Edited version of private advice

Authorisation Number: 1052335937458

Date of advice: 5 December 2024

Ruling

Subject: GST - decreasing adjustment

Question 1

Is the Principal's request to the Contractor to pay the obligated Repayment Amount an adjustment event under subsection 19-10(1) of the GST Act?

Answer

Yes.

Question 2

Does the Contractor have a decreasing adjustment under section 19-5 of the GST in respect of the Repayment Amount?

Answer

Yes.

Question 3

Is the apportionment method to apportion the bank guarantee between the three Debt items fair and reasonable?

Answer

Yes.

Question 4

If the answer to Question Two is 'yes', to which tax period is the decreasing adjustment attributable?

Answer

The decreasing adjustment is attributable to the tax period in which the relevant adjustment note is issued by, or on behalf of, the Contractor.

This ruling applies for the following period:

1 July 2024 to 30 June 2028

The scheme commenced on:

21 October 2021

Relevant facts and circumstances

XYZ Pty Ltd (XYZ) has been registered for GST since 200X. Together with several other companies, XYZ is part of a group collectively referred to as the XYZ Group of Companies, which, broadly, provides ZZZ services in Australia.

On XX October 202B, XYZ (the Contractor) entered a 'Formal Instrument of Agreement' with ABC Pty Ltd (the Principal) for design, equipment supply, fabrication, installation, commissioning, preliminaries, and other deliverables, for the project (the Contract). The Contract also includes the General Conditions of Contract for Design and Construct (AS 4902-2000), as amended by the Contractor and the Principal (the General Conditions) and Annexures. Under the Contract, the Contractor was engaged by the Principal, to carry out the design and construction works for a project.

The Principal was registered for GST in 200Y.

On S June 202C, the XYZ Group of Companies (which includes the Contractor) entered voluntary administration pursuant to Part 5.3A of the Corporations Act 2001 (Cth). Messrs M, N and O were appointed joint and several voluntary administrators of the XYZ Group of Companies (the Administrators).

On T September 202C, the Administrators and the XYZ Group of Companies' creditors agreed to enter into a Deed of Company Arrangement (DOCA) to maximise the chances of the Contractor continuing its business and providing a better return for the creditors.

Pursuant to the DOCA, on U September 202C, the XYZ Group of Companies were recapitalised and exited administration, with control being handed back to new directors.

The DOCA also provided for the establishment of a creditors trust. Accordingly, Messrs M, N and O were appointed as the trustees for the Creditors' Trust with effect from V October 202C. The effect of the Creditors Trust was to accelerate the XYZ Group of Companies' exit from external administration. Under the terms of the DOCA, the creditors' claims were transferred to the newly created Creditors Trust and any return of funds to creditors were to be paid by the Creditors Trust, and not the Administrators.

Also pursuant to the terms of the DOCA, any tax adjustments relating to the administration or pre-administration period are the property of the Creditors Trust (for the purposes of making distributions to creditors).

The Works under the Contract

The Recitals of the Contract relevantly provide as follows:

A.    The Principal wishes to engage the Contractor to design and construct the Works in accordance with the Contract.

B.    The Contractor has agreed to design and construct the Works in accordance with the Contract.

Clause 1 of the Contract relevantly provides as follows:

Performance

The parties acknowledge and agree that they must perform the obligations imposed on them by the Contract.

Without limiting the above:

a)    the Contractor must design and construct the Works and otherwise perform WUC in accordance with the Contract; and

b)    the Principal must pay to the Contractor the contract sum and any other amounts payable under the Contract at the times and in the manner provided for in the Contract.

Clause 2 (General Conditions) of the Contract further notes as follows:

2 Nature of Contract and Contractor's warranties

2.1 Performance and payment

The Contractor shall carry out and complete WUC in accordance with the Contract and directions given or purported to be given by the Superintendent under a provision of the Contract.

The Principal shall pay the Contractor the contract sum adjusted by any additions or deductions made pursuant to the Contract.

Other than as expressly set out in the Contract, the contract sum is not subject to adjustment for:

a)    changes in taxes or changes in legislative requirements (except as provided in subclause 12.2);

b)    changes in currency exchange rates; or

c)    any other rise and fall in costs,

and any expenditure of whatever nature incurred by the Contractor in connection with the Contract for which responsibility has not been explicitly assumed by the Principal under the Contract shall be the responsibility of the Contractor.

