Edited version of private advice

Authorisation Number: 1052059714822

Date of advice: 13 December 2022

Ruling

Subject: GST and financial support agreements

Question 1

Are you making an input taxed financial supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you enter into the Support Agreements?

Answer

Yes, you make an input taxed financial supply under section 40-5 of the GST Act of the provision of an interest in a derivative under table item 11 of subsection 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) under the Support Agreements.

You also make a second input taxed financial supply under section 40-5 of the GST Act, being an acquisition-supply (financial supply) of the acquisition of an interest in the Support Agreement from the Supplier.

Question 2

If you are making an input taxed financial supply when you enter into the Support Agreements, are the payments made to you under the Support Agreements further consideration for that input taxed financial supply under subparagraph 40-5.09(1)(a)(i) of the GST Regulations?

Answer

Yes, the payments made to you that are determined under the Support Agreements are further consideration for your input taxed financial supply of a provision of an interest in a derivative under subparagraph 40-5.09(1)(a)(i) of the GST Regulations.

Question 3

If you are making an input taxed financial supply when you enter into the Support Agreements, are the additional payments made by you to the Supplier further consideration for that input taxed financial supply under subparagraph 40-5.09(1)(a)(i) of the GST Regulations?

Answer

Yes, as the additional payments you make are further consideration for the Supplier's input taxed financial supply of the provision of an interest in a derivative to you, the additional payments are also consideration for your acquisition-supply of the acquisition of that interest in a derivative from the Supplier.

Question 4

Pursuant to the Support Agreements, are you making a creditable acquisition of intangible products under section 11-5 of the GST Act, and, if so, are you entitled to the full input tax credit under section 11-25 in respect of the GST payable on the supply of the intangible products to you?

Answer

Yes, you are making a creditable acquisition of intangible products under section 11-5 of the GST Act, and you are entitled to the full input tax credit under section 11-25 in respect of the GST payable on the supply of the intangible products to you, as the acquisition is fully creditable.

However, this is modified to the extent that the following apply:

Taxation Administration Act 1953 subsection 357-60(3) of Schedule 1

A New Tax System (Goods and Services Tax) Act 1999 Division 93

A New Tax System (Goods and Services Tax) Act 1999 Division 142

Question 5

If you are making a creditable acquisition of intangible products, and you hold a tax invoice when you lodge your GST return for the relevant tax period but an invoice has not yet been issued, is the input tax credit attributable entirely to the relevant tax period in which the Support Agreements are executed under section 29-10 of the GST Act?

Answer

No, under section 29-10 of the GST Act, where an invoice has not been issued, the input tax credit is attributable entirely to the relevant tax period in which the conditions precedent are either satisfied or waived under the Support Agreements.

Question 6

If liquidated damages are paid to you under the Support Agreements, are those payments consideration for any taxable supply made by you under section 9-5 of the GST Act?

Answer

If payments of liquidated damages are made to you from the Supplier, those payments are not consideration for any taxable supply made by you to the Supplier under section 9-5 of the GST Act.

Question 7

If liquidated damages are paid to you under the Support Agreements, would that give rise to you having an adjustment event under section 19-10 of the GST Act?

Answer

No, as the payment of liquidated damages made to you from the Supplier is not consideration for any taxable supply made by you, it would not give rise to you having an adjustment event under section 19-10 of the GST Act.

This ruling applies for the following period:

DD MM YYYY to the occurrence of a specified event.

Relevant facts and circumstances

You have entered into separate financial support agreements with several other entities.

Under the terms of each financial support agreement there is a transfer of mutual obligations between you and each other entity. You have an obligation to pay each other entity a sum of money if certain conditions are met. Each other entity has a corresponding obligation to pay you a sum of money if certain opposing conditions are met.

Each other entity is additionally required to supply specified intangible products to you under the terms of each financial support agreement. In the event an entity fails to supply the specified intangible products to you, the entity become liable to pay liquidated damages to you under the terms of the relevant financial support agreement.

You are registered for goods and services tax (GST). Each other entity is also registered for GST.

You account for GST on a non-cash (accruals) basis.

You provided us with a template financial support agreement in support of your private ruling application.

