Edited version of your private ruling

Authorisation Number: 1012523567095

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Ruling

Subject: GST and payments between government related entities for seconded employees

Question

Are the payments received by the supplier entity from the recipient entity for supplies of seconded employees covered by an appropriation under an Australian law?

Answer

Yes, on the facts provided, the payments received by the supplier entity for supplies of seconded employees are covered by an appropriation under an Australian law.

Relevant facts and circumstances

The supplier entity (you) is a Department of the State which is registered for goods and services tax (GST).

You have an agreement (not in writing) with the recipient entity whereby some of your employees are seconded on a temporary basis to the recipient entity.

Under the terms of the agreement you continue paying your seconded employees whilst on secondment. You agreed with the recipient entity that only anticipated costs in relation to the employees would be recovered and invoiced.

However, in the financial year you only invoiced the recipient entity for the actual costs after the supply was made. These costs include salary and wages, annual leave and leave loading, long service leave, superannuation, payroll tax and workers compensation.

Other indirect costs that could be included in the payment are administration fees calculated based on the indirect costs associated with issuing the invoices and processing the payments (reimbursements) of actual employee business related travel and accommodation.

You confirmed that you calculate the payments made by the recipient entity in connection with the supplies of seconded employees on the basis of recovering your direct and indirect costs of making the supplies. As the supplier you hold the documentation which sufficiently identifies the basis on which the payment for the supply has been calculated.

The recipient entity is a Department of the State and is registered for GST.

The recipient entity advised you that it receives appropriated funds allocated to it to cover its departmental services which include employee expenses.

You advised that it is your understanding that the recipient entity receives funds appropriated to it to cover its departmental services a component of which would be staff secondment (but not separately listed).

You also advised that under the Appropriation Acts the Treasurer is authorised to pay funds from the consolidated fund to departments (including the recipient entity) for a financial year.

Under the Appropriation Acts, an amount was appropriated for the recipient entity to be applied to its departmental services, administered items and equity adjustment.

The Budget Statements for you and the recipient entity define terms such as 'administered items' and 'controlled items'.

You explained that the Budget Statements for the recipient entity provides a table for Departmental Budget Summary which includes appropriations allocated to departmental services under the heading of 'controlled items' of an amount and other revenue not appropriated of an amount.

The recipient entity Departmental Budget Summary provides no clear breakdown in the expense table to indicate which expenses relate to the appropriated revenue and which to other revenue.

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 195-1

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

Income Tax assessment Act 1997 section 995-1

Reasons for decision

Summary

On the facts provided by you, the payments received by you from the recipient entity in relation to supplies of seconded employees are covered by an appropriation under an Australian law namely the relevant Appropriation Act.

Furthermore, the payments received by you for the supplies of seconded employees satisfy the requirements of paragraphs 9-17(3)(a) 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 receive payments from the recipient entity which is also a government related entity in connection with supplies of seconded employees you make, and

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

Therefore, the payments received by you from the recipient entity in connection with the supplies of seconded employees are not the provision of consideration.

Consequently, the supplies of seconded employees made by you after 1 July 2012 were not taxable supplies under section 9-5 of the GST Act. It follows, that no GST 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

· 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 seconded employee services you provide 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 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 associated with the secondment of employees to the recipient entity 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 of seconded employees were supplies made by you 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 associated with seconded employees to the recipient entity. The payments received by you from the recipient entity under the terms of the agreements were payments for those supplies and, as such, are clearly payments 'in connection with' the supply of the seconded employee services.

Unless the exception in subsection 9-17(3) of the GST Act applies, the payments received by 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 …

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. That is, you and the recipient entity are a Department of State of a State and therefore, a government related entity.

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, which is of particular interest in the present circumstances, is whether the payments are covered by an appropriation under an Australian law.

An Australian law is defined in section 195-1 of the GST Act to have the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and includes a State law. The State Appropriation Acts and State public finance legislation are State laws and therefore Australian laws.

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 a 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 State Constitution provides that the payment from the consolidated fund must be authorised under an Act and the Act authorising the payment must specify the purpose for which the payment is made.

