Private ruling: GST and payments by one government related entity to another
Published: March 2014

Ruling: Q1: Are the following payments, which you receive for the financial year ended 30 June 2013 (2012 - 13 financial year), treated as not being the provision of consideration under subsection 9-17(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act): • Payment 1 • Payment 2 • Payment 3 • Payment 4 • Payment 5? | A1: The following payments, which you receive for the 2012 - 13 financial year, are treated as not being the provision of consideration under subsection 9-17(3) of the GST Act and are not subject to GST: • Payment 1 • Payment 4. Payment 2 is consideration for a taxable supply you make under section 9-5 of the GST Act. You are liable to remit GST in relation to this payment. Payment 3 is not consideration for a supply, as you do not make a supply under section 9-10 of the GST Act in relation to the payment. The payment is not subject to GST Payment 5 is consideration for a taxable supply you make under section 9-5 of the GST Act. You are liable to remit GST in relation to this payment. | Q2: Are the following payments, which you receive for the 2012 - 13 financial year, consideration for GST-free supplies under Division 38 of the GST Act: • Payment 6 • Payment 7 • Payment 8 • Payment 9? | A2: Yes, the following payments, which you receive for the 2012 - 13 financial year, are consideration for GST-free supplies under Division 38 of the GST Act: • Payment 6 • Payment 7 • Payment 8 • Payment 9.

Relevant facts and circumstances: Entity A (you) is a public corporation established pursuant to State legislation as a business enterprise with the principal responsibility of providing services for the benefit of the people and economy of the State. You are registered for GST. Generally, you charge for services provided to the community as well as providing various concessions and exemptions. The payments are intended to provide funding to enable you to undertake activities and provide services that are recognised as being non-commercial, but are considered necessary to fulfil the obligations of the State Government. You receive payments from Department A and Department B. Both Department A and Department B are registered for GST and are administrative units (part of the Crown in the State) established pursuant to State legislation. You receive the following payments for the 2012 - 13 financial year: • Payment 1 • Payment 2 • Payment 3 • Payment 4 • Payment 5 • Payment 6 • Payment 7 • Payment 8 • Payment 9. You have provided the following information in relation to each of the payments: Payment 1 You are required to enter into a non-commercial agreement for use of services and receive a payment from Department A. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment is calculated in consultation between you and Department A and is paid to compensate you for the anticipated expenditure incurred in using the services. This ensures that you are not disadvantaged as a result of being compelled to support and use the services as opposed to a cheaper alternative. The payment reflects anticipated expenditure in using the services and does not include a return on capital / assets or revenue foregone. Payment 2 You receive a payment from Department B to enable you to administer payments under a scheme. This payment reflects anticipated administration costs of administering the scheme and does not include opportunity cost, revenue foregone or return on capital / assets. Your responsibilities include: • the establishment and maintenance of a database of customers • performance of adequate eligibility checks • compliance with certain reporting requirements to Department B. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment is appropriated as a fixed amount and no information has been supplied that shows the payment amount was calculated on the basis of covering costs of making relevant supplies. Payment 3 You receive a funding payment from Department B to reimburse you for payments you make to other entities. Your responsibilities include the repayment of any unexpended funding. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment has been calculated in consultation between you and the Department and is to compensate you for the exact amounts that you have paid. At the end of the period, during the reconciliation and acquittal process, any amounts you have received from the Department that are greater than the payments you have made are returned to the Department. The calculation of the payment does not include a return on assets and is not based on opportunity cost or forgone revenue. Payment 4 You receive a payment from Department A to compensate you for the costs associated with implementing and administering a scheme. The amount of the payment was supported by the anticipated costs to be incurred and funds were made available. As the scheme has now been implemented, the implementation costs have been incurred and the actual costs calculated. The Department has instructed that any unspent monies must be returned to them. As a consequence, a payment of will be made to the Department. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment has been calculated in consultation between you and the Department and reflects the anticipated costs to be incurred in implementing and administering the scheme. For example, IT changes that need to be made and customer enquires. The calculation of the payment does not include a return on assets and is not based on opportunity cost or forgone revenue. Payment 5 A project was initiated by the State Government. You were nominated as a lead agency for the implementation of several initiatives. As acknowledgement of the non-commercial nature of the activities to be imposed on you and costs associated with the implementation of the above initiatives, the State Government approved a payment to you. You receive this payment from Department A. However, the purpose of the payment has changed since it was originally introduced. You use the payment to fund your activities. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment has been determined in consultation between you and the Department as part of the State Government's policy. There is no calculation methodology available to support the amount of the payment, however, you use the payment to fund your activities. Payment 6 The payment to you by Department A allows you to provide services to designated areas on a commercial basis. The payment is calculated as the shortfall in revenue that exists between the revenue able to be generated from customers and the cost to you. That is, the payment is made to effectively fund the loss that you would otherwise sustain in providing these services and is made up of operating costs, depreciation and a return on assets. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment has been calculated in consultation between you and the Department and is to provide shortfall funding to you which has been necessitated by your under recovery of revenue in respect of the provision of services (on a non-commercial basis) under, basically, a subsidy program. Payment 7 You receive a payment from Department B as supplement funding for the revenue you have forgone in providing exemptions from service charges under a scheme. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment is calculated as the estimate of revenue forgone for providing the various exemptions / concessions. That is the payment represents the difference foregone by you for the actual price charged to the eligible customer. The amount received is based on a review of the list of customers within the customer billing system and is, basically, a subsidy program for eligible customers. Payment 8 You receive a funding payment from Department B as reimbursement for remissions provided to State residents. The remissions are shown as a credit on the customer's account. Your responsibilities include the repayment of any unexpended funding. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment has been calculated in consultation between you and the Department and is the estimate of revenue forgone for providing the remissions. The payment is a subsidy to reduce costs to eligible customers and represents the difference foregone by you for the actual price charged to the eligible customer. Payment 9 You receive a payment from Department A as supplement funding for the shortfall in revenue you collect (i.e. reduced cash received) from eligible customers as a result of a rebate scheme. The rebate will be automatically calculated and credited to customer bills and will be displayed as a separate item. The authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. The amount of the payment has been calculated on the basis of forgone revenue and is the estimate of revenue not collected from eligible customers as a result of the rebate. The scheme is, basically, a subsidy program for eligible customers. You have provided copies of various documents.

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 section 9-15 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-17(3) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: The following payments, which you receive for the 2012 - 13 financial year, are treated as not being the provision of consideration under subsection 9-17(3) of the GST Act and are not subject to GST: • Payment 1 • Payment 4. Payment 2 is consideration for a taxable supply you make under section 9-5 of the GST Act. You are liable to remit GST in relation to this payment. Payment 3 is not consideration for a supply, as you do not make a supply under section 9-10 of the GST Act in relation to the payment. The payment is not subject to GST Payment 5 is consideration for a taxable supply you make under section 9-5 of the GST Act. You are liable to remit GST in relation to this payment. | Detailed Reasoning - Detailed reasoning: Payment 1 Section 9-40 of the GST Act provides that an entity must pay GST on any taxable supply that it makes. Under section 9-5 of the GST Act, an entity makes a taxable supply if: a) the entity makes the supply for consideration b) the supply is made in the course or furtherance of an enterprise that the entity carries on c) the supply is connected with Australia, and d) the entity is registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. The first requirement of a taxable supply to be satisfied is that there is a supply for consideration. In your case, subsection 9-17(3) of the GST Act is relevant in examining if the payment is consideration for a supply. Subsection 9-17(3) Subsection 9-17(3) is intended to ensure that non-commercial activities of government related entities are not subject to GST. This is achieved by treating a payment which meets certain conditions as not being the provision of consideration and therefore not subject to the basic GST rules. Under subsection 9-17(3) of the GST Act, a payment is not the provision of consideration where the payment: • is made by a government related entity to another government related entity for making a supply; • is covered by an appropriation under an Australian law, and • satisfies a non-commercial test. Government related entity The first condition of subsection 