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Ruling

Subject: GST and funding

Question 1

Is the payment of funds by Entity A to Entity B under the Funding Program, consideration for a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is the payment of funds by Entity A to Entity C under another Funding Program, consideration for a taxable supply pursuant to section 9-5 of the GST Act?

Answer

Yes, to the extent they receive consideration for administering the funding.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A provides assistance with the costs of operating a Program.

There are two funding bases:

Entity A is approved to provide a program and must do certain things and deliver a service.

Agreements are made between Entity A and the Entity B.

The agreement provides that Entity B must deliver the services in accordance with the agreement.

The funding is paid directly (quarterly and in arrears) by Entity A to Entity B.

The agreement provides for the recovery of funding where the funding has not been applied as agreed or has not been spent. Entity A may require funding to be repaid or deducted from future funding or applied in accordance with Entity A's directions.

There is no agency or partnership that exists between Entity B and Entity A.

Other entities not approved to receive the above funding but can demonstrate certain things must be affiliated with Entity C.

Funding is only provided where an entity affiliated with Entity C is eligible.

Agreements have been entered into between Entity A and Entity C. There are no agreements between Entity A and the actual affiliated entities of Entity C. Funding is made by Entity A to Entity C for onward payment to particular entities. There is no discretion on the distribution arrangements with Entity C.

The agreement provides that Entity C holds the funds on trust for Entity A until the funds are paid to an eligible entity.

Entity C must hold the funds in a separate bank account with an authorised deposit taking institution under the Banking Act 1959 (Cth).

Any interest earned on the funds forms part of the funds and Entity C may only use the interest for the purpose of the Funding Program and in otherwise meeting its reasonable costs in carrying out its obligations under the agreement.

Interest earned that is not expended on Financial Assistance Distribution and Support Services will be returned to Entity A at the expiry or earlier termination of the agreement.

There is no employment relationship, agency or partnership that exists between Entity C and Entity A.

Relevant legislative provisions

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

Reasons for decision

Summary

The payment of funds by Entity A to Entity B under the Funding Program, is consideration for a taxable supply as Entity B will make a supply of an obligation for the funding it receives.

Detailed reasoning

Supplies are taxable where they satisfy section 9-5 of the GST Act. This section provides:

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.

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

The meaning of 'supply' under section 9-10 of the GST Act is very broad - it means any form of supply whatsoever and under subsection 9-10(2) includes:

(a) a supply of goods,

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, transfer or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply, or

(g) an entry into, or release from, an obligation to: do anything, refrain from an act, or tolerate an act or situation.

(h) …

The granting of rights or entry into an obligation are supplies. However, these supplies can form part of a supply which is the substance of the transaction.

Consideration is broadly defined, therefore most financial assistance payments are consideration.

For a financial assistance payment to be consideration for a supply it is not sufficient for there to be a supply and a payment. The supply must be for that payment.

A financial assistance payment is consideration for a supply if the payment is 'in connection with' a supply.

To determine whether a financial assistance payment is consideration 'in connection with', 'in response to' or 'for the inducement of' a supply it needs to be established whether there is a sufficient nexus between the financial assistance payment and the supply.

In determining whether a financial assistance payment has a sufficient nexus to a supply regard needs to be had to the true character of the transaction. An arrangement between parties is characterised not merely by the description which parties give to the arrangement, but by the agreements entered into and the surrounding circumstances.

The following is an example from Goods and Services Tax Ruling GSTR 2000/11 on financial assistance payments.

Example 2 - Payment for entry into an obligation

110. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art. While its performances are popular and critically acclaimed, their continued presentation is not viable given increasing production costs. In order that the troupe can continue its work, and in recognition of the organisation's contribution to the arts, it receives a financial assistance payment from the Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts.

111. The troupe enters into a written agreement that, in return for the payment, it will continue to develop and present its innovative performances. The agreement provides that the payment is to be repaid if the payee fails to do this. By agreeing to continue to develop and present its performances, the troupe enters into an obligation for which the payment is consideration. The financial assistance payment has a sufficient nexus with the obligation. Therefore, the payment is consideration for the supply of the obligation.

Under an agreement between Entity B and Entity A, Entity B agrees to deliver the services in return for the funding from Entity A. Where Entity B does not comply with the agreement Entity A may require funding to be repaid or deducted from future funding or applied in accordance with Entity A's directions.

In this circumstance, there is a supply of an obligation to provide the services by Entity B to Entity A in return for consideration in the form of funding from Entity A. Hence, paragraph 9-5(a) of the GST Act is satisfied. Where the other requirements of section 9-5 are met the supply will be taxable. That is, where Entity B makes the supply in furtherance of the enterprise they carry on, their supply is made in Australia and they are registered for GST.

Question 2

Summary

The payment of funds by Entity A to Entity C under the Funding Program, is only consideration for a taxable supply to the extent Entity C receives it in administering the funding.

Detailed reasoning

Under an agreement between Entity C and Entity A, Entity C administers the funding to an eligible entity. In doing so, Entity C provides a service to Entity A of administration. In return Entity C can apply any interest earned, for amongst other things, to meet its reasonable costs in carrying out its obligations under the agreement. Furthermore, the funding provided by Entity C is held in trust and at no time belongs to Entity C. Hence, Entity C makes a supply of administration to Entity A and in return receives consideration, being the amount of interest earned which is applied to Entity C's cost in administering the funds. Resulting in paragraph 9-5(a) of the GST Act being met.

Hence, where the other requirements of section 9-5 are met the supply of administration by Entity C will be taxable. That is, where Entity C makes the supply of administration in furtherance of the enterprise they carry on, their supply of administration is made in Australia and they are registered for GST.

As there is no binding obligation on behalf of an eligible entity to Entity A there is no supply for which the funding is for as such the funding is not paid for a supply, and is therefore, not for a taxable supply.

Further information regarding the application of GSTR 2011/D4 the draft ruling that when final will replace GSTR 2000/11

100. When the final Ruling is issued, it is proposed to apply both before and after its date of issue subject to the proposed transitional arrangement outlined in paragraphs 104 to 105 of this draft Ruling.

101. The final Ruling will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the ruling (see paragraphs 75 to 77 of Taxation Ruling TR 2006/10).

Conflict between GSTR 2000/11 and the final Ruling

102. Where entities have relied on GSTR 2000/11 to treat a supply as a taxable supply and the supply is not a taxable supply under the views expressed in this draft Ruling, they may seek a refund for past overpaid GST if it is within relevant time limits and the payer is first refunded the overpaid amount.

103. Where entities have relied on GSTR 2000/11 to determine that they did not make a taxable supply and the supply is a taxable supply under the views expressed in this draft Ruling, then no GST is payable on that supply. This means the amount of input tax credit the recipient is entitled to is zero.

Proposed transitional arrangement

104. It is proposed that entities can continue to rely on the views expressed in the withdrawn GSTR 2000/11 for payments made before 31 December 2012 if:

· the arrangement between the parties was entered into before the date of issue of the final Ruling; and

· the GST consequences concerning the treatment of financial assistance payments made under those arrangements is impacted by any conflict between the views expressed in the final Ruling and GSTR 2000/11.

105. Where entities have entered into arrangements that they can not alter to take into account a change in GST treatment as a result of the views expressed in the final Ruling, they should apply to the ATO, in writing, for consideration of their circumstances on a case by case basis.