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    11 Government Grants and Payments

    11.1 Compensation

    11.1.1 - Compensation Payments for Destruction of Crops etc. Due to Disasters

    Question

    Will compensation payments associated with the destruction of livestock, crops, etc., due to disasters, eg bushfire, flood, oil spill, etc., be subject to GST if the payment is not an insurance payment or settlement of a legal dispute?

    Answer

    Payments of income support and interest rate subsidies from government relief programs to farmers will generally not be subject to GST. Payments of in the nature of reimbursement grants to farmers under these programs will also generally not be subject to GST.

    Explanation

    Payments of Income support and Existing Debt Interest rate subsidies will not be subject to GST as the recipient is usually not making a taxable supply.

    Most often the recipient is merely satisfying eligibility requirements that will either ensure they are entitled to the payments or not. Although there may be some expectation that the money will be used for certain purposes (eg. paying back loans), there is no binding obligation.

    The payments by government entities are therefore not consideration in return for a supply by the recipient. The recipient is therefore not making a taxable supply to the government in return for the payment and accordingly no GST is applicable to the transaction.

    In the case of reimbursement grants, the recipient usually has expended the money and is seeking reimbursement only. This is not a taxable supply by the recipient and the grant will not be subject to GST.

    A specific example of a government compensation package, the Federal Government Flood Package, is discussed further at issue 11.3.1.

    11.2 Dairy

    11.2.1 - Dairy Industry Restructuring Compensation Package

    Question

    Will Dairyfarmers be liable for GST on payments made under the Dairy Structural Adjustment Program and the Dairy Exit Program?

    Answer

    No.

    Explanation

    Payments made to Dairyfarmers under either the Dairy Structural Adjustment Program (DSAP) or Dairy Exit Program (DEP) are considered to be grants of financial assistance. The GST treatment of grants is discussed in Goods and Services Tax Ruling GSTR 2000/11 Goods and Services Tax: Grants of Financial Assistance.

    Paragraph 10 of the ruling states:

    "GST is payable in respect of taxable supplies. Supplies made in connection with the receipt of a grant will be subject to GST where the grant represents consideration for a supply which is a taxable supply"

    It is, therefore, necessary to determine whether Dairyfarmers make a supply in relation to the payments under both DSAP and DEP.

    Section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the meaning of supply. It says that a supply is any form of supply whatsoever and includes the creation, grant, transfer, assignment or surrender of any right.

    However, Paragraph 33 of GSTR 2000/11 states:

    "For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish a supply. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties."

    Dairy Structural Adjustment Program

    The DSAP consists of payments from the Dairy Adjustment Authority (DAA) to dairy farmers. This is to assist them to adjust to a deregulated environment. DSAP payments are paid to dairy farmers who operate as various entities including sole traders, partnerships, companies and trusts. There are three types of payment under the scheme:

    1. standard payments,

    2. exceptional events supplementary payments and

    3. anomalous circumstance payments.

    In order to be eligible for standard payments, dairy farmers must hold an eligible interest in the enterprise at 6:30pm on 28 September 1999 and the enterprise must have delivered milk during the financial year beginning on 1 July 1998. Similar provisions apply in the case of exceptional events supplementary payments and anomalous circumstance payments. The main requirement placed on the recipients of these payments is that written claims contain enough information to enable the Dairy Adjustment Authority to determine eligibility for payment.

    In the case of payments made under the Dairy Structural Adjustment Program (DSAP) no obligation is placed on the recipient.

    Therefore, there is no supply.

    Dairy Exit Program

    The DEP payments are made to assist farmers who exit the dairy industry and are paid by Centrelink. In order to be eligible for payment the recipient must first be granted a DSAP payment right. They are also required to sell their farm and exit the dairy industry. It is understood that there is a requirement that the farmer is to remain outside the agricultural industry for five (5) years but this is not binding on the recipient of the payment.

