Edited version of your private ruling

Authorisation Number: 1012448634117

Ruling

Subject: GST and grant funding

Question

Are you entitled to an input tax credit in relation to the funding provided to organisations for various services?

Answer

Yes, you are entitled to an input tax credit in relation to the funding provided where all of the requirements for a creditable acquisition are met.

Relevant facts and circumstances

You are an Australian Government Agency which is registered for GST.

A separate division controlled and administered by you receives levies which are distributed to organisations to provide services to a section of the community.

To receive the funding, an organisation must lodge an application and be approved by the relevant Minister. Organisations can be either non-profit organisations or a for-profit organisation.

Funds are allocated on a program and project basis and the duration of the funding is dependent upon the nature of the program/project.

Successful applicants are also required to enter into a written agreement which contains the terms and conditions of the grant funding. These terms and conditions include delivering the agreed services, providing reports on the delivery of these services via a set of performance indicators and giving you ownership of intellectual property.

The payment of each instalment of funding is dependent on the services being provided to the standard required by you and on the receipt of reports outlining the satisfactory delivery of these services.

We have been advised that organisations receiving funding are providing the services in the course of their enterprises, the services are connected with Australia and the organisations are generally registered for GST. In addition, the organisations are not government related entities.

Previous grants of funding have been treated as taxable and input tax credits have been claimed for the GST included with the payments. For any taxable supply you will issue a recipient created tax invoice (RCTI).

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 Subsection 9-17(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Division 149

A New Tax System (Goods and Services Tax) Act 1999 Section 184-1

Reasons for decision

Summary

The organisations (both non-profit and for-profit organisations) are making a supply for which the funding is consideration when they agree to provide various services.

Where these organisations are making a taxable supply, you will be entitled to claim an input tax credit in relation to the funding provided to them because all of the requirements for a creditable acquisition will be met.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit for any creditable acquisition that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

However, in some cases, a government entity will not meet the definition of 'entity' in section 184-1 of the GST Act but the special rules in Division 149 of the GST Act apply to enable government entities, that are technically not entities, to register for GST.

Once registered for GST, a government entity, like other GST registered entities, will be liable for GST on the taxable supplies that it makes and entitled to input tax credits for its creditable acquisitions.

In relation to creditable acquisitions, section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

To be entitled to claim input tax credits all of the above requirements must be satisfied. One of the requirements for a creditable acquisition is that the supply of the thing to you is a taxable supply.

Under section 9-5 of the GST Act, you make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are 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.

In this case, you distribute funds to organisations that have been approved to provide services.

Guidance on the application of GST to grants of financial assistance was previously contained in Goods and Services Tax Ruling GSTR 2000/11 but this ruling was withdrawn on 30 May 2012 and replaced with Goods and Services Tax Ruling GSTR 2012/2.

As explained in paragraph 99 of GSTR 2012/2, for a payee to have a GST liability in relation to a financial assistance payment and for a payer to be entitled to an input tax credit, it must be established that:

· the financial assistance payment is consideration, and

· there is a sufficient nexus or connection between the payment and a supply.

This means that the GST treatment of a financial assistance payment depends primarily on whether the payment represents consideration that has the relevant connection with a supply and all of the other requirements for a taxable supply are met.

In this case, it is the organisations that receive the funding that will be liable for GST if that funding is consideration for a supply which is a taxable supply.

Where an organisation is liable for GST in respect of the funding, you will be entitled to claim an input tax credit for that GST if it makes a creditable acquisition and holds a valid tax invoice.

When considering whether you are able to claim an input tax credit it is first necessary to determine if each organisation which receives funding is making a taxable supply for which the funding is consideration.

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 'you make 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

· a provision of advice or information

· 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 meaning of supply is explained in detail in Goods and Services Tax Ruling GSTR 2006/9 which sets out a number of propositions for characterising and analysing supplies. Of relevance to this case is proposition 5 which provides that to 'make a supply' an entity must do something and proposition 9 which provides that the creation of expectations alone does not establish a supply.

Proposition 5 is outlined in paragraphs 71 to 91 of GSTR 2006/9. In particular, paragraph 72 of GSTR 2006/9 provides that the use of the word 'make' in the context of section 9-5 of the GST Act, indicates that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier', had there been a supply.

Proposition 9 is outlined in paragraphs 102 to 111 of GSTR 2006/9. As explained in paragraph 102 of GSTR 2006/9 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 enough to establish a supply.

In this case, to obtain funds an organisation must do something. That 'something' is that the organisation must put in an application and, if successful, enter into a written agreement. This agreement sets out the services to be provided, the terms and conditions of the arrangement and the obligations that the organisation has agreed to abide by.

In relation to the provision of services, most organisations use the funds received to provide services to third parties.

As explained in paragraph 6 of GSTR 2012/2:

In addition to providing the payee with financial assistance, the payer or a third party may also benefit from the arrangement.

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 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 third parties may benefit from the funding they are not a party to any agreement between the organisations and you and therefore, it is only necessary to consider the arrangement currently in place between the organisations and you.

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, GSTR 2012/2 provides at paragraph 7 that the types of arrangements that are covered by this ruling include an arrangement for the provision of advice or information and the entry into an obligation to do, or not to do, something.

However, as per proposition 9 in GSTR 2006/9, to be a 'supply' under the GST Act, the supply must be binding on the parties involved. The mere creation of expectations between the parties is not a supply for GST purposes.

