Edited version of your written advice

Authorisation Number: 1013075056702

Date of advice: 24 August 2016

Ruling

Subject: GST - Subsidy Program

Issue

Whether the crediting by Entity A of the subsidy credit against charges charged by Entity A for the taxable supply decreases the consideration for the supply and/or gives rise to a decreasing adjustment for Entity A under either Division 19 or section 134-5 of the GST Act.

Question 1

Is the subsidy credited by Entity A to Entity A's retail customer (through the customer's account with Entity B)) a reduction to the consideration paid by the customer for the supply by Entity A during a particular period (when an agreement pursuant to Subdivision 153-B of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (Subdivision 153-B Agreement) was put in place between Entity A and Entity B) so that:

• where the subsidy was credited in a tax period against charges for that tax period Entity A was entitled to calculate the GST payable by Entity A on the supply for that tax period by reference to the 'net' charges payable by the customer (i.e. gross charges less the subsidy credit); and

• where the subsidy credit was credited in a subsequent tax period Entity A was entitled to a decreasing adjustment pursuant to Division 19 of the GST Act?

Answer

No.

Question 2

For the relevant period, is the subsidy credited by Entity A to Entity A's retail customer (through the customer's account with Entity B) a decreasing adjustment pursuant to section 134-5 of the GST Act where the supply provided by Entity A through Entity B pursuant to the Subdivision 153-B Agreement?

Answer

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity B is a wholly-owned subsidiary of Entity A.

Entity A was registered for GST with effect from xxx. Entity B was registered for GST with effect from xxx. Entity A is the representative member of a GST group of which Entity B is a member.

Entity A and Entity B provide supplies to the same customers. A government subsidy program was developed to provide incentive to encourage a particular group of the public to uptake the program.

This was provided for by legislation and contracts entered into by the parties. The customer to receive the subsidy credit has to comply with the eligibility requires. As part of the eligibility requirements the customer was required to input infrastructure that was contracted for and approved by Entity A for which the customer paid for.

Entity A charges for their supply as does Entity B. Where the customer produces excess product and provides it back to the system they receive an amount of subsidy credit which is taken of their bill. The legislation treats the amount of subsidy as a reduction of the price Entity A charges for their services to the customer.

However, Entity A recoups the amount of the subsidy credit by passing it on to its other customers.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 19, and

A New Tax System (Goods and Services Tax) Act 1999 section 134-5.

Reasons for decision

Question 1

Summary

The subsidy credit by Entity A is not a reduction to the consideration paid by a customer for Entity A's supply.

Detailed reasoning

Entity A makes a supply of services for consideration

In accordance with the arrangement between Entity A and the customers, Entity A supplies 'customer services' to the customer. The consideration for this supply is a component of the amount a customer is billed by Entity B in applying a single amount for the supplies of both Entity A and Entity B's supplies. While a customer will not know how much they pay for the supply from entity, the contractual arrangements between Entity A, Entity B and the customer will make the customer aware that their bill includes consideration for the supply by Entity A.

A customer's subsidy entitlement arises subject to separate agreement between them and Entity A and statutory obligations placed on Entity A and Entity B

Generally, Entity A's customers that participate in the subsidy program will enter into a number of agreement.

As a condition of the arrangement Entity A, is required to provide subsidy credits against the charges payable by an eligible customer, for supplies provided to the eligible customer. This is done by Entity B reducing the amount payable by an eligible customer for supplies by the 'amount of any credit' given by Entity A.

The subsidy credit reduces the amount payable for supplies payable by the customer and may also become an amount payable to the customer (where the credit continues to exceed the amount due for the supplies by Entity A and Entity B).

When the effect of the provisions is considered together, in the context of the separate agreements between Entity A and an eligible customer and Entity B and the customer, the customer acquires supplies for which it still pays a particular amount, but if certain separate conditions are met then an entitlement to a subsidy credit arises. The subsidy is then 'credited against' and 'reduces' the customer's amount payable, and may ultimately be paid to the customer. It is our view that the statutory references to 'credit' and 'reduce' do not mean that the consideration for the supply is changed but merely that the customer has a further entitlement that is taken into account in determining the net amount payable or receivable by the customer for the billing period. In this way, it is simply an accounting mechanism.

Any perceived connection in a broad sense between the supplies by Entity A and the crediting of the subsidy credit in accordance with the legislation, does not mean that the subsidy credit necessarily changes the consideration for the supply.

This conclusion is supported by the statutory purpose of the subsidy credit. Entity A has submitted that the Government's policy objective was 'to encourage the uptake'. That is, the subsidy programs purpose is separate to the provision of supplies by Entity A and Entity B.

Entity A passes on the cost that it incurs for the subsidy program to all its customers that they provide supplies to. In addition, the entitlement to the credit subsidy does not relate to a lesser degree of the supply being provided to the eligible customer. Rather, the application of the commercial price to the customer's circumstances reflects the supply to that customer. The subsidy is then calculated separately.

