FAQ – ATO
Q. What is factoring and discounting?
A. 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.
Q. What is the difference between factoring
and discounting?
A. 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:
- 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;
- the factor/discounter may have the discretion to
accept or reject the offer;
- 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.
- funding is then made available and drawn by the assignor.
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.
The following frequently asked questions are addressed
below:
Q. 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?
A. 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).
Q. 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?
A. 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).
Q. 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?
A. 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:
- the consideration for the supply of the debt
to the factor/discounter, or
- 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.
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.
Q. 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?
A. 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).
Q. 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?
A. 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).
Q. Has a factor made a taxable supply when it provides
sales accounting services or debt collection services
under a discounting/factoring arrangement?
A. 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).
Q. Is a sales accounting service that is provided as
part of a discounting/factoring arrangement an incidental
financial supply?
A. 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.
Q. 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?
A. 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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