Private ruling: GST and settlement payments
Published: June 2012

Ruling: Q1: Are the Receivers entitled to claim an input tax credit in relation to the acquisition of the retention of title (ROT) goods pursuant to paragraph 58-10(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No | Q2: Do the Receivers and Managers have an increasing adjustment in respect of the earlier supply of the ROT goods to the liquidated entity? | A2: No

Relevant facts and circumstances: You are a retailer of goods and are registered for goods and services tax (GST). Your directors resolved to appoint Voluntary Administrators on the appointment date. Following this announcement, a lender appointed their Receivers and Managers (the Receivers) on the same date. The Receivers took control of the business and its assets and have continued the business. Prior to the appointment, the liquidated entity accounted for GST on a non-cash basis. The Receivers account for GST on a cash basis. Delivery of undelivered goods Prior to the appointment of the Receivers, the liquidated entity contracted with various suppliers (wholesalers, manufacturers and distributors) for the supply of goods (pre-appointment contracts). In some instances, the supply of the goods was subject to the ROT clause (ROT goods). The title of the ROT goods would not have passed to the liquidated entity until either the relevant invoice had been paid or the balance owing to the supplier had been paid. At the time of delivery of the ROT goods the suppliers issued a tax invoice to the liquidated entity for the total purchase price of the ROT goods and the liquidated entity claimed input tax credit equal to the GST payable on the acquisition of the ROT goods in the tax period when the relevant tax invoice was received. At the time of the appointment of the Receivers, the ROT goods have been delivered however the suppliers had not been paid in full by the liquidated entity for the supply of the ROT goods. Under the terms of their respective retention of title clauses, the suppliers alleged that they had a number of rights in respect of the ROT goods (or the amount owing in respect of the ROT goods) which they could have attempted to enforce against the liquidated entity. Following the appointment, the Receivers contacted certain suppliers seeking settlement agreements. The settlements occurred with some haste shortly after the appointment and were completed in an informal, non-uniform manner without the same level of documentation (i.e. letter of offer rather than deeds of settlement). The key focus for the Receivers, in entering into settlements was to, as quickly as possible, to ensure that the business could continue to operate. In general, the settlements agreements provided by the Receivers contained the following terms: The supplier will allow the Receivers to order new goods from the supplier, on similar terms to those previously granted to the liquidated entity. The supplier will grant the Receivers the same access to preferential pricing rebates and marketing incentives as those previously granted to the liquidated entity. The Receivers will pay the agreed settlement amount (Settlement Payment) to the supplier. The Receivers have provided: · Appendix A contained the settlement agreements with all suppliers · Appendix B contained a number of tax invoices issued by the suppliers. · The pre-appointment contracts for the ROT goods delivered prior to the appointment date have not been cancelled. No new contract has been entered into between the Receivers and the suppliers in relation to those ROT goods.

Relevant legislative provisions: The A New Tax System (Goods and Services Tax) Act 1999 Subsection 7-1(2) | Section 9-10 | Section 9-15 | Sections 11-5 | Division 29 | Division 58

