The Meaning of Payment in GST and Tax Law

Have you ever wondered what the meaning of “payment” is? This term is used in many areas of tax law. In GST, the meaning of payment is often discussed in relation to the time of supply for taxable supplies, eligibility for second-hand goods input tax claims, and change-in-use adjustments under apportionment rules.

Let’s discuss what “payment” means.

Under its ordinary meaning, payment can be made with money or money’s equivalent. The GST Act does not specifically define “payment”, so reference is often made to the Oxford English Dictionary, which defines payment as:

• A sum of money or equivalent paid or payable in return for goods or services or in discharge of a debt, such as wages or pay.

• The action of paying money or remunerating a person with money or its equivalent.

This definition also includes the payment of money or its equivalent for goods and services.

Promissory notes and bills of exchange

Payments for supplies can be made using promissory notes or bills of exchange. When promissory notes and bills of exchange are exchanged for the supply of goods, the payment obligation under the supply agreement may be discharged and replaced by separate obligations under those instruments.

However, the mere acknowledgement of a debt is not enough to constitute payment. If an instrument only acknowledges the debt under a purchase agreement, the payment obligations under the purchase agreement are not discharged.

Whether a promissory note, bill of exchange, or acknowledgement of debt constitutes payment depends on whether the document satisfies the relevant legal conditions.

The Commissioner may also consider the GST general anti-avoidance provision under section 76, particularly where supplies occur between associated persons.

For example, a person may purchase land from an associate and attempt to claim a GST input tax deduction based on a promissory note or another technical arrangement where no actual payment has effectively occurred. In such cases, the arrangement may provide a GST advantage to the taxpayer without genuine economic payment, and section 76 may apply.

Payment by transferring property or providing services

A transfer of property or provision of services can also constitute payment for the supply of goods and services.

Payment using borrowed funds

Where the purchase price for a supply of goods or services is deferred, payment is generally not considered to have occurred merely because an amount remains owing under the supply agreement.

However, payment may occur if the purchaser borrows funds under a separate loan agreement with the supplier and uses those borrowed funds to satisfy the payment obligation under the supply agreement. In that case, the payment may be recognised for GST purposes.

Payment by set-off of existing debt

A set-off against an existing debt can also constitute payment for supplies.

Accounting entries as evidence of payment

Evidence of payment may sometimes be supported through accounting entries. However, accounting entries alone are not always sufficient evidence of payment.

Whether payment has occurred depends on the legal effect of the transaction, and the legal effect may not always be clear from accounting entries alone.

The registered person bears the burden of proving that payment under the supply agreement has occurred. Solely relying on accounting entries may not satisfy this burden. Therefore, taxpayers should ensure that sufficient supporting evidence exists to substantiate any GST deductions claimed.

Deferred payment arrangements

Deferred payment arrangements can affect GST input tax deductions. Different types of deferred payment arrangements include:

• Standard credit sales

• Buy now, pay later arrangements

• Hire purchase agreements

• Lay-by sales

Each arrangement may have different GST consequences.

Deposits

A deposit is generally considered a payment. The Commissioner’s view is that a deposit paid under a supply agreement constitutes payment for the supply.

An alternative view is that deposits are not payments until the supply agreement is completed.

Payments made to stakeholders

A stakeholder is commonly a person who receives payment to hold on behalf of parties until certain conditions under a supply agreement are satisfied.

For GST purposes, payment is generally not considered to have been made merely because funds are held by a stakeholder.

The supplier does not receive payment, and the recipient does not make payment, until the supplier obtains beneficial entitlement to the amount held by the stakeholder.

Accordingly, payment for GST purposes generally occurs only when the beneficial interest in the payment passes to the supplier.