EDITED VERSION OF GST PRIVATE RULING

Authorisation Number: 90176

SUBJECT:

GST and membership requirements of a GST group

QUESTIONS AT ISSUE:

1. Can the Activity Groups (AGs) become GST Group members of the Department?

2. What is the GST status of the monies that are forwarded to the AGs by Department from the Account?

FACTS:

The full proclamation of the Act will allow the recognition of Activity Groups (AGs).

The policy guiding recognition of an activity group will require the group to be incorporated under the Association Incorporations Act 1987 in order to quality for recognition.

The Account will be held in a Department operating account and the Department will be responsible for forwarding monies from this account to the AGs.

The monies that the AGs will receive from the Account will be the core of their operational funding. However, they may seek to supplement this core funding with monies from third parties.

The AGs will be required to report to the Director Genera! of the Department Activity Council will monitor their programs and achievements and identify opportunities for improvements..

They will have a statutory obligation to the Department to spend all monies advanced to them from the Account in accordance with the Director General's instructions, to provide an annual report to the Director General on the use of such funds and to re-pay any remaining unspent.

The AGs will be substantially controlled by the Department. The control the Department will have over the AGs will arise from a AG being provided with money from Account (to use for the purpose of carrying out activities in the area which the particular AG operates.

Where this happens the Director General will give the AG written notice specifying the purpose for which the money is to be used, directions as to the use of the money for those purposes, reporting requirements in relation to the use of the money and the period in which the purposes are to be accomplished. The AG must use the money as directed by the Director General in the notice and if it does not the amount transferred (and not so used) may be recovered.

You also gave the following responses to our questions:

(1) Please provide details of the nature of control of the (AGs) by the Department?

The AGs must meet the eligibility criteria that are set (in policy) in order to be awarded AG status. They are required to be incorporated, be involved in declared activities and must be able to demonstrate that they have appropriate indemnity insurance(s). The transfer of money to an AG is governed by the Act and the money must be used in accordance with the directions given in a written notice to the AG under this section. The current expectation is that the Department will continue to provide all administrative support to the AGs. Hence, there is further scope to influence their direction and activities.

(2) Can all the members of the proposed GST Group be regarded as 'non-profit bodies'? (The Tax office accepts an organisation as non-profit if its constitution or governing documents prohibit the distribution of profits or gains to individual members, and its actions are consistent with the prohibition).

It is our understanding that a government department/entity can never be a non-profit body. The remainder of the entities within the current GST group are all statutory authorities that exist as a consequence of legislation. They cannot be dissolved but may cease to exist as a consequence of the relevant Act being repealed.

A requirement for the incorporation of an AG is that they be a non-profit body. In order to qualify for incorporation, their constitution must include the following clause: Non profit Association -The assets and income of the Association shall be applied solely in the furtherance of its objects and no portion shall be distributed directly or indirectly to members of the Association except as bona fide compensation for services rendered or expenses incurred on behalf of the Association.

(3) Is it accurate to describe an AG as an organisation that is (i) established by the State to carry on an enterprise or established for a public purpose by an Australian law and (ii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation?

(i) An AG is not 'an organisation that is established by the State to carry on an enterprise'. AGs are not established by the State. They can be regarded as being established for a public purpose, but they are not established by an Australian law. These groups are existing groups that are recognised under the Act but they are not established by it.

(ii) Yes. Every organisation that qualifies for AG status will be involved with the activities within a certain area However, a given AG may also be involved in other activities as well such as natural resource management issues.

(4) Will all the AGs be registered for GST?

Yes.

(5) Will all the members of the proposed GST Group have the same tax periods?

Yes.

(6) Will all the members of the proposed GST Group account on the same basis?

Yes.

(7) Will any members of the proposed GST Group be a member of another GST Group?

No.

(8) Will any of the proposed members of the GST Group have a branch registered

under the GST Act?

No.

(9) Where the Director General gives a AG a written notice (purpose, directions, reporting etc), does the AG enter into any kind of written agreement with the Department?

Yes. However, what has legal force is the directions in the written notice under Act which the AGs will be bound by.

You provided further answers to our questions:

1. What is the agreement designed to do?

The intent is basically to ensure proper accountability for public funds. It is envisaged that the written notice issued by the Director General of the Department will be set up as a formal agreement which becomes the final part of a process in which the AG concerned would earlier have provided a works proposal and an annual budget, in order to address one or more activities within a given area. In conjunction with their establishment, each AG will be required to provide a 5 year Strategic Plan detailing such things as its intended mode of operation, the particular activities, the area in which it intends to carry out activities, and the manner in which activities are to be funded and physically implemented. Annual budget proposals will then be called for to translate the higher level strategies of each AG, into yearly operational programs. These annual budget proposals will form the basis of the agreements which are then signed by the AGs authorised delegate, and the Director General.

