Edited version of private advice

Authorisation Number: 1052096034838

Date of advice: 15 March 2023

Ruling

Subject: GST and adjustments

Question

Does Entity A have a decreasing adjustment under section 19-70 of the A New Tax System (Goods and Services Tax) Act 1999 when it made a payment to Entity B in accordance with the agreement?

Answer

Yes, Entity A has a decreasing adjustment

This ruling applies for the following periods:

tax periods ending on or after 17 October 20XX

Relevant facts and circumstances

Entity A is registered for GST and carries on an enterprise.

Entity A entered in the agreement with Entity B which provides that Entity B will provide services to Entity A.

Under the agreement, Entity B is entitled to be paid a fee annually in arrears. The fee was calculated with reference to the profit of Entity A. There has been an ongoing dispute between the parties to the agreement about the correct calculation of the fee payable to Entity B.

The agreement was terminated and Entity A has made payments to Entity B in relation to the fee however, the total amount that is payable to Entity B continues to be in dispute.

Entity A agreed to pay an amount to Entity B. The payment was calculated with reference to Entity B's claimed additional Entity A profit.

Entity A has (through its lawyers) requested a tax invoice in respect of the payment made to Entity B however Entity B has not complied with the request.

The Commissioner has previously issued a private ruling to Entity A confirming that Entity A made a creditable acquisition of the services under the agreement and that Entity A is entitled to input tax credits on that acquisition.

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 19-75

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

A New Tax System (Goods and Services Tax) Act 1999 section 29-75

Reasons for decision

Summary

An adjustment for previously paid or claimed GST can arise where a subsequent event or circumstance cancels the supply or acquisition; changes the amount paid or payable for the supply or acquisition or causes the supply or acquisition to become (or stop being) a taxable supply or creditable acquisition.

Generally, an entity that has a decreasing adjustment arising from an adjustment event must hold an adjustment note for the adjustment for the adjustment to be attributable to a tax period. The Commissioner may treat a particular document as an adjustment note.

Detailed reasoning

Section 19-70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you have an adjustment for an acquisition for which you are entitled to an input tax credit if:

•         an adjustment event occurs in relation to the acquisition; and

•         an input tax credit on the acquisition was attributable to an earlier tax period; and

•         as a result of the adjustment event, the previously attributed input tax credit amount for the acquisition no longer correctly reflects the amount of the input tax credit on the acquisition

An adjustment event is defined by section 19-10 of the GST Act as any event which has the effect of:

•         cancelling a supply or acquisition; or

•         changing the consideration for a supply or acquisition; or

•         causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

Examples of adjustment events are given in subsection 19-10(2) including 'a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise'. The amount payable to Entity B for the services it provided was not quantified in the agreement. Instead, the amount was to be calculated with reference to the profit made by Entity A. That is, there was not an agreed amount of consideration for the supply, only a method for calculating the amount. Nevertheless, the example demonstrates that a change in the consideration through some form of negotiation, dispute resolution or agreement is an adjustment event for the purposes of section 19-10 of the GST Act. Paragraph 18 of the Goods and Services Tax Ruling, Goods and services tax: making adjustments under Division 19 for adjustment events (GSTR 2000/19) states:

18. Where the consideration for a supply or acquisition changes for any reason you have an adjustment event ...

Although the discussion of changes in consideration in GSTR 2000/19 is centred around the purchaser paying less than the previously agreed amount, there is no provision in section 19-10 which would exclude the purchaser paying additional consideration from being an adjustment event. The Goods and Services Tax Ruling, Goods and services tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) discusses the GST consequences which may arise from a payment made under a court order or out-of-court settlement. An important concept discussed in GSTR 2001/4 is whether the payment relates to an earlier supply and, if so, whether there is an adjustment event because of that payment. Paragraph 128 of GSTR 2001/4 states:

128. An adjustment is needed where the supplier or recipient attributes on a basis other than cash and:

(i) the payment is consideration for an earlier supply; and

(ii) an invoice was issued, or some part of the consideration was received or provided in an earlier tax period; and

(iii) the payment (together with earlier payments if any) made under the settlement or order differs from the amount of the consideration on which the GST payable and input tax credit were previously attributed.

Entity A previously pain an amount to Entity B for the services provided by Entity B under the agreement. The further payment to Entity B has increased the consideration for the acquisition made by Entity A. No further services were provided by Entity B in relation to this payment as the agreement was already terminated.

The payment by Entity A to Entity B is an adjustment event under section 19-10 of the GST Act. In accordance with section 29-10 of the GST Act, the input tax credit on the acquisition of the services was attributable to the first tax period in which any part of the consideration was payable (or an earlier tax period if Entity B issued an invoice for payment). The further payment means that the previously attributed input tax credit amount for the acquisition no longer reflects the correct amount of the input tax credit.

As an adjustment event has occurred; and the original input tax credit was attributable to an earlier tax period; and the original input tax credit amount no longer reflects the correct input tax credit amount, Entity A has an adjustment under section 19-70 of the GST Act.

Note: Generally, section 29-20 of the GST Act provides that an adjustment is attributable to the tax period in which the entity becomes aware of the adjustment. However, subsection 29-20(3) of the GST Act provides that a decreasing adjustment is attributable to the first tax period in which an adjustment note is held. Subsection 29-75 of the GST Act allows the Commissioner to treat a particular document as an adjustment note.