ATO Interpretative Decision

ATO ID 2002/87

Goods and Services Tax

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

Issue

Does the entity, a representative of an incapacitated entity, have an adjustment under section 19-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it makes a refund for defective goods supplied by the incapacitated entity?

Decision

No, the representative entity does not have an adjustment under section 19-40 of the GST Act when it makes a refund for defective goods supplied by the incapacitated entity. The incapacitated entity has the adjustment.

Facts

The entity is a representative of an incapacitated entity that is a company.

The incapacitated entity supplied spare parts to a customer, prior to becoming incapacitated. Subsequently, the company became insolvent and the entity was appointed to wind up the company.

During the administration to wind up the incapacitated entity, the representative entity discovered that the spare parts supplied by the incapacitated entity to a customer were defective and forwarded a refund to the customer. The incapacitated entity had previously attributed the goods and services tax (GST) in relation to the supply of the goods to an earlier tax period.

Both entities are registered for GST.

Reasons for Decision

Under section 19-40 of the GST Act, an entity has an adjustment for a supply for which it is liable to pay GST if:

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in relation to the supply, one or more adjustment events occur during a tax period;

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GST on the supply was attributable to an earlier tax period; and

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as a result of those adjustment events, the previously attributed GST amount for the supply no longer correctly reflects the amount of GST on the supply, taking into account any change of circumstances that has given rise to an adjustment for the supply.

According to section 19-10 of the GST Act, an adjustment event is any event which has the effect of:

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cancelling a supply or acquisition;

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changing the consideration for a supply or acquisition; or

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causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

The representative entity has forwarded a refund to a customer for defective goods. The refund has the effect of changing the consideration for the supply of the goods made by the incapacitated entity to that customer. Therefore, the refund is an adjustment event under section 19-10 of the GST Act.

The incapacitated entity had attributed GST in relation to the supply of the goods to an earlier tax period. As a result of the adjustment event, the previously attributed GST amount for the supply no longer correctly reflects the amount of GST on the supply. Therefore, an adjustment for a supply has arisen under section 19-40 of the GST Act.

The correct amount of GST for the supply is less than the previously attributed GST amount. Therefore, under section 19-55 of the GST Act, the adjustment is a decreasing adjustment.

However, it is necessary to determine which entity, the representative entity or the incapacitated entity, has the adjustment.

Subsection 147-20(1) of the GST Act provides that if a decreasing adjustment:

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relates to a supply, acquisition or importation made before a representative of an incapacitated entity was appointed; and

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arises after that appointment;

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the decreasing adjustment is to be treated as if:

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the representative did not have the adjustment; and

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the incapacitated entity had the adjustment.

Although the adjustment arises after the entity's appointment as the representative of the incapacitated entity, the adjustment relates to a supply of the defective goods that was made prior to the entity being appointed representative of the incapacitated entity.

According to subsection 147-20(1) of the GST Act, the incapacitated entity has the adjustment. Therefore, the representative entity does not have an adjustment under section 19-40 of the GST Act when it makes a refund for defective goods supplied by the incapacitated entity.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 19-10
   section 19-40
   section 19-55
   subsection 147-20(1)

Keywords
Goods & services tax
GST special rules
Representative of incapacitated entities

Business Line:  GST

Date of publication:  30 January 2002

ISSN: 1445-2782