Edited version of your private ruling

Authorisation Number: 1012506758861

Ruling

Subject: GST and payments by government related entity to another for supplies of services

Question 1

Are the payments received by a supplier entity from a recipient entity the provision of consideration for supplies of services made from 1 July 2012 onwards by the supplier entity?

Answer

No, the payments received by supplier entity from the recipient entity are not the provision of consideration for supplies of services made by the supplier entity from 1 July 2012 onwards.

Question 2

Where the payments to the supplier entity are not the provision of consideration for the supply of services, what is the mechanism for the supplier entity to recover any GST that it believes it has overpaid?

Answer

The mechanism for the supplier entity to recover any GST it has overpaid will involve making an application to the Commissioner for a refund in accordance with section 105-65 of Schedule 1 to the Tax Administration Act 1953 (TAA).

Relevant facts and circumstances

The supplier entity (you) is a state body established under the relevant State law.

You advise that you are a government related entity under the control of a State department.

You are registered for goods and services tax (GST) and account for GST on a non cash basis in monthly tax periods.

The recipient entity is a state government department.

You executed an agreement in the form of a Memorandum of Understanding (MoU) with the recipient entity whereby, amongst other things, you were to provide the recipient entity with services.

You charged the recipient entity for the services purchased in accordance with the terms of the MoU.

All prices are exclusive of GST. The recipient's obligation to pay the GST component of the consideration is subject to it receiving a valid tax invoice in respect of the supply at or before the time of payment.

In accordance with the arrangement set out in the MoU, you treated the supply of services to the recipient entity as taxable supplies on which GST was payable.

You issued tax invoices to the recipient entity in relation to the supplies of services you made.

The recipient entity is registered for GST and receives funding from a State Appropriation Act for general operations which includes the services acquired from you.

The payments for the supply of services are calculated on the basis that the sum of the payment relating to the supply of services and anything that you receive from another entity in connection with the supply does not exceed your anticipated costs of making those supplies.

In the last quarter of each financial year you calculate your anticipated costs of making supplies of services for the coming financial year based on an aggregate of cost elements which include labour asset costs, vendor costs, depreciation on asset schedule costs and a CPI factor. These anticipated costs are then invoiced to the recipient entity in the subsequent financial year on a quarterly in advance basis.

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 9-17

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

A New Tax System (Goods and Services Tax) Act 1999 section 35-5

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

A New Tax System (Australian Business Number) Act 1999 section 41

Taxation Administration Act 1953 Schedule 1 to subsection 105-65(1)

Reasons for decisions

Question 1

Summary

On the facts provided, the payments made to you in relation to supplies of services to the recipient entity satisfy the requirements of paragraphs 9-17(3)(a) (b) and (c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). That is;

· you are a government related entity and you received payments from the recipient entity who is also a government related entity in connection with supplies of services you made

· the payments made by the recipient entity were covered by an appropriation under an Australian law, and

· the payments for the supply of services are calculated on the basis that the sum of the payment relating to the supply of services and anything that you receive from another entity in connection with the supply does not exceed your anticipated costs of making those supplies.

That being the case the payments made by the recipient entity to you in connection with the supplies of services are not the provision of consideration.

Consequently, the supplies of services made by you from 1 July onwards were not taxable supplies under section 9-5 of the GST Act. It follows that no GST was and is payable by you on those supplies under section 9-40 of the GST Act.

Detailed reasoning

Section 7-1 of the GST Act relevantly provides that GST is payable on taxable supplies and entitlements to input tax credits arise on creditable acquisitions.

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 (paragraph 9-5(a) of the GST Act)

· 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 services you provide are GST-free or input taxed.

The meaning of 'supply' is given in section 9-10 of the GST Act. Subsection 9-10(1) of the GST Act 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

· 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).

The services described in the MoU and made by you come within the definition of supply under section 9-10 of the GST Act.

As you are registered for GST and making supplies in Australia to the recipient entity in the course of an enterprise that you carry on, the issue that arises under section 9-5 of the GST Act in the present circumstances is whether the supplies of services made by you were for consideration (paragraph 9-5(a) of the GST Act).

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, the supply in question is the supply by you of services to the recipient entity. The fees paid to you by the recipient entity under the terms of the MoU were payments for those supplies and, as such, are clearly a payment 'in connection with' the supply of the services.

Unless the exception in subsection 9-17(3) of the GST Act applies, the payments made to you would fall within the statutory definition of consideration under subsection 9-15(1) of the GST Act.

Subsection 9-17(3) of the GST Act provides that a payment is not the provision of consideration if:

· the payment is made by one government related entity to another government related entity for making a supply (paragraph 9-17(3)(a) of the GST Act)

· the payment is (amongst other things) covered by an appropriation under an Australian law (paragraph 9-17(3)(b) of the GST Act), and

· the payment satisfies the non-commercial test (paragraph 9-17(3)(c) of the GST Act).

