Edited version of your private ruling

Authorisation Number: 1012554326393

Ruling

Subject: GST and appropriations

Question

Are the payments received by the Government Department under the Initiative consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the payments received by the Government Department (you), under the Initiative are not consideration for a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You are a state government department and you are registered for goods and services tax (GST).

You entered into a funding agreement (Deed) between you, a government related entity and the Commonwealth of Australia (Commonwealth) as represented by a Commonwealth government department to meet particular objectives.

The Deed sets out your obligations and that of the government related entity.

The Deed provides that funding is paid by the Commonwealth to the government related entity which are then paid to you in the manner specified in each plan.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

Reasons for decision

Under section 9-5 of the GST Act you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia, and

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

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

What needs to be determined first is whether you make a 'supply for consideration' such that paragraph 9-5(a) of the GST Act is satisfied. For there to be a 'supply for consideration' there must a sufficient nexus between any supply being made and the relevant consideration.

Guidance on the application of GST to grants of financial assistance is contained in Goods and Services Tax Ruling GSTR 2012/2.

Paragraph 99 of GSTR 2012/2 states:

99. 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.

Therefore, the GST treatment of financial assistance payments (FAP's) depends primarily on whether the payments represent consideration that has the relevant connection with a supply. In this case, it is you that would be liable for GST on receipt of the payments from other government related entity if those payments represent consideration for a supply which is a taxable supply.

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

· a supply of goods

· a supply of services

· a provision of advice or information

· a creation, grant, transfer, assignment or surrender of any right, or

· an entry into, or release from, an obligation:

o to do anything

o to refrain from an act, or

o to tolerate an act or situation.

However, the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money.

In this case, you entered into a Deed with Commonwealth Government Department and other government related entity to implement the Initiative. There are certain terms and conditions that you are required to abide by to successfully implement this Initiative. As such, it is considered you entering into obligations to do particular things (including providing information), that satisfy the definition of a supply under section 9-10 of the GST Act.

The term 'consideration' is defined in subsection 9-15(1) of the GST Act to include 'any payment, or any act or forbearance, in connection with a supply of anything' and 'any payment, or any act or forbearance, in response to or for the inducement of a supply of anything'.

In this case, a payment of funds is made to you from another government related entity to distribute in its entirety according to the terms of the Deed.

GSTR 2012/2 explains that it is not sufficient for there to be a supply and a payment. For the FAP to be consideration for a supply there must be a sufficient nexus between the FAP made by the payer and a supply made by the payee (you). The FAP is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply of anything. This test is an objective one.

Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether the FAP is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include:

· the statutory purpose of the payer in providing the financial assistance

· the activities which are to be undertaken by the payee, and

· any other terms and conditions attached to the payment.

However, none of these factors will be determinative on their own and the arrangement must be considered as a whole.

Paragraphs 24 and 28 of GSTR 2012/2 states:

24. Providing advice or information is a supply. A financial assistance payment has a sufficient nexus with such a supply where the payment is made for the purpose of obtaining the information.

28. Where a supply is constituted by the payee entering into an obligation with the payer to do or refrain from doing something and the payment is made to secure that obligation, there is a sufficient nexus between the payment and the obligation. This is because the financial assistance payment is made in connection with, in response to, or for the inducement of the entry into the obligation.

In order for another government related entity to make the funding payment to you, you must satisfy the terms as detailed in the Deed.

You receive the FAP from another government related entity in order to meet the initiative objectives. You do not receive the payments from another government related entity to satisfy the terms and conditions and the obligations under the Deed. Nor do you receive the payment for any information that you provide to another government related entity.

Therefore, whilst there are supplies created under the Deed, the payment from another government related entity that you receive is not in connection with, in response to or for the inducement of a supply made by you.

Therefore, it is not considered that paragraph 9-5(a) of the GST Act is satisfied. As such, the consideration you receive is not for any taxable supply that you make under section 9-5 of the GST Act.

Additional Information

You have asked if the payment made to you by a government related entity is a payment covered by an appropriation under an Australian law for the purposes of paragraph 9-17(3)(b) of the GST Act.

The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012 (EM) explains that a payment is covered by an appropriation under an Australian law if the payment is made pursuant to an appropriation. An appropriation is not in itself a payment. Once funds have left the consolidated funds they are less likely to be covered by an appropriation. Funds sourced from an appropriation paid to an entity that are accounted for separately to funds from other sources would indicate that the entity receiving those funds is unable to use the funds as it sees fit and therefore that further payment is likely to be covered by an appropriation.

On the facts provided the government related entity making the payment is an intermediary of the Commonwealth in making the payment to you for you to then distribute. Under the terms of the Deed the government related entity making the payment is unable to use the funds as it sees fit. Once the plan is approved by the Commonwealth the government related entity making the payment must distribute the funding to you in accordance with the plan unless otherwise authorised by the Commonwealth.

The government related entity does not retain any of the funds paid to it and cannot use them other than according to the terms of the Deed. This factor points to the payments being covered by an appropriation notwithstanding that they are paid to the government related entity before being distributed to you. The relevant Appropriations Act authorises the payment of the funds from the Commonwealth.

Accordingly, the payment you receive is covered by an appropriation under an Australian law.

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