Goods and services tax: treatment of ATM service fees, credit card surcharges, and debit card surcharges

This Draft Ruling explains the goods and services tax (GST) treatment of: • a fee payable for ATM services listed in subregulation 40-5.09(4A) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) • a surcharge imposed by a merchant on a customer in respect of a credit card transaction concerning supplies of goods or services by the merchant to the customer • a surcharge imposed on a customer in respect of a credit card transaction used for payment of an Australian tax or an Australian fee or charge subject to Division 81, and • a surcharge imposed by a merchant in respect of a debit card transaction concerning a supply of goods or services, cash withdrawal and a transaction involving both a supply of goods or services and a cash withdrawal.

In this Draft Ruling all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

Under subregulation 40-5.09(4A) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), a supply by an entity for a fee of not more than $1,000 is a financial supply if it is a supply of one or more of the following ATM services: • a withdrawal from an account • a deposit into an account • an electronic transfer from an account • advice of the balance of an account.

The term 'ATM services' in subregulation 40-5.09(4A) of the GST Regulations qualifies the listed services to those performed through the use of an automatic teller machine (ATM).

The term 'ATM' is an automatic teller machine that is used in the payment system designated by the Reserve Bank of Australia (RBA) as the ATM system. It takes its meaning from the following definition set out in the Consumer Electronic Clearing System (CECS) Manual: ATM means an approved electronic device capable of automatically dispensing Cash in response to a Cash withdrawal Transaction initiated by a Cardholder. Other Transactions (initiated by a debit card) such as funds transfers, deposits and balance enquiries may also be supported. The device must accept either magnetic stripe Cards or smart (chip) Cards where Transactions are initiated by the Cardholder keying in a Personal Identification Number (PIN). Limited service devices (known as 'Cash dispensers') that only allow for Cash withdrawal are included.

A fee imposed for an ATM service listed under subregulation 40-5.09(4A) of the GST Regulations is consideration for an input taxed supply.

A facility that is used to access a payment system other than the ATM system (for example the payment system designated by the RBA as the EFTPOS system) is not used to provide an ATM service under subregulation 40-5.09(4A).

A credit card surcharge imposed by a merchant on a customer in respect of a credit card transaction forms part of the price for a supply of goods or services to the customer. The surcharge is part of the consideration payable by the customer for the supply of the goods or services made by the merchant.

The credit card surcharge therefore forms part of the consideration for a taxable, input taxed or GST-free supply depending upon the GST treatment of the underlying supply of the goods or services. Where a surcharge is imposed on payment for more than one supply, [1] the merchant can use any fair and reasonable method to apportion the surcharge to the underlying supplies of goods or services.

Anna purchases a shirt using her credit card. The shirt's price tag states that the shirt is $55 (inclusive of GST). A sign at the store's counter states that a surcharge of 3% of the price will be imposed if payment is made by credit card.

When Anna pays for the shirt using her credit card, the merchant imposes a surcharge of $1.65 in respect of the sale. The price of the shirt is $56.65 as the $1.65 surcharge forms part of the consideration for the shirt. The supply of the shirt is a taxable supply under section 9-5. The GST payable in respect of the sale is $5.15, being 1/11th of the GST inclusive price of $56.65.

Ming Ho, a fruit and vegetable retailer, purchases $1,100 of stock for his store from a wholesaler using his credit card. The wholesaler imposes a surcharge of 2% on the price if payment is made by credit card.

When Ming Ho pays the wholesaler using his credit card, the wholesaler imposes a surcharge of $22. The price of the fruit and vegetables is $1,122 as the $22 surcharge forms part of the consideration for the fruit and vegetables. The wholesaler does not have a GST liability in respect to the sale as the supply of the fruit and vegetables is GST-free under section 38-2.

Ben enrolls in a number of college subjects. One of the subjects is a taxable supply under section 9-5 and the other two subjects are GST-free under section 38-85. The college charges $1,000 (inclusive of GST) for the taxable subject, $800 for one of the GST-free subjects and $700 for the other GST-free subject. The total amount payable by Ben on the Statement of Account issued by the college is $2,500.

The college imposes a surcharge of 4% if payment of the Statement of Account is made by credit card. Ben decides to pay for the subjects by credit card and the college imposes a surcharge of $100. The $100 forms part of the consideration for the mixed supply, thereby increasing the price of the supply to $2,600.