An example of where a provision of an 'obligation to do something' is binding on the parties involved is given in the table in Appendix 2 of GSTR 2012/2 (paragraph 144). This example states:

Payee enters into an obligation with the payer, under which the payee is required to deliver specified services to the community. The payer makes the payment to the payee for the purpose of those services being delivered in pursuit of the payer's objects.

In this case, the facts show that the obligations contained in the agreement are more than just 'mere expectations' that the relevant organisation will do certain things. It lists a number of specific obligations that the organisation has agreed to do. These include delivering the agreed services, providing reports on the delivery of these services via a set of performance indicators and giving you ownership of intellectual property.

When viewed as a whole, the obligations are 'binding obligations' and the entry into these obligations by an organisation (regardless of whether it is a non-profit or a for-profit organisation) is a supply under section 9-10 of the GST Act.

Notwithstanding the above, the provision of advice or information and the grant of a right are also supplies for GST purposes.

As stated previously, the provision of advice or information and the grant of a right to receive such advice or information is also a supply for GST purposes.

Therefore, it is clear from the facts provided that the organisations (both non-profit and for-profit organisations), regardless of the specific services that they have agreed to provide, are making a supply to you under section 9-10 of the GST Act.

As there is a supply being made by the organisations to the fund it is necessary to consider if the funding received constitutes 'consideration'.

The term 'consideration' is broadly defined in section 9-15 of the GST Act and includes any payment, or any act or forbearance, 'in connection with', 'in response to' or 'for the inducement' of a supply.

In the context of financial assistance payments, paragraph 5 of GSTR 2012/2 provides that 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.

However, subsection 9-17(3) of the GST Act provides that a payment is not the provision of consideration if all of the following requirements are satisfied:

· the payment is made by a government related entity to another government related entity

· the payment is covered by an appropriation under an Australian law, and

· the payment satisfies the non-commercial test.

Based on the information provided, the organisations are not government related entities and therefore, subsection 9-17(3) of the GST Act will not apply to exclude the funding from being consideration.

Accordingly, the funding received by the organisations will constitute a financial assistance payment and as such, is consideration for the purposes of section 9-15 of the GST Act.

It is not sufficient that there just be a 'supply' and 'consideration'. To satisfy the first requirement of section 9-5 of the GST Act, the supply must be made for consideration.

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.

In determining whether a financial assistance payment is 'in connection with' 'in response to' or 'for the inducement of' a supply it is necessary to consider all of the surrounding circumstances of the arrangement including any written documentation.

Also of assistance is GSTR 2012/2 which addresses a number of specific situations (with examples) that may arise in the context of financial assistance payments.

Of relevance to this case is paragraph 18 of GSTR 2012/2 which states:

In some arrangements the payer obtains a material benefit in return for the financial assistance payment. This may occur where the payer is provided with the right to commercially exploit the results of the payee's work in return for the financial assistance payment. In this circumstance, the payment has a sufficient nexus with the supply of the right because the payment is made in connection with, in response to or for the inducement of the supply of the right.

Also of relevance to this case is paragraph 24 of GSTR 2012/2 which states:

Providing advice or information is a supply. A financial assistance payment has a sufficient nexus with such a supply where the payment is made for the purposes of obtaining the information.

In relation to payments for an entry into an obligation to do something, paragraph 28 of GSTR 2012/2 states:

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.

In addition, paragraphs 29 to 31 of GSTR 2012/2 provide an example of where there is a sufficient nexus for payments for an entry into an obligation. It states:

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 this case, by entering into an agreement an organisation has agreed to carry out a number of specific obligations including to deliver agreed services and to report on the delivery of these services. The payment of each instalment of funding for these agreed services is dependent on the services being provided to the standard required by you and on the receipt of reports outlining the satisfactory delivery of these services.

The fact that the funding is not paid unless there has been a satisfactory performance clearly establishes a link or nexus between the obligations entered into by an organisation and the funding paid by you.

Therefore, the funding is consideration for the supply that an organisation is making to you. Consequently, the first requirement of section 9-5 of the GST Act (a supply for consideration) is satisfied.

However, in order for the funding to be consideration for a taxable supply all of the other requirements of section 9-5 of the GST Act must be satisfied. In relation to these other requirements we have been advised that the supply made by the organisations is made in the course or furtherance of their enterprise, the supply is connected with Australia and the organisations are generally registered for GST. There are also no provisions that would make the supply GST-free or input taxed.

Therefore, where all of the requirements of section 9-5 of the GST Act are satisfied in respect of an organisation, that organisation is making a taxable supply for which the funding is consideration.

Where this occurs, you will be entitled to claim an input credit in relation to the GST included with the funding provided to that organisation as all of the requirements for a creditable acquisition under section 11-5 of the GST Act are met and you will hold an RCTI for the supply.

Specifically, you have acquired an acquisition (the supply from the organisation) solely or partly for a creditable purpose. That is, the acquisition has been acquired in carrying on your enterprise and the acquisition is not in relation to making supplies that are input taxed or private or domestic. In addition, the supply from the organisation is a taxable supply to you (as determined above), you are liable to provide consideration for the supply (being the funding) and you are registered for GST.

However, if an organisation is not making a taxable supply because, for example, it is not registered or required to be registered for GST, you will not be entitled to claim an input tax credit in relation to the funding paid to that organisation.