ATO Interpretative Decision

ATO ID 2006/20 (Withdrawn)

Goods and Services Tax

• This ATO ID is withdrawn from the database as it is superseded by Goods and Services Tax Ruling GSTR 2006/1.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the entity, a surety, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 or an input taxed financial supply under regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), where the principal makes a payment to the entity under an indemnity underlying a surety bond?

Decision

The entity is not making either a taxable supply under section 9-5 of the GST Act or an input taxed financial supply under regulation 40-50.9 of the GST Regulations.

The payment under the indemnity underlying the surety bond merely discharges a debt owed by the principal to the entity.

Facts

The principal contracted with a creditor for a supply of services by the creditor. The creditor required the principal to provide a guarantee for the payment of its fees.

The principal entered into a surety bond with the entity, a surety, under which the entity agreed to pay the amount of the fees to the creditor if the principal defaulted.

The principal failed to pay the creditor. The entity made a payment to the creditor under the surety bond.

A debt arose between the principal and the entity under the indemnity underlying the surety bond. That is, under the underlying indemnity, the principal owed the entity for the amount it paid under the surety bond. The principal discharged its debt to the entity under this indemnity.

Reasons for Decision

Paragraph 9-5(a) of the GST Act requires that to make a taxable supply, there must be a supply for consideration. Subregulation 40-5.09(1)(a)(i) of the GST Regulations requires that to make a financial supply, the disposal of an interest must be for consideration.

The supply of an interest in a surety bond is the supply of an interest in or under a guarantee as mentioned in item 7 of subregulation 40-5.09(3) of the GST Regulations. The nature of the supply to the creditor by the entity is that it is a supply of rights under the guarantee.

When the surety enters into the surety bond, it acquires the right to be indemnified by the principal if called upon to make payment under the surety bond. This right to indemnity may arise expressly within the contract or in equity.

The underlying indemnity crystallises only if a payment is made by the surety and is not a supply separate from the guarantee. This is because it is either a condition of the contract or a right that arises in law.

When the principal pays the entity under this indemnity, it merely discharges the resulting debt. A payment to discharge a debt is not consideration for a supply. As there is no consideration, neither paragraph 9-5(a) of the GST Act nor subregulation 40-5.09(1)(a)(i) of the GST Regulations are satisfied.

Further, the payment is not for a supply of money. Therefore, subsection 9-10(4) of the GST Act does not apply.

Accordingly, the entity is not making either a taxable supply under section 9-5 of the GST Act or an input taxed financial supply under regulation 40-50.9 of the GST Regulations.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   paragraph 9-5(a)
   paragraph 9-10(4)

Keywords
Goods and services tax
GST supplies & acquisitions
GST consideration
GST supply
Taxable supply
Input taxed supplies
GST financial supplies
GST guarantees and indemnities

Business Line:  GST

Date of publication:  25 January 2006

ISSN: 1445-2782