Edited version of private ruling

Authorisation Number: 1011600414036

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Ruling

Subject: GST and loans written off

Question

Is there any GST implication for you when a lender wrote off the loans they have provided to you?

Answer

Based on the facts given, there is no GST implication for you when a lender wrote off the loans they have provided to you.

Relevant facts and circumstances

You are an Australian company which is registered for the goods and services tax (GST). Your business activity is a consultancy service.

The lender has regularly provided funds by way of loan to you in anticipation that you would be able to pay back the loan. There is no interest payable on these loans. The lender is not registered for GST and is not required to be registered for GST.

The lender has decided to forgive the debt you owe him and did not receive anything from you in return for this cancellation.

Reasons for decision

Goods and Services Tax Ruling GSTR 2002/2 provides guidance on 'loans' for the purposes of GST.

Paragraphs 37 to 43 in GSTR 2002/2 state the following

Consideration relating to a loan

37. When an entity borrows money from a lender on terms that include payment of interest, it creates an interest in a debt that includes the payment of interest. The lender creates and supplies an interest in a credit arrangement. Aside from the operation of subsection 9-10(4) each entity would make a supply of a financial interest (under item 2 in subregulation 40-5.09(3)) to the other, and each supply would be consideration for the other.

38. However, whatever is supplied as payment by way of creation of a debt is money as defined in section 195-1, and by operation of subsection 9-10(4) is not a supply unless supplied as consideration for a supply that is money. The supply of an interest in a credit arrangement is not money nor is it a supply of money. Where the consideration for the debt is an interest in a credit arrangement, the interest in debt is not a supply (because it is not provided as consideration for a supply that is a supply of money).

39. The supply of an interest in a credit arrangement is provided for (monetary) consideration (namely the debt) and is a financial supply.

40. Similarly, where an entity borrows money on terms that do not include payment of interest, the borrower creates and provides an interest in debt that is money as defined in section 195-1. The interest in debt is monetary consideration for the supply of an interest in a credit arrangement by the lender.

41. The lender provides an interest in a credit arrangement and the borrower acquires the interest in the credit arrangement provided by the lender. In acquiring the financial interest, the borrower is a financial supply provider of that interest, and the acquisition-supply is for consideration.

Example 2: Consideration for an interest-free loan

42. Meteor Limited lends $150,000 to Satellite Limited, a subsidiary company that is not part of Meteor's GST group. The loan is for five years and there is no interest payable by Satellite Limited. Satellite Limited supplies an interest in a debt to Meteor Limited, and Meteor Limited supplies an interest in a credit arrangement to Satellite Limited. The consideration provided by Satellite is the interest in a debt and is money as defined in section 195-1. The supply by Meteor of the interest in a credit arrangement is the supply of a financial interest for consideration (the interest in a debt). In acquiring the interest in a credit arrangement, Satellite has made an acquisition-supply for consideration.

Financial supply given as consideration for a financial supply

43. Where a transaction involves the provision, acquisition or disposal of a financial interest in return for another financial interest, the transaction may give rise to four financial supplies. That is, both sets of supplies to the transaction will be comprised of a financial supply and an acquisition-supply. An example of this is a share swap. This is a result of the acquisition-supply itself being a financial supply and does not cause any unintended consequences. Input tax credits are denied in respect of any acquisitions that relate to making the financial supplies (unless the acquisitions are reduced credit acquisitions).

The A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that financial supplies are input taxed and that 'financial supply' has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST regulations).

Where a supply is input taxed under the GST Act, no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired or imported to make the supply.

Subregulation 40-5.09(1) of the GST regulations provides that the provision, acquisition or disposal of an interest mentioned under subregulation 40-5.09(3) of the GST regulations is a financial supply if:

· the provision, acquisition or disposal is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia; and

· the supplier is:

· registered or required to be registered; and

· a financial supply provider in relation to the supply of the interest.

GSTR 2002/2 uses the term 'financial interest' where the supply is mentioned in subregulation

40-5.09(3) of the GST regulations and may be capable of being a financial supply if it satisfies the test in subregulation 40-5.09(1) of the GST regulations

The provision, acquisition or disposal of something is a financial supply where it satisfies the requirements of the GST regulations. For the purposes of the GST regulations a financial supply includes the acquisition of a financial interest (acquisition-supply).

