Edited version of your private ruling

Authorisation Number: 1012511708004

Ruling

Subject: GST and Input Tax Credits

Question

Does Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 apply to the transaction described in the facts provided?

Answer

In this case the Commissioner is of the view that Division 156 of the GST Act applies so that your input tax credit is attributable, in accordance with section 29-10 of the GST Act, as if each progressive or periodic component of the acquisition were a separate acquisition.

It is therefore not necessary to rule upon the application of Division 165 of the GST Act to the arrangement described in your private ruling request. However, if our view that Division 156 applies is not correct, then the Commissioner would further consider the application of Division 165 of the GST Act to the arrangement described.

Relevant facts and circumstances

The buyer is registered for the goods and services tax (GST) and accounts on an accrual basis.

The seller is registered for GST and accounts on a cash basis.

In 20XX, the buyer entered into a written agreement to acquire from the seller the following rights ("the Rights"):

a. the exclusive global distribution, commercialisation, exploitation of the patented product ("the Product") and associated technology and;

b. an exclusive licence to exploit a Methodology Patent.

A schedule of the contract provides that the consideration for the exclusive distribution, commercialisation and exploitation of the Product, Inventions and Methodology is a fixed payment of $xxx excluding GST.

Payment of the consideration must be completed on or before specific dates.

In 20XX, the seller issued a tax invoice for the buyer's acquisition of "the Rights" pursuant to the written agreement.

The tax invoice shows a total amount of $xxx; inclusive of GST.

The buyer's business plan is to distribute, commercialise, exploit and otherwise deal with each concerned entity on a global basis.

The written agreement

· A clause of the written agreement provides that the agreement continues for the "Initial Term" unless otherwise terminated in accordance with its terms. The expression "Initial Term" means the period of 10 years from the date of the agreement.

· Clause xx of the written agreement provides that the seller will register a security interest over the buyer until the final payment is completed.

· Clause xx of the written agreement provides that the seller must accept any order placed by the buyer for the Product at the Product Price.

· Clause xx of the written agreement provides that the seller must perform the Methodology for the buyer for the Methodology Price.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) 1999 Act (GST Act) section 29-5

A New Tax System (Goods and Services Tax) 1999 Act (GST Act) section 29-10

A New Tax System (Goods and Services Tax) 1999 Act (GST Act) subsection 156-5(1)

A New Tax System (Goods and Services Tax) 1999 Act (GST Act) subsection 156-10(1)

A New Tax System (Goods and Services Tax) 1999 Act (GST Act) section 156-25

Reasons for decision

Attribution rules

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

Goods and Services Tax Ruling GSTR 2000/29 provides guidance on the attribution of GST payable, input tax credits and adjustments to tax periods.

Paragraphs 13, 14, and 35 of GSTR 2000/29 have been reproduced below:

13. The basic attribution rules are set out in Division 29 of Part 2-6 of the GST Act. These rules are about when you, account for GST payable on taxable supplies, input tax credits for creditable acquisitions and creditable importations, and adjustments. The basic attribution rules differ depending on whether or not you account for GST on a cash basis.

14. If you account for GST on a cash basis, you attribute GST on a taxable supply to the tax period in which you receive consideration for the supply, but only to the extent that the consideration is received in the tax period. This means that if, in a particular tax period, you receive only part of the consideration for a supply, you attribute GST on the supply only to the extent that the consideration is received in that tax period. For example, if in a particular tax period you received $5,000 as part of the consideration for a supply, you attribute 1/11th of the consideration received, that is, 1/11th of $5,000, as the GST on the supply for that tax period.

35. If you do not account for GST on a cash basis, you attribute all the input tax credit for a creditable acquisition to the earlier of the tax periods in which:

· you provide any of the consideration; or

· an invoice is issued for the acquisition.

This means that you may be entitled to input tax credits before actually paying for the acquisition.

Supplies and acquisitions made on a progressive or periodic basis

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 provides that the GST payable by an entity on a taxable supply that is made for a period or on a progressive basis; and for consideration that is to be provided on a progressive or periodic basis is attributable, in accordance with section 29-5 of the GST Act as if each progressive or periodic component of the supply were a separate supply. 

Similarly subsection 156-10(1) of the GST Act provides that the input tax credit to which an entity is entitled for a creditable acquisition 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 29-10 of the GST Act as if each progressive or periodic component of the acquisition were a separate acquisition.

