Edited version of private ruling

Authorisation Number: 1011833150603

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Ruling

Subject: GST and registration

Question

Are you required to be registered for GST?

Answer: Yes.

Relevant facts and circumstances

You are carrying on a specified business.

You were registered for GST for many years until you decided to deregister as your income was below the registration turnover threshold of $75,000. Your gross income for the last financial year was less than $75,000. At present, your current GST turnover is less than $75,000.

You applied and were offered a grant by a specified entity (the grantor) under a specified project (the project).

You have provided a copy of the agreement between you and the grantor.

The agreement provides the following background to the project:

· The grantor makes funds available to certain entities (grantees) through the project. The project is funded through a specified program with specified aims.

· It is a condition of the funding for the project that the grantees will transfer a specified right (the right) to a specified entity upon the execution of the agreement.

· The grantor will fund the grantee to undertake certain works (the works) as described in the agreement.

The transferred right attracts a grant at a specified set rate.

Under the agreement, you have agreed to carry out the works and the grantor has agreed to pay the funding to you in accordance with the terms and conditions of the agreement.

Under the agreement, you have agreed to transfer the right in return for a specified amount of money (funding) to finance mutually agreed works. You have been requested to submit invoices for the GST inclusive amount of the funding.

Pursuant to the agreement, you have agreed to carry out the works. The agreement defines the term works. The definition of works includes the permanent transfer of the right to the specified entity.

The conditions of the payment of the grant are outlined in the agreement, which include:

(a) you accepting the offer of funding under the project

(b) permanently transferring the right to the specified entity within a specified time, and

(c) carrying out the works.

There is nothing in the agreement that indicates that you will receive any further payment. You confirmed that no other consideration is paid to you for the transfer of the right.

The agreement outlines the milestones and the payment schedule. A significant portion of the funding will be paid to you upon transfer of the right and entering into the agreement.

According to the agreement, you are also committed to contribute a specified sum of money towards this project.

The agreement provides that the grantor can end the agreement early for its convenience. You may also terminate or vary the agreement.

The agreement provides that, where the agreement is ended early, you must repay the grantor all amounts previously paid other than those amounts that you have spent or committed legally in accordance with the agreement.

The agreement provides that you may only use the funding specifically for the works as outlined in the agreement.

The agreement provides that you must return any unspent funding to the grantor unless the grantor gives approval for you to spend the funding on a variation to the works.

The agreement does not create an employment relationship between the grantor and you.

The agreement provides that you must keep full and accurate records of the conduct and accounting of the works. You must provide specified reports to the grantor. The agreement sets out the minimum reporting requirements associated with the project. These include keeping before, during and after photos of works, diary record of work undertaken, receipts, records of expenditure and a short summary of the works.

The agreement provides that the grantor owns the intellectual property rights in works material (as defined in the agreement).

The agreement provides that where the grantee is registered for GST the grantor will pay an additional amount to the grantee to cover the GST that the grantee has to pay on the taxable supplies that it makes to the grantor.

You acquired the right many years ago. You paid consideration for the right when you acquired it.

The right that you are transferring under the agreement to the specified entity is tradable on the market. The current market value of the right is around $X.

The transfer of the right will take place in the next financial year and the payment will also be received at that time.

You stated that if you are required to be registered for this once only transaction it is more likely that you will deregister in the subsequent tax period.

The grantor is registered for GST.

Reasons for decision

Summary

You are required to be registered for GST as your GST turnover meets the registration turnover threshold.

Detailed reasoning

Registration

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

(* denotes a term defined in section 195-1 of the GST Act)

Whether you are carrying on an enterprise - paragraph 23-5(a)

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, among other things, an activity, or series of activities, done in the form of a business (paragraph 9-20(1)(a) of the GST Act).

You advised that you are carrying on a specified business. Therefore you satisfy the requirements of paragraph 23-5(a) of the GST Act.

Whether your GST turnover meets the registration turnover threshold - paragraph 23-5(b)

Under subsection 188-10(1) of the GST Act, you have a GST turnover that meets the registration turnover threshold if:

(a) your current GST turnover is $75,000 or more, and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or

(b) your projected GST turnover is $75,000 or more.

Subsection 188-15(1) of the GST Act provides that your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Subsection 188-20(1) of the GST Act provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

However, sections 188-15 and 188-20 of the GST Act provide that the following supplies are excluded from the calculation of both current and projected GST turnovers:

· supplies that are input taxed

· supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act)

· supplies that are not made in connection with an enterprise that you carry on

· supplies that are not connected with Australia

· supplies that are connected with Australia because of paragraph 9-25(5)(c) of the GST Act

· supplies (other than those mentioned in the immediately preceding two dot points) of a right or option to use commercial accommodation in Australia where the supplies are not made in Australia and are made through an enterprise that the supplier does not carry on in Australia, and

· supplies made from one member of a GST group to another member of that GST group.

