Edited version of your private ruling

Authorisation Number: 1012449923579

Ruling

Subject: GST and grant funding

Question

Does the grant from a grantor to you constitute consideration for a taxable supply?

Answer

Yes, based on the information provided, the grant from the grantor to you does constitute consideration for a taxable supply.

Relevant facts and circumstances

You are a non-profit entity which is registered for GST.

The grantor agreed to provide you with a grant to undertake a project over a number of years.

The grant agreement between you and the grantor outlines the details of the grant, its purpose and the conditions of the grant.

One of the conditions refers to an application for the grant funding when expending and using the grant money. You provided a copy of the grant application which covers other aspects of the project.

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(2)

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

Reasons for decision

Section 9-40 of the GST Act provides that an entity must pay GST on any taxable supply that it makes.

This means that where it is established that you are making a taxable supply to the grantor, then you are liable to pay GST on the grant received.

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.

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of financial assistance was previously contained in Goods and Services Tax Ruling GSTR 2000/11 but this ruling was withdrawn on 30 May 2012 and replaced with Goods and Services Tax Ruling GSTR 2012/2.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

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

The first requirement for a taxable supply is that there must be 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.

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies provides guidance on the meaning of 'supply' in the GST Act. The Ruling examines 10 propositions for characterising and analysing supplies.

Of relevance is proposition 5 which states that to 'make a supply' an entity must do something and proposition 9 which states that the creation of expectations alone does not establish a supply.

Proposition 5 is discussed in paragraphs 71 to 91 of GSTR 2006/9. In paragraph 76 of GSTR 2006/9, the Full Federal Court in the Westley case (Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461: 2006 ATC 4363: (2006) 62 ATR 682) noted that the ordinary meaning of supply requires a positive action and is 'arguably extended' by paragraph 9-10(2)(g) of the GST Act, which includes the entry into an obligation to do something, to refrain from doing something or to tolerate an act or situation as a supply.

Proposition 9 is discussed in paragraphs 102 to 111 of GSTR 2006/9. Paragraph 102 of GSTR 2006/9 provides that the Commissioner considers that an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other. In other words, the creation of expectations among the parties is not enough to establish a supply.

In this case, to receive funding from the grantor, you must do something. That 'something' is that you must put in an application for the grant. By doing this 'something' you will enter into an obligation to abide by the terms and conditions attached to the arrangement.

There is nothing in the grant agreement to identify any supply of goods or services in connection with these terms and conditions. However, as outlined in section 9-10 of the GST Act, a supply is not just goods and services. A supply can also include rights and obligations.

In the context of financial assistance payments, GSTR 2012/2 provides at paragraph 7 that 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 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 both 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.

From the facts provided, the obligations set out in the grant agreement are more than just 'mere expectations' that you as a grantee of the funding from the grantor will do certain things. That is, when viewed as a whole, the obligations are 'binding obligations' and the entry into these obligations by you is a supply for GST purposes.

Therefore, from the facts provided, you are making a supply to the grantor under section 9-10 of the GST Act.

As there is a supply being made by you to the grantor, it is necessary to consider if the grant funding constitutes 'consideration'.

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 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(2) of the GST Act provides that making a gift to a non-profit body is not the provision of consideration.

Guidance on when a gift to a non-profit body is not consideration for a supply is contained in paragraphs 69 to 83 of GSTR 2012/2. Further information on whether a particular transfer of money constitutes a gift is outlined in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift.

Paragraph 70 of the GSTR 2012/2 provides that for a payment to be a gift, it must have the following characteristics:

· there is a transfer of a beneficial interest in property

· the transfer is made voluntarily

· the transfer arises by way of benefaction, and

· no material benefit or advantage is received by the giver (payer) by way of return.

In this case, the relevant characteristics are benefaction and material benefit. These characteristics are discussed at length from paragraphs 27 to 44 of TR 2005/13. The discussion explains that for the transfer to be by way of benefaction, there can be no control by the giver over the use of the funds provided. It has been noted in TR 2005/3 that while it is acceptable for a giver to specify how they would like the funds to be used, the giver cannot enforce this preference by way of obligations. That is, the attribute of benefaction may be missing where the payment is attached to obligations on the part of the non-profit body.

Based on the above facts, the payment is more in the nature of a grant than a gift and as such, subsection 9-17(2) of the GST Act will not apply to exclude the payment from the grantor being consideration.

Accordingly, the funding from the grantor 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.

This means that the GST treatment of the grant funding provided to you will depend primarily on whether there is a sufficient nexus between the payment made by the grantor and a supply made by you as the receiver or grantee.

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.

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.

The terms and conditions of the arrangement clearly establish a link or nexus between the obligations entered into by you and the funding provided by the grantor. As such, the payment is made 'in connection with' you entering into such obligations with the grantor.

Therefore, the funding from the grantor is consideration for the supply that you make to the grantor under the grant arrangement. Consequently, the first requirement of section 9-5 of the GST Act (a supply for consideration) is satisfied.

However, in order for the grant 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 the supply made by you is in the course or furtherance of your enterprise, the supply is connected in Australia and you are registered for GST. There are also no provisions that would make the supply under the grant agreement GST-free or input taxed.

Therefore, as all of the requirements of section 9-5 of the GST Act are satisfied the grant is consideration for a taxable supply. Consequently, you are liable to pay GST on the grant funds received.