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GST for Online Marketplaces
A thriving marketplace is generally a great place to find a bargain. But GST & marketplaces? Time for a startup accountant’s view.
Marketplace applications have revolutionised the way businesses connect with each other. From eBay to Uber, being an intermediary has proved a very successful business model for some of the world’s largest organisations. At a point in time even these companies stopped to consider how to account for their taxes, those of their customers and the vendors using the platform. Organising how your entity is accounting for the Goods & Services Tax can be complex in these arrangements, that’s why knowing your obligations early will prevent issues with the tax office down the road.
Marketplace – agent or principal?
To understand the requirements for marketplaces and GST, we should first review the concept of agency agreements. An agency relationship involves one party (the Principal) authorising another party (the Agent) to engage third parties in legal relationships. The complexity of relations in the gig economy means that we are having to redefine our interpretations of what exactly constitutes an agency relationship. For instance, drivers use Uber to engage passengers in exchange for a fee. The passengers pay the fee to Uber who then remit the balance to the driver less their own fee.
Does an agency relationship exist here? Uber has consistently argued no, as it presents itself as a company that simply allows people seeking a ride to find drivers willing to provide that ride. Moreover, it strictly labels its branding as a ‘technology’ company rather than a ‘transportation company’. Clearly this is a foggy area and speaking to a commercial solicitor about drafting an agency agreement is recommended.
Marketplaces and GST & ID 2010/146
But what does this matter for GST? The reason is explained in the tax office interpretative decision ID 2010/146. Following the example used by the tax office, Entity A and B are both registered for GST and make separate taxable supplies of certain services to the same customer. Despite the tax office conceding that they both make ‘separate’ taxable supplies, it was decided that Entity B will be required to issue a single tax invoice for the services provided by both.
An Airtasker example
The Airtasker model explains this well (assume all entities are registered for GST):
- Mr X needs his bed moved to his new house. Using Airtasker (Entity B), he connects with Mr Y (Entity A) and once the bed has been moved receives an invoice from Airtasker with the quoted job cost. Mr X pays Airtasker who then remits the agreed upon amount to Mr Y. Mr X sleeps soundly that night knowing Airtasker was just an intermediary connecting himself and Mr Y.
The interpretive decision expounded that although Airtasker and Mr Y both provide different services to the customer, the former being to provide a marketplace to find services and the latter being to provide that service, Airtasker would be responsible to physically prepare and issue the invoice on behalf of Mr Y. It also cannot charge a fee for this service. This means that it is Airtasker’s responsibility to dissect and show each parties GST collected per job.
In practical terms, this means that the marketplace business will need to have an invoicing system that preferably can automatically generate specific invoices for each vendor on specific jobs. Dual invoices will need to be issued concurrently; one for the vendor, and one for the client. Subsection 29-70(1) of the GST Act provides for the contents of tax invoices, however the actual layout of each of the invoices to the vendor and the client will be different.
- Using the Airtasker example again, the tax invoice issued to Mr X (the client) would simply have the subtotal, any additional surcharges, the GST and the total cost. The tax invoice issued to Mr Y however would contain Airtasker’s ABN and details, Mr Y’s ABN and details and the GST breakdown of the total transaction. Take this example below:
- Mr Y quotes $110 to Mr X for moving the bed. Having organised this through Airtasker, who charge a 15% fee, Mr X pays Airtasker directly who after withdrawing their fee of $16.50, remits the balance of $93.50 to Mr Y.
- The implications for GST can be summarised as follows:
- Airtasker collects $110 which includes GST of $10.
- Airtasker remits $93.50 to Mr Y which includes GST of $8.50.
- Airtasker retains balance of $16.50 which includes GST of $1.50.
The actual tax invoice wouldn’t need to provide this level of detail, only the total amount collected by Airtasker, the amount remitted and that both amounts are GST inclusive.
Defining actual revenue through clearing accounts.
The structure of marketplace businesses as intermediaries can be confusing; after all it appears, they are collecting the total invoice, incurring a large cost of sale on purchase then the residual is just the net profit, however, this is not exactly true. The service fee that the marketplace charges is the real gross profit of the entity. It’s gross profit less running costs (i.e. administration costs) will equal its net profit.
To ensure this is managed correctly, clearing accounts must be setup in the entities Profit & Loss report. Each will be a “Revenue” account and we recommend the following format:
- Clearing A/c 1 – Marketplace Sales – GST on Income
- Clearing A/c 2 – Marketplace Purchases– GST on Income
- Clearing A/c 3 – Refunds/Chargebacks– GST on Income
- Take for instance a marketplace platform for ordering wholesale products for use in pharmacies.
- A pharmacy uses the marketplace platform to order its monthly supply of dental products. The marketplace platform then purchases this from the wholesaler on behalf of the pharmacy and organises delivery the next day. The total cost of the dental products was $440 and the marketplace charges a 5% fee for organising. The marketing platform issues an invoice of $440 to the pharmacy who then pays the invoice directly. A remittance advice is then issued to the wholesaler which contains the breakdown of the invoice being $440 including GST, the marketplace’s service fee of $22, and the residual amount owing of $418.
- Accounting wise – the $440 revenue is collected in Clearing A/c – Marketplace Sales. The $418 purchase of the inventory is remitted through Clearing A/c – Marketplace Purchases, which leaves the residual service fee of $22 as the effective revenue for the marketplace.
- The marketplace would then be required to report on GST collected of $2 ($22 divided by 11).
Where this can get complicated is if the vendor isn’t registered for GST. By default, the Clearing A/c – Marketplace Purchases should be GST inclusive, however as alluded to above each entity is providing a separate taxable supply. Therefore, each is responsible for their own obligations under the GST Act 1999. On each transaction the marketplace will need to confirm whether the vendor is indeed registered for GST to ensure no additional input tax credits are being claimed.
What is the GST sales for a marketplace?
The structure of the income and cost of sales then poses another issue about when the marketplace business should register for GST. A business is required to register for GST where they are expected to generate income of $75,000 or more in a rolling 12-month period. Is the income then the amount generated through the total invoices or the residual gross profit? The answer is the latter, however regardless of whether the residual gross profit is nearing the threshold many start-ups prefer to register for GST early to claim back input tax credits on the development of the software in order to get the marketplace up and running. In this way, accounting for the transactions also becomes more straightforward and the steps above can be followed.
Electronic Distribution Platform operators (EDP) & GST
It’s also worth noting the recent changes to the treatment of GST on low value imported goods. From 1 July 2018, GST is payable by suppliers of low value goods to non-GST registered consumers. This may catch businesses that are based outside of Australia that sell goods to individuals whereas previously the requirement to register was mainly crossed over the $75,000 threshold.
- This affects both merchants of low value imported goods and Electronic Distribution Platform operators (EDP), however only one entity need register for GST which is determined by the following;
- if an EDP operator is responsible for GST on a sale, the merchant will not be responsible for GST
- if an EDP operator or the merchant is responsible for GST on a sale, a re-deliverer will not be responsible for GST.
As technology continues to disrupt normal market relationships, we expect the tax office to be more proactive with both its interpretive advice for GST and its data matching services in determining whether marketplace applications have failed to comply with their obligations.
For any further questions on GST or a proper Xero Accounting setup for your online marketplace, please speak to your Fullstack Advisor.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.