Private ruling: Creditors' trust - adjustment
Date of advice: 13 September 2017
Published: October 2017

Ruling: Q1: Does the calling of the securities by X & Y give rise to an adjustment event under subsection 19-10(1) of the GST Act? | A1: Yes. | Q2: Is the Creditors' Trust entitled to make a decreasing adjustment under section 19-55 of the GST Act? | A2: No. The decreasing adjustment must be made by the Company.

Relevant facts and circumstances: The Company provides construction services. The Company was registered for GST with effect from 1 July 20XX and lodged monthly Business Activity Statements with the Australian Taxation Office (ATO). The Company was de-registered for GST with effect from X. The Company entered into construction contracts ("the Contracts") with X and Y. The terms of those contracts referred to the Company as "the Subcontrator" and specified the contract price. Under all of the contracts, the Company was required to provide security to X and Yin the event of default. The Company obtained security in the form of 12 separate bonds for a total amount of $X ("the Bonds") The General Conditions in the Contracts set out the payment arrangements in respect of receipt of consideration by the Company upon completing the works under the Contracts. Payment Claims were made on a monthly basis for the services provided. Further to issuing a payment claim, X & Y would issue payment statements to the Company. The Company accounted on an accruals basis and issued tax invoices to X & Y. Upon issuing an invoice for services provided, the Company remitted GST on those taxable supplies. On X joint and several administrators (the Administrators) were appointed to the Company. The Administrators were subsequently appointed as Joint and Several Deed Administrators of the Company in X, pursuant to the Deed of Company Arrangement dated X (the DOCA). The purpose of the DOCA was to provide for the business, property and affairs of the Company to be administered in a way that maximised the chances of the Company continuing to carry on business, or if that was not possible, to provide a better return for creditors than the immediate winding up of the Company. Under the terms of the DOCA, a trust entity was created and the Company's obligations to the creditors bound by the DOCA were transferred to the trust. The Company's creditors agreed to relinquish their rights and claims against the Company, in exchange for becoming beneficiaries under the newly created trust. The Company's creditors executed the Creditors' trust deed on X ("the Creditors' Trust Deed") which established the Company Trust ("the Creditors' Trust"). Following the effectuation of the DOCA in X, the Creditors' Trust was established and control of the Company reverted to its directors. The Administrators were appointed as the Trustees of the Creditors' Trust. The Creditors' Trust registered for GST with effect from X, accounts for GST on a cash basis and lodges BAS quarterly. As part of the creation of the Creditors' Trust, the DOCA required the Company to: • assign its rights, title and interest in its claims to the Trustee of the Creditors' Trust; • transfer certain assets to the Trustee; and • apply any funds from the realisation of existing assets such as trade debts owing to the Company pre-appointment in respect of activities undertaken prior to X. Pursuant to the terms of the DOCA the Company assigned to the Trustee of the Creditors' Trust the Company's right, title, and interest in, and benefit arising from all the Company's Claims. This included the Company's claims against X & Y. The Claims In accordance with the general conditions in the Contracts, X & Y were able to have recourse to the Bonds for reimbursement. "Claim" is defined in the DOCA as: "Claim includes a claim, demand, debt, action, proceeding, suit, cost, charge, expense, damage, loss and other liability." Any funds received by the Trustee from the above were to be paid into a Creditors' Trust fund. Per the Creditors' Trust Deed, the beneficiaries of the Creditors' Trust are to be paid a distribution from the Creditors' Trust fund, in satisfaction of the creditors' claims against the Company. After the Company went into administration, X & Y terminated the Contracts on the grounds that the Company was insolvent. Upon termination of the Contracts, X & Y retained all amounts which were due and payable to the Company with respect to the terminated portion of the construction services and sought the recovery of amounts previously paid in connection with costs incurred in completing the work. Both X & Y separately called on the security. X On Z, X wrote to the Administrators in respect of the termination of the Contracts it had with the Company, outlining the amounts it sought to recover in respect of the terminated Contracts ("X Payment Request"). X exercised its right of set off under the Contracts and set off amounts payable to the Company. However this left an additional $X of monies owing to the Company in respect of one contract to X for which the Bonds of $X (including GST) were applied to further reduce the amount outstanding. X also used its right of set off under the contract in connection with additional