Edited version of private advice

Authorisation Number: 1051863718855

NOTICE

This private ruling was revised following issue. This edited version has therefore been replaced with the edited version of the private ruling with the authorisation number of 1052378838238.

Date of advice: 22 July 2021

Ruling

Subject: GST and government support payments

Question 1

Are the contract payments payable under the Agreement, consideration for a supply for the purposes of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the contract payments are not consideration for a supply under section 9-5 of the GST Act.

Question 2

Are the amounts payable under the Agreement, consideration for a supply for the purposes of section 9-5 of the GST Act?

Answer

Not necessary to answer.

Question 3

Is the component amount payable under the Agreement consideration for a supply for the purposes of section 9-5 of the GST Act?

Answer

No. The amount forms part of the total amount payable as payments under the terms of the Agreement.

Relevant facts and circumstances

You are a market participant.

Following a successful bid, you and the government entered into an Agreement.

The Agreement gives effect to the government's policies

Under the Agreement, you will supply into the market.

Under the market, you must sell to, and receive the market price from the operator for the supply into the market. That is, you are most likely price takers within the market and are not likely to be price makers who are able to set their own prices.

Under the Agreement, the government "guarantees" the price that you will obtain for your supply into the market by "fixing" the price for a period of years. This fixed amount is referred to as the contract price, as detailed in the Agreement.

This fixed pricing arrangement is common to similar projects. It recognises that developers and operators of projects require certainty of revenue flows, to be able to attract capital. This "guaranteed pricing", along with other amounts under the Agreement are hereinafter referred to in this request as the contract payments.

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 9-15

Reasons for decision

Question 1

A supply is a taxable supply where the positive requirements imposed by section 9-5 GST Act are satisfied. Amongst these is the requirement imposed by paragraph 9-5(a) of the GST Act that a supply be made for consideration.

Relevantly, Goods and Services Tax Ruling 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2) explains the Commissioner's views on when a financial assistance payment is consideration for a supply and provides the following guidance:

•        for a financial assistance payment to be consideration for a supply there must be a 'sufficient nexus' between the financial assistance payment made by the payer and a supply made by the payee;

•        a sufficient nexus exists where, upon an objective assessment and regard is had to the true nature of the transaction, the financial assistance payment is found to be made 'in connection with', 'in response to' or 'for the inducement of' a supply;

•        in identifying the character of the nexus required, the word 'for' ensures that not every connection between a supply and consideration meets the requirements for a taxable or input taxed supply (it is therefore not enough that there be any form of connection between a supply and the payment of consideration to constitute a taxable or input taxed supply);

•        reference to all of the surrounding circumstances of the arrangement supporting the payment of financial assistance (considered as a whole) determines whether there is a sufficient nexus. The surrounding 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;

•        provided that there is a sufficient nexus, a voluntary payment can be consideration for a supply (i.e. the payer in such a case does not have to be the recipient of the supply).

The government provides financial assistance in the form of contract payments to you because you were a successful contender for the funding.

The contract payments are made up of two components.

The Agreement states that the amounts are the total of the government's consideration.

You participated in the funding process based on the criteria set up by the government and you are entitled to the contract payments subject to a number of terms and conditions which are set out under the Agreement that you are obliged to perform. The performance or otherwise of these obligations under the Agreement forms part of the circumstances which determine whether you are entitled to the payments.

As such, your performance of the obligations has a connection with the government making the payments to you because these obligations establish that you are entitled to the contract payments.

However, the obligations under the Agreement solely serve to formalise the process of the contract payment entitlement. The rights and obligations to make and receive contract payments flow from the authority of the government to implement its policies.

Your supplies will be sold through the market to a market participant or a retailer. The contract payment provided by the government will not have any effect on supplies you make into the market. That is, the supply made by you is to the market and not to the government.

However, the contract payments may still be treated as consideration received by you, in relation to your supply where a sufficient nexus is found with the supply to the market. This is because of the operation of subsection 9-15(2) of the GST Act, which contemplates that an entity can make a payment that is consideration for a supply to someone else (a tripartite arrangement).

As per GSTR 2012/2 discussed above, the test for establishing a 'sufficient nexus' is to be determined on an objective basis (taking into account the true character of the transaction). Further, in identifying the nexus required, the use of the word 'for' in paragraph 9-5(a) ensures that not every connection between a supply and a payment will satisfy the taxable supply requirement.

This view is further supported by Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies, at proposition 14 (when a third party may pay for a supply but not be the recipient of the supply), and by the FFC decision in TT-Line Company Pty Ltd v Commissioner of Taxation [2009]FCAFC 178 (TT- Line).

The facts of this particular case can be distinguished from that anticipated at proposition 14 and the decision in TT-Line. The recipient of the supply in TT- Line was directly affected by the assistance payment, as it enabled him or her to access services at a cheaper rate. In contrast, the supply to the market is not going to be affected by the receipt of the contract payments by you, as the payments are assistance from the government under its program. That is, the retailer or market participant will not be able to purchase your supplies at a cheaper rate because of the contract payments you receive from the government.

While there is a relationship between the contract payments and your performance of obligations under the Agreement, the connection is not sufficient to find that the payment forms part of the consideration that you receive for making the supplies.

The supply by you to the market is not affected by the arrangement entered into under the Agreement and therefore the contract payments are not considered to be third party consideration for your supply.

On this basis, the receipt of contract payments does not have a sufficient nexus with any supply that you make to the government. As there is no sufficient nexus then the receipt of the payments under the government's policy initiative does not constitute the provision of consideration for a supply or supplies that are made by entering into the obligations under the Agreement.

Accordingly, any contract payments you receive under the Agreement are not consideration for a supply. As there is no taxable supply, the payments are therefore not subject to GST.

Question 3

The government will acquire XXX as stipulated under the Agreement, but the issue is whether the government obtains additional benefits when it acquires them. Specifically, whether the obligation by you to transfer XXX to the government at no cost constitutes a supply for which the contract payments can be said to be consideration.

The facts illustrate that the relevant component of the contract payments is not objectively intended to be consideration for the XXX as the premise of the payment is to drive the government's policy outcomes and is not consideration for the receipt of any supply of XXX made by you to the government.