'The Works' is defined within the Definitions of the General Conditions of the Contract as follows:

means the whole of the work to be carried out and completed in accordance with the Contract, including variations provided for by the Contract, which by the Contract is to be handed over to the Principal;

'Work' is defined in the Definitions of the General Conditions of the Contract to include 'the provision of materials, plant and equipment.'

'WUC' is defined in the Definitions of the General Conditions of the Contract as follows:

means the work which the Contractor is or may be required to carry out and complete under the Contract and includes variations, remedial work, construction plant and temporary works, and like words have a corresponding meaning.

The Contract Sum and Payment Claims

The 'Contract Sum' is defined in the Definitions of the General Conditions of the Contract as follows:

means the fixed lump sum set out in Item 6A including provisional sums (if any) but excluding any additions or deductions which may be required to be made under the Contract;

Item 6A (the Contract Sum) of Annexure Part A to the Contract refers to Annexure Part G, Schedule C1 for the value of the Contract Sum. Pursuant to Schedule C of Annexure Part G, the Contract Sum Summary table provides that the total Contract Sum is $XX, excluding GST.

In accordance with clause 40.1 of the Contract, the Contractor was entitled to claim payment progressively in accordance with Item 33 of Annexure Part A to the Contract.

Item 33 of Annexure Part A to the Contract states in respect of 'times for progress claims' or 'stages of WUC for progress claims':

25th day of each month for WUC done to the last day of that month (with an estimate for the value of WUC between the 25th day and the last day of that month, which will be reconciled with actual value in the next month's progress claim).

Accordingly, the Contractor delivered to the Superintendent claims for each payment progressively (each a payment claim) for WUC done. Upon receiving the payment claim, the Superintendent would value the WUC completed and issue a progress certificate to the Principal and Contractor.

Subject to receiving a progress certificate from the Superintendent, and in accordance with clause 40.2 of the Contract, the Contractor would raise a tax invoice equal to the value of the progress certificate issued. Clause 40.2 provides that, if the Contractor failed to provide a tax invoice, then after the third day the Principal would issue a Recipient Created Tax Invoice (RCTI) for the amount stated in the progress certificate. However, the Principal did not issue any RCTIs under this clause and the Contractor issued tax invoices for each of the progress certificate amounts.

Clause 48 of the Contract sets out the GST provisions governing the Contract. The relevant sub-clauses are as follows.

48.1 Interpretation

...

Unless stated otherwise, all consideration to be provided under or in connection with this Contract other than under this clause 48 is exclusive of GST. Any consideration that is specified to be inclusive of GST must not be taken into account in calculating the GST payable in relation to a supply for the purpose of this clause 48.

...

48.3 Payment of GST

...

If GST is payable in relation to a supply made under or in connection with this Contract, then the party ("Recipient") providing consideration to another party ("Supplier") for that supply must pay an additional amount to the Supplier equal to the GST payable in relation to that supply at the same time as any other consideration is to be first provided for that supply subject to the issue of a tax invoice by the Supplier to the Recipient.

Provision of the Security

Clause 6 of the General Conditions sets out the Security which was to be provided under the terms of the Contract, as follows:

6 Security

6.1 Provision

a)    Security shall be provided by the Contractor to the Principal in accordance with Item 14.

Item 14(a) of Annexure Part A to the General Conditions of the Contract provides that the Security must:

a)    be an unconditional, irrevocable, pay-on-demand banker's undertaking in a form approved by the Principal in its absolute discretion (and the form of undertaking set out in Annexure Part B is an approved form);

b)    be given by an Australian branch of a bank that:

                                      i.        is licensed and operating as a bank in Australia and has at all material times, a branch in PQR;

                                     ii.        has a Standard & Poor's long-term issuer credit rating of AA minus or better; and

                                    iii.        is approved by the Principal in its absolute discretion; and

c)    be able to be converted into money in Australia by the making of a demand for payment at a branch of the bank located in Australia.

Item 14(b) of Annexure Part A to the General Conditions of the Contract provides that the amount for the Contractor's security is defined as two undertakings, each for 5% of the Contract Sum. In accordance with Item 14(b), the Contractor provided the Principal with XX bank guarantees, each in the value of $XXX (i.e. total collective value of the bank guarantees under Item 14(b) were $XX).

In addition to the above, Item 14(e) of Annexure Part A to the General Conditions of the Contract provides that additional security for the unfixed plant and materials shall be given. In accordance with Item 14(e) the Contractor provided the Principal with XX additional bank guarantees valued at $XXX each (i.e. total collective value of the bank guarantees under Item 14(e) were $XX).

In accordance with Items 14(b) and 14(e), there were a total of seven bank guarantees provided by the Contractor.

