Edited version of your written advice

Authorisation Number: 1012675110886

Ruling

Subject: GST and decreasing adjustment for incapacitated entity.

Questions

1. Do you have a decreasing adjustment of $X?

2. If you have a decreasing adjustment of $X, is that adjustment attributable to the GST return for the monthly tax period ended Y?

3. If you have a decreasing adjustment, is that adjustment ascribed to you being the incapacitated entity, or to the liquidators being the representatives of the incapacitated entity?

Answers

1. Yes, you have a decreasing adjustment of $X

2. Yes, the adjustment is attributable to the GST return for the monthly tax period ended Y.

3. The adjustment is ascribed to you being the incapacitated entity.

Relevant facts and circumstances

You (in liquidation) were registered for GST.

You entered into a contract (the contract) with the recipient to design and construct a plant.

You provided security in the form of bank guarantees (the bank guarantees).

You made claims for progress payment to the superintendent. The superintendent assessed the claims and issued payment certificates stating the amount of payments to be made. You paid to the recipient or the recipient paid you, as required, amounts not less than those shown in such certificates.

You issued the recipient with a tax invoice including $X of GST amount.

The recipient paid the tax invoice. You lodged a GST return for the monthly tax period and attributed the $X of GST arising from the issue of the tax invoice.

W was appointed your voluntary administrators.

The superintendent issued a payment certificate (certificate). The effect of the certificate was that you were obliged to repay all money received in relation to the contract to the recipient.

The recipient called upon the bank guarantees for their full value.

You have advised that the amount $X which is the GST payable amount on the tax invoice issued by you can be considered as having been repaid when the recipient called upon your bank guarantees for their full value.

W was appointed your liquidators.

You are an incapacitated entity and you have not lodged a GST return for the tax period ended Y, during which the superintendent issued the payment certificate, or any subsequent tax period.

You plan to issue an adjustment note to the recipient and will lodge a GST return for the monthly tax period when the certificate was issued.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 19-A

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 29-A

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

A New Tax System (Goods and Services Tax) Act 1999 Division 195

Reasons for decision

Question 1:

Adjustment events

Subsection 19-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines adjustment events as any event which has the effect of:

a) cancelling a supply or acquisition; or

b) changing the consideration for a supply or acquisition; or

c) causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

Furthermore, without limiting subsection 19-10(1) of the GST Act, subsection 19-10(2) of the GST Act describes the following as adjustment events:

a) the return to a supplier of a thing, or part of a thing, supplied (whether or not the return involves a change of ownership of the thing);

b) a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise

(c) a change in the extent to which an entity that makes an acquisition provides, or is liable to provide, consideration for the acquisition (unless the entity accounts on a cash basis)

Goods and Services Tax Ruling (GSTR) 2013/2 provides the Tax Office view on adjustment notes and events. Paragraph 7 of GSTR 2013/2 states, in part, as follows: 

7. Adjustments can arise because of adjustment events. Under the GST Act, an adjustment event occurs when

·   a supply or acquisition is cancelled;

·   the consideration for a supply or acquisition is changed;

·   a supply becomes taxable or stops being taxable; or

·   an acquisition becomes creditable or stops being creditable.

A change to the previously agreed consideration for a supply

After the issue of the superintendent's certificate during the tax period ended Y, the recipient called upon your bank guarantees for their full value.

Since the consideration for your supply has been reduced due to your bank guarantees being paid to the recipient, we consider there was an adjustment event through the change in consideration. The adjustment event is the issue of the superintendent's certificate.

On the information you have provided, we accept that the change in consideration was subsumed within payment of the bank guarantees that you had paid the recipient. Based on what you have said, it is reasonable to accept that you repaid some of the consideration you received from the recipient as your bank guarantees were paid by you to the recipient.

As discussed above, the issue of the superintendent's payment certificate is an event under subsections 19-10(1)(b) and 19-10(2)(b) of the GST Act. The event reduces the consideration for your supply; hence you have an adjustment event.

Paragraphs 5 and 6 of GSTR 2013/2 state:

Adjustments

5. If GST or input tax credits are attributable to a tax period, but later events change the amount of GST or input tax credits for the supply or acquisition, a supplier or recipient may need to make adjustments to their net amount in the later tax period.

