Edited version of private ruling

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Ruling

Subject: Attribution of creditable acquisitions made under Service Agreements

Question:

Can the State Department ('D') claim an input tax credit in respect of a creditable acquisition made pursuant to a Service Agreement with a non-government agency in D's Business Activity Statement ('BAS') for a tax period if D does not provide any of the consideration for that creditable acquisition during that tax period?

Answer:

No, D cannot claim an input tax credit in respect of a creditable acquisition made pursuant to a Service Agreement with a non-government agency in D's BAS for a tax period if D does not provide any of the consideration for that creditable acquisition during that tax period.

Relevant facts and circumstances:

Payments under Service Agreements:

D enters into Service Agreements with non-government agencies pursuant to which the non-government agencies make taxable supplies to D in return for D making regular payments to the non-government agencies. D also makes ad hoc payments to the non-government agencies as required. The Service Agreements are managed pursuant to D's Service Agreement Management program. D also enters into recipient created tax invoice ('RCTI') agreements with the non-government agencies.

D uses a particular financial system to maintain D's accounting records and prepare D's BAS. The system recognises D's revenue and expenses when the system interfaces with another system or a funding instruction is uploaded. Where a funding instruction in respect of a Service Agreement is uploaded the upload is recorded as an expense and flows through to D's BAS for the tax period in which the upload is recorded. However it is not until several days later that D makes the payment to the non-government entity pursuant to the Service Agreement and generates the RCTI. There is a delay between the upload and payment to the non-government agency because D requires three to five working days for quality control before paying the non-government agency. D must follow this quality control process because it is difficult for D to recoup an incorrect payment or an overpayment.

Example:

D provided the following example of the upload of a funding instruction and payment to a non-government agency:

D uploads a funding instruction for a payment under a Service Agreement to a non-government agency on 29 March;

D pays the amount to the non-government agency and generates an RCTI on 6 April; and

The upload of the funding instruction for the payment flows through to D's BAS for the March tax period.

Sample Service Agreement:

D provided a sample Service Agreement between D ('the Department') and a community service ('the Organisation'). The recitals to the Service Agreement state that the Organisation agrees to provide the Services as outlined in the Agreement and that the Department will provide funding to the Organisation as specified in Schedule X. Schedule Y to the Service Agreement states:

If the Organisation meets its obligations under this Agreement the Department will pay the Funding to the Organisation as set out in Schedule X

Unless otherwise stated the funding is provided as a supply of services by the Organisation that is a taxable supply for which GST is payable by the Department.

All funding in this Agreement is shown exclusive of GST. If GST is payable, it will be added to the funding when payment is made.

If GST is payable, and the Organisation has not entered into a recipient created tax invoice agreement (RCTI agreement) with the Department, the Organisation must issue tax invoices to the Department prior to receiving Funding.

Schedule X to the Service Agreement sets out the total plan funding for the relevant income year and provides:

All funding and payment amounts shown in this schedule are exclusive of GST. Where GST is payable, GST will be added at the time each payment is made. Your organisation will be issued with a Remittance Advice for each payment and a Recipient Created Tax Invoice where GST is included.

Schedule X also includes a payment schedule for the relevant income years which sets out the amounts of funding to be paid to the organisation on 12 specified dates and includes the following note:

GST is not included in the payment schedule. The RCTI provided at the time of payment will identify the exact GST payable for each activity payment. The payment schedule provides information of proposed payments to be made over the current financial year of the service agreement and is indicative only. Funding may change through either adjustment to the price or a variation.

Submission:

D submitted that the discussion in Goods and Services Tax Ruling GSTR 2000/35 of supplies to which Division 156 of the GST Act applies supports D's current practice of attributing the creditable acquisition to the tax period in which the funding instruction is uploaded. GSTR 2000/35 states at paragraph 49 that if an agreement or similar document related to such a supply satisfies the requirements of a tax invoice, the supplier does not have to issue separate tax invoices for each component of the supply. D appears to submit that the Service Agreement is an 'invoice' and that as an invoice is issued in relation to the acquisition made by D from the Organisation at the time a funding instruction is uploaded, D is correct to attribute that acquisition to the tax period in which the funding instruction is uploaded.

Reasons for decision:

Summary:

Based on the sample Service Agreement provided by D, Division 156 of the GST Act applies to the creditable acquisition made by D under a Service Agreement as that creditable acquisition is made for a period and for consideration that is provided on a periodic basis.

