Edited version of your written advice

Authorisation Number: 1051254598916

Date of advice: 2 November 2017

Ruling

Subject: GST Adjustment

Question 1

Is the Owner’s request to the Contractor to pay the Repayment Amount an adjustment event under subsection 19-10(1) of the GST Act?

Answer

Yes

Question 2

Does the Contractor have a decreasing adjustment under section 19-55 of the GST Act in connection with the Repayment Amount?

Answer

Yes

Relevant facts and circumstances

On or around X B entered into a construction contract with the Owner (“the Contract”).

Contractor was acquired by Y in X.

On X B changed its name to C (“the Contractor”).

From X the Contractor was a member of the Y GST Group (“the Y GST Group”).

From X the Contractor ceased being a member of the Y GST Group.

The Contractor accounted on an accruals basis.

On X the Y Group, including the Contractor, went into administration.

Subsequently, receivers and managers were appointed to the Y group, including the Contractor.

The Contract provided for the following payments (“the Contract Price”):

● $X

The supplies the subject of this ruling were connected with the indirect tax zone such as to attract Australian GST.

To secure performance under the Contract, the Contractor obtained bank guarantees amounting to $X (“the Bonds”).

Subject to a Deed of Amendment dated X, the Contractor made various claims against the Owner, which included variations to the works ordered by the Owner. This increased the Contract Price by $X.

Following this, the amounts that made up the Final Contract Price were amended as follows:

● $X

The Final Contract Price was exclusive of GST.

Prior to the Contractor’s insolvency it issued invoices for, and was paid, the following amounts:

● $A (GST-exclusive);

● $B;

● $C

● $D

The above are collectively referred to as the Invoiced Amount.

Following the Contractor’s insolvency, by letter dated X the Owner terminated the Contract and sought recourse to the Bonds (“the Repayment Request”).

The Owner then exercised its right under the Contract to employ others to complete the works.

The Repayment Request detailed that the owner considered that it would incur $X (“Additional Costs”) to complete the works as a result of the Contractor’s insolvency and the termination of the Contract. None of the Additional Costs claimed by the Owner were in relation to liquidated damages as the Owner already had recourse to $X of the Bonds to satisfy payment.

By deducting/setting off the Additional Costs from the Final Contract Price the Owner’s position in relation to the Contract was that the Additional Costs became a debt due and payable by the Contractor (“the Repayment Amount”).

The Owner sought recovery of the Repayment Amount from the Contractor.

When decreasing the Invoiced Amount by the Repayment Amount the value of the Contract would be as follows:

● $A

● $B

● $C;

● $D.

The above is collected referred to as the Adjusted Invoice Amount

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 19-10.

A New Tax System (Goods and Services Tax) Act 1999 section 19-55;

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

Reasons for decision

Question 1

Subsections 19-10(1) and (2) state:

19-10 Adjustment events

(1) A adjustment event is 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.

Example: If goods that are supplied for export are not exported within the time provided in section 38-185, the supply is likely to become a taxable supply after originally being a supply that was GST-free.

(2) Without limiting subsection (1), these are* 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).

A change to the previously agreed consideration for a supply

Paragraph 13 of Goods and Services Tax Ruling GSTR 2000/19 (Making adjustments under Division 19 for adjustment events) includes as an adjustment event any event which has the effect of:

…changing the consideration for a supply or acquisition…

On the information you have provided, we accept that a change in consideration was brought about by the Owner issuing the Repayment Request and calling on the Bonds.

Subparagraph 19-10(2)(c) includes as an adjustment event:

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

The issuance of the Payment Request and recourse to the Bonds by the Owner following termination of the Contract constitute adjustment events under paragraphs 19-10(1)(b) and 19-10(2)(b) because they change the original consideration amount under the Contract.

Nexus

For the Contractor’s obligation to pay the Repayment Amount to give rise to an adjustment event, there must be a nexus with a supply or supplies under the Contract.

Paragraph 180 of GSTR 2006/9 (Goods and Services Tax: Supplies) discusses nexus:

In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that:

● the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;·

● regard needs to be had to the true character of the transaction; and·

● an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

Paragraph 98 of GSTR 2009/3 (Cancellation Fees) states:

“In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.”

‘Consideration’ is defined in section 195 as:

…any consideration, within the meaning given by sections 9-17 and 9-17, in connection with the supply or acquisition.

In defining consideration, subsection 9-15(2) states:

It does not matter whether the payment, or any act or forbearance was voluntary, or whether it was by the *recipient of the supply.

In Berry v. FC of T (1953) 89 CLR 653 (“Berry”) at 659 Kitto J noted that consideration will be ‘in connection with’ property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

Having terminated the Contract pursuant to the terms of the Contract, the Owner was entitled to complete the Project by employing others. The practical effect was that the terms of the Contract allowed the Owner to take the work out of the hands of the Contractor. Recourse to the Bonds facilitated completion of the supply specified in the Contract, albeit by different contractors.

Paragraph 80 of GSTR 2006/1 (Goods and services tax: guarantees and indemnities) states:

Where the creditor has made a supply to the principal, payment for which is guaranteed by the surety, a payment by the surety is third-party consideration for that supply.

