Edited version of private ruling

Authorisation Number: 1011765430054

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Ruling

Subject: GST and grants

Question

Are you required to be registered for goods and services tax (GST)?

Answer

Yes, you will be required to register for GST once your GST turnover meets the registration turnover threshold of $150 000.

Relevant facts

You are not registered for GST.

You carry on an enterprise as a not for profit organisation that works in partnership with organisations in and out of Australia to enhance the quality of life of people with mobility disabilities.

You have been granted income tax exemption and GST concessions under Division 176 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Your activities involve amongst others, providing products and services to people with disabilities, with a view to enhancing their life.

You receive grants from various organisations for overseas projects and gifts from members of the public. Your other source of income is from the sale of goods to disabled people.

You are unsure as to whether your income from those sources will reach $150 000 by the end of this financial year.

Grant from first organisation:

Some time ago, you received a grant from an organisation (grantor) with which you had a written agreement for you to conduct a specific project.

The terms and conditions of the agreement imposed upon you some obligations and you had to complete the project in accordance with those terms.

Some of the terms of the agreement were that you had to publicly acknowledge, for example, in the display of their logo, the funding assistance provided by the grantor. Your project was constantly monitored and evaluated. Another term was that all intellectual property rights remained with the grantor.

A further condition was that in case of termination of the agreement, you had to refund any unspent monies to the grantor together with the submission of final reports.

Grant from second organisation

Recently, you successfully applied for and received a grant from an organisation (grantor) to undertake a project in accordance with some specific objectives as detailed in your application.

You entered into an agreement with the grantor and one of the terms was that you return any unspent funds to them upon termination of the agreement. Moreover, you had to keep accurate records and submit written reports on the project's activities and its outcomes.

Another term of the agreement was that you had to grant a licence to the grantor to use your intellectual property. You were also required to publicly acknowledge the funds granted to you, through the display of the grantor's logo, at all activities conducted by you.

Grant from third organisation

Some time ago, you were granted funds by an organisation to undertake a specific project. You entered into a written agreement with that organisation and it contained specific terms and conditions. One of the terms was that you abide by the completion date of the project.

You were also required to provide written reports to the grantor and to publicly acknowledge their funding of the project. You were also required to grant to the grantor right to your intellectual property.

Funds from fourth organisation

In addition to the above grants, you received some funds from an organisation to cover your costs in relation to a project you had undertaken.

In this case, there was an unsigned memorandum of understanding (MOU), however there was no formal agreement between you and the payer.

Funds from fifth organisation

In this case, you were granted funds to cover costs incurred whilst you were undertaking a programme overseas.

Funds from sixth organisation

The funds were voluntarily and unconditionally granted to you by a not for profit overseas organisation. The funds were to cover your direct costs relating to your work overseas. You and the organisation are financially independent of each other.

Funds from seventh organisation

You received a reimbursement of direct expenses from this organisation, after assisting them with a specific overseas project.

Reasons For Decision.

GST is a value added tax that is paid by entities which are required to be registered for GST. A registered entity is liable for GST on supplies, to the extent that they are taxable. Before a supply that is made in connection with the receipt of a grant will be subject to GST, the person making the supply, that is the grantee, must be registered, or required to be registered for GST.

Requirement to register for GST

Section 23-5 of the A New Tax System Goods and Services Tax) Act 1999 (GST Act) GST Act provides that an entity is required to be registered for GST if:

(a) it is carrying on an enterprise; and

(b) and its GST turnover meets the registration turnover threshold.

Registration turnover threshold

The term 'enterprise' is defined in section 9-20 of the GST Act to include, amongst other things, an activity or series of activities done in the form of a business.

From the facts provided, we consider that as a charitable organisation, you are carrying on an enterprise. Therefore, you satisfy the requirement of paragraph 23-5(a) of the GST Act, and you will be required to be registered for GST if you meet the registration turnover threshold.

As you are a not for profit entity, the relevant GST registration turnover threshold applicable to you under section 23-15 of the GST Act is $150 000. Therefore, where you carry on an enterprise and your GST turnover meets the threshold of $150 000, you will be required to be registered for GST.

You advised that that your income is derived from grants for overseas projects, donations and proceeds from the sales of goods to associations. You are of the opinion that the sale of the goods to disabled people is exempt pursuant to Schedule 3 of the GST Act. However, the next issue is to determine what exactly should be included in your GST turnover.

According to section 188-10 of the GST Act, an entity's GST turnover meets a particular registration turnover threshold if:

(a) the entity's current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that the entity's projected GST turnover is below the turnover threshold, or

(b) the entity's projected GST turnover is at or above the turnover threshold.

Hence, in order to examine whether an entity needs to be registered for GST, the entity must on a monthly basis analyse its GST turnover to ensure it is not $150 000 or more. Goods and Services tax Ruling GSTR 2001/7 explains the meaning of GST turnover, provides guidance on the interpretation of section 188-10 of the GST Act.

