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Financial services - questions and answers

Debt factoring

(a) added, (u) updated, (w) withdrawn

Preamble

Debt factoring and invoice discounting is the assignment of debts for consideration. The debt is sold to the debt factor for a price that is less than the face value of the debt. The difference between the face value and the purchase price is often called a factoring service fee. In commercial practice the term debt factoring is loosely used to also mean invoice discounting. Although there may be a difference between these two activities, for the purposes of these frequently asked questions we will just use the term debt factoring.

Also, for the purposes of these frequently asked questions, the assignment of the debt involves the disposal by the assignor of all (or part) of the right, title and interest in the debt to the debt factor.

Debt factoring assignments fall into two categories: recourse debt factoring and non-recourse debt factoring.

Non-recourse debt factoring

Non-recourse debt factoring is less common than recourse debt factoring. Under non-recourse debt factoring the debt factor acquires the debt at his own risk. That is, if the debtor does not pay the debt factor, the debt factor does not have recourse to the assignor for any amounts outstanding and so stands to lose the amount of the unpaid debt.

Recourse debt factoring

Generally, under a recourse debt factoring agreement:

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the assignor and debt factor enter into an agreement whereby, for the term of the agreement, the assignor offers debts that are due (or that will become due) for sale to the debt factor

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the debt factor has the discretion to accept or reject the offer

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if the offer is accepted by the debt factor, the debt factor purchases the debt at a price less than the face value of the debt (the difference being the factoring service fee). Under some agreements, the debt factor pays the purchase price to the assignor when the debtor has paid the debt factor, but this may not always be the case

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the debt factor can reassign certain debts back to the assignor - for example, where the debtor disputes or does not pay the debt, or where a payment instrument of the debtor (such as a cheque) is dishonoured.

For both recourse debt factoring and non-recourse debt factoring, the assignor will normally be making a financial supply when it assigns the debt (or a part of it) to the debt factor.

8.1. Has a debt factor made a taxable supply when it provides sales accounting services or debt collection services under a debt factoring arrangement?

For source of ATO view, refer to paragraphs 88 to 91 of GSTR 2004/4 Goods and services tax: assignment of payment streams including under a typical securitisation arrangement

Yes. Debt factoring arrangements can also include the provision of debt collection services and sales accounting services by the debt factor. Where a separate fee is charged for these services and the other requirements in section 9-5 are met, the supply of the services is a taxable supply. The fee will not be input taxed because 'debt collection services' and 'sales accounting services' are listed as supplies that are not financial supplies (see items 13 and 14 respectively of section 40-5.12 of the GST Regulations).

8.2. Is a sales accounting service that is provided as part of a debt factoring arrangement an incidental financial supply?

Non-interpretative - straight application of the law

No. Section 40-5.10 of the GST Regulations provides that for a supply to be an incidental financial supply, the services in question must be provided by the same entity that supplies the interest that was input taxed. In a factoring arrangement, the (input taxed) interest in the debt is supplied by the assignor to the debt factor, whilst the accounting services are supplied by the debt factor to the assignor. Therefore, such supplies of sales accounting services are not incidental financial supplies.

8.3. Is the assignor entitled to an input tax credit (or a reduced input tax credit) for the acquisition of the sales accounting or debt collection services?

For source of ATO view, refer to paragraphs 424 to 442 of GSTR 2004/1 Goods and services tax: reduced credit acquisitions.

The fee for either service is consideration for an acquisition that relates to making financial supplies and so a full input tax credit entitlement will not arise for either service. However, to the extent that the particular debt collection activity is one that is referred to in item 17 of section 70-5.02 of the GST Regulations, that debt collection activity is a reduced credit acquisition and, therefore, the assignor may be entitled to a reduced input tax credit.

8.4. Is a debt factor entitled to input tax credits (or reduced input tax credits) for acquisitions it makes in relation to the financial supply of the acquisition of the interest in the debt?

For source of ATO view, refer to:

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paragraphs 424 to 442 of GSTR 2004/1 Goods and services tax: reduced credit acquisitions

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paragraphs 54 to 108 of GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose?

Where the debt factor makes acquisitions in relation to a debt acquired from the assignor, Division 11 does not allow an input tax credit for the acquisitions. This is because the acquisitions relate to making input taxed supplies. For example, where a debt factor does not make any taxable supplies (including sales accounting and debt collection services) and he pays rent for an office from which he carries on his debt factoring enterprise, an entitlement to any input tax credit in relation to the rental payments does not arise under Division 11.

