Edited version of private ruling

Authorisation Number: 1011785024165

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Ruling

Subject: Cash and In-kind Contributions

Question 1:

Does an Administering Organisation make a taxable supply in return for a Cash Contribution received from a Collaborating Organisation pursuant to a Project Participation Agreement?

Answer:

No, an Administering Organisation does not make a taxable supply in return for a Cash Contribution received from a Collaborating Organisation pursuant to a Project Participation Agreement.

Question 2:

Does an Administering Organisation make a taxable supply in return for a Cash Contribution received from a Partner Organisation pursuant to a Project Participation Agreement?

Answer:

No, an Administering Organisation does not make a taxable supply in return for a Cash Contribution received from a Partner Organisation pursuant to a Project Participation Agreement.

Question 3:

Does an Administering Organisation make a taxable supply in return for an In-kind Contribution received from a Collaborating Organisation pursuant to a Project Participation Agreement?

Answer:

No, an Administering Organisation does not make a taxable supply in return for an In-kind Contribution received from a Collaborating Organisation pursuant to a Project Participation Agreement.

Question 4:

Does an Administering Organisation make a taxable supply in return for an In-kind Contribution received from a Partner Organisation pursuant to a Project Participation Agreement?

Answer:

No, an Administering Organisation does not make a taxable supply in return for an In-kind Contribution received from a Partner Organisation pursuant to a Project Participation Agreement.

Relevant facts and circumstances

The Parties:

University is established by State legislation.

The Council is established by Federal legislation.

Projects Scheme:

The Federal legislation deals with financial assistance for research and for the Minister to approve a proposal for expenditure by an approved organisation on an approved program, subject to the requirement that a set of Funding Rules which relate to the proposal must be in force and the proposal must satisfy the eligibility criteria in those Funding Rules.

Funding rules:

The Council has published Funding Rules. 'Eligible Organisation' is defined in the Funding Rules as an organisation that satisfies the eligibility requirements and Appendix C sets out a list of higher education organisations eligible to submit proposals which includes University. The Funding Rules provide that only an Eligible Organisation may submit a 'Proposal' (defined as a request to the Council for financial assistance for a research project).

The Council, assisted by selection advisory committees or external assessors, assesses each Proposal submitted by an Eligible Organisation and the Council's CEO submits Proposals to the Minister for consideration and approval. If a Proposal is approved then the Eligible Organisation becomes the Administering Organisation under the relevant Funding Agreement and is responsible for administration of the relevant funding.

The Funding Rules require that each Proposal must identify at least one Partner Organisation which will be involved in a project and the agreed contributions to be made by that Partner Organisation (which must satisfy the eligibility criteria set out in the Funding Rules).

The Funding Rules contain the eligibility criteria for Partner Organisations and sets out Partner Organisation Contribution Requirements which include a requirement that the combined Partner Organisation contributions for a Proposal must at least match the amount sought from the Commonwealth. The Funding Rules also contain guidelines for evaluation of the adequacy of In-kind Contributions by a Partner Organisation. For example, analytical and other services supplied by a Partner Organisation may be valued using either internal rates or incremental costs of providing such services, but not at commercial rates.

Funding Agreement:

Pursuant to the Funding Agreement between the Council and University in respect of this Project, University is the Administering Organisation.

The Funding Agreement sets out the conditions governing payment of funding which include that the Administering Organisation enters into an agreement with each Partner Organisation. The Funding Agreement also requires the Administering Organisation to enter into written Partner Agreements with each Partner Organisation which, inter alia, specify the Partner Organisation Contribution for the Project.

Draft Project Participants' Agreement:

University provided a draft Project Participant's Agreement ('draft PPA') which is between University (as 'Administering University') and one Collaborating Organisation and four Partner Organisations. 'Collaborating Organisation' is defined as any party to the draft PPA which is neither the Administering University or a Partner Organisation which is eligible to apply for and receive funding under the Funding Rules.

