House of Representatives

A New Tax System (Goods and Services Tax) Bill 1998

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

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

CHAPTER 3 - CENTRAL CONCEPTS

This chapter tells you the central concepts of the GST. It explains:

·
what supplies and importations are generally taxable;
·
what acquisitions and importations are generally creditable;
·
generally how to work out the amount of tax and input tax credit; and
·
generally what adjustments are and how they are made.

Chapter Summary

Taxable supplies GST is payable by you on your taxable supplies. See 3.4.
Amount of tax on taxable supplies The amount of GST on a taxable supply is the value of that supply multiplied by the rate of GST. See 3.13.
Creditable acquisitions You are entitled to credits for your creditable acquisitions. See 3.19.
Amount of credit on creditable acquisitions The amount of input tax credit on a creditable acquisition is the amount of GST on the supply to you multiplied by the extent of creditable purpose. See 3.30.
Taxable importations GST is payable by you on your taxable importations. See 3.42.
Creditable importations You are entitled to input tax credits for your creditable importations. See 3.55.
Amount of tax on taxable importations The amount of GST on a taxable importation is the value of that importation multiplied by the rate of GST. See 3.52.
Amount of credit on creditable importations The amount of input tax credit on a creditable importation is the amount of GST on that importation multiplied by the extent of creditable purpose. See 3.61
Adjustments Adjustments are necessary if the consideration for a supply or acquisition changes due to an adjustment event, or if you write off a bad debt. See 3.70.

Central concepts

3.1 GST is payable in relation to certain supplies and importations. Input tax credits for GST paid are available in relation to certain acquisitions and imports. Division 7 of the Bill sets out the central provisions for deciding whether you must pay GST and whether you are entitled to input tax credits. Division 7 provides that GST is payable on taxable supplies. Some of the concepts that are relevant to deciding if a supply you make is a taxable supply are contained in other Divisions such as Division 9 .

3.2 Likewise, Division 7 provides that input tax credits for acquisitions arise in relation to creditable acquisitions and Division 11 contains some of the concepts relevant to deciding if an acquisition is creditable.

3.3 There are some situations that do not fit the central concepts. Such situations are dealt with in the special rules in Chapter 4 of the Bill. The special rules generally alter some of the central concepts in relation to particular supplies and acquisitions.

GST on supplies

3.4 GST is payable on supplies that are taxable supplies -- subsection 7-1(1) . If you make a taxable supply you must pay GST on the taxable supply -- section 9-40 . How GST is paid is discussed under net amount at 4.1.

Taxable supplies

3.5 You make a taxable supply if:

·
you make a supply for consideration (see 3.9);
·
you make the supply in the course or furtherance of an enterprise that you carry on (see 2.2 and 3.10);
·
the supply is connected with Australia (see 3.11); and
·
you are registered or required to be registered (see 2.6).

Section 9-5.

If the supply meets these criteria but is partly GST-free or partly input taxed , or both, the supply is a taxable supply to the extent that it is not GST-free or input taxed. Section 9-5 .

Supplies

3.6 A supply is any form of supply whatsoever -- subsection 9-10(1) . This is defined broadly and is intended to encompass supplies as widely as possible. Subsection 9-10(2) of the Bill provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in subsection 9-10(1) .

Money

3.7 Money that is provided as consideration (payment) for a supply is not in itself a supply -- subsection 9-10(2) . Otherwise money supplied as payment for a supply could be a taxable supply in itself. Money is defined in the Dictionary .

Illegal supplies

3.8 Even if a supply is not lawful it is a supply for GST if it meets all the relevant criteria -- subsection 9-10(3) .

Consideration

3.9 Section 9-15 defines consideration . Consideration for GST is broader than it is for contractual purposes. Consideration for GST is intended to be very broad and includes any:

·
payments, acts, refraining from acting or forbearance that are made for a supply;
·
payments, acts, refraining from acting or forbearance that are made in response to a supply;
·
payments, acts, refraining from acting or forbearance that are made to induce a supply; and
·
payment for a supply even if paid by a person other than the recipient of the supply.

The supply of a right or option will be taxed when it is supplied. The later exercise of that right or option will be another supply. That later supply will not be taxable unless there is further consideration when the right or option is exercised. Subsection 9-15(3) .

Example Brian buys a book voucher for his mum for Christmas. He pays $55 including GST. When his mum later uses the voucher she buys $66 worth of books, including GST. GST is included in the extra $11 she pays, but no extra GST is included in the $55.

In the course or furtherance of your enterprise

3.10 In the course or furtherance is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. In the course or furtherance does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991)
13 NZTC 3361 .

