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Ruling

Subject: GST and Grants of Financial Assistance

Question

Does the grant of financial assistance for the approved purpose, in accordance with the deed, constitute consideration for a taxable supply for purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the grant of financial assistance for the approved purpose, in accordance with the deed, does constitute consideration for a taxable supply for purposes of the GST Act.

Relevant facts and circumstances

You and another entity entered into a deed.

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

Under the terms of the deed (a copy of which you have provided), the other entity made a grant to you for the approved purpose, being, among other things, the design, construction, delivery and installation of an item to be used in a specified location.

Clause A in the deed provides the conditions for the grant whereby you agree:

(a) to use the grant only for the approved purpose

(b) to store, maintain, transport, clean, erect and dismantle the item

(c) to make the item available to authorised users

(d) to maintain proper financial records in relation to the grant

(e) to disclose the grant as a separate and identifiable item in your financial statements

(f) to provide annual audited financial statements, and

(g) to keep the other party informed on progress and provide other information as agreed.

Under clause B of the deed you are required to publically acknowledge the assistance of the grant from the other party.

Clause C of the deed deals with the possible repayment of the grant, at the option of the other party, if you fail to apply the grant for approved purposes.

Clause D of the deed deals with the GST. It is noted that the grant does not include GST. You and the other party agree that, should the GST be payable, the other party will pay the additional amount of GST when you provide a tax invoice for the amount.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 9

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

Reasons for decision

Summary

The grant of financial assistance, in accordance with the deed, is consideration for a taxable supply for purposes of the GST Act.

Detailed reasoning

Under the basic rules, Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies.

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

· you make a supply for *consideration; and

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

· 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 that it is *GST-free or *input taxed under the exemptions.

Note: Definitions of asterisked terms are provided in the Dictionary under section 195-1 of the GST Act.

The question at issue is whether the grant of financial assistance provided under the deed constitutes consideration for a supply that you have made or will make.

Goods and Services Tax Ruling GSTR 2012/2 - Goods and services tax: financial assistance payments, which replaced Goods and Services Tax Ruling GSTR 2000/11 and Draft Goods and Services Tax Ruling GSTR 2011/D4, deals with the application of the GST to financial assistance payments. Paragraphs 15 and 16 of GSTR 2012/2 state:

15. For a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one.

16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must the considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative.

Under clause A of the deed you agreed:

(a) to use the grant only for the approved purpose (acquisition of the item)

(b) to store, maintain, transport, clean, erect and dismantle the item

(c) to make the item available to authorised users

(d) to maintain proper financial records in relation to the grant

(e) to disclose the grant as a separate and identifiable item in your financial statements

(f) to provide the other party annual audited financial statements, and

(g) to keep the other party informed on progress and provide other information as agreed.

Under clause B of the deed you agreed to publically acknowledge the assistance of the grant from the State.

Clause C of the deed details the conditions under which the grant is repayable for failure to apply the grant or any part of it for the approved purpose.

In the arrangement, there are things done which may satisfy the definition of supply (such as those covered by clauses A(d) to (g) and clause B), but these things will not necessarily have sufficient nexus with the financial assistance payment such that it can be said to be 'in connection with', 'in response to' or 'for the inducement of' a supply. Paragraph 40 of GSTR 2012/2 discusses this:

40. Things are often supplied by the payee to the payer that satisfy the statutory definition of a 'supply', given the broad meaning of 'supply'. In some circumstances, things may be supplied by the payee that are merely incidental or have an insufficient nexus to the financial assistance payment. Further, in such circumstances, although there may be supplies which are merely incidental or have an insufficient nexus to the financial assistance payment, the payment may be consideration for a good, service or some other thing supplied under the arrangement.

In looking at the other clauses (clauses A(a) to (c) and clause C), it is noted that, in some circumstances, a financial assistance payment may be provided for an entity to make acquisitions and that the payment can only be used for that purpose. In such cases, despite that fact that the funds can only be used for a particular purpose, this will often only amount to a mere expectation that the activity is undertaken. Example 10 in GSTR 2012/2 discusses this:

Example 10 - no supply - mere expectation

58. A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts. The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.

59. The local council has an expectation that the works will be carried out. However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council.

60. There are no GST consequences arising from the arrangement for either party.

Also, in respect of repayment clauses, paragraphs 44 and 45 of GSTR 2012/2 state:

44. An arrangement may include an obligation to repay a financial assistance payment in specified circumstances. The existence of a repayment clause alone is not determinative in establishing whether a financial assistance payment is consideration for a supply.

45. Rather, the repayment obligation is to be taken into account in the broader context of the arrangement as a whole and may be relevant in determining whether the financial assistance payment is consideration for a supply made by the payee.

In the circumstances in question, the grant is to be used for the approved purpose: the design, construction, delivery and installation of an item to be used in a specified location.

However, while this is consistent with Example 10 in GSTR 2012/2, the conditions under which the grant is paid also include:

· to make the item available to authorised users, and

· to store, maintain, transport, clean, erect and dismantle the item.

As such, this goes beyond providing a grant to enable you to acquire the item, which on its own could result in a mere expectation only. It also includes requirements to make the item available to others and to maintain the item. The presence of these additional clauses (the requirement to maintain the item and make them available) evidences that there is more than a mere expectation. It is only by building the item that the express obligations to maintain them and make them available to authorised users can be fulfilled.

When the arrangement is viewed as a whole, in particular clauses A(b) and (c) but also noting clause A(a) and clause C, it is considered that the grant is consideration for a supply made to the other party.

Conclusion

When the arrangement is viewed as a whole, it is considered that you are making a supply for consideration to the other party. The supply is made in the course or furtherance of an enterprise that you carry on. The supply is connected with Australia because the goods and services will be supplied in Australia, and you are registered for GST. The supply is not GST-free or input taxed. Therefore, you are making a taxable supply.

Conflict between GSTR 2012/2 and GSTR 2000/11

The arrangement was entered into before the issue of GSTR 2012/2. Entities can apply GSTR 2012/2 prior to its date of issue.

However, it should also be noted that paragraph 92 of GSTR 2012/2 provides that entities can continue to rely on the views expressed in the withdrawn GSTR 2000/11 for payments made before 1 January 2013 if:

· the arrangement between the parties was entered into before the date of issue of GSTR 2012/2; and

· the GST consequences concerning the treatment of financial assistance payments made under those arrangements are impacted by any conflict between the views expressed in GSTR 2012/2 and GSTR 2000/11.

Where entities in these circumstances rely, or have relied, on GSTR 2000/11, paragraphs 89 to 91 of GSTR 2012/2 outline the consequences:

89. Where entities have relied on GSTR 2000/11 to treat a supply as a taxable supply before the date of issue of this Ruling and the supply is not a taxable supply under the views expressed in this Ruling, they may choose to seek a refund for past overpaid GST if it is within relevant time limits¹ and the payer is first refunded the overpaid amount.²

90. 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 Ruling, they may choose to pay GST on that supply. If GST is paid on the supply the payer may be entitled to an input tax credit.

91. Where, entities rely or have relied on this Ruling or GSTR 2000/11 to determine that there is no GST payable on that supply, there is no input tax credit available to the entity making the payment.