Edited version of your private ruling

Authorisation Number: 1012479030305

Ruling

Subject: GST and taxable supplies and receipt of scholarship funds

Question

Are the scholarship funds paid by an entity (Entity) to you under Agreements X, Y and Z consideration for a taxable supply by you to the Entity?

Answer

No, the scholarship funds paid by the Entity to you under Agreements X, Y and Z are not consideration for a taxable supply by you to the Entity.

Relevant facts and circumstances

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

Your enterprise involves the supply of education courses.

You are a party to a number of agreements under which you are paid scholarship funds by the Entity which you then distribute to successful scholarship applicants.

You refer to three such agreements (collectively referred to as the Agreements) namely:

· Agreement X

· Agreement Y, and

· Agreement Z.

Each of the Agreements is in the same form comprising a 'Schedule' and 'Terms'.

Scholarship funds vary in amounts. The Agreements refer to these payments as an amount of 'funding' to be provided by the Entity.

Notwithstanding the payment arrangements stipulated under each of the Agreements which provide the Entity with options to pay either you or the student (Student) nominated in the Agreement, you advise that in practice all the scholarship funds are paid by the Entity to you.

The Agreements also refer to 'Additional Expenses' to be paid by the Entity to cover things such as the Student's living/rental allowance and operating expenses.

You invoice the Entity half yearly in advance for the Student's scholarship funds. The scholarship funds are then distributed by you to the Student.

You withhold no part of the scholarship funds paid to you by the Entity and distribute the scholarship funds in their entirety to the Student pursuant the terms of the Agreement. You do not charge either the Student or the Entity a fee to distribute the funds to the Student.

You advise that the scholarship funds are paid by you to the Student in order to provide that Student with financial assistance and support. Under the terms of each of the Agreements, the Entity and you nominate the Student to work on a particular project (Project) to provide that Student with an opportunity to undertake applied research under the direction of experienced researchers.

The Student's purpose in undertaking the research work is for the opportunity to attain a higher degree.

The Agreements set out the Student's obligations in relation to the Project including:

· working on the Project under the direction of the supervisors and keeping records of all results and any other work the Student does in relation to the Project

· providing reports at the end of the Project or whenever reasonably requested by either the Entity or you outlining results and any work the Student did in relation to the Project and reporting all potential innovations conceived by the Student in relation to the Project, and

· executing any documents as may be necessary to give effect to the terms of the Agreement.

Potentially the research work undertaken in the Project and the Results created by any one or more of the parties to the Agreement may give rise to Project Intellectual Property (Project IP). Project IP is defined in the Agreements as all Intellectual Property (IP) in the Results, excluding copyright in the Student's thesis.

In each of the Agreements there is a clause identifying the owner of Project generated IP:

· in Agreement X, the Entity will own all Project IP

· in Agreement Y, the Entity and or you will own all Project IP, and

· in Agreement Z, the Student or you will own all Project IP.

Agreement X refers to you receiving a share of revenue from commercialisation of Project IP calculated by reference to contributions you make (financial, intellectual and facilities). Agreements Y and Z do not.

Unlike Agreement X, Agreement Y and Z contemplate you owning an interest in the Project IP and refer to the terms of other agreements and primary scholarship.

The Agreements also provide that the Student is to undertake research work on the Project under the direction of supervisors. The Entity is to provide one supervisor and you are to provide a co-supervisor.

The Student is not registered for GST whilst the Entity is.

The Agreements provide that the Agreements do not create the relationship of:

· employee and employer between the parties or

· partnership or agency between any of the parties.

You advise that you have treated the scholarship funds you received from the Entity as consideration for a taxable supply you made to the Entity. You have issued the Entity with tax invoices.

In your application for a private ruling, you provided a copy of a private ruling issued to the Entity. The Entity argues that the scholarship funds paid to you is not consideration for a taxable supply and as such no GST is payable.

You contend that the payment of the scholarship funds by the Entity to you gives rise to a taxable supply. You identify a number of supplies including:

· reports for research findings provided by the Student to the Entity

· full ownership / co ownership of any Project IP transferred to the Entity, and

· supervision and co supervision provided by your academic staff.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

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 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

Reasons for decision

Legislation

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) relevantly provides that GST is payable on taxable supplies. Under section 9-40 of the GST Act, an entity must pay the GST payable on any taxable supply it makes.

A supply is a taxable supply if pursuant to section 9-5 of the GST Act:

· 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. None of the supplies in connection with the scholarship funds you received are GST-free or input taxed.

