How goods and services tax (GST) is dealt with in insolvency can be complex and the technicalities are best left to tax accountants. This factsheet outlines the basics of how GST is treated under the legislation.
Introduction
The goods and services tax (GST) places additional tax obligations on taxpayers and on the insolvency practitioners appointed to those taxpayers. This factsheet explains the more common issues arising from the appointment of external administrators and GST. It deals with who is responsible for any GST liability and when that liability will arise. However, the technicalities of GST are best left to tax accountants.
When an entity becomes insolvent, particularly through vesting of assets in a bankruptcy trustee, it does not automatically give rise to any GST consequences or liabilities as neither party (i.e. the bankrupt and the trustee) has incurred a ‘taxable supply’. However, when a trustee is appointed, it changes the entity’s status for GST purposes, and the practitioner assumes some of the taxpayer’s responsibilities. This means the bankruptcy trustee must start reporting GST in their own right.
These rules are governed by the A New Tax System (Goods and Services Tax) Act 1999 (Tax Act).
What is an incapacitated entity?
An entity (i.e. the taxpayer) becomes an incapacitated entity and an external administrator becomes a “representative of the incapacitated entity” if an administrator is appointed in relation to:
- bankruptcy
- controlling trusteeship
- liquidation
- receivership—even if only appointed over some of the assets
- voluntary administration
- executing a Deed of Company Arrangement (DOCA).
An incapacitated entity is defined (section 195-1 of the Tax Act) as:
(a) An individual who is a bankrupt; or
(b) An entity that is in liquidation or receivership; or
(c) an entity that has a representative.
The ‘catch all’ part of this definition is “an entity that has a representative”. This effectively includes all other insolvency appointments that are not bankruptcies, liquidations or receiverships. A ‘representative’ of the incapacitated entity is also defined in section 195-1 of the Tax Act as:
(a) a trustee in bankruptcy; or
(b) a liquidator; or
(c) a receiver; or
(ca) a controller (within the meaning of section 9 of the Corporations Act 2001); or
(d) an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Act 2001; or
(e) a person appointed, or authorised, under an Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable; or
(f) an administrator of a deed of company arrangement executed by the entity.
Nearly all formal appointments over a person’s or a company’s financial affairs create an incapacitated entity, and require the representative to register with the Australian Taxation Office (ATO). The appointment makes the representative (i.e. the practitioner) a new entity for GST purposes. Registration is only required if the incapacitated entity is, or was required to be, registered for GST purposes.
Two registrations
To register the representative (i.e. the practitioner), two parts are required. The first part is the incapacitated entity’s representative advising the ATO that a representative has been appointed. The second part is the representative’s registration for GST, if required. GST registration is required if the entity was—or should have been—registered before the appointment, regardless of whether the entity is expected to exceed the turnover limits after the appointment. If the entity was not registered, nor required to be registered for GST the representative will not have any GST responsibilities (e.g. a bankrupt that only has credit card debt).
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 58.20
Representatives are required to be registered
(1) A representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered.
(2) This section has effect despite section 23-5 (which is about who is required to be registered). If the representative is required to register for GST, they must lodge returns in their own right, and report various matters to the ATO.
Under section 58.25 of the Tax Act, the ATO must cancel the representative’s GST registration if they believe that they do not need to be registered: “The Commissioner must cancel the registration of a representative of an incapacitated entity if the Commissioner is satisfied that the representative is not required to be registered in that capacity”.
In summary, if the entity becomes incapacitated:
- The practitioner becomes the representative of the incapacitated entity and becomes a new tax entity in their own right. They must register their status with the ATO.
- If the incapacitated entity was—or should have been—registered for GST, the representative must register for GST.
Under section 58.30 of the Tax Act, the registration ends when the appointment ends. The practitioner (the liquidator or trustee etc.) must notify the Commissioner within 21 days to cancel the registration.
How does the representative’s appointment affect tax periods?
Most insolvency appointments happen during a financial year, not as of 30 June. The incapacitated entity’s tax period is deemed to have ended on the day before the appointment. A new tax period commences on the day of the appointment.
Final BAS’s should be lodged for GST purposes as at the date of the appointment and the ATO will calculate any outstanding debt. The new tax period will end on the date that the normal tax period would have ended, and returns must be lodged separately for that period (i.e. the tax period is divided into two periods at the date of appointment).
