Private ruling: GST Decreasing Adjustment for Termination of Contract
Date of advice: 7 July 2016
Published: August 2016

Ruling: Q1: Does the request for repayment of $ (Payment Request) issued by A to B constitute an adjustment event under section 19-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes | Q2: Is B entitled to issue an adjustment note to A and make a decreasing adjustment under section 19-55 of the GST Act? | A2: Yes | Q3: Are the representatives of B entitled to the decreasing adjustment? | A3: No

Relevant facts and circumstances: B has been registered for GST since X. B entered into a contract signed on X (the Subcontract) with A to provide, on a subcontractor basis, certain works and services under a head contract with C. A entered into a contract with C (Main Contract) to undertake engineering, procurement and construction works, which it subcontracted to B. The documents making up the Subcontract include: • the General Terms and Conditions for Construction Subcontractors (General T&Cs); • Technical Requisitions; • the Purchase order; and • the Main Contract. B was required to carry out and complete the contract works for which it was entitled to receive the Subcontract Price under the General T&Cs. The Purchase Order dated X was issued by A to B for the provision of site works. The Purchase Order provided that A was to make an advance payment of part of the Subcontract Price in favour of B. Bank guarantees were provided by B to A. On X, B issued an invoice to A for the Advance Payment of $, which B received from A on X. B provided construction services to A and requested payment in accordance with the General T&Cs, whereby B would issue invoices to A on a monthly basis in accordance with the progress of work performed. On X Voluntary Administrators and Receivers were appointed to B. On X, A wrote to B informing it of the amount repayable as a consequence of its abandonment of the project and consequent termination of the Subcontract. A has requested that B repay the Advance Payment paid to B by A upon executing the Subcontract. Excluding liquidated damages, A's total request for recovery of monies is $ (Repayment Request). A requested recovery of the Advance Payment and applied this amount, as well as the monies recovered upon executing the Bank Guarantees to the costs to be recovered from B. On X, A called on the bank guarantees and wrote to B notifying it that it was in "material breach" of the Subcontract as a consequence of its abandonment and repudiation of the work under the Subcontract. The Subcontract was terminated in accordance with the General T&Cs. Subject to the outcome of this Ruling on whether the Repayment Request is an adjustment event giving rise to an entitlement for B to make a decreasing adjustment, B intends to issue an adjustment note for $ (including GST) to A and report the decreasing adjustment in the relevant Business Activity Statement (BAS).

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 19 | Division 29 | Division 58

Reasons for decision: Summary: 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: 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 a change in consideration was brought about by A calling on the bank guarantees and recovery of the Advance Payment. The calling on the bank guarantees and issuance of the Payment Request by A following termination of the Subcontract constitute adjustment events under paragraphs 19-10(1)(b) and 19-10(2)(b) because they change the original consideration amount under the Subcontract. | Detailed Reasoning - Attribution: Subsection 29-5(1) of the GST Act states: | Detailed Reasoning - 29-5 Attributing the GST on your taxable supplies: (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. You have advised: B provided construction services to A and requested payment per clause X of the General T&Cs, whereby B would issue invoices to A on a monthly basis in accordance with the progress of work performed. The GST on those supplies is therefore attributable to those periods prior to termination of the Subcontract in which B issued monthly invoices to and received payment from A for work done. | Detailed Reasoning - Question 2: Section 19-55 of the GST Act states: | Detailed Reasoning - 19-55 Decreasing adjustments for supplies: If the *corrected GST amount is less than the *previously attributed GST amount, you have a decreasing adjustment equal to the difference between the previously attributed GST amount and the corrected GST amount. Because of the adjustment resulting from A's recovery of $ previously paid to B, there is a decreasing adjustment equal to the difference between the GST amount B previously attributed and the new amount which takes into account the change in consideration. Applying section 19-40, the adjustment relates to the earlier tax periods when B issued monthly invoices to and received payment from A. | Detailed Reasoning - Adjustment Note: Applying subsection 29-20(3), the adjustment is attributable to the first tax period for which the entity gives the Commissioner a GST return when it holds an adjustment note. You have advised that B became aware of the adjustment event upon receipt of the Repayment Request from A on X. As this ruling concurs with your submission that an adjustment event occurred at that time, we agree that B may issue an adjustment note to A and make the decreasing adjustment in the relevant GST return under section 19-55. The adjustment note must meet the requirements of subsections 29-75(1) and (2) which state: | 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. However, the Commissioner may treat as an adjustment note a particular document that is not an adjustment note. (2) The supplier of the *taxable supply must: (a) within 28 days after the *recipient of the supply request the supplier to give an *adjustment note for the *adjustment relating to the suppl; or (b) if the supplier has issued a *tax invoice in relation to the supply or the recipient has requested one) and the supplier becomes aware of the adjustment before an adjustment note is requested - within 28 days after becoming aware of that fact; give to the recipient an *adjustment note for thr *adjustment, unless any *tax invoice relating to the supply would have been a *recipient created tax invoice (in which case it must be issued by the recipient). | Detailed Reasoning - Question 3: You have advised that the consideration for the taxable supplies made to A was received by B before the appointment of its representatives on X. Subsection 58-10(1) of the GST Act states: | Detailed Reasoning - Circumstances in which representatives have GST-related liabilities and entitlements: (1) A *representative of an *incapacitated entity: (a) is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a *taxable supply or a *taxable importation; and (b) is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a *creditable acquisition or a *creditable importation; and (c) has any *adjustment that the incapacitated entity would, but for this section or section 48-50, have; to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs. We agree that the exception in paragraph 58-10(4)(a) applies in this instance. Because the consideration was received by B before the appointment of the representatives, the transactions to which the adjustment relates fall outside the scope of their responsibility or authority. Therefore, only B is entitled to the decreasing adjustment. As section 437C of the Corporations Act 2001 effectively bars the officers of B from issuing the adjustment note, we agree that the representatives are the only ones able to issue the adjustment note on behalf of B.

Reasons for decision: In this reasoning, unless otherwise stated, all legislative references are to the GST Act.