Edited version of private advice

Authorisation Number: 1052122783328

Date of advice: 31 May 2023

Ruling

Subject: GST - financial support agreement

Question 1

Are you making an input taxed financial supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you enter into Support Agreement?

Answer 1

Yes, you make an input taxed financial supply under section 40-5 of the GST Act of the provision of an interest in a derivative under table item 11 of subsection 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) under the Support Agreement.

You also make a second input taxed financial supply under section 40-5 of the GST Act, being an acquisition-supply (financial supply) of the acquisition of an interest in the Support Agreement from the other entity.

Question 2

If you are making an input taxed financial supply when you enter into the Support Agreement, are the payments made to you under the Support Agreement further consideration for that input taxed financial supply under subparagraph 40-5.09(1)(a)(i) of the GST Regulations?

Answer 2

Yes, the payments made to you that are determined under the Support Agreement are further consideration for your input taxed financial supply of a provision of an interest in a derivative under subparagraph 40-5.09(1)(a)(i) of the GST Regulations.

Question 3

Pursuant to the Support Agreement, are you making a taxable supply of intangible products under section 9-5 of the GST Act?

Answer 3

Yes. Pursuant to the Support Agreement, you are making a taxable supply of intangible products to the other entity under section 9-5 of the GST Act.

Question 4

If you are making a taxable supply of intangible products, is the GST payable on that supply entirely attributable to the relevant tax period in which the conditions precedent are either satisfied or waived under the Support Agreement (if no invoice has been issued prior to this tax period)?

Answer 4

Yes, under section 29-5 of the GST Act, where an invoice has not been issued, the GST payable on your taxable supply of intangible products is attributable entirely to the relevant tax period in which the conditions precedent are either satisfied or waived under the Support Agreement.

Question 5

If liquidated damages are payable by you under the Support Agreement, are those payments consideration for any taxable supply made to you, for the purposes of determining whether those liquidated damages payments give rise to a creditable acquisition under section 11-5 of the GST Act?

Answer 5

No. If payments of liquidated damages are made by you under the Support Agreement, those payments are not consideration for any taxable supply made to you, for the purposes of determining whether those liquidated damages payments give rise to a creditable acquisition under section 11-5 of the GST Act.

Question 6

If liquidated damages are paid by you under the Support Agreement, would that give rise to you having an adjustment event under section 19-10 of the GST Act?

Answer 6

No. As the payment of liquidated damages made by you to the other entity is not consideration for any taxable supply made by the other entity, it would not give rise to you having an adjustment event under section 19-10 of the GST Act.

This ruling applies for the following period:

Specified date to the occurrence of a specified event.

Relevant facts and circumstances

You have entered into a support agreement (Support Agreement) with another entity.

You are registered for goods and services tax (GST). The other entity is also registered for GST.

You account for GST on a non-cash (accruals) basis.

You provided us with a copy of the Support Agreement in support of your private ruling application.

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 19-10

A New Tax System (Goods and Services Tax) Act 1999 section 29-5

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

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

Reasons for decision

Question 1

Under section 9-5 of the GST Act, a supply is not a taxable supply to the extent that it is input taxed. Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that financial supply has the meaning given by the GST Regulations.

Section 40-5.09 of the GST Regulations sets out supplies that are financial supplies. A supply is a financial supply if there is the provision, acquisition or disposal of an interest mentioned in subsection 40-5.09(3), and the other requirements of paragraphs 40-5.09(1)(a) and (b) of the GST Regulations are satisfied.

Table item 11 of subsection 40-5.09(3) of the GST Regulations lists an interest in or under a derivative as an interest that can give rise to a financial supply. A derivative is defined in the dictionary of 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 the context of supplies you may make under the Support Agreement, you meet the requirements in subsection 40-5.09(1) of the GST Regulations as they are made for consideration, in the course or furtherance of an enterprise, and are connected with Australia. You are also registered for GST. There are no factual elements that would give rise to GST-free supplies under Division 38 of the GST Act.

It remains to be determined whether the supplies for consideration made by you under the Support Agreement are of an interest in a derivative, and whether you are a financial supply provider under subparagraph 40-5.09(1)(b)(ii) of the GST Regulations.