Reasons for decision: Summary: The Receivers are not entitled to claim an input tax credit in relation to the payment of the ROT goods as the Receivers are the third party payers and have not acquired the relevant goods. | Detailed Reasoning - Detailed reasoning: Under subsection 7-1(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), entitlements to input tax credit arise on creditable acquisitions. As the entity in these circumstances is the Receivers and Managers, we will consider the issue under both the general provisions and Division 58 of the GST Act (that sets out how GST applies where representatives were appointed to act for incapacitated entities). Under section 11-5 of the GST Act an entity makes a creditable acquisition if all of the following requirements are met: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered That is: · an entity must acquire something · the thing acquired is made solely or partly for a creditable purpose, · the supply of the thing to the entity is a taxable supply, · the entity provides or is liable to provide consideration for the supply, and · the entity is registered or required to be registered for GST. | Detailed Reasoning - Acquisition: Goods and Services Tax Ruling GSTR 2006/9 examines the meaning of 'supply' in the GST Act which also has relevance to acquisitions. Of particular relevance to this case, paragraphs 53-56 of GSTR 2006/9 state: 53. The meaning of 'acquisition' in section 11-10 is the corollary of the meaning of supply in section 9-10. Subsection 11-10(1) provides that, 'An acquisition is any form of acquisition whatsoever'. Subsection 11-10(2) refers to the thing acquired, such as goods, services or a right, and the means by which the thing is acquired, such as its receipt or acceptance. 54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. 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. Creditable acquisitions and input tax credits 56. If you make an acquisition and the other requirements of section 11-5 are met then the acquisition is a creditable acquisition. However, if you are not the recipient of the supply you will not have made a creditable acquisition, even if you provide consideration for the supply. It is first necessary to determine whether the Receivers were the recipient of a supply when they made a payment to a supplier under a settlement agreement. Where the supplier made no supply to the Receivers in return for the payment, it is considered that although the Receivers made the payment, they did not make any acquisition in relation to the payment. Matters in dispute between two parties may be resolved either by the judgement of a court or by agreement between the parties (out-of-court settlement). We consider that an out-of-court settlement includes any form of dispute resolution in which the terms of the resolution are agreed between the parties. This includes an agreement between the parties settling their differences before court action commences. The views of the Commissioner of Taxation on the GST consequences resulting from out of court settlements are expressed in Goods and Services Tax Ruling GSTR 2001/4. This ruling explains how a payment (or act of forbearance) that is made in compliance with an out of court settlement constitutes consideration for a supply and if so, whether the supply is in the nature of taxable, GST-free or input taxed. 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 any thing. (2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply. (2A) It does not matter: (a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or (b) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or There are two elements to the definition of consideration: · the payment from one entity to the other, and · the nexus that must be established between the payment and the supply. In order to determine whether a Settlement Payment made by the Receivers to a supplier, a party to a settlement agreement constitutes consideration for a supply, we need to consider whether the payment from the Receivers to a supplier was made for any supply. Supply is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever. A supply is essentially something that passes from one entity to another. A supply under subsection 9-10(2) includes goods, services, surrender of a right, entering into an obligation or something else. In GSTR 2001/4, the Commissioner is of the view the supplies for an out-of-court settlement fall within three categories: · Earlier supply - where the subject of the dispute is an earlier transaction in which the supply was made involving the parties. · Current supply - where a new supply is created by the terms of the settlement. · Discontinuance supply - where the terms of settlement, in finalising a dispute, create one or more new supplies to ensure that no further legal action in relation to the dispute. Each and every such supply is subject to GST provided the supply is a taxable supply. In general, the settlements agreements provided by the Receivers contained the following terms: The supplier will allow the Receivers to order new goods from the suppliers, on similar terms to those previously granted to liquidated entity. The supplier will grant the Receivers the same access to preferential pricing rebates and marketing incentives as those previously granted to liquidated entity. The Receivers will pay the Settlement Payment to the supplier. We will consider whether any supply is made under the terms of the settlement agreement. The following facts are relevant in consideration of whether a supply is made by the Receivers under the terms of a settlement agreement: The pre-appointment contracts for the ROT goods delivered prior to the appointment date have not been cancelled. No new contract has been entered into between the Receivers and the supplier in relation to those ROT goods. Generally a settlement agreement specified the Settlement Payment which is: · the amount of reconciled book debts owed by the liquidated entity (in relation to the supply of the ROT goods prior to the appointment date) and the commitment to pay this amount by the Receivers. · each of the settlement agreement with a number of suppliers specified the Settlement Payment which is an amount less than the book debt in relation to the