Issue
Is entity A, a business operator, making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it: • enters into a separate termination agreement that states that its service agreement with entity B, another business operator, is being terminated by entity B in accordance with the termination clause in the service agreement; and • receives payment from entity B for the early termination?
Decision
No, entity A is not making a taxable supply under section 9-5 of the GST Act, when it: • enters into a separate termination agreement that states that its service agreement with entity B, another business operator, is being terminated by entity B in accordance with the termination clause in the service agreement; and • receives payment from entity B for the early termination.
Facts
Entity A is a business operator. Entity A receives a payment for the early termination of a service agreement.
Entity A entered into the service agreement with entity B to provide entity B with services for a specified period. The service agreement contained a termination clause which allowed entity B to terminate all or part of the service agreement on the happening of a specified event. The service agreement also provided for a payment to be made to entity A if the service agreement was terminated pursuant to the termination clause.
The specified event occurred and entity B advised entity A that it wished to terminate the service agreement.
Entity A entered into negotiations with entity B regarding compensation for the termination of entity A's services. The negotiations did not result in entity A being entitled to receive any more than it was already entitled to under the service agreement.
The parties entered into a separate termination agreement which contained a clause stating that entity B was exercising its right under the termination clause of the service agreement to terminate the services provided by entity A.
Entity A is registered for goods and services tax (GST).
Reasons for Decision
Under section 9-5 of the GST Act, an entity makes a taxable supply if: • it makes a supply for consideration; and • the supply is made in the course or furtherance of an enterprise that it carries on; and • the supply is connected with Australia; and • the entity is registered or required to be registered for GST.
However, a supply is not taxable to the extent that it is GST-free or input taxed.
Section 9-10 of the GST Act defines a supply to include the creation or grant of any right, or the entry into, or release from, an obligation (paragraphs 9-10(2)(e) and 9-10(2)(g) of the GST Act). These are the only supplies that may be of relevance to entity A's situation.
The service agreement contained a termination clause which allowed entity B to terminate all or part of the service agreement on the happening of a specified event. The service agreement also provided for an amount to be paid to entity A in the event that entity B terminated the agreement pursuant to this termination clause. Although entity A negotiated with entity B regarding the compensation for the early termination of its services, the negotiations did not result in entity A receiving any more than it was already entitled to under the service agreement.
As there was provision in the service agreement for entity B to terminate the service agreement, and the termination agreement stated that the service agreement was in fact being terminated pursuant to that provision, entity A is not making a supply to entity B. Entity A is not granting a right to terminate the contract early, or releasing entity B from an obligation, because the right to terminate was granted at the time the service agreement was entered into.
Therefore, as entity A is not making any supply to entity B, the requirement in paragraph 9-5(a) of the GST Act is not met. As such, entity A is not making a taxable supply under section 9-5 of the GST Act.