The Principal has only called on the following bank guarantees:

Bank Guarantee No.1 - $XXX

Bank Guarantee No.2 - $XXX

Bank Guarantee No.3 - $XXX

Bank Guarantee No.4 - $XXX

Total Bank Guarantee $XXX

The remaining 3 bank guarantees totalling $XX million had not been called on at as at K July 202D.

Clause 6.2 of the General Conditions of the Contract sets out when the Principal may have recourse to the security provided at clause 6.1, as follows:

6.2 Conversion and use

Without limiting any of the Principal's rights, the Principal may, at any time, convert into money any security that does not consist of money.

The Contractor shall not at any time take any steps to injunct or otherwise restrain:

a)    any issuer of the security from paying the Principal pursuant to the security;

b)    the Principal from taking any steps (such as making a demand) which may be a precondition to obtaining payment under the security; or

c)    the Principal using the proceeds of any security.

If the Principal converts any security into money in breach of this clause 6 or converts an amount in excess of that to which it is subsequently determined the Principal was entitled, the Principal must promptly repay to the Contractor the relevant amount. The Principal is not liable for any loss occasioned by the conversion of any security into money.

In accordance with clause 6.2 the Principal called on the Security when the Contractor appointed the Administrators.

Further to the Administrators being appointed, the Principal issued the Contractor with a Proof of Debt Notice (Form 535) (the Proof of Debt Notice) for the following costs which the Principal asserts are owed to it by the Contractor:

Debt Item 1

Description: Refund of earlier payments

Net amount: $XXX

GST: $XX

Value (GST incl): $XXX

Debt Item 2

Description: Excess Accommodation, Flights and Fuel costs to be paid by the Contractor

Net amount: $XXX

GST: $XX

Value (GST incl): $XXX

Debt Item 3

Description: Liquidated damages

Net amount: $XXX

GST: $XX

Value (GST incl): $XXX

Total amount owed: $XXX

With respect to Debt Item 1, due to the size of the payment claims submitted by the Contractor, there were instances where the Contractor's payment claims were not assessed and reviewed by the Superintendent prior to the Principal making payment.

Instead, the Contractor and the Principal agreed that the Principal could issue the following tax invoices prior to the Superintendent certifying the works (however, the Principal reserved its right to have the Superintendent review and certify the costs):

•         $XXX (GST inclusive) - The Contractor issued a tax invoice for an advance payment to the Principal in December 20XX and remitted the GST shown on the tax invoice to the ATO at this time. The Principal subsequently paid this amount to the Contractor. This work has not been completed and the Principal has requested that the advance payment previously made now be refunded to it.

•         $XX (GST inclusive) - The Contractor issued tax invoices for works that had not yet been certified by the Superintendent. The Contractor remitted the GST on these tax invoices to the ATO in the tax period that the tax invoices were issued. The Principal paid these amounts on the basis that the Superintendent would assess the works at a later stage and if the value of the works were less than the tax invoices issued the Contractor would refund the difference. The Superintendent has now assessed the works and determined that the value of these works is nil. As a result, the Principal has requested that the Contractor repay this amount in full.

With respect to Debt Item 2, the Principal assessed that it had incurred excess accommodation, flights and fuel costs which, under the Contract, the Contractor was required to repay to the Principal. On this basis, the Principal's position in relation to the Contract was that the excess costs incurred became a debt due and payable to it by the Contractor.

To satisfy the above debts due to the Principal (i.e. Debt Items 1 and 2), the Contractor was required to repay funds previously received under the Contract ('the Refund Payment'), which, in accordance with Clause 2.1 of the Contract, had the practical effect of adjusting the contract sum.

Thus, the practical effect of the Contractor's obligation to repay to the Principal the Refund Payment is to repay the previously received consideration by the Contractor for the services it provided to the Principal under the Contract.

The Principal has also determined that the Contractor is liable for payment of liquidated damages in accordance with the provisions set out in the Contract (Debt Item 3). (For the avoidance of doubt, Debt Item 3 is not a subject of this Private Ruling.)

As a result of the Principal's assessment of the work performed in relation to the Refund Payment amounts, the Principals' position was that the amount totalling $XXX in respect of Debt Items 1 and 2 became a debt due and repayable by the Contractor (the Repayment Amount). To satisfy the debt due to the Principal, the Contractor was required to repay funds previously received under the Contract, which had the practical effect of adjusting the consideration it had previously received.

