Private ruling: GST and insolvency issues
Published: May 2012

Ruling: Q1: Is GST payable on payments to be received, in discharge of a Receivers' indemnity? | A1: Yes, GST is payable on payments to be received, in discharge of a Receivers' indemnity to the extent that it relates to the remuneration component. | Q2: Is the assignment by the Receivers (both in their capacity as receivers, and personally) of their rights, title and interests in the Receivers' indemnity to another entity under Assignment Deed an input taxed financial supply? | A2: Yes. Facts Entity A is an incapacitated entity. Entity A holds property on-behalf of third parties. Entity B (Receiver) has been appointed by the creditors (Appointors) of entity A as receiver of entity A. The Receivers claimed their right of indemnity from the property held by entity A (which was secured by a lien), in respect of their costs, expenses and remuneration incurred in caring for property held by entity A. The Receivers caused the property to be preserved by way of paying for expenses to care for the property. The recipient of the Receivers services (including the services in relation to caring for the property) was the Appointors who appointed the Receivers. The remuneration for the supply of the Receivers services to their Appointors is payable under a deed of appointment between the Receivers and the Appointors. Under the deed of appointment, the Receivers are entitled to recover their costs, remuneration and reimbursements through exercising their indemnity The Appointors instructed the remuneration referrable to the supply of caring for the property to be recovered through the Receivers indemnity. Whilst this amount will be paid to the Receivers when they exercise their rights under the indemnity, the Receivers have already invoiced their Appointors for this amount. The Receivers intend to assign the rights, title and interest that they have under the indemnity to another entity for an amount.



Reasons for decision: Summary: GST is payable on taxable supplies. A taxable supply is defined in section 9-5 of the A New Tax System (Gods and Services Tax) Act 1999 (GST Act) as follows: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (terms marked with asterisks (*) are defined in section 195-1 of the GST Act) In order for the first requirement of section 9-5 of the GST Act to be met (which is, 'you make a supply for consideration') the following three conditions must be satisfied: · there must be a supply, · there must be consideration, · the supply must be made for consideration (in other words, there must be a sufficient nexus between the supply and consideration. | Detailed Reasoning - Supply: A supply is defined in section 9-10 of the GST Act as follows: "A supply is any form of supply whatsoever. Consideration is defined in section 9-15 of the GST Act as follows: (1) Consideration includes: (a) any payment, or any act or forbearance, in connection with a supply of anything; and (b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply. The following is a discussion of whether payment arising out of the indemnity in respect of the costs, expenses and remuneration of the Receivers can be regarded as consideration for any supply. | Detailed Reasoning - Costs and expenses: In this case there is clearly a flow of money to the Receivers that will take place when the indemnity is exercised (i.e. there is consideration). Is there a supply? The Receivers are seeking to recover through their indemnity, costs and expenses that they have incurred in carrying out their role as the receivers and managers of the incapacitated entity as they have paid for such costs and expenses using their "personal funds". Any input tax credits that may have arisen for acquisitions that the Receivers have made on behalf of the incapacitated entity should have been reported under Division 58 of the GST Act. Subsection 58-5(1) of the GST Act states: Subject to this Division, any supply, acquisition or importation by an entity in the capacity of a *representative of another entity that is an incapacitated entity is taken to be a supply, acquisition or importation by the other entity. As we have been advised that the input tax credits have been duly claimed under Division 58 of the GST Act, we have not considered the GST implications arising under Division 58 in this ruling. Thus, whilst the Receivers are claiming an amount through their indemnity, what is essentially occurring is that the Receivers are seeking to 'recover' amounts which they have paid or incurred as costs and expenses using their own funds, in carrying out their duty as the representative of the incapacitated entity. For GST purposes, when such an amount is recovered by an entity it can only be characterised as either as a 'reimbursement' of the expenses or an 'on-charge' of the expenses. Goods and Services Tax Advice GSTA TPP 042 states the following in respect of reimbursements in relation to lawyers' expenses. …In the absence of an agency relationship directing liability to the client, the client's reimbursement to a lawyer of an expense forms part of the consideration for the lawyer's taxable supply of services. Conversely, where there is an agency relationship directing liability to the client, the expense does not form part of the consideration for the lawyer's taxable supply of services. Consistent with the explanation in GSTA TPP 042, a reimbursement is merely a 'recovery' of an expense that an entity incurs 'on-behalf-of' another entity rather than consideration 'for' a supply made to the other entity. In this case it is acknowledged that the Receivers have made acquisitions in their capacity as the representative of the incapacitated entity which has been duly accounted for under Division 58. However, in making payments for some of these costs and expenses 'on-behalf' of the incapacitated entity, the Receivers used their own funds. On this basis, when the costs and expenses are recovered back through the indemnity, we are of the view that they represent a 'reimbursement' of a cost or an expense rather than consideration for any supplies that the Receivers have made. In addition, we have been advised that these costs and expenses are not those that are classified as 