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  • Issue 6 Adjustments

    6.1 How does a supplier with an adjustment event (for example, allowing volume rebates) issue an adjustment note enabling the making of a decreasing adjustment?

    GSTR 2000/1 issued on 22 March 2000, and that ruling explains the requirements for issuing adjustment notes. To the greatest extent possible, the ruling takes the approach of enabling adjustment note issuers to combine such notes with existing documentation.

    It is common for a volume rebate for one billing period to be on the tax invoice for the next period. The ruling permits an adjustment note to be combined with a tax invoice, or alternatively a credit note and reissued tax invoice may together form an adjustment note. This is dealt with at paragraphs 29 to 33 of the ruling, as follows:

    Combined adjustment note and tax invoice

    29. The one document may be both a tax invoice and an adjustment note if it satisfies the requirements for tax invoices in subsection 29-70(1) and the requirements for adjustment notes in 29-75(1). For example:

    a tax invoice that shows the terms of a settlement or prompt payment discount may also be an adjustment note;
    a summary statement may be both a tax invoice and adjustment note; and
    an adjustment note may be combined with a subsequent tax invoice.

    This is explained in paragraphs 80 to 88.

    Adjustment note contained in two documents - a credit note and a tax invoice

    30. Some suppliers do not issue only a credit or debit note for an adjustment. Instead, they cancel the original tax invoice with a credit note and then issue a new tax invoice showing the new price.

    31. The Commissioner will treat these two documents together as an adjustment note if:

    they satisfy subsection 29-75(1) and the requirements of this ruling; and
    they are cross-referenced.

    32. As a supplier, you must issue both documents within 28 days of:

    a request by the recipient; or,
    you becoming aware of the adjustment (where you issued or were requested to issue a tax invoice).

    33. A decreasing adjustment cannot be claimed until both documents are held that together form the adjustment note.

    6.2 When a customer takes a settlement discount, in general business practice no document is issued to recognise this. Will there be any exceptions to the adjustment note rules allowed in these circumstances?

    This question was answered in GSTR 2000/1 which issued in March 2000.

    Settlement discounts

    81. One example where a tax invoice and adjustment note may be combined is when a settlement or prompt payment discount is available. To be an adjustment note, the tax invoice must show the amount of the reduction in price that is available to the recipient as a settlement or prompt payment discount. If the other information necessary for an adjustment note is shown, the document can be both an adjustment note in the approved form and a tax invoice. The document will become an adjustment note when the settlement or prompt payment discount is taken up by the recipient.

    Paragraphs 2(f), 3(f), and 4(f) of the A New Tax System (Goods and Services Tax) Act 1999 Adjustment Note Information Requirements Determination 2000 require an adjustment note to show 'the difference between the price of the supply before the adjustment event and the price of the supply after the adjustment event'. This difference may be shown as a dollar amount, as well as a percentage.

    6.3 Can an interest charge be a change in consideration and therefore an adjustment event (as opposed to a financial supply)?

    Goods and services tax ruling GSTR 2000/19 explains the Commissioner's view on how division 19 operates. In relation to late payment charges it comments:

    29. A charge for late payment that is consideration for the supply of an interest in a credit arrangement is not an adjustment event. The charge is consideration for a financial supply. Whether a charge for late payment is consideration for the acquisition of an interest in a credit arrangement will depend on the facts of each case. Where the charge is commercial compensation based on the time value of money (ie interest), this will indicate that it is consideration for a financial supply.

    The ruling also provides further examples of a financial supply and a change to consideration:

    Example - financial supply

    30. Henry supplies goods to Andrew under terms that require the amount invoiced to be paid within 30 days after which interest will accrue at 14% per annum. Henry based the interest rate on the cost of finance for his working capital. Andrew does not pay the invoice on time. Henry subsequently obtains payment of the amount invoiced together with the amount of interest. Under the terms of the agreement Henry has supplied Andrew with an interest in a credit arrangement. The charge is consideration for a financial supply and is not an adjustment event.

    31. A charge for late payment will not be consideration for an interest in a credit arrangement (and therefore not a financial supply) where the purpose of the charge is to change the consideration to compensate the supplier for additional costs (eg account keeping fees). Such a charge will be an adjustment event.

    Example - change to consideration

    32. George's Plumbing sells goods to Jasper on agreement that if payment is not received within 30 days a fee of 2% for account keeping services will be payable. Neither party accounts for GST on a cash basis. Jasper makes the payment (including the fee) after the due date. The charge is not consideration for a financial supply and is an adjustment event because it has had the effect of changing the consideration for the supply.

    End of example

    6.4 Interaction between Divisions 27, 129 and 162

    Issue

    Barry is a GST registered taxpayer. For the 2003 income year (ie from 1 July 2002 to 30 June 2003), Barry has elected to pay his GST by instalments, under Division 162 -ie annually.