The State legislation provides that an ordinary annual appropriation Act is an Act that authorises the Treasurer to pay from the consolidated fund an amount for the departments for a financial year and appropriates an amount to be applied to the departmental services, administered items and equity adjustment of each department.

The Appropriation Acts provide that the amount mentioned for the recipient entity in those Acts is appropriated for the financial year for the recipient entity to be applied to its administered items and its controlled items.

The Appropriation Acts show the amount appropriated for each financial year for the recipient entity of certain amounts to be applied to its departmental services which comprise 'controlled items'.

The Appropriation Acts do not define the terms 'departmental services, controlled items or administered items'. The issue here is whether expenditure for seconded employees by the recipient entity is covered by appropriated funds for controlled items comprising departmental services identified in the Appropriation Act.

Controlled items are defined in the Budget Statements to include, amongst other things, expenses that relate directly to the departmental operational objectives and arise at the discretion and direction of the department (in this case the recipient entity). Administered items are defined to include, amongst other things, expenses an entity administers without discretion, on behalf of the Government.

The State legislation defines the term 'departmental services' to mean discrete services or other products, including policy advice, delivered by a department.

The Appropriation Acts allocate appropriated funds between 'controlled items' and 'administered items' and no further details is provided in the Budget Statements other than in defining the terms as to what may be covered by administered items and controlled items.

However, in a state government publication (Publication) a distinction is made between controlled revenues and administered revenues and controlled expenses and administered expenses.

The Publication states that controlled expenses include those liabilities incurred in the process of providing departmental services for the purposes of performing functions of the department and include wages, salaries and other employee entitlements.

As indicated in the Publication and the definitions in the Budget Statement,

· 'controlled items' include controlled expenses on wages, salaries and other employee entitlements incurred by the recipient entity in the process of providing the recipient entity's departmental services, and

· the relevant Appropriation Act identifies funds appropriated for the recipient entity for application to its departmental services under the heading 'controlled items'.

Therefore, it would be reasonable to expect that a payment for an expense on seconded employees made by the recipient entity would have been made from funds appropriated for that purpose i.e. funds to be applied to departmental services. If that is the case then such payments would be covered by an appropriation.

Whether a departments controlled expenses include expenses in connection with seconded employees or whether the payment made by the recipient entity in relation to those seconded employees is made from funds appropriated to it to cover its controlled items is a question of fact. Such a question can only be answered with any certainty by the entity making the payment and who is presumably accountable for those funds.

As you have noted there is no clear breakdown in the expense table of the recipient entity Departmental Budget Summary to determine which expense relates to the appropriated revenue and which to the other revenue. There are insufficient details in the Appropriation Acts and other documents for you as the supplier to be in a position to draw the conclusion that a particular payment made to you is covered by an appropriation under an Australian law.

You advised that in this case the recipient entity has advised you that the recipient entity receives appropriations to cover its departmental services which include employee expenses.

On the facts provided, there were appropriations under the relevant Appropriation Acts for the recipient entity to cover its controlled items. Controlled items for which funds have been appropriated cover departmental services which include costs of employees.

Accordingly, based on all the available information and in the absence of evidence to the contrary, it is considered that the payments received by you from the recipient entity for seconded employee services are covered by an appropriation under an Australian law and as such, 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 (seconded employee 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 seconded employee 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 government related entity supplier) from another entity is taken into account in determining whether the sum of the payment and things received by you (the government related entity supplier) 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.

The EM at paragraph 2.31 refers to an absorption costing methodology as an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies.

You advise that the payments are calculated after the supply of seconded employees is made and as such the calculation is based on the actual costs of making the supply. The payments were equal to the actual costs of providing the seconded employee services. Those costs included salary and wages, annual leave and leave loading, long service leave, superannuation, payroll tax and workers compensation. On that basis 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 received by you from the recipient entity in connection with the supplies of seconded employee services are not the provision of consideration.

Consequently, the supplies of seconded employee services made by you after 1 July 2012 were not taxable supplies made for consideration under section 9-5 of the GST Act. It follows that no GST was 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.