9-17(3) of the GST Act is that the payment must be made by a government related entity to another government related entity for making a supply, in accordance with paragraph 9-17(3)(a) of the GST Act. The term 'government related entity' is defined in section 195-1 of the GST Act. The definition includes: • a department of state of a state or territory • an entity established by a state (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law and can be separately identified by reference to the nature of the activities carried on through the entity. For the purposes of this ruling, we accept that you are a government related entity because: • you were established pursuant to State legislation • you were established by a State to carry on an enterprise, or established for a public purpose, and • you can be separately identified by reference to the nature of the activities you carry on. Department A (and Department B, where relevant in this ruling) is a government related entity as it is a department of the State. You have advised that you receive a payment from Department A to compensate you for the non-commercial expenditure incurred in using the services. Therefore, the payment made to you by the Department is a payment made between government related entities and satisfies paragraph 9-17(3)(a) of the GST Act. Payment covered by an appropriation In relation to the relevant second condition in subsection 9-17(3) of the GST Act, it is necessary to determine if the payment is covered by an appropriation under an Australian law in accordance with subparagraph 9-17(3)(b)(i) of the GST Act. Relevant guidance is contained in the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No.1) Bill 2012 (EM). In particular, clause 2.17 of the EM explains that a payment is covered by an appropriation under an Australian law if the payment is made pursuant to an appropriation. An appropriation is not in itself a payment. Payments cannot be drawn from a government's consolidated revenue fund unless the funds for which the payment is for have been appropriated for that purpose. In relation to the payment you receive, you have advised that the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment. We accept that appropriation of expenditure of money has occurred in the State appropriation legislation for Administered Items for the Department, as a statute of the Government of the State. Therefore, as the appropriation for the payment is by way of a statute of the Government of the State, the payment is 'covered' by an appropriation under an Australian law in accordance with subparagraph 9-17(3)(b)(i) of the GST Act. Non-commercial test The third condition of subsection 9-17(3) of the GST Act is that the payment must satisfy the non-commercial test set out in paragraph 9-17(3)(c) of the GST Act, which states: (c) the payment is calculated on the basis that the sum of: (i) the payment (including the amounts of any other such payments) relating to the supply; and (ii) anything (including any payment for any act or forbearance) that the other government related entity receives from another entity in connection with, or in response to, or for the inducement of, the supply, or for any other related supply; does not exceed the supplier's anticipated or actual costs of making those supplies. The test is that the payment is calculated on the basis that the sum of the payment received by the government related entity supplier and anything else received by it from another entity in connection with the supply (or any other related supply), does not exceed the actual or anticipated costs of making those supplies. Paragraph 2.31 of the EM explains the concept of 'cost' for the purposes of the calculation and states: 2.31 …………… the concept of cost includes the government related entity supplier's direct and indirect costs of making the supply or supplies, but does not include a return on capital or concepts of cost which are measured based on opportunity cost or forgone revenue. An absorption costing methodology is an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies. If the above conditions in subsection 9-17(3) of the GST Act are satisfied, a payment made by a government related entity to a government related entity supplier is not subject to GST. In your case, the amount of the payment is calculated in consultation between you and the Department and is paid to compensate you for the anticipated expenditure incurred in using the services. This ensures that you are not disadvantaged as a result of being compelled to support and use the services as opposed to a cheaper alternative. The calculation of the payment does not include a return on assets and is not based on opportunity cost or forgone revenue. Therefore, the payment satisfies the non-commercial test as the payment does not exceed your anticipated or actual costs of the expenses you will incur as a result of agreeing to acquire services with the funds provided. If this agreement amounts to a supply the non-commercial test is nevertheless satisfied. In summary, we consider the payment satisfies the conditions set out in subsection 9-17(3) of the GST Act. Specifically: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation, and • paragraph 9-17(3)(c) is satisfied as the payment has been calculated on the basis that the payment does not exceed your anticipated or actual costs of making the supply. Therefore, the payment is treated as not being the provision of consideration and is not subject to GST. Payment 2 You receive a payment from Department B to compensate you for the administration costs associated with administering a scheme. Financial