Edited version of private ruling

Authorisation Number: 1011830744138

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Ruling

Subject: GST and grants

Question 1

Is the grant funding made by you to Entity A consideration for a taxable supply?

Answer

Yes. The grant funding made by you to Entity A is consideration for a taxable supply.

Relevant facts and circumstances

You have entered into a project agreement with Entity A in respect of a refurbishment project. Entity A is a public benevolent institution.

The refurbishment project involves the refurbishment and upgrade of particular accommodation units and associated facilities.

Under the agreement, you will provide a financial contribution to Entity A in instalments to fund the refurbishment. The agreement provides that you are not liable to pay any further monies and if the refurbishment exceeds the financial contribution, Entity A must provide the additional funds. In addition the agreement allows you to suspend payment in the event of certain breaches.

The agreement provides for the land and premises to be bound by the terms of the agreement from financial close until the termination or expiry of the agreement. Under the agreement Entity A must arrange a certain task and allow you to lodge an absolute caveat against the certificate of title in order to secure the performance of Entity A's obligations under the agreement. The agreement provides certain restrictions in relation to the transfer, mortgage or sale of interests in the land and premises.

Under the agreement Entity A is required to provide the following to you:

· access to the land and premises

· audited financial statements

· evidence of current insurance policies

· annual reports and GST reports

· an inspection notice, at least 10 business days prior to the anticipated date of practical completion

In addition, Entity A agrees to:

· maintain its registration

· manage the premises under specific terms in the agreement, from the date of practical completion of the refurbishment.

· acknowledge the financial and other support that you have provided in publications, promotional materials and activities relating to the project

· negotiate in good faith and execute within 12 months a further housing agreement

· ensure that within 10 weeks of the practical completion of the refurbishment all tenancies within the premises are managed in accordance with provisions in the agreement.

The agreement establishes the terms and conditions under which Entity A is to procure and project manage the refurbishment. The agreement includes terms which allow you to recover all or part of the financial contributions in the event of termination or certain breaches. Under the agreement Entity A bears all the risk of the refurbishment.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements that must be met for an entity to make a taxable supply. It states:

You make a taxable supply if:

· you make the supply for consideration; and

· the supply is made in the course or furtherance of an enterprise that you carry on; and

· 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 a grant depends primarily on whether a payment represents consideration that has the relevant connection with a taxable supply. Therefore, to satisfy the first requirement of a taxable supply in section 9-5 of the GST Act, there must be a supply and consideration and there must be a connection between the two.

On the basis of the information that is available, it is accepted that Entity A satisfies all of the other conditions of section 9-5 of the GST Act (relating to GST registration, the supply being connected with Australia and the supply being made in the course or furtherance of its enterprise) therefore the question that is to be addressed is whether the grant funding made by you is consideration for a supply.

Essentially, a supply is something that passes from one entity to another. The supply may be one of particular goods, services or something else that is reflected in an agreement by one party to do something for another.

'Supply' is defined under section 9-10 of the GST Act. The definition includes 'an entry into, or release from, an obligation to do anything; or to refrain from an act; or to tolerate an act or situation' but excludes 'a supply of money unless the money is provided as consideration for a supply that is a supply of money'.

'Consideration' is defined under section 9-15 of the GST Act. The definition extends beyond payments to include 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 the supply. Paragraph 9-15(3) (b) of the GST Act provides that the making of a gift to a non-profit body is not consideration for a supply.

Often, a grant agreement will establish rights and obligations between the parties, such as the obligation on the grantee to provide services to others. The entry into that obligation by the grantee may constitute a supply to the grantor.

Goods and Services Tax Ruling GSTR 2000/11 provides guidance on the GST treatment in relation to grants of financial assistance.

Paragraph 33 of GSTR 2000/11 advises that for there to be a supply of rights or obligations, the rights or obligation must be binding on the parties. The creation of expectations among the parties that the grant will be used in a particular manner is not sufficient to establish a supply.

Paragraph 34 of GSTR 2000/11 provides examples of arrangements that will indicate an agreement that binds the parties as follows:

· 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.

You have entered into an agreement for the grant to be used for specific purposes under certain terms and conditions. On the basis of the terms and conditions in the agreement, this agreement binds both parties. The agreement provides that failure to comply with certain requirements in the agreement will result in the grantee having to repay the grant. In addition, the agreement requires the lodgement of a caveat over the property of the grantee in order to secure the performance of the grantee's obligations under the agreement. Therefore we consider that a supply has been made under these circumstances.

Regard also must be had to whether the supply is made for consideration. Paragraph 79 of GSTR 2000/11 explains that in determining whether a payment is in connection with a supply, the test is whether there is a link or nexus that provides a substantial relation between the substance of the obligation and the grant.

Paragraphs 85 and 86 of GSTR 2000/11 clarify the nexus that must exist between the substance of the obligation and the grant.

Paragraph 86 states:

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.

In this case, the purpose of the grant as provided for in the project agreement is the refurbishment of accommodation that will be used for housing. As the project agreement provides contractual obligations on the grantee to provide specific services in return for the funding, there is a sufficient connection between the supply and the provision of the grant.

Having established that consideration has been made in relation to a supply, the question remains as to whether the grant could be considered to be a gift to a non profit body because the recipient of the grant is a non profit body.

The issue of what constitutes a gift is also discussed in GSTR 2000/11. In general, a payment will be considered a gift where it possesses the following attributes:

· the payment is made voluntarily (and not pursuant to a contractual obligation);

· the payment is made out of benefaction and flows from the 'disinterested generosity' of the donor; and

· the payer does not receive a material benefit in return for the payment.

We consider that the grant is not a gift because the payment is made pursuant to contractual obligations, is not made out of benefaction and the payer receives a material benefit in return for the payment. You receive a material benefit as the obligations that Entity A enters into in return for the grant enable you to meet your policy objective of providing housing. Therefore, we do not consider that the financial contribution under the project agreement is a gift.

Accordingly, the grant funding you have provided to Entity A is consideration for a taxable supply. This means that an input tax credit can be claimed in relation to the provision of the grant provided that you hold a valid tax invoice from Entity A.