Edited version of your written advice

Authorisation Number: 1051405890901

Date of advice: 3 August 2018

Ruling

Subject: GST, appropriations and financial assistance payments

Question 1

Are the payments received by Entity A (you) from Entity B, that are credited to an account (Account A), subject to GST?

Answer 1

No, the payments received by you from Entity B, that are credited to Account A, are not subject to GST.

Question 2

Are the amounts that you credit to an account (Account B) from Account A subject to GST?

Answer 2

No, the amounts that you credit to Account (B) from Account A are not subject to GST.

Question 3

Are you making a creditable acquisition from Entity C when you make a payment to Entity C under a Memorandum of Understanding (MOU) for the implementation of a program?

Answer 3

No, you are not making a creditable acquisition from Entity C when you make a payment to Entity C under a MOU for the implementation of a program and you are not entitled to an input tax credit.

Relevant facts and circumstances

You are a department of the Government of a State and you are registered for GST.

You have certain responsibilities and functions for the State.

Pursuant to State legislation you receive certain funds from Entity B that are credited to Account A which is established and maintained by you.

Entity B was established under State legislation and has certain responsibilities and functions for the State.

Pursuant to State legislation you credit certain amounts to Account B, which is established and maintained by you, from Account A.

You entered into a MOU with Entity C for the implementation of a program.

You make payments to Entity C in accordance with the provisions of the MOU.

The MOU contains certain relevant information.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision

Question 1

Are the payments received by you from Entity B, that are credited to Account A, subject to GST?

Detailed reasoning

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.

Subsection 7-1(1) provides that GST is payable on taxable supplies. Under section 9-5 one of the requirements for making a taxable supply is that you make a supply for consideration.

Therefore, to determine if you have made a taxable supply for which you received the payment, it is first necessary to consider whether you have made a supply for consideration. In your case, subsection 9-17(3) is relevant in examining if the payment is consideration for a supply.

Subsection 9-17(3) is intended to ensure that non-commercial activities of government related entities are not subject to GST. This is achieved by treating a payment which meets certain conditions as not being the provision of consideration and therefore not subject to the basic GST rules.

Under subsection 9-17(3), a payment is not the provision of consideration where the payment:

● is made by a government related entity to another government related entity for making a supply

● is covered by an appropriation under an Australian law, and

● satisfies a non-commercial test.

Government related entity

The first condition of subsection 9-17(3) is that the payment must be made by a government related entity to another government related entity for making a supply.

The term ‘government related entity’ is defined in section 195-1 and includes:

● a Department of State of a State or Territory

● an entity established by a state (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 entity.

For the purposes of this ruling, we accept that Entity B is a government related entity because Entity B:

● was established under State legislation

● was established by a State to carry on an enterprise, or is established for a public purpose, and

● can be separately identified by reference to the nature of the activities it carries on.

You are a government related entity as you are a department of a State.

As you receive a payment from Entity B, the payment made to you is a payment made between government related entities.

Payment covered by an appropriation

In relation to the second condition in subsection 9-17(3), it is necessary to determine if the payment is covered by an appropriation under an Australian law.

Relevant guidance is contained in the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No.1) Bill 2012 (EM). In particular, clause 2.17 of the EM explains that a payment is covered by an appropriation under an Australian law if the payment is made pursuant to an appropriation.

An appropriation is not in itself a payment. Payments cannot be drawn from a government’s consolidated revenue fund unless the funds for which the payment is for have been appropriated for that purpose.

In relation to the payment you receive, the appropriation for the expenditure of money has occurred via State legislation which specifies amounts appropriated from consolidated revenue to Account A.

We accept that appropriation of expenditure of money has occurred via State legislation as a statute of the Government of a State.

Therefore, the payment is ‘covered’ by an appropriation under an Australian law.

Non-commercial test

The third condition of subsection 9-17(3) is that the payment must satisfy a non-commercial test.

The test is that the payment is calculated on the basis that the sum of the payment received by the government related entity supplier and anything else received by it from another entity in connection with the supply (or any other related supply), does not exceed the actual or anticipated costs of making those supplies.

In your case, the amount of the payment is calculated on the basis expressed in the State legislation as being a certain amount. The amount does not exceed the actual or anticipated costs of any supplies you make.

Therefore, the non-commercial test is satisfied.

Conclusion

In summary, we consider the payment satisfies the conditions set out in subsection 9-17(3). Specifically, the payment:

● is made by a government related entity to another government related entity, being paid by Entity B to you

● is covered by an appropriation under an Australian law, being State legislation, and

● has been calculated on the basis that the payment does not exceed your anticipated or actual costs of making the supply.

Therefore, the payment is treated as not being the provision of consideration.

As you have not made a supply for consideration for the purposes of section 9-5, the payment is not consideration for a taxable supply and is not subject to GST.

Question 2

Are the amounts that you credit to Account B from Account A subject to GST?