    The requirement to be excluded from an industry for a period of time is a restrictive covenant. If a restrictive covenant is enforced it will be a supply. However, in circumstances where the obligation is not binding, there is no supply.

    In addition, under the DEP program the dairy farmers have already exited the industry and consequently the supply will not be made in the course or furtherance of an enterprise that they are carrying on. Therefore, it is considered that on this basis any obligation entered into in relation to the DEP program will not constitute a taxable supply.

    11.3 Flood relief

    11.3.1 - Flood Package and GST - Income support

    Are the payments of income support and existing debt interest rate subsidies from the Federal Government Flood Package to farmers subject to GST?

    Answer

    No.

    Explanation

    This advice is based on the information and joint press release provided to the ATO by the Commonwealth Department of Agriculture, Fisheries, Forestry - Australia (AFFA), through Department of the Treasury, dated 6 December 2000.

    The payments of Income Support and Existing Debt Interest rate subsidies will not be subject to GST as the recipient is not making a taxable supply.

    The recipient is merely satisfying eligibility requirements that will either ensure they are entitled to the payments or not. Although there may be some expectation that the money will be used for certain purposes (for example, paying back loans), there is no blinding obligation.

    The payments by AFFA or Centrelink are therefore not consideration in return for a supply by the recipient. The recipient is therefore not making a taxable supply to the government in return for the payment and accordingly no GST is applicable to the transaction.

    11.3.2 - Are the payments of reimbursement grants for Small Business and Crop Replanting from the Federal Government Flood Package to farmers subject to GST?

    Answer

    No.

    Explanation

    This advice is based on the information and joint press release provided to the ATO by AFFA, through the Department of the Treasury, dated 6 December 2000.

    Payments of the Small Business Grant and the Crop Replanting Grant are not consideration for a taxable supply by the recipient and the grant will, therefore, not be subject to GST. The recipient has merely expended the money and is seeking reimbursement only.

    11.4 Farm help

    11.4.1 - GST on Farm Help Payments

    Question

    Will farmers be liable for GST on payments made under the Farm Help Income Support (formerly Restart Income Support) and the Farm Help Re-establishment Grant Scheme (formerly Restart Re-establishment Grant)?

    Answer

    (a) No. The Farm Help Income Support Scheme will not be consideration for a taxable supply.

    (b) No. The Farm HelpRe-establishment Grant Scheme will not be consideration for a taxable supply.

    Explanation

    Payments made to farmers under either the Farm Help Income Support Scheme (FHIS) or the Farm Help Re-establishment Grant Scheme (FHRG) are considered to be grants of financial assistance. The GST treatment of grants is discussed in Goods and Services Tax Ruling GSTR 2000/11 Goods and Services Tax: grants of financial assistance.

    Paragraph 10 of GSTR 2001/11 states:

    "GST is payable in respect of taxable supplies. Supplies made in connection with the receipt of a grant will be subject to GST where the grant represents consideration for a supply which is a taxable supply."

    It is, therefore, necessary to determine whether farmers make a supply in relation to the payments under FHIS and the FHRG.

    Section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the meaning of supply. It says that a supply is any form of supply whatsoever and includes the creation, grant, transfer, assignment or surrender of any right.

    However, paragraph 33 of GSTR 2000/11 states:

    "For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish a supply. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties."

    (a) Farm Help Income Support Scheme

    The FHIS consists of payments from Centrelink to farmers. The payments are available to the farmers for up to twelve (12) months whilst the farmers are receiving professional advice on the future viability of their farm.

    If farmers meet the eligibility criteria of the FHIS, there is an expectation that they will obtain professional advice on the viability of their farm business and future options. Farmers can receive up to $3,000.00 per family. These payments can include payments of up to $450.00 for travel costs and other costs associated with obtaining the advice. The seeking of professional advice is not a binding requirement. It is merely expected that the payment be used to obtain professional advice. As per paragraph 33 of GSTR 2000/11 the creation of an expectation does not establish a supply.

