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Edited version of your written advice
Authorisation Number: 1012737694650
Ruling
Subject: GST and consideration for a supply
Question
Are payments from the government entity to another government entity consideration for a supply?
Answer
No
Relevant facts and circumstances
The government entity is a State government agency that is registered for GST.
The Program is run by the other government entity which is jointly funded by the Australian Government.
Amounts payable pursuant to the funding agreement are based on reasonable forecasts of the costs to be incurred in fulfilling the obligations.
The government entity does not profit from the funding provided.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999, subsection 9-17(3)
Reasons for decision
All legislative references in this ruling are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.
Subsection 9-17(3) 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
• the payment is, amongst other things, covered by an appropriation under an Australia law, and
• the payment satisfies the non-commercial test.
The term 'government related entity' is defined under section 195-1 and includes an entity that would be a government entity but for subparagraph (e)(i) of the definition of 'government entity' in the ABN Act.
Section 41 of the ABN Act defines government entity:
government entity means:
(a) a Department of State of the Commonwealth; or
(b) a Department of the Parliament established under the Parliamentary Service Act 1999; or
(c) an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999; or
(d) a Department of State of a State or Territory; or
(e) an organisation that:
(i) is not an entity; and
(ii) 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
(iii) 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 paragraph (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph
We consider both entities are government related entities. Therefore, the payment is being made by one government related entity to another government related entity for making a supply.
The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012 states at paragraphs 2.17 to 2.20:
Is the payment covered by an appropriation under an Australian law?
2.17 These amendments require that the payment must be covered by an appropriation under an Australian law. This requirement is met if the payment is made pursuant to an appropriation.
2.18 The payment need not be 'specifically covered' by an appropriation under an Australian law. The term 'specifically' has not been included in these amendments. This is to clarify that this exception has been expanded.
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 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.
We consider that the payment is covered by an appropriation under an Australia law.
The main element to satisfying the non-commercial test relates to the payment not exceeding the government related entity supplier's anticipated or actual costs of making the supplies.
On the facts provided, the funding is based on reasonable forecasts of the costs to be incurred and the government entity does not profit from the funding which is merely provided on a cost recovery basis. Therefore, the non-commercial test is satisfied.
As all of the elements of subsection 9-17(3) are satisfied, the payments are not consideration for a supply. Consequently, the government entity is not liable for GST in relation to the relevant supplies.
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