Additionally, section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

(a) by way of transfer of ownership of a capital asset, or

(b) solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Whether your current GST turnover meets the registration turnover threshold

Currently you are not registered for GST and advised that your current GST turnover is less than $75,000. Therefore, your current GST turnover does not meet the registration turnover threshold.

What is left to determine is whether your projected GST turnover is $75,000 or more in order to establish if you are required to be registered for GST.

Whether your projected GST turnover meets the registration turnover threshold

In order to determine whether your projected GST turnover is $75,000 or more we need to examine whether the grant paid by the grantor is consideration for a supply or supplies that you will make to the grantor and whether the values of these supplies are included when calculating your projected GST turnover.

Supply is defined in section 9-10 of the GST Act and is intended to encompass supplies as widely as possible. This section states, in part:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) 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).

Goods and Services Tax Ruling GSTR 2000/11 deals with the application of the GST to grants of financial assistance and funding.

Paragraph 15 of GSTR 2000/11 states:

15. Essentially, a supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else which is reflected in an agreement by one party to do something for another.

Paragraphs 33 and 34 of GSTR 2000/11 deal with supplies of rights and obligations and state:

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.

34. Examples of arrangements that will indicate an agreement binds the parties include:

· a contract, such as a purchaser-provider agreement;

· a provision providing that the money granted must be repaid in specified circumstances;

· a guarantee or lien over property of the grantee; or

· an agreement such as a deed that is enforceable on its own terms even without specific remedies being provided for in the event of a breach.

In your case, the agreement specifies the rights and obligations of both parties and includes a schedule of milestones that you need to meet to receive the funding. Under the agreement, you have undertaken to permanently transfer the right to the grantor and to carry out the works within a specified time in return for the funding. The agreement is binding on you and the grantor. The agreement provides that if the works are not carried out you will have to refund the money.

The grant is paid for a specified purpose. Under the agreement you are making the following supplies to the grantor:

· surrender of the right, and

· entry into an obligation to use the funding on the works.

The funding approximates the cost of the works. The grant is neither based on nor increased to take into account the commercial value of the right.

The Agreement provides that you agree to carry out the works and the grantor agrees to pay the funding. We consider that this is the essence of the arrangement.

You are also required to provide documentary evidence of the works such as records of expenditure, photographic records of works etc to the grantor.

While the objective of the grant project is to obtain the right to achieve specified outcomes, from your perspective, the supply is an undertaking which has the overall effect of restructuring your enterprise to make it more efficient. While the right is surrendered, this loss of right is (probably more than) offset by the efficiency measures (the value of which is significantly greater than the market value of the right). It is reasonable to conclude that the net effect of the loss of the right and efficiency gains does not result in the diminution of your enterprise's productive capability. The net effect is likely to be an increase in the productive capacity/improved value.

When viewing the totality of the arrangement we do not consider that the appropriate characterisation of the supply is that of (a part of) the business profit yielding structure. The reality is that the funding/works improves the profit yielding structure. Your purpose is to enable the works to be undertaken. These works supersede the right foregone. The supply is the fulfilment or performance of the obligation to do something with the granted funds in accordance with GSTR 2000/11. This is further evidenced/supported by the obligation to expend all of the grant money.

There is a nexus between the supplies that you make to the grantor and the funding that you receive from the grantor. That is you are making supplies for consideration to the grantor when you transfer the right and enter into an obligation to carry out the works in return for the funding. Furthermore, you make these supplies in the course or furtherance of your enterprise.

The exclusions specified in section 188-20 of the GST Act do not apply to the supplies that you make to the grantor under the agreement. Accordingly, the value of these supplies are not disregarded under section 188-20 when working out your projected GST turnover.

Additionally, as stated above the funding is a financial assistance that allows your business to restructure to be more efficient. The funding is not consideration that is wholly or primarily for the supply of a capital asset (the right). Accordingly, the supplies that you make to the grantor are not excluded from your projected GST turnover under paragraph 188-25(a) of the GST Act.

The supplies that you make to the grantor are also not excluded from your projected GST turnover pursuant to paragraph 188-25(b) of the GST Act. This is because the supplies that you make to the grantor are not solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Accordingly, the value of the supplies that you make to the grantor is included when calculating your projected GST turnover. As your projected GST turnover, which includes the funding, is $75,000 or more you meet the requirements of paragraph 23-5(b) of the GST Act. You are therefore required to be registered for GST.