However, if an acquisition is a reduced credit acquisition, the debt factor may be entitled to a reduced input tax credit. For example, certain aspects of debt collection services acquired by the debt factor to collect the money owing on the assigned debt are reduced credit acquisitions (see item 17 of section 70-5.02 of the GST Regulations).

8.5. If you are a supplier (assignor) and you assign a debt to a debt factor, whether on a recourse or non-recourse basis, what is the consideration for the assignment?

Non-interpretative - other references (see paragraph 90 of GSTR 2004/4 Goods and services tax: assignment of payment streams including under a typical securitisation arrangement)

The consideration is the price for which you sell the debt to the debt factor. The consideration is not the difference between the face value of the debt and the amount the debt factor pays you for the debt.

Example - consideration for assigning a debt under a debt factoring arrangement

A makes a taxable supply of goods to B for $110. A then sells the debt (owed to him by B in relation to the taxable supply) to a debt factor for $95.

The consideration for the assignment of the debt is $95. The consideration is not $15 (being the difference between the face value of the original debt and the $95).

8.6. If you are a supplier accounting for GST on a non-cash basis and you assign a debt to a debt factor, whether on a recourse or non-recourse basis, when do you account for the GST on the taxable supply to which the debt relates? How much GST should you account for?

For source of ATO view, refer to paragraphs 44 and 47 of GSTR 2004/4 Goods and services tax: assignment of payment streams including under a typical securitisation arrangement

You account for the GST on the taxable supply under the normal attribution rules. That is, you attribute the GST for the taxable supply at the earlier of when you issued the invoice or when the recipient of the taxable supply makes any payment to you or to the debt factor.

The amount you must account for is 1/11th of the full face value of the invoice you issued for the taxable supply you made to the recipient. The GST for the taxable supply is not equal to 1/11th of the consideration for the supply of the debt to the debt factor.

Example

A makes a taxable supply of goods to B for $110 and issues an invoice at the same time. A then sells the debt (owed to him by B in relation to the taxable supply) to a debt factor for $95. B later pays the debt factor only $99.

The GST payable for the taxable supply A made is $10. But for the factoring arrangement, A would ordinarily account for $10 GST at the earlier of when A issued the invoice to B or when A receives any of the $110. This outcome does not change because of the factoring arrangement. A accounts for $10 GST at the earlier of when B pays the debt factor $99 or when the invoice is issued.

The GST payable for the taxable supply A made is not 1/11th of the $95 payment received from the debt factor. This payment is consideration for a financial supply made by A (being the supply of the interest in the debt to the debt factor).

8.7. If you are a supplier accounting for GST on a non-cash basis and you assign a debt to a debt factor, whether or not on a recourse or non-recourse basis, can you claim a decreasing adjustment for a bad debt? For source of ATO view, refer to paragraphs 65 to 67 of GSTR 2004/4 Goods and services tax: assignment of payment streams including under a typical securitisation arrangement.

Under a non-recourse arrangement

No. The consideration for the supply of the debt will normally be less than the full face value of the invoice. Also, the recipient of the taxable supply that you made might not pay all of the consideration for that supply to the debt factor. You can not claim a decreasing adjustment under Division 21 in respect of the difference between the full face value of the invoice and:

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the consideration for the supply of the debt to the debt factor, or

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the total amount paid to the debt factor by the recipient of your taxable supply.

If you assign the debt, Division 21 can not apply to allow you a decreasing adjustment because you will not have any debt to write off or that can be overdue for 12 months or more.

However, if you only assign a part of the debt to the debt factor, you may be entitled to claim a decreasing adjustment in respect of the amount that was not assigned. This is because it is possible to either write off that unassigned part or for the unassigned part of the debt to become overdue (to you) for 12 months or more.

Example 7.1 - assignment under non-recourse arrangement

A makes a taxable supply of goods to B for $110 and issues an invoice at the same time. A then sells the debt to a debt factor for $99.

A accounts for $10 GST when the invoice is issued. B later only pays the debt factor $90 who then writes off the unpaid $9 debt as bad.

But for the factoring arrangement, A would ordinarily make a $10 decreasing adjustment under Division 21 if he wrote off the $110 as bad or the $110 was overdue for 12 months or more. However, this is not the outcome under the factoring arrangement.