The acquisition of a financial interest can be both an acquisition and a financial supply. The acquirer of the financial interest both acquires and supplies a financial interest, that is, it makes a supply of the acquisition (acquisition-supply). Hence, the entity that makes or supplies the financial interest and the entity that acquires the financial interest have both made financial supplies to the extent that all the requirements for a financial supply in the GST regulations are satisfied.

The provision, acquisition or disposal of a financial interest is therefore a financial supply once it satisfies all the requirements of subregulation 40-5.09(1) of the GST regulations. Further the acquisition of a financial interest from an unregistered supplier may be a financial supply if the acquirer is registered for GST.

Item 2 in the table in sub-regulation 40-5.09(3) of the GST regulations (Item 2) lists a debt, credit arrangement or right to credit, including a letter of credit. The glossary in Schedule 1 of GSTR 2002/2 defines a credit arrangement as 'an arrangement under which an entity lends on terms that include deferred repayment, or under which payment of a debt owed by one entity is deferred or time is allowed to pay'. Hence, when a loan is made it is considered to be a provision of an interest in a credit arrangement covered by Item 2.

GST implication of the loan and its write off

When the lender makes a loan to you and there is no interest payable, it is considered that you have created and provided an interest in a debt to the lender and, the lender has supplied an interest in a credit arrangement to you.

Further you have made an acquisition-supply of the interest in a credit arrangement to the lender when you acquired this financial interest (interest in a credit arrangement) and, the lender has made an acquisition-supply of the interest in a debt to you when they acquired this financial interest (interest in a debt).

Each supply would be consideration for the other supply.

We will now consider the GST implications of each of the supplies relating to the establishment and disposal of the loan between you and the lender.

Provision of interest in a debt

Where the consideration for the provision of interest in a debt is an interest in a credit arrangement, this payment is money as defined in section 195-1 of the GST Act.

Under subsection 9-10(4) of the GST Act, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

From the facts given, we consider that you have made no supply under subsection 9-10(4) of the GST Act when you provide the interest in a debt to the lender as the payment is money and this money is not provided as consideration for a supply that is a supply of money.

Accordingly, GST is not applicable when you provide the interest in a debt to the lender.

Provision of interest in a credit arrangement

When the lender makes a loan to you it is considered that they have made a provision of an interest in a credit arrangement covered by Item 2 and, at the same time you have acquired a financial interest and made a supply of a financial interest to the lender (acquisition-supply) for consideration (the supply of an interest in a credit arrangement is not money nor is it a supply of money for GST purposes).

When the lender cancels the debt, they are disposing of their interest in the credit arrangement. Since the lender is not registered for GST and is not receiving any consideration when they cancel the debt, all the requirements in subregulation 40-5.09(1) of the GST regulations are not satisfied. Therefore the lender has not made a financial supply to you for GST purposes.

However, the acquisition of a financial interest from an unregistered supplier may be a financial supply if the acquirer is registered for GST. The next step is to determine whether your acquisition-supply of the interest in a credit arrangement and its disposal to the lender is a financial supply under subregulation 40-5.09(1) of the GST regulations.

Acquisition-supply of the interest in a credit arrangement

From the information received, your acquisition-supply of the interest in a credit arrangement will be a financial supply under subregulation 40-5.09(1) of the GST regulations as:

· the provision of the interest is for consideration;

· the provision is made in the course of an enterprise(business) that you carry on;

· the provision of the interest is connected with Australia as it is done in Australia;

· you are registered for GST; and

· you are considered to be a financial provider in relation to the supply of the interest.

As a financial supply is input taxed under the GST Act, no GST is payable on that supply.

For more information on how to account input taxed supply in an activity statement, please refer to the guide 'GST completing your activity statement'.

Acquisition-supply of the disposal of an interest in a credit arrangement

In regard to the acquisition-supply of the disposal of the interest in a credit arrangement to the lender, all the requirements in subregulation 40-5.09(1) of the GST regulations will not be satisfied since there is no consideration received for the disposal of this financial interest. Accordingly, you have not made a financial supply and therefore GST is not applicable to this supply.

Summary

Based on the facts given, there is no GST implication for you when the lender wrote off the loans they have provided to you.