Both you and the other entity each make a supply of the provision of an interest in a derivative to the other party. You both provide non-monetary consideration to the other party in the form of an interest under the derivative. The payments which may be payable by either party are additional consideration for the supply of the interest under the Support Agreement. Each party to the Support Agreement provides an interest in a derivative to the other - you and the other entity are both financial supply providers in relation to the supply of the interest under subparagraph 40-5.09(1)(b)(ii) of the GST Regulations.

All the requirements in section 40-5.09 of the GST Regulations are satisfied. Under the Support Agreement you make an input taxed financial supply of the provision of an interest in a derivative, and the consideration for that supply is:

•                     the other entity making an input taxed financial supply to you of the provision of an interest in a derivative under the Support Agreement.

•                     any payments made by the other entity to you.

You also make a second financial supply, an input taxed acquisition-supply, when you acquire the interest in the Support Agreement from the other entity.

The financial supply of the derivative by you is not overridden by section 40-5.12 of the GST Regulations, which excludes 'deliverable' derivatives from being financial supplies.

Question 2

As discussed in Question 1, it is evident that these payments made to you under the Support Agreement are additional monetary consideration under subparagraph 40-5.09(1)(a)(i) of the GST Regulations for the input taxed financial supply of the provision of the interest in the Support Agreement by you to the other entity.

Question 3

Under section 9-5 of the GST, you make a taxable supply if:

(a)          you make the supply for consideration; and

(b)          the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)           the supply is connected with the indirect tax zone; and

(d)          you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

As your supply of intangible products under the Support Agreement satisfies all the other elements in section 9-5 of the GST Act (and is neither GST-free nor input taxed), whether the transfer of the intangible products is a supply for consideration is all that needs to be determined in order for the transfer to qualify as a taxable supply.

Under the Support Agreement, you are required to transfer intangible products to the other entity.

While the derivative involves each way financial supplies made between the parties, it is evident from the Support Agreement that while each party entered into obligations under the Support Agreement in exchange for the other party's corresponding obligations under the Support Agreement, the other party additionally required that you supply intangible products to it.

Your supply of intangible products to the other entity under the Support Agreement is further non-monetary consideration for the other entity's financial supply of the derivative to you (see paragraph 16 of Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6)).

Conversely, the consideration for your supply of intangible products to the other entity is part of the other entity's input taxed financial supply of the derivative, as well as the amounts payable as an additional GST under the Support Agreement.

The consideration provided by the other entity for your supply of intangible products is only 'part' of the interest it provides in or under the derivative, as the other entity enters into the derivative as consideration for two supplies and will need to be apportioned between those two supplies - as one supply is taxable (your supply of intangible products) and the other supply is input taxed (your supply of a derivative). See paragraph 135 of GSTR 2001/6.

The supply for consideration by you, is the transfer of the intangible products from you to the other entity, rather than the contractual obligation to transfer those rights upon entry into the Support Agreement. The consideration is 'for' the performance of the obligations (transfer of the intangible products), rather than the entry into the obligation to transfer. This is evident from the requirement to supply substitute intangible products if you do not transfer intangible products that you have created, and the requirement to pay liquidated damages for yearly shortfall in intangible products. The fact that the quantum of the intangible products to be transferred is unknown upon entry into the Support Agreement does not mean that the relevant supply is the transfer obligation rather than the actual transfer of the intangible products.

Therefore, you are making a taxable supply of intangible products under the Support Agreement as the supply is made for consideration, and all the other elements in section 9-5 of the GST Act are satisfied. Your supply of the intangible products to the other entity is neither GST-free nor input taxed.

Question 4

As you account for GST on a non-cash (accruals) basis, subsection 29-5(1) of the GST Act provides that the GST payable on your taxable supply of intangible products is attributable to the earlier of the tax periods in which:

(a)          any of the consideration for is received for the supply; or

(b)          an invoice is issued for the supply.

As addressed in Question 3, the other entity's entry into the Support Agreement is partly non-monetary consideration for your taxable supply of intangible products. Assuming that an invoice has not been issued for the supply, attribution will be triggered when you enter into the Support Agreement.