In connection with Australia

3.11 Section 9-25 provides generally for what supplies are made in connection with Australia. Australia excludes any external Territory but includes installations such as oil rigs -- section 195-1 . There are three categories of supplies:

·
supplies of goods;
·
supplies of real property; and
·
supplies of things other than goods or real property.

When supplies of goods are connect with Australia

When supplies of real property are connected with Australia

When supplies of anything other than goods or real property are connected with Australia

Summary

3.12 The following diagram summarises the central concepts of GST on supplies.

GST on supplies

Amount of GST on taxable supplies

3.13 Section 9-70 provides that the amount of GST on a taxable supply is the value of the taxable supply multiplied by 10%. 10% is the rate of GST.

Value of taxable supplies

3.14 The value of a taxable supply is determined using the formula in section 9-75 . With a GST rate of 10% the value of a taxable supply is 10/11 of the price paid for the supply.

Price

3.15 The price paid for a taxable supply always includes the GST. The price is the amount of money paid for the supply. If the consideration for the supply is not in money, or not only in money, the price is the sum of the amount of money, if any, and the tax inclusive market value of the non-money part of the consideration -- section 9-75 . Tax inclusive market value is defined in the Dictionary to include the amount of GST payable on the supply.

Example Denis buys a computer for his business. The supply of the computer to him was a taxable supply. He wants to work out how much GST was included in the price of the computer. He paid $3,300 for the computer. Assume a rate of GST of 10%. The value of the taxable supply of the computer is 10/11 of $3,300. This is $3,000. The GST on the taxable supply is 10% of $3,000. This is $300.

Tax fraction

3.16 A shortcut to working out how much GST was included in the price paid for a taxable supply is to combine the formula for value with the formula for the amount of GST as follows:

GST = value X rate
value = price X 100%/100%+rate

Putting these two formulae together:

GST = price X 100%/100% + rate X rate
GST + price X (100% X rate)/(100% X rate)

The rate of GST is 10%. Therefore:

GST = price X (100% X 10%)/(100% X 10%)
GST = price x 1/11

3.17 So, in the above example Denis could have worked out the amount of GST that was included in the price of his computer by multiplying $3,300 by 1/11. Doing so produces the same result, that is, $3,300 x 1/11 equals $300. This is the tax fraction method of working out the GST on a taxable supply. This method can also be used to work out the input tax credit for a creditable acquisition.

Value of partly taxable, partly GST-free or input taxed supplies

3.18 The value of a supply that is partly taxable and partly GST-free or input taxed is worked out using section 9-80 . You work out the value of the whole supply as if it were wholly a taxable supply, that is, its value is 10/11 of the price of the whole supply. You then work out the proportion the taxable part of the supply is of the whole supply. Multiply that proportion by the value of the whole supply.

Example Troy undertakes a six month distance education course offered by the University of Higher Degrees as part of gaining his qualifications as an accountant. Assume that the fees for the course are GST-free under Subdivision 38-B . The course includes three residential weekends at one of the Universitys residential colleges. The University includes the meals and accommodation for the residential weekends in the all-inclusive course fee of $5,500. The supply of meals is generally a taxable supply. The University must determine the GST liability for the supply of the course by apportioning the all inclusive fee between the meals (taxable) and the tuition (GST-free).The value of the whole supply is 10/11 of $5,500, which is $5,000.The meals and accommodation represent 10% of this value. The value of the meals and accommodation is 10% of $5,000, which is $500. The GST on that value is $50. The University charges $50 GST on the whole supply. That is, the all-inclusive course fee is made up of the following amounts: $500 for meals and accommodation + $50 GST + $4,950 for the GST-free education component.

Input tax credits on acquisitions

3.19 Entitlements to input tax credits arise on creditable acquisitions -- subsection 7-1(2) . If you make a creditable acquisition you are entitled to an input tax credit -- section 11-20 . How input tax credits are paid to you is discussed under net amount at 4.1.

Creditable acquisitions

3.20 You make a creditable acquisition if:

·
you made the acquisition solely or partly for a creditable purpose (see 3.23);
·
the supply of the thing to you was a taxable supply (see 3.27);
·
you provide or are liable to provide the consideration for the acquisition (see 3.9); and
·
you are registered or required to be registered (see 2.6).

Section 11-5

Acquisitions

3.21 An acquisition is any form of acquisition whatsoever -- subsection 11-10(1) . This is defined broadly and is intended to encompass acquisitions as widely as possible. Subsection 11-10(2) provides a list of things that are included as acquisitions. It is not an exhaustive list. It does not limit the possible breadth of the definition of acquisition in subsection 11-10(1) .

Money

3.22 Money that is provided as consideration (payment) for an acquisition is not in itself an acquisition -- subsection 11-10(2) . Otherwise money provided as payment for an acquisition could be a creditable acquisition in itself. Money is defined in the Dictionary .

