Act, which is reproduced below.)
The purchaser of the goods may be entitled to an input tax credit if the supply of the goods is a creditable acquisition and the purchaser holds a valid tax invoice.
For further information on agency relationships, see Goods and Services Tax Ruling GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law.
If further consideration is received from the purchaser in respect of the GST that may not have been included in the original price, this represents a change in the consideration for the supply and will be an adjustment event (paragraph 19-10(1)(b) of the GST Act).
GST of 1/11th of the extra consideration, will be payable by the supplier. The purchaser may be entitled to an input tax credit and would need to hold an adjustment note from either the vendor or the vendor's agent to do so.
Please note the following relevant provisions, which relate to adjustment notes.
A document is an adjustment note if it satisfies subsection 29-75 (1) of the GST Act, which provides that it:
- (a)
- must be issued by the supplier of the taxable supply in the circumstances set out in subsection (2); and
- (b)
- must set out the ABN of the entity that issues it; and
- (c)
- must contain such other information as the Commissioner determines in writing; and
- (d)
- must be in the approved form.
However, the Commissioner may treat as an adjustment note a particular document that is not an adjustment note.
The supplier of a taxable supply, as provided in subsection 29-75(2) of the GST Act, must:
- •
- within 28 days after the recipient of the supply requests the supplier to give an adjustment note for the adjustment relating to the supply; or
- •
- if the supplier has issued a tax invoice in relation to the supply (or the recipient has requested one) and the supplier becomes aware of the adjustment before an adjustment note is requested - within 28 days after becoming aware of that fact;
give to the recipient an adjustment note for the adjustment, unless any tax invoice relating to the supply would have been a recipient created tax invoice (in which case it must be issued by the recipient).
Please find reproduced below section 9-75 of the GST Act, which relates to the amount of GST payable on taxable supplies.
Section 9-75 of the GST Act provides that:
The amount of GST on a taxable supply is 10% of the value of the taxable supply.
(1) The
value
of a taxable supply is as follows:
Price × 10/11
where:
price
is the sum of:
1.2.1 - Del Credere agency arrangements
Question
With reference to attribution rules, is there any difference in the GST treatment between supplies made through 'agents' and supplies made through a Del Credere agency arrangement?
For the source the of ATO view refer to:
- •
- GSTR 2000/37 - Goods and services tax: agency relationships and the application of the law
- •
- GSTR 2000/29 - Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25
Answer:
No
Explanation:
The difference between vendors making supplies through a normal agent as compared with making supplies through a 'Del Credere' agent, is that in the latter situation, the vendor will receive payment for supplies (by virtue of the Del Credere Agreement) even where the recipient has not made payment within the required period set down in the sale contract.
Assumption
The following answer has been made on the basis that a vendor receives payment from a del credere agent prior to the time when the vendor knows that:
- •
- any consideration has been received by the agent from a purchaser; or
- •
- the invoice has been issued by the agent for a supply made by the agent on the vendor's behalf.
It is also based on the assumption that the agent makes payment for the full consideration under the Del Credere Agreement rather than part payment in relation to a supply.
Similar circumstances are covered in paragraph 87 and 88 of Goods and Services Tax Ruling GSTR 2000/29 Goods and Services Tax: attributing GST payable, input tax credits and adjustments, which covers the situation where the vendor relies on his agent for information about when a supply occurs.
Please also refer to . Because the vendor is unaware of when a supply is made on his behalf by the agent, the normal attribution rules vary so that in the case of a vendor operating on a:
Cash basis:
The vendor attributes GST to the tax period or periods in which the vendor becomes aware that consideration for the supply has been received, but only to the extent of the consideration that the vendor becomes aware of.
Non-cash basis:
- •
- the vendor attributes GST to the earlier of:
- •
- the tax period in which the vendor becomes aware that any of the consideration for the supply has been received; or
- •
- the tax period in which the vendor becomes aware that an invoice relating to the supply has been issued.
However, the above variation in the attribution rules, should not be misinterpreted to suggest that a vendor doesn't have a GST liability upon receiving payments from his agent, because he is unable to determine the identity of the recipients to which those payments relate, at that particular instance. In other words, the vendor becomes aware that consideration has been received by the agent for supplies by virtue of having received payments from the agent.
Payments made by an agent under a Del Credere Agreement, are consideration in the hands of the vendor; even though the agent may not have received payment from the recipient (refer subsections 9-15(1) and (2) of the GST Act).
