Edited version of private advice

Authorisation Number: 1051727315301

Date of advice: 06 August 2020

Ruling

Subject: GST, adjustment and correction of an error

Question 1

Is the Company entitled to recover the under-claimed input tax credits (ITCs) by making a decreasing adjustment pursuant to Division 19 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The Company is not entitled to recover the under-claimed ITCs by making a decreasing adjustment pursuant to Division 19 of the GST Act.

The Court's decision, which held that the Company was not entitled to a rebate or discount and owed the debt to its supplier, means no adjustment event occurred for which a decreasing adjustment can be made under Division 19 of the GST Act.

Question 2

If the answer to Question 1 is 'No' and the ITCs are considered to be GST credit errors, is the Company entitled to go beyond the four-year time limit and correct the credit error in full, with reference to the Court's observations in Coles and Linfox?

Answer

No. The Company is not entitled to go beyond the four-year time limit and correct the credit errors in full. The Court's observations in Coles and Linfox about the four-year time limit have no particular relevance to the Company's circumstances because the Company has claimed the full ITCs on their acquisitions.

In Coles, the taxpayer did not claim fuel tax credits in any of the business activity statements they lodged. In Linfox, the taxpayer partially claimed fuel tax credits by taking into account the road user charge in the calculation of the amount of their claim.

In terms of the ITCs that the Company reversed for the Refund Period (which it did in the mistaken belief that it was entitled to a rebate or discount), the reversals were made in error.

(a)    For each of the tax periods that start prior to 1 July 2012, the Company is not entitled to correct the errors made because the Company's entitlement to a refund for each of those tax periods has ceased under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA)

(b)    For each of the tax periods from 1 July 2012 to 31 March 2016, the Company is not entitled to correct the errors made because the period of review for each of the tax periods has already expired

(c)    For each of the tax periods from 1 April 2016 to 30 September 2017, the Company may correct the errors made by requesting an amendment of the assessment for each of the tax periods.

However, the Company will need to also make an increasing adjustment under Division 21 of the GST Act to repay ITCs it has claimed on acquisitions because the debts are overdue for 12 months or more. Each of the increasing adjustments is attributable to the tax period in which the relevant debt remained unpaid after 12 months of the debt becoming due and payable.

Unless there is fraud or evasion by the Company in not making the increasing adjustments at the time they were required to be made, the application of the relevant four-year time limit means the increasing adjustments that are attributable to the tax periods from 1 July 2008 to 31 March 2016 do not need to be made.

Relevant facts and circumstances

·   The Company is registered for GST and accounts for GST on an accrual basis with a quarterly GST reporting period

·   For the period from 1 July 2008 to 30 September 2017 (the Refund Period), the Company:

·   made creditable acquisitions from a supplier and claimed full input tax credits on those acquisitions in the tax period in which the acquisitions were invoiced

·   subsequently reversed some of its claims on the basis that it was entitled to a rebate or discount on the acquisitions.

·   The supplier later sued the Company for the debts outstanding

·   The Court held that the Company was not entitled to a rebate or discount on the acquisitions.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 19-10

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

A New Tax System (Goods and Services Tax) Act 1999 section 29-20

Taxation Administration Act 1953 Schedule 1 section 105-50

Taxation Administration Act 1953 Schedule 1 section 105-55

Taxation Administration Act 1953 Schedule 1 section 155-35

Reasons for decision

All legislative references in this Reasons for Decision are to the A New Tax System (Goods and Services Tax) Act 1999, unless otherwise specified.

Question 1

Summary

The Company is not entitled to recover the under-claimed ITCs by making a decreasing adjustment pursuant to Division 19.

The Court's decision, which held that the Company was not entitled to a rebate or discount and owed the debt to its supplier, means no adjustment event occurred for which a decreasing adjustment can be made under Division 19 of the GST Act.

Detailed reasoning

Input tax credit on acquisitions

Section 11-20 provides that an entity is entitled to an input tax credit for any creditable acquisitions that it makes. The amount of the input tax credit is equal to the amount of the GST payable on the supply of the thing acquired but the amount of the input tax credit is reduced if the acquisition is only partly creditable.

Section 29-10 provides that, if an entity accounts on a non-cash basis, the input tax credit to which the entity is entitled for a creditable acquisition is attributable to:

(a)    the tax period in which the entity provides any of the consideration for the acquisition; or

(b)    if, before the entity provides any of the consideration, an invoice is issued relating to the acquisition - the tax period in which the invoice is issued.

