Issue
Does the entity, a company in liquidation, have an adjustment under section 19-70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when its representative receives a payment in settlement of a voidable preference claim?
Decision
Yes, the entity has an adjustment under section 19-70 of the GST Act when its representative receives the settlement payment.
Facts
The entity is registered for goods and services tax (GST) and accounts for GST on a basis other than cash.
The entity made a creditable acquisition from a supplier and provided payment for the acquisition. The input tax credit for the creditable acquisition was attributable to, and claimed in, the tax period in which the payment was made. The entity has not had any adjustments under Division 21 or 129 of the GST Act for the acquisition.
Subsequently, a liquidator (representative) was appointed to wind up the entity. The representative commenced legal action against the supplier on the basis that the payment made to the supplier was a voidable transaction pursuant to section 588FE of the Corporations Act 2001 .
The supplier and the representative agreed to settle the matter before it was heard by a court. Under the deed of settlement, the supplier repaid, to the representative, a portion of the consideration it had previously received from the incapacitated entity for the creditable acquisition.
The deed provides that the supplier will not lodge a claim (proof of debt) against the incapacitated entity in the winding up process.
Reasons for Decision
Under section 19-70 of the GST Act an entity has an adjustment for an acquisition if: • in relation to the acquisition, one or more adjustment events occur during a tax period • an input tax credit on the acquisition was attributable to an earlier tax period, and • as a result of those adjustment events, the previously attributed input tax credit amount for the acquisition no longer correctly reflects the amount of the input tax credit on the acquisition taking into account any change of circumstances that has given rise to an adjustment under Divisions 21 or 129 of the GST Act for the acquisition.
Paragraph 19-10(1)(b) of the GST Act provides that an adjustment event is any event 'which has the effect' of changing the consideration for a supply or acquisition.
The deed of settlement requires the supplier to repay some of the consideration provided by the incapacitated entity for the creditable acquisition. Paragraph 129 of Goods and Services Tax Ruling GSTR 2001/4 provides that an adjustment is required when a payment made under an out of court settlement is a repayment of consideration wholly or in part for an earlier supply. Under the deed, the supplier agrees that it will not lodge a claim (proof of debt) against the incapacitated entity in the winding up process.
Therefore, although the deed does not expressly state that the parties are agreeing to a change in the consideration for the earlier supply, the 'effect' of the deed is that the final consideration for the supply is less than the original amount. As such, the arrangement has the effect of changing the consideration for the incapacitated entity's acquisition and there is an adjustment event under paragraph 19-10(1)(b) of the GST Act.
As a result of the adjustment event, the previously attributed input tax credit amount no longer correctly reflects the amount of the input tax credit on the acquisition. Therefore, the incapacitated entity has an adjustment under section 19-70 of the GST Act for its acquisition. Note: In accordance with subsection 58-10(4)(b) and section 58-60 of the GST Act, if an increasing adjustment relates to an acquisition made before a representative was appointed, and arises after that appointment, it is to be treated as if the incapacitated entity had the adjustment provided the representative notifies the Commissioner of the circumstances in which the adjustment has arisen. This notice must be in writing and specify the amount of the adjustment. [HISTORY: This ATO ID was amended on 2 July 2007 to clarify the wording in the note.]
Amendment History
Date of amendment Part Comment 2 May 2014 Reasons for decision Replace reference to section 147-20 with its current equivalents, subsection 58-10(4) and section 58-60.
Date of amendment | Part | Comment
2 May 2014 | Reasons for decision | Replace reference to section 147-20 with its current equivalents, subsection 58-10(4) and section 58-60.