If we had a contract with a supplier to supply, for example, 500 tons of grain at $300 per ton but they only supplied 400 tons of grain. The supplier has to pay us, for example, $50 a ton for the 100 tons difference between what they contracted to supply and what they actually supplied. If we invoice that amount to them, should we apply GST to the invoice or not (both parties being GST registered)?
Being that the money is still income to business A the expectation would be to charge GST - even if the payment is technically a "penalty".
As businesses in general aren't allowed to charge what constitutes a legal penalty (government based / fine), if the stipulation of the contract agreement is to pay X for failure to deliver then by all means you can charge X but it's still business income.
I could be wrong as the question is fairly specialised and there may be other rulings or information I'm missing, so wait and see if anyone else can validate or present other ideas.