ATO Interpretative Decision
ATO ID 2006/21
Goods and Services Tax
GST and receipt of surety bond paymentFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Did the entity, a law firm, receive consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it received payment under a surety bond for its supply of legal services to the liquidator?
Decision
Yes, the entity received consideration for a taxable supply under section 9-5 of the GST Act. The payment was third-party consideration provided by the surety.
Facts
The entity is a law firm that provides legal services to the liquidator of a company in liquidation.
The entity required security for the payment of its fees. An associate of the company in liquidation agreed to pay the fees and procured a surety bond from a third party (surety), to secure their obligation under this agreement.
The associate was called upon to pay the entity's fees but failed to do so. The surety made a payment to the entity under the surety bond.
The supply by the entity satisfied paragraphs 9-5(b), (c) and (d) of the GST Act.
Reasons for Decision
First, it is necessary to examine the nature of the supply to the entity by the surety.
The provision, acquisition or disposal of an interest in or under a guarantee, including an indemnity (except a warranty for goods or a contract of insurance or reinsurance) is a financial supply under item 7 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).
Part 5 of Schedule 7 to the GST Regulations lists the following examples:
- 1.
- An indemnity that is not a contract of insurance.
- 2.
- A surety bond that is a guarantee.
- 3.
- A performance bond.
Therefore, the entity has acquired an input taxed financial supply from the third party surety in the form of an interest under a guarantee.
A surety bond typically involves an undertaking by a party (the third party surety in this case) to make payment to another party (the entity) upon the occurrence of a specified event-usually the default of a debtor (the associate in this case) that has contracted with the entity.
The nature of the supply to the entity by the surety is a supply of rights under the guarantee or indemnity. The entity may exercise its rights on the happening of specific events or in certain circumstances. If the entity exercises those rights, it is entitled to payment. Paragraph 9-15(3)(a) of the GST Act provides that if a right or option to acquire a thing is granted, then:
- •
- the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or
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- if there is no such additional consideration - there is no consideration for the supply.
The supply made by the surety on exercise of the right under the surety bond by the entity is payment. The supply is not for consideration because the entity does not provide additional consideration to the surety.
Further, the payment of money is not a supply because of subsection 9-10(4) of the GST Act, which provides that a supply does not include a supply of money.
The exercise of the rights under the surety bond is also not the supply of a surrender of a right or a release from an obligation by the entity. Rather, it is the exercise of the right and the obligation of the surety is extinguished when it makes the payment in response to the exercise of rights by the entity.
It is also necessary to look at the nature of the payment in the hands of the entity. That is whether the payment by the surety is consideration for a taxable supply by the entity.
The entity made a supply of legal services to the liquidator of the company. Section 9-5 of the GST Act sets out the requirements of a taxable supply. As the supply by the entity satisfied paragraphs 9-5(b), (c) and (d) of the GST Act, it remains to be determined whether the supply was made for consideration (paragraph 9-5(a) of the GST Act).
The associate of the company in liquidation agreed to pay the fees to the entity. When the associate fails to make the payment, the payment is made by the surety. Under subsection 9-15(2) of the GST Act, it does not matter whether the payment was by the recipient of the supply. Accordingly, the payment received under the surety bond is third-party consideration for the taxable supply of legal services.
Therefore, all the requirements of a taxable supply under section 9-5 of the GST Act are satisfied.
Date of decision: 7 July 2003
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
paragraph 9-5(a)
subsection 9-10(4)
subsection 9-15(2)
paragraph 9-15(3)(a)
subregulation 40-5.09(3) table item 7
Schedule 7 Part 5
Keywords
Goods and services tax
GST supplies & acquisitions
GST consideration
GST supply
Taxable supply
Input taxed supplies
GST financial supplies
GST guarantees and indemnities
ISSN: 1445-2782
| Date: | Version: | |
| You are here → | 7 July 2003 | Original statement |
| 30 May 2008 | Archived |