Edited version of private ruling

Authorisation Number: 1011678002000

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Ruling

Subject: GST and funding grant

Question

Is the government department (Dept X) liable for GST in respect of the funding provided by another government department (Dept Y)?

Advice/

No, Dept X is not liable for GST in respect of the funding provided by Dept Y.

Relevant facts

Dept X (you) conducts an annual conference for a particular category of employees.

Dept Y has agreed to provide funding to extend the conference to additional employees of that category:

You and Dept Y recently signed a Memorandum of Understanding (MOU), which included the following:

Recitals

Dept X is providing funding to coordinate the conference for a specified number of a particular category of employees. Dept Y has agreed to provide funding to provide an extra number of places for those employees to attend.

Dept X agrees to offer an extra number of places to that particular category of employees to attend the conference.

Dept X must:

· ensure that the extra number of employees are made aware of the opportunities available to attend the conference.

· provide Dept Y with any documentation for the conference, such as the agenda, promotional material, delegate handouts and any other supporting document.

· provide Dept Y with feedback on the conference.

Unless otherwise expressly agreed, the funding available under this MOU will be made available as follows:

· Dept Y will make a payment to Dept X towards the conference upon execution of this MOU.

· The funds must only be used by Dept X for the purposes of fulfilling its obligations under this MOU.

· You will be acknowledging Dept Y's support by having all printed materials provided at the conference co-branded with Dept X and Dept Y's logos.

· You will be providing feedback to Dept Y on the conference in the form of a report. An edited version of the report on the outcome of the conference will also be placed on your website.

· You advised that the relationship between the parties does not lead to a legal obligation.

Reasons for decision

You are liable for GST on any taxable supplies you make

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

· the supply is made for consideration;

· the supply is made in the course or furtherance of an enterprise that is carried on;

· 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.

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

Paragraph 14 of GSTR 2000/11: grants of financial assistance states:

14. A taxable supply cannot exist unless there is a supply for consideration . There are three questions that are relevant to determining this question:

· is there a supply;

· is there consideration; and

· does the necessary relationship exist between supply and consideration?

Subsection 9-10(1) of the GST Act defines a 'supply' as any form of supply whatsoever and subsection 9-10(2) of the GST Act expands this meaning to include:

· a supply of goods;

· a supply of services;

· a provision of advice or information;

· a grant, assignment or surrender of *real property;

· a creation, grant, transfer, assignment or surrender of any right;

· a financial supply;

· an entry into, or release from, an obligation:

· to do anything; or

· to refrain from an act; or

· to tolerate an act or situation;

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

To be a 'supply' under the GST Act, a 'supply of rights or obligations' requires that a binding agreement exists between the parties. Paragraphs 32 to 34 of GSTR 2000/11 state that:

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.

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. An agreement that does not bind the parties in some way would not be sufficient to 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.

The MOU between you and Dept Y was executed recently. You have advised that the relationship between the parties, does not lead to a 'legal obligation'. The MOU does not specify the circumstances in which the funds must be returned.

In this instance, the MOU creates an 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.

Arguably, there may be some other things passing between you and Dept Y which may amount to supplies for GST purposes; for example you are to provide Dept Y with copies of all conference documents, which are co-branded with your respective logos, and a feedback report after the conference has concluded. However, a taxable supply cannot exist unless there is a supply for consideration.

Subsections 9-15(1) and 9-15(2) of the GST Act provide that 'consideration' includes:

· any payment, or any act or forbearance, in connection with a supply of anything; and

· any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

For the purposes of determining the relationship between the supply and the consideration, paragraphs 81 and 82 of GSTR 2000/11 state that:

81. In determining whether consideration is in connection with, in response to, or for the inducement of a supply, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the agreements entered into and the circumstances in which the agreements are made.

82. Where the grant involves a supply of only a right or obligation, there needs to be some binding commitment supplied by the grantee which goes to the substance of the grant transaction. In determining what the substance of the transaction is where the transaction is an exchange of a grant for a right or obligation, the key consideration will be the object or purpose which the grant is intended to achieve. Things supplied as part of such a grant agreement that are merely incidental to the purpose for which the grant is made will not be supplies for which the grant is consideration.

Paragraphs 85 and 86 of GSTR 2000/11 further discuss the nexus where a grantee supplies an obligation.

85. Many grants are paid in exchange for the grantee's entry into an obligation to the grantor to do something with the grant. The grant is sufficiently connected with the supply of such an obligation if the obligation is something which goes to the purpose for which the grant is made.

86. Conditions that a grantee may enter into include a requirement to use the granted funds in a particular manner, such as to deliver specified services to the community in furtherance of an objective of the grants program. Provided that the grant is made for the purpose of those services being delivered, the acceptance by the grantee of an obligation to fulfil such conditions will establish a supply to the grantor in connection with the grant.

While the conditions of the funding require you to provide certain documents and a feedback report, the funding is not paid to you for these things.

We consider that these things are merely incidental to the purpose for which the grant is made and will not be supplies for which the grant is consideration.

As there is neither a supply of goods or services nor a supply of a right or obligation by you to Dept Y in exchange for the funding, paragraph 9-5(a) of the GST Act is not satisfied. Consequently, you are not liable for GST in respect of the funding provided by Dept Y.