Edited version of private advice

Authorisation Number: 1051580705625

Date of advice: 25 September 2019

Ruling

Subject: A refund of overpaid GST

Is the supply of rights by you under the Deed of Assignment of Put and Call Option on the property an input taxed supply?

Answer

Yes, your supply of the rights is an input taxed financial supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The assignment of the rights under the Deed of Assignment of Put and Call Option is also an input taxed supply under paragraph 9-30(2)(b) of the GST Act. Therefore, the supply is not a taxable supply.

Question 2

If the answer to question 1 is yes, are you entitled to a refund if you reimburse the excess GST you have passed on to the other party?

Answer

Yes, where you reimburse the other party the excess GST, you will be entitled to a refund of an equivalent amount.

The reimbursement you make to the other party has the effect of changing the consideration for the supply of your rights under the Deed of Assignment of Put and Call Option. The change in consideration is an adjustment event and you will have a decreasing adjustment that is attributable to the tax period in which you make the reimbursement to the other party.

Relevant facts and circumstances

·        You are registered for the goods and services tax (GST).

·        You entered into a put and call option agreement with the owners of a residential property.

·        The owners of the residential property are not registered for GST.

·        Under the Recitals to the put and call option agreement:

˗        The Grantor is the registered proprietor of the property.

˗        The Grantor has agreed to grant the Grantee the Call Option to require the Grantor to sell the property.

˗        The Grantee has agreed to grant to the Grantor the Put Option to require the Grantee to purchase the property.

·        You assigned your rights under the Deed of Assignment of Put and Call Option to another party for consideration. You treated the assignment of your rights under the Deed of Assignment of Put and Call Option as a taxable supply and issued a tax invoice to the other party.

·        You further advised that the other party exercised its call option under the Put and Call option agreement and entered into a contract of sale. The contract specified in the particulars of sale that the property contained a house and that the property was not a taxable supply but did not specify the basis for that decision.

·        You advised the vendors of the property treated the supply of the property to the other party under the contract as an input taxed supply of existing residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(4)

A New Tax System (Goods and Services Tax) Act 1999 Division 142

A New Tax System (Goods and Services Tax) Act 1999section 142-10

A New Tax System (Goods and Services Tax) Regulations 2019 subsection 40-5.09(1)

A New Tax System (Goods and Services Tax) Regulations 2019 subsection 40-5.09(3)

A New Tax System (Goods and Services Tax) Regulations 2019 subsection 40-5.09(4)

A New Tax System (Goods and Services Tax) Regulations 2019 section 40-5.06

Reasons for decision

Question 1

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act defines a financial supply as having the meaning given by the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations).

Subsection 40-5.09(1) of the GST Regulations, provides that the provision, acquisition or disposal of an interest mentioned in subsections 40-5.09(3) of the GST Regulations is a financial supply if:

(a) the provision, acquisition or disposal of that interest is:

·        for consideration

·        in the course or furtherance of an enterprise, and

·        connected with the indirect tax zone, and

(b) the supplier:

·        is registered or required to be registered for GST, and

·        is a financial supply provider in relation to supply of the interest.

Item 11 in the table in subsection 40-5.09(3) of the GST Regulations (Item 11) lists a derivative. A derivative is defined in the GST Regulations to mean an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate.

In your case, you assigned to the other party under the Deed of Assignment of Put and Call Option the right to purchase residential premises for a specific amount up until a specified date. The other party paid you consideration for the assignment of those rights under the Deed of Assignment of Put and Call Option. Therefore, the put and call option is an agreement the value of which is derived from the value of an asset, the property. Accordingly, the put and call option satisfies the definition of a derivative.

The assignment of your rights under the Deed of Assignment of Put and Call Option was made for consideration, in the course or furtherance of your enterprise and was connected with the indirect tax zone. You are registered for GST and as you assigned your rights under the Deed of Assignment of Put and Call Option, you are a financial supply provider in relation to the assignment of the put and call option to the other party (section 40-5.06 of the GST Regulations). Therefore, the requirements in subsection 40-5.09(1) of the GST Regulations are satisfied and your assignment of the put and call option to the other party is an input taxed financial supply under subsection 40-5(1) of the GST Act.

In addition, under subsection 9-30(2) of the GST Act a supply is input taxed if:

a) it is input taxed under Division 40 of the GST Act or under a provision of another Act, or

b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

The assignment of your rights under the Deed of Assignment of Put and Call Option is a supply of a right to receive a supply of residential premises which would be input taxed under subsection 40-65(1) of the GST Act. Therefore, the supply of your rights is also an input taxed supply under paragraph 9-30(2)(b) of the GST Act.

Accordingly, you made an input taxed financial supply, under subsection 40-5(1) of the GST Act, and an input taxed supply under paragraph 9-30(2)(b) of the GST Act, when you assigned the rights under the put and call option to the other party to purchase real property, the supply of which is an input taxed supply. You are not entitled to any input tax credits for any acquisitions that relate to making of this input taxed supply. If you have claimed input tax credits, you will need to amend your activity statement.

