Edited version of private advice

Authorisation Number: 1052330646289

NOTICE

This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number 1052328527700.

Date of advice: 12 November 2024

Ruling

Subject: GST and novation of contracts

Question 1

Does novation of the Original Agreement give rise to an adjustment event for you under section 19-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes. Under subsection 19-10(1) of the GST Act, where a supply or acquisition is cancelled or there is a change in consideration an adjustment event occurs. The novation of the Original Agreement partially cancels acquisitions made through the Original Agreement by you and changes the consideration you provide for those acquisitions.

Question 2

Where you have been issued a tax invoice by the Supplier for the taxable supply of all the intangible products to be transferred over the life of the Original Agreement, will you be entitled to receive an adjustment note from the Supplier as a result of the novation pursuant to section 29-75 of the GST Act?

Answer 2

Yes. The Supplier is required to provide you with an adjustment note within 28 days of your request for one or becoming aware of the adjustment as detailed in section 29-75 of the GST Act.

Question 3

Where you claimed input tax credits on the acquisition of all the intangible products to be supplied under the Original Agreement on receipt of a tax invoice from the Supplier, will you need to make an increasing adjustment in the tax period in which the Original Agreement is novated pursuant to section 19-80 of the GST Act?

Answer 3

Yes. As defined in section 19-80 of the GST Act, where the previously attributed input tax credits for the intangible products are greater than the corrected input tax credits, the amount is an increasing adjustment equal to the difference between the previously attributed input tax credit amount and the corrected input tax credit amount.

This ruling applies for the following period:

XX November 20XX to XX November 20XX.

Relevant facts and circumstances

You have a contractual arrangement with another entity referred to as the Original Agreement.

You propose to enter into a deed of novation between you and a Third Party and the entity that is party to the Original Agreement, to create the proposed New Agreement.

You will cease to have rights or obligations under the Original Agreement once the deed of novation is executed.

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 the deed of novation, the Original Agreement and 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 11-25

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 29-10

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

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 subsection 19-10(1) of the GST Act, where a supply or acquisition is cancelled or there is a change in consideration an adjustment event occurs. The novation of the Original Agreement cancels supplies made through the Original Agreement to you and changes the consideration you provide for those supplies.

The deed of novation and amendment forms a New Agreement between the Third Party and the other entity party to the Original Agreement.

Relevant points from the deed of novation have been detailed below which demonstrate the intention of the novation contractually.

•                     The Third Party will assume all future rights, benefits, obligations and liabilities that you held under the Original Agreement under the New Agreement.

•                     You will be released and discharged by the other entity from all obligations under the Original Agreement, and the Third Party replaces you in these arrangements.

In review, the facts detailed demonstrate the contractual terms to cancel the existing Original Agreement between you and the other entity, as well as detailing that the Third Party then assumes the contractual obligations of the New Agreement under novation. The cancellation of the arrangement between you and the other entity leads us to examine the implications of this contract event to supplies, specifically adjustments, under the GST Act.

Section 19-10 of the GST Act provides that:

Adjustment events

(1)

An adjustment event is any event which has the effect of:

(a)           cancelling a supply or acquisition; or

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

...

An adjustment event will arise where the supply or acquisition has been cancelled or where there has been a change in consideration.

The contractual consequences of novation was discussed by the High Court of Australia in Olsson v Dyson (1969) 120 CLR 365 at 388 [14]-[15] Per Windeyer J:

14 ... Novation is the making of a new contract between a creditor and his debtor in consideration of the extinguishment of the obligations of the old contract: if the new contract is to be fully effective to give enforceable rights or obligations to a third person he, the third person, must be a party to the novated contract.

15. ... In that sense 'novation' means simply a new contract standing in the place of the old. It may be a new contract between the parties to the old contract, A (in this case Dyson) and B (in this case the company); or it may be a contract between them and a new party, or parties, e.g., between A, B and C (in this case the respondent). ...

The novation of the Original Agreement partially cancels the original supply to you under the Original Agreement. This gives rise to an adjustment event under paragraph 19-10(1)(a) of the GST Act. We also note that the consideration for the supply will change because of the novation. This also gives rise to an adjustment event under paragraph 19-10(1)(b) of the GST Act.

In further support, the Commissioner's view on what constitutes an adjustment event is set out in Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events.

In relation to what constitutes an adjustment event, the Commissioner comments at paragraph 16 and 18 of GSTR 2000/19 that:

16. The cancellation of a supply or an acquisition is an adjustment event.7 Generally, the return of a thing, or a part of it, to a Supplier is an adjustment event (whether or not the return involves a change of ownership)...

...

18. Where the consideration for a supply or acquisition changes for any reason you have an adjustment event.10...

In summary, the result of novation is the partial cancellation of the supply to you, as well as a change in consideration for that supply. The novation of the Original Agreement gives rise to an adjustment event under section 19-10 of the GST Act.

Question 2

The Supplier is required to provide you with an adjustment note within 28 days of your request for one or becoming aware of the adjustment as detailed in section 29-75 of the GST Act.

The novation of the Original Agreement as answered in Question 1 above creates an adjustment event under section 19-10 of the GST Act. As a result, the Supplier is required to provide you with an adjustment note as detailed in section 29-75 of the GST Act:

Adjustment notes

(1)            

An adjustment note for an adjustment that arises from an adjustment event relating to a taxable supply:

(a)           must be issued by the Supplier of the taxable supply in the circumstances set out in subsection (2); and

(b)           must set out the ABN of the entity that issues it; and

(c)           must contain such other information as the Commissioner determines in writing; and

(d)           must be in the approved form.

However, the Commissioner may treat as an adjustment note a particular document that is not an adjustment note.

(2)

The Supplier of the taxable supply must:

(a)           within 28 days after the recipient of the supply requests the Supplier to give an adjustment

(b)           note for the adjustment relating to the supply; or

(c)           (b) if the Supplier has issued a tax invoice in relation to the supply (or the recipient has requested one) and the Supplier becomes aware of the adjustment before an adjustment note is requested - within 28 days after becoming aware of that fact;

give to the recipient an adjustment note for the adjustment, unless any tax invoice relating to the supply would have been a recipient created tax invoice (in which case it must be issued by the recipient).

(3)

However, in circumstances that the Commissioner determines in writing, paragraph (2)(b) has effect as if the number of days referred to in that paragraph is the number of days specified in the determination in relation to those circumstances.

(4)

Those circumstances may, for example, include the kind of the taxable supply.

As the Supplier has issued you with a tax invoice for the supply, the Supplier is required to provide you with an adjustment note within 28 days of your request for one or becoming aware of the adjustment.

Question 3

Section 19-80 of the GST Act provides:

Increasing adjustments for acquisitions

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 amount and the corrected input tax credit amount.

The increasing adjustment is attributable to the tax period in which the Original Agreement is novated under subsection 29-20(1) of the GST Act, as it is the time at which you become aware of the adjustment.