assistance payments Relevant guidance in relation to the GST treatment of this payment is provided in Goods and Services Tax Ruling GSTR 2012/2, which sets out the Commissioner's views on when a financial assistance payment is consideration for a supply. In GSTR 2012/2, 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 in the implementation of government policy and initiatives. In your circumstances, the payment you receive is considered to be a financial assistance payment. The payment is made to provide support to you by way of the provision of funding to compensate you for the administration costs associated with administering the scheme and / or to support or aid in the implementation of government policy and initiatives. An entity that receives a financial assistance payment is liable for GST in respect of that payment if the payment is consideration for a supply and all of the requirements for a taxable supply in section 9-5 of the GST Act are met. Therefore, in order to determine if you have made a taxable supply for which you receive the payment, it is first necessary to consider whether you have made a supply for consideration. Supply The term 'supply' is defined in section 9-10 of the GST Act as meaning any form of supply whatsoever and includes: • a supply of goods or services; • a provision of advice or information; • a grant, transfer or surrender of real property; • a creation, grant, transfer, assignment or surrender of any right; or • an entry into, or release from, an obligation to: do anything, refrain from an act, or tolerate an act or situation. However, the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money. The meaning of supply is explained in detail in Goods and Services Tax Ruling GSTR 2006/9 which sets out a number of propositions for characterising and analysing supplies. Of relevance in your case is Proposition 9: that the creation of expectations alone does not establish a supply, which is discussed at paragraphs 102 to 111. In particular, paragraph 102 of GSTR 2006/9, explains that 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. Under the provisions of section 9-10 of the GST Act, a supply is not just a supply of goods or services. Supplies can also be made in relation to rights, obligations and information for GST purposes. In your case, the payment is made to you for the administration of the scheme. The payment is made on a basis which creates more than expectations alone as to the nature of the activities you are to undertake, or services to be provided, with the funds. We consider the agreement you have with Department B in relation to this payment is binding on both parties and, consequently, the entry into these obligations by you is a supply under section 9-10 of the GST Act. Consideration As there is a supply by you to Department B, it is necessary to consider if the payment you receive constitutes 'consideration'. The term 'consideration' is broadly defined in section 9-15 of the GST Act and includes any payment, or any act or forbearance, 'in connection with', 'in response to' or 'for the inducement' of a supply. In your case, subsection 9-17(3) of the GST Act is relevant in examining if you have made the supply for consideration. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by Department B to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment is appropriated as a fixed amount and no information has been supplied that shows the payment amount was calculated on the basis of covering costs of supplying the administration services. We consider the payment satisfies only some of the conditions set out in subsection 9-17(3) of the GST Act, in particular: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by Department B to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation. However, the payment does not satisfy the non-commercial test set out in paragraph 9-17(3)(c) of the GST Act as the amount of the payment has not been calculated on the basis that the payment does not exceed the anticipated costs of supplying the administration services. Therefore, as all of the requirements of subsection 9-17(3) of the GST Act are not satisfied, the payment received by you is not excluded from being consideration. Accordingly, the payment constitutes consideration for the purposes of section 9-15 of the GST Act. Sufficient nexus between supply and payment For a financial assistance payment to be consideration for a supply, it is not sufficient for there to be a supply and a payment. The financial assistance payment must be consideration for that supply. Paragraph 15 of GSTR 2012/2 explains that there must be a sufficient nexus between: • the financial assistance payment made by the payer, and • a supply made by the payee. 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. The test is an objective one. Paragraph 16 of GSTR2012/2 discusses factors that are to be taken into account when examining an arrangement and states: 16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. 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. However, none of these factors will be determinative on their own and the arrangement must the considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative. The guidance at paragraph 28 of GSTR 2012/2 is of particular relevance. Paragraph 28 discusses payments for the entry into an obligation to do or refrain from doing something and states: 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. The following example of sufficient nexus in relation to a payment for entry into an obligation is provided at paragraphs 29 to 31 of GSTR 2012/2: 29. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art in South Australia. It enters into an arrangement with Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts. Under that arrangement, in return for a financial assistance payment from the Foundation, the troupe enters into a binding agreement under which it is obligated to expand its activities - by presenting three performances outside South Australia during the following year. 30. By entering into this obligation to present three performances outside South Australia, the troupe has made a supply to the Foundation. The payment by the Foundation has been made in connection with, in response to, or for the inducement of this supply. Therefore, there is a sufficient nexus between the entry into the obligation and the financial assistance payment such that the financial assistance payment is consideration for that supply. 31. Snake Glass Jugglers is liable for GST on the supply of the entry into the obligation. The Gooseville Arts Foundation is entitled to an input tax credit on their acquisition of the right to require Snake Glass jugglers to present the performances. In your case, under the agreement you have with Department B in relation to this payment, you have entered into obligations regarding the use of the funds for the administration of the scheme. Therefore, there is sufficient nexus between the payment you receive from Department B and the obligations you entered into for the payment to be consideration for that supply. Conclusion As the payment is consideration for a supply, you are liable to remit GST in relation to the payment if all the other requirements for a taxable supply under section 9-5 of the GST Act are met. As discussed above, the first requirement for a taxable supply is satisfied as there is a supply for consideration. In relation to the other requirements of section 9-5 of the GST Act, the supply made by you is made in the course or furtherance of your enterprise, the supply is connected with Australia and you are registered for GST. In addition, there are no provisions of the GST Act that apply to make the supply GST-free or input taxed. Accordingly, on the basis of the information provided, you are making a taxable supply for which the payment you receive from Department B is consideration. You are liable to remit GST in relation the payment. Payment 3 You receive a payment from Department B to reimburse you for payments you make to other entities. Financial assistance payments Relevant guidance in relation to the GST treatment of this payment is provided in Goods and Services Tax Ruling GSTR 2012/2, which sets out the Commissioner's views on when a financial assistance payment is consideration for a supply. In GSTR 2012/2, 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 in the implementation of government policy and initiatives. In your circumstances, the payment you receive from the Department is considered to be a financial assistance payment. The payment is made to provide support to you by way of reimbursing you for payments you make to other entities and / or to support or aid in the implementation of government policy and initiatives. An entity that receives a financial assistance payment is liable for GST in respect of that payment if the payment is consideration for a supply and all of the requirements for a taxable supply in section 9-5 of the GST Act are met. Therefore, in order to determine if you have made a taxable supply for which you receive the payment, it is first necessary to consider whether you have made a supply for consideration. Supply The term 'supply' is defined in section 9-10 of the GST Act as meaning any form of supply whatsoever and includes: • a supply of goods or services; • a provision of advice or information; • a grant, transfer or surrender of real property; • a creation, grant, transfer, assignment or surrender of any right; or • an entry into, or release from, an obligation to: do anything, refrain from an act, or tolerate an act or situation. However, the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money. The meaning of supply is explained in detail in Goods and Services Tax Ruling GSTR 2006/9 which sets out a number of propositions for characterising and analysing supplies. Of relevance in your case is Proposition 9: that the creation of expectations alone does not establish a supply, which is discussed at paragraphs 102 to 111. In particular, paragraph 102 of GSTR 2006/9, explains that 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 your case, you have advised that the purpose of the payment is to reimburse you for payments you make to other entities. Under the provisions of section 9-10 of the GST Act, a supply is not just a supply of goods or services. Supplies can also be made in relation to rights, obligations and information for GST purposes. In the context of financial assistance payments, paragraph 119 of GSTR 2012/2 explains that the creation of a mere expectation between the parties that an act or event will happen is not sufficient to establish a supply. Paragraph 119 states: 119. A further example of where there may be no supply is where an agreement between the parties is not binding and creates expectations alone. Where the financial assistance payment is made in circumstances where a party expects that something will be done, and it does not involve a binding obligation or the supply of goods, services or some other thing, there is no supply. The mere expectation that an act or event will happen is not sufficient to establish a supply. In the table at paragraph 144 of GSTR 2012/2, an example is provided of circumstances where a payment is made