GST considerations for buy-now, pay-later providers

March 2023

Background

One key area of focus under the ATO's GST Financial Services and Insurance strategy is engaging with entities in the Fintech sector, including buy-now, pay-later providers. We are keen to engage with you to provide practical guidance and share our observations on how we assess GST risk in this area.

In this guidance, we set out the key GST considerations for buy-now, pay-later providers, focusing on how to determine your entitlement to input tax credits on related costs. This guidance provides practical insight into how we assess risk in this area.

If you rely on this guidance you have the protections that apply to Guidance - see How our advice and guidance protects you.

This guidance considers typical buy-now, pay-later arrangements. The GST implications for any particular arrangement will depend on the particular facts and circumstances of that arrangement.

GST considerations for buy-now, pay-later providers

The key GST considerations for buy-now, pay-later providers are:

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Tax governance: It's critical to make sure that you have a well-designed tax control framework which is fit for purpose in mitigating the tax risks that arise in your business. For GST, the ATO's GST governance, data testing and transaction testing guide sets out how the ATO will review GST governance for top 100 and top 1,000 taxpayers. For entities who are yet to reach this size, investing in your tax governance framework will give you confidence in your reporting, minimise reporting errors and provide a strong foundation for the future.

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GST classification of supplies: You must ensure that supplies are classified correctly for GST purposes, and that GST is remitted on taxable supplies you make. We have seen errors arise where supplies are incorrectly treated which has resulted in significant GST shortfalls - for example, where entities fail to remit GST on taxable supplies made to related entities that are not within their GST group. Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions provides the ATO view on classification of financial supplies.

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Claiming input tax credits: Under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), input tax credits are generally not available on acquisitions to the extent they relate to making input taxed supplies.

Apportionment methodologies used to determine the extent of recoverable GST must be fair and reasonable and reflective of the objective use of your costs in making input taxed and non-input taxed supplies. You must ensure that your apportionment methodology is well-documented and regularly reviewed. Guidance on apportionment methods that can be used for calculating extent of input tax credit entitlement is available in ATO public rulings; for example, Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies.

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Claiming reduced input tax credits (RITCs): Where input tax credits are denied under Division 11 of the GST Act, you may still be entitled to 75% RITCs under Division 70 of that Act for specified acquisitions that qualify under the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations). You should be prepared to provide documentation (for example, relevant workpapers, invoices and supporting general ledger records) to support RITCs claimed on these acquisitions, which demonstrates that the acquisition falls within an item in the GST Regulations. Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions provides guidance on which acquisitions are reduced credit acquisitions.

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Reverse charged GST: Cross-border acquisitions that relate partly or solely to making input taxed supplies must be reverse charged under Division 84 of the GST Act (subject to exceptions). For these transactions, you will need to account for GST on your purchase, and can then claim back any available input tax credits.

We have observed that a number of entities have failed to reverse charge cross-border acquisitions from third-party suppliers or overseas related parties, which has resulted in significant GST shortfalls. This is often caused by a poorly designed tax governance framework. We have published guidance on the application of the reverse charge provisions with practical recommendations for how you can minimise compliance risk in this area.

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Significant and unusual transactions: The GST consequences of significant and unusual transactions require careful consideration. One example is ensuring that input tax credits on costs associated with initial public offerings, capital raising activities and costs associated with funding the buy-now, pay-later product are identified and appropriately denied.

If you've identified errors in reviewing your arrangements, you should let us know. If you make a voluntary disclosure, we may reduce any penalties we would usually charge you.

Supplies made by buy-now, pay-later providers

This guidance addresses instances where buy-now, pay-later providers provide credit to customers, rather than in alternate scenarios such as where buy-now, pay-later providers supply software to businesses which enable each business to provide credit to its customers.

Depending on the facts, a buy-now, pay-later provider may generally make:

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input taxed supplies of credit when a customer initiates the provider's provision of payment to the merchant in exchange for the customer's obligation to repay the provider at a later date.^[1] Input taxed supplies are made when the customer is provided with credit, regardless of whether interest or fees are charged to the customer.^[2] As the supply is input taxed, no GST is payable in relation to fees charged to the customer, such as late fees or account fees. However, input tax credits are generally not available to the extent that acquisitions relate to making these supplies, regardless of whether any charge is made to the customer.

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taxable supplies of services to merchants in enabling them to accept payment using the provider's facilities, with the provider then becoming liable to make payment to the merchant (and the customer's obligation to pay the merchant being discharged). These supplies are made in exchange for merchant fees, charged on a purchase transaction-by-transaction basis.

