Edited version of private advice

Authorisation Number: 1051535028515

Date of advice: 24 June 2019

Ruling

Subject: GST and grants

Question

For the purposes of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is entity A making a taxable supply to entity B for which the grant of funds made by entity B is consideration?

Answer

No. Entity A is not making a taxable supply to entity B for which the grant of funds made by entity B is consideration and therefore, the grant of funds is not subject to goods and services tax (GST).

Relevant facts and circumstances

Entity A is registered for GST. The entity owns and runs a particular facility. The entity received a grant of money (excluding GST) to upgrade and refurbish the facility.

The grant is from entity B under a specified program. A grant agreement (the Agreement) between entity A and entity B was executed on a particular date. A copy of the Agreement and additional terms and conditions was provided.

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

Reasons for decision

Under section 9-40 of the GST Act an entity must pay the GST payable on any taxable supply it makes. Section 9-5 of the GST Act provides that you make a taxable supply if, amongst other things, 'you make the supply for consideration'.

The Commissioner has considered when a financial assistance payment is consideration for a supply in Goods and Services Tax Ruling GSTR 2012/2: financial assistance payments (GSTR 2012/2).

In GSTR 2012/2 the term 'financial assistance payment' is intended to encompass a wide range of payments including those made to provide support or aid to the payee. Paragraphs 15, 15A and 16 of GSTR 2012/2 explain 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, in this case entity B, and a supply made by the payee, entity A.

A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of a supply'. In identifying the character of the connection, the word 'for' ensures that not every connection between supply and consideration meets the requirements for a taxable supply. Entity B considers that this is an objective test.

On the facts provided, entity A entered into an Agreement with entity B whereby funds were granted to entity A to complete certain things in entity A's grant application within a required timeframe. Entity A's eligible grant involves the upgrade and refurbishment of specified areas of a facility.

Entity B may require repayment of grant funds in certain circumstances, including where the grant funds are spent otherwise than in accordance with the Agreement or on termination of the Agreement by entity B.

Entity A is also required to provide certain reports to entity B by specified due dates.

A GST liability in relation to the grant funds turns on identifying:

·        one or more supplies made by the entity receiving the funds

·        establishing that the payment was consideration (a payment, act or forbearance), and

·        a sufficient nexus between the payment and the supply to constitute a 'supply for consideration'.

Is there a supply?

The definition of 'supply' provided by section 9-10 of the GST Act includes 'any form of supply whatsoever', such as the 'supply of goods', or the 'supply of services', or 'a provision of advice or information', or 'an entry into...an obligation... to do anything'.

With respect to the entry into an obligation, GSTR 2012/2 states:

28. Where a supply is constituted by the payee entering into an obligation with the payer to do or refrain from doing something and the payment is made to secure that obligation, there is a sufficient nexus between the payment and the obligation. This is because the financial assistance payment is made in connection with, in response to, or for the inducement of the entry into the obligation.

Under the Agreement, entity A is provided with grant funds to enable them to undertake agreed upgrades (the Activity) to a facility within a certain timeframe. The grant funds are provided on the understanding that they will be used to undertake the Activity. The Agreement does not indicate that entity A is obligated to use the grant funds in the way specified. If the funds are not used in the agreed way, entity A is merely required to return the funds to entity B. Paragraph 44 of GSTR 2012/2 states that the existence of a repayment clause is not determinative in establishing whether a financial assistance payment is consideration for a supply.

That is, entity B has an expectation that the Activity will be completed in the specified timeframe, but there is no binding obligation on entity A to do so.

Relevantly, paragraph 56 of GSTR 2012/2 states:

56. In particular, there is no supply where the agreement between the parties is not binding and creates expectations alone. However, the payee may still make a supply in the absence of enforceable obligations. Where there is an agreement that does not bind the parties in some way there may still be a supply where there is something else, such as goods or some other benefit, passing between the parties.

In this case, the Agreement also requires various reports, including a final report, to be provided by entity A to entity B by specified due dates. These reports include information on progress towards completion of the agreed Activity, how the funds are spent and evidence of the completed agreed Activity.

The provision of information in the form of a report satisfies the definition of a supply under subsection 9-10(2) of the GST Act. However, the expectation under the Agreement that the grant funds be spent on the Activity in the specified timeframe does not amount to a supply to entity B.

Are the grant funds consideration?

The term 'consideration' is defined in subsection 9-15(1) of the GST Act and includes any payment, or any act or forbearance, in connection with a supply of anything. On the facts provided the grant funds are a payment for GST purposes and are, therefore, consideration.

Consequently, it is necessary to determine whether the payment of the grant funds (that is, the consideration), has a sufficient nexus with the identified supply of information to constitute a supply 'for' consideration.

Is there a sufficient Nexus between the supply and the consideration?

With respect to the supply of information, paragraph 24 of GSTR 2012/2 states that a financial assistance payment has a sufficient nexus with a supply where the payment is made for the purpose of obtaining the information.

Although the reports entity A is required to submit under the Agreement involve the provision of information which meets the statutory definition of a supply, these supplies are not the reason for which the grant funds are provided. The funds are not provided to obtain or use the information contained in the reports but are merely part of the mechanism of making or accounting for the financial assistance payment.

Rather, the grant funds are made to assist entity A in undertaking the upgrade and refurbishment of the facility.

Having regard to the Agreement and the surrounding circumstances, the grant funds do not have a sufficient nexus with the supply of information to constitute consideration for the supply. Accordingly, an essential requirement for a taxable supply is not satisfied.

The table in paragraph 144 of GSTR 2012/2 confirms that no GST is payable by the payee and the payer is not entitled to input tax credits in circumstances where the only supply that you make is acknowledging the payment received, submitting an application for the payment, agreeing to repay an amount not spent and/or giving a report to the payer about how the monies were spent.

The Agreement does not indicate the supply of any other goods, services or acts for which the funds could be consideration. The grant funds provided by entity B have an insufficient nexus with the identified supply of information to constitute consideration for that supply. As an essential requirement for a taxable supply that there is a 'supply for consideration' is not satisfied, there is no taxable supply made by entity A to entity B on which GST is payable.

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