Edited version of your written advice

Authorisation Number: 1051512067356

Date of advice: 13 May 2019

Ruling

Subject: GST on payments received

Question 1

Are the payments received by you from a government department (Department 1), under Agreement 1, subject to goods and services tax (GST)?

Answer 1

Yes, the payments received by you under Agreement 1 are subject to GST.

Question 2

Are the payments received by you from a government department (Department 2), under Agreement 2, subject to GST?

Answer 2

Yes, the payments received by you under Agreement 2 are subject to GST.

Relevant facts and circumstances

You are registered with the Australian Charities and Not-for-profits Commission and are a not for profit organisation. You are registered for GST.

You entered into Agreement 1 with Department 1 to deliver particular services.

You have provided Agreement 1 which details the obligations of the parties.

You entered into Agreement 2 with Department 2 to deliver particular activities.

You have provided Agreement 2 which details the obligations of the parties.

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 Section 9-40

Reasons for decision

Question 1

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

Under section 9-40 an entity must pay GST on any taxable supply that it makes. Under section 9-5 an entity makes a taxable supply if:

● the entity makes the supply for consideration

● the supply is made in the course or furtherance of an enterprise that the entity carries on

● the supply is connected with Australia, and

● the entity is 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.

This means that where it is established that an entity is making a taxable supply, then the entity is liable to pay GST in relation to the monies received.

The concepts of supply, consideration and nexus are discussed in Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2).

In GSTR 2012/2 the term ‘financial assistance payment’ is intended to encompass a wide range of payments including those made to provide support or aid to the payee and/or a payment provided to support or aid in the implementation of government policy and initiatives. Paragraphs 15 and 16 of GSTR 2012/2 explain that for a financial assistance 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.

A financial assistance payment is consideration for a supply if the payment is ‘in connection with’, ’in response to’ or ‘for the inducement of a supply’. 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. The Commissioner considers that this is an objective test.

In this case, you have entered into Agreement 1 with Department 1 to deliver services for which you receive payment.

A GST liability in relation to such payments turns on identifying:

● one or more supplies made by you, being the entity receiving payment

● establishing that the payment is consideration, and

● a sufficient nexus between the payment and the supply.

Is there a supply?

The term ‘supply’ is defined in section 9-10 as ‘any form of supply whatsoever’, such as ‘a supply of goods’, ‘a supply of services’, ‘a provision of advice or information’ or an ‘entry into…an obligation…to do anything’.

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9), considers several propositions for characterising and analysing supplies.

Of relevance is Proposition 9, which is discussed in paragraphs 102 to 111 of GSTR 2006/9. Paragraph 102 explains that the Commissioner considers that an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other. In other words, the creation of expectations among the parties is not enough to establish a supply.

In the context of financial assistance payments, the types of arrangements considered at paragraph 7 of GSTR 2012/2 include the entry into an obligation to do, or not to do, something and payments made to assist the payee to acquire goods or services.

An example of where there is an ‘obligation to do something’ is given in the table in Appendix 2 of GSTR 2012/2 (paragraph 144). This example states:

Payee enters into an obligation with the payer, under which the payee is required to deliver specified services to the community. The payer makes the payment to the payee for the purpose of those services being delivered in pursuit of the payer’s objects.

It is considered that the services you have agreed to deliver under Agreement 1 are binding obligations and create more than just ‘expectations’ that you will do certain things. Therefore, when the arrangement is viewed as a whole, in providing the services you are making a supply to Department 1 under section 9-10.

Although there are also various other acts or things provided for in Agreement 1 which may satisfy the statutory definition of a supply, unless there is a sufficient nexus between a payment and a supply, there is no taxable supply under the Agreement.

Are the payments consideration?

The term ‘consideration’ is defined in section 9-15 and extends beyond payments to include such things as acts and forbearances. That is, a payment will be consideration for a supply if the payment is ‘in connection with’, ‘in response to’ or ‘for the inducement’ of the supply.

On the facts provided, the payments received are consideration for GST purposes. Therefore, it is necessary to determine whether the payments have a sufficient nexus to the supplies identified under Agreement 1 to constitute payment for those supplies

Sufficient nexus between supply and consideration

It is not enough that there just be a ‘supply’ and ‘consideration’. To satisfy the first requirement of section 9-5, the supply must be for consideration.

Paragraph 180 of GSTR 2006/9 provides factors one would consider in determining whether a payment is consideration and whether there is a supply for consideration. These factors are that:

● the test whether there is a sufficient nexus between the supply and the payment made is an objective one,

● regard needs to be had to the true character of the transaction, and

● an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all the transactions entered into and the circumstances of the transactions.

In entering into the Agreement with Department 1 you became obligated to provide specific services.

