Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 4 - Adjustments
Outline of Chapter
4.1 Schedule 4 amends the GST Act to:
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- ensure that a decreasing adjustment will be available where an entity makes a taxable supply, in the course of carrying on its enterprise, of a thing that has been used solely or partly for a private or domestic purpose;
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- provide special rules for adjustments for bad debts that are not fully taxable or creditable;
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- provide an increasing adjustment to the recipient of a going concern where the going concern is used to make solely input taxed supplies; and
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- provide rules for adjustments occurring after a representative has been appointed but relate to supplies made by the incapacitated entity.
Detailed explanation of new law
Sale of assets used partly for a creditable purpose
4.2 Where a thing is acquired by an entity registered for GST and it is to be used partly for making taxable supplies and partly for a private or domestic purpose, the acquisition is only partly creditable. The entity is entitled to a partial input tax credit in respect of the acquisition of the thing in accordance with subsection 11-30(3).
4.3 Where an entity disposes of the thing, in the course or furtherance of its enterprise, section 9-5 applies and GST will be applied to the full value of the thing, except where the supply is an input taxed or GST-free supply.
4.4 Where an entity makes a taxable supply of a thing that has been used solely or partly for a private or domestic purpose, it is appropriate that it is able to claim any input tax credits it has been denied in relation to any private or domestic use of the thing.
4.5 Item 9 amends section 132-5 to allow an entity to claim a decreasing adjustment where it has previously been denied input tax credits because the thing was used for a private or domestic purpose [paragraph 132-5(1)(c)] . Item 10 amends subsection 132-5(4) to ensure that the decreasing adjustment is correctly calculated.
Example 4.1
Ian runs a plumbing business and is registered for GST. Ian has acquired a station wagon for $1,100 (including $100 GST). Ian uses the vehicle 80% in his business and 20% for private purposes. Ian has claimed an input tax credit equal to 80% of the GST included in the purchase price ($80). The vehicle is no longer subject to the adjustment provisions contained in Division 129 which relate to changes in creditable purpose.
Ian sells the vehicle for $550 (including $50 GST) in the course of his enterprise and the supply is a taxable supply. Ian now has a decreasing adjustment calculated using the formula in Division 132. That is:
1/11 * 550 * (1 - 80/100)
50 * 20% = $10
Ian claims the decreasing adjustment of $10.
4.6 Items 6 to 8 amend the headings and descriptions for Division 132 to reflect that the adjustment under the Division applies where the thing supplied has been used for a private or domestic purpose. Items 1, 3 and 5 amend references to Division 132.
Adjustments for bad debts that are not fully taxable or creditable
4.7 Where an entity accounts for GST other than on a cash basis, it may account for the GST on a taxable supply, or the input tax credit on a creditable acquisition, before it receives or pays any or all of the consideration for the supply. If debts are written off as bad or are outstanding after 12 months, adjustments are made under Division 21.
4.8 If an entity subsequently recovers an amount that relates to a bad debt adjustment, then Division 21 provides for another adjustment. This Division also provides that the amount of an adjustment in respect of a bad debt is 1/11 of the amount written off or recovered.
4.9 Where the supply or acquisition is fully taxable and creditable, but not to the extent of 1/11 of the price, the amount of the adjustment calculated under Division 21 will not correctly reflect the amount of GST included in the amount written off or recovered. Examples where this occurs include luxury cars, insurance and long-term accommodation.
4.10 Item 16 inserts new Subdivision 136-B , which provides special rules for calculating the amount of an entitys bad debt adjustment where it relates to a transaction that is taxable or creditable at less than 1/11 of the price.
4.11 An entity must still meet the rules in Division 21 for determining when it will have a bad debt adjustment and will also still make the adjustment under that Division. Note that an entity that accounts for GST on a cash basis will never have an adjustment under Division 21, therefore new Subdivision 136-B will never be applicable to the entity. New Subdivision 136-B merely provides a method for working out the amount of the adjustment where the supply or acquisition is fully taxable or creditable, but at less than 1/11 of the price. [Subsections 136-30(1), 136-35(1), 136-40(1) and 136-45(1)]
Meaning of taxable and creditable at less than 1/11 of the price
4.12 New subsection 136-50(1) defines the term taxable at less than 1/11 of the price. A taxable supply is taxable at less than 1/11 of the price if the amount of GST payable on a supply is less than an amount equal to 1/11 of the price of the supply. A creditable acquisition is creditable at less than 1/11 of the consideration where it relates to a taxable supply covered by subsection 136-50(1) [subsection 136-50(2)] .
4.13 Items 18 and 19 amend section 195-1 to include the meaning of the terms taxable at less than 1/11 of the price and creditable at less than 1/11 of the consideration in the GST Dictionary. These terms will have the meanings given by new subsections 136-50(1) and 136-50(2) respectively.