ROT goods delivered prior to the appointment date. | Detailed Reasoning - Discontinuance supply: Under a settlement agreement, the supplier accepted the settlement amount as full and final settlement to avoid protracted and costly litigation (regardless of the book debt in relation to the ROT goods delivered prior to the appointment date). There will be no further claim/action in relation to the dispute (the unpaid amount of the ROT goods delivered prior to the appointment date). | Detailed Reasoning - Current supply: Under the settlement agreement, no supply was created by the terms of the settlement itself other than the substance of the dispute in relation to the recovery of the ROT goods (delivered to the liquidated entity prior to the appointment date). The pre-appointment contracts for the ROT goods delivered prior to the appointment date have not been cancelled. No new contract has been entered into between the Receivers and the suppliers in relation to those ROT goods. The grant of the same access to preferential pricing rebates and marketing incentives and the order new goods from the suppliers, on similar terms to those previously granted to the liquidated entity might be a current supply created by the settlement agreement. However, similarly to the discussion above, the grant/consent under the settlement agreement does not have a separately ascribed value. They are the conditions of the settlement and did not give rise to additional payment in its own right Therefore, there was no nexus between the current supply and the settlement payment. | Detailed Reasoning - Earlier supply: It is considered that the substance of the settlement agreement was the payment of amount owed on the ROT goods delivered to the liquidated entity prior to the appointment date. The payment was made in relation to the earlier transaction between the liquidated entity and the suppliers. All of the Settlement Payments are reconciled book debts (unpaid amount of the relevant ROT goods, taking into account rebates, other deductions by the suppliers) except payments to a few suppliers were fixed settlement amounts (also related to book debts of the relevant ROT goods). All of the suppliers have agreed to accept the Settlement Payments as full and final settlement of the amount owed in respect of the ROT goods supplies to the liquidated entity prior to the appointment date The descriptions of all tax invoices provided by the suppliers indicated that the payments are the settlement of the amount owed arising from the unpaid delivery of ROT goods prior to the appointment date. As the identity of the ROT goods cannot be clearly determined and quantified by the suppliers, the purposes of the payments under the settlement agreement was not for any new supply to the Receivers. The pre-appointment contracts for the ROT goods delivered prior to the appointment date have not been cancelled. No new contract has been entered into between the Receivers and the suppliers in relation to those ROT goods. The Receivers have provided that they act as agents for the liquidated entity and will be personally liable to the suppliers for payment of goods purchased by the liquidated entity during the receivership but otherwise they neither nor their respective representatives will have any liability to the suppliers (whether in contract, negligence or equity and howsoever arising) in relation to the supply of the ROT goods delivered the appointment date. Therefore, the Settlement Payment under a settlement agreement was for payment of the unpaid (or settlement) amount from an earlier supply which is the pre-appointment supply of ROT goods prior to the appointment date. There was no acquisition made by the Receivers as there was no supply made to them. They were the third party payer and did not make an acquisition in relation to the Settlement Payment. It has been established in Interchase Operation Ltd v. CAN 010 087 573 Pty Ltd & Others [2000] QSC 13; 2000 ATC 4552; ATR 445 that the extinguishing of a debt through its payment does not depend on any action on the part of the creditor and does not constitute a supply by the creditor for GST purposes. | Detailed Reasoning - The application of Division 58 of the GST Act: Division 58 of the GST Act sets out how GST applies where representatives were appointed to act for incapacitated entities. This Division: · provides that any supply, acquisition or importation by a representative of an incapacitated entity in his or her representative capacity will be treated as a supply, acquisitions or importation of the incapacitated entity. This ensures that the GST consequences that arise from a supply, acquisition or importation of the representative are the same as the consequences that would have arisen as if they were supply, acquisition or importation of the incapacitated entity · ensures the representative is responsible for certain GST consequences which arise from a supply, acquisition or importation that falls within the scope of the representative's responsibility or authority for managing the incapacitated entity. Although the payments were made by the Receivers during the receivership, there was no acquisition (for GST purposes) made by them in relation to the payments and therefore Division 58 of the GST Act does not apply to the Settlement Payments. | Summary: The Receivers do not have an increasing adjustment in respect of the payment of the pre-appointment supply of the ROT goods. | Detailed Reasoning - Detailed reasoning: As discussed above, the Settlement Payment was not provided in return for an acquisition. It was payment to settle an amount owed to the suppliers for the delivery of ROT goods the appointment date. The supply and acquisition of the ROT goods were made under the pre-appointment contract which was not cancelled. The GST consequences for the supply and acquisition of the delivery of the ROT goods prior to the appointment date had been accounted for by the suppliers and the liquidated entity respectively. The Settlement Payments settled the debts and extinguished any rights the suppliers have on the ROT goods following the payment. Therefore, there would be no increasing adjustment either to the liquidated entity or the Receivers.

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