When compared with other payment methods, cheque and direct debit payments have an inherent risk of being dishonoured (when a cheque is presented) or being declined (when a direct debit request is processed). Having enough funds in an account to cover a cheque or direct debit is pretty much ‘Business 101’. However, there are occasions, for a variety of reasons, where funds may be lacking. For the business concerned, there will be GST consequences.
The circumstances covered by GSTD 2013/1 arise where an attempt is made to make a payment for the underlying supply by the supplier presenting a cheque or attempting a direct debit on the recipient’s bank account in accordance with the authority it has from the recipient. The attempted payment is dishonoured or declined and the supplier’s financial institution imposes an ‘inward dishonour fee’ on the supplier.
The mere fact that an amount can have the character of damages, a penalty or compensation does not mean it cannot be in connection with a supply. The fundamental question to be answered is whether the amount is consideration for a supply. (This determination does not address supplies associated with the ‘dishonour fee’ charged by financial institutions to their account holders, as these dishonour fees are part of the consideration for the supply of the bank account.)
The ATO view is that the payment of a failed payment fee is not consideration for either a financial supply or another supply. However, the determination also states that the characterisation of a payment for GST purposes is dependent upon the facts in each case and that, as a result, it may be possible for the payment of a failed payment fee to have a sufficient nexus with the underlying supply for the failed payment fee to form part of the consideration for that supply.
In this determination, a ‘failed payment’ means a dishonoured cheque or a declined direct debit request, an ‘underlying supply’ means the supply in respect of which the payment failed, and a ‘failed payment fee’ is the fee charged by the supplier to the recipient in respect of the failed payment.
Note also that Goods and Services Tax Advice (GSTA) Tax Practitioner Partnership (TPP) 065, which described a failed payment fee as consideration for an input taxed financial supply, has been withdrawn with effect from the date of the issue of GSTD 2013/1 – that is, from 27 February 2013. However, the determination states that taxpayers can choose to apply the GST treatment stated in it to past transactions, despite having previously relied on GSTA TPP 065, if their circumstances are consistent with those described in GSTD 2013/1.
That may increase the extent to which certain acquisitions made are treated as being for a creditable purpose. However, any entitlement to a refund would also involve consideration of relevant time limits and the restriction on refunds of overpaid GST (see Miscellaneous Taxation Ruling MT 2010/1: Restrictions on GST refunds under s105-65 of Schedule 1 to the Taxation Administration Act 1953), including potential reimbursement of unregistered recipients.