Creditable purpose

3.23 Section 11-15 provides that if you acquire a thing in carrying on your enterprise you acquire it for a creditable purpose. However, if the acquisition:

·
is partly of a private or domestic nature; or
·
relates to making input taxed supplies;

you acquire it for a creditable purpose except to the extent the acquisition is of a private or domestic nature or relates to making input taxed supplies.

3.24 Input tax credits are intended to offset the GST included in the price you paid for an acquisition if the acquisition is for use in your enterprise. If you are going to use a thing in your enterprise, for example by selling it on to someone else, GST will be included in that sale. Therefore, to avoid double taxing that thing, you receive a credit for the GST included in the price you paid for the thing. You therefore have a creditable purpose if you acquire a thing for the purpose of your enterprise.

3.25 The creditable purpose test is broader than the test of deductibility for income tax in section 8-1 of the Income Tax Assessment Act 1997 . For example, input tax credits may be available in relation to the acquisition of capital items whereas your capital purchases are not deductible for income tax. The acquisition of services for preparing your tax returns may satisfy the creditable purpose test, even though these are only deductible under a specific provision for income tax.

3.26 However, you are not entitled to an input tax credit for acquiring a thing if your acquisition of the thing relates to an input taxed supply you are going to make. No tax will be charged on that supply. Therefore, you do not have a creditable purpose if your acquisition of a thing relates, either directly or indirectly, to a supply you make that is input taxed. Input taxed supplies are discussed at 5.4.

Example Jonathon runs a greengrocers. His sales of fruit and vegetables are taxable supplies. The fruit and vegetables that he acquires to sell to his customers are acquired for the purposes of his enterprise and are therefore creditable acquisitions. Jonathon also buys a new broom for sweeping the floor of his shop. This too is a creditable acquisition because the broom was acquired for the purpose of his enterprise.However, the bus ticket that Jonathon buys and uses to get to and from his business is not acquired for a purpose of his enterprise. It is acquired for a private or domestic purpose. It is not a creditable acquisition.

Example MidBank acquires a new computer network. The new computer network is only going to be used in running its financial services. Financial services are input taxed. The acquisition is therefore related to making input taxed supplies. Midbank is not entitled to a credit for the acquisition.

Taxable supply

3.27 For an acquisition to be a creditable acquisition the supply to you will have to be a taxable supply. This is because the input tax credit for the acquisition is a credit for the GST that you pay on the thing when you acquire it. GST is a tax on private consumption. Therefore, if you acquire something for the purpose of your enterprise you are entitled to an input tax credit for the GST included in the price you paid for the acquisition.

3.28 There are some exceptions which are dealt with in the special rules, such as for second-hand goods and a limited range of returnable containers. See 6.68 and 6.153.

Summary

Creditable acquisitions

3.29 The following diagram summarises the central concepts of input tax credits on acquisitions.

Amount of input tax credit on creditable acquisitions

3.30 Section 11-25 provides that the amount of an input tax credit on a creditable acquisition is an amount equal to the GST payable on the taxable supply. The amount of input tax credit is reduced if the acquisition is not solely for a creditable purpose. See 3.23 for creditable purpose.

Acquisitions that are partly creditable

3.31 Acquisitions that are partly creditable are dealt with in section 11-30 . If an acquisition you make is only partly creditable, you are only entitled to a reduced input tax credit for that acquisition.

3.32 There are two things that can affect whether your acquisition is partly creditable:

·
your extent of creditable purpose; and
·
your extent of consideration.

3.33 If you make a creditable acquisition only partly for a creditable purpose, the acquisition is only partly creditable -- paragraph 11-30(1)(a) .

3.34 If you make a creditable acquisition for which you provide, or are liable to provide, only part of the consideration, the acquisition is partly creditable -- paragraph 11-30(1)(b) .

Input taxed supplies

3.35 However, if your acquisition is partly creditable because it relates to making financial supplies, the acquisition may be taken to be fully creditable. The acquisition will be fully creditable if the value of financial supplies that you made in the year ending at the end of the current month, or that you are likely to make in the year beginning at the start of the current month, is less than or equal to the lessor of:

·
$50,000; and
·
5% of what your annual turnover would be if you included input taxed supplies -- see 7.33 for annual turnover.

Subsection 11-30(2) .

Amount of input tax credit for partly creditable acquisitions

3.36 If your acquisition is only partly creditable, you work out the amount of input tax credit you are entitled to using the formula in section 11-30 rather than section 11-25 .

Only partly for a creditable purpose

3.37 If your acquisition is only partly for a creditable purpose, your reduced input tax credit is the input tax credit you would have been entitled to if it was not reduced (full input tax credit) multiplied by your extent of creditable purpose -- subsection 11-30(3) . See 3.23 for creditable purpose.

