Edited version of your written advice

Authorisation Number: 1051369072005

Date of advice: 22 June 2018

Ruling

Subject: Supply for consideration

Question 1

Are you the entity which will make supplies or acquisitions in respect of the operation of the scheme?

Answer

Yes. For the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are the entity which will make supplies or acquisitions in respect of the operation of the scheme.

Question 2

Are the following amounts, which are payable under the scheme, subject to GST

(a) Contributions to the scheme by an industry participant

(b) Payments of cash surety by an industry participant

(c) Payments to the scheme of amounts recovered from an industry participant

(d) Cash advance by the State to the scheme

(e) Interest earned on the amounts held in the scheme

(f) Interest earned on the cash surety amounts

(g) Assessment and administration fees payable to the scheme by an industry participant?

Answer

No. Each of the amounts payable to the scheme is not subject to GST for the following reasons:

(a) the contribution is not the provision of consideration under Division 81 of the GST Act

(b) on receipt of the cash surety, you are not making a supply to the industry participant; on realisation of the cash surety, you are also not making a supply to the industry participant

(c) the payment of the amount recovered from an industry participant is not consideration for a supply you make

(d) the advance is an input taxed financial supply; the cash itself is not consideration for the input taxed financial supply

(e) the interest earned on the amount held in the scheme is part of the consideration for a financial supply

(f) the interest earned on the cash surety amounts is part of the consideration for a financial supply

(g) the assessment and administration fees are not the provision of consideration under Division 81 of the GST Act.

Question 3

Are the following amounts, which are payable from the scheme, creditable acquisitions

(a) Amounts paid to another State department for costs and expenses incurred where an industry participant fails to comply with its obligations

(b) Return of cash surety payment to an industry participant

(c) Repayments of the State’s advance

(d) Refunds of contributions to an industry participant?

Answer

No. Each of the amounts payable from the scheme is not for a creditable acquisition because each of the payments is not consideration for a supply by the payee.

This ruling applies for the following period:

From 1 July 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You are an Australian government agency.

Pursuant to a State law, you administer a scheme which imposes a fee or charge on an industry to finance regulatory or other government activities connected with the industry.

Participants in the industry pay contributions to the scheme, a cash surety, an assessment fee and an administration fee.

Where a participant of the industry does not comply with its obligations, the participant may be required to pay an amount for the costs and expenses incurred by another State department in performing the participant’s obligations. You pay the other State department with funds from the scheme or by realising the cash surety amount.

The State advances money to you, which are repayable on terms determined by the State.

Funds held in the scheme and the cash surety are deposited in an account held with an Australian authorised deposit-taking institution and interest may be earned on those funds.

The cash surety is refundable to the industry participant unless it is realised to recover the cost and expenses incurred by the other State department where the participant did not comply with its obligations.

A pro-rata refund of the contribution by an industry participant is payable where there is a change in the participant during 12 months after the contribution was paid.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 149

A New Tax System (Goods and Services Tax) Act 1999 Division 81

A New Tax System (Goods and Services Tax) Act 1999 section 40-5

Reasons for decision

Question 1

Section 184-1 of the GST Act defines the term ‘entity’ to include a body politic. It includes the Crown in right of the Commonwealth, a State or Territory. A department of the Commonwealth, State or Territory is not a body politic in its own right. Instead, it is part of an entity that is the larger body politic of the Commonwealth, State or Territory. As such, a department of a State is not an entity under section 184-1 of the GST Act.

Division 149 of the GST Act provides a special rule for government entities. A government entity is defined to include a department of a State.

As you are a department of the State, you are not an entity under section 184-1 of the GST Act. However, Division 149 of the GST Act applies to you. Therefore, for the purposes of the GST Act, you are the entity that will make supplies or acquisitions in respect of the operation of the scheme.

Question 2

Broadly, a supply is subject to GST if the supply is a taxable supply. Relevantly, under section 9-5 of the GST Act, an entity makes a taxable supply if the entity makes a supply for consideration. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Contribution to the scheme, assessment fee and administration fee

Division 81 of the GST Act and the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) provide that certain payments are not the provision of consideration.

Pursuant to GST Regulation 81-15.01(1), certain fees and charges do not constitute consideration. Relevantly, it lists the following at:

● Item (c) – a fee or charge imposed on an industry to finance regulatory or other government activities connected with the industry

● Item (f) – a fee or charge for a supply of a regulatory nature made by an Australian government agency.

The contributions by industry participants, the assessment fee and the administration fee are not the provision of consideration under Division 81 of the GST Act. Therefore, these amounts are not subject to GST because you are not making a taxable supply as there is no consideration present.