(2)     What does the agreement contain?

      At a minimum, the wording of each agreement could be expected to contain some initial background as to the reason for its existence, the exact amount of funds to be transferred to the AG, the details of activities to be carried out during the year by the AG in question, the location, manner and timeframe in which the intended activities are to be carried out, any legislative requirements which the AGs or their contractors must agree to abide by whilst carrying out their intended work, the degree to which Officers of the Department are to be involved and any means of assistance that they are required to provide plus timing and location of same, the means by which the success or failure of the activities are to be assessed (including key milestones that are to be met and the timeframe in which each is to be achieved plus who will be responsible for assessing achievement), the nature and timing of progress reports to be provided back to the Director General, the conditions under which the funds are provided to the AG and under which they may have to be repaid by the AG (either in part or in full), the AG's specific acceptance of these conditions, the details of a senior Officer who is to be the Department's official contact for the purposes of carrying the agreement into effect, the mechanism via which any disputes arising are to be settled, and the manner in which the AGs will be required to indemnify the Department and the State for any damages/losses arising out of their intended operations.      

(3)     When the Director General gives the AGs a written notice, is an agreement entered into each and every time for this or is there an overarching agreement that covers all written notices?

It is intended that a written notice will be issued and an agreement entered into on an annual basis.

You provided this response to our further questions:

(1) Are the Notice and the agreement separate or incorporated? (Giving a notice sounds like a unilateral action whereas an agreement is bilateral). 

        The Notice and the agreement are separate.

(2) (a) Does the agreement end up as a contractual arrangement with the AG supplying binding obligations?

No.

      (b) Is it more a case of mere expectation between the parties with the legal force through the relevant legislation?

           

Yes.      

DECISION:

1. No, the AGs cannot become GST Group members with the Department.

2. The monies forwarded to the AGs by the Department from the Account are not consideration for a taxable supply.

REASONS FOR DECISION:

Question 1

Section 149-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) specifies the membership requirements of a GST group or proposed GST group of government related entities.

Section 195-1 of the GST Act defines government related entity as:

government related entity is:

(a) a *government entity; or
(b) an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999; or
(c) a local governing body established by or under a *State law or *Territory law.

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

Section 41 of the A New Tax System (Australian Business Number) Act 1999 states:

government entity means:

(a) a Department of State of the Commonwealth; or
(b) a Department of the Parliament; or
(c) an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999; or
(d) a Department of State of a State or Territory; or
(e) an organisation that:
(i) is not an entity; and
(ii) is either established by the Commonwealth, a State or a Territory (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law; and
(iii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation;

whether or not the organisation is part of a Department or branch described in paragraph (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph.

You have informed us that an AG is not established by the State to carry on an enterprise but rather is an existing group recognised under the Act but is not established by that Act. It cannot meet the definition of government entity in (e)(ii) above, nor does it satisfy any other criteria for a 'government related entity'.

Therefore an AG will not meet the membership requirement of a government GST group under section 149-25 of the GST Act.

The general GST group membership requirements are set out in section 48-10 of the GST Act. Subsection 48-10(1) of the GST Act states:

An entity satisfies the membership requirement of a *GST group, or a proposed GST group, if the entity:

(a) is:

(i) a *company; or

(ii) ….

(b) is, if the entity is a company, a company of the same 90% owned group as all the other members of the GST group or proposed GST group that are also companies; and

(c) …

A company is defined in section 195-1 of the GST Act as:

(a) a body corporate; or

(b) any other unincorporated association or body of persons;

but does not include a * partnership or a *non-entity joint venture.

Taking the broad definition of body corporate, the Department may be regarded as a company for the purposes of the GST Act.

Division 190 of the GST Act deals with 90% owned groups of companies:

190-1  90% owned groups

Two companies are members of the same 90% owned group if:

(a) one of the companies has *at least a 90% stake in the other company; or

(b) a third company has *at least a 90% stake in each of the two companies.

190-5  When a company has at least a 90% stake in another company

A *company (the holding company) has at least a 90% stake in another company (the subsidiary company) if the holding company:


(a) controls, or is able to control, at least 90% of the voting power in the subsidiary company (whether directly, or indirectly through one or more interposed companies); and

(b) has the right to receive (whether directly, or indirectly through one or more interposed companies) at least 90% of any *dividends that the subsidiary company may pay; and

(c) has the right to receive (whether directly, or indirectly through one or more interposed companies) at least 90% of any distribution of capital of the subsidiary company.