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 27.39
Tax periods of incapacitated entities
(1) If an entity becomes an incapacitated entity, the entity’s tax period at the time is taken to have ended at the end of the day before the entity became incapacitated.
(2) If a tax period (the first tax period) ends on a particular day because of subsection (1), the next tax period starts on the day after that day and ends when the first tax period would have ended but for that subsection.
The representative’s tax period begins on the appointment date (i.e. the date of the new divided tax period described above), and each period has the same start and end dates as the incapacitated entity. So, the initial tax period is likely to be shorter than a normal tax period unless the appointment happened on the first date of a tax period.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 58.35
Tax periods of representatives
(1) If a representative of an incapacitated entity is required to be registered in that capacity, the tax periods applying to the representative in that capacity are the same tax periods that apply to the incapacitated entity.
(2) This section has effect despite Division 27 (which is about how to work out the tax periods that apply).
The representative’s obligations end when the appointment ends, but the entity may continue to exist after that date. The Tax Act provides that the entity will have a concluding tax period (i.e. its tax obligations will end) in the case of a person’s death, or if it ceases to exist (i.e. for business entities).
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 27.40
An entity’s concluding tax period
(1) If:
(a) an individual dies; or
(b) another entity for any reason ceases to exist; the individual’s or entity’s tax period at the time is taken to have ceased at the end of the day before the death or cessation.
(1A) If an entity ceases to carry on any enterprise, the entity’s tax period at the time is taken to have ceased at the end of the day on which the cessation occurred.
(2) If an entity’s registration is cancelled, the entity’s tax period at the date of effect of the cancellation (the cancellation day) ceases at the end of the cancellation day.
Who must lodge the business activity statement (BAS)?
Section 31.5 of the Tax Act provides that a GST representative must lodge a BAS in each tax period regardless of the activity or any GST amount owing, or refund due.
This section places GST responsibilities on the representative. If the entity or representative is required to be registered for GST purposes, the obligation to start lodging returns begins upon appointment, regardless of how the representative was appointed.
Who is liable for the GST?
Under section 58.5, the general principle is that the representative is liable for the tax consequences of transactions entered into during their appointment, regardless of their capacity. If the entity ceases to be an incapacitated entity and the representative resigns, the entity is liable for further GST on transactions that occurred while it was incapacitated.
Additionally, the entity is liable for, or entitled to, any GST consequences of transactions entered into during the representative’s appointment.
Furthermore, it places liability on the representative for the entity’s GST liabilities—when “within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs”.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 58.10
Circumstances in which representatives have GST-related liabilities and entitlements
General rule
(1) A representative of an incapacitated entity:
(a) is liable to pay any GST that the incapacitated entity would, but for this section or section 48-40, be liable to pay on a taxable supply or a taxable importation; and
(b) is entitled to any input tax credit that the incapacitated entity would, but for this section or section 48-45, be entitled to for a creditable acquisition or a creditable importation; and
(c) has any adjustment that the incapacitated entity would, but for this section or section 48-50, have; to the extent that the making of the supply, importation or acquisition to which the GST, input tax credit or adjustment relates is within the scope of the representative’s responsibility or authority for managing the incapacitated entity’s affairs.
The representative is not liable when the supply or acquisition of goods and services occurred prior to becoming the incapacitated entity’s representative.
(2) This section does not apply to the GST payable on a taxable supply to the extent that one or more of the following apply:
(a) the incapacitated entity received the consideration for the supply before the representative became a representative of the incapacitated entity;
(b) if, under Division 83 or 84, the GST is payable by the recipient of the supply – the incapacitated entity provided the consideration for the supply before the representative became a representative of the incapacitated entity;
(c) if:
(i) the supply is a supply for which a voucher to which Division 100 applies is redeemed; and
(ii) the incapacitated entity supplied the voucher before the representative became a representative of the incapacitated entity; the consideration for the supply referred to in subparagraph (i) does not exceed the consideration provided for the incapacitated entity’s supply of the voucher.
(3) This section does not apply to an input tax credit for a creditable acquisition to the extent that the incapacitated entity provided the consideration for the acquisition before the representative became a representative of the incapacitated entity.
