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Edited version of your written advice
Authorisation Number: 1012830603306
Date of advice: 29 June 2015
Ruling
Subject: GST and the New Services Agreement
Question 1
Can the parties continue to rely upon the Initial Ruling on the basis that the new agreement including the supplies and acquisitions to be made between the parties under the New Agreement (NA) is substantially the same as that referred to in the Initial Ruling?
Answer
Yes, the parties can continue to rely upon the Initial Ruling where the NA including the supplies and acquisitions to be made between the parties under the NA is substantially the same as that referred to in the Initial Ruling.
Question 2
Where the NA is terminated as a result of a policy change and a Termination Payment is made to the Contractor pursuant to a clause of the NA, will there be a taxable supply made by the Contractor for which GST will be payable by the Contractor?
Answer
Yes, the Contractor will be making a taxable supply where the NA is terminated as a result of a policy change and a Termination Payment is made to the Contractor pursuant to a clause of the NA.
Question 3
Where goods and/or services are provided by the Contractor in accordance with a clause of the NA, will the Contractor only be required to account for GST on those goods and/or services to the extent that the Contractor actually receives monetary consideration for the supply, being, the amount paid by the recipient to the Contractor net of any available discounts, if any?
Answer
Yes, where goods and/or services are provided by the Contractor in accordance with a clause of the NA, the Contractor will only be required to account for GST on those goods and/or services to the extent that the Contractor actually receives monetary consideration for the supply, being the amount paid by the recipient to the Contractor net of any available discounts, if any.
Relevant facts and circumstances
Xxxxxx
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
Reasons for decision
Yes, the parties can continue to rely upon the Initial Ruling where the NA including the supplies and acquisitions to be made between the parties under the NA is substantially the same as that referred to in the Initial Ruling.
Detailed reasoning
According to the facts of this case a NA was entered into by the parties on xx yy zzzz - the terms of which are similar to the Original Agreement.
Importantly, the NA does not make any material changes to the previous agreement.
Where the:
• facts of the previous ruling issued on xx yy zzzz are the same as those in the present ruling; and
• as long as the facts remain the same; and
• the GST legislation continues to apply in the same way to the sets of facts provided; then the parties can continue to rely upon the Initial Ruling.
Question 2
Summary
Yes, the Contractor will be making a taxable supply where the NA is terminated as a result of a policy change and a Termination Payment is made by the recipient to the Contractor pursuant to a clause of the NA.
Detailed reasoning
Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply if it makes the supply for consideration, in the course or furtherance of an enterprise that it carries on, the supply is connected with Australia, and the entity is 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.
In this instance the issue is whether the Contractor makes a supply for which the termination payment is consideration, and if so is the supply a taxable supply.
The meaning of 'supply' is given in section 9-10 of the GST Act.
Subsection 9-10(1) of the GST Act relevantly provides that a 'supply' is any form of supply whatsoever.
Subsection 9-10(2) of the GST Act provides that without limiting subsection (1), 'supply' includes any of the following:
(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;
(g) an entry into, or release from, an obligation:
• to do anything;
• to refrain from an act;
• to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to above.
The Commissioner's view on the meaning of 'supply' is set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9).
GSTR 2006/9 sets out a number of propositions to assist in analysing a transaction to identify supplies made in the transaction. Proposition 5 is that to 'make a supply' an entity must 'do something'. The action required by proposition 5 does not have to be the supply itself. If an entity takes some action that causes a supply to occur, that can be sufficient (paragraph 83A of GSTR 2006/9 and Hornsby Shire Council v. Commissioner of Taxation [2008] AATA 1060; 2008 ATC 10-061; 71 ATR 442).
In agreeing to a clause of the NA that if the services agreement is terminated as a result of a policy change the Contractor may invoice the recipient for an amount (GST inclusive) for any loss or expenditure incurred as a direct consequence of the termination the Contractor has 'done something' for the purposes of Proposition 5.
Proposition 9 of GSTR 2006/9 is that the creation of expectations alone does not establish a supply. When the Department and the Contractor entered into the agreement, they were bound by the specific provision of a clause of the NA that recipient's total liability to the Contractor arising from the recipient terminating this agreement under the relevant clause is limited to the amount received. This was more than simply the creation of expectations as contemplated in Proposition 9.
The principles discussed in Goods and Services Tax Ruling GSTR 2009/3 Goods and services tax: cancellation fees (GSTR 2009/3) are also relevant to determining this issue. GSTR 2009/3 recognises a 'release supply' when a customer exercises their contractual right to be released from the performance of their obligations, for which they agree to pay a cancellation fee as consideration.
