ATO Interpretative Decision
ATO ID 2002/1078 (Withdrawn)
Goods and Services Tax
GST and termination payments made in accordance with an agreement's termination clauseFOI status: may be released
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This ATO ID is withdrawn because the ATO is reconsidering the position stated in the ATO ID.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is entity A, a business operator, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it:
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- enters into a separate termination agreement that states that its service agreement with entity B, another business operator, is being terminated by entity B in accordance with the termination clause in the service agreement; and
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- receives payment from entity B for the early termination?
Decision
No, entity A is not making a taxable supply under section 9-5 of the GST Act, when it:
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- enters into a separate termination agreement that states that its service agreement with entity B, another business operator, is being terminated by entity B in accordance with the termination clause in the service agreement; and
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- receives payment from entity B for the early termination.
Facts
Entity A is a business operator. Entity A receives a payment for the early termination of a service agreement.
Entity A entered into the service agreement with entity B to provide entity B with services for a specified period. The service agreement contained a termination clause which allowed entity B to terminate all or part of the service agreement on the happening of a specified event. The service agreement also provided for a payment to be made to entity A if the service agreement was terminated pursuant to the termination clause.
The specified event occurred and entity B advised entity A that it wished to terminate the service agreement.
Entity A entered into negotiations with entity B regarding compensation for the termination of entity A's services. The negotiations did not result in entity A being entitled to receive any more than it was already entitled to under the service agreement.
The parties entered into a separate termination agreement which contained a clause stating that entity B was exercising its right under the termination clause of the service agreement to terminate the services provided by entity A.
Entity A is registered for goods and services tax (GST).
Reasons for Decision
Under section 9-5 of the GST Act, an entity makes a taxable supply if:
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- it makes a supply for consideration; and
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- the supply is made in the course or furtherance of an enterprise that it carries on; and
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- the supply is connected with Australia; and
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- the entity is registered or required to be registered for GST.
However, a supply is not taxable to the extent that it is GST-free or input taxed.
Section 9-10 of the GST Act defines a supply to include the creation or grant of any right, or the entry into, or release from, an obligation (paragraphs 9-10(2)(e) and 9-10(2)(g) of the GST Act). These are the only supplies that may be of relevance to entity A's situation.
The service agreement contained a termination clause which allowed entity B to terminate all or part of the service agreement on the happening of a specified event. The service agreement also provided for an amount to be paid to entity A in the event that entity B terminated the agreement pursuant to this termination clause. Although entity A negotiated with entity B regarding the compensation for the early termination of its services, the negotiations did not result in entity A receiving any more than it was already entitled to under the service agreement.
As there was provision in the service agreement for entity B to terminate the service agreement, and the termination agreement stated that the service agreement was in fact being terminated pursuant to that provision, entity A is not making a supply to entity B. Entity A is not granting a right to terminate the contract early, or releasing entity B from an obligation, because the right to terminate was granted at the time the service agreement was entered into.
Therefore, as entity A is not making any supply to entity B, the requirement in paragraph 9-5(a) of the GST Act is not met. As such, entity A is not making a taxable supply under section 9-5 of the GST Act.
Date of decision: 23 April 2002
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
paragraph 9-5(a)
section 9-10
paragraph 9-10(2)(e)
paragraph 9-10(2)(g)
ATO ID 2002/1079
Keywords
Goods and services tax
GST supplies and acquisitions
GST supply
GST taxable supply
ISSN: 1445-2782
| Date: | Version: | |
| 23 April 2002 | Original statement | |
| You are here | 27 August 2003 | Archived |