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  • GST and payments between government related entities – overview

    The following technical terms are explained in the glossary:

    • government related entity
    • appropriation
    • Australian law.

    This overview discusses when payments made between government related entities are subject to goods and services tax (GST).

    Are your payments subject to GST?

    Yes/no matrix

    Introduction

    From 1 July 2012, a payment will not be subject to GST if all of the following apply:

    • the payment is made by a government related entity (GRE) to another GRE for making a supply
    • the payment is covered by an appropriation under an Australian law or is made under a specified intergovernmental health reform agreement
    • the payment satisfies the non-commercial test.

    Payments made between government related entities

    The payment must be made by a GRE to another GRE for making a supply. It is not necessary that the supply is made to the GRE making the payment. The supply may be made either to the GRE making the payment or to a third party.

    Attention

    If there is no supply made for the payment, there will be no GST under the basic rules in the GST Act.

    End of attention

    Payments covered by an appropriation or intergovernmental health reform agreement

    The payment must either be:

    • covered by an appropriation under an Australian law, or
    • made under a specified intergovernmental health reform agreement.

    The payment is covered by an appropriation under an Australian law

    An 'appropriation under an Australian law' means a segregation of funds from the consolidated revenue fund, by a:

    • statute of the Commonwealth
    • state or a territory
    • delegated legislation.
    Attention

    An appropriation is not in itself a payment; it is the legislative segregation of funds from the consolidated revenue fund.

    End of attention

    The payment is made under a specified intergovernmental health reform agreement

    If the payment is not covered by an appropriation under an Australian law, the payment must be made under one of the following:

    • the National Health Reform Agreement agreed by the Council of Australian Governments on 2 August 2011
    • an agreement entered into to implement the National Health Reform Agreement.
    • The National Health Reform Agreement is available from the Council of Australian Governments (COAG)External Link

    Satisfying the non-commercial test

    To satisfy this requirement, the amount of the payment must be calculated on the basis that the sum of the following does not exceed the anticipated or actual cost of making those supplies:

    • the payment or payments relating to the supply
    • anything else the supplier receives from other entities in connection with, or in response to, or for the inducement of the supply or related supplies.

    In this context, 'cost' includes the supplier's direct and indirect costs of making the supply or supplies. It does not include a return on capital or concepts of cost which are measured based on opportunity cost or forgone revenue.

    If the payment is made in instalments, an aggregate of the instalment payments is required to be tested against the anticipated or actual costs of making the supply or related supplies. Instalment payments are not tested separately.

    If the payment is worked out before the supply or supplies are made, the calculation is based on the anticipated cost of making the supply or supplies. If the payment is worked out after the supply or supplies are made, the calculation is based on the actual costs of making the supply or supplies.

    Where the calculation of the amount of the payment is based on anticipated costs, it is not necessary to subsequently review the calculation once the actual costs of making the supply or related supplies are known.

    Related supplies

    A supplier may make a supply to a third party, or alternatively it may make supplies to both the GRE making the payment and the third party. Where the arrangement involves the supplier making a supply to the GRE that made the payment and also a supply to a third party, the supply made to the third party will relate to making the supply to the GRE. Payments or any other thing that the supplier receives from the third party under the arrangement, are included in the calculation to determine if the non-commercial test is satisfied.

    Examples

    The examples below discuss whether payments by one GRE to another GRE will be subject to GST.

    Example 1: Anticipated costs - education outcomes

    A territory department of education (the Department) has funding arrangements with government and non-government schools. Funding payments are made pursuant to a territory appropriation Act.

    The terms of the appropriation allow payments to be made to both government and non-government schools, which commit to achieving certain educational outcomes as part of the funding arrangements. The appropriation also states the total amount of money authorised to be paid to both government and non-government schools.

    A payment is made by the Department to a government school to fund its general operations. The Department determines the amount of funding to be allocated to each school based on objective criteria. These criteria are based on the anticipated costs of the school in meeting the educational outcomes that it has undertaken to achieve.

    The payment from the Department to a government school is:

    • from a GRE (the Department) to another GRE (government school) for the school making the supply of delivering educational outcomes
    • covered by an appropriation under an Australian law
    • calculated on the basis that the payment does not exceed the anticipated costs to the school in delivering the educational outcomes.

    The payment from the Department to a government school will not be subject to GST because all of the requirements are satisfied.

    Attention

    As the payment was calculated based on anticipated costs, it is not necessary to subsequently review the calculation once the actual costs of making the supply are known.

    Payments by the Department to non-government schools are subject to the normal GST rules.

    End of attention

    Example 2: Actual costs - bulk purchase

    A state government decides to centralise the purchasing of stationery through Department A which bulk buys stationery supplies and then on-supplies to individual departments.

    The individual departments have agreed to pay Department A an amount equal to their portion of the actual costs incurred by Department A in purchasing the stationery, including the administration costs incurred by Department A. The payments by individual departments are made pursuant to a state appropriation Act.

    The payments made by individual departments to Department A are:

    • from a GRE (the individual department) to another GRE (Department A) for making a supply of stationery items
    • covered by an appropriation under an Australian law
    • the amount of the payment is calculated on the basis that it does not exceed Department A's actual costs, including its administration costs, in making the supply of stationery items.

    The payments made by individual departments to Department A will not be subject to GST because all of the requirements are satisfied.

