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Edited version of your written advice

Authorisation Number: 1051352877363

Ruling

Subject: Payment of financial assistance

Question

Is the funding you receive from the government office pursuant to the Agreement consideration for a taxable supply?

Answer

No, the funding you receive from the government office pursuant to the Agreement is not consideration for a taxable supply and, therefore, is not subject to goods and services tax (GST).

Relevant facts and circumstances

Relevant legislative provisions

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

Subsection 9-15(1) A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements that must be met for an entity to make a taxable supply. It states:

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act).

The GST treatment of funding depends primarily on whether such a payment represents consideration that has the relevant connection with a taxable supply. Therefore, to satisfy the first requirement of a taxable supply in paragraph 9-5(a) of the GST Act, there must be a supply and consideration, and there must be a connection between the two.

There are three questions that are relevant to determining whether there is a supply for consideration:

Essentially, a supply is something that passes from one entity to another. The supply may be one of particular goods, services or something else that is reflected in an agreement by one party to do something for another.

‘Supply’ is defined under section 9-10 of the GST Act. The definition includes ‘an entry into, or release from, an obligation to do anything; or to refrain from an act; or to tolerate an act or situation’ but excludes ‘a supply of money unless the money is provided as consideration for a supply that is a supply of money’.

‘Consideration’ is defined under section 9-15 of the GST Act. The definition extends beyond payments to include such things as acts and forbearances to act. A payment will be consideration for a supply if the payment is ‘in connection with’, ‘in response to’ or ‘for the inducement’ of the supply.

Under the Agreement, you are required to use the grant funds only in the manner proposed in the project within the Agreement. You are also required to comply with specific reporting requirements.

Goods and Services Tax Ruling GSTR 2006/9 (Supplies) states at paragraph 123:

Under the Agreement, there are no goods, services or other thing passing between you and the government office, so the question is whether there is a supply by you of an entry into an obligation.

The Tax Office view of the GST treatment of funding and whether the funding represents consideration that has the relevant connection with a taxable supply is discussed in GSTR 2012/2 (financial assistance payments).

Paragraph 28 of GSTR 2012/2 explains that an agreement between the parties to a funding arrangement may establish rights or obligations between the parties

The government office’s intention in structuring the Agreement in this manner is to control the expenditure of the funds so they are applied for the measures that contribute to safer, sustainable community rather than to contractually compel you to do a particular thing. As a result, the Agreement does not require you to make a supply to third parties.

The remaining relevant questions to consider are whether the grant is consideration and if it possesses the necessary relationship with a supply made by the grantee.

A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply (see subsection 9-15(1) of the GST Act).

GSTR 2012/2 distinguishes between things that are mere conditions of the arrangement and things which go to the core, or substance, of the arrangement and which convey to the grantor a material benefit. Mere conditions, such as a repayment clause, whose purposes are to regulate disposal of granted funds and/or to maintain accountability over those funds, whilst possibly relevant in determining the legal intentions of the parties, do not possess the relevant connection with the granted funds to constitute supplies for consideration. They generally do not go to the purpose for which the funds were granted nor do they convey a material benefit to the grantor for which the funds are paid.

In the case of the grant, you agree to use the funds only for the activities specified in the Agreement and in no other manner. You also agree to the reporting and accounting requirements in relation to the funds. The Agreement also states you are to repay to the government office any funding held by you that remains unspent.

The purpose of the grant in each case is to pay for the on-ground activities undertaken by you, being measures that contribute to safer, sustainable community.

Based on the form and content of the Agreement and the lack of commerciality to the subject matter of the grant program, the Agreement falls short of being a contract for goods or services and falls short of creating binding obligations on you that go to the purpose of the grant.

Whilst a number of binding obligations are entered into by the grantee under the Agreement which may amount to 'supplies' for GST purposes; for example, the obligation to repay the funding, and the obligation to provide reports, none go to the purpose of the grant nor do they convey a material benefit to the grantor. Accordingly, there exists no relevant connection between the obligations and the grant itself, the purpose of which is to assist you to undertake the project activities in your community.

There are no other identifiable supplies you provide for which the grant funding might be consideration. Consequently, as paragraph 9-5(a) of the GST Act will not be satisfied, you will not make a taxable supply in relation to the funds you receive. Therefore, no GST should be charged on the funds which are provided to you under the Agreement.


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