    In September 2002, Barry acquired a car for $33,000 (including $3,000 GST). Assume that Barry will use the car to the extent of 80% for creditable purposes (on the basis of a valid log book). However, six months later, Barry finds that the car is used more for private purposes. Barry had originally overestimated the creditable use of the car and, therefore, is required to make one or more adjustments under Division 129.

    1. What is Barry's 1st adjustment period under Division 129?

    2. Would the conclusion be any different if Barry did not continue paying GST instalments for the 2004 income year (but reverted back to lodging BAS returns quarterly)?

    NTAA view

    Answer 1

    Under S.129-20, Barry's 1st adjustment period is the tax period that starts at least 12 months after the tax period for which the acquisition is attributable, and ends on 30 June.

    If Barry were not paying GST instalments, and continued to lodge quarterly BAS's, his 1st adjustment period would be the quarter ending 30 June 2005.

    However, it appears that S.27-99 'Item 1AA', and S.162-55(1), produce a different result. That is, it seems the effect of these provisions are to deem that Barry has an 'annual' GST tax period, rather than a 'quarterly' GST tax period. On this basis, Barry's 1st adjustment period would be the annual tax period that ends on 30 June 2006.

    Alternative view - the definition of 'tax period' in S.195-1, does not provide a direct link with Division 162, but only refers to Division 27, S.57-35 or S.147-25. On this basis, it could be argued that Barry's 1st tax period is determined on the basis of a 'quarterly' GST tax period, rather than an 'annual' GST tax period. However, we believe that this alternative view is not the preferred view, as there is a link between Division 27 and Division 162, through S.27-99 (Item 1AA).

    Answer 2

    If Barry does not continue paying GST instalments for the 2004 income year, it is not clear as to whether Barry's 1st adjustment period is now determined on a 'quarterly' basis, or can be determined on an 'annual' basis for that particular acquisition.

    Division 129 does not make it clear as to how an adjustment period is determined for a taxpayer that has gone from 'quarterly' to 'annually' (and vice versa - as is the case with Barry, above), or even where tax periods have changed from 'quarterly' to 'monthly' (and vice versa) for that matter.

    It is submitted that the tax period to which a particular acquisition is attributed, and the tax period relating to any Division 129 adjustments for that acquisition, should be the same (ie 'quarterly', 'monthly' or 'annually'). On this basis, it would be argued that Barry's adjustment periods under Division 129 in respect of the input tax credit for the purchase of the car, would be measured by reference to 'annual' GST tax periods.

    ATO response

    The issue raised by the TPIP member concerns the delayed adjustment period in the following scenario:

    Barry, an instalment taxpayer (Division 162) with an annual tax period (1 July 2002 to 30 June 2003) acquires a car for $ 33,000 in September 2002. The first adjustment period for Barry in respect of this acquisition is the period ending 30 June 2005. If Barry had quarterly tax periods, his first adjustment period in respect of the same acquisition would be one year earlier, that is the period ending on 30 June 2004.

    Clarification has been sought as to, whether this is the correct outcome under the legislation.

    Relevant provisions

    Where an entity elects to pay GST by instalments they have an annual tax period (Subsection 162-55(1)). This provision overrides the normal rules about tax periods in Division 27 (Subsection 162-55(4)). The effect of these provisions is that the attribution of the input tax credit for Barry will occur in the tax period which ends on 30 June 2003. This is in contrast to an attribution which would occur in the period ending 30 September 2002 if Barry's tax periods were quarterly. As Barry has an annual tax period he would not need to determine the extent of his creditable purpose of the car until he lodges his annual GST return (which could be at the time he lodges his income tax return).

    Division 129 deals with adjustments for changes in the extent of creditable purpose. Section 129-20 provides rules for attributing adjustments under Division 129. The number of adjustments that can be made depends upon the value of the acquisition. There is one adjustment period per year.

    As per section 129-20, an adjustment period relating to an acquisition:

    - starts at least 12 months after the end of the tax period to which the acquisition is attributable, and

    - ends on 30 June in any year.

    Application of provisions to scenario

    Applying these attribution rules to the scenario:

    Barry's acquisition is attributable to his annual tax period ending on 30 June 2003. Barry will claim his ITC in his annual GST return for the period 1 July 2002 to

    30 June 2003. His first adjustment period will end on the 30 June following 1 July 2004, which is 30 June 2005.

    If Barry was a quarterly taxpayer his acquisition in September 2002 would be attributed to his quarterly tax period ending on 30 September 2002. Barry would claim an ITC in his BAS for this period. His first adjustment period would end on the 30 June following 1 October 2003, which is 30 June 2004. However, if Barry acquired the vehicle in the last quarter, say on 2 May 2003, the acquisition would be attributable to the period ending 30 June 2003. The adjustment period would be 30 June 2005, as is the case of an entity with annual tax periods.

