Edited version of private ruling

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Ruling

Subject: GST and appropriations

Question

Is a payment made to government related entities under your funding agreement consideration for the purposes of the GST law?

Answer

A payment made to government related entities under your funding agreement is consideration for the purposes of the GST law.

Relevant facts and circumstances

You are a commonwealth government department.

You administer a fund which provides funding to entities to implement projects which achieve certain objectives.

The funding is provided to you under an appropriation Act. The appropriation Act does not specify that the funding is to be paid to government related entities.

In order to receive funding, entities must enter into a funding agreement.

Under the funding agreement, the recipient agrees to carry out the project in the manner specified, within the project period and in accordance with the agreement.

The sample funding agreement provides:

· terms which allow recovery of all or part of the funding in the event of termination or certain breaches.

· clauses that do not allow the provision of additional money to meet any expenditure in excess of the funds and for the recovery of unexpended funds

· specific rules for the keeping, acquittal, accountability and use of funds

· for project plans, budgets, milestone reports and a final report with audited financial statements to be provided by the recipient

· for access to the recipient's premises and sites

· specific rules in acquiring, reporting and dealing with assets

· for the recipient to acknowledge publicly in advertising material the funding support under the fund

Detailed reasoning

Section 9-15 of the GST Act defines the term 'consideration'.

Subsection 9-15 (1) of the GST Act states:

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 respect to or for the inducement of a supply of anything

Paragraph 9-15(3)(c) of the GST Act states:

A payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law.

Tax Office view in GSTR 2011/2

Goods and Services Tax Ruling GSTR 2011/2: Goods and services tax: appropriations sets out the Tax Office view on appropriations.

Paragraph 6 of GSTR 2011/2 points out that to satisfy paragraph 9-15(3) (c) all three requirements must be met:

· there has to be an appropriation under an Australian law

· the payment must be made by a government related entity to another government related entity and

· the payment must be specifically covered by the appropriation.

An appropriation under an Australian law provides the parliamentary authority for the expenditure of government monies for a particular purpose. An appropriation is an authorisation for an arm of government to draw funds from a specified fund, such as consolidated revenue, in furtherance of a particular purpose.

We accept that an authorisation of expenditure of money has occurred under the appropriation Act under an Australian law. The appropriation Act lists the amounts that were appropriated to you under a particular outcome. In addition to the appropriation Act, the portfolio budget statement and agency budget statements that are linked with the appropriation Act were referred to.

In order to satisfy the second requirement both entities must satisfy the definition of 'government related entity' as defined in section 195-1 of the GST Act. A government related entity is also a government entity as defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (the ABN Act). Included in the definition of a government related entity are a Department of State of the Commonwealth, a Department of State of a State or Territory. As you are a Department of the State of the Commonwealth you are a government related entity. On the basis that the recipients of payments under the fund are also government related entities as defined in section 195-1, this requirement will be met

The third requirement is whether the payment is specifically covered by the appropriation. Paragraphs 14 to 18 of GSTR 2011/2 address the issue of what the term 'specifically covered' means. In particular, paragraphs 15 and 16 state:

15. The phrase 'specifically covered' is not defined in the GST Act. Edmonds J in the Full Federal Court in TT-Line Company Pty Ltd v. Commissioner of Taxation (TT-Line) considered that the minimum level of specificity required for paragraph 9-15(3) (c) to apply is that the payment is made pursuant to an appropriation 'the terms of which specify the government related entity by name or, generically, to those entities having that status.'

16. Not all payments between government related entities fall under paragraph 9-15(3) (c). A payment is not 'specifically covered by an appropriation' for the purposes of paragraph 9-15(3)(c) if the relevant terms of an appropriation authorise the government related entity to make payments that can be made to either a government related entity or a non-government related entity. Therefore, if a payment could, under the terms of the appropriation be payable to either a government related entity or a non-government related entity, paragraph 9-15(3) (c) does not apply to the payment.

