Edited version of your private ruling

Authorisation Number: 1012442999119

Ruling

Subject: GST and attribution of GST payable

Question:

When do you account for your goods and services tax (GST) in regard to the instalment payments you receive for the taxable supply of a good to a customer in Australia?

Advice

Based on the information received, you will attribute the GST payable on the taxable supply of the good to the tax period in which you receive the first payment from the customer under subsection 29-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The amount of GST payable by you in the tax period you receive the first payment will be 1/11 of the total price of the good and not on the part payment received at that time.

Relevant facts

You are an Australian company and are registered for GST.

You have a Sales Agreement with a customer in Australia in regard to the supply of a good to them. In the Sales Agreement, the customer pays a deposit on signing the agreement and an agreed deposit instalment amount (payments) relating to the stages of the good's construction. There are no terms or conditions in or attached to the Sales Agreement in regard to these instalment payments.

The payments are made to your bank account. You advise you do not provide an invoice to the customer on receipt of the payments. It is only on completion of the manufacture of the good that you raise an invoice for the customer.

The good is built overseas by an overseas company (offshore manufacturer). You advised that the offshore manufacturer requires deposits/progress payments to commence each stage of the building process. You pay the offshore manufacturer on receipt of the deposit and progress payments from the customer.

You will import the good into Australia after it is paid in full and deliver it to the customer in Australia. The title of the good is passed to the customer after final payment is received and an inspection of the good is done by the customer.

You are accounting your GST on an accrual basis.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 29-5

A New Tax System (Goods and Services Tax) Act 1999 Section 99-5

A New Tax System (Goods and Services Tax) Act 1999 Section 156-5

Reasons for decision

Basic attribution rules for GST

Division 29 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) establishes the basic rules for the attribution of GST and input tax credits (basic attribution rules).

Subsection 29-5(1) of the GST Act provides that if you account for GST on a basis other than cash, you attribute all the GST payable on a taxable supply to the earlier of the tax period in which:

(a) any of the consideration for the supply is received; or

(b) an invoice for the supply is issued.

This means that you may have to account for GST payable on the full value of the supply before actually receiving payment for the supply. Further, you report and pay GST on the full value of the supply even if you only receive a part payment.

For more information on 'attribution of GST payable under the basic rules' please refer to Goods and Services Tax Ruling GSTR 2000/29 (available at www.ato.gov.au).

Special attribution rules

The GST Act has special rules which modify the basic rules for GST. Relevant to the attribution of GST payable is Divisions 99 and 156 of the GST Act.

Division 99 of the GST Act

Division 99 of the GST Act provides special rules in relation to security deposits. To fall within the provisions of Division 99 of the GST Act, the amount received by the supplier must be a 'deposit'.

Under subsection 99-5(1) of the GST Act, a deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless the deposit:

(a) is forfeited because of a failure to perform the obligation; or

(b) is applied as all or part of the consideration for a supply.

The fact sheet 'GST for security deposits and part-payment' and Goods and Services Tax Ruling GSTR 2006/2 (available at www.ato.gov.au) explains the difference between a security deposit and a part payment for goods for GST purposes and how to account for GST on a security deposit.

The fact that a certain payment is labelled a 'deposit' does not make it a security deposit at law. Whether a particular payment is a security deposit is a question of fact, determined by looking at the terms of the contract and intention of the parties to the contract.

Paragraph 31 of GSTR 2006/2 explains that in analysing contracts, the courts have commonly described a deposit as an 'earnest' that is paid 'to bind the bargain'. A payment made as an earnest has been said to be 'a portion of something, given or done in advance as a pledge of the remainder'. This can be distinguished from paying the first instalment of the total price in a purchase contract, which is to be paid over a period of time, that is, an initial payment, or a part payment.

Paragraph 20 of GSTR 2006/2 explains that for a payment to be considered a 'security deposit' for the purposes of Division 99 of the GST Act, it should have the following characteristics:

· be held as a security for the performance of an obligation (that is, the deposit is not to be applied as all or part of the payment for a supply);

· the contract, conduct and intent of the parties to the contact must be consistent with the payment being a security deposit;

· be at risk of forfeiture upon failure to perform the obligation;

· be a reasonable amount (usually no greater than 10% of the total purchase price, though each case must be individually assessed).

