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Ruling

Subject: GST treatment of electricity subsidy payment

Question 1

What is the GST treatment of a fixed sum assistance payment that an eligible person receives as a credit on their electricity account?

Answer

The amount that you receive and apply to the customer's account is consideration for a supply made to the paying Department.

GST is payable on the total value of the supplies of electricity made to the eligible customers, and the supply of the service of providing the electricity to eligible customers (this supply is made to the paying Department).

Relevant facts and circumstances

You are a body corporate established under relevant legislation.

You are registered for GST.

You are responsible for administering a energy subsidy payment, referred to as the 'assistance payment'.

Publicly available budget fact sheets refer to the payment as 'a new energy subsidy payment, which will reduce electricity bills for a large number of households in need.' It is described as a rebate to eligible recipients.

Eligible customers will receive a flat amount per annum regardless of electricity consumption.

Applicants must register their details with you. Eligible customers are required to provide their concession card details to you, and you validate the eligibility of the customers.

You then apply the assistance payment to an eligible customer's electricity account in the form of a credit. The credit is offset against the cost of electricity supplied to the consumer.

The assistance payment is to be applied from the date a person is approved by you as an eligible recipient. It is not retrospective and cannot normally be backdated before the date of such approval.

The assistance payment amounts distributed by you will be reimbursed to you by the paying Department pursuant to a Community Service Obligation (CSO) arrangement.

You have provided a copy of a draft Service Level Agreement (the SL Agreement) made between you and the paying Department (and another Department).

The SL Agreement defines Community Service Obligations (CSOs) as:

"obligations to perform functions that are not in the commercial interests of …… to perform. A CSO arises when the Government specifically requires a public enterprise to carry out activities relating to outputs or inputs which it would not elect to do on a commercial basis, and which the Government does not require other businesses in the public or private sectors to generally undertake, or which it would only do commercially at a higher price."

In summary, the objectives of the SL Agreement are to:

· Support eligible customers' affordability of energy,

· Efficiently distribute assistance payments to eligible customers

· Ensure your actual costs of establishing and administering the assistance scheme are fully recovered from the Government

· Ensure implementation of the assistance scheme meets all relevant governance requirements.

Under the Agreement you must establish and maintain procedures regarding:

· how a person can apply for assistance payments,

· information required by you to assess assistance applications,

· notification and assessment of assistance payment applications on successful or unsuccessful assistance payment application

· how you will pay the assistance payment to eligible recipients following a successful application

· how you will periodically check and validate the eligibility of persons registered as eligible recipients to continue to remain so registered and

You must assess (in your absolute discretion) whether a person meets the eligibility criteria set out in the Schedule to the SL Agreement.

You must make the assistance payments for each eligible recipient in accordance with the SL Agreement.

The SL Agreement also considers cost recovery. The paying Department will pay you, via budget processes and the CSO payment, for and in respect of all and any of the following costs and amounts:

a) Your costs incurred for or in relation to establishing, implementing, administering and closing the assistance scheme (including but not limited to all ancillary costs and related systems and processes costs); and

b) The amounts of all payments made to eligible recipients for or in relation to the assistance scheme.

Payments under the SL Agreement will be made to you by the paying Department on the basis of actual costs incurred by you in the relevant periods.

If you estimate that the CSO budget will be insufficient to meet your costs you must notify the paying Department as soon as possible. They will then work with you to seek approvals in the upcoming budget or mid year review processes to cover the CSO funding shortfall.

You must also provide forecasts of the CSO payments required over the budget period to the paying Department as part of the budget and mid year review processes. Changes may be made outside these processes to recognise policy changes or major market developments.

You must reconcile any difference between the CSO payments made and the total CSO payment required to be made under the SL Agreement to determine any amounts owed to or by the paying Department.

You have advised that you also receive additional funding amounts from Government in relation to your supplies of electricity. These are calculated based on projected consumption and projected income.

They are designed to compensate you for any shortfalls incurred in providing electricity at capped rates to household consumers under the relevant legislation which allows regulations for access and pricing. Without this additional funding your supplies to household customers would result in a loss. However, with all your funding sources included you make an overall profit.

Under the relevant legislation you are required to act in accordance with prudent commercial principles. You must also endeavour to make a profit, consistently with maximising your long term value. However, these requirements are subject to the regulations as to access and pricing of electricity transmission and distribution systems.

