Member Q&A – GST and the treatment of credit card surcharges

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Question

Council is introducing a credit card processing fee to recover the cost of merchant fees incurred. We are seeking advice as to the correct GST treatment and confirmation as to which of the two possible options is correct:

  • The fee may be taxable or GST free, depending on the GST treatment of the underlying transaction to which it relates – i.e. if the surcharge is added to a GST free transaction, it would be GST free, and if it is added to a taxable transaction, it would include GST; or
  • All surcharge fees should be taxable as the merchant fees incurred that Council seeks to recover are taxable.

Thanks for your assistance.

Answer

We note that GSTR 2014/2 sets out the ATO view on credit card/debit card surcharges.

Generally, a surcharge is treated as part of the consideration for the underlying supply and, if that transaction is a taxable supply, GST will apply to the surcharge component as well. Refer to paragraphs 8 and 9 of the ruling:

  1. A credit card surcharge imposed by a merchant on a customer for a credit card transaction forms part of the consideration for the supply of the goods or services made by the merchant. There is a sufficient nexus between the surcharge and the supply of the goods or services for the surcharge to be paid for the supply.
  2. The credit card surcharge forms part of the consideration for a taxable, input taxed or GST-free supply depending on the GST treatment of the supply of the goods or services in question. Where a surcharge is imposed on payment for more than one supply,[1] the merchant can use any fair and reasonable method to apportion the surcharge to the respective supplies of goods or services.

The above paragraphs confirm the treatment of the amount being charged to the customer may differ to the treatment of the charge from the bank/financial service provider to Council.

We further note that if the amount being paid is a Division 81 taxes, fees or charges, then the same GST treatment also applies – refer to paragraph 26 from the ruling:

  1. A credit card surcharge imposed on a customer in respect of a credit card transaction used for the payment, or the discharging of a liability to make a payment, of an Australian tax or an Australian fee or charge subject to Division 81 has the same treatment under Division 81 as the payment of the tax, fee or charge in question.

We also note that GSTR 2014/2 distinguishes situations where an entity is acting as agent, and charges the payment processing separately – refer to paragraph 10 of the ruling:

  1. An entity may act as an agent for a third party that supplies goods or services to the customer, but make a separate supply to the customer of processing the transaction including accessing the relevant payment system to authorise the transaction. Where the entity imposes a credit card surcharge for the processing service, the surcharge has a sufficient nexus with the supply of the service to be regarded as being paid for that supply. The credit card surcharge does not form part of the consideration for the supply of the goods or services made by the third party.

Assuming Council is acting on its own behalf, and not as agent, then the first scenario (paragraphs 8 and 9, and 26 of the ruling) appears to be the correct approach.

 

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