Extent of creditable purpose

3.38 Your extent of creditable purpose is a percentage figure based on the proportion that creditable purpose is of the total purpose of the acquisition. That is;

Creditable purpose / total purpose X 100

Example

Solely for a creditable purpose

Mendelsons Music Museum Pty Ltd is registered and exhibits historical and unusual musical instruments. MMM bought a theramin for $5,500. MMM acquired the theramin solely for including in its latest touring exhibition and, after the tour is over, putting on display in the Museum. The theramin has been acquired solely for the purpose of the enterprise. It has therefore been acquired solely for a creditable purpose. The input tax credit on the acquisition is equal to the amount of GST on the taxable supply of the theramin to MMM. The amount of GST on the supply is 10% of the tax exclusive value. The tax exclusive value of the supply is 10/11 of the price. Therefore the GST on the supply is the price MMM paid, multiplied by 10/11, multiplied by 10%. This equals $5,000 x 10%; which equals $500.

The tax fraction approach discussed at 3.16 could also have been used to calculate the amount of input tax credit. Using the tax fraction approach, the amount of the input tax credit is $5,500 multiplied by 1/11, which equals $500.

Example

Partly for a creditable purpose

Kath is a framemaker. She runs a business making and selling frames for pictures, mirrors, etc. She is a sole trader and registered. She acquires 50m of timber from a registered timber supplier for making frames. She paid $110 for the timber. She intends to use most of the acquisition for making frames for customers. However, she also intends to use 5m of the timber for making a mirror frame as a birthday present for her mother. She therefore acquired 90% of the timber for the purpose of her enterprise and 10% of it for a private purpose. The extent of creditable purpose of the acquisition is 90%. The full input tax credit for the acquisition is $110 multiplied by 10/11 multiplied by 10%; which equals $10. Kaths reduced input tax credit is 90% of $10; which is $9.

The tax fraction approach discussed at 3.16 could also have been used to calculate the amount of input tax credit. Using the tax fraction approach, the reduced input tax credit is $110 multiplied by 1/11 multiplied by 90%, which equals $9.

Only part consideration

3.39 If you provide or are liable to provide only part of the consideration for an acquisition, the amount of input tax credit you are entitled to is the full input tax credit multiplied by the extent of consideration -- subsection 11-30(3) . The extent of consideration is the proportion that the consideration you provide or are liable to provide is to total consideration. That is,

consideration you provide or are liable to provide / total consideration X 100

Example Norman retires from the army and sets up an enterprise giving lectures and other training to businesses about his experiences and how they translate into the corporate world. His usual deal for businesses that want him to travel interstate is that he pays half his airfare and the business pays the other half.Normans acquisition of the air-fare is a creditable acquisition as it is for his enterprise and the supply to him was taxable. The business that pays half of the air-fare is also acquiring the fare for a creditable purpose. Norman has only paid part of the consideration for the acquisition. He is entitled to half of the input tax credit for the acquisition. The business is also entitled to half the input tax credit for the acquisition.

Part consideration and partly creditable purpose

3.40 If you make an acquisition only partly for a creditable purpose and you provide or are liable to provide only part of the consideration for the acquisition, your input tax credit is the full input tax credit multiplied by the extent of creditable purpose multiplied by the extent of consideration -- subsection 11-30(3) .

Changes in creditable purpose

3.41 Note that if your application of a thing in carrying on your enterprise is different from your extent of creditable purpose you may have an adjustment for change in creditable purpose. See 6.216.

GST on importations

3.42 GST is payable on importations that are taxable importations regardless of whether the person is registered or required to be registered. Subsection 7-1(1). A taxable importation can be made by any person. However, an input tax credit for GST paid on an importation will only be available to a registered or required to be registered person. See 2.6.

3.43 If you make a taxable importation you must pay the GST on the taxable importation -- subsection 13-15 . Generally, GST is payable by the entity importing the goods at the same time and in the same manner as customs duty. For this reason GST on taxable importations is not attributed to tax periods. This is different from taxable supplies. See 7.27.

3.44 GST on importations is different from GST on supplies. GST on supplies is only paid by people who are registered or required to be registered. See 3.5. However, you do not have to be registered or required to be registered to pay GST on importations. This is because GST is a tax on private consumption. Private consumers can import things themselves, they do not have to do it through someone else. Hence, GST has to be payable by anyone who makes a taxable importation.

Taxable importations

3.45 A taxable importation is an importation of goods into Australia that is not a non-taxable importation . A taxable importation can also be an importation of goods into Australia that is partly a non-taxable importation. If such is the case, it is a taxable importation to the extent that it is not a non-taxable importation -- subsection 13-5(1) . Non-taxable importations are discussed at 5.169.

