Private ruling: GST and change in consideration
Published: November 2014

Ruling: Q1: By how much did the consideration for the relevant supply change? | A1: The consideration changed by the amount of the bank guarantees being called upon by M. | Q2: Was the issuing of the certificate an event which had the effect of causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition within the meaning of paragraph 19-10(1)(c) of the A New Tax System (Goods and Services Tax) Act (GST Act)? | A2: No. | Q3: Was the issuing of the certificate an event which changed the extent to which M provides, or is liable to provide, consideration for the acquisition within the meaning of paragraph 19-10(2)(c) of the GST Act? | A3: No. | Q4: Does A have a further decreasing adjustment of $J? | A4: No.

Relevant facts and circumstances: At all relevant times A was registered for GST. A entered into a contract (contract) with M to design and construct plant. The terms of the terms of the contract provided are as follows: a. A shall provide security in the amount of P% of the contract sum; b. A shall make claims for progress payments to M. M shall assess the claims and issue payment certificates stating the amount of any payment to be made. The A shall pay to the Principal (M) or the Principal shall pay to A, as the case may be, an amount not less than the amount shown in such certificate as due to A or the Principal; and c. M may direct A to provide it with statutory declarations that all workers and subcontractors have been paid all monies due to them. A provided M with security in the form of two unconditional bank guarantees. Subsequently A issued M with nine tax invoices for a supply or supplies under the contract (relevant supply). M paid A in various instalments. A lodged GST returns, it attributed the GST included in the invoices listed above. A paid all these GST liabilities as they became due. Later voluntary administrators were appointed to A. M lawfully issued a payment certificate. The intended contractual effect of the certificate was to require A to repay a sum to M. The reasons for M issuing the certificate were: M called upon the bank guarantees for their full value. The administrators were appointed liquidators of A. A, being the incapacitated entity as opposed to its representatives, has not lodged a GST return that tax period or any subsequent tax period.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-15 | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 19-10