An entity's current GST turnover is the sum of the values of all supplies it has made or is likely to make in a particular month and the previous 11 months. Its projected GST turnover is the sum of the values of all supplies it has made in a particular month plus the sum of the values of supplies it is likely to make over the next 11 months. Hence, the GST turnover test is continuous over any
12 month period and is not necessarily restricted to a financial year. Hence you will need to monitor your GST turnover closely to ascertain whether an obligation to register for GST has arisen or is likely to arise as a result of projected income.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are disregarded:

· supplies that are input taxed;

· supplies that are not for consideration;

· supplies that are not made in connection with an enterprise that you carry on; and

· supplies that are not connected with Australia.

The term 'supplies' refers to all supplies and is not limited to taxable supplies as defined in section 9-5 of the GST Act. For example, you may be required to be registered even if your GST turnover reaches $150 000, and all your supplies are GST-free.

Treatment of grants for GST purposes

GST is payable in respect of taxable supplies. Supplies made in connection with the receipt of a grant will be subject to GST where the grant represents consideration for a taxable supply.

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

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of your enterprise

(c) the supply is connected with Australia; and

(d) you are registered or required to be registered for GST.

When a grant is made, the grant provider (grantor) is generally the recipient of a supply and the grant recipient (grantee) is the supplier of a supply. In your case, we need to determine whether upon receipt of the grants, you made a 'supply' for which you received 'consideration' and the necessary connection between the two.

Goods and Services Tax ruling GSTR 2000/11 deals with the GST treatment of grants of financial assistance. The ruling provides guidelines for working out when grants of financial assistance and funding constitute consideration for a taxable supply. Paragraph 15 explains the notion of supply as:

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 term 'supply' is defined in subsection 9-10(1) of the GST Act, and is any form of supply, whatsoever'. It includes, amongst others, an entry into, or release from, an obligation to do anything; or to refrain from an act; or to tolerate an act or situation.

There are two aspects of supply - the thing which passes, such as an obligation, and the means by which it passes, as its entry or release.

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 and states:

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.

When determining whether an agreement between two parties gives rise to a binding obligation to do something, the substance of the entire transaction must be examined. At that time, we must also take into account the surrounding circumstances of the agreement to determine the true nature of the transaction for GST purposes.

Grant from first organisation

Was there a supply?

With regards to the grant from the grantor, we need to determine whether you made a supply when you entered into an obligation to do something for the grantor in return for the funds.

Paragraphs 33 and 34 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. 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:

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

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

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

o 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.

In entering into the agreement with the grantor, you accepted the funds subject to the condition that you use them in accordance with the specific activity, which required you to provide services to people with disabilities. Moreover, you were required to repay any unspent funds to the grantor at termination. These conditions establish a binding obligation on you to use the funds for the purpose for which the grant was given. This entry into an obligation to comply with the terms expressed in the legally enforceable deed constitutes a supply made by you as per section 9-10 of the GST Act.

Whether there is consideration

A supply is a taxable supply, if, among other things, the supply is made for consideration. Thus, there must be some nexus or connection between a particular supply and particular consideration which is provided for that supply.

Section 9-15 of the GST Act defines the meaning of 'consideration'. The definition extends beyond payments and includes 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 a supply.

In your case, the grant you received from the grantor represents consideration for your supply of entering into an obligation pursuant to section 9-15 of the GST Act.

The necessary relationship which must exist between supply and consideration?

Paragraph 71 of GSTR 2000/11 states:

It will not be sufficient for there to be supply and consideration. GST is not payable on supplies unless they are made for consideration, and the other tests in section 9-5 are satisfied. There must be some nexus between supply and consideration. In C of IR v. New Zealand Refining Co. Ltd (1997) 18 NZTC 13187, at 13193 Blanchard J commented:

'It can be seen that…a linkage between supply and consideration is requisite to the imposition of the tax…There is a practical necessity for a sufficient connection between the payment and the supply. The mechanics of the legislation will otherwise make it impossible to collect the GST'.

Paragraphs 81 and 82 of GSTR 2000/11 further explain:

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.

Purpose for which the grant was made

The specific 'programme' explains that the main purpose of the grant is to establish effective provision for disabled people in some specific areas, to meet their immediate and ongoing needs.

Paragraphs 85 and 86 of GSTR 200/11 explain the nexus where the grantee supplies obligations and state:

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.

The agreement you entered into with the grantor clearly stated the conditions you had to comply with in exchange for the funds. Some of the conditions you had to abide by under the agreement were that you must acknowledge their funding assistance provided to you and advise them of matters relating to any publicity and media relations, prior to any publication or media release. Furthermore, the grantor constantly monitored and evaluated your Activity and use of the funds.

