Edited version of private advice

Authorisation Number: 1052372342613

Date of advice: 17 March 2025

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 from Entity 1 to Entity 2 partially cancels the original supply you make for all intangible products during the contract period to the extent of intangible products have not yet been supplied. The intangible products you supply after the novation will no longer be supplied to Entity 1, therefore there has been both a change in consideration and partial cancellation of the original supply.

Question 2

Where you have issued a tax invoice for the taxable supply of all of the intangible products to be transferred over the life of the Original Agreement, will you be required to issue an adjustment note to Entity 1 as a result of the novation pursuant to section 29-75(2) of the GST Act?

Answer 2

Yes. You are required to provide Entity 1 with an adjustment note within 28 days of their request for one or when you become aware of the adjustment as detailed in section 29-75 of the GST Act.

Question 3

Where you have remitted GST to the ATO on the supply of all the intangible products to be supplied under the Original Agreement following the issue of a tax invoice to Entity 1, will you need to make a decreasing adjustment in the tax period in which the Original Agreement is novated pursuant to section 19-55 of the GST Act?

Answer 3

Yes, provided you hold an adjustment note as required by subsection 29-20(2) of the GST Act, the period in which the novation of the Original Agreement occurs is likely when you become aware of the decreasing adjustment and therefore under section 29-20 that would be the relevant tax period.

Question 4

Under the New Agreement, will you be making a taxable supply of all the intangible products to be transferred over the life of the New Agreement pursuant to section 9-5 of the GST Act, which is new and separate to the taxable supply of the intangible products to Entity 1 which occurred under the Original Agreement?

Answer 4

Yes. The New Agreement is a new contractual arrangement, which gives rise to a new taxable supply of intangible products under section 9-5 of the GST Act with a different recipient.

Question 5

Will you be required to issue a tax invoice to Entity 2 (if requested by Entity 2) for all the intangible products to be transferred from the effective time until the expiry of the contract period detailed in the New Agreement, pursuant to section 29-70(2) of the GST Act, upon entry into the New Agreement?

Answer 5

Yes. For the supplies of intangible products to Entity 2 under the New Agreement, you are required to provide Entity 2 with a tax invoice within 28 days of their request for one as detailed in subsection 29-70(2) of the GST Act.

Question 6

In determining the GST exclusive market value of its supply to Entity 2 of intangible products (in partial return for Entity 2's supply an interest in a derivative), can you utilise the same valuation method in determining the value of that supply of the intangible products as was previously adopted by you and Entity 1 under the Original Agreement, provided it was a reasonable method to determine the GST exclusive market value of that non-monetary consideration pursuant to GSTR 2001/6 GST: Non-monetary consideration?

Answer 6

Yes. Provided that the New Agreement is materially the same as the Original Agreement between you and Entity 1 and it is a reasonable valuation method pursuant to GSTR 2001/6.

This ruling applies for the following period:

xx March 20xx - xx March 20xx

Relevant facts and circumstances

You have a contractual arrangement with Entity 1 referred to as the Original Agreement.

You propose to enter into a deed of novation between a third party - Entity 2, and Entity 1 the party to the Original Agreement, to create the proposed New Agreement. The novation will result in the Entity 2 taking over all rights and obligations of Entity 1 under the New Agreement.

Under the terms of the New Agreement there is a transfer of mutual obligations between you and Entity 2. You have an obligation to pay Entity 2 a sum of money if certain conditions are met. Entity 2 has a corresponding obligation to pay you a sum of money if certain opposing conditions are met. You are additionally required to supply specified intangible products to Entity 2 under the terms of the New Agreement. In the event that you fail to supply the specified intangible products to Entity 2, you become liable to pay liquidated damages to the Entity 2 under the terms of the New Agreement.

You are registered for goods and services tax (GST). Entity 1 and Entity 2 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 19-10

A New Tax System (Goods and Services Tax) Act 1999 section 19-55

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

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

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

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 from Entity 1 to Entity 2 cancels the original supply you make for all intangible products created during the contract period to the extent of intangible products have not yet been supplied. The intangible products you supply after the novation will no longer be supplied to Entity 1, therefore there has been both a change in consideration and partial cancellation of the original supply.

The novation of the Original Agreement forms a proposed new agreement between the Entity 2 and you represented by the New Agreement.