Subsection 156-10(1) of the GST Act provides that such a creditable acquisition is attributable, in accordance with section 29-10 of the GST Act as if each periodic component of the creditable acquisition is a separate acquisition. Subsection 156-10(2) of the GST Act provides that the components of the creditable acquisition correspond to the proportion of total consideration that each separate amount of consideration represents.

Paragraph 29-10(1)(a) of the GST Act attributes the component of the creditable acquisition to the tax period in which D provides any of the consideration for that component. Applying paragraph 29-10(1)(a) of the GST Act to the example provided by D in the ruling request, the input tax credit would be attributed to April 2010 tax period because D paid an instalment of the funding to the non-government agency in April in 2010.

However there is an alternative attribution rule in paragraph 29-10(1)(b) of the GST Act - if an 'invoice' (as defined in the GST Act) relating to the creditable acquisition is issued before D pays the instalment of the funding to the non-government agency, paragraph 29-10(1)(b) of the GST Act attributes the relevant component of the creditable acquisition made by D to the tax period in which that invoice is issued. In our view, based on Goods and Services Tax Ruling GSTR 2000/34, the Service Agreement is not an 'invoice' as defined in the GST Act - although Schedule X to the Service Agreement includes a Payment Schedule which sets out the amounts and payment dates for twelve funding payments during the financial year, those amounts are stated to be 'indicative only' and subject to change through adjustment to price or variation. In addition, Goods and Services Tax Ruling GSTR 2000/35 states that where (as is the case with the Service Agreement) an agreement is created at the commencement of an arrangement for a creditable acquisition to be made for a period, it is unlikely to be an invoice for each component of the relevant acquisition.

Consequently attribution of each component of the creditable acquisition made by D is determined by the test in paragraph 29-10(1)(a) of the GST Act, that is, when D pays the corresponding portion of the funding to non-government agency which, in the example provided by D, occurs in April 2010.

This means that the situation outlined in the example provided by D where D uploads the funding instruction for a payment in March 2010 (which results in that component of the acquisition being attributed to the March 2010 tax period in D's BAS) but D does not pay the non-government agency until April 2010 results in that component of the acquisition being attributed to the wrong tax period - the acquisition should have been attributed to the April 2010 tax period and included in D's BAS for the April 2010 tax period.

Detailed reasoning:

Attribution rules for creditable acquisitions:

Subsection 29-10(1) of the GST Act provides:

The input tax credit to which you are entitled for a creditable acquisition is attributable to:

(a) the tax period in which you provide any of the consideration for the acquisition; or

(b) if, before you provide any of the consideration, an invoice is issued relating to the acquisition - the tax period in which the invoice is issued.

Subsection 29-10(3) of the GST Act provides:

If you do not hold a tax invoice for a creditable acquisition when you give to the Commissioner a GST return for the tax period to which the input tax credit (or any part of the input tax credit) on the acquisition would otherwise be attributable:

(a) the input tax credit (including any part of the input tax credit) is not attributable to that tax period; and

(b) the input tax credit (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice.

However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply.

Section 29-39 states that Chapter 4 of the GST Act contains special rules related to attribution, including Division 156. Subsection 156-10(1) of the GST Act provides:

The input tax credit to which you are entitled for a creditable acquisition that is made:

· for a period or on a progressive basis; and

· for consideration that is to be provided on a progressive or periodic basis;

· is attributable, in accordance with section 29-10, as if each progressive or periodic component of the acquisition were a separate acquisition.

Goods and Services Tax Ruling GSTR 2000/35 provides (Para 25):

A supply or acquisition you make is for a period when it is made over a specified length of time or for a time with an identifiable end point. This may be stated in your contract, agreement or other similar document. However, a supply will not be for a period merely because there is a stipulated completion date.

Schedule Y to the Service Agreement provides that the Service Agreement will start on a specified date and end on a specified date unless terminated earlier and sets out how the Organisation will deliver the services specified in Schedule Z to the Service Agreement. In our view D makes a creditable acquisition for a period under the Service Agreement.

GSTR 2000/35 also provides at paragraph 29):

You provide consideration on a periodic basis when it is made in equal or unequal instalments provided upon expiration of specified periods. An example of consideration on a periodic basis is where payments are made monthly under an agreement to lease a building.

