Edited version of private ruling

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Ruling

Subject: Grant of financial assistance under Part 23 of the SIS Act 1993

Question:

Is the receipt by Acting Trustee in its capacity as an acting trustee of certain superannuation funds of a grant of financial assistance pursuant to a Determination made by the Minister for Financial Services and Superannuation under Part 23 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) consideration for a taxable supply made by Acting Trustee?

Answer:

No, the grant received by Acting Trustee in its capacity as acting trustee of certain superannuation funds is not consideration for a taxable supply made by Acting Trustee provided that Acting Trustee deposits the grant into an account in Acting Trustee's name, distributes the grant into the accounts of members of the superannuation funds, and repays to the Commonwealth any amount by which the grant exceeds the 'eligible loss' in accordance with the Conditions in Schedule the Determination.

Relevant facts and circumstances:

Background:

The Acting Trustee is GST registered.

Prior to the appointment of the Acting Trustee, T Ltd was trustee of a number of superannuation funds ('the Superannuation Funds').

T Ltd went into voluntary administration and then liquidation.

The Australian Prudential Regulation Authority ('APRA') suspended T Ltd as trustee of the Superannuation Funds, appointed Acting Trustee as acting trustee for the Superannuation Funds, and vested the assets of the Superannuation Funds in Acting Trustee.

In addition to acting as trustee for the Superannuation Funds T Ltd had been the responsible entity for a number of Managed Investment Schemes ('MISs') and T Ltd directly or indirectly invested funds of the Superannuation Funds in some of those MISs. As a result the Superannuation Funds and a number of the MISs in which the Superannuation Funds have invested now hold impaired assets which are unlikely to yield their book values.

Part 23 of the Superannuation Industry (Supervision) Act:

The object of Part 23 of the SIS Act is set out in section 227 as follows:

The object of this Part is to make provision for the grant of financial assistance for certain superannuation entities that have suffered loss as a result of fraudulent conduct or theft.

Section 229 of the SIS Act provides that if a fund suffers an eligible loss at a time when that fund is a regulated superannuation fund or an approved deposit fund and the loss has caused substantial diminution of the fund leading to difficulties in the payment of benefits then a trustee of the fund may apply to the Minister for Financial Services and Superannuation for a grant of financial assistance for the fund.

Section 230 of the SIS Act requires the Minister to request assistance from APRA in relation to such an application.

Section 231 of the SIS Act provides that if the Minister, after considering the application and APRA's advice, is satisfied that the fund has suffered an eligible loss, the Minister is to determine:

(a) Whether the public interest requires that a grant of financial assistance should be made to a trustee of the fund for the purposes of restoring the loss; and

(b) If so, the amount of the assistance.

Section 232 provides that the amount of financial assistance granted must not be greater than the amount which the Minister determines to be the eligible loss suffered by the fund.

Subsection 233(1) of the SIS Act provides that the payment of a grant of financial assistance is subject to the following conditions:

(a) A condition that the amount of financial assistance granted will be deposited in the corpus of the fund;

(b) A condition that the amount will be applied, within a period determined by the Minister:

(i) In making payments to persons who were beneficiaries of the fund at the time the fund suffered the eligible loss; or

(ii) For the benefit of those persons in such other manner as the Minister approves in writing;

(c) A condition that the trustee of the fund will prepare and give to the Minister such reports on the application of the amount as are required by the Minister;

(d) Such other conditions (if any) as the Minister determines and notifies in writing to a trustee of the fund.

Section 238 of the SIS Act provides that a grant of financial assistance is liable to be repaid if either a condition to which the grant was subject has been contravened or the grant was subject to a condition that a particular event does not occur and that event has occurred.

Application for grant:

On behalf of the Superannuation Funds Acting Trustee applied to the Minister for a grant of financial assistance under Part 23 of the SIS Act.

The application for grant of financial assistance quantified the 'eligible loss' (as defined in section 228 of the SIS Act, i.e. a loss suffered by a fund as a result of fraudulent conduct, or theft, but does not include an amount that the fund did not receive because of the failure to pay contributions to the fund) of the Superannuation Funds as $X.

In relation to the requirement in section 229 of the SIS Act that the loss suffered by a fund has caused substantial diminution of the fund leading to difficulties in the payment of benefits, the application stated that a Stop Order issued by ASIC for each of the Superannuation Funds also applied to Acting Trustee and prevented Acting Trustee from accepting new contributions or rolling over members' benefits to alternative funds (because the schemes into which the Superannuation Funds had invested were under the control of administrators (now liquidators) who could neither set unit prices nor allow redemptions, which meant that there was insufficient cash to meet members' rollover requests).

