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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012432561594

Ruling

Subject: GST and financial assistance payments

Question

Are the funds that you receive under a program consideration for a taxable supply?

Answer

No, the funds that you receive under a program are not consideration for a taxable supply.

Relevant facts and circumstances

You are registered for GST and one of your roles is the distribution of funds under a program.

To be eligible to participate in the program all parties must satisfy eligibility criteria and be approved.

You entered into an agreement with a government entity in respect of the program.

The agreement sets out the funds to be paid under the program and provides that you must hold the funds on trust for the government entity until the funds are paid to another entity and that the funds must be held in a separate bank account.

Any interest earned on the funds forms part of the funds and must be returned unless you pay out the funds to other entities or use the funds for meeting your reasonable costs in carrying out your obligations under the agreement.

You have a number of obligations under the agreement including that, to be paid the funds the other entity must also be approved by the government entity and have entered into a service agreement with you. You have entered into service agreements with several other entities.

The government entity has not entered into any agreements with the other entities.

To date, none of the interest received has been applied to cover your administration or operating costs nor will it be in the future. You receive a separate funding payment to cover your operating 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

Reasons for decision

Summary

The funds received by you under the program are not consideration for a taxable supply because there is not sufficient nexus between these funds and any supply made by you to the government entity.

Detailed reasoning

In essence, for a payment to be consideration for a taxable supply the payment must be consideration for a supply that is a taxable supply. In other words, all of the requirements for a taxable supply must be met.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

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

The first requirement to be satisfied in section 9-5 of the GST Act is that there is a supply for consideration.

The term 'supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes:

In your role you receive funds from the government entity under the program for distribution to other entities that you have entered into service agreements with.

Guidance on the application of GST to financial assistance payments is now contained in Goods and Services Tax Ruling GSTR 2012/2 which replaced Goods and Services Tax Ruling GSTR 2000/11. GSTR 2012/2 takes into account recent Australian case law on GST and provides further explanation and clarification of the GST law in respect of financial assistance payments.

As stated in paragraph 15 of GSTR 2012/2:

This means that the GST treatment of financial assistance payments depends primarily on whether the payments represent consideration that has the relevant connection or nexus with a supply.

The facts in this case show that you have entered into an agreement to undertake a number of obligations such as, to distribute the funds provided under the program to the other entities.

In general terms, you have an overall obligation to assist the government entity to administer the program for those other entities that you have entered into a service agreement with. In addition, the agreement lists a number of specific obligations that you have agreed to undertake in order to fulfil this overall obligation.

Therefore, in undertaking these obligations you are providing a service to the government entity which is a supply for GST purposes. In addition, as the obligations in the agreement are more than just 'mere expectations' your entry into these obligations would also be a supply for GST purposes.

As there is a supply by you to the government entity, it is necessary to determine if the funds received by you under the program constitute 'consideration'.

The term 'consideration' is defined in section 9-15 of the GST Act to include any payment. It also extends beyond payments to include such things as acts and forbearances.

In the context of financial assistance payments, GSTR 2012/2 explains at paragraph 5 that financial assistance payments includes payments provided to support or aid in the implementation of government policy and initiatives.

Therefore, the funds received by you under the program would constitute consideration for the purposes of section 9-15 of the GST Act.

However, it is not sufficient that there just be a 'supply' and 'consideration'. To satisfy the first requirement of section 9-5 of the GST Act, the supply must be made for consideration. This means that there must be a sufficient nexus between the supply and the consideration.

In this case, you have entered into an agreement to receive funds that will be on-forwarded to the other entities. Under the agreement you are required to hold the funds, in a separate bank account, on trust for the government entity until the funds are paid to the other entities.

In addition, while the agreement allows you to use the interest earned on the funds for meeting your reasonable costs, you have advised that no interest currently received by you has been applied in this manner nor will it be in the future. You further advised that you receive a separate funding payment from the government entity to cover your operating expenses.

As the funds are not being applied for your own use it is considered that you are not making a supply to the government entity for which the funds under the program is consideration. In other words, there is not a sufficient nexus between any supply that you make to the government entity and the funds that you receive under the program for on-forwarding to the other entities. Rather, your role is more in the nature of a conduit for the payment of funds between the government entity and the other entities.

Therefore, the funds received by you under the program are not consideration for any supply that you make to the government entity. As there is no supply for consideration being made, the first requirement of section 9-5 of the GST Act is not satisfied and consequently, the funding arrangement between you and the government entity cannot be a taxable supply.

Accordingly, the funds received by you under the program are not consideration for a taxable supply and as such, you are not required to remit GST to the ATO in respect of these funds.

Additional Information

Please note, if you do apply some of the interest received for your own purposes, as allowed under the agreement, the interest applied will have a sufficient nexus with the supply that you make to the government entity to satisfy the first requirement of section 9-5 of the GST Act (a supply for consideration). Therefore, where the other requirements of section 9-5 of the GST Act are satisfied the interest applied will be consideration for a taxable supply and thus, subject to GST.

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