Edited version of your written advice

Authorisation Number: 1012982135746

Date of advice: 9 March 2016

Ruling

Subject: GST and input tax credit entitlement for acquisition of rights to outcomes and/or proceeds

Question:

Will the Company make a creditable acquisition from Entity A of the rights to the outcomes and/or proceeds of the action undertaken for the claims as defined in the Agreement, and will it be able to attribute an input tax credit in accordance with Divisions 11 and 29 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

No. The Company will not make a creditable acquisition in relation to the acquisition of the rights under the Agreement with Entity A, and will not be able to attribute an input tax credit to a tax period because the Company has not provided, and is not presently liable to provide, consideration for the supply.

Relevant facts and circumstances

The Company is incorporated in Australia and advises that it is in the business of purchasing and enforcing legal rights and obligations of citizens against Receivers and Managers, Administrators, Liquidators, Trustee in Bankruptcy, Solicitors and other professionals, companies and individuals.

The Company became registered for GST, reporting on a quarterly basis and accounting on a
non-cash basis for GST.

The Company advises that Entity A is a business person who was and remains in a business in their own right, through various companies in their own right and as trustee of trusts, trusts and in joint venture arrangements with others. We note that Entity A's circumstances may have changed given the events that have taken place.

Entity A is registered for GST, reporting on a quarterly basis and accounting on a cash basis for GST.

Entity A does not have the resources, skill or the capacity to maintain the litigation to enforce their rights, title and interests in the Court Orders for Compensation and Damages hence, wishes to sell to the Company certain of their rights, title and interest in the Court Orders for Compensation and Damages.

The Company confirmed that its principal payment obligations can be summarised as follows:

1. Payment of the Purchase Price by the Company to Entity A -

The payment of the Purchase Price of $X will come out of the proceeds of the prosecution of the action.

2. Payment of the Part-Payment of the Purchase Price by the Company to Entity A -

The payment of the part-payment of the Purchase Price is payable only if, and when any GST credit incidental to the Agreement is received from the Company. If the Company does not receive a GST credit incidental to the Agreement, the Company has no obligation to pay Entity A.

3. The Company's obligations to pay its Director for their personal exertion and other costs -

The Company will be paid an annual fixed management fee for each and every year of the term of the Agreement. This management fee shall be paid by Entity A to the Company out of the proceeds of the action in priority to any other sum...

The Company also clarified that no payments are due to Entity A under the Agreement at this time and therefore no payments have been made to him.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, Section 11-5

A New Tax System (Goods and Services Tax) Act 1999, Paragraph 11-5(c)

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

Reasons for decision

The Company is entitled to claim input tax credits for the GST paid on a creditable acquisition if the Company satisfies all the requirements of section 11-5 of the GST Act, which states:  

You make a creditable acquisition if:

(a)    you acquire anything solely or partly for a ^*creditable purpose; and

(b)    the supply of the thing to you is a ^*taxable supply; and

(c)    you provide, or are liable to provide, ^*consideration for the supply; and

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

(* denotes a defined term under the GST Act)

Accepting that the Company is registered for GST purposes and therefore satisfies the requirement imposed by paragraph 11-5(d), for the Company to make a creditable acquisition of the acceptance of the 'rights' assigned by Entity A under the terms of the Agreement, the Company will need to further demonstrate that the acquisition:

• is made in carrying on the Company's enterprise and is made solely or partly for a creditable purpose (paragraph 11-5(a)); and

• is a taxable supply made to the company (paragraph 11-15(b)); and

• is made for consideration that the Company provides or is liable to provide (paragraph 11-5(c))

With particular regard to the creditable acquisition requirement imposed by paragraph 11-5(c), we note that the facts demonstrate that the Company has not paid for the acquisition of the rights (supply) outlined in the Agreement. This is further confirmed by the Company separately indicating that, at this stage, it has made no payment to Entity A under the Agreement, nor are there any payments due to be paid to him by the Company under the Agreement.

In view of the fact that the Company has not 'provided' consideration for the supply in question, it turns to consider whether the Company satisfies paragraph 11-15(c) on the basis that it is 'liable' to provide consideration for the supply.

Pursuant to the facts, the Agreement provides that the Company shall only pay Entity A a part payment of the purchase price within a certain period of receiving the amount of GST credit from the ATO. Furthermore, the Company shall only pay the balance remaining, if any, of the purchase price within a certain period of receiving an amount of the Outcome and/or Proceeds.

The Agreement (and the Company) confirms that the part-payment shall be made after receipt of GST due under the Agreement from the ATO, and that the balance outstanding of the purchase price shall be paid as and when monies are received. The contingent nature of the Company's payment obligations to Entity A is further confirmed in a correspondence received by the ATO, which acknowledges that the Company is under no obligation to pay under the Agreement until the contingent factors are satisfied.

In the Commissioner's opinion the Agreement reflects the exchange of a promise between the parties to the effect that the Company promises to enter into obligation to pay the Purchase Price contingent upon the events occurring as described in the Agreement. While the exchange of such a promise represents consideration from a contractual viewpoint (and is sufficient to trigger the operation of paragraph 9-5(a) of the GST Act), it remains to be determined if the words 'liable to provide consideration for a supply' found in paragraph 11-5(c)) contemplate within their meaning the 'promise to pay consideration for a supply'.