The college is required to allocate part of the $100 surcharge to the taxable supply of the subject. It would be fair and reasonable for the college to allocate $40 from the $100 surcharge to the taxable supply on the following basis: 1000/2500 * 100 = 40

A credit card surcharge imposed on a customer in respect of a credit card transaction used for a payment, or the discharging of a liability to make a payment, of an Australian tax or an Australian fee or charge subject to Division 81 has the same treatment as the underlying payment of the tax, fee or charge.

Jenny acquires a resident parking permit from her local council. The fee for the parking permit is $20. However, the council also imposes an additional 1.1% credit card surcharge for customers that pay by credit card. When Jenny uses her credit card to purchase the parking permit, the Council charges Jenny $20.22.

Pursuant to section 81-15 and paragraph 81-15.01(1)(f) of the GST Regulations, the fee for the resident parking permit is an Australian fee or charge that is not the provision of consideration. The credit card surcharge of $0.22 has the same treatment as the underlying payment of the fee or charge and is therefore not consideration for a supply.

A debit card surcharge imposed by the merchant on a customer in respect of a debit card transaction to pay for the supply of goods or services forms part of the price for the supply of the goods or services to the customer.

The debit card surcharge therefore forms part of the consideration for the taxable, GST-free or input taxed supply depending on the GST treatment of the underlying supply of the goods or services Where a surcharge is imposed on payment for more than one supply, the merchant can use any fair and reasonable method to apportion the surcharge to the underlying supplies of goods or services.

Grace purchases a toaster using her debit card. The price tag states that the toaster is $88 (GST inclusive). A sign at the store's counter states that all debit card transactions incur a $2 surcharge.

When Grace pays for the toaster using her debit card the merchant imposes a surcharge of $2 in respect of the sale. The price of the toaster is $90 as the $2 surcharge forms part of the consideration for the toaster. The supply of the toaster is a taxable supply under section 9-5. The GST payable in respect of the sale is $8.18, being 1/11th of the GST inclusive price of $90.

A merchant that imposes a surcharge on a customer for withdrawing cash through a debit card transaction makes a taxable supply where the requirements of section 9-5 are satisfied. The merchant is supplying the customer with the service of accessing the relevant payment system through the use of the terminal to authorise the transaction.

Steve withdraws $100 from his savings account using his debit card at a bar. The merchant advises Steve that there is a $2.00 surcharge to use the debit card facilities. In providing Steve the service of accessing the relevant payment system through the use of the terminal to authorise the transaction, the merchant makes a taxable supply for which it is liable for GST of $0.18.

A fixed debit card surcharge imposed by a merchant on a customer in respect of a debit card transaction that includes both a supply of goods or services and a cash withdrawal forms part of the consideration for the underlying supply of the goods or services.

The surcharge has the relevant connection or nexus with the underlying supply of the goods or services. It does not have a sufficient connection or nexus with the supply of the service to access the relevant payment system through the use of the terminal to authorise the transaction. This is because the surcharge is not increased if the customer exercises the option to make a cash withdrawal at the time of acquiring the goods or services.

A debit card surcharge forms part of consideration for both the supply of goods or services and the service of accessing the relevant payment system through the use of the terminal to make a cash withdrawal where the surcharge is calculated as a percentage of the listed price [2] of the goods or services and the amount of cash withdrawn. This is because the surcharge has a sufficient relationship or nexus with all of the supplies made by the merchant to the customer. The merchant may allocate the debit card surcharge to the different supplies using any fair and reasonable method of apportionment.

Joanne purchases meat from a shop with a price tag stating that the meat is $20 using her debit card. A sign at the store's counter states that all debit card transactions incur a $2 surcharge.

While paying for the meat, the merchant offers Joanne an option to also withdraw cash as part of her debit card transaction. Joanne chooses to withdraw $50.

When Joanne pays for the meat and withdraws $50 cash using her debit card the merchant imposes a surcharge of $2.

The price of the meat is $22 as the $2 surcharge forms part of the consideration for the meat. The merchant does not have a GST liability with respect to the sale as the supply of the meat is GST-free under section 38-2.

Assume the same facts as for Example 7 except that the merchant charges a surcharge calculated as 1.5% of the price of the meat and amount of the cash withdrawal.

When Joanne pays for the meat and withdraws $50 cash using her debit card, the merchant imposes a surcharge of $1.05 (being 1.5% of $70).