Importation of goods into Australia

3.46 Subsection 13-5(2) provides that if you enter goods for home consumption and you are the owner of the goods when you so enter them, you make an importation of goods into Australia.

Entering goods for home consumption

3.47 Entering goods for home consumption is an act or activity that takes the imported goods out of the customs control. The importation itself is only a pre-condition to the entry of goods through customs into Australia.

Owner

3.48 The owner of the goods is not restricted to the beneficial owner. Under section 4 of the Customs Act 1901 the owner can be any person (other than a Customs officer) such as the beneficial owner, importer, exporter, consignee, agent, or person in possession or control of the goods.

Importations without entry for home consumption

3.49 Certain importations can be made without entry for home consumption. The Bill includes some such importations as importations of goods into Australia in the special rules. See 6.187.

Importations of money

3.50 An importation of money is not an importation of goods -- subsection 13-5(3) . Section 13-10 would make the importation of currency in its tangible form non-taxable. This is consistent with the treatment of supplies of currency. See 3.7 and 5.140.

Summary

3.51 The following diagram summarises the central concepts of GST on taxable importations.

GST on importations of goods

Amount of GST on taxable importations

3.52 Subsection 13-20(1) provides that the amount of GST on a taxable importation is the value of the taxable importation multiplied by the rate of GST.

Value of taxable importations of goods

3.53 The value of taxable importations of goods is determined in relation to the value of those imported goods for customs duty. Customs duty is currently related to the Free on Board (FOB) value of those goods. That is, the value of those goods not including the costs related to bringing those goods to Australia. This is the market value of those goods before they reach Australia, not their market value in Australia. As GST on goods generally relates to the value of those goods in Australia, the value of imported goods is not the FOB value. It is the FOB value plus the cost of bringing those goods into Australia. The costs of bringing goods into Australia are the cost of transport, the cost of the insurance and the cost of the customs duty. FOB value plus the costs of bringing goods into Australia is referred to as the Customs, Insurance, Freight (CIF) value. Subsection 13-20(2) provides that the value of taxable importations is the CIF value, that is, the customs value (FOB value) plus the costs of transport, insurance and duty.

Example Anastasia imports some washing machines. The washing machines cost her $10,000. She then paid another $3,000 in freight charges and $500 insurance. She then pays customs duty to enter the goods for home consumption. The GST is 10% of ($13,500 + the customs duty).

Value of partly taxable partly non-taxable importations

3. 54 The value of an importation that is partly taxable and partly exempt is worked out using section 13-25 . You work out the value of the whole importation as if it were wholly a taxable importation. You then work out the proportion the taxable part of the importation is of the whole importation. Multiply that proportion by the value of the whole importation.

Input tax credits on importations

3.55 Entitlements to input tax credits arise on creditable importations -- subsection 7-1(2) . If you make a creditable importation you are entitled to an input tax credit -- section 15-15 . How input tax credits are paid to you is discussed under net amount at 4.1.

Creditable importations

3.56 Section 15-5 provides the three factors relevant to deciding whether an importation of goods that you make is a creditable importation:

·
you import the goods solely or partly for a creditable purpose;
·
the importation is a taxable importation; and
·
you are registered or required to be registered.

3.57 The same general criteria apply to a creditable acquisition, except that consideration is not an issue for an importation, because the customs value is the key component of the valuation.

Creditable purpose

3.58 Section 15-10 provides that if you import a thing in carrying on your enterprise you import it for a creditable purpose. However, if the importation:

·
is partly of a private or domestic nature; or
·
relates to making input taxed supplies;

you import it for a creditable purpose except to the extent the importation is of a private or domestic nature or relates to making input taxed supplies.

Taxable importations

3.59 See 3.45 above for a discussion of what are taxable importations. For an importation to be a creditable importation the importation will have to have been a taxable importation. This is because the input tax credit for the importation is a credit for the GST that you pay on the thing when you import it. GST is a tax on private consumption. Therefore, if you import something for the purpose of your enterprise you get an input tax credit for the GST you pay on the importation.

Summary

3.60 The following diagram summarises the central concepts of input tax credits on importations.

Creditable importations

Amount of input tax credit on creditable importations

3.61 Subsection 15-20 provides that the amount of an input tax credit on a creditable importation is the amount of GST on the taxable importation. The amount of the input tax credit is reduced if the importation is not solely for a creditable purpose. See 3.23 for creditable purpose.

Importations that are partly creditable

3.62 Importations that are partly creditable are dealt with in section 15-25 . If an importation you make is only partly creditable, you are only entitled to a reduced input tax credit for that importation.

3.63 If you make a creditable importation only partly for a creditable purpose, the importation is only partly creditable.

