Edited version of private ruling

Authorisation Number: 1011893146834

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Ruling

Subject: Entitlement to input tax credits

Question 1

Are you entitled to claim input tax credits on acquisitions made by disability clients, their guardian, an administrator or a supporting organisation when participating in the Self Managed Funding Scheme?

Answer

No

Relevant facts and circumstances

· You are a state government department and are registered for GST.

· You have a division which assists a certain class of people and their families by providing a wide range of specialist services and by funding other organisations to provide specialised support. They also assist these people and their families to access the services they need.

· An Act provides the legislative basis for the funding of these services. It provides that the Minister is responsible for approving funding for the purpose of these services. The Minister may grant money to any person, body or authority, or to any person in this class of persons or a carer of such a person for the purpose of obtaining the care, support or assistance the person or the carer may need.

· You are currently responsible for the acquisition of support services for your clients.

· The scheme trials an arrangement whereby clients, their guardian, an administrator or a supporting organisation will be paid funding directly to allow them to arrange and purchase support services from providers. These services were previously provided to a person in this class of persons by you.

· The funds may be used to acquire services and items which support participants in various ways.

· Eligible recipients of this funding are:

o A person in the class of persons;

o A legally nominated or recognised guardian, administrator or attorney;

o A service provider.

· To participate in the scheme, the client must meet the following requirements:

o Have an approved support and expenditure plan which details the client's support needs and a plan of how the funding will be used to meet these needs.

o Sign an agreement with the Minister.

o Have a separate bank account solely for receiving the funding payments.

o Keep expenditure records for a number of years.

o Participate in the monthly monitoring of expenditure, transactions and service arrangements.

o Complete quarterly and annual acquittals of the funds.

· The use of funds is restricted as follows:

o For approved purposes within the client's approved support and expenditure plan, which may include respite, personal care or professional services by a therapist

o Excludes the purchase of items that any member of the community would reasonably be expected to pay for from their income

o Excludes the purchase of things that are available from community and government service programs

o Excludes the use of funds for gambling, alcohol or illegal purposes

o Exclude the use of funds to employ staff

o Excludes the client from using the funds to pay themselves for the time spent managing their arrangements.

· The support and expenditure plan separately identifies the amount of GST that is payable on the services and items to be purchased.

· The ATO has issued a Class Ruling which considers the income tax implications of the scheme. This ruling states that the funding received by a recipient is not assessable income, and that the outgoings are not deductible to the funding recipient.

· You have provided copies of the scheme's Participant Guidelines, a sample Principal Carer Agreement (agreement is between the Principal Carer and the Minister) and a sample Client Agreement (agreement is between the Client and the Minister).

· You request that the ATO confirm that you are entitled to claim input tax credits on acquisitions made by participants in the scheme.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Division 11

Reasons for decision

Summary

You are not entitled to claim input tax credits on acquisitions of support services made by clients or their representatives when participating in the scheme, as you are not the recipient of the supplies.

Detailed reasoning

According to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to input tax credits for the creditable acquisitions you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

e) you acquire anything solely or partly for a *creditable purpose; and

f) the supply of the thing to you is a *taxable supply; and

g) you provide, or are liable to provide, *consideration for the supply; and

h) you are *registered, or *required to be registered.

Note: *asterisk denotes a term defined in the GST Act.

Therefore, in order to be entitled to an input tax credit, an entity must make an acquisition that meets all of these requirements.

Although GST Ruling 2006/9 (GSTR 2006/9) examines the meaning of 'supply' in the GST Act, it also explains that in order to make an acquisition, an entity has to be the recipient of a supply.

Of particular relevance in this case, paragraphs 53-56 of GSTR 2006/9 state:

53. The meaning of 'acquisition' in section 11-10 is the corollary of the meaning of supply in section 9-10. Subsection 11-10(1) provides that, 'An acquisition is any form of acquisition whatsoever'. Subsection 11-10(2) refers to the thing acquired, such as goods, services or a right, and the means by which the thing is acquired, such as its receipt or acceptance.

54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

55. The supplier and the recipient have to be different entities because an entity cannot make a supply to itself. Also, the recipient has to be identified, as you cannot make a supply to the world at large. However, a supply can be made for no consideration.

Creditable acquisitions and input tax credits

56. If you make an acquisition and the other requirements of section 11-5 are met then the acquisition is a creditable acquisition. However, if you are not the recipient of the supply you will not have made a creditable acquisition, even if you provide consideration for the supply.

Are you the recipient of the service under the scheme?