Reasons for decision: Summary: The consideration has not decreased as the actual payments made by M have not decreased by this amount. | Detailed Reasoning - Detailed reasoning: In this case there was an agreed price of $X for the design and construction of plant. Invoices were issued by A and paid by M. The payment of $Y to A is considered to meet the definition of 'consideration' as per section 9-15. This consideration is considered to be for the work undertaken by A to that point for the purposes of paragraph 9-5(a). That is, it is 'the supply for consideration' for the purposes of establishing a taxable supply under section 9-5. The phrase 'the supply for consideration' was considered in the High Court case Qantas Airways Pty Ltd v FC of T 2011 ATC 20-276 (Qantas), where at paragraph 14 it states: … the word "for" is not used to adopt contractual principles. Rather, it requires a connection or relationship between the supply and the consideration. The issue in dispute was whether Qantas had made a taxable supply when it received fares for flights booked but not undertaken by the prospective passengers. This included where the passenger was entitled to a refund but no refund claim was made. The High Court concluded at paragraphs 33 and 34 that: 33. The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This was a "taxable supply" for which the consideration, being the fare, was received. 34. The GST payable for that taxable supply was attributable to and included in the calculation of the Qantas net amount for the tax periods in issue in this litigation and the assessments objected to were not shown to be excessive. In this case there have been supplies for consideration and the (invoiced) amounts have been attributed by A in the relevant periods. Similarly to the Qantas case there is a contractual entitlement to a repayment, but this has not occurred to the extent under that contract ($Y). The definition of consideration contained in section 9-15 does not extend across multiple dimensions of past, present and future, it deals solely in the single tense, 'any payment, or any act or forbearance'. It follows that in calculating consideration already paid and in particular recalculating consideration post initial attribution, there must be some actual increase or decrease in the amount previously paid. A change in the consideration for a supply is an 'adjustment event', as defined under section 19-10, and paragraph 19-10(1)(b) is the applicable provision. As a certain amount of work has been undertaken by A it is considered that the supply has not been cancelled so paragraph 19-10(1)(a) does not apply. It is also considered that the supply remains a taxable supply and paragraph 19-10(1)(c) does not apply, unless it is concluded that there has been no consideration. Any reduction in the consideration to A will be a decreasing adjustment for the supply as per section 19-55. This applies where the previously attributed GST amount is higher than the corrected GST amount. As per section 19-45 the previously attributable GST amount (prior to any adjustment for the bank guarantees) is the GST on the $Y received by A. The corrected GST amount is defined by paragraph 19-40(c) and provides 'the amount of GST (if any) on the supply' and 'taking into account any change of circumstances that has given rise to an adjustment for the supply'. The circumstances in this case are that supplies have been made, payment has been received and then there is a subsequent reduction to that payment. We consider that the residual payment amount satisfies the 'any payment' part of the definition of consideration under paragraph 9-15(1)(a). Accordingly, it is considered that the change in consideration for the supplies by A is limited to the previously advised amount that came about due to M calling upon the bank guarantees for their full value. | Detailed Reasoning - Alternative view: You have submitted that a liability to repay and the payments already made (bank guarantees) can be offset and be deemed a change in the payment and therefore the consideration. It is accepted that there may be an obligation for A to repay the full $Y under the contract. It is also agreed that the re-payments already made, being the bank guarantee called upon by M, represents a change in consideration for the supplies that have occurred. Paragraph 19-10(2)(c) has been raised in discussions on this case and is relevant to consider. This provides that a change in the extent that an entity that makes an acquisition provides, or is liable to provide, consideration for an acquisition is an adjustment event. In this case M has provided the consideration and it is the extent to which they have provided it that is changing. M has made the payments and has no liability to provide any further consideration and is in fact, actually due the amount under the contract. M has provided consideration in the context of 'you provide' in paragraph 11-5(c) and that this does not change unless it is repaid. It would be unbalanced to deny input tax credits for an amount that remains paid for supplies that have occurred. Accordingly, although the contract provides for an amount to be repaid to M, it is considered that the actual consideration provided for the purposes of section 9-15 does not change until it is no longer provided, that is, until it is repaid in some format. | Summary: The issuing of the certificate did not cause a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition within the meaning of paragraph 19-10(1)(c). | Detailed Reasoning - Detailed reasoning: Section 19-10(1)(c) notes that an adjustment event is any event which has the effect of causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition. According to subsection 9-5(a) a taxable supply is a supply which is made for consideration. Complementing this, section 11-5 states that a creditable acquisition is made if, amongst other requirements, you provide consideration. It is the payment and receipt and subsequent liability to repay that are central to this issue. As discussed above, while consideration paid for the supplies made by A has reduced, the residual consideration remains paid by M and received by A. The serving of the certificate did not alter the transaction apart from leading to the recalling of bank guarantees and the limited reduction of consideration that subsequently occurred. While the residual consideration remains 'paid' to A, in the absence of other unforseen events that would reduce the paid amount, the supplies made by A are taxable and the acquisitions made by M are creditable. | Summary: The issuing of the certificate did not change the extent to which M provides, or is liable to provide, consideration for the acquisition within the meaning of paragraph 19-10(2)(c). | Detailed Reasoning - Detailed reasoning: Paragraph 19-10(2)(c) refers in part to the provision of or the liability to provide consideration, necessarily mirroring the requirements of section 11-5. Both provisions are structured on the basis of provide or liable to provide. You have argued that M is no longer liable to provide any consideration for its acquisitions, however M has provided consideration already. On that basis it is considered that the appropriate approach is to look at the adjustment to what has been provided. In this case the extent to which the consideration provided has been adjusted is the recalling of the bank guarantees. The 'corrected GST amount' as per paragraph 19-40(c) should be based on the amount that remains provided. The attribution of the adjustment would be based on subsection 29-20(1) which provides that the attribution occurs in 'the tax period in which you become aware of the adjustment' . The Commissioner takes a practical application of this but the change in extent, as per paragraph 19-10(2)(c), dictates the amount of the actual adjustment. | Summary: A does not have a further decreasing adjustment. | Detailed Reasoning - Detailed reasoning: As there is no further reduction in the consideration, A does not have a further decreasing adjustment.