Edited version of private advice

Authorisation Number: 1051789355912

Date of advice: 10 December 2020

Ruling

Subject: GST and funding

Question

Are the funds paid by you to a provider under the Agreement consideration for a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the funds paid by you to a provider under the Agreement are not consideration for a creditable acquisition under section 11-5 of the GST Act and as such do not give rise to an entitlement to input tax credits (ITCs).

Relevant facts and circumstances

You are registered for GST. You are registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and are a public benevolent institution endorsed to access GST concessions.

Your activities involve raising funds from donations and Government grants to distribute.

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 sections 11-5 and 11-20

Reasons for decision

Section 11-20 of the GST Act provides that you are entitled to an ITC for any creditable acquisition you make. You make a creditable acquisition under section 11-5 of the GST Act if:

•         you acquire anything solely or partly for a creditable purpose

•         the supply of the thing to you is a taxable supply

•         you provide, or are liable to provide, consideration for the supply, and

•         you are registered or required to be registered for GST.

You make an acquisition for a creditable purpose to the extent that you acquire a thing in carrying on your enterprise unless the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature. Any supplies and corresponding acquisitions contemplated by the Agreement are made in carrying on your enterprise and do not relate to making supplies that are input taxed or a private or domestic nature.

The issue here is whether the funds paid by you to the provider constitute consideration for a supply made by the provider to you.

The provider makes a taxable supply to you under section 9-5 of the GST Act, if amongst other things, the provider makes a 'supply for consideration'.

The Commissioner has considered when a financial assistance payment is consideration for a supply in Goods and Services Tax Ruling GSTR 2012/2: financial assistance payments. In GSTR 2012/2 the term 'financial assistance payment' (FAP) is intended to encompass a wide range of payments including those made to provide support or aid to the payee.

GSTR 2012/2 focuses on the first requirement of a taxable supply that there is a 'supply for consideration' in relation to an FAP and outlines that for there the be a 'supply for consideration' there must be:

•         a supply

•         consideration

•         and a nexus between supply and consideration.

Is there a supply?

The definition of 'supply' provided by section 9-10 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' or any combination of any 2 or more of the matters referred to in subsection 9-10(2) the GST Act. The meaning of acquisition in section 11-10 of the GST Act is the corollary of the meaning of supply in section 9-10 of the GST Act.

The provision of services or the provision of information under the Agreement answers the definition of a supply under subsection 9-10(2) of the GST Act. However, unless there is a sufficient nexus between an FAP and any supply, there is no 'supply for consideration' and accordingly no taxable supply under the Agreement made to you.

Is there 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 or in response to or for the inducement of a supply of anything.

Under the Agreement, you pay to the provider funds. The funds are a payment that has a connection with the supplies contemplated under the Agreement.

Paragraphs 15 and 16 of GSTR 2012/2 explain that for the FAP to be consideration for a supply there must be a sufficient nexus between the FAP made by the payer (you) and a supply made by the payee (provider). The FAP 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.

Merely having any form of connection of any character between a supply and payment of consideration is insufficient to constitute a taxable supply. The Commissioner considers that this is an objective test, having regard to all of the surrounding circumstances of the arrangement. In particular, any written documentation determines whether a sufficient nexus is established.

Is there a nexus?

Whilst the Agreement gives rise to supplies made by the provider to you the funds are not paid by you to the provider to obtain those supplies. Although there is a connection between the funds and the supplies identified in the Agreement the payment has an insufficient nexus with those supplies to constitute consideration 'for' those supplies.

The terms of the Agreement are such that the funds are is paid to assist the provider to support others.

The existence of a repayment clause is not in itself determinative in establishing whether the funds are consideration for a supply. However, such a clause may be taken into account in the broader context of the arrangement. In the present case the Agreement merely requires the return of the funds to you if demanded by you if the provider does not use them for their intended purpose.

The funds are made available to the provider to cover the 'gap' in the costs of the eligible person. There is no 'supply for consideration' to you when the provider uses the funds on the costs of the eligible person as agreed. The existence of the repayment clause does not alter this. This view is consistent with the principles set out in paragraphs 51 to 54 of GSTR 2012/2.

Having regards to the entire arrangement the better view is that notwithstanding that the Agreement gives rise to supplies acquired by you, the funds you pay to the provider has an insufficient nexus with those supplies contemplated under the Agreement to constitute consideration for those supplies made to you. Further you are not the recipient of some supplies supplied by the provider to the eligible person. As such, the essential requirement for a taxable supply that there is a 'supply for consideration' is not satisfied.

Accordingly, the funds paid by you under the Agreement to the provider are not consideration for a creditable acquisition under section 11-5 of the GST Act.