When you must apply for GST registration

Section 25-1 of the GST Act provides that an entity that is required to be registered for GST must apply for GST registration within 21 days of becoming required to do so.

Accordingly, as your projected GST turnover meets the registration turnover threshold of $75,000, you need to register for GST and backdate the date of effect of your registration to the day that your projected GST turnover met the registration turnover threshold.

GST liability

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

Section 9-5 of The GST Act states:

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 a *taxable supply to the extent that it is *GST-free or *input taxed.

As the supplies that you make to the grantor meet all the requirements of section 9-5 of the GST Act, you are liable to pay an amount equal to 1/11 of the total funding that you receive from the grantor as GST.

Entitlement to input tax credits

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Subsection 11-15(1) of the GST Act states that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, pursuant to subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

(b) the acquisition is of a private or domestic nature.

You will be entitled to claim an in put tax credit for any creditable acquisition that you make. Generally, you must hold a valid tax invoice when you claim the input tax credits.

Cancelling GST registration

You stated that if you are required to be registered for this once only transaction, it is more likely that you will deregister in the subsequent tax period.

Under section 25-55 of the GST Act, the Commissioner must cancel the GST registration of an entity if:

· the entity applies for cancellation of its registration in the approved form

· at the time of application the entity is registered for GST for at least 12 months, and

· the Commissioner is satisfied that the entity is not required to be registered for GST.

Under section 25-57 of the GST Act the Commissioner has a discretion to cancel an entity's GST registration before the 12 months have expired. Section 25-57 of the GST Act states:

(1) The Commissioner may cancel your *registration if:

(b) less than 12 months after being registered, you apply for cancellation of registration in the *approved form; and

(c) the Commissioner is satisfied that you are not *required to be registered.

(2) In considering your application, the Commissioner may have regard to:

(a) how long you have been *registered; and

(b) whether you have previously been registered; and

(c) any other relevant matters.

(3) The Commissioner must notify you of any decision he or she makes in relation to you under this section. If the Commissioner decides to cancel your registration, the notice must specify the date of effect of the cancellation

Accordingly, once you are no longer required to be registered for GST you can request the Commissioner to exercise his discretion under section 25-57 of the GST Act to allow you to cancel your GST registration.

Adjustments when leaving the GST system

Subsection 138-5(1) of the GST Act provides that an entity has an increasing adjustment if:

(a) its GST registration is cancelled, and

(b) immediately before the cancellation takes effect, its assets include anything in respect of which the entity was, or is, entitled to an input tax credit.

Division 138 of the GST Act applies in relation to each item that is included in the assets of an entity immediately before the cancellation of its registration takes effect.

The reason for the adjustment is that the assets are being taken out of the GST system. As the assets are not being used in the GST system, there is no entitlement to an input tax credit for those assets.

However, an entity will not have an adjustment in respect of a thing if there was one or more adjustment periods for the thing acquired and the last of those adjustment periods has ended before the cancellation of registration takes effect.

The amount of the adjustment for each thing referred to in paragraph 138-5(1)(b) of the GST Act is calculated using the formula provided in subsection 138-5(2) of the GST Act as follows:

1/11 x actual application of the thing x applicable value

Where the 'applicable value' is the lesser of:

· the GST-inclusive market value of the thing immediately before the cancellation takes effect, or

· if the entity was, or is, entitled to an input tax credit for acquiring the thing - the amount of the consideration that it provided, or was liable to provide, for its acquisition of the thing, but only if the amount is less that that value.

Accordingly, the 'applicable value' is the lesser of the cost and the GST-inclusive market value immediately before the cancellation. The adjustment recognises that some of the assets used in the enterprise may have lost value. In effect, the value represents usage in the enterprise while the asset was in the GST system. The adjustment allows an input tax credit for the value used in the enterprise for a creditable purpose, and recoups the difference. If the amount of consideration provided for acquiring the asset is less than its GST-inclusive market value (for example, where the asset has appreciated over time), the applicable value is the amount of consideration provided.

The term 'actual application of a thing' has the meaning given by section 129-40 of the GST Act. This term refers to the degree that an item has been used for a creditable purpose in a period starting from the time it was acquired or imported, and finishing at the end of the adjustment period. The amount is expressed as a percentage.

In your case, the works are assets and improvements made to your enterprise. These assets and improvements are things included in your assets for the purposes of Division 138 of the GST Act.

For further information and practical examples of what to do when cancelling your GST registration, you may refer to the fact sheet entitled Leaving the GST system (NAT 14829) which is available on our website at www.ato.gov.au

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