The entitlement to a subsidy is not an 'adjustment event' within the meaning in section 19-10 of the GST Act

The event of crediting the subsidy does not have 'the effect of changing the consideration' for the supply for similar reasons to those set out above. It does not change the previously agreed consideration for the supply, being a component of the price. This amount remains the consideration for the supply however the customer becomes entitled to a further 'credit' due to the requirements of the subsidy provided by legislation.

The subsidy is not similar to a discount or rebate. Nor is it similar to a change in consideration where the actual supply differs from the intended supply. Also, it does not follow from the fact that the customer must be acquiring a supply from Entity A to be eligible for the subsidy, that the subsidy must reduce the consideration for the supply by Entity A.

Question 2

Summary

Entity A is not entitled to a decreasing adjustment pursuant to section 134-5 of the GST Act. The requirement in paragraph 134-5(1)(d) of the GST Act is not satisfied. The subsidy is not made in connection with, in response to or for the inducement of the customer's acquisition of a supply from Entity B.

Detailed reasoning

Subsection 134-5(1) of the GST Act contains five paragraphs setting out requirements for a decreasing adjustment to arise. In Entity A's circumstances, paragraphs (a), (b), (c) and (e) are satisfied. The contentious requirement is paragraph 134-5(1)(d): 'the payment is made in connection with, in response to or for the inducement of the payee's acquisition of the thing'. In the context of this case, this requirement becomes a question of whether the subsidy is made in connection with, in response to or for the inducement of the customer's acquisition of a supply from Entity B. This question is different to any issue relevant to Question 1.

The application of paragraph 134-5(1)(d) of the GST Act is considered in GSTR 2014/1 in the context of motor vehicle incentive payments. Paragraph 67 of the ruling notes that it will depend on the nature of the particular payment and the relevant circumstances of each case. Paragraphs 296-299 of GSTR 2014/1 relevantly provide:

296. The language used in those paragraphs mirror the language used in subsection 9-15(1) which defines the term 'consideration'. The term 'consideration' is defined in subsection 9-15(1) to include, among other things, any payment in connection with, in response to or for the inducement of a supply of anything.

297. As discussed in other public rulings, whether a payment is 'consideration' under subsection 9-15(1) involves determining whether there is a sufficient nexus between a particular payment and a particular supply. A tenuous or remote connection with a supply will not be enough to constitute consideration.

298. Given the similarity in language used in subsection 9-15(1) and in paragraphs 134-5(1)(d) and 134-10(1)(d), principles relevant to determining whether there is a sufficient nexus in the context of subsection 9-15(1) as discussed in those public rulings may also be considered relevant in determining whether there is a sufficient nexus for adjustments under Division 134.

299. In determining whether there is a sufficient nexus, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

GSTR 2001/6 at paragraph 70 and GSTR 2001/4 at paragraph 95 also refer to the meaning given to the term 'in connection with' in Berry's Case: it is broader than 'for' and consideration will be in connection with property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'. The words are of wide import and the meaning to be given to them depends on the context (paragraph 125 of GSTR 2012/2).

Accordingly, it is a question of whether there is a sufficient nexus between the payment and the customer's acquisition of a supply from Entity B.

As outlined above in relation to question 1, the objective regarding the payment was 'to encourage the uptake of the subsidy program' and was not related to a lesser degree of a supply being provided to the eligible customer. The statutory framework provides for the subsidy to be a further entitlement that is taken into account in determining the net amount payable or receivable by the customer for the billing period. The subsidy payment is in connection with the customer's entitlement. It is not a change in the consideration for the supply provided by either Entity A or Entity B. Despite the terms used in the legislation, the subsidy is separate to the supplies and acquisitions made by Entity A, and equally, is separate to and wholly unconnected with the supply made by Entity B in the context of the subdivision 153-B of the GST Act agreement.

Also, the policy underlying Division 134 of the GST Act is expressed in the Explanatory Memorandum to the Tax Laws Amendment (2010 GST Administration Measures No. 1) Bill 2010. In particular, paragraph 1.1 notes that the Bill amended the GST Act:

1.1 …to ensure that the appropriate amount of goods and services tax (GST) is collected and the appropriate amount of input tax credits claimed in situations where there are payments between the parties in a supply chain which indirectly alter the price paid or received by the parties for the things supplied.

1.2 ...

1.3 The amount of GST paid or input tax credits claimed in a previous tax period may need to be adjusted to ensure that the correct GST outcome is obtained when circumstances change. Adjustments may arise due to, among other things, changes in consideration such as a change in price due to a discount. A third party rebate may not give rise to an adjustment because it would not, ordinarily, alter the consideration for the supply by the payer to its customer, or the consideration paid for the acquisition by the payee from its supplier.

The circumstances of this case are not the same as a third-party cash-back, discount or rebate that indirectly alters the price paid for a supply. The reasons for this are explained in Question 1.

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