The draft PPA provides for the Administering University to deposit into a Project Account the Cash Contributions as described in Schedule 4 to the draft PPA. Schedule 4 sets out the Total Cash or Contributions by Partner/Collaborating Organisations and Total In-kind contributions by Partner/Collaborating Organisations for each year of the Project. University did not disclose the Contributions for each Partner Organisation or Collaborating Organisation.

The draft PPA requires any unexpended monies held in the Project account at the completion or termination of the Project to be returned to each Partner Organisation or Collaborating Organisation.

The draft PPA also provides that each Party grants to the other Parties a royalty-free non-exclusive licence to use its Background Intellectual Property and that Project Intellectual Property (i.e. created or developed by the Parties in the course of conducting the Project) vests in the Administering University unless otherwise specified or agreed, and the Administering University grants to all other Parties a perpetual, royalty-free, and non-exclusive licence to use Project Intellectual Property for business purposes but not for commercial gain (unless a commercial licence has been granted under the draft PPA. The draft PPA provides that the owner of any Project Intellectual Property must negotiate in good faith with the other Parties to share the proceeds of commercialisation having regard to the extend of Cash or In-kind Contributions made to the Project by each Party and the costs and risks associated with commercialisation of the Project Intellectual Property.

Ruling request:

In the ruling request University stated that there would be no material changes to the draft PPA.

University submitted that the relevant issue was whether University made a supply for consideration (i.e. for a Cash Contribution or In-kind Contribution received from a Partner Organisation or Collaborating Organisation) in terms of paragraph 9-5(a) of the GST Act.

University submitted that paragraph 9-5(a) of the GST Act has three components - there must be a supply, there must be consideration, and there must be a nexus between the supply and the consideration.

In relation to the first component, University submitted that a supply requires that something passes from one entity to another, making it necessary to identify whether anything is passing from University to either a Partner Organisation or a Collaborating Organisation.

In relation to the second component, University referred to Goods and Services Tax Ruling GSTR 2001/6 (Para 12) which states that consideration includes a payment in in-kind form.

In relation to the third component University referred to Goods and Services Tax Ruling GSTR 2000/11 which discusses the supply of an obligation in return for a grant and states that the relevant test is whether there is a substantial relation between the substance of the obligation and the grant having regard to the true character of the transaction, and a binding commitment by the grantee. University submitted that University did not enter into a binding obligation to provide anything in return for a Cash Contribution or In-kind Contribution. University referred to a GST Private Ruling which states that the granting of non-exclusive intellectual property rights had insufficient nexus with payment of any Cash Contribution or In-kind Contribution by a Partner Organisation or Collaborating Organisation.

Reasons for decision:

Question 1 - Cash Contribution received from a Collaborating Organisation:

Summary:

Although the Administering University does make a supply under the draft PPA and a Collaborating Organisation does provide consideration in the form of a Cash Contribution, there is no nexus between that supply and that consideration.

Detailed reasoning:

Supply:

Section 9-10 of the GST Act provides that 'supply' is any form of supply whatsoever and paragraph 9-10(2)(e) provides that 'supply' includes a creation, grant, transfer, assignment or surrender of any right.

The draft PPA provides for the Administering University to grant to the other Parties a non-exclusive licence to use Background Intellectual Property and for Project Intellectual Property to vest in the Administering University which then grants a non-exclusive licence to the other Parties to use that Project Intellectual Property for business purposes but not for commercial gain. The draft PPA also allows the owner of Project Intellectual Property (which we assume would be the Administering University) to grant a commercialisation licence of Project Intellectual Property on terms set out in Schedule 2 to the draft PPA (which currently states that the terms are 'to be agreed between the Parties'.

In our view the grant of non-exclusive licences or commercialisation licence by University as the Administering University is the creation or grant of any right within the meaning of paragraph 9-10(2)(e) of the GST Act and therefore a supply made by University. This view is supported by the discussion in Goods and Services Tax Ruling GSTR 2006/9 of Proposition 6, i.e. 'supply' usually requires something to be passed from one entity to another (Para 92):

92. The fact that 'supply' requires something to be passed from one entity to another is largely self-evident in a transaction based tax. However, not all forms of supply have this characteristic. For instance, paragraph 9-10(2)(e) includes a creation of a right as a supply. The 'creation' of a right does not involve a passing of the right from one entity to another. In this case, the action of the supplier causes the recipient to make an acquisition but without anything passing between them.

