Almost 20 years on from the introduction of GST in Australia by then-Prime Minister John Howard and who’d have thought that robust deliberation on its application continues.
Rule of thumb? Identify exactly who is providing which service for consideration to whom to determine the GST implications of the transaction.
Who’s doing what for whom and who pays?
A recent case has highlighted how all-pervasive the GST can be. In what could be considered a most curious case, involving a brothel and a sex worker (HKYB and FCT  AATA 4770), there was much conjecture about whether it was indeed the bordello providing the services or the lady of the night herself who was subject to GST.
The crux of the case was the issue of assessments totalling about $5m, on the basis that each time a sexual service was provided at the brothel, there was a single supply by the taxpayer of a sexual service to a client giving rise to a GST liability.
The brothel, however, contended that the supply of each sexual service (for GST purposes) was by the relevant sex worker and that it provided only the facility where that service was conducted.
The outcome? The Administrative Appeals Tribunal (AAT) concluded that a sex worker supplied a service to the brothel so that the brothel could in turn fulfil its obligation to the client. Since the sex worker did not quote an ABN (assuming the worker was not an employee), the brothel should also have withheld an amount under the PAYG system.
Putting aside the salacious nature of the services, this is a clear example on the importance of determining who is providing services to whom, and who is paying.
Akin to any modern-day romance novel, the Tribunal went into a lot of detail about the nature of the arrangements; we suspect not as much to hold our interest but to ensure the factual circumstances were correct.
The nature of the arrangements was critical for determining the outcome. The brothel argued that the workers were all independent contractors. Somewhat unusually, it said that it rented the room to the client who then undertook separate arrangements with the worker.
However, the Tribunal noted that all services were costed by the brothel and there was little scope for the worker to negotiate a different price. It also noted that it would be unlikely that the client would know that the amount they paid was supposedly partly for the service and partly for the rent of the room.
In the circumstances, the Tribunal found that it was the brothel supplying the service (and the room) to the client, with the workers supplying their labour to the brothel in order for the obligation to be fulfilled.
This is despite other tax cases of similar operations coming to a different view.
In addition to the interesting reading, the outcome carries warnings for external tax advisers. In the case, the external accountant 'Mr Derrick' (presumably another pseudonym) advised the brothel that they were correctly meeting their GST and PAYGW obligations. It seems that he based this on a Private Binding Ruling he managed to find on a similar arrangement. For those interested, that was Commissioner’s Private Binding Ruling Authorisation Number 72326.
The lack of detailed investigation of the arrangements by the accountant before coming to his view didn’t sit well with the Tribunal – it was critical of his understanding of the way the taxpayer actually operated. It said:
“Mr Derrick’s answer that he did not look at the applicant’s website because that would not have been approved of by the firm was not, with respect, credible at all, much less persuasive. We were left to wonder whether this answer had recently been invented. Be that as it may, viewing the applicant’s website could hardly have been regarded as gratuitous, much less prurient, given the professional service he was rendering to the applicant.”
Having a full and complete understanding of a client’s business, and the consequences of supposed arrangements, is a major takeaway for tax advisers. Another lesson; documented arrangements must reflect actual arrangements.
Application to other business models
An obvious parallel is medical practices. The medical practitioner is often not an 'employee' of the medical practice but an independent contractor. This may be an issue, depending on the written agreements between the parties. The agreements should reflect what is actually happening and provide the basis for the GST position.
Keep in mind that the GST legislation is very specific about when a health supply is GST-free.
One requirement for the supply to be GST-free as a health supply is that it must be to the recipient of the supply. Taking the example of the brothel (with all jokes aside regarding its qualification as a health supply), the Tribunal found that it was the brothel (the taxpayer), not the worker providing the service. If it is the medical practice rather than the doctor making the supply to the patient, it is arguable that the supply will not be GST-free.
It is critical to get all arrangements in place in order to achieve the desired result.
Of note, the payroll tax implications of these arrangements should be considered following recent cases around medical practices.
Following from the title of this piece, I will now segue seamlessly into the GST implications of one of the world’s newest professions, the sharing economy. The sharing economy can also be referred to as the ‘gig economy’ where the online seller is predominately offering a service on a short-term basis.
In 2018, the Organisation for Economic Co‑operation and Development (OECD) described the ‘gig economy’ as:
‘a labour market characterised by the prevalence of short-term and often non-standard contracts or freelance work as opposed to permanent jobs and standard labour contracts’
The burgeoning gig economy has resulted in challenges for all involved in determining who is supplying which services to whom. We note that this is also an issue for payroll tax purposes, but I don’t have the bandwidth to further address that here.
The cases to date tend to result in varying outcomes about whether or not the worker is an employee, an independent contractor or something else. While this reflects the many different variations to the arrangements, it is also, I suspect, partly as a result of arrangements and contracts being poorly worded or not reflecting the actual working arrangements.
In the case of ride sharing arrangements for example, is it the platform operator providing the service to the customer using either a contractor or an employee driver? Or is the platform operator simply providing an operating system allowing the independent driver to provide the service to the customer? Is the passenger a customer of the platform or the driver?
It may boggle the mind, but back to my rule of thumb and the answers to these questions will help determine who has the GST liability.
With an increasing amount of the workforce headed down this path, it is important that all parties have a good understanding of exact arrangements. The exact nature of the arrangements (both in terms of the contract and the actual arrangements) will provide the GST result.
As each arrangement may produce a different GST outcome, it is important to consider all issues.
FOR MORE INFORMATION ON GST OBGLIGATIONS
For more information on GST, please contact your local RSM office.