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| FAQ- ATO |
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| Q. |
What is factoring and discounting?
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Factoring and discounting involve the
assignment of debts by a business (the assignor of the debts,
usually referred to as the client) for consideration, generally
on a continuing basis.
There are various ways the purchase transactions are structured.
For example, the debt can be sold to the factor/discounter
for a price that is less than the face value of the debt.
In this case the factor/discounter pays the business up
to 90% of the invoice value in cash and the balance, less
fees, is paid to the business after a set period, or after
the debt has been collected. Sometimes the debt is purchased
for its full face value and then a prepayment of the amount
owed is made based upon an agreed prepayment rate.
What is the difference between
factoring and discounting?
Under both facilities the client sells the unpaid invoices
for immediate access to cash, but under the factoring arrangement
the factor additionally manages the client's sales ledger
and collection of accounts. Therefore, under a factoring
arrangement the debtor makes payments to the factor. Under
discounting, the debtor nominally makes payments to the
supplier; but as the debt is owned by the discounter, the
supplier is collecting these debts on behalf of the discounter.
An example:
The client has a $110 debt;
The client sells the debt to a factor/discounter;
The factor/discounter makes a $90 upfront payment to the
client;
The factor/discounter earns a $1 administration fee;
The factor/discounter also earns a discount fee (usually
a daily charge based on usage, similar to interest) on the
upfront $90 payment until the debt is paid (assume $2 in
this example);
When the $110 is collected from the client's customer, the
factor/discounter pays or makes available to the client
the $110 amount less the $90 upfront payment, the $1 administration
fee and the $2 discount fee, i.e. $17.
Recourse and non-recourse arrangements
The distinction between recourse and non-recourse arrangements
is that under the latter the factor/discounter acquires
the debt at its own credit risk. In practice, virtually
all factoring/discounting in Australia is conducted on a
recourse basis, and these arrangements generally operate
along the following lines:
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the assignor (client) and factor/discounter
enter into an agreement whereby, for the term of the
agreement, the assignor offers its debts that are
due (or that will become due) for sale to the factor/discounter;
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the factor/discounter may have
the discretion to accept or reject the offer;
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the factor/discounter determines
the availability for funding based on the value of
debts purchased and their classification as approved
or disapproved for funding. For example, debts that
are over 90 days old are commonly not eligible for
funding against.
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funding is then made available
and drawn by the assignor.
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For factoring/discounting arrangements
(both recourse and non-recourse) the assignor will normally
be making a financial supply when it assigns the debt (or
part of it) to the factor/discounter.
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The following frequently
asked questions are addressed below |
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Q.
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If you are a
supplier (assignor) and you assign a debt to a factor/discounter,
whether on a recourse or non-recourse basis, what
is the consideration for the assignment?
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A.
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The consideration is the price
for which you sell the debt to the factor/discounter.
The consideration is not the difference between the
face value of the debt and the amount the factor/discounter
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 (including
GST). A then sells the debt (owed to him by B in relation
to the taxable supply) to a factor/discounter for
$107.
The consideration for the assignment of the debt is
$107. The consideration is not $3 (being the difference
between the face value of the original debt and the
$107).
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Q.
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If you are a
supplier accounting for GST on a non-cash basis and
you assign a debt to a factor/discounter, 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?
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A.
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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 factor/discounter.
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 factor/discounter.
Example
A makes a taxable supply of goods to B for $110 (including
$10 GST) 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 factor/discounter for
$107. B later pays the factor/discounter only $88.
The GST payable for the taxable supply A made is $10.
But for the factoring/ discounting 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/discounting arrangement. A accounts
for $10 GST at the earlier of when B pays the factor/discounter
$88 or when the invoice is issued.
The GST payable for the taxable supply A made is not
1/11th of the $107 payment received from the factor/discounter.
This payment is consideration for a financial supply
made by A (being the supply of the interest in the
debt to the factor/discounter).
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Q.
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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?
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A.
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Under a recourse arrangement
Yes, but only if the assigned debt is reassigned
to you.
