Edited version of your written advice

Authorisation Number: 1051474034595

Date of advice: 1 February 2019

Ruling

Subject: GST and bank guarantees

Question

Are you, the Administrators, entitled to an input tax credit (ITC) under section 58-10(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the acquisition of product from P and O paid for by recourse to Bank Guarantees?

Answer

Yes

Relevant facts and circumstances

The Joint Venture

By way of Deed dated XXYY, several parties formed an unincorporated joint venture (JV) for the purposes of mining, processing and selling D (Former Joint Venture Deed).

The participants in the JV have changed over time.

Under the JV Agreement:

1. G had an X% participating interest and H had a X% participating interest in the JV;

2. Reference was made to the replacement of E by F as the JV manager with effect from XXYY;

3. F was required to perform the duties and responsibilities as JV manager as set out in cl XX and under the Administration Agreement.

4. The key responsibilities of the JV manager (F) include:

a) the overall management, operation and administration of the Joint Venture;

b) managing the funds of the Joint Venture; and

c) co-ordinating the supply of D for the Joint Venture.

GST registration and GST reporting

The two JV participants, K and G have been registered for GST since 1 July 2000.

The JV has been registered as a GST JV from 1 July 2000 and F is registered as the JV operator of the GST JV. There has been no change in the operator or cancellation of the GST JV.

F remained the joint venture operator (as defined in section 195-1) during the period in which product was purchased under the Sale Agreement.

The Sale Agreement

On XXYY, F in its capacity as manager of the JV, and as agent for each of the participants, entered into a sale agreement with M (the Sale Agreement).

M agreed to sell and make product available for delivery to F for payment calculated in accordance with formulas contained in clause X of the Sale Agreement.

M was required to issue a monthly invoice to F for the quantity of product supplied and F was required to make a payment within 10 business days of receiving the invoice.

In relation to GST, clause X of the Sale Agreement provided:

Goods and services tax

1 Interpretation

Expressions used in this clause 18 and in the GST Act have the same meanings as the GST Act.

2 Recipient of supply to pay GST

(a) except where this Agreement specifies otherwise, an amount payable by a Party under this Agreement in respect of a taxable supply by the other party represents the value of the supply or the net amount under clause 18.3

(b) the recipient of the supply must, in addition to that amount and at the same time, pay to the supplier the amount of GST payable in respect of the supply.

3 Reimbursement of expenses

If this Agreement requires a Party to pay for, reimburse or indemnify against any expense or liability (reimbursable expense) incurred by the other Party (payee) to a third party, the amount to be paid, reimbursed or indemnified is the amount of the reimbursable expense net of any input tax credit to which the payee is entitled in respect of the reimbursable expense (net amount).

4 Supplier to provide tax invoice

A Party is not obliged, under clause X, to pay an amount for GST in respect of a taxable supply to it, until given a valid tax invoice for the supply.

There were two bank guarantees provided by F through Bank A with each of the beneficiaries being O and P (collectively referred to as the Original Bank Guarantees).

O and P are both registered for GST.

On XXYY, X was appointed as the Administrators of F.

On or around XXYY, the original Bank Guarantees were cancelled and the Administrators took out new bank guarantees in the name of F through Bank B in favour of O and P to secure the ongoing operation of the Sale Agreement (collectively referred to as the Bank Guarantees).

The key terms of the Bank Guarantee between P (Beneficiary) and F (Customer) were:

1. The sum guaranteed.

2. The Bank B Guarantee was identified as being for the ‘Sale Agreement between O and P and F in its capacity as manager of the Joint Venture and as agent for and on behalf of the joint venture participants G and K dated XXY; and

3. Bank B was required to pay to the Beneficiary the sum guaranteed under the Bank Guarantee upon receiving an irrevocable written notice from the Beneficiary.

The Bank Guarantee provided to O was also for the same amount and also on identical terms as the P Bank Guarantee.