If the exception to the definition of consideration in subsection 9-17(3) of the GST Act is to apply, the first requirement is that the payments in question must have been made by one 'government related entity' to another 'government related entity' for making a supply.

The term 'government related entity' is defined in section 195-1 of the GST Act as:

· a government entity

· an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999 (ABN Act), or

· a local government body established by or under a State law or a Territory law.

Section 41 of the ABN Act defines a 'government entity' as:

· a Department of State of the Commonwealth

· a Department of the Parliament established under the Parliamentary Service Act 1999

· an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999

· a Department of State of a State or Territory, or

· an organisation, that:

o is not an entity

o is either established by the Commonwealth, a State or a Territory (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law, and

o can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation,

whether or not the organisation is part of a Department or branch described in the first four dot points above or of another organisation of the kind described in this paragraph.

On the facts, both you and the recipient entity are government related entities for the purposes of subsection 9-17(3) of the GST Act.

Accordingly, the first requirement of subsection 9-17(3) of the GST Act is satisfied.

The second requirement of subsection 9-17(3) of the GST Act to consider, in your circumstances, is whether the payment is covered by an appropriation under an Australian law.

The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Act 2012 (EM) explains in paragraph 2.17 in Chapter 2 that the requirement that the payment must be covered by an appropriation under an Australian law is met if the payment is made pursuant to an appropriation.

Under paragraph 9-17(3)(b) of the GST Act the payment need not be 'specifically covered' by an appropriation under an Australian law, as was the case before 1 July 2012 under the former paragraph 9-15(3)(c) of the GST Act.

The recipient entity is funded from a State Appropriation Act for its general operation expenses which include supplies of your services.

Accordingly, the payments the recipient entity made to you for services are covered by an appropriation under an Australian law and thus, the second requirement of subsection 9-17(3) of the GST Act is satisfied.

The third requirement of subsection 9-17(3) of the GST Act to consider (referred to as the non-commercial test) is whether the payment was calculated on the basis that the sum of:

· the payment (including the amounts of any other such payments) relating to the supply, and

· anything (including any payments for any act or forbearance) that 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.

This is achieved by requiring that the payment for the supply in question (services) be calculated on the basis that the sum of the payment and anything else received from another entity in connection with, or in response to, or for the inducement of, the supply of services or any other related supply, does not exceed your anticipated or actual cost of making the supplies.

The reference to 'anything' in the third requirement of subsection 9-17(3) of the GST Act ensures that things of a non monetary nature received by you the supplier from another entity is taken into account in determining whether the sum of the payment and things received by you in connection with the supply does not exceed your anticipated or actual costs of making the supply.

The EM explains at paragraphs 2.27 and 2.31 that:

2.27 Whether or not the amount of the payment exceeds the government related entity supplier's anticipated or actual costs of making the supply, or supplies, is determined at the time at which the amount to be paid is worked out rather than at the time of payment (if it is later). If the determination of the amount of the payment to be made takes place before the relevant supply, or supplies, are made, it will be necessary to base the calculation on the anticipated costs of making the supply, or supplies. The amount of the payment will commonly be calculated in consultation between the government related entity making the payment and the government related entity supplier. If the payment is calculated after the relevant supply, or supplies, are made, the calculation is based on the actual costs of making the supply, or supplies. Where the calculation is based on the anticipated costs of making the supply, or supplies, it is not necessary to subsequently determine the actual costs of making the supply, or supplies. …

2.31 In the context of these amendments, the concept of cost includes the government related entity supplier's direct and indirect costs of making the supply or supplies, but does not include a return on capital or concepts of cost which are measured based on opportunity cost or forgone revenue. An absorption costing methodology is an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies.

If the payment is made in instalments, paragraph 9-17(3)(c) of the GST Act requires the aggregate of the instalment payments for the supply to be tested against the anticipated or actual costs of making the supply or supplies. Instalment payments are not tested separately. It is therefore necessary to identify the total payment under the factual arrangement in applying the non-commercial test.

In the last quarter of each financial year you calculate your anticipated costs of making supplies of services for the coming financial year based on an aggregate of cost elements which include labour asset costs, vendor costs, depreciation on asset schedule costs and a CPI factor. These anticipated costs are then invoiced to the recipient entity in the subsequent financial year on a quarterly in advance basis.

As the amounts of the payments are calculated to equal your anticipated costs of providing the services the third requirement of subsection 9-17(3) of the GST Act is satisfied.

As all three of the requirements of subsection 9-17(3) of the GST Act are satisfied, the payments made by the recipient entity to you in connection with the supplies of services are not the provision of consideration.