Division 19

Subsection 19-10(1) provides that an adjustment event is any event which has the effect of:

·   cancelling a supply or an acquisition; or

·   changing the consideration for a supply or an acquisition; or

·   causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

Subsection 19-70(1) provides that an entity has an adjustment for an acquisition if:

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

(b)    an input tax credit on the acquisition was attributable to an earlier tax period; and

(c)    as a result of those adjustment events, the previously attributed input tax credit amount for the acquisition no longer correctly reflects the amount of the input tax credit on the acquisition.

The adjustment is:

·   an increasing adjustment if the previously attributed input tax credit amount is more than the corrected input tax credit amount (section 19-80)

·   a decreasing adjustment if the previously attributed input tax credit amount is less than the corrected input tax credit amount (section 19-85).

Goods and services tax ruling GSTR 2000/19 making adjustments under Division 19 for adjustment events explains the Commissioner's view on the operation of Division 19.

Paragraph 18 of GSTR 2000/19 states that there is an adjustment where the consideration for an acquisition changes for any reason. Whether a payment or allowance changes the consideration will depend on the circumstances. The same commercial term could be used to describe various types of arrangements which may be quite different in substance. The substance of the arrangement or event will determine whether it is an adjustment event.

Relevantly, GSTR 2000/19 provides that discounts and rebates are adjustment events:

·   Discounts - after a supply occurs, a discount may be granted for early payment. Discounts referred to as settlement discounts or prompt payment discounts are made for the purpose of encouraging early payment of an amount owing for a supply. Benefits to the supplier include early cash flow, certainty of payment at an earlier point and avoidance of collection costs. Although the discount is typically expressed as a percentage of the amount owing and is conditional on payment within a specified period, the discount is considered to be a change in consideration. [paragraph 20 of GSTR 2000/19]

This situation can be contrasted with a 'discount' offered in negotiating a price for an acquisition. In such a situation, the 'discount' is used to arrive at the consideration for the supply at the time the invoice is issued. As there is no change to the consideration, there is no adjustment event. [paragraph 21 of GSTR 2000/19]

·   Rebates - under their terms of trade, suppliers may pay rebates to customers who reach certain levels of purchases. The rebates are typically expressed as a percentage of the purchases made in a particular period. A payment of this type is regarded as a reduction in the consideration for the relevant purchases and so is an adjustment event. [paragraph 24 of GSTR 2000/19]

Application to your facts

The Company is not entitled to recover the under-claimed ITCs by making a decreasing adjustment pursuant to Division 19.

The Court's decision, which held that the Company was not entitled to a rebate or discount and owed the debt to its supplier, means that there was no change in the consideration for the acquisitions made by the Company and, as such, no adjustment event has occurred during a tax period and no adjustment under subsection 19-70(1) can arise.

Question 2

Summary

The Company is not entitled to go beyond the four-year time limit and correct the credit errors in full. The Court's observations in Coles and Linfox about the four-year time limit have no particular relevance to the Company's circumstances because the Company has claimed the full ITCs on their acquisitions.

In Coles, the taxpayer did not claim fuel tax credits in any of the business activity statements they lodged. In Linfox, the taxpayer partially claimed fuel tax credits by taking into account the road user charge in the calculation of the amount of their claim.

In terms of the increasing adjustments the Company made (which it did in the mistaken belief that it was entitled to a rebate or discount), the adjustments were made in error.

(a)    For each of the tax periods that start prior to 1 July 2012, the Company is not entitled to correct the errors made because the Company's entitlement to a refund for each of those tax periods has ceased under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA)

(b)    For each of the tax periods from 1 July 2012 to 31 March 2016, the Company is not entitled to correct the errors made because the period of review for each of the tax periods has already expired

(c)    For each of the tax periods from 1 April 2016 to 30 September 2017, the Company may correct the errors made by requesting an amendment of the assessment for each of the tax periods.

However, the Company needs to make increasing adjustments, under Division 21 of the GST Act, to repay ITCs it has claimed on acquisitions that remained unpaid for 12 months or more. Each of the increasing adjustments is attributable to the tax period in which the relevant debt remained unpaid after 12 months of the debt becoming due and payable.

Unless there is fraud or evasion by the Company in not making the increasing adjustments at the time they were required to be made, the application of the relevant four-year time limit means the increasing adjustments that are attributable to the tax periods from 1 July 2008 to 31 March 2016 do not need to be made.

