• 8.7. If you are a supplier accounting for GST on a non-cash basis and you assign a debt to a debt factor, whether or not on a recourse or non-recourse basis, can you claim a decreasing adjustment for a bad debt?

    For source of ATO view, refer to paragraphs 65 to 67 of GSTR 2004/4External Link - Goods and services tax: assignment of payment streams including under a typical securitisation arrangement.

    Under a non-recourse arrangement

    No. The consideration for the supply of the debt will normally be less than the full face value of the invoice. Also, the recipient of the taxable supply that you made might not pay all of the consideration for that supply to the debt factor. You can not claim a decreasing adjustment under Division 21 in respect of the difference between the full face value of the invoice and:

    • the consideration for the supply of the debt to the debt factor, or
    • the total amount paid to the debt factor by the recipient of your taxable supply.

    If you assign the debt, Division 21 can not apply to allow you a decreasing adjustment because you will not have any debt to write off or that can be overdue for 12 months or more.

    However, if you only assign a part of the debt to the debt factor, you may be entitled to claim a decreasing adjustment in respect of the amount that was not assigned. This is because it is possible to either write off that unassigned part or for the unassigned part of the debt to become overdue (to you) for 12 months or more.

    Example 7.1 – assignment under non-recourse arrangement

    A makes a taxable supply of goods to B for $110 and issues an invoice at the same time. A then sells the debt to a debt factor for $99.

    A accounts for $10 GST when the invoice is issued. B later only pays the debt factor $90 who then writes off the unpaid $9 debt as bad.

    But for the factoring arrangement, A would ordinarily make a $10 decreasing adjustment under Division 21 if he wrote off the $110 as bad or the $110 was overdue for 12 months or more. However, this is not the outcome under the factoring arrangement.

    A is not entitled to a decreasing adjustment under Division 21 in respect of the difference between $110 and $99. Nor is A entitled to a decreasing adjustment for the $9 that B owed the debt factor. This is because there is no bad debt (or amount overdue) for A for the $9 because the $9 is a part of the debt that was assigned to the factor on a non-recourse basis. Therefore, Division 21 (about accounting for bad or overdue debts) does not apply to A.

    Note also that the debt factor is not entitled to a decreasing adjustment under Division 21 for any amount that is not paid to him by B.

    End of example

    Under a recourse arrangement

    Yes, but only if the assigned debt is reassigned to you.

    As with a non-recourse debt factoring arrangement, the consideration for the supply of the debt will normally be less than the full face value of the invoice. Also, the recipient of the taxable supply that you made might not pay all of the consideration for that supply to the debt factor. You cannot claim a decreasing adjustment under Division 21 in respect of the difference between the full face value of the invoice and the consideration for the supply of the debt to the debt factor.

    However, if the debt (or a part of it) is reassigned to you from the debt factor – for example, because the debtor does not pay the debt factor – you may be entitled to a decreasing adjustment under Division 21. This is because you have a debt (owed to you by the debtor) which you can write off or which can be overdue (to you) for 12 months or more.

    Example 7.2 – assignment under recourse arrangement

    A makes a taxable supply of goods to B for $110 and issues an invoice at the same time. A then sells the debt to a debt factor for $99.

    A accounts for $10 GST when the invoice is issued. B does not make any payment to the debt factor. Because B does not make any payment to the debt factor, the debt factor reassigns the original debt back to A.

    Because A now has a debt owed to him by B, A may become entitled to a decreasing adjustment when A writes off the $110 (or it becomes overdue to A for 12 months or more).

    End of example
      Last modified: 24 Jun 2015QC 16359