In determining the taxable supplies and creditable acquisitions associated with social PPP arrangements, careful consideration needs to be given to the precise terms of the relevant agreement.
Characteristics of social PPPs from a GST perspective
Not all arrangements will be the same and the creation of different rights and obligations can result in different GST implications. However, in relation to the standard form 'social infrastructure' PPP arrangement as outlined in this guide, we have assumed that:
- the relevant infrastructure project being built or developed by the government is not used to make input-taxed supplies
- the PPP entities that are party to the arrangements
- are registered for GST purposes
- make supplies in carrying on their enterprises and that those supplies are connected with the indirect tax zone, and
- Finance Co exceeds the financial acquisition threshold.
In the context of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) it is necessary to identify the relevant supplies being made. Figures 4 and 5 below identify the key supplies that will arise in a standard form PPP arrangement during the D&C and O&M phases. Note that Figures 4 and 5 represent the same transactions as outlined in the key transactions section of this guidance, but with an emphasis on the supplies that are pertinent for GST analysis.
The design and construction stage
The key supplies in the D&C phase for GST purposes are as follows:
- The D&C financiers supplying a loan to Finance Co, either up front, or in stages (such as through a facility arrangement). Finance Co will subsequently repay that loan to the D&C financiers over time.
- Finance Co supplying a loan to Project Trust. Project Trust will subsequently repay the loan to Finance Co over time.
- D&C subcontractors supply construction services to Project Trust.
- Project Trust supplying D&C services to the government.
Figure 4: Expected supplies from a standard form PPP during D&C phase
The O&M phase
The key supplies in the O&M phase pertinent for GST purposes are as follows:
- The government granting a licence to Project Trust for the right to access the Crown land for the operational and maintenance services to be undertaken on, for which it receives licence payments as consideration.
- Project Trust supplying ongoing operational and maintenance services to the government.
- The government assigning its right to receive the licence payments to Finance Co under the securitisation agreement (and noting that Finance Co pays the receivables purchase payment under this agreement).
- The O&M financiers providing long-term loans or facilities to Finance Co.
- Finance Co and Project Trust exchanging rights to make a payment based on Finance Co’s financing cost, being the equalisation swap.
Figure 5: Expected supplies from a standard form PPP during the O&M phase
GST treatment
- Funding arrangements between Finance Co and the third-party financiers
- Funding arrangement between Finance Co and Project trust
- Securitisation arrangement between the government and Finance Co
- Equalisation swap agreement between Finance Co and Project trust
- Attribution rules
- Valuation
- Administration matters
The typical GST treatment for the standard form PPP arrangement is expected to be as follows:
- The loans or other financial facilities with the external financiers, or by Finance Co to Project Trust, are input-taxed financial supplies by both the relevant lender and borrower.
- The securitisation agreement involving the supply of the right to receive cash payments under an agreement will also be an input-taxed financial supply by the government.
- The supplies by the D&C subcontractors to Project Trust are taxable supplies by those subcontractors. These supplies also constitute creditable acquisitions by Project Trust and Project Trust is entitled to claim the corresponding GST credits.
- The supply of D&C services by Project Trust to the government is a taxable supply. The construction payments paid by the government are consideration for that supply. As a result, GST is payable on the taxable supply by Project Trust, and the government can claim a corresponding GST credit.
- The licence over real property granted by the government is a taxable supply. Project Trust as the recipient makes a creditable acquisition from the government. As a result, GST is payable on the supply by the government and Project Trust will be entitled to claim a GST credit for this acquisition.
- Project Trust makes a taxable supply of the ongoing O&M of the project infrastructure to the government. The availability payments paid by the government are consideration for the taxable supply made by Project Trust. As a result, GST is payable on the taxable supply by Project Trust, and the government is entitled to claim the corresponding GST credit.
- The payments (made by either Finance Co or Project Trust to each other) that arise under the equalisation swap represent additional consideration for the initial supply of the rights in the equalisation swap. These supplies are input-taxed financial supplies as they are the supply of a derivative made by both Finance Co and Project Trust.
Funding arrangements between Finance Co and the third-party financiers
When Finance Co enters a debt funding arrangement (on either a short-term or long-term basis) with the third-party financiers, the ATO accepts that:
- Finance Co acquires an interest in a credit arrangement for consideration and makes an input-taxed financial supply
- Finance Co is not liable to pay GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
Funding arrangement between Finance Co and Project trust
When Finance Co enters a D&C loan with Project Trust, the ATO accepts the following:
- Finance Co provides an interest in a credit arrangement to Project Trust for consideration and has made an input-taxed financial supply to Project Trust.
- Finance Co is not liable to pay GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
- Project Trust, in acquiring an interest in a credit arrangement from Finance Co for consideration, also makes an input-taxed financial supply to Finance Co.