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 9-17,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Summary

From the one activity of supplying electricity you make two supplies, the supply of electricity to the customer and the supply under the SL Agreement of the service of providing this electricity. The consideration received from each party is in connection with the corresponding supplies that you make to them.

That is, the customer pays an amount of consideration for the supply of electricity that you make to them. The amount that you receive from the paying Department, and apply to the customer's account, is consideration from the paying Department for a supply made to them.

GST is payable on the total value of the supplies made to customers and to the paying Department. That is, on the full value of the supplies of electricity.

Detailed reasoning

You carry on an enterprise as an electricity retailer, providing electricity services to the public. You are also a government related entity, and undertake certain obligations in this capacity. You enter into an arrangement with Government Departments to provide assistance payments to eligible persons. You have a binding agreement (the SL Agreement) with the Departments for the arrangements regarding the assistance payments.

You have requested a private ruling on the GST treatment of your supplies under this arrangement.

To determine the supplies that are made in your circumstances it is necessary to look at the respective agreements between the parties (the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply, see proposition 11 of GSTR 2006/9).

In your circumstances you receive amounts via a CSO payment (under budget processes) for two types of costs. These are:

· your costs incurred in establishing, implementing, administering and closing the assistance scheme (including systems and processes costs), and

· the amount of all payments made to eligible recipients for or in relation to the assistance payment.

Your ruling request primarily addresses the treatment of the amounts received for payments made to eligible recipients for or in relation to the assistance payment. This is considered below.

Your activities result in two taxable supplies being made

Following the principles in GSTR 2006/9, one set of activities may constitute the making of two (or more) supplies. In the context of your arrangement, there may be supplies made by you to the government entities as well as the supply of electricity to the eligible person.

Where a party arranges with you to provide services to another party (the eligible customer), if the party enters into a binding obligation with you to provide services to an eligible person and is liable to pay for that supply, you make a supply to the arranging entity even though the supply may be provided to another entity.

We consider that your entry into a binding obligation (and your administrative services to the parties under this binding obligation) results in supplies being made to the paying Department. These are the supplies of your services and undertakings under the Agreement, and also the service of supplying subsidised electricity to the customer.

Your SL agreement requires you to charge or collect a lower amount for supplies of electricity to eligible persons (by applying a credit to the account in recognition of the concession payment). The amount of the subsidy is not a reduction in the overall price of the electricity. It is a credit towards payment for this electricity. You do not collect this amount from the customer on the basis that you will receive it from the paying Department.

Whether a supply is a taxable supply depends on whether consideration is received for, or in connection with, that supply. We consider that under your agreements with the paying Department the relevant arrangement is that you receive both the payment amounts (reimbursement of your costs, and reimbursement of the amounts paid as assistance payments) from the paying Department. These amounts are in connection with the supplies that you make to the paying entity, and this supply will be a taxable supply as it is for consideration. Even though you may make supplies to the non-paying party to the Agreement these supplies are not taxable as they are not for consideration.

The amount that you are provided by the paying Department is akin to a co-payment for your overall electricity supplies. However, the payments are properly characterised as consideration for a supply that you are making to the paying Department. The payments made by the paying Department are directly in connection with your agreement to administer the assistance payments. The payments that you receive from the paying Department are therefore consideration for the supplies that you make to the paying Department under the SL agreement.

You also make separate supplies of electricity to your customers in the course of your enterprise. Your supply to the paying Department of the service of providing the electricity to the eligible person means that the eligible person still receives a supply of electricity. As the eligible customer provides payment of their amount, this is directly connected to the supply of electricity to them. It is therefore properly characterised as consideration for that supply.

GST is payable based on the total of the amount received from the customer, together with the amount of the rebate paid to you by the paying Department under the arrangements.

In effect, this does not alter the GST that is payable by the consumer on the value of the supply to them. They only pay GST based on the component of consideration that they provide. That is, the eligible person pays their amount and the GST attributable. The paying Department pays the rest, and the GST attributable to that amount.

As the supplier, your GST liability is the same whether your activities are characterised as resulting in a single supply of electricity to the customer or supplies to the customer and the paying Department. From your perspective you receive consideration, and are liable for GST, based on the full value of the supplies that you make. Whether the consideration is in connection with a supply made to the eligible person, or to the paying Department, is not relevant to GST liability.

However, this issue is relevant to any input tax credit entitlement of the paying Department. This is because to make a creditable acquisition an entity must be the recipient of the supply (that is, the supply must be made to them).

