GST and motor vehicles and incentive payments and fleet discounts and runout models and…

One of the more interesting GST cases in recent times is AP Group Limited v. Federal Commissioner of Taxation (2013) 214 FCR 301; [2013] FCAFC 105; 2013 ATC 20-417. The case considered a series of payments made in the motor vehicle industry.

Following this case the Commissioner has released his first GST ruling for 2014 (in October… it looks like GST is settling down) on this issue. The ruling is Goods and Services Tax Ruling 2014/1 – Goods and services tax: motor vehicle incentive payments.

But before we go further, the Commissioner sets a very clear rule – this only applies to the motor vehicle industry…

“The Ruling only applies to the class of entities that make or receive incentive payments in the motor vehicle industry. This Ruling is therefore confined to the facts and circumstances of the motor vehicle industry and does not consider incentive payments made in other industries and caution should be applied if you seek to apply the view in this Ruling to payments made in other industries.”

But this statement is rubbish. The reasoning in this Ruling is just as applicable to incentive payments in other industries – it just you can’t quote this Ruling when applying for a ruling.

So what payments in the motor vehicle industries does the ruling apply to?

  1. Where the dealer does something for the manufacturer, like installing a tow bar or presenting the cars in certain ways. As you would expect, GST applies as this is a taxable supply.
  1. Where there is a supply by a dealer to a retail customer for consideration provided by the manufacturer. Common payments in this category include fleet rebates, run-out model payment and free accessories’ payments. But you need an example…

Max Manufacturer makes certain incentive payments to Delta Dealership under the terms of their dealership agreement. As part of its ‘Creating Havok’ run-out program, Max Manufacturer pays Delta Dealership $3,300 for each Havok vehicle when it is sold at a discounted price to a customer.

Pat purchases a Havok vehicle from Delta Dealership for $23,100.

The $3,300 payment is part of the consideration for the supply of the motor vehicle by Delta Dealership to Pat. It is not consideration for a separate supply by Delta Dealership to Max Manufacturer of supplying the vehicle to Pat.

Therefore Delta dealership has to remit 1/11th of $23,100 + $3,300. If registered for GST, Pat can claim back 1/11th of $23,100. And as Max manufacture has not made a creditable acquisition it cannot claim anything (subject to the Division 134 discussion below).

  1. Where there is no supply, like retail incentives and wholesale incentives. Another example:

Max Manufacturer runs a competition for sales assistants employed by one of its dealers, Delta Dealership, whereby Max Manufacturer will reward the sales assistant who makes the most sales for the dealership each month with a prize.

Delta Dealership has not made a supply to Max Manufacturer for consideration as there is no conduct which can be identified as a supply – Delta Dealership does not do anything, or agree to do anything, for that payment.

But there is just one more issue – Division 134. This Division was introduced in 2010 (with 2 amendments in the same year as the Treasury has never been good in getting the GST law right the first time) and it ensures that certain manufacturer rebates create a decreasing adjustment. For example:

Fascam Ltd, a manufacturer, sells a camera to Choice Cameras Ltd, a retailer, for $660. Choice Cameras sells the camera to a customer, Irene, for $880 at a time when Fascam is offering a cash-back incentive to retail customers to boost its sales. Irene applies for and receives a cash-back payment of $110 from Fascam.

Under section 134-5 Fascam is entitled to a decreasing adjustment with regard to the cash-back payment.

So what does Division 134 mean for Max Manufacturer and its ‘Creating Havok’ run-out program from the example above…

Max Manufacturer has made a payment to Delta Dealership, which acquired the vehicle that Max Manufacturer supplied to the interposed finance company as a taxable supply. Further, the payment is made for the inducement of Delta Dealership’s acquisition of the vehicle as the payment relates to Delta Dealership’s acquisition of the vehicle because the $3,300 indirectly alters the price Delta Dealership paid for the vehicle by $3,300. Max Manufacturer therefore has a decreasing adjustment of $300 under section 134-5 once Delta Dealership acquires the motor vehicle.

So don’t forget Division 134…

Finally if this all gets to much there is a table summarising it all starting a paragraph 322.

What does this mean… First, if you are advising motor dealers it is time to review all the payments they get from manufactures and make sure GST is treated properly.

But if you have any clients in other industries whether there are payments from manufacturers to retailers, like incentive payments, this ruling is a great way to assess if the GST treatment of these payments is correct. These types of payments are especially common in franchise arrangements…

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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