Edited version of private ruling

Authorisation Number: 1011665738646

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Ruling

Subject: GST treatment of certain Receivers' transactions.

Question 1

Whether the Receivers are liable for goods and services tax (GST) when they deliver the undelivered goods to a customer in accordance with a contract entered into by the incapacitated entity (the Entity) with the customer prior to the appointment of the Receivers?

Answer

No

Question 2

Whether the Receivers are entitled to an input tax credit for the acquisition of the retention of title (ROT) goods under a new contract entered into by the Receivers and a supplier?

Answer

Yes

Question 3

Whether the Receivers have any increasing adjustment for the cancellation (in part) of the earlier acquisition of the ROT goods?

Answer

No

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Mr A and B were appointed as Receivers and Managers of the Entity on the appointment date.

An administrator was also appointed to the Entity. However, the ruling request is limited to the actions of the Receivers.

Prior to the appointment, the Entity accounted for GST on a non-cash basis.

The Receivers account for GST on a cash basis.

Delivery of undelivered goods

Prior to the appointment of the Receivers, numerous customers had ordered goods from the Entity.

Upon accepting an order, the Entity required the customer to pay the full sale price in advance. However, in practice, the customer negotiated with the Entity for the payment of a lesser amount.

At the time of the order:

· The customer paid the agreed amount

· The Entity issued a tax invoice to the customers for the full sale price.

· The Entity had attributed the entire GST payable on the sale price of the undelivered goods in the tax period in which the lesser amount was received and a tax invoice was issued for the sale price.

· The customer and the Entity were bound by the Terms of Sales which provides that title to the undelivered goods would not pass until full payment of the sale price had been received by the Entity.

· At the time of the appointment of the Receivers some customers had not received their goods (undelivered goods) and became unsecured creditors of The Entity.

· In relation to an outstanding order of undelivered goods, the Receivers chose to deliver those goods to the customer when they had paid the balance of the sale price (if any).

Cancellation (in part) of the pre-appointment contract

Prior to the appointment of the Receivers, the Entity purchased and received goods under the retention of title clause (ROT goods) from various suppliers under certain purchase contracts (pre-appointment contracts). The title of the ROT goods would not have passed to the Entity until either the relevant invoice had been paid or all moneys owing to the supplier had been paid.

The suppliers issued a tax invoice to the Entity for the total purchase price of the ROT goods and the Entity claimed input tax credit equal to the GST payable on the acquisition of the ROT goods in the tax period when the relevant tax invoice was received.

At the time of the appointment of the Receivers, some suppliers had not been paid in full by the Entity for the supply of the ROT goods.

The Receivers and those suppliers entered into a Deed of Settlement under which:

· the supply of the ROT goods to the Entity was to be cancelled in part and to be returned to the supplier

· the supplier was to issue an adjustment note to the Entity, showing the partial cancellation of the supply of ROT goods

· the supplier was to enter into a new contract with the Receivers for supplying the Receivers the ROT goods to the extent they were cancelled.

· payment to be made by the Receivers under the term of their appointment

· a tax invoice was issued to the Receivers for the supply of the ROT goods under the new contract.

To the extent that the supply of the ROT goods has not been cancelled, the suppliers continue to have a right to prove as unsecured creditors in the liquidation of the Entity.

The purpose of the deed was to allow the suppliers to receive some funds (but less than they were entitled to under the pre-appointment contract) without giving up their rights to pursue the administrators of the Entity and the Receivers to get full, clear title of the ROT goods on terms they have negotiated with the suppliers and to allow the Receivers to continue the Entity's business.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 7

A New Tax System (Goods and Services Tax) Act 1999 Division 9

A New Tax System (Goods and Services Tax) Act 1999 Division 11

A New Tax System (Goods and Services Tax) Act 1999 Division 58

Reasons for decisions

These reasons for decision accompany the Notice of private ruling for the Receivers of the Entity

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

No, the Receivers are not liable for GST on the receipt of the balance of the consideration of the supply.

Detailed reasoning

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is liable for GST on the taxable supplies it makes.

The term 'taxable supply' is defined in section 9-5 of the GST Act. The section sets out the criteria for making a taxable supply. The first requirement is whether a supply was made by the Receivers when they delivered the undelivered goods.

Section 9-10 of the GST defines 'supply' to mean any form of supply whatsoever. Subsection 9-10(2) of the GST Act further provides that supply includes a supply of good amongst the supply of other things.

In this circumstance:

· a customer and the Entity entered into a sale contract prior to the appointment of the Receivers

· the customer made a part payment of the sale price to the Entity

· the Entity issued a tax invoice to the customer for the sale price of the supply

· the Entity attributed the GST of the sale price in the tax period when it received the part payment or issued a tax invoice.