It would be fair and reasonable for the merchant to allocate $0.75 from the $1.05 debit card surcharge to the taxable supply of the service of accessing the relevant payment system through the use of the terminal to make a cash withdrawal on the following basis: 50/70 * 1.05 = 0.75

When the final Ruling is issued, it is proposed to apply both before and after its date of issue. However, the Ruling will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10).

The preliminary view set out in paragraph 5 of the draft Ruling sets out a meaning of the term 'ATM' that differs to the description of an 'Automatic Teller Machine (ATM)' contained in the Glossary of Terms set out in Schedule 1 of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions. Whilst most machines that fall within the glossary meaning in GSTR 2002/2 will also fall within the meaning set out in paragraph 5 of the draft Ruling, you are invited to raise the need for any transitional arrangements that may arise.

Subregulation 40-5.09(4A) of the GST Regulations provides that a supply by an entity for a fee of not more than $1,000 is a financial supply if it is a supply of one or more of the following ATM services: • a withdrawal from an account • a deposit into an account • an electronic transfer from an account • advice of the balance of an account.

The term 'ATM services' in subregulation 40-5.09(4A) of the GST Regulations is not defined. Combining the term 'ATM' with the word 'services' qualifies the listed services to those performed through the use of an ATM.

Pursuant to section 11 of the Payment Systems (Regulation) Act 1998, the RBA has designated the ATM system as a payment system operated within Australia. [3] The ATM system is a funds transfer system utilising automatic teller machines and governed by the set of rules set out in the CECS Manual. The ATM system allows a person to use an ATM card to withdraw cash or obtain other services from automatic teller machines.

The terms 'ATM' and 'ATM transaction' are defined in the CECS Manual as: ATM means an approved electronic device capable of automatically dispensing Cash in response to a Cash withdrawal Transaction initiated by a Cardholder. Other Transactions (initiated by a debit card) such as funds transfers, deposits and balance enquiries may also be supported. The device must accept either magnetic stripe Cards or smart (chip) Cards where Transactions are initiated by the Cardholder keying in a Personal Identification Number (PIN). Limited service devices (known as 'Cash dispensers') that only allow for Cash withdrawal are included.

As the term 'ATM services' is not defined in the GST Regulations, it is appropriate to adopt the industry meaning of the term 'ATM' as set out in the CECS Manual.

In Collector of Customs v. Agfa-Gevaert Ltd [4] the High Court observed that when construing revenue statutes that use trade or technical terms, the law generally favours interpretation of the terms as they are understood in the trade to which the statute applies. [5] This was applied by the New South Wales Supreme Court in P & N Beverages Australia v. Federal Commissioner of Taxation [6] where the Supreme Court stated at [10] that: Since A New Tax System (Goods and Services Tax) Act 1999 (Cth) is directed to persons who supply goods and services in the course of commerce, many exemption items employ technical terms that are framed by reference to trade usage, as Hill J observed in Pepsi Seven-Up Bottlers Perth Pty Ltd v Federal Commissioner of Taxation (1995) 62 FCR 289 at 295. An interpretation of such terms as they are understood in the relevant trade is to be preferred, as was observed by the High Court in Collector of Customs v Agfa-Gevaert Ltd (1995-1996) 186 CLR 389 at 398.

Adopting the industry meaning of the term 'ATM' is consistent with statements made in the Explanatory Statement to A New Tax System (Goods and Services Tax) Amendment Regulations 2009 (No. 1) which discusses the introduction of subregulation 40-5.09(4A) of the GST Regulations. The Explanatory Statement refers to the need for the amendment arising from the RBA introducing rules permitting ATM providers to charge users directly when they make use of the providers' ATM. The reference in the Explanatory Statement to the rules introduced by the RBA suggests that it is appropriate to use the industry meaning of the term 'ATM' when interpreting subregulation 40-5.09(4A) of the GST Regulations.

While not expressly considered, this approach is broadly consistent with comments made by Rares J. in Westpac Banking Corporation v. Australian Securities & Investments Commission [7] at [2] to [13]. In considering differences between particular types of debit cards, his Honour discussed ATMs by reference to the Australian ATM system and the regulatory and standards framework administered by the Australian Payments Clearing Association Ltd. [8]

Accordingly, a fee imposed for an ATM service listed under subregulation 40-5.09(4A) of the GST Regulations is consideration for an input taxed supply.