Cash surety

The cash surety is refundable to the industry participant. This is akin to the payment of a bond to secure the performance of a particular outcome. However, the cash surety is realised where another State department incurs costs and expenses if the participant does not comply with its obligations. In both of these instances, you are not making a supply to the industry participant. Therefore, these amounts are not subject to GST because of the absence of a supply being made.

Amount recovered from an industry participant

In circumstances where an amount is recovered from an industry participant for the costs and expenses incurred by another State department where the participant failed to comply with its obligations, the amount is not consideration for any supply that you make.

Therefore, the payment of the amount to you is not subject to GST because of the absence of a supply being made.

In addition, the amount recovered is not an adjustment event that causes a change in consideration under paragraph 19-10(1)(b) of the GST Act. There cannot be a change in consideration for a supply because the initial payment by you, as outlined in the answer to Question 3 item (a), is itself not consideration for a supply.

Advance from the State

The amount the State will advance to you is repayable on terms the State considers appropriate. The advance by the State will be made pursuant to an enactment and paid out of the consolidated fund.

Although the payment of the advance is made by one government entity to another and is covered by an appropriation under an Australian law, subsection 9-17(3) of the GST Act does not apply to the payment because the payment is not for a supply. Consistent with loan arrangements, the amount lent is not consideration for a supply. Therefore, the advanced amount itself is not subject to GST because it is not consideration for a supply.

However, the arrangement is covered by Item 2 in the table in Regulation 40-5.09(3) of the GST Regulations.

By making the advance, you provide an interest in a debt to the State and the State provides an interest in a credit arrangement to you. The interest in the debt created by you is money as defined in section 195-1 of the GST Act. The interest in the debt is monetary consideration for the supply of an interest in a credit arrangement by the State. [paragraph 40 of GSTR 2002/2]

Pursuant to section 40-5 of the GST Act, the arrangement is an input taxed financial supply and is not subject to GST.

Line no. B27 in the table in Schedule 2 of GSTR 2002/2 states that the advancement and repayment of principal occurs under an agreement for a loan but is not itself a financial supply.

Interest earned by the funds in the scheme and the cash surety

The amounts held in the scheme and the cash surety are held by you in an account made available by an Australian authorised deposit-taking institution (ADI). The ADI may periodically pay interest on the balance held in the accounts.

Item 1 in the table in Regulation 40-5.09(3) lists an interest in an account made available by an ADI in the course of its banking business as an input taxed financial supply. The interest paid by the ADI to the account holder is part of the consideration for the financial supply. [Line no. 121 in the table in Schedule 2 of GSTR 2002/2]

Therefore, the interest earned on the amounts held in the scheme and the cash surety is consideration for an input taxed financial supply and is not subject to GST.

Question 3

A recipient of a supply makes a creditable acquisition if, among other things, the supply to the recipient is a taxable supply. Relevantly, under section 9-5 of the GST Act, a supplier makes a taxable supply if the supplier makes a supply for consideration.

Payments to the other State department

In circumstances where funds from the scheme are provided to meet the cost and expenses incurred by the other State department, that other State department is not making a supply to you because the other State department is not doing anything for you in return for the payment. You simply provide funding pursuant to the law that establishes the scheme.

As the other State department is not making a supply to you, your payment of the amount does not result in a creditable acquisition.

Return of the cash surety

As stated above, you are not making a supply to the industry participant when cash surety is given because the payment is akin to the payment of a bond.

Similarly, on return of the cash surety to the industry participant, you are not making an acquisition from the participant who is simply getting back the cash surety it initially paid.

Therefore, on return of the cash surety, you are not making a creditable acquisition.

Repayment of the advance from the State

As stated above, the arrangement is covered by Item 2 in the table in Regulation 40-5.09(3) of the GST Regulations.

Line no. B27 in the table in Schedule 2 of GSTR 2002/2 states that the advancement and repayment of principal occurs under an agreement for a loan but is not itself a financial supply. Line no. B28 confirms that the repayment of the principal is not consideration for the provision, acquisition or disposal of an interest under Regulation 40-5.09(3) of the GST Regulations.

Therefore, you are not making a creditable acquisition when repaying the advance because the repayment is not consideration for a supply.

Refund of a contribution

As stated above, the contribution to the scheme is not the provision of consideration under Division 81 of the GST Act.

In circumstances where contribution is refunded to an industry participant, the refund is also not consideration for a supply. The industry participant is not making a supply to you as the participant is merely getting back money that it initially paid to you.

In addition, there is no adjustment event under paragraph 19-10(1)(b) of the GST Act upon refund of any amount of the contribution. As the contribution is not the provision of consideration, any refund of the amount cannot result in a change in consideration because there is no consideration that can change to begin with.