ATO Interpretative Decision

ATO ID 2008/166

Goods and Services Tax

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Issue

Under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), are the Fleet Sales Support, Margin Support and Discretionary payments that the entity, a motor vehicle dealer, receives from a manufacturer consideration for supplies that the entity makes to the manufacturer?

Decision

Yes, under the GST Act, the Fleet Sales Support, Margin Support and Discretionary payments that the entity receives from a manufacturer are consideration for supplies the entity makes to the manufacturer.

Facts

The entity is registered for goods and services tax (GST).

Its enterprise consists of selling motor vehicles through a motor vehicle dealership. It conducts that enterprise under a number of dealership agreements with motor vehicle manufacturers and distributors.

The dealership agreements govern the conduct of the entity's motor vehicle dealership. The vehicles it sells are acquired under a floor plan arrangement whereby it acquires legal title to vehicles from a finance company, which has previously acquired legal title to those vehicles from a manufacturer or distributor (for ease of reference, a manufacturer or distributor that the entity deals with will be referred to as a 'Manufacturer').

The entity receives certain payments from a Manufacturer when it sells motor vehicles.

The type of payment received depends on the particular circumstances of the sale:

•

Fleet Sales Support payments. These payments are paid to the entity when it sells motor vehicles to a particular class of customer (generally a company or an employee of that company), which is identified by the Manufacturer as qualifying for fleet recommended pricing. After the entity has sold a vehicle to such a prescribed customer, the entity lodges a claim with the Manufacturer for reimbursement and the entity receives the Fleet Sales Support payment.

•

Margin Support payments (including campaign and run-out model support payments) occur after the entity sells vehicles during the period of a campaign as specified by the Manufacturer. The payments apply only for a specified period and on specific models.

•

Discretionary payments (including confidential rebates, pre-delivery allowance, price protection payment and other bonuses and incentives) are similar to Margin Support payments in that they are designed to assist the entity's profitability and viability in individual circumstances. For example, the entity may negotiate a payment from the Manufacturer in order to make a particular transaction viable.

Reasons For Decision

Subsection 7-1(1) of the GST Act states that 'GST is payable on *taxable supplies ...' (note that the asterisk denotes a defined term in the GST Act).

Section 9-5 of the GST Act also provides the requirements necessary for a supply to be taxable and 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.

Supplies

The first consideration is whether an entity makes a supply (paragraph 9-5(a) of the GST Act).

The meaning of a supply for GST purposes is provided by section 9-10 of the GST Act.

The Tax Office view on supplies is contained in Goods and Services Tax Ruling GSTR 2006/9. Paragraph 33 of GSTR 2006/9 confirms that the concept of a supply as provided by subsection 9-10(1) of the GST Act is intended to encompass supplies as widely as possible. Subsection 9-10(2) of the GST Act provides a list of things that are included as supplies. This list includes a supply of services and the entry into, or release from, an obligation to do anything.

A supply requires some act of provision, furnishment, conferral or giving of some thing (paragraph 76 of GSTR 2006/9).

For GST purposes the entity may still make a supply in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from the supplier to the recipient (paragraph 108 of GSTR 2006/9).

Consideration for a supply

A supply is a taxable supply, if, among other things, the supply is made for consideration. Consideration is defined in section 195-1 of the GST Act which states:

consideration , for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.

Section 9-15 of the GST Act relevantly states:

(1)

Consideration includes:

(a)

any payment, or any act or forbearance, in connection with a supply of anything; and

(b)

any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2)

It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

Paragraph 9-15(1)(b) of the GST Act highlights the fact that a payment will be consideration for a supply if the payment is in connection with a supply and if it is in response to or for the inducement of a supply. Thus, there must be a sufficient nexus between a particular supply and a particular payment which is provided for that supply for there to be a supply for consideration.

Therefore, consideration comprises two elements. The first element is the payment by one entity to another; the second is the nexus that must be established between that payment and a supply.

The entity receives the following types of payments from a Manufacturer:

•

Fleet Sales Support payments;

•

Margin Support payments (including campaign and run-out model support payments); and

•

Discretionary payments (including confidential rebates, pre-delivery allowance, price protection payment and other bonuses and incentives).

It is therefore necessary, given the definitions of supply and consideration in the GST Act, to determine whether there are supplies made by the entity (a motor vehicle dealer) to the Manufacturer and whether there is a sufficient nexus between these supplies and the above listed payments.

Holdbacks

Goods and Services Tax Determination GSTD 2005/4 provides that 'holdback' payments are not consideration for a supply in certain circumstances. The Determination applies to 'holdback' payments that are made to a dealer by a manufacturer or importer of new motor cars or trucks. Such payments are not made pursuant to the dealership agreement between the Manufacturer and the dealer. The Determination describes the requirements for the payments to be considered holdbacks.

The Fleet Sales Support payments, Margin Support payments and Discretionary payments the dealer receives are not 'holdbacks' as that term is used in GSTD 2005/4 or as it is understood in the motor vehicle industry. One of the features of a 'holdback' is that the payment does not relate to the dealer doing anything (other than actually buying or selling a vehicle), or meeting any target. Another feature is that the holdback is a standard payment that, although it may be varied over time, and is not tied to any particular campaign by the Manufacturer.

If a payment is connected to a service performed by the dealer, an obligation entered into by the dealer or something else that is a supply within the meaning of section 9-10 of the GST Act, it would be consideration for a supply and would not be a holdback.

