Edited version of private advice

Authorisation Number: 1052045688293

Date of advice: 24 October 2022

Ruling

Subject: GST - funding agreement

Question

Are the payments from Entity B to Entity A for Entity A performing its obligations under the Funding Arrangement consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the payments from Entity B to Entity A are not consideration for a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

Entity A and Entity B entered into a funding arrangement.

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 Division 11

Reasons for decision

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

'Consideration' is defined in subsection 9-15(1) of the GST Act which states that consideration includes:

a)            any payment, or any act or forbearance, in connection with a supply of anything;

b)            any payment, or any act of forbearance, in response to or for the inducement of a supply of anything.

Furthermore, subsection 9-15(2) of the GST Act provides that:

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

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:

                      •                      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).

We do not consider that Entity A's expectations under the funding arrangement involves Entity A making a supply for consideration in accordance with paragraph 9-5(a) of the GST Act.

Provision of third-party consideration

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) of the GST Act ensures that not every connection between a supply and a payment will satisfy the taxable supply requirement.

The services provided by Entity A are provided to third parties however, we do not consider that the payments from Entity B have sufficient nexus to the services provided

In summary

There is an insufficient nexus between the supply of services by Entity A and the payments received from Entity B.