Edited version of your written advice

Authorisation Number: 1012826967826

Date of advice: 19 June 2015

Ruling

Subject: GST and new agreement

Question 1

Is the new arrangement between the parties including the supplies and acquisitions to be made between the parties under the new arrangement (NA) substantially the same as that referred to the Initial Ruling and on this basis, the parties can continue to rely upon the Initial Ruling with respect to the new arrangement?

Answer

A private ruling is a written expression of the Commissioner's opinion about the way in which a relevant provision applies or would apply to an entity. The Commissioner cannot rule on matters outside the scope of the relevant provisions.

Therefore, the commissioner cannot rule on whether the new arrangement between the parties including the supplies and acquisitions to be made between the parties under the NA is substantially the same as that referred to in the Initial Ruling.

Question 2

Where the NA is terminated by the Commonwealth as a result of a policy change and a Termination Payment is made by the Commonwealth to the Contractor pursuant to clause 2.2 of the NA, will there be a taxable supply made by the Contractor to the Department for which GST will be payable by the Contractor?

Answer

Yes, the Contractor will be making a taxable supply where the NA is terminated by the Department as a result of a policy change and a Termination Payment is made by the Department to the Contractor pursuant to clause 2.2 of the NA.

Question 3

Where goods and/or services are provided by the Contractor to the Department in accordance with clause 37 of the NA, will the Contractor only be required to account for GST on those goods and/or services to the extent that the Contractor actually receives monetary consideration for the supply, being the amount paid by the Department to the Contractor net of any available discounts, if any?

Answer

Yes, where goods and/or services are provided by the Contractor to the Department in accordance with clause 37 of the NA, the Contractor will only be required to account for GST on those goods and/or services to the extent that the Contractor actually receives monetary consideration for the supply, being the amount paid by the Commonwealth to the Contractor net of any available discounts, if any.

Relevant facts and circumstances

XXXXXXX

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 section 9-10

Taxation Administration Act 1953 section 357-55

Reasons for decision

Practice Statement Law Administration PS LA 2008/3 provides assistance in the form of advice and guidance on the application of the laws administered by the Commissioner and enables taxpayers to understand and meet their obligations and be aware of their rights and entitlements in a self-assessment system.

Paragraph 15 of PS LA 2008/3 states the following:

15. A ruling is an expression of the Commissioner's opinion of the way in which a provision of a tax law applies, or would apply, to a taxpayer who has obligations or entitlements under those laws. A ruling is a way for a taxpayer to find out the Commissioner's view about how the laws apply, thereby reducing uncertainty when they self-assess their obligations or entitlements.

Provisions that are relevant to rulings are defined in section 357-55 of Schedule 1 to the Taxation Administration Act 1953. Relevant provisions are provisions of Acts and regulations administered by the Commissioner that are about any of the following:

• income tax;

• Medicare levy;

• fringe benefits tax;

• franking tax (that is, franking deficit tax, over-franking tax and venture capital deficit tax);

• withholding taxes (including non-resident withholding taxes and mining withholding tax);

• petroleum resource rent tax;

• indirect tax (including goods and services tax (GST), wine tax and luxury car tax (LCT));

• excise duty;

• the administration and collection of the above taxes, levies and duties;

• product grants or benefits mentioned in section 8 of the Product Grants and Benefits Administration Act 2000 (including energy grants, cleaner fuel grants and product stewardship (oil) benefits), or the administration or payment of the product grants and benefits;

• a net fuel amount, or the administration, collection or payment of a net fuel amount;

• a net amount or the administration, collection or payment of a net amount; and

• a wine tax credit, or the administration or payment of a wine tax credit.

Only provisions of Acts and regulations administered by the Commissioner are directly covered by section 357-55 of Schedule 1 to the TAA. Therefore, for example, the Commissioner cannot directly rule on matters that are outside the scope of the relevant provisions on which the Commissioner can directly rule.

Consequently, the Commissioner cannot rule on whether the new arrangement between the parties including the supplies and acquisitions to be made between the parties under the NSA is substantially the same as that referred to in the Initial Ruling. This is because those are matters outside the scope of the relevant provisions.

Question 2

Summary

Yes, the Contractor will be making a taxable supply where the NSA is terminated by the Department as a result of a policy change and a Termination Payment is made by the Department to the Contractor pursuant to clause 2.2 of the NSA.

Detailed reasoning

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply if it makes the supply for consideration, in the course or furtherance of an enterprise that it carries on, the supply is connected with Australia, and the entity is registered, or required to be registered for GST.

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

In this instance the issue is whether the Contractor makes a supply for which the termination payment is consideration, and if so is the supply a taxable supply.

The meaning of 'supply' is given in section 9-10 of the GST Act.

Subsection 9-10(1) of the GST Act relevantly provides that a 'supply' is any form of supply whatsoever.

Subsection 9-10(2) of the GST Act provides that without limiting subsection (1), 'supply' includes any of the following:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply;

(g) an entry into, or release from, an obligation:

• to do anything;

• to refrain from an act;

• to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to above.

The Commissioner's view on the meaning of 'supply' is set out in Goods and Services Tax Ruling GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9).

GSTR 2006/9 sets out a number of propositions to assist in analysing a transaction to identify supplies made in the transaction. Proposition 5 is that to 'make a supply' an entity must 'do something'. The action required by proposition 5 does not have to be the supply itself. If an entity takes some action that causes a supply to occur, that can be sufficient (paragraph 83A of GSTR 2006/9 and Hornsby Shire Council v. Commissioner of Taxation [2008] AATA 1060; 2008 ATC 10-061; 71 ATR 442).

