Edited version of your private ruling

Authorisation Number: 1012527155348

Ruling

Subject: GST and the adjustment and attribution rules

Questions

1. Was the payment of grant funds made to you by the government consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999. (GST Act)?

2. Will the refund of excess funds by you to the government constitute a reduction of the consideration for the supply made by you and, as such, give rise to an adjustment event for you and the government?

3. If so, to which tax period is the decreasing adjustment for you attributable under section 29-20 of the GST Act?

4. Will the refund of Excess Funds need to be treated as GST inclusive or GST exclusive?

5. What information will need to be disclosed on adjustment notes by you and what is the required timing of issuance?

6. Will the interest component of the unspent funds be treated differently from the remaining grant funds from a GST perspective?

7. Under the Agreement, you must pay the GST Refund Amount to the government within 10 business days of receiving the GST Refund Amount from the Australian Taxation Office. Confirmation is sought that payment of the GST Refund Amount by you does not trigger a further decreasing adjustment event.

Answers

1. Yes, the payment of the grant funds was consideration for a taxable supply.

2. Yes, the refund of excess funds by you to the government will constitute a reduction of the consideration for the original supply made by you and give rise to an adjustment event for you and the government.

3. The increasing adjustment is attributable to the tax period in which the government becomes aware of the adjustment. The decreasing adjustment is attributable to the first tax period for which you give the Commissioner a GST return at a time when you hold an adjustment note.

4. The refund of excess funds needs to be treated as GST inclusive as was the original consideration.

5. The information required on the adjustment note is contained in A New Tax System (Goods and Services Tax) Adjustment Note Information Requirements Determination 2012.

The adjustment note should be issued within 28 days of the supplier (you) becoming aware of the fact or a request by the recipient of the supply whichever is the earliest.

6. The interest component of the unspent funds will be treated as an input taxed financial supply in accordance with section 40-5 of the GST Act.

7. If the payment under the Agreement represents the balance of the excess amount payable, that payment will not trigger a further decreasing adjustment event.

Relevant facts and circumstances

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

You entered into a funding agreement with the government in the 200X financial year to administer funding to provide particular services.

At the time of entering into the funding agreement, you registered the project as a separate enterprise with the Australian Taxation Office and duly registered for GST in order to claim back GST on the provision of the services. GST was remitted on the receipt of original grant funds in the relevant business activity statement for the period.

The Agreement included the following clauses:

Term of Agreement

This Agreement commences on the date the last party signs this Agreement and ends on the date one day after [you] performed all of its obligations under this agreement to the government's satisfaction, unless terminated earlier in accordance with its terms.

Use of Funds

The Funds must not be used as security for any purpose without the government's prior written consent.

Interest on Funds

Money earned by [you] from interest on the Funds will be used and dealt with by [You] as if that interest were part of the Funds.

Refund of Funds

If at the end of this Agreement's term, there remains an amount of unspent Funds, that amount must be refunded by [you] to the government within 30 days of that date.

You entered into a Supplemental Agreement with the government in order to set out the terms in which you were permitted to distribute funds; to set out modification to the terms of the agreement and to provide for return by you to the government of excess funds standing to the credit of the Specified Account.

Copies of the original and Supplemental Agreements were provided.

You hold unspent grant funds which includes interest accrued on the funds over the life of the project. The unspent grant funds and interest is required to be returned to the government.

With respect to the GST implications associated with the refund of excess funds, the Supplemental Agreement prescribes how and in what manner GST needs to be accounted for in the remittance of Excess Funds.

The Supplemental Agreement provides:

Acknowledgement

The parties acknowledge that:

(a). the Funds paid by the government to you were treated as consideration for a taxable supply made under the Agreement.

(b). In accordance with the Agreement, upon receipt of a tax invoice issued by you to the government, the government paid GST to you in addition to the GST-exclusive value of the Funds ("GST Amount");

(c). you remitted the GST Amount to the ATO; and

(d). the government claimed an input tax credit equal to the GST Amount.

GST consequences of return of Excess Funds

The parties agree that:

(a). the payment of the Excess Funds will give rise to an adjustment event (on the basis that it will change the consideration for the taxable supply that was the grant of the Funds under the Agreement); and

(i) You will have a decreasing adjustment for the tax period in which the adjustment note is issued; and

(ii) the government will have an increasing adjustment for the tax period in which the adjustment note is received;

(b). in accordance with the Agreement, you will issue an adjustment note to the government on account of the adjustment event;

(c). the parties will each complete and lodge with the ATO, within the time required under the GST law, their respective Business Activity Statements for the tax period in which the adjustment event happened, which will take into account the decreasing adjustment (for you) and the increasing adjustment (for the government);

(d). You will pay to the government:

