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  • GST and payments between government related entities

    A payment isn't subject to GST if it meets the following conditions.

    The payment must:

    Government related entity

    A government related entity is:

    • a department of state of the Australian Government
    • a department of state of a state or territory government
    • 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
    • an organisation that
      • is either established
        • by the Australian Government or a state or territory government (under a law or not) to carry on an enterprise, or
        • for a public purpose by an Australian law
         
      • can be separately identified by
        • the nature of the activities carried on through the organisation, or
        • the location of the organisation regardless of the organisation being part of a department or branch described in the first 4 dot points above or of another organisation
         
       
    • a local governing body established by or under a state law or territory law.

    A supply

    For a payment to be exempt for GST, it must be made by one government related entity (GRE) to another GRE for a supply.

    Supplies can be made to:

    • a GRE making a payment, or
    • to a third party.

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

    Appropriation

    An 'appropriation' is a segregation of funds from a consolidated revenue fund by a statute of:

    • the Australian Government
    • a state or a territory government, or
    • by delegated legislation.

    Payments covered by an appropriation or intergovernmental health reform agreement must be covered by an appropriation under an Australian law.

    Specified intergovernmental health reform agreement

    If a payment is not covered by an appropriation under an Australian law, it 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.

    Australian law

    An 'Australian law' means a:

    • statute of the Australian Government
    • state or a territory
    • delegated legislation.

    Satisfy the non-commercial test

    To satisfy the non-commercial test, the amount of a payment must be less than the anticipated or actual cost of making those supplies.

    In this context, 'cost' includes the supplier's direct and indirect costs of making the supply.

    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, use an aggregate of the instalment payments to work out costs. Instalment payments are not tested separately.

    If the payment is worked out before the supply is made, the calculation is based on the anticipated cost of making the supply.

    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.

    If costs are worked out using anticipated costs, you do not need to re-calculate once the actual costs of making the supply is known.

    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 under a territory appropriation Act.

    The terms of the appropriation:

    • allow payments to be made to both government and non-government schools that commit to achieving certain educational outcomes
    • 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 anticipated costs the school needs to meet the agreed educational outcomes.

    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 so the payment doesn't exceed the anticipated costs to the school in delivering the educational outcomes.

    The payment from the Department to the government school isn't subject to GST because all requirements are satisfied.

    Even though the payment was calculated based on anticipated costs, it's not necessary to review the calculation once the actual costs of making the supply are known.

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

    End of example

     

    Example 2: Actual costs – bulk purchase

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

    The individual departments agree to pay Department A an amount equal to their portion of the actual costs incurred by Department A, including administration costs. These payments are made under 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 so it doesn't exceed Department A's actual costs, including administration costs.

    The payments made by individual departments to Department A isn't subject to GST because all requirements are satisfied.

    End of example

     

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

    Department A is the lessee of a building and sub-leases an unoccupied floor to Department B.

    The annual rent Department B pays to Department A is calculated to cover anticipated lease costs for that floor. The lease agreement allows payments to be made in instalments throughout the agreement using funds allocated to Department B under an Australian Governemtn appropriation Act for general operating costs.

    The payment from Department B to Department A is:

    • from one GRE (Department B) to another GRE (Department A) for sub-leasing office space
    • covered by an appropriation under an Australian law
    • calculated so the total of the instalment payments won't exceed Department A's anticipated costs of making the supply.

    The payment from Department B to Department A isn't subject to GST because all requirements are satisfied.

    Even though the payment is calculated on anticipated costs and it's not necessary to review the calculation when the actual costs are known.

    End of example

    Related supplies

    A GRE that receives a payment from another GRE may make supplies to third parties relating to the payment.

    Supplies to third parties relate to the payment if the supply is part of the arrangement between the GREs.

    Payments or any other thing the GRE receives from a third party for a supply related to the payment must be included in determining if the non-commercial test is satisfied.

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

    A state GRE (transport supplier) supplies transport services to the general public.

    The full fare charged by the transport supplier exceeds the anticipated costs of supplying the transport. The full fare for transport is $10.00.

    A state department (Department A) establishes a program to subsidise fares for pensioners residing in the state (eligible customers).

    Department A makes an agreement with the transport supplier. Under the agreement, the transport supplier enters into a binding obligation to charge a lower amount to eligible customers with Department A paying the balance.

    Under the program, an eligible customer pays half the whole fare ($5.00) to the transport supplier and Department A pays the other half ($5.00) of the fare (the subsidy).

    The payments by Department A are made as an appropriation under a state appropriation Act.

    The subsidy payment ($5.00) 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.
    • does not satisfy the non-commercial test as the payment is calculated on the basis that the sum of the subsidy payment ($5.00) and the subsidised fare ($5.00) exceeds the anticipated cost of the transport supplier making the supplies to the GRE and the eligible customer.

    Therefore, the payment is subject to GST if the basic GST rules are met.

    The GST consequences are:

    • The transport supplier is making a taxable supply to Department A and a separate supply to the eligible customer and is required to pay GST of 1/11th of the $5 received from Department A and 1/11th of $5 received from the passenger.
    • Department A is entitled to a GST credit for 1/11th of the $5 paid to the transport supplier where the acquisition from the transport supplier is for a creditable purpose.
    End of example

     

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

    In some subsidy arrangements there won’t be a supply to the GRE making the payment. Instead, the subsidy payment is only for the supply made to a third party.

    If in Example 4 the arrangement between Department A and the transport supplier didn't involve the transport supplier entering into a binding obligation with Department A, the subsidy payment by Department A and the payment from the eligible customer are both payments for the supply of transport to the eligible customer.

    The subsidy payment 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.

    The payment is calculated so the sum of the subsidy payment and the subsidised fare exceeds anticipated costs of making the supply of transport to the eligible customer. This doesn’t satisfy the non-commercial test and is subject to GST if the basic GST rules are met.

    The GST consequences are:

    • The transport supplier is a making a taxable supply to the eligible customer and is required to pay GST of 1/11th of the $10 received for the supply ($5 received from Department A and $5 received from the passenger).
    • Department A isn't entitled to a GST credit for 1/11th of the $5 paid to the transport supplier as no supply was made to it for the payment.
    End of example
      Last modified: 26 Mar 2021QC 25884