Private ruling: GST and employer payments to a training fund
Date of advice: 22 March 2017
Published: August 2017
Date scheme commenced: Year Ended 30 June 2017

Ruling: Q1: Is the entity making a supply for consideration when participating employers make contributions to its training fund? | A1: No, the entity is not making a supply for consideration when participating employers make contributions to its training fund.

Relevant facts and circumstances: The entity is an Australian public company incorporated and funded by participating employers in its industry in State X. An employee association enter into an industrial agreement with a participating employer whereby the employer agrees to pay an organisation approved by the association a certain amount (the training levy) for the purpose of facilitating ongoing structured vocational training in its industry. The entity is the only organisation in State X approved by the employee association to receive the payments from participating employers. Employees covered by the industrial agreement receive 'free training' (that is, pays no fee to the training provider) for training approved by the entity. The entity is independent of the employee association but, if its performance is deemed inadequate, the training levy can be redirected to another organisation. There is no benchmark as to how the entity disburses the training levy monies but, consistent with similar funds, the objective is to maximise the spending on training for the industry's benefit. The entity targets an expenditure of XX% towards the provision of training. The entity does not get remunerated for administering the training levy monies. Board members of the employee association sit on the Board of the entity and dictate how the entity operates. The entity is registered with the Australian Charities and Not-for-Profit Commission under the subtype 'Advancing education'. The entity's constitution states that: ● its object it to create a training fund to collect and receive the training levy and to expend on, grant or pay monies in the training fund to facilitate provision by registered training organisations to persons in its industry ● employer means both employers and employer association participating in its industry ● training levy means monies that are payable from time to time by employers to a registered training organisation pursuant to an industrial agreement ● all training levy monies, including income earned on them, must be maintained in the training fund for the benefit of the objects of the entity ● no part of the profits or other income may be transferred to members of the entity, nor do such levies vest to the members of the entity or to the employers who make the contributions

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Reasons for decision: Summary: The requirements of a taxable supply are set out in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). One of the requirements is for an entity to make the supply for consideration. In order for there to be a supply for consideration, there needs to be a supply, consideration and a sufficient nexus between the supply and the consideration. What is a supply? Essentially, a supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else. [paragraph 22 of GSTR 2001/4] Supply is defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. Without limiting subsection (1), subsection 9-10(2) provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply. Subsection 9-10(2) of the GST Act refers to two aspects of a supply: the thing which passes, such as goods, services, a right or obligation; and the means by which it passes, such as its provision, creation, grant, assignment surrender or release. In GSTR 2006/9: Supplies , Proposition 6 states that 'supply' usually, but not necessarily, requires something to be passed from one entity to another. The fact that 'supply' requires something to be passed from one entity to another is largely self-evident in a transaction based tax. However, not all forms of supply have this characteristic. For instance, paragraph 9-10(2)(e) of the GST Act includes a creation of a right as a supply. The 'creation' of a right does not involve a passing of the right from one entity to another. The action of the supplier causes the recipient to make an acquisition but without anything passing between them. In GSTR 2006/9: Supplies : Proposition 12 states that transactions that are neither based in an agreement that binds the parties in some way nor involve a supply of goods, services, or some other thing, do not establish a supply. An agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other unless there is something else, such as goods, services, or some other thing, passing between the parties. What is consideration? Consideration is defined in section 195-1 of the GST Act to mean 'any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply'. The meaning given to consideration in section 9-15 of the GST Act extends beyond payments to include such things as acts and forbearances. It may include payments made voluntarily, and payments made by persons other than the recipient of a supply. Section 9-15 of the GST Act further provides that a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. It follows that there are two elements to the definition of consideration. The first is the payment by one entity to another. The second element is the nexus that must be established between the payment and a supply. The Commissioner considers that, in the context of the GST Act, the expression 'you make the supply for consideration' in paragraph 9-5(a) has a similar meaning to 'there is consideration for the supply that you make'. [paragraphs 90 of GSTR 2001/4 and 65 of GSTR 2001/6] The references in the GST Act to 'supply for consideration' and more commonly to 'consideration for a supply' underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply. [paragraphs 91 of GSTR 2001/4 and 66 of GSTR 2001/6] In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. [paragraph 96 of GSTR 2001/4 and 71 of GSTR 2001/6] The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive. [paragraph 72 of GSTR 2001/6] Application to your case Pursuant to an industrial agreement between an employer and the employee association, the participating employer pays you the training levy. You administer the training levy for the benefit of your objectives. There are no goods or services that pass from you to the participating employer nor have you created a right to a thing to the participating employer. As such, in line with Proposition 6 in GSTR 2006/9, you are not making a supply to the participating employer. The industrial agreement is between an employer and the employee association. It does not bind you in some way and the training levy is paid to you only because you are the organisation approved by the employee association to receive and administer such payments. There are no goods, services or some other thing that passes between you and a participating employer. As such, in line with Proposition 12, this arrangement is not sufficient to establish that there is a supply by you to a participating employer. A participating employer's payment of the training levy to you satisfies the first element of the definition of consideration. However, as you are not making a supply to the participating employer in relation to the payment, the payment is not consideration for a supply because no nexus between the payment and a supply can be established in the circumstances. In summary, as there is no identifiable supply, you are not making a supply for consideration when a participating employer pays you the training levy.