Where a vendor who is reliant on the agent for information about the supply, and receives Del Credere payments, GST should be attributed to the tax period for the following bases:
Cash basis: the tax period in which payment is received by the vendor from the agent.
This accords with the basic attribution rule in that the payment be accounted for when it is received by the vendor as consideration; and simultaneously
It accords with subclause 3(2) of A New Tax System (Goods and Services Tax) (Particular Attribution Rules for Supplies and Acquisitions made through Agents) Determination (No. 1) 2000 in that the time of receipt of payment from the agent is the tax period in which the vendor becomes aware that any of the consideration for a supply has been received
Non-cash basis: the tax period in which any of the consideration is received.
This is in accordance with subclause 3(1) of A New Tax System (Goods and Services Tax) (Particular Attribution Rules for Supplies and Acquisitions made through Agents) Determination (No. 1) 2000 in that it is the first instance at which the vendor becomes aware that:
- •
- any of the consideration for the supply has been received; or
- •
- an invoice relating to the supply has issued (leading to the response of payment by the recipient).
1.2.2 - Del Credere Agency - GST implications of payment default by purchaser
For the source of the ATO view refer to GSTR 2000/37 - GSTR 2000/37 Goods and services tax: agency relationships and the application of the law.
Question
An agent sells livestock, produce, or other taxable goods on behalf of a GST registered principal ('the vendor') to a recipient of the goods ('the purchaser'). The agent charges the vendor a particular rate of commission for the totality of the selling services. The agent operates on a 'del credere' basis - that is guarantees the vendor will be paid, even in a situation where the purchaser defaults on payment and it is not feasible to recover the goods. What are the GST implications for the vendor, agent, and purchaser in the case of such a default by the purchaser, where the sale cannot be cancelled?
Answer
The agent has paid the purchase monies to the vendor, as they are obliged to under the del credere basis of the agency, but has found it impossible to recover the monies from the purchaser. The sale has not been reversed or cancelled and the purchaser retains possession of the items sold.
The relevant GST implications for the various parties are as follows:
- •
- the vendor, having received the purchase monies, remains liable for the GST on the taxable supply of the items
- •
- the purchaser, having not paid for the items, loses any entitlement to an input tax credit on the acquisition of the items, and
- •
- the agent, has no GST consequences - that is, they are neither liable for a taxable supply of the goods, nor entitled to an input tax credit. The agent remains liable for the GST included in the commission.
Explanation
References to the GST Act are references to A New Tax System (Goods and Services Tax) Act 1999.
Background
In an ordinary case of a sale through a stock and station agent, the livestock, produce or other goods change hands and payment is made by the purchaser. The agent passes on this payment to the vendor, after deducting commission and other particular costs.
In many settings, for example an auction, the standard conditions of sale may preclude a purchaser from collecting the items until payment is made.
However, instances arise, particularly with established purchasers, where the agent will allow the purchaser to receive the items, before the tendering of payment. Also, where payment is made by cheque, the cheque may be dishonoured and subsequent recovery may prove impossible - for example, the purchaser has unexpectedly become insolvent.
Where these difficulties arise, the vendor is frequently protected by way of a standard 'del credere' guarantee by the agent to forward payment to the vendor, despite the payment default. The guarantee is not always evidenced in writing if it is the norm for the industry. What is referred to as a 'guarantee' is actually an indemnity under which the del credere agent assumes primary liability for the obligation of the purchaser.
As the instances of default are relatively rare, the portion of a commission the agent charges attributable to covering these situations is usually quite small - if it is capable of identification at all. Many agents will not quote a non 'del credere' rate of commission, as vendors expect the agent to operate on the 'del credere' basis as the norm for the industry. Some agents take out insurance to cover the risk of these occasional losses.
Del credere guarantee often merely an incidental component of the commission charged
In the situations described above, the part of the commission charged to the vendor for the del credere undertaking or indemnity will generally be small, sometimes difficult to quantify, and will normally be merely incidental to the supply of agency services.
Under the GST regulations relating to financial supplies, the giving of an indemnity that has the character of the one given by the del credere agent, will ordinarily be a financial supply and input taxed. However, where the giving of an indemnity is a minor incidental component to taxable agency services, the whole of the agency services should be treated as taxable. The dominant nature of the supply is taxable and the part that might be input taxed is so small and incidental that it is subsumed into the dominant nature of the supply. (This is explained further at paragraphs 91 to 93 of GSTR 2002/2 - Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions.)