3.64 If your importation is only partly creditable you work out the amount of input tax credit you are entitled to using the formula in section 15-25 rather than section 15-20 .

Only partly for a creditable purpose

3.65 If your importation is only partly for a creditable purpose your reduced input tax credit is the input tax credit you would have been entitled to if it was not reduced (full input tax credit) multiplied by your extent of creditable purpose. Creditable purpose is discussed at 3.23.

3.66 The extent of creditable purpose is a percentage figure based on the proportion that creditable purpose is of total purpose of importation. That is,

creditable purpose / total purpose X 100

3.67 This is the same calculation as for creditable acquisitions. See 3.31.

Interaction of the GST concepts of supply and importation

3.68 Generally, a taxable importation is distinguishable from a taxable supply. However, some taxable importations may also be taxable supplies. For example, a supply of goods from offshore may be both a taxable supply and a taxable importation. This is one of the effects of the connected with Australia rules. See 3.11. Subsection 9-25(3) provides that goods being brought to Australia are connected with Australia if the supplier either:

·
imports the goods into Australia -- paragraph 9-25(3)(a) , or
·
installs or assembles the goods in Australia -- paragraph 9-25(3)(b) .

3.69 If a supplier both imports the goods and installs the goods in Australia, GST will apply on the importation and will also apply on the supply.

Example Tracey operates a company in New Zealand. Tracey is registered because she regularly imports things into Australia. Bruce operates a company in Australia. Tracey sells some goods to Bruce which he is going to use in Australia. The sale is done under a supply and install contract, so Tracey imports the goods and also installs them at Bruces factory.The importation of the goods by Tracey is a taxable importation. GST is charged on the importation, but she is entitled to an input tax credit for the importation because the importation is also a creditable importation. As Tracey installs the goods in Bruces factory, the supply of the goods is also a taxable supply. Tracey accounts for 1/11 of the supply price as GST. Bruce is entitled to an input tax credit for the creditable acquisition of the goods.Bruce pays Tracey a GST inclusive price of $110,000 under the contract for the supply and installation of the goods. This is the consideration for the supply. GST on a supply is charged in relation to the consideration for the supply. GST on an importation is charged on the customs value of the goods, plus the transport and insurance costs, plus the customs duty. Here, the customs value plus the transport and insurance costs plus the duty adds up to $70,000.Tracey pays $7,000 GST on the importation (10% of $70,000) and is entitled to an input tax credit of $7,000 on the importation, netting out to zero GST.Tracey also pays $10,000 GST (1/11 of the price of $110,000) on the supply. Bruce is entitled to an input tax credit of $10,000 on the acquisition.This means that Tracey pays $7,000 GST on the importation, which she gets back as an input tax credit and remits $10,000 GST for the supply, which Bruce gets back as an input tax credit.

Adjustments

3.70 Adjustments are necessary because in some situations you will have accounted for GST or input tax credits but subsequent events mean that GST or those input tax credits were incorrectly accounted. If the GST or input tax credits were incorrectly accounted for you will have either received too much or too little input tax credit or you will have paid too much or too little GST.

3.71 There are two sorts of adjustment -- increasing and decreasing. An increasing adjustment increases your net amount. You will have an increasing adjustment if you received too much input tax credit or paid too little GST. A decreasing adjustment decreases your net amount. You will have a decreasing adjustment if you have received too little input tax credit or paid too much GST. Net amount is discussed at 4.1. Section 17-10.

3.72 Adjustments can arise in several ways:

·
from adjustment events ;
·
from bad debts ; and
·
from a change in your extent of creditable purpose .

Adjustments due to adjustment events are dealt with in Division 19 and discussed here. Adjustments arising from bad debts are dealt with in Division 21 and discussed at 3.84. Adjustments due to changes in extent of creditable purpose are dealt with in Division 129 and discussed at 6.216.

Adjustments from adjustment events

3.73 An adjustment of GST paid by a supplier is required when an incorrect amount of GST was paid by the supplier. An adjustment of input tax credits accounted for by a recipient of a supply is required when an incorrect amount of input tax credits was received by the recipient. An incorrect amount of GST or input tax credit could have resulted if:

·
all or part of the supply or acquisition is cancelled or returned; or
·
the consideration of the supply or acquisition is altered, such as through a volume discount; or
·
a supply becomes, or stops being taxable; or
·
an acquisition becomes or stops being creditable.

Such events are adjustment events section 19-10 .

Adjustment events and supplies

3.74 You make an adjustment to your net amount for a tax period if:

·
GST on a supply was attributable to an earlier tax period;
·
you have an adjustment event for a supply; and
·
the GST you previously attributed is no longer correct because of that adjustment event.

Section 19-40 .

