Edited version of private ruling

Authorisation Number: 1011536212022

Subject: payment received from Commonwealth

Question:

Is a payment made by the Commonwealth Department pursuant to a Funding Agreement consideration for a taxable supply made by a State Department for the purposes of the GST Act?

Answer:

No, a payment made by the Commonwealth Department pursuant to a Funding Agreement is not consideration for a taxable supply made by a State Department for the purposes of the GST Act.

Relevant facts and circumstances:

Memorandum of Understanding:

The Funding Agreement discussed below refers (clause 1) to a Memorandum of Understanding between the Commonwealth Government (represented by the Commonwealth Department), the State Government, and the Association pursuant to which the parties agreed to establish the Board which is an unincorporated body funded solely by the Commonwealth government.

The Memorandum of Understanding provides that the parties agree to establish a new advisory committee (which, we understand, is the Board).

The Memorandum of Understanding provides:

The parties agree to establish administrative frameworks under which it is their intention that the current level of funding provided by the Commonwealth…would be maintained subject to appropriation. The Parties agree that funding will be provided direct to…Bodies through Funding Agreements.

Funding Agreement:

In 2010 the State Department entered into a Short Form Funding Agreement ('Funding Agreement') with the Commonwealth Department. The Funding Agreement comprises a letter with two Schedules attached to it.

Schedule 1 to the Funding Agreement deals with the funding to be provided by the Commonwealth Department.

Clause 1 in Schedule 1 provides that the State Department is being funded by the Commonwealth Department to provide support services for the Board on a cost recovery basis. The support services comprise specified activities (i.e. provide the services of a project officer; pay and reimburse the travel expenses of Board members; pay for Board activities such as consultations and forums; provide secretariat, administrative and research support of at least 15 hours per week).

Clause 2 in Schedule 1 to the Funding Agreement sets out the GST-inclusive amounts of funding for the 2009-10, and later financial years plus a schedule for payment of the funding. Schedule 1 also deals with other matters.

Clause 2.5 in Schedule 1 emphasises the 'cost recovery' basis of the payments to the State Department as the State Department is required to repay to the Commonwealth Department any amount of funding which is not expended in accordance with the Funding Agreement.

Schedule 2 to the Funding Agreement sets out the standard terms and conditions of the funding. Clause 2 in Schedule 2 provides that the State Department is required to expend the funding only for the Activity specified in the Funding Agreement and must separately identify the receipt and expenditure of the funding in its accounts.

Clause 4 in Schedule 2 deals with GST as follows:

4.2 Unless otherwise indicated, all consideration for any supply made under this Agreement is exclusive of any GST imposed on the supply.

4.3 The Parties have relied on GSTR 2006/11 (as it stands at the date of this Agreement) for Funding paid by [the Commonwealth Department] to [the State Department] not being consideration for any supply in return and for no GST being imposed by reference to that Funding.

4.4 If one party (supplier) makes a taxable supply to the other party (recipient) under this Agreement, the recipient on receipt of a tax invoice from the supplier must pay without setoff an additional amount to the supplier equal to the GST imposed on the supply in question.

4.5 No party may claim or retain from the other party any amount in relation to a supply made under this Agreement for which the first party can obtain an input tax credit or decreasing adjustment.

Ruling request:

The ruling request acknowledged that the Funding Agreement contained a clause which stated that the State Department and the Commonwealth Department relied on Goods and Services Tax Ruling GSTR 2006/11 (which deals with appropriations) 'and accordingly the grant is GST-free'.

However the State Department had reviewed the Funding Agreement and now considered that the State Department is making a taxable supply, being the undertaking to carry out activities/projects in accordance with the Funding Agreement.

The State Department had raised this issue with the Commonwealth Department and had received the following response (p. 2):

The Commonwealth has advised that its usual practice is to rely on the standing appropriation of s.30A within the Financial Management and Accountability Act 1997 and unless [the State department] receives a private ruling from the ATO advising that it is making a taxable supply to [the Commonwealth Department] it is unable to pay an amount inclusive of GST.

