Edited version of your private ruling

Authorisation Number: 1012558261513

Ruling

Subject: GST and releasing of obligations under a contract

Questions

1. Did Entity A make one or more supplies for GST purposes under the Nomination Arrangement which included the cancellation of Contract 1 and the nomination of Entity B as purchaser under Contract 2?

2. If the answer to question 1 is 'yes', is each supply identified a taxable supply on which the goods and services tax (GST) is payable by the Entity A?

3. If the answer to question 1 is 'yes' and the answer to question 2 is that one or more of the supplies is/are taxable, what is the value of each taxable supply so identified and the amount of the GST (if any) payable?

Answers

Yes, under the Nomination Arrangement, Entity A made a supply under subparagraph 9-10(2)(g)(i) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) of releasing Entity B of it's obligations under Contract 1 and nominating Entity B as the purchaser under Contract 2.

Note: Entity A also made a second supply under the Loan Agreement which was an interest in a credit arrangement.

1. Yes, the supply of releasing Entity B from their obligations under Contract 1 is a taxable supply and therefore goods and services tax (GST) is payable on the making of that supply.

The supply made under the Loan Agreement is an input taxed financial supply of an interest in a credit arrangement and thus, no GST is payable on the making of that supply.

2. The Commissioner ruled that the value of the taxable supply made under the Nomination Arrangement was a particular sum.

Relevant facts and circumstances

Entity A carries on an enterprise.

Entity A is registered for GST.

Under a contract of sale Entity A, entered into a sale contract (Contract 1) to purchase property (Property) from Entity C. The purchase price of the property was stated (exclusive of GST).

Later, Entity A agreed to sell the Property to Entity D for a purchase price (which was exclusive of GST) (Contract 2).

Entity D nominated Entity B to be the purchaser under Contract 2.

Settlement of Contract 2 did not occur, which had a flow on effect such that the Entity A did not settle Contract 1.

Entity A was served with a notice by Entity C to rescind Contract 1.

In order to minimise the loss and damage incurred by Entity A because of Entity B's inability to complete Contract 2, Entity A and Entity B agreed to enter into a "Nomination Arrangement".

There is no one written document recording the agreement in relation to the 'Nomination Arrangement'. However, evidence of what Entity B and Entity A had agreed by way of the 'Nomination Arrangement' is contained in a Loan Agreement and the nomination documents.

The Loan Agreement sets out the following:

· Entity A and Entity B agreed to cancel Contract 2 on the basis that Entity B pays to the Entity A an amount (defined as the 'Principal Sum' in the Loan Agreement),

· Entity A released Entity B from Entity B's obligations under Contract 2,

· Entity A agreed to nominate Entity B as the substitute purchaser under Contract 1,

· Entity A agreed to forego the immediate reimbursement of costs incurred by it under Contract 1,

· Entity B as the nominated purchaser would complete Contract 1.

Also under the Loan Agreement, Entity A has lent the 'Principal Sum' to Entity B which Entity B has agreed to pay to Entity A as per the terms and conditions outlined in the Loan Agreement. A particular clause of the Loan Agreement outlines repayment obligations of Entity B.

The 'Principal Sum' advanced to Entity B under the Loan Agreement is a GST-exclusive amount. The 'Principal Sum' represents the economic outcome that would have been achieved had the original transactions under Contract 1 and Contract 2 been completed.

Pursuant to the Nomination arrangement, the Transfer of Land document in relation to the Property was exchanged between entity C: as the Transferor of land and Entity B: as the Transferee of land for a consideration of $xyz. As the land (Property) was transferred by Entity C to Entity B, Entity A has not issued any tax invoices in relation to the transfer of land (Property).

Relevant legislative provisions

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 and

A New Tax System (Goods and Services Tax) Act 1999 section 9-70.

Reasons for decision

1. Supplies

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines a supply under section 9-10 as follows:

(1) A supply is any form of supply whatsoever

Without limiting subsection (1), supply includes any of these:

a) a supply of goods;

b) a supply of services;

c) a provision of advice or information;

d) a grant, assignment or surrender of *real property;

e) a creation, grant, transfer, assignment or surrender of any right;

f) a *financial supply;

an entry into, or release from, an obligation:

(i) to do anything; or

(ii) (ii) to refrain from an act; or

(iii) (iii) to tolerate an act or situation;

a) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: Supplies (GSTR 2006/9) provides the Commissioners views about supplies and state:

Subsection 9-10(1)

33. The words 'A supply is any form of supply whatsoever' in subsection 9-10(1) cover all supplies regardless of whether they concern goods or services. This obvious breadth of the concept of supply is confirmed by the EM, which states (in reference to subsection 9-10(1)):

This is defined broadly and is intended to encompass supplies as widely as possible.