    Therefore, any payments received in relation to the FHIS scheme will not represent consideration for taxable supply.

    (b) Farm Help Re-establishment Grant Scheme

    The FHRG payments are made to assist farmers who exit the farming industry and are paid by Centrelink. In order to be eligible for payment, the recipient must first qualify for Restart Income Support. They are also required to have sold their farm and exited the farming industry. It is understood that there is a requirement that the farmer is to remain outside the agricultural industry for five (5) years. If the recipient of the payment chooses to return to the industry, repayment of the FHRG will be sought.

    The requirement to be excluded from an industry for a period of time is a restrictive covenant. If a restrictive covenant is enforced it will be a supply. However, under the FHRG program the farmers have already exited the industry and consequently the supply will not be made in the course or furtherance of an enterprise that they are carrying on. Therefore, it is considered that on this basis any obligation entered into in relation to the FHRG program will not constitute a taxable supply.

    11.5 Landcare

    11.5.1 - Can a number of small landcare groups get together as one large group and apply for one ABN?

    Where each small group is a separate entity, they may be permitted to group, but will have to register for an ABN and GST individually. Once they have received their individual ABN and GST registrations, they may complete a single group registration form provided they satisfy the grouping rules. For further information refer to Part 3 of the Charities consultative committee resolved issues.

    11.5.2 - How will grants be treated under GST?

    The ATO has issued a ruling on grants - Goods and Services Tax Ruling GSTR 2000/11 Goods and Services Tax: grants of financial assistance.

    The GST treatment of grants depends primarily on whether the grant represents consideration that has the relevant connection with a taxable supply This will depend on the particular facts and circumstances of each grant program.

    The term grant is not defined and the general principles of the GST Act apply in determining whether GST is payable on a grant transaction.

    GST is payable in respect of taxable supplies. Supplies made in connection with the receipt of a grant will be subject to GST where the grant represents consideration for a supply which is a taxable supply.

    Conditional grants made to a registered grantee will usually be subject to GST.

    A grant will be subject to GST if the following four tests are satisfied:

    A. Is the grant consideration for a supply by the recipient to the grantor?

    B. Is the supply to which the grant relates made as part of the recipient's enterprise?

    C. Is the supply for which the grant is paid connected to Australia?

    D. Is the recipient of the grant registered, or required to be registered, for GST?

    A. Grant as consideration for a supply?

    The first test can be answered by considering whether a grant is conditional or unconditional. If the recipient undertakes or is required to do something in exchange for the funds this is a supply by the recipient for which the grant is consideration. The grant would therefore represent consideration for that supply.

    While a gift to a non-profit body is not consideration and so not subject to GST, most grants are not gifts. As mentioned above, a gift is something that is given by a donor out of generosity or benefaction, made voluntarily, and with no material benefit provided to the donor as a result of the gift. Funding grants do not generally have this character.

    B. Enterprise

    The second test asks whether the supply by the recipient is made in the course of the recipient's enterprise. Activities performed in the nature of a business, and all activities of a religious institution or a charitable institution or fund, fall within this test. We would consider that the supply made by the Australian organisation under a conditional grant would be made in the course of its enterprise.

    C. Connected with Australia

    The third test requires that the supply is connected with Australia. The supply of anything other than goods or real property is connected with Australia if the thing is done in Australia or is made through an enterprise carried on in Australia. The Tax Office has issued a ruling on the meaning of "connected with Australia", GSTR 2000/31 Goods and Services Tax: supplies connected with Australia.

    D. Is the grantee registered?

    The last test requires the supplier to be registered, or required to be registered, for GST. It is assumed that the Australian organisation will be registered for GST.

    Therefore, conditional grants made to a registered Australian organisation will be subject to GST provided the grants are connected with Australia. Unconditional grants, payments made as gifts to the Australian organisation, and payments made to unregistered organisations will not be subject to GST.

