In AusNet Services Limited v Commissioner of Taxation [2026] FCA 1609, Moshinsky J of the Federal Court considered the character of payments made, and whether the payments gave rise to “decreasing adjustments” under either Div 19 or Div 134 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act).

The decision confirms that a payment to a customer will affect the GST treatment of a supply only where it reduces the consideration for that supply. It is not enough that the payment is simply connected with the supply.

For GST, a payment to a customer will alter the GST outcome of a supply only if it is properly characterised as reducing the consideration for that supply; a payment that is merely related to the supply is not enough.

More broadly, characterisation under the tax legislation, including for royalty withholding tax, is approached by reference to the whole of the arrangements and their practical and commercial reality. Consistent documentation and evidence are critical.

Summary of the case

Electricity distributor AusNet Electricity Services Pty Ltd (AES), a member of the GST group of which AusNet Services Limited (AusNet) was the representative member, made payments to customers under Victoria’s Guaranteed Service Level (GSL) regime. 

The GSL regime requires distributors to make payments to customers where specified service standards are not met. These include delayed new connections, late or missed appointments and unplanned supply interruptions. 

During the relevant period (1 March 2019 to 31 December 2020), AES made approximately $16 million in GSL payments and claimed decreasing adjustments totalling approximately $1.4 million. The appeal was dismissed with costs.

A central issue was the characterisation of AES’s supplies. 

AusNet’s primary argument at the hearing (relying on Division 134) was that AES supplied network services to retailers, who then supplied those services to end customers (Indirect Supply Analysis), with an alternative argument under Division 19 premised on AES supplying end customers directly (Direct Supply Analysis). The Commissioner contended that AES supplied the relevant services directly to customers, with retailers handling billing and payment. Justice Moshinsky accepted the Commissioner’s position. 

In undertaking the characterisation task, the Court examined a combination of regulatory materials, contractual documents (including the Use of System Agreement or UoSA, between distributor and retailer, and the Retail Contract Model Terms between retailers and end customers), sample invoices and billing practices and witness evidence regarding the purpose of the GSL payments scheme.

The Court found that the purpose of the GSL scheme was that the payments are intended to acknowledge the inconvenience suffered by customers when minimum service standards are not met and to incentivise distributors to improve reliability. The Court did not accept the Commissioner’s contention that partially compensating customers for loss was a substantial purpose of the scheme, as the link between the payments and any loss suffered was too tenuous.

The Court analysed whether Direct Supply Analysis or the Indirect Supply Analysis was correct for the purpose of applying the provisions of the GST Act. Justice Moshinsky found that the contractual and other like documents that form part of the regulatory regime did not point consistently in one direction. However, from a practical and commercial perspective, His Honour concluded that the relevant services were provided by AES directly to the end customers (with billing and payment done through the retailer).

From this finding about characterisation, the Court then concluded that the GSL payments did not change the consideration for the supply of the connection and supply services; they were not an integer in that consideration. Rather, they were standalone amounts that AES was required to pay under the regulatory regime. 

The Court noted that the Electricity Distribution Code presented the payments as standalone obligations, the contracts contained no mechanism treating them as a discount or rebate, the payments were fixed amounts unrelated to the price of the services, they remained payable where fees were waived and could exceed the connection charge, and they appeared as a separate line item on customer bills. 

As a result, the payments did not constitute an “adjustment event” under section 19-10 of the GST Act and did not give rise to decreasing adjustments under Division 19. Nor could Division 134 apply, because the Court found that the relevant services were supplied directly to customers rather than to retailers, so the first requirement of section 134-5(1) was not satisfied.

GST implications

For GST purposes, the key question is whether a payment to a customer is properly characterised as a reduction in the consideration for a supply or as a separate obligation. 

Payments that arise independently under legislation, regulation or industry codes, and are not structured as discounts, rebates or credits against the price, are unlikely to give rise to decreasing adjustments. Businesses making service-level, remediation or reliability payments, whether in energy or other regulated sectors, should review how those payments are documented and whether historical adjustment positions remain supportable.

Characterisation beyond GST

The decision is also a useful illustration of the characterisation task that arises throughout the tax legislation. The Court did not treat any single document as decisive. Where the contracts pointed in different directions, it considered the regulatory regime as a whole, who physically performed the services, the flow of funds, billing practices and the taxpayer’s own commercial view of the arrangements, and characterised the transaction by reference to its practical and commercial reality.

The Court also confirmed that a mere connection between a payment and a supply is not enough. 

Applying the Full Federal Court’s observations in AP Group Ltd v Federal Commissioner of Taxation [2013] FCAFC 105 on the word “for”, and with the Commissioner relying on the High Court’s analysis of “consideration for” in Federal Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30, the question was whether the GSL payments were an integer in the consideration for the supply, not merely whether they were related to it. The same distinction, between a payment being connected with something and being consideration for it, arises in many other provisions.

An example of this is in the context of royalty withholding tax, which is a current focus of the ATO. Whether a payment under a distribution, licensing, software or bundled supply arrangement includes a royalty, being an amount paid as consideration for the use of, or the right to use, intellectual property or similar rights, is a characterisation question. As in AusNet, the answer is likely to depend on the whole of the arrangements: the terms of the agreements, how pricing is set, what is actually provided and by whom, and the commercial substance of the payments, rather than the labels the parties adopt or whether a royalty is separately identified. 

Whatever the context taxpayers should ensure that their documentation (contracts, regulatory materials, invoicing and internal records etc) tell a consistent story, and that their witnesses’ evidence about the purpose and operation of the arrangements aligns with the documents. Documents that support the taxpayer’s position, such as the UoSA in AusNet, will not necessarily carry the day, and the outcome may turn on evidence of practical and commercial reality, including evidence given by the taxpayer’s own witnesses.