Another clause of the agreement provided that in the event of termination, you were required to refund any uncommitted part of the funds already paid by the grantor. Furthermore, upon completion of the programme, you were required to submit a final report on the outcomes as compared with objectives, and any unspent funds had to be repaid.

When applying the principles of GSTR 2000/11 to the totality of the arrangements which involved the conditions binding you and the grantor, we are of the opinion that there is a connection between the supply you made, (your entry into an obligation to deliver as per your proposal), and the consideration you received from the grantor.

Grant from second organisation

To be binding and more than a mere expectation, the terms of any grant agreement must require you as the grant recipient to do something in exchange for which the grantor is required to pay the agreed funds. The totality of the arrangements between the parties must create a contractual requirement to that effect.

In respect of the grant from the grantor, we consider that you made a supply to them, under subsection 9-10(1) of the GST Act, when you first lodged an application with that institute for funding and entered into an obligation to undertake the specific Activity. You then received consideration in the form of the funds, subject to the terms of the Agreement between you and the ATI that is, to use the funds for a specific purpose.

To determine the connection between supply and consideration as required by paragraph 81 of GSTR 2000/11, we look at the purpose of the grant, which was for the enhancement of services provided by an overseas organisation. The activities included, amongst others, providing training to members of the overseas organisation.

Some of the conditions attached to the agreement were that the Activity had to be completed and acquitted within a fixed period, otherwise the grant had to be repaid. Furthermore, funding by the grantor had to be publicly acknowledged in any publicity and their logo must feature prominently in all material published. You were also required to grant the grantor a permanent and irrevocable licence to use and exploit the intellectual property rights in your material.

With regards to this condition, we refer to paragraph 83 of GSTR 2000/11 which explains that there exists a nexus where the grantee (you) supplies rights to the grantor in the form of a licence. In this case, the grantor will derive a benefit from the right to use your intellectual property in exchange for the grant.

In summary, when you agreed to abide by these conditions which go to the purpose of the funding programme, that action created the necessary nexus between your supply and the consideration received from the grantor.

This supply is not input taxed under any section of the GST Act or any other Act. Therefore the value of this supply is included in your turnover for GST purposes. If you are registered or required to be registered for GS, when you make the supply, it will be a taxable supply and you will be required to remit 1/11^th of the grant to the Tax Office.

Grant from third organisation

With regards to the grant made to you by the grantor, we consider that in return for the funds (representing consideration), you entered into a binding agreement with the grantor to undertake a project. The grant agreement sets out rights and obligations which require you to use the funds to provide some goods and services to disabled people. This entry into an obligation to abide by the rules as contained in the project application constitutes a supply in accordance with section 9-10 of the GST Act.

Nexus between supply and consideration

At the time of application for the grant, you specified your objectives and you were expected to deliver on these. The purpose of the grant was for you to undertake the specific project .The grant was made to you in exchange for your entry into an obligation to use it for that purpose. The conditions you had to abide by were listed in the document and stated that you had to acknowledge publicly the grantor's funding by displaying their logo, and to repay the unused funds.

After considering the presented facts, the arrangement between you and the grantor, and the attached conditions which go to the core of the grant, we consider that there exists the necessary nexus between your supply and the consideration you received.

As such, the grant you received from the grantor must be included in the calculation of your turnover for GST purposes.

If you are registered or required to be registered for GST when you make the supply, the supply will be a taxable supply and you will be required to remit 1/11^th of the amount of the grant to the Tax Office. You will also need to issue the grantor with a valid tax invoice

Funds from fourth organisation

You have advised that the organisation granted you funds to cover your direct costs incurred for your work overseas. You have also stated that you only have a MOU and not a binding agreement with the grantor for these funds. We therefore need to determine whether that amount represents a gift made to you by the organisation.

Paragraphs 49-69 of GSTR 2000/11 discuss the GST treatment of 'gifts' to non-profit bodies. The ruling explains that under paragraph 9-15(3)(b) of the GST Act payments that are 'gifts' made to a non-profit body, are specifically excluded from being consideration for a supply. The underlying condition of this provision is that the payment is in fact a 'gift'.

Paragraphs 57 to 68 of GSTR 2000/11 explain the three tests used to determine whether a grant is a gift. The three tests are

· the payment is made voluntarily, and not as a result of a prior contractual obligation;

· the payer does not receive an advantage of a material character by way of return for making the payment, and

· the payment essentially arises from benefaction.

As per the facts provided, the organisation voluntarily granted you funds to cover your direct costs for your work overseas. You have also advised that there was no contract imposing any binding obligations upon you, except for a MOU.

The second test examines whether the payer received any advantage of a material character by way of return, even if the advantage is of a value that is less than the value of the grant. You have advised that the organisation did not provide you the funds to conduct work in furtherance of their grants programme and that they did not derive any benefit from the payment of the grant.

