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Ruling

Subject: GST and grant of financial assistance

Question

Is the grant of financial assistance, pursuant to an agreement, consideration for a taxable supply for the purposes of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the grant of financial assistance you received is consideration for a taxable supply for the purposes of section 9-5 of the GST Act.

Relevant facts and circumstances

You are registered for GST and carry on an enterprise.

You received a grant of money pursuant to a written agreement made in 2010, as a part of a project you were to undertake.

You have provided a copy of that agreement.

You received the final instalment of the grant in 2011.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision

Summary

The grant of financial assistance you received is consideration for a taxable supply for the purposes of section 9-5 of the GST Act.

Accordingly, you are liable to remit GST for the taxable supply.

Detailed reasoning

Section 9-40 of the 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 of a taxable supply 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 meaning any form of supply whatsoever and includes:

· a supply of goods or services;

· a provision of advice or information;

· a grant, transfer or surrender of real property;

· 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

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.

Financial assistance payments

Goods and Services Tax Ruling GSTR 2012/2 provides the Commissioner's views on when a financial assistance payment is consideration for a supply. GSTR 2012/2 replaced Goods and Services Tax Ruling GSTR 2000/11.

In GSTR 2012/2, the term 'financial assistance payment' is intended to 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 your case, you entered into a written agreement with a government entity in 2010 for a grant of money.

The objective of the agreement was the provision of funding as part of a project you were to undertake.

You received the final instalment of the grant in 2011.

In your circumstances, the payments you received are considered to be financial assistance payments. They were made to provide support to you by way of the provision of funding to you as part of a project you were to undertake and/or to support or aid in the implementation of government policy and initiatives.

Sufficient nexus between supply and payment

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. Paragraph 15 of GSTR 2012/2 explains that 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. Paragraph 16 of GSTR2012/2 discusses factors that are to be taken into account when examining an arrangement and states.

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.

The guidance at paragraph 28 of GSTR 2012/2 is of particular relevance. Paragraph 28 discusses payments for the entry into an obligation to do or refrain from doing something and states:

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.

The following example of sufficient nexus in relation to payment for entry into an obligation is provided at paragraphs 29 to 31 of GSTR 2012/2:

29. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art in South Australia. It enters into an arrangement with Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts. Under that arrangement, in return for a financial assistance payment from the Foundation, the troupe enters into a binding agreement under which it is obligated to expand its activities - by presenting three performances outside South Australia during the following year.

30. By entering into this obligation to present three performances outside South Australia, the troupe has made a supply to the Foundation. The payment by the Foundation has been made in connection with, in response to, or for the inducement of this supply. Therefore, there is a sufficient nexus between the entry into the obligation and the financial assistance payment such that the financial assistance payment is consideration for that supply.

31. Snake Glass Jugglers is liable for GST on the supply of the entry into the obligation. The Gooseville Arts Foundation is entitled to an input tax credit on their acquisition of the right to require Snake Glass jugglers to present the performances.

In your case, the obligations that the arrangement imposed on you are contained in the agreement which you entered into with the government entity. You agreed to undertake the project involving provision of funding to you.

Therefore, there is sufficient nexus between the financial assistance payments made by the government entity and the obligations you entered into for the payments to be consideration for that supply.

Consequently, you were making a supply for consideration in relation to the payments you received from the government entity.

Conclusion

As the payments are consideration for a supply, you are liable to remit GST in relation to those payments if all the other requirements under section 9-5 of the GST Act for a taxable supply are met.

You are registered for GST and you have made the supply in the course of an enterprise you carry on. The supply is connected with Australia because the goods and services will be supplied in Australia. There are no provisions of the GST Act that apply to make the supply GST-free or input taxed.

Accordingly, the supply is a taxable supply for which you are liable to remit GST.

Conflict between GSTR 2012/2 and GSTR 2000/11

The arrangement between you and the government entity was entered into in 2010. This date precedes the issue of GSTR 2012/2 on 30 May 2012. Entities can choose to apply GSTR 2012/2 prior to its date of issue.

Where entities in these circumstances rely on, or have relied on, GSTR 2000/11, paragraphs 90 and 91 of GSTR 2012/2 explain the following consequences:

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.

Transitional arrangement

As a transitional arrangement, paragraph 92 of GSTR 2012/2 explains 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.

It is anticipated that there will be few transactions which will now become subject to GST as a result of the views expressed in GSTR 2012/2. However, where entities have entered into arrangements that they cannot alter to take into account a change in GST treatment and they fall outside of the scope of the transitional arrangement outlined in paragraph 92, they can apply to the ATO, in writing, for consideration of their circumstances on a case by case basis.