Edited version of private advice

Authorisation Number: 1052252797232

Date of advice: 12 June 2024

Ruling

Subject: GST and bad debts

Question

Is entity X entitled to make a decreasing adjustment of $XX in the tax period ending 31 March 2023 pursuant to section 21-5 and subsection 29-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, entity X is not entitled to make the decresing adjustment in the tax period ending XXXX 2023.

This ruling applies for the following period:

Date of issue of this private ruling to quarter ending 31 December 2024

The scheme commenced on:

1 June 2014

Relevant facts and circumstances

Entity X is an entity that carries on an enterprise and is registered for GST.

Entity X has made taxable supplies and reports on a non-cash basis for GST.

Entity X has made taxable supplies to Entity Y between 20XX and 20XX. Relevantly these taxable supplies are evidenced by tax invoices issue by Entity X to Entity Y with each tax invoice having a due date, being approximately 1 month from the date of issue.

In respect of all invoices issued by Entity X, the amounts represented by the invoices was outstanding by the relevant invoice due date and continues to be outstanding as Entity Y has not provided the relevant payment.

Entity Y has since gone into liquidation into 20XX.

Over the years Entity X has entered into three different agreements with Entity Y known as Agreement 1, Agreement 2 and Agreement 3. Agreement 1 and Agreement 2 have been entered into in 20XX and Agreement 3 was entered into in 20XX.

Broadly Agreement 1 and Agreement 3 are debt acknowledgement deeds, which recognise that Entity Y is indebted to Entity X an amount (the Relevant Amount). The Relevant Amount is made up of the amounts due under the outstanding invoices together with other amounts owed to Entity X. Where payment is not made by the due date interest will accrue on a daily basis.

Agreement 1 established a due date for the Relevant Amount in late 2017. Agreement 3 was executed after Agreement 1. Agreement 3 includes a clause which provides that all prior debts owed to Entity X by Entity Y are extinguished and a new debt is created between the parties pursuant to the terms of Agreement 3. The due date for the Relevant Amount under Agreement 3 is late 20XX.

Agreement 2 is an agreement under which Entity X has provided a loan to Entity Y. This agreement acknowledges that Entity Y is indebted to Entity X and will pay the Relevant Amount by late 2017. Where payment is not made of the Relevant Amount interest will accrue on a daily basis.

The outstanding invoices can be generally categorised as follows:

•         "Category 1 invoices" are invoices that have issued and have a due date prior to Agreement 1, Agreement 2 and Agreement 3. Further Agreement 1, Agreement 2 and Agreement 3 have all been executed at least 12 months after the due date.

•         "Category 2 invoices" are invoices that have issued and have a due date prior to Agreement 1, Agreement 2 and Agreement 3, however before 12 months had passed Agreement 1 and Agreement 2 was executed. Further Agreement 3 did not have effect.

•         "Category 3 invoices" are invoices that have issued and have a due date after Agreement 1 and Agreement 2. Further all invoices have a due date prior to Agreement 3.

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 21-5, section 21-10

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

Taxation Administration Act 1953 Subdivision 155-B

Reasons for decision

Section 9-5 of the GST Act state:

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 *enterprisethat 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.

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

Section 21-5 of the GST Act deals with writing off bad debts (taxable supplies) and state:

          (1)        You have a decreasing adjustment if:

(a)  you made a *taxable supply; and

(b)  the whole or part of the *consideration for the supply has not been received; and

(c)   you write off as bad the whole or a part of the debt, or the whole or a part of the debt has been overdue for 12 months or more.

The amount of the decreasing adjustment is 1/11 of the amount written off, or 1/11 of the amount that has been *overdue for 12 months or more, as the case requires.

          (2)        However, you cannot have an *adjustment under this section if you *account on a cash basis.

Section 29-20 states:

29-20 Attributing your adjustments

          (1)        An *adjustment that you have is attributable to the tax period in which you become aware of the adjustment.

Goods and Services Tax Ruling GSTR 2000/2 Goods and Services Tax: adjustments for bad debts (GSTR 2000/2) describes the circumstances in which adjustments arise for taxable supplies or creditable acquisitions where a debt is written off as bad or is overdue for 12 months or more.

Paragraphs 13, 15,16 and 17 of GSTR 2000/2 states as follows:

13. If you make a taxable supply and the related debt is subsequently written off as bad, or the debt has been overdue for 12 months or more, you have a decreasing adjustment to your net amount. However, if you subsequently recover the whole or part of the debt for which you previously had a decreasing adjustment, you will have an increasing adjustment to your net amount.

GST must have been attributed

15. A decreasing adjustment for a bad debt can arise in respect of a supply if either:

•         you attributed the GST on the supply on your BAS in a previous tax period, or

•         you are attributing the GST on the supply in the same period as you write off of the related debt (this means that you account for the GST payable and the bad debt adjustment separately on your BAS).

Attribution of adjustment

16. You attribute an adjustment to the tax period in which you become aware of it. Accordingly, you have a decreasing adjustment in the tax period in which the debt is written off, or, if the debt has not been written off, in the tax period in which you become aware that the debt has been overdue for 12 months or more.

