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Ruling

Subject: GST status of fees, charges and taxes described in an Agreement

Questions:

Are the following fees, charges or taxes imposed by you fees, charges or taxes under Division 81 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore not consideration for a taxable supply?

Question 1:

A fee stipulated in the Agreement?

Answer:

Yes. A fee required under the Agreement is an Australian fee or charge and is not consideration for a taxable supply.

Question 2:

The allocation of monies to a fund, as stipulated in the Agreement?

Answer:

No. The requirement to allocate monies to a fund does not create a taxable supply under general principles.

Question 3:

Tax stipulated in the agreement?

Answer:

Yes. This is an Australian tax. Therefore there is no taxable supply.

Question 4:

A payment of compensation as stipulated under the Agreement?

Answer:

No. These payments are in the nature of a penalty and are therefore not consideration for a taxable supply.

Question 5:

A pro-rata return of the fee stipulated in the Agreement for early termination?

Answer:

No. A refund of money to the Operator does not result in you making a taxable supply.

Question 6:

A reimbursement of costs as stipulated in the Agreement?

Answer:

Yes. In these circumstances a fee in relation to legal costs for permission is an Australian fee or charge and is not consideration for a taxable supply.

Relevant facts and circumstances

You are an Australian government entity.

You are registered for GST.

You have entered into an Agreement with an operator, under relevant Legislation, for the conduct of certain arrangements in an industry.

You have raised questions about the application of GST to your arrangements in the context of the following provisions of the relevant Act and the subsequent agreement.

Applicable legislation

You are authorised under the relevant Act to enter into an agreement for the conduct of operations by an operator, and the purpose and manner of conduct for such operations.

The relevant Act requires that any person who enters into an agreement must pay to you any fees specified in, or calculated in accordance with, the Agreement at the times specified in the Agreement. The Act also requires that the person must also pay any taxes or levies specified in, or calculated in accordance with the agreement at the times specified in the agreement.

First requirement

In your agreement you have agreed that - pursuant to or under the relevant Act - the fee for the agreement is the named sum.

The operator must pay the fee to you within the terms of the agreement, and there are to be no additional fees charged to the operator for any amendment of the manner in which existing operations under the agreement are conducted.

Second requirement

Under your agreement the operator must establish a fund (the Fund) and maintain this fund for the term of the agreement. All monies allocated towards or paid into the Fund are to be used by the operator in a certain way.

The operator must pay in an amount in the first year of the agreement. On or before each anniversary a further lump sum amount must be paid in. This amount is equivalent to the previous year's amount, indexed by a relevant amount.

Funds must be held cumulatively with any amount not spent in a year available for future expenditure.

In each year of the agreement the operator must use the money for mutually beneficial purposes. They must advise in writing any proposal to use the money providing relevant details. You may approve or disapprove the use. Where the use is approved you may advise at any time if you would like an alternative use. If the use is disapproved the parties agree to negotiate an alternative proposal.

Third requirement

It is a condition of the agreement that, pursuant to the relevant legislation, the operator must lodge returns and pay tax to you as stipulated in the agreement. The agreement details calculations and payment and administration requirements.

Fourth requirement

The Agreement contains clauses relating to variation, suspension or termination of the Agreement. This may occur where 'relevant circumstances' of the nature described have occurred. The Agreement then sets out steps that can be taken.

'Relevant circumstances' include failure to comply with the Agreement, failure to comply with relevant laws, necessary authorities or licences no longer being held, failure to pay fees, failure to pay monies into the Fund, failure to comply with lawful directions from you, misconduct or similar, insolvency or bankruptcy etc.

A breach or 'relevant circumstance' that does not relate to a failure to pay taxes or any other fee or money is called a 'non-material' relevant circumstance.

In the case of a non-material relevant circumstance (ie anything other than non-payment) that is not capable of being remedied, termination can be avoided by paying an amount acceptable to you by way of compensation for the breach within the timeframe requested.

Fifth requirement

The Agreement specifies that no compensation or damages shall be payable by you where certain things occur.

You may conduct a review of the activities undertaken by the Operator. If the review results in termination of the Agreement for unsatisfactory performance then under the Agreement the Operator will be entitled to a pro rata return of the fee paid to operate (described here as the first requirement). The Agreement provides details of the amounts the Operator will be entitled to.

