Edited version of your private ruling

Authorisation Number: 1012378922735

Ruling

Subject: GST treatment of the recovery of debt collecting costs

Question

Are the debt collection costs invoiced to the customer consideration for a supply that is a taxable supply?

Answer

No. (See details below)

This ruling applies for the following periods:

Not applicable in this case

The scheme commences on:

Not applicable in this case

Relevant facts and circumstances

You are engaged in an enterprise in the supply of a resource to rural areas.

You are registered for the goods and services tax (GST).

You function under an Act of State Parliament (Act), the objective of which is the supply of the resource to rural properties.

In the course of your enterprise, you provide both taxable and GST-free supplies to your customers.

One of the main supplies you make is the supply of the resource to rural properties.

You don't have individual contracts with these customers.

You invoice the owner or occupier of the property for the resource consumed.

Some customers fail to pay the amounts invoiced on due dates.

In such cases, you charge interest on the outstanding amount at settlement of the invoices.

You send your customers a statement which shows the fixed and usage charge and the interest on outstanding amounts.

When a customer fails to settle the amounts due, you engage a debt collecting agency (Debt Collector) to recover the amounts due.

The Debt Collector issues a notice demanding payment to your customer.

This notice shows the fixed and usage charge, outstanding interest and an amount which represents the debt collection fee of the Debt Collector.

The Debt Collector's fee does not include GST.

The customer then either sends the money to you or to the Debt Collector. If it is sent to the Debt Collector, the Debt Collector forwards that money to you.

You do not issue any invoice to the customer or to the Debt Collector for any money received consequent to the issuance of Debt Collector's notice.

If the customer still fails to make payment, the Debt Collector's solicitors will commence court proceeding by issuing a letter of complaint. This letter subpoenas the customer to court. It also includes the outstanding debt, including principal, interest and debt collections agency fees up to that point.

If the matter goes to court, the court awards damages including the cost incurred by the debt collection agency.

You indicate the amounts received in the monthly statement to the customer.

Under the Act you also have the authority to set and collect charges from your customers, such as those incurred in the collection of customers' debts.

The Act has provision to charge interest on the outstanding amounts to the customers who delay settlement of invoices and the customer is aware of that fact.

Relevant legislative provisions

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that:

You make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is connected with Australia; and

(d) you are *registered, or *required to be registered.

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

* Denotes a term defined in the GST Act.

The first requirement for a taxable supply necessitates that an entity make a supply for consideration.

The meaning of 'supply' is provided in section 9-10 of the GST Act and subsection 9-10(1) of the GST Act states that, 'A supply is any form of supply whatsoever'.

Subsection 9-10(2) of the GST Act contains a list of things that are included as supplies which consists (amongst other things) of:

· a supply of goods or services;

· a creation, grant, transfer, assignment or surrender of any right; and

· a financial supply;

· an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation.

Section 9-15 of the GST Act provides the meaning of the term consideration and states:

(1) Consideration includes:

(a) Any payment, or any act or forbearance, in connection with a supply of anything; and

(b) Any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Further, Goods and Services Tax Ruling GSTR 2001/6, Goods and services tax: non-monetary consideration (GSTR 2001/6) states at paragraph 47:

47. The definition of a taxable supply requires, among other things, that you make a supply for consideration. There needs to be a supply, a payment and the necessary relationship between the supply and the payment. Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration.

Therefore, to satisfy the first requirement towards being a taxable supply there are three fundamental conditions that must be met:

(1) there must be a supply;

(2) there must be a payment; and

(3) there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

Where a payment is described as 'damages' or 'compensation', the fundamental question is still whether the amount paid is consideration for a supply.

What constitutes the term compensation is not defined in the GST Act and therefore the term has its ordinary meaning.

The Macquarie Dictionary defines compensation as:

1. the act of compensating.

2. Something given or received as an equivalent for services, debt, loss, suffering, etc.; indemnity.

The Macquarie Dictionary defines damages to be:

2. (plural) Law the estimated money equivalent for detriment or injury sustained.

You contend that the debt collection cost you incur and which you then charge the relevant customer is not consideration for a supply made by you to that customer. Rather, when the customer makes the payment to you of the amount attributed as a debt collection cost, that payment has the character of 'compensation' or 'damages'. It is quite explicitly to recover the costs you had incurred when you engaged a debt collector to recover what a customer owes you because of the customer's failure to settle your account when it became due. Accordingly, no GST should apply.

