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Ruling

Subject: GST and payments covered by an appropriation

Question

From 1 July 2012, do you make a creditable acquisition when you provide funding to the local government body for the administration of an approved program?

Answer

No, from 1 July 2012, you do not make a creditable acquisition when you provide funding to the local government body for the administration of an approved program.

Relevant facts and circumstances

· You are a state or territory government which is registered for GST.

· You provide funding to a local government body for its costs incurred in administering an approved program.

· This is a strict cost recovery program only, with no profit margin. The local government body only issues a tax invoice for the costs incurred in administering the program.

· A copy of a pre 1 July 2012 tax invoice was provided to the ATO. This tax invoice included an amount for GST but you have advised that you only require a private ruling with respect to payments made after 1 July 2012.

· These payments of funds to the local government body are authorised as appropriations as provided by an Appropriation Act.

· These payments of funds are not part of a National Health Reform Agreement.

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 Paragraph 9-15(3)(c)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-17

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-17(3)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-17(3)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-17(3)(b)

A New Tax System (Goods and Services Tax) Act 1999 Subparagraph 9-17(3)(b)(i)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-17(3)(c)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 184

Reasons for decision

Summary

No, there is no creditable acquisition made as the funding is not the provision of consideration in accordance with subsection 9-17(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

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

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

However, in some cases, a government entity will not meet the definition of 'entity' in section 184-1 of the GST Act but special rules apply to enable government entities, that are technically not entities, to register for GST.

Once registered for GST, a government entity, like other GST registered entities, will be liable for GST on the taxable supplies that it makes and entitled to input tax credits for its creditable acquisitions.

In relation to creditable acquisitions, section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

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

· you are registered or required to be registered for GST.

To be entitled to claim input tax credits all of the above requirements must be satisfied. One of these requirements is that the supply of the thing to you is a taxable supply.

Under section 9-5 of the GST Act, you make a taxable supply if, amongst other things, you make the supply for consideration.

The term 'consideration' is defined in section 9-15 of the GST Act and would include the funding provided by you to the local government body for the administration of the approved program.

However, with effect from 1 July 2012, Schedule 2 to the Tax and Superannuation Laws Amendment (2012 Measures No.1) Bill 2012 (the Bill) amended the GST Act to restore the policy intent that the non-commercial activities of government related entities are not subject to GST. This is achieved by treating payments which meet certain criteria as not being the provision of consideration.

Prior to the amendments, paragraph 9-15(3)(c) of the GST Act provided that a payment made by one government entity to another was not treated as consideration if it was 'specifically covered' by an appropriation, but the policy intent of this paragraph was diminished following the decision in TT-Line Company Pty Ltd v Commissioner of Taxation [2009] FCAFC 178.

Under the amendments in Schedule 2 to the Bill, subsection 9-15(3) of the GST Act was repealed and replaced with section 9-17 of the GST Act.

Of relevance to this case is subsection 9-17(3) of the GST Act which states:

(3) A payment is not the provision of consideration if:

(a) the payment is made by a *government related entity to another government related entity for making a supply; and

(b) the payment is:

(i) covered by an appropriation under an *Australian law; or

(ii) made under the National Health Reform Agreement agreed to by the Council of Australian Governments on 2 August 2011, as amended from time to time; or

(iii) made under another agreement entered into to implement the National Health Reform Agreement; and

(c) the payment is calculated on the basis that the sum of:

(i) the payment (including the amounts of any other such payments) relating to the supply; and

(ii) anything (including any payment for any act or forbearance) that the other government related entity receives from another entity in connection with, or in response to, or for the inducement of, the supply, or for any other related supply; does not exceed the supplier's anticipated or actual costs of making those supplies.

In relation to the first requirement of subsection 9-17(3) of the GST Act, it is clear that both you and the local government body would constitute government related entities and therefore, the payment of funds for the administration of the approved program would be a payment made by one government related entity to another government related entity. Thus, paragraph 9-17(3)(a) of the GST Act is satisfied.

In relation to the second requirement in subsection 9-17(3) of the GST Act, the facts show that the payment of funds for the administration of the approved program was not made under any National Health Reform Agreement. Therefore, it is necessary to determine if the payment is covered by an appropriation under an Australian law in accordance with subparagraph 9-17(3)(b)(i) of the GST Act.

Guidance on the requirements of subparagraph 9-17(3)(b)(i) of the GST Act is contained in the Explanatory Memorandum to the Bill (EM). In particular, clause 2.17 of the EM provides that the requirement in subparagraph 9-17(3)(b)(i) of the GST Act is met if the payment is made pursuant to an appropriation.

In addition, clause 2.18 of the EM highlights the fact that the payment no longer needs to be 'specifically covered' by an appropriation under an Australian law as the term 'specifically' has been excluded from the amendments.

Following on from this, clauses 2.19 and 2.20 of the EM state:

2.19 The government related entity supplier does not need to be specified under the terms of the appropriation, either by name, or as part of a class of government related entities, for subparagraph 9-17(3)(b)(i) to be satisfied. Subparagraph 9-17(3)(b)(i) is satisfied where the terms of the appropriation state the purpose for which the funds are appropriated, rather than the entities to which the funds can be paid. A payment is therefore covered by an appropriation for the purposes of subparagraph 9-17(3)(b)(i), if the terms of the appropriation authorise the payment to be made.

2.20 Furthermore, the exception can apply where the terms of the appropriation under which the payment is made do not confine the payment to government related entities, either by name or to a class of government related entities. Accordingly, a payment is covered by an appropriation where the terms of the appropriation authorise payments to be made to both government related entities and non-government related entities.

This means that to satisfy the requirement in subparagraph 9-17(3)(b)(i) of the GST Act the payment only needs to be 'covered' by an appropriation under an Australian law rather than being 'specifically covered'.

An 'appropriation under an Australian law' means an authorisation to spend money, by a statute of the Commonwealth, a state or a territory, or by delegation legislation. In other words, a payment is covered by an appropriation under an Australian law if it is authorised to be paid under that law. However, an appropriation is not in itself a payment; it is the legislative authorisation for making a payment.

In this case, you have advised that the funding provided to the local government body for its administration of an approved program is authorised under an Appropriation Act.

This appropriation is a statute of the government which authorises the payment of funds. Therefore, as the authorisation for the payment of these funds is by way of a statute of the Australian government, the payment is 'covered' by an appropriation under an Australian law in accordance with subparagraph 9-17(3)(b)(i) of the GST Act.

Furthermore, the third requirement of subsection 9-17(3) of the GST Act is satisfied as the payment of funds from you to the local government body does not exceed the actual costs for the delivery of the program. That is, it is a strict cost recovery program only with no profit margin and the local government body only issues a tax invoice for the costs incurred in administering the program.

Therefore, as all of the requirements of subsection 9-17(3) of the GST Act are satisfied the funding provided by you to the local government body is not consideration for a supply. Accordingly, no taxable supply has been made, so consequently you are not making a creditable acquisition when you provide funding to the local government body for the administration of the approved program.

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