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 payer. You have advised that the organisation made the donation to you to encourage you in the work undertaken overseas. You did not enter into any obligation to undertake any project or to abide by any conditions, and the organisation made the payment to you essentially out of benefaction.

Applying the above principles of GSTR 2000/11 to the payment you received from the grantor, we conclude that it satisfies all the three tests that determine whether funds granted to you were a gift. Therefore, the grant you have received from the organisation is considered a gift under paragraph 9-15(3)(b) of the GST Act and is not a provision of consideration.

Funds from fifth organisation

You have advised that you were conducting a joint programme with an overseas organisation. The amounts paid to you were to reimburse you for your incidental expenses. No agreement which imposed any binding obligations upon the parties was entered into between you and the organisation. We are of the opinion that these amounts were not consideration for any supply you made.

Funds from sixth organisation

You have advised that these funds were transferred by the overseas organisation to support your work in a specific country. You have also advised that you conduct your enterprise independently of the fund provider and there was no contractual obligation between you and the grantor which would amount to a supply made by you. When you undertook the activities and provided services to a specific group of the community, there was no material benefit that flowed to the organisation as you were not undertaking the project in furtherance of their enterprise.

In this case, we consider that the organisation's financial assistance to you satisfies the three tests stated above and satisfies the definition of a gift under paragraph 9-15(3)(b) of the GST Act and as explained in paragraph 49 of GSTR 2000/11 does not constitute consideration for a supply.

Funds from seventh organisation

In this case, we need to determine whether the reimbursement of the direct costs by the organisation represents consideration for a supply made by you.

As previously explained, where a recipient undertakes or is required to do something in exchange for the funds, there exists a supply by the recipient for which the grant is consideration.

We refer to paragraph 108 of GSTR 2000/11 which provides an example resembling your situation and it states:

108. Vacuum Australia administers a scheme to encourage the use of vacuum cleaners to keep Australia's footpaths clean. It provides subsidies for the costs of vacuum cleaners acquired by businesses. The Agency has discretion as to whether it approves claims. Alana, who operates a greengrocery, acquires a vacuum cleaner for use in the business and makes an application for reimbursement. The application contains information about how she will use the vacuum cleaner. The grant is approved after the grantor considers the application for reimbursement.

109. The reimbursement grant is not subject to GST. There is nothing given up by Alana in exchange for the grant. The information in the application for reimbursement merely establishes Alana's entitlement to claim the reimbursement, and the grant is not consideration that is sufficiently connected with the supply of information by Alana to Vacuum Australia.

In your circumstances, the organisation's voluntary reimbursement of your expenses incurred for assisting them with their project does not constitute consideration for a supply made by you.

Donations from the public

As previously explained, and in accordance with paragraphs 49 to 69 of GSTR 2000/11, we consider that the donations from the public satisfy all the tests which determine the attributes of a gift, in that

the payment was made voluntarily, and not as a result of a prior contractual obligation;

the donors did not receive any material advantage in return for the donation and

the payments were made out of the donor's detached and disinterested benefaction.

Consequently, the donations from the public are not considered as consideration for a supply .made by the donor.

Sale of goods for the disabled to associations

Section 38-45 of the GST Act provides that where the elements of that section are satisfied, a medical aid or appliance listed in Schedule 3 to the GST Act (Schedule 3) is GST-free. Subsection 38-45(1) requires that the medical aid or appliance be:

· covered by Schedule 3 or a subsequent GST regulation, and

· specifically designed for people with an illness or disability, and

· not widely used by people without an illness or disability.

Once an item meets all of the above elements then its supply will be GST-free all the way down the supply chain and not only when supplied to a person who has an illness or disability.

In this instance the goods you supply to the associations are listed at Item 55 of Schedule 3 and are specifically designed for people with an illness or disability and are not widely used by people without an illness or disability. As such, the supply of the goods is GST-free as a medical aid or appliance under section 38-45 of the Act. Please note however, that the proceeds from the sale of such goods should be included in the calculation of your GST turnover.

Requirement to register for GST

Under section 25-1 of the GST Act, an entity is required to make a registration application within 21 days of being required to be registered for GST.

An entity that is registered for GST or required to be registered for GST is liable to remit GST on any taxable supplies that it makes and can claim input tax credits on its creditable acquisitions.

GST reporting requirements

The GST legislation requires an entity which is registered for GST to meet all its tax obligations. Once registered, it must include GST in all its taxable supplies. The entity must lodge an activity statement with the Tax Office on or before the due date following the end of each tax period. The GST returns (activity statements) will be sent to the entity for each tax period. The entity is then required to complete the activity statements and return them to the Tax Office by their due dates. The activity statements can also be lodged electronically.