Edited version of private ruling

Authorisation Number: 1011849205877

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Ruling

Subject: GST and grants

Question 1

Is GST payable on the grant you received from Entity X?

Answer

No, GST is not payable on the grant you received from Entity X.

Question 2

Is GST payable on the grant you received from the Entity Y?

Answer

No, GST is not payable on the grant you received from the Entity Y.

Facts

You are a not-for-profit organisation that is registered for GST.

You have received funding from Entities X and Y. Details of these funding are as follows:

Entity X

The letter you received from Entity X contains the following information:

Project which is to provide community service

Grant: $X over a number of years

The grant is conditional upon your signing the Grant Agreement and agreeing to the Conditions of Grant.

You are expected to manage the Grant in accordance with these requirements. Failure to complete the evaluation and reporting requirements may affect your organisation's chances of receiving further grants from Entity X.

The Entity X has obtained a GST private ruling from the ATO which confirms that the payment of these types of Major grants will not be subject to GST.

The Grants Agreement contains the following information:

The Grantee will provide a final report form outlining the activities and achievements of the Project and any issues arising that should be brought to the attention of Entity X.

The Grantee shall provide more detailed information on the overall conduct of a Project and the achievement of its objectives if requested to do so at any time by Entity X.

The Grantee will provide a certified financial statement of all income and expenditure relating to the Project, and the balance of those funds.

The Grantee will provide an audited financial statement of all income and expenditure relating to the Project, and the balance of those funds.

All funds granted by Entity X must be used solely for the purposes of the Project, in accordance with the Project budget. The budget will be expended as per the application or approved amended budget.

The Conditions of Grant contains the following information:

The Grantee shall:

· Acknowledge Entity X's support and promote the role of Entity X so that the community becomes more aware of Entity X's strategic directions, funding opportunities and Project achievements.

· Ensure that project events, activities and materials acknowledge Entity X's funding and use reasonable endeavours to ensure such events, activities and materials bear Entity X's logo including: launches, signage, programs, invitations, written and oral statements, media releases and interviews, promotions, journal articles, stationery, posters, conference papers, presentations, reports, workshops, information kits, brochures, public meetings, scripts, advertisements associated with staff recruitment or Project events, etc.

· Use best endeavours to ensure that third parties directly associated with the Project also acknowledge Entity X's support and are made aware of the grant conditions insofar as those conditions apply to the third party.

· Advice Entity X of the dates of key Project events.

· Display Entity X's banners, posters, signage, brochures and other materials at all Project activities and functions, as reasonably required by Entity X.

· Where appropriate consent to, and agree to participate in, any promotion of the funded Project undertaken by Entity X, or undertaken by another organisation commissioned by Entity X, or any independent promotion of the Project, or a number of projects, as reasonably determined by Entity X.

· Providing display materials, such as banners, posters, signage, brochures and other materials, as reasonably required under the Grant Agreement.

The Project Materials and the Intellectual Property Rights in the Project Materials shall vests immediately in the Grantee.

While Entity X is funding the Grantee to undertake the tasks set out in the Grant Agreement, it is agreed by both parties that the Grant Agreement does not preclude the Grantee from undertaking activities as an independent organisation which are additional to the tasks specified in the Agreement, provided that this is in no way detrimental or inconsistent with the undertaking of the funded activities approved in the Agreement.

The Grantee shall not do any act or thing which is damaging to the reputation of Entity X, or which is inconsistent with the objects of Entity X or of the Project, or which is in breach of the intellectual property rights of Entity X and, in particular, must not alter, modify or adapt any intellectual property owned by or licensed to Entity X without Entity X's prior written consent.

Entity Y

The letter you received from Entity Y contains the following information:

Project which is to provide community service

Amount: $Y payable in a number of instalments.

Your organisation is required to submit a progress report on the project. On completion of the project a final report is also required.

Entity Y reserves the right to stop payments of grants at any time. This decision is based on the Entity Y's assessment of unsatisfactory progress of the project for which the grant was made, or for any other reason the Trustee may consider relevant.

The Grants Agreement contains the following information:

The Grantee will use the whole of the Grant exclusively for the Project.

The Grantee will show the Grant separately in its books of account and keep records adequate to enable the use of the grant funds to be checked readily.

The Grantee will acknowledge the assistance of the Grantor in any published or display material.

Entity Y considers the grants made to organisations as gifts that are freely given and would not ordinarily constitute consideration for taxable supply by recipients.

The application of the grant contains the following information:

The project which is to provide community service

The application lists a brief description of the project, the project aims, the issue that the project is addressing, who will benefit from the project and how, and a project budget.

You have remitted GST when you received the above funding.

Reasons for decision

Question 1

Summary

You do not make a taxable supply under section 9-5 of the GST Act when you receive the funding from Entity X. Hence, GST is not payable.

