Edited version of private advice

Authorisation Number: 1012638200605

Ruling

Subject: GST and appropriations and funding agreements

Question 1

Were the payments made by entity A, as the lead institution, to entity B before 1 July 2012 the provision of consideration for a taxable supply under section 9-5 of the A New Tax System Goods and Service Tax Act (GST Act)?

Answer

Yes, the payments made by entity A to entity B before 1 July 2012 were the provision of consideration for a supply made by entity B. Therefore, the supplies made by entity B were taxable supplies under section 9-5 of the GST Act.

Question 2

Are the payments made by entity A, as the lead institution, to entity B on or after 1 July 2012 the provision of consideration for a taxable supply under section 9-5 of the GST Act?

Answer

No, the payments made by entity A to entity B on or after 1 July 2012 are not the provision of consideration for a taxable supply made by entity B.

Question 3

If the answers to Questions 1 and 2 are no, then to the extent payments previously made have been treated as consideration for a taxable supply, will the Commissioner allow entity A and entity B to 'preserve the status quo' in accordance with the principles set out in Practice Statement Law Administration (General Administration) PS LA 2013/3 (GA)?

Answer

Payments made on or after 1 July 2012

On the facts provided, subsection 105-65(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) would restrict a goods and services tax (GST) refund if one were to be requested by entity B. To maintain the symmetry of the GST system and to overcome unnecessary administration and compliance costs, the Commissioner will not enforce the reversal of the transactions.

Applying the Commissioner's power of general administration, under PS LA 2013/3(GA), it is appropriate for the Commissioner not to disturb the ITCs claimed by entity A in relation to acquisitions of supplies made by entity B for which payments were made on or after 1 July 2012.

Payments made before 1 July 2012

The status quo approach will not apply to the ITCs claimed by entity A in relation to acquisitions of supplies made by the entity B for which payments were made prior to 1 July 2012 because the precondition set out in PS LA 2013/3 (GA) that the supply has incorrectly been treated as taxable is not satisfied. On the facts provided, the supplies made by the entity B were taxable supplies correctly treated as such.

Relevant facts and circumstances

Following an application submitted by a consortium of entities comprising entity A, B,C,D and E (Consortium Members), the Commonwealth through its Department (Department) approved a grant (the Grant) to fund the proposed Project (Project).

The Consortium Members applied for the Grant in a competitive grant process under the Commonwealth's Program (Program). The legislative framework for the Program is provided by the Commonwealth Act (Commonwealth Act).

Each of entity A and the other Consortium Members is registered for GST in its own capacity and has been so registered since 1 July 2000. Any supply made by the other Consortium Members and corresponding acquisition by entity A under the Agreements in undertaking their obligations is connected with Australia and made in the course of an enterprise carried on by them.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-15(3)(c)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-17(3)

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

Reasons for decisions

Question 1: Were payments made by entity A to entity B before 1 July 2012 consideration for a taxable supply?

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 contemplated by entity B and the other Consortium Members under the Agreements is 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 services, a provision of advice or information or an entry into or release from an obligation to do anything or any combination of any two or more matters referred to in subsection 9-10(2) of the GST Act.

The obligations undertaken by entity B and the other Consortium Members to comply with the FACs as well as agreeing to assist entity A to comply with the FACs with respect to undertaking the Activities with other Consortium Members, meeting milestones and keeping financial records relating to the funds come within the definition of supply under section 9-10 of the GST Act.

As entity B and the other Consortium Members are registered for GST and are making the supplies contemplated under the Agreements in Australia in the course of an enterprise they carry on, the issue that arises under section 9-5 of the GST Act is whether the supplies in question were supplies made by entity B and the other Consortium Members 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).

Subsection 9-15(2) of the GST Act provides that 'it does not matter whether the payment, act or forbearance was voluntary or whether it was by the recipient of the supply'.