Sixth requirement

The Operator must pay your legal and other costs relating to any consents or approvals required for the purposes of the Agreement, and relating to any default action taken under the agreement.

Relevant legislative provisions

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

Division 81

Reasons for decision

Summary

All of the transactions or arrangements that you have questioned do not give rise to taxable supplies for the reasons discussed below.

Detailed reasoning

Background

When the GST was introduced the Commonwealth, states and territories agreed that the GST would apply to the commercial activities of government at all levels, but that the non-commercial activities of government would be outside the scope of the GST.

Until 1 July 2011, payment of Australian taxes, fees and charges were treated as consideration for a supply, except to the extent that the Australian tax, fee or charge was listed in the A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2011 (No. 1) (the determination). As a transitional measure, fees and charges listed in the Treasurer's determination as at 30 June 2011 remain exempt until 1 July 2013. We note that your current charges are not listed under the determination.

Division 81 of the GST Act was amended effective 1 July 2011. Division 81 of the GST Act allows entities to self assess the GST treatment of a payment of an Australian tax, fee or charge in accordance with certain principles.

Australian taxes

Section 81-5 of the GST Act states that a payment, or the discharging of a liability to make a payment, is not the provision of consideration to the extent the payment is an Australian tax. While there is provision in the legislation to make regulations to specifically prescribe payments as consideration for a taxable supply (sub-sections 81-5(2), 81-5(3), no regulations have currently been made.

An Australian tax means a tax (however described) imposed under an Australian law. An Australian law means a Commonwealth, state or territory law. Australian government agency means the Commonwealth, a state or territory, or an authority of the Commonwealth or of a state or territory (section 195-1 GST Act, as defined by reference to section 995-1, Income Tax Assessment Act 1997 (ITAA 1997)). Under this definition you are an Australian government agency.

Generally a tax is a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered. Taxes are imposed as part of the general revenue raising activities of government, and are generally not considered to be associated with a supply and are not subject to GST under the basic rules for GST. However, as 'supply' and 'consideration' are broad terms under the GST Act, Division 81 is a specific provision to ensure that the payment of tax is not subject to GST.

We consider that a tax is imposed under an Australian law when there is legislation identifying the particular tax. Provided there is a law which imposes the tax, it does not matter that the quantum or details of the tax are not specified in that law. The relevant matter is whether the ability to impose the tax is authorised or required under an Australian law. In your circumstances we consider that this requirement is met by the sections of the relevant Legislation.

Therefore any taxes imposed by you under that legislation are amounts imposed under an Australian law and payable to an Australian government agency. They therefore meet the requirements of an Australian tax.

Australian fees or charges

Section 81-10 of the GST Act considers the effect of payment of certain Australian fees and charges.

An Australian fee or charge is a fee or charge (however described), imposed under an Australian law and payable to an Australian government agency (section 195-1 GST Act). The meaning of an Australian law has been considered above, and we consider that you are an Australian government agency. Therefore any fees or charges imposed by you under the relevant legislation are amounts imposed under an Australian law and payable to an Australian government agency. They therefore meet the requirements of an Australian fee or charge.

We consider that a fee or charge is imposed under an Australian law when that law provides specific authority to impose the relevant fee or charge. Provided that there is a law which imposes the fee or charge, it does not matter that the quantum and details of the charge is not specified in the law. The relevant matter is whether the ability to impose the charge is authorised or required under an Australian law. In your circumstances we consider that this requirement is met by particular sections of the relevant legislation. Having met this initial hurdle the particular fees, charges or transactions need to be considered in further detail.

Australian fees or charges are not treated as the provision of consideration for a supply at first instance where they are of the nature described in subsections 81-10(4) or (5) of the GST Act. If a payment is not consideration for a supply, then the supply will not be a taxable supply under section 9-5 of the GST Act.

Subsection 81-10(4) of the GST Act considers fees or charges paid for permissions etc. A payment is not the provision of consideration to the extent that the fee or charge relates to, or relates to an application for, the provision, retention, or amendment, under an Australian law, of a permission, exemption, authority or licence (however described).