Subsection 99-5(1) of the GST Act prevents a security deposit from being treated as consideration for a supply until such time that the deposit is either forfeited because of a failure to perform the secured obligation or applied as all or part of the consideration for a supply. Hence, you do not pay GST on a security deposit unless the deposit is forfeited or applied as a payment for a supply.

Part-payment

For GST purposes, a part-payment is an amount that is paid to reduce the balance of the full amount due to be paid under a contract. However, it is not forfeited if the payer defaults on the contract. As a part-payment is not a deposit held as security, the payment is treated as a payment for a supply when it is received.

Division 156 of the GST Act

Division 156 of the GST Act is a special attribution rule that applies only to entities that account for GST on a basis other than cash.

Where you make a supply for a period or on a progressive basis and for consideration that is to be provided on a progressive or periodic basis, subsection 156-5(1) of the GST Act provides that you attribute the GST payable as if each progressive or period components of the supply that you make were a separate supply.

Where the components of a taxable supply you make for a period or on a progressive basis are not readily identifiable, subsection 156-5(2) of the GST Act provides that the components will correspond to the proportion of the total consideration that each separate amount of consideration represents.

Accordingly, if the supply that you make is one to which Division 156 of the GST Act applies, then you attribute GST as if each component of the supply was a separate supply. You then attribute the GST payable in respect of each separate component in accordance with the application of section 29-5 of the GST Act.

Milestone payments

Contracts for major capital works often involve construction over a lengthy period of time and result in progress payments being made upon agreed milestones being reached. Division 156 of the GST Act may or may not apply to supplies made under such contracts depending on the terms of the contract.

Where a contract provides for the achievement of milestones in the construction of an item, and title in each completed stage of the item passes to the recipient during the course of construction, the contract is for a progressive supply. For example, if a contract for the construction of a ship provides for title in each completed stage of the ship to pass on receipt by the supplier of the respective milestone payments, then Division 156 of the GST Act applies.

Conversely, if a contract for the construction of a ship provides for milestone payments with title to the ship passing only on its delivery, then Division 156 of the GST Act does not apply (paragraph 112 of GSTR 2003/35).

For more information on Division 156 of the GST Act please refer to Goods and Services Tax Ruling GSTR 2000/35 which is available at www.ato.gov.au

Applying attribution rules to the payments you receive for the taxable supply of the good

Division 99 of the GST Act

Your Sales Agreement with the customer provides for milestone deposits (payments) for the construction of the good.

From the information received, at different stages of the building of the good, you access the deposits/payments at the time you receive them from the customer to pay the overseas manufacturer.

In this instance Division 99 of the GST Act does not apply to your supply since these payments represent a part-payment or an instalment towards the purchase price of the good as agreed under the Sales Agreement.

Division 156 of the GST Act

You advised that the title to the good is passed to the customer only on its delivery, that is after all the payments are made. In this instance Division 156 of the GST Act is not applicable to you as per paragraph 112 of GSTR 2000/35.

Subsection 29-5(1) of the GST Act

You account for GST on a basis other than cash. In this instance, you need to attribute the GST payable on the taxable supply of the good under subsection 29-5(1) of the GST Act.

Under subsection 29-5(1) of the GST Act, where you account for GST on a basis other than cash, you attribute all the GST payable on a taxable supply to the earlier of the tax period in which:

· any of the consideration for the supply is received; or

· an invoice for the supply is issued.

Under subsection 29-5(1) of the GST Act, you must report and pay GST on the full value of the supply even if you only receive a part-payment.

As discussed above, the progressive payments that you receive are considered to be part payments for the taxable supply of the good to the customer. Since you do not issue any invoice for these payments, you will report your GST payable for the taxable supply of the good in the tax period in which you receive the first part payment. The amount of GST payable in that tax period will be on the total amount of the consideration payable on the taxable supply of the good (that is 1/11 of the full price of the good).

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