Edited version of private ruling

Authorisation Number: 1011478547799

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Ruling

Subject: Reimbursements and GST Free acquisitions

Issue1

Question

Are reimbursements by you under a contract consideration for creditable acquisitions?

Answer

Yes.

Issue 2

Question

Do you make a creditable acquisition where a supply to you includes things that were GST-free acquisitions to the supplier?

Answer

Yes.

Issue 3

Question

If answer to the above question is 'Yes', do you need to review past payments to include an additional amount for the supplier's GST liabilities?

Answer

Unable to rule.

Relevant facts and circumstances

You administer a fund which is used deliver services to participants through service providing organisations.

Organisations are contracted by the Australian Government to deliver the services. They are selected through a competitive public tender process.

A legal document outlines the contractual arrangement between you and the organisations. This document incorporates guidelines for the organisations to assist targeted participants to obtain particular skills and also outlines funding arrangements.

Organisations are required to carry out the services efficiently and effectively in a manner which meets the objectives, so as to achieve an optimum performance when measured against key performance indicators and to your satisfaction.

Organisations are required to provide a tailored approach based on the individual circumstances of the participants.

Acquisitions made by Organisations are reimbursed by you. Acquisitions which are subsequently reimbursed by you can include GST-free acquisitions.

Your policy is that whilst Organisations should not profit from the transaction, they should not be left 'out of pocket' in respect of reimbursed expenses.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Issue 1

Question 1:

Are reimbursements by Entity Q consideration for creditable acquisitions made from Entity B?

Summary:

Yes. The reimbursements by Entity Q are consideration for creditable acquisitions made from Entity B.

Detailed reasoning

Section 11-5 of the GST Act provides that you make a creditable acquisition where the supply to you is a taxable supply, you provide consideration for the supply, your acquisition is for a creditable purpose and you are registered for GST. Accordingly, it is first necessary to consider whether Entity B makes taxable supplies to Entity Q.

A supply is a taxable supply if all the conditions under section 9-5 of the GST Act are satisfied. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you*carry on; and

· the supply is *connected to Australia; and

· you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act.)

Subsection 9-10(1) of the GST Act defines supply as any form of supply whatsoever. 

The breadth of 'supply' is illustrated by subsection 9-10(2) which states that without limiting subsection (1), supply includes any of:

a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a *financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Entity Q has entered contractual arrangements with Entity B to provide services to participants. The contractual arrangements provide detailed guidance and directions and list performance standards. We are satisfied that services and/or obligations are supplied by Entity B to Entity Q. These supplies are made for consideration.

The Commissioner has released a public ruling GSTR 2000/11 that provides advice on how GST applies to payments of financial assistance and funding within both the public and private sectors. The ruling refers to payments of financial assistance and funding as 'grants'.

One entity may provide financial assistance to another by means of direct grants, contributions, subsidies, co-payments and similar means. Both government and private organisations make such payments, sometimes referred to as transfer payments, for many reasons. These range from money given out by a charity for food or clothing to major government-funded projects to the organisations as part of the flow of such funding from consolidated revenue funds to consumers.

In GSTR 2000/11 the terms 'grantor' is used to refer to the entity that makes a grant and 'grantee' refers to the entity to which a grant is made. With respect to the supply of obligations, GSTR 2000/11 states at paragraphs 32 and 33: 

32. It is common for a grantor and grantee to enter into a grant agreement which establishes rights and obligations between the parties. Often the grant agreement will provide for the grantee to be obliged to make supplies to third parties, rather than the grantor. That obligation to make supplies to others may itself be a supply to the grantor.

33. 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.

Further, paragraph 82 provides:

82. Where the grant involves a supply of only a right or obligation, there needs to be some binding commitment supplied by the grantee which goes to the substance of the grant transaction. In determining what the substance of the transaction is where the transaction is the exchange of a grant for a right or obligation, the key consideration will be the object or purpose which the grant is intended to achieve. Things supplied as part of such a grant agreement that are merely incidental to the purpose for which the grant is made will not be supplies for which the grant is consideration.

