Edited version of your written advice

Authorisation Number: 1051463507509

Date of advice: 10 December 2018

Ruling

Subject: GST and financial assistance payments

Question

Is Entity A (you) making a creditable acquisition from Entity B when you make a payment to Entity B under a grant program?

Answer

No, you are not making a creditable acquisition from Entity B when you make a payment to Entity B under a grant program and you are not entitled to an input tax credit (ITC).

Relevant facts and circumstances

You are a government entity and you are registered for GST.

You provide grants under a grant program to certain entities to be used for a certain purpose.

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 9-10

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision

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

Under section 11-20, you are entitled to the 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.

Under section 11-10 an acquisition is not just a supply of goods or services. Acquisitions can also be made in relation to rights and information for GST purposes.

Generally, for each acquisition there is a corresponding supply. Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies 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 is not just a supply of goods or services. Supplies can also be made in relation to rights, obligations and information for GST purposes. Under section 9-15 the term ‘consideration’ is broadly defined as including any payment, or any act or forbearance, ‘in connection with’, ‘in response to’ or ‘for the inducement’ of a supply.

Therefore, to determine if you are making a creditable acquisition from Entity B, we must first analyse if Entity B is making a supply to you for which a payment you make under the grant program is consideration.

Financial assistance payments

Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (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 payments you make are considered to be financial assistance payments. The payments are made to provide support to Entity B.

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, you will make a payment to Entity B which is to be used for a certain purpose.

Relevant guidance in relation to arrangements that do not involve the making of any supply whatsoever is provided at paragraphs 55 and 56 of GSTR 2012/2. If no supply has been made a key element of the definition of taxable supply is not met. In particular, there is no supply where the agreement between the parties is not binding and creates expectations alone.

Further, paragraph 119 of GSTR 2012/2 explains that where the financial assistance payment is made in circumstances where a party expects that something will be done, and it does not involve a binding obligation or the supply of goods, services or some other thing, there is no supply. The mere expectation that an act or event will happen is not sufficient to establish a supply. The payee has done nothing in return for or in relation to the payment.

Paragraphs 58 to 62 of GSTR 2012/2 provide examples in relation to circumstances where there is no supply as the agreement between the parties is not binding and creates expectations alone. The paragraphs state:

Example 10 – no supply – mere expectation

58. A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts. The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.

59. The local council has an expectation that the works will be carried out. However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council.

60. There are no GST consequences arising from the arrangement for either party.

Example 11 – no supply – mere expectation (where the thing is done)

61. Continuing with the last example.

62. Even if the payment is ultimately used to resurface the tennis courts, this does not change the fact that the tennis club has not made any supply to the local council. Transactions that are neither based in an agreement that binds the parties in some way nor involve the supply of goods, services or, some other thing to the payer, do not establish a supply. In this example, the mere doing of the thing that was expected does not amount to a supply to the local council because it does not involve some good, service or other supply being provided to the local council by the tennis club for which the payment is consideration.Rather, the payment has facilitated the acquisition of services by the tennis club in having its courts resurfaced. This is not a supply made to the local council.

In your circumstances, it is considered that the basis on which the grants are to be made does not involve a binding obligation. Further, in the absence of enforceable obligations, there is nothing else such as goods, services or some other thing passing between the parties.

Therefore, consistent with the relevant guidance provided in GSTR 2012/2, the arrangements under the grant program create expectations alone and there is no supply.

As Entity B is not making a supply under section 9-10, there is no taxable supply made to you under section 9-5. Therefore, you are not making a creditable acquisition under section 11-5.

Consequently, you are not entitled to an ITC under section 11-20 when you make a payment to Entity B under the grant program.

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