Are the supplies made to you?

The scheme guidelines state:

… For these services you will need to negotiate a Service Agreement with the service provider in writing that clearly sets out the services that will be provided and the costs of these services. The Service agreements must specify that the participant is the recipient of the service …

… The contract must specify that the participant is the recipient of the service …

Under the scheme, the funds will be paid directly to the bank account of the clients, their guardian, an administrator or a supporting organisation to allow them to arrange and purchase services from providers. The payments for the purchase of services are to be made directly from the client or their nominated representative, to allow them to arrange and purchase services from the providers. You do not make payment or have an obligation to make payment to the service providers.

Where the services are provided to a particular class of person in accordance with their support and expenditure plan, there is no contract between you and the service provider. It is the client, or their nominated guardian, administrator or supporting organisation that arranges and purchases the services. The client or their representative chooses and instructs the service provider and as a result, the contract is between the client or their representative and the service provider.

These arrangements support a finding that it is the client that is the recipient of the service in this arrangement.

Are the clients acting as your agent in relation to the purchase of the services?

Agency

You contend that your clients or their nominated representatives are acting as your agent when they organise and acquire the services.

Both the sample Principal Carer Agreement and the sample Client Agreement relevantly state:

Principal Carer Agreement

…The Principal Carer must ensure that when entering into Service Agreements with the Service provider for General Support Services to be provided to the Client that:

16.1 the Service Agreement is between the Principal Carer (in his/her own right) and the Service Provider and that the Client is to be the recipient of the Services …

…The Principal Carer must ensure that when entering into a Service Agreement with a Service Provider for Personal Care and Support Services that:

17.1 the Service Agreement is in writing and is between the Principal Carer (in his or her own right) and the Service Provider and includes, as a minimum, clauses which address the issues set out in Schedule 3; and

17.2 it is clear that the Client is to be the recipient of the Services …

Client Agreement

…The Client must ensure that when entering into contracts for General Support Services …

…The Client must ensure that when entering into a Service Agreement with a Service Provider for Personal Care and Support Services that the Service Agreement is in writing and is between the Client and the Service Provider and includes, as a minimum, clauses which address the issues set out in Schedule 3…

These clauses indicate that the funding recipient enters into contracts or agreements on their own behalf, rather than as agent for you.

GST Ruling GSTR 2000/37 (GSTR 2000/37) discusses principal/agent relationships and explains the operation of Subdivision 153-A,153-B and Divisions 57 and 111 of the GST Act.

Paragraph 47 of GSTR 2000/37 states that:

… the provisions of the GST Act require, inter alia, that you 'make' a supply or an acquisition if it is made for consideration. When the supply is made through an agent, it is necessary for the agent to make a supply for consideration on behalf of the principal and it can only do that it has the authority of the principal. Also, the explanatory Memorandum to the GST Act explains the principles of general law of agency are to be followed in applying GST law to agency relationships.

GSTR 2000/37 explains the interaction of general law and agency relationships. Some key points are as follows:

11. For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

12. The principal is bound by the acts of an agent as a result of the authority given to the agent. In cases of actual authority, the relationship between a principal and an agent is a consensual one so that no party can claim to be a principal's agent unless both parties consent to the creation of the agency.

28. In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

For a transaction (i.e. taxable supply, taxable importation, creditable acquisition or creditable importation) to be made through an agent, the agent must have the authority of the principal to make the supply for consideration on the principal's behalf.

In this case, the acquisition of the services is made by the client, their guardian, an administrator or a supporting organisation, not by you.

There is nothing in the documentation and Agreements that you have provided to indicate that:

· the client will act as a common law agent for you,

· the client receives the supplies of services on your behalf.

Your main roles as defined in the Agreements and other scheme documentation are to distribute the funding to the recipients, provide support and monitor/audit the use of the funding by the recipients.

The documentation supporting the transactions indicates that a principal/agent relationship does not exist. The funding Agreements provide that funding recipients enter into transactions on their own behalf. There are no legal relations created between the service providers and you through the actions of the clients.

It is considered that the discharging of your duty to provide the services is not related to whether the funding recipient is acting as your agent in relation to the acquisition of services, for the purposes of the GST Act.

The duty to provide the services to the client can be discharged by either you or by other entities, including the clients, acting on your behalf.

However, in order to be acting as an agent for GST purposes, the requirements under GSTR 2000/37 must be satisfied.

The discussion above surrounding agency explains why there is no agency relationship between you and client for GST purposes in relation to the acquisition of services under the scheme.