The entity is responsible for GST transactions, but the representative is liable if they entered into the transaction. The representative must lodge returns at the same time as the entity, but the commencement date for the first period depends on the appointment date.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 58.35
Tax periods of representatives
(1) If a representative of an incapacitated entity is required to be registered in that capacity, the tax periods applying to the representative in that capacity are the same tax periods that apply to the incapacitated entity.
(2) This section has effect despite Division 27 (which is about how to work out the tax periods that apply).
It is possible that two BAS should be lodged for an entity. For example, a DOCA that has its deed administrator file a BAS for the company’s tax consequences, and the company trades under its own right and lodges its own BAS for each period. Each party will report its own transactions on their individual BAS.
Adjustments to pre-appointment GST liabilities
In many insolvent administrations, GST is owed to the ATO. Adjustments to the GST consequences may be required to pre-appointment transactions that can cause the ATO to increase or decrease their outstanding debt. These are called ‘increasing’ or ‘decreasing’ adjustments.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 19.10
Adjustment Events
(3) An adjustment event:
(a) can arise in relation to a supply even if it is not a taxable supply; and
(b) can arise in relation to an acquisition even if it is not a creditable acquisition.
Accrual based accounting
The two most common adjustments under accrual accounting relate to the GST consequences from:
- The non-collection of debtors where GST has been paid before the appointment (decreasing adjustment).
- The non-payment of creditors where taxable credits are adjusted through a dividend where GST has been claimed pre-appointment (increasing adjustment).
Further, if a representative is reporting on an accrual basis, the GST effects of the entity’s transactions made before the representative’s appointment may be attributed to the first tax period of the representative.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 58.40
Effect on attribution rules of not accounting on a cash basis
(1) If:
(a) a representative of an incapacitated entity does not account on a cash basis; and
(b) because of section 58-10, all or part of the amount of GST payable on a taxable supply is payable by the representative, or the representative is entitled to all or part of the input tax credit for a creditable acquisition then, to the extent that, but for this section, the GST or input tax credit would be attributable to a tax period that ended before the representative became a representative of the incapacitated entity, the GST or input tax credit is instead attributable to the first tax period applying to the representative in that capacity.
(2) This section has effect despite sections 29-5 and 29-10 (which are about attribution of GST on taxable supplies and of input tax credits for creditable acquisitions).
Writing off bad debts
For many reasons, insolvency practitioners commonly write-off pre-appointment debtors as uncollectible. It is also possible that the insolvent entity has accrued these debts before the appointment and may have paid or accrued GST on them. If these debtors are written off, the GST on those debts should in theory be refunded. In practice the GST is deducted from the outstanding GST debt.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 21.5
Writing off bad debts (taxable supplies)
(1) You have a decreasing adjustment if:
(a) you made a taxable supply; and
(b) the whole or part of the consideration for the supply has not been received; and
(c) you write off as bad the whole or a part of the debt, or the whole or a part of the debt has been overdue for 12 months or more.
The amount of the decreasing adjustment is 1/11th of the amount written off, or 1/11th of the amount that has been overdue for 12 months or more, as the case requires.
(2) However, you cannot have an adjustment under this section if you account on a cash basis.
Section 21.5 of the Tax Act states the adjustment cannot be made if the representative is reporting on a cash basis.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 58.15
Adjustments for bad debts
(1) For the purposes of determining whether an adjustment arises under section 21-5 or 21-15 for the whole or a part of a debt relating to a taxable supply or creditable acquisition for which a representative of an incapacitated entity is liable to pay GST, or is entitled to an input tax credit, under section 58-10:
(a) the adjustment cannot arise if, when the whole or part of the debt is written off, or has been overdue for 12 months, the representative accounts on a cash basis; but
(b) it does not matter whether the incapacitated entity accounts on a cash basis at that or any other time.
(2) This section has effect despite subsections 21-5(2) and 21-15(2) (which preclude adjustments for bad debts when accounting on a cash basis).
