Edited version of your private ruling

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Ruling

Subject: GST and creditable acquisition of funding

Question

Does the entity make a creditable acquisition when it provides funding?

Answer

Yes, the entity is making a creditable acquisition when it provides funding.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity is registered for the goods and services tax (GST).

The entity has entered into a Deed with entity X.

Under the Deed, the entity has agreed to provide funding to entity X.

Under the Deed, entity X has obligations.

The Deed allows for an annual review of the terms of the Deed.

The Deed provides that if entity X breaches any of its obligations under this Deed, the entity may, in addition to any other rights in respect of the breach, suspend payment of the funding until the breach is remedied or the entity may terminate the Deed. However, there is no requirement to refund any of the funding.

Entity X is registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

Reasons for decision

These reasons for decision accompany the Notice of private ruling

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The entity is making a creditable acquisition because the funding to entity X is consideration for a supply that is a taxable supply.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit for any creditable acquisition that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

In relation to creditable acquisitions, section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

To be entitled to claim input tax credits all of the above requirements must be satisfied. One of these requirements is that the supply of the thing to you is a taxable supply.

Under section 9-5 of the GST Act, you make a taxable supply if:

· you make the supply for consideration

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

· the supply is connected with Australia, and

· you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this case, the entity has entered into a Deed with entity X in which the entity has agreed to provide entity X with funding.

Guidance on the application of GST to grants of financial assistance and funding is contained in Goods and Services Tax Ruling GSTR 2000/11.

As explained in paragraph 6 of GSTR 2000/11, one entity (a grantor) may provide financial assistance to another (a grantee) by means of direct grants, contributions, subsidies, co-payments and similar means.

Following on from this, paragraph 9 of GSTR 2000/11 provides that the GST treatment of grants depends primarily on whether the grant represents consideration that has the relevant connection with a taxable supply.

In this case, it is entity X that will be liable for GST on receipt of the funding from the entity if that funding represents consideration for a supply which is a taxable supply.

Where entity X is liable for GST in respect of the funding, the entity which made the payment may be entitled to claim an input tax credit for that GST if it makes a creditable acquisition.

Therefore, in order for the entity to be able to claim an input tax credit it is first necessary to determine if entity X is making a taxable supply in respect of the funding arrangement between it and the entity.

To be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied. The first requirement to be satisfied is that there is a 'supply for consideration'.

As outlined in paragraph 14 of GSTR 2000/11, there are three questions that are relevant to determining if there is a supply for consideration:

· is there a supply by entity X to the entity

· does the payment of the funding constitute consideration, and

· is there a necessary relationship between the supply and the consideration.

Supply

The term 'supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes:

· a supply of goods

· a supply of services

· a provision of advice or information

· the creation, grant, transfer, assignment or surrender of any right, and

· an entry into, or release from an obligation:

o to do anything

o to refrain from an act, or

o to tolerate an act or situation.

However, the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money.

Therefore, a supply is essentially 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.

This view is contained in Goods and Services Tax Ruling GSTR 2006/9 which sets out a number of propositions for characterising and analysing supplies. Of relevance to this case is paragraph 123 of GSTR 2006/9 which states:

The Commissioner explained in Part 2 of this Ruling at paragraphs 102 to 103 how an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other unless there is something else, such as goods, services, or some other thing, passing between the parties.

Under the Deed, there are no goods or services passing between entity X and the entity, however entity X is required to provide information. Therefore, it is necessary to consider if this information is in the nature of a provision of advice or information.

According to paragraph 90 of GSTR 2000/11, a grant will not be consideration for a supply of advice or information unless the grantor derives some benefit from the information or the grant is made for the purpose of obtaining such information. However, paragraph 91 of GSTR 2000/11 provides that a requirement to account for the expenditure of the grant is merely incidental to the making of the grant.

While we accept that some of the reporting information provided by entity X is merely incidental to the funding arrangement as a whole, it is considered that the other information provided would not fall within this category. Therefore, it could be argued that part of the funding received by entity X is for the provision of information.

Also of relevance to this case is the need to determine whether there is a supply by entity X of a right or an entry into an obligation to do something.

Paragraph 32 of GSTR 2000/11 explains that an agreement between the parties to a funding arrangement may establish rights or obligations between the parties and that an obligation to make supplies to others may itself be a supply to the grantor.

However, according to paragraph 30 of GSTR 2000/11, not every grant of a right or entry into an obligation will establish a supply that is subject to GST.

This is further explained in paragraph 33 of GSTR 2000/11 which states:

33. For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish a supply. 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.

This means that, to be a 'supply' under the GST Act, a supply of rights or obligations must be binding on the parties involved. The mere creation of expectations between the parties is not the entry into a binding obligation and as such, is not a supply for GST purposes.