'enterprise costs' of the Receivers'. These costs and expense are over and above the Receivers enterprise costs. Therefore, on the basis that the Receivers paid these costs and expenses on-behalf of the incapacitated entity in their capacity as their 'representative' (or an agent) in caring for entity A's property, we are of the view that the costs and expenses that the Receivers are entitled to claim through the indemnity have the characteristics of a 'reimbursement'. Summary According to GSTA TPP 042 where there is a reimbursement of an amount, it is not regarded as consideration for a supply of services. Rather, the reimbursement is a 'recovery' of an expense or a cost. Accordingly, we consider that the cost and expenses that the Receivers are claiming is not consideration for any supply that the Receivers have made personally. On this basis the costs and expenses component of the indemnity does not meet the first requirement of section 9-5 of the GST Act and as such will not be subject to GST. Additional information regarding entitlement to Input tax credits As input tax credits entitlements for any acquisitions that the Receivers have made using their own funds in their capacity as the representative of have been reported pursuant to rules under Division 58 of the GST Act no further input tax credits entitlements will arise from the indemnity payments. | Detailed Reasoning - Remuneration: The Receivers are entitled to receive payment. Thus, there is consideration. What needs to be determined here is whether the remuneration component represents consideration for: · supplies made personally by the Receivers to the Appointors or the entity for whom entity A held the property and/or · supplies made by the Receivers to the entities for whom entity A held the property. Determining the above is important because, if the remuneration component is considered to be for supplies that the Receivers have made in their capacity as the representative of entity A, then any GST payable on that supply needs to be reported under Division 58 of the GST Act. However if it is decided that the remuneration component is consideration for supplies made by the Receivers in their personal capacity (to either the entity for whom entity A held the property and/or the Appointors), then any GST payable on those supplies need to be reported under section 9-5 of the GST Act by the Receivers in their personal capacity. Given that the 'remuneration' component of the indemnity is owed personally to the Receivers rather than to entity A we accept that the Receivers have not 'earned' the relevant amount in their capacity as the representative of entity A. That is, the remuneration component of the indemnity is not for any services that the Receivers have performed in their capacity as the representative of entity A. Consequently the remuneration component is not an amount that is reported by the Receivers under Division 58 of the GST Act. The remuneration component has been treated as being consideration for a supply personally made by the Receivers as part of their appointment under the deed of appointment. We agree with the way the remuneration component has been treated for GST. That is, the supply that has been made for which the remuneration component is the consideration is part of the receiver and manager services supplied to the Appointors. Our reasons are as follows. In this case, it is necessary to analyse the arrangement that takes place involving the Receivers, Appointors and the entity for whom entity A held the property. This is because the activities of caring for the property effects three parties (being the entity for whom entity A held the property, the Appointors, and the Receivers). The Commissioners' views on supplies are provided in Goods and services tax ruling , Goods and services tax: supplies (GSTR 2006/9). GSTR 2006/9 states the following: | Detailed Reasoning - Proposition 2: generally, for every supply there is a recipient and an acquisition: 53. ……………… 54 …………Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient. 55 The supplier and the recipient have to be different entities because an entity cannot make a supply to itself. Also, the recipient has to be identified, as you cannot make a supply to the world at large. However, a supply can be made for no consideration. Further, the following is stated in GSTR 2006/9 in regard to agreements between parties: | Detailed Reasoning - Proposition 9: creation of expectations alone does not establish a supply: 102. The Commissioner considers that an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other. In relation to tripartite arrangements GSTR 2006/9 also provides the following: | Detailed Reasoning - Grandma's flowers: 119 The scenario of Grandma's flowers illustrates some of the tripartite propositions. A enters into a contract with B for B to provide goods to C. A is an individual, B is a florist, the goods are flowers, and C is A's grandmother: A -------- → Contract-------→ B ---------→ Flowers provided ----------→ C- | Detailed Reasoning - Proposition 11: the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply: 123 Examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom. 124 In Grandma's flowers there is no contractual relationship between A and C. Also, there is no contractual relationship between B and C. B simply provides flowers to C on A's behalf. 