Schedule Y to the Service Agreement obliges D to pay the Funding 'as set out in Schedule X' and the 'Payment Schedule' in Schedule X specifies amounts and dates which are the first particular weekday in each month. In our view D provides consideration on a progressive basis.

As the requirements of subsection 156-10(1) of the GST Act are satisfied, D is required to attribute the creditable acquisition as if each separate component of the acquisition is a separate acquisition. Subsection 156-10(2) of the GST Act provides that if the progressive or periodic components of an acquisition are not readily identifiable, the components correspond to the proportion of the total consideration for the acquisition that the separate amounts of consideration represent.

Subsection 29-10(1) of the GST Act:

As stated above, section 156-10 of the GST Act requires an input tax credit for a creditable acquisition that is made for a period to be attributed in accordance with section 29-10 of the GST Act as if each periodic component of the acquisition is a separate acquisition.

Paragraph 29-10(1)(a) of the GST Act attributes the component of the creditable acquisition to the tax period in which D provides any of the consideration for that component. Applying paragraph 29-10(1)(a) of the GST Act to the example provided by D, the input tax credit for the component of creditable acquisition which D makes from the non-government agency would be attributed to the April tax period because the payment is made to the non-government agency on X April 2010. Goods and Services Tax Ruling GSTR 2003/12 provides that consideration paid by interbank transfer is provided on the date the funding is actually credited to the non-government agency's account (see paragraphss 37-38):

Payments made by interbank transfer are usually of a fixed amount and are made regularly on a date advised in advance (for example, $250 on the 23rd of each month). Consideration is provided on a date authorised by the recipient of the supply and is received when the payment is credited to the supplier's account.

Interbank transfers are authorised by the recipient of the supply, and are in the form of a direction to the financial institution to transfer a specified amount at a specified time on a regular basis. The recipient of the supply stipulates when the transfer is to take place and the amount, and is taken to provide consideration at that time. The amount may not actually be credited to the supplier's account until after the date authorised by the recipient, and the date of actual crediting is the date on which the supplier receives consideration.

As paragraph 29-10(1)(a) of the GST Act attributes the input tax credit to the April 2010 tax period, only paragraph 29-10(1)(b) of the GST Act can possibly be used to attribute the input tax credit to D's March 2010 tax period.

In order for paragraph 29-10(1)(b) of the GST Act to apply D must issue an invoice before D provides any of the consideration for the component of the creditable acquisition. 'Invoice' is defined in section 195-1 of the GST Act as a document notifying an obligation to make payment. D's submission in the ruling request appears to be that if GSTR 2000/35 could treat a lease as a tax invoice, the Service Agreement could be treated as an 'invoice'.

Goods and Services Tax Ruling GSTR 2000/34 states at paragraph 12 that an 'invoice' as defined in the GST Act requires the existence of a document (either paper or in electronic form) which informs the parties that there is a presently existing obligation to make a payment and the amount of that payment. GSTR 2000/34 also states at paragraph 25 that whether an agreement includes an obligation to make a payment, depends on the terms of the agreement, and furthermore paragraphs 28-31state:

28. A document will be an invoice if it notifies a presently existing obligation. In the Shell case, the word 'notify' was taken to mean its ordinary dictionary meaning of 'to give notice to-, to inform'.

29. It is not sufficient that the obligation exists and that the document merely evidences the existence of the liability. The document must also inform the recipient of the obligation to make a payment and the amount of that payment.

30. A contract creates a contractual obligation to make a payment. If the obligation created is a presently existing one, a copy of the executed contract, which is returned to the recipient of the supply, will be a document which notifies that obligation, if it specifies the amount due by the recipient to the supplier. The copy of the contract will be an invoice. However, many contracts do not create an immediate obligation to pay. This will depend on the terms of the contract and the intention of the parties.

31. The amount notified by an invoice must be a sum certain. It is not enough that an amount might become payable in the future upon the happening of some contingency.

In the present case the Service Agreement creates contractual obligations as it states that each party agrees to be bound by the Service Agreement and that D will pay the Funding as set out in Schedule X to the Organisation if the Organisation meets its obligations under the Service Agreement.

The Service Agreement provides that D 'will pay the Funding to the Organisation as set out in Schedule X and Schedule X specifies 12 amounts to be paid on 12 dates. However the Schedule also provides:

The payment schedule provides information of proposed payments to be made over the current financial year of the service agreement and is indicative only. Funding may change through either adjustment to the price or a variation.

