ATO Interpretative Decision

ATO ID 2002/1079 (Withdrawn)

Goods and Services Tax

GST and termination payments made in accordance with a separate termination agreement
FOI status: may be released

This ATO ID is withdrawn because the ATO is reconsidering the position stated in the ATO ID.

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

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 entity A, a business operator, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it:

•: enters into a termination agreement to terminate its service agreement with entity B, another business operator, rather than relying on the termination clause in the service agreement; and
•: receives payment from entity B for the early termination?

Decision

Yes, entity A is making a taxable supply, under section 9-5 of the GST Act, when it:

•: enters into a termination agreement to terminate its service agreement with entity B, another business operator, rather than relying on the termination clause in the service agreement; and
•: receives payment from entity B for the early termination.

Facts

Entity A is a business operator. Entity A receives a payment for the early termination of a service agreement.

Entity A entered into the service agreement with entity B to provide services to entity B for a specified period. The service agreement contained a termination clause which allows entity B to terminate all or part of the service agreement on the happening of a specified event. The service agreement also provided for a payment to be made to entity A if the agreement was terminated pursuant to the termination clause.

The specified event occurred and entity B advised entity A that it wished to terminate the service agreement.

The parties entered into a separate termination agreement which contained a clause stating that the service agreement was being terminated in accordance with the termination agreement and not pursuant to the termination clause in the service agreement.

Entity A is registered for goods and services tax (GST). The supplies it makes are in the course or furtherance of its enterprise and are connected with Australia.

Reasons for Decision

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

•: it makes a supply for consideration; and
•: the supply is made in the course or furtherance of an enterprise that it carries on; and
•: the supply is connected with Australia; and
•: the entity is registered or required to be registered for GST.

However, a supply is not taxable to the extent that it is GST-free or input taxed.

Section 9-10 of the GST Act defines a supply to include the creation or grant of any right, or the entry into, or release from, an obligation (paragraphs 9-10(2)(e) and 9-10(2)(g) of the GST Act). These are the only supplies that may be of relevance to entity A's situation.

The service agreement contained a termination clause that allowed entity B to terminate all or part of the service agreement on the happening of a certain event. The service agreement also provided for an amount to be paid to entity A in the event that the service agreement was terminated by entity B pursuant to this termination clause. Had entity B terminated the agreement pursuant to this clause, it would have been merely exercising a right under the service agreement and entity A would not have made a supply. (See ATO ID 2002/1078)

However, entity B is not exercising this right. The termination agreement specifically stated that the service agreement was being terminated in accordance with the termination agreement and not pursuant to the termination clause in the service agreement.

By terminating the service agreement in accordance with the termination agreement, entity A is making a supply to entity B. Entity A is releasing entity B from its obligations under the service agreement. This is a supply by virtue of paragraph 9-10(2)(g) of the GST Act.

Entity A is receiving consideration for that supply, when it receives the payment for the early termination of the service agreement. As such, entity A is making a supply for consideration and the first requirement in section 9-5 of the GST Act is met.

In addition, entity A is registered for GST, supplies it makes are in the course or furtherance of its enterprise and are connected with Australia. Therefore, the remaining the positive requirements in section 9-5 of the GST Act are satisfied.

Furthermore, entity A's supply is neither GST-free under Division 38 of the GST Act nor input taxed under Division 40 of the GST Act. Therefore, entity A is making a taxable supply under section 9-5 of the GST Act.

Date of decision: 23 April 2002

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 9-10
   paragraph 9-10(2)(e)
   paragraph 9-10(2)(g)
   section 9-15

Related ATO Interpretative Decisions
ATO ID 2002/1078

Keywords
Goods and services tax
GST supplies and acquisitions
GST consideration
GST supply
GST taxable supply

Business Line: GST

Date of publication: 30 November 2002

ISSN: 1445-2782

history

	Date:	Version:
	23 April 2002	Original statement
You are here	27 August 2003	Archived

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