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Edited version of private ruling

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Ruling

Subject: GST and cancellation of registration and adjustments

Question

What are the GST implications of cancelling your GST registration?

Answer

Upon cancelling your GST registration, you are required to make adjustments where you continue to hold assets and other acquisitions for which you have previously claimed, or were entitled to claim, input tax credits.

Relevant facts and circumstances

You paid an amount including GST in consideration of the granting of a franchise and the rights to use the name, system and intellectual property of the franchisor.

You claimed 1/11th of the total purchase price as a GST credit when you lodged the Business Activity Statement (BAS) for that quarter.

Initially, you received a guaranteed weekly payment for the first thirteen weeks while your franchise was being established and you undertook training.

Thereafter, it was up to you to derive assessable income based on the amount of deliveries you had per day/week allocated to your area.

After a while, you ceased to derive any assessable income due to no more work being available.

Then, there was a notification of appointment of administrator lodged with the Australian Securities and Investments Commission against the franchisor company.

As you are no longer deriving any assessable income, you will be completing a final BAS, and cancelling your GST registration.

According to our records, you account for GST on a cash basis.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subsection 138-5(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 138-5(2).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 138-5(3).

A New Tax System (Goods and Services Tax) Act 1999 Section 129-20.

Reasons for decision

According to section 138-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when you decide to cancel your registration, you may be required to make an increasing adjustment to account for any assets for which you were entitled to claim an input tax credit; unless there were one or more adjustment periods for your acquisition, and the last of those adjustment periods has ended before the cancellation of your registration takes effect.

An entity whose registration has been cancelled may still hold assets and acquisitions for which entitlements to GST credits have arisen. Division 138 of the GST Act provides for an increasing adjustment to repay some of those GST credits.

The reason for the adjustment is that the assets are being taken out of the GST system. No GST credits are available in respect of things outside of, or taken out of, the GST system. As the assets are no longer being used in the GST system, an entity should no longer have a GST credit in respect of those assets. The adjustment operates to enable the ATO to recoup GST credits the entity has had.

When Division 138 of the GST Act applies (subject to any exceptions), the business's net GST will be adjusted upwards to the extent that the asset has value. The amount of this adjustment is calculated as:

This effectively leaves the entity with an amount of GST credit on the value of the asset used in its enterprise for a creditable purpose whilst in the GST system.

You may use any reasonable method to work out the market value of the asset held.

The adjustment is made in the entity's concluding tax period.

Therefore, when your GST registration is cancelled, and if you still hold the acquisitions for which you have claimed GST credits and no exceptions apply, you will be required to include an increasing adjustment in your concluding tax period to repay some of the GST credits.

It should also be noted that as you operate on a cash basis, you would need to record in your concluding tax period all the sales and purchases that you have not yet attributed to a previous tax period.

For further information and practical examples of what to do when cancelling your GST registration, you may refer to the ATO guide 'Leaving the GST system' (NAT 14829-05.2007) which is available on our website.

You may also refer to the guide "GST for small business' (NAT 3014) for further guidance.

Further, once your registration has been cancelled, you will be unable to claim input tax credits on any future acquisitions that you make.

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