Detailed reasoning

As discussed in the reasons under Question 1 above, the Court decision means there was no change in the consideration for the acquisitions made by the Company.

Therefore, the ITC reversals the Company made in the Refund Period were made in error because no adjustment event has occurred during a tax period for which the Company was entitled to make an adjustment under subsection 19-70(1).

Tax periods that start before 1 July 2012

Section 105-55 of Schedule 1 to the TAA provides that an entity is not entitled to a refund in relation a net amount in respect of a tax period unless, within 4 years after the end of the tax period, the entity notifies the Commissioner that it is entitled to the refund.

Miscellaneous Taxation Ruling MT 2009/1 sets out the Commissioner's views on what constitutes notification by an entity to the Commissioner under section 105-55 of Schedule 1 to the TAA.

Paragraph 11 of MT 2009/1 states that there is no specific form that is required for a notification for the purposes of section 105-55. However, the notification must be received on or before the fourth anniversary of the end of the relevant tax period. The notification must also identify and assert the entitlement such that it brings to the Commissioner's attention the refund, other payment or credit to which the entity claims entitlement. This requires that the notification puts the Commissioner on notice of the entitlement. If the notified entitlement is to be claimed at a later time, it needs to be possible to ascertain that the subsequent claim is covered by the notification.

There is no record the Company has given the Commissioner a notice of entitlement to a refund in respect of the ITC reversals the Company made for the tax periods from 1 July 2008 to 30 June 2012. Therefore, the errors can no longer be corrected because the Company's entitlement to a refund for this period has already ceased.

Tax periods that start on or after 1 July 2012

Subsection 155-15 of Schedule 1 to the TAA provides that the Commissioner is taken to have made an assessment of an entity's net amount for a tax period when the entity lodges a BAS for that period. The BAS is taken to be the notice of assessment given to the entity on the same day.

Section 155-35 of Schedule 1 to the TAA provides that the assessment may be amended during the period of review for the assessment. The period of review is the period:

·   starting on the day on which the Commissioner first gives the notice of assessment; and

·   ending on the last day of the period of 4 years starting the day after that day.

Once the period of review has expired, the assessment can no longer be amended unless the exception in sections 155-45, 155-50, 155-55, 155-60 or 155-70 of Schedule 1 to the TAA applies.

The second column in Table 1 sets out the date the Company lodged the BAS for each of the tax period starting on or after 1 July 2012. The period of review for the assessment of the net amount for the tax periods from 1 July 2012 to 31 March 2016 have now expired.

As such, those assessments can no longer be amended because none of the exceptions in Schedule 1 to the TAA applies to each of the assessments for the tax periods from 1 July 2012 to 31 March 2016.

Coles and Linfox decisions

The Coles[1] case concerned whether the taxpayer was entitled to fuel tax credits or decreasing fuel tax adjustments in respect of fuel that was lost through evaporation and/or leakage whilst held for retail sale, and if so, whether any such entitlements had ceased due to the time limit under section 47-5 of the Fuel Tax Act 2006 (FTA).

In its monthly fuel tax returns for the period from July 2012 to January 2014, Coles did not quantify fuel tax credits for fuel that was lost through evaporation or leakage at Coles Express stores nor did they quantify it in any of its subsequent fuel tax returns. However, in August 2016, Coles objected to the deemed assessments constituted by its fuel tax returns for these tax periods. In its objections, Coles claimed an entitlement to fuel tax credits for the fuel lost through evaporation and leakage during those tax periods. [paragraph 116 in [2019] FCA 1582)

It was not necessary for the Court to decide the time limit issue because the Court found that the taxpayer was not entitled to fuel tax credits on the basis that the fuel that was lost through evaporation and/or leakage was not 'used' in carrying on the taxpayer's enterprise for the purposes of the FTA.

While it was not necessary for the Court to decide the time limit issue, the Court made the following observations regarding the parties' submissions:

·   The Court would have rejected the taxpayer's submission that the relevant fuel tax credits in dispute had been 'taken into account in an assessment' within the four-year period referred to in section 47-5 of the FTA. The fuel tax credits at issue were not a relevant integer in calculating the taxpayer's net amount in its fuel tax returns for the relevant tax periods.

·   Otherwise, the Court found force in the taxpayer's submissions that section 47-5 of the FTA did not disentitle a taxpayer to fuel tax credits once a return had been assessed with a valid objection lodged against the related assessment.