(iii) the GST-exclusive value of the Excess Funds (ie. not including the GST Refund Amount); and

(iv) the GST Refund Amount within [10] Business Days of receipt of the GST Refund Amount from the ATO.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 19-10

A New Tax System (Goods and Services Tax) Act 1999 Section 19-55

A New Tax System (Goods and Services Tax) Act 1999 Section 19-80

A New Tax System (Goods and Services Tax) Act 1999 Section 29-20

A New Tax System (Goods and Services Tax) Act 1999 Section 29-25

A New Tax System (Goods and Services Tax) Act 1999 Section 29-75

A New Tax System (Goods and Services Tax) Act 1999 Section 40-5

A New Tax System (Goods and Services Tax) Regulations 1999

Regulation 40-5.9

Reasons for decision

Was the payment of grant funds made to you by the government consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999. (GST Act)?

The basic rules

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on supplies that are taxable supplies.

Section 9-5 of the GST Act defines a taxable supply as:

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 you *carry on; and

(c). the supply is *connected with Australia; and

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

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

(*Asterisked terms are defined in the Dictionary under section 195-1 of the GST Act)

Supplies are taxable supplies if the requirements of section 9-5 of the GST Act are satisfied.

Goods and Services Tax Ruling GSTR 2006/9 GST: Supplies examines the meaning of 'supply' in the GST Act. The ruling focuses on analysing the various arrangements in which supplies are made. The ruling also considers the meaning of consideration and the requirement for a sufficient nexus between the supply and the consideration.

Supply

A supply is broadly defined by section 9-10 of the GST Act as any form of supply whatsoever. It includes an entry into, or release from, an obligation. An act or activity is a supply for GST purposes if it meets any relevant criteria.

In executing the agreement with the government you entered into an obligation to perform certain activities.

Consideration is also broadly defined by section 9-15 of the GST Act. Consideration includes any payments that are made for a supply, in response to a supply, or to induce a supply.

The payment of the grant funds made to you was consideration to induce you to enter into the agreement.

In executing the agreement and accepting the consideration you made a supply for consideration.

Enterprise

An enterprise is defined under section 9-20 of the GST Act. In carrying out the activity you were required to perform under the agreement, the supply was made in the course or furtherance of an *enterprise you carried out

Connected with Australia

Because you made the supply through an enterprise that you carried on in Australia, the supply is connected with Australia.

Registration

You were registered for GST at the time the supply was made.

Taxable supply

Because your supply of entering into an obligation to perform services as agreed satisfied the requirements of section 9-5 of the GST Act, the supply was a taxable supply. The supply was not GST-free or input taxed under the exceptions identified under Chapter 3 of the GST Act.

The payment of the grant funds made to you was consideration for a taxable supply under section 9-5 of the GST Act.

Question 2

Will the refund of excess funds by you to the government constitute a reduction of the consideration for the supply made by you and, as such, give rise to an adjustment event for you and the government?

Adjustments can arise because of adjustment events. Section 19-10 of the GST Act relevantly defines an adjustment event as any event which has the effect of changing the consideration for a supply or acquisition. A change to the previously agreed consideration for a supply or acquisition may be due to the offer of a discount or otherwise (refer to paragraph 19-10(2)(b) of the GST Act).

You have agreed, under the Supplemental Agreement, to return excess funds standing to the credit of the Specified Account established under the agreement. This represents a reduction in the consideration for your supply under the agreement.

When you return the excess funds you will reduce the GST payable on the original supply. If the consideration for a supply is reduced, you have a decreasing adjustment for supplies under section 19-55 of the GST Act.

Conversely, the recipient will have an adjustment to reflect the reduction in the input tax credits previously attributed. This is an increasing adjustment for acquisitions under section 19-80 of the GST Act.

Question 3

If the refund gives rise to an adjustment event, to which tax period is the decreasing adjustment attributable?

Division 29 of the GST Act tells you the tax periods to which your taxable supplies, creditable acquisitions, creditable importations and adjustments are attributable.

Section 29-20 of the GST Act relevantly provides that:

29-20 Attributing your adjustments

(1) An *adjustment that you have is attributable to the tax period in which you become aware of the adjustment.

…

(3) If:

(a) you have a *decreasing adjustment arising from an *adjustment event; and

(b) you do not hold an *adjustment note for the adjustment when you give to the Commissioner a *GST return for the tax period to which the adjustment (or any part of the adjustment) would otherwise be attributable;

then:

(c) the adjustment (including any part of the adjustment) is not attributable to that tax period; and

(d) the adjustment (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 adjustment note.

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 an adjustment note does not apply.

An adjustment is defined under section 195-1 of the GST Act as meaning an increasing or decreasing adjustment. A decreasing adjustment for supplies under section 19-55 of the GST Act is an adjustment to which section 29-20 of the GST Act applies.

