Edited version of your private ruling

Authorisation Number: 1012506703035

Ruling

Subject: GST and payments made by one government related entity to another for acquisitions of services

Question

Is a recipient entity making creditable acquisitions of services from 1 July 2012 onwards when it makes payments for those acquisitions to the supplier entity?

Answer

No, the recipient entity is not making creditable acquisitions of services from 1 July 2012 onwards when it makes payments for those acquisitions to the supplier entity.

Relevant facts and circumstances

The recipient entity (you) is a department of a state government.

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

You executed an agreement in the form of a Memorandum of Understanding (MoU) with a supplier entity whereby, amongst other things, the supplier entity was to provide you with services.

Under the MoU, the supplier entity will charge you for the services purchased in accordance with the terms of the MoU.

All prices are exclusive of GST. Your obligation to pay the GST component of the consideration is subject to you receiving a valid tax invoice in respect of the supply at or before the time of payment.

The MoU declares that the supplier entity is a state body established under the relevant State law to provide services.

In accordance with the arrangement set out in the MoU the supplier entity has treated the supply of services to you as taxable supplies on which GST was payable.

The supplier entity issued you with tax invoices in relation to the supplies of services it has made to you.

You claimed input tax credits (ITCs) in relation to your acquisitions of services supplied by the supplier entity.

The payments you provided for the services always originated from funds appropriated under the relevant Appropriation Acts from which your general operation expenses are funded.

The supplier's payment calculation did not include any margins and the fees to you represent actual costs of labour, vendors and depreciation charges. The supplier entity 'trues up' with you annually and the make of costs is also represented in the schedule of the MoU agreement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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 9-17

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 11-25

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Australian Business Number) Act 1999 section 41

Taxation Administration Act 1953 Schedule 1 to subsection 105-65(1)

Reasons for decision

Summary

On the facts provided, the payments made by you to the supplier entity satisfy the requirements of paragraphs 9-17(3)(a),(b) and (c) of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act). That is;

· you are a government related entity and you made payments to the supplier entity who is also a government related entity in connection with supplies of services

· the payments made by you were covered by an appropriation under an Australian law namely the relevant Appropriation Acts, and

· the payments for the supply of services are calculated on the basis that the sum of the payment relating to the services and anything that the supplier receives from another entity in connection with the supply does not exceed the supplier's anticipated costs of making those supplies.

That being the case the payments made by you in connection with the supplies of services are not the provision of consideration.

Consequently, the supplies of services made to you from 1 July 2012 onwards were not taxable supplies under section 9-5 of the GST Act on which GST was payable. It follows that the acquisitions of services were not creditable acquisitions under section 11-5 of the GST Act and you were not and are not entitled to ITCs for those acquisitions under section 11-20 of the GST Act.

Detailed reasoning

Section 7-1 of the GST Act relevantly provides that ITCs arise on creditable acquisitions and that GST is payable on taxable supplies. Under section 11-20 of the GST Act an entity is entitled to ITCs for any creditable acquisition it makes.

An acquisition is a creditable acquisition under section 11-5 of the GST Act if:

· you acquire anything solely or partly for a creditable purpose (paragraph 11-5(a) of the GST Act)

· the supply of the thing to you is a taxable supply (paragraph 11-5(b) of the GST Act)

· you provide, or are liable to provide consideration for the supply (paragraph 11-5(c) of the GST Act), and

· you are registered or required to be registered for GST (paragraph 11-5(d) of the GST Act).

The meaning of 'acquisition' is given in section 11-10 of the GST Act. Subsection 11-10(1) of the GST Act states that an acquisition 'is any form of acquisition whatsoever'. Without limiting subsection 11-10(1) of the GST Act, subsection 11-10(2) of the GST Act provides that an acquisition includes:

· an acquisition of goods

· an acquisition of services

· a receipt of advice or information

· an acceptance of a grant, transfer, assignment or surrender of any right, and

· an acquisition of a right to require another person:

o to do anything

o to refrain from an act, or

o to tolerate an act or situation.

· or any combination of any 2 or more of the matters referred to in subsection 11-10(2) of the GST Act.

The services described in the MoU and acquired by you come within the definition of an acquisition under section 11-10 of the GST Act.

The meaning of 'supply' in section 9-10 of the GST Act is the corollary to the meaning of 'acquisition' in section 11-10 of the GST Act. Accordingly, the services described in the MoU acquired by you and made by the supplier entity come within the definition of an acquisition under section 11-10 of the GST Act and a supply under section 9-10 of the GST Act.

You are registered for GST and made payments to the supplier entity to acquire services in the course of your enterprise. The issue that arises under section 11-5 of the GST Act is whether the supplies of the services to you are taxable supplies.

A supply is a taxable supply under section 9-5 of the GST Act if, among other criteria not presently relevant, the supplier entity made the supply for consideration (paragraph 9-5(a) of the GST Act).

The term 'consideration' for a supply or acquisition is defined in section 195-1 of the GST Act as any consideration within the meaning given by section 9-15 of the GST Act in connection with the supply or acquisition.

Subsection 9-15(1) of the GST Act provides that consideration includes:

· any payment, or any act or forbearance, in connection with a supply of anything (paragraph 9-15(1)(a) of the GST Act), and

· any payment, or any act or forbearance, in response to or for the inducement of a supply of anything (paragraph 9-15(1)(b) of the GST Act).

