Edited version of private advice

Authorisation Number: 1052328486991

Date of advice: 6 November 2024

Ruling

Subject: GST and novation of contracts

Question 1

Under the New Agreement, will you be making a creditable acquisition of intangible products under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and, if so, are you entitled to the full input tax credit under section 11-25 of the GST Act in respect of the GST payable on the supply of the intangible products to you?

Answer 1

Yes, you are making a creditable acquisition of intangible products under section 11-5 of the GST Act, and you are entitled to the full input tax credit under section 11-25 of the GST Act in respect of the GST payable on the supply of the intangible products to you, as the acquisition is fully creditable.

However, this is modified to the extent that the following apply:

Taxation Administration Act 1953 Subsection 357-60(3) of Schedule 1

A New Tax System (Goods and Services Tax) Act 1999 Division 93

A New Tax System (Goods and Services Tax) Act 1999 Division 142

Question 2

Will you be entitled to receive a tax invoice from the Supplier (if requested) for all the intangible products to be transferred over the life of the New Agreement, pursuant to section 29-70 of the GST Act, upon entry into the New Agreement?

Answer 2

Yes. It is assumed that all of the other requirements in section 9-5 of the GST Act are met by the Supplier and the transfer of the intangible products to you is a supply for consideration. Under this assumption the supply of intangible products are a taxable supply, and the supplier of a taxable supply must, within 28 days after the recipient of the supply requests it, give to the recipient a tax invoice for the supply as detailed in subsection 29-70(2) of the GST Act.

Question 3

In determining the market value of your supply to the Supplier of an interest in a derivative (in partial return for the Supplier's supply of the intangible products under the New Agreement), can you utilise the same valuation method in determining the value of that supply of the intangible products that you are receiving, as was previously adopted by that Supplier and the Third Party under the Original Agreement, provided it was a reasonable method to determine the GST inclusive market value of that non-monetary consideration pursuant to GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6)?

Answer 3

Yes. Provided that the New Agreement is materially the same as the Original Agreement between the Third Party and the Supplier, and it is a reasonable valuation method pursuant to GSTR 2001/6.

Question 4

Will you be entitled to input tax credits on your creditable acquisition of the intangible products to be transferred over the life of the New Agreement, where you would have had no entitlement under the Original Agreement either due to:

•                     the reliance of a Supplier on a ruling that worked out the GST payable on the supply of the intangible products as nil (section 11-25 of the GST Act; subsection 357-60(3) of Schedule 1 to the Taxation Administration Act 1953), or

•                     the operation of the four year time limit on claiming credits under section 93-5 of the GST Act?

Answer 4

Yes. Provided you hold a valid tax invoice pursuant to subsection 29-10(3) of the GST Act. The New Agreement is a new contractual arrangement, which gives rise to a new supply of intangible products. Your entitlement to input tax credits on your creditable acquisition of intangible products under the New Agreement is unaffected by either the reliance of the Supplier on a ruling in relation to the Original Agreement or the expiration of the four year time limit in relation to attribution of input tax credits under the Original Agreement.

This ruling applies for the following period:

XX XXX 20XX to XX XXX 20XX.

Relevant facts and circumstances

A Third Party has a contractual arrangement with another entity referred to as the Original Agreement.

You propose to enter into a deed of novation between that Third Party and the other entity that are parties to the Original Agreement, to create the proposed New Agreement.

Under the terms of the New Agreement there is a transfer of mutual obligations between you and the other entity. You have an obligation to pay the other entity a sum of money if certain conditions are met. The other entity has a corresponding obligation to pay you a sum of money if certain opposing conditions are met. The other entity is additionally required to supply specified intangible products to you under the terms of the New Agreement. In the event the entity fails to supply the specified intangible products to you, the entity becomes liable to pay liquidated damages to you under the terms of the New Agreement.

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

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

You provided us with a template deed of novation and template New 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 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-25

A New Tax System (Goods and Services Tax) Act 1999 section 11-30

A New Tax System (Goods and Services Tax) Act 1999 section 29-10

A New Tax System (Goods and Services Tax) Act 1999 section 29-70

A New Tax System (Goods and Services Tax) Act 1999 Division 93

A New Tax System (Goods and Services Tax) Act 1999 section 93-5

A New Tax System (Goods and Services Tax) Act 1999 Division 142

Taxation Administration Act 1953 section 357-60 of Schedule 1

Reasons for decision

Question 1

Under section 11-5 of the GST Act, there are four requirements that must be met to make a creditable acquisition:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

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

The first requirement to address is paragraph 11-5(b) of the GST Act, and whether the supply of the intangible products is a taxable supply made by the Supplier to you. It is assumed that all of the other requirements in section 9-5 of the GST Act are met by the Supplier, and whether the transfer of the intangible products to you is a supply for consideration is all that remains to be determined.