The payment from the paying Department is consideration (not an appropriation)

As the payments you receive are from a Government Department it is necessary to consider the impact of section 9-17 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This section provides that certain payments and other things are not consideration. In particular, a payment between government bodies is not treated as consideration for a supply if it is made without strings or conditions. It is also not treated as consideration if it is covered by an appropriation under an Australian law and meets certain other requirements.

The policy intent of this provision is that the non-commercial activities of government related entities not be subject to GST. The rules on appropriations are intended to exclude funding payments, which are non-commercial in nature, from the operation of GST, while not excluding payments that represent fees for goods, services and similar things. It is also important to note that once an appropriation is used to acquire goods and services those transactions will be subject to the GST rules in the normal way.

Even where a payment is made by a government related entity to a government related entity supplier pursuant to an appropriation made under an Australian law that authorises the payment to be made, there are further requirements of subsection 9-17(3) of the GST Act that must be met before the payment will be excluded from being consideration for a supply.

In particular, under 9-17(3)(c) of the GST Act the payment must be calculated on the basis that the sum of:

(i) the payment (including the amounts of any other such payments) relating to the supply; and

(ii) anything (including any payment for any act or forbearances) the other government related entity receives from another entity in connection with, or in response to, or for the inducement of, the supply, or for any other related supply;

does not exceed the supplier's anticipated or actual costs of making those supplies.

Paragraph 2.30 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012 considers where a government related entity makes a payment to a government related entity supplier to make a supply to a third party for an amount that is below the market value of the supply, for example under a subsidy program. Depending on the details of the arrangement, the government related entity supplier may only be making a supply to the third party, or alternatively it may be making supplies to both the government related entity making the payment and the third party. We have considered above that the latter scenario applies in your circumstances.

The paragraph goes on to explain that

"[w]here the arrangement involves the government related entity supplier making a supply to the government related entity that made the payment and also a supply to a third party, the supply made to the third party will relate to making the supply to the government related entity. Consistent with the policy intent that non-commercial activities of government are not subject to GST, payments or any other thing that the government related entity supplier receives from the third party under the arrangement, are included in the calculation set out in paragraph 9-17(3)(c)."

Following this reasoning, your supply to the paying Department is related to your supplies of electricity to eligible customers. The supply of electricity to the customer is a commercial supply. We consider that, although you may be a government related entity, you also have a dual nature as a commercial electricity provider. It is in your capacity as a retailer, rather than a government related entity, that you receive the electricity subsidy amounts (and also the payment for your services in administering these subsidies).

The purpose of the payment by the paying Department is to provide a contribution towards the commercial supply of electricity to ease the burden on eligible consumers. To be eligible for the assistance payment the eligible customer must have an electricity account with you. The purpose is not to fund the activities of the electricity supplier, but rather to contribute to the cost of an eligible consumer's electricity supply. The amounts provided by the paying Department are payment in exchange for a supply, rather than a non-commercial funding arrangement. Therefore the payments are not exempted from GST under section 9-17 of the GST Act.

We acknowledge that you have advised that if it were not for additional funding (under separate arrangements) the amount invoiced to the customer (or the customer's amount payable) may not exceed your anticipated or actual costs of making the electricity supplies to the household customer (or eligible person). However, we consider that any other amounts that you receive from another entity (for example by way of funding) are in connection with either the supply of electricity or another supply related to your supply of electricity to household customers (or eligible persons).

Therefore the total payments that you receive in relation to your electricity supplies and related supplies exceed your anticipated or actual costs of making the supplies of electricity to eligible persons. Therefore the payments made under the SL Agreement do not meet the requirements of subsection 9-17(3)(c) of the GST Act are not appropriations.

As subsection 9-17(3) of the GST Act is not satisfied, the payment is not excluded from being the provision of 'consideration' as defined in section 195-1 (and 9-15) of the GST Act. It is therefore consideration for your supply to the paying Department.

Conclusion

As your supply to the paying Department is for consideration, made in the course or furtherance of your enterprise, is connected with Australia and you are registered or required to be registered the requirements of section 9-5 of the GST Act are met. As the supply is not a GST-free or input taxed supply, it is a taxable supply and you must pay the GST payable. You must also pay GST on the supply of electricity made to the eligible person.

Other matters to consider - grossing up

Whether the amount of an assistance payment or subsidy should be grossed up to allow for the GST is a matter for the parties to determine based on their relevant intentions. We note that in your particular circumstances where the amount is grossed up the GST amount can be claimed back as an input tax credit by the paying Department (as they are the recipient of a supply).