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 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-25

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

A New Tax System (Goods and Services Tax) Act 1999 section 29-10

A New Tax System (Goods and Services Tax) Act 1999 section 40-5

A New Tax System (Goods and Services Tax) Regulations 2019 section 40-5.09

Reasons for decision

Question 1

Under section 9-5 of the GST Act, a supply is not a taxable supply to the extent that it is input taxed. Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that financial supply has the meaning given by the GST Regulations.

Section 40-5.09 of the GST Regulations sets out supplies that are financial supplies. A supply is a financial supply if there is the provision, acquisition or disposal of an interest mentioned in subsection 40-5.09(3), and the other requirements of paragraphs 40-5.09(1)(a) and (b) of the GST Regulations are satisfied.

Table item 11 of subsection 40-5.09(3) of the GST Regulations lists an interest in or under a derivative as an interest that can give rise to a financial supply. A derivative is defined in the dictionary of the GST Regulations to mean 'an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate'.

In the context of supplies you may make under the Support Agreements, you meet the requirements in subsection 40-5.09(1) of the GST Regulations as they are made for consideration, in the course or furtherance of an enterprise, and are connected with Australia. You are registered for GST. There are no factual elements that would give rise to GST-free supplies under Division 38 of the GST Act.

It remains to be determined whether the supplies for consideration made by you under the Support Agreement are of an interest in a derivative, and whether you are a financial supply provider under subparagraph 40-5.09(1)(b)(ii) of the GST Regulations.

Both you and the Supplier each make a supply of the provision of an interest in a derivative to the other party. You both provide non-monetary consideration to the other party in the form of an interest under the derivative. The additional payments which may be payable by either party are additional consideration for the supply of the interest under the Support Agreement. Each party to the Agreement provides an interest in a derivative to the other - you and the Supplier are both financial supply providers in relation to the supply of the interest under subparagraph 40-5.09(1)(b)(ii) of the GST Regulations.

All the requirements in section 40-5.09 of the GST Regulations are satisfied. Under the Support Agreement you make an input taxed financial supply of the provision of an interest in a derivative, and the consideration for that supply is:

•                     the Supplier making an input taxed financial supply to you of the provision of an interest in a derivative under the Support Agreements;

•                     any payments made by the Supplier to you under the Support Agreements (see Question 2); and

•                     a supply of the transfer of intangible products to you (see Question 4).

You also make a second financial supply, an input taxed acquisition-supply, when you acquire the interest in the Support Agreements from the Supplier.

The financial supply of the derivative by you is not overridden by section 40-5.12 of the GST Regulations, which excludes 'deliverable' derivatives from being financial supplies.

Question 2

As discussed in Question 1, the payments made to you under the Support Agreements are additional monetary consideration under subparagraph 40-5.09(1)(a)(i) of the GST Regulations for the input taxed financial supply of the provision of the interest in the derivative by you to the Supplier.

Question 3

As set out in paragraphs 33-35 of Goods and Services Tax Ruling 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2), a single transaction between two parties can involve two financial supplies - the provision or disposal of an interest for consideration by one entity, and the acquisition of that interest by the other entity for consideration. Provided that the provision or disposal of an interest has been made 'for consideration,' the acquisition-supply made by the recipient will also be 'for consideration' - there is no need to identify a separate second amount of consideration for the acquisition-supply.

The additional payments made by you to the Supplier will be consideration for your acquisition-supply, if the payments are consideration for the provision of the interest in the derivative made by the Supplier.

The additional payments made under the Support Agreement are monetary consideration paid by you for the Supplier's supply of the interest in the derivative. In turn, this means that the additional payments are also consideration for your acquisition-supply of the derivative from the Supplier.

Question 4

Under section 11-5 of the GST Act, there are four requirements that must be met to make a creditable acquisition:

(a)          you acquire anything solely or partly for a creditable purpose; and

(b)          the supply of the thing to you is a taxable supply; and

(c)           you provide, or are liable to provide, consideration for the supply; and

(d)          you are registered, or required to be registered.

The first requirement to address is paragraph 11-5(b) of the GST Act, and whether the supply of the intangible products is a taxable supply made by the Supplier to you. It is assumed that all of the other requirements in section 9-5 of the GST Act are met by the Supplier, and whether the transfer of the intangible products to you is a supply for consideration is all that remains to be determined.