In this case, the supply in question is the supply by entity B and the other Consortium Members of complying with their obligations under the Agreements which include assisting entity A to undertake the Activities. A clause of the Agreements provides that in consideration for entity B and the other Consortium Members complying with their obligations, entity A agrees to allocate the Funds.

The Allocation payments made by entity A to entity B and the other Consortium Members under the terms of the Agreement were payments for those supplies and, as such, payments 'in connection with' the supply of entity B undertaking its obligations. There was a sufficient nexus between the Allocation payments made by entity A and the supply made by entity B for the Allocation payments to constitute consideration under subsection 9-15(1) of the GST Act for those supplies.

Unless the exception in the former paragraph 9-15(3)(c) of the GST Act applied, the Allocation payments made by entity A before 1 July 2012 to entity B and the other Consortium Members would fall within the statutory definition of consideration under subsection 9-15(1) of the GST Act. The Allocation payments would have the relevant connection with the supplies of complying with the obligations to satisfy the requirement under paragraph 9-5(a) of the GST Act that there is a supply for consideration.

Guidance on the application of the former paragraph 9-15(3)(c) of the GST Act is contained in Goods and Services Tax Ruling GSTR 2011/2(withdrawn). This ruling replaced Goods and Services Tax Ruling GSTR 2006/11 because of the significant changes which needed to be made to GSTR 2006/11 as a result of the Full Federal Court decision in the TT-Line Company Pty Ltd v FC of T [2009] FCAFC 178 (TT-Line case).

The effect of the former paragraph 9-15(3)(c) of the GST Act was that a payment did not constitute the provision of consideration if the payments satisfied the following requirements:

• the payment was made by a government related entity to another government related entity, and

• the payment was specifically covered by an appropriation under an Australian law.

Government related entity

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 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', to include, amongst other things, at paragraph (a) a Department of State of the Commonwealth and at paragraph (e) an organisation, that:

(i) is not an entity

(ii) 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

(iii) 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 paragraph (a)(b)(c) or (d) or of another organisation of the kind described in this paragraph.

The Department as a Department of the Commonwealth is a government entity under section 41 of the ABN Act and consequently a government related entity under section 195-1 of the GST Act.

Entity A, B, C and D are government related entities for the purposes of the GST Act because they:

• are established for a public purpose by an Australian Law (entity A, B, C and D Acts), and

• they can be separately identified by reference to the nature of the activities carried on through them or the location of the organisation (paragraph (e) of the definition of government entity under section 41 of the ABN Act and the definition of government related entity under section 195-1 of the GST Act).

Contrary to the submissions made, entity E does not come within the definition of a government related entity because entity E is not a local government body or a government entity or an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the ABN Act.

It follows that entity E does not come within the definition of a government entity under section 41 of the ABN Act or a government related entity under section 195-1 of the GST Act.

Accordingly, the payments made by entity A to entity B, C, and D under the Agreement and payments made by the Commonwealth to entity A under the Agreement satisfied the first requirement of former paragraph 9-15(3)(c) of the GST Act.

The payment made by entity A to entity E did not satisfy the first requirement of the former paragraph 9-15(3)(c) of the GST Act.

Covered by an appropriation

The second requirement of the former paragraph 9-15(3)(c) of the GST Act to consider is whether the payments in question were specifically covered by an appropriation under an Australian law

The Commonwealth Act provides that amounts payable by the Commonwealth under the Commonwealth Act are payable out of the Consolidated Revenue Fund which is appropriated accordingly.

Under section 83 of the Commonwealth of Australia Constitution Act, no money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law. The relevant Appropriation Acts are to appropriate money out of the Consolidated Revenue Fund for the ordinary annual service of the government and for related purposes.

The Commonwealth Act comes within the definition of an Australian law being a law of the Commonwealth.

There is no issue in the present case that the Grant approved by the Commonwealth (Minister) under the Commonwealth Act has been appropriated under an Australian law and thus would be covered by an appropriation under that law.