Given that the terms of the fund appropriation do not specify that payments under the fund are to be made to government related entities, these payments are not specifically covered by the appropriation. Therefore the third requirement under paragraph 9-15(3)(c) of the GST Act has not been satisfied. As the payment is not subject to paragraph 9-15(3)(c) the question to be resolved is whether the payment is consideration in connection with a supply under section 9-15. Prior to considering whether section 9-15 applies, we will consider GSTR 2006/11.

Tax Office view in GSTR 2006/11

The Goods and Services Tax Ruling GSTR 2006/11: Goods and services tax: appropriations is the Tax Office's former view on appropriations. This ruling is being withdrawn with effect from 1 July 2012. Entities may continue to rely on GSTR 2006/11 for supplies made before 1 July 2012 if they have relied on the Tax Office view in GSTR 2006/11 to determine that paragraph 9-15(3)(c) applies to a payment.

As GSTR 2006/11 applies up to 30 June 2012, we will apply the view in this ruling to the payments made from the Fund.

The Tax Office view in GSTR 2006/11 is identical to the view in GSTR 2011/2 with respect to the meaning of an appropriation under an Australian law and the definition of a government related entity.

Paragraphs 30 to 39 of GSTR 2006/11 consider the meaning of 'payment' for the purposes of paragraph 9-15(3)(c) in relation to the nature of the payments which are made from a government related entity to another. In particular, paragraphs 30 and 34 state:

30. Paragraph 9-15(3)(c) is intended to apply to payments of a funding nature. As noted in paragraph 29, an 'appropriation under an Australian law' is the authority for the expenditure of government money. In the context of paragraph 9-15(3)(c) the Commissioner is of the view that for a payment to come within paragraph 9-15(3)(c) the payment has to be of a funding nature and not commercial in character. For a payment to be of a funding nature, the payment must be an expenditure of money supported by a statute of the Commonwealth, a State or a Territory, or by delegated legislation.

34. Accordingly, an agency may be funded by the allocation of government money under the authority of an appropriation Act, but when the funds are expended on goods and services to further the agency's operations, that expenditure will not be of a funding nature whether paid to a government related entity or a non-government related entity. At this point paragraph 9-15(3)(c) no longer has application and the basic GST rules apply.

Therefore the issue of whether the fund payment can be characterised as funding in nature will be considered.

A payment made to a recipient under the fund is for the purpose of implementing a project which meets certain objectives. The use of the funds by the fund recipients is in the course of the recipients operations and involves the provision of goods and/or services as specified in the funding agreement. The purpose of the payment is not to fund the activities of the recipient; the payment is for the provision of goods and/or services under the fund agreement. For this reason, we consider that the funds are used for operational purposes and will not be a payment of a funding nature.

Paragraph 62 of GSTR 2006/11 advises that if the payment is not of a funding nature paragraph 9-15(3)(c) will not be met. Therefore it is not necessary to consider whether the payment meets the requirement under paragraph 9-15(3)( c) for the payment to be specifically covered by the appropriation.

As the fund payments made by you do not satisfy the requirements of paragraph 9-15 (3)(c) based on the view in GSTR 2011/2 and GSTR 2006/11 consideration will be given to whether the payments are consideration for the purposes of section 9-15 of the GST Act.

Consideration for a supply

The question that is to be addressed in this case is whether the funding made by you under the fund is consideration for a supply.

The term 'consideration' as defined in section 9-15 of the GST Act 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.

A supply is defined in 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.

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.

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

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 a contract for the funds 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 recipient having to repay the funds. 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 payment as provided for in the funding agreement is the conduct of the project which is for the purposes of meeting certain objectives. As the funding agreement provides contractual obligations on the recipient to provide specific services in return for the funding, there is a sufficient connection between the supply and the provision of the grant.

Accordingly, the funding provided by you under the funding agreement to government related entities is consideration for a supply.