Factors to consider when handling a transaction involving a mixed supply in line with GST
Assume that you have been approached by a prospective client, Burwood Cheese; a retail shop that specializes in different cheese products. The client is looking to introduce a promotional deal to customers, which involves packaging a new exclusive cheese product along with a T-Shirt. The client is aware that, if supplied separately, the cheese would be a GST-free supply, whereas the T-Shirt would be a taxable supply.
The main issue under consideration is determining how mixed supplies should be taxed. Should a mixed supply (The Cheese and the T-Shirt) taxed separately or as one unit? The Australian Taxation Commissioner introduced the Goods and Services Tax Act 1999 (“GSTA”) meant to address such a transaction. This paper seeks to apply GST to address the key issues surrounding the transaction. The issues under consideration are; a) factors to be considered when handling a transaction involving a mixed supply in line with GST; b) discussing relevant case law or a tribunal ruling on the application of GST in addressing a transaction involving mixed supplies; and c) making a determination of the most appropriate way of taxing the transaction.
The Goods and Services Tax (GST) Act 1999 was meant to address transactions involving composite and mixed supplies. GTS elaborates how tax can be levied on the consumption of products and services during its movement from the supplier to the final consumer (Australian National Audit Office, 2003, p. 51). GSTA also introduces a new concept that addresses a scenario where two or more products or services are supplied together in determining whether they are related or not. A transaction involving at least two products or services can be treated as either a composite supply or a mixed supply. The Concept of composite supply is similar to the naturally bundled services concept captured under the Service Tax Law. On the other hand, mixed supply is a newly introduced concept (Did not exist under Service Tax Law) (Ryan, 2002, p. 221).
Under GST, composite supply is defined as a supply that comprises at least two products or services which are combined and supplied together. Between the two products/ services, one is regarded as the main supply while the other one is treated as a support supply. The items are sold as a combination and cannot be separated (Cleartax, 2018).
On the other hand, mixed supply is defined as a supply that comprises of at least two products or services that have been combined and supplied at s single item. Compared to a composite supply, the items under mixed supply are independent of each other and can be transacted/ supplied separately (Cleartax, 2018).
Relevant case law or a tribunal ruling on the application of GST in addressing a transaction involving mixed supplies
Mixed Supply: Under the GST, tax liability on a mixed supply lies on the item with the highest tax rate. Consider a gift box comprising of sweets, aerated drink, cakes, and canned foods. Although these products constitute of a mixed supply, they can be sold separately as well. Based on the GST tax rating, Aerated drink has the highest tax rate at 28%, and the tax applies to the entire package (Schenk & Oldman, 2007, p. 117).s a composite supply or it’s a mixed supply. Second, identification relevant court case and tax ruling on GST. And, third, analysing the Cheese and T-Shirt supply.
The factor that are used to differentiate between composite and mixed supplies
There some factors to consider whether a supply is either composite or mixed. There are three factors applied to determine if supply is a composite supply;
- First, a supply must constitute of at least two products or service which are supplied together,
- Second, a natural bundle must exist among the products or services. That is, items should be supplied together (Modi & Gupta, 2018, p. 145).
- Third, the products or services cannot be supplied separately.
On the other hand, supply is treated as a mixed supply if and only if it is not a composite supply. That is, the items can be supplied separately, and they lack a natural bundle (Peacock, 2011, p. 87).
The difference between composite supply and mixed supply also lies in the main item and applicable tax rate. Under a composite supply, the main item is the principal item while the item with the highest rate of tax is the main item under the mixed supply. On the other hand, an applicable tax under composite supply is the tax rate belonging to the principal item. Consequently, the applicable tax under mixed supply is the highest rate among all the involved items (Barkoczy, 2018, p. 521).
Besides the actual difference between composite and mixed supplies, other factors might be helpful. They include;
- Value of constituent items: determining the value of constitute items is vital in determining if they are composite or mixed supplies. Items under composite supply cannot be separated and have no separate values. On the other hand, items under mixed supply can be sold separately hence has separate values (CCH, 2017, p. 49).
- The intention of suppliers and recipients: the Economic rationale is applied to determine a type of supply. Items should not be combined or separated artificially if there is no economic rationale supporting such a decision (Woellner & Evans, 2018, p. 598).
- Invoice description: An invoice can also be used to define a transaction/ supply. A mixed supply has a single value. On the other hand, a composite supply may or may not have a single value (Nethercott, 2010, p. 59).
- Industry practice: Established practices in the industry can also be used to determine the nature of supply. For example, in the airline industry, the ticket price comprises the cost of food as well. Travelers cannot get food when they have not paid for the ticket. In such a case the supply cannot be separated (composite supply) based on the industrial practice. If the industry practice allows travellers to either pay a single price or purchase the items separately, then the transaction becomes a mixed supply (Australian National Audit Office, 2003, p. 66). The same case applies when food is provided as a promotional offer to encourage more people to travel via airline because each item has a separate value.
The case between Kemberly-Clark and Customs and Excise Commissioners was brought before the VAT tribunal for determination. Kimberly-Clark was selling nappies. The plaintiff came up with a promotion whereby instead of using the usual packaging, plastic toybox was used to pack nappies for the customers. Kimberly-Clark held that transaction should be treated as a composite supply because the plastic toybox was used as a package for the nappies and hence it could be sold separately. The Customs and Excise Commissioners objected saying that the plastic toybox had a separate value because it could be used for other purposes besides selling nappies. The defendant maintained that the transaction ought to be treated as a mixed supply because even though the nappies were zero-rated, the plastic toy box has a standard tax rate attached to its value (Kimberly-Clark Ltd v. Customs and Excise Commissioners, 2004).
