Private ruling: GST and prepaid expense
Published: December 2013

Ruling: When do you attribute the GST payable on the supply of a prepaid expense? | As you account for GST on a non-cash basis, the GST on the taxable supply of the prepaid expense is attributable to the tax period in which any of the consideration is received or an invoice is issued for the supply, whichever is earlier. | You offer prepaid services. You are registered for GST and account on a non-cash basis. | You enter into a contract with a customer to provide a service at a future date for a fixed price. The customer pays the money to your bank and you invest it. When an event occurs, you receive the funds including any investment earnings and you perform the service. | Currently, when you receive the payment from the customer, you pay the total GST on the fixed price contract in the period that the contract is placed. | A New Tax System (Goods and Services Tax) Act 1999 Section 9-5. | A New Tax System (Goods and Services Tax) Act 1999 Section 9-10. | A New Tax System (Goods and Services Tax) Act 1999 Section 9-15. | A New Tax System (Goods and Services Tax) Act 1999 Section 29-5. | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1. | An entity is liable to pay the GST on any taxable supply that that entity makes. | Section 9-5 of the GST Act sets out the requirements for a taxable supply: | You make a taxable supply if: | (a) you make the supply for *consideration; and | (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and | (c) the supply is *connected with Australia; and | (d) you are *registered, or *required to be registered for GST. | However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. | (* denotes a term defined in section 195-1 of the GST Act.) | All of these requirements must be satisfied for there to be a taxable supply. In your case, we consider paragraphs 9-5(b), 9-5(c) and 9-5(d) of the GST Act are satisfied. However, we need to consider if the requirements of paragraph 9-5(a) are satisfied. | To satisfy the first requirement of a taxable supply there must be a supply and consideration, and there must be a sufficient connection between both these elements. | There are three questions that are relevant to determining whether there is a supply for consideration: | · is there a supply; | · is there consideration; and | · does that necessary relationship exist between the supply and the consideration? | Essentially, a supply is something that passes from one entity to another. The supply may be one of particular goods, services or something else that is reflected in an agreement by one party to do something for another. | 'Supply' is defined under section 9-10 of the GST Act. The definition includes the creation, grant, transfer, assignment or surrender of any right. | Under section 9-15 of the GST Act, consideration includes any payment, act or forbearance, in connection with, in response to or for the inducement of a supply of anything. | You enter into a prepaid contract with a customer to provide a service at some future date. | As the service provider you are making a supply of the right to receive a service. The consideration for this supply is the contract price which is received at the time the contract is entered into. | As such, you satisfy the requirements of paragraph 9-5(a) of the GST Act. The supply of the prepaid service is neither GST-free nor input taxed. Therefore, as all the requirements of 9-5 are satisfied, you are making a taxable supply. | The GST payable on the supply of the prepaid service is one-eleventh of the price for the right to receive the service agreed to with the customer. | You should note that the actual supply of the service is not considered to be a taxable supply as no further payment is received. | Attribution | Division 29 of the GST Act sets out the basic rules for the attribution of GST and input tax credits. | Subsection 29-5(1) of the GST Act provides that if an entity accounts for GST on a basis other than cash the GST payable 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. | As you account for GST on a non-cash basis, you account for all the GST payable in whichever is earlier, the tax period you: | · issue a tax invoice for the service | · receive any of the payment for the service. | Additional information | Where there is investment in a bond in the name of the customer this is viewed as a separate financial supply and not subject to GST at the point of investment or redemption.