A lot of attention has recently been given to foreign owned companies that sell services into Australia who end up paying little or no tax from income derived through the Australian economy. The figures reported in mainstream media are staggering.
It is the case that many businesses legitimately structure their operations to minimise their taxation obligations and no issue is taken with those strategies. However, even when online travel agents (“OTAs”) (foreign or local) are legitimately operating within the rules, there are some less obvious outcomes that often have a direct impact on the bottom line of mum and dad operators whose services or products are being offered and sold through OTAs. Especially so, if the OTAs are not registered for GST in Australia.
It is common for OTAs to charge commissions of anywhere between 6% and 20% of an accommodation provider’s gross nightly room rate.
Whilst accommodation providers rely heavily on OTAs to engage and attract customers, the combination of:
- foreign non-resident OTAs, with limited operations in Australia; and
- those entities not being registered for GST in Australia,
can have a significant impact on a small business’s cash flow and margins.
Why an OTA being registered for GST matters
Let’s start by looking at some of the basics:
– generally, OTA commissions are calculated on the gross room rate per night. Where a room is sold for $250.00 per night, the OTA earns anywhere between $15.00 (6%) and $50.00 (20%);
– accommodation providers must remit to the Australian Taxation Office 1/11th of the $250.00 per night room rate as GST. This GST goes to the benefit all Australians;
– an OTA that is outside of Australia and not registered for GST, means that the accommodation provider is unable to claim back an input tax credit on the commission paid;
– if an OTA is registered for GST in Australia, an accommodation provider may, generally, claim back an input tax credit of 1/11th of the commission.
On a per night basis, the input tax credit based on a:
– 12% commission of $30.00, equates to $2.73; or
– 15% commission of $37.50, equates to $3.41.
Whilst these amounts may seem insignificant, the table below shows how a small input tax credit may translate into the difference between a business breaking even or suffering a substantial loss.
| Colum 1 | Colum 2 | Colum 3 | Colum 4 | Colum 5 | Colum 6 | Colum 7 |
| Assumptions | Direct Sale no discount | Direct Sale Discount offered to Guest | Australian Owned OTA registered for GST | Foreign Owned OTA not registered for GST | Australian Owned registered for GST | Foreign Owned OTA not registered for GST |
| Commission payable/discount offered | 0% | 5% | 12% | 12% | 15% | 15% |
| Sales method | 100% Direct | 100% Direct with discount | 100% OTA | 100% OTA | 100% OTA | 100% OTA |
| Total Available Nights | 2000 | 2000 | 2000 | 2000 | 2000 | 2000 |
| Gross Room Rate | $250.00 | $250.00 | $250.00 | $250.00 | $250.00 | $250.00 |
| Commission paid to OTA or discount to customer | $0.00 | $12.50 | $30.00 | $30.00 | $37.50 | $37.50 |
| Room Rate Nett of Commission | $250.00 | $237.50 | $220.00 | $220.00 | $212.50 | $212.50 |
| GST on Gross Room Rate | $22.73 | $22.73 | $22.73 | $22.73 | $22.73 | $22.73 |
| Room Rate Nett of Commission and GST | $227.27 | $214.77 | $197.27 | $197.27 | $189.77 | $189.77 |
| GST – Input Credit | $0.00 | $0.00 | $2.73 | $0.00 | $3.41 | $0.00 |
| Cost of Opening Room | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 | $200.00 |
| Gross Profit/Loss per room | $27.27 | $14.77 | $0.00 | -$2.73 | -$6.82 | -$10.23 |
| Annual Profit/Loss | $54,545.45 | $29,545.45 | $0.00 | -$ 5,454.55 | -$13,636.36 | -$20,454.55 |
| Outcome | Profit | Profit | Base Case – Break Even | Loss | Loss | Loss |
If the example in column 4, OTA registered for GST in Australia (12% commission), is taken as the base case and represents a break-even scenario, the impact of being unable to recover just $2.73 on all room nights sold (with all other things being equal) translates to a $5,454.55 loss (see column 5). The potential loss is amplified as the commission rate rises to 15% and the differential between an OTA that is registered or not registered for GST increases to $6,818.18 (columns 6-7).
The figures used in the example are to demonstrate the potential effects that recovery/non-recovery of the GST input tax credit may have on the bottom line and does not take into account whether the pricing structure or margins are appropriate. Further, it should be noted that most accommodation providers source their bookings through a combination of direct sales and OTAs.
Book direct or use an Australian based OTA who is registered for GST
The buy “Australian made” campaign applies equally to services such as accommodation. Travellers wishing to support the local economy can:
– significantly benefit local businesses;
– ensure that more of their holiday dollars are retained in Australia; and
– obtain at least equivalent rates and possibly lower rates directly from the accommodation provider,
by adopting a couple of basic strategies:
– book directly with accommodation providers; or
– purchase accommodation through an Australian based OTA who is registered for GST in Australia.
An accommodation provider who is on the ball should gladly share a portion of the commission that might otherwise be payable to an OTA, with a valued customer who books directly. Note that some OTAs seek to limit the way in which accommodation providers may offer rooms at lower rates than those offered by an OTA. Customers should walk-in, email or telephone the accommodation provider directly for the best rate.
By making these small changes, Australian holiday makers can significantly benefit the overall economy and convey a message to foreign companies that whilst their trade and services are welcome and valued, the Australian spirit of giving everyone a fair go is still alive and well.
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