Adjustments for bad debts and taxable supplies
4.14 New section 136-30 provides the method to calculate a decreasing adjustment for a bad debt for a taxable supply that is taxable at less than 1/11 of the price in the method statement located in new subsection 136-30(2) .
Example 4.2
Quons Prestigious Cars is a seller of luxury cars and has sold one such car to Tatiana which she uses wholly for running her delivery business. The price of the luxury car was $110,000. Tatiana has paid $99,000 of this amount but the outstanding $11,000 remains unpaid for more than 12 months. There have been no previous adjustments in respect to the car.
This overdue amount is a bad debt. It is a decreasing adjustment in relation to a taxable supply that is taxable at less than 1/11 of the price. Therefore, Quons Prestigious Cars must use the method statement in new subsection 136-30(2) to calculate its adjustment.
Quons bad debt decreasing adjustment is calculated as follows:
Step 1: amount of GST payable for the luxury car = $9,076.33 Step 2: $11,000 Step 3: $110,000 - $11,000 = $99,000 Step 4: amount of GST that would be payable if the price of the luxury car were $99,000 = $8,261.52 Step 5: $9,0760 - $8,2610 = $8140 (the amount of the bad debt decreasing adjustment for Quons Prestigious Cars)
Recovering bad debts written off
4.15 New section 136-35 provides the method to calculate an increasing adjustment where an entity has recovered an amount previously written off for a taxable supply that is taxable at less than 1/11 of the price in the method statement located in new subsection 136-35(2) .
Example 4.3
Six months after Quons Prestigious Cars has written off the unpaid amount in respect of its supply to Tatiana, Tatiana pays the outstanding amount ($11,000) to the car dealer. Apart from the previous bad debt adjustment of $11,000, there have been no other adjustments for the car.
As this recovered bad debt relates to a supply that is taxable at less than 1/11 of the price, Quons Prestigious Cars must use the method statement in new subsection 136-35(2) to calculate its bad debt increasing adjustment.
Quons bad debt increasing adjustment is calculated as follows:
Step 1: amount of GST payable for the luxury car, taking account of the previous bad debt (i.e. the amount of GST that would be payable if the price of the luxury car was $99,000) = $8,261.52 Step 2: $11,000 Step 3: $110,000 - $11,000 = $99,000 Step 4: $99,000 + $11,000 = $110,000 Step 5: amount of GST that would be payable if the price of the luxury car were $110,000 = $9,076.33 Step 6: $9,0760 - $8,2610 = $8140 (the amount of the bad debt increasing adjustment for Quons Prestigious Cars)
Adjustments for bad debts and creditable acquisitions
4.16 New section 136-40 provides the method to calculate an increasing adjustment for a bad debt for a creditable acquisition that is creditable at less than 1/11 of the price in the method statement located in new subsection 136-40(2) .
Example 4.4
Following on from Example 4.2, Tatiana has a bad debt increasing adjustment and as it relates to an acquisition that is creditable at less than 1/11 of the consideration, she must use the method statement in new subsection 136-40(2) to calculate her bad debt adjustment.
Tatianas bad debt increasing adjustment is calculated as follows:
Step 1: amount of input tax credit Tatiana was entitled for the luxury car (there have been no adjustments in respect of the acquisition) = $50120 (because of section 69-10) Step 2: $11,000 Step 3: $110,000 - $11,000 = $99,000. The step 2 amount is subtracted from the consideration Tatiana has paid and is liable to pay Quons Prestigious Cars Step 4: amount of input tax credit Tatiana would be entitled to if the consideration for the luxury car were $99,000 = $5,012.18 Step 5: $5,0120 - $5,0120 = $0 (in this example, there is no bad debt adjustment for Tatiana)
4.17 New section 136-45 provides the method to calculate a decreasing adjustment for recovering amounts previously written off for a creditable acquisition that is creditable at less than 1/11 of the price in the method statement located in new subsection 136-45(2) .
Example 4.5
Following on from Example 4.3, after Tatiana has paid Quons Prestigious Cars the outstanding amount of $11,000 her bad debt decreasing adjustment is calculated through the method statement in new subsection 136-45(2) .
Her decreasing adjustment is calculated as follows:
Step 1: amount of input tax credit Tatiana was entitled to for the luxury car, taking account of the previous bad debt (i.e. the amount of GST that would be payable if the price of the luxury car was $99,000) = $5,0120 (because of section 69-10) Step 2: $11,000 Step 3: $110,000 - $11,000 = $99,000. The step 2 amount is subtracted from the consideration Tatiana has paid and is liable to pay for the car. Step 4: $99,000 + $11,000 = $110,000 Step 5: amount of input tax credit Tatiana would be entitled to if the consideration for the luxury car were $110,000 = $5,012.18 Step 6: $5,0120 - $5,0120 = $0 (in this example, there is no bad debt adjustment for Tatiana).