Relevant guidance in relation to payments for an entry into an obligation to do something is provided at paragraph 28 of GSTR 2012/2 which states:

28. Where a supply is constituted by the payee entering into an obligation with the payer to do or refrain from doing something and the payment is made to secure that obligation, there is a sufficient nexus between the payment and the obligation. This is because the financial assistance payment is made in connection with, in response to, or for the inducement of the entry into the obligation.

An example of where there is a sufficient nexus for payments for an entry into an obligation is illustrated in paragraphs 29 to 31 of GSTR 2012/2 which states:

29. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art in South Australia. It enters into an arrangement with Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts. Under that arrangement, in return for a financial assistance payment from the Foundation, the troupe enters into a binding agreement under which it is obligated to expand its activities – by presenting three performances outside South Australia during the following year.

30. By entering into this obligation to present three performances outside South Australia, the troupe has made a supply to the Foundation. The payment by the Foundation has been made in connection with, in response to, or for the inducement of this supply. Therefore, there is a sufficient nexus between the entry into the obligation and the financial assistance payment such that the financial assistance payment is consideration for that supply.

31. Snake Glass Jugglers is liable for GST on the supply of the entry into the obligation. The Gooseville Arts Foundation is entitled to an input tax credit on their acquisition of the right to require Snake Glass jugglers to present the performances.

You submit a tax invoice to Department 1 as soon as practicable after the completion of the services. You receive payment from Department 1 once you provide the services and fulfil the obligations as set out in Agreement 1.

As payment is made for the services you provide, consistent with the guidance provided at paragraphs 28 -31 of GSTR 2012/2, it is considered that there is sufficient nexus between the specific services provided and the payment made by Department 1. As such, the payment is made in connection with, in response to or for the inducement of a supply made by you.

Therefore, the payment from Department 1 is consideration for a supply that you make under Agreement 1. Consequently, the first requirement of section 9-5 (a supply for consideration) is satisfied.

However, in order for the payment to be consideration for a taxable supply all of the other requirements of section 9-5 must be satisfied. In relation to these other requirements, the supply made by you is made in the course or furtherance of your enterprise, the supply is connected with Australia and you are registered for GST. There are no provisions in the GST Act that would make the supplies made GST-free or input taxed.

Therefore, as all of the requirements of section 9-5 are satisfied the payments from Department 1 are consideration for a taxable supply. Consequently, you are liable to remit GST in relation to the payments received.

Question 2

Detailed reasoning

In this case, you have entered into Agreement 2 to deliver the activities as detailed in the Agreement for which you receive funding.

As discussed in the answer to Question 1 above, a financial assistance payment is consideration for a supply if the payment is ‘in connection with’, ’in response to’ or ‘for the inducement of a supply’.

Is there a supply?

In this case, in entering into the Agreement with Department 2 you became obligated to do something.

For reasons similar to those provided in the answer to Question 1 above, it is considered that the activities you have agreed to deliver under Agreement 2 are binding obligations and create more than just ‘expectations’ that you will do certain things. Therefore, when Arrangement 2 is viewed as a whole, in delivering the activities as detailed you are making a supply to Department 2 under section 9-10.

Although there are various acts or things which satisfy the statutory definition of a supply under Agreement 2, unless there is a sufficient nexus between a payment and the supply, there is no taxable supply under the Agreement.

Are the payments consideration?

On the facts provided, the funding received from Department 2 is consideration for GST purposes. Therefore, it is necessary to determine whether the funding has a sufficient nexus to the supplies identified under Agreement 2 to constitute payment for those supplies.

Sufficient nexus between supply and consideration

In entering into the Agreement with Department 2, you became obligated to deliver the activities as set out in Agreement 2.

You receive payment once you fulfil your obligations in accordance with Agreement 2 and deliver the activities as specified. You have agreed to use the funding received only for the activities as detailed. Therefore, consistent with the guidance provided at paragraphs 28-31 of GSTR 2012/2 (as described in the answer to Question 1) it is considered that there is sufficient nexus between the supplies made and the payment from Department 2. As such, the payment is made in connection with, in response to or for the inducement of a supply made by you.

Therefore, the payment from Department 2 is consideration for a supply that you make to them under Agreement 2. Consequently, the first requirement of section 9-5 (a supply for consideration) is satisfied.

However, in order for the payment to be consideration for a taxable supply all of the other requirements of section 9-5 must be satisfied. In relation to these other requirements, the supply made by you is made in the course or furtherance of your enterprise, the supply is connected with Australia and you are registered for GST. There are no provisions in the GST Act that would make the supplies made GST-free or input taxed.

Therefore, as all of the requirements of section 9-5 are satisfied the payments from Department 2 for delivery of the activities as detailed are consideration for a taxable supply. Consequently, you are liable to remit GST in relation to the payments received.