Under the Support Agreement, the Supplier is required to transfer intangible products to you.

While the derivative is in itself a financial supply made by each party, it is evident from the Support Agreement that while each party entered into obligations under the Agreement in exchange for the other party's corresponding obligations under the Agreement, you additionally required that intangible products be supplied to you.

The supply of intangible products by the Supplier is further non-monetary consideration for your financial supply of the derivative, in addition to the Supplier's supply of the derivative to you (see paragraph 16 of Goods and Services Tax Ruling 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6)).

Conversely, the Supplier makes a supply of the intangible products to you and the consideration for that supply is part of your input taxed financial supply of the derivative as well as the amounts payable as an additional GST amount under the Support Agreement.

The consideration for the supply of intangible products is only 'part' of the derivative you supply, as it's provided to the Supplier as consideration for two supplies and will need to be apportioned between those two supplies - as one supply is taxable (intangible products), and the other supply is input taxed (Supplier's supply of a derivative). See paragraph 135 of GSTR 2001/6.

As addressed in Question 3, any additional amounts payable by you is solely consideration for the Supplier's supply of the derivative and is not consideration for the supply of the intangible products.

The supply for consideration by the Supplier is the transfer of the intangible products by the Supplier to you, rather than the contractual obligation to transfer those rights upon entry into the Agreement. The consideration is 'for' the performance of the obligations (transfer of the intangible products), rather than the entry into the obligation to transfer. This is evident from the requirement to supply substitute intangible products if the Supplier does not transfer intangible products that it has created, and the requirement to pay liquidated damages for a yearly shortfall in intangible products. The fact that the quantum of the intangible products to be transferred is unknown upon entry into the Agreement does not mean that the relevant supply is the transfer obligation rather than the actual transfer of the intangible products.

Creditable purpose

The next requirement is whether you acquire the intangible products solely or partly for a creditable purpose under paragraph 11-5(a) of the GST Act. You have acquired the intangible products in carrying on your enterprise and subsection 11-15(1) is satisfied. Paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies that would be input taxed, by precluding an acquisition from being for a creditable purpose to the extent that it relates to the making of supplies that would be input taxed. Determining whether there is a relevant connection between an acquisition and the making of supplies that would be input taxed requires an objective assessment of the surrounding facts and circumstances to determine whether the acquisition is intended to be used in making those supplies (see paragraph 119 of Goods and Services Tax Ruling 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1)).

Your acquisition of the intangible products is solely for a creditable purpose and paragraph 11-5(a) of the GST Act is satisfied.

Paragraph 11-5(c) of the GST Act is met as you provide consideration for the supply of intangible products as you are making the input taxed financial supply of the derivative to the Supplier. You are registered for GST, so paragraph 11-5(d) of the GST Act is satisfied.

As you meet all the requirements in section 11-5 of the GST Act, you are making a creditable acquisition of intangible products under the Agreements.

Entitlement to input tax credits

You will be entitled to full input tax credits equal to the GST payable by the Supplier under section 11-25 of the GST Act for your creditable acquisition of intangible products, unless your acquisition of intangible products is partly creditable under section 11-30. As concluded above, your creditable acquisition of intangible products is solely for a creditable purpose under section 11-15 of the GST Act, and you provide all the consideration by making the financial supply of the derivative. Section 11-30 of the GST Act doesn't apply, and you are entitled to full input tax credits equal to the GST payable by the Supplier.

Question 5

As you account for GST on a non-cash (accruals) basis, subsection 29-10(1) of the GST Act provides that the input tax credit to which you are entitled for your creditable acquisition of intangible products is attributable to the earlier of the tax periods in which:

(a)          you provide any of the consideration for the acquisition; or

(b)          an invoice is issued for the acquisition.

As addressed in Question 4, your entry into the Support Agreement is partly non-monetary consideration for your creditable acquisition of intangible products. As an invoice has not been issued for the acquisition, attribution will be triggered when you enter into the Support Agreement.

The Commissioner explains at paragraph 197 of GSTR 2001/6 that:

197. Where consideration is entry into, or release from an obligation, the consideration is both received and provided when the obligation is entered into or the release is effected. The question of what is the act that effects entry into, or release from an obligation, is again one of fact.

