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Ruling

Subject: Community Service Obligation Payments

Question

Disregarding subsection 9-17(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is the payment from the State to you consideration for a taxable supply made by you within the meaning of section 9-5 the GST Act?

Answer

Yes

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a Government Owned Corporation (GOC) that operates and maintains a business in a regional area.

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

You are a member of a GST group.

You hold an Authority which allows you to provide your supplies to customers located in the regional area.

As a GOC, you are governed by the Government Owned Corporations Act 1993 (the GOC Act).

The Government in which you operate has a Policy to ensure that the price of your supplies for your customers is uniform throughout the State regardless of whether a customer resides in a regional area. To achieve this objective, State legislation requires retailers in your industry to sell your supplies at set prices. The prices are prescribed by a Schedule enacted under the legislation and include any GST component.

The actual cost for you to make your supplies to your customers can exceed the set prices due to these customers residing in regional areas which are less densely populated. That is, your supplies at the set prices to many of your customers is made at an economic loss and therefore not in your commercial interest.

You undertake various community service obligations (CSOs). Under section 112 of the GOC Act.

Under section 102 of the GOC Act, every GOC must have a Statement of Corporate Intent (SCI) for each financial year.

The CSO payments are intended to provide funding to government agencies to enable them to undertake activities and provide services that are recognised as being non-commercial, but are considered necessary to fulfil the obligations of the government.

Under section 113 of the GOC Act, your SCI is evidence as between the State and yourself, of the CSOs performed by you and the way in which you will be compensated by the State for performing these CSOs.

The current SCI provides that charges applying to customers are set by an Authority under a delegation from the Minister of the State Government Agency under the prescribed legislation and are uniform throughout the State for a given type of customer.

To compensate for these effects, the State pays a CSO to you. The actual CSO paid can vary materially from the CSO forecast due to changes in the forecast assumptions.

The Community Service Obligations and associated Deed provide that you are obliged to provide your services to customers at set prices.

You have been treating the CSO payment as out-of-scope for GST purposes on the basis that it is specifically covered by an appropriation under Australian law and therefore not consideration pursuant to paragraph 9-15(3)(c).

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated:

Section 9-5

Section 9-10

Section 9-15

Section 9-17

Section 9-40

Section 195-1

Reasons for decision

Summary

The payment from the State to you is consideration for a supply made by you within the meaning of section 9-5 the GST Act.

Detailed reasoning

Supply

Section 7-1 of the GST Act states that GST is payable on taxable supplies.

A supply is a taxable supply if all the conditions under section 9-5 of the GST Act are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with Australia; and

(d) 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.

(The asterisks in this ruling indicate terms defined under section 195-1 of the GST Act.)

In the current case assuming that the requirements in paragraphs (b), (c) and (d) of section 9-5 of the GST Act are satisfied and that any supply made by EEQ will not be GST-free or input taxed, the relevant criterion to be resolved is the requirement in paragraph (a).

Under paragraph 9-5(a) of the GST Act, there must be a supply and consideration, and there must be a connection between the two.

Subsection 9-10(1) of the GST Act defines supply as any form of supply whatsoever.

The intended scope of subsection 9-10(1) of the GST Act is more fully illustrated in subsection 9-10(2) of the GST which states that without limiting subsection 9-10(1) of the GST Act, supply includes any of these:

· a supply of goods;

· a supply of services;

· a provision of advice or information;

· a grant, assignment or surrender of *real property;

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

· a *financial supply;

· an entry into, or release from, an obligation:

· to do anything;

· to refrain from an act; or

· to tolerate an act or situation;

· any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling GSTR 2006/9: supplies, explains the meaning of the term supply in section 9-10 of the GST Act. GSTR 2006/9 explains the meaning through propositions that are relevant in analysing a transaction in relation to a supply.

Paragraph 35 of GSTR 2006/9 explains that the intended scope of subsection 9-10(1) of the GST Act is more fully illustrated in subsection 9-10(2) and that subsection 9-10(2) does not limit subsection 9-10(1). Something that is not listed in subsection 9-10(2) but falls within subsection 9-10(1) will be a supply.

We consider that the framework or environment within which you (a GOC) operates where it is required to deliver the services at a price necessary for the State government to meet its objectives under its Policy results in you making a supply to the State. This supply is either a supply under paragraph 9-10(g) being the entry into an obligation or under paragraph 9-10(b) being the supply of services. These alternatives will be discussed in the following.

Paragraph 9-10(2)(g)

The obligation that you have entered into for the purposes of this paragraph is the obligation to the Shareholding Ministers to provide services to customers under terms consistent with the policy.

Proposition 9 of GSTR 2006/9 provides that the creation of mere expectations alone does not establish a supply.

In this instance, there are measures in existence to ensure that any supplies made to customers are made in accordance with the government's policy. Specifically, these measures include:

· approval of your SCI by the Shareholding Ministers which include the CSOs to be delivered by you in fulfilling government policy

· that the subsection 7(2) of the GOC Act provides that the SCI is intended to represent an agreement between the Board of Directors of the GOC and the Shareholding Ministers. This status of a SCI is provided for in the legislation that governs GOCs

· that paragraph 88(b) of the GOC Act requires the Board of a GOC to act in accordance with the SCI.

· the CSO deed sets out the amount payable to you under your obligation to make supplies to customers at the set prices.

Therefore, there are a number of measures in place to ensure that supplies to customers are made on terms consistent with the Government's policy. We consider that the level of governance in place results in there being something more than a mere expectation that supplies to customers will be made on terms consistent with the policy as you are obliged to make supplies on these terms.

Paragraph 9-10(2)(b)

Notwithstanding that the Commissioner considers that you are under an obligation to make your supplies to customers at the set prices, should it be established that the framework in place relating to supplies by you to customers does not result in the entry into an obligation by you with the Government, there may still be a supply where something else passes from you to the Government. This point is made in paragraph 108 of GSTR 2006/9 which states:

108. For GST purposes you may still make a supply in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from the supplier to the recipient. For the supply to be a taxable supply there must also be consideration and a sufficient nexus between the supply and the consideration.

In considering whether there is something else passing from you to the Government it is relevant to consider the objective of the government in making the CSO payment.

The Government has committed to a policy that ensures that the price of supplies for customers is uniform throughout the state regardless of whether the customer resides in a regional area.

It is recognised that for customers outside of a particular area of the state that the cost of supplies generally exceeds the price paid under the policy.

Therefore, if it was left to the free market to make those supplies to these customers, it is unlikely that the Government would meet its policy objectives as commercially operated suppliers would not enter a market where they are required to make supplies at an economic loss.

We consider that your activity of providing services customers at the set price is a supply to the Government. This supply is the supply of services necessary for the Government to meets its commitment under the policy.

Conclusion

Therefore, we consider that there is a supply between by you to the State and that the CSO payments are consideration for that supply for the purposes of paragraph 9-5(a) of the GST Act.