but there is no supply, which states: The payments is made in circumstances which create expectations without a binding agreement or anything else provided by the payee;.. On the bases of the facts provided, it is considered that the payment you receive from the Department is made in circumstances that do not involve a binding obligation or the supply of goods, services or some other thing by you. It is also noted that you receive another payment from the Department to compensate you for the administration costs associated with administering the scheme in relation to which you make the payments to other entities. Therefore, we consider the agreement between you and the Department in relation to the making of the payment to reimburse you for payments you make to other entities is not for a supply by you. You act, essentially, as a conduit for the funds and are not making a supply with these funds. Your role is to hand over the funds to the other entities who have abided by the scheme and who, therefore, have charged a reduced amount for the supplies they have made. Accordingly, there is no supply made by you to the Department and, therefore, you are not required to account for GST for this payment. NOTE: It is our view you are acting as a conduit or paying agent in handing over the funds on behalf of the Department. As such, the payment could be inclusive of GST if the supply by the other entity is a taxable supply. This is a question for the relevant entity and not yourselves. Payment 4 You receive a payment from Department A to compensate you for the costs associated with implementing and administering a scheme. The amount of the payment was supported by the anticipated costs that were going to be incurred and funds were made available. As the scheme has now been implemented, the implementation costs have been incurred and the actual costs calculated. The Department has instructed that any unspent monies must be returned to them. As a consequence, a payment will be made to the Department. Under section 9-5 of the GST Act, the first requirement of a taxable supply to be satisfied is that there is a supply for consideration. In your case, subsection 9-17(3) of the GST Act is relevant in examining if the payment is consideration for a supply. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by the Department to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment has been calculated according to the actual costs incurred to implement the scheme. It was always intended that you were to be paid an amount that covered your costs, as through an acquittal process the actual payment for the supply equals the costs after some of the funds were repaid. The calculation of the payment (actual costs) does not include a return on assets and is not based on opportunity cost or forgone revenue. We consider the payment satisfies the conditions set out in subsection 9-17(3) of the GST Act. Specifically: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation, and • paragraph 9-17(3)(c) is satisfied as the amount made available was on the basis that any excess funds are to be repaid to the Department. The repayment of these excess funds shows that the amount of the payment was not intended to be greater than your actual costs of making the supply. Therefore, the payment is treated as not being the provision of consideration and is not subject to GST Payment 5 You receive a payment from Department A which you use to fund your activities. Financial assistance payments Relevant guidance in relation to the GST treatment of this payment is provided in Goods and Services Tax Ruling GSTR 2012/2, which sets out the Commissioner's views on when a financial assistance payment is consideration for a supply. In GSTR 2012/2, 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 in the implementation of government policy and initiatives. In your circumstances, the payment you receive from the Department is considered to be a financial assistance payment. The payment is made to provide support to you by way of the provision of funding for your activities and / or to support or aid in the implementation of government policy and initiatives. An entity that receives a financial assistance payment is liable for GST in respect of that payment if the payment is consideration for a supply and all of the requirements for a taxable supply in section 9-5 of the GST Act are met. Therefore, in order to determine if you have made a taxable supply for which you receive the payment, it is first necessary to consider whether you have made a supply for consideration. Supply The term 'supply' is defined in section 9-10 of the GST Act as meaning any form of supply whatsoever and includes: • a supply of goods or services; • a provision of advice or information; • a grant, transfer or surrender of real property; • a creation, grant, transfer, assignment or surrender of any right; or • an entry into, or release from, an obligation to: do anything, refrain from an act, or tolerate an act or situation. However, the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money. The meaning of supply is explained in detail in Goods and Services Tax Ruling GSTR 2006/9 which sets out a number of propositions for characterising and analysing supplies. Of relevance in your case is Proposition 9: that the creation of expectations alone does not establish a supply, which is discussed at paragraphs 102 to 111. In particular, paragraph 102 of GSTR 2006/9, explains that 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. Under the provisions of section 9-10 of the GST Act, a supply is not just a supply of goods or services. Supplies