ATO Interpretative Decision

ATO ID 2002/2 (Withdrawn)

Goods and Services Tax

• This ATO ID is a straight application of the law and does not contain an interpretative decision. In addition, the facts and reasons for decision are considered to be incomplete and therefore potentially misleading.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the entity, a franchisor, have an adjustment under section 19-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it has attributed the goods and services tax (GST) payable on its supply of the franchise to the franchisee in an earlier tax period and the franchise agreement is terminated before the entity receives all of the instalments that are payable under that franchise agreement?

Decision

Yes, the entity does have an adjustment under section 19-40 of the GST Act, when it has attributed the GST payable on its supply of the franchise to the franchisee in an earlier tax period and the franchise agreement is terminated before the entity receives all of the instalments that are payable under that franchise agreement.

Facts

The entity is a franchisor. The entity supplies a franchise to a franchisee under a franchise agreement and receives the payment for the supply in periodic instalments.

The entity is registered for goods and services tax (GST) and the supply of the franchise under the franchise agreement is a taxable supply under section 9-5 of the GST Act.

The entity accounts for GST on a non-cash basis and, in accordance with subsection 29-5(1) of the GST Act, has attributed the total GST on the supply in an earlier tax period when it received the first instalment payment.

Under a clause of the franchise agreement, the franchisee is allowed to terminate the agreement within 90 days after the date of commencement. Any payments made by the franchisee will be forfeited and the franchisee will not be liable to make further payments.

The franchisee terminates the franchise agreement in accordance with this clause in the current tax period. However, the entity has not received all of the instalments that are payable under the franchise agreement.

Reasons for Decision

Section 19-40 of the GST Act provides that an entity has an adjustment for a supply for which it is liable to pay GST if:

•

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

•

GST on the supply was attributable to an earlier tax period; and

•

as a result of those adjustment events, the previously attributed GST amount for the supply no longer reflects the amount of GST on the supply, taking into account any change of circumstances that has given rise to the adjustment event(s).

Under paragraph 19-10(1)(a) of the GST Act, an event that has the effect of cancelling a supply is an adjustment event.

In this case, the franchisee terminates the franchise agreement. The termination of the franchise agreement has the effect of cancelling the supply of the franchise to the franchisee. Consequently, the termination of the franchise agreement is an adjustment event under paragraph 19-10(1)(a) of the GST Act.

The entity accounts for GST on a non-cash basis and, in accordance with subsection 29-5(1) of the GST Act, has attributed the total GST on the supply in an earlier tax period when it received the first instalment payment. However, the entity would not receive all of the instalments that are payable under the franchise agreement when the franchise agreement is terminated.

Therefore, because of the adjustment event, the previously attributed GST amount for the supply no longer reflects the amount of GST on the supply. Accordingly, the remaining requirements in section 19-40 of the GST Act are also satisfied.

Therefore, the entity has an adjustment under section 19-40 of the GST Act when it has attributed the GST payable on its supply of the franchise to the franchisee in an earlier tax period and the franchise agreement is terminated before the entity receives all of the instalments that are payable under that franchise agreement.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   paragraph 19-10(1)(a)
   section 19-40

Keywords
Goods & services tax
GST net amounts & adjustments
Adjustment events
Adjustments

Business Line:  GST

Date of publication:  9 January 2002

ISSN: 1445-2782