Edited version of private advice

Authorisation Number: 1051547128204

Date of advice: 18 July 2019

Ruling

Subject: GST and the transition of a government scheme to local arrangements

Question 1

Is there a taxable supply made under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST) Act in return for the payments made by the government?

Answer

No, the payments made by the government are not consideration for a taxable supply made.

Question 2

Is there a taxable supply (under section 9-5 of the GST Act) or creditable acquisition (under section 11-5 of the GST Act) made where assets/liabilities are transferred pursuant to an Act?

Answer

No

The scheme commences on:

The date of issue for the notice of private ruling.

Relevant facts and circumstances

Current Arrangements

A Government entity (GE) is an infrastructure developer and manager, owning and managing infrastructure assets.

GE owns and operates certain schemes.

The schemes have significant operational costs. The schemes are long lived assets and require regular maintenance and capital expenditure.

Overall, GE's schemes are currently running at a loss, where the size of the shortfall varies amongst the schemes.

The State sets the prices that GE charges for their supply via the schemes. Price paths have been set with the intention of closing the gap between costs and revenues and achieving cost reflective pricing. In practice, however, while some schemes are approaching cost reflective pricing, in other schemes the gap has grown due to an underestimation of costs and/or inadequate price increases.

Retaining the schemes within GE under the current pricing policy and operational arrangements is likely to result in significant future costs to the State.

LA Project

Following concerns raised about the sustainability of GE's schemes, the State established the Project to consider proposals for the transition of schemes from GE to Local Arrangements (LA).

For the purposes of the LA Project, local management is considered to broadly involve 'transferring the ownership and the operation and management of GE's schemes to new entities owned by customers who are the primary beneficiaries of those schemes'.

The LA Project involves three stages, as outlined below.

Assessment

The assessment model was developed by the Independent LA Project team and involved calculation of the net present value (NPV) of the financial losses and direct costs to the State of the continued ownership and operation by GE of the schemes.

The assessment model was the subject of a quality assurance review.

The calculation of the assessment was underpinned by key inputs/assumptions including in relation to pricing policy and forecast capital expenditure costs. The Independent LA Project team sought advice of independent experts and GE in determining these inputs.

The size of the shortfall between costs and revenues varies significantly between the schemes depending on how close the respective scheme's pricing is to full cost recovery.

The assessment indicated that for all Schemes total costs exceed total revenue over the forecast period, resulting in negative NPVs. Prima facie, this is an indication that the Schemes are not economically viable under the current State ownership model.

Business proposals

The business proposals submitted for each scheme consisted of financial and nonfinancial information outlining how the schemes could be run under LAs and for the particular preferred corporate form proposed by the scheme.

The financial information submitted included a financial model which calculated the net present value of the shortfall of revenues compared to outgoings in respect of operating and maintaining the scheme following transition to local arrangements.

The Independent LA Project team assessed each business proposal having regard to fundamental LA principles, which were set by the State.

Payment offer made by the State

As part of each transfer, the State will make a final investment commitment (in the form of a Payment' paid to each respective special purpose vehicle) to provide for each Scheme's financial viability.

The Payment provides funds to cover the losses from the Scheme while the local arrangements may consider increasing prices (revenues) and reducing costs to reach cost reflective pricing. The Payment may include funds that could be directed towards identified future capital expenditure and/or modernisation where appropriate.

Transition to LA

To facilitate the transfers, the government has established a special purpose vehicle (SPV) for each of the Schemes to represent the interests of the scheme customers in the transfer process.

Each of the SPVs has been provided with a formal offer from the State outlining the proposed assets to transfer to LA and a Payment. While the State's offer is a 'best and final offer', the terms of the agreement have been included in the Transfer Deed, based on the offer document.

An offer document has been issued by the State to all customers in each Scheme, which provides sufficient information for each customer to make an informed decision about whether to participate as a holder of a membership interest in the SPV.

The Enabling Legislation facilitates the transfer of the assets/liabilities to each SPV. The Enabling Legislation establishes a declared project and transfer scheme to enable the transfer of the businesses, assets and liabilities of GE in relation to a declared scheme to an entity and the divestment from the State of an entity.

SPV legal form

The LAs obtained legal advice in relation to the legal form of the SPV entities. The Schemes intend to adopt a range of legal forms.

Each Scheme has proposed restrictions on membership/shareholder eligibility and restrictions/caps on voting rights.

Scheme

The SPV relates to the Scheme.

The scheme serves customers who primarily carry on business in related industries.

