GST core
Composite supply
A composite supply is a single sale made up of a main element and minor incidental parts, and the whole sale takes the GST treatment of the main element.
A composite supply exists when what the customer is really buying is one thing, even though the sale includes several parts. The ordinary example is a product delivered in packaging. The packaging is not a separate sale, it is part of the product, so the whole supply is treated according to the product. A haircut that includes a shampoo, or a repair job that includes a small amount of materials, are similar.
The test is about the real substance of the transaction from the customer's point of view. If there is a dominant element, and the other parts are integral to it or incidental to it, the other parts take on the character of the dominant element for GST purposes. The result is a single supply that is either taxable, GST-free or input-taxed as a whole, rather than being split into separate parts.
This is quite different from a mixed supply. In a mixed supply, the parts are separate and of similar importance, so they are treated individually. In practice, the line between the two can be blurry. A holiday package that includes flights, accommodation and tours may be viewed as a series of separate supplies, while a software licence that includes a short online training session might be a single composite supply. The facts and contract terms matter.
The ATO has published guidance on how to distinguish between single supplies with several parts and multiple separate supplies. Factors it looks at include how the supply is described in the contract, whether the parts can be bought independently, how they are priced, and what a reasonable person would see the supply as. A business that sells combined products should think carefully about how these factors apply.
A common misunderstanding is that any bundle must be split into its parts. If one part is clearly incidental, splitting would not be correct. The opposite mistake is treating genuinely separate items as a single composite supply simply because they are sold at one price. This can result in either over-charging or under-charging GST, and customers or auditors may notice.
If you sell products that combine elements, review your invoices and contracts and decide how the items are viewed. Document the reasoning for your approach, particularly if one element is taxable and another is not. This page is general information only, so confirm the treatment of your products with the ATO or a registered tax professional.
Worked example
A bakery sells a GST-free loaf of bread for $5 in a paper bag that costs it about 10 cents. The bag is part of the bread sale, so the whole supply is a single GST-free supply and no GST is charged. By contrast, a $110 hamper holding a $55 taxable bottle of wine and $55 of GST-free food is likely to be a mixed supply, with GST of $55 / 11 = $5 on the wine.
Practical tips
- Ask whether the customer is really buying one thing with minor extras or several things of similar importance.
- Write down the reasoning behind your treatment of bundled products, particularly if the parts would be taxed differently.
- Check any change in how a product is sold, because adding an optional extra can turn a composite supply into separate supplies.