Non-payment of creditors
Unless sufficient assets can pay all creditors in full, some part of creditors’ debts will go unpaid. If the insolvent entity claimed the GST on these creditor amounts before the insolvency appointment, they should in theory refund these amounts to the ATO to the extent that the creditors were unpaid. In practice, however, the GST liability to the ATO increases.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 21.15
Bad debts written off (creditable acquisitions)
(1) You have an increasing adjustment if:
(a) you made a creditable acquisition for consideration; and
(b) the whole or part of the consideration is overdue, but you have not provided the consideration
overdue; and
(c) the supplier of the thing you acquired writes off as bad the whole or a part of the debt, or the whole or a part of the debt has been overdue for 12 months or more.
The amount of the increasing adjustment is 1/11th of the amount written off, or 1/11th of the amount that has been overdue for 12 months or more, as the case requires.
(2) However, you cannot have an adjustment under this section if you account on a cash basis.
Cash accounting
The two most common adjustments under a cash reporting system relate to the GST consequences from:
- The collection of debtors where GST has not been paid before the appointment (increasing adjustment).
- The payment of creditors through a dividend where GST has not been claimed pre-appointment (decreasing adjustment).
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 19.40
Where adjustments for supplies arise
You have an adjustment for a supply for which you are liable to pay GST (or would be liable to pay GST if it were a taxable supply) if:
(a) in relation to the supply, one or more adjustment events occur during a tax period; and
(b) GST on the supply was attributable to an earlier tax period (or if the supply was not a taxable supply, would have been attributable to an earlier tax period had the supply been a taxable supply); and
(c) as a result of those adjustment events, the previously attributed GST amount for the supply (if any) no longer correctly reflects the amount of GST (if any) on the supply (the corrected GST amount ), taking into account any change of circumstances that has given rise to an adjustment for the supply under this Subdivision or Division 21 or 134.
Collection of debtors
Sometimes practitioners collect amounts from debtors that were billed before the insolvency appointment. Under a cash reporting system, no GST would be paid on these amounts. In practice, this payment of the GST is an increasing adjustment to the ATO’s owed liability.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 19.50
Increasing adjustments for supplies
If the corrected GST amount is greater than the previously attributed GST amount, you have an increasing adjustment equal to the difference between the corrected GST amount and the previously attributed GST amount.
Payment of dividends to creditors
Under the cash accounting system, GST is not claimed on supplies from creditors until they are paid. No GST credit will have been allowed for outstanding creditors at the time of the appointment, but is allowed for when creditors are paid a dividend. The practitioner can claim the GST on dividends paid via a decreasing adjustment to the ATO liability for the dividend amount paid to relevant creditors.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 – SECTION 19.55
Decreasing adjustments for supplies
If the corrected GST amount is less than the previously attributed GST amount, you have a decreasing adjustment equal to the difference between the previously attributed GST amount and the corrected GST amount.
Summary of adjustments
The below table sets out the general adjustments required for adjusting events occurring after the appointment for pre-appointment transactions.
|
Cash Reporting |
Accruals Reporting |
|
|
Debtors |
Where debtors are collected by the representative under a cash reporting system, GST is attributable to the amount collected. An increasing adjustment should be made to the ATO’s proof of debt. |
Where debtors are written off as non-collectable (and GST has been accrued on these debtors), the amount of GST attributable to the written-off debtors becomes a decreasing adjustment to the ATO’s proof of debt. |
|
Dividend to Creditors |
Where dividends are paid to creditors under a cash system, GST credits arise for the payment amounts. These give rise to a decreasing adjustment to the ATO’s proof of debt. |
Where GST credits have been claimed and those creditors will not be paid, an increasing adjustment is made to the ATO’s proof of debt to add back the unpaid credits. |
Representatives must notify the ATO of increasing adjustments, or the representative may become liable for the lost dividends that the ATO should have collected. The ATO then adjusts their proof of debt to reflect their debt on pre-appointment transactions once they know the result of those transactions.
Summary
The points following summarise the Tax Act provisions:
- The appointment of an external administrator requires the administrator to register as a representative of an incapacitated entity.
- If the incapacitated entity is required to be registered for GST, the representative will be required to register for GST.
- The incapacitated entity’s tax year ends on the date of the appointment and a final BAS must be filed.
- The representative registered for GST purposes has a responsibility to file BAS during their administration.
- The representative must notify the ATO of any increasing adjustments due to collection of debtors and payment of dividends.
Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.
Last Updated: 3.11.2017