In agreeing to clause 2.2 of the NA that if the services agreement is terminated by the Department as a result of a policy change the Contractor may invoice the Department for an amount (GST inclusive) for any loss or expenditure incurred as a direct consequence of the termination the Contractor has 'done something' for the purposes of Proposition 5.

Proposition 9 of GSTR 2006/9 is that the creation of expectations alone does not establish a supply. When the Department and the Contractor entered into the agreement, they were bound by the specific provision of a clause of the NA that the Department's total liability to the Contractor arising from the Department terminating this agreement under the relevant clause is limited to the amount received. This was more than simply the creation of expectations as contemplated in Proposition 9.

The principles discussed in Goods and Services Tax Ruling GSTR 2009/3 Goods and services tax: cancellation fees (GSTR 2009/3) are also relevant to determining this issue. GSTR 2009/3 recognises a 'release supply' when a customer exercises their contractual right to be released from the performance of their obligations, for which they agree to pay a cancellation fee as consideration.

The termination in this instance is not a breach of the contract (paragraphs 51-58 of GSTR 2009/3). Paragraph 55 of GSTR 2009/3 states:

55. Without limiting subsection 9-10(1), a supply includes the supply of services, the creation or surrender of any right and the release from an obligation under paragraphs 9-10(2)(b), 9-10(2)(e) and 9-10(2)(g) respectively. In the context of the broad definition of supply, and having regard to the things included as supplies as set out in subsection 9-10(2), the Commissioner's view is that, if it is not consideration for any other supply, a cancellation fee may be consideration for the creation or surrender of rights and/or a release supply that occurs when an arrangement is cancelled, and/or a combination of these supplies under paragraph 9-10(2)(h).

In the context of the overall operation of the agreement, formal notification of termination, making the appropriate payment, may be viewed as having similar characteristics to the early termination (or cancellation fee) scenarios described in GSTR 2009/3.

Paragraph 18 of GSTR 2009/3 notes that a supply for which a cancellation fee may be consideration can be 'a release from an obligation to do anything, refrain from an act or tolerate an act or situation'.

In agreeing to the relevant clause of the NA that if the services agreement is terminated by the Department as a result of a policy change the Contractor may invoice the Department for an amount (GST inclusive) for any loss or expenditure incurred as a direct consequence of the termination the Contractor has 'done something' for the purposes of Proposition 5.

Thus, in exercising its discretion to terminate the agreement under clause 2.2 of the NA and in paying the required termination amount, the Department acquired a release from the Contractor in relation to its ongoing obligations under the agreement.

Paragraph 55 of GSTR 2009/3 contemplates that a 'release supply' may stand alone from a supply that is constituted by the 'creation or surrender of rights' and the release supply that occurred in this case was a release by the Contractor of the Department relevant obligations under the agreement.

This 'release supply' is made for consideration, in the course or furtherance of the Contractor's enterprise, it is connected with Australia, and the Contractor is registered for GST. The supply is neither GST-free nor input taxed. Therefore it is a taxable supply.

As the 'release supply' is a taxable supply, the Department is providing consideration for a taxable supply under section 9-5 of the GST Act when it makes a payment to the Contractor in the course of exercising its right to terminate the agreement.

Question 3

Summary

Yes, where goods and/or services are provided by the Contractor to the Department in accordance with a clause of the NA, the Contractor will only be required to account for GST on those goods and/or services to the extent that the Contractor actually receives monetary consideration for the supply, being the amount paid by the Department to the Contractor net of any available discounts, if any.

Detailed reasoning

Effectively a clause of the agreement provides two options to the Department, namely:

• the Department can continue to receive a payment for liquidated damages from the Contractor or obtain a reduction in the contract price as a result of the Contractor failing to meet specified service levels;

• the Department can elect to receive goods and/or services from the Contractor free of charge or at a discounted price.

The GST consequences of the different options considered under that clause are examined below:

Option one

Under option one the Department can continue to receive a payment for liquidated damages from the Contractor or obtain a reduction in the contract price as a result of the Contractor failing to meet specified service levels (Service Level Rebate), as the case may be.

Therefore there are two things to consider under option one:

• receipt of a payment by the Department from the Contractor for liquidated damages;

• the Department obtaining a reduction in the contract price as a result of the Contractor failing to meet specified service levels.

Receipt of a payment by the Department from the Contractor for liquidated damages:

GSTR 2001/4 explains how a payment (or act or forbearance) that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of the GST Act.

Paragraph 22 of GSTR 2001/4 provides that 'essentially, a supply is something which passes from one entity to another'. In paragraph 71 of GSTR 2001/4, the Commissioner also identifies situations where the subject matter of a claim for damages or compensation cannot be regarded as a 'supply'. Examples include property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.

Since there is no supply made by the Department for the receipt of a payment for liquidated damages from the Contractor, the compensation will not be consideration for a taxable supply made by the Department.

Therefore, there are no GST consequences attached to the compensation payment.

The Department obtaining a reduction in the contract price as a result of the Contractor failing to meet specified service levels:

We agree that any reduction in the contract price as a result of the Contractor failing to meet specified service levels will be either a reduction in or an adjustment to the contract price and the Contractor will have to account for GST on the consideration received from the Department.

The Department can elect to receive goods and/or services from the Contractor free of charge or at a discounted price:

Where the Department elects to receive goods and/or services free of charge there are no GST implications for the contractor. This is because not all of the conditions of a taxable have been met.

Where the Department elects to receive goods and/or services for a discount the Contractor accounts for GST on the consideration received for those goods or services.

Note: In this ruling the provision of non-monetary consideration has not been considered.