Relevantly, in the context of determining what is an 'invoice' for the purposes of the GST Act, the Commissioner, at paragraphs 23 to 25 of Goods and Services Tax Ruling GSTR 2000/34, discusses the section 195-1 of the GST Act definition of an 'invoice; (being a document notifying an obligation to make a payment), by stating that:

23. The ordinary meaning of an 'obligation' is defined in the Macquarie Dictionary (5th ed) as 'a legal relationship between two persons, such that one person's right entails the other person's duty'.

24. In considering the meaning of 'obligation' in the definition of invoice in the New Zealand legislation, Heron J, in the Shell case at the New Zealand High Court, commented:

'The Act does not speak in terms of future obligation or conditional obligation or contingent obligation. It speaks of obligation. It is an obligation to make payment'. (footnote deleted)

25. The words 'obligation to make a payment' refer in our view to a legal obligation which is analogous to being 'required to pay'. A party can only be regarded as under an obligation to make a payment if '...there is a requirement for either an actual payment or, at least, a present obligation to pay a sum certain at some future date'. (footnote deleted)

The Commissioner then goes on to relevantly state at paragraphs 30 and 31 of GSTR 2000/34 that:

30. A contract creates a contractual obligation to make a payment. If the obligation created is a presently existing one, a copy of the executed contract, which is returned to the recipient of the supply, will be a document which notifies that obligation, if it specifies the amount due by the recipient to the supplier. The copy of the contract will be an invoice. However, many contracts do not create an immediate obligation to pay. This will depend on the terms of the contract and the intention of the parties.

31. The amount notified by an invoice must be a sum certain. It is not enough that an amount might become payable in the future upon the happening of some contingency.

In view of this guidance it is clear that the words 'liable to pay consideration for the supply' found in paragraph 11-5(c) of the GST Act are analogous to imposing a requirement that there must exist between the parties a 'presently existing' obligation to pay a sum certain. Consequently, the creditable acquisition requirement imposed by paragraph 11-15(c) can never be satisfied in circumstances where an agreement/contract creates nothing more than the possibility of a debt arising (as the consideration given to secure the acquisition of something).

The terms of the Agreement is one such case, as they do not presently make the Company liable to pay consideration to Entity A. In particular, clause X of the Agreement only evidences the Company's promise to pay in the event of either of the outlined circumstances occurring. As such, the Company is under no presently existing obligation to make a part payment of the Purchase Price to Entity A until either of those events crystalises. 

The Agreement also states that the Company is entitled to a management fee from Entity A. This Management Fee shall be paid to the Company as and when the Outcome and/or Proceeds of the actions have been paid to Entity A and shall be paid to the Company in priority to any amount of the Purchase Price. In other words, the Company's liability to pay any part of the Purchase Price to Entity A is also contingent on the priority payment of the management fee that is payable by Entity A to the Company.

The Agreement clearly does not notify a presently existing obligation to make a payment as the obligation to pay is contingent upon a range of factors. Therefore, as the Company is not presently liable to provide consideration for the supply, the requirement imposed by paragraph 11-5(c) of the GST Act is not satisfied, and the Company does not make a creditable acquisition of the rights supplied by Entity A.

Furthermore, in relation to the attribution of a creditable acquisition to a tax period, Subdivision
29-A of the GST Act outlines the basic rule for all entities accounting on a non-cash basis.

The input tax credit for a creditable acquisition is attributable to the earlier of the tax periods in which:

• you provide any consideration; or

• an invoice is issued for the acquisition (subsection 29-10(1)).

As previously mentioned, an 'invoice' is defined in section 195-1 of the GST Act to mean 'a document notifying an obligation to make a payment.'

For GST purposes, it is important to identify an invoice that meets the definition of invoice in section 195-1 of the GST Act. GSTR 2000/34 states:

12. An 'invoice' is defined in section 195-1 of the GST Act to mean 'a document notifying an obligation to make a payment'. For the purposes of this definition:

A document may be in the form of paper, a computer system, tapes, or computer disks and may be in an electronic form.

Notifying an obligation to make a payment is the essential characteristic of a document which is an invoice. This characteristic exists where the document informs the parties that there is a presently existing obligation to make a payment and the amount of that payment.

28. A document will be an invoice if it notifies a presently existing obligation. In the Shell case, the word 'notify' was taken to mean its ordinary dictionary meaning of 'to give notice to-, to inform'.

29. It is not sufficient that the obligation exists and that the document merely evidences the existence of the liability. The document must also inform the recipient of the obligation to make a payment and the amount of that payment.

Paragraph 26 of GSTR 2000/34 states that the existence of an obligation to pay will depend on the terms of the contract which govern the supply.

As addressed above, the Agreement does not notify a presently existing obligation to make a payment as the Company's obligation to pay is contingent upon a range of factors.

Clause X of the Agreement also indicates that a party making a taxable supply under or in accordance with this agreement must give to the other party receiving the taxable supply a tax invoice. The tax invoice must be given at the same time payment is received or within X business days of receiving payment.

The Company has not provided any payments for the acquisition, and therefore no tax invoice is required to be issued in accordance with the Agreement.

Therefore, as the Agreement does not create an immediate obligation to pay, the Company will not hold the required invoice to attribute an input tax credit to a tax period in accordance with subsection 29-10(1) of the GST Act.

In summary, the Company will not satisfy the requirement of paragraph 11-5(c) of the GST Act and will not make a creditable acquisition of the rights supplied by Entity A in accordance with section 11-5 of the GST Act. Furthermore, under the terms of the Agreement the Company is not presently under an obligation to make any payments, and therefore it will not have an invoice (as defined) in order to attribute an input tax credit to a tax period in accordance with subsection 29-10(1) of the GST Act.

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