6. There are increasing adjustments and decreasing adjustments. An increasing adjustment increases the net amount for the tax period, while a decreasing adjustment decreases the net amount for the tax period

You have an adjustment event for your supply to the recipient, and the corrected GST amount ($0) is less than the previously attributed amount ($X), which results in a decreasing adjustment of $X under section 19-55 of the GST Act.

Question 2

Paragraph 8 of GSTR 2013/2 states:

Obligation of the supplier to issue an adjustment note

8. The supplier must issue an adjustment note within 28 days of the earlier of:

• receiving a request by the recipient of the supply; or

• becoming aware of the adjustment (where the supplier issued, or was requested to issue, a tax invoice).

Attribution of the decreasing adjustment

Subsection 29-20(1) of the GST Act provides that an adjustment an entity has is attributable to the tax period in which the entity becomes aware of the adjustment. The word adjustment as used in subsection 29-20(1) is defined in section 195 of the GST Act to include a decreasing adjustment.

The GST Act does not provide any specific guidance in relation to when an entity becomes aware of an adjustment it has. However, in relation to adjustments which arise from an adjustment event, an entity becomes aware of the adjustment when it becomes aware the event has occurred.

In the case of a decreasing adjustment, subsection 29-20(3) of the GST Act provides that the adjustment is attributable to the first tax period for which the entity gives the Commissioner a GST return when it holds an adjustment note.

You became aware of the decreasing adjustment during the monthly tax period ended Y, upon receipt of the superintendent's payment certificate. You state that you will issue an adjustment note to the recipient and lodge the GST return for the monthly tax period ended Y.

Subsection 29-20(3) of the GST Act does not apply to prevent the adjustment being attributed to the period that you became aware of the adjustment event, provided a valid adjustment note is held. Accordingly, you can attribute the decreasing adjustment you have under section 19-55 of the GST Act to the tax period ended Y provided you issue the adjustment note before lodging your GST return. As the liquidators are the only ones with power to act for and on behalf of you, it will be necessary for them to issue the adjustment note on your behalf.

Question 3:

If XXXX has a decreasing adjustment, is that adjustment ascribed to XXXX being the incapacitated entity, or to the liquidators of XXXX being the representatives of the incapacitated entity?

Representative of the incapacitated entity:

The definition of 'representative' in section 195-1 of the GST Act includes an administrator and a liquidator.

Division 58 of the GST Act deals with activities of a representative performed for and on behalf of an incapacitated entity for GST purposes.

Subject to certain exceptions, a supply, acquisition or importation by a representative, in its capacity as a representative, is taken, for GST purposes, to be a supply, acquisition or importation of the incapacitated entity (section 58-5 of the GST Act). However, the representative (and not the incapacitated entity) is liable for or entitled to certain GST consequences that arise from a supply, acquisition or importation or related acts or omissions during the representative's appointment (section 58-10 of the GST Act). The key words are "to the extent that the making of the supply is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs".

General rule

A *representative of an *incapacitated entity: ….

(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.

Exceptions for certain adjustments

This section does not apply to an adjustment to the extent that one or more of the following apply:

(a) if the adjustment relates to a supply - the incapacitated entity received the consideration for the supply before the representative became a representative of the incapacitated entity;….

(c) the adjustment would not be attributable to a tax period applying to the representative in the capacity of a representative of the incapacitated entity.

We agree with the submissions in the private ruling application that, pursuant to subsection 58-10, the decreasing adjustment should not be ascribed to the liquidators.

We note that the liquidators were appointed in their capacity as administrators of on a date which was before the adjustment event. As the definition of "representative" in section 195 includes administrators, they were required to register as your representatives for GST from that point onward. As they became aware of the adjustment whilst acting in that capacity, it was incumbent upon them to issue a valid adjustment note to the recipient for and on behalf of you within 28 days of becoming aware of the adjustment. This would have made the adjustment event attributable to a tax period in which they were responsible for administering your affairs. Applying subsection 58-10(4)(a) of the GST Act, because you received the consideration for the supply before the liquidators were appointed (either in that capacity or as administrators), the decreasing adjustment is ascribed to the incapacitated entity.