The State Department submitted that the requirements for a taxable supply as set out in section 9-5 of the GST Act were satisfied because the State Department had made a supply (i.e. entered into an obligation to deliver the services) in order to obtain the funding and the funding was 'consideration' within the meaning of the GST Act (as it was not excluded by paragraph 9-15(3)(b) of the GST Act - a gift made to a non-profit body) and Goods and Services Tax Ruling GSTR 2000/11 provides that a grant is sufficiently connected with the supply of entry into an obligation if the obligation goes to the purpose for which the grant is made.

Reasons for decision:

Summary:

We consider that the amounts paid under the Funding Agreement are covered by paragraph 9-15(3)(c) of the GST Act as those payments are of a funding nature, are paid by one government related entity (the Commonwealth Department) to another (the Board), and are specifically covered by an appropriation under an Australian law (under both the test in GSTR 2006/11 and in line with the decision of the Full Federal Court in TT Line Company v Commissioner of Taxation). Consequently the amounts paid under the Funding Agreement are not consideration and the State Department does not make a taxable supply.

Detailed reasoning:

Supply for consideration:

Section 9-5 of the GST Act provides:

You make a taxable supply if:

a) You make the supply for consideration; and

b) The supply is made in the course or furtherance of an enterprise that you carry on; and

c) The supply is connected with Australia; and

d) You are registered or required to be registered.

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

Subsection 9-15(1) of the GST Act provides that consideration includes any payment, act or forbearance in connection with, in response to, or for the inducement of a supply of anything. However paragraph 9-15(3)(c) of the GST Act provides that a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law.

The effect of paragraph 9-15(3)(c) is that if a payment made by the Commonwealth Department under the Funding Agreement was a payment made by one government related entity to another government related entity which was specifically covered by an appropriation under an Australian law then that payment cannot be consideration for any supply made by the State Department and the State Department cannot make a taxable supply in relation to that payment.

We note that the letter which comprises the first part of the Funding Agreement offered the State Department the funding 'subject to the Attached Schedule 2' and that the State Department accepted the funding on those terms by signing, dating and returning a copy of the Funding Agreement. Clause 4.3 in Schedule 2 provides:

4.3 The Parties have relied on GSTR 2006/11 (as it stands at the date of this Agreement) for Funding paid by [the Commonwealth Department] to [the State Department] not being consideration for any supply in return and for no GST being imposed by reference to that Funding.

Goods and Services Tax Ruling GSTR 2006/11 deals with the application of paragraph 9-15(3)(c) of the GST Act. By signing, dating and returning a copy of the Funding Agreement which included clause 4.3 of Schedule 2 the State Department agreed that the amounts paid under the Funding Agreement were covered by paragraph 9-15(3)(c) of the GST Act and were 'not…consideration for any supply'.

Policy intent of paragraph 9-15(3)(c):

GSTR 2006/11 states (Paras 15-16):

15. The policy intent behind [paragraph 9-15(3)(c)] can be found in the following statement in Tax Reform, Not a New Tax, A New Tax System:

The Government's intention would be to apply the GST to the commercial activities of all levels of government in the normal manner. However, there are constitutional limitations on subjecting some activities of government to the GST…The non-commercial activities of government will be outside the scope of the GST. For example, appropriations for general government activities will not be taxable, nor will grants from one level of government to another, as neither constitutes consideration for a supply.

16. [Paragraph 9-15(3)(c)] is intended to exclude funding payments, which are non-commercial in nature, from the operation of GST, while not excluding payments which represent fees for goods, services and similar things. This is reflected in paragraph 1.16 of the Senate Supplementary Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1999:

For example, if a State government makes an appropriation to a State Crown department, there would be no GST on this payment as it would be covered by new paragraph 9-15(3)(c). If the department makes a further payment to a State authority under the appropriation, there would be no GST on this payment. If the authority distributes the money to various registered community bodies and the community bodies have to use the money for particular purposes (that is, the payments are not unconditional gifts), the payments to the community bodies will be consideration for a supply, and hence will be taxable.