Hence in the ordinary case of a taxable supply of agency services using a commission rate that includes a small incidental component corresponding to a del credere guarantee, both the supplier of the selling services (the agent) and the client receiving those services can treat the whole of the commission as taxable.
Situation A - Del credere agent unaware of default at the time sale proceeds are paid
In practice, a del credere agent may routinely pass on sale proceeds to a vendor without establishing whether or not the purchaser has actually paid, or whether, if a payment has been made by cheque, the cheque has been honoured. It may take some time before it becomes apparent to the del credere agent that the purchaser is unable to pay.
Situation B - Del credere agent aware of default before sending sale proceeds
In other instances, the agent will be specifically aware that payment has not been made by the purchaser, or that a default appears likely, but will nevertheless pass on the sale proceeds, being aware that this is an obligation under the del credere arrangement.
The vendor
In either situation A or B above, the vendor receives the payment as consideration for the taxable supply of items to the purchaser, whether this consideration takes the form of sale proceeds paid by the actual purchaser, or sale proceeds paid by the agent under the del credere guarantee. Under subsection 9-15(2) of the GST Act, consideration for a taxable supply need not be provided by the recipient of the supply, but can come from third parties. Hence the vendor need not be concerned with the success or otherwise of the agent in recovering the debt for the sale, as the vendor has been paid in full. The GST liability of the vendor remains unchanged (that is, continues to include the GST included in the price of the goods supplied), despite failure of the purchaser to pay.
The purchaser
Cash basis
If the purchaser is on a cash basis, the entitlement to claim an input tax credit on a creditable acquisition is dependent on whether the purchaser has actually paid. If no payment is made there can be no claim for an input tax credit. This is governed by the GST Act provisions relating to attribution, in particular subsection 29-10(2). It is a requirement that the consideration be provided by the recipient.
In the del credere situation of purchaser default described above, the purchaser has not paid and is thus not entitled to claim any input tax credit in their Business activity statement. The fact that the agent has made a payment to the vendor under the del credere guarantee (indemnity) is irrelevant to the purchaser. The purchaser did not appoint the agent to be their guarantor. Although there has been a transfer of the right to sue for the debt from the vendor to the vendor's agent, the debt remains unpaid from the purchaser's perspective.
Other than cash basis (accruals)
Where the purchaser operates on the other than cash basis, it is not necessary for payment to have been made for an input tax credit to be claimed in the purchaser's Business activity statement. The tax invoice issued by the agent for the vendor (or by the vendor entity itself) at the time of the sale will be enough for the purchaser to claim an input tax credit on a creditable acquisition. This arises from the operation of GST Act paragraph 29-10(1)(b).
However, where the purchaser fails to pay, the provisions of section 21-15 of the GST Act are relevant. This section requires an increasing adjustment for a purchaser, not operating on a cash basis, where the debt is overdue for 12 months or more, or where the debt has been written off.
It is considered that although the vendor may have been paid an amount by the agent, pursuant to the del credere arrangement between the vendor and the agent, this does not stop the operation of Division 21 in relation to the purchaser. In particular, there is still a debt that is unpaid, even though the debt is now owed to the agent suing in its own name rather than to the vendor. The debt is in relation to the original supply of goods to the purchaser. That debt remains unpaid from the purchaser's perspective.
The agent
The agent facilitates the supply of taxable goods by the vendor to the purchaser. The agent is faced with a business risk that occasionally a purchaser will not pay and the goods cannot economically be recovered. The agent having previously undertaken to indemnify the vendor for the sale, by way of the del credere guarantee, cannot ask the vendor to accept the loss. It is the agent's loss. Some agents take out insurance to cover this risk.
The transaction, from the viewpoint of the GST law, is a taxable supply of goods from the vendor to the purchaser, through the agent as a facilitator of the transaction. The funds supplied by the agent to the vendor do not represent the purchase by the agent of anything - rather they are part and parcel of the agent's business obligations to make this payment, regardless of whether or not the purchaser pays. That is, they are payments under the indemnity.
The point may be reached where the agent regards the debt as irrecoverable. Because the agent has not made a taxable supply of the goods, a write-off by the agent has no GST implications for the agent. Section 21-5 of the GST Act, which provides for decreasing adjustments where a supplier has had to write off a debt; or where the debt is overdue for 12 months or more, is only applicable to taxable supplies. It has no application to the agent. The entity making the taxable supply of the goods is the vendor, not the agent. The agent is not liable to remit the GST liability on the taxable supply - rather that liability remains with the vendor.
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