Edited version of your private ruling

Authorisation Number: 1012594362362

Ruling

Subject: GST and government appropriations

Question

Do the payments received by you satisfy the criteria set out in subsection 9-17(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore, are not the provision of consideration by the entities making the payments:

Answer

Yes, the payments received by you satisfy the criteria set out in subsection 9-17(3) of the GST Act and therefore, are not the provision of consideration by the entities making the payments.

Relevant facts and circumstances

You are an entity established by the Government to complete various projects and you are registered for goods and services tax (GST).

In order to carry on your operations, you receive funding under various contracts with other government entities. The contracts outline the projects and specific activities that you are required to undertake.

You supplied documentation to show that the payments are set out in budgetary papers and the related Appropriation Acts.

In relation to the calculation of the funding provided to you, you advised that the funding is based on a reasonable forecast of the costs to be incurred by you in fulfilling your obligations and you supplied documentation to confirm this.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-17

Subsection 9-17(3)

Subsection 9-17(4)

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 under the contracts satisfy all of the requirements of subsection 9-17(3) of the GST Act. That is,

• you and the entities making the payments are government related entities

• there is an appropriation under an Australian law which supports each of the payments, and

• the payments are calculated on the basis that the sum of the payments does not exceed your anticipated or actual costs of making the related supplies.

As the requirements of subsection 9-17(3) of the GST Act are met, the payments made to you will not be consideration for a supply.

Consequently, the supplies of services made by you are not taxable supplies under section 9-5 of the GST Act. As a result, you will not be required to remit GST in respect of these payments.

Detailed reasoning

Section 7-1 of the GST Act provides that GST is payable on taxable supplies.

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 services that 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'.

The services that you undertake under the contracts 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 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 were made 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).

It is clear that 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 made by you to satisfy the requirement of paragraph 9-5(a) of the GST Act.

However, section 9-17 of the GST Act provides that certain payments and other things are not consideration for the purposes of the GST Act. Of relevance to this case is subsection 9-17(3) of the GST Act which states:

(3) A payment is not the provision of consideration if:

(a) the payment is made by a *government related entity to another government related entity for making a supply; and

(b) the payment is:

(i) covered by an appropriation under an *Australian law; or

(ii) made under the National Health Reform Agreement agreed to by the Council of Australian Governments on 2 August 2011, as amended from time to time; or

(iii) made under another agreement entered into to implement the National Health Reform Agreement; and

(c) the payment is calculated on the basis that the sum of:

(i) the payment (Including the amounts of any other such payments) relating to the supply; and

(ii) anything (including any payment 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.

(* denoted a term defined in section 195-1 of the GST Act).

Therefore, a payment by one government related entity to another government related entity in respect of a supply will not be the provision of consideration and thus, not subject to GST where it satisfies the above criteria.

The first requirement of subsection 9-17(3) of the GST Act to be satisfied 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:

• is not an entity

• 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

• 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.

In this case, you are an 'entity' for the purposes of section 184-1 of the GST Act.

As you are an entity, you cannot be a 'government entity' but the facts show that you were established by the Government to complete various projects and that you can be separately identified by way of your activities. Therefore, you satisfy the definition of a government related entity.

As well, the other government entities would also be 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 is whether the payments made to the entity are 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 funding provided to you is set out in budgetary papers and the related Appropriation Acts.

Therefore, the payments made to you 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.

The main element to satisfying the non-commercial test relates to the payment not exceeding the government related entity supplier's anticipated or actual costs of making the supplies.

Paragraph 2.31 of the EM explains the concept of 'cost' for the purposes of the calculation and states, in part:

2.31 … 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.

In relation to the calculation of the funding provided to you, you provided documentation to show that the funding is based on a reasonable forecast of the costs to be incurred by you in fulfilling your obligations under each contract.

Therefore, the sum of the payments and any inducements received by you in respect of the supplies you provide does not exceed the anticipated or actual costs incurred by you in making those supplies. As such, the non-commercial test under paragraph 9-17(3)(c) of the GST Act will be satisfied in regard to the payments being made to you.

As all of the requirements of subsection 9-17(3) of the GST Act are satisfied, the payments received by you will not be consideration for a supply. Consequently, the supplies of services made by you are not taxable supplies under section 9-5 of the GST Act. As a result, the entity will not be required to remit GST in respect of the payments.

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