GST and adjustments – getting back to basics

The GST law contains various rules, set out in chapters, as follows:

• Chapter 2 – The Basic Rules (including rules for taxable supplies, creditable acquisitions, registration, tax periods, attribution, etc);
• Chapter 3 – The Exemptions (containing the GST-free and input taxed rules, and non-taxable importations); and
• Chapter 4 – The Special Rules (containing various rules including Division 81 (taxes, fees and charges, grouping, margin scheme, deposits, employee reimbursements, change-in-use adjustments, etc.).

One of the Basic Rules, in Division 19, deals with ‘adjustment events’. Here we look at how those rules generally apply.

What is an adjustment event?

An ‘adjustment event’ is any event which has the effect of:

• cancelling a supply or acquisition;
• changing the consideration for a supply or acquisition; or
• causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

Example of adjustment events include:

• returning a thing to a supplier; or
• changing the previously agreed consideration for a supply or acquisition, whether due to the offer of a discount or otherwise.

For guidance on adjustment events, the ATO has issued GSTR 2000/19 which includes various examples, such as:

• a customer returning some defective goods for a refund;
• settlement discounts;
• incorrect invoicing – such as, incorrect price or incorrect quantity delivered shown on an invoice; and
• volume rebates – where a discount is provided based on total quantity of purchases over a period of time.

GSTR 2000/19 also provides examples of supplies that are not adjustment events, such as:

• promotional or advertising rebates;
• third party rebates; and
• foreign exchange gains/losses – where there is a difference in the amount paid/received compared to the amount on the invoice.

[Note: if you are interested in a more detailed understanding of adjustments it worth reviewing GSTR 2000/19 as it provides useful examples of transactions, some of which are an adjustment event, and some not.]

Adjustments

Where there is an adjustment event, this will give rise to an adjustment where:

• there is a difference between the ‘previously attributed GST amount’ differs when compares the ‘corrected GST amount’; or
• there is a difference between the ‘previously attributed input tax credit amount’ differs when compares the ‘corrected input tax credit amount’.

The difference may result in either:

• an increasing adjustment – referring to an adjustment that results in additional GST payable:
  • e.g., where the adjustment for a taxable supply is an increase in the consideration payable, the supplier will have an additional GST amount payable;
  • e.g., where the adjustment for a creditable acquisition is a decrease in the consideration payable, the recipient will have originally claimed a higher GST credit, and the adjustment results in the GST on the difference needing to be repaid to the ATO;
• a decreasing adjustment – referring to an adjustment that results in reducing the GST payable:
  • e.g., where the adjustment for a taxable supply is a decrease in the consideration payable, the supplier will have paid a higher GST amount on the original transaction, and can now claim the GST on the difference from the ATO;
  • e.g., where the adjustment for a creditable acquisition is an increase in the consideration payable, the recipient will have originally claimed a smaller GST credit, and the adjustment results in the GST on the difference being able to be claimed from the ATO.

Attribution

The attribution rules are found in Division 29 (also in Chapter 2 Basic Rules). The general attribution rule for taxable supplies, for an entity under the accruals method (also called the non-cash method), is that the GST liability is attributed to:

• the tax period in which any of the consideration for the supply is received; or
• if an invoice is issued before any consideration is received – the tax period in which the invoice is issued.

Similarly, the general attribution rules for creditable acquisitions, for an entity under the accruals method, is that the GST credit is attributed to:

• the tax period in which any of the consideration for the acquisition is provided; or
• if an invoice is issued before any consideration is provided – the tax period in which the invoice is issued.

However, the recipient must also hold a tax invoice to be able to claim the input tax credit.

The general attribution rule for adjustments (including adjustments that arise as a result of an adjustment event) is that it is attributable to the tax period in which you become aware of the adjustment. Similar to the tax invoice rule for input tax credits, an entity must hold an ‘adjustment note’ to be able to claim a decreasing adjustment.

Note, the tax invoice and adjustment note compliance requirements only apply where an entity is claiming amounts of GST from the ATO. There is no such documentation requirement to attribute GST on a taxable supply or GST on an increasing adjustment. However, as the attribution of adjustments (including increasing adjustments) arises when you become aware of the adjustment, from a commercial viewpoint an adjustment note (or credit note, or re-issuing an invoice) may be the only form of communication between the parties that creates the awareness. Also, this does not preclude other ways that an entity may become aware of an adjustment – and those other circumstances equally trigger the attribution for an adjustment – just that it is a decreasing adjustment, the entity also needs to hold an ‘adjustment note’.

Illustrative Example

GSTR 2000/19 provides the following useful example.

78. In Eliza’s first tax period (ending on 31 March 2001), she makes a taxable supply with a consideration of $1,100. GST payable of $100 is attributable to the first tax period.

79. The consideration is decreased in her second tax period (ending on 30 June) by $110 because Eliza allows a discount to the recipient of the supply. This is an adjustment event for the supply.

80. The corrected GST amount for her second tax period is worked out as follows:

The previously attributed GST amount for a supply

81. The previously attributed GST amount for a supply in relation to a tax period is:^[29]•the amount of any GST that was attributable to a tax period for the supply; plus•the sum of any increasing adjustments under Subdivision 19-B or Division 21 that were previously attributable to any tax period for the supply; minus•the sum of any decreasing adjustments under Subdivision 19-B or Division 21 that were previously attributable to any tax period for the supply.

82. The previously attributed GST amount does not take into account the effect of any adjustment events that occur in the current period for the supply.

83. Using the example from paragraphs 78 to 80, Eliza’s previously attributed GST amount is worked out as follows:

Working out the amount of the adjustment

84. The amount of an adjustment is the difference between the previously attributed GST amount and the corrected GST amount. If the corrected GST amount is greater than the previously attributed GST amount, you will have not paid enough GST. Therefore you have an increasing adjustment. If the corrected GST amount is less than the previously attributed GST amount, you will have paid too much GST. Therefore you have a decreasing adjustment.^[33]

Example

85. For Eliza’s supply (continuing with the same example), the corrected GST amount ($90) is less than the previously attributed GST amount ($100). Therefore a decreasing adjustment has arisen. The amount of the adjustment is:

$100 – $90 = $10.

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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.