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Ruling

Subject: GST and financial assistance payments

Question 1

Are the financial contributions that you receive from community groups for projects, subject to GST?

Answer

No, the financial contributions that you receive from community groups for projects are not subject to GST.

Question 2

Are the financial contributions that you receive from community groups for projects that are partly funded by a government grant, subject to GST?

Answer

No, the financial contributions that you receive from community groups for projects that are partly funded by a government grant are not subject to GST.

Relevant facts and circumstances

You are registered for GST.

As part of your enterprise, you undertake projects on sporting and community facilities that, in most cases, are owned by you. The projects generally involve upgrading the facilities.

You are responsible for managing and carrying out the projects and paying the supplier invoices.

To assist with the cost of the projects the community group that is using the facility will provide a financial contribution towards the cost.

There is no agreement between you and the community group in relation to the financial contribution made.

In some cases, a government grant may also have been received for the project and hence, there are three parties contributing resources. That is, you, the Federal or State Government and the community group.

Where there is a government grant involved, the details can vary depending on the Government Department issuing the grant but generally, the grant application includes details of the financial contribution to be made by both you and the community group.

However, the subsequent grant agreement between you and the Government Department generally does not include details of the financial contribution made by the community group.

There is no agreement between you and the community group in relation to their financial contribution towards the project for which a government grant is received.

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

Question 1

Summary

The financial contributions made by the community groups to you for projects are not subject to GST because there is no supply being made by you to the community groups for which these financial contributions are consideration.

Detailed reasoning

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

To be a taxable supply all of the requirements of section 9-5 of the GST Act must be satisfied.

The first requirement 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 'any form of supply whatsoever' and includes:

· a supply of goods

· a supply of services

· the creation, grant, transfer, assignment or surrender of any right, and

· an entry into, or release from an obligation:

o to do anything

o to refrain from an act, or

o to 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. That is, a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of the supply.

In this case, you receive financial contributions from community groups for projects. The financial contribution that a particular community group makes to you will be in respect of the project to be undertaken on the sporting or community facility that the community group uses.

Guidance on the application of GST to financial assistance payments, such as the financial contributions made by the community groups to you, is now contained in Goods and Services Tax Ruling GSTR 2012/2 which replaced Goods and Services Tax Ruling GSTR 2000/11. GSTR 2012/2 takes into account recent Australian case law on GST and provides further explanation and clarification of the GST law in respect of financial assistance payments.

As stated in paragraph 15 of GSTR 2012/2:

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.

This means that the GST treatment of financial assistance payments depends primarily on whether the payments represent consideration that has the relevant connection with a supply.

The facts in this case show that the projects are undertaken on sporting and community facilities that, in most cases, are owned by you. In addition, you are responsible for managing and carrying out the projects and paying the supplier invoices.

Therefore, while the community groups may derive a benefit from the financial contributions they provide towards specific projects, it is only an indirect one since the financial contributions are for goods and services which are provided to you or where the facility is not owned by you, to the owner of the facility through you. Consequently, there is no supply of goods or services being made to the community groups.

However, as outlined in section 9-10 of the GST Act, a supply is not just goods and services. Rights, obligations and information can also be a supply for GST purposes.

In the context of financial assistance payments, paragraph 7 of GSTR 2012/2 provides that the types of arrangements that are covered by this ruling include the entry into an obligation to do, or not to do, something.

However, according to paragraph 55 of GSTR 2012/2, there will be some arrangements that do not involve the making of any supply whatsoever. As outlined in paragraph 56 of GSTR 2012/2, this can be in situations were the agreement between the parties is not binding and merely creates expectations. If no supply has been made a key element of the definition of taxable supply cannot be met.

An example of this situation is provided in Examples 10 and 11 in paragraphs 58 to 62 of GSTR 2012/2 which states:

Example 10 - no supply - mere expectation

58. A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts. The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.

59 The local council has an expectation that the works will be carried out. However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council.

60. There are no GST consequences arising from the arrangement for either party.

Example 11 - no supply - mere expectation (where the thing is done)

61. Continuing with the last example.

62. Even if the payment is ultimately used to resurface the tennis courts, this does not change the fact that the tennis club has not made any supply to the local council. Transactions that are neither based in an agreement that binds the parties in some way nor involve the supply of goods, services or, some other thing to the payer, do not establish a supply. In this example, the mere doing of the thing that was expected does not amount to a supply to the local council because it does not involve some good, service or other supply being provided to the local council by the tennis club for which the payment is consideration. Rather, the payment has facilitated the acquisition of services by the tennis club in having its courts resurfaced. This is not a supply made to the local council.

Examples 10 and 11 in GSTR 2012/2 show that while an agreement between the parties to a funding arrangement may establish rights or obligations between the parties, for these rights or obligations to constitute a supply, the supply of the rights or obligations must be binding on the parties. The mere creation of expectations between the parties does not establish a supply.

Based on the information provided, there is no agreement between you and each community group in relation to the financial contribution it makes to you.

Where there is no agreement, there can be no contractual obligation for the community groups to make the financial contributions or for you to use the financial contributions made for a particular purpose. Instead, there are only expectations that the community groups will contribute funds towards the cost of any projects on the facilities that they use and that you will use the funds contributed for these specific projects.

As there is no binding agreement between the community groups and you for the projects, there is no supply of a right or an obligation being made by you.

Therefore, as you are not making a supply to the community groups, any financial contribution they make to you is not consideration for a supply. As the first requirement of section 9-5 of the GST Act is not satisfied the funding arrangement between you and the community groups cannot be a taxable supply and as such, is not subject to GST.

Question 2

Summary

The financial contributions made by the community groups to you for projects that are partly funded by a government grant are not subject to GST because there is no supply being made by either you or the relevant Government Department to the community groups for which these financial contributions are consideration.

Detailed reasoning

You have advised that, in some cases, a government grant may also have been received for the project, in addition to the financial contribution made by a community group.

An arrangement that involves more than two parties is referred to as a tripartite arrangement and guidance on the GST treatment of these arrangements is contained in Goods and Services Tax Ruling GSTR 2006/9.

In particular, paragraph 116 of GSTR 2006/9 provides that, as with two party transactions, the GST consequences of tripartite arrangements depends on whether there is a supply, to whom the supply is made and whether there is consideration that has a sufficient nexus with that supply or any other supply made under the arrangement.

In this case, while the particular community group is listed on the funding application it is not a party to the subsequent grant agreement between you and the Government Department providing the grant. As well, the financial contribution that the community group makes to the project is generally not even mentioned in that grant agreement.

Therefore, in the absence of any contractual obligations between the community group and the relevant Government Department there can be no supply from that Government Department to the community group for which the financial contribution paid to you could be considered to be consideration.

Furthermore, no goods and services are being provided directly to the community group. Consequently, any benefit derived by the community group for being part of a tripartite arrangement is, as determined in Question 1, an indirect one as the financial contributions made by both the community group and the Government Department is for goods and services which are provided to you or the owner of the facility through you.

In addition, there is no binding agreement between you and the community group in relation to their financial contribution towards the project for which a government grant is received.

An agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to another. In other words, the creation of expectations among the parties is not a supply for GST purposes.

As there is only an expectation that both you and the community group will act in a certain way in relation to the project, there is no supply being made by you for which the financial contribution is consideration. Therefore, the first requirement of section 9-5 of the GST Act is not satisfied.

Accordingly, as all of the requirements for a taxable supply cannot be met, the financial contributions made by the community groups to you for projects that are partly funded by a government grant are not subject to GST.