Examples of arrangements that may indicate that an agreement is binding on the parties to a funding arrangement is outlined in paragraph 34 of GSTR 2000/11. It states:

34. Examples of arrangements that will indicate an agreement binds the parties include:

· 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.

In this case, the terms and conditions of the funding arrangement are set out in the Deed. The Deed lists a number of specific obligations that entity X has agreed to do. There are also some incidental reporting obligations in the Deed.

Notwithstanding all of these obligations, there is no provision in the Deed for the funding to be repaid in specified circumstances such as, in the event of a breach. However, the absence of a specific repayment clause would not be sufficient to indicate that there are no binding obligations between the parties to a funding arrangement.

In addition, while there is no repayment clause in the Deed, the Deed does provide that if entity X breaches any of its obligations under the Deed, the entity may suspend payment of the funding until the breach is remedied or the entity may terminate the Deed.

After weighing up all of the information, it is considered that the obligations under the Deed are more than just 'mere expectations' that entity X will do certain things. Rather, they include specific obligations with agreed timeframes for completion and the obligations are enforceable as there are agreed remedies in the event of a breach. As such, the obligations are 'binding obligations' and consequently, the entry into these obligations by entity X is a supply under section 9-10 of the GST Act.

Consideration

As there is a supply by entity X to the entity, it is necessary to consider if the payment of the funding constitutes 'consideration'.

The term 'consideration' is defined in section 9-15 of the GST Act and extends beyond payments to include such things as acts and forbearances. That is, 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.

It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

Therefore, the payment of funding to entity X does constitute consideration for GST purposes.

However, it is not sufficient that there just be a 'supply' and 'consideration'. To satisfy the first requirement of section 9-5 of the GST Act, the supply must be made for consideration. This means that there must be a necessary relationship between the supply and the consideration.

Relationship between the supply and the consideration

As entity X is making a supply to the entity and there is consideration in the form of funding, then it is necessary to determine if there is a relationship or nexus between that supply and that consideration.

In relation to the question of consideration and nexus, GSTR 2000/11 at paragraph 79 explains that:

… the test is whether there is a link or nexus that provides a substantial relation between the substance of the obligation and the grant. …

For the purposes of determining the relationship between the supply and the consideration, paragraphs 81 and 82 of GSTR 2000/11 state:

81. In determining whether consideration is in connection with, in response to, or for the inducement of a supply, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description which parties give to the arrangement, but by looking at all of the agreements entered into and the circumstances in which the agreements are made.

82. Where the grant involves a supply of only a right or obligation, there needs to be some binding commitment supplied by the grantee which goes to the substance of the grant transaction. In determining what the substance of the transaction is where the transaction is an exchange of a grant for a right or obligation, the key consideration will be the object or purpose which the grant is intended to achieve. Things supplied as part of such a grant agreement that are merely incidental to the purpose for which the grant is made will not be supplies for which the grant is consideration.

Paragraphs 85 and 86 of GSTR 2000/11 further discuss the nexus where a grantee supplies an obligation:

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, the purpose of the funding is to enable entity X to carry out its obligations under the Deed. The specific nature of the obligations indicates that the entity had a clear understanding of what it wanted entity X to achieve in respect of the funding that it was providing. In addition, entity X has agreed to carry out those obligations.

This means that there is a sufficient connection between the funding paid by the entity and the obligations entered into by entity X, to establish a link or nexus between the substance of the obligations and the funding received.

Therefore, as there is a relationship or nexus between the supply by entity X and the payment to it of the funding, that supply will be made for consideration. As such, the first requirement of section 9-5 of the GST Act is satisfied.

In relation to the other requirements of section 9-5 of the Act, the supply by entity X of an entry into an obligation to do something will be made in the course or furtherance of entity X's enterprise, the supply is connected with Australia and entity X is registered for GST. In addition, there are no provisions that would make the supply in this case either GST-free or input taxed.

Therefore, as all of the requirements of section 9-5 of the GST Act are satisfied entity X is making a taxable supply in respect of the funding arrangement between it and the entity. As such, the funding represents consideration for a taxable supply and thus, is subject to GST.

As stated previously, for the entity to be entitled to claim an input tax credit for the GST paid to entity X, the supply acquired by the entity must be a creditable acquisition under section 11-5 of the GST Act.

It has already been determined that the supply by entity X to the entity is a taxable supply. Another requirement to be satisfied is that the thing supplied is acquired solely or partly for a creditable purpose. That is, it is acquired in carrying on the entity's enterprise.

Therefore, based on the information provided, it is considered that the supply acquired from entity X was acquired in carrying on the entity's enterprise. In addition, the entity is liable to provide consideration for the supply (being the funding) and the entity is registered for GST.

As all of the requirements of section 11-5 of the GST Act have been satisfied the entity is making a creditable acquisition when it provides funding. As such, the entity is entitled to claim an input tax credit for that creditable acquisition.