After the appointment, the Receivers delivered the goods upon receiving the balance of the sale price under the terms of the contract between the customer and the Entity. There was no new contract or change in the terms of the contract. The Receivers simply carried out the terms of an existing contract.

The issue is whether the Receivers made a supply to the customer when the Receivers delivered the goods to the customers.

Goods and Services Tax ruling GSTR 2006/9 examines the meaning of supply in the GST Act.

Proposition No 11 of this Ruling suggests that 'the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply'. In this case, there was a sale contract between the Entity and the customer. The Receivers were not a party to the contract. After the appointment of the Receivers, the terms of the contract had not been altered and no new contract was entered into between the Receivers and the customer. The Receivers chose to carry out the terms of the contract in delivering the goods to the customer although they were not legally required to do so.

On the basis of the fact above, it is considered that the Receivers are not the supplier in relation to the delivery of the goods in accordance with an existing contract.

Division 58 of the GST Act sets out how GST applies where representatives were appointed to act for incapacitated entities. This Division:

· provides that any supply, acquisition or importation by a representative of an incapacitated entity in his or her representative capacity will be treated as a supply, acquisitions or importation of the incapacitated entity. This ensures that the GST consequences that arise from a supply, acquisition or importation of the representative are the same as the consequences that would have arisen as if they were supply, acquisition or importation of the incapacitated entity.

· ensures the representative is responsible for certain GST consequences which arise from a supply, acquisition or importation that falls within the scope of the representative's responsibility or authority for managing the incapacitated entity.

· places all types of representative on common footing and provide a consistent base from which the representative becomes liable for relevant liabilities and becomes entitled to relevant entitlements.

Section 58-5 of the GST Act provides the general principle for the relationship between incapacitated entities and their representative. Paragraph 1.23 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Measures No 5) Bill 2009 (the EM) explains that:

The overall effect of section 58-5 is to ensure that all supplies, acquisitions and importations, and certain acts or omissions made during the period of a representative's appointment will be taken to be those of the incapacitated entity, regardless of whether it was the incapacitated entity or the representative that undertook the transactions or undertook the relevant acts or omissions.

However, section 58-10 of the GST Act provides the exceptions in which the representatives have GST-related liabilities and entitlements rather than the incapacitated entity.

General rule in paragraph 58-10(1)(a) [in relation to GST payable] provides:

(1) A *representative of an *incapacitated entity:

(a) is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a *taxable supply or a *taxable importation; …

(b) …

(c) …

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

* Asterisk denotes a defined term in the Act

Under this paragraph, the Receivers are only liable to pay GST on the delivery of the outstanding orders to the extent that the Entity would be liable to pay GST on delivering those orders as taxable supply and to the extent that the Receivers was making the supply within the scope of the Receivers' responsibilities or authority for managing the Entity's affairs.

It is considered above that the Receivers do not make any supply when delivering goods to a customer, therefore paragraph 58-10(1)(a) of the GST Act does not apply to make the Receivers liable for GST for the delivery.

Even if subsection 58-10(1) of the GST Act applies, the Receivers are only liable to pay the GST to the extent of the GST payable on the transaction that the Entity has not attributed in any BAS prior to the appointment of the Receivers.

As the Entity accounted for GST on a non-cash basis, the attribution rule in subsection

29-5(1) of the GST Act requires them to attribute the (entire) GST payable on the taxable supply in the earlier of the tax period when they received any consideration for the supply or when an invoice is issued.

The Entity had attributed the GST payable on the (entire) sale price of the goods to be delivered under a sale contract in the tax period when they received a part payment. Therefore, the Receivers would not be 'liable to pay' any GST liability (as there was none) when the Receivers delivered the goods to the customer in accordance with the sale contract.

In conclusion, the Receivers are not liable for the GST on the delivery of the goods in the circumstance considered above. The relevant (entire) GST payable had been attributed by the Entity when they received the part payment /issued a tax invoice in a tax period prior to the appointment of the Receivers.

Question 2

Summary

The Receivers are entitled to an input tax credit in accordance with paragraph 58-10(1)(b) of the GST Act.

Detailed reasoning

Prior to the appointment of the Receivers:

The Entity purchased and received the ROT goods under a pre-appointment contract with a supplier.

The supplier issued a tax invoice to the Entity for the total purchase price of the ROT goods at the time of the contract/delivery

The Entity claimed an input tax credit equal to the GST payable on the acquisition in the tax period in which the Entity received the tax invoice in accordance with subsection 29-10(1) of the GST Act as they accounted for GST on a non-cash basis.

