Agency Relationships - How to claim GST when a supplier invoice is made out to another entity.
What is an Agency Relationship?
An intermediary may be authorised by another party to do something on that party's behalf (e.g. make a purchase). The intermediary is known as the agent and the party who authorises the agent to act on their behalf is called the principal.
In strata, the concept of agency is important when it comes to reimbursing expenses and the eligibility for input tax credits (aka: GST credits) tied to the purchase. In short, the GST law (backed up by various Rulings) view agency relationships as if the principal had entered into the purchase transaction in its own right. That is, it is the principal that is entitled to claim any input tax credits (aka: 'GST credits') linked to the transaction. The agent or 'middle person' is effectively ignored for the purposes of determining GST liability / input tax credit entitlement.
When Does an Agency Relationship Exist?:
GST Ruling 2000/37 provides guidance on factors that are considered to indicate when an agency relationship exists. The Ruling stresses however that no one factor in isolation confirms the existence of an agency relationship and every situation is to be assessed on the facts of the case. Some of the factors listed in the Ruling include:
- Permission being provided for an agent to act (eg: via a valid and current strata management contract);
- The principal being liable for payments (eg: strata company being the one to pay for expenses arranged for by a strata manager);
- Transactional paperwork being written up in the principal's name (eg: tax invoices for goods / services); and
- Whether the principal has some form of control in setting or limiting the price charged or paid for (eg: via the combination of an approved budget line item and a strata management contract authorising the manager to arrange for approved expenditure).
Do Reimbursements Paid to Strata Managers / Owners qualify as Agency?
In the majority of circumstances, the answer is thankfully, 'Yes'.
Ascend have applied for numerous Private Binding Rulings on behalf of strata companies over the years to confirm whether agency relationships exists in a variety of different scenarios. It has been our experience that even where tax invoices issued by suppliers are issued in the name of the strata manager or owner, the existence of an agency relationship has been confirmed by the ATO each time due to valid authorisation being in place prior to the transaction occurring.
Reimbursements and Strata Managers
GST Ruling 2000/37 outlines a concept known as 'general agents' where it is accepted that "...where an entity has authority arising out of, and in the ordinary course of their business, to do some act or acts on behalf of their principals in relation to that business...", then it will be accepted that an agency relationship exists by default. Specific examples of general agents listed in the ruling include share brokers, solicitors and property managers and our office has confirmed with the ATO that duly appointed strata managers also fall into this category of agent.
With the existence of an agency relationship confirmed, it follows on to conclude that where a validy appointed strata manager makes a purchase on behalf of their principal (ie: the strata company), it will generally be accepted that the strata company will be eligible to claim input tax credits (GST credits) on purchases made by the strata manager on the strata company's behalf.
Note: The general GST rule of requiring a valid tax invoice (irrespective of whether it is in the name of the manager or the strata company itself) for any purchase over $75+GST still applies of course.
Reimbursements and Owners:
Unlike Strata Managers however, owners (unless they are also employees of the strata company)* are generally not considered to be agents of their strata company by default as they are not classified as 'general agents'. Hence a strata company cannot automatically claim back GST when it reimburses an owner for an expense even with a valid tax invoice. Thankfully though, there is an exception to the rule where a well-documented arrangement in place prior to any transactions being entered into that authorises the owner to make purchases on behalf of the strata company.
Note: Again, the tax invoice substantion rules apply in the same way for owner reimbursements as they do for strata manager reimbursements.
*The GST law provides that employees are agents of their employer by default
Quick Takes:
- A strata company will generally be eligible to claim input tax credits (GST credits) for supplier tax invoices that happen to be in the name of their agents so long as there is documented support authorising the expenditure.
- A strata manager will usually be considered an agent of the strata company by virtue of their appointment via a management agreement.
- Owners should be authorised in writing by the council before making purchases on behalf of the strata company if the strata company wishes to claim GST credits for the acquisitions being made.
Links:
- A New Tax System (Goods and Services Tax) Act 1999
- ATO: GST Ruling 2000/37 (GST: Agency Relationships and the application of the law)
The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above. Please contact our office for more information.
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