Supply

The meaning of 'supply' is given in section 9-10 of the GST Act. Subsection 9-10(1) of the GST states that a supply 'is any form of supply whatsoever'. Without limiting subsection 9-10(1) of the GST Act, subsection 9-10(2) of the GST Act provides that a supply 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

o or any combination of any 2 or more of the matters referred to in subsection 9-10(2) of the GST Act.

However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money (subsection 9-10(4) of the GST Act).

Consideration

The term 'consideration' is defined in subsection 9-15(1) of the GST Act so as to include 'any payment, or any act or forbearance, in connection with a supply of anything' (paragraph 9-15(1)(a) of the GST Act), and 'any payment, or any act or forbearance, in response to or for the inducement of a supply of anything' (paragraph 9-15(1)(b) of the GST Act).

In the present case, you are operating in your capacity as an educational facility. It is in this capacity that you receive the scholarship funds from the Entity to distribute in their entirety to the Student in accordance with the terms in the Agreements. Each of the Agreements provide for the Entity to pay the scholarship funds either directly to the Student or you (to distribute to the Student). The arrangement made under the Agreements involves more than two parties (sometimes referred to as tripartite arrangements) consisting of:

· the Entity (paying the scholarship funds to you)

· you (accepting the scholarship funds from the Entity for distribution to the Student), and

· the Student (to whom the funds are distributed).

This is the setting in which section 9-5 of the GST Act is to be applied. The concepts of 'supply' and 'consideration' are important because if there is no supply or if there is no 'consideration' for the supply, paragraph 9-5(a) of the GST Act will not be satisfied and as such, there will be no taxable supply on which GST is payable.

The Commissioner of Taxation (Commissioner) has considered the concept of 'supply' in the context of tripartite arrangement in Goods and Services Tax Ruling GSTR 2006/9. Paragraph 116 of GSTR 2006/9 explains that as with two party transactions, the GST consequences of tripartite arrangements turn on identifying:

· one or more supplies

· consideration (a payment, act or forbearance)

· a nexus between supply and consideration, and

· to whom the supply is made.

Tripartite arrangements can relate to any of the matters referred to in section 9-10 of the GST Act which discusses the meaning of supply. The difficulty with tripartite arrangements is identifying the supply or supplies made in these arrangements and by whom and to whom the supply is made.

GSTR 2006/9 sets out propositions to analyse tripartite arrangements including proposition 16 which explains that the total fact situation will determine the nature of a transaction, the entity that made a supply and the recipient of the supply (paragraphs 222 to 246 of GSTR 2006/9).

Examining the agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies (if any) made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes (paragraph 222 of GSTR 2006/9).

Agreements X, Y and Z provide for the scholarship funds to be paid by the Entity directly to the Student or to you, to distribute in their entirety to the Student.

On the facts provided by you, no part of the scholarship funds are retained by you nor is a fee charged by you to either the Student or the Entity for the service of administering and distributing the scholarship funds. These facts support the view that you are merely distributing the scholarship funds to the Students on the Entity's behalf.

You have expressed concern that the Agreement precludes such an interpretation as a clause in the Agreement stipulates that a relationship of agency between the parties is not created under the Agreement. Notwithstanding this clause, the Agreement provides for two payment methods in relation to the scholarship funds. That clause is unlikely to be concerned with regulating the payment methods provided for under the Agreement.

Apart from the mere payment of these funds to the Student, the Agreements provide regulation of the various commercial aspect of the relationship between you and the Entity. The totality of these Agreements makes it clear that the 'no agency' clause in the Agreements does not relate to the payment by the Entity to you for the Student and instead is something of a standard insertion in such commercial contracts.

Other concepts besides agency may be of assistance in determining the GST treatment of the scholarship funds and the supplies to which they relate. An essential requirement for a taxable supply under section 9-5 of the GST Act is that the supplier makes the supply for consideration. The word 'for' connotes a nexus between the supply and the consideration. The definition of 'consideration' also imports such a nexus requirement.

The Commissioner has explored the issue of a 'supply for consideration' and of a 'nexus between supply and consideration' in relation to financial assistance payments in Goods and Services Tax Ruling GSTR 2012/2.

Paragraph 5 of GSTR 2012/2 explains that the term 'financial assistance payment' (FAP) is intended to encompass a wide range of payments including payments made to provide support or aid to the payee. In this case, that 'payee' is the Student being the one the FAP is to provide support or aid to. This is the case notwithstanding that you are an intermediary in the transit of those funds from the Entity to the Student.

GSTR 2012/2 assumes for the purposes of that Ruling that if it is concluded that a payee makes a supply for which the FAP is consideration, the other requirements for making a taxable supply are satisfied including that the payee is registered or required to be registered for GST and making the supply in the course or furtherance of their enterprise.

