ATO Interpretative Decision
ATO ID 2005/201
Goods and Services Tax
GST and increasing adjustment where previously written off bad debts are sold to a debt factorFOI 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ATO ID contains references to provisions of the A New Tax System (Goods and Services Tax) Regulations 1999, which have been replaced by the A New Tax System (Goods and Services Tax) Regulations 2019.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.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does the entity, a supplier, have an increasing adjustment under section 21-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where its previously written off debts (bad debts) are sold to a debt factor?
Decision
No, the entity does not have an increasing adjustment under section 21-10 of the GST Act where its bad debts are sold to a debt factor.
Facts
The entity is a supplier that makes taxable supplies.
The entity has debts that it has previously written off as bad. Where allowable under section 21-5 of the GST Act, the entity made decreasing adjustments when the debts were written off.
The entity is now selling those debts to a debt factor. Any payments the entity receives for the debts will be made by the debt factor and not the original customers to whom the services were supplied.
Reasons for Decision
Under section 21-10 of the GST Act, the entity has an increasing adjustment if:
- (a)
- the entity made a taxable supply in relation to which it had a decreasing adjustment under section 21-5 of the GST Act for a debt, and
- (b)
- the entity recovers the whole or a part of the amount written off, or the whole or a part of the amount that has been overdue for 12 months or more, as the case requires.
The debts referred to in section 21-5 of the GST Act are the debts that arise in respect of an underlying supply, that is, the debts in respect of the entity's services.
Section 21-10 of the GST Act then requires the supplier to make a corresponding increasing adjustment for any amount recovered. The amount recovered would also be in respect of the same debt that initially gives rise to the increasing adjustment, that is, the debt in respect of the entity's services.
The factoring of the debts is a separate and independent transaction from the initial supplies of the services giving rise to the debts. Therefore, the amounts paid by the debt factor for the debts are payments for the factoring of the debts. The amounts paid are not the recovery of the amounts written off or overdue for 12 months or more that arise from the underlying supplies of the services.
As such, the entity would not have an increasing adjustment under section 21-10 of the GST Act.
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 21-5
section 21-10
subregulation 40-5.09(1)
subregulation 40-5.09(3) table item 2
Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2004/4
Goods and Services Tax Ruling GSTR 2000/2
Other References:
Australian Taxation Office Financial Services Industry - questions and answers - Issue 8 - Debt Factoring
Keywords
Goods and services tax
GST bad debts
Recovering amounts
Write off
Input taxed supplies
GST financial supplies
GST debt, loan and credit
ISSN: 1445-2782