In the present case the supply in question is the supply to you by the supplier entity of the services. The fees paid by you under the terms of the MoU were payments for the supply of those services. Those amounts paid by you were clearly a payment 'in connection with' the supply of the services.

Unless the exception in subsection 9-17(3) of the GST Act applies, the payments made by you would fall within the statutory definition of consideration under subsection 9-15(1) of the GST Act and would have the relevant connection with the supplies of services to satisfy the requirement of paragraph 9-5(a) of the GST Act.

Subsection 9-17(3) of the GST Act provides that a payment is not the provision of consideration if:

· the payment is made by one government related entity to another government related entity for making a supply (paragraph 9-17(3)(a) of the GST Act)

· the payment is (amongst other things) covered by an appropriation under an Australian law (paragraph 9-17(3)(b) of the GST Act), and

· the payment satisfies the non-commercial test (paragraph 9-17(3)(c) of the GST Act).

If the exception to the definition of consideration in subsection 9-17(3) of the GST Act is to apply, the first requirement is that the payments in question must have been made by one 'government related entity' to another 'government related entity' for making a supply.

The term 'government related entity' is defined in section 195-1 of the GST Act as:

· a government entity

· an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999 (ABN Act), or

· a local government body established by or under a State law or a Territory law.

Section 41 of the ABN Act defines a 'government entity' as:

· a Department of State of the Commonwealth

· a Department of the Parliament established under the Parliamentary Service Act 1999

· an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999

· a Department of State of a State or Territory

· an organisation, that:

o is not an entity

o 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

o 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 the first four dot points above or of another organisation of the kind described in this paragraph.

On the facts provided, both you and the supplier entity are government related entities for the purposes of applying subsection 9-17(3) of the GST Act.

Accordingly, the first requirement of subsection 9-17(3) of the GST Act is satisfied.

The second requirement of subsection 9-17(3) of the GST Act to consider, in your circumstances, is whether the payment is covered by an appropriation under an Australian law.

The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Act 2012 (EM) explains in paragraph 2.17 in Chapter 2 that the requirement that the payment must be covered by an appropriation under an Australian law is met if the payment is made pursuant to an appropriation.

Under paragraph 9-17(3)(b) of the GST Act the payment need not be 'specifically covered' by a appropriation under an Australian law, as was the case before 1 July 2012 under the former paragraph 9-15(3)(c) of the GST Act.

You advised that payments to cover your expenses including the services acquired always originate from funds appropriated under the relevant Appropriation Acts.

Accordingly, the payments you made to the supplier entity for the services are covered by an appropriation under an Australian law and as such, the second requirement of subsection 9-17(3) of the GST Act is satisfied.

The third requirement of subsection 9-17(3) of the GST Act (referred to as the non commercial test) to consider is whether the payment was calculated on the basis that the sum of:

· the payment (including the amounts of any other such payments) relating to the supply, and

· anything (including any payments 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.

The reference to 'anything' in the third requirement of subsection 9-17(3) of the GST Act ensures that things of a non monetary nature received by the government related entity supplier from another entity is taken into account in determining whether the sum of the payment and things received by the government related entity supplier in connection with the supply does not exceed the anticipated or actual costs of making the supply.

The EM explains at paragraphs 2.27 and 2.31 that:

2.27 Whether or not the amount of the payment exceeds the government related entity supplier's anticipated or actual costs of making the supply, or supplies, is determined at the time at which the amount to be paid is worked out rather than at the time of payment (if it is later). If the determination of the amount of the payment to be made takes place before the relevant supply, or supplies, are made, it will be necessary to base the calculation on the anticipated costs of making the supply, or supplies. The amount of the payment will commonly be calculated in consultation between the government related entity making the payment and the government related entity supplier. If the payment is calculated after the relevant supply, or supplies, are made, the calculation is based on the actual costs of making the supply, or supplies. Where the calculation is based on the anticipated costs of making the supply, or supplies, it is not necessary to subsequently determine the actual costs of making the supply, or supplies. …

2.31 In the context of these amendments, the concept of cost includes the government related entity supplier's direct and indirect costs of making the supply or supplies, but does not include a return on capital or concepts of costs which are measured based on opportunity cost or forgone revenue. An absorption costing methodology is an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies.

As noted at paragraph 2.25 of the EM, if the payment is made in instalments, paragraph 9-17(3)(c) of the GST Act requires the aggregate of the instalment payments for the supply to be tested against the anticipated or actual costs of making the supply or supplies. Instalment payments are not tested separately. It is therefore necessary to identify the total payment under the factual arrangement in applying the non-commercial test.

The EM at paragraph 2.31 refers to an absorption costing methodology as an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies.

The supplier entity's payment calculation did not include any margins and the fees to you represent actual costs of labour, vendors and depreciation charges. The supplier entity 'trues up' with you annually and the make of costs is also represented in the schedule of the MoU agreement.

As the amounts of the payments are calculated to equal the supplier entity's anticipated costs of providing the services the third requirement of subsection 9-17(3) of the GST Act is satisfied.

As all the requirements of subsection 9-17(3) of the GST Act are satisfied, the payments made by you in connection with the supplies and corresponding acquisitions of services are not the provision of consideration.

Consequently, the supplies of services made to you from 1 July 2012 onwards were not taxable supplies under section 9-5 of the GST Act on which GST was payable. It follows that the acquisitions of services were not creditable acquisitions under section 11-5 of the GST Act and you were not and are not entitled to ITCs for those acquisitions under section 11-20 of the GST Act.

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