GST and increasing adjustment where previously written off bad debts are sold to a debt factor

Does the entity, a supplier, have an increasing adjustment under section 21-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where its previously written off debts (bad debts) are sold to a debt factor?

No, the entity does not have an increasing adjustment under section 21-10 of the GST Act where its bad debts are sold to a debt factor.

The entity is a supplier that makes taxable supplies.

The entity has debts that it has previously written off as bad. Where allowable under section 21-5 of the GST Act, the entity made decreasing adjustments when the debts were written off.

The entity is now selling those debts to a debt factor. Any payments the entity receives for the debts will be made by the debt factor and not the original customers to whom the services were supplied.

Under section 21-10 of the GST Act, the entity has an increasing adjustment if: (a) the entity made a taxable supply in relation to which it had a decreasing adjustment under section 21-5 of the GST Act for a debt, and (b) the entity recovers the whole or a part of the amount written off, or the whole or a part of the amount that has been overdue for 12 months or more, as the case requires.

The debts referred to in section 21-5 of the GST Act are the debts that arise in respect of an underlying supply, that is, the debts in respect of the entity's services.

Section 21-10 of the GST Act then requires the supplier to make a corresponding increasing adjustment for any amount recovered. The amount recovered would also be in respect of the same debt that initially gives rise to the increasing adjustment, that is, the debt in respect of the entity's services.

The factoring of the debts is a separate and independent transaction from the initial supplies of the services giving rise to the debts. Therefore, the amounts paid by the debt factor for the debts are payments for the factoring of the debts. The amounts paid are not the recovery of the amounts written off or overdue for 12 months or more that arise from the underlying supplies of the services.

As such, the entity would not have an increasing adjustment under section 21-10 of the GST Act. Note: Debt factoring is the disposal of an interest in a debt under item 2 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Therefore, the entity's supply to the debt factor will be a financial supply provided that the other requirements in subregulation 40-5.09(1) of the GST Regulations are satisfied.