Under the New Agreement the Supplier is required to transfer intangible products to you.

While the supply of the provision of an interest in a derivative is in itself a financial supply made by each party, it is evident from the New Agreement that each party enters into obligations under the derivative arrangement in exchange for the other party's corresponding obligations under the derivative arrangement, you additionally required that intangible products be supplied to you.

The supply of intangible products by the Supplier is further non-monetary consideration for your financial supply of the provision of an interest in a derivative, in addition to the Supplier's supply of an interest in a derivative to you as detailed in paragraph 16 of Goods and Services Tax Ruling 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6):

16. By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you received for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

Conversely, the Supplier makes a supply of the intangible products to you and the consideration for that supply is part of your input taxed financial supply of the interest in a derivative as well as the amounts payable as an additional GST amount under the New Agreement.

The consideration for the supply of intangible products is only 'part' of the interest in a derivative you supply, as it's provided to the Supplier as consideration for two supplies and will need to be apportioned between those two supplies - as one supply is taxable (intangible supply), and the other supply is input taxed (Supplier's supply of a derivative). Paragraph 135 of GSTR 2001/6 details the Commissioners view on the need to apportion the consideration between parts of the supply:

Transaction involving no money

135. Where a single in kind payment is provided as consideration for a supply consisting of more than one identifiable part, you will need to apportion the consideration between the parts of the supply, if part of the supply is taxable and another part of the supply is GST-free, input taxed or otherwise non-taxable.

The supply for consideration by the Supplier is the transfer of the intangible products by the Supplier to you, rather than the contractual obligation to transfer those rights upon entry into the New 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 the Supplier does not transfer intangible products that it has created, and the requirement to pay liquidated damages for an intangible products shortfall. The fact that the quantum of the intangible products to be transferred is unknown upon entry into the Agreement does not mean that the relevant supply is the intangible products transfer obligation rather than the actual transfer of the intangible products.

Creditable purpose

The next requirement is whether you will acquire the intangible products solely or partly for a creditable purpose under paragraph 11-5(a) of the GST Act. You will acquire the intangible products in carrying on your enterprise and subsection 11-15(1) will be satisfied. Paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies that would be input taxed, by precluding an acquisition from being for a creditable purpose to the extent that it relates to the making of supplies that would be input taxed. Determining whether there is a relevant connection between an acquisition and the making of supplies that would be input taxed requires an objective assessment of the surrounding facts and circumstances to determine whether the acquisition is intended to be used in making those supplies. Paragraph 119 of Goods and Services Tax Ruling 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) details the Commissioners view:

Establishing a connection to input taxed supplies

119. For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Your acquisition of intangible products is solely for a creditable purpose and paragraph 11-5(a) is satisfied.

Paragraph 11-5(c) of the GST Act is met as you will provide consideration for the supply of intangible products as you will be making the input taxed financial supply of the provision of an interest in a derivative to the Supplier. You are registered for GST, so paragraph 11-5(d) of the GST Act is satisfied.

As you meet all the requirements in section 11-5 of the GST Act, you will be making a creditable acquisition of intangible products under the Agreements.

Entitlement to input tax credits

You will be entitled to full input tax credits equal to the GST payable by the Supplier under section 11-25 of the GST Act for your creditable acquisition of intangible products unless your acquisition of intangible products is partly creditable under section 11-30 of the GST Act. As concluded above, your creditable acquisition of intangible products is solely for a creditable purpose under section 11-15 of the GST Act, and you provide all the consideration by making the financial supply of the provision of an interest in a derivative. Section 11-30 of the GST Act doesn't apply, and you are entitled to full input tax credits equal to the GST payable by the Supplier.

Question 2

It is assumed that all of the other requirements in section 9-5 of the GST Act are met by the Supplier and the transfer of the intangible products to you is a supply for consideration. Under this assumption the supply of intangible products is a taxable supply, and the supplier of a taxable supply must, within 28 days after the recipient of the supply requests it, give to the recipient a tax invoice for the supply as detailed in subsection 29-70(2) of the GST Act.

Question 3

Provided that the New Agreement is materially the same as the Original Agreement between the Third Party and the Supplier, and it is a reasonable valuation method pursuant to GSTR 2001/6.

Question 4

Provided you hold a valid tax invoice pursuant to subsection 29-10(3) of the GST Act. The New Agreement is a new contractual arrangement, which gives rise to a new supply of intangible products. Your entitlement to input tax credits on your creditable acquisition of the intangible products under the New Agreement is unaffected by either the reliance of the Supplier on a ruling in relation to the Original Agreement or the expiration of the four year time limit in relation to attribution of input tax credits under the Original Agreement.