A is not entitled to a decreasing adjustment under Division 21 in respect of the difference between $110 and $99. Nor is A entitled to a decreasing adjustment for the $9 that B owed the debt factor. This is because there is no bad debt (or amount overdue) for A for the $9 because the $9 is a part of the debt that was assigned to the factor on a non-recourse basis. Therefore, Division 21 (about accounting for bad or overdue debts) does not apply to A.

Note also that the debt factor is not entitled to a decreasing adjustment under Division 21 for any amount that is not paid to him by B.

Under a recourse arrangement

Yes, but only if the assigned debt is reassigned to you.

As with a non-recourse debt factoring arrangement, the consideration for the supply of the debt will normally be less than the full face value of the invoice. Also, the recipient of the taxable supply that you made might not pay all of the consideration for that supply to the debt factor. You cannot claim a decreasing adjustment under Division 21 in respect of the difference between the full face value of the invoice and the consideration for the supply of the debt to the debt factor.

However, if the debt (or a part of it) is reassigned to you from the debt factor - for example, because the debtor does not pay the debt factor - you may be entitled to a decreasing adjustment under Division 21. This is because you have a debt (owed to you by the debtor) which you can write off or which can be overdue (to you) for 12 months or more.

Example 7.2 - assignment under recourse arrangement

A makes a taxable supply of goods to B for $110 and issues an invoice at the same time. A then sells the debt to a debt factor for $99.

A accounts for $10 GST when the invoice is issued. B does not make any payment to the debt factor. Because B does not make any payment to the debt factor, the debt factor reassigns the original debt back to A.

Because A now has a debt owed to him by B, A may become entitled to a decreasing adjustment when A writes off the $110 (or it becomes overdue to A for 12 months or more).

8.8. If you are a supplier accounting for GST on a cash basis and you sell a debt to a debt factor, whether on a recourse or non-recourse basis, when do you account for the GST on the taxable supply to which the debt relates? How much GST should you account for?

For source of ATO view, refer to paragraphs 44 and 56 of GSTR 2004/4 - Goods and services tax: assignment of payment streams including under a typical securitisation arrangement.

You account for the GST on the taxable supply under the normal attribution rules. That is, you attribute the GST for the taxable supply when the recipient of the taxable supply makes any payment to the debt factor. The amount you must account for is 1/11th of the total consideration received by the debt factor from the recipient.

The GST payable for the taxable supply you make to the recipient is not equal to 1/11th of the consideration received by you for the supply of the debt to the debt factor.

Note that in some cases, you might not assign all of the right, title and interest in your debt to the debt factor. For example, you might assign 90% of the debt to the debt factor, with the recipient still being liable to you for 10% of the original debt. In these cases, you must account for 1/11th of the total consideration provided by the recipient to both the debt factor and to yourself.

Example

A makes a taxable supply of goods to B for $110. A then sells the debt (owed to him by B in relation to the taxable supply) to a debt factor for $95. B later pays the debt factor $99.

But for the factoring arrangement, A would ordinarily account for $9 GST when A receives the $99 from B. This outcome does not change because of the factoring arrangement. A accounts for $9 GST when B makes the $99 payment to the debt factor.

A does not account for 1/11th of the $95 payment received from the debt factor. This payment is consideration for a financial supply made by A (being the supply of the debt to the debt factor).

8.9. If you are a recipient accounting for GST on a non-cash basis and you claim an input tax credit for an acquisition but do not provide all or a part of the consideration for the acquisition, do you need to make an increasing adjustment under Division 21?

Non-interpretative - straight application of the law

Yes. You make the increasing adjustment when the debt is overdue by 12 months or more. (Note, if you are the debt factor, you are not entitled to a decreasing adjustment under Division 21 for the amount written off or overdue.)

Example

A makes a taxable supply of goods to B for $110. A then sells the debt (owed to him by B in relation to the taxable supply) to a debt factor for $95. B claims an $11 input tax credit but later only pays the debt factor $99.

But for the factoring arrangement, B would ordinarily account for a $1 increasing adjustment when A writes off as bad the outstanding amount of $11 or when the $11 amount is overdue for 12 months or more. This outcome does not change because of the factoring arrangement. B makes a $1 increasing adjustment when the debt factor writes off as bad the outstanding amount of $11 or when the $11 amount is overdue (to the debt factor) for 12 months or more.

The debt factor is not entitled to a decreasing adjustment in respect of the amount written off or overdue for 12 months or more.

If the agreement you have entered into is different to the general cases outlined above, you may want to request a private ruling.

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