Edited version of private advice

Authorisation Number: 1051539383984

Date of advice: 4 July 2019

Ruling

Subject: (GST) and increasing adjustments for acquisitions

Question

Does the partnership (Partnership) have an increasing adjustment under either section 19-80 or 21-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to acquisitions of by the partnership from a supplier (Supplier)?

Answer

Yes, the Partnership has an increasing adjustment under section 19-80 of the GST Act in relation to acquisitions of services form the Supplier.

Relevant facts and circumstances

The Partnership carried on an enterprise which involved land development.

The Partnership is currently registered for goods and services tax (GST) and reports GST in quarterly tax periods on a non-cash (accruals) basis.

A dispute arose between the partners of the Partnership (Dispute).

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 section 19-80

The A New Tax System (Goods and Services Tax) Act 1999 section 21-15

Taxation Administration Act 1953 Schedule 1 subsection 155-35(1) and (2)

Reasons for decision

Section 11-20 of the GST Act provides that you are entitled to ITCs for creditable acquisitions. You make a creditable acquisition under section 11-5 of the GST Act if amongst other things, you provide or are liable to provide consideration for the supply of the thing acquired.

Attributing ITCs for creditable acquisition

Subsection 29-10(1) of the GST Act provides that if an entity accounts on a non-cash basis, an ITC in relation to a creditable acquisition is attributable to:

·                 the tax period in which you provide any of the consideration for the acquisition or

·                 if before you provide any of the consideration, an invoice is issued relating to the acquisition - the tax period in which the invoice is issued

The term 'invoice' is defined in section 195-1 of the GS Act to mean a document notifying of an obligation to make a payment.

However, the recipient of a supply cannot attribute an ITC unless it holds a tax invoice for the creditable acquisition at the time it gives a GST return to the Commissioner (subsection 29-10(3) of the GST Act).

Conversely under subsection 29-5 of the GST Act the GST payable by an entity who accounts on a non-cash basis on a taxable supply is attributable to:

·                 the tax period in which any of the consideration is received to the supply or

·                 if, before any of the consideration is received, an invoice is issued relating to the supply - the tax period in which the invoice is issued.

Increasing adjustment under Division 21 Bad debts

Division 21 of the GST Act provides rules for adjustments to the GST payable or input tax credits allowed, where bad debts are written off or debts are overdue after 12 months.

Section 21-15 of the GST Act relevantly provides that an entity that accounts on non-cash basis has an increasing adjustment:

·                 if it made a creditable acquisition for consideration, and

·                 the whole or part of the consideration is overdue, but you have not provided the consideration overdue, and

·                 the supplier of the thing you acquired writes off as bad the whole or part of the debt or the whole or a part of the debt has been overdue for 12 months or more.

The amount of the increasing adjustment is 1/11 of the amount written off, or 1/11 of the amount that has been overdue for 12 months or more as the case requires.

A debt is 'overdue' if there has been a failure to discharge the debt, and that failure is a breach of the debtor's obligations in relation to the debt (section 195-1 of the GST Act).

On the facts provided, the Partnership accounts for GST in other than a cash basis and the Partnership made creditable acquisitions of taxable supplies of services. The Partnership claimed ITCs in relation to those acquisitions of services notwithstanding that it did not pay the consideration for the services after 12 months after the invoices were issued and the payment was said to be overdue.

A due date for payment of an invoice can be established in a number of ways. One common way is by nominating a due date for payment on the invoice. Another could be a long term course of conduct between the same contracting entities. Yet another way can be an express term of a contract which requires payment of claims or milestones within a specified period.

Importantly there must be clear and unequivocal evidence of an actual due date for payment before it can be said that a payment is overdue. In this case you have not provided any evidence of an actual due date for payment of the invoice. A mere assertion without any evidence is insufficient to allow the invoices and corresponding consideration to be treated has having become overdue for the purposes of the GST Act.

For there to be a breach of an obligation there has to be an obligation to pay within a certain time. In the absence of a proven due date for payment it is not possible to say that there is a breach of an obligation to pay. On that basis the invoices although outstanding are not overdue for the purposes of the GST Act. An essential element to apply subsection 21-15(1) of the GST Act is that the consideration is overdue. As the facts indicate that element was not satisfied and any adjustment is not to be made under subsection 21-15(1) of the GST Act.

