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Ruling

Subject: GST, recovered amounts and increasing adjustments

Question 1

Is an increasing adjustment under section 21-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) required on recovery of an outstanding amount of consideration, where no decreasing adjustment had been made under section 21-5 of the GST Act for the amount of consideration relating to a taxable supply which had been outstanding for more than 12 months?

Answer

No, an increasing adjustment under section 21-10 of the GST Act is not required on recovery of an outstanding amount of consideration, where no decreasing adjustment had been made under section 21-5 of the GST Act for the amount of consideration relating to a taxable supply which had been outstanding for more than 12 months.

Relevant facts and circumstances

You are registered for goods and services tax (GST) and are an administrative unit established pursuant to the Public Service Act 2009.

You account for GST on other than on a cash basis in monthly tax periods.

During prior years you made taxable supplies of services to the recipient.

You regularly issued tax invoices to the recipient in relation to the services supplied and remitted all of the GST payable on those taxable supplies of services you made as per the values invoiced.

Due to a contractual dispute, the recipient paid you a percentage of the amount invoiced (consideration owing) for the supplies.

At a later date (more than 12 months after the consideration for the supplies became due), the recipient paid all of the outstanding consideration, being the remaining amount that had been invoiced and was the subject of the dispute between you and the recipient.

Notwithstanding that the recipient had not paid the outstanding amount of the consideration (outstanding debt) more than 12 months after the amount was due, you had not written off that outstanding debt. This was because you believed that the contractual dispute could be resolved and the outstanding debt recovered. On that basis, you did not make a decreasing adjustment under section 21-5 of the GST Act in relation to the outstanding debt.

You did not make an increasing adjustment under section 21-10 of the GST Act in relation to the outstanding amount of consideration you recovered at a later date.

In your correspondence, you sought advice on whether or not you are required to make an increasing adjustment under section 21-10 of the GST Act on recovering the consideration amount. You advised that:

'It is our view that the receipt of the remaining consideration that was more than 12 months overdue should not be subject to an increasing adjustment under section 21-10 of the GST Act because this section only applies where a decreasing adjustment under section 21-5 has previously been claimed.'

Relevant legislative provisions

A New Tax System (Goods and Service Tax) Act 1999 section 7-1,

A New Tax System (Goods and Service Tax) Act 1999 section 9-5,

A New Tax System (Goods and Service Tax) Act 1999 section 9-40,

A New Tax System (Goods and Service Tax) Act 1999 Division 21,

A New Tax System (Goods and Service Tax) Act 1999 section 21-5,

A New Tax System (Goods and Service Tax) Act 1999 subsection 21-5(1),

A New Tax System (Goods and Service Tax) Act 1999 section 21-10,

A New Tax System (Goods and Service Tax) Act 1999 section 29-5, and

A New Tax System (Goods and Service Tax) Act 1999 section 195-1.

Reasons for decision

Section 7-1 of the GST Act provides that GST is payable on taxable supplies.

A supply will be a taxable supply if pursuant to section 9-5 of the GST Act:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered, or required to be registered for GST.

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

Under section 9-40 of the GST Act, an entity must pay the GST payable on any taxable supply it makes.

Subsection 29-5 of the GST Act provides that if an entity accounts for GST on other than on a cash basis, the GST payable on taxable supplies is attributable to:

· the tax period in which any of the consideration is received for the supply or

· the tax period in which the invoice is issued, if, before any of the consideration is received an invoice is issued relating to the supply.

If an entity accounts for GST other than on a cash basis, an entity may be required to attribute GST on taxable supplies it has made before it receives the consideration for them. If the consideration is in fact not paid or not paid in full, the entity will have overpaid GST on the taxable supplies it made.

Division 21 of the GST Act provides rules for adjustments to the GST payable or input tax credits allowed, where bad debts are written off or debts are overdue after 12 months.

Section 21-5 of the GST Act relevantly provides that an entity that accounts for GST other than on a cash basis has a decreasing adjustment if it made a taxable supply, the whole or part of the consideration for the supply has not been received and either:

· the entity writes off as bad the whole or part of the debt or

· the whole or part of the debt has been overdue for 12 months or more.

A debt is 'overdue' if there has been a failure to discharge the debt, and that failure is a breach of the debtor's obligations in relation to the debt (section 195-1 of the GST Act).

For a debt adjustment to arise, the debt written off must be bad. In Goods and Services Tax Ruling GSTR 2000/2, the Commissioner of Taxation (Commissioner) explains when a debt is bad for GST purposes. In the Commissioner's view, a creditor must make a bone fide assessment based on sound commercial consideration that the debt is bad. This view cannot be reached where there is a real and continuing dispute in relation the debt. You have advised that you did not write off the debt being the outstanding consideration.

Under section 21-10 of the GST Act, an entity has an increasing adjustment if:

· it made a taxable supply in relation to which it had a decreasing adjustment under section 21-5 for a debt and

· it recovered the whole or a part of the amount written off or the whole or a part of the amount that has been overdue for 12 months or more, as the case requires.

On the facts provided, you account for GST on other than a cash basis and you made taxable supplies of services to the recipient for which you were not paid all of the consideration. You remitted to the Tax Office all the GST payable on those supplies notwithstanding that you were not paid the outstanding consideration for more than 12 months after it was due. You did not make a decreasing adjustment under section 21-5 of the GST Act in relation to the outstanding consideration. You have since recovered the outstanding consideration owed.

The question that arises in these circumstances is whether you have an increasing adjustment under section 21-10 of the GST Act where you recover the outstanding consideration and you had not previously made a decreasing adjustment under section 21-5 of the GST Act.

You submit that a close reading of section 21-10 of the GST Act leaves some uncertainty as to its correct interpretation. You argue that the words 'in relation to which you had a decreasing adjustment' in section 21-10 of the GST Act may have one of two interpretations:

· you have an increasing adjustment under section 21-10 of the GST Act provided that an entitlement to a decreasing adjustment previously arose under section 21-5 of the GST Act, regardless of whether or not you have actually claimed that decreasing adjustment or

· you have an increasing adjustment under section 21-10 of the GST Act provided that you have actually previously claimed a decreasing adjustment under section 21-5 of the GST Act.

You sought guidance from GSTR 2000/2 which describes the circumstances in which adjustments arise for taxable supplies or creditable acquisitions where a debt is written off as bad or is overdue for 12 months or more.

In particular paragraph 57 of GSTR 2000/2, states:

Increasing adjustment

57. Where you have previously made a decreasing adjustment for a bad debt and subsequently recovered the whole or a part of the debt, you account for the amount recovered. You make an increasing adjustment to your net amount equivalent to 1/11 of the amount recovered. This increasing adjustment is made in the tax period in which the debt is recovered.

The words 'where you have previously made a decreasing adjustment' supports the view that the supplier needs to have actually made a decreasing adjustment under section 21-5 of the GST Act before an increasing adjustment under section 21-10 of the GST Act arises on recovery of an outstanding debt.

On the facts you have provided, all of the GST payable on the taxable supplies you made has been paid. You made no decreasing adjustment under section 21-5 of the GST Act in relation to the outstanding debt. There is, therefore, no GST payable on the taxable supplies you made notwithstanding that you did not recover the outstanding consideration in relation to those supplies until a later date.

On that basis, you do not have an increasing adjustment under section 21-10 of the GST Act on receipt of the remaining outstanding consideration which was more than 12 months overdue.

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