Private ruling: GST and decreasing adjustment
Published: June 2012

Ruling: Q1: Are you entitled to a reducing adjustment in respect of the additional consideration that you are required to pay which represents GST payable under a gross-up clause for the property purchased in accordance with section 133-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, you are entitled to a reducing adjustment in respect of the additional consideration that you are required to pay which represents GST payable under a gross-up clause for the property purchased in accordance with section 133-5(1) of the GST Act.

Relevant facts and circumstances: You purchased a property as a supply of a going concern for GST purposes. The front page of the contract of sales (sale contract) indicates that the margin scheme will be used and the sale is a GST-free supply of going concern The sale contract provides the following clauses: · if the sale is the supply of a going concern, the parties agree it is a going concern. The vendor must carry on the enterprise between the contract date and completion and what happen if the purchaser is not registered by the completion date · if the Vendor is assessed by ATO to pay GST on the supply, the purchaser must pay the vendor on demand the amount of GST assessed · normally the margin scheme will not apply · if the contract says the margin scheme applies, the parties have agreed to apply the margin scheme · the vendor does not have to give the purchaser a tax invoice if the margin scheme applies to a taxable supply. The preamble of the Special conditions (SC) provides that if there is any inconsistency between a special condition and a clause, the special condition prevails to the extent of the inconsistency. Some of the terms are extracted as below. If for any reason the sale or any supply under this Contract is not GST free as contemplated by special condition xx, than the Purchaser shall on demand pay to the Vendor by way of further consideration for the sale an amount calculated as: A x R where: A is the amount of consideration for the sale together with adjustments to be made pursuant to the Contract and R is the rate of GST. This special condition xx does not apply if the sale or any supply under this Contract is not GST free solely because of some fault on the part of the Vendor. In the event that special condition xx applies the Vendor shall promptly do such things and give to the Purchaser such information (including providing a tax invoice) as may be reasonably required by the Purchaser to obtain an input tax credit under the GST law. This special condition xx shall not merge on completion of the Contract or on termination of the Contract for any reason. A review on the above transaction by the ATO has confirmed that the transaction did not qualify as a GST-free supply of a going concern for GST purposes. You are required to pay the GST amount in accordance with the gross-up clause in the sale contract. You also confirmed that both parties agreed that in the event that the sale was not a sale of a going concern, the intention was for the sale to be a taxable supply and not the margin scheme as indicated on the front-cover of the contract.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 93 | A New Tax System (Goods and Services Tax) Act 1999 subsection 133-5(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 153-5(2) | A New Tax System (Goods and Services Tax) Act 1999 subsection 153-5(3) | A New Tax System (Goods and Services Tax) Act 1999 section 153-10

Reasons for decision: Summary: Division 93 of the GST Act provides that you cease to be entitled to an input tax credit for a creditable acquisition to the extent that you have not taken it into account within the required time. This refers to activity statements lodged after 12 May 2009. This means that the credit must be claimed in an activity statement for a tax period within four years from the date the credit would have been attributable, based on payment of the consideration or receipt of an invoice. It is common for GST 'gross-up' clauses to be included in commercial agreements entitling the supplier to an additional amount, should a supply made under the contract prove to be subject to GST. In its simplest form, a 'gross up' clause provides that the consideration under the contract includes the stated amount plus any applicable GST. Division 133 of the GST Act addresses the inequitable situation where a recipient is contractually required to make an extra payment after the expiry of the four year period, due to the supplier being liable for GST. Such a recipient may have had no opportunity to claim the input tax credit within the four year period. | Detailed Reasoning - You have a decreasing adjustment if:: (a) you made an acquisition on the basis that: (i) it was not a *creditable acquisition because the supply to which the acquisition relates was not a *taxable supply; or (ii) it was *partly creditable because the supply to which the acquisition relates was only partly a taxable supply; and (b) you provided *additional consideration for the acquisition in compliance with a contractual obligation that required you, or had the effect of requiring you, to provide additional consideration if: (i) in a case where subparagraph (a)(i) applies - the supply was later found to be a taxable supply, or to be partly a taxable supply; or (ii) in a case where subparagraph (a)(ii) applies - the supply was later found to be a taxable supply to a greater extent; and (c) GST on the supply has not ceased to be payable (other than as a result of its payment); and (d) at the time you provided the additional consideration, you were no longer entitled to an input tax credit for the acquisition. | Detailed Reasoning - (2) The amount of the *decreasing adjustment is the difference between:: (a) what would have been the *previously attributed input tax credit amount for the acquisition if: (i) the *additional consideration for the acquisition had been provided as part of the original *consideration for the acquisition; and (ii) in a case where you have not held a *tax invoice for the acquisition - you held such an invoice; and (iii) subsection 29-10(4) did not apply in relation to the acquisition; and (b) the previously attributed input tax credit amount. | Detailed Reasoning - (3) To avoid doubt, additional consideration for an acquisition includes a part of the *consideration for the acquisition that:: (a) relates to the amount of GST payable on the *taxable supply to which the acquisition relates; and (b) at the time of the acquisition, the parties to the transaction under which the acquisition was made assumed was not payable. The asterisk denotes a defined term in the GST Act. In your case, you have made an acquisition on the basis that it was not a creditable acquisition because it was GST-free supply of a going concern. You were required to provide additional consideration for the acquisition in compliance with the contractual obligation. The GST on the supply has not ceased to be payable and you were no longer entitled to an input tax credit for the acquisition. Thus you have met all the requirements of subsection 133-5(1) of the GST Act. The amount of the decreasing adjustment is equal to the difference between the amount of the input tax credit claimed and the amount which the taxpayer would have been entitled to claim if the taxpayer had held a relevant tax invoice. In your case, no input tax credit has been claimed in a fully creditable transaction, therefore the adjustment will be equal to the full amount of the credit according to subsection 133-5(2) of the GST Act. You, as a recipient, may be entitled to a decreasing adjustment to reduce your net amount by the amount of the input tax credit to which you would otherwise have been entitled as provided in subsection 133-5(2) of the GST Act. As the gross-up payment would result in you having a decreasing adjustment under both Division 19 and Division 133, no adjustment will result under Division 19 according to subsection 133-10 of the GST Act.

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