1 Is the request made by the Principal to the Contractor to pay an obligated amount an adjustment event under subsection 19-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?
Yes, the request is an adjustment event. Question 2 Does the Contractor have a decreasing adjustment under section 19-5 of the GST Act in respect of the obligated amount? Answer Yes, the Contractor has a decreasing adjustment of $X. Question 3 If there is a decreasing adjustment, to which tax period is it attributable? Answer The decreasing adjustment is attributable to the tax period in which the Administrators of the Contractor issue an adjustment note on behalf of the Contractor.
The Contractor is registered for GST. The Contractor entered into a contract on XXX (the Contract) with the Principal. The Principal is registered for GST. Broadly, under the Contract, the Contractor agreed to carry out design and construction. The Contract provides that the Principal shall pay the Contractor the Contract Sum at the times and in the manner set out in the Contract. The Contract sets out the GST provisions governing the Contract. The Contract sets out the security which was to be provided under the terms of the Contract. The Contract sets out when the Principal may have recourse to the security. The Principal was entitled to call on the Security. On XXX, the Contractor entered voluntary administration pursuant to Part 5.3A of the Corporations Act 2001 (Cth). The Administrators were appointed as the joint and several administrators of the Contractor. To satisfy the debt due to the Principal, the Contractor was required to repay funds previously received under the Contract, which had the practical effect of adjusting the Contract Sum. The Principal sought recovery of the Repayment Amount from the Contractor by way of claiming and applying the Security amount.
The Repayment Amount represents a repayment of previously paid consideration for services supplied by the Contractor. In essence, the Contractor has agreed to repay, to the Principal, funds previously received from the Principal.
A New Tax System (Goods and Services Tax) Act 1999 (GST Act): section 9-15 A New Tax System (Goods and Services Tax) Act 1999 (GST Act): section195-1 A New Tax System (Goods and Services Tax) Act 1999 (GST Act): Division 19 A New Tax System (Goods and Services Tax) Act 1999 (GST Act): Division 29 A New Tax System (Goods and Services Tax) Act 1999 (GST Act): Division 58
Issue 1 Is the Principal's request to the Contractor to pay the Repayment Amount an adjustment event under subsection 19-10(1) of the GST Act? Paragraph 19-10(1)(b) of the GST Act provides that an adjustment event is any event that has the effect of changing the consideration for a supply or acquisition. Without limiting that provision, paragraph 19-10(2)(b) states that a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise, is an adjustment event. Based on the information provided, the Contractor's obligation to pay the Repayment Amount has the effect of changing the consideration for supplies it previously made under the Contract and represents an adjustment event. Nexus For the Contractor's obligation to pay the Repayment Amount to give rise to an adjustment event, there must be a nexus with a supply or supplies under the Contract. Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) discusses nexus as follows. At paragraph 180 we state:
In other GST rulings the Commissioner discusses the close coupling between supply and consideration in the GST Act. In determining whether a payment is consideration under section 9-15 and whether there is a 'supply for consideration' those rulings take the view that: • the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective; • regard needs to be had to the true character of the transaction; and • an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. Consistent with the Commissioner's views in GSTR 2006/9, 'consideration' should be given to the true character of the Repayment Amount, being a repayment of money which was previously paid to the Contractor by the Principal under the Contract. 'Consideration' is defined in section 195-1 of the GST Act as: any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.
Subsection 9-15(2) of the GST Act further provides that 'it does not matter whether the [consideration] was voluntary, or whether it was by the recipient of the supply'. Based on the information provided, we accept the Repayment Amount has a direct nexus with the supplies made by the Contractor under the Contract and that the Contractor's obligation to pay the Repayment Amount should be considered to be an adjustment to the previously agreed consideration for supplies it made under the Contract. In Goods and Services Tax Ruling GSTR 2006/1 Goods and services tax: guarantees and indemnities (GSTR 2006/1) the Commissioner states at paragraph 80: Where the creditor has made a supply to the principal, payment for which is guaranteed by the surety, a payment by the surety is third-party consideration for that supply. In accordance with GSTR 2006/1, under the terms of the Contract, the called on the security to recoup additional costs. This has had the contractual effect of changing the consideration received by the Contractor by means of deducting the Repayment Amount from the Contract Sum.
We accept that, in accordance with paragraph 80 of GSTR 2006/1, if the payment of the surety can be third-party consideration, then, by extension, the payment of the surety can also be considered to be a repayment of consideration previously provided by the Principal to the Contractor. Issue 2 Does the Contractor have a decreasing adjustment under section 19-5 of the GST Act in connection with the request for repayments? In accordance with section 29-5(1), the Contractor attributed GST on its supplies under the Contract to the earlier of the tax periods in which either part of the consideration was received, or a tax invoice was issued. This GST was reported in tax periods prior to the Contractor being aware that the Repayment Amount was required to be paid. The payment of the Repayment Amount has the effect of changing the consideration for supplies made under the Contract and results in an adjustment event. In essence, the GST that was originally attributed in the earlier tax periods by the Contractor no longer reflects the correct and current amount of GST attributable to the supplies under the Contract.
In accordance with section 19-55 of the GST Act, the adjustment in respect of the Repayment Amount is a decreasing adjustment on the basis that the corrected GST amount is less than the previously attributed GST amount. We therefore consider that the Contractor is entitled to a decreasing adjustment equal to 1/11th of the Repayment Amount. Issue 3 To which tax period is the decreasing adjustment attributable? In accordance with subsection 29-20(1) of the GST Act, the Contractor became aware of the adjustment event upon receiving the request for payment of the Repayment Amount.. As no adjustment note was held at the time the Contractor first became aware of the adjustment, in accordance with subsection 29-20(3) of the GST Act, the adjustment is attributable to the first tax period for which the entity gives the Commissioner a GST return (i.e., BAS) and it holds an adjustment note. Who should issue the adjustment note? It is the supplier who is responsible for issuing adjustment notes upon becoming aware of an adjustment event, or upon the recipient requesting the supplier to do so, in accordance with subsection 29-75(2).
As the Contractor was an incapacitated entity at the time it became aware of the adjustment, it was incumbent upon the Administrators to issue the adjustment note for and on behalf of the Contractor at that time. For the purposes of Division 58 of the GST Act, it was within the scope of the Administrators authority to issue adjustment notes for and on behalf of the Contractor at that time. Therefore, it will be necessary for the Administrators to issue the adjustment note to the Principal on behalf of the Contractor