The supplies made in a typical 3-party buy-now, pay-later arrangement are outlined in Diagram 1 of this guidance.

Diagram 1: 3-party buy-now, pay-later arrangement

You will also need to consider other supplies you make - for instance, in relation to how the business is funded - as these should be considered in determining the creditable purpose of your acquisitions (including in the treatment of enterprise costs). For example, costs may relate to the issue of debt securities by a trust within the GST group as part of a warehouse funding arrangement (with certain costs relating only to these financial supplies).

Alternatively, if the trust is outside the GST group, you may need to pay GST on taxable supplies you make to the trust, and certain costs may have a real or substantial connection to these supplies of servicer services.^[3]

GST implications for merchants

As with any arrangement, the GST consequences will depend on the particular facts and circumstances, including the contractual arrangements. This guidance does not address circumstances where there is an assignment of debt from the merchant as, under typical buy-now, pay-later arrangements, the customer's debt to the merchant is discharged by the buy-now, pay-later provider. Relevant guidance on assignment arrangements is provided in GSTR 2004/4.

While the GST consequences will depend on the facts of the particular arrangement, generally the merchant does not make a financial supply to the customer in circumstances where, under the relevant agreements:

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the customer has the ability to initiate the buy-now, pay-later provider's payment to the merchant (a third party) in exchange for the customer's corresponding obligation to pay the buy-now, pay-later provider at a later time, and

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the customer's obligation to pay the merchant for the underlying goods or services is discharged by the buy-now, pay-later provider. This will be either when the merchant agrees to accept the customer's use of the buy-now, pay-later provider's payment method, or the buy-now, pay-later provider pays the merchant on behalf of the customer.

Determining the entitlement to input tax credits

Under Division 11 of the GST Act, input tax credits are generally not available on acquisitions to the extent that they relate to the making of input taxed supplies. The extent to which input tax credits are recoverable under this provision is the 'extent of creditable purpose' (ECP).

Some exceptions apply where input tax credits can still be claimed, such as where you do not exceed the Financial Acquisitions Threshold, or where an acquisition qualifies for a reduced input tax credit.

There are 2 steps in applying Division 11 of the GST Act:

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firstly, identifying whether a relevant connection exists between acquisitions and supplies

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secondly, for acquisitions that relate to both input taxed and taxable or GST-free supplies, determining an apportionment method that gives a fair and reasonable reflection of the extent of the relationships between those acquisitions and supplies.

This means you will need to identify which of your acquisitions:

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only relate to making input taxed supplies of credit to customers, for which no input tax credits are generally available

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only relate to making taxable supplies to merchants, for which full input tax credits are available

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relate to making both supplies, which means that acquisition has a partial extent of creditable purpose that must be determined on a fair and reasonable basis.

Relevant principles

There is no general proposition that all acquisitions made in a buy-now, pay-later business will relate to both supplies made. The application of these provisions requires the precise identification of the relevant acquisition and a factual enquiry into the connection between the acquisition and the making of supplies that would be input taxed.^[4]

This requires an objective assessment of the facts to determine if a relevant connection exists between an acquisition and the making of input taxed supplies. An approach which looks through to the subjective intention or actual purpose for making the acquisition will be inconsistent with the operation of the provision.^[5]

The identification of the relevant connection does not turn upon a characterisation of the purpose, or the occasion of the purpose, of the supplier in the sense of a broader commercial objective of the enterprise.^[6] If an objective assessment shows that an acquisition only has a relevant connection to the making of input taxed supplies, the acquisition is not to be apportioned merely because those supplies may also serve a broader commercial objective (that is, has a wider consequence).

For example, a buy-now, pay-later provider may acquire advertising services to promote credit arrangements to potential new customers (Example 5 of this guidance provides such an example). This will serve a broader commercial purpose in that when the new customer accesses credit, the provider will supply taxable services to merchants. Depending on the business model, merchant fees may represent the principal source of revenues derived by the business. However, where an objective assessment shows that advertising services acquired only have a relevant connection to making input taxed supplies to customers (as they are intended to promote new credit arrangements to those customers), the acquisition is not to be apportioned merely because those supplies serve that broader commercial objective. Conversely, there may be advertising services which are only intended to promote supplies of merchant services to new merchants, and which only relate to making taxable supplies to merchants.

