ATO Interpretative Decision
ATO ID 2004/359 (Withdrawn)
Goods and Services Tax
GST and default payments for deliverable commodity forward contractsFOI status: may be released
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This ATO ID is withdrawn, as it is no longer necessary. The ATO view expressed in this ATO ID is a straight application of the law and does not contain an interpretative decision. Guidance on the view contained in this ATO ID can be found in GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlementsThis document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 makes a cash settlement payment in relation to a deliverable commodity forward contract where there is a formal default?
Decision
No, the entity is not making a taxable supply under section 9-5 of the GST Act when it makes a cash settlement payment in relation to a deliverable commodity forward contract where there is a formal default.
The cash settlement payment is made in respect of damages and accordingly the payment is not a supply.
Facts
The entity is a commodity trader. The entity enters into commodity forward contracts to buy and sell commodities. 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 rules state that a formal default occurs when one party defaults by either the buyer not paying for the goods, or the seller not delivering the goods. These rules for a formal default will only apply if the defaulter is provided with written notice that they are in default under the relevant trade rule. Once written notice is provided the rule operates as follows:
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- The non defaulting party will have the right to repurchase or resale of the commodity as the case may be. The defaulter must make good the loss from any repurchase or resale, by payment of a cash settlement amount.
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- The party in default must pay, by way of liquidated damages, an amount equal to the difference between the contract price and the fair market value for the commodity at the date of termination of the contract.
The trade rules also specify that the same calculation of the default payment will apply when one of the parties becomes insolvent.
The entity defaults in relation to the deliverable commodity forward contract it makes with another entity. This is a formal default under the industry association's trade rules. The entity makes a cash settlement payment in relation to a deliverable commodity forward contract.
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
Section 9-5 of the GST Act sets out the requirements that must be met for an entity to make a taxable supply. A transaction is only a taxable supply under section 9-5 of the GST Act if it also comes within the word 'supply' as discussed in section 9-10 of the GST Act.
Goods and Services Tax Ruling GSTR 2001/4 (paragraphs 71 to 73) discusses some circumstances where a payment may not relate to a supply:
Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of...termination or breach of contract.
...The most common form of remedy is a claim for damages arising out of the termination or breach of a contract or for some wrong or injury suffered. This damage, loss or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.'
Where the default provisions in the trade rules are triggered, the payment is for damages, as one party has not met their obligations under the contract. Therefore, as the payment made by the entity is in respect of damages, the payment is not a supply under section 9-10 of the GST Act.
As such, the entity is not making a taxable supply under section 9-5 of the GST Act when it makes a cash settlement payment in relation to a deliverable commodity forward contract where there is a formal default.
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
section 9-10
Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2001/4
ATO ID 2004/358
ATO ID 2004/360
Keywords
Goods and services tax
GST supplies & acquisitions
GST supply
Taxable supply
GST financial supplies
GST derivatives
ISSN: 1445-2782
| Date: | Version: | |
| 14 August 2002 | Original statement | |
| You are here | 5 May 2022 | Archived |
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