Consideration:

The definition of consideration in section 195-1 of the GST Act states:

consideration, for a supply or acquisition, means any consideration within the meaning given by section 9-15, in connection with the supply or acquisition.

Section 9-15 defines consideration to mean:

(1)   Consideration includes:

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

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

(2)   It does not matter whether the payment, act or forbearance was voluntary…

The draft PPA recites that the Collaborating Organisations have agreed to contribute cash and/or in-kind assistance to the Project. The Cash Contributions clearly fall within the word 'payment' in the definition of 'consideration' in section 9-15 of the GST Act. Consequently we consider that the draft PPA requires the Collaborating Organisations to provide consideration.

The definition of 'consideration' in section 9-15 also requires that the consideration be in connection with, in response to, or for the inducement of a supply. We consider this requirement in the next section.

Supply for consideration:

Paragraph 9-5(a) of the GST Act provides that an entity makes a taxable supply if, inter alia, that entity makes the supply for consideration. Section 195-1 of the GST Act defines 'consideration' for a supply to mean any consideration, within the meaning of subsection 9-15(1), in connection with the supply and subsection 9-15(1) of the GST Act provides that consideration includes any payment, act or forbearance in connection with, in response to, or for the inducement of a supply of anything.

Goods and Services Tax Ruling GSTR 2006/9 states (Para 180) that the test whether there is a sufficient nexus between a supply and consideration is objective, regard needs to be had to the true character of the transaction, and that the arrangement between the parties is characterised by examining all of the transactions entered into and the circumstances in which the transactions are made.

In the present case the Funding Rules state that the aims of funding schemes under the Council's grants program include building the scale and focus of research and research training and facilitating collaborative approaches to research and research training and that Projects support research and development projects which are collaborative between higher education researchers and other parts of the national innovation system. The references to 'collaborative research' and 'building scale' suggest that the aim is to augment research projects by fostering collaboration between universities and other parties where the other parties augment the government funding provided to universities by the Council by making cash or in-kind contributions. This is also reflected in the Funding Agreement which provides that the Administering Organisation must not allow a Project to commence nor funding to be expended until it has entered into a written agreement with each Partner Organisation which outlines the role and contribution of the Partner Organisation and provides rules for evaluating cash and in-kind contributions in order to meet the requirement that the combined Partner Organisation contributions for a Proposal must at least match the amount sought from the Commonwealth.

The nexus between consideration and a supply in the context of grants of financial assistance is discussed in Goods and Services Tax Ruling GSTR 2000/11 which makes a distinction between the following two situations:

· where a grant is paid in exchange for the grantee entering into an obligation in favour of the grantor to do something with the grant (Para 85) - in this situation a nexus is established between consideration and a supply; and

· where the grantee supplies to the grantor things which do not go to the purpose for which funds were granted but are merely part of the mechanism of making or accounting for the grant (Para 89) - in this situation a nexus is not established between consideration and a supply.

The draft PPA states that the Collaborating Organisations and Partner Organisations have agreed to contribute cash or in-kind assistance to the Project and requires Cash Contributions to be deposited into a Project Account, expenditure from the Project Account to be determined by a Project Team, and any unspent Cash Contributions to be repaid to the relevant Collaborating Organisation or Partner Organisation upon completion or termination of the Project. In our view these are merely administrative provisions governing the disposal of Cash Contributions and do not amount to the Administering University entering into an obligation in favour of the Collaborating Organisations to do something with the Cash Contributions in terms of Para 85 of GSTR 2000/11.