Subsection 81-10(5) considers fees or charges relating to information and record keeping. A payment is not the provision of consideration to the extent that the fee or charge is paid to an Australian government agency and relates to the agency recording, copying, modifying, allowing access to, receiving, processing or searching for information.

Again, regulations may be made (under subsection 81-10(2)) that prescribe fees and charges that are to be treated as consideration. Such regulations have been made in Division 81 of the A New Tax System (Goods and Services Tax) Regulations 1999, at regulation 81-10.01. They include a fee or charge for a supply of a non-regulatory nature, and a fee or charge for a supply by an Australian government agency, where the supply may also be made by a supplier that is not an Australian government agency.

Section 81-15 of the GST Act provides that regulations may be made that make the payment of other prescribed fees or charges not the provision of consideration. Accordingly, regulation 81-15.01 provides details of further fees and charges which do not constitute consideration. Examples include a fee or charge to compensate an agency for costs incurred by the agency in undertaking regulatory activities, and a fee or charge for a supply of a regulatory nature made by an agency.

Your role under the Relevant Legislation

The objects of the Act are

· to promote probity and integrity in the industry;

· to maintain the probity and integrity of persons engaged in the industry;

· to promote fairness, integrity and efficiency in the operations of persons engaged in the industry;

· to reduce any adverse social impact of the industry; and

· to promote a balanced contribution by the industry to general community benefit and amenity.

The Act also considers the powers and functions of the relevant governing body that you have established. The functions include doing such things as it considers necessary or desirable for the proper regulation and control, in the interests of the public, of the industry.

The regulatory principles for performing functions under the Act include:

· minimum regulatory intervention by government

· maximum cooperation between industry and government

· performance-based risk management controls

· proactive and competitive industry positioning

· long term viability of the industry

· etc

The relevant activities cannot be conducted except in accordance with the Act (and its Regulations).

Based on the above sections, we consider that your role under the Act (and in any Agreements entered into under that Act) is a regulatory role.

Consideration of particular fees, charges or taxes

Payment by Operator of fee for right to conduct activities

The Agreement details the fee for the right to conduct lotteries. We consider that there is a supply of a right for consideration under general principles, and therefore this supply would normally be a taxable supply. However, it is necessary to consider whether the operation of Division 81 in relation to these amounts changes this position.

In these circumstances the fee is of a type for the provision and retention of a permission, authority or licence. However, it is still necessary to determine whether it is a fee or charge that is, or is of a kind prescribed by the regulations.

Regulation 81-10.01(g) provides that a fee or charge for a supply of a non-regulatory nature will constitute consideration. Conversely, regulation 81-15.01(f) provides that a fee or charge for a supply of a regulatory nature does not constitute consideration.

The Explanatory Memorandum to the regulations explains that the term 'regulatory' captures those supplies made by a government agency, where that agency is legislatively empowered to make the relevant supply and the supply is to satisfy a regulatory purpose. We consider that the objects and regulatory purpose of the Act indicate that the supply you make to the Operator is a supply of a regulatory nature.

We consider that even though the Operator acquires something of intrinsic value, the acquisition is made in the context of satisfying a regulatory requirement of an Australian law. For example, the EM considers that a fee or charge that relates to activities of government that are regulatory in nature includes a fee paid for a licence to operate a childcare facility. We consider that the current fee can be considered in the same way.

Therefore, the fee for conduct of the operations is a fee for a permission under Division 81 (section 81-10(4)) it is not a fee prescribed by the regulations as being a fee that constitutes consideration. As it is not consideration for a supply under this Division, the supply made by you is not a taxable supply as it is not for consideration.

The same conclusion can be reached by characterising the fee or charge as a fee or charge which does not constitute consideration under regulation 81-15.01(f), and therefore not consideration for a supply under section 81-15 of the GST Act. Where the payment of a fee or charge is covered by both paragraph 81-10(1)(g) and regulation 81-15.01, payment of the fee is not to be treated as the provision of consideration (see regulation 81-15.02(1)).

The result is that the supply made by you is therefore not a taxable supply as it is not for consideration.

