Edited version of private advice

Authorisation Number: 1052337451613

Date of advice: 3 December 2024

Ruling

Subject: GST and grants

Question 1

Do you make a 'supply' (as defined under section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)) to non-resident entity A as a result of the receipt of a grant by you from non-resident entity A?

Answer

Yes, you make a supply to non-resident entity A.

Question 2

Is the supply to non-resident entity A GST-free under table item 2 of subsection 38-190(1) of the GST Act?

Answer

Yes, the supply is GST-free under table item 2 of subsection 38-190(1) of the GST Act.

This ruling applies for the following periods:

1 July 2024 to 30 June 2028

The scheme commenced on:

13 August 2024

Relevant facts and circumstances

You are an Australian company and registered for GST.

Non-resident entity A has received a grant from non-resident entity B.

You have received a sub-grant from non-resident entity A.

You have an agreement with non-resident entity A in relation to the grant which requires you to deliver particular objectives in return for the grant.

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 Subparagraph 9-10(2)(g)(i)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190(3)

Reasons for decision

Question 1

Summary

Yes, you make a supply to non-resident entity A.

The GST Act defines a supply under section 9-10 as follows:

(1)   A supply is any form of supply whatsoever

(2)   Without limiting subsection (1), supply includes any of these:

(a)   a supply of goods;

(b)   a supply of services;

(c)   a provision of advice or information;

(d)   a grant, assignment or surrender of real property;

(e)   a creation, grant, transfer, assignment or surrender of any right;

(f)    a financial supply;

(g)   an entry into, or release from, an obligation:

i.      to do anything; or

ii.     to refrain from an act; or

iii.    to tolerate an act or situation;

(h)   any combination of any 2 or more of the matters referred to in paragraphs (a) and (g)

Goods and Services Tax Ruling 2006/9 Goods and services tax: supplies (GSTR 2006/9) examines the meaning of supply in detail. It sets out a number of propositions for characterising and analysing supplies.

Proposition 9 is most relevant to your case and is outlined in paragraphs 102 to 111 of GSTR 2006/9. As explained in paragraph 102 of GSTR 2006/9 an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to another. In other words, the creation of expectations among the parties is not enough to establish a supply.

In entering into the agreement with non-resident entity A, you accepted the funds subject to the condition that you use them in accordance with the agreement which specifies how the amount of allocated funds is to be spent. The agreement provides amounts for your use and amounts to be used by your partner organisation in accordance with the terms you agreed to in the contract. Furthermore, the funds can only be used to further the programme objectives. The conditions of the funding establish a binding obligation on you to use the funds for the purpose for which the grant was given. The agreement creates 'the entry into a binding obligation' for you to do certain things.

The entering into an obligation to do anything is a supply as per subparagraph 9-10(2)(g)(i) of the GST Act.

Question 2

Summary

Yes, the supply is GST-free under table item 2 of subsection 38-190(1) of the GST Act.

Detailed reasoning

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act states:

You make a taxable supply if:

a)    you make a supply for consideration; and

b)    the supply is made in the course or furtherance of an enterprise that you carry on; and

c)    the supply is connected with the indirect tax zone; and

d)    you are registered or required to be registered.

However, the supply is not taxable to the extent that it is GST-free or input taxed.

You are making a supply as per subparagraph 9-10(2)(g)(i) of the GST Act.

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

In GSTR 2012/2, paragraph 5 states:

In this Ruling the term 'financial assistance payment' is intended to encompass a wide range of payments. This includes payments:

•         made to provide support or aid to the payee; and/or

•         provided to support or aid the implementation of government policy and initiatives.

The grant you have received is consideration pursuant to section 9-15 of the GST Act.

Sufficient Nexus

Under paragraph 15 of GSTR 2012/2 there must be a sufficient nexus between the financial assistance payment made by the grantor and a supply made by the grantee. 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.

Paragraph 28 of GSTR 2012/2 provides further detail where a payment is for the entry into an obligation to do or refrain from doing something:

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.

Non-resident entity A has provided the sub-grant to you as it has an obligation to the use the funds provided by non-resident entity B to achieve a goal. It has engaged you to help achieve this goal and support the delivery of its programme in another country and Australia. There is therefore a sufficient nexus between the supply and consideration.

The supply is made in the course or furtherance of an enterprise that you carry on, is connected with the indirect tax zone and you are registered for GST. As such, you are making a taxable supply of the entry into a binding obligation under section 9-5 of the GST Act.

GST-free supply

Section 38-190 of the GST Act lists supplies of things other than goods or real property for consumption outside Australia that are GST-free. The services you supply are neither goods nor real property and therefore come within the scope of subsection 38-190(1) of the GST Act. In particular, table item 2 of subsection 38-190(1) of the GST Act is relevant to your circumstances.

Under item 2 a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident, who is not in Australia when the thing supplied is done, and:

a)    the supply is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or

b)    the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST.

The supply of entering into the binding obligation with non-resident entity A satisfies table item 2 of subsection 38-190(1) of the GST Act as the supply is made to a non-resident company that is not in Australia in relation to your supply and your supply is neither a supply of work physically performed on goods situation in Australia when the work is done, not a supply directly connected with real property situation in Australia.

Limitation of item 2

However, a supply covered by item 2 will not be GST-free if the provisions of subsection 38-190(3) of the GST Act are met. Subsection 38-190(3) of the GST Act provides that the supply will not be GST-free if:

a)    it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

b)    the supply is provided, or the agreement requires it to be provided, to another entity in Australia; and

c)    for a supply other than an input taxed supply - none of the following applies:

                              i.        the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

                             ii.        the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

                            iii.        the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

The supply of the entry into the obligation is made under an agreement between you and non-resident entity A.

Subsection 38-190(3) will not operate to negate the GST-free status of the performance of the obligation as this is not a supply that is provided to another entity in Australia.

The supply of the entry into the obligation is GST-free supply under table item 2 of subsection 38-190(1) of the GST Act.