After the appointment of the Receivers:

At the time of the appointment of the Receivers, some of the suppliers had not been paid (in full) by the Entity for the supply of the ROT goods

A Deed of Settlement was reached between the Receivers and those suppliers:

· the supply of the ROT goods to the Entity (under the pre-appointment contract) was cancelled in part and the ROT goods were returned to the supplier

· the supplier issued an adjustment note to Entity, showing the partial cancellation of the supply of ROT goods

· the supplier agreed to supply the Receivers the ROT goods to the extent they were cancelled Under a new contract

· payment to be made by the Receivers under the term of their appointment

· a tax invoice was issued to the Receivers for the supply of the ROT goods under the new contract.

· to the extent that the supply of the ROT goods has not been cancelled, the supplier continue to have a right to prove as unsecured creditors in the liquidation of the Entity.

· the purpose of the deed was to allow the supplier to receive some funds (but less than they were entitled to under the pre-appointed contract) without giving up their rights to pursue the administrators of the Entity and the Receivers to get full, clear title of the ROT goods on terms they have negotiated with the Entity and to allow the Receivers to continue the Entity's business.

Making Acquisition

Under the Settlement Deed

· the Receivers have entered into a new contract with a supplier in relation to the supply of those ROT goods which has been cancelled and returned to the supplier under a pre-appointed contract between the supplier and the Entity

· the Receivers have the title of the ROT goods upon making the full payment of the purchase price under the new contract

Example 1.1 of the EM suggests that a supply is within the scope of the representative's responsibility or authority if, following the appointment, the representative notifies the recipient of the supply of the representative's appointment and enters into a new contract with the recipient. Similarly, we consider that where the Receivers notify a supplier of the appointment and entered into a new contract with the supplier under the Settlement Deed, the acquisition the Receivers make from the supplier would be within the scope of the Receivers' responsibility or authority to manage the Entity's affairs.

Those matters above indicate that the Receivers, not the Entity, were making an acquisition, within the scope of their responsibility or authority for managing the incapacitated entity's affairs (not the Entity) under section 11-10 of the GST Act which includes an acquisition of goods.

Section 58-5 of the GST Act provides that all supplies, acquisitions and importations, and certain acts or omissions made during the period of a representative's appointment will be taken to be those of the incapacitated entity, regardless of whether it was the incapacitated entity or the representative that undertook the transactions or undertook the relevant acts or omissions.

However, paragraph 58-10(1)(b) of the GST Act provides the exceptions in which a representative will have GST-related entitlements rather than the incapacitated entity. This paragraph states:

A *representative of an *incapacitated entity:

(a) …

(b) is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a *creditable acquisition or a *creditable importation; …

(c) …

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

Pursuant to paragraph 58-10(1)(b) of the GST Act, in order for the Receivers to be entitled to claim the input tax credit, the input tax credit must be one that the incapacitated would be entitled to claim but for section 58-10 or section 48-45 of the GST Act (which provides that the representative member of a GST group is entitled to an input tax credit in respect of a creditable acquisition made by a member of that GST group).

The Entity would be entitled to an input tax credit in respect of the acquisition of the cancelled ROT goods from the supplier if the Entity had made a creditable acquisition in accordance with subsection 7-1(2) of the GST Act which provides that entitlements to input tax credits arise on creditable acquisitions.

Section 11-5 of the GST Act explains the meaning of the term 'creditable acquisition. An entity only makes a creditable acquisition if all of the requirements under the section are satisfied. This section states:

You make a creditable acquisition if:

(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 term 'creditable purpose' is defined in section 11-15 of the GST Act to mean:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

It is considered that the acquisition if made by the Entity would meet all the requirement of section 11-5 of the GST Act as:

Similar to the earlier acquisition of the ROT goods under a pre-appointment contract, the acquisitions of the cancelled ROT goods under a new contract would be made in carrying on an enterprise. The ROT goods would be acquired to make taxable not input taxed supplies and they would not be acquired for a domestic or private nature.

The supply of the ROT goods by the supplier would be a taxable supply (similar to the earlier supply to the Entity) and a tax invoice would be issued by the supplier.

The Entity would pay the purchase price for the acquisition of the ROT goods (if they actually acquired the ROT goods)

The Entity is registered for GST.

Therefore, the Entity would, in the absence of paragraph 58-10(1)(b) of the GST Act, be entitled to an input tax credit in respect of the acquisition of the cancelled ROT goods from the supplier.

It should be noted that section 58-10(3) of the GST Act provides further qualification to paragraph 58-10(1)(b) of the GST Act discussed above. This subsection states:

(3) This section does not apply to an input tax credit for a *creditable acquisition to the extent that the *incapacitated entity provided the *consideration for the acquisition before the *representative became a representative of the incapacitated entity.