The New Agreement sets out the contractual terms to cancel the Original Agreement between Entity 1 and you, as well as detailing that Entity 2 then assumes the contractual obligations of the New Agreement under novation. The cancellation of the arrangement between Entity 1 and you leads us to examine the implications of this contract event to you, 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 has been 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 from the Entity 1 to Entity 2 partially cancels the original supply by you to Entity 1 of all intangible products created during the contract period. As the full contract period will not be achieved because of the early termination of the Original Agreement to which you are a party. 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 of the intangible products will change because of the novation, as your entry into the derivative arrangement for the contract period will have changed to a shorter period. 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 that there is a partial cancellation of the supply by you of all intangible products created during the contract period, as well as a change in consideration for the intangible products. To the extent of the intangible products not yet supplied by you to Entity 1, the novation of the Original Agreement gives rise to an adjustment event under section 19-10 of the GST Act.

Question 2

You are required to provide Entity 1 with an adjustment note within 28 days of their request for one or when you become aware of the adjustment as detailed in section 29-75 of the GST Act.

The novation of the Original Agreement with you, by Entity 1 to Entity 2, as answered in Question 1 above, creates an adjustment event under section 19-10 of the GST Act. As a result, you are required to provide Entity 1 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

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 you have issued to Entity 1 a tax invoice for all of the intangible products reasonably estimated to be transferred over the contract period, you are required to provide to Entity 1 an adjustment note within 28 days of their request for one or becoming aware of the adjustment.

Question 3

Provided you hold an adjustment note as required by subsection 29-20(2) of the GST Act, the period in which the novation of the Original Agreement occurs is likely when you become aware of the decreasing adjustment and therefore under section 29-20 that would be the relevant tax period.

Where you remitted input tax credits on the supply to Entity 1 of all the intangible products to be supplied under the full contract period set out under the Original Agreement on provision of a tax invoice to Entity 1, you need to make a decreasing adjustment on novation of the Original Agreement due to the early termination of the contract period.

Section 19-55 of the GST Act provides:

Decreasing adjustments for supplies

If the * corrected GST amount is less than the • previously attributed GST amount, you have a decreasing adjustment equal to the difference between the previously attributed GST amount and the corrected GST amount.

Provided you hold an adjustment note as required by subsection 29-20(2) of the GST Act, the decreasing 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.

Question 4

The New Agreement is a new contractual arrangement, which give rise to a new taxable supply of intangible products under section 9-5 of the GST Act with a different recipient.

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 New 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 New Agreement, while the derivative involves each way financial supplies made between the parties, it is evident that while each party enters into obligations under the derivative in exchange for the other party's corresponding obligations under the derivative, Entity 2 additionally requires that you supply intangible products to it. The effect of novation of future rights, benefits, obligations and liabilities of the Original Agreement novates this derivative arrangement and the requirement to supply intangible products to Entity 2 under the New Agreement.

Your supply of intangible products and a derivative to party(b) under the New Agreement is non-monetary consideration for Entity 2'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)).

The consideration provided by Entity 2 for your supply of intangible products is only 'part' of the interest it provides in or under the derivative, as Entity 2 enters into the derivative as consideration for two supplies. Accordingly, the derivative 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.

For the avoidance of doubt, the additional consideration provided by Entity 2 for your entry into the derivative in the form of derivative payments under the New Agreement, is not consideration for the intangible products and is solely additional monetary consideration for your entry into the derivative.

The supply for consideration by you, is the transfer of the intangible products from you to Entity 2, rather than the contractual obligation to transfer those rights (intangible products transfer obligation) upon entry into the 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 when you do not transfer intangible products that you have created. 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.

Therefore, you are making a taxable supply of intangible products under the novated Original 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 intangible products to Entity 2 is neither GST-free nor input taxed.

Question 5

For the supplies of intangible products to Entity 2 under the New Agreement, you are required to provide Entity 2 with a tax invoice within 28 days of their request for one as detailed in subsection 29-70(2) of the GST Act.

All of the requirements in section 9-5 of the GST Act are met by you and the transfer of the intangible products by you to Entity 2 is a supply for consideration. 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 6

Provided that the New Agreement is materially the same as the Original Agreement between you and Entity 1, and it is a reasonable valuation method pursuant to GSTR 2001/6.