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Ruling

Subject: GST and Financial Assistance Payments

Question 1

Are you (Entity A) making a taxable supply to Entity C when you receive the Capital Contribution Payment from Entity C?

Answer

Yes

Question 2

Are you making a taxable supply to Entity C when you receive Operation Funding from Entity C?

Answer

Yes

Relevant facts and circumstances

Entity B and you (together the Manufacturer) are Australian resident entities registered for GST.

Both entities are wholly owned subsidiaries of Entity D

The Manufacturer owns and operates a manufacturing facility (the Plant).

The Manufacturer and Entity D (as guarantor) entered into an Operations Support Deed (the Deed) with Entity C.

The objective of the Deed is to facilitate financial assistance from Entity C to the Manufacturer to allow the Manufacturer to continue producing and delivering its product.

The provision of the Capital Contribution payment and Operations Funding is subject to the Manufacturer satisfying its obligations under the Deed.

The Deed imposes the following obligations, amongst others, on the Manufacturer (Operation Obligations):

Apply the Operations Funding solely for the purpose of continuing to manufacture the product at the Plant;

Apply the Capital Contribution Payment solely for capital upgrades to the plant necessary to meet its Operation Obligations;

Relevant legislative provisions

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

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

Reasons for decision

An entity makes a taxable supply if all of the following tests are satisfied:

· There is a supply made for consideration;

· The supply is made in the course or furtherance of an enterprise that is carried on by the supplier;

· The supply is connected with Australia; and

· The entity making the supply is registered for Goods and Services Tax (GST).

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

An entity that receives a financial assistance payment is liable for GST in respect of that payment if the payment is consideration for a supply and all the other requirements for a taxable supply are met.

In your case, Entity B and you are conducting an enterprise. The enterprise is connected with Australia. You are registered for GST.

We must therefore determine whether you are making a supply and whether that supply is for consideration.

In order for you to have a GST liability in relation to a financial assistance payment, it must be established that:

· The financial assistance payment is 'consideration'; and

· There is sufficient nexus between the payment and a supply.

Consideration is defined in section 9-15 of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act). It includes:

· any payment, or any act or forbearance, in connection with a supply of anything; and

· any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

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

You have advised that the Manufacturer and Entity D entered into an Operations Support Deed (the Deed) with Entity C.

The objective of the Deed is to facilitate financial assistance from Entity C to the Manufacturer to allow the Manufacturer to continue producing and delivering its product.

Entity C made the following payments to you as a consequence of this agreement:

· A Capital Contribution Payment at the commencement of the arrangement; and

· Operations Funding comprised of a number of instalment payments.

Goods and Services Tax Ruling GSTR 2012/2, Goods and Services tax: financial assistance payments (GSTR 2012/2) considers that the term 'financial assistance payment' can encompass a wide range of payments. This includes payments:

· made to provide support or aid to the payee; and/or

· provided to support or aid in the implementation of government policy and initiatives.

In addition to providing the payee with financial assistance, the payer or a third party may also benefit from the arrangement.

In your case, the payments made by Entity C to you are considered to be financial assistance payments as they are made to provide support to you to continue manufacturing the product.

Paragraphs 15 and 16 of GSTR2012/2 provide guidance on when a financial assistance payment is consideration for a supply.

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.

Further, paragraph 28 stipulates that:

28. Where a supply is constituted by the payee entering into an obligation with the payer to do or refrain from doing something and the payment is made to secure that obligation, there is a sufficient nexus between the payment and the obligation. This is because the financial assistance payment is made in connection with, in response to, or for the inducement of the entry into the obligation.

Paragraphs 44 and 45 of GSTR 2012/2 also consider the impact of repayment clauses in an arrangement. An arrangement may include an obligation to repay financial assistance payments in specified circumstances. 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.

The meaning of 'supply' is outlined in section 9-10 of the GST Act and includes:

· a supply of goods or services;

· a provision of advice or information;

· a creation, grant, transfer, assignment or surrender of any right; or

· an entry into, or release from, an obligation to do anything, refrain from an act, or tolerate an act or situation.

Paragraph 121 of GSTR 2012/2 advises that in determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a supply for consideration, the test is whether there is sufficient nexus between the supply and the payment. This is an objective test. Regard also needs to be had to the true character of the transaction or arrangement.

An arrangement is evidenced by amongst other things:

· written and oral contracts;

· deeds, assignments and options;

· legal instruments; and

· memoranda of understanding.

Paragraphs 123 and 124 of GSTR 2012/2 go on to say that, 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 financial assistance payment must be consideration for that supply. A financial assistance payment is consideration for a supply if the payment is 'in connection with' a supply. Consideration can also be 'in response to' or 'for the inducement of' a supply.

In the High Court decision in Berry v FCT (1953) 89 CLR 653, Kitto J commented that consideration will be in connection with property where 'the receipt of the payment has a substantial relation, in a practical business sense, to that property'.

A financial assistance payment may have a sufficient nexus with a supply even though it may also serve to fulfil another aspect, or be connected with other aspects, of the arrangement, such as the objectives of the payer, that are not themselves supplies by the payee (Paragraph 130 of GSTR 2012/2).

In your case, the corresponding obligations between the Manufacturer and Entity C are contained in the Deed.

The provision of the Capital Contribution payment and Operations Funding to you, is subject to the Manufacturer satisfying its obligations under the Deed.

The Deed imposes a number of obligations on the Manufacturer (Operation Obligations). In particular, that the Manufacturer must continue to Manufacture and deliver the product necessary to meet the requirements of customers for each contract year. Further, the Manufacturer must apply the Operations Funding solely for the purpose of continuing the manufacture and supply of the product and apply the Capital Contribution Payment solely for capital upgrades to the plant.

In addition to the clauses highlighted above, the Deed outlines the responsibilities of the respective parties with regard to Operation Costs and Step in Rights in the event of a material breach by the Manufacturer of its Operation Obligations.

Where there is a material breach of the Operations Obligations by the Manufacturer, the Deed allows Entity C to terminate the Operation with immediate effect. If this occurs, then Entity C will have no further obligation to pay any Operations Funding and the Manufacturer must repay any part of the Operations Funding or Capital Contribution Payment that has not been utilised or legally committed.

Conclusion

The arrangement imposes a binding obligation on you. You are required to continue producing and delivering the product for a specified time to customers in the industry. Entity C makes the payments to you to secure that obligation in pursuit of its objectives. A material benefit or advantage is received by Entity C as a consequence of this arrangement. Further, you are required to repay Capital or Operations Funding which has not been allocated in the event of the breach of this agreement.

There is therefore sufficient nexus between the Financial Assistance Payments and the binding obligations entered into by you, for the payments by Entity C to be consideration for that supply.

Consequently, you are making a supply for consideration when you receive both the Capital Contribution Payment and the Operation Funding from Entity C.