    Similarly in the case of entities with monthly tax periods the first adjustment period for an acquisition in the month of May is 12 months earlier than for an acquisition made in June. For an acquisition on 2 June 2003, the first adjustment period is the period ending on 30 June 2005, where as for an acquisition on 2 May 2003 the first adjustment period is 30 June 2004.

    The second query was whether the outcome would be different if for the 2004 financial year Barry reverted back to quarterly tax periods.

    If Barry reverted back to quarterly tax periods in the 2004 financial year, his first adjustment period will remain the same, that is, the period ending on 30 June 2005. His acquisition was attributed to his annual tax period ending on 30 June 2003 and 12 months after the end of this period is 1 July 2004. Although Barry is on quarterly tax periods now, his last quarter ending on 30 June 2005 will still be his first adjustment period in respect of the acquisition.

    If Barry was a quarterly taxpayer during the 2003 financial year and elected to pay GST by instalments for the 2004 financial year his adjustment period in respect of the September 2002 acquisition would still be his tax period ending on 30 June 2004.

    Changing tax periods from quarterly to monthly and vice versa does not make any difference as the adjustment period is always the last period of the financial year ending on 30 June.

    6.5 Division 138 and substantive renovations

    Issue

    What is the ATO's position in respect of section 138 where something is acquired, and an input tax credit claimed, and this thing is subsequently attached or subsumed in an asset upon which no GST has been paid?

    Example

    A commercial property is purchased prior to 30 June 2000 by a business for $110,000 and upon which no GST has been paid. Extensive renovations are carried out such as new kitchens, alteration to walls, painting etc. These things become part of the building and lose their identity. (The value of each acquisition exceeds $1,000). The total amount of these alterations is $55,000 (of which a $5,000 ITC was claimed). The business ceases activity and cancellation of GST registration occurs. The assets stay with the existing entity. There is no market value of attached things.

    Does section 138 require an adjustment on $110,000 plus $55,000 or the market value of the building which is $250,000?

    End of example

    ATO response

    An entity whose registration for GST is cancelled may still have assets on hand which include things for which input tax credit entitlements have arisen. The entity is required to make an increasing adjustment under subsection 138-5(1) of the GST Act, in respect of each thing included in the assets on hand, to cancel those input tax credits.

    The reason for the adjustment is that the assets are being taken out of the GST system. As the assets are not being used in the GST system, there is no entitlement to an input tax credit for those assets. The adjustment operates to take back any input tax credits already given in respect of things acquired that are included in the assets.

    The structural improvements made to the commercial building are things included in the assets of the entity for the purposes of Division 138 of the GST Act.

    However the entity will not have an adjustment in respect of a thing if there was one or more adjustment periods for the thing acquired and the last of those adjustment periods has ended before the cancellation of registration takes effect.

    In answering the question it has been assumed that for of each of the things acquired (for which input tax credits were claimed), the last adjustment period has not ended.

    The amount of the adjustment for each thing referred to in paragraph 138-5(1)(b) of the GST Act is calculated using the formula provided in subsection 138-5(2) of the GST Act as follows:

    1/11   X   Actual application of the thing   X   Applicable value

    Where the applicable value is the lesser of:

    • the GST-inclusive market value of the thing immediately before the cancellation takes effect, and
    • if the entity is, or was, entitled to an input tax credit for acquiring the thing - the amount of the consideration that it provided, or was liable to provide, for its acquisition of the thing.

    Accordingly, the 'applicable value' is the lesser of the cost and the GST-inclusive market value immediately before the cancellation. The adjustment recognises that some of the assets used in the enterprise may have lost value. In effect, the value represents usage in the enterprise while the asset was in the GST system. The adjustment allows an input tax credit for the value used in the enterprise for a creditable purpose, and recoups the difference. If the amount of consideration provided for acquiring the asset is less than its GST-inclusive market value (for example, where the asset has appreciated over time), the applicable value is the amount of consideration provided.

    In this case, you have stated that the improvements have no market value. However it is considered that the value of the improvements is reflected in the value of the property immediately before cessation of registration. It is considered that the market value of the improvements is equal to:

    Cost of improvements
    Cost of improvement   +   Value of property before improvements

    X   Value of property at cessation of registration

    $55,000
    $55,000   +   $110,000

    X   $250,000

    (In this calculation it has been assumed that the value of the property immediately before the improvements were made was equal to the acquisition cost. This will not necessarily be the case.)

