Edited version of private ruling

Authorisation Number: 1011922294341

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Ruling

Subject: financial grant

Question

Is Entity C (you) entitled to claim input tax credits on your payments for supplies supplied to a third party (Entity B)?

Decision:

No

Relevant facts:

You are registered for the goods and services tax (GST).

You are endorsed as a charitable institution for GST purposes.

Entity A provides supplies to people with disabilities (clients) who face financial hardship and have difficulties paying for their acquisitions.

Entity A is registered for GST.

Entity A supplies GST-free supplies to Entity B.

Entity A can apply for a reimbursement grant from you to recover their costs in providing the supplies to Entity B.

You confirmed the following:

Entity A claims the cost of their supply to Entity B by lodging an application form for reimbursement.

There is no contract or binding agreement between you and Entity A on the use of the funds provided. Entity A invoices you for the supplies provided to Entity B.

Entity A keeps the Entity B's name confidential.

Reasons for decision

The basic rules under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) require an entity, the supplier, to make the supply and generally another entity, the recipient, to acquire the supply.

A recipient who is registered for GST is generally able to claim input tax credits for acquisitions it makes in the course of its business.

Making an acquisition of something is the first element to be considered in determining whether you make a creditable acquisition under section 11-5 of the GST Act. The meaning of acquisition is given in section 11-10 of the GST Act and provides that an acquisition can be any form of acquisition whatsoever and can include such things as goods, services, information, real property, financial supplies or a right and the means by which the thing is acquired, such as its receipt or acceptance.

You make an acquisition if you are the recipient of a supply. You do if you are not for the recipient of that supply.

In this situation, Entity A is registered for GST and provides GST-free supplies to Entity B. Where Entity B cannot provide payment to Entity A, it can apply to you for reimbursement by lodging an application form for reimbursement. Entity A and you do not enter into any agreement in return for you providing the reimbursement to Entity A. There is though an expectation that you will be only paying for the meals that Entity A provides to Entity B where approval has been given. As mentioned previously the provision of information can be an acquisition but only if the payment is for the information. In the situation of information being in the form of an application for a grant, the information is for the grantor to determine whether to make the grant it is not for the information contained in the application. Hence, the reimbursement grant will not be consideration for an acquisition of information in the application.

Furthermore, for there to be an acquisition of rights due to a supply of an obligation, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish an acquisition. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties.

Agreements such as a contract or deed are examples of arrangements that indicate an agreement that binds parties. However, as previously mentioned there is no binding agreement for which you pay the reimbursement and neither are you being provided with anything else. Therefore, you have not acquired an enforceable right for which the reimbursement could be consideration. You are not the recipient of the supply.

Third party in a tripartite arrangement

Where you provide consideration for a supply, but you are not the recipient of the supply, you are referred to as a 'third party payer'. As a third party payer you do not make an acquisition in relation to your payment because the supply is not made to you as required by section 11-5 of the GST Act. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

We have determined earlier (above) that Entity A has not made a supply for the "reimbursement", that is Entity A has not made a taxable supply to you. You have therefore not made a creditable acquisition under section 11-5 of the GST Act and are not entitled to the input taxed credits on the "reimbursement" provided to Entity A.

When you receive a claim for reimbursement, as a third party payer, you reimburse Entity A the amount that Entity B would have paid. That is, you pay on behalf of Entity B an amount charged by Entity A to Entity B.

You have advised that Entity A provides GST-free supplies to Entity B. It follows that you will reimburse Entity A the amount charged to the Entity B. As there is no GST included on the price of the GST-free supply to Entity B, the amount you reimbursed Entity A will have no GST component.

As you do not acquire anything for which you provide the reimbursement and section 11-5 of the GST Act is not satisfied, you have not make a creditable acquisition. Consequently, you will not be entitled to any input tax credits where you pay for the supply to Entity B.