The issue is whether the Allocation payments made by entity A to entity B and the other Consortium Members before 1 July 2012 were specifically covered by an appropriation.

Specifically covered by an appropriation

GSTR 2011/2 (withdrawn) with effect from 13 July 2011 considers the requirement in the former paragraph 9-15(3)(c) of the GST Act that the payment be 'specifically covered by an appropriation' under an Australian law in paragraphs 16 to 18 which state:

16. Not all payments between government related entities fall under paragraph 9-15(3)(c). A payment is not 'specifically covered by an appropriation' for the purpose of paragraph 9-15(3)(c) if the relevant terms of an appropriation authorise the government related entity to make payments that can be made to either a government related entity or a non-government related entity. Therefore, if a payment could, under the terms of the appropriation, be payable to either a government related entity or a non-government related entity, paragraph 9-15(3)(c) does not apply to the payment.

17. A Government related entity may be funded by the allocation of government money under the authority of an appropriation Act to run its operations. When the government related entity uses the funds allocated to purchase supplies to run its operations, those further payments are not covered by paragraph 9-15(3)(c) unless the terms of the appropriation specify that the payment made by the entity can only be made to a government related entity….

18. The fact that the government related entity may not have a choice of supplier other than a government related entity is not sufficient to make the payment for that supply 'specifically covered by an appropriation'. For the payment to be specifically covered' the terms of the appropriation need to specify that the payment can only be made to a government related entity.

Under the Commonwealth Act, tabled providers are eligible for grants to promote equality of opportunity. Tabled providers include entity E as well as entity A, B, C and D. Entity E is not a government related entity. The Commonwealth Act contemplates that the Minister may approve a grant to a body that is eligible for such a grant. Since an eligible body includes entity E it follows that a grant may be approved for both a government and non-government related entity.

As the payment in question could, under the terms of the relevant appropriation, have been payable to either a government or non-government related entity, former paragraph 9-15(3)(c) of the GST Act did not apply.

Accordingly, the Allocation payments made by entity A to entity B and the other Consortium Members did not satisfy the second requirement of former paragraph 9-15(3)(c) of the GST Act and as such, the payments came within the statutory definition of consideration under subsection 9-15(1) of the GST Act.

On the facts provided, entity B and the other Consortium Members treated the Allocation payments made by entity A as consideration for taxable supplies made by them to entity A. Entity A treated the acquisition of those taxable supplies as creditable acquisitions and claimed the corresponding ITCs. It would appear that entity A and the other Consortium Members relied on the view expressed in GSTR 2011/2 (withdrawn) and the principles set out in the TT Line case and correctly treated the payments as consideration for taxable supplies. The view expressed in GSTR 2011/2 (withdrawn) was able to be relied upon for payments made before 1 July 2012.

As a transitional arrangement for the withdrawal of GSTR 2006/11 and before GSTR 2011/2 (withdrawn) was issued taxpayers were able to rely on the Commissioner's view on the operation of former paragraph 9-15(3)(c) of the GST Act as expressed in GSTR 2006/11 (withdrawn) for payments made before 1 July 2012.

If a supplier relied on GSTR 2006/11 (withdrawn) to determine that the former paragraph 9-15(3)(c) applied to a payment made for a supply, then no GST was payable on the supply. This meant that the recipient could not claim an ITC in respect of that payment. GSTR 2006/11 (withdrawn) was not withdrawn until 1 July 2012 to allow affected entities time to make changes to their practices and systems.

Question 2: Were payments made by entity A to entity B on or after 1 July 2012 consideration for a taxable supply?

Subsection 9-17(3) of the GST Act replaced the former paragraph 9-15(3)(c) of the GST Act with effect from 1 July 2012 and is considered for those Allocation payments made by entity A on or after 1 July 2012.

The effect of subsection 9-17(3) of the GST Act is that a payment does not constitute the provision of consideration if the payment satisfies the following three prerequisites:

• 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 is calculated on the basis that the non-commercial test is satisfied (paragraph 9-17(3)(c) of the GST Act).

