ATO Interpretative Decision
ATO ID 2004/360
Goods and Services Tax
GST and cancellation fees for deliverable commodity forward contractsFOI status: may be released
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This ATO ID contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019. This ATO ID continues to apply in relation to the remade Regulations.
A comparison table which provides the replacement provisions in the A New Tax System (Goods and Services Tax) Regulations 2019 for regulations which are referenced in this ATO ID is available.
With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the entity, a commodity trader, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it receives a cancellation fee in relation to a deliverable commodity forward contract?
Decision
Yes, the entity is making a taxable supply under section 9-5 of the GST Act when it receives a cancellation fee in relation to a deliverable commodity forward contract.
Facts
The entity is a commodity trader. The entity enters into forward contracts to buy and sell a taxable commodity with another entity. The physical delivery of the commodity would be a taxable supply under section 9-5 of the GST Act.
The relevant contracts conform to an industry association's trade rules.
The entity and the other entity verbally agree to terminate the forward contracts and agree on a cancellation fee. This process is an alternative to the formal default process under the industry association's trade rules.
The entity has agreed to accept a cancellation fee for agreeing to allow the other party to default on its obligations in relation to delivery of the commodity.
The entity is registered for goods and services tax (GST). The transaction is made in the course of an enterprise carried on by the entity and is connected with Australia.
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
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- the supply is made in the course or furtherance of an enterprise that it carries on
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- the supply is connected with Australia, and
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- the entity is registered for GST, or required to be registered for GST.
However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.
A transaction is only a taxable supply under section 9-5 of the GST Act, if it also comes within the meaning of the word 'supply' as discussed in section 9-10 of the GST Act.
Subsection 9-10(2) of the GST Act provides a non-exhaustive list of things that are a 'supply' for GST purposes. Subparagraph 9-10(2)(g)(i) of the GST Act provides that an entry into, or release from, an obligation to do anything is a supply under the GST Act.
The agreed termination of the forward contracts, without physical delivery occurring, results in the entity releasing the other entity from its obligations in relation to delivery of the commodity. As such, the entity is making a supply under subparagraph 9-10(2)(g)(i) of the GST Act. The cancellation fee is consideration for the supply of that release.
The entity is registered for GST, the transaction is in the course or furtherance of the entity's enterprise and the supply is connected with Australia. The entity's supply meets the positive requirements of section 9-5 of the GST Act. However, it needs to be determined whether the entity is making an input taxed supply.
Financial supplies are input taxed under section 40-5(1) of the GST Act. An interest in or under a derivative that is cash settled, will be a financial supply if the all the requirements in subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 are satisfied.
The payment (cancellation fee) that occurs when both parties agree to terminate the contract is not the cash settlement of a derivative. This is because when the two parties verbally agree to pay a cancellation fee this is a new agreement, outside the terms of the original contract. Therefore, when a cancellation fee is paid, the transaction that occurs does not result in either party making a financial supply that is input taxed.
Accordingly, the entity is making a taxable supply under section 9-5 of the GST Act when it receives a cancellation fee in relation to a deliverable commodity forward contract.
Date of decision: 14 August 2002
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
section 9-10
subsection 9-10(2)
subparagraph 9-10(2)(g)(i)
section 40-5(1)
subregulation 40-5.09(1) Related ATO Interpretative Decisions
ATO ID 2004/358
ATO ID 2004/359
Keywords
Goods and services tax
GST supplies & acquisitions
GST supply
Taxable supply
Input taxed supplies
GST financial supplies
GST derivatives
ISSN: 1445-2782