The consideration for the supply of the debt will
normally be less than the full face value of the
invoice. The recipient of the taxable supply that
you made might not pay all of the consideration
for that supply to the factor/discounter. 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 factor/discounter.
However, if the debt (or a part of it) is reassigned
to you from the factor/discounter - for example,
because the debtor does not pay the factor/discounter
- 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 3.1 - assignment
under recourse arrangement
A makes a taxable supply of goods to B for $110
(including $10 GST) and issues an invoice at the
same time. A then sells the debt to a factor/discounter
for $107.
A accounts for $10 GST when the invoice is issued.
B does not make any payment to the factor/discounter.
Because B does not make any payment to the factor/discounter,
the factor/discounter 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).
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 factor/discounter. 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 factor/discounter,
or
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the total amount
paid to the factor/discounter by the
recipient of your taxable supply. If
you only assign the debt, Division 21
cannot 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.
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Example 3.2 - assignment
under non-recourse arrangement
A makes a taxable supply of goods to B for $110
(including $10 GST) and issues an invoice at the
same time. A then sells the debt to a factor/discounter
for $107.
A accounts for $10 GST when the invoice is issued.
B later only pays the factor/discounter $88 who
then writes off the unpaid $22 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 $107. Nor is A entitled to a decreasing
adjustment for the $22 that B owed the factor/discounter.
This is because there is no bad debt (or amount
overdue) for A for the $22 because the $22 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
factor/discounter is not entitled to a decreasing
adjustment under Division 21 for any amount that
is not paid to him by B.
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Q.
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If you are a
supplier accounting for GST on a cash basis and you
sell a debt to a factor/discounter, 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?
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A.
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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 factor/discounter. The amount you must
account for is 1/11th of the total consideration received
by the factor/discounter 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
factor/discounter.
Example
A makes a taxable supply of goods to B for $110 (including
$10 GST). A then sells the debt (owed to him by B
in relation to the taxable supply) to a factor/discounter
for $107. B later pays the factor/discounter $88.
But for the factoring arrangement, A would ordinarily
account for $8 GST when A receives the $88 from B.
This outcome does not change because of the factoring
arrangement. A accounts for $8 GST when B makes the
$88 payment to the factor/discounter.
A does not account for 1/11th of the $107 payment
received from the factor/discounter. This payment
is consideration for a financial supply made by A
(being the supply of the debt to the factor/discounter).
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Q.
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Is a factor/discounter
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?
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A.
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Where the factor/discounter 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 factor/discounter 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 factoring/discounting 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 factor/discounter may be entitled to a reduced
input tax credit. For example, certain aspects of
debt collection services acquired by the factor/discounter
to collect the money owing on the assigned debt are
reduced credit acquisitions (see item 17 of regulation
70-5.02).
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Q.
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Has a factor
made a taxable supply when it provides sales accounting
services or debt collection services under a discounting/factoring
arrangement?
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A.
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Yes. Factoring arrangements include
the provision of debt collection services and sales
accounting services by the 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 regulation
40-5.12 of the GST regulations).
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Q
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Is a sales accounting
service that is provided as part of a discounting/factoring
arrangement an incidental financial supply?
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A.
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No. Regulation 40-5.10 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 factor,
whilst the accounting services are supplied by the
factor to the assignor. Therefore, such supplies of
sales accounting services are not incidental financial
supplies.
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Q
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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?
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A.
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Yes. You make the increasing adjustment
when the debt is overdue by 12 months or more. (Note,
if you are the factor/discounter, 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 factor/discounter for
$107. B claims an $10 input tax credit but later only
pays the factor/discounter $88.
But for the factoring arrangement, B would ordinarily
account for a $2 increasing adjustment when A writes
off as bad the outstanding amount of $22 or when the
$22 amount is overdue for 12 months or more. This
outcome does not change because of the factoring arrangement.
B makes a $2 increasing adjustment when the factor/discounter
writes off as bad the outstanding amount of $22 or
when the $22 amount is overdue (to the factor/discounter)
for 12 months or more.
The factor/discounter is not entitled to a decreasing
adjustment in respect of the amount written off or
overdue for 12 months or more.
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