Under the terms of the Agreement, the act that effects your entry into the Support Agreement is the completion or waiver of the conditions precedent.

As a result, the input tax credit to which you are entitled for your creditable acquisition of intangible products is entirely attributable to the tax period in which the conditions precedent are either satisfied or waived under the terms of the Agreement, provided that you hold a tax invoice for the creditable acquisition at the time you lodge your GST return for the relevant tax period (subsection 29-10(3) of the GST Act).

Question 6

Under section 9-5 of the GST Act, a supply is a taxable supply if, among other things, the supply is made for consideration.

Consideration is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15 and 9-17, in connection with the supply...'

Section 9-15 of the GST Act extends the meaning of consideration beyond payments to also include such things as acts and forbearances. Reference to a 'payment' hereafter includes a reference to an act or forbearance. Consideration may include payments made voluntarily and payments made by persons other than the recipient of the supply. Section 9-15 of the GST Act further provides that a payment will be consideration for a supply if the payment is 'in connection with,' 'in response to,' or 'for the inducement' of a supply.

Thus, there must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

It follows that for there to be a supply for consideration, three fundamental criteria must be satisfied:

(a)         there must be a supply;

(b)         there must be a payment; and

(c)          there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

Supply is defined by section 9-10 of the GST Act as:

(1)         any form of supply, whatsoever.

(2)         Without limiting subsection (1), supply includes any of these:

...

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation...

In Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4), the Commissioner explains how a payment that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of the GST Act.

In GSTR 2001/4, an agreement between the parties is referred to as an out of court settlement. This includes any form of dispute resolution in which the terms of the resolution are agreed between the parties rather than imposed by the court (paragraph 13 of GSTR 2001/4).

As explained in paragraph 17 of GSTR 2001/4, the GST consequences of a court order or out-of-court settlement will depend on a number of matters including whether a payment made under the order or settlement constitutes consideration for a supply, and, if so, whether the supply is in the nature of a taxable, input taxed, or GST-free supply.

Paragraphs 45 to 50 of GSTR 2001/4 identify three types of supply in relation to out-of-court settlements, being earlier supplies, current supplies, and supplies related to discontinuance of action.

Where a sufficient nexus is established between a settlement payment and a supply in relation to an out of court settlement, the payment is consideration for that supply.

Paragraph 71 of GSTR 2001/4 explains that disputes often arise over incidents that do not relate to a supply. Examples of such cases include claims for damages arising out of termination or breach of contract.

Paragraph 73 of GSTR 2001/4 explains that the most common form of remedy is a claim for damages arising out of the termination or breach of a contract. This damage, loss, or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

In this case, under the terms of the Agreement, the parties have agreed that the Supplier will pay various types of liquidated damages to you in particular circumstances.

Each of these liquidated damages payments are required to be paid to you by the Supplier where the Supplier is in breach of particular clauses in the contract. The payments are intended to compensate you for the loss and damage suffered as a result of the breaches by the Supplier. In line with the principles in GSTR 2001/4, the various types of liquidated damages that may become payable to you are akin to damages and are not in return for any supply you make to the Supplier.

Consequently, the liquidated damages payments will not be consideration for any taxable supply made by you to the Supplier under section 9-5 of the GST Act.

Question 7

Under section 19-40 of the GST Act, you have an adjustment for a supply if:

•                     one or more adjustment events in relation to the supply occur during a tax period;

•                     GST on the supply was attributable to an earlier tax period (or, if the supply was not a taxable supply, would have been attributable to an earlier tax period had the supply been a taxable supply); and

•                     the event has caused the previously attributed GST amount for the supply to differ from the corrected GST amount.

Under subsection 19-10(1) of the GST Act, an adjustment event is any event which has the effect of:

•                     cancelling a supply or an acquisition;

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

•                     ausing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

In this case, and in accordance with paragraph 132 of GSTR 2001/4, since the payments are not consideration for a supply, no adjustment action is required in respect of the liquidated damages. That is, if liquidated damages are paid to you under the Agreements, these will not give rise to you having an adjustment event under section 19-10 of the GST Act.

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