GSTR 2006/11 provides (Para 18) that one of the requirements of paragraph 9-15(3)(c) of the GST Act is that there must be an appropriation under an Australian law, that (Para 25) the dictionary definitions of 'appropriation' indicate that that term has both a general meaning and a 'government specific' meaning, and that (Para 25) the 'government specific' meaning is relevant for the purposes of paragraph 9-15(3)(c), i.e. that the payment must be specifically covered by 'an authorisation for the expenditure of money'.

Goods and Services Tax Ruling GSTR 2006/11 also provides (Para 29) that for an appropriation to be 'under an Australian law' there must be an authorisation for the expenditure of money by a statue of the Commonwealth, a State or a Territory, or by delegated legislation, in furtherance of a particular purpose.

Meaning of 'payment' in paragraph 9-15(3)(c):

GSTR 2006/11 then addresses the meaning of 'payment' in paragraph 9-15(3)(c) of the GST Act and states (Para 30) that paragraph 9-15(3)(c) is intended to apply to 'payments of a funding nature', i.e.

…the Commissioner is of the view that for a payment to come within paragraph 9-15(3)(c) the payment has to be of a funding nature and not commercial in character.

Goods and Services Tax Ruling GSTR 2006/11 then explains the test for determining whether a payment is of a funding nature (Paras 32 -26):

32. When considering if paragraph 9-15(3)(c) applies to the payment, the purpose of the payment will be integral in characterising the payment as being of a funding nature or otherwise.

33. Not all payments between government related entities will be of a funding nature.

34. Accordingly, an agency may be funded by the allocation of government money under the authority of an appropriation Act, but when the funds are expended on goods and services to further the agency's operations, that expenditure will not be of a funding nature whether paid to a government related entity or a non-government related entity. At this point paragraph 9-15(3)(c) no longer has application and the basic GST rules apply.

35. Therefore, once the funds are allocated to the particular government related entity to be used in the course of its operations, any payments using those funds by that particular government related entity may not be made as an allocation of government money under the law appropriating the funds. The use of those funds, that is, payments made with the funds, to meet the particular government related entity's expenditure in the course of its operations, will not be payments of a funding nature. Therefore, paragraph 9-15(3)(c) will not be met and the basic GST rules will apply.

36. This accords with the intention as given in the Senate Supplementary Explanatory Memorandum, as noted in paragraph 16 of this Ruling. That is, where the funding transfer from the department to the State authority is otherwise covered by paragraph 9-15(3)(c), but the use of those funds by the State authority is in its operations, such as payments to the community bodies for services, those payments are meant to be subject to the basic GST rules.

Applying this test, we consider that the payment made by the Commonwealth Department to the State Department is a payment of a funding nature as the funding is an allocation of government money to a government related entity (the Board) to be used in the course of the Board's operations and is not an expenditure of funds on goods and services. It is only when the State Department subsequently makes a payment for a purpose specified in Schedule 1 to the Funding Agreement (e.g. paying for a Board activity such as a consultation or a forum) that that payment is not of a funding nature and is not a 'payment' for the purposes of paragraph 9-15(3)(c) of the GST Act.

Payment made by a government related entity to another government related entity:

Paragraph 9-15(3)(c) requires that the payment must be made by a government related entity to another government related entity. 'Government related entity' is defined in section 195 of the GST Act by reference to the 'government entity' definition in section 41 of the A New Tax System (Australian Business Number) Act 1999 which includes:

(a) A Department of State of the Commonwealth

…

(d) a Department of State of a State or Territory

(e) an organisation that:

i. is not an entity; and

ii. 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

iii. 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 paragraph (a), (b), (c), or (d) or of another organisation of the kind described in this paragraph.

In our view the payment is made by a government related entity as it is made by a Department of State of the Commonwealth.

