Issue
Does an entity have a GST decreasing adjustment under section 19-55 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in circumstances where the payment stream relating to a hire purchase (HP) agreement has been equitably assigned to a special purpose trust, and the entity subsequently exercises its right to terminate a hire purchase agreement due to a default by a customer?
Decision
Yes, the entity has a GST decreasing adjustment under section 19-55 of the GST Act in circumstances where the payment stream relating to the HP agreement has been equitably assigned to a special purpose trust, and the entity subsequently terminates its supply under the HP agreement due to a default by a customer.
Facts
The entity enters into an HP agreement with a customer under which it makes a supply of goods. The consideration for this supply is provided by payment of regular instalments over the term of the HP agreement.
Legal title in the goods remains with the entity until all amounts payable under the HP agreement have been received.
The provision of goods to a customer under the HP agreement is a taxable supply (there is also a financial supply component which is not relevant to this issue).
The entity accounts for GST on a non-cash basis and attributes all of the GST payable on the supply of goods in the period in which the hire purchase agreement is entered into, as the agreement constitutes an invoice.
The entity has entered into a securitisation arrangement and equitably assigned the payment stream that arises from the HP agreement to a special purpose trust. The assignment also includes other incidental related rights. The assignment of the entity's rights under the HP agreement does not amount to an assignment of underlying property.
The entity continues to service the HP agreements that are the subject of the assignments. The entity remains liable for the performance of its obligations under the terms of the HP agreement.
In a later tax period, there is a genuine default by the customer under the HP agreement and the entity exercises its right to terminate the HP agreement and repossesses the goods.
Although a separate termination amount will become payable to compensate the entity, the future instalments under the HP agreement will no longer be due and payable by the customer. As a result, the entity will not receive the full amount of consideration for the supply of the goods agreed to under the HP agreement.
There is no adjustment under Division 21 of the GST Act occurring in the relevant tax period.
Reasons for Decision
The facts establish that the assignment of the entity's rights under an HP agreement does not amount to an assignment of underlying property but is rather an equitable assignment of the right to a payment stream. This will be a financial supply if the conditions of regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) are satisfied.
Goods and Services Tax Ruling 'GSTR 2004/4: assignment of payment streams including under a typical securitisation arrangement' (GSTR 2004/4) explains the Commissioner's view on how the GST Act and the GST Regulations apply to the supply of rights to a payment stream by means of an assignment.
Paragraph 44 of that ruling provides that the assignment of a payment stream does not change the underlying supply, and the assignor retains the obligation to make the underlying supply and remit any GST liability in respect of that supply. It follows that, although the entity has assigned the relevant payment streams, it remains the supplier of the relevant goods.
Division 19 of the GST Act explains the meaning of an adjustment event and the circumstances when an entity will have an adjustment.
Subsection 19-10(1) of the GST Act provides that 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 (c) causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.
When a customer defaults and the goods are repossessed, the HP agreement is terminated. This means that future instalments will no longer be payable, resulting in a decrease in the agreed consideration for the supply of the goods under the HP agreement (refer to ATO ID 2006/2 and paragraphs 215 and 216 of GSTR 2000/29).
Accordingly, the entity has an adjustment event under paragraph 19-10(1)(b) of the GST Act as the consideration for the relevant supply has changed.
Section 19-40 of the GST Act provides that an entity has an adjustment for a supply for which it is liable to pay GST if: (a) in relation to the supply, one or more adjustment events occur during a tax period, and (b) GST on the supply was attributable to an earlier tax period, and (c) as a result of those adjustment events, the previously attributed GST amount for the supply no longer reflects the amount of GST on the supply (the corrected GST amount), taking into account any change in circumstances that has given rise to an adjustment for the supply under this Subdivision or Division 21 of the GST Act.
The entity has attributed the GST on the supply of the goods under the HP agreement in an earlier tax period and, as a result of the adjustment event, the previously attributed GST amount for the supply no longer reflects the amount of GST on the supply. Therefore, all the requirements in section 19-40 of the GST Act have been met.
Section 19-55 of the GST Act provides that if the correct amount of GST is less than the previously attributed amount, the supplier is entitled to a decreasing adjustment. Accordingly, the entity will be entitled to a decreasing adjustment under section 19-55 of the GST Act in respect of the HP agreement terminated, regardless of whether the rights to the payment stream under the HP agreement were assigned to the special purpose trust at the time of termination. Note : in the circumstances described above, if the goods supplied are a luxury car, the entity will be entitled to a decreasing luxury car tax adjustment (under section 15-25 of the A New Tax System (Luxury Car Tax) Act 1999 ) of the luxury car tax that was paid by the entity.