A facility that is used to access a payment system other than the ATM system (for example the payment system designated by the RBA as the EFTPOS system) is not used to provide an ATM service under subregulation 40-5.09(4A).

A customer acquiring goods and services from a merchant provides consideration for the acquisition by tendering their credit card to the merchant, or providing their credit card details to the merchant, and having the transaction authorised. [9]

Merchants that accept credit cards for payment of goods or services are able to charge a surcharge to recover their credit card acceptance costs. [10]

In Waverley Council v. Commissioner of Taxation [11] (Waverley Council), the Administrative Appeals Tribunal (Tribunal) considered the GST treatment of an administration fee payable by a customer to the Waverley Council when the customer used a credit card to pay fees or charges to the Council. The Tribunal stated at [42]: The question comes down to one of characterising the credit card administration fee - either as a stand-alone fee in itself, or as part of the 'underlying' tax, fee or charge that the credit card is being used to pay. We think that the fee is correctly characterised as part of the fee for the underlying supply. The person procuring the supply is buying, for example, a parking permit. There is one payment. In a practical sense there is one supply.

A credit card surcharge imposed by a merchant on a customer in respect of a credit card transaction forms part of the price for a supply of goods or services to the customer. The surcharge is part of the consideration payable by the customer for the supply of the goods or services made by the merchant.

The credit card surcharge therefore forms part of the consideration for a taxable, input taxed or GST-free supply depending upon the GST treatment of the underlying supply of the goods or services. Where a surcharge is imposed on payment for more than one supply, the merchant can use any fair and reasonable method to apportion the surcharge to the underlying supplies of goods or services.

Practical difficulties may arise where merchants need to apportion a credit card surcharge between supplies. These difficulties can similarly concern merchants seeking to apportion debit card surcharges (see below). The Commissioner will consider any reasonable approaches that reduce compliance costs. You are invited to provide comments outlining what practical difficulties merchants may face and how these difficulties may be mitigated.

Division 81 provides rules as to when a payment, or the discharging of a liability, is consideration for a supply to the extent that the payment is an Australian tax, or an Australian fee or charge.

Consistent with the approach taken in Waverley Council, a credit card surcharge imposed on a customer in respect of a credit card transaction used for a payment of an Australian tax or an Australian fee or charge subject to Division 81 has the same treatment as the underlying payment of the tax, fee or charge.

Merchants that accept debit cards for payment of goods or services are able to charge a surcharge to recover their credit card acceptance costs. The debit card payment systems include the EFTPOS system, the Visa Debit system and the MasterCard Debit system.

Pursuant to section 11 of the Payment Systems (Regulation) Act 1998, the RBA has designated the EFTPOS system as a payment system operated within Australia. [12] The EFPTOS system is the electronic funds transfer system governed by the EFTPOS Scheme Rules [13] promulgated under the constitution of eftpos Payments Australia Limited and any schedule, document, specification or rule published by eftpos Payments Australia Limited pursuant to those EFTPOS Scheme Rules. [14]

The EFTPOS Scheme Rules provide that an EFTPOS transaction is an electronic funds transfer that: • involves an EFTPOS issuer and an EFTPOS acquirer, and • is processed via an Interchange Link and/or processing infrastructure owned or operated by, or on behalf of, eftpos Payments Limited Australia, and • is one of the transaction types described in clause 20.1 of the Scheme Rules. [15]

Clause 20.1 of the EFTPOS Scheme Rules relevantly includes a cashout transaction. Under this transaction, the Acquirer Member [16] (on behalf of the merchant) obtains authorisation from the Issuer Member [17] to complete an EFTPOS Cardholder initiated cashout request at an EFTPOS terminal. [18]

Pursuant to clause 22.3 of the EFTPOS Scheme Rules, a merchant is permitted to surcharge an EFTPOS transaction.

Pursuant to section 11 of the Payment Systems (Regulation) Act 1998, the RBA has designated the Visa debit system as a payment system operated within Australia. [19] Under paragraph 9 of The 'Honour All Cards' Rule in the Visa Debit and Visa Credit Systems and the 'No Surcharge' Rule in the Visa Debit System Standard made by the RBA under section 18 of the Payment Systems (Regulation) Act 1998, a merchant is not prohibited from charging a surcharge to recover part or all of the reasonable cost of it accepting a Visa Debit card.

