Edited version of private ruling

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Ruling

Subject: GST and donation to government entity

Question 1

Is a contribution in cash to a government entity a gift to a non-profit body pursuant to paragraph 9-15(3)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore not consideration for a supply pursuant to paragraph 9-5(a) of the GST Act?

Answer

No, the contribution in cash to a government entity is not a gift to a non-profit body pursuant to paragraph 9-15(3)(b) of the GST Act. The contribution is consideration for a taxable supply. Therefore GST will apply to the contribution.

Question 2

Is the government entity receiving non-monetary consideration when an entity provides labours for building work?

Answer

Yes, the government entity is receiving non-monetary consideration when an entity provides labours for building work.

Relevant facts

A government entity plans to undertake an upgrade of a market for an entity.

The entity will be contributing both cash and labour for this project.

The government entity contends that the contribution in cash is in the nature of a donation to the project and not a payment for materials or services. The government entity has no legal binding contract with the entity to expend the money in a specific manner.

The entity will keep a log book of their staff that worked on this project and estimated the cost of such labour.

The entity is not registered for GST.

Reasons for decision

Question 1

GST is payable on taxable supplies. Under section 9-5 of the GST Act you make a taxable supply if:

· you make the supply for consideration; and

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

· the supply is connected with Australia; and

· 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.

For paragraph 9-5(a) of the GST Act to be satisfied, there must be a supply and consideration, and there must be a sufficient nexus or connection between them.

However, paragraph 9-15(3)(b) of the GST Act states:

Making a gift to a non-profit body is not the provision of consideration.

Therefore paragraph 9-15(3)(b) specifically excludes a gift made to a non-profit body from consideration for a supply. Gift and non-profit body are the essential terms in this paragraph. It follows that if there is a gift to a non-profit body there will not be a taxable supply, unless there is other consideration for the supply.

Goods and Services Tax Ruling GSTR 2000/11 provides guidance as to the meaning of non-profit body and gift.

Firstly when considering whether or not the government entity is a non-profit body, paragraphs 50 to 54 of GSTR 2000/11 state:

50. Section 9-15 further provides that a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.

51. It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply.

52. The definition of consideration in the New Zealand GST Act is similar to the Australian definition. In C of IR v . Databank Systems Ltd (1989) 11 NZTC 6,093, at 6,102, Richardson J commented that the New Zealand definition of consideration 'breathed comprehensiveness'.

53. In the New Zealand High Court decision of New Zealand Refining Co . Ltd v . C of IR (1995) 17 NZTC 12,307, at 12,314 (' New Zealand Refining (HC)'), Henry J commented that the definition was wide, and that 'in response to' and 'for the inducement of' added little to 'in respect of', given the breadth of the latter term.

54. In Australia, the definition of consideration is similarly wide. To the extent that 'in connection with' may be narrower in scope than 'in respect of', the phrases 'in response to' and 'for the inducement of' may assume added stature.

In relation to the government entity we consider that the government entity is a body under the GST law that exhibits the qualities and characteristics of a non-profit body. Therefore, for the purposes of paragraph 9-15(3)(b) of the GST Act we consider that the government entity is a non-profit body.

It is now necessary to consider whether or not the payment from the entity satisfies the requirements of a gift.

Paragraphs 57 to 62 of GSTR 2000/11 discuss the meaning of gift. Those paragraphs state:

57. The term gift is not defined in the GST Act, and thus takes on its ordinary meaning. The ATO considers that for the purposes of the GST guidance is provided in income tax cases relating to gifts. The income tax similarly gives special treatment to some charitable and non-profit type bodies.

58. FC of T v . McPhail (1968) 117 CLR 111 is the leading income tax case on the test of what a gift is. There are two limbs to the McPhail test. If either of the two limbs is not established the grant will not be a gift. Whether or not this is the case will depend on the particular circumstances and the individual facts surrounding the grant.

59. The first limb of the test is that the grant is transferred voluntarily by the grantor to the grantee. To be a gift, a grant would not be the result of a prior contractual obligation to transfer the grant.

60. The second limb of the test is that the grantor may not receive an advantage of a material character by way of return in making the grant. It does not matter if the advantage returned is of less than equal value to the grant. An advantage of a material character would not include mere recognition for making the grant.

61. A further characteristic of a gift is that it essentially arises from benefaction, and the gift proceeds from the detached and disinterested generosity of the grantor. A grant that is made as a function of government, and does not have the characteristics of benefaction and detached, disinterested generosity, is not a gift.

62. A grant may have conditions attached to it that flow from the grantor's right to regulate the disposal of the grant and still be a gift. Such conditions reflect the terms on which the donor intends to make the grant and the grantee's understanding of the terms on which the grant will be made. Such conditions create equitable rights that are enforceable by equitable remedies. Nevertheless, the grant may still be a gift where the equitable rights arise as part of the grant transaction and do not directly or indirectly provide a material benefit to the grantor or an associate.