On the information provided, the Department and the proposed AGs will not meet the requirements to be in the same 90% owned group because they would not satisfy section 190-5 of the GST Act. As such they will not satisfy paragraph 48-10(1)(b) of the GST Act and consequently the membership requirements for a GST Group will not be met.

Note that subsection 48-10(2) of the GST Act states:

Paragraph (1)(b) does not apply if:


(a) the entity is a non-profit body; and

(b) all the other members of the GST group or proposed GST group are non-profit bodies; and

(c) the entity and all those other members are members of the same *non-profit association.

However, even if all the proposed members of the GST group were non-profit bodies and satisfied paragraphs 48-10(2) (a) and (b) of the GST Act, paragraph (c) would not be met because all the members are not members of the same non-profit association.

The proposed members of the GST group do not meet the membership requirements under either section 48-10 or section 149-25 of the GST Act, and so cannot become members of the same GST group.

Question 2

Section 7-1 of the GST Act states that GST is payable on taxable supplies.

In your situation, we need to examine whether an AG makes a taxable supply to you in relation to the funding provided from the Account.

Section 9-5 of the GST Act sets out the requirements that must be met for an entity to make a taxable supply. It states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry

on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

The GST treatment of funding depends primarily on whether such a payment represents consideration that has the relevant connection with a 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:

- is there a supply;

- is there consideration; and

- does that necessary relationship exist between the supply and the 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.

Goods and Services Tax Ruling GSTR 2006/9 'Goods and service tax: supplies' states at paragraph 123:

123. The Commissioner explained in Part 2 of this Ruling at paragraphs 102 to 103 how an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other unless there is something else, such as goods, services, or some other thing, passing between the parties.

There are no goods, services or other thing passing between the AG and the Department, so the question is whether there is a supply of an entry into an obligation.

The GST treatment of funding and whether the funding represents consideration that has the relevant connection with a taxable supply is discussed in Goods and Services Tax Ruling GSTR 2000/11 'Goods and services tax: grants of financial assistance'.

Paragraph 32 of GSTR 2000/11 explains that an agreement between the parties to a funding arrangement may establish rights or obligations between the parties.

32. It is common for a grantor and grantee to enter into a grant agreement which establishes rights and obligations between the parties. Often the grant agreement will provide for the grantee to be obliged to make supplies to third parties, rather than the grantor. That obligation to make supplies to others may itself be a supply to the grantor.

The agreement does not result in an obligation to make supplies to third parties through the conducting of pest control activities.

Paragraph 33 of GSTR 2000/11 states that for these rights or obligations to constitute a supply for the purposes of the GST Act, the supply of the rights or obligations must be binding on the parties. The mere creation of expectations between parties does not establish a supply.

Examples of arrangements that may indicate that an agreement is binding on the parties are such things as a contract or an agreement such as a deed that is enforceable on its own terms.

Based on the information provided, the AG will carry out activities under a written notice from the Director General and in accordance with the agreement.

This in itself indicates that the activities are not things that an AG is obligated to provide under the agreement but rather, are indicators of what needs to be done to obtain the outcomes and objectives of the written notice.

The AG's accountabilities are set out in the agreement and the written notice. The Department is responsible for the payment of the funding.

It is considered that the purpose of the agreement between the Department and the AG is to establish a framework within which the Department will provide funding to AG in support of the given written notice. It is understood that the agreement describes the respective roles and responsibilities of the Department and the AG. The status of the agreement and the notice is described as one which sets out the party's mutual understanding of their respective rights and obligations for the provision of the funding as part of the Department's funding arrangements.

As paragraph 15 of GSTR 2000/11 states:

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

The written notice and the Act may impose requirements to be fulfilled by the AG, but these are not obligations furnished by the AG to the Department. The activities are part of an AG's normal business and although an AG may have a statutory obligation to do so under a written notice from the Director General, the agreement does not establish any obligation to conduct particular activities, nor are those activities for supply to the Department. The AG is conducting its own business rather than doing something for the Department.

In this instance, the agreement creates a mere expectation between the parties for the purpose for which the funding is provided. A mere expectation is not 'the entry into a binding obligation' and is not a 'supply' for GST purposes.

As there is neither a supply of goods or services nor a supply of a right or obligations by the AG to the Department in exchange for the funding, paragraph 9-5(a) of the GST Act is not satisfied. Therefore, the AG does not make a taxable supply and GST is not applicable.

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