Transfer of money by the Operator to a Fund

The Agreement specifies that the Operator must allocate, or pay, amounts to a fund from which third parties are then sponsored. The fund is managed by the Operator (although with your agreement).

Although not paid directly to you, you control payments into the Fund and the allocation of monies is paid on behalf of, and as directed by, you.

While this allocation of monies to the fund may discharge a liability to you to do this, in these circumstances we do not consider that you make any supply to the Operator. Therefore you do not make a taxable supply.

A mere transfer of money by the Operator to a fund is not consideration for any supply. However, when those funds are applied as payments to third parties for any supplies these may be taxable supplies.

Payment of 'tax' by the Operator

The Agreement details the 'tax' on the operator, as authorised or imposed under the relevant legislation.

Factors to consider in determining whether an impost is a tax include:

· Whether it is a general impost without particular services provided

· If there is a service, whether there is a relationship between the fee and the value of the services delivered

· Whether the overall fee structure is designed for a general revenue raising purpose

In your circumstances no further services are provided by you in return for the impost. The impost is a general amount imposed by reference to operations. Therefore the indicators of the impost being a tax are present in these circumstances. While it is possible to conclude that the tax is not considered to be associated with a supply and therefore not subject to GST under the GST basic rules, the context of the tax makes it prudent to also consider the tax in the context of Division 81.

The Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 2) Act 2011) (paragraph 4.22) provides that examples of Australian taxes imposed under an Australian law may include various industry levies. We consider that your tax is a specific type of levy imposed on this particular area of the industry. We consider that it is an Australian tax. A payment is not the provision of consideration to the extent the payment is an Australian tax.

Therefore you do not make a taxable supply in relation to these taxes.

Payment of compensation by Operator for breach of the Agreement

The Agreement contemplates that an amount may be payable by the Operator, by way of compensation, to remedy a breach of the Agreement and avoid termination.

A charge that is properly characterised as a fine or penalty, and does not relate to particular goods or services, will be exempt from GST (see, for example, paragraph 4.7 of the explanatory memorandum to the Tax Laws Amendment (2011 Measures No.2) Act 2011). This is because we consider that the imposition of a penalty does not amount to a supply.

In these circumstances we consider that the payment of an amount to remedy a breach can be considered to be in the nature of a fine or penalty. Whilst it is intended to provide compensation to you, it is also in the nature of penalising the particular breach. The compensation is for any detriment incurred by you, rather than a supply that you have made.

GSTR 2001/4 confirms that a remedy for a breach of an agreement cannot be characterised as a supply made by the aggrieved party (eg you). This is because the damage or loss does not constitute a supply under section 9-10 of the GST Act (see paragraph 73).

Therefore we consider that this amount is in the nature of a penalty and is not consideration for a supply. Therefore you do not make a taxable supply in relation to any such amount.

Pro-rata return of operating fee by you where you terminate the agreement

The Agreement provides for a pro-rata return of the operating fee considered above.

Under these circumstances you are not making a taxable supply for consideration by returning these funds to the Operator.

As considered above, a fee under Clause 7 is not consideration for a taxable supply made by you. Therefore a return of a proportion of that fee does not have any GST consequences.

Payment by Operator of your legal costs etc relating to consents or approvals

Under the relevant legislation you are able to charge fees to effectively claim reimbursement of your legal and other costs incurred in giving consents or approvals required for the purposes of the Agreement. Based on the reasoning above, we therefore consider that these fees or charges are Australian fees or charges.

Legal costs relating to obtaining the necessary consents or approvals are sufficiently connected with the provision and retention of permission, authority or licence such that they can be considered to be a fee or charge for the same. However, it is still necessary to determine whether it is a fee or charge that is, or is of a kind, prescribed by the regulations.

We consider that the consents or approvals required are of a regulatory nature, and that your role in administering and charging them is also a regulatory role. Based on the reasoning above, these fees are therefore a fee for a permission under Division 81 (section 81-10(4)) and it is not a fee prescribed by the regulations as being a fee that constitutes consideration. Therefore any supply made by you in relation to this fee is not a taxable supply (as it is not for consideration).

Conclusion

For the reasons outlined above, we consider that the activities under the Agreement do not constitute taxable supplies made by you.