Edited version of your written advice

Authorisation Number: 1051412857327

Date of advice: 9 August 2018

Ruling

Subject: Project support payments

Question

Are project support payments received from a state government, consideration for a supply for GST purposes, and if so, is it a taxable supply?

Answer

No, the project support payments are not consideration for a supply for GST purposes and, therefore, there is no taxable supply.

Relevant facts and circumstances

You were allocated funding for a project to commence the construction of a facility.

The State aims to provide financial support to projects that meet certain eligibility criteria.

The investment program is established to encourage the development of projects by providing upfront capital grants and long-term revenue contracts to facilitate financing and enhance commercial viability of these projects.

Funding will provide project proponents with long-tern income security. This will assist in obtaining favourable financing arrangements and develop lower-cost projects. The program is intended as a government intervention needed to remove obstacles to growth.

There was an application process for the funding.

The financial support is for projects that are:

● proposed for construction and operation in the State

● connected to infrastructure

● able to finalise all necessary, licensing, permitting and developmental approvals.

You also signed a Deed. The Deed contains a number of conditions and obligations.

Support Payments

● For each month of the support term, the State must pay you the support payment as calculated under the Deed.

● The support payment has an entitlement rate and will not be subject to indexing and ensures that you will receive a minimum amount of consideration, thus fulfilling the intent of the State’s program.

● In the event that the support payment calculation results in a negative amount, the amount payable by the State to you will be zero ($0), that is the difference will not be applied to future payments nor will any adjustment amount be payable by you to the State. This fact supports the interpretation that the purpose of the support payments from the State is to ensure you always receives a minimum financial payment per month.

● The Deed stipulates that you are required to issue a monthly statement and tax invoice to the State, setting out the amounts payable by the State in respect of that period. The State will subsequently pay the net amount stated on the monthly statement (and tax invoice) issued by depositing the funds to a nominated bank account. Where any adjustments are required to accommodate inaccuracies or updated information, a new monthly statement and adjustment note is required to be issued by you.

● The Deed provides for termination of this Deed by the State if you fail to satisfy a Condition on completion by the Commissioning Date.

Relevant legislative provisions

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

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

Reasons for decision

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

● the entity makes the supply for consideration;

● the supply is made in the course or furtherance of an enterprise that the entity carries on;

● the supply is connected with Australia; and

● the entity is 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.

Goods and Services Tax Ruling 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2) explains the Commissioner’s view on when a financial assistance payment is consideration for a supply.

Paragraph 15 of GSTR 2012/2 provides that for a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A sufficient nexus exists if the financial assistance payment is made ‘in connection with’, ‘in response to’ or ‘for the inducement of’ a supply.

As explained in paragraph 99 of GSTR 2012/2, for a payee to have a GST liability in relation to a financial assistance payment and for 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 or connection between the payment and a supply.

GSTR 2012/2 provides further guidance:

● a sufficient nexus exists where, upon an objective assessment having regard to the true nature of the transaction, the financial assistance payment is found to be made ‘in connection with’, ‘in response to’ or ‘for the inducement of’ a supply;

● in identifying the character of the nexus required, the word ‘for’ ensures that not every connection between a supply and consideration meets the requirements for a taxable or input taxed supply;

● reference to all of the surrounding circumstances of the arrangement supporting the payment of financial assistance (considered as a whole) determines whether there is a sufficient nexus. 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; and

● provided that there is a sufficient nexus, a voluntary payment can be consideration for a supply (that is the payer in such a case does not have to be the recipient of the supply).

The State provided financial assistance to you because you met the eligibility criteria.

You participated in the funding process based on the criteria set up by the State and the State granted you an entitlement to support payments subject to a number of terms and conditions which are set out under the Deed that you are obliged to perform. The performance or otherwise of these obligations under the Deed forms part of the circumstances which determine whether you are entitled to the support payments.

As such, your performance of the obligations has a connection with the State making the support payments to you because these obligations establish that you are entitled to the support payments.

However, the right to receive the support payments is not dependent upon you entering into the Deed or the obligations under the Deed. The obligations under the Deed solely serve to formalise the process of the support payment entitlement. The rights and obligations to make and receive support payments flow from the authority of the State to implement its policies under its program.

The support payment provided by the State will not have any effect on supplies you make.

This view is further supported by Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies, at proposition 14 (when a third party may pay for a supply but not be the recipient of the supply), and by the FFC decision in TT-Line Company Pty Ltd v Commissioner of Taxation [2009] FCAFC 178 (TT- Line).

The facts of this particular case can be distinguished from that anticipated at proposition 14 and the decision in TT-Line. The recipient of the supply in TT- Line was directly affected by the assistance payment, as it enabled him or her to access services at a cheaper rate. In contrast, your supply is not going to be affected by the receipt of the support payments by you, as the support payments are assistance from the State. That is, the recipient will not be able to purchase at a cheaper rate because of the assistance payment you receive from the State.

While there is a relationship between the support payments and your performance of obligations under the Deed, the connection is not sufficient to find that the support payment forms part of the consideration that you receive for making the supplies (obligations created under the Deed).

The supply by you is not affected by the arrangement entered into under the Deed and therefore the support payments are not considered to be third party consideration for your supply.

On this basis, the receipt of support payments does not have a sufficient nexus with any supply that you make to the State. As there is no sufficient nexus then the receipt of the project support payments under the State’s policy initiative does not constitute the provision of consideration for a supply or supplies that are made by entering into the obligations under the Deed.

Accordingly, any support payments you receive under the State’s program are not consideration for a supply. As there is no taxable supply, the support payments are therefore not subject to GST.

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