Edited version of your private ruling

Authorisation Number: 1012539409337

Ruling

Subject: GST and appropriations

Question

Is the total payment received by you from other government departments for services subject to GST?

Answer

No, the total payment received by you from other government departments is not subject to GST because the payment is not the provision of consideration for supplies of services.

Relevant facts and circumstances

You are a government department which is registered for GST.

You provide services to other government departments for payment.

You advised that the other government department are government related entities as they are all public service departments and that each is registered for GST.

You also advised that the payments received from each government department are funded under a relevant Act and that the expenses are included under the relevant budget papers.

You provided the ATO with a copy of the agreement that you use with each government department. This agreement is in the form of a Memorandum of Understanding (MOU). You advised that you do not modify the wording to this MOU apart from inserting the name of the government department as the relevant party to the agreement.

You advised that all costs are calculated on the basis of a forecast of expected actual costs and that there is no profit margin factored into these calculations. The costs are regularly adjusted and reviewed.

To date you have been treating the provision of services as a taxable supply and as such invoicing the government departments inclusive of GST.

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

Reasons for decision

Summary

On the facts provided, the payments received by you in relation to supplies you made from 1 July 2012 onwards to the government departments 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 government departments who are also government related entities in connection with supplies you made

· the payments made by the government departments were covered by an appropriation under an Australian law namely the relevant Act, and

· the payments for the supply are calculated on the basis that the sum of the payment relating to the supply 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 government departments to you in connection with the supplies from 1 July 2012 onwards are not the provision of consideration.

Consequently, the supplies you made from 1 July 2012 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

· 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. Your provision of services is not 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.

You provide services and these services as described in the MOU 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 government departments 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 were supplies made by you for consideration (paragraph 9-5(a) 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).

These payments paid to you by each of the government department under the MOU were payments for your supply of services and, as such, are clearly a payment 'in connection' with the supply of those services.

Therefore, 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 and would have the relevant connection with the supplies to satisfy the requirement of paragraph 9-5(a) of the GST Act.

Subsection 9-17(3) 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).

Government related entity

The first requirement of subsection 9-17(3) of the GST Act 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 the term '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 provided, both you and the government departments are government related entities for the purposes of subsection 9-17(3) of the GST Act. That is, you and each of the government departments are Government Departments of the State.

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

Appropriation under an Australian law

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 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.

You advised that each government departments' payments to you are funded under the relevant Act and the expenses for each government department are included in the budget papers.

The relevant Act is an Australian law.

Accordingly, the payments the government departments made to you for supplies of 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.

Non-commercial test

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 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 or any other related supply, does not exceed your anticipated or actual cost of making the supplies.

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.

Also, as noted at paragraph 2.25 of the EM, 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.

You advised that the payment is calculated based on the forecast of expected actual costs and that you do not factor in a profit margin into the calculations. The costs are regularly adjusted and reviewed.

As the total payment received by you does not exceed your anticipated or actual costs, 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 payment received from the government departments under the MOU from 1 July 2012 onwards is not the provision of consideration.

Consequently the supplies from 1 July 2012 onwards are 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 government departments under section 9-40 of the GST Act.