Ruling request:

In the ruling request lodged with the ATO it was submitted that any payments received by Acting Trustee as grants of financial assistance under Part 23 of the SIS Act would not be consideration for a supply made by Acting Trustee. It was submitted that 'supply' referred to things passing from one party to another and the definition of 'supply' in subsection 9-10(2) of the GST Act referred both to a thing that passes (e.g. a right or obligation) and to the means by which that thing passes (e.g. provision or surrender). This indicated that there must be something that passes between the parties in order for there to be a supply. In addition GSTR 2006/9 stated (Proposition 5) that in order to make a supply an entity must do something.

It was also submitted that, although Acting Trustee would agree to accept certain conditions in relation to any grant of financial assistance, Acting Trustee would not need to take any action apart from applying for the grants and that the mere acceptance of conditions would not be a supply because Acting Trustee would not have to do anything to make the grant of financial assistance happen. The fact that Acting Trustee may be obliged under the SIS Act to repay a grant if Acting Trustee did not apply the grant for the benefit of members of the Superannuation Funds did not mean that Acting Trustee would be doing anything in return for grants of financial assistance.

The ruling request referred to another GST private ruling as being on a very similar point and finding that a recipient of a grant did not make a supply.

It was further submitted that even if Acting Trustee made a supply, there would be no nexus between the grant of financial assistance and that supply (as required by GSTR 2000/11, Para 44) and therefore no taxable supply by Acting Trustee. It was submitted that the issue was whether the grant of financial assistance would be in connection with, in response to, or for the inducement of any supply and that there would be no such nexus because the purpose of the grant of financial assistance would be to benefit the beneficiaries of the Superannuation Funds. Thus the grant of financial assistance would be akin to compensation for the members of the Superannuation Funds who suffered losses as a result of fraudulent activity as it would not be paid so that the trustee will undertake specific acts or obligations but to compensate members for losses suffered as a result of fraudulent activity.

It was further submitted that the acceptance of conditions by the Acting Trustee would be incidental to the grant of financial assistance.

Determination:

One week after the ruling request was lodged the Minister granted $X of financial assistance to Acting Trustee by way of a Determination made under Part 23 of the SIS Act ('Determination').

The Determination stated that the Superannuation Funds had suffered an 'eligible loss' of $X and that the public interest required a grant of financial assistance of the same amount to be paid to Acting Trustee. The grant was made subject to the Conditions (set out in Schedule1 to the Determination) which required Acting Trustee to deposit the grant in an account in the name of Acting Trustee for the Superannuation Funds and to distribute the grant to the accounts of members of the Superannuation Funds within a time specified by APRA and to repay any unallocated money to the Commonwealth.

Further information requested and provided:

When we reviewed the other GST private ruling referred to in the ruling request we noted that the conditions set out in the Determination governing the grant of financial assistance in that case allowed the acting trustee to deduct the acting trustee's costs and expenses from the financial assistance before crediting the balance of the financial assistance to member accounts in proportion to their interest in the relevant superannuation fund and the amount of the eligible loss.

We became concerned that if the Determination issued to Acting Trustee contained the same Conditions then a portion of the financial assistance could be consideration (provided for a third party) for a supply made by Acting Trustee.

We asked Acting Trustee's adviser to provide a copy of the Determination plus details as to how certain components of the 'eligible loss' (i.e. investigation costs and incidental costs) had been treated for GST by Acting Trustee.

Subsequently Acting Trustee's adviser provided a copy of the Determination. Acting Trustee's adviser also provided a copy of a letter issued by Acting Trustee to the members of the Superannuation Funds which stated that the Minister had granted the financial assistance and that, once each member's eligible loss had been finally calculated, each member's entitlement to the grant financial assistance would be transferred to the member's alternative superannuation arrangement (in most cases the account which Acting Trustee had set up with a successor superannuation fund on behalf of the member).

However the Acting Trustee's adviser did not respond to our question as to whether Acting Trustee had invoiced the Superannuation Funds for investigation costs and incidental costs and account for GST, and stated that Acting Trustee was still working out with APRA the precise mechanics of distributing the financial assistance to members of the Superannuation Funds. Consequently we made a further request for information.

In a subsequent e-mail Acting Trustee's adviser stated that the grant of financial assistance received by Acting Trustee would not be paid out to third parties and that the incidental costs and investigations costs had been borne by the Superannuation Funds as they had been debited against investment options in which individual members had an interest (although not debited against individual member accounts). Acting Trustee's adviser stated that they understood that Acting Trustee had charged GST on fees charged to the Superannuation Funds and that the portions of the grant of financial assistance related to investigation costs and incidental costs were limited to the costs borne by the Superannuation Funds net of input tax credit entitlements.

Reasons for decision:

Summary:

Although Acting Trustee enters into obligations pursuant to the Conditions in the Determination, entry into those obligations is either part of a larger transaction or a mechanism for accounting for the grant and is not a supply for which the grant of financial assistance is consideration.

