Court decision on trade incentive payments could have far-reaching GST consequences – March 2014
A recent decision by the Full Federal Court dealt with the goods and services tax (GST) treatment of four types of manufacturer incentive payments made to a car dealership. However the decision, and the Tax Office’s response, is likely to have an impact in the wider market, not just in the motor vehicle dealership industry.
The GST law in relation to identifying “supply” and “consideration for supply” are not industry specific. Therefore the interpretations and concepts that have been highlighted by the court case may have implications for business taxpayers in many other industries that use supplier rebate programs, incentive agreements and similar schemes.
In fact, should any business’s circumstances reflect the decisions in the case and/or the Tax Office’s administrative advice as offered in its “decision impact statement”, that business may well be entitled to claim a refund. In fact, all business taxpayers should also take these factors into consideration before finalising any proposed future supplier rebate or incentive agreements.
A business taxpayer, AP Group, ran a number of car dealerships, selling motor vehicles to end users. AP Group entered into dealership agreements with vehicle manufacturers and wholesale distributors, which included incentive payments such as the following:
- Fleet rebate — in some cases the dealer will have paid more for a car than if they were a fleet buyer, so the difference in price is paid to the dealer
- Run-out model support payment – the dealer receives payments by reference to cars earmarked from specified run-out stock (with no requirement to pass on any discount to end user)
- Retail target incentive – payments made to dealers that achieve sales volume targets
- Wholesale target incentive – orders placed within certain parameters for a qualifying period receive percentage discount on subsequent invoices, with payments not tied to sales made.
The Tax Office had taken the view that each of these attracted liability for GST, as they were “consideration for taxable supplies” under the GST rules. The taxpayer however disagreed with this, with the resulting appeals and counter-appeals landing the case before the Full Federal Court.
The end result from the AP Group case is that the first two of the above payments have been deemed to attract GST, while the last two do not. Basically this is because the Full Federal Court was of the view that the first two constitute “consideration” for the supply of cars to AP Group’s customers. Therefore GST will specifically be payable on fleet rebates and run-out model support payments that have the characteristics of the examples in the case, however in more general terms similar incentive arrangements for businesses operating in industries other than vehicle retail may in fact also attract GST.
And a warning regarding motor vehicles that were subject to the luxury car tax (LCT) before the court decision – the LCT liability will increase as a result of the incentive payment being added to the consideration paid by the customer, or for cars that were just under the LCT threshold before may now be over it.
The Tax Office’s decision impact statement (ask this office for a copy, or speak to us about it) makes it plain that the Tax Office may consider similar incentive agreements made in other industries to be “consideration for taxable supplies”, but it says that this will be dependent on relevant facts and circumstances. It also says that it will prepare guidance for other industries.
The Tax Office has also announced that it is reviewing GST public rulings that discuss “supply” as well as “consideration for supply” to determine whether any revisions are necessary to these rulings. Consult this office for more if you have any concerns regarding this area of the tax law.