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Specific guidance on the GST implications for buy-now, pay-later providers has been published on the ATO legal database. The key issue in this area is determining the nature of the supplies made by these businesses and the impact this might have on claiming input tax credits.
The ATO indicates that buy-now, pay-later providers would typically make two common types of supplies:
- Input taxed supplies of credit when a customer initiates the provider’s provision of payment to the merchant in exchange for the customer’s obligation to repay the provider at a later date.
- Taxable supplies of services to merchants in enabling them to accept payment using the provider’s facilities, with the provider then becoming liable to make payment to the merchant (and the customer’s obligation to pay the merchant being discharged). These supplies are made in exchange for merchant fees, charged on a purchase transaction-by-transaction basis.
Input tax credits are generally not available on acquisitions to the extent that they relate to the making of input taxed supplies. The main exception to this is where the taxpayer does not exceed the Financial Acquisitions Threshold or where an acquisition relating to financial supplies qualifies for a reduced input tax credit.
The guidance includes examples of common expenses incurred by businesses in this area:
- Only relating to input taxed supplies
- Debt collection costs
- Advertising to originate new credit contracts
- Customer service for customers
- Merchant fees and processing costs for recovering payments from customers
- Customer credit checks / authorisation and fraud tools
- Acquisitions that relate only to taxable supplies
- Advertising to originate new merchant agreements
- Customer service for merchants
- Costs for integration with merchant systems
- Acquisitions that relate to both supplies
- Processing costs for payments to merchants when customers initiate the provision of credit
In cases involving businesses that make input taxed financial supplies, the critical issue for acquisitions that relate to both input taxed and taxable or GST-free supplies is determining an apportionment method that provides a fair and reasonable reflection of the extent of the relationships between those acquisitions and supplies.
On this point, the ATO considers that the use of a revenue-based apportionment methodology gives rise to a significant risk that input tax credits may be overclaimed. Due to the nature of the business where complying customers are not charged interest, there is typically limited input taxed revenue to reflect the extent to which acquisitions relate to input taxed supplies of credit. However, the ATO doesn’t really provide an example of a low-risk approach.
Tax practitioners with clients in the buy-now, pay-later space should review the guidance in detail to confirm whether their clients are accounting for GST correctly and to assess the likelihood of the ATO seeking to query or challenge the existing GST treatment.
More information can be found on the ATO website here: GST considerations for buy-now, pay-later providers
If you’re unsure how this impacts you, please contact us for more specific advice