| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012776828818
Ruling
Subject: GST - assignment of debtors and decreasing adjustments
Question:
Is an Australian partnership (you) entitled to make a decreasing adjustment in relation to the assignment of the debtors?
Answer:
No, you are not entitled to make a deceasing adjustment in relation to the assignment of the debtors.
Relevant facts and circumstances
An Australian partnership ('you') operates a service practice. You are made up of several entities.
One of the partners ('exiting partner') left the partnership and as agreed by the partners, debtors of $X were assigned to the exiting partner. You advised that consideration was made for the assignment of the debtors.
You will continue to operate with the remaining partners.
The debtors were originally invoiced by you to the clients.
You are registered for goods and services tax (GST) and report quarterly on an accruals basis.
A copy of a deed of agreement is provided and covers the assignment of the debtors.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999, Section 40-5
A New Tax System (Goods and Services Tax) Act 1999, Division 19
A New Tax System (Goods and Services Tax) Act 1999, Division 21
A New Tax System (Goods and Services Tax) Regulations 1999, Regulation 40-5.09
Reasons for decision
Summary
You are not entitled to make a deceasing adjustment for bad debts under Division 21 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and there is no adjustment event under Division 19 of the GST Act, in relation to your assignment of the debtors.
Detailed reasoning
Financial supply - interest in or under a debt
You have agreed to assign the debtors to the exiting partner.
GST is payable on a taxable supply to the extent that it is not GST-free or input taxed. Section 40-5 of the GST Act states that a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).
Goods and Services Tax Ruling GSTR 2004/4 covers payment streams and states:
19. The provision, acquisition or disposal of an interest in or under a debt is a financial supply under item 2 of subregulation 40-5.09(3). Provided the requirements of subregulation 40-5.09(1) are satisfied the supply of the right to a payment stream by way of assignment is a financial supply as it is the provision, acquisition or disposal of an interest in a debt.
..
Provision, acquisition or disposal of an interest in or under a debt
23. A debt is a chose in action. In the general law it is usual to talk of the assignment of a chose in action, rather than provision, acquisition or disposal of an interest. For GST purposes an assignment comes within the meaning of disposal9 of an interest. There are two methods of assignment:
• a legal assignment; and
• an equitable assignment.
…
30. Provided there has been an effective legal or equitable assignment of a right to all or part of a payment stream, or an agreement to assign the right to a payment stream that arises in the future there will be the supply of an interest in or under a debt. This is a financial supply under item 2 of subregulation 40-5.09(3) provided the requirements of subregulation 40-5.09(1) are also satisfied.
Additionally, Issue 8 of the Financial Supplies Questions and Answers (FS-Q&A) in relation to debt factoring provides that the assignor will generally be making a financial supply when it assigns the debt (or a part of it) to the debt factor.
Subparagraphs 40-5.09(1)(a)(i) to (iii) of the GST Regulations provide that the provision, acquisition or disposal of the interest mentioned in subregulations 40-5.09(3) or (4) must be:
• for consideration;
• in the course or furtherance of an enterprise; and
• connected with Australia.
Furthermore, subparagraph 40-5.09(1)(b) of the GST Regulations state that the financial supplier must be registered or required to be registered and a financial supply provider in relation to the provision, acquisition or disposal of the interest. The acquisition of a financial interest from an unregistered supplier may be a financial supply if the acquirer is registered.
Accordingly, where consideration was provided for the financial supply (and the other requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied), you (the assignor) are making a financial supply when you assign the debtors (or part of it) to the exiting partner. Hence, the assignment of the debtors is an input tax supply, and is not taxable.
Additional information
For information on the 'GST consequences of a technical dissolution (reconstitution)' in relation to assignment of interests refer to paragraphs 172 to 180 of Goods and Services Tax Ruling GSTR 2003/13 (which is available at the ATO website at www.ato.gov.au).
Division 21 - Bad debts
Division 21 of the GST Act allows for an adjustment if debts are written off as bad or are outstanding after 12 months.
GSTR 2004/4 also discusses bad debts and assignments, and states:
Bad debts and assignments
65. Division 21 of the GST Act provides for adjustments for bad debts, for the purpose of working out net amounts of GST payable, where an entity accounts for GST on a basis other than the cash basis. Requirements for a decreasing or an increasing adjustment include that the whole or part of a debt is written off as bad, or is overdue for 12 months or more.
66. Where a debt that arises from an underlying taxable supply is assigned, by legal or equitable means, it is no longer the property of the assignor. In this situation the assignor is unable to write off any of the debt and claim a decreasing adjustment if it subsequently turns bad. However if the whole or part of the debt remaining is reassigned by the assignee, then the original assignor is again able to write off the whole or that part reassigned and claim a decreasing adjustment accordingly.
67. The assignee of the debt will not be entitled to any adjustment under Division 21 because:
• they are not the supplier in the underlying transaction that gave rise to the right to the debt or payment stream; and
• in any event, the assignment of the debt is a financial supply that does not attract GST.
Additionally, Issue 8.7 of the FS-Q&A in relation to debt factoring states that for a 'non-recourse' arrangement, if you assign the debt, Division 21 of the GST Act cannot apply to allow you a deceasing adjustment because you will not have any debt to write off or that can be overdue for 12 months or more. You may be entitled to claim a decreasing adjustment in respect of the amount that was not assigned. For a 'recourse' arrangement, you are entitled to claim a deceasing adjustment but only if the assigned debt is reassigned to you.
Goods and Services Tax Ruling GSTR 2000/2 also discusses adjustments for bad debts, and states:
47. If you assign the debt to another party, the provisions of Division 21 cannot operate. Under Division 21 only the entity that makes the supply can make the adjustment for any bad debt relating to that supply. For example, if a debt is assigned, the assignee has no entitlement to a bad debt adjustment under Division 21.
Accordingly, you (as the assignor) are not entitled to claim a deceasing adjustment for bad debts under Division 21 of the GST Act when you assign the debtors to the exiting partner.
Division 19 - Adjustments
An adjustment arises under Division 19 of the GST Act where an adjustment event has caused you to have accounted for too much (or too little) GST payable for a supply; or too much (or too little) input tax credit for an acquisition in a previous tax period.
Subsection 19-10(1) of the GST Act provides that an 'adjustment event' is any event which has the effect of:
• cancelling a supply or an acquisition; or
• changing the consideration for a supply or an acquisition; or
• causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.
Your assignment of the debtors is not as a result of an adjustment event, and therefore you are not entitled to make a deceasing adjustment under Division 19 of the GST Act.
Additional information
As per paragraph 44 of GSTR 2004/4:
Liability for GST on the underlying supply
44. Since an assignment of a payment stream does not change the underlying supply, the assignor retains the obligation to make the underlying supply and remit any GST liability in respect of that supply.
You (as the assignor) retain the obligation to make the underlying supply (relating to the debtors assigned) and must remit any GST liability in respect of that supply.
All ATO public rulings and publications are available at the ATO website at www.ato.gov.au
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
