In GST we have to decide, whether a supply is mixed supply or composite supply. The tax treatment in GST for mixed supply or composite supply is different, so we should understand the concept of mixed supply or composite supply.
“mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;
The term ‘mixed supply’ is used to describe a supply that has to be separated or unbundled as it contains separately identifiable supply.
“composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
“Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary
The term ‘composite supply’ is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing.
A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply. You need to consider all of the circumstances of a supply to work out whether the supply is mixed or composite.
Whether a supply is composite or not, invoice or agreement is not a deciding factor
In Customs and Excise Commissioners v . British Telecommunications plc , Lord Slynn of Hadley considered whether delivery was ancillary or incidental to a supply of cars or whether it was separately identifiable. In concluding that, as a matter of commercial reality, there was one contract for a delivered car, Lord Slynn found it necessary to consider all of the circumstances of the supply and said:
‘… the fact that separate charges are identified in a contract or on an invoice does not on a consideration of all the circumstances necessarily prevent all the supplies from constituting one composite transaction nor does it prevent one supply from being ancillary to another supply which for VAT purposes is the dominant supply … the essential features of a transaction may show that one supply is ancillary to another and that it is the latter that for VAT purposes is to be treated as the supply.it is a composite supply even if separate charge are identified in invoice.’
Mixed Vs, Composite supply
The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part you adopt a commonsense approach for example, the supply of a car by a dealership to a customer. A car has many parts which are fitted together to make a single vehicle. Although some of those parts, such as the tyres, may also be purchased separately, it is readily apparent that only the car is supplied when it is sold. In considering whether there is a supply of one thing a commonsense, practical approach to characterisation is to be taken. However, other supplies are more complex and contain (or may appear to contain) more than one part. In these cases, you need to further analyse the supply to determine its character and GST treatment.
A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.
In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.
Separately identifiable parts
In many circumstances, it will be a matter of fact and degree whether the parts of a supply are separately identifiable, and retain their own identity.
In Re Food Supplier and Commissioner of Taxation (Food Supplier) promotional items packaged with food had intrinsic value, would not be consumed with the food and were mostly unconnected with the food. This was so even when, for example, the main item was a jar of coffee and the promotional item was a mug in which coffee might be served. In these circumstances the Tribunal found that the supply of the promotional items packaged with the food items was a mixed supply. In such a case, it could not be said that the food component was the dominant part of the supply and the promotional item was ancillary or incidental to the supply of the food.
The question in Sea Containers was whether the supply was of transport or of transport and catering. It was decided that the proper approach was to see whether the catering element was significant in its own right or whether it was merely ancillary to the provision of transport. Keene J said: ‘The evidence shows that it [the catering] constituted a very important element in its own right in what was being provided by the appellant. Its significance in these transactions went well beyond the point where it could be seen merely as a way of better enjoying the transport element. …it constituted for customers an aim in itself. Not, of course, the sole aim but, given its prominence in the marketing literature, clearly a separate aim from the travel element. The emphasis upon this aspect of the facilities provided is very striking. The fine meals and wines were a vital part of what the customer was paying for, whether by way of a separate or an all-inclusive price.’
In British Airways , the Court of Appeal found that the provision of in-flight catering was, in substance and reality, an integral part of the supply of air transportation. Stuart-Smith LJ said: ‘While something that is necessary for the supply will almost certainly be an integral part of it, the converse does not follow … Catering facilities are part of and integral to the transportation in that degree of comfort which British Airways have decided is commercially appropriate and indeed necessary to attract passengers.’The Court was also influenced by the fact that no separate charge was made for the in-flight catering, and the price of the air ticket did not vary, regardless of the type of meal provided or whether or not meals were provided. It was not part of the contractual obligation of the airline to supply meals, even if meals were expected as part of the service. Customers could not obtain a refund if a meal was not served on their flight.
Sea Containers and British Airways show that different conclusions may be reached after taking into account the relevant facts of cases that are similar.
In Customs and Excise Commissioners v . Wellington Private Hospital Ltd (Wellington ), Millett LJ also considered the question of separate identity: ‘The proper inquiry is whether one element of the transaction is so dominated by another element as to lose any separate identity as a supply for fiscal purposes, leaving the latter, the dominant element of the transaction, as the only supply. If the elements of the transaction are not in this relationship with each other, each remains as a supply in its own right with its own separate fiscal consequences.’
Integral, ancillary or incidental parts
Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.
In Saga Holidays Stone J focussed on the ‘social and economic reality’ of the supply and found that there was a single supply of accommodation and the adjuncts to that supply (including the use of the furniture and facilities within each room, cleaning and linen services, access to common areas and facilities such as pools and gymnasiums and various other hotel services such as porterage and concierge) were incidental and ancillary to the accommodation part of the supply. This is an example of a composite supply.