- While Project Trust is not liable to pay GST on this supply, it may be entitled to a GST credit on things acquired or imported to make the supply. This is due to Project Trust being able to enjoy the benefit of either the financial acquisition threshold or ‘borrowings rule’ concessions.
- Where Finance Co has a right against Project Trust to ‘on-charge’ the costs it incurs (as a principal) in borrowing funds from the external financiers, the payment of this amount by Project Trust to Finance Co may be further consideration for financial supplies depending on the documentation (see paragraphs 191–197 of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions).
Securitisation arrangement between the government and Finance Co
When the government enters into the securitisation agreement with Finance Co for the securitisation of the licence fee payments that Project Trust is required to make to the government, the ATO accepts the following:
- The government is not liable to pay GST on this securitisation supply and will be entitled to a GST credit for anything acquired or imported to make the supply, where it is able to take advantage of the financial acquisition threshold concession.
- Where the government is not able to access this concession, it will generally not be entitled to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
- Whether the government is entitled to GST credits on the acquisition of the asset being designed and constructed by Project Trust depends upon whether the acquisition is found (based on an objective assessment of the facts and surrounding circumstances) to have a sufficient connection to the financial supply that the government makes to Finance Co under the terms of the securitisation agreement.
- Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? provides our views on when an entity acquires or imports anything solely or partly for a creditable purpose. In this case, based on the facts and circumstances described, and the guidance provided by GSTR 2008/1, the ATO considers that the government would be entitled to a GST credit in respect of the asset as the acquisition does not have a sufficient connection to the financial supply that the government makes to Finance Co.
- Finance Co, in acquiring an interest in a debt from the government for consideration, also makes an input-taxed financial supply to the government.
- Finance Co is not liable to pay GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
- The assignment of the licence fee income stream does not change the underlying supply of the licence over real property that the government provides to Project Trust for these payments. The government retains the obligation to make this supply and remit any GST liability in respect of that supply. So long as the government continues to make the underlying supply, it will be entitled to claim GST credits on its acquisitions to make that supply in much the same manner as before the assignment occurred.
Equalisation swap agreement between Finance Co and Project trust
When Finance Co and Project Trust enter into an equalisation swap under the ISDA master agreement, the ATO considers the following to apply:
- Both parties exchange rights to make a payment dependent upon the value of Finance Co’s financing costs. This constitutes each party making an input-taxed financial supply of rights under the equalisation swap, which are derivatives, to the other for the consideration of the rights exchanged.
- For Finance Co, it is not liable for GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
- For Project Trust, it is similarly not liable for GST on this supply, but will be entitled to a GST credit on things acquired or imported to make the supply if it is able to take advantage of the financial acquisition threshold concession.
- No GST consequences arise from either party making a payment to the other in discharge of its equalisation swap obligation.
Attribution rules
The timing of an entity’s GST liabilities and GST credit entitlements is driven by the tax period (either monthly or quarterly) to which that obligation or entitlement is attributed.
In the context of a PPP, where a party to the PPP accounts for GST on a non-cash basis, a GST liability or a corresponding GST credit entitlement is attributable to the earliest tax period in which either:
- any of the consideration or payment (monetary or non-monetary) is received, or
- an invoice is issued.
An entity must also hold a tax invoice for the creditable acquisition when it claims the GST credit.
If the arrangement provides for the payment of an amount for the licence or the operating rights to be made on a progressive or periodic basis, then the rules in Division 156 of the GST Act about progressive and periodic supplies will apply to attribute any GST liability and GST credit on a progressive basis.
Understanding when a GST liability is triggered in these types of arrangements assists the developer to ensure that they have adequate cash flow for the life of the project.
Valuation
PPP arrangements can also raise issues regarding how to determine the appropriate market value of any non-monetary consideration provided.
We accept that parties dealing with each other at arm’s length can use a reasonable valuation method as agreed between them to determine the GST inclusive market value of any non-monetary consideration for supplies arising in the context of a PPP.
Administration matters
We maintain running balance accounts for various taxes. These taxpayer accounts record obligations, payments, and credit entitlements under tax laws.
In general, where the taxpayer is due a credit entitlement or refund of payment, this amount may be reduced due to offsetting. Use of the term ‘offsetting’ describes when an amount that we owe to the taxpayer is applied or allocated against another debt owed by the taxpayer, therefore reducing their refund.
For completeness, in circumstances where a taxpayer has no outstanding tax debts or other Commonwealth liabilities to offset, we are required to refund the credit to the taxpayer.
For more on this subject, see Practice Statement Law Administration PS LA 2011/21 Offsetting of refunds and credits against taxation and other debts.