Periodic supplies and acquisitions 

The special rule in Division 156 of the GST Act is designed to overcome some practical liquidity problems that would occur if the rule in section 29-5 of the GST Act were to apply to contracts for a period or on a progressive basis. The following text is an extract from the House of Representatives Supplementary Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Act (No. 2) 1999 (177 of 1999)

Sup 1.13 Amendments 101 to 104 amend Division 156 to make it clear that the Division applies to supplies and acquisitions that are made for a period. This would cover, for example, a supply of right to use something for a 5 year period where consideration is provided annually.

From the information received, the seller is supplying to the buyer "the Rights" for an initial period of ten years from the date of the agreement. The consideration for "the Rights" is paid by way of regular periodic payments as provided by clause xx. Accordingly Division 156 may be relevant in this instance.

Goods and Services Tax Ruling GSTR 2000/35 describes how to attribute GST and input tax credits with respect to supplies and acquisitions made for a period or on a progressive basis.

Paragraphs 10, 21 and 22 of GSTR 2000/35 have been reproduced below

10. Division 156 (other than section 156-15) applies only to entities that account for GST on a basis other than cash (section 156-25). Generally, the division will produce a similar result for a taxpayer accounting on a basis other than cash as the cash basis of accounting, as it will spread the liability for GST and the availability of input tax credits over the period during which payments are made.

21. If you account for GST on a basis other than cash and you make an acquisition for a period or on a progressive basis you must attribute input tax credits in accordance with Division 156.

22. If the supplier and recipient account on different bases, Division 156 will only apply to the party which accounts on a basis other than cash.

Applying subsection 156-5(1) of the GST Act to the agreement

At the outset subsection 156-5(1) of the GST Act only applies to taxable supplies. Under the agreement with the buyer, the seller is supplying "the Rights". The supply of "the Rights" by the seller is a taxable supply because it satisfies all the elements of section 9-5 of the GST Act and is neither GST-free nor input taxed.

Accordingly, as "the Rights" supplied by the seller to the buyer are taxable supplies we now need to consider whether paragraphs (a) and (b) of subsection 156-10(1) of the GST Act are also satisfied.

(a) for a period or on a progressive basis

Paragraphs 25 to 27 of GSTR 2000/35 state:

 When is a supply or acquisition made for a period?

25. A supply or acquisition you make is for a period when it is made over a specified length of time or for a time with an identifiable end point. This may be stated in your contract, agreement or other similar document. However, a supply will not be for a period merely because there is a stipulated completion date.

26. If a contract for a supply of goods or services provides that they are to be delivered or completed by a specific date, that will not be a supply for a period. A supply for a period will be one which is made on a continuous basis until the stipulated end point occurs, or the period expires. An example of a supply or acquisition for a period is a contract for the supply of maintenance services for a period of 12 months.

 When is a supply or acquisition made on a progressive basis?

27. A supply or acquisition you make is 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, under a contract, goods or services are to be supplied on an ongoing basis. An example of a supply or acquisition on a progressive basis is a contract for supply of property management services by a real estate agent.

Under the agreement, the seller has agreed to supply "the Rights" under the agreement for an initial period of ten years. Therefore, the buyer acquired "the Rights" at the beginning of the ten years to be used by the buyer continuously for that period.

Accordingly paragraph 156-10(1)(a) of the GST Act is satisfied as the acquisition is made for a period.

(b) for consideration that is to be provided on a periodic or progressive basic

 Paragraphs 28 and 29 in GSTR 2000/35 state: 

When is consideration provided on a progressive basis?

28. You provide consideration on a progressive basis when it is paid by instalments that reflect stages of a supply or acquisition: for example, progress payments on a house construction contract.

 When is consideration provided on a periodic basis?

29. You provide consideration on a periodic basis when it is made in equal or unequal instalments provided upon expiration of specified periods. An example of consideration on a periodic basis is where payments are made monthly under an agreement to lease a building.

Under the agreement, the buyer is to make the payments for their acquisition on or before specific dates (clause xx of the contract).

Accordingly paragraph 156-10(1)(b) of the GST Act is satisfied as the consideration is provided on a periodic basis.

To summarise, subsection 156-10(1) of the GST Act applies to the buyer's acquisition because;

i. the acquisition is a creditable acquisition

ii. the acquisition is for an initial period of ten years; and

iii. the consideration is paid on a periodic basis.