The Administrators continued to act in accordance with the terms of the Sale Agreement, including making payments for supplies of product under the Sale Agreement.

The Administrators were served with a notice, dated XXYY, purporting to replace F as operator of the business and appointing Q as the new operator.

There was no formal novation of the Sale Agreement or JV Agreement by F to Q. As a result, F remained the party to the Sale Agreement and the recipient of any supplies made under the Agreement. In addition, P and O had recourse against F and were legally able to enforce F to pay any outstanding debts under the Sale Agreement.

Therefore, F continued to make acquisitions under the Sale Agreement entered into in its capacity as manager of the JV and as agent for and on behalf of the JV participants (even after the purported replacement by Q as the JV operator).

Consequently, the creditors began pursuing outstanding debts with the JV participants. In light of mounting debt under the Sale Agreement, the Bank Guarantees were called upon by P and O (for the amount of $X each) on XXYY and the proceeds were applied towards the debt owed by F (in its capacity as the manager of the JV and as agent on behalf of the participants) for product acquired by F under the Sale Agreement (after its purported replacement as the manager). The Bank Guarantees provided by the Administrators were able to be called by P and O because even though F was purportedly replaced by Q as the JV manager, F continued to make acquisitions under the Sale Agreement and remained liable to pay the invoices for product acquisitions (collectively, referred to as the Outstanding Invoices) because the Sale Agreement was not novated to Q.

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 51-35

A New Tax System (Goods and Services Tax) Act 1999 section 58-10

Reasons for decision

Question

Are you, the Administrators, entitled to an input tax credit (ITC) under section 58-10(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the acquisition of product from P and O pursuant to Bank Guarantees dated XXYYYY and XXYYYY?

Division 58 sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes. Section 195-1 provides that a representative relevantly includes an administrator and the Corporations Act includes the definition of administrator.

You were appointed as the Administrators of F on XXYY. Therefore you met the section 195-1 definition of representative during the period in which you were appointed in that capacity.

An incapacitated entity is defined in section 195-1 to mean an entity that has a representative. As you were appointed as a representative over the assets of F, the company is an incapacitated entity.

When registering as representatives of F, the Administrators were assigned a unique Client Activity Account (CAC) for GST transactions during the period of their appointment in that capacity.

Subparagraph 58-10(1)(b) provides that a representative of an incapacitated entity ‘is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a creditable acquisition or a creditable importation’, to the extent that the making of the acquisition to which the GST input tax credit relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs.

F’s entitlement to claim ITCs

Subdivision 51-B considers the consequences of GST joint ventures.

Section 51-35 states:

51-35 Who is entitled to input tax credits

(1) If the *joint venture operator of a *GST joint venture makes a *creditable acquisition or a *creditable importation, on behalf of another entity that is a participant in the joint venture, in the course of activities for which the joint venture was entered into:

(a) the *joint venture operator is entitled to claim an input tax credit for the acquisition or importation; and

(b) the participant is not entitled to the input tax credit on the acquisition or importation.

(2) This section has effect despite sections 11-20 and 15-15 (which are about who is entitled to input tax credits).

As the JV is registered as a GST joint venture and F was appointed as the joint venture operator (as defined in section 195-1) at the relevant time, it is necessary to consider whether F made a ‘creditable acquisition’ of product from O and P on behalf of the joint venture participants pursuant to section 51-35.

Under section 11-5, an entity makes a creditable acquisition if:

(a) the acquisition is solely or partly for a creditable purpose; and

(b) the supply of the thing to the entity is a taxable supply; and

(c) the entity provides, or is liable to provide, consideration for the supply; and

(d) the entity is registered or required to be registered.

The meaning of creditable purpose is contained in section 11-15 which states:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) The acquisition relates to making supplies that would be *input taxed; or

(b) The acquisition is of a private or domestic nature.