This subsection provides an exception to the general rule in paragraph 58-10(1)(b) of the GST Act. In particular, the Receivers are not entitled to any GST-related amounts to the extent that the consideration for a creditable acquisition was provided before the appointment of the Receivers. In these circumstances, the Entity would remain entitled in respect of such amount.

It is considered that subsection 58-10(3) of the GST Act does not apply in this circumstance as the new contract (for the acquisition of the cancelled ROT goods) was entered into between the Receivers and the supplier after their appointment.

Consequently, the Receivers are entitled to an input tax credit arising from the acquisition of the ROT goods from the supplier as the making of the acquisition to which the input tax credit relates is within the scope of the Receivers' responsibility or authority for managing the Entity's affairs as discussed above.

Question 3

Summary

No, the Receivers do not have an increasing adjustment for the cancellation (in part) of the earlier acquisition of the ROT goods. The increasing adjustment is applicable to the Entity.

Detailed reasoning

The part return of the goods to the supplier is an adjustment event under paragraph 19-10(2)(a) of the GST Act. An adjustment event is the trigger for determining whether there is an adjustment in respect of an acquisition under section 19-70 of the GST Act.

In this circumstance, an adjustment arose from the cancellation of an earlier acquisition (by the Entity) of the ROT goods as the requirements under subsection 19-70(1) of the GST Act are met:

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

· an input tax credit on the acquisition was attributable to an earlier tax period, and

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

As the previously attributed input tax credit amount is greater than the corrected input tax credit amount, there would be an increasing adjustment [which equal the difference between the previously attributed input tax credit amount and the corrected input tax credit amount (section 19-80 of the GST Act)].

Paragraph 58-5(2)(c) of the GST Act states:

(2) Subject to this Division, any other act, or any omission, of an entity in the capacity of a *representative of another entity that is an *incapacitated entity is taken to be an act or omission of the other entity, but only for the purposes of determining, for the purposes of the *GST law:

(a) …, or

(b) …, or

(c) whether an *adjustment arises in relation to a supply, acquisition or importation, or the amount of such an adjustment.

Paragraph 1.20 of the EM explains further the application of the paragraph:

Paragraph 58-5(2)(c) ascribes acts or omissions that give rise to an adjustment to the incapacitated entity. New section 58-10 is the relevant provision that allocates the relevant liability or entitlement arising from the adjustment to the representative in specified circumstances.

Paragraph 58-10(1)(c) of the GST Act provides the exceptions in which the representatives have adjustment rather than the incapacitated entity. This subsection states:

(1) A *representative of an *incapacitated entity:

(a) …

(b) …

(c) has any *adjustment that the incapacitated entity would, but for this section or section 48-50, have;

to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

Under this paragraph, the Receivers have any adjustment that would, in the absence of the paragraph, be an amount that the Entity would have. However, this only apply to the extent that the making of the supply or acquisition to which an amount of adjustment relates is within the scope of the Receivers' responsibility or authority for managing the Entity's affairs.

As discussed in question 2, we consider that where the Receivers notify the supplier of the appointment and entered into a new contract, the acquisition would be within the scope of the Receivers' responsibility or authority to manage the Entity's affairs.

In this circumstance, the return of a part of the ROT goods to the supplier was made under a pre-appointment contract. The Receivers did not make the acquisition to which the adjustment relates.

Consequently, section 58-10(1) did not apply to allocate the increasing adjustment to the Receivers. That is the Entity has the increasing adjustment.

Under section 58-60 of the GST Act, the Receivers are required to notify the Commissioner of certain liabilities as follows:

(1) A *representative of an *incapacitated entity must notify the Commissioner, in the *approved form, of an amount of GST for which the entity is liable, or an *increasing adjustment that the entity has, if:

(a)  the representative becomes aware, or could reasonably be expected to have become aware, of the amount of GST, or the adjustment; and

(b)  the amount of GST, or the adjustment, has not been taken into account in any *GST return that has been given to the Commissioner; and

(c)  the Commissioner has not been previously notified of the amount of GST, or the adjustment, under this section.

(2) The notification must be given to the Commissioner before the day on which the *representative declares a dividend to unsecured creditors of the *incapacitated entity.

(3) This section does not apply if the *representative is a representative of a kind that does not have the capacity to declare dividends to unsecured creditors of the *incapacitated entity.

(4) This section does not apply in circumstances determined by the Commissioner under subsection (5).

(5) The Commissioner may, by legislative instrument, determine circumstances in which this section does not apply

Therefore, the Receivers are required to notify the Commissioner any increasing adjustment that the Entity has.