The longstanding issue of the GST treatment of incentive payments looks like it is finally about to come to an end.
As readers will know, following the litigation on holdback payments and the subsequent ‘son of holdback’ litigation on other incentive payments, the ATO has been paying out refunds to Dealers who incorrectly accounted for GST. The ATO, from an administrative point of view, had to deal with applications for refunds in two batches. The first was incentive payments of a type covered by the ‘son of holdback’ judgment and these have, in the main, been refunded to taxpayers. The second batch was what is known as ‘outside objection’ refund claims, being incentive payments that were not close enough to the payments specifically addressed in the judgment but where the principles of the court’s decision meant that these incentives also resulted in overpaid GST. The second batch of payments are still, in some cases, in the process of being repaid.
It is the finalisation of the second batch of ‘outside objection’ claims that is the last step in resolving this longstanding matter. The GST treatment of the vast majority of incentive payments has been able to be agreed with the ATO and is consistent with the ATO’s views expressed in Public Ruling GSTR 2014/1. However, there remains a small number of potentially controversial incentives that were provisionally ‘parked’ and which now need to be addressed in order for all Dealers who lodged refunds to finalise this once and for all. These ‘parked’ issues are as follows:
- Demonstrator and service loan car incentives
On a close analysis of the ‘son of holdback’ judgment, it is the author’s view that a number of demo/service loan incentive payments are indeed eligible for a GST refund. A key principle arising is to identify the ‘trigger’ for the incentive payment. Where the Dealer becomes entitled to the demo/service loan incentive as a result of acquiring the vehicle (including registering the vehicle in the Dealer’s name as a demo/service loan vehicle), there should be no GST payable on the incentive payment.
The author accepts that incentive payments triggered by the ultimate retail sale of the vehicle to a customer are a ‘third party consideration’ following ‘son of holdback’ and subject to GST. It is the author’s contention that other things done in the context of demo and service loan cars – such as holding for a specified number of days, making them available to customers for test drives – does not alter this analysis.
- Certain parts subsidies
Each parts-related payment needs to be considered on its own merits to see if there has been a supply for GST purposes. In the author’s view, some (but not all) parts incentives should be eligible for a refund.
Where obsolescent parts are returned to the distributor, while there is a specific action required to trigger the payment it could also be seen that the payment could be compensatory in nature for parts pushed onto the Dealer with little or no ongoing commercial value. Where obsolescent parts are scrapped, then to the extent a payment has passed between the Dealer and the scrap yard, a GST supply will exist, being a supply of the parts. However, where the payment by the distributor relates to a more general activity, such as disposal of a certain level of obsolete parts, an argument exists that the distributor payment should not be considered as consideration for a supply by the Dealer. Where a parts incentive directly relates to the Dealer meeting specific targets set by the distributor, the required link between the payment and the supply of a specific part is absent in the author’s view.
- Advertising incentives With respect to advertising co-payments and subsidies, determining whether a payment is consideration for a supply by the Dealer depends on a careful examination of each arrangement (of which there are many variations). The more specific the prescriptions attached to an advertising support program, the more likely will it be that the required link exists and the payment will be consideration for a supply. The variation between programs means that it is impossible to adopt a generic position on their GST treatment. Again, however, the author’s view is that some GST refunds do exist for some marques under this category.
Watch this space
So there are only three categories of incentive payment – or more accurately sub-categories within each category – that require further discussion with the ATO in order to finally put the GST and incentive payments matter to bed. It is expected that the ATO will be in a position to finalise these three matters within the next couple of months.
The views of the author may still be challenged by the ATO and readers should seek specialist tax advice if in doubt about their entitlement to refunds in respect of GST and incentive payments.
AADA will keep its members updated as these matters progress.
Account Director – Indirect Tax,
Motor Vehicle Team Deloitte