GST and attribution of an increasing adjustment for a recipient of a GST-free supply of a going concern

In which tax period does an entity attribute an increasing adjustment arising under section 135-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where the entity is the recipient of a GST-free supply of a going concern and it only becomes aware in a subsequent tax period that the supplies which, at the time of its acquisition, it intended to make and subsequently made through the enterprise, are neither taxable supplies nor GST-free supplies?

The increasing adjustment arising under section 135-5 of the GST Act is attributable to the tax period in which the entity acquired the GST-free supply of the going concern.

The entity was the recipient of a GST-free supply of a going concern. The entity intended to make particular supplies through the enterprise it acquired and understood, at the time of acquisition of the enterprise, that the GST law applied such that those supplies would be taxable supplies.

The entity has become aware in a subsequent tax period that it was mistaken in its original understanding of how the GST law applied to its intended supplies in that the intended supplies, which were the supplies it actually made, were input taxed supplies rather than taxable supplies.

The entity has an increasing adjustment in relation to the supply of the going concern under section 135-5 of the GST Act that takes into account the proportion of all intended supplies to be made through the enterprise that are neither taxable supplies nor GST-free supplies.

The entity is registered for GST and accounts for GST on a non-cash basis.

Division 135 of the GST Act does not contain rules concerning the attribution of increasing adjustments that arise under section 135-5 of the GST Act. It is therefore necessary to consider the general attribution rules for adjustments in section 29-20 of the GST Act.

Subsection 29-20(1) of the GST Act provides that an adjustment an entity has, is attributable to the tax period in which the entity becomes aware of the adjustment. The word 'adjustment' as used in this subsection is defined in section 195-1 of the GST Act to mean an increasing adjustment or a decreasing adjustment. The term 'increasing adjustment' is also defined in this section to mean an amount arising under one of the provisions listed in the table. Item 7 in the table includes section 135-5 of the GST Act.

It follows then, that an increasing adjustment which arises under section 135-5 of the GST Act is attributable, in accordance with subsection 29-20(1) of the GST Act, to the tax period in which the entity became aware of the adjustment.

The GST Act does not provide any specific guidance in relation to when an entity becomes aware of an adjustment it has. However, in relation to adjustments which arise from an adjustment event, an entity becomes aware of the adjustment when it becomes aware the event has occurred. Generally, the time an entity becomes aware an event has occurred is when the event actually occurs.

Although the adjustment which arises under section 135-5 of the GST Act is not strictly an adjustment which arises from an adjustment event as defined, that section sets out two conditions which need to be satisfied for the adjustment to arise.

The first condition is satisfied when an entity becomes the recipient of a supply of a going concern. An entity becomes the recipient of such a supply when it makes the acquisition of the enterprise.

The second condition is that the recipient intends that some or all of the supplies made through the enterprise which has been acquired will be supplies that are neither taxable supplies nor GST-free supplies. The intention of the recipient is determined at the time the acquisition is made.

As both of these conditions relate to the point in time at which the acquisition is made, the adjustment under section 135-5 of the GST Act arises at this time. In effect, this is consistent with the treatment of adjustments which arise from an adjustment event.

It follows then that the adjustment which arises under section 135-5 of the GST Act is attributable to the tax period in which the entity acquired the enterprise. This is when the entity forms the intention to make the particular input taxed supplies, even though at the time, it incorrectly characterised those intended supplies as being taxable supplies.

The correct GST treatment of the intended supplies is not dependent on the entity's understanding of the GST law, but is determined by the law itself. At the time the entity made the acquisition of the supply of a going concern it was aware that it was the recipient of the supply and was aware of the supplies which it intended to make. Under the GST law, those intended supplies were supplies that, when made, will be input taxed.

Accordingly, the entity attributes the increasing adjustment it has under section 135-5 of the GST Act to the tax period in which its acquisition of the supply of the going concern occurred.