Edited version of private ruling

Authorisation Number: 1011768368524

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Ruling

Subject: GST and contributions from community groups

Question

Is the financial contribution made by the Entity A to the Entity B, towards a project, subject to GST?

Answer

No, the financial contribution made by the Entity A to the Entity B, towards the project, is not subject to GST.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity B is registered for GST.

Recommendation proposed the development of the project.

Financial assistance would be provided by a commitment from Entity A.

Entity A is not registered for GST.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The financial contribution made by the Entity A to the Entity B, towards the project, is not subject to GST because there is no supply being made by the Entity B to the Entity A for which this contribution is consideration.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay GST on any taxable supply that it makes.

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

· the entity makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that the entity carries on

· the supply is connected with Australia, and

· the entity is registered or required to be registered for GST.

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

The first requirement to be satisfied is that there is a supply for consideration.

The term 'supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes:

· a supply of goods

· a supply of services

· the creation, grant, transfer, assignment or surrender of any right, and

· an entry into, or release from an obligation:

· to do anything

· to refrain from an act, or

· to tolerate an act or situation.

However, the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money.

The term 'consideration' is defined in section 9-15 of the GST Act and extends beyond payments to include such things as acts and forbearances. That is, 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.

However, it is not sufficient that there just be a 'supply' and 'consideration'. To satisfy the first requirement of section 9-5 of the GST Act, the supply must be made for consideration. This means that there must be a necessary relationship between the supply and the consideration.

In this case, the Entity A has made a financial contribution to the Entity B towards the project.

Guidance on the application of GST to grants of financial assistance and funding is contained in Goods and Services Ruling GSTR 2000/11.

As explained in paragraph 6 of GSTR 2000/11, one entity may provide financial assistance to another by means of direct grants, contributions, subsidies, co-payments and similar means.

Following on from this, paragraph 9 of GSTR 2000/11 provides that the GST treatment of financial assistance depends primarily on whether the financial assistance represents consideration that has the relevant connection with a taxable supply.

The facts show that it was the Entity B that was undertaking the project.

Consequently, there was no supply of goods or services to the Entity A.

However, it now needs to be determined if the financial contribution by the Entity A is for the supply of a right or entry into an obligation to do something.

According to paragraph 30 of GSTR 2000/11, not every grant of a right or entry into an obligation will establish a supply that is subject to GST.

This is further explained in paragraphs 33 and 34 of GSTR 2000/11 which 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:

· 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.

This means that while an agreement between the parties to a funding arrangement may establish rights or obligations between the parties, for these rights or obligations to constitute a supply, the supply of the rights or obligations must be binding on the parties. The mere creation of expectations between the parties does not establish a supply.

Based on the information provided, the Entity A was under no contractual obligation to make a payment. Rather, there were only expectations that the Entity A would contribute and that the Entity B would use the funds contributed.

As there is no binding agreement between the Entity A and Entity B, there is no supply of a right or an obligation being made by the Entity B.

Therefore, as the Entity B is not making a supply to the Entity A, the financial contribution from the Entity A is not consideration for a taxable supply.

Accordingly, the financial contribution made by the Entity A to the Entity B, is not subject to GST.