Thus, to be a gift the payment must be transferred voluntarily, and not as a result of a contractual obligation. Further, the donor must not receive an advantage of a material character as a result of making the donation. It does not matter if the advantage is of less than equal value to the payment.

In this case, the donation is made voluntarily by market to the government entity and not as a result of a contractual obligation. However, if the donation is utilised as wished, that is, for the upgrade of the market, a benefit will be received by the entity. The upgrade of the market will not only enhance the facilities of the market but also expand the market to accommodate more stalls. Thus the entity will benefit from it via the extra income received from the hiring of the additional stalls.

Therefore, we conclude that the entity receives some material benefit for providing the donation. The donation in cash is not a gift made to a non-profit body under paragraph 9-15(3)(b) of the GST Act. The payment in cash is therefore consideration of a taxable supply of building work by the government entity under paragraph (9-5(a) of the GST Act and is subject to GST.

Question 2

As discussed in Question1, the definition of a taxable supply requires, among other things, that you make a supply for consideration (paragraph 9-5(a) of the GST Act). There needs to be a supply, a payment and the necessary relationship between the supply and the consideration.

Consideration is defined in section 195-1 of the GST Act to mean any consideration, within the meaning given by section 9-15 of the GST Act, in connection with the supply or acquisition.

Subsection 9-15(1) of the GST Act provides that consideration include any payment, or an act or forbearances in connection with, in response to or for the inducement of a supply.

Goods and Services Tax Ruling GSTR 2001/6 'Goods and services tax: non-monetary consideration' considers how GST applies if part or all of the consideration for a supply is not expressed as an amount of money (that is, if it is non-monetary consideration).

Paragraph 12 of GSTR 2001/6 provides that a payment is not limited to a payment of money. It also includes a payment in non-monetary or in an in kind form such as:

· providing goods;

· granting a right or performing a service (an act); and

· entering into an obligation (a forbearance).

Paragraph 50 of GSTR 2001/6 provides that there are two elements to the definition of consideration. The first element is the payment by one entity to another; and the second is the sufficient nexus that must be established between the payment and the supply.

In this case, the act of providing building works by the government entity is a service which falls within the meaning given to the term consideration.

The act of providing labour by the entity is a non-monetary consideration which has sufficient nexus to the taxable supply of building works by the government entity.

Therefore the government entity is receiving non-monetary consideration when the entity provides labour for the building works undertaken by the government entity. GST will therefore be payable on the taxable supply of building work by the government entity based on the non-monetary consideration provided by the entity.

Value of a taxable supply

Section 9-70 of the GST Act provides that the amount of GST on a taxable supply is 10% of the value of the taxable supply.

Section 9-75 (1) of the GST Act provides the value of a taxable supply is as follows:

Price x 10/11

where:

price is the sum of:

· so far as the consideration for the supply is consideration expressed as an amount of money the amount (without any discount for the amount of GST (if any) payable on the supply); and

· so far as the consideration is not consideration expressed as an amount of money the GST inclusive market value of that consideration.

Pursuant to section 9-75 of the GST Act and as stated in paragraph 138 of GSTR2001/6:

Where the consideration for a supply is non-monetary, the GST inclusive market value of that consideration is used to work out the price and value of the supply. In most circumstances where parties are dealing at arm's length, we are of the view that the goods, services or other things exchanged are of equal GST inclusive market value

It should be noted that the onus for determining the GST inclusive market value of the consideration rests with this supplier. Paragraph 139 of GSTR2001/6 states:

As the GST inclusive market value of consideration will be shown as the price on any tax invoice that the supplier issues, the onus for determining the GST inclusive market value of the consideration rests with the supplier.

Paragraph 19 of GSTR 2001/6 states:

We consider that, in most circumstances, when the parties to a transaction are acting at arms length, the goods, services or other things being exchanged are of equal market value. This value can be determined by using a reasonable valuation method that is agreed to by you and the other party. However, this method must produce a reasonable GST inclusive market value of the things exchanged.

Therefore, the government entity and the entity are able to agree on a valuation method for the non-monetary consideration provided for the supply of building work that the value arrived at is a reasonable value for such services.

From the information provided, the entity will keep a log book of their staff that worked on this project and have estimated the total cost of such labour.

Entitlement to input tax credits

The provision of non-monetary consideration will also be a supply. Paragraph 16 of GSTR 2001/6 states:

By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply that you make. If it is a taxable supply, you need to determine the market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you.

In this case, the entity also makes a supply to the government entity by providing labour. If the supply of labour by the entity to the government entity is a taxable supply, that is, all of the elements of section 9-5 of the GST Act are satisfied, then the government will be entitled to an input tax credit in relation to the acquisition of those services from the entity.

You have advised that the entity is not registered for GST thus all the requirements of section 9-5 of the GST Act are not satisfied. The supply of labour by the entity to the government entity will not be a taxable supply. As such the government entity will not be entitled to an input tax credit in relation to the acquisition of those services from the entity.