Edited version of your written advice

Authorisation Number: 1012875329603

Date of advice: 24 September 2015

Ruling

Subject: GST and payments by one government related entity to another for a supply

Question 1

Are the payments (with exception of payments between members of a GST group) for supplies not the provision of consideration under subsection 9-17(3) of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act)?

Answer

Yes, the payments (with the exception of payments between members of a GST group) are not the provision of consideration under subsection 9-17(3) of the GST Act.

Question 2

Are the supplies (with exception of supplies between members of a GST group) for which the payments are made, taxable supplies under section 9-5 of the GST Act on which goods and services tax (GST) is payable?

Answer

No, the supplies (with exception of supplies between members of a GST group) are not taxable supplies under section 9-5 of the GST Act on which GST is payable. This is because the payments do not constitute the provision of consideration under subsection 9-17(3) of the GST Act.

The payments and supplies made between members of a GST group are outside the scope of the question because paragraph 48-40(2)(a) of the GST Act provides that supplies between members of the same GST group are treated as if they are not taxable supplies

Relevant facts and circumstances

Each of the entities is registered for GST and undertake activities on behalf of a State government.

In the course of carrying out their respective functions, each of the entities may make payments to other entities for various 'things'. None of the supplies the subject of this ruling are GST-free or input taxed and all of the various things supplied by each of the entities to one another satisfy the definition of a 'supply'.

The expenditure of public funds by each of the entities is governed by various legislative provisions in State Acts.

The entities only make payments which are authorised under the relevant statute.

Each entity is subject to an internal policy which requires that any payment made by a entity is calculated on the basis that the sum of the payment and anything that the entity supplier receives from another entity in connection with the supply or for any other related supply does not exceed the entity supplier's anticipated costs or actual costs of making those supplies.

That is the amounts of all payments are set on a cost recovery basis with amounts calculated so as to cover the relevant entity's expected costs. None of the entities aim to make a commercial profit from their operations.

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 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 subsection 9-17(3)

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

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 on which GST is payable under section 9-5 of the GST Act if, amongst other things, 'you make a supply for consideration'.

Section 9-10 of the GST Act includes in the meaning of 'supply' a supply of goods, a supply of services, a provision of advice or information, the creation, grant…of any right, and an entry into, or release from an obligation to do anything…or any combination of any 2 or more of these matters.

On the facts provided the 'things' supplied by each of them to one another come within the definition of a supply under section 9-10 of the GST Act.

In this case, each entity is registered for GST and making supplies to one another within the indirect tax zone in the course of carrying out their respective operations and functions. In addition, supplies are neither GST-free or input taxed. Therefore, the issue that arises under section 9-5 of the GST Act is whether the supplies were made for 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, in response to or for the inducement of a supply of anything.

On the facts provided the payments made by each entity is for the supplies and, as such, are clearly a payment 'in connection with' the supply.

Therefore, unless the exception in subsection 9-17(3) of the GST Act applies, the payment made for an supply would fall within the statutory definition of consideration under subsection 9-15(1) of the GST Act and, where the other requirements of a taxable supply are satisfied, GST would apply.

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, and

• the payment is covered by an appropriation under an Australian law, and

• the payment satisfies what is referred to in this ruling as the non-commercial test.

The first requirement of subsection 9-17(3) of the GST Act is that the payment must have been made by one 'government related entity' to another 'government related entity' for making a supply. As determined above, the payment is made for a supply so the issue is whether each of the entities comes within the definition of a 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 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:

…

(d) a Department of State of a State or Territory, or

(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 the first four dot points above or of another organisation of the kind described in this paragraph.

There is no issue that the entities are government related entities.

On the facts provided, the payments are made by one government related entity to another government related entity for making an supply and as such, the first requirement of section 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 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 a payment must be covered by an appropriation under an Australian law is met if the payment is made pursuant to an appropriation.

In the ATO publication entitled 'GST and payments between government related entities - overview' an appropriation under an Australian law is said to mean a segregation of funds from the consolidated revenue fund by, amongst other things, a statute of the state or delegated legislation. An appropriation is not in itself a payment rather it is the legislative segregation of funds from the Consolidated Revenue Fund.

The term 'Australian law' is defined in section 195-1 of the GST Act as having the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The ITAA 1997 relevantly defines an Australian law to include a State law. The State Appropriation Act, the State Act and related regulations and the PF Act are State laws and therefor Australian laws.

Accordingly, payments made by the entities to one another for supplies are covered by an appropriation under an Australian law and as such, satisfy the requirements of paragraph 9-17(3)(b) of the GST Act.

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 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 the entity supplier's 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 an entity supplier from another entity is taken into account in determining whether the sum of the payment and things received by the entity supplier in connection with the supply does not exceed its anticipated or actual costs of making the supply.

The EM explains at paragraph 2.31 that:

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.

On the facts provided, the entities are subject to an internal policy where the amounts of all payments are calculated so as to cover and not exceed the anticipated costs of the relevant entity making the supply. That is, all payments are set on a cost recovery basis. If that is the case then paragraph 9-17(3)(c) 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 entities to one another for the supply are not the provision of consideration.

Question 2

An essential requirement for a taxable supply under section 9-5 of the GST Act is that there is a 'supply for consideration'.

As determined above, subsection 9-17(3) of the GST Act operates to preclude the payments from constituting consideration and as such, there is no 'supply for consideration'.

It follows, therefore, that the supplies made by each entity to one another for payments are not taxable supplies on which GST is payable under section 9-40 of the GST Act.