Fleet Sales Support payments: these payments are in respect of a particular class of sale and are not regarded as holdbacks as the payments are related to the sale of the vehicle on certain terms, that is, at or below a particular price for a particular customer.

Margin Support payments: this payment is paid to the entity in return for it selling particular vehicles during a campaign (for example run-out models), and is therefore not regarded as a holdback.

Discretionary payments: these payments include confidential rebates, pre-delivery allowance, price protection payments and other bonuses and incentives. The payments are negotiated with the Manufacturer to enable the entity to make a particular sale viable. These payments are not standard or fixed. They are not regarded as holdbacks.

Adjustment Events

GSTR 2000/19 states, at paragraph 42B,

An entity (such as a manufacturer) may also make a payment to a third party entity that is neither an end user of its products nor a direct recipient of its supply. Provided such a payment is made directly by the manufacturer to that third party entity and does not involve any other entity, it does not give rise to an adjustment event.

In the circumstances of the incentive payments dealt with in this ATO ID, it is considered that the payments from the Manufacturer to the entity are neither adjustment events in relation to the supply of motor vehicles from the Manufacturer to the finance company, nor adjustment events in relation to the supply of motor vehicles from the finance company to the entity.

Paragraph 42B of GSTR 2000/19 concludes, 'Whether the payment is consideration for a separate supply made by the third party entity to the manufacturer will depend on the facts and circumstances of the case.'

Is the payment consideration for a supply?

The payments made are not matters of a private nature but are part of the complex arrangements which traditionally exist in the motor vehicle industry for the purpose of selling the motor vehicles of manufacturers and importers to the ultimate consumers. The relationship between the Manufacturer and the entity is a business or commercial one, for their mutual benefit. The existence of a functional network of dealers, that operate their businesses in a manner that accords with the goals or needs of the Manufacturer, is important to maintain or enhance the Manufacturer's market position. Furthermore, through the conduct of its business the entity contributes to the reputation of the brand which is owned by or licensed to the Manufacturer.

It is considered that the conduct of the dealership in a manner which benefits the Manufacturer constitutes a supply. When viewed in the context of the overall commercial arrangement between the entity and the Manufacturer, it is apparent that the Fleet Sales Support payments, Margin Support payments and Discretionary payments are sufficiently connected with this supply to constitute consideration. Their connection is further demonstrated by the context in which each payment is made, as outlined below.

Fleet Sales Support payments

Fleet Sales Support payments are initiated when the entity sells motor vehicles to a particular class of customer (generally a company or an employee of that company), identified by the Manufacturer as qualifying for the fleet recommended price. After the entity has sold a vehicle to a fleet customer, a claim is lodged by the entity with the Manufacturer for reimbursement and the Manufacturer pays the entity a Fleet Sales Support payment.

The sale of motor vehicles to this particular class of customer is a precondition to these payments being paid and the sale confers a benefit or other advantage on the Manufacturer in the form of greater sales or market share for this particular class.

By selling the vehicle on such particular terms the entity is conducting the dealership business in a manner that benefits the Manufacturer such that the entity is making a supply as identified above. The entity is contributing to the Manufacturer's reputation with a particular market segment. Furthermore, the entity conducts the dealership in accordance with the Manufacturer's policies and procedures in order to obtain these payments and there is a sufficient nexus between these payments to the entity and the supply identified above.

Margin Support payments

Margin Support payments (including campaign and run-out model support payments) are paid after vehicles are sold during the relevant period. The payments apply only for a specified period and on specific models.

The payment is made to the entity after it sells particular vehicles during a sales campaign, for example run-out models. The sales contribute to the Manufacturer's reputation and market share within a particular market segment. In addition, to obtain the Margin Support payment, the entity is required to conduct the dealership in accordance with the Manufacturer's policies and procedures. In selling vehicles on such particular terms the entity is conducting the dealership business in a manner that benefits the Manufacturer such that the entity is making a supply as identified above. It is considered that there is a sufficient nexus between the payment and the supply identified above.

Discretionary payments

Discretionary payments (including confidential rebates, pre-delivery allowance, price protection payment and other bonuses and incentives) are similar to Margin Support payments.

To obtain the Discretionary payment, the entity is required to conduct the dealership in accordance with the Manufacturer's policies and procedures. By conducting the dealership business in a manner that benefits the Manufacturer the entity is making a supply as identified above. It is considered that there is a sufficient nexus between the payment and the supply identified above.

Taxable supply

Accordingly, the entity is making a supply for which the above payments are consideration. Paragraphs (b), (c) and (d) of section 9-5 of the GST Act are also satisfied as the supplies are made in the course or furtherance of the enterprise, are connected with Australia as they are made in Australia and the entity is registered for GST.

There are no provisions in the GST Act or any other Act that would allow the supplies to be GST-free or input taxed. Consequently, the entity's supplies are taxable given they satisfy all the requirements of section 9-5 of the GST Act.

Amendment History

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   subsection 7-1(1)
   section 9-5
   paragraph 9-5(a)
   paragraph 9-5(b)
   paragraph 9-5(c)
   paragraph 9-5(d)
   subsection 9-10(1)
   subsection 9-10(2)
   section 9-15
   paragraph 9-15(1)(b)
   section 9-17
   section 195-1

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2000/19
Goods and Services Tax Ruling GSTR 2006/9
Goods and Services Tax Determination GSTD 2005/4

Keywords
Goods and services tax
GST consideration
GST supply
Taxable supply

Business Line:  Indirect Tax

Date of publication:  17 December 2008

ISSN: 1445-2782