Private ruling: GST and Government appropriations
Published: July 2012

Ruling: Q1: Are SOC grants made by a Government Entity (GE) to another Government Entity (you) subject to goods and services tax (GST) | A1: No, the grants made by GE to you are not subject to GST.

Relevant facts and circumstances: You are registered for GST. You own, operate and manage a range of assets. The State Government decided to restructure the industry you are involved in. As a result of the restructure, you now sell all of your output to another trading entity. The Government, you and the trading entity signed a deed. This deed sets out the arrangements for the completion of the various transactions underlying the documents comprising the transaction. A key component of the restructure, involved you entering into a Trading Agreement (TA) in relation to your assets and other related agreements with the trading entity. Under the TA, You agreed to a contracted supply. The contracted supply is the supply (and ancillary services) from the underlying capacity of your assets. You have a series of obligations under the TA which include operating and maintaining your assets in compliance with certain operating requirements and meeting certain performance standards. You cannot sell any of the supply, or supply any rights over the capacity specified in the TA, to any other entity other than the trading entity. If you are unable to provide the contracted supply, you may be required to make a payment of damages to the trading entity, under the TA. Under the TA, the trading entity is required to pay you an annual charge, a fixed and variable charge and a charge for certain pass through costs. The charges have been set such that their value was equal to the present value of cost forecasts for your operation. To account for variations over time, the fixed and variable charges are escalated over time. To ensure you are not exposed to unanticipated risk over the life of the TA, the State Government guaranteed your performance under the TA and related agreements. The design of the TA is such that you may be exposed to the risk of having insufficient cash flows to meet your contractual obligations. The two key residual risks in this regard is your obligation to pay damages to the trading entity and potential cost overruns. Any payment made to you to compensate you for an obligation to make a damages payment or an exposure to cost overruns will be made by the GE. Another entity manages and reports on service wide assets, liabilities and transactions that are the overall responsibility of the State Government rather than individual departments and statutory bodies. Its Annual Report includes the financial statements and the Consolidated Fund. The activities of the Consolidated Fund are principally the collection of State taxes, Commonwealth grants and financial distributions from public trading and financial enterprise sector agencies on behalf of the Government. Payments from the Consolidated Fund mainly comprise recurrent and capital appropriation to government budget dependent agencies. The payments made by GE to you to compensate you for an obligation to make a damages payment or an exposure to cost overrun are referred to as grants'. We have been advised that the grants are included in the terms of the Appropriations Act and in two supporting documents to that Act. We have also been advised that the grants are only made to you and another entity and that the payment of a grant by GE to you merely constitutes a transfer of funds by one government related entity to another under the terms of an appropriation Act and are not made pursuant to a service agreement between the two entities.

Relevant legislative provisions: Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | Section 9-5 of the GST Act | Subsection 9-15(1) of the GST Act | Paragraph 9-15(3)(c) of the GST Act Section 9-40 of the GST Act | Division 149 of the GST Act | Section 184-1 of the GST Act | Section 195-1 of the GST Act | Section 184-1 of the GST Act | Section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act)