Attribution of GST payable and input tax credit entitlement

The consequences of satisfying subsection 156-10(1) of the GST Act is that the input tax credit to which an entity is entitled for a creditable acquisition is attributable, in accordance with section 29-10 of the GST Act, as if each progressive or periodic component of the acquisition were a separate acquisition.

Subsection 156-10(2) of the GST Act is of assistance where the component is not readily identifiable. Subsection 15610(2) of the GST Act provides the following:

· if the progressive or periodic components of such an acquisition are not readily identifiable, the components correspond to the proportion of the total consideration for the acquisition that the separate amounts of consideration represent.

In this case the acquisition of the rights is at the beginning of the ten year period. Therefore, each payment is not representative of any actual acquisition, provided throughout the period. Accordingly, under subsection 156-10(2) of the GST Act the components will be separated out according to each payment.

Goods and Services Tax Ruling GSTR 2003/8 is about the supply of rights for use outside Australia. GSTR 2003/8 provides support for the above arguments at paragraph 136, which states:

136. Division 156 provides a special rule where you do not account for GST on a cash basis and a supply is made for a period or on a progressive basis. Under Division 156, where a supply is made for a period or on a progressive basis and the consideration is provided on a progressive or periodic basis, the GST payable and input tax credits are attributed as if each periodic component were a separate supply/acquisition. An example is where rights are granted for a period in return for the payment of periodic royalties.

The statement in paragraph 136 of GSTR 2003/8 is relevant to the extent it shows that it is the ATO view that Division 156 of the GST Act will apply to supplies of rights that are granted for a period and paid for in periodic payments.

Section 29-10 of the GST Act provides that the input tax credits to which an entity is entitled for its creditable acquisition is attributable to the tax period in which the entity provides any of the consideration for the acquisition or if before any of the consideration is provided an invoice relating to the acquisition is issued - the tax period in which the invoice is issued.

Paragraphs 30 to 34 of GSTR 2000/35 discuss the interaction of Division 156 with sections 29-5 and 29-10 of the GST Act.

30. If the supply or acquisition that you make is one to which Division 156 applies, then you attribute GST and input tax credits as if each component of the supply or acquisition were a separate supply or acquisition.

31. You then attribute GST payable and input tax credits to which you are entitled in respect of each separate component in accordance with the application of sections 29-5 and 29-10.

32. Section 45-5 provides that the special rules in Chapter 4 (which includes Division 156) will override rules in Chapter 2 (which includes sections 29-5 and 29-10), but only to the extent of any inconsistency. For example, inconsistency may occur where a document which is an invoice for the purposes of Division 29 is issued at the commencement of an arrangement and would otherwise have the effect of triggering full attribution at the time it is issued.

33. Where an invoice for the whole supply or a number of components of the supply is issued prior to any payment of consideration, the effect of attributing GST and input tax credits in accordance with paragraphs 29-5(1)(b) and 29-10(1)(b) (for a taxpayer who accounts on a basis other than cash), would be that attribution would occur at the time the invoice issued. However, because this is not consistent with the intended operation of Division 156, the basic attribution rules will be modified by the operation of section 45-5:

· Paragraphs 29-5(1)(b) and 29-10(1)(b) will only apply where an invoice is issued for a particular component;

· Where no invoice which is particular to a component of the supply or acquisition can be identified, then attribution will occur when a payment is made which relates to a particular component.

34. For the purposes of Division 156 an invoice for the whole supply or acquisition, or a number of components of the supply or acquisition, will not be regarded as the relevant invoice for attribution purposes. This document, if it is a tax invoice may nevertheless still be a tax invoice in relation to each component of the supply or acquisition.

As Division 156 of the GST Act applies to the buyer's acquisition, the input tax credits to which the buyer is entitled for its creditable acquisition is attributable, in accordance with section 29-10 of the GST Act, as if each progressive or periodic component of the acquisition were a separate acquisition.

As explained above the buyer can only claim input tax credits for its periodic acquisition according to each payment made.

Section 156-25 of the GST Act provides that Division 156 does not apply to an entity accounting for GST on a cash basis. This means that the seller will attribute GST on its taxable supply to the tax period in which it receives consideration for the supply, but only to the extent that the consideration is received in the tax period.

To reiterate, in this case the Commissioner is of the view that Division 156 of the GST Act applies to attribute your input tax credit.