In accordance with Clause 6.2 of the Contract, the Principal exercised its right to call on the bank guarantees for the sum of $XXX. The bank guarantees called on by the Principal were then used, in part, to satisfy the Repayment Amount, representing (as outlined above) a repayment of funds previously paid by the Principal to the Contractor.

The total value of the bank guarantees that have been called on by the Principal is $XXX while the total amount owing to the Principal is $XXX (GST inclusive). This requires an apportionment of the total value of the called upon bank guarantees across Debt Items 1, 2, and 3.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Division 19

A New Tax System (Goods and Services Tax) Act 1999 Division 29

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question One

Is the Principal's request to the Contractor to pay the obligated Repayment Amount an adjustment event under subsection 19-10(1) of the GST Act?

Answer

Yes.

Detailed reasoning

Pursuant to paragraph 19-10(1)(b) of the GST Act, an adjustment event is any event which has the effect of changing the consideration for a supply or acquisition. Without limiting that provision, paragraph 19-10(2)(b) states that a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise, is an adjustment event.

In accordance with paragraph 80 of Goods and Services Tax Ruling GSTR 2006/1: Guarantees and indemnities, under the terms of the Contract the Principal has incurred additional costs in completing the Works and, as a result, has called upon the bank guarantees to recoup those additional costs. This has had the contractual effect of changing the consideration received by the Contractor by means of deducting the Repayment Amount from the Contract Sum.

We agree that the Contractor's obligation under the Contract to pay the Repayment Amount has a direct nexus with the previous supplies made by the Contractor under the Contract (Debt Item 1) and the additional costs incurred by the Principal in excess of the amount that the Principal was initially required to pay under the Contract (Debt Item 2). We therefore agree that this has the effect of changing the consideration for supplies the Contractor previously made under the Contract, thus representing an adjustment event.

Question Two

Does the Contractor have a decreasing adjustment under section 19-5 of the GST in respect of the Repayment Amount?

Answer

Yes.

Detailed reasoning

In accordance with subsection 29-5(1) of the GST Act, the Contractor attributed GST on its supplies under the Contract to the earlier of the tax periods in which either part of the consideration was received, or a tax invoice was issued. (We note the Contractor accounts for GST on an accruals basis.) This GST was reported in tax periods prior to the Contractor becoming aware that the Repayment Amount was required to be paid.

The payment of the Repayment Amount has the effect of changing the consideration for supplies made under the Contract and results in an adjustment event. In essence, the GST that was originally attributed in the earlier tax periods by the Contractor no longer reflects the correct and current amount of GST attributable to the supplies under the Contract.

In accordance with section 19-55 of the GST Act, the adjustment in respect of the Repayment Amount is a decreasing adjustment for the Contractor on the basis that the corrected GST amount is less than the previously attributed GST amount.

The Contractor has previously remitted GST of $XXX, being 10% of the GST-exclusive amount of $XX paid to the Contractor by the Principal.

We therefore agree that the Contractor is entitled to a decreasing adjustment for the adjustment event for the portion of the called upon bank guarantee that relates to Debt Items 1 and 2, as calculated below.

Question Three

Is the apportionment method to apportion the bank guarantee between the three Debt items fair and reasonable?

Answer

Yes.

Detailed reasoning

As you have noted, the Contractor needs to apportion the value of the bank guarantees between the three Debt Items to determine the value of the guarantees that should be applied to the Refund Payment.

We agree that it is a reasonable basis to apportion the guarantees between the three Debt Items based on the percentage that each individual Debt Item represents out of the total debt amount owing.

Based on that apportionment, we agree the Contractor is entitled to a decreasing adjustment of $XX, being the sum of 1/11^th of $XXX for Debt Item 1 (based on an apportionment of XX.X%) and 1/11^th of $XXX for Debt Item 2 (based on an apportionment of XX.X%). There is no adjustment in respect of Debt Item 3.

Question Four

If the answer to Question Two is 'yes', to which tax period is the decreasing adjustment attributable?

Answer

The decreasing adjustment is attributable to the tax period in which the relevant adjustment note is issued by, or on behalf of, the Contractor.

Detailed reasoning

The Administrators were appointed to the Contractor on XX month 20XX. The Contractor became aware of the adjustment event upon receiving the request for payment of the Repayment Amount in the Proof of Debt Notice dated XX month 20XX. We accept that, for the purposes of subsection 29-20(1) of the GST Act, the Contractor became aware of the adjustment event on or shortly after that date.

As no adjustment note was held at the time the Contractor became aware of the adjustment, in accordance with subsection 29-20(3) the adjustment is attributable to the first tax period the entity gives the Commissioner a GST return when it holds an adjustment note.