Analysis of the Cheese and T-Shirt supply
The VAT was faced with an issue of determining if the transaction was a composite or a mixed supply. Having considered the presentation from the two sides, the tribunal ruled in favour of the commissioners. Therefore, the transaction constituted a mixed supply.
The applicant (Food supplier) is a supplier of food products. The applicant would supply pack its food products using non-food products such as cricket balls, radio, mugs, and alarms for promotion purposes. The applicant branded the non-food products using its name and was labelled ‘free.’ In other words, a customer would only acquire a non-food product by purchasing a food product (Food Supplier and Commissioner of Taxation, 2007).
The defendant (Commissioner of Taxation) while acknowledging that food products were GSY free, the non-food products were liable for taxation. The defendant fined the applicant for failing to pay GST on the non-food products. The applicant objected to the decision and filled an appeal at the Administrative Appeals Tribunal (AAT). The applicant sought a determination whether or not GST was payable on the non-food products and whether the fined imposed by the defendant would be remitted back (Food Supplier and Commissioner of Taxation, 2007).
On 16th July 2007, Judge Downes of the AAT determined the issues raised by the applicant. In his ruling, Downes ruled in favour of the Commissioner of Taxation. The applicant was required to pay GST because the non-food products were taxable. The AAT could not entertain the request by the applicant that the fined imposed by the Commissioner of Taxation should be remitted (MURRAY-JONES, 2017, p. 789).
Based on the analysis, the following conclusions have been made;
- This was a mixed supply because: The supply constituted of two; the two products were not naturally bundled, and the products had separate values and could be supplied separately.
- The cheese would be a GST-free supply, whereas the T-Shirt would be a taxable supply. Just like in the tribunal ruling by Judge Downes in the case of Food Supplier v. Commissioner of Taxation (above mention), the labelled T-shirts would be used to promote the Cheese product. The cost of the T-shirts would not be transferred to the customers because they are labelled free. The Burwood Cheese should not charge an extra cost on the supply besides the usual cost of cheese. However, customers can only acquire the T-shirts after purchasing cheese (Deutsch, 2017, p. 237).
- Just like in the case of Food Supplier v. Commissioner of Taxation, Cheese is a food product while the T-shirt is a non-food product. Therefore, the former would be GST free while the latter would attract a payable tax (FL Memo Ltd, 2005, p. 312).
- As a mixed supply, the items (cheese and T-shirt) would be taxed separately.
Conclusion
The Goods and Services Tax (GST) Act 1999 was meant to address transactions involving composite and mixed supplies. A transaction involving at least two products or services can be treated as either a composite supply or a mixed supply. While items under composite supply are treated as a single transaction (cannot be separated), items under mixed supply can be separated and should be valued using separate transactions.
The analysis was based on a scenario where Burwood Cheese seek to introduce different cheese products in the market under a new promotion deal. Burwood Cheese believes that if the supply is treated to be mixed that the two products, cheese, and T-shirt, would be taxed partially. A tribunal and court ruling have been considered in analysing the scenario. The findings show that the transaction should be treated a mixed supply. In such a case, the Cheese (food product) would be GST free while the T-shirt (non-food product) would be a taxable supply.
References List
Australian National Audit Office, 2003. Goods and Services Tax (GST) Administration: A Better Practice Guide for the Management of GST Administration. Sydney: Australian National Audit Office : Australian Taxation Office.
Australian Taxation Office, 1999. Guide to GST. Sydney: Australian Taxation Office.
Barkoczy, S., 2018. Foundations of Taxation Law 2018. Chicago: Oxford University Press.
CCH, 2017. Practical Tax Examples. Sydney: CCH Australia.
Deutsch, R. L., 2017. Australian Tax Handbook: Tax Return Edition 2017. Sydney: Thomson Reuters.
FL Memo Ltd, 2005. Tax Memo 2005-2006. Sydney: FL Memo Ltd.
Food Supplier and Commissioner of Taxation (2007) Australian Taxatino Office.
Kimberly-Clark Ltd v. Customs and Excise Commissioners (2004) Gray’s Inn Tax Chambers, .
Modi, C. A. & Gupta, C. M., 2018. GST And Customs Law: 2018-19. New Delhi: SBPD Publications.
MURRAY-JONES, I., 2017. Australian GST Handbook 2017-18. Sydney: Thomson Reuters Australi, Limited.
Nethercott, L., 2010. Australian Taxation Study Manual: Questions and Suggested Solutions. Sydney: CCH Australia Limited.
Peacock, C., 2011. GST in Australia: Looking Forward from the First Decade. Sydney: Thomson Reuters.
Ryan, A., 2002. GST and BAS for Dummies. Sydney: John Wiley & Sons Australia.
Schenk, A. & Oldman, . O., 2007. Value Added Tax: A Comparative Approach. Chicago: Cambridge University Press.
Woellner, R. & Evans, C., 2018. Australian Taxation Law 2018. Illustrated ed. Sydney: Oxford University Press.
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