GST TREATMENT FOR DEBT FACTORING ARRANGEMENTS
WHAT IS DEBT FACTORING
It is type of invoice financing, when accounts receivable is sold to third party at a lower value. Generally it is done to receive the funds which are not available on demand.
GST TREATMENT OF DEBT FACTORING:
When the Assignor (a GST registered person who owns a debt) sells an outstanding debt to the Factor (a third party), on a recourse or non-recourse basis at a price less than the debt’s face value, the difference between the face value of the debt and the price received from the Factor is not a considered to be a bad debt.
*A non-recourse basis means that the Factor cannot claim back to the Assignor even if the debt is uncollectible.
*A recourse basis means the Factor has some form of claim back to the Assignor if the debt is uncollectible.
GST Taxation Laws applies:
ss20(3)(i) and s 26 of Goods and Service Act 1985.
Section 26 and 20(3)(i) of GSTA allow a register person to claim GST on the uncollectable sales which has written off as a bad debt.
However, this does not apply to the case where a GST registered person factors (i.e., sells) a debt owing for less than its face value and claim the difference between face value and price received.
This is because rather than being a bad debt, the difference from face value is considered to be a discount which accepted by both parties during the process of the agreeing the consideration of the debt.
i.e., Company A owns an outstanding debt of $5000 (GST inclusive) and decide to factor the debt to a third party on an agreed price of $4000 (GST inclusive). The difference between the face value and the price is $1000 ($5000 less $4000) and this amount should not be treated as bad debt under s26, GSTA.
GST consequences when a debt is factored:
The GST consequences depends on which accounting basis you are using.
If the registered person is using invoice basis where the GST has been paid on the issued invoice, the subsequent factoring of the debt would be considered a financial service under s 3(1)(c) because it is a transfer of ownership of a debt security. Therefore, it is an exempt supply under s 14(1) and no GST liability is incurred.
If the registered person is using payment basis where the GST has yet to be paid on the debt, the above situation would not apply because s 3(4)(a) makes the transaction a taxable supply. And the Assignor would be required to return GST on the amount received from the sales.
Analysis of above were also publised in TIB Vol 33 No7 Aug
*The above article is a high-level explanation of the methods of calculation, and there may be other technicalities/rules that are applicable. The complexity of the calculations can also vary. Please reach out to us if you have specific questions regarding your situation.
Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.
Contact Tax Accountant
Please fill the form below to contact us!