Disclaimer
This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012826475067

Date of advice: 6 July 2015

Ruling

Subject: GST and memorandum of understanding

Question

Is a government department (you) making a creditable acquisition from an entity (Entity A) when you make the annual funding payments under the Memorandum between you and Entity A (Memorandum)?

Answer

No.

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Under section 11-20, you are entitled to the input tax credit (ITC) for any creditable acquisition that you make.

Under section 11-5 one of the requirements for making a creditable acquisition is that the supply of the thing to you is a taxable supply.

The meaning of 'acquisition' is given in section 11-10. An acquisition is any form of acquisition and includes:

Generally, for each acquisition there is a corresponding supply. Goods and Services Tax Ruling GSTR 2006/9 provides guidance in relation to the meaning of 'supply' and explains, at paragraph 53, that the meaning of 'acquisition' in section 11-10 is the corollary of the meaning of 'supply' in section 9-10.

Supply

Under section 9-5 one of the requirements for making a taxable supply is that you make a supply for consideration.

Under section 9-10 a 'supply' means any form of supply whatsoever and includes:

Therefore, to determine if you are making a creditable acquisition from Entity A, we must first analyse if Entity A is making a supply to you for which the annual payments you make under the Memorandum are consideration.

Financial assistance payments

Goods and Services Tax Ruling GSTR 2012/2 provides guidance on when a financial assistance payment is consideration for a supply. The term 'financial assistance payment' is intended to encompass a wide range of payments and includes payments made to provide support or aid to the payee.

In your circumstances, the annual payments you make are considered to be financial assistance payments. The payments are made to provide support to Entity A in its charitable purpose.

An entity that receives a financial assistance payment is liable for GST in respect of that payment if the entity has made a taxable supply in accordance with section 9-5.

In the context of financial assistance payments, paragraph 15 of GSTR 2012/2 explains that for a payment to be consideration for a supply there must be a sufficient nexus between the payment made by the payer and a supply made by the payee. The payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply under an objective test.

Further, in establishing if there is a sufficient nexus between a payment and a supply, paragraphs 15A and 16 of GSTR 2012/2 explain that not every connection between supply and consideration meets the requirements for a taxable supply. Reference is to be made to all of the surrounding circumstances of the arrangement, in particular any written documentation. The 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.

In your circumstances, the Memorandum provides that you will make the annual payments to Entity A to assist Entity A to meet its charitable purpose for the term of the agreement.

Entity A acknowledges your support by including your logo on all official Entity A publications.

Relevant guidance in relation to acknowledgement of financial assistance payments, in circumstances where there is insufficient nexus between the payment and a supply, is provided in Example 5 at paragraphs 37 to 39 of GSTR 2012/2. Consistent with the principle contained in this guidance, we consider the publicity provided by Entity A is mere acknowledgement of the payments you make as support and is not an act which has the character of advertising or promoting you.

In addition, in the table at paragraph 144 of GSTR 2012/2, an example of circumstances where a payment is made but a supply has insufficient nexus is provided at page 27 which states:

As there is nothing else supplied to you by Entity A, the annual payments you make are not in connection with, in response to or for the inducement of a supply. Rather, the purpose of the payments is to facilitate Entity A's charitable work.

As Entity A is not making a supply for consideration, there is no supply to you that is a taxable supply under section 9-5 and you are therefore not making a creditable acquisition under section 11-5.

Consequently you are not entitled to an ITC under section 11-20 when you make the annual funding payments under the Memorandum to Entity A.

Relevant facts and circumstances

You carry on an enterprise and you are registered for GST.

Entity A, a not-for-profit entity, is also registered for GST.

You provide annual funding to Entity A under the Memorandum.

The Memorandum contains relevant provisions.

Relevant legislative provisions

All legislative references are to the GST Act:

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).