Selling goods for a good profit and finding the right buyer is not for everyone. However, it is inevitable to find yourself in a situation where you need to get rid of old equipment. Unfortunately, this can take time and focus away from your business. As a result, the best option may be to have someone sell the goods for you. This is where consignment agreements are useful and why it is important you understand how they work. With a consignment agreement, you can protect your ownership of the goods even when you give them to someone else to sell. This article will cover how exactly a consignment agreement works and the benefits it will provide to you.
What is a Consignment Agreement?
In a consignment agreement, there are two parties; the consignor and the consignee. The consignee is someone who agrees to sell goods on behalf of the owner of those goods (‘the consignor’). The consignee agrees to sell the goods because they will generally recieve some form of profit in exchange for their services. Typically, there are two ways of selling goods on consignment and each one has different tax obligations. The two types of consignment agreements are a ‘sale or return’ and an agency sale.
Sale or Return
A sale or return agreement is essentially a promise that a consignee will buy the goods from the consignor for an agreed price if they can find someone who will buy the goods. Afterwards, the consignee resells the goods to the buyer they found. Therefore, the consignor retains ownership of the goods until the consignee finds a buyer. However, if the consignee never finds a buyer, they are not obligated to buy the goods from the consignor. Furthermore, the price the consignee sells the goods for is often higher than the agreed price between the consignor and consignee. Consequently, the consignee gains a profit from the agreement.
To simplify a sale or return agreement, the following will be the transaction broken down into basic steps:
- The consignor and consignee enter into a consignment agreement
- Then, the consignee looks for and, hopefully, finds a buyer
- Next, the consignee buys the goods from the consignor for the agreed price
- Lastly, the consignee resells the goods to the buyer
A sale or return agreement will likely have the following terms:
- Retention of Title Clause
- An agreed price for the goods once a buyer has been found
- If the buyer pays more than the agreed price, the consignee can keep the remaining amount
If the consignee is registered for GST, they must pay GST on the full sale price of the goods. However, there are some conditions that can make the consignee eligible for GST credits.
Unlike a sales or return agreement, an agency sale does not involve the consignee purchasing the goods from the consignor. Instead, an agent agrees to sell the goods on behalf of the consignor in exchange for a commission fee. The commission can be a flat rate or a percentage of the final sale price. Through an agreement, an agent has the ability to enter into legal relationships on behalf of the consignor. As a result, the agreement sets out the scope and authority the agent has in representing the consignor. Although an agent is required to act in the best interest of a consignor, it is important to set out in the agreement who can control the sale price. This is to ensure the consignor gets the outcome they want.
Furthermore, an agent only has to pay GST for their commission and not for the sale. However, certain circumstances will require the owner to pay GST for the sale.
What are the Benefits of Using a Consignment Agreement?
There is a range of benefits from using a consignment agreement instead of selling the goods yourself. The benefits for a consignor include:
- Another party will do the majority of the work finding a buyer
- If a buyer is not found, they can organise for their goods to be returned to them
- There are no restrictions on what goods can be sold using a consignment agreement
- They will retain ownership of their goods while a buyer is being found
- In the case of an agency sale, they can still retain control over the final sale price of the goods
A consignment agreement generally involves one party (‘the consignee’) selling goods on behalf of the owner (‘the consignor’). Whether this is through ‘sales or return’ or agency, the consignment agreement provides necessary conditions that protect the interests of the owner. Specifically, the consignor retains ownership of the goods until an owner is found. If you are interested in using a consignment agreement but you are unsure how to create one, simply click here to start.