In this case there is clearly a payment (the debt collection cost) that flows from a customer to you. Therefore what needs to be considered is whether the payment has a relevant nexus to any supply made by you.

Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9), provides guidance on the meaning of 'supply' in the GST Act. Paragraph 22 of GSTR 2006/9 sets out a number of propositions that are important to characterising supplies. Of relevance to this case are the following two propositions:

· Proposition 5: to 'make a supply' an entity must do something;

· Proposition 6: 'supply' usually requires something to be passed from one entity to another.

Proposition 5 is further elaborated in paragraphs 71 to 74 of GSTR 2006/9 and states:

71. In overseas jurisdictions the term 'supply' has been held to take its ordinary and natural meaning, being 'to furnish or to serve' or 'to furnish or provide'. The Commissioner picks up this meaning in considering the meaning of supply in the GST Act at paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

72. The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2) ('Shaw') in relation to the payment of a judgment debt. His Honour was of the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply. He considered the actions of the judgment creditor with respect to the extinguishment of the debt when the judgment debtor made the payment of the judgment sum to meet the judgment debtor's obligations.

73. The Commissioner agrees with Underwood J's decision that there was no supply by the judgment creditor, as the judgment creditor did not do any act or thing to extinguish the obligation when the judgment debtor paid the judgment debt.

74. However, Underwood J was of the view, with which the Commissioner also agrees, that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done.

Where a customer pays you under a court order, the payment would take the character of a judgement debt being paid. This judgement debt will include the money owing to you not only for the supplies which you had made to the customer but also the debt collecting costs, including legal costs. These latter two components fall within the context of Proposition 5 which states, 'to make a supply an entity must do something'. You have not 'done' anything in the form of making a supply when the judgement debt is settled in terms of these two components. Thus, there is no supply being made as far as the money paid in settlement of the debt collecting costs is concerned.

Proposition 6 is elaborated on in paragraphs 92 to 94 of GSTR 2006/9. Paragraph 92 of GSTR 2006/9 states, in part, "The fact that a 'supply' requires something to be passed from one entity to another is largely self-evident in a transaction based tax….."

The remainder of this paragraph, and paragraph 93 of GSTR 2006/9, deal with the 'creation of rights', which are not relevant in the transaction under consideration. Paragraph 94 of GSTR 2006/9 deals with financial supplies which also has no relevance in this case. Therefore, in the case under consideration, Propositions 5 and 6 can be taken to mean that 'to make a supply an entity must do something and something must be passed from one entity to another'. In regard to the debt collection costs, you do nothing and nothing passes from you to the customer when the customer pays the debt collection costs to you. Therefore, no supply takes place.

Goods and Services Tax Ruling GSTR 2001/4, Goods and services tax: GST consequences of court orders and out of court settlements (GSTR 2001/4) explains this further under the heading "Where the subject of a claim is not a supply".

Paragraphs 71 to 73 of GSTR 2001/4 states:

71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the matter is resolved by a court or through negotiation.

73. 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.

It will be seen from the above that the debt collecting cost you charge to the customer is to compensate you for the "loss" you incurred in recovering the debt the customer owes you. This "loss", as stated above, cannot and does not constitute a supply which you make to the customer under section 9-10 of the GST Act.

Further, according to your submission, the Act under which you make your supplies to customers allows you to collect any charge incurred in the performance of that function. The debt collection cost you charge a customer provides you with compensation to recognise that you have experienced a loss (that is the debt collection cost) because of the customers' failure to satisfy their payment obligations.

The charge of the debt collection cost to the customer does not modify the charges for the taxable and GST-free supplies you had made to the customer previously. You incurred the debt collecting cost because you had to pay the Debt Collector for the services the Debt Collector provided to you in recovering the money the customer owed you. You are merely passing this burden to your customer in accordance with the Act under which you operate and which allows you to make that charge. You do not make any positive act and/or furnish or provide the customer with anything in the process of recovering this cost.

Furthermore, the payment does not represent a payment for the price of an earlier supply you made to the customer. The payment of the debt collecting cost arises directly from the customers' failure to fulfil their obligation for the payment for the taxable and GST-free supplies you made to them when such payments become due.

Accordingly, the debt collecting cost cannot be identified with any particular supply that you make to your customers. Therefore, the payment of the debt collection cost will not satisfy paragraph 9-5(a) of the GST Act as it is not consideration for any supply.

Consequently, the debt collection cost which you invoice to the customer is not consideration for a supply that is a taxable supply under the GST Act.

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