In Westley Nominees the Full Federal Court considered what the expenditure was calculated to effect from a practical and business point of view in characterising the supply as a single supply.
In Customs and Excise Commissioners v. Madgett and Anor (t/a Howden Court Hotel), the European Court of Justice described the term ‘ancillary’ in terms of scale and connection: ‘… a service is ancillary if, first, it contributes to the proper performance of the principal service and second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.’
Examples of mixed supplies
Example 1 – commercial and residential premises
Robert owns a building comprising both residential and commercial premises. He leases the building to Lawrence who operates a small recruitment agency from the commercial premises and lives in the residential part. The supply of the residential part is input taxed. The supply of the commercial part is taxable. Robert is making a mixed supply that is partly taxable and partly input taxed.
Example 2 – education courses
A natural therapies college allows students to select four individual units from both GST-free and taxable courses. Students with good grades are permitted to undertake a fifth unit for no extra charge. Barbara takes advantage of this offer and selects both taxable and GST-free units. Barbara’s packaged course is a mixed supply. The part of the consideration that is for the taxable parts needs to be worked out, with the fees charged to be apportioned between the five units.
Example 3 – student board at a university college
Rory is a student who lodges in a university’s residential college. The college provides full board by way of a furnished room and meals. The college charges an all-inclusive fee for the board. The furnishing merely forms part of the amenity of the room and is integral to its supply. However, neither the room nor meals are integral, ancillary or incidental to each other. This is a mixed supply of input taxed residential premises and meals that are taxable. The college needs to work out its liability for the taxable part of the supply by apportioning the fee between the room and the meals.
Example 4 – promotional pack
Terrence supplies a promotional pack that consists of ‘Toff’s Tea’ and a china cup and saucer. The tea is GST-free, and the cup and saucer are taxable. Each part of the supply has significant value. This is a mixed supply because the tea, and the cup and saucer are separately identifiable, and each would not be considered merely incidental or ancillary to the other.
Example 5 – health cover and gym membership
A private health fund offers six months gym membership with every purchase of its premium cover package. Both the health cover and the gym membership are, in this case, each of significant value when viewed as a part of the total package, such that it cannot be said that the essential character of the supply is of one part and not the other part of the supply. This is a mixed supply.
Example 6 – hamper
Harry sells assorted hampers. The ‘Deluxe Picnic Hamper’ includes food and beverage items (bread rolls, cheese, fruit, chocolate and fruit juice), and a silver handled knife which are packaged with a wooden bread board. The supply of the chocolate, knife and bread board is taxable. The other items are GST-free. Each of the parts of the supply are significant. The sale of the ‘Deluxe Picnic Hamper’ is a mixed supply and Harry needs to apportion the consideration for the hamper.
Examples of composite supplies
Example 7 – delivery of GST-free goods
A customer of ‘Net-it-out’ places an order for GST-free food through the internet. Net-it-out supplies the goods to the customer’s doorstep for the price listed on its internet site. In this case, Net-it-out is making a supply of delivered GST-free goods, and has no liability to account for GST on the delivery of them. In this case, delivery is an integral, ancillary or incidental part of a supply as the supply is of delivered goods.
Example 8 – picnic box
The Restless Traveller Hotel supplies guests with a picnic box that consists of bread rolls, tomatoes, a packet of cheese slices and bananas. All of these items are GST-free and are packed in a disposable cardboard box. Also included in the picnic box are some paper serviettes and a plastic knife, that are ordinarily taxable, but in this case they are insignificant in terms of scale and connection with the food. The serviettes and knife merely contribute to the better enjoyment of the dominant parts of the supply (the food). They are integral, ancillary or incidental to the supply. The consideration for the picnic box does not need to be apportioned.
Example 9 – GST-free services and the use of goods
The Heart Hospital provides GST-free hospital treatment. During hospital stays, patients are provided with the use of newspapers and television sets. No extra charges are made for the provision of these goods. They are merely incidental and ancillary to the composite supply of hospital treatment.
Example 10 – GST-free goods with ancillary item
A hearing aid is supplied with a small brush that is used as an accessory to clean the hearing aid so that it performs properly. Compared to the value of the hearing aid, the brush represents a small proportion of the value of the total package. In this case, from a commonsense and objective approach, a customer who purchases the package is acquiring a hearing aid. The supply of the brush is not regarded as a part, but is merely ancillary to the supply of the hearing aid. This is a composite supply.
Example-10 Service with ancillary parts
Car parts supplied as an integral, ancillary or incidental component of a car service are not a supply of car parts under either of those subsections. For example, spark plugs supplied in the course of a routine service of a car are not a supply of car parts. Those car parts are only an incidental part of a supply that is properly regarded as a supply of services, not a supply of car parts.
No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where: