Special arrangements
Third-party payments
Third-party payments are amounts paid to a supplier by someone other than the customer, and they usually count as consideration for the supply, so GST can apply to them.
In GST, the amount on which tax is calculated is the consideration for a supply. Consideration is not limited to what the customer pays. If a third party, such as an insurer, a government body or a manufacturer, pays all or part of the price, that payment is also consideration for the supply. A supplier must therefore look beyond the customer when working out whether GST applies and how much.
A simple example is a repair shop fixing a customer's car after an accident. The customer may pay part of the cost, and the insurer pays the balance. The shop makes a single supply of repairs to the customer, and the total of the customer's payment and the insurer's payment is the consideration. The shop must pay GST on the full amount, if it is registered and the supply is taxable, even though some of the money comes from the insurer.
Another common example is a payment tied to a particular sale, such as a manufacturer paying a retailer a contribution towards a promotion on specific products. Whether such a payment is consideration depends on whether it is for the supply or really a payment for something else, like advertising services. Each situation depends on the facts, so it is risky to treat all third-party money in the same way.
The tax treatment also affects the buyer's side. The customer may claim a credit only for the part it is entitled to, and the credit must be based on a tax invoice showing the GST. Where an insurer pays, the insurer may have its own entitlements under the insurance rules. It is worth working out who is the recipient of the supply and who is a mere payer, because only the recipient generally claims the credit.
Government payments can be a trap. Some payments from governments are in return for a supply, for example funding for services delivered to the public, and may be subject to GST. Others are genuine grants without any supply in return, which usually do not attract GST. The label used in the agreement does not settle the question, and the substance of what the supplier must do for the money is what matters.
Records should show the source of each payment, the supply it relates to, and how GST was calculated. If invoices ignore a third-party contribution, the GST reported may be understated. When the supplier is unsure, it is best to seek advice before lodging, because correcting errors later may involve interest or penalties.
The question is fact-dependent, so this page is general information only. Confirm how it applies to your circumstances with the ATO or a registered tax professional.
Worked example
A registered physiotherapy-equipment supplier sells a $1,320 taxable GST-inclusive item. The customer pays $320 and a government program pays $1,000 for the same item. The consideration is the total $1,320, so GST is $1,320 divided by 11, which is $120. The supplier reports $120 on the BAS even though the customer paid only $320 directly.
Practical tips
- Include payments from insurers, programs and other third parties when working out the consideration for a supply.
- Do not assume a payment is a grant outside GST just because it is called one. Look at what you must provide in return.
- Record who paid, who received the supply and how GST was worked out.