4.18 Item 13 amends section 136-1 to reflect the new structure of Division 136 which deals with:
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- transactions that are partly taxable or creditable in Subdivision 136-A; and
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- transactions that are fully taxable or creditable at less than 1/11 of the price in Subdivision 136-B.
4.19 Items 14 and 15 ensure that both sets of rules in Division 136 may apply to the one transaction. For example, you may have a bad debt that is overdue for 12 months or more that relates to an acquisition of insurance and is partly creditable. When this occurs, these amendments ensure that both factors are taken into account so that the bad debt is correctly calculated under Subdivisions 136-B and 136-A.
4.20 Item 12 changes the heading of Division 136 to Bad debts relating to transactions that are not taxable or creditable to the fullest extent and adds a table of Subdivisions referring to both Subdivisions.
4.21 Items 2 and 4 make consequential amendments to sections 21-99 and 37-1 to update the name of Division 136.
Going concern increasing adjustment
4.22 The supply of an enterprise as a going concern is GST-free if certain requirements within Subdivision 38-J are met. That is, no GST is payable on the supply. However, the recipient may not be entitled to the full benefit of GST-free treatment because of its planned use of the things acquired as the going concern.
4.23 If at the time of acquiring the going concern, the recipient plans to use the things acquired for private purposes or to make input taxed supplies, it will need to make an increasing adjustment under Division 135 to reflect the planned non-creditable use of the things acquired as the going concern. This is because if the supply to the recipient had been taxable, it would have been denied that proportion of the input tax credits.
4.24 Division 135 applies to provide an increasing adjustment where some, but not all, of the supplies made through the enterprise that has been acquired as a going concern will not be taxable or GST-free. However, Division 135 will not apply to provide an increasing adjustment where all supplies made by the going concern will be input taxed.
4.25 There may be circumstances where an entity that solely makes input taxed supplies will be able to be supplied GST-free. For example, an entity only making financial supplies. If the supply of the going concern had been taxable the recipient of the supply would have been denied input tax credits.
4.26 Item 11 amends section 135-5 to allow for an increasing adjustment where an entity acquires a going concern and intends to use some or all of the enterprise acquired supply to make supplies that are neither taxable supplies or GST-free supplies. [Paragraph 135-5(1)(b)]
Post-appointment adjustments relating to pre-appointment supplies
4.27 Division 147 provides that a representative of an incapacitated entity assumes the responsibilities of the incapacitated entity for the period in which the representative is entitled to act for the incapacitated entity. During this period, the representative is liable for the GST and is entitled to input tax credits attributable to that period. This is because the representative, rather than the incapacitated entity, is carrying on the enterprise.
4.28 Adjustments may arise under Division 19 (adjustments), Division 21 (bad debts), Division 100 (unredeemed vouchers), Division 129 (changes in extent of creditable purpose) and Division 130 (goods applied solely for private or domestic use).
4.29 As the law currently stands, a representative is personally liable for GST adjustments of the incapacitated entity that crystallise after the appointment of the representative, even where the adjustment relates to a pre-appointment supply because of section 147-20.
4.30 Generally, the ATO is ranked as an unsecured creditor. Making the representative personally liable may give GST a de facto priority higher than that of an unsecured creditor, which was never intended. For example, if a representative writes off a bad debt and the incapacitated entity did not account for GST on a cash basis, the representative would be personally liable for the increasing adjustment in respect of this bad debt. Personal liability may encourage the representative to pay GST before paying a secured creditor and may therefore have indirectly influenced the priority in which the representative satisfies debts.
4.31 Item 17 amends section 147-20 to ensure that an adjustment (either increasing or decreasing) that:
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- relates to a supply, acquisition or importation made before a representative was appointed; and
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- arises after that appointment of the representative
will be attributable to the incapacitated entity and not the representative where the representative has notified the Commissioner in writing of the amount and occurrence of the adjustment (if the adjustment is an increasing adjustment). [Subsection 147-20(1)]
4.32 Where the representative has not notified the Commissioner in writing of the amount and occurrence of an increasing adjustment, then the increasing adjustment is attributable to the representative and not the incapacitated entity.
4.33 Where the adjustment is a decreasing adjustment, it will always be treated as if the incapacitated entity had the adjustment (and not the representative).
Application and transitional provisions
4.34 The amendments explained in this Chapter apply in relation to net amounts for tax periods starting on or after 1 July 2000. [Item 20]