This adjustment is attributable to the tax period in which you become aware of the adjustment. However, if you do not have an adjustment note when you give to the Commissioner a GST return for that tax period, the adjustment is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that adjustment note.

The tax period in which you become aware of the adjustment

The phrase 'the tax period in which you become aware of the adjustment' is not defined in the GST Act or in the Acts Interpretation Act 1901. It therefore takes its ordinary meaning. The Macquarie Dictionary Online defines 'aware' as cognisant or conscious and as informed and up to date. This definition implies that it may include relevant specific legal knowledge.

Some assistance is provided by the High Court in Deming No 456 Pty Ltd v Brisbane Unit Development Corporation Pty Ltd [1983] HCA 44; (1983) 155 CLR 129 where the majority (Mason, Deane and Dawson JJ) held at paragraph 23, CLR 151, that:

Indeed, the very words "becomes aware" strongly indicate that the statute is looking to the purchaser's actual knowledge of the failure which, by description, is a failure to comply with the statutory provisions. We conclude that the words "becomes aware of the failure" in s. 49(5) involve not only knowledge that a statement containing the specified material has not been given but an awareness that the fact that such a statement was not given constitutes a "failure" to do something which the Act says should be done.

In the context of section 29-20 of the GST Act, we accept that the statute requires that the taxpayer must have knowledge of the factual situation and the understanding that the statute requires an adjustment to be made.

Under the supplemental agreement you have agreed to refund excess funds. You and the recipient have agreed that the payment will give rise to an adjustment event.

You are required to calculate the amount of the refund and issue an appropriate adjustment note. The adjustment that you have is attributable to the tax period in which you become aware of the adjustment. The recipient's increasing adjustment will be the first tax period in which they receive either the refund payment or the relevant adjustment note.

Your decreasing adjustment will be attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold the relevant adjustment note.

The adjustment note

Section 29-75 of the GST Act requires you, as the supplier of the taxable supply, to issue an adjustment note in accordance with subsection (2). That subsection relevantly provides:

29-75 Adjustment notes

(2) The supplier of the *taxable supply must:

(a). within 28 days after the *recipient of the supply requests the supplier to give an *adjustment note for the *adjustment relating to the supply; or

(b). if the supplier has issued a *tax invoice in relation to the supply (or the recipient has requested one) and the supplier becomes aware of the adjustment before an adjustment note is requested-within 28 days after becoming aware of that fact

give to the recipient an *adjustment note for the *adjustment, unless any *tax invoice relating to the supply would have been a *recipient created tax invoice (in which case it must be issued by the recipient).

You were the supplier of the original supply and have agreed to return excess funds to the recipient. If you make the refund prior to issuing an adjustment note, you are required to issue the adjustment note to the recipient within 28 days in accordance with paragraph 29-75(2)(b) of the GST Act.

Question 4

Will the refund of Excess Funds need to be treated as GST inclusive or GST exclusive?

Under the Supplemental Agreement you have agreed to specify in the adjustment note the GST-exclusive value of the excess funds and the amount of GST to be included in the payment. The original payment of the grant funds made to you was GST-inclusive consideration for a taxable supply under section 9-5 of the GST Act. Accordingly, when you return part of the grant as a refund of excess funds, the refund will be GST-inclusive.

Question 5

What information will need to be disclosed on adjustment notes by you and what is the required timing of issuance?

Goods and services tax Ruling GSTR 2013/2 GST: adjustment notes, sets out the requirements for adjustment notes under Division 29 of the GST Act. The ruling outlines:

· when a document is in the approved form for an adjustment note;

· the information requirements that the Commissioner has determined under section 29-75 of the GST Act; and

· when the Commissioner will treat a particular document as an adjustment note under subsection 29-75(1) of the GST Act.

Under section 29-75 of the GST Act an adjustment note must:

· be issued by the supplier (or recipient in relation to recipient created adjustment notes),

· include the ABN of the entity that issues the adjustment note, and

· contain such other information as the Commissioner determines in writing.

The Commissioner has published his determination of the requirements for an adjustment note in 'A New Tax System (Goods and Services Tax) Adjustment Note Information Requirements 2012'.

