Edited version of your written advice

Authorisation Number: 1013106950524

Date of advice: 13 October 2016

Ruling

Subject: Goods and services tax and adjustment notes.

Question

Does the Commissioner of Taxation (Commissioner) accept that for the purposes of paragraph 29-75(1)(a) of the GST Act, Entity A is the issuer of the adjustment note where the document is prepared by the business customer under the terms of the proposed agreement?

Answer

Yes, the Commissioner accepts that for the purposes of paragraph 29-75(1)(a) of the GST Act, Entity A is the issuer of the adjustment note where the document is prepared by the business customer under the terms of the proposed agreement.

Relevant facts and circumstances

Entity A is registered for goods and services tax (GST).

Entity A makes taxable supplies to various business customers who then on-sell its products.

All of Entity A's business customers are registered for GST.

Entity A raises tax invoices to its various business customers for the sale of its product. There are no recipient created tax invoice (RCTI) arrangements in place between Entity A and its business customers.

In supplying its product to the various business customers, Entity A has offered deferred discount arrangements to its business customers which take various forms.

GST treatment applied by Entity A

As it is Entity A's business customers that first become aware of the entitlement to the deferred discount, Entity A's business customers issue a document to Entity A for the discount amount. Entity A submits that this is effectively a “recipient created adjustment note” and is consistent with broader industry practice.

The nature of the deferred discounts negotiated or pre-agreed with the business customers results in the business customers being entitled to, and availing themselves of rebates. These arise in a subsequent tax period to the one in which the original sale of the product is recognised.

The following GST treatment has historically been applied by Entity A to these deferred discount arrangements:

a. Entity A agrees to sell its products to various business customers and issues a tax invoice for the full amount (plus GST) to customers. The GST displayed on the tax invoice (the full amount) is remitted by Entity A in the relevant monthly Business Activity Statement (BAS) which correlates to the tax period in which the invoice is issued pursuant to the GST attribution rules for accruals based taxpayers as contained in Division 29 of the GST Act;

b. Once the criteria for the respective deferred discount is satisfied, the business customer will quantify the discount, issue a document to Entity A and short pay their subsequent payment; and

c. Entity A will then claim the corresponding decreasing adjustment (i.e. to recover the relevant portion of GST previously remitted to the ATO in an earlier tax period) in the monthly tax period when the document is received from its business customer.

It has been identified that the software package which Entity A has used to account for its business activities since inception cannot, in its current state, issue adjustment notes to Entity A's business customers.

Entity A has asked the Commissioner to provide a ruling with the following key assumptions:

● Entity A is required, at all times, to issue adjustment notes in respect of its deferred discount arrangements with its business customers; 

● Entity A will separately enter into agreements with its business customers whereby they agree to outsource the preparation and issuance of the adjustment notes for such deferred discount arrangements to its business customers whereby such customers will effectively undertake this function on behalf of Entity A;

● The agreement to outsource the preparation and issuance of the adjustment notes to the business customers will require the following:

● The business customer will only issue the adjustment note on behalf of Entity A at the time that it has satisfied the commercial requirements as set out by Entity A to be eligible for the particular rebate forming the deferred discount arrangement giving rise to a decreasing adjustment for Entity A for GST purposes;

● A copy of all adjustment notes issued by business customers on behalf of Entity A will be made available to Entity A within 14 business days of being generated for record keeping purposes; and

● The adjustment notes generated by the business customer, together with the relevant supporting documentation, will contain all of the information required by the Commissioner of Taxation in section 29-75 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) and Goods and Services Tax Ruling GSTR 2013/2 Goods and services tax: adjustment notes.

Submissions the subject of this GST private ruling request

In light of the facts provided above, Entity A makes the following submissions:

● Pursuant to subsection 29-75(1) of the GST Act, the Commissioner may treat as an adjustment note a particular document/s that is not an adjustment note.

● Due to limitations of the accounting system utilised, Entity A is as it currently stands, unable to automate the issuing of adjustment notes to business customers in respect of its deferred discount arrangements.

● Entity A would be required to make substantial modifications to its accounting software to enable automation of adjustment notes, which would involve disruption to Entity A's business, including the reallocation of staff and the cost associated with a third party contractor changing the infrastructure of Entity A's software.

● Entity A further submits that the net GST position of the deferred discounts offered by Entity A to its business customers is 'revenue neutral' from an ATO perspective.

● Entity A's business customer is the only party to the transaction with visibility as to when it becomes eligible for, and the quantum of, the deferred discount. As such, it makes commercial and practical sense that the business customer issues the adjustment note to Entity A for the deferred discounts.

● The adjustment note document issued by Entity A's business customers and relied upon by Entity A technically satisfies each of the requirements of a valid adjustment note, but for the party who issues the document.

● Entity A overall has an excellent compliance history and has been transparent with the ATO around its GST errors.

● The Commissioner has exercised his discretion to treat the documents historically issued by business customers to Entity A as valid adjustment notes for historical tax periods.

● The Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 (Cth) further highlights that the requirements of an adjustment note are not intended to impose a disproportionate burden upon taxpayers.

● Entity A satisfies each of the criteria set out in the decision tree in Law Administration Practice Statement PS LA 2004/11 The Commissioner's discretions to treat a particular document as a tax invoice or adjustment note (PSLA 2004/11) for the Commissioner's discretion to be exercised in respect of the “recipient created adjustment notes”.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 29-75(1)

Reasons for decision

Subsection 29-75(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

An adjustment note for an *adjustment that arises from an *adjustment event relating to a *taxable supply:

(a) must be issued by the supplier of the *taxable supply in the circumstances set out in subsection (2); and

(b) must set out the *ABN of the entity that issues it; and

(c) must contain such other information as the Commissioner determines in writing; and

(d) must be in the approved form.

However, the Commissioner may treat as an adjustment note a particular document that is not an adjustment note.

(*denotes a term defined in section 195-1 of the GST Act)

Paragraph 29-75(1)(a) requires that an adjustment note must be issued by the supplier of a taxable supply.

Entity A, as the supplier of alcoholic beverages, intends to enter into agreements with its business customers (recipients of the taxable supply) whereby it agrees to outsource the preparation and issuance of adjustment notes for its deferred discount arrangements to the business customers. By doing so, Entity A will incorporate these agreements as part of its standard trade terms and is therefore effectively issuing the adjustment notes. That is, the Commissioner accepts that Entity A is the issuer of the adjustment note for the purposes of paragraph 29-75(1)(a) of the GST Act even though the document is prepared and provided by the business customer.

Therefore, the documents prepared and provided by the business customers to Entity A under these agreements satisfy the requirements of paragraph 29-75(1)(a) of the GST Act and constitute an adjustment note where it meets the remaining requirements of section 29-75 of the GST Act.

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