Government related entity

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. As already determined, undertaking the obligations to comply with the FACs etc under the terms of the Agreement come within the definition of a supply under section 9-10 of the GST Act by entity B and the other Consortium Members.

Having determined that entity A, B, C and D are government related entities and that the Allocation payments made by entity A to entity B, are for making the supplies in question, the Allocation payments made by entity A on or after 1 July 2012 to entity B satisfied the first prerequisite of subsection 9-17(3) of the GST Act.

Appropriation under an Australian law

The second requirement of subsection 9-17(3) of the GST Act to consider is whether the payments made by entity A to each of entity B and the other Consortium Members 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.

The Commonwealth Act confirms that all amounts payable by the Commonwealth under that Act have been appropriated accordingly. Thus, the Grant approved by the Minister's delegate is a payment covered by an appropriation under an Australian law (Commonwealth Act).

Once the funds have left the consolidated fund, further payments using those funds are less likely to be covered by an appropriation. This raises the issue of whether the payments by entity A to entity B and the other Consortium Members are covered by an appropriation under an Australian law.

Consideration of all aspects of the arrangements between the Department, entity A and entity B and each of the other Consortium Members under the Funding Agreement and SF Agreements indicate that Allocation payments made by entity A to entity B and each of the other Consortium Members is covered by an appropriation under an Australian law.

Factors that point to that include:

• the allocations made by entity A to entity B and the other Consortium Members were sourced from funds that were covered by an appropriation. The allocation of the Grant by the Minister to entity A under the Funding Agreement refer to the other Consortium Members

• the Allocations made by entity A to the other Consortium Members are accounted for separately by entity A from funds from other sources (Funding Agreement) and are effectively quarantined and separately accounted for from its other funds

• entity A is not entitled to use the Funds as it sees fit but must expend the Funds for the purpose they were granted that is to undertake the Project (Funding Agreement), and

• each of the other Consortium Members by virtue of the SF Agreement must comply with the FACs as if it were the party defined as the 'Recipient' in the Funding Agreement in place of entity A.

Accordingly, the second prerequisite of subsection 9-17(3) of the GST Act is also satisfied.

Non-commercial test

The third prerequisite of subsection 9-17(3) of the GST Act to consider (referred to as the non-commercial test) is whether the Allocation 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 (other Consortium Members) anticipated or actual costs of making those supplies (paragraph 9-17(3)(c) of the GST Act).

This is achieved by requiring that the payment for the supply in question (undertaking the obligations and Project Activities under the Agreement) 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 the obligations or any other related supply, does not exceed the suppliers (entity B and the other Consortium Members) 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.

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.

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.

On the facts provided, the Allocation payments by entity A to entity B and each of the other Consortium Members is based on the estimated costs of undertaking the Project in accordance with the Project Budget set out in Part B.

Each Consortium Members' anticipated costs in undertaking their obligations in relation to the Project were calculated and included in the Grant application submitted to the Department. The Project Budget confirms that the funding received from the Commonwealth and then allocated by entity A only reflects the anticipated costs of the Consortium Members. There is not expectation by any of the Consortium Member of any surplus or commercial profit.

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

As all the requirements of subsection 9-17(3) of the GST Act are satisfied in relation to the Allocation payments made on or after 1 July 2012 by entity A to entity B, C and D those payments are not the provision of consideration.

This means, that the supplies made by entity B are not taxable supplies under section 9-5 of the GST Act. Consequently, the corresponding acquisitions of those supplies are not creditable acquisitions and do not give rise to an entitlement to ITCs.

Question 3: If the payments were incorrectly treated as consideration for a taxable supply, will the Commissioner allow parties to preserve the status quo?