For completeness please note the concessions in subsection 11-15(4) of the GST Act and Division 70 of the GST Act that allow entities to claim input tax credits or reduced input tax credits for acquisitions that relate to making financial supplies, do not apply as the supply of the call option is also input taxed under paragraph 9-30(2)(b) of the GST Act.

Question 2

The object of Division 142 of the GST Act is to ensure that excess GST is not refunded if this would give an entity a windfall gain. Generally, Division 142 of the GST Act operates so that a supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on the GST to another entity (the recipient), and has not reimbursed that other entity for the passed-on GST.

Is there an amount of excess GST?

Paragraph 12 of Goods and Services Tax Ruling GSTR 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 provides:

'Excess GST' is an amount of GST that has been taken into account in an entity's assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142.

In your case, there is an amount of excess GST. The excess GST resulted from the inclusion of an amount of GST in your assessed net amount for the tax period ending xx xxxx xx on the assignment of your rights under the Deed of Assignment of Put and Call Option to the other party, which is an input taxed supply.

When is excess GST passed on?

Paragraphs 23 to 33 of GSTR 2015/1 provide the view of the Commissioner as to when excess GST has been passed on.

Paragraph 23 of GSTR 2015/1 states that whether the excess GST has been passed on is a question of fact and must be determined on a case by case basis taking into account the particular circumstances of each case. However, section 142-25, and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases.

Expectation that excess GST has been passed on

Paragraphs 24 to 27 of GSTR 2015/1 explain the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply and this simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is treated as a taxable supply. If excess GST is included on a tax invoice, this is prima facie evidence that the excess GST has been passed on. While there is a general expectation that, in ordinary circumstances, excess GST has been passed on, the particular facts and circumstances of an individual case may demonstrate that excess GST has not in fact been passed on.

Matters relevant to determining whether GST has been passed on

In paragraph 28 of GSTR 2015/1the Commissioner considers that the matters relevant to whether GST has been passed on include:

·        the manner in which the excess GST arose

·        the supplier's pricing policy and practice

·        the documentary evidence surrounding the transaction, and

·        any other relevant circumstances.

In your case, you advised that the GST had been passed on to the other party. The passing on of the GST is also evidenced in the tax invoice you issued to the other party for the assignment of the rights in the put and call option and in the assignment fee being described as $x plus GST.

The manner in which the excess GST arose

The manner in which an amount of excess GST arises is relevant in considering whether or not the excess GST was passed on. Paragraph 31 of GSTR 2015/1 considers four common circumstances:

·        incorrectly treating something which is not a supply as a taxable supply

·        miscalculating a GST liability under the GST law

·        incorrectly reporting an amount of GST on a GST return, and

·        incorrectly treating a GST-free or input taxed supply as a taxable supply (including incorrectly apportioning the taxable and non-taxable components of a mixed supply).

In your case we consider that it is clear, from the information provided, that the excess GST has been passed on by you. This is evidenced by the issuing of tax invoices, inclusive of GST, by you and by the assignment fee being an amount plus GST.

Does section 142-10 the GST Act apply in this case?

Paragraph 17 of GSTR 2015/1 describes when section 142-10 of the GST Act applies:

17. If the excess GST has been passed on to the recipient, section 142-10 applies to treat the excess GST as always having been payable, and payable on a taxable supply, until the excess GST has been reimbursed to the recipient. Once section 142-10 ceases to apply, the supplier can claim a refund of the excess GST.

As there is excess GST and it has been passed on by you, under section 142-10 of the GST Act the excess GST is treated as having always been payable on a taxable supply until you reimburse the other party for the passed-on GST.

What constitutes reimbursement?

Paragraphs 69 to 71 of GSTR 2015/1 in relation to reimbursement provides:

69. The Commissioner considers that, for the purposes of section 142-10, an amount of excess GST that has been passed on to the recipient is appropriately reimbursed when the recipient has been compensated an equivalent amount by the supplier. This reimbursement may be made voluntarily by the supplier or in satisfaction of a contractual obligation.

70. For the purposes of section 142-10, a supplier has reimbursed the recipient for the passed-on excess GST where:

·        reimbursement takes the form of a payment in money, the setting off of mutual liabilities, or the issuing of a voucher, the recipient must be able to choose the form in which reimbursement is made

·        the amount of the reimbursement corresponds to the amount of excess GST passed on to the recipient and the method of reimbursement ensures this is achieved, and

·        the reimbursement or journal entry under an agreement to set-off the liabilities between the parties has actually been made, and is not merely planned to be made.

71. A supplier may self-assess its entitlement to a refund of the excess GST to the extent that it has reimbursed the recipient.

What is the effect of a reimbursement?

Paragraph 18 of GSTR 2015/1 provides that an adjustment event arises under Division 19 of the GST Act when a supplier reimburses its recipient as the reimbursement has the effect of changing the consideration for the supply. The supplier has a decreasing adjustment which is attributable to the tax period in which the reimbursement is made to its recipient.

In your case, when you reimburse the other party, the reimbursement has the effect of changing the consideration for the supply of your rights under the Deed of Assignment of Put and Call Option. The change in consideration is an adjustment event and you will have a decreasing adjustment that is attributable to the tax period in which you make the reimbursement to the other party. The amount of the decreasing adjustment is equal to the amount of excess GST that you reimburse to the other party.