Entity B makes a supply of services to Entity Q for consideration under the contractual arrangements. Paragraph 9-5(a) of the GST Act is satisfied. Where the remaining elements of section 9-5 are satisfied, Entity B is making taxable supplies to Entity Q, and has an obligation to remit GST.

The Commissioner has also released a public ruling GSTR 2006/9 that considers the meaning of the term 'supply'. GSTR 2006/9 addresses the GST implications of multi-party arrangements, commonly referred to as "tripartite arrangements". Under typical tripartite arrangements, a supply is made to one entity but provided to another entity; alternatively a supply is made and provided to one entity while the consideration is paid by a third entity.

To determine the GST consequences of a tripartite arrangement requires identifying the entity making a supply, the recipient of the supply, any consideration and its nexus with the supply.

GSTR 2006/9 states that where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation along with supporting documents and the surrounding facts is the logical starting point in determining the supplies that have been made.

The contractual arrangements between Entity Q and Entity B are consistent with Proposition 13 of GSTR 2006/9: where A has an agreement with B for B to provide a supply to C; there is a supply made by B to A (contractual flow) that B provides to C (actual flow).

Paragraphs 131 to 132 of GSTR 2006/9 explain the words 'made' and 'provide':

131. 'Made' in the context of 'a supply made' takes its meaning from the definition of recipient in section 195-1:

recipient, in relation to a supply, means the entity to which the supply was made.

132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided).

Entity Q is the recipient of the taxable supplies made by Entity B and in return Entity Q provides consideration.

A reimbursement of costs incurred by Entity B pursuant to the contractual clauses constitutes consideration provided by Entity Q for the supplies made by Entity B. Where the supplies made by Entity B are taxable supplies, and the remaining requirements of a creditable acquisition are satisfied, input tax credits are available to Entity Q.

Issue 2

Question:

Does Entity Q make a creditable acquisition where Entity B's supply to Entity Q includes things that were GST-free acquisitions to Entity B?

Summary

Yes, Entity Q makes a creditable acquisition where Entity B's supply to Entity Q includes things that were GST-free acquisitions to Entity B.

Detailed reasoning

As explained in issue 1 above, Entity B makes taxable supplies to Entity Q, the recipient of the service, under the contractual arrangement between them. Reimbursements by Entity Q in respect of acquisitions made by Entity B is consideration for taxable supplies made by the Entity B.

Entity B providers may make GST-free acquisitions to enable them to meet their contractual obligations with Entity Q. The supply made to Entity Q is a different supply to the things necessarily acquired by Entity B Providers in meeting those obligations.

The GST- free status of the acquisitions made by the Entity B providers does not affect their contractual arrangements with Entity Q. When Entity B providers seek reimbursement from Entity Q, the reimbursement constitutes consideration for a taxable supply made to Entity Q in the circumstances discussed in issue one above. Entity Q's entitlement to input tax credits is not determined by the characterisation of any supply (GST-free, taxable or otherwise) made by a third party to Entity B.

Issue 3

Question 1

If answer to the above question is 'Yes', does Entity Q need to review past payments to Entity B providers to include an additional amount for providers' GST liabilities?

Summary

This question does not directly concern application of the GST Act.

Detailed reasoning

As the query pertains to Entity Q's contractual obligations rather than the application of the GST Act we are unable to specifically address this question. However, we provide the following general advice:

The GST Act provides that the price of a taxable supply includes GST. This is so regardless of whether a supplier specifically added a GST component. A GST liability for a supplier and input tax credit entitlement for an acquirer will therefore arise in respect of taxable supplies and creditable acquisitions in circumstances where a taxable supply was inadvertently treated as non taxable.

If Entity Q has made mistakes in its activity statements in respect of past GST obligations or input tax credit entitlements it should rectify these.

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