Edited version of your written advice

Authorisation Number: 1012972304133

Date of advice: 19 February 2016

Ruling

Subject: Grants and GST

Question

Is Entity A liable to pay Goods and Services Tax (GST) on the payment that it has received from Entity B?

Answer

No

Relevant facts and circumstances

Background

Entity A is a not-for-profit incorporated community association committed to providing services for young people and their families.

Entity A is a deductible gift recipient (DGR) and is registered for GST.

The grant from Entity B

Entity A submitted an application to Entity B seeking financial assistance to support the establishment of a project. The application was successful and Entity A received a payment from Entity B.

The grant from Entity B was however subject to the following conditions:

1. The Grantee will use the whole of the Grant exclusively for the Project as described in the application for the grant and not for any other purpose.

2. The Grantee will use its best endeavour to complete the Project within 12 months from the date of receipt of the Grant (the 'Specified Period').

3. The Grantee will promptly advise the Grantor of any material change which may affect the Grantee's ability to undertake or complete the Project within the Specified Period.

4. The Grantee will expend the Grant only within Australia and where specified within the particular State or Territory.

5. The Grantee will show the Grant separately in its books of account and keep records adequate to enable the use of grant funds to be checked readily.

6. The Grantee may acknowledge the assistance of the Grantor in any published or display material.

7. The Grantee will give the Grantor a final report at the end of the Specified Period and, if the Project is completed after the Specified Period, within two months of the completion of the Project. The Report will include:

(a) The brief description of the Project as submitted in the application.

(b) A brief description of the Project at the time of the report.

(c) A brief outline of any changes which were made to the Project as described originally.

(d) A brief outline of the reasons for any changes which were made to the Project.

(e) A signed and dated statement of expenditure showing:

• The amount received;

• Details of the amounts expended on the Project;

• The balance remaining at date of the report and the Grantee's intention in relation to unspent funds;

• Short term outcomes and projected long term outcomes;

• Project evaluation method;

• Problems, if any, associated with the Project;

• Description of any media coverage received; and

• Will the Project be continuing in any form.

Relevant legislative provisions

A New Tax System (GST) Act 1999 section 9-5

A New Tax System (GST) Act 1999 section 9-10

A New Tax System (GST) Act 1999 subsection 9-15(1)

A New Tax System (GST) Act 1999 section 9-17

A New Tax System (GST) Act 1999 section 9-40

Reasons for decision

Summary

Entity A is not liable to pay GST on the grant from Entity B because it has not made a taxable supply in connection with the receipt of the payment.

Detailed reasoning

Section 9-40 of the A New Tax System (GST) Act 1999 (the GST Act) provides that you must pay GST on any taxable supply that you make.

Taxable Supply

Under section 9-5 of the GST Act, you make a 'taxable supply' if all of the following conditions are satisfied:

• you make the supply for consideration; and

• the supply is made in the course or furtherance of an enterprise that you carry on; and

• the supply is connected with the indirect tax zone, 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.

You make the supply for consideration

The first condition that must be satisfied under section 9-5 of the GST Act is that 'you make the supply for consideration'.

Supply

The definition of 'supply' provided by section 9-10 of the GST Act includes 'any form of supply whatsoever', such as the 'supply of goods', or the 'supply of services', or 'a provision of advice or information', or 'an entry into…an obligation… to do anything'.

In accordance with the conditions imposed in return for the grant from Entity B, Entity A is required, amongst other things, to prepare separate books of account documenting the usage of funds and provide Entity B with a report detailing the project outcomes.

Given the broad definition of 'supply', the acts or things required to be undertaken by Entity A as part of the grant conditions are likely to satisfy the statutory definition of a supply.

Consideration

The term 'consideration' is defined in subsection 9-15(1) of the GST Act and includes any payment, or any act or forbearance, in connection with a supply of anything.

On face value, but without further consideration of any specific exceptions (such as those contained in section 9-17 of the GST Act), the grant from Entity B would fall within the definition of 'consideration'.

Sufficient nexus

However, for a grant to be consideration for a supply, it is not sufficient for there to be a supply and a payment. The grant must be consideration 'for' that supply. There must be a sufficient nexus between the grant made by the payer and a supply made by the payee. A grant is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. This test is an objective one.

In identifying the character of the connection, the word 'for' ensures that not every connection between supply and consideration meets the requirements for a taxable supply. That is, merely having any form of connection of any character between a supply and payment of consideration is insufficient to constitute a taxable supply.

Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2), outlines the Commissioner's view on when a grant is consideration for a supply.

Taking into consideration the key conditions attaching to the grant from Entity B, the following parts of GSTR 2012/2 are considered relevant in the current circumstances:

• Using the grant for the specified purpose

Whether using grant money for a specific purpose will amount to a supply will depend on whether there is a binding obligation created or only a mere expectation. In this regard, paragraph 119 of GSTR 2012/2 notes:

…Where the financial assistance payment is made in circumstances where a party expects that something will be done, and it does not involve a binding obligation or the supply of goods, services or some other thing, there is no supply. The mere expectation that an act or event will happen is not sufficient to establish a supply.

• Requirement to report on how the grant money was used.

Paragraph 132 of GSTR 2012/2 states:

Things are often supplied by the payee to the payer that are merely part of the mechanism of making or accounting for the financial assistance payment. These things are considered to form part of the circumstance in which a supply is made but are not of themselves the supplies for which the consideration is provided.

• Acknowledgment of grant

Paragraph 32 of GSTR 2012/2 explains that:

Where, in return for a grant, the payee promoted the payer's business through promotional material, programs or uniforms or advertises the business at events and in the media, the payment will have a sufficient nexus with the supply of the promotion and advertising. That is, the grant is in return for the promotion or advertising.

However paragraph 38 of GSTR 2012/2 notes that 'the mere acknowledgement of the financial assistance payment is not an act which has the character of advertising, or promoting the company'.

Application to your agreement with Entity B

Applying the guidance provided by GSTR 2012/2 to the current circumstances, it is considered that the conditions imposed on Entity A as part of the agreement with Entity B (and in particular those restricting the use of funds provided, acknowledging the grant and the requirement to prepare and provide a final report primarily accounting for the use of the funds) are not supplies that are made 'for' the grant. Viewing the arrangement as a whole, it is considered that there is an insufficient nexus between the grant provided and any supply made by Entity A 'for' that grant.

As the first condition in section 9-5 of the GST Act i.e. that you make the supply for consideration is not satisfied, Entity A is not making a taxable supply and consequently is not liable to pay GST on the grant from Entity B.