Increasing adjustment under Division 19 - Adjustment events

Under subsection 19-10(2) of the GST Act there is an adjustment event when there is a change in the extent to which an entity that makes an acquisition provides, or is liable to provide, consideration for the acquisition.

Under subsection 19-70(1) of the GST Act you have an adjustment for an acquisition for which you are entitled to an ITC (or would have been entitled to an ITC if the acquisition were a creditable acquisition) if:

(a)   in relation to the acquisition, one or more adjustment events occur during a tax period; and

(b)   an ITC on the acquisition was attributable to an earlier tax period ...

(c)   as a result of those adjustment events, the previously attributed ITC amount for the acquisition (if any) no longer correctly reflects the amount of the ITC (if any) on the acquisition (the corrected ITC amount).

Section 19-80 of the GST Act provides that if the previously attributable ITC amount is greater than the corrected ITC amount, you have an increasing adjustment equal to the difference between the previously attributed ITC amount and the corrected ITC amount.

Everything takes effect on execution of the Deed. As at the date the Deed was settled you had not provided nor were you liable to provide consideration for the supply of services and the acquisitions you made ceased to be creditable acquisitions.

Goods and Service Tax Ruling GSTR 2000/19 explains the Commissioner's view on the operation of Division 19 of the GST Act. Paragraph 91 of GSTR 2000/19 explains that an adjustment will arise, in relation to an acquisition, where an adjustment event has caused the previously attributed ITC amount to differ from the corrected ITC amount. You need to work out the two amounts and then compare them to determine if an adjustment arises because of the adjustment event.

In your circumstances an adjustment event, as contemplated by subsections 19-10(1) and 19-10(2) of the GST Act, occurred in that the effect of the Deed and the Agreement was to extinguish The Partnership's liability to pay for its services causing the acquisition of services to stop being creditable acquisitions.

An adjustment under subsection 19-70(1) of the GST Act arose in relation to the acquisition of services by the Partnership as there was an adjustment event. That adjustment is an increasing adjustment under section 19-80 of the GST Act because the previously attributed ITC amount is greater than the corrected ITC amount.

When do you attribute an adjustment?

Subsection 29-20(1) of the GST Act provides that an adjustment that you have is attributable to the tax period in which you become aware of the adjustment.

The word 'adjustment' in subsection 29-20(1) of the GST Act is defined in section 195-1 of the GST Act to mean an increasing or a decreasing adjustment. The term 'increasing adjustment' is defined to include an amount arising under, one of the provisions listed in the table in the definition including amongst others, section 19-80 of the GST Act (Item 2).

In the context of section19-80 of the GST Act you 'become aware of the adjustment' when you have all the information necessary to satisfy the requirements of section 19-80 of the GST Act.

The meaning of 'you become aware of the adjustment' starts and ends with the text of the provision, but the statutory text must be considered in its context - FCT v Consolidated Media Holdings Ltd [2012] HCA 55 at [39]. The term 'become aware' is not defined and takes its ordinary meaning, subject to its context and the applicable rules of interpretation. The Macquarie Dictionary defines 'aware' as 'cognisant or conscious'.

The attribution rules for supplies and acquisitions depend on consideration and invoices - see sections 29-5 and 29-10 of the GST Act. The operation of these provisions depends on when in point of time the entity concerned gets actual knowledge of the particular fact, thing or event. It does not depend on when the entity may turn its mind to precisely how the attribution provision in question operates on that knowledge once gained. It follows that generally, 'become aware' will refer to when an entity has certain information or knows of a particular thing or event, not when that entity applies a particular adjustment provision to such information.

On the date of the execution of the Deed the parties became relevantly aware that all claims and cross claims including between the related entities were extinguished so that the invoices were no longer payable, and an appropriate increasing adjustment needed to be made by the Partnership in the BAS statement for the quarterly tax period in which the Deed was executed. This was the point of time when the Partnership and the entities concerned got actual knowledge of the particular fact, thing or event and became aware of the adjustment for the purposes of subsection 29-20(1) of the GST Act.

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