ATO ID 2005/253: GST and adjustments in relation to the settlement of a voidable preference claim
Date of decision: 8 March 2005
Business line: Indirect Tax

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
Summary: Under section 19-70 of the GST Act an entity has an adjustment for an acquisition if: 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.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 paragraph 19-10(1)(b) section 19-70 Division 21 subsection 58-10(4) section 58-60 Division 129
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2000/19 | Goods and Services Tax Ruling GSTR 2001/4
Subject references: Goods and services tax GST net amounts & adjustments Adjustment events Adjustments GST special rules Representative of incapacitated entities