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Edited version of your written advice
Authorisation Number: 1012859939450
Date of advice: 27 August 2015
Ruling
Subject: GST and interest payments
Question
Is the payment of interest received by Entity A from Entity B (Purchaser) under the contract of sale (the Contract), consideration for a taxable supply?
Answer
No. The payment of interest to Entity A is not consideration for a taxable supply.
A supply will not be a taxable supply where it is an input taxed supply. For the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a financial supply is input taxed. Pursuant to subsection 40-5(2) on the GST Act, the term financial supply has the meaning given by the regulations.
On the understanding that subregulation 40-5.09(1) of the GST Regulations is satisfied, the provision, acquisition or disposal of an interest mentioned in subregulation 40.5.09(3) will be a financial supply.
Item 2 in the table in GST Regulations subregulation 40-5.09(3) (Item 2) lists a debt, credit arrangement or right to credit, including a letter of credit. The glossary in Schedule 1 of Goods and Services Tax Ruling GSTR 2002/2 (GSTR 2002/2) defines a credit arrangement as 'an arrangement under which an entity lends money on terms that include deferred repayment, or under which payment of a debt owed by one entity to another is deferred or time is allowed to pay'.
Under the terms of the Contract, Entity A (as Vendor) is owed an amount which remains unpaid (by the Purchaser) on/by the Completion Date. In respect of the amount outstanding, Entity A charges the Purchaser interest for any late payment.
Therefore consistent with paragraphs 37 to 41 of GSTR 2002/2 the payment of interest to Entity A is consideration for an input taxed supply.
On this basis the interest received by Entity A is not a taxable supply and there is no GST liability on this amount.
Relevant facts and circumstances
Entity A is registered for GST in Australia.
Entity A (as Vendor) and Entity B (as Purchaser) entered into a contract for the sale of land (the Contract).
The supply of the land under the Contract was a taxable supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
Under the Contract, the consideration for the Land was a GST inclusive amount of $X.
Under the terms of the Contract the completion date was 4 months after the Contract Date.
Settlement of the Contract did not occur on the Completion Date but did occur sometime after.
The Contract provided that if completion does not take place by Completion Date the Purchaser must pay the Vendor interest at X% per annum on the unpaid balances of the Price.
A clause in the Contract provides that unless otherwise expressly stated, all prices or other sums payable or Consideration to be provided under or in accordance with the Contract are exclusive of GST.
The Contract provides that Entity B must pay to Entity A an additional amount equal to the GST payable on any taxable supply made under the Contract. The payment of that additional amount must be made at the same time and in the same manner as payment for the taxable supply is required to be made under the Contract.
On settlement of the Contract an amount of approximately $Y in interest was payable pursuant to the terms of the Contract.
After settlement of the Contract, Entity A remitted no amount of GST to the ATO in respect of the interest amount.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 9-5
A New Tax System (Goods and Services Tax) Act 1999 40-5