Consequently the supplies of services made by you from 1 July 2012 were not taxable supplies made for consideration under section 9-5 of the GST Act. It follows that no GST was and is payable by you on those supplies to the recipient entity under section 9-40 of the GST Act.

Please note, you need to comply with all record-keeping requirements which otherwise apply in relation to the application of paragraph 9-17(3)(c) of the GST Act. That is, it is expected that you as the supplier will have documentation which sufficiently identifies the basis on which the payment for the relevant supply has been calculated.

Question 2

Summary

Miscellaneous Taxation Ruling MT 2010/1 sets out the Commissioner's view on section 105-65 of Schedule 1 to the TAA, which provides for a restriction on GST refunds that arise from the overpayment of GST.

In the present circumstances, paragraphs 105-65(1)(a) and (b) of Schedule 1 to the TAA apply and either or both the conditions in paragraph 105-65(1)(c) of Schedule 1 to the TAA are met. As such, the Commissioner need not refund the overpaid GST to you, but has discretion to do so.

If you consider that your circumstances warrant the exercise of the Commissioner's discretion to pay a refund under section 105-65 of Schedule 1 to the TAA you will need to make that request in a private ruling application which sets out all of the relevant facts.

Detailed reasoning

A refund or credit may arise as a result of an entity miscalculating their net amount and either the entity or the Commissioner amends or revises that net amount by, for example, reducing the GST payable.

The result of the amendment or revision may be that the net amount the entity paid is reduced, the entity becomes entitled to a refund under section 35-5 of the GST Act or the amount of the refund under section 35-5 of the GST Act is increased.

Where this occurs, the Commissioner is generally required to give a refund or apply that amount in accordance with the running balance account (RBA) rules.

However, where the refund or credit arises from an overpayment of the amount of GST payable in the calculation of the net amount, subsection 105-65(1) of Schedule 1 to the TAA modifies this requirement so that the Commissioner need not give a refund (or apply that amount) where the entity overpaid its net amount or an amount of GST and the other requirements of the section are established.

Subsection 105-65(1) of Schedule 1 to the TAA states:

(1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies: if:

(a) you overpaid the amount, or the amount was not refunded to you because a* supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply, to any extent; and

(b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is *GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient; or

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is registered or required to be registered for GST.

(*asterisk denotes a term defined in section 195-1 of the GST Act)

The Commissioner sets out his views on the operation of section 105-65 of Schedule 1 to the TAA in MT 2010/1.

Where paragraphs 105-65(1)(a) and (b) of Schedule 1 to the TAA apply:

· but neither of the conditions in paragraphs 105-65(1)(c) of Schedule 1 to the TAA are met - section 105-65 does not apply and the Commissioner must refund the overpaid GST to the supplier

· and either or both the conditions in paragraph 105-65(1)(c) of Schedule 1 to the TAA are met - the Commissioner need not refund the overpaid GST to the supplier, but has a discretion to do so.

Suppliers must be able to demonstrate that these conditions have been met, with each case depending on its own circumstances.

These conditions seek to ensure that the supplier does not enjoy a windfall gain at the expense of the end consumer by receiving and retaining in full a GST-inclusive price for a supply on which GST is not properly payable.

However, as outlined in paragraph 27 of MT 2010/1 the use of the words 'need not' indicate that the Commissioner may choose to pay a refund in appropriate circumstances, even though the conditions in paragraphs 105-65(1)(a), 105-65(1)(b), 105-65(1)(c) of Schedule 1 to the TAA are satisfied. It is to that limited extent that the Commissioner has a discretion.

As well, paragraph 20 of MT 2010/1 indicates that for section 105-65 of Schedule 1 to the TAA to apply there has to be an overpayment of GST. That is, the amount remitted as GST for a supply in a relevant tax period must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65 of Schedule 1 to the TAA.

You advise that you have treated the supplies of services you made to the recipient entity as taxable supplies on which GST was payable. As determined above in Question 1, those supplies were not taxable supplies on which GST was payable and as such, you overpaid GST. The recipient entity is registered for GST. It follows that as either or both the requirements in paragraph 105-65(1)(c) of Schedule 1 to the TAA are met the Commissioner need not refund the overpaid GST to you but has a discretion to do so.

Paragraph 128 of MT 2010/1 sets out the guiding principles in relation to when the Commissioner may exercise the discretion to give a supplier a refund.

Paragraph 129 of MT 2010/1 explains that the Commissioner will not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are other countervailing reasons for doing so.

If you consider that your circumstances warrant the exercise of the Commissioner's discretion to pay a refund under section 105-65 of Schedule 1 to the TAA you will need to make that request in a private ruling application which sets out all of the relevant facts.