costs to complete the Company's work and recovery of costs of materials purchased on the Company's behalf which equalled $X. X called on the Bonds of $X (including GST) to reduce the amount owing by the Company to X. Y Z, Y wrote to the Administrators of the Company in respect of amounts owing as a result of termination of its contracts ("Y Payment Request"). In respect of one contract, excluding liquidated damages, Y requested recovery of $X, of which the Bonds of $X (including GST) were applied against. In respect of another contract, excluding liquidated damages, Y requested recovery of $X, of which the Bonds of $X (including GST) were applied against. This included the recovery of overpayments made by Y to the Company and costs to complete the work. Relevant legislative provisions A New Tax System (Goods and Services Tax) Act 1999 Division 19 A New Tax System (Goods and Services Tax) Act 1999 Division 29 A New Tax System (Goods and Services Tax) Act 1999 Division 58 A New Tax System (Goods and Services Tax) Act 1999 Section 184 Detailed reasoning Question 1 Subsections 19-10(1) and (2) state: 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). 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 X & Y calling on the bank guarantees. The issuance of the repayment requests and set off of the amounts by applying the Bonds constitute adjustment events under paragraphs 19-10(1)(b) and 19-10(2)(b) because they change the original consideration amounts under the Contracts. Attribution Subsection 29-5(1) of the GST Act states: 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 that the Company accounted on an accruals basis and requested progress payments from X & Y. The Company would issue invoices and remit GST as those progressive payments were received. The GST on those supplies is therefore attributable to those periods prior to termination of the Contracts in which the Company issued invoices to and received payment from X & Y for work done. Question 2 Creditors' Trust is a Separate Entity You have advised that the Creditors' Trust has its own ABN and is registered for GST. Applying subparagraph 184-1(1)(g), for GST purposes we consider the Creditors' Trust to be a separate entity from that which originally made the taxable supplies to X & Y. You have advised that the Company has retained the same ACN as the Company which entered into the Contracts with X & Y. As such, only the Company can make the adjustments because it is the same legal entity as the original Company merely trading under a different name. Division 58 Subsection 58-10(1) of the GST Act states: 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. The administrators were appointed to the Company on X. The creditors executed the Creditors' Trust deed on Z. Following the effectuation of the DOCA in W, the Creditors' Trust was established and control of the Company reverted to its directors. Therefore, the administrators were 'representatives' (Division 195) of the Company (incapacitated entity) from X until creation of the Creditors' Trust in W. As the trustee of the Creditors' Trust does not fall within the definition of 'representative' in Division 195, Division 58 has no application from the time the Creditors' Trust was created. The Administrators were in control of the Company at the following times: As evidenced by their subsequent actions in negotiating the creation of the Creditors' Trust, response to the above Payment Requests was within the Administrators' scope of authority or responsibility for the purposes of Division 58. Section 19-55 of the GST Act states: 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 X & Y's recovery of money previously paid to the Company, there is a decreasing adjustment equal to the difference between the GST amount the Company 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 the Company issued invoices to and received payment from X & Y. Adjustment Note The Administrators, acting for and on behalf of the Company, first became aware of the adjustment events upon receipt of the Repayment Requests from X (Z) and Y (Z). Although knowledge of the adjustment events can be imputed to the Company at those times, the Administrators did not issue adjustment notes to X & Y and make the decreasing adjustments in the relevant GST returns under section 19-55. As the Administrators ceased in W, the Company is the only entity which can now issue adjustment notes. Applying subsection 29-20(3), the adjustments are attributable to the first tax period for which that entity gives the Commissioner a GST return when it holds an adjustment note. The adjustment notes must meet the requirements of subsections 29-75(1) and (2) which state: 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 supply; or (b) if the supplier has issued a *tax invoice in relation to the supply 9or 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 the *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). Disclaimer You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf. The Register of private binding rulings is a public record of private rulings issued by the ATO. 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the X Payment Request (Z); and