Edited version of your written advice

Authorisation Number: 1012996970817

Date of advice: 10 May 2016

Ruling

Subject: Bank Guarantee Payment

Question 1

Is the payment of the bank guarantee consideration for a taxable supply and therefore subject to GST?

Answer

No. The payment of the bank guarantee is not consideration for a taxable supply and therefore is not subject to GST.

Question 2

If no to question 1, does Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (Division 142) apply to restrict the refund for the GST remitted on the bank guarantee amount?

Answer

No. Division 142 applies to tax periods that started on or after 31 May 2014 and the GST on the bank guarantee was remitted for a tax period that commenced on a date prior to 31 May 2014. The applicable provision is section 105-65 of Schedule 1 of the Taxation Administration Act 1953 (Section 105-65).

Relevant facts and circumstances

• You are registered for GST.

• You are a lessor of commercial premises.

• You entered into a lease agreement with X on the basis that X would procure an unconditional bank guarantee in your favour which you were entitled to drawn down in an event of a breach of the lease.

• X breached the lease and failed to remedy the breach as per the lease agreement. As a result, you terminated the lease and retook possession of the premises. In addition, you drew down the bank guarantee pursuant to terms of the lease agreement to compensate you for loss and damage you suffered as a result of the breach.

• The breach of the lease did not relate to default on rental payments as there was no outstanding rent. The payment of the bank guarantee was also not payment for a supply you made to X or any third party as a result of the breach by X.

• You remitted GST on the bank guarantee amount in your BAS.

• You now seek a refund of the GST remitted for the bank guarantee payment.

Relevant legislative provisions

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

Division 142 of the A New Tax System (Goods and Services Tax) Act 1999

Section 105-65 of Schedule 1 of the Taxation Administration Act 1953

Reasons for decision

Issue 1: Is the payment of the bank guarantee amount consideration for a taxable supply and therefore subject to GST?

You are liable to pay GST on any taxable supply you make. One of the conditions of a taxable supply is that "you make a supply for consideration" (paragraph 9-5(a) of the GST Act). The bank guarantee payment in these circumstances is not consideration for any supply and therefore is not subject to GST.

Goods and Services Tax Ruling GSTR 2006/1 Goods and services tax: guarantees and indemnities provides an explanation of our view on whether a payment under a guarantee is consideration for a supply. For the purposes of the GSTR 2006/1, the guarantor is referred as the "surety". The person requiring the guarantee or whom the guarantee is paid for benefit of is referred to as the "creditor".

Payment under a guarantee or indemnity

74. If the surety is called upon to make a payment to the creditor under a guarantee or indemnity, the payment is made as a result of the exercise of the creditor's rights under the guarantee or indemnity.

75. Where the surety pays money, this is not consideration for the release of the surety from an obligation under paragraph 9-10(2)(g) of the GST Act, nor is it consideration for the surrender of the creditor's rights under paragraph 9-10(2)(e). Rather, the payment discharges (or partly discharges) the surety's obligations under the contract. Accordingly, there is no supply to the surety by the creditor in consideration of the payment by the surety.

76. The payment of money on the exercise of a right is also not a supply by the surety because of subsection 9-10(4) of the GST Act. [our emphasis]

In your circumstances, the bank made a payment to you (a creditor) under a guarantee when X defaulted under the lease agreement. The payment is not consideration for the release of an obligation by you in favour of the bank, or a surrender or your rights to the bank. Rather the payment discharges the bank's obligations under the bank guarantee with X. You make no supply to the bank in consideration for payment of the bank guarantee.

We then turn to the question whether you made a supply to the X, payment for which is guaranteed by the bank (see paragraphs 79 to 81 of GSTR 2006/1). That is, whether the bank guarantee payment is third-party consideration for a supply.

There were no outstanding rental payments and you made no supply in relation to the payment of the bank guarantee. The bank guarantee payment compensates you for the loss or damage you suffered as a result of the breach and not in connection to the supply of the premises or any other supply. Our view is that any loss or damage you suffer cannot be characterised as a supply for the purposes of the GST Act (see Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements, in particular paragraphs 71 to 74). Therefore, the payment of the bank guarantee is not third party consideration for any supply.

As the bank guarantee is not consideration for a taxable supply, it is not subject to GST and you have overpaid GST for the tax period quarter ended 30 June 2014.

Issue 2: If no to question 1, does Division 142 of the GST Act apply to restrict the refund for the GST remitted on the bank guarantee payment?

Division 142 was inserted in the GST Act to replace section 105-65 to clarify the circumstances where taxpayers are entitled to refunds of overpaid GST. Section 105-65, applies to the tax periods that start before 31 May 2014 and Division 142 applies to tax periods that start on or after 31 May 2014. As the GST remitted on the bank guarantee payment relates to a tax period that commenced prior to 31 May 2014, section 105-65 applies to determine whether the refund of the overpaid GST should be restricted.

Section 105-65 provides that the Commissioner need not give you a refund if all of the following conditions are satisfied:

• there was an overpayment of GST;

• a supply or arrangement was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent; and

• either the recipient or the entity that is treated as a recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST.

The bank guarantee payment is not connected to any taxable supply that you make and therefore is not subject to GST. The GST you remitted in relation to the bank guarantee payment represents an overpayment of GST. Further, you have not reimbursed the "GST" to the bank or X. Therefore section 105-65 may apply to restrict the refund of the overpaid GST.

However, section 105-65 applies in such a way that the Commissioner need not give a refund of the overpaid GST amount, but the Commissioner may exercise his discretion to allow the refund in appropriate circumstances. You may ask the Commissioner to exercise his discretion to pay you the refund.

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