In a recent case the AAT had to consider how a transaction involving a supply of spectacles which consisted of the frame sold to the customer at a discount which was a supply and the lenses which was sold without any discount, the price of the complete pair of spectacles being the aggregate of these two amounts. There was no additional charge for fitting the lenses into the frame. Treated separately, the supply of the frames would be subject to GST as a taxable supply whereas the supply of the lenses would be a GST free supply.
The issue raise in the proceedings was how to treat the amount of the discount that applies to the frame content of the supply of spectacles for GST purposes.
There was an argument as to whether there was one supply of spectacles or two supplies of frames and lenses. The tribunal if did not matter whether was one supply or two supplies in determining how to treat the discount on the frames for GST Purposes but it was inclined to the view that the there was one supply being a supply of a pair of spectacles, comprising two components, the frame and a pair of lenses. The tribunal said this was the more commonsense outcome, and one which sits more comfortably with the “practical business tax” approach to GST which had been favoured by the Federal Court in previous cases.
The question of how much GST was applicable to the supply of the spectacles was to be answered by determining “the value of the part of the actual supply that is a taxable supply”. The tribunals held that commonsense dictates that the taxable proportion of the total GST inclusive price was to be calculated by dividing the discounted frame price (less GST) by the actual selling price of the complete pair of spectacles (less GST) with GST being applicable on to that proportion of the total price. The tribunal rejected the Commissioner’s argument that the undiscounted frame price was to be taken into account in the calculation of the taxable proportion.
The tribunal further also held that it did not matter if there were two supplies rather than one supply. There was a supply of frames at a price and a supply of lenses at a price. On this basis GST was only applicable to the price of the frames albeit that was a discounted price.
It is however important to note that in this case the tribunal found that on the evidence in this case that there were sound commercial reasons for the discounting of frames, there was no commercial imperative for the discounting of lenses and there is nothing contrived or artificial about the pricing methodology adopted by the Applicant in its promotional arrangements. There may be cases where doing exactly what was done in this case may be caught by the general anti-avoidance provisions of the GST Act so it should not be assumed that structuring a transaction in this way will necessarily reduce the overall GST inclusive price of an item.