Edited version of private advice

Authorisation Number: 1051905439855

Date of advice: 12 October 2021

Ruling

Subject:GST adjustments

Question

Does Entity A, have an increasing adjustment pursuant to section 48-50 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)) in relation to creditable acquisitions made by Entity B from Entity C and / or its related entities between ddmmyyyy and ddmmyyyy?

Answer

Yes

Relevant facts and circumstances

Up to and including ddmmyyyy, Entity B was the representative member of a Group. Entity B was registered for GST and accounted for GST on the accruals basis and reported monthly.

With effect from ddmmyyyy, Entity A replaced Entity B as the GST Group's representative member. However, Entity B remained a member of the GST Group until it became an incapacitated entity on ddmmyyyy. A liquidator was appointed by court order on that date.

On ddmmyyyy Entity A announced to the ASX that it was seeking approval for both a Members' and Creditors Scheme of Arrangement ("the Creditors Scheme") in the New South Wales Supreme Court.

On ddmmyyyy, the scheme creditors voted unanimously to accept the final terms of the Creditors' Scheme.

The Scheme creditors were certain large creditors of Entity B, as defined in the Court documents including Entity C and / or its related entities. The New South Wales Supreme Court approved both Schemes (the Members and Creditors Schemes) on ddmmyyyy.

Amongst other things, the Schemes included:

•                    Scheme creditors releasing Entity B and the other Group companies subject to the Scheme from any claim, upon the Scheme creditors, including the Australian Taxation Office receiving payment of X cents in the dollar in respect of their unsecured portions.

•                    The assignment of all assets (including business names), liabilities and contracts of Entity B to Entity A on ddmmyyyy;

•                    Entity A and X related entities being placed into liquidation on ddmmyyyy.

•                    The Debts admitted for the Creditors scheme in relation to Entity C were for those incurred between ddmmyyyy and ddmmyyyy.

On ddmmyyyy, the Creditor Scheme administrator, paid out all Scheme creditors X cents in the dollar based on proof of debt claims as agreed. Prior to the approval of the Schemes, Entity B had been the main trading entity within the Group and made all acquisitions which are subject to this PBR request (i.e., it was the recipient of the acquisitions). Entity B held, valid tax invoices, and had claimed input tax credits ("ITCs") in respect of all acquisitions it had made.

This PBR request is concerned solely with acquisitions made by Entity B from Entity C. Entity C was Entity B's main supplier.

Entity B had made all the acquisitions from Entity C during the period in which it was the representative member of the GST Group.

The Debts incurred by Entity B were entirely unpaid by until the Scheme Administrators paid the funds in line with the Scheme.

The scope of this PBR request does not include any debts to creditors other than Entity C.

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 19-80

A New Tax System (Goods and Services Tax) Act 1999 section 21-15

A New Tax System (Goods and Services Tax) Act 1999 section 29-20

A New Tax System (Goods and Services Tax) Act 1999 section 48-50

Reasons for decision

Section 48-50 provides that any adjustment that an entity has and that is attributable to a tax period during which the entity is a member of a GST Group is treated as if the entity did not have the adjustment (unless the entity is the representative member) and the representative member had the adjustment.

Paragraph 19-10(1)(b) provides that an adjustment event includes any event which has the effect of changing the consideration for a supply or acquisition.

The Scheme creditors agreed to the Scheme in return for, amongst other things, releasing Entity A and the other Group companies subject to the Scheme from any claim, upon the Scheme creditors, including the Australian Taxation Office and receiving payments of X cents in the dollar in respect of their unsecured portions.

On ddmmyyyy the relevant state Court approved both Schemes.

Entity A was still in the GST group on this date until ddmmyyyy.

The Scheme, amongst other things changed the consideration payable for Entity A's debt to Entity B to X cents in the dollar of the existing debt. The GST impact of this is explained in Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events.

Paragraph 60 of GSTR 2000/19 provides

60. The amount of input tax credit you claim in relation to an acquisition made in a tax period is based upon the extent to which you provide, or are liable to provide the consideration for that acquisition. If your extent of liability changes, you may have claimed too much (or not enough) input tax credit. The change in liability is an adjustment event.

Therefore there was an adjustment event for Entity A.

Section 29-20 provides that you attribute any adjustments to the tax period in which you become aware of the adjustment. For Entity A this would have been when the Creditors Scheme received unanimous support and when it was approved by the State Court.

Section 19-80 provides that if the previously attributed input tax credit amount is greater than the corrected input tax credit amount you have an increasing adjustment equal to the difference between the previously attributed input tax credit and the correct input tax credit amount.

Therefore, pursuant to section 19-80 Entity A had an increasing adjustment of $X and it is to be attributed to the quarter ending on or before the ddmmyyyy pursuant to section 29-20.

As set out above, subsection 48-50 (1) provides that any adjustment that an entity has and that is attributable to a tax period during which the entity is a member of a GST group, is to be treated as if the entity did not have the adjustment and the representative member had the adjustment.

As at the ddmmyyyy up until ddmmyyyy Entity A was a group member of a GST group and Entity C was the group representative. Therefore, pursuant to section 48-50 the increasing adjustment is to be reported by Entity C.

Additional information

We note that the representative was appointed on the ddmmyyyy. The representative was not liable for the GST on the adjustment as the making of the acquisition to which the GST adjustment related was not within the scope of the representative's responsibility or authority for managing the incapacitated entities affairs.

For completeness we will also consider section 21-15.

Section 21-15, provides that an entity has an increasing adjustment where:

•                    It made a creditable acquisition for consideration.

•                    The whole or part of the consideration is overdue, but the entity has not provided the consideration overdue.

•                    The supplier has written off as bad the whole or part of the debt, or whole or part or the debt has been overdue for 12 months or more.

We consider that following the Scheme approval there was no bad debt in existence for section 21-15 to apply to as the consideration for the acquisition was paid in full in mmyyyy. The Commissioners view on this matter is found in Goods and Services Tax Ruling GSTR 2000/2 Goods and Services Tax: adjustments for bad debts. We refer you to paragraph 46 of GSTR 2000/2 which provides:

46. ... if you settle a debt before writing it off, or before the 12 months have elapsed, there will be no debt in existence for the application of Division 21. The settling or compromising of a debt may be treated as an adjustment event for the purposes of paragraph 19-10(1)(b) which deals with adjustments for changes in consideration.