    Further information on Grants can be found in Part 7 of the Charities consultative committee resolved issues.

    11.5.3 - If a landcare entity receives a grant of just over $50,000 a year, does the entity have to register for the GST?

    The entity must register if it is carrying on an enterprise and its annual turnover is at or above $50,000 (or $100,000 if the entity is a non-profit organisation). If the entity's annual turnover is less than the relevant threshold, then registration is a matter of choice.

    11.5.4 - If a landcare entity's turnover is below the GST registration threshold, and it chooses not to register for GST, does the landcare entity still need an ABN?

    If the landcare entity is carrying on an enterprise and does not quote its ABN to the grant provider, then the grant provider will (subject to various exceptions) be obliged to withhold 48.5% of the grant and remit it to the ATO. The grant recipient can claim a credit for the withheld money through its annual income tax return.

    It is therefore advisable for the landcare entity to get an ABN.

    11.5.5 - If a landcare entity makes arrangements for another organisation (eg local council) to be the designated funding manager, does that landcare entity need to have an ABN and/or register for the GST?

    The registration rules referred to at the answer for question 2 above, still apply to the landcare entity regardless of the funding management arrangement.

    Further information can be found in Part 16 (Conservation) of the Charities consultative Committee resolved issues document.

    11.5.6 - Will not for profit Landcare groups be able to claim back any GST they pay on goods such as fencing?

    Provided the landcare group is registered for GST, and acquires the fencing in the course of their enterprise, they will be entitled to claim an input tax credit for GST paid.

    Further information can be found at question 17 in Part 16 (Conservation) of the Charities consultative Committee resolved issues document.

    11.5.7 - What are the GST consequences of the following events:

    (a) A grant is paid under an agreement for the period 1 July 1999 to 30 June 2000 The agreement stipulates that any monies that remain unspent as at 30 June 2000 must be refunded to the government unless alternative arrangements are made. and

    (b) Agreement is reached whereby the grantee will be able to spend the excess funds in the 2001 financial year.

    The above arrangements would have the following effects:

    A. There is a reduction in the consideration payable in respect of the agreement for the period 1 July 1999 to 30 June 2000. This in itself has no GST consequences, as it relates to pre GST supplies.

    B. There is a new agreement for the period 1 July 2000 onwards. Under this new agreement, the grantee is agreeing to spend the monies carried over from the 2000 financial year. This new undertaking by the grantee is subject to GST as it relates to the period after 1 July 2000.

    C. The new agreement is accounted for under division 156 of the GST legislation, which treats each progressive or periodic component of the supply as a separate supply.

    D. Each component of the supply under the agreement will be accounted for at the earlier of receiving the cash or providing the service. In this instance, the grant monies have already been paid by the government body to the grantee. Therefore, the grantee would be required to account for the GST on all supplies under the new agreement in the first period after 1 July 2000.

    11.5.8 - What are the GST implications where a landholder provides services to the entity and receives payment in return?

    If the landholder is registered for GST, and the other elements of a taxable supply are satisfied, the supply of services will be subject to GST.

    11.5.9 - What are the Pay As You Go (PAYG) Withholding tax requirements where the landcare entity does not quote an ABN to the payer of grant monies?

    If an entity carrying on an enterprise does not quote an ABN, the payer would normally be required to deduct 48.5% of the grant monies and forward the amount deducted to the Commissioner of Taxation. However, where the monies are income tax exempt in the hands of the recipient, the payer of the grant is not required to deduct tax where an ABN is not quoted. The payer of the grant should ask the payee to complete a 'Statement by a Supplier' form (reason for not quoting an ABN to an enterprise).

    11.5.10 - What are the Pay As You Go (PAYG) Withholding tax requirements where a landholder does not quote an ABN to the landcare entity?