The Commissioner explains at paragraph 197 of GSTR 2001/6 that:

197. Where consideration is entry into, or release from an obligation, the consideration is both received and provided when the obligation is entered into or the release is effected. The question of what is the act that effects entry into, or release from an obligation, is again one of fact.

Under the terms of the Support Agreement, the act that effects your entry into the Support Agreement is the completion or waiver of the conditions precedent.

As a result, the GST payable on your taxable supply of the intangible products is entirely attributable to the tax period in which the conditions precedent are either satisfied or waived under the terms of the Support Agreement.

Question 5

Under section 9-5 of the GST Act, a supply is a taxable supply if, among other things, the supply is made for consideration.

Consideration is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by section 9-15 and 9-17, in connection with the supply...'

Section 9-15 of the GST Act extends the meaning of consideration beyond payments to also include such things as acts and forbearances. Reference to a 'payment' hereafter in this private ruling includes a reference to an act or forbearance. Consideration may include payments made voluntarily and payments made by persons other than the recipient of the supply. Section 9-15 of the GST Act further provides that a payment will be consideration for a supply if the payment is 'in connection with,' 'in response to,' or 'for the inducement' of a supply.

Thus, there must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration.

It follows that for there to be a supply for consideration, three fundamental criteria must be satisfied:

(a)          there must be a supply;

(b)          there must be a payment; and

(c)           there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

Supply is defined by section 9-10 of the GST Act as:

(1)          any form of supply, whatsoever.

(2)          Without limiting subsection (1), supply includes any of these:

...

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation...

In Goods and Services Tax Ruling GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4), the Commissioner explains how a payment that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of the GST Act.

In GSTR 2001/4, an agreement between the parties is referred to as an out-of-court settlement. This includes any form of dispute resolution in which the terms of the resolution are agreed between the parties rather than imposed by the court (paragraph 13 of GSTR 2001/4).

As explained at paragraph 17 of GSTR 2001/4, the GST consequences of a court order or out-of-court settlement will depend on a number of matters including whether a payment made under the order or settlement constitutes consideration for a supply, and, if so, whether the supply is in the nature of a taxable, input taxed, or GST-free supply.

Paragraphs 45 to 50 of GSTR 2001/4 identify three types of supply in relation to out-of-court settlements, being earlier supplies, current supplies, and supplies related to discontinuance of action.

Where a sufficient nexus is established between a settlement payment and a supply in relation to an out-of-court settlement, the payment is consideration for that supply.

Paragraph 71 of GSTR 2001/4 explains that disputes often arise over incidents that do not relate to a supply. Examples of such cases include claims for damages arising out of termination or breach of contract.

Paragraph 73 of GSTR 2001/4 explains that the most common form of remedy is a claim for damages arising out of the termination or breach of a contract. This damage, loss, or injury, being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act.

In this case, under the terms of the Support Agreement, the parties have agreed that you will pay various types of liquidated damages to the other entity in particular circumstances.

Each of these liquidated damages payments are required to be paid by you to the other entity where you are in breach of particular clauses in the Support Agreement.

The payments are intended to compensate the other entity for loss and damage suffered as a result of your breach of the Support Agreement. In line with the principles set out in GSTR 2001/4, these various types of liquidated damages that may become payable by you are akin to damages and are not made in return for any supply made by the other entity to you.

Consequently, the liquidated damages payments will not be consideration for any taxable supply made by the other entity to you under section 9-5 of the GST Act, for the purposes of determining whether you will have an entitlement to an input tax credit under section 11-5 of the GST Act.

Question 6

Under subsection 19-10(1) of the GST Act, an adjustment event is any event which has the effect of:

(a)          cancelling a supply or an acquisition; or

(b)          changing the consideration for a supply or an acquisition; or

(c)           causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

In this case, and in accordance with paragraph 132 of GSTR 2001/4, since the payments are not consideration for a supply, no adjustment action is required in respect of the payment of liquidated damages. That is, if liquidated damages are paid by you under the Support Agreement, this will not give rise to you having an adjustment event under section 19-10 of the GST Act.