We consider that the payment is made to the Board, notwithstanding that the funds are held by the State Department before being disbursed in the manner specified in Schedule 1 to the Funding Agreement, i.e. to provide support services to the Board, pay travel expenses for Board members and pay for Board activities such as consultations and forums. The reasons for this are that clause x of the Memorandum of Understanding provides that the Commonwealth Department, the State Department and the Association will jointly administer the relevant program in the State, clause y of the Memorandum of Understanding provides that those parties agree that funding would be provided 'direct to Bodies through Funding Agreements', clause z in Schedule 1 of the Funding Agreement states that payments to the State Department are made on a 'cost recovery' basis and that the State Department is required to repay to the Commonwealth Department any amount of funding which is not expended in accordance with the Funding Agreement, and Schedule 2 to the Funding Agreement provides that the State Department must separately identify the receipt and expenditure of the funding in it's accounts. In our view the State Department simply manages and disburses the funding on the Board's behalf as part of the support it provides to the Board

In our view the Board falls within paragraph (e) of the 'government entity' definition. The Board calls itself a 'board' and the Memorandum of Understanding refers to the Board as a committee. Consequently the Board is unlikely to be an 'entity' as that term is defined in section 184 of the GST Act. The Board is established by a Commonwealth or State as the Commonwealth (represented by the Commonwealth Department) and the State Minister (acting through the State Department) are parties to the Memorandum of Understanding which established the Board. The Board can be separately identified by either the nature of its activities or its location.

For the reasons set out above we consider that payment of the funding is made by one government related entity to another government related entity.

Payment 'specifically covered' by an appropriation:

GSTR 2006/11 discusses the meaning of the requirement in paragraph 9-15(3)(c) of the GST Act that the payment is 'specifically covered' by an appropriation under an Australian law (Para 48):

A payment authorised by an appropriation is an expenditure of money authorised by a statute or by delegated legislation. For Parliament to authorise expenditure it needs to specify the amount allocated. The payment is made so that particular outcomes or other purposes desired by Parliament are achieved. Hence, to be specifically covered the following must be specified:

· the purpose of the payment; and

· the amount of the payment.

Goods and Services Tax Ruling GSTR 2006/11 acknowledges (Para 52) that the purpose and amount of a payment is generally not specified in an Appropriation Act (which generally refers to high level 'outcomes' which provide only a brief outline of funding arrangements) and that the amount and purpose of a payment must be specified in the appropriation Act and supporting documents (e.g. Budget Papers, Portfolio Budget Statements and Agency Budget Statements plus Ministerial media releases, statements or speeches related to the Budget, Budget documents prepared at agency level, and written agreements such as Funding Deeds, Service Level Agreements or Memoranda of Understanding between government related entities).

Certain material, together with the Funding Agreement appears to meet the requirement in GSTR 2006/11 (Para 52) that the purpose and amount of a payment must be specified in an Appropriation Act and supporting documents such as Portfolio Budget Statements and written agreements such as Funding Deeds in order for that payment to be 'specifically covered' by an appropriation.

Payment 'specifically covered' by an appropriation - GSTR 2006/11 as modified following the TT-Line decision:

GSTR 2006/11 is under review as a result the decision issued on 18 December 2009 by the Full Federal Court in TT Line Company v Commissioner of Taxation 2009 ATC 20-157 and refers to the ATO's Decision Impact Statement issued on 19 May 2010 in respect of that decision.

TT Line involved a payment made by the Commonwealth under the Bass Strait Passenger Vehicle Equalisation Scheme ('Bass Strait Scheme') which was aimed at reducing the cost of sea travel to Tasmania for eligible passengers.