Clause 5 of this determination states:

5. Information requirements

(1) Adjustment Note other than a recipient created adjustment note

An adjustment note, other than a recipient created adjustment note referred to in subclause (2), must contain the following information, or enough information in the adjustment note to enable the following to be clearly ascertained:

(a) that the document is intended as an adjustment note and the effect¹ of the adjustment;

(b) the identity² of the supplier or the supplier's agent;

(c) the identity or ABN of the recipient, the recipient's agent, or another member of the recipient's GST group, if the adjustment note:

(i) relates to a tax invoice showing the total price for the supply or supplies is at least $1,000 (or such higher amount as the regulations specify); or

(ii) arises out of an adjustment event where a supply that was not taxable becomes taxable and the price of the supply is at least $1,000;

(d) the issue date of the adjustment note;

(e) a brief explanation of the reason for the adjustment;

(f) the amount of the adjustment to the GST payable;

(g) the difference between the price of the supply before the adjustment event and the price of the supply after the adjustment event. If the supply is not a wholly taxable supply, the price of the supply is referable to that part of the supply that is affected by the adjustment event and that is, or becomes, taxable.

In summary, you will need to disclose the information required by the determination and include your ABN since you will issue the adjustment note.

As noted under question 3 above, if you make the refund prior to issuing an adjustment note, you are required to issue the adjustment note to the recipient within 28 days in accordance with paragraph 29-75(2)(b) of the GST Act.

Question 6

Will the interest component of the Unspent Funds be treated differently from the remaining grant funds from a GST perspective?

Goods and services tax Ruling GSTR 2003/12 GST: when consideration is provided and received for various payment instruments and other methods of payment, in relation to Lines of credit and overdrafts, provides at paragraph 77:

Where a supply is made by a supplier who also provides a line of credit or overdraft facility (with interest accruing) to the recipient of the supply, and if the payment for the supply is reflected by an increase in the amount owing in relation to the debt facility, consideration is both provided and received at the time the increase in the debt is recorded in the accounts of the supplier. Whether the line of credit or overdraft is provided by the supplier or another person is immaterial.

Goods and Services Tax Advice, GSTA TPP 018 GST Can an interest charge be a change in consideration and therefore an adjustment event (as opposed to a financial supply)? - provides that an interest charge is consideration for a financial supply and does not give rise to an adjustment event.

Section 40-5 of the GST Act provides that a financial supply is input taxed and that a financial supply has the meaning given in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

GST Regulations, subregulation 40-5.09(1) provides that the provision, acquisition, or disposal of an interest mentioned under subregulation (3) or (4) is a financial supply if it:

(a) is for consideration, in the course or furtherance of an enterprise, and connected with Australia, and

(b) the supplier is registered or required to be registered for GST, and is a financial supply provider in relation to the supply of the interest.

Item 2 in the table in GST Regulations subregulation 40-5.09(3) (Item 2) lists a debt, credit arrangement or right to credit, including a letter of credit as an interest that is a financial supply.

The glossary in Schedule 1 of Goods and Services Tax Ruling GSTR 2002/2 defines a credit arrangement as:

An arrangement under which an entity lends money on terms that include deferred repayment, or under which payment of a debt owed by one entity to another is deferred or time is allowed to pay

The Agreement provided that money earned by you from interest on the Funds will be used and dealt with by you as if that interest were part of the Funds. You also agreed that if at the end of the Agreement's term, there remained an amount of unspent Funds, that amount must be refunded by you within 30 days of that date.

Under the terms of the supplemental agreement the interest earned by you on the government's funds is being paid to the government as interest, as required under the Agreement.

This supply is the provision of an interest in a credit arrangement and is covered by Item 2. The consideration received for the supply of an interest in a credit arrangement is the interest payments paid by you under the terms of the agreements. In addition, the provision of this interest is made in the course of your enterprise and it is connected with Australia. Therefore, all of the requirements of GST Regulations paragraph 40-5.09(1)(a) are satisfied.

The government entity is registered for GST. As the entity created the interest in the credit arrangement, it is the financial supply provider in relation to the supply of the credit arrangement (GST Regulations subregulation 40-5.06(1)). Therefore, the requirements in GST Regulations paragraph 40-5.09(1)(b) are satisfied.

As all the requirements of GST Regulations subregulation 40-5.09(1) are satisfied, the supply of the credit arrangement is a financial supply. You and the government are making input taxed financial supplies of a credit arrangement under subsection 40-5(1) of the GST Act.

Question 7

Under the Agreement, you must pay the GST Refund Amount to the government within 10 business days of receiving the GST Refund Amount from the Australian Taxation Office. Confirmation is sought that payment of the GST Refund Amount by you does not trigger a further decreasing adjustment event.

Provided the adjustment note provided for the full GST-inclusive amount of the refund, the actual payment of the refund can be made in instalments. The second and final payment in this circumstance will not trigger a further adjustment event.

As the payment of the interest is an input taxed supply, no further GST consequences arise.

¹ For example, whether it is a positive or negative amount, or a debit or credit amount, to the supplier or the recipient.

² Paragraph 29-75(1)(b) of the GST Act also requires the adjustment note to contain the ABN of the entity that issues it, either the supplier or the supplier's agent.

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