17. If a debt, or part of a debt, is recovered for which you previously had a decreasing adjustment, you attribute the corresponding increasing adjustment to the tax period in which the debt is recovered.

Paragraph 21-5(1)(c) of the GST Act provides that you have a decreasing adjustment where you make a taxable supply and the related debt is subsequently written off as bad, or the debt has been overdue for 12 months or more.

'Overdue' is a defined term in section 195-1 of the GST Act which states:

A debt is overdue if there has been a failure to discharge the debt, and that failure is a breach of the debtor's obligations in relation to the debt.

In this case it is not in dispute that Entity X was owed amounts for outstanding invoices and Entity X had knowledge that these invoice amounts continued to be outstanding from their original due dates. However, the matter of contention is whether the definition of "overdue" is met. Specifically, in the scheme as identified, is the failure to pay the outstanding amounts a breach of Entity Y's obligations to Entity X and has this state persisted for 12 months or more.

The terms in the definition of 'overdue' are not further defined in the GST Act and we consider they take on their ordinary meaning in context. The debtor's obligation in relation to a debt will be determined by the contractual arrangements between the parties. This will be evidenced by the documentation, including contracts and invoices, that the parties use to set down the terms of their arrangement. There will be a breach where those terms are not met. The terms, or obligations, of the agreement and whether there has been a breach in those terms or obligations, will be determined objectively looking at the agreement between the parties. It is not something that is determined subjectively.

Therefore, the obligations in relation to the debt to Entity X, and whether the non-payment of that debt will be a breach of those obligations will be determined objectively based on the facts of the scheme. It is recognised that parties may enter into negotiations for payments after a due date for a debt has passed without it altering the position that the debt is overdue. It would need to be clear on the evidence that due date for the debt had actually been changed. Changes made to a due date before the debt becomes due are more likely to result in a changed due date. Further, for the purposes of paragraph 21-5(1)(c) of the GST Act, any evidence dated more than 12 months after the due date had passed would not be relevant to determining if the section was met.

Application to the invoices:

Category 1 Invoices

The only evidence of the agreement or obligations of the parties are the invoices. These transactions were all before Agreement 1, Agreement 2 and Agreement 3 and as such are not relevant to the terms on which the debt was payable at the time or for the following 1-2 years. These invoices all clearly have a due date that was approximately 1 month from the issue date of the invoice. The invoices document the obligation to make a payment by the date on the invoice and to not pay by this date would be a breach of the obligation to pay. Therefore, to the extent that these amounts were not paid by this date, they were overdue. Further, the facts provide that the payments remained outstanding 12 months after the due date of the invoice, they were overdue for at least 12 months.

Even if Agreement 1, Agreement 2 and Agreement 3 was relevant to the obligations in relation to the debt, these agreements have been entered into after the debts were already outstanding for more than 12 months. Therefore, the requirement in paragraph 21-5(1)(c) would already have been met and you would have a decreasing adjustment.

Category 2 Invoices

The initial evidence of the agreement or obligations of the parties are the invoices. These transactions were all before Agreement 1, Agreement 2 and Agreement 3 and as such it is not relevant to the terms on which the debt was payable at the time the invoices were issued and for the next 5 - 11 months. These invoices all clearly have a due date that was approximately 1 month from the issue date of the invoice. The invoices document the obligation to make a payment by the date on the invoice and to not pay by this date would be a breach of the obligation to pay. Therefore, to the extent that these amounts were not paid by this date, they were overdue.

However, before 12 months had passed, the parties entered into Agreement 1 and Agreement 2 which noted there was a Relevant Amount owed to Entity X and set a date for payment for this amount in late 20XX. The outstanding amounts from these invoices formed part of the Relevant Amount. While this agreement sets an agreement for payment of the Relevant Amount, we do not accept that there is sufficient evidence that this represents that the parties considered the amounts were no longer overdue or that there was not still a breach in the obligation to pay by the invoiced due date. Therefore, we do not consider this impacts the time when the debts met the requirements in paragraph 21-5(1)(c). Further this view is not modified by the terms of Agreement 3 which provided a new "Due Date" in late 20XX.

Category 3 Invoices

These invoices were entered into after Agreement 1 and Agreement 2. Further all invoices have a due date prior to the Agreement 3 and as such this later agreement is not relevant to the terms on which the debt was payable at the time. The payment terms are documented in the invoices that were issued. To the extent the invoices were not paid by the due date on the invoice, there was a breach of the debtor's obligations in relation to the payment. To the extent they remained unpaid after 12 months, the requirements in paragraph 21-5(1)(c) are met.

GSTR 2000/2 states:

Attribution of adjustment

22. You attribute an adjustment to the tax period in which you become aware of it. Accordingly, you have an increasing adjustment in the tax period in which you become aware that the debt is written off, or if the debt has not been written off at the time when the debt has been overdue for 12 months or more, in the tax period in which you become aware that the debt has been overdue for 12 months or more.

Consequently, none of Entity X's decreasing adjustments are attributable to the 20XX tax period and Entity X cannot make a decreasing adjustment in the tax period ending 20XX.