3.75 The amount of GST that was attributable to an earlier tax period is the previously attributed GST amount . The correct amount of GST is the corrected GST amount . The previously attributed GST amount is the total amount of GST for the supply that was attributed to any earlier tax period. That is, it includes any adjustments that have already been made in relation to the GST for that supply. Therefore, the previously attributed GST amount is:

·
any GST for the supply attributable to an earlier tax period; plus
·
any increasing adjustments for the supply attributable to an earlier tax period; less
·
any decreasing adjustments for the supply attributable to an earlier tax period.

Section 19-4

5.

3. 76 If the corrected GST amount is smaller than the previously attributed GST amount, you will have paid too much GST. You will need to make a decreasing adjustment. The decreasing adjustment will decrease your net amount for the tax period in which the adjustment event occurs by an amount equal to the difference between the corrected GST amount and the previously attributed GST amount. Section 19-55 .

Example Mr S. Gonzales is a courier and registered. He undertakes to courier documents for Mr S. Katt who is also registered. Mr Gonzales sends Mr Katt a bill of $2,200 for the courier services provided in a quarter. Mr Katt pays the bill. Mr Gonzales accounts for $200 in GST. Later Mr Katt talks about the huge cost of couriers to a friend who assures Mr Katt that he has paid too much. Mr Katt complains to the Master Couriers Association who persuade Mr Gonzales to reduce his bill and refund Mr Katt $550.Mr Gonzales has already attributed the GST on his services and therefore needs to make an adjustment. As the corrected GST amount is smaller than the previously attributed GST amount Mr Gonzales has paid too much GST and has a decreasing adjustment, reducing his net amount. The amount of the adjustment will be 1/11 of $550, which equals $50.

3.77 If the corrected GST amount is greater than the previously attributed GST amount, you will have paid less GST than you should. You will need to make an increasing adjustment. The increasing adjustment will increase your net amount for the tax period in which the adjustment event occurs by an amount equal to the difference between the corrected GST amount and the previously attributed GST amount. Section 19-50 .

3.78 If a previously non-taxable supply becomes a taxable supply, you will not have previously attributed any GST on that supply. The previously attributed GST amount was zero. The previously attributed GST amount will always be less than the corrected GST amount. You will always have an increasing adjustment if a previously non-taxable supply becomes taxable.

Adjustment events and acquisitions

3.79 You make an adjustment to your net amount for the tax period if:

·
you have an adjustment event for an acquisition;
·
an input tax credit for that acquisition was attributable to an earlier tax period; and
·
the input tax credit you previously attributed is no longer correct because of that adjustment event.

Section 19-70 .

3.80 The amount of input tax credit that was attributable to an earlier tax period is the previously attributed input tax credit amount . The correct amount of input tax credit is the corrected input tax credit amount . The previously attributed input tax credit amount is the total amount of input tax credit for the acquisition that was attributed to any earlier tax period. That is, it includes any adjustments that have already been made in relation to the input tax credit for that acquisition. Therefore, the previously attributed input tax credit amount is:

·
any input tax credits for the acquisition attributable to an earlier tax period; plus
·
any increasing adjustments for the acquisition attributable to an earlier tax period; less
·
any decreasing adjustments for the acquisition attributable to an earlier tax period.

Section 19-7

5.

3. 81 If the corrected input tax credit amount is smaller than the previously attributed input tax credit amount, you will have received too much input tax credit. You will need to make an increasing adjustment. The increasing adjustment will increase your net amount for the tax period in which the adjustment event occurs by an amount equal to the difference between the corrected input tax credit amount and the previously attributed input tax credit amount. Section 19-80 .

Example Continuing the example of Mr Gonzales and Mr Katt from 3.76 above, Mr Katt had already attributed the input tax credit for the courier services based on a bill of $2,200. When he is refunded $550 he needs to make an adjustment. As the corrected input tax credit amount is smaller than the previously attributed input tax credit amount Mr Katt makes a decreasing adjustment, reducing his net amount. The amount of the adjustment will be 1/11 of $550, which equals $50.

3.82 If the corrected input tax credit amount is greater than the previously attributed input tax credit amount, you will have received too little input tax credit. You will need to make a decreasing adjustment. The decreasing adjustment will decrease your net amount for the tax period in which the adjustment event occurs by an amount equal to the difference between the corrected input tax credit amount and the previously attributed input tax credit amount. Section 19-85 .

3.83 If a previously non-creditable acquisition becomes a creditable acquisition, you will not have previously attributed any input tax credits for that acquisition. The previously attributed input tax credit amount was zero. The previously attributed input tax credit amount will always be less than the corrected input tax credit amount. You will always have a decreasing adjustment if a previously non-creditable acquisition becomes creditable.

