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Ruling

Subject: GST and contributions for loan instalments or repayments of a borrowing

Question

Is a payment by Entity B to Entity A for loan instalments or repayments of a borrowing, consideration for an input taxed supply by Entity A?

Answer

No. The payment by Entity B to Entity A for loan instalments or repayment of a borrowing is not consideration for a supply made to it by Entity A.

Relevant facts and circumstances

Entity A is registered for GST.

Entity B participates in a project managed by Entity A.

Entity A, Entity B and a Lender (Entity C) enter into a Loan Agreement.

Entity A uses the lending facility under the Loan Agreement to establish the project and acquire the necessary capital assets to run the project for Entity B.

Entity A receives payments from Entity B in relation to the lending facility provided by Entity C. These payments are collected by Entity A to pay the loan.

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements that must be met for an entity to make a taxable supply. It states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

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

 

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act).

Subsection 9-30(2) states as follows:

(2) A supply is input taxed if:
(a) it is input taxed under Division 40 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

Note:

If a supply is input taxed, there is no entitlement to an input tax credit for the things that are acquired or imported to make the supply (see sections 11-15 and 15-10).

Division 40 and in particular Section 40-5 of the GST Act provides that a financial supply is input taxed and has the meaning given by the A New Tax System (Goods And Services Tax) Regulations 1999 (GST Regulations).

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

a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to the supply of the interest.

Item 2 in the table of subregulation 40-5.09(3) of the GST Regulations provides that an interest in or under a debt, credit arrangement or right to credit, including a letter of credit is a financial supply. 

Part 2 of Schedule 7 to the GST Regulations lists examples of things that fall within Item 2. Relevantly, borrowing and lending, including establishing, maintaining and discharging loans are listed as examples of things that fall within item 2.

Schedule 1 of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) defines "Debt" and "Loan" as follows:

Debt: An amount due from one entity to another or a presently existing obligation to pay an ascertainable amount at a future time.

Loans: A loan is a credit arrangement under which the lender provides the use of its funds on specified terms under a business contract.

Paragraph 37 of GSTR 2002/2 provides that when an entity borrows money from a lender on terms that include the payment of interest, that entity creates an interest in a debt which includes the payment of interest. The lender creates and supplies an interest in a credit arrangement. Both the lender and borrower would make a supply of a financial interest (under item 2 in subregulation 40-5.09(3) of the GST Regulations) to the other, and each supply would be consideration for the other.

Therefore the supply of a loan under which there is an obligation to repay the principal amount and interest is a financial supply to the extent that all the conditions of subregulation 40-5.09(1) of the GST Regulations are satisfied.

In this case, the Loan Agreement is entered into between Entities A, B and C for a secured lending facility. The Loan Agreement provides that the purpose of the borrowing is to provide for the establishment, operation and management of a project.

Given the terms of the Loan Agreement, Entity B is a party to the Loan Agreement with Entity C and as such there is a binding obligation (as set out in the Loan Agreement) which makes Entity B liable for the debt created by the lending facility.  

Payments made by Entity B in relation to the lending facility will be a financial supply to the extent that all the conditions of subregulation 40-5.09(1) of the GST Regulations are satisfied. The principal component of these payments arises as a consequence of a financial supply and therefore no GST will apply. The interest component of these payments is the consideration for the provision of a financial supply being the provision of a debt or credit arrangement and is therefore input taxed.

On the basis that Entity B is liable to make the payment for the Loan, it is considered that the payments received by Entity A do not represent consideration for a supply by Entity A. Rather, Entity A is merely collecting the payments to meet Entity B's obligation to pay the loan amounts under the Loan Agreement.