    = $83,333

    As the market value of the improvements is greater than the consideration provided for the acquisition of the improvements the applicable value is $55,000.

    The term 'actual application' refers to the degree that an item has been used for a creditable purpose in a period starting from the time it was acquired or imported, and finishing at the end of the adjustment period. The amount is expressed as a percentage.

    Therefore, the adjustment required is 1/11   x   100%   x   $55,000 = $5,000.

    6.6 Division 129 increasing/decreasing adjustments

    Issue

    Entities are required to make adjustments in adjustment periods when planned use of an acquisition differs from actual usage. Division 129 details a method statement to follow to calculate the adjustment amount. There is a de minimus threshold of $1,000 for acquisitions before the adjustments are required.

    Two concerns with Division 129 as follows:

    a) Adjustments can be trivial for the amount of time taken to comply with GST Act. Even were an asset use for creditable purposes changes once during an adjustment period, this will result in the requirement to make further adjustments in all other adjustment periods due to averaging affect over time.

    b) The concept of adjustment periods is unique for GST purposes and bears no resemblance to how such changes in use are dealt with under capital allowance provisions. Increasing/decreasing adjustments under Div 129 impact on cost base calculations and time periods when adjustments are required. There is a total mismatch between GST and capital allowances provisions.

    The adjustment period concept is poorly understood in practice. It is a real compliance issue for the smaller taxpayer than the larger one as these entities are unlikely to have assets used privately. Although the concept of allowing for a period of usage to develop before adjustments are required was a reasonable reason for its original existence, it is totally impractical to apply in normal circumstances.

    What needs to done is a re-think of how adjustments should be dealt with under Div 129.

    Method statement needs to be revised in line with existing practices for dealing with change in use scenarios.

    ATO response

    This issue was previously raised by the TPA last year and looked at the November 2002 TPIP forum meeting. At that meeting members were advised that the issue is legislative. Any requests for legislative amendments should be forwarded to the ATO for referral to Treasury. In addition to this, members should forward requests directly to Treasury.

    Note that if members provide the Tax Office with specific scenarios where there are large costs in complying with Division 129, the Tax Office may be able to work with members with a view to providing an acceptable method for applying Division 129 of the GST Act in those scenarios.

    6.7 Division 132 adjustment

    Issue

    A sole trader taxpayer acquires a car before 1 July 2000 for $44,000 which the taxpayer uses 60% for business purposes. The taxpayer registers for GST on 1 July 2000. The taxpayer sells the car in 2003 for $22,000 and must pay GST of $2,000. Under Division 132 the taxpayer's decreasing adjustment would be nil because under the formula in s.132-5:

    1. Adjusted ITC = $0 because no ITC attributed at time of purchase.

    2. Full ITC = $0 because even if the car had been acquired solely for a creditable purpose (ie 100% for business purposes) the ITC claim would be $0 because at the time of acquisition the taxpayer would not have been entitled to any ITC as the car was acquired pre-GST.

    3. 0/0 = 1 and so the amount of decreasing adjustment is $0.

    An alternative view is that 0/0 = 0 and so there would be a decreasing adjustment equal to the price.

    Can the Tax Office please confirm that their view is that the decreasing adjustment is nil. Can the Tax Office please also confirm the decreasing adjustment would be nil for similar reasons if the car was a new car and was acquired before 23 May 2001 or if the car was purchased after 1 July 2000 but the taxpayer was not registered for GST at the time of purchase but became registered at a later time.

    ATO response

    The Tax Office confirms that there is no decreasing adjustment in this scenario. Division 132 does not apply or alternatively produces a nil adjustment. (In the analysis above even if 0/0 = 0 subsection 132-5(3) would operate in this case to reduce the decreasing adjustment to nil, being the difference between the full input tax credit and the adjusted input tax credit). Division 132 will only provide a decreasing adjustment where an amount of GST was payable in relation to the acquisition and an entitlement to an input tax credit existed (but was denied or limited by the legislation).

    Division 132 will also not provide a decreasing adjustment in relation to new cars acquired before 23 May 2001. In these situations the adjusted input tax credit will be nil as no input tax credit will have been claimed. The full input tax credit will also be nil due to the operation of section 20 of the A New Tax System (Goods and Services Transition) Act 1999. If section 20 of the GST Transition Act did not apply to the acquisition, Division 132 should provide a decreasing adjustment for a car that was used partly for private purposes (for example, a vehicle acquired by a primary producer that would have satisfied the exemption in Item 3 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992).

    Where a car is purchased after 1 July 2000 by an entity not registered for GST but is sold after the entity becomes registered for GST, Division 132 will not provide a decreasing adjustment for the same reasons as outlined above.

      Last modified: 22 May 2014QC 28063