ATO ID 2007/185: GST and adjustment events
Date of decision: 16 August 2007
Business line: Indirect Tax

Issue
Is an entity entitled to a decreasing adjustment under section 19-55 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) , when it supplies a grant of a right or option to acquire goods to a non-resident recipient as a taxable supply, but upon the exercise of the right or option by the recipient, the underlying goods acquired are exported from Australia as a GST-free supply?

Decision
No. The entity is not entitled to a decreasing adjustment under section 19-55 of the GST Act. The subsequent supply of the goods as a GST-free export when the recipient exercises its right or option to acquire the goods does not result in an adjustment event under section 19-10 of the GST Act.

Facts
The entity granted a right or option to purchase goods within an agreed period of time to a non-resident recipient. The recipient was outside of Australia when the right or option was granted. In consideration for the supply of this right or option, the non-resident recipient pays a monthly instalment to the entity. At the time the supply of the right or option was made, the intention of the parties was for the goods to be made available and remain in Australia if the right or option to purchase the goods was exercised. Accordingly, the supply of the grant of the right or option by the entity was treated as a taxable supply under section 9-5 of the GST Act. Although the supply of the grant of the right or option satisfied the requirements of a GST-free supply under paragraph (b) of item 4 in the table in subsection 38-190(1) of the GST Act, subsection 38-190(2) of the GST Act negates the GST-free status as the supply of the underlying goods would be connected with Australia and would not be GST-free. Subsequently, the recipient exercised the right or option to acquire the goods within the agreed period. The goods were then exported from Australia within the requirements of section 38-185 of the GST Act as a GST-free export. The entity is registered for GST.

Reasons for decision
Summary: Goods and Services Tax Ruling GSTR 2003/8 provides guidance in determining the GST treatment of rights under item 4 in the table in subsections 38-190(1) (item 4) and 38-190(2) of the GST Act. Paragraph 114 of this Ruling states: ...it is the intended use of the rights at the time they are created, granted, transferred, assigned or surrendered that determines whether the rights are 'for use outside Australia' and therefore the extent to which the supply is GST-free. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use. Further, paragraphs 140 and 141 of GSTR 2003/8 discuss whether an adjustment event occurs where the actual use of the rights under item 4 differs from the intended use. These paragraphs state: Division 19 outlines how adjustments arise through adjustment events. Subsection 19-10(1) states: An adjustment event is any event which has the effect of: The extent to which a supply of a right is GST-free under paragraph (a) of item 4 is a question of apportionment based on the extent of intended use of the right outside Australia. There is no adjustment event under paragraph 19-10(1)(c), where the actual use differs from the intended use, as nothing has occurred to cause the supply to become or stop being a taxable supply. A change in use of a supply of rights does not cause the supply to become or stop being a taxable supply for the purposes of Division 19. Although the guidance above specifically relates to the supply of a right for use outside Australia under paragraph (a) of item 4, it is considered that the guidance set out in GSTR 2003/8 equally applies to the supply of a right or option to acquire something which is contemplated under subsection 38-190(2) of the GST Act. This is because, in describing the circumstances in which the GST-free status of a supply under items 2 to 4 in the table in subsection 38-190(1) of the GST Act is negated under subsection 38-190(2) of the GST Act, Parliament have used the words 'would be connected with Australia' and 'would not be GST-free'. This language suggests that the GST status of the supply of the granting of the right or option is determined on the basis of how the goods were intended to be supplied in the event that the right or option to acquire was exercised rather than how the goods are actually supplied. In this case, at the time the right or option was granted, it was the intention of the parties that the supply of the goods, if the right was exercised, would be a supply that was connected with Australia and would not be GST-free. It is this intended treatment of the underlying supply of the goods which determines for the purposes of subsection 38-190(2) of the GST Act, that the supply of the right or option is not GST-free. It is not relevant for the purposes of subsection 38-190(2) that the actual treatment of the supply of the goods upon the exercise of the option is a GST-free supply. Accordingly, there is no adjustment event under section 19-10 of the GST Act when, upon the exercise of the right or option, the goods acquired were exported from Australia as a GST-free supply. Nothing has occurred to cause the supply of the right or option to be a GST-free supply for the purposes of subsection 38-190(2) of the GST Act. The entity therefore will not have a decreasing adjustment under section 19-55 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 19-10 section 19-55 subsection 38-190(1) subsection 38-190(1) table item 4 subsection 38-190(2)
Related public rulings and determinations: GSTR 2003/8
Subject references: Consumption outside Australia Export of ships or aircraft Supplies used or enjoyed outside Australia Adjustment events