The RBA has not designated the MasterCard debit system. However MasterCard Asia/Pacific (Australia) Pty Ltd has made an undertaking with the RBA which includes that it will voluntarily comply with consistent requirements set out in paragraph 9 of The 'Honour All Cards' Rule in the Visa Debit and Visa Credit Systems and the 'No Surcharge' Rule in the Visa Debit System Standard. [20] Accordingly a merchant is not prohibited from charging a surcharge to recover part or all of the reasonable cost of it accepting a Debit MasterCard card.

A debit card surcharge imposed by the merchant on a customer in respect of a debit card transaction to pay for the supply of goods or services forms part of the price for the supply of the goods or services to the customer. This view is consistent with the approach taken by the Tribunal in Waverley Council.

The debit card surcharge therefore forms part of the consideration for the taxable, GST-free or input taxed supply depending on the GST treatment of the underlying supply of the goods or services. Where a surcharge is imposed on payment for more than one supply,, the merchant can use any fair and reasonable method to apportion the surcharge to the underlying supplies of goods or services.

A merchant that imposes a surcharge on a customer for withdrawing cash under a debit card transaction makes a taxable supply where the requirements of section 9-5 are satisfied. The merchant is supplying the customer with the service of accessing the relevant payment system through the use of the terminal to authorise the transaction.

A fixed debit card surcharge imposed by a merchant on a customer in respect of a debit card transaction that includes both a supply of goods or services and a cash withdrawal forms part of the consideration for the underlying supply of the goods or services. The surcharge has the relevant connection or nexus with the underlying supply of the goods or services. It does not have a sufficient connection or nexus with the supply of the service to access the relevant payment system through the use of the terminal to authorise the transaction. This is because the surcharge is not increased if the customer exercises the option to make a cash withdrawal at the time of acquiring the goods or services.

A debit card surcharge forms part of consideration for both the supply of goods or services and the service of accessing the relevant payment system through the use of the terminal to make a cash withdrawal where the surcharge is calculated as a percentage of the listed price [21] of the goods or services and the amount of cash withdrawn. This is because the surcharge has a sufficient relationship or nexus with all of the supplies made by the merchant to the customer.

The merchant may allocate the debit card surcharge to the different supplies using any fair and reasonable method of apportionment.

You are invited to comment on this draft Ruling. Please forward your comments to the contact officer by the due date.

In particular, we invite your comments as to whether there are practical difficulties in apportioning credit card and debit card surcharges between supplies and how these difficulties may be mitigated, as mentioned at paragraph 53. The Commissioner will consider any reasonable approaches that reduce compliance costs.

A compendium of comments is prepared for the consideration of the relevant Rulings Panel or relevant tax officers. An edited version (names and identifying information removed) of the compendium of comments will also be prepared to: • provide responses to persons providing comments; and • be published on the ATO website at www.ato.gov.au. Please advise if you do not want your comments included in the edited version of the compendium. Due date: 12 September 2014 Contact officer details have been removed following publication of the final ruling.

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Ruling 3 ATM services 3 Credit Card Surcharge 8 Example 1: Credit card surcharge - taxable supply 10 Example 2: Credit card surcharge - GST-free supply 12 Example 3: Credit card surcharge - apportionment 14 Credit card surcharge for payment of taxes, fees and charges subject to Division 81 17 Example 4: Payment for a tax, fee or a charge subject to Division 81 18 Debit card surcharge 20 Debit card surcharge - purchase of goods or services 20 Example 5: Debit card surcharge and purchase of goods 22 Debit card surcharge - withdrawal of cash 24 Example 6: Debit card surcharge and withdrawal of cash 25 Debit card surcharge - purchase and withdrawal of cash 26 Example 7: Debit card surcharge -fixed 29 Example 8: Debit card surcharge-percentage 33 Date of effect 36 Appendix 1 - Explanation 38 ATM Services 38 Credit Card Surcharge 48 Credit card surcharge for payment of taxes, fees and charges subject to Division 81 54 Debit card surcharge 56 EFTPOS system 57 Visa Debit system and Debit MasterCard payment system 61 Debit card surcharge - purchase of goods or services 63 Debit card surcharge - withdrawal of cash 65 Debit card surcharge - purchase and withdrawal of cash 66 Appendix 2 - Your comments 69 Appendix 3 - Detailed contents list 72