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Edited version of your written advice
Authorisation Number: 1051257924394
Date of advice: 26 July 2017
Ruling
Subject: GST and an amount of money
Question
Is there a GST amount to be remitted on the money received?
Answer
No. There is no GST amount to be remitted on the money received.
This ruling applies for the following periods:
NA
The scheme commences on:
NA
Relevant facts and circumstances
An amount of money was owed to you by an entity.
The entity did not pay you the amount due.
You subsequently received the amount due from the guarantor.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 paragraphs 9-10(2)9 (e) & (g).
A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(4).
A New Tax System (Goods and Services Tax) Act 1999 section 40-5.
Reasons for decision
Goods and Services Tax Ruling GSTR 2006/1 explains how guarantees and indemnities are treated under the GST legislation.
In relation to the paragraphs quoted below the vendor is referred to as the principal, the purchaser as the creditor and the guarantor as the surety.
Paragraphs 20-21, 25 & 74-78 of GSTR 2006/1 have been reproduced below:
Guarantees and indemnities in GST
20. Under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), financial supplies are input taxed. The term financial supplies is defined in the GST regulations under Subdivision 40-A.
21. The table in sub-regulation 40-5.09(3) lists the interests which can be financial supplies when they are provided, acquired, or disposed of. Item 7 of the table specifies a guarantee. Item 7A specifies an indemnity that holds a person harmless from any loss as a result of a transaction the person enters with a third party.
25. Under a guarantee, there are two obligations: the primary and secondary obligation. The principal has the primary obligation to the creditor, the surety the secondary. In other words, the surety has no liability under the guarantee unless the principal defaults on the primary obligation.
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.
77. Following a payment by the surety under the guarantee or indemnity, the surety is entitled to payment from the principal under the underlying indemnity. This payment is also not consideration for the release of the principal from an obligation, nor for the surrender of the surety's rights. The payment discharges the principal's obligations under the contract or in accordance with the law. That is, there is no supply to the principal by the surety in consideration of the payment by the principal.
78. As is the case with a payment by the surety to the creditor under a guarantee or indemnity (see paragraph 76), the payment of money on the exercise by the surety of the right to be indemnified is also not a supply by the principal because of subsection 9-10(4) of the GST Act.
Consequently, the money received by the purchaser from the guarantor is not consideration for a taxable supply. No GST is to be remitted on the amount received.
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