    • If the landholder is conducting an enterprise, and does not quote an ABN, the entity would be required to withhold 48.5% of any payments made.

    • If the landholder is conducting a hobby, PAYG withholding is not applicable. The landholder would merely provide a letter to the effect that his/her activity was only a hobby. If in doubt, the landcare organisation should ask the landholder to complete a 'Statement by a Supplier' form confirming that the landholderser's activities are merely a hobby.

    11.5.11 - What can the entity do if it has inadequate accounting systems, and cannot afford to update them?

    The ATO has prepared a simplified computerised cashbook (E Record). The operator enters transactions and the cashbook produces all the necessary labels for the Business Activity Statement. The software is available from the ATO free of charge. The ATO also has field officers available to help taxpayers such as landcare entities understand GST.

    11.5.12 - Is a landcare group entitled to obtain an ABN?

    The issue of whether a landcare group is able to obtain an ABN is largely dealt with in Miscellaneous Taxation MT 2000/1 which discusses the meaning of 'entity carrying on an enterprise' for the purposes of entitlement to an ABN.

    The first step in determining eligibility for an ABN is to ascertain whether a landcare group is an entity.

    It would appear clear that in the majority of situations, a landcare group is an entity. The term 'entity' includes an 'unincorporated association of persons'. Paragraph 46 of MT 2000/1 provides several examples of 'unincorporated associations of persons' including a non-profit athletics club that has a membership, a committee, a system of rules, and an understanding between the members of their rights, privileges and responsibilities. Paragraph 47 of MT 2000/1 states that the term 'body of persons' can cover 'all types of groups of people'.

    The second requirement that a landcare group must satisfy in order to obtain an ABN is that they are carrying on an enterprise.

    The term 'enterprise' is defined in section 38 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act), and includes an activity or series of activities, done by a charitable institution or by a trustee of a charitable fund. Where a landcare group is a charitable institution etc. they are not required to be carrying on a business in order to obtain an ABN.

    A discussion of whether conservation bodies (including landcare groups) can qualify as charitable institutions appears in Part 16 of the Charities consultative committee resolved issues document.

    Generally speaking, there are two main types of landcare group that could miss out on being considered a charity. The first is groups that are in fact government bodies. The second is where the primary activities of the landcare group are other than charitable - political lobbying would not be charitable for example. Government bodies are not required to be in business in order to obtain an ABN - they must merely be conducting activities. Landcare groups that have the main purpose of lobbying may in any event be able to contend their activities amount to a business. Importantly, only an individual or partnership is prohibited from obtaining an ABN where there is no reasonable expectation of profit.

    11.6 Under and over passes

    11.6.1 - Reimbursement Grant from RIDF - GST status

    Question

    Is the payment of a reimbursement grant from the Victorian Rural Infrastructure Development Fund (RIDF) to farmers for the completion of a stock under/overpass subject to GST?

    Answer

    No.

    Background

    A total of $4 million has been made available from the Rural Infrastructure Development Fund (RIDF), established under the Bracks Government's Reviving Rural and Regional Victoria policy for the installation of stock under/overpasses.

    The installation of stock under/overpasses has been a key concern for members of the Victorian Farmers' Federation (VFF), in particular those involved in the dairy industry for many years. The provision of this funding is intended to facilitate the installation of stock under/overpasses improving the safety of farming families and their employees who regularly take stock across arterials and also the safety of rural roads for the motoring public. The installation is not compulsory nor is there public access to these stock under/overpasses.

    The VFF is administering this funding on behalf of the Department of State and Regional Development.

    The RIDF has directed that funding for each under/overpass will be to a maximum of $20,000 and applied on a dollar for dollar basis. For example, if the under/overpass is valued at $50,000 the maximum contribution will be $20,000. If the project is valued at $32,000 the maximum contribution will be $16,000. Funding is available for stock under/overpasses on any road or rail line. It is not available for channel crossings.