At first instance (i.e. in the Federal Court - TT Line Co Pty Ltd v FCT 72 ATR 982), Stone J found (Para 17) that the Appropriation Act (No. 1) 2007-08 (Cth) appropriated $842 million to 'Transport and Regional Services', that the Schedule to that Act included 'Outcome 1: Fostering an efficient, sustainable, competitive, safe and secure transport system', and that the Portfolio Budget Statement listed the Bass Strait Scheme as an administrative program for Outcome 1. However Stone J noted that paragraph 9-15(3)(c) of the GST Act required the 'payment', not the Bass Strait Scheme, to be covered by an appropriation and required the payment to be 'specifically' covered by an appropriation (Paras 23-24):

I note, however, that the subsection, in referring to the payment that must be specifically covered, uses the definite article. It is the payment that is made to the government related entity that must be specifically covered. It is not sufficient for the payment to be consistent with a specified purpose. As the Commissioner submitted:

There is nothing in the [Bass Strait] Scheme that limits the recipient of a payment of a rebate to TT Line or any wider class of government related entities…

It is clear from the words of subsection (c) that it is not sufficient for payment merely to be made by one government related entity to another. In order for such a payment to be specifically covered by an appropriation it would, at the very least, be necessary for payments to be limited to government related entities. The fact that the Scheme allows for payment to a non-government related entity indicates that the appropriation is limited to a purpose not to a payee or class of payees. This is sufficient to dispose of the issue under s 9-15(3)(c) even if, as a matter of fact, no payments were made to non-government related entities.

TT Line unsuccessfully appealed to the Full Federal Court. There Edmonds J referred to Stone J's reasoning and to the ATO's submission that Stone J's decision was correct (Paras 55-56):

In the Commissioner's submission s. 9-15(3)(c) only applies where the purpose of the appropriation pursuant to which the payment is made is to appropriate money for payments specifically to government related entities. The circumstance that the recipient of the payment is a government related entity is not, on the Commissioner's argument, sufficient to attract the benefit of the provision if the appropriation, pursuant to which the payment is made, would permit payment to a non-government related entity, albeit for the same purpose…It is common ground that the appropriation in the present case would permit payment to a non-government related entity for the purposes of the Scheme.

The Commissioner submitted that such a construction is consistent with the overall intention of the GST legislation in its application to government and that the primary judge recognised this…According to the Commissioner, that intention was that the Commonwealth, State and local government and their instrumentalities should be subject to the GST Act is the same way as non-government organisations, but that appropriations for general government activities or grants from one level of government to another should be exempt from GST. The Commissioner submitted that s 9-15(3)(c) gives effect to this intention by creating a limited exception to the general subjection of government to GST which applies in the case of payments appropriated for the specific purpose of being made to government related entities. For this the Commissioner relied on Para 17 of the Intergovernmental Agreement which appears as Schedule 2 to the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (Cth) and the Explanatory Memorandum to the Bill which introduced s 9-15(3)(c) into the GST Act.

Edmonds J concluded that the policy intent behind paragraph 9-15(3)(c) of the GST Act supported construction of that provision set out by Stone J and contended for by the ATO (Paras 62-63):

Not without some hesitation, I think that the answer to this question lies in the policy underlying the application and scope of the GST, namely that, generally, it is to apply to government related entities , organisations and instrumentalities - Commonwealth, State, and local - in the same way as it does to non-government entities and the like…So understood, there is created as between government related entities and non-government related entities supplying the same services a 'level playing field'. A payment, pursuant to an appropriation, for the supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government related entity should be subject to the same tax treatment; in other words, as taxable supplies irrespective of the status of the supplier. On the other hand, the potentiality for discrimination between government related and non-government related entities does not exist where, by the terms of the appropriation, the services can only be supplied by a government related entity. The exclusion created by s 9-15(3)(c) is only intended to operate in this limited class of case; it is not intended to extend to payments, pursuant to an appropriation, for a supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government related entity (even if the appropriation is otherwise specific as to the amount and particular purpose) because that would discriminate in favour of the government related entity contrary to the general policy underlying the application and scope of the GST Act.

So understood, it is not a giant leap to adopt a construction of s 9-15(3)(c) which confines it to payments pursuant to an appropriation the terms of which specify the government related entity by name or, generically, to those entities having that status. That is the minimum specificity of coverage that is required to be found in the terms of the appropriation for the exclusion to apply; whether it is sufficient, is something with which I need not be concerned because clearly, in the present case, the minimum specificity of coverage is not met.

