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Edited version of your written advice
Authorisation Number: 1051224658623
Date of advice: 14 July 2017
Ruling
Subject: GST and adjustments
Question 1
Does a receipt of an amount on termination of an agreement result in an adjustment for entity A, under Division 19 of The A New Tax System (Good and Services Tax) Act 1999 (GST Act), in relation to the original creditable acquisition made by the entity from entity B on entry into the agreement?
Answer
No, it does not result in an adjustment event under Division 19 of the GST Act.
Question 2
Is the payment of an amount, by entity B to entity B, on termination of the agreement, consideration for any taxable supply under section 9-5 of the GST Act made by entity A to entity B?
Answer
No, the payment of an amount by entity A on termination of the agreement is not consideration for any taxable supply made by entity A to entity B under section 9-5 of the GST Act.
Relevant facts and circumstances
Entity A is registered for GST.
Entity A enters into agreements with entity B to provide funding under the terms and conditions of that agreement.
Entry A into the agreement by entity B is a taxable supply (entry into obligations) by entity B, consideration for which is the entity A’s grant of funding to the entity B.
The funding provided by the entity A under the agreement can be either monetary or non-monetary.
Entity A provided the relevant agreement which detail the obligations of the parties under the agreement.
One of the terms of the agreement is that entity B needs to pay an amount to entity A under certain circumstances.
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 Division 19
A New Tax System (Goods and Services Tax) Act 1999 section 19-10
Reasons for decision
Question 1
Under Division 19 of the GST Act, an entity will have an adjustment where an adjustment event occurs in relation to the original supply or an acquisition. Division 19 of the GST Act defines an adjustment event as any event that has the effect of cancelling a supply or acquisition; changing the consideration for a supply or acquisition; or causing a supply or acquisition to become or stop being a taxable supply or a creditable acquisition.
Goods and Services Tax Ruling GSTR 2000/19 at paragraph 16 explains that:
16. The cancellation of a supply or an acquisition is an adjustment event. Generally, the return of a thing, or a part of it, to a supplier is an adjustment event (whether or not the return involves a change of ownership). If, on the facts, the return does not have the effect of cancelling the supply, it will not be an adjustment event. For example, the return of a thing for repair or maintenance is not an adjustment event. In the case of exchange of goods, where the exchange does not result in a cancellation of the supply or a change in the consideration, it will not be an adjustment event. This will depend on the facts and the contractual arrangements between the parties.
Relevant to this request is whether the termination of the agreement is an adjustment event that had the effect of cancelling a creditable acquisition made by the entity A from entity B.
On entry into the agreement with entity A, entity B agrees to the various terms and conditions under the agreement, consideration for which is the funding provided by entity A for entity B. Under the terms of the agreement if the agreement comes to an end a payment of an amount is triggered and becomes payable by entity B.
Relevant to this private ruling request, the agreement is terminated through either entity B breaching an obligation under the agreement or entity B wishing for the agreement to come to an end.
It is not considered that termination of the agreement between entity A and entity B results in an adjustment event in relation to the original supply made by entity B to entity A. That is, the termination of the agreement does not result in any event that has the effect of cancelling the original supply or changing the consideration for the original supply.
Question 2
Under the GST Act, an entity makes a taxable supply if the requirements of section 9-5 of the GST Act are met. One of those requirements is that the supply is made for consideration. For a supply to be for consideration there must be a sufficient nexus or connection between that supply and consideration received. Under sub-section 9-10(1) of the GST Act a supply is any form or supply whatsoever. Sub-sections 9-15(1) and (2) of the GST Act define consideration to include 'any payment, or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything’.
When the agreement is terminated, entity B makes a payment. This occurs regardless of whether the initial funding by entity A was monetary or non-monetary. However, payment of the amount only arises in situations where the entity B retains the non-monetary funding.
The payment of the amount is calculated in accordance with the terms of the agreement. Under the GST law, for such a payment to be consideration it needs to be in connection with, in response to or for the inducement of a supply of anything.
Where entity B makes a payment entity B, we do not consider that entity B makes a payment in connection with, in response to, or for the inducement of a supply of anything by entity A. By making a payment, entity B is merely fulfilling its obligations under the agreement. Once the payment is made the agreement comes to an end. Entity A does not do or supply anything in return for that payment.
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