125 If you take a contractual approach in analysing the arrangement in Grandma's flowers, then the only contractual relationship is between A and B. Under this contract B makes a supply of flowers to A and consideration is paid by A to B. That supply is provided by B to C: A ¬ supply of flowers ¾B ------- Flowers provided ---------- → C- 126 The analysis of Grandma's flowers raises the following propositions for identifying supplies in tripartite arrangements: · transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply; and · when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow). As stated at paragraph 119 of GSTR 2006/9, the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom. In this case, there is no agreement by the Receivers (or contractual obligation) to suggest that any supply was made to the entity for whom entity A held the property individually or collectively. Further, those entities are not contractually liable to pay the 'remuneration' component. Thus, whilst those entities may have in some way benefited from the work that the Receivers have caused to occur in caring for the property, we consider that the Receivers have not made any supply personally to those entities. According to the Australian Securities and Investment Commission's (ASIC) principles, a receiver's responsibility is to the creditor. In this case, the Receivers were engaged by the Appointors to manage their interests in entity A. Accordingly, any work undertaken by the Receiver under the deed of appointment will be taken to be made to the Appointors. The remuneration component in question is an amount payable under the Deed of Appointment. Thus, given that the relevant amount is not payable to entity A and that it is an amount earned by the Receivers personally, we are of the view that the remuneration component has a nexus with supplies arising under the deed of appointment. Under the deed of appointment, the Receivers had an obligation to supply receiver and manager services to the Appointors. The Receivers did cause the activity of caring for the property to occur. However we consider that such a step was taken by the Receivers as part of their receiver and manager services in looking after the property during entity A's receivership for the interest of their Appointors. Thus, consistent with the, Grandma's flowers example mentioned in GSTR 2006/9, we are of the view that whilst the entities for whom entity A held the property may have indirectly benefited from the services of caring for the property, the Receivers 'caused' those services to occur, as part of supplying their receiver and manager services to the Appointors. Consequently, we are of the view that the 'remuneration' component was consideration for receiver and manager services supplied to the appointers under the deed of Appointment. Other requirements of section 9-5 of the GST Act It has been established that the relevant services for which the remuneration component that is arising out of the indemnity were not supplied by the Receivers in their capacity as the representative of entity A, but rather the services were supplied to the Appointers in their personal capacity in undertaking their receiver manager services. Accordingly, the services were supplied personally by the Receivers in the course of their enterprise. The Receivers are registered for GST. The supply is connected with Australia, The supply is neither GST-free nor input taxed. Consequently the 'remuneration' portion of the payment that arises out of the indemnity satisfies all the requirement of section 9-5 of the GST Act and is therefore subject to GST. | Detailed Reasoning - Which tax period is the taxable supply attributable to?: As the 'remuneration' component of the indemnity claim represents consideration for the receiver and manager services supplied by the Receivers personally to the Appointors, the GST payable will be attributed according to the attribution rules under Division 29 of the GST Act. In particular subsection 29-5 of the GST Act states: 1. The GST payable by you on a *taxable supply is attributable to: (a) the tax period in which any of the *consideration is received for the supply; or (b) if, before any of the consideration is received, an *invoice is issued relating to the supply - the tax period in which the invoice is issued. In this case we have not been advised of the relevant tax period in which the tax invoices for the services of the Receivers were issued or consideration was received. Therefore GST on the relevant amount should be attributable by the Receivers (personally) according to the rule set out in subsection 29-5(1) of the GST Act. As GST has already been attributed when the invoice for the relevant amount was raised, no further GST liability arises when the payment is actually made. | Detailed Reasoning - Question 2: A financial supply is defined in subsection 40-5(2) of the GST Act as follows: Financial supply has the meaning given by the regulations. Regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) states: 1. The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if: (a) the provision, acquisition or disposal is: (i) for consideration; and (ii) in the course or furtherance of an enterprise; and (iii) connected with Australia; and (b) the supplier is: (i) registered or required to be registered; and (ii) a financial supply provider in relation to supply of the interest. Therefore, in order to decide whether the assignment is a financial supply as per the above definition, what must be established first is whether the rights, title and interests in the Receivers' indemnity in respect of the property comes within the definition/meaning of an "interest" mentioned in subregulation (3) or (4) of Regulation 40-5.09 of the GST Regulations. Regulation 40-5.02 of the GST Regulations defines an 'interest' as anything that is recognised at law or in equity as property in any form. Further item 2 in the table in subregulation 40-5.09(3) of the GST Regulations, provides that a debt is considered an interest for the purposes of subregulation 40-5.09(1) of the GST Regulations. Consequently what remains to be determined in this case is whether the rights, title and interest in the Receivers' indemnity is a debt for the purposes of item 2. The term 'debt' is defined in Goods and Services Tax Ruling GSTR 2002/2, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) as follows. | Detailed Reasoning - Debt: An amount due from one entity to another or a presently existing obligation to pay an ascertainable amount at a future time. In this case we consider that the rights, title and interests in the Receivers' indemnity has the characteristics of a debt as it represents an amount due from one entity to another. Accordingly, on the understanding that the remaining requirements of Regulation 40-5.09 of the GST Regulations are satisfied by the Receivers, the assignment of the rights, title and interests in the Receivers indemnity will satisfy the definition of a financial supply. A financial supply is an input taxed supply.

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