Reasons for decision: Summary: Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make. The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally. However, in some cases, a government entity will not meet the definition of 'entity' in section 184-1 of the GST Act but special rules in Division 149 of the GST Act apply to enable government entities, that are technically not entities, to register for GST. A government entity that is registered for GST, like other GST registered entities, will be liable for GST on the taxable supplies that it makes and entitled to input tax credits for its creditable acquisitions. In relation to taxable supplies, section 9-5 of the GST Act sets out the requirements for a supply to be a taxable supply. It states: You make a taxable supply if: · you make the supply for *consideration; and · the supply is made in the course or furtherance of an *enterprise that you *carry on; and · the supply is *connected with Australia; and · you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*denotes a term defined under section 195-1 of the GST Act.) To be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied. The first requirement to be satisfied is that there is a 'supply for consideration'. Consideration is defined in section 9-15 of the GST Act. In particular, subsection 9-15(1) of the GST Act provides that the word consideration, for the purposes of the GST Act, includes; (a) any payment, act or forbearance in connection with a supply of anything; and (b) any payment, act or forbearance in response to or for the inducement of a supply of anything. However, paragraph 9-15(3)(c) of the GST Act states; A payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law. The first requirement to be satisfied in paragraph 9-15(3)(c) of the GST Act is that there is a payment between government related entities. Section 195-1 of the GST Act defines a 'government related entity' as: (a) a government entity; or (b) an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the A New Tax System (Australian Business Number) Act 1999 ; or (c) a local governing body established by or under a State law or Territory law." Section 195-1 of the GST Act states that the term 'government entity' has the meaning given by section 41 of the ABN Act. Section 41 of the ABN Act defines 'government entity' as: (a) a Department of State of the Commonwealth; or (b) a Department of the Parliament established under the Parliamentary Service Act 1999 ; or (c) an Executive Agency, or Statutory Agency, within the meaning of the Public Service Act 1999 ; or (d) a Department of State of a State or Territory; or (e) an organisation that: (i) is not an entity; and (ii) is either established by the Commonwealth, a State or a Territory (whether under a law or not) to carry on an *enterprise or established for a public purpose by an *Australian law; and (iii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation; whether or not the organisation is part of a Department or branch described in paragraph (a), (b), (c) or (d) or of another organisation of the kind described in this paragraph." On the facts provided, we consider that GE and government related entities for the purposes of the GST Act and that the grants paid by GE to you would be payments between government related entities. Therefore, the first requirement of paragraph 9-15(3)(c) of the GST Act is satisfied. The other requirement to be satisfied in paragraph 9-15(3)(c) of the GST Act is that the payments between the government related entities must be 'specifically covered' by an appropriation. Guidance on appropriations and the application of paragraph 9-15(3)(c) of the GST Act is provided in Goods and Services Tax Ruling GSTR 2011/2. In particular, GSTR 2011/2 provides that for a payment to be specifically covered by an appropriation under an Australian law, the payment must have the following features: · the payment cannot be made to both government related and non-government related entities · the terms of the appropriation must specify that the payment be made to a government related entity or entities, by name or generically, and · a redirection of funding by a government related entity to another government related entity may be covered by paragraph 9-15(3)(c), provided the payment is not made pursuant to a service agreement between the two entities. In relation to the first point above paragraph 16 of GSTR 2011/2 states: 16. Not all payments between government related entities fall under paragraph 9-15(3)(c). A payment is not 'specifically covered by an appropriation' for the purposes of paragraph 9-15(3)(c) if the relevant terms of an appropriation authorise the government related entity to make payments that can be made to either a government related entity or a non-government related entity. Therefore, if a payment could, under the terms of an appropriation, be payable to either a government related entity or a non-government related entity, paragraph 9-15(3)(c) does not apply to the payment." In relation to what must be specified, paragraphs 20 and 21 of GSTR 2011/2 state: 20. For a payment to be specifically covered by an appropriation under an Australian law for the purposes of paragraph 9-15(3)(c), the terms of the appropriation must specify that the payment be made to a government related entity or entities, by name or generically. 21. If the 'specifically covered' requirement is not met the basic GST rules apply to determine whether the payment is consideration for a taxable supply. Following on from this, paragraph 22 of GSTR 2011/2 provides that while the authorisation to make a payment derives from the relevant appropriation Act, the terms of the appropriation can be included in other documents that work in conjunction with the appropriation Act in giving additional details about the authorised expenditure. Examples of documents that work in conjunction with the appropriation Act include: · documents that are linked to the appropriation Act by a provision in the appropriation Act, and · documents that were considered by Parliament together with the appropriation Bill. In relation to a redirection of funding paragraph 29 of GSTR 2011/2 states: Paragraph 9-15(3)(c) is satisfied in respect to a payment of redirected funds if the recipient of the payment under the terms of the appropriation Act can only be a government related entity. In this case, the facts show that under the Appropriations Act , GE was provided with funds from the Consolidated Fund for recurrent services. In addition, two other supporting documents, being the budgeted financial statements and forward estimates report show that the funds appropriated to GE included an amount for grants and subsidies which were used to fund damages, being the grants. Furthermore we have been advised that the grants paid to you to compensate you for an obligation to make a damages payment or an exposure to cost overrun are only made to you and another entity and that the payment of a grant by GE to you merely constitutes a transfer of funds by one government related entity to another under the terms of an appropriation Act and it is not made pursuant to a service agreement between the two entities. Therefore, based on the information provided, the grants paid by GE to you are specifically covered by an appropriation under an Australian law and as such, are excluded from being consideration under paragraph 9-15(3)(c) of the GST Act. As the grants are excluded from being consideration, you cannot make a 'supply for consideration'. Accordingly, the grants that you receive from GE are not subject to GST.

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