Due to the widespread economic impact of COVID-19 which has caused financial uncertainty for many businesses, contracts for the acquisition of goods or services may be cancelled in order to mitigate against further losses.
Additionally, the need to comply with social distancing rules has necessitated the need for businesses to cancel numerous events in the entertainment, sporting and hospitality industries. In many instances, ticket holders will be entitled to refunds.
If your business has cancelled contracts due to the impact of COVID-19, you may need to adjust your Goods and services tax (GST). Similarly, you may also need to adjust GST if you are the recipient under a contract that has been cancelled by the supplier.
What is a GST adjustment?
When there is a subsequent change to a contract for the supply of goods or services, it may become necessary to adjust the amount of GST that has been accounted for, or the amount of input tax credit that has been claimed.
In each case, a business may need to adjust the GST previously attributed to a particular tax period. There is no need to report an adjustment if the original supply and cancellation both occur in the same reporting period.
An adjustment may either decrease or increase your net GST payable as follows:
- A decreasing adjustment has the effect of reducing the net GST – e.g. GST is reduced on your supplies, or input tax credits are increased on your acquisitions;
- An increasing adjustment has the effect of increasing the net GST – e.g. the amount of GST payable on your supplies is increased, or the amount of input tax credits on your acquisitions is reduced.
For instance, a supplier may have already remitted GST to the Australian Tax Office (ATO) on a contract which is subsequently cancelled. To the extent that the customer receives a refund, the supplier can make a decreasing adjustment to reduce the amount of GST payable in its current reporting period.
Similarly, if your business has claimed input tax credits on an acquisition which is subsequently cancelled by the supplier, you may need to make an increasing adjustment to increase your net GST payable.
Importantly, when you are claiming a reduction in GST liability or an increase in input tax credits, you will need to hold an adjustment note which is issued by the supplier.
Talk to our Tax and Wealth team to further understand your GST reporting obligations on cancelled contracts.
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