Edited version of your written advice

Authorisation Number: 1051255079232

Date of advice: 2 November 2017

Ruling

Subject: GST Adjustment

Question

Can a GST decreasing adjustment be made in respect of the Contractor’s client account (CAC) in relation to a change in the original contract price resulting payment from settlement of court proceedings?

Answer

Yes

Relevant facts and circumstances

X Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (“the Contractor“) was a member of the Y Group (Receivers and Managers Appointed) (“Y”) GST Group from X to Y with Y being the representative member of the GST Group.

The Contractor accounts on an accruals basis.

On X the Contractor entered into a contract with K, as agent for and on behalf of Z and the Joint Venture Partners from time to time in the W Joint Venture for certain construction works (“the Contract”).

The Contractor issued invoices to K. However several invoices issued by the Contractor to K remained unpaid either in full or in part.

On X, receivers and managers (“the Receivers and Managers”) were appointed to the Y group, including Y and the Contractor.

K subsequently terminated the Contract due to the insolvency of the Contractor.

Upon termination of the Contract, the Receivers and Managers sought to recover monies in respect of works completed. The Receivers and Managers also sought payment of the outstanding monies resulting in a dispute between the parties with the Receivers and Managers commencing legal proceedings.

The outstanding invoices amounted to $X (plus GST) (“the Outstanding Invoice Amount”).

On or around X the parties settled the legal proceedings and settled the dispute. K settled by paying the Contractor a certain amount (“the Settlement Amount”).

The practical effect of the settlement was that consideration for the outstanding invoices was reduced to the Settlement Amount with no further consideration being payable by K to the Contractor in respect of the outstanding invoices.

On X the Receivers and Managers issued an adjustment note to K on behalf of the Contractor.

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

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 settlement.

Settlement

Goods and Services Tax Ruling GSTR 2001/4 provides guidance as to the application of GST to court orders and out-of-court settlements. Paragraph 100 of GSTR 2001/4 provides that there must be a sufficient nexus between the payment made under the court order or out-of-court settlement and a supply to exist to create a 'supply for consideration' before GST may apply. GST is payable on supplies if they are made for consideration and the other tests in section 9-5 of the GST Act are satisfied.

Paragraph 44 of GSTR 2001/4 explains that supplies that are related to an out-of-court settlement fall within the three categories of supplies. They are:

● a current supply, where, because one party agrees to provide another party with something of substance, a new supply is created out of the settlement;

● an earlier supply, where the subject of the dispute is an earlier transaction in which supply was made involving the parties; and

● a discontinuance supply, where the terms of an out-of-court settlement will include undertakings by one or more of the parties to discontinue action in relation to the dispute.

A payment is consideration for a supply if there is sufficient nexus between the supply and the payment made.

Where the only supply (other than a discontinuance supply) in relation to a court order or out-of-court settlement is an earlier supply or a current supply, and a sufficient nexus exists between the payment made under that order or settlement and the earlier or current supply, the payment will be consideration for that supply.

Earlier Supply

On the information you have provided, we consider the settlement to be payment for an earlier supply made by the Contractor to K.

Paragraph 46 of GSTR 2001/4 states:

In these circumstances, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'.

We consider the situation to be analogous to the following example in paragraph 47 of GSTR 2001/4:

Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

Nexus

For the settlement payment 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.

‘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'.

We consider the settlement payment to be consideration for an earlier supply under the Contract. It therefore has sufficient nexus with that earlier supply 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 K 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 K for work done.

Adjustment

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 settlement, 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 K.

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 settlement. The Receivers and Managers were appointed to the Contractor on X. As such, knowledge of the adjustment event could be imputed to the Contractor via its Receivers and Managers at the time of settlement on or around 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 Receivers and Managers 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 representatives’ authority to issue adjustment notes for and on behalf of the Contractor at that time.

As you have advised that the Receivers and Managers did not issue the adjustment note for and on behalf of the Contractor until Y, the adjustment will be attributable to that tax period.