In addition Funding can be increased by the rate of indexation approved by the State Government or varied by a variation (for example if D decides it no longer requires the Services and reduces the Funding accordingly). Consequently we do not consider that the Service Agreement 'informs' D of the obligation to make a payment and the amount of that payment in the manner required by GSTR 2000/34.

Goods and Services Tax Ruling GSTR 2000/35 sets out at paragraphs 30-34 how the requirement in subsection 156-10(1) of the GST Act to attribute each component of the acquisition in accordance with section 29-10 of the GST Act works in practice:

30. If the supply or acquisition that you make is one to which Division 156 applies, then you attribute GST and input tax credits as if each component of the supply or acquisition were a separate supply or acquisition.

31. You then attribute GST payable and input tax credits to which you are entitled in respect of each separate component in accordance with the application of sections 29-5 and 29-10 of the GST Act..

32. Section 45-5 of the GST Act provides that the special rules in Chapter 4 (which includes Division 156) will override rules in Chapter 2 (which includes sections 29-5 and 29-10 of the GST Act), but only to the extent of any inconsistency. For example, inconsistency may occur where a document which is an invoice for the purposes of Division 29 of the GST Act is issued at the commencement of an arrangement and would otherwise have the effect of triggering full attribution at the time it is issued.

33. Where an invoice for the whole supply or a number of components of the supply is issued prior to any payment of consideration, the effect of attributing GST and input tax credits in accordance with paragraphs 29-5(1)(b) and 29-10(1)(b) of the GST Act (for a taxpayer who accounts on a basis other than cash), would be that attribution would occur at the time the invoice issued. However, because this is not consistent with the intended operation of Division 156 of the GST Act, the basic attribution rules will be modified by the operation of section 45-5:

Paragraphs 29-5(1)(b) and 29-10(1)(b) of the GST Act will only apply where an invoice is issued for a particular component;

Where no invoice which is particular to a component of the supply or acquisition can be identified, then attribution will occur when a payment is made which relates to a particular component.

34. For the purposes of Division 156 of the GST Act an invoice for the whole supply or acquisition, or a number of components of the supply or acquisition, will not be regarded as the relevant invoice for attribution purposes. This document, if it is a tax invoice may nevertheless still be a tax invoice in relation to each component of the supply or acquisition.

In our view, even if Schedule X in the Service Agreement was an 'invoice' under the tests in GSTR 2000/34, it would be 'an invoice for the whole supply or acquisition, or a number of components of the supply or acquisition' in terms of paragraph 34 of GSTR 2000/35 and therefore not an invoice in respect of any component of the acquisition. Schedule X to the Service Agreement indicates every payment and the due date and amount of each payment under the Service Agreement. The Service Agreement, including Schedule X, is created at the commencement of the arrangement whereby the organisation supplies services in return for funding from D and GSTR 2000/35 states at paragraph 48, the a document which is created at the commencement of an arrangement (e.g. a lease) is generally not an invoice for each component of the relevant supply or acquisition.

For these reasons we consider that the Service Agreement cannot be regarded as an 'invoice' for the purposes of paragraph 29-10(1)(b) of the GST Act. In these circumstances paragraph 33 of GSTR 2000/35 states that attribution of each component of the acquisition occurs when payment is made:

Where no invoice which is particular to a component of the supply or acquisition can be identified, then attribution will occur when a payment is made which relates to a particular component.

This means that the situation outlined in the example provided by D where D uploads the funding instruction for a payment on 29 March 2010 (which attributes that component of the acquisition to D's BAS for the March 2010 tax period but D does not pay the non-government agency until 66 April 2010 results in the component of the acquisition being attributed to the wrong tax period - it should be attributed to the April 2010 tax period because payment is made in the April 2010 tax period.

Subsection 29-10(3):

As stated above, subsection 29-10(3) of the GST Act qualifies the attribution rules by providing that if an entity does not hold a tax invoice for a creditable acquisition at the time when the entity lodges a BAS for the tax period to which the creditable acquisition is otherwise attributable, the creditable acquisition is not attributable to that tax period.

Applying the example provided by D, D would generate a RCTI on 6 April 2010 when D pays the non-government agency. Consequently D would hold a tax invoice at the time D lodges D's BAS for the April 2010 tax period to which the relevant component of the creditable acquisition is attributable and subsection 29-10(3) of the GST Act would not apply to defer attribution to a later tax period.

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