Edited version of private advice

Authorisation Number: 1051779369062

Date of advice: 19 November 2020

Ruling

Subject: GST and adjustment

Question

Does Company A have an increasing adjustment under Division 19 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the Credit Notes received from Company B?

Answer

Yes. Company A has an increasing adjustment under Division 19 of the GST Act in relation to the Credit Notes received from Company B.

This ruling applies for the following period:

1 November 2016 to 30 November 2016

The scheme commences on:

1 November 2016

Relevant facts and circumstances

Company A is registered for GST since 2008.

Company A previously entered into an agreement with Company B, under which Company B made supplies to Company A (Company B Supplies).

Company B has been registered for GST since 2001.

The Company B Supplies were treated as taxable supplies by Company B subject to GST. Company B issued Company A tax invoices for the supplies and Company A validly claimed input tax credits (ITC) in respect of GST paid to Company B on the Company B Supplies.

Company A and Company B entered into a Business Sale Agreement (BSA) in 2016 under which Company B acquired the business (Business) operated by Company A (Company A Business Sale).

The Company A Business Sale was treated as a GST-free supply of going concern for GST purposes and completed in 2016. In this regard, the BSA states that the parties acknowledge and agree that the sale of the Business Assets under the BSA, together with the supply of anything else by Company A to Company B under the BSA, constitutes a GST-free supply of a going concern.

The Purchase Price for the Company A Business Sale is defined the BSA to be the sum of $xxx (Purchase Price) comprising:

•         the Initial Purchase Price;

•         the Additional Purchase Price (subject to adjustments); and

•         the Retention Amount (subject to adjustments)

Clause 4.3 of the BSA dealt with adjustments to the Purchase Price and was based on the Completion Accounts prepared by the parties.

Clause 4.3 states in part:

(a)  Following finalisation and acceptance (or deemed acceptance) of the Completion Accounts, the amount of the Purchase Price must be adjusted as follows:

(i)    the Purchase Price must be increased on a dollar for dollar basis by the sum of:

(A)  the amount by which the Actual Working Capital in the Completion Accounts is more than the Target Working Capital; and

(B)  the amount by which the Employee Entitlements in the Completion Accounts are less than the Assumed Accrued Employee Entitlements at the Completion Date;

(ii)   the Purchase Price must be decreased on a dollar for dollar basis by the sum of:

(A)  the amount by which the Actual Working Capital in the Completion Accounts is less than the Target Working Capital at the Completion Date; and

(B)  the amount by which the Employee Entitlements in the Completion Accounts are more than the Assumed Accrued Employee Entitlements at the Completion Date,

As part of preparing the Completion Accounts under the BSA, Company B issued credit notes to Company A.

Company A has not accounted for the Credit Notes as an adjustment to the consideration for the earlier Company B Supplies and has not therefore adjusted its input tax credits previously claimed on the Company B Supplies.

It was submitted that while the Credit Notes state that they are for the Company B Supplies, it was merely a methodology employed to adjust the Purchase Price of the Company A Business Sale.

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 19-70

A New Tax System (Goods and Services Tax) Act 1999 section 19-80

Reasons for decision

Subsection 19-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

(1) You have an adjustment for an acquisition for which you are entitled to an input tax credit (or would be entitled to an input tax credit if the acquisition were a creditable acquisition) if:

(a)  in relation to the acquisition, one or more *adjustment events occur during a tax period; and

(b)  an input tax credit on the acquisition was attributable to an earlier tax period (or, if the acquisition was not a creditable acquisition, would have been attributable to an earlier tax period had the acquisition been a creditable acquisition); and

(c)   as a result of those adjustment events, the *previously attributed input tax credit amount for the acquisition (if any) no longer correctly reflects the amount of the input tax credit (if any) on the acquisition (the corrected input tax credit amount).

(*denotes a term defined in section 195-1 of the GST Act).

Subsection 19-10(1) of the GST Act defines an adjustment event as 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.

Credit notes have the effect of changing the consideration for a supply or acquisition; and thus, give rise to an adjustment event.

While an adjustment event can arise even if the supply is not a taxable supply or the acquisition is not a creditable acquisition, a recipient will have an adjustment under subsection 19-70(1) of the GST Act if the previously attributed input tax credit amount for the acquisition no longer correctly reflects the amount of input tax credit on the acquisition.

In accordance with section 19-80 of the GST Act, a recipient will have an increasing adjustment if the previously attributed input tax credit amount is greater than the corrected input tax credit amount.

The Purchase Price for the Company A Business Sale is defined in clause 1 of the BSA subject to any adjustments under clause 4.3. The adjustments relating to the Company B Supplies were included in the Completion Accounts and, as a result, affected the amount calculated as the Purchase Price.

The adjustment in the Purchase Price contemplated by clause 4.3 of the BSA does not give rise to an adjustment event in respect of the Company A Business Sale under paragraph 19-10(1)(b) of the GST Act. The adjustment to the Purchase Price forms part of the calculation of the amount required to be paid by Company B to Company A under the BSA and does not change the consideration for the supply of the Business; that is, the amount resulting from the calculation is the Purchase Price which reflects the consideration agreed by the parties.

The Credit Notes received by Company A from Company B indicate that they are for Company B Supplies made previously to Company A; it was submitted that the Credit Notes were issued by Company B as part of preparing the Completion Accounts.

Our view is that Company B made adjustments to the consideration for the earlier Company B Supplies for which the Credit Notes were issued. This is an adjustment event under paragraph 19-10(1)(b) of the GST Act.

Pursuant to section 19-80 of the GST Act, the Credit Notes received by Company A from Company B give rise to an increasing adjustment as the previously attributed input tax credit amount by Company A is greater than the corrected input tax credit amount.