    Construction must have commenced after 17 June 2000. Funding is not retrospective prior to this date. Funds will be received when the stock under/overpass is completed. This will need to be verified by a final inspection report issued by an authorised officer of either VicRoads, Council or the Rail Authority. Original copies of receipts for construction costs will need to be provided.

    Eligible costs include - laneway construction including cost of fencing materials and the material for the laneway surface back to the boundary fence, electricity connection, pumps, plumbing/drainage costs, signage, construction, road resurfacing and guard rails whether these are provided by the farmer or a supplier.

    Costs associated with the farmer's contribution to the under/overpass cost eg finance expenses and ongoing maintenance expenses are not eligible.

    Explanation

    The Australian Taxation Office understands that the installation of stock under/overpasses in Victoria is intended to improve the safety of farming families and their employees who regularly take stock across public roads this in turn makes these roads safer for motorists.

    These structures are installed on private property and have no public access. The building of these structures is not compulsory and the funds are only received when the stock under/overpass is completed.

    Generally, where a grant is paid for a specific purpose or subject to conditions, this will be treated as a payment by the recipient for a supply. This would also apply if the grant reimburses the recipient for expenses which the recipient has already incurred. Grants may be consideration for the supply of information in the grant application or, in some cases, the giving up of a recipient's right to reimbursement.

    However, in the case of under/over pass reimbursement grants no conditions are imposed. Therefore they are not subject to GST as they are made for no consideration (Sections 9-5 and 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)).

    This issue is considered in paragraphs 108-109 of Goods and Services Tax Ruling GSTR 2000/11 Goods and Services Tax: grants of financial assistance, as follows:

    Example

    Vacuum Australia administers a scheme to encourage the use of vacuum cleaners to keep Australia's footpaths clean. It provides subsidies for the costs of vacuum cleaners acquired by businesses. The Agency has discretion as to whether it approves claims. Alana, who operates a greengrocery, acquires a vacuum cleaner for use in the business and makes an application for reimbursement. The application contains information about how she will use the vacuum cleaner. The grant is approved after the grantor considers the application for reimbursement.

    The reimbursement grant is not subject to GST. There is nothing given up by Alana in exchange for the grant. The information in the application for reimbursement merely establishes Alana's entitlement to claim the reimbursement, and the grant is not consideration that is sufficiently connected with the supply of information by Alana to Vacuum Australia."

    Therefore as the stock under/overpasses grants are paid without any conditions the payments will not be subject to GST. The payment is not consideration for a supply made by the grant recipient.

    11.7 Sugar

    11.7.1 - Sugar Industry Assistance Package

    Question

    Are payments to canegrowers under the Sugar Industry Assistance Package subject to GST?

    Answer

    No. Payments under the Sugar Industry Assistance Package do not represent consideration for supplies made by canegrowers. Therefore, payments to canegrowers under the Package will not be subject to GST.

    Background

    The package was announced by the Federal Agriculture minister on 1 September 2000 as including:

    • significant interest subsidies on loans of up to $50,000 used to plant cane crops this and next season;

    • interest subsidies on new or existing loans of up to $100,000 associated with the business of producing cane;

    • family relief payments from 1 September to assist cane farmers and their families;

    • vouchers of up to $1,000 per farmer to access financial counselling services, where these services are not already provided

    Explanation

    The payments and the benefits provided are in the nature of assistance, and not consideration for any supplies made by the growers.

    Although canegrowers must complete an application form in order to establish their eligibility for the interest subsidies, family relief payments, or financial counselling vouchers, made available by the government, these benefits are not consideration for the supply of the information in the application form. Rather, the benefits are paid to assist the canegrowers maintain their businesses. Paragraphs 89 to 100 of Goods and Services Tax Ruling GSTR 2000/11 'Goods and service tax: grants of financial assistance'discuss supplies of information required to establish eligibility for financial assistance.

      Last modified: 07 Jan 2005QC 17855