For the ATO's application of these principles in a different factual context relevant to credit cards and transaction accounts, see:

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Goods and Services Tax Ruling GSTR 2019/2 Goods and services tax: determining the creditable purpose of acquisitions in a credit card issuing business

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Goods and Services Tax Ruling GSTR 2020/1 Goods and service tax: determining the creditable purpose of acquisitions in relation to transaction accounts.

Examples of the determination of creditable purpose of common acquisitions

The following are examples which outline our views on the treatment of common types of acquisitions made by a buy-now, pay-later provider (who makes input taxed supplies of credit to customers and taxable supplies of services to merchants as described above), to illustrate the relevant principles.

Acquisitions that only relate to input taxed supplies of credit to customers

Acquisitions that only relate to taxable supplies to merchants

Acquisitions that relate to both input taxed supplies to customers and taxable supplies to merchants

How we risk assess apportionment methodologies

The apportionment methodology you use must reflect the objective intended use of acquisitions. The methodology used must have regard to whether some of the acquisitions only relate to making input taxed supplies, or conversely only relate to making taxable supplies.^[8]

We expect buy-now, pay-later providers to analyse their acquisitions to determine their creditable purpose, rather than apportioning all acquisitions on the assumption that they all relate to both input taxed and taxable supplies. We also expect your methodology and analysis of acquisitions to be well-documented which will assist with preparing for any compliance reviews (see Table 2 of this guidance for examples).

We consider that the use of a revenue-based apportionment methodology gives rise to a significant risk that input tax credits may be overclaimed. Due to the nature of the business where complying customers are not charged interest, there is typically limited input taxed revenue to reflect the extent to which acquisitions relate to input taxed supplies of credit. Therefore, the use of this approach will be a high priority for review to test whether the GST recovery is appropriate based on an analysis of the objective use of the acquisitions that the method is applied to.

Even where a revenue-based apportionment methodology is only applied to acquisitions that relate to both supplies, we would need to carefully consider whether this is a fair and reasonable measure of the objective use of those acquisitions. The extent of creditable purpose of an acquisition is based on its relationship to the making of particular supplies, and revenue is only an indirect method of approximating this relationship.^[9] A revenue-based method will, however, be fair and reasonable if the assumption holds that there is a proportionate relationship between the revenue used to measure the supplies made, and the use of the acquisitions that the revenue method applies to.^[10]

To use an example, let's say an acquisition is used for processing a customer's purchase transaction with a particular merchant (for example, processing costs in making payments to the merchant, or in enabling the customer to initiate their access to credit for that particular transaction), through which a buy-now, pay-later provider makes both taxable and input taxed supplies. Such an acquisition can be viewed as equally relating to both supplies. Apportioning the acquisition based on the revenue derived from each supply may not fairly measure the objective use of the acquisition.

The following provides examples of high risk and low risk apportionment methods. This is not intended to be prescriptive but instead to illustrate how we assess the risk of different approaches. Note that the figures used are illustrative only.

Credit cards offered on buy-now, pay-later terms

We have also observed that some cards issued in 4-party credit card networks are being offered on buy-now, pay-later terms, with interest-free instalment payments. Where in substance the product is a credit card facility, we will apply Schedule 1 of Practical Compliance Guideline PCG 2019/8 ATO compliance approach to GST apportionment of acquisitions that relate to certain financial supplies.

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Legislative References:
   GST Act Div 11
   GST Act Div 70
   GST Act Div 84
   ANTS(GST)R 2019

Case References:
Commissioner of Taxation v American Express Wholesale Currency Services Pty Limited
   [2010] FCAFC 122
   187 FCR 398
   77 ATR 12
   2010 ATC 20-212
   273 ALR 501

Rio Tinto Services Limited v Commissioner of Taxation
   [2015] FCAFC 117
   235 FCR 159
   2015 ATC 20-525
   101 ATR 546

AXA Asia Pacific Holdings Limited v Commissioner of Taxation
   [2008] FCA 1834
   173 FCR 500
   2008 ATC 20-074
   (2008) 71 ATR 1

Rio Tinto Services Limited v Commissioner of Taxation
   [2015] FCAFC 117
   235 FCR 159
   2015 ATC 20-525

Related Rulings/Determinations:
GSTR 2002/2
GSTR 2006/3
GSTR 2004/1
GSTR 2004/4
GSTR 2019/2
GSTR 2020/1
GSTR 2008/1

Other References:
PCG 2019/8