    Example 3: Instalment costs – sub-lease of office space

    Department A is the lessee of a building in the city centre and sub-leases an unoccupied floor to Department B. The annual rent that Department B will pay to Department A is calculated to recover the anticipated lease costs incurred by Department A for that floor. The lease agreement allows for the payments to be made in instalments throughout the agreement using funds allocated to Department B under a Commonwealth appropriation Act for its general operating costs.

    The payment from Department B to Department A is:

    • from one GRE (Department B) to another GRE (Department A) for Department A sub-leasing the office space
    • covered by an appropriation under an Australian law
    • calculated on the basis that the aggregate of the instalment payments do not exceed Department A's anticipated costs of making the supply.

    The payment from Department B to Department A will not be subject to GST because all of the requirements are satisfied.

    Attention

    As the payment was calculated based on anticipated costs, it is not necessary to subsequently review the calculation once the actual costs of making the supply are known.

    End of attention

    Example 4: Subsidy arrangement with supplies made to both the GRE payer and third parties

    A state GRE (the transport supplier) supplies transport services to the general public. The state government has a policy of subsidising the fares for pensioners who reside in that state (eligible customers). A state department (Department A) has established a program to deliver this policy objective and enters into an agreement with the transport supplier that requires the transport supplier to charge a lower amount to eligible customers.

    The diagram below illustrates a subsidy arrangement with supplies made to both the GRE payer and third parties.

    diagram illustrating a subsidy arrangement with supplies made to both the GRE payer and third parties

    Under the program, an eligible customer pays only half of the unsubsidised fare to the supplier with Department A paying an amount (subsidy) equivalent to the other half of the fare. The payments by Department A are made pursuant to an appropriation under a state appropriation Act.

    The transport supplier makes a supply (Supply 1) to Department A and receives the subsidy payment ($D) in return. However, the payment from Department A to the transport supplier is conditional on the transport supplier making a related supply (Supply 2) to the eligible customer.

    The sum of the subsidy payment ($D) and the subsidised fare paid by the eligible customer ($EC) is equal to the fare the supplier would normally charge when the subsidy is not applicable. The normal charge (unsubsidised fare) is determined by the transport supplier on the basis that it exceeds the anticipated costs of supplying the transport.

    The subsidy payment ($D) is:

    • made by a GRE (Department A) to another GRE (the transport supplier) for making a supply
    • covered by an appropriation under an Australian law.

    However, as the payment has been calculated on the basis that the sum of the subsidy payment ($D) and the subsidised fare ($EC) exceeds the anticipated costs of making the supplies (Supply 1 and Supply 2), it will not satisfy the non-commercial test and therefore will be subject to GST if the basic GST rules are met.

    Attention

    If the payment from Department A to the transport supplier was calculated on the basis that all amounts received by the transport supplier for making both supplies will not exceed the transport supplier's anticipated costs of making those supplies, then the subsidy payment from the Department will not be subject to GST because all of the requirements are satisfied.

    End of attention

    Example 5: Subsidy arrangement with supplies made to third parties only

    In some subsidy arrangements there may not be a supply to the GRE making the payment. Instead, the subsidy payment may be for the supply made to a third party.

    The diagram below illustrates a subsidy arrangement similar to example 4 except there is no supply made to Department A by the transport supplier.

    diagram illustrating a subsidy arrangement similar to example 4 except there is no supply made to Department A by the transport supplierIn this situation the subsidy payment by Department A ($D) and the payment from the eligible customer ($EC) are both payments for the supply of transport to the eligible customer.

    The subsidy payment ($D) is:

    • made by a GRE (Department A) to another GRE (the transport supplier) for making the supply to the eligible customer
    • covered by an appropriation under an Australian law.

    However, as the payment has been calculated on the basis that the sum of the subsidy payment ($D) and the subsidised fare ($EC) exceeds the anticipated costs of making the supply, it will not satisfy the non-commercial test and therefore will be subject to GST if the basic GST rules are met.

    Glossary

    Government related entity

    • A 'government related entity' is:
    • a department of state of the Commonwealth
    • a department of the parliament established under the Parliamentary Service Act 1999
    • an executive agency, or statutory agency, within the meaning of the Public Service Act 1999
    • a department of state of a state or territory
    • an organisation, whether or not it is an entity, that

    i. is either established by the Commonwealth, a state or a territory (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law and

    ii. can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation; whether or not the organisation is part of a department or branch described in the first four dot points above or of another organisation of the kind described in (i) or (ii)

    • a local governing body established by or under a state law or territory law.

    Appropriation

    An 'appropriation' is a segregation of funds from the consolidated revenue fund, by a statute of the Commonwealth, a state or a territory, or by delegated legislation.

    Australian law

    An 'Australian law' means – a law of:

    • the Commonwealth
    • a state
    • a territory.

    More information

    For more information:

    • phone us on 13 28 66
    • write to us at

    Australian Taxation Office
    PO Box 3524
    ALBURY  NSW  2640

    If you do not speak English well and need help from us, phone the Translating and Interpreting Service on 13 14 50.

    If you are deaf, or have a hearing or speech impairment, phone us through the National Relay Service (NRS) on the numbers listed below:

    • TTY users, phone 13 36 77 and ask for the ATO number you need
    • Speak and Listen (speech-to-speech relay) users, phone 1300 555 727 and ask for the ATO number you need
    • internet relay users, connect to the NRS on relayservice.com.auExternal Link and ask for the ATO number you need.
      Last modified: 27 Oct 2014QC 25884