Subsection 9-10(2)

34. The intended scope of subsection 9-10(1) is more fully illustrated in subsection 9-10(2), of which the EM states:

[It] provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in subsection 9-10(1).

By agreeing to the terms of the Loan Agreement, Entity B and Entity A have cancelled Contract 2 and have entered into an arrangement to release Entity B of any obligations imposed on Entity B under Contract 2. We are of the view that the releasing of Entity B by Entity A of Entity B's obligations that are imposed under Contract 2 is a supply that falls within subparagraph 9-10(2)(g)(i) of the GST Act and therefore is a supply for GST purposes.

Loan

In addition to the above supply identified, Entity A also entered into a Loan Agreement with Entity B. We understand that the 'loan' in this context is in the form of a credit arrangement in that the Entity B has entered into a debt obligation to Entity A and agrees to repay the Principal sum in instalments.

The Glossary in Schedule 1 to Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) defines a credit arrangement as follows:

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. (emphasis added)

The supply of an interest in a credit arrangement is a financial supply under item 2 of Regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

1. Taxable supplies

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

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

Paragraph 9-5(a) of the GST Act

In order for the first requirement of section 9-5 of the GST Act to be satisfied (which is, you make a supply for consideration), the following three requirements must be satisfied:

· there must be a supply,

· there must be consideration,

· the supply must be made for consideration (that is, there must be a nexus between the supply and consideration).

Supply

We outlined the supplies made under the Nomination Arrangement.

Consideration

Consideration is defined in section 9-15 of the GST Act as:

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.

(1) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

(2) (2A) It does not matter:

a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or


b) whether the payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders.

There is a payment, which is the 'Principal Sum' that Entity B was required to pay to Entity A under the Loan Agreement.

Nexus between the supply and consideration

The next requirement is establishing whether there is a nexus between the two types of payments with the supplies identified above.

'Principal Sum'

Pursuant to a clause of the Loan Agreement the trustee and Entity B have agreed to cancel the Springfield contract on the basis that Entity B pays to the trustee the 'Principal Sum'. We are of the view that this clause provides sufficient evidence to conclude that a nexus exists between supply of releasing Entity B of it's obligations under the Springfield Contract and payment of the 'Principal Sum' for that supply.

Interest payable under the loan

The payment of interest under the Loan Agreement has a sufficient connection with the supply of the interest in the credit arrangement and is therefore part of the consideration for that supply (along with the supply of the interest in the debt by the borrower). Pursuant to the Loan Agreement, we are of the view that the payment of interest does not form part of the consideration for the supply made under paragraph 9-10(2)(g)(i) of the GST Act.

The other requirements of section 9-5 of the GST Act

Both the supply of releasing Entity B of their obligations under Contract 2 and the supply of the interest in a credit arrangement under the Loan Agreement were made by Entity A in the course of carrying on their enterprise and the supplies are connected with Australia. Entity A is registered for GST.

The supply made by Entity A under the Nomination Agreement of releasing Entity B from their obligations under Contract 2 is neither GST-free nor input taxed. Accordingly, it is a taxable supply.

However, the supply of the loan (interest in the credit arrangement) meets the requirements of an input taxed financial supply as outlined in sub-regulation 40-5.09 of the GST Regulations.

2. Value of the taxable supply

Section 9-70 of the GST Act states:

The amount of GST on a *taxable supply is 10% of the *value of the taxable supply.

Section 9-75 of the GST Act defines the value of a taxable supply as:

(1) The value of a *taxable supply is as follows:

Price x 10/11

where:

price is the sum of:

(a) so far as the *consideration for the supply is consideration expressed as an amount of *money - the amount (without any discount for the amount of GST (if any) payable on the supply); and

(b) so far as the consideration is not consideration expressed as an amount of money - the *GST inclusive market value of that consideration.

Example:

You make a taxable supply by selling a car for $22,000 in the course of carrying on an enterprise.

The value of the supply is:

$22,000x10/11=$20,000

The GST on the supply is therefore $2,000 (i.e. 10% of $20,000).

The Commissioner ruled that the value of the taxable supply made under the Nomination Arrangement was a particular sum.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

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