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Ruling

Subject: GST and attribution of advance payment

Question

When do you attribute the GST on payments for your supplies that you receive in advance?

Answer

You attribute the GST in the tax period in which the payment is received; or, if before any of the payment is received an invoice is issued relating to the supply, the tax period in which the invoice is issued.

Relevant facts and circumstances

You operate a business and account for GST on a non-cash basis.

Under a services agreement, you are an authorised representative of another entity, Company X.

You are offered to receive certain payments (the payments) in advance. The payments are based on a business activity over a six month period and are normally paid every six months upon qualifying for such a payment.

The payments are for investing in two financial products.

To be eligible for the payments, you must have an agreement with Company X or its related entity. As you operate under the licence of Company X, you have qualified for these payments for a number of years.

If you cease to be a licensee, any advance payments made to you would need to be repaid.

Reasons for decision

Division 29 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) establishes the basic rules for the attribution of GST and input tax credits (the basic attribution rules).

If you account for GST on a basis other than cash, subsection 29-5(1) of the GST Act provides that the GST payable by you on a taxable supply is attributable to:

(a) the tax period in which any of the consideration is received for the supply; or

(b) if, before any of the consideration is received, an invoice is issued relating to the supply - the tax period in which the invoice is issued.

Accordingly you attribute all the GST payable on a taxable supply to the earlier of the tax periods when:

· you received any of the consideration for the supply; or

· you issued an invoice is for the supply.

However, Division 156 of the GST Act provides special attribution rules in relation to supplies and acquisitions that are made for a period or progressively over a period where the consideration for the supply is made progressively or periodically.

Subsection 156-5(1) of the GST Act states:

(1)     The GST payable by you on a *taxable supply that is made:

(a)     for a period or on a progressive basis; and

(b)     for *consideration that is to be provided on a progressive or periodic basis;

is attributable, in accordance with section 29-5, as if each progressive or periodic component of the supply were a separate supply.

 (*denotes a defined term under section 195-1 of the GST Act)

Division 156 of the GST Act does not apply if you account on a cash basis.

A supply is for a period when it is made over a specified length of time or for a time with an identifiable end point; while a supply is made on a progressive basis when the contract or agreement provides for stages of the supply during the course of the supply. A supply may also be a progressive supply where goods or services are to be supplied on an ongoing basis.

Consideration is provided on a progressive basis when it is paid by instalments that reflect stages of a supply or acquisition. Consideration is provided on a periodic basis when it is made in equal or unequal instalments provided upon expiration of specified periods.

In this case, your supply for which you receive the payments is made on a progressive basis; and the payments are made on a periodic basis. Furthermore, you account for GST on a non-cash basis. As such, Division 156 of the GST Act applies.

Goods and Services Tax Ruling GSTR 2000/35 provides guidance on how to attribute GST and input tax credits with respect to supplies and acquisitions made for a period or on a progressive basis. It also discusses the application of Division 156 of the GST Act to particular payment arrangements.

As regards advance payments, paragraphs 94-100 of GSTR 2000/35 state:

94. A contract or agreement may call for a payment to be made in advance of the supply of the goods or services which are the subject of the agreement. Such payments are commonly called 'advance payments'.

95. Where an advance payment is the first of a series of payments for a supply or acquisition for a period or on a progressive basis, attribution of the GST payable and input tax credits will be in accordance with Division 156.

96. If you account on a basis other than cash, you attribute GST and input tax credits to the earlier of the tax periods in which either any of the consideration is provided, or an invoice is issued.

97. The component of the supply or acquisition to which the advance payment applies may not be readily identifiable, in which case, it will correspond to the proportion of the total payment represented by the advance payment.

Example 9

98. Michelle has a bookkeeping business producing a monthly set of accounts for each client.

She has a number of on-going clients, but all new clients are required to enter into an agreement to utilise her services for 12 months at a GST inclusive fee of $1,100 per month with two months payable in advance . She accounts on a basis other than cash . No invoices are issued . Michelle lodges quarterly GST returns.

99. A new client signs an agreement on 15 March 2001 and, in accordance with the agreement, makes a $2,200 payment in advance. The advance payment can be identified as payment for two months' services . In the last two months of the contract the new client will not have to make any payment to Michelle .

100. As Michelle's services are periodic in nature, and as the consideration is provide periodically, GST is attributed under subsection 156-5(1) as if each month's services were a separate supply. Michelle's GST return for the quarter ended 31 March 2001 includes $200 (1/11x $2,200) GST in respect of the advance payment made by the new client.

In this case, you receive payments in advance. As you account for GST on a non-cash basis and Division 156 of the GST Act applies, you attribute the GST in the tax period in which you receive the payment. If you issue an invoice before you receive the payment, then you attribute the GST in the tax period in which you issue the invoice.