Unfortunately not every customer is a payer.
As a result a GST registered organisation will occasionally have to make a decision as to what to do with a debt that is proving difficult to recover.
The options include:
Where a debt is ‘sold’ a question arises as to whether there is any GST payable on the consideration received.
In short, the answer is generally no.
Section 40-5 of the GST law provides that a financial supply is input taxed. A ‘financial supply’ has the meaning given by the GST Regulations. Regulation 45.09.03 at Item 2 provides that the disposal of an interest in a debt is a financial supply (assuming other related conditions are met which they would be in this scenario).
As a result no GST applies.
Members should keep in mind that the underlying transaction that gave rise to the debt may have been subject to GST and that there are mechanisms in the GST law to ‘recoup’ GST remitted in relation to that supply where the consideration is not received. We refer to our article from 2022 that sets out rules regarding when GST remitted can be recouped for overdue and bad debts.
The entitlement to recoup GST is not impacted by any later sale of the debt. For example where a debt is written off (and a decreasing GST adjustment claimed as provided by section 21-5 of the GST law) there is no requirement to further ‘adjust’ (e.g., repay the GST recouped) on a later sale of the debt. Section 21-10 only requires an increasing adjustment where some part of the debt written off is recouped. The sale of the debt is a different supply to the underlying transaction and consideration for the sale is not an amount recovered in relation to the debt. ATO ID 2005/121 provides support for the view above.
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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.