Private ruling: GST Decreasing Adjustments for Termination of Contract
Date of advice: 8 November 2016
Published: March 2017

Ruling: Q1: Are the requests for repayment of $X (“First Payment Request”) and $Y (“Second Payment Request”) issued by A (“Contractor”) to B (“Subcontractor”) adjustment events under subsection 19-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes | Q2: Is B entitled to decreasing adjustments under section 19-55 of the GST Act in relation to the First Payment Request and the Second Payment Request? | A2: Yes

Relevant facts and circumstances: On DD MM YY the Contractor entered into a construction project (“the Subcontract”) with the Subcontractor and another subcontractor (“Subcontractor 2”). B provided a X service (“the First Service”) under the Subcontract. B registered for GST from mid-late 201X. B accounts on an accruals basis. Under the terms of the Subcontract, B was required to provide services for performance of its obligations under the Subcontract to perform works. B and Subcontractor 2 were jointly and severally liable. On XX A terminated the Subcontract due to the insolvency of Subcontractor 2. B was unable to step in to perform the works unable to be performed by Subcontractor 2. This resulted in A incurring costs in having to make other arrangements for the works to be completed. On or around XX, A and B entered into an interim agreement (“Interim Subcontract”) to complete the works that had been allocated to B. B provided X services (“the Second Services”) under the Interim Subcontract. The terms of both the Subcontract and the Interim Subcontract provided for A to be compensated from the services provided by B under both contracts for work taken out of the hands of B by A. On XX A called on the First Service However it only received the benefit of the First Services in mid-late X. On XX A issued B with a notice seeking payment of the shortfall caused by the termination of the Subcontract (“the First Payment Claim”). A did not claim any amount for liquidated damages in the First Payment Claim. A took the work out of the hands of B under the Interim Subcontract. This resulted in A incurring costs in having to make other arrangements for the works to be completed. On XX A issued B with a notice seeking payment of the shortfall (“the Second Payment Claim”) caused by having to take work out of the hands of B under the Interim Subcontract and make alternate arrangements for performance of the works not completed by the Subcontractor On XX B called upon the Second Services.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Divisions 19 and 29.

Reasons for decision: Summary: In this reasoning, unless otherwise stated, all legislative references are to the GST Act. Subsections 19-10(1) and (2) state: | Detailed Reasoning - 19-10 Adjustment events: (1) A adjustment event is any event which has the effect of: (a) cancelling a supply or acquisition; or (b) changing the *consideration for a supply or acquisition; or (c) causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition. Example: If goods that are supplied for export are not exported within the time provided in section 38-185, the supply is likely to become a taxable supply after originally being a supply that was GST-free. (2) Without limiting subsection (1), these are* adjustment events: (a) the return to a supplier of a thing, or part of a thing, supplied (whether or not the return involves a change of ownership of the thing); (b) a change to the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise; (c) a change in the extent to which an entity that makes an acquisition provides, or is liable to provide, consideration for the acquisition (unless the entity accounts on a cash basis). | Detailed Reasoning - A change to the previously agreed consideration for a supply: Section 19-40 sets out when adjustments for supplies arise: | Detailed Reasoning - 19-40 Where adjustments for supplies arise: You have an adjustment for a supply for which you are liable to pay GST (or would be liable to pay GST if it were a *taxable supply) if: (a) in relation to the supply, one or more *adjustment events occur during a tax period; and (b) GST on the supply was attributable to an earlier tax period (or, if the supply was a not a taxable supply, would have been attributable to an earlier tax period had the supply been a taxable supply); and (c) as a result of those adjustment events, the *previously attributed GST amount for the supply (if any) no longer correctly reflects the amount of GST (if any) on the supply (the corrected GST amount), taking into account any change of circumstances that has given rise to an adjustment for the supply under this Subdivision or Division 21 or 134. Paragraph 13 of Goods and Services Tax Ruling GSTR 2000/19 (Making adjustments under Division 19 for adjustment events) includes as an adjustment event any event which has the effect of: …changing the consideration for a supply or acquisition… On the information you have provided, we accept that changes in consideration were brought about by A issuing both the First Payment Request and the Second Payment Request. They constitute separate adjustment events under paragraphs 19-10(1)(b) and 19-10(2)(b) because they change the original consideration amounts under both the Subcontract and the Interim Subcontract. In both cases B will have a decreasing adjustment equal to the difference between the originally contracted amounts and the amounts remaining after A has recourse to the First Services and the Second Services respectively. | Detailed Reasoning - Attribution: Subsection 29-20 of the GST Act states: | Detailed Reasoning - 29-20 attributing your adjustments: (1) An *adjustment that you have is attributable to the tax period in which you become aware of the adjustment. (2) However, if you *account on a cash basis, and the *adjustment arises from an *adjustment event as a result of which you are liable to provide *consideration, then: (a) If, in a tax period, all of the consideration is provided - the *adjustment is attributable to that tax period; or (b) if, in a tax period, part .of the consideration is provided - the adjustment is attributable to that tax period, but only to the extent that the consideration is provided in that tax period; or (c) if, in a tax period, none of the consideration is provided - none of the adjustment is attributable to that tax period. (3) If: (a) you have a *decreasing adjustment arising from an *adjustment event; and (b) you do not hold an *adjustment note for the adjustment when you give to the Commissioner a *GST return for the tax period to which the adjustment (or any part of the adjustment) would be attributable: then: (a) the adjustment (including any part of the adjustment) is not attributable to that tax period; and (b) the adjustment (or part) is attributable to the first tax period for which you give the Commissioner a GST return at a time when you hold that adjustment note. However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for an adjustment note does not apply. You have advised that B has not yet issued adjustment notes to A in relation to the adjustments resulting from issuance of the First Payment Request and the Second Payment Request, but that upon receipt of a ruling from the ATO that those events trigger decreasing adjustments, B will issue adjustment notes to A for those respective events. We concur with that approach, provided the adjustment notes meet the requirements of subsection 29-75(1) which states: | Detailed Reasoning - 29-75 Adjustment notes: (1) An adjustment note for an *adjustment that arise from an *adjustment event relating to a *taxable supply: (a) must be issued by the supplier of the taxable supply in the circumstances set out in subsection 92); and (b) must set out the *ABN of the entity that issues it; and (c) must contain such other information as the Commissioner determines in writing; and (d) must be in the *approved form. As B accounts on an accruals basis, each of the decreasing adjustments will be attributable to the tax period in which B issues A with an adjustment note for each of the decreasing adjustments. Upon receipt of those adjustment notes, A will have corresponding increasing adjustments.