Detailed reasoning

GST is payable on any taxable supply that you make.

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:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry

on; and

(c) the supply is *connected with Australia; and

(d) 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.

(* indicates a term defined under section 195-1 of the GST Act).

A grant of financial assistance is subject to GST where the grant is provided as consideration for a supply made by an entity and the other requirements of section 9-5 of the GST Act are satisfied.

There are three questions that are relevant to determining whether there is a supply for consideration:

· is there a supply;

· is there consideration; and

· does that necessary relationship exist between the supply and the consideration?

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.

Goods and Services Tax Ruling GSTR 2000/11 provides guidelines for working out when grants of financial assistance and funding constitute consideration for a taxable supply.

In this case, it is necessary to establish whether the grant payments from Entity X to you under the Grant Agreement are 'for' a supply.

You receive funding under the Grant Agreement from Entity X to fund the named project. The Grant Agreement regulates the way in which the funding will be dealt with by you. In this instance you do not supply goods to Entity X, except in the form of progress and final reports of the project and financial reports.

In establishing if the supply of the reports constitutes a supply, paragraph 89, 90 and 91 of GSTR 2000/11 states:

89. Things will often be supplied by the grantee to the grantor which do not go to the purpose for which the funds were granted, but which are merely part of the mechanism of making or accounting for the grant.

90. For example, paragraph 9-10(2)(c) specifically includes a provision of advice or information in the meaning of 'supply'. However, a grant will not be consideration for such a supply unless the grantor derives some benefit from the information or the grant is made for the purpose of obtaining such information.

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.

Based on this, it can be said that the reports and information you provide to Entity X are merely incidental to the predominant purpose of the funding agreement.

It is necessary to consider whether you supply anything else, such as a grant of rights or an obligation to do something, in return for the funding.

Paragraphs 32 to 34 of GSTR 2000/11 explain that an agreement between parties to a funding arrangement may establish rights or obligations between the parties. However, for these rights or obligations to constitute a supply for the purposes of the GST Act, the supply of the rights or obligation must be binding on the parties. The mere creation of expectations between parties does not establish a supply.

Examples of arrangements that may indicate that an agreement is binding on the parties are such things as a contract, a provision providing that the money granted must be repaid in specified circumstances, or an agreement such as a deed that is enforceable on its own terms.

Paragraphs 85 and 86 of GSTR 2000/11 discuss the nexus where the grantee supplies obligations and states:

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.

In this case, apart from the requirement for you to use the funds for the purpose of the project, the Grant Agreement does not stipulate as to what you are required to do as part of the project. Although it is understood that the project benefits the community, there are no conditions or directions in the Grant Agreement.

Furthermore the ownership of the Project Materials vests with you.

As such although there is supply of an obligation there is not enough nexus between the supply and the purpose for which the grant was made.

A further supply identified is that where you are required to acknowledge the contribution of Entity X to the project in any relevant correspondence, public announcement, advertising material or other material produced by you relating to the project. This is a supply of obligation which does not have the sufficient nexus between the supply and the purpose for which the grant was made.

In summary, there are no identifiable supplies for which the funding you receive from Entity X might be consideration. Consequently paragraph 9-5(a) of the GST Act is not satisfied and hence you are not making a taxable supply in relation to the funds you receive from Entity X. Hence, GST is not payable.

Question 2

Summary

You do not make a taxable supply under section 9-5 of the GST Act when you receive the funding from Entity Y. Hence, GST is not payable.

Detailed reasoning

With regard to the funding arrangement you entered into with Entity Y, the application form required you to provide a plan of your proposed project. You were required to outline, among other things, a brief description of the project, the project aims, the issue that the project is addressing, who will benefit from the project and how, and a project budget.

You are required to provide Entity Y with a progress report to confirm that the funds are spent for the purpose of the project. Failure to comply with this requirement may make you ineligible for further funding. In addition, you are required to provide a final report and to acknowledge Entity Y's financial assistance in the project.

While the conditions of the grant require you to comply with certain requirements, the grant is not paid to you for entry into these obligations. No portion of the grant directly relates to the reporting and promotional obligations entered into. Such things are merely incidental to the grants purpose and the entry into these peripheral obligations are not supplies for which the grant funding is made and are not sufficiently connected to the grant funding to create supplies for which the grant is consideration.

As there is neither a supply of goods or services, nor a supply of right or obligations by you to Entity Y in exchange for the grant, paragraph 9-5(a) of the GST Act is not satisfied. Therefore, you have not made a taxable supply and GST is not payable on the funding you receive from Entity Y.

Additional information

Where you have incorrectly calculated your GST payable, you have to correct this mistake in your activity statement. Please refer to the fact sheet Correcting GST Mistakes. This publication and GSTR 2000/11 are available from our website www.ato.gov.au