Paragraph 15 of GSTR 2012/2 explains that for an FAP to be consideration for a supply there must be a sufficient nexus between the FAP made by the payer and a supply made by the payee. The FAP is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply of anything. The test is an objective one.

Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether the FAP is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include:

· the statutory purpose of the payer in providing the financial assistance

· the activities which are to be undertaken by the payee, and

· any other terms and conditions attached to the payment.

However, none of these factors will be determinative on their own and the arrangement must be considered as a whole. The description the parties may give to the arrangement whilst relevant is not determinative.

An entity that receives an FAP is liable for GST in respect of that payment if the payment is consideration for a supply and all of the requirements for a taxable supply in section 9-5 of the GST Act are met.

As suggested by the Commissioner, the entirety of the arrangement should be evaluated. The first step should be to identify any relevant supplies.

You contend that the payment of the scholarship funds by the Entity could give rise to a taxable supply by you. You identify a number of possible supplies including:

· reports for research finding provided by the Student to the Entity

· full ownership /co-ownership of any project IP transferred to the Entity, and

· supervision and co-supervision provided by your academic staff.

You refer to paragraphs 18 and 24 of GSTR 2012/2 in support of your view which states:

'18. 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. …

24. 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 purpose of obtaining the information.'

On the facts, there may be many goods, services, rights and entry into obligations which may satisfy the statutory definition of a supply. However, for the FAP to be consideration for a supply it is not sufficient for there to be a supply and a payment. The FAP must be consideration for that supply.

Supplies by the Student

Each Agreement sets out the obligations of the Student. There is no issue in the present case that work on the Project under the direction of supervisors or the provision of reports outlining the Results in each of the Agreements come within the definition of a supply. Nor is there an issue that the surrender of moral or intellectual property rights in any Results created by the Student to you or the Entity or both constitutes a supply.

Supplies by you

The Agreements indicate that you are to provide a supervisor, such services and acceptance of any other obligations in the Agreements would also satisfy the definition of a supply. Other supplies may involve the assignment of interests in Project IP or services in administering and distributing the scholarship funds received by you from the Entity.

While the nexus test does not vary according to the types of supplies involved, the characteristics of supplies and the context in which they are made are relevant to an evaluation of the motives and objective of the parties and the relationship between them.

Paying the scholarship funds to you to distribute to the Student rather than to the Student directly does not change the character of the sponsorship funds or the purpose for which they are paid.

On the facts, the scholarship funds paid by the Entity to you do not have a sufficient nexus with a supply made by you to the Entity for the scholarship funds to constitute consideration for such a supply. This is supported by:

· no separate fee being identified as charged by you and no part of the scholarship funds being withheld by you, and

· the funds paid by the Entity are distributed in their entirety to the Student.

As the scholarship funds are paid to give support and aid to the Student and the Agreements are specific in terms of the nature of the obligations and work the Student is to provide, it is the Student's supplies which have the only possible nexus to the scholarship funds.

It follows that the scholarship funds are not consideration for a taxable supply made by you to the Entity. On that basis, an essential requirement of section 9-5 of the GST Act that there is a supply by you for consideration is not satisfied. This is not to be construed to mean that there are no other taxable supplies made by you under the arrangements in each of the Agreements, simply that the scholarship funds are not consideration for any such supply.

Subsection 9-20(1) of the GST Act provides that an enterprise is an activity, or series of activities done, amongst other things, in the form of a business or in the form of an adventure or concern in the nature of trade. However, under subsection 9-20(2) an enterprise does not include an activity, or series of activities by an individual without a reasonable expectation of profit or gain. An entity is required to register for GST if that entity is carrying on an enterprise and its GST turnover meets the registration turnover threshold (section 23-5 of the GST Act).

The Student is not registered for GST and where he/she is not carrying on an enterprise, he/she is not required to be registered for GST. The Commissioner gives guidance on the meaning of an entity carrying on an enterprise in Miscellaneous Taxation Ruling MT 2006/1.

The Student's purpose in undertaking the work in the Project nominated in each Agreement is to perform research work so as to produce a thesis leading to the award of a higher degree. In such circumstances, the Student is unlikely to be carrying on an enterprise or have a GST turnover that meets the registration turnover threshold. It follows that where the Student is not registered or required to be registered for GST, any supplies made by the Student under the Agreements are not taxable supplies under section 9-5 of the GST Act on which GST is payable.

From the entirety of the arrangements and the commercial reality of the transactions between the parties, the scholarship funds paid to you by the Entity do not have the relevant nexus with a supply made by you to the Entity in order for those funds to constitute consideration for that supply. Accordingly the scholarship funds are not consideration for a taxable supply made by you to the Entity on which GST is payable.