Detailed reasoning:

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations and subsection 9-5(1) provides that an entity makes a taxable supply if the entity makes a supply for consideration. 'Supply' is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever and paragraph 9-10(2)(g) provides that 'supply' includes an entry into an obligation to do anything.

The Determination states that the grant of financial assistance is made subject to the Conditions in Schedule1. Those Conditions oblige Acting Trustee to deposit the grant of financial assistance in an account in the name of Acting Trustee for the Superannuation Funds (clause 1), to distribute the grant to the accounts of members of the Superannuation Funds within a time specified by APRA (clause 2), and to repay any unallocated money to the Commonwealth (clause 8). By accepting the grant of financial assistance subject to those Conditions, Acting Trustee enters into obligations to undertake the actions specified in clauses 1, 2, and 8 of the Conditions.

Goods and Services Tax Ruling GSTR 2000/11 states (Para 30) that not every grant of a right or entry into an obligation will establish a supply that is subject to GST. GSTR 2000/11 cites the acquisition of an option to acquire property as an example of the supply of a right or entry into an obligation which is a supply that is subject to GST (Para 26). On the other hand, business dealings which involve the exchange of rights and obligations over time and where the rights and obligations merely form part of a larger transaction do not involve a supply that is subject to GST (Para 30). GSTR 2000/11 also acknowledges that a grantee may supply things to a grantor which do not go to the purpose for which the funds were granted but are merely a mechanism of making or accounting for the grant (Para 89) and states (Para 91):

Grants are not normally made for the purpose of the grantee accounting for the expenditure of the grant. A requirement to account for the grant is merely incidental to the making of the grant. The grantor uses this information to maintain accountability over the funds disbursed, and to assist in evaluating the effectiveness of the program in meeting its objectives.

In our view the obligations entered into by Acting Trustee pursuant to the Conditions in the Determination are obligations which merely form part of a larger transaction and do not go to the purpose for which the financial assistance was granted and Acting Trustee does not make a supply that is subject to GST. It is clear from the recitals in the Determination and the relevant provisions of the SIS Act that the Minister granted the financial assistance only because each of the Superannuation Funds has suffered an 'eligible loss' which has caused substantial diminution of funds leading to difficulties in payment of benefits (section 229 SIS Act) and the Minister had determined that the public interest required a grant of financial assistance (section 231 SIS Act). In our view those circumstances (a grant of financial assistance made in the public interest to make good an 'eligible loss') constitute the 'larger transaction' and the obligations entered into by Acting Trustee under the Conditions in the Determination merely ensure that the financial assistance is applied for the purpose set out in section 231 of the SIS Act, i.e. 'for the purpose of restoring the loss'.

Alternatively, adopting the analysis in Para 91 of GSTR 2000/11, the obligations entered into by Acting Trustee under Conditions 1, 2 and 8 in the Determination are merely requirements to account for the grant and are therefore merely incidental to the making of the grant.

We therefore consider that, provided the Acting Trustee complies with the Conditions in the Determination, the Acting Trustee does not make a 'supply' within the meaning of section 9-10 of the GST Act by accepting the financial assistance subject to the Conditions.

It was submitted in the ruling request that, in terms of Proposition 5 in Goods and Services Tax Ruling GSTR 2006/9 (to make a supply an entity must do something) that Acting Trustee does not have to take action in order to receive the financial assistance. In our view it is clear from Conditions 1, 2 and 8 annexed to the Determination (which was issued after the ruling request was lodged) that Acting Trustee is obliged to do something, i.e. enter into obligations to deposit and distribute the financial assistance and to repay any amount by which the financial assistance exceeds the 'eligible loss'. As stated above, we consider Acting Trustee's entry into those obligations to be either part of a larger transaction or requirements to account for the grant.

It was further submitted in the ruling request that Acting Trustee does not make a supply for consideration, as required by paragraph 9-5(a) of the GST Act in order for there to be a taxable supply, because there was no nexus between the grant of financial assistance and entry into the obligations. It was submitted that Acting Trustee's circumstances were similar to those of the taxpayer in CIR v New Zealand Refining Co Ltd (1997) 18 NZTC 13187. We consider that there is little similarity between the compensation received beneficially by the taxpayer in that case and the grant of financial assistance made subject to the Conditions in the present case. In our view Acting Trustee does not make a supply by accepting the grant of financial assistance subject to the Conditions and there is therefore no supply made by Acting Trustee for which the financial assistance can be consideration.

We note that the ruling request was lodged a week before the Determination was made by the Minister. In our view it would have been preferable for Acting Trustee to have waited until the Determination was made and then lodged a ruling request containing submissions which addressed the Conditions in the Determination.