Paragraph 18 of GSTR 2000/19 in part states:

Where the consideration for a supply or acquisition changes for any reason you have an adjustment event.

The practical effect of the terms of the Contract is to allow for a change in the original Contract Price in the event it is necessary for the Owner to complete the works using other contractors and recoup those expenses by recourse to the Bonds. This had the effect of changing the consideration by deducting the Repayment Amount from the Paid Invoice Amount, resulting in the Adjusted Paid Invoice Amount.

Looking at the overall effect of the commercial arrangement, we are of the view there is sufficient nexus by triggering recourse to the Bonds under the terms of the Contract to constitute an adjustment event.

Attribution

Subsection 29-5(1) of the GST Act states:

29-5 Attributing the GST on your taxable supplies

(1) 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.

You have advised that prior to the Contractor’s insolvency, it issued invoices to the Owner and remitted GST relating to the Paid Invoice Amount.

The GST on those supplies is therefore attributable to those periods prior to termination of the Contract in which the Contractor issued invoices to and received payment from the Owner for work done.

Question 2

Section 19-55 of the GST Act states:

19-55 Decreasing adjustments for supplies

If the *corrected GST amount is less than the *previously attributed GST amount, you have a decreasing adjustment equal to the difference between the previously attributed GST amount and the corrected GST amount.

Because of the adjustment resulting from the Owner’s recovery of the Repayment Amount from the Paid Invoice Amount, there is a decreasing adjustment equal to the difference between the GST amount the Contractor previously attributed and the new amount which takes into account the change in consideration.

Subparagraph 19-40 states where adjustments arise. Paragraph (c) of that provision states:

“as a result of those adjustment events, the *previously attributed GST amount for the supply (if any) no longer correctly reflects the amount of GST (if any) on the supply (the corrected GST amount), taking into account any change of circumstances that has given rise to an adjustment for the supply under this Subdivision or Division 21 or 134.

Applying section 19-40, the adjustment relates to the earlier tax periods when the Contractor issued invoices to and received payment from the Owner.

Adjustment Note

Subsection 29-20(1) states:

An *adjustment that you have is attributable to the tax period in which you became aware of the adjustment.

The Contractor became aware of the adjustment event upon receipt of the Repayment Request from the Owner on X. The Administrators were appointed to the Contractor on Y. As such, knowledge of the adjustment event could be imputed to the Contractor via its Administrators from Y.

As no adjustment note was held at the time at which the Contractor (through its representatives) first became aware of the adjustment, it is necessary to consider subsection 29-20(3), which states:

If

(a) you have a *decreasing adjustment arising from an *adjustment event; and

(b) you do not hold an *adjustment note for the adjustment when you give to the Commissioner a *GST return for the tax period to which the adjustment (or any part of the adjustment) would otherwise be attributable;

then

(c) the adjustment (including any part of the adjustment) is not attributable to that tax period; and

(d) the adjustment (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold the adjustment note.

However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for an adjustment note does not apply.

Applying subsection 29-20(3), 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.

As the Contractor was an incapacitated entity at the time it became aware of the adjustment, it was incumbent upon the Administrators to issue the adjustment note for and on behalf of the Contractor at that time. For the purposes of Division 58, it was within the scope of the Administrators’ authority to issue adjustment notes for and on behalf of the Contractor at that time.

You have advised that:

Given the Contractor is an incapacitated entity, it does not have the practical ability to actually issue the adjustment note. In these circumstances, the representatives of the incapacitated entity are the only ones with power to act for and on behalf of the Contractor. Therefore it will be necessary for the representatives to issue the adjustment note to the Owner on behalf of the Contractor.

Pending the outcome of an ATO ruling in relation to whether issuance of the Repayment Request and recourse to the Bonds constitute an adjustment event, the representatives have yet to issue an adjustment note to the Owner.

As the representatives are the only ones who can now issue an adjustment note for and on behalf of the Contractor, we agree that they may issue an adjustment note to the Owner and make the decreasing adjustment in the relevant GST return under section 19-55. The adjustment note must meet the requirements of subsections 29-75(1) and (2) which state:

29-75 Adjustment notes

(1) An adjustment note for an *adjustment that arise from an *adjustment event relating to a *taxable supply:

(a) must be issued by the supplier of the taxable supply in the circumstances set out in subsection 92); and

(b) must set out the *ABN of the entity that issues it; and

(c) must contain such other information as the Commissioner determines in writing; and

(d) must be in the *approved form.

However, the Commissioner may treat as an adjustment note a particular document that is not an adjustment note.

(2) The supplier of the *taxable supply must:

(a) within 28 days after the *recipient of the supply request the supplier to give an *adjustment note for the *adjustment relating to the supply; or

(b) if the supplier has issued a *tax invoice in relation to the supply 9or the recipient has requested one) and the supplier becomes aware of the adjustment before an adjustment note is requested – within 28 days after becoming aware of that fact;

give to the recipient an *adjustment note for the *adjustment, unless any *tax invoice relating to the supply would have been a *recipient created tax invoice (in which case it must be issued by the recipient).