Adjustments from adjustment events

Adjustments for bad debts

Adjustments for bad debts and taxable supplies

Writing off bad debts

3.84 If you account for GST other than on a cash basis you may account for the GST on a taxable supply before you receive any or all of the consideration for the supply. See Chapter 4 for the accounting rules. If you have accounted for GST on a supply and you later write off as a bad debt some or all of the consideration you were due to receive for the supply, you will have accounted for GST but not have received an amount for that GST from the recipient of the supply. You will have accounted for too much GST.

3.85 You therefore have a decreasing adjustment to reduce your net amount in the tax period in which you write off the bad debt. Subsection 21-5(1).

3.86 You will have accounted for GST of 1/11 of the consideration you were due to receive. Therefore, if you write off the entire consideration as a bad debt, the amount of the decreasing adjustment is 1/11 of the consideration, that is, 1/11 of the amount written off. If you write off part of the consideration as a bad debt, the amount of the decreasing adjustment is 1/11 of the amount written off. Note that 1/11 of the amount written off is the amount of GST on the amount written off. Subsection 21-5(1).

3.87 The term bad debt is not defined. To qualify for a decreasing adjustment you must:

·
have made a taxable supply for consideration in money;
·
lodged a return for the relevant tax period and properly accounted for GST on the supply; and
·
written off as a bad debt all or part of the consideration not paid.

Recovering bad debts written off

3.88 If you previously wrote off a bad debt for a taxable supply, had a decreasing adjustment, and later recover some or all of the debt, you will not have paid GST on the amount recovered. You will not have accounted for all of the GST on the supply. You therefore have an increasing adjustment to increase your net amount in the tax period in which you recover some or all of the debt. The previous decreasing adjustment was 1/11 of the amount written off. The increasing adjustment is 1/11 of the amount recovered. This is the amount of GST on the amount recovered. Section 21-10.

Adjustments for bad debts and creditable acquisitions

Bad debts written off

3.89 If you account for GST other than on a cash basis you may account for the input tax credit on a creditable acquisition before you pay any or all of the consideration for the acquisition. See Chapter 4 for the accounting rules. If you have accounted for the input tax credit on an acquisition and the supplier later writes off as a bad debt all of the consideration you were liable to pay for the supply, you will have accounted for an input tax credit in relation to an acquisition for which GST has not been paid. You are only entitled to input tax credits for GST included in the consideration for acquisitions you make. Section 11-25 . If the supplier writes off some of the consideration as a bad debt you will have accounted for an amount of input tax credit for an amount of GST that the supplier has been refunded. In either case you will have accounted for too much input tax credit. Subsection 21-15(1).

3.90 You therefore have an increasing adjustment to increase your net amount in the tax period in which the supplier writes off the bad debt. Subsection 21-15(1).

3.91 You will have accounted for 1/11 of the consideration as an input tax credit. Therefore, if the entire consideration is written off as a bad debt, the amount of the increasing adjustment is 1/11 of the consideration, that is, 1/11 of the amount written off. If part of the consideration is written off as a bad debt, the amount of the increasing adjustment is 1/11 of the amount written off. This is equivalent to the GST included in the amount written off. Subsection 21-15(1).

Bad debts recovered

3.92 If you previously had a decreasing adjustment because of a bad debt written off, and you later pay some or all of the debt, you will not have received enough input tax credit for the GST paid on the amount recovered. You will not have accounted for all of the input tax credit on the acquisition. You therefore have a decreasing adjustment to decrease your net amount in the tax period in which you pay some or all of the debt. The decreasing adjustment is 1/11 of the amount you pay. This is equivalent to the GST included in the amount you pay. Section 21-20.

Comparison of taxable supplies and taxable importations

GST
  Taxable supplies Taxable importations
Must there be a supply? Yes. No, but it could be both a supply and importation.
Who pays GST? Registered entities. Any entity.
Is consideration required? Yes. Not necessary.
Must be in carrying on an enterprise? Yes. Not necessary.
Must be connected with Australia? Yes. It is by its nature.
Must be registered? Yes. Not necessary.
What is not taxable? GST-free and input taxed supplies. Importations that would have been GST-free or input taxed if they were supplies, and
non-taxable importations.
GST equals? GST = value x 10% GST = value x 10%
Value = price x 10/11 Value = sum of customs value, transport, insurance, and customs duty.
Affected by adjustment events? Yes. Yes.

Input tax credits
  Creditable acquisition Creditable importations (of goods)
Must be registered? Yes. Yes.
Must be consideration? Yes. Not necessary.
Must be acquired for a creditable purpose? Yes. Yes.
Must have been taxable? Yes. Yes.
Are credits offset against GST? Yes. Yes.
Input tax credit equals? GST on supply x extent of creditable purpose x extent of consideration. GST on importation x extent of creditable purpose.
Affected by adjustment events? Yes. Yes.


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