Application of section 11-5 to your circumstances

(a) F (as joint Venture Operator) acquired product from O and P for the purpose of the joint venture’s enterprise of mining, processing and selling D. Further, the JV does not make any input taxed supplies.

(b) Based on the information provided and the Sale Agreement, we accept that the supply of product by O and P to F was a taxable supply.

(c) Pursuant to the Sale Agreement entered into on XXYY, F agreed to purchase product from O and P on the terms and conditions contained therein.

The amount payable for supplies of gas is calculated in accordance with clause X of the Sale Agreement.

Clause X of the Sale Agreement states that the recipient must pay to the supplier the amount of GST payable and the supplier must provide a tax invoice.

On XXYY, as a consequence of the escalating debt due to O and P, the Bank Guarantees (held by the bank) were called upon by O and P to settle the outstanding debt.

The payments by the bank to O and P discharged F’s liability to pay the Outstanding Invoices to O and P under the Sale Agreement.

Pursuant to section 9-15(2), for a payment to be regarded as ‘consideration’, it does not matter that the payment was made by the bank and not by the recipient of the supply, F. That is, the payment made from the calling in of the Bank Guarantees was effectively third party consideration that served the purpose of discharging F’s obligations to pay the Outstanding Invoices.

Goods and Services Tax Ruling Goods and services tax: guarantees and indemnities (GSTR 2006/1) explains how guarantees and indemnities are treated under the GST legislation.

Paragraphs 74, 75, 77, 79 and 80 of GSTR 2006/1 state:

74. If the surety is called upon to make a payment to the creditor under a guarantee or indemnity, the payment is made as a result of the exercise of the creditor's rights under the guarantee or indemnity

75. Rather the payment discharges (or partly discharges) the surety’s obligations under the contract. Accordingly, there is no supply to the surety by the creditor in consideration of the payment by the surety.

…

77. The payment discharges the principal’s obligation under the contract or in accordance with the law.

…

79. Although the payment made by the surety is not a supply, and is not consideration for a financial supply of the release of obligations under the guarantee, it may be consideration for a supply made by the creditor to the principal.

80. 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.

We consider your case to be analogous to the example provided in paragraphs 82-85 of GSTR 2006/1 which explains that amounts paid by a guarantor to the lessor in satisfaction of lease payments owed by the lessee to the lessor, is third party consideration for a supply by the lessor to the lessee pursuant to the lease agreement.

Consequently, we consider that the payments made under the bank guarantees to O and P are third-party consideration for the supply of product to F.

We further note that F remained liable to make payment for supplies under the Sale Agreement (even after the purported replacement of F by Q as the JV operator) as the Sale Agreement was not novated by F to Q.

(d) Subparagraph 11-5(d) is satisfied because F (and the JV participants) was registered for GST at the relevant time.

Consequently, as all the requirements of section 11-5 are satisfied, F made creditable acquisitions of product from O and P.

Application of Division 58

As outlined above, section 58-10(1)(b) provides that a representative of an incapacitated entity is entitled to any input tax credit that the incapacitated entity would be entitled to for a creditable acquisition or a creditable importation, to the extent that the making of the acquisition to which the GST input tax credit relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs.

In this case, the Administrators are ‘representatives’ as defined in section 195-1 and the acquisition of product was clearly made in the scope of the Administrator’s responsibility or authority for managing F’s affairs. This is because when the Administrators were appointed over F, they continued to act in accordance with the terms of the Sale Agreement and the acquisitions in question were made during the period of administration.

Therefore, as section 58-10(1)(b) applies, the input tax credit entitlement for the Outstanding Invoices that were paid through the calling of the Bank Guarantees, shifts from F to the Administrators.

The Administrators are therefore entitled to claim input tax credits relating to the creditable acquisitions of product from O and P. To do so, they must possess valid tax invoices from O and P for those supplies.

The CAC account associated with those credits is that assigned to them whilst acting in their capacity as Administrators of F.