ATO Interpretative Decision

ATO ID 2001/689

Goods and Services Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the entity, a guarantor, making a financial supply that is input taxed under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it provides a guarantee to its client?

Decision

Yes, the entity is making a financial supply that is input taxed under subsection 40-5(1) of the GST Act when it provides a guarantee to its client.

Facts

The entity is a guarantor. The entity has a client that is purchasing goods from another company. The entity is providing a guarantee to its client to the effect that if the client defaults on its payments for the goods, the entity will be responsible for the payments to the company. The entity does this in the course or furtherance of its enterprise in Australia.

The entity is charging a fee for the service of providing the guarantee.

The entity is registered for goods and services tax (GST).

Reasons for Decision

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Financial supply is defined in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest is a financial supply if:

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the interest is listed in subregulation 40-5.09(3) or (4); and

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is for consideration;

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is in the course or furtherance of an enterprise;

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is connected with Australia

(paragraph 40-5.09(1)(a) of the GST Regulations); and

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the supplier is:

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registered or required to be registered for GST; and

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a financial supply provider in relation to the supply of the interest (paragraph 40-5.09(1)(b) of the GST Regulations).

Item 7 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 7) lists an interest in or under a guarantee, including an indemnity (except a warranty for goods or a contract of insurance or reinsurance).

The entity is providing an interest in a guarantee to its client, which is covered by Item 7. Furthermore, the entity receives a guarantee fee for providing this interest and the entity provides the interest in Australia in the course or furtherance of its enterprise. Therefore, all of the requirements in paragraph 40-5.09(1)(a) of the GST Regulations are satisfied.

Paragraph 40-5.09(1)(b) of the GST Regulations provides that the supplier of the financial supply must be registered or required to be registered for GST; and must also be a 'financial supply provider' in relation to a supply of the interest.

In this situation, as the entity (the supplier of the financial supply) is registered for GST, it must be determined whether the entity is a 'financial supply provider' in relation to a supply of the interest.

Under subregulation 40-5.06(1) of the GST Regulations, the financial supply provider of an interest is the entity that:

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had property in the interest immediately before it was supplied; or

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created the interest in making the supply.

The entity created the interest when it supplied the guarantee to its client. Therefore, the entity is the financial supply provider of the interest as per the definition in paragraph 40-5.06(1)(b) of the GST Regulations. Accordingly, the requirements in paragraph 40-5.09(1)(b) of the GST Regulations are satisfied.

As all of the requirements in subregulation 40-5.09(1) of the GST Act are satisfied, the entity is making a financial supply when it provides a guarantee to its client. This is an input taxed supply as per subsection 40-5(1) of the GST Act.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   subsection 40-5(1)

Other References:
Questions and Answers - Banking and Finance

Keywords
Goods & services tax
Input taxed supplies
GST financial supplies
Accounts

Business Line:  GST

Date of publication:  30 November 2001

ISSN: 1445-2782