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Ruling
Subject: GST and financial assistance payments
Question
Is the financial contribution made by the Club to the Council towards a project, subject to GST?
Answer
No, the financial contribution made by the Club to the Council, is not subject to GST.
Relevant facts and circumstances
The Council is registered for GST.
The Council is responsible for the management of community assets.
The project is in relation to one the community assets managed by the Council
The asset to which the project relates is on Crown land and remains the property of the Crown.
The Club is one of the users of this community asset.
The Club does not provide payments to the Council for the use of the asset.
The Council contacts out the running of that community asset to another entity to which the Club pays fees for the use of the asset.
The Club does not maintain or repairs the asset.
Financial assistance will be provided by the Club.
The Club does not obtain any further rights as a result of their financial contribution.
The Club is not registered for GST.
Reasons for decision
Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay GST on any taxable supply that it makes.
Under section 9-5 of the GST Act, an entity makes a taxable supply if:
§ the entity makes the supply for consideration
§ the supply is made in the course or furtherance of an enterprise that the entity carries on
§ the supply is connected with Australia, and
§ the entity is 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.
The first requirement to be satisfied is that there is a supply for consideration.
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
§ 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.
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.
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.
In this case, the Club will make a financial contribution to the Council in relation to the project.
Guidance on the application of GST to grants of financial assistance and funding is contained in Draft Goods and Services Ruling GSTR 2011/D4.
As explained in paragraph 2 of GSTR 2011/D4, entities may provide financial assistance to other entities for various reasons.
The GST treatment of financial assistance depends primarily on whether the financial assistance represents consideration that has the relevant connection with the supply.
Paragraph 11 of GSTR 2011/D4 states:
11. To determine if there is a supply for consideration that is a financial assistance payment, the surrounding facts and circumstances of the arrangement, including any documentation, must be examined. For example, if the application for a financial assistance payment is the only written evidence of an agreement between the parties, the surrounding facts and circumstances must also be taken into account.
While the Club may derive a benefit from the financial contribution it provided towards the project, it is only an indirect one since the financial contribution is for goods and services provided to the Crown through the Council. Consequently, there is no supply of anything from the Council to the Club.
However, it now needs to be determined if the financial contribution by the Club is for the supply of a right or entry into an obligation to do something.
Paragraph 24 of GSTR 2011/D4 states:
24. Some financial assistance payments are made for the payee entering into an obligation with the payer to do or not do something. The payment has a sufficient nexus with the supply of the entry into the obligation where the payee is obligated to do or not do something, and taking into account the terms of the agreement and the surrounding circumstances, it is the obligation for which the financial assistance payment is made.
While an agreement between the parties to a funding arrangement may establish rights or obligations between the parties, for these rights or obligations to constitute a supply, the supply of the rights or obligations must be binding on the parties. The mere creation of expectations between the parties does not establish a supply.
Based on the facts provided, the Club is not under a contractual obligation to make a financial contribution to the Council in relation to the project. There are only expectations that the Club will make a financial contribution to the project and that the Council will use the funds contributed by the Club for the project.
Paragraph 25 of GSTR 2011/D4 states:
25. Where the payer merely expects or anticipates that the payee will or will not do something with or for the financial assistance payment but there is no obligation on the payee to do that thing, the mere expectation by the payer does not establish a supply to the payer for which the payment is consideration.
Example 3, paragraphs 28 to 30 of the GSTR 2011/D4 may also be relevant.
As there is no binding agreement between the Council and the Club, there is no supply of a right or an obligation being made by the Council.
Therefore, as the Council is not making a supply to the Club, the financial contribution from the Club is not consideration for a taxable supply.
Accordingly, the financial contribution made by the Club to the Council, is not subject to GST.