The SPV is a proprietary company limited by shares. The Scheme Board has determined that post-transition the SPV will operate on a not-for-profit basis with all surplus funds to be retained in the business. As such, Shareholders will not receive dividends or distributions.

The SPV will operate as a customer-owned business, with only holders of Allocations in the area eligible to hold shares, with limitations on individuals and their associates holding more than a set percentage of issued shares.

The government and the SPV entered into the Transfer Deed to facilitate the move to LAs for the Scheme.

It is currently anticipated that the Scheme will transition to LAs on the Transfer Day.

The Transfer Deed provides that the State will make Payments to the SPV.

We note that the Payment is to be received by Service SPV as a disclosed agent of the SPV pursuant to a Funding Agreement. The government has established the Service SPV as an entity to support the activities of, and act as agent for, each of the SPVs. A copy of this Funding Agreement 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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

Reasons for decision

Section 9-5 of the GST Act provides that you make a taxable supplyif:

·         you make the supply for consideration

·         the supply is made in the course or furtherance of an enterprise that you carry on

·         the supply is connected with the indirect tax zone (Australia), and

·         you are 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.

Section 11-5 of the GST Act provides that you make a creditable acquisition if, among other requirements, the supply of the thing to you is a taxable supply.

To satisfy the first requirement of a taxable supply, it is necessary to determine whether the SPV is making a supply under section 9-10 of the GST Act and whether the cash payments or the assets transferred are consideration under section 9-15 of the GST Act.

If there is a supply and consideration, it will then be necessary to determine whether the consideration is for the supply. That is, there must be a sufficient connection or nexus between the supply and the consideration.

Section 9-10 of the GST Act defines supply broadly as 'any form of supply whatsoever'. The non-exhaustive list in subsection 9-10(2) of the GST Act serves to emphasise that a supply can be anything and can be provided by any means. This includes providing something by means of the supplier refraining from acting, or by means of the supplier tolerating some act or situation, just as it can be provided by means of the supplier doing some act.

Goods and Services Tax Ruling GSTR 2006/9 GST: Supplies examines the meaning of 'supply' in the GST Act. To assist in analysing a transaction to identify the supply made in the transaction, GSTR 2006/9 describes a number of propositions.

Proposition 5 states that an entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient).

In Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49, the High Court noted that a transaction which involves a supplier entering into and performing an executory contract will in general involve the supplier making at least two supplies. The first being creation of contractual rights and obligations at the time of entry into the contract and secondly, a supply by means of contractual performance of the obligation.

While an entity may make a supply by observing an obligation, even if that involves no more than refraining from doing something or tolerating some act or situation, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something.

For example, in Shaw v. Director of Housing and State of Tasmania (No 2) [2001] TASSC 2, it was held that a judgment creditor makes no supply on extinguishment of the obligation to pay the judgment sum. In Reglon Pty Limited v. Commissioner of Taxation [2011] FCA 805, no supply was found to have been made when vesting of title in goods occurred by operation of law on satisfaction of the judgment in full.

Similarly, there is no supply within the meaning of section 9-10 of the GST Act when an entity assumes a liability that is imposed, required and effected by statute. This is so even if the assumption of the liability is set out in an agreement between the parties. The contractual clauses of an agreement merely confirm the operation of the statute. An example of such a liability is the liability for long service leave entitlements to employees. [Paragraphs 23 to 25 and 46 to 55 of Goods and Services Tax Ruling GSTR 2004/9 Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise]

Turning to the facts of the arrangement:

·         Separation Payments - The funds are provided to ensure financial viability. While the funds may be used towards identified future capital expenditure and/or modernisation where appropriate, the SPV is not under any obligation to do or provide something in return for receiving the payments.

In addition, the SPV is not making a supply by assuming the liabilities for the employee entitlements.

·         Transfer of assets and liabilities - the Enabling Legislation, will cause the transfer and is achieved in a similar way to that of a land acquisition by a gazettal notice.

Therefore, from the facts provided, neither GE nor the SPV are undertaking any action to effect the transfer and they are not providing anything in return for the transfer.

The SPV is not making a supply under section 9-10 of the GST Act nor making an acquisition under section 11-10 of the GST Act when the assets and liabilities are transferred.

As the SPV is not making a supply, there can be no supply for consideration as required by section 9-5 of the GST Act. As such, the SPV is not making a taxable supply when it receives the Separation Payments. It is also not making a taxable supply or creditable acquisition when the assets and liabilities are transferred to it.

As GE is not making a supply to the SPV, there can be no creditable acquisition by the SPV for the purposes of Division 11 of the GST Act when the assets and liabilities are transferred to it.

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