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Ruling

Subject: Goods and services tax and the supply of funds to welfare recipients

Question 1

Can you claim full input tax credits for payments made to welfare recipients who purchase goods with the funds?

Answer

No. You can not claim input tax credits for purchases made by the welfare recipients. You have not acquired the goods and services for a creditable purpose in carrying on your enterprise.

Relevant facts and circumstances

· You are registered for GST

· You are a not for profit organisation and your business activities include the provision of community and charitable services

· You deliver a number of client programs, including various programs funded by the Commonwealth.

· You provided assistance to enable elderly welfare recipients to remain in their home by purchasing goods and services to make them more comfortable.

· You have commenced a trial where you provided support by providing funding by issuing a debit card linked to a bank account

· The account is held in your name "on behalf of" each of the welfare recipients.

· You have access to 'on line statements' from the debit card purchases made by the welfare recipients.

· Welfare recipients can spend the funds on items in accordance with their care plan. It is expected they will spend it on purchases from suppliers of groceries and small consumables.

· There are no agreements between you and the suppliers to provide welfare recipients with goods and services. The purchases can be goods or services classified as taxable, GST-Free or input taxed supplies.

· The result of inappropriate purchases by the welfare recipients does not result in the repayment of funds but may jeopardise the continued use of the debit card by the welfare recipient.

· The goods and services are supplied directly to the welfare recipient by the supplier.

· Ownership of the funds changed hands at the point of the transaction, when the withdrawal from the bank account occurs.

· If the welfare recipient leaves the program then the account is closed and any remaining funds are returned to your main operating account.

Relevant legislative provisions

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

Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You are entitled to the input tax credit for any *creditable acquisition that you make.

Under section 11-5 of the GST Act you make a creditable acquisition if:

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

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

(c)   you provide or are liable to provide *consideration for the supply; and

(d)   you are *registered or *required to be registered for GST.

 * denotes a term defined in section 195-1 of the GST Act

Section 11-15 of the GST Act states:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

Under subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent you acquire it in carrying on an enterprise.

This subsection requires that the acquisition is acquired in carrying on that enterprise. It is therefore necessary to identify the activity or series of activities that constitute the enterprise that is being carried on and secondly to determine whether there is a connection or link between the acquisition and the enterprise being carried on.

Paragraph 56 of Goods and Services Tax Ruling: GSTR 2008/1 Goods and Services Tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) provides guidance on what is an enterprise. It states:

56. The definition of 'enterprise' refers to an activity or series of activities that is done in the form of a business, an adventure or concern in the nature of trade or the regular or continuous leasing, licensing or granting of an interest in property. It also includes an activity or series of activities done by a trustee of a trust or complying superannuation fund, a charitable institution or charitable fund, a religious institution or a government or an entity established for a public purpose.²⁵

From the facts, you are a non-profit company and your business activities include the provision of community and charitable services in a State . As such, you provide assistance to enable elderly welfare recipients to remain in their home by providing a number of Government supported client programs.

You have established a new program where you provide funds directly to the welfare recipients in the form of a debit card. This is one of the activities you perform as part of the furtherance of your enterprise.

What remains to be considered is, if under Subsection 11-5(1) of the GST Act, there is a connection or link between the acquisition and the enterprise being carried on.

From the facts, it is the welfare recipients who make the acquisitions. The goods and services are purchased and supplied directly to the welfare recipient and they can spend the funds on items in accordance with their care plan.

It is expected but not enforced that the welfare recipients will spend the funds on groceries and small consumables. There are no agreements between you and the suppliers to provide the welfare recipients with goods and services, as the suppliers can be any merchant who will accept the debit card. For example, the welfare recipient can go to any store to purchase food, and pay for the food with the debit card.

We now turn to guidance provided in paragraph 62 of Goods and Services Tax Ruling: GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9), to clarify who is the recipient of the supply.

The recipient is not difficult to identify where there are only two parties to a transaction. In a two party transaction, a thing supplied to an entity is typically also provided to that entity.

However this is not always simple, as outlined in the following paragraphs of GSTR 2006/9 which state:

115. In more complex arrangements involving more than two entities, which the Commissioner refers to as tripartite arrangements, analysis may reveal:

· a supply made to one entity but provided to another entity;

· two or more supplies made; or

· a supply made and provided to one entity and consideration paid by a third party.

116. As with two party transactions, the GST consequences of tripartite arrangements turn on identifying:

· one or more supplies;

· consideration (a payment, act or forbearance);

· a nexus between the supply and the consideration; and

· to whom the supply is made.

Paragraph 183 of GSTR 2006/9 states:

183. If you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to in this Ruling as a 'third party payer'. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

Therefore, you are not the recipient of the supply when the acquisitions are made by the welfare recipients. In these instances you will not make a creditable acquisition when you provide consideration for the supply.

In accordance with Section 11-20 of the GST Act, you will not be entitled to the input tax credit that was paid on the supply made by the various supplies to the welfare recipients.

Further support has been provided to charities on the ATO web site. The ATO has produced a document called:

'Charities consultative committee resolved issues document. Nat 5156"

You can access this document by using the search criteria "NAT5156" in the search box under the non profit tab on our web site www.ato.gov.au

While in NAT 5156, locate the table of contents and click on the link to Part 9 - vouchers.

Access the link called 'specific questions and answers' and review question 2 which is reproduced below for your convenience.

Question 2. When a charity pays for electricity, phone bills and other things for people are they entitled to input tax credits for GST charged on the supplies?

When a charity pays a bill on behalf of a person in need, the charity is paying the account as a 'third party' and is not making an acquisition of anything. As the supply of the electricity or telephone service is made to the person and not to the charity, the charity is not entitled to an input tax credit.

Similarly, a charity is not entitled to an input tax credit where it purchases a voucher (with a stated money value) from a retailer and gives the voucher to someone for them to purchase goods or services. GST is not payable when the voucher is purchased and any taxable supply of goods or services on redemption of the voucher is made to the person using the voucher and not to the charity. If the charity gives the person cash as an alternative to a voucher any goods or services purchased by the person with the cash are also supplied to the person and not to the charity.

The case is different if a charity has an agreement with a retailer that requires the retailer to provide certain individuals with goods or services upon presentation by the individuals to the retailer of an appropriate authority from the charity. After provision of the goods (or services) to the individuals, the retailer sends the authority and the tax invoice to the charity for payment. Under the agreement the supply of the goods (or services) is made to the charity even though the agreement requires the goods (or services) to be provided to the individuals. As the charity makes an acquisition of the goods (or services) it will be entitled to an input tax credit for any GST payable on those goods (or services).