Miscellaneous Taxation Ruling MT 2010/1 sets out the Commissioner's views on the operation and effect of subsection 105-65(1) of Schedule 1 to the TAA provides that the Commissioner need not give a refund of an amount or apply an amount if an entity overpaid the amount, or the amount was not refunded to an entity, because:

(a) a supply was treated as a taxable supply, or an arrangement was treated as giving rise to a taxable supply, to any extent

(b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent, and

(c) either :

• the Commissioner is not satisfied that the entity has 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

• 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.

Where subsection 105-65(1) of Schedule 1 to the TAA applies the Commissioner need not give an entity a refund of the amount or apply the amount under the relevant RBA provisions. However, the words 'need not' indicate the Commissioner may choose to pay a refund in appropriate circumstances, even though the conditions in paragraphs 105-65(a), (b) and (c) of Schedule 1 to the TAA are satisfied.

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

For subsection 105-65(1) of Schedule 1 to the TAA to apply, there must first be an amount of incorrect GST (arising from a supply or arrangement being wrongly treated as a taxable supply to any extent). The incorrect GST must result in:

• an overpaid amount - because the assessed net amount the entity paid was more than its amended net amount for the tax period, or

• an amount not refunded because the assessed net amount paid to the entity was less than the amended assessed net amount payable to it.

The word overpaid as used in paragraph 105-65(1)(a) of Schedule 1 to the TAA is not a defined term so it takes its normal meaning. In the present case there has been an overpayment because a payment, as GST, occurred 'where no amount of GST was actually due'.

The supplies made by entity B for which payments were made by entity A after 1 July 2012 were initially treated as taxable supplies on which GST was payable but it has been ascertained that those supplies were not taxable supplies. Consequently entity B overpaid GST on those supplies. Entity B did not reimburse entity A (the recipient) a corresponding amount. Entity A was and is registered for GST and claimed the corresponding ITCs for the creditable acquisitions it made. On the facts provided, should entity B request a refund, subsection 105-65(1) of Schedule 1 to the TAA would apply such that the Commissioner need not refund entity B the overpaid GST.

PS LA 2013/3 (GA) sets out the circumstances when the Commissioner generally does not require the recipient (entity A) to repay the over-claimed ITCs or pay any general interest charge related to the over-claimed ITCs. This is referred to as preserving the 'status quo approach'.

Paragraph 4 of PS LA 2013/3 (GA) sets out the following preconditions that must be satisfied before adopting an approach that preserves the status quo:

(a) a supply has incorrectly been treated as taxable to any extent

(b) the supplier is registered for GST and has overpaid GST

(c) the supplier has issued a tax invoice to the recipient

(d) the recipient has over claimed an input tax credit and would have been entitled to claim that input tax credit if the supply had been a taxable supply

(e) the recipient has treated the acquisition as a creditable acquisition when applying other taxation laws such as the income tax law and the fringe benefit tax law

(f) should the supplier request a refund, subsection 105-65(1) of Schedule 1 to the TAA would apply such that the Commissioner need not refund the supplier the overpaid GST, and

(g) the Commissioner has not given a refund of the overpaid GST to the supplier.

Considering each of these preconditions in turn, on the facts provided:

The prerequisites of paragraph 4 of PS LA 2013/3(GA) are satisfied and preserving the status quo approach will not:

• result in a windfall gain to the recipient or disturb the inherent symmetry in the GST system, or

• produce an unreasonable outcome.

Payments made on or after 1 July 2012

Accordingly, having regard to the whole of the arrangements, it is appropriate for the Commissioner to apply the Commissioner's power of general administration not to disturb those ITCs claimed by entity A and not to take any compliance action to reverse the transaction in the circumstances outlined in paragraph 4 of PS LA 2013/3 (GA) and.

The approach aims to overcome unnecessary administrative and compliance costs for the parties involved in the transaction that would otherwise arise if a reversal of the transactions were to be required.

Payments made before 1 July 2012

The status quo approach will not apply to the ITCs claimed by entity A in relation to acquisitions of supplies made by entity B for which payments were made by entity A prior to 1 July 2012 because those supplies were not incorrectly treated as taxable supplies.