The termination in this instance is not a breach of the contract (paragraphs 51-58 of GSTR 2009/3). Paragraph 55 of GSTR 2009/3 states:
55. Without limiting subsection 9-10(1), a supply includes the supply of services, the creation or surrender of any right and the release from an obligation under paragraphs 9-10(2)(b), 9-10(2)(e) and 9-10(2)(g) respectively. In the context of the broad definition of supply, and having regard to the things included as supplies as set out in subsection 9-10(2), the Commissioner's view is that, if it is not consideration for any other supply, a cancellation fee may be consideration for the creation or surrender of rights and/or a release supply that occurs when an arrangement is cancelled, and/or a combination of these supplies under paragraph 9-10(2)(h).
In the context of the overall operation of the agreement, formal notification of termination, making the appropriate payment, may be viewed as having similar characteristics to the early termination (or cancellation fee) scenarios described in GSTR 2009/3.
Paragraph 18 of GSTR 2009/3 notes that a supply for which a cancellation fee may be consideration can be 'a release from an obligation to do anything, refrain from an act or tolerate an act or situation'.
In agreeing to the relevant clause of the NA that if the services agreement is terminated as a result of a policy change the Contractor may invoice the recipient for an amount (GST inclusive) for any loss or expenditure incurred as a direct consequence of the termination the Contractor has 'done something' for the purposes of Proposition 5.
Thus, in exercising its discretion to terminate the agreement under a clause of the NA and in paying the required termination amount, the recipient acquired a release from the Contractor in relation to its ongoing obligations under the agreement.
Paragraph 55 of GSTR 2009/3 contemplates that a 'release supply' may stand alone from a supply that is constituted by the 'creation or surrender of rights' and the release supply that occurred in this case was a release by the Contractor of the Department relevant obligations under the agreement.
This 'release supply' is made for consideration, in the course or furtherance of the Contractor's enterprise, it is connected with Australia, and the Contractor is registered for GST. The supply is neither GST-free nor input taxed. Therefore it is a taxable supply.
As the 'release supply' is a taxable supply, the recipient is providing consideration for a taxable supply under section 9-5 of the GST Act when it makes a payment to the Contractor in the course of exercising its right to terminate the agreement.
Question 3
Summary
Yes, where goods and/or services are provided by the Contractor in accordance with a clause of the NA, the Contractor will only be required to account for GST on those goods and/or services to the extent that the Contractor actually receives monetary consideration for the supply, being the amount paid by the recipient to the Contractor net of any available discounts, if any.
Detailed reasoning
Effectively a clause of the agreement provides two options to the recipient, namely:
• the recipient can continue to receive a payment for liquidated damages from the Contractor or obtain a reduction in the contract price as a result of the Contractor failing to meet specified service levels;
• the recipient can elect to receive goods and/or services from the Contractor free of charge or at a discounted price.
The GST consequences of the different options considered under that clause are examined below:
Option one
Under option one the recipient can continue to receive a payment for liquidated damages from the Contractor or obtain a reduction in the contract price as a result of the Contractor failing to meet specified service levels, as the case may be.
Therefore there are two things to consider under option one:
• receipt of a payment by the recipient from the Contractor for liquidated damages;
• the recipient obtaining a reduction in the contract price as a result of the Contractor failing to meet specified service levels.
Receipt of a payment by the recipient from the Contractor for liquidated damages:
GSTR 2001/4 explains how a payment (or act or forbearance) that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of the GST Act.
Paragraph 22 of GSTR 2001/4 provides that 'essentially, a supply is something which passes from one entity to another'. In paragraph 71 of GSTR 2001/4, the Commissioner also identifies situations where the subject matter of a claim for damages or compensation cannot be regarded as a 'supply'. Examples include property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.
Since there is no supply made by the recipient for the receipt of a payment for liquidated damages from the Contractor, the compensation will not be consideration for a taxable supply made by the recipient.
Therefore, there are no GST consequences attached to the compensation payment.
The recipient obtaining a reduction in the contract price as a result of the Contractor failing to meet specified service levels:
We agree that any reduction in the contract price as a result of the Contractor failing to meet specified service levels will be either a reduction in or an adjustment to the contract price and the Contractor will have to account for GST on the consideration received from the recipient.
The recipient can elect to receive goods and/or services from the Contractor free of charge or at a discounted price:
Where the recipient elects to receive goods and/or services free of charge there are no GST implications for the contractor. This is because not all of the conditions of a taxable have been met.
Where the recipient elects to receive goods and/or services for a discount the Contractor accounts for GST on the consideration received for those goods or services.
Note: In this ruling the provision of non-monetary consideration has not been considered.
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