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Ruling

Subject: GST and funding agreements

Question

Are you entitled to an input tax credit for the funding you provide to research participants?

Decision:

No, you are not entitled to an input tax credit for the funding you provide to research participants as the research participants are not making a taxable supply to you.

Relevant facts and circumstances

You offer grants to participants to develop their research capacity for a project. You are managing the grant program.

You are registered for goods and services tax (GST).

You enter into a grant funding agreement with research participants.

You stated that the grants are grants to develop research capacity and not to actually conduct the research. You receive progress and final reports, financial reports and details of the project are placed on your website.

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 Paragraph 11-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

Reasons for decision

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides:

11-5 What is a creditable acquisition?

You make a creditable acquisition if:

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

· the supply of the thing to you is a *taxable supply; and

· you provide, or are liable to provide, *consideration for the supply; and

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

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

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply. Section 9-5 of the GST Act defines a taxable supply and provides:

9-5 Taxable supplies

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 with Australian; 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 first positive element of section 9-5 of the GST Act to be satisfied is that the entity makes a supply for consideration.

Goods and Services Tax Ruling GSTR 2012/2 provides the Commissioner's views on when a financial assistance payment is consideration for a supply.

In GSTR 2012/2 the term 'financial assistance payment' is intended to encompass a wide range of payments. This includes payments:

· made to provide support or aid to the payee, and/or

· provided to support or aid in the implementation of government policy and initiatives.

Paragraph 99 of GSTR 2012/2 provides that for a payee to have a GST liability in relation to a financial assistance payment and a payer to be entitled to an input tax credit, it must be established that:

· the financial assistance payment is 'consideration', and

· there is a sufficient nexus between the payment and a supply.

Is it consideration?

Section 9-15 of the GST provides:

9-15 Consideration

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

The financial assistance payment is consideration as it is a payment of funding.

Is there a supply?

The meaning of supply is defined in section 9-10 of the GST Act and it provides:

9-10 Meaning of supply

(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).

Paragraphs 119 and 120 of GSTR 2012/2 provide:

An expectation is created between the parties and nothing more

119. A further example of where there may be no supply is where an agreement between the parties is not binding and creates expectations alone. Where the financial assistance payment is made in circumstances where a party expects that something will be done, and it does not involve a binding obligation or the supply of goods, services or some other thing, there is no supply. The mere expectation that an act or event will happen is not sufficient to establish a supply.

120. However, the payee might still make a supply in the absence of enforceable obligations, if there is something else such as goods, services or some other thing passing from the payee to the payer or a third party.

Nexus between financial assistance payment and supply

Paragraph 121 of GSTR 2012/2 provides factors one would consider in determining whether a payment is consideration and whether there is a supply for consideration. These factors are:

· the test whether there is a sufficient nexus between the supply and the payment made is an objective one,

· regard needs to be had to the true character of the transaction, and

· an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all the transactions entered into and the circumstances of the transactions.

Paragraphs 41 to 43 of GSTR 2012/2 provide an example where there is insufficient nexus and the provision of information is just to substantiate expenditure.

Example 6 - insufficient nexus - provision of information to substantiate expenditure

41. A business qualifies for a government financial assistance payment that is to promote the advancement of technology. For the purposes of the government agency's own internal assurances, the business is required to provide a report to the agency outlining how the funds were expended.

42. The payment is made to enable the business to improve its technological capability, not to obtain the report on how the financial assistance payment was expended. The financial assistance payment does not have a sufficient nexus with the supply of the report because the payment was not in connection with, in response to or for the inducement of the report.

43. Therefore, there are no GST consequences for either party.

You receive progress and final reports, financial reports and details of the project are placed on your website. However, the funding provided is not provided for the provision of these reports. As such, there is not a sufficient nexus between the funding you provide and the provision of the information by the research participants. Therefore, the research participants are not making a supply for consideration and therefore there is not a taxable supply being made under section 9-5 of the GST Act.

As such, you are not making a creditable acquisition under section 11-5 of the GST Act and therefore are not entitled to an input tax credit under section 11-20 of the GST Act.

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