Detailed reasoning

Pursuant to State legislation you have established and maintain Account B which you credit with certain amounts from Account A, also established and maintained by you.

The crediting of the amount is merely a transfer you make between two of your accounts.

Goods and Services Tax Ruling GSTR 2006/9 provides guidance in relation to the meaning of ‘supply’ and explains, at paragraph 55, that an entity cannot make a supply to itself.

Therefore, the crediting of the amount is not subject to GST.

Question 3

Are you making a creditable acquisition from Entity C when you make a payment to Entity C under a MOU for the implementation of a program?

Detailed reasoning

Under section 11-20, you are entitled to the input tax credit (ITC) for any creditable acquisition that you make.

Under section 11-5 one of the requirements for making a creditable acquisition is that the supply of the thing to you is a taxable supply.

Under section 11-10 an acquisition is not just a supply of goods or services. Acquisitions can also be made in relation to rights and information for GST purposes.

Generally, for each acquisition there is a corresponding supply. Goods and Services Tax Ruling GSTR 2006/9 provides guidance in relation to the meaning of ‘supply’ and explains, at paragraph 53, that the meaning of ‘acquisition’ in section 11-10 is the corollary of the meaning of ‘supply’ in section 9-10.

Supply

Under section 9-5 one of the requirements for making a taxable supply is that you make a supply for consideration.

Under section 9-10 a supply is not just a supply of goods or services. Supplies can also be made in relation to rights, obligations and information for GST purposes. Under section 9-15 the term ‘consideration’ is broadly defined as including any payment, or any act or forbearance, ‘in connection with’, ‘in response to’ or ‘for the inducement’ of a supply.

Therefore, to determine if you are making a creditable acquisition from Entity C, we must first analyse if Entity C is making a supply to you for which the payments you make under the MOU are consideration.

Financial assistance payments

Goods and Services Tax Ruling GSTR 2012/2 provides guidance on when a financial assistance payment is consideration for a supply. The term ‘financial assistance payment’ is intended to encompass a wide range of payments and includes payments made to provide support or aid to the payee.

In your circumstances, the payments you make are considered to be financial assistance payments. The payments are made to provide support to Entity C in its purpose of implementing a program.

An entity that receives a financial assistance payment is liable for GST in respect of that payment if the entity has made a taxable supply in accordance with section 9-5.

In the context of financial assistance payments, paragraph 15 of GSTR 2012/2 explains that for a payment to be consideration for a supply there must be a sufficient nexus between the payment made by the payer and a supply made by the payee. The payment is consideration for a supply if the payment is ‘in connection with’, ‘in response to’ or ‘for the inducement of’ a supply under an objective test.

Further, in establishing if there is a sufficient nexus between a payment and a supply, paragraphs 15A and 16 of GSTR 2012/2 explain that not every connection between supply and consideration meets the requirements for a taxable supply. Reference is to be made to all of the surrounding circumstances of the arrangement, in particular any written documentation. The circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must be considered as a whole.

In your circumstances, the MOU provides that you will make payments to Entity C to assist Entity C to deliver the program for the term of the agreement.

However, the MOU also provides that Entity C is to do something in relation to the support you provide. For example, in relation to publicity, the MOU provides that Entity C is to acknowledge the support received in any publication, promotional or publicity material, or advertising by Entity C about the program, as directed by you from time to time.

Relevant guidance in relation to acknowledgement of financial assistance payments, in circumstances where there is insufficient nexus between the payment and a supply, is provided in Example 5 at paragraphs 37 to 39 of GSTR 2012/2. Consistent with the principle contained in this guidance, we consider the publicity provided by Entity C is mere acknowledgement of the payments you make as support and is not an act which has the character of advertising or promoting you.

In addition, in the table at paragraph 144 of GSTR 2012/2, an example of circumstances where a payment is made but a supply has insufficient nexus is provided at page 27 which states:

The only supply the payee makes is acknowledging the payment received;….

Other conditions of funding specified in the MOU in relation to reporting and acquittal requirements are considered to be part of the mechanism of making or accounting for the financial assistance payment. In accordance with the guidance at paragraphs 132 and 133 of GSTR 2012/2, these things are considered to form part of the circumstance in which a supply is made but are not of themselves supplies for which the payment is made.

Further, although the MOU provides for repayment of funding in certain circumstances and the entry of Entity C into this obligation meets the statutory definition of ‘supply’, consistent with the guidance at paragraphs 134 to 137 of GSTR 2012/2 the payment you make to Entity C is not consideration for that supply.

As there is nothing else supplied to you by Entity C, the payments you make are not in connection with, in response to or for the inducement of a supply. Rather, the purpose of the payments is to facilitate Entity C’s work in delivering the program.

As Entity C is not making a supply for consideration, there is no supply to you that is a taxable supply under section 9-5. Therefore, you are not making a creditable acquisition under section 11-5.

Consequently, you are not entitled to an ITC under section 11-20 when you make the payments under the MOU to Entity C.