Perram J agreed with Edmonds J's reasons, referred (Para 66) to clause 17 of the 1998 Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations:

The Parties intend that the Commonwealth, States, Territories and local government and their statutory corporations and authorities will operate as if they were subject to the GST legislation. They will be entitled to register, will pay GST or make voluntary or notional payments where necessary and will be entitled to claim input tax credits in the same way as non-Government organizations. All such payments will be included in GST revenue.

and stated (Para 69):

The learned primary judge thought that 'specifically' should be interpreted to mean 'expressly' or 'explicitly' and that those words qualified the payment. The appellant, on the other hand, contended that all that is meant is that appropriation must be sufficiently specific to cover the payment claimed to attract GST. The trial judge's view is, with respect, more consistent with clause 17. This is for the positive reason that expenditure by way of specific appropriation is unlikely to resemble any expenditure which a non-government organisation might make and hence to fall outside what is contemplated by cl. 17. It is also for the negative reason identified by Emmett and Edmonds JJ that the appellant's position leaves non-government operators having to collect GST whilst exempting the appellant, an outcome inconsistent with the principle of equality underpinning cl. 17.

The ATO's Decision Impact Statement in respect of the Full Federal Court's decision in TT Line refers to the reasoning of Edmonds and Perram JJ:

Edmonds J., with whom Perram J agreed, found that paragraph 9-15(3)(c) should be interpreted by reference to the underlying policy that the GST is generally to apply to government related entities, organisations and instrumentalities - Commonwealth, State, and local - in the same way as it does to non-government entities. The exclusion created by paragraph 9-15(3)(c) is only intended to operate where, by the terms of the appropriation, the services can only be supplied by a government related entity. It is not intended to extend to payments, pursuant to an appropriation, for a supply of services which can, under the terms of the appropriation, be supplied by a government related entity or a non-government related entity (even if the appropriation is otherwise specific as to the amount and its particular purpose).

Tax Office view of decision:

…

While favourable to the Commissioner, the reasoning of the Court in relation to the interpretation of paragraph 9-15(3)(c) differs to how the Commissioner has expressed his views on this issue in GSTR 2006/11. The view expressed in GSTR 2006/11 is that for a payment to come within paragraph 9-15(30(c), the payment has to be of a funding nature and not commercial in character.

Implications for current Public rulings and Determinations:

As noted above, the Commissioner's views as set out in GSTR 2006/11 in relation to the application of paragraph 9-15(3)(c) are expressed in different terms to the reasoning of the Court. The application of the decision to Example 10 in GSTR 2006/11, specifically paragraphs 91 to 93, may lead to a different outcome to that expressed in this example. The Commissioner will review GSTR 2006/11 to ensure that it is consistent with the Court's reasoning.

Following the TT Line decisions and the Decision Impact Statement, in order for a payment by one government related entity to another government related entity to be 'specifically covered by an appropriation under an Australian law' there must be:

an authorisation for the expenditure of money by a statue of the Commonwealth, a State or a Territory, or by delegated legislation (or by reference to relevant supporting documents such as Ministerial statements, speeches, or media releases related to a budget, documents prepared at agency level which are related to an Appropriation Act, Funding Deeds, Service Level Agreements or Memoranda of Understanding between government related entities); and

that authorisation must specify the purpose of the payment and the amount of the payment; and

that authorisation must specify that the payment is to be made to one or more government related entities which are specified either by name or generically.

Applying these criteria to the present case, we consider that there is an authorisation under and Australian law for expenditure of money.

We also consider that the authorisation specifies the purpose and amount of the payment.

We also consider that the authorisation specifies that the payment must be paid to government related entities which are specified either by name or generically. As stated above, we consider that the payment is made to the Board. Thus, adopting Stone J's reasoning, the payment by the Commonwealth Department under the Funding Agreement is 'specifically covered' by an appropriation because that payment is made to the Board and such Boards are specified by name in the 'Program Expenses' table. Thus the payment is 'specifically covered' by an appropriation as that test has been modified following the TT Line decision.

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