Edited version of private ruling

Authorisation Number: 1011656740161

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Ruling

Subject: Financial incentive scheme

Question

What, if any, are the GST implications for you, a government agency and other government agencies, of the particular financial incentive scheme?

Advice/Answers

There are no GST consequences for you, and other government agencies, of the particular financial incentive scheme.

Relevant facts

You develop and manage particular arrangements. Where an arrangement has been established, a public authority must make its purchases under it in accordance with the relevant guide

One such contract is for the provision of specified services and ancillary services. This contract is mandatory for all particular state agencies and optional for other approved users.

You provided a description of the arrangement.

You also provided unsigned copies of several contract documents:

Reasons for decision

Consequences for you

You have negotiated an arrangement with service providers for the provision of specified and ancillary services.

The arrangement includes a financial incentive scheme. Under the scheme you will receive payments from service providers, calculated in accordance with an agreed formula.

This raises the question of whether the payments by the service providers are consideration paid to you in exchange for a taxable supply that you make to them.

You are making a taxable supply if the supply satisfies all the criteria in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This section states that:

 

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.

 

*Note that the asterisks denote a defined term in the GST Act

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

Supply is defined under section 9-10 of the GST Act as follows:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a *financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in
paragraph (a) to (g).

Consideration' is defined under section 9-15 of the GST Act to include any payment in connection with, in response to, or for the inducement of a supply.

When you receive an incentive payment from one of the service providers it is necessary to consider if there is a supply from you to the service provider for which the payments are consideration. In this case you are not supplying goods or services to the service provider. It is, however, necessary to consider if there is a supply from you to the service provider of anything else, such as an entry into an obligation to do anything, in return for the incentive payments. Where there is an obligation, there is a requirement that it be binding on the parties for there to be a supply.

Paragraphs 32 to 36 of Goods and Services Tax Ruling GSTR 2000/11: grants of financial assistance (GSTR 2000/11), explain that an agreement between parties to a funding arrangement may establish rights or obligations between the parties.

In particular paragraphs 33 to 36 of GSTR 2000/11 state:

33. For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties.  The creation of expectations among the parties does not establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties.

34. Examples of arrangements that will indicate an agreement binds the parties include:

· a contract, such as a purchaser-provider agreement;

· a provision providing that the money granted must be repaid in specified circumstances;

· a guarantee or lien over property of the grantee; or

· an agreement such as a deed that is enforceable on its own terms even without specific remedies being provided for in the event of a breach.

35. This requirement was emphasised by the New Zealand Court of Appeal in C of IR v. New Zealand Refining Co. Ltd (1997) 18 NZTC 13187. The case concerned certain payments made by the New Zealand Government to the New Zealand Refining Company that were only to be made on condition that the refinery remained operational. Blanchard J referred to Richardson J's dictum in the Marac cases that the nature of the legal arrangements entered into needed to be considered, and noted that there was an expectation among the parties that the refinery would continue to operate, but there was no contractual requirement to that effect. The government's only recourse in the event that the refinery ceased to be operational was to stop making payments. In New Zealand Refining, the court held:

In terms of any binding commitment between the parties, there was to be little or no linkage between the Crown's payments and the making of particular (or any) supplies of goods or services.

36. We consider that the requirement that a transaction needs to bind the parties in some way before it will involve a supply has application in Australia where the transaction is the supply of a right or obligation.

The incentive payments are made to you in accordance with the agreement that you have negotiated. However, having negotiated the agreement, you are not required to do anything further to receive these payments. The payments are made to you as a consequence of the agencies accessing the services.

Further, the only action required of the agencies is to use the services. The application form is not a contract of performance and contains no provision for incentive payments.

In discussing applications for grants, paragraph 98 of GSTR 2000/11 states:

It is common for a grantee to submit an application for the grant to the grantor, and for the application to contain information which the grantor will use to determine whether or not to make a grant. The provision of information in such an application is a supply to the grantor. However, the grant will not be consideration for the supply, as the grant is not made for the purpose of receiving applications for grants. The submission of the application, together with the information required to consider it, is merely a mechanism to establish whether a grant will be made.

You have not entered into an agreement, or any other binding arrangement, requiring you to do something for the service providers in return for the payment. Therefore, the incentive payments are not consideration for a supply by you. Accordingly, you are not making a taxable supply to the service provider.

Paragraphs 43 to 46 of Goods and Services Tax Ruling GSTR 2000/19: making adjustments under Division 19 for adjustment events (GSTR 2000/19) deal with payments arranged and administered by third parties. In your case, the payments are made in accordance with a contract that you have negotiated and the amounts of the payments are calculated by reference to an agreed formula. Further, you have agreed to redistribute the payment to the agencies in accordance with an agreed formula. However, neither you nor the agencies pay any consideration for the specified services. Therefore, the incentive payments are not an adjustment to the consideration paid for a supply to your or the agencies.

Section 134-10 of the GST Act deals with payments you receive from an entity (the payer) that supplied a thing that you acquire from another entity. However, you have not made any acquisitions from any of the agencies. Therefore, section 134-10 will not apply.

The payments from the service providers are neither consideration for a taxable supply that you have made, nor adjustments to the consideration that you have paid for a supply made to you. Further, they are not payments that you receive from an entity that supplied a thing that you acquire from another entity. Therefore, there are no GST consequences for you in relation to the financial incentive scheme.

Consequences for agencies

The government agencies will receive an annual disbursement from you of the monies that you receive from service providers. The amounts received by the individual agencies will be based on an agreed formula.

The respective agencies will not make any supply to you in return for the disbursement. Further, there is no contractual arrangement that requires you to pay the monies to them. The agencies will simply access the services of the service provider. Additional matters relating to accessing the services will be negotiated directly between the agency and the service provider. The agency agrees to the conditions as prescribed by the service provider. The supply in this transaction is the supply of services by the service providers.

There is no supply by the respective agencies to the service provider. The agency simply chooses the provider from the panel of approved providers. The distribution from you is akin to the redemption of loyalty points. Accordingly, the agencies will not be making a taxable supply.

As discussed previously, the agencies do not pay any consideration for the specified services. Therefore, the incentive payments are not an adjustment to the consideration paid for a supply to the agencies.

As is the case with the initial payment to you, section 134-10 of the GST Act will not apply in this circumstance.

The payments from you are neither consideration for a taxable supply that the agencies have made, nor adjustments to the consideration that they have paid for a supply made to them. Further, they are not payments that the agencies receive from an entity that supplied a thing that the agencies acquire from another entity. Therefore, there are no GST consequences for the agencies in relation to the financial incentive scheme.