Although the Administering University grants non-exclusive licences of Background Intellectual Property and Project Intellectual Property to Collaborating Organisations, we consider that the grants of those licences are merely part of the collaborative nature of the draft PPA and do not have a nexus with any Cash Contributions paid by those Collaborating Organisations. Our view is supported by the fact that the non-exclusive licence of Background Intellectual Property is for the sole purpose of carrying out the Project, the non-exclusive licence of Project Intellectual Property is for business purposes but not for commercial gain, and another clause in the draft PPA provides separate terms for the grant of any commercialisation licence in respect of Project Intellectual Property. Although the draft PPA states that the terms of a commercialisation licence are to be agreed, we assume that those terms would involve payment of separate consideration by the Collaborating Organisation which would have a nexus with the grant of the commercialisation licence. We therefore consider that any grants of licences in respect of Background Intellectual Property or Project Intellectual Property by the Administering University to any Collaborating Organisation would not have a nexus with any Cash Contribution paid by that Collaborating Organisation.

Question 2 - Cash Contribution received from a Partner Organisation:

Summary:

Although the Administering University does make a supply under the draft PPA and a Partner Organisation does provide consideration in the form of a Cash Contribution, there is no nexus between that supply and that consideration.

Detailed reasoning:

Supply:

Clause 8 of the draft PPA provides for the Administering University to grant the non-exclusive licences to 'other Parties' to the PPA and 'Party' is defined is defined as any Party to the draft PPA which would include a Partner Organisation as well as a Collaborating Organisation. Consequently we consider that University makes a supply to a Partner Organisation under the draft PPA.

Consideration:

A Recital to the draft PPA states that the Partner Organisation(s) have agreed to contribute cash and/or in-kind assistance to the Project. Consequently we consider that the draft PPA requires a Partner Organisation to provide consideration.

Supply for consideration:

For the reasons set out above in Question 1 we consider that any grants of licences in respect of Background Intellectual Property or Project Intellectual Property by the Administering University to any Partner Organisation would not have a nexus with any Cash Contribution paid by that Partner Organisation.

Question 3 - In-kind Contribution received from a Collaborating Organisation:

Summary:

Although the Administering University does make a supply under the draft PPA and a Collaborating Organisation does provide consideration in the form of an In-kind Contribution, there is no nexus between that supply and that consideration.

Detailed reasoning:

Supply:

For the reasons set out above in relation to Question 1, we consider that there is a supply made by the Administering University to a Collaborating Organisation.

Consideration:

Goods and Services Tax Ruling GSTR 2001/6 states (Para 12) that 'payment' in section 9-15 also includes a payment in a non-monetary or in-kind form such as providing goods, granting a right or performing a service, and entering into an obligation. For the reasons set out above in Question 1 we consider that if the draft PPA requires a Collaborating Organisation to provide an In-kind Contribution, that In-kind Contribution will be consideration.

Supply for consideration:

For the reasons set out above in Question 1 we consider that any grants of licences in respect of Background Intellectual Property or Project Intellectual Property by the Administering University to any Collaborating Organisation would not have a nexus with any In-kind Contribution paid by that Collaborating Organisation.

Question 4 - In-kind Contribution received from a Partner Organisation:

Summary:

Although the Administering University does make a supply under the draft PPA and a Partner Organisation does provide consideration in the form of an In-kind Contribution, there is no nexus between that supply and that consideration.

Detailed reasoning:

Supply:

For the reasons set out above in relation to Question 2, we consider that there is a supply made by the Administering University to a Partner Organisation.

Consideration:

Goods and Services Tax Ruling GSTR 2001/6 states (Para 12) that 'payment' in section 9-15 also includes a payment in a non-monetary or in-kind form such as providing goods, granting a right or performing a service, and entering into an obligation. For the reasons set out above in Question 1 we consider that if the draft PPA requires a Partner Organisation to provide an In-kind Contribution, that In-kind Contribution will be consideration.

Supply for consideration:

For the reasons set out above in Question 1 we consider that any grants of licences in respect of Background Intellectual Property or Project Intellectual Property by the Administering University to any Partner Organisation would not have a nexus with any In-kind Contribution paid by that Partner Organisation.