The Linfox[2] case concerned whether the taxpayer was required to reduce its fuel tax credit by the road user charge (RUC), and if not, whether section 47-5 of the FTA would have operated to deny any entitlement to the fuel tax credits at issue outside of the four-year limitation period.

Broadly, under the FTA, taxpayers are (subject to exceptions) entitled to a fuel tax credit for taxable fuel that they acquire for use in carrying on their enterprise. However, that fuel tax credit is reduced by a RUC if the fuel is acquired to use for travelling on a public road.

In Linfox, the taxpayer's vehicles travelled, from time to time, on certain privately-operated toll roads. The vehicles also had cabin air-conditioning powered by the vehicle's main engine. The taxpayer claimed fuel tax credits less the RUC but argued that the RUC did not apply to fuel acquired to power cabin air conditioning and for travelling on privately-operated toll roads.

The Tribunal found that:

·   the RUC applied to fuel acquired to power cabin air conditioning and for travelling on privately-operated toll roads

·   section 47-5 of the FTA would not have operated to deny the taxpayer any increased fuel tax credit that would have occurred if the RUC did not apply. The Tribunal considered that, having applied the RUC to reduce the fuel tax credit claimed in its returns, the taxpayer had 'taken into account' the relevant fuel tax credits at issue in an assessment.

The Full Federal Court found no error in the Tribunal's decision. In particular, 'taken into account in an assessment' involves the ascertainment of the taxpayer's total fuel tax credits, which in turn includes the calculation by which the taxpayer's entitlement to credits is reduced by the amount of the RUC.

The Coles and Linfox decisions do not have particular relevance to the Company's circumstances. In Coles, the taxpayer did not claim fuel tax credits in any of the returns they lodged. In Linfox, the taxpayer claimed fuel tax credits less the RUC.

In contrast, the Company has claimed full ITCs for the acquisitions it made from ABCL. By having claimed the full ITCs, the time limit for entitlement under section 93-5 is no longer relevant. What is relevant is the time limit for entitlement to a refund (for tax periods before 1 July 2012) and the period of review (for tax periods from 1 July 2012).

Division 21

The input tax credit on a creditable acquisition is attributable to a particular tax period. For an entity that accounts on an accrual basis, this may be before any or all of the consideration is paid.

If an entity claimed an input tax credit before any or all of the consideration is paid and the whole or part of the debt is subsequently written off as bad by the supplier, or has been overdue for 12 months or more, the entity will have attributed the input tax credit but have not paid an amount equivalent to that input tax credit to the supplier.

Division 21 provides that, in the above circumstances, the entity has to make an increasing adjustment to reflect the correct amount of input tax credit.

Section 29-20 provides that the increasing adjustment is attributable to the tax period in which the entity becomes aware of the adjustment.

The GST Act does not provide any specific guidance in relation to when an entity becomes aware of an adjustment it has. However, in relation to adjustments which arise from an adjustment event, an entity becomes aware of the adjustment when it becomes aware the event has occurred. Generally, the time an entity becomes aware an event has occurred is when the event actually occurs. (ATO Interpretative Decision 2007/72)

This means that 'become aware' refers to when an entity has certain information or knows of a particular 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.

In your case, the Court held that the Company has a debt of $12.475 million to ABCL. As part of its usual practice, the Company claimed full ITCs on all of its acquisitions from ABCL including those that formed part of the $12.475 million that remains outstanding.

Pursuant to Division 21, the Company needs to make increasing adjustments to reduce its input tax credit claims. Each of the increasing adjustments is attributable to the tax period in which the relevant debt remained unpaid after 12 months of the debt becoming due and payable.

It should be noted that the amount of the increasing adjustments is not necessarily equal to each of the amounts listed in the third column of Table 1. This is because the amounts listed in the third column only refer to acquisitions which the Company mistakenly thought to be subject to a rebate / discount (being a total of $10,046,102 ($913,282 ITCs x 11)).

The amount of the Division 21 increasing adjustment is likely higher than the amount shown in the third column of Table 1 because the Court held that the total amount the Company owes ABCL is $12.475 million.

However, unless there is fraud or evasion by the Company in not making the adjustments at the time they were required to be made, the Company does not need to make the increasing adjustments that are attributable to the:

·   tax periods from 1 July 2008 to 30 June 2012 because the liability to pay the amount has ceased under section 105-50 of Schedule 1 to the TAA

·   tax periods from 1 July 2012 to 31 March 2016 because the period of review for each of those tax periods has already expired.

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