can also be made in relation to rights, obligations and information for GST purposes. In your case, the payment made to you is used to fund your activities. The payment is made on a basis which creates more than expectations alone as to the nature of the activities you are to undertake, or services to be provided, with the funds. We consider the agreement you have with the Department in relation to this payment is binding on both parties and, consequently, the entry into these obligations by you is a supply under section 9-10 of the GST Act. Consideration As there is a supply by you to the Department, it is necessary to consider if the payment you receive constitutes 'consideration'. The term 'consideration' is broadly defined in section 9-15 of the GST Act and includes any payment, or any act or forbearance, 'in connection with', 'in response to' or 'for the inducement' of a supply. In your case, subsection 9-17(3) of the GST Act is relevant in examining if you have made the supply for consideration. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by the Department to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment has been determined in consultation between you and the Department as part of the State Government's policy. However, no calculation methodology has been provided to the ATO that shows how the amount payable was determined. We consider the payment satisfies only some of the conditions set out in subsection 9-17(3) of the GST Act, in particular: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation. However, the payment does not satisfy the non-commercial test set out in paragraph 9-17(3)(c) of the GST Act as no costing methodology has been provided that verifies that the basis of calculation of the amount of the payment meets parameters of this provision. Therefore, as all of the requirements of subsection 9-17(3) of the GST Act are not satisfied, the payment received by you is not excluded from being consideration. Accordingly, the payment constitutes consideration for the purposes of section 9-15 of the GST Act. Sufficient nexus between supply and payment For a financial assistance payment to be consideration for a supply, it is not sufficient for there to be a supply and a payment. The financial assistance payment must be consideration for that supply. Paragraph 15 of GSTR 2012/2 explains that there must be a sufficient nexus between: • the financial assistance payment made by the payer, and • a supply made by the payee. 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. The test is an objective one. Paragraph 16 of GSTR2012/2 discusses factors that are to be taken into account when examining an arrangement and states. 16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. 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. However, none of these factors will be determinative on their own and the arrangement must the considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative. The guidance at paragraph 28 of GSTR 2012/2 is of particular relevance. Paragraph 28 discusses payments for the entry into an obligation to do or refrain from doing something and states: 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. The following example of sufficient nexus in relation to a payment for entry into an obligation is provided at paragraphs 29 to 31 of GSTR 2012/2: 29. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art in South Australia. It enters into an arrangement with Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts. Under that arrangement, in return for a financial assistance payment from the Foundation, the troupe enters into a binding agreement under which it is obligated to expand its activities - by presenting three performances outside South Australia during the following year. 30. By entering into this obligation to present three performances outside South Australia, the troupe has made a supply to the Foundation. The payment by the Foundation has been made in connection with, in response to, or for the inducement of this supply. Therefore, there is a sufficient nexus between the entry into the obligation and the financial assistance payment such that the financial assistance payment is consideration for that supply. 31. Snake Glass Jugglers is liable for GST on the supply of the entry into the obligation. The Gooseville Arts Foundation is entitled to an input tax credit on their acquisition of the right to require Snake Glass jugglers to present the performances. In your case, under the agreement you have with the Department in relation to this payment, you have entered into obligations regarding the use of the funds for your activities. Therefore, there is sufficient nexus between the payment you receive from the Department and the obligations you entered into for the payment to be consideration for that supply. Conclusion As the payment is consideration for a supply, you are liable to remit GST in relation to the payment if all the other requirements for a taxable supply under section 9-5 of the GST Act are met. As discussed above, the first requirement for a taxable supply is satisfied as there is a supply for consideration. In relation to the other requirements of section 9-5 of the GST Act, the supply made by you is made in the course or furtherance of your enterprise, the supply is connected with Australia and you are registered for GST. In addition, there are no provisions of the GST Act that apply to make the supply GST-free or input taxed. Accordingly, on the basis of the information provided, you are making a taxable supply for which the payment you receive from the Department is consideration. You are liable to remit GST in relation the payment. | Summary: The following payments, which you receive for the 2012 - 13 financial year, are consideration for GST-free supplies under Division 38 of the GST Act: • Payment 6 • Payment 7 • Payment 8 • Payment 9. | Detailed Reasoning - Detailed reasoning: Payment 6 You receive a payment from Department A which allows you to provide services to designated areas on a commercial basis. The payment is calculated as the shortfall in revenue that exists between the revenue able to be generated from customers and the cost to you. That is, the payment is made to effectively fund the loss that you would otherwise sustain in providing these services and is made up of operating costs, depreciation and a return on assets. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by the Department to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment has been calculated in consultation between you and the Department and is to provide shortfall funding to you which has been necessitated by your under recovery of revenue in respect of the provision of services (on a non-commercial basis) under, basically, a subsidy program. We consider the payment satisfies only some of the conditions set out in subsection 9-17(3) of the GST Act, in particular: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation. However, the payment does not satisfy the non-commercial test set out in paragraph 9-17(3)(c).of the GST Act as the cost methodology used as a basis for calculating the payment includes a return on assets and a measurement of cost based on foregone revenue. Paragraph 2.31 of the EM, discussed above, explains that the concept of cost does not include a return on capital or measurements of cost based on foregone revenue. Tripartite arrangements and supplies As all of the conditions in subsection 9-17(3) of the GST Act are not satisfied, the payment is not excluded from being consideration. Therefore, the basic GST rules must be applied. To satisfy the first requirement of a taxable supply in section 9-5 of the GST Act, the supply must be made for consideration. It is not sufficient that there just be a 'supply' and 'consideration'. The term 'consideration' is broadly defined in section 9-15 of the GST Act and includes any payment, or any act or forbearance, 'in connection with', 'in response to' or 'for the inducement' of a supply. In your case, it is necessary to examine if the payment you received from the Department constitutes 'consideration' for a supply. You have advised that you receive the payment from the Department which allows you to provide services to designated areas on a commercial basis. This type of arrangement, involving more than two entities, is referred to as a tripartite arrangement. GSTR 2006/9 Goods and services tax: supplies provides guidance in relation to tripartite arrangements. Of relevance in your case is Proposition 14, at paragraphs 177 to 216 of GSTR 2006/9, which discusses circumstances where a third party (referred to as a 'third party payer') may pay for a supply but not be the recipient of the supply. In determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a 'supply for consideration', paragraph 180 of GSTR 2006/9 explains that: • the objective test is whether there is a sufficient nexus between the supply and the payment made; • regard needs to be had to the true character of the transaction; and • an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. Example 10A, at paragraphs 212A to 212D of GSTR 2006/9, also provides relevant guidance in relation to administrative arrangements for subsidy programs and explains at paragraph 212D that: 212D. While there is a pre-existing framework which requires the supplier and the Department to act in a particular way under the arrangement, the payment by the Department to the supplier is merely an administrative arrangement to pay on behalf of the individual…. In your circumstances, we consider an examination of the total facts provided indicates there is sufficient nexus between the payment you receive from the Department and the supplies you make to customers in designated areas. Accordingly, the payment you receive from the Department is part consideration for the supplies you make to customers in the designated areas. Under this tripartite arrangement, the Department is a third party payer for those supplies, although not being the recipient of the supplies, and the payment to you is made as merely an administrative arrangement. GST-free supplies The supply of the services is GST-free under Division 38 of the GST Act. Payment 7 You receive a payment from Department B as supplement funding for the revenue you have foregone in providing exemptions from service charges under a scheme. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by the Department to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment is calculated as the estimate of revenue forgone for providing the various exemptions / concessions. That is the payment represents the difference foregone by you for the actual price charged to the eligible customer. The amount received is based on a review of the list of customers within the customer billing system and is, basically, a subsidy program for eligible customers. We consider the payment satisfies only some of the conditions set out in subsection 9-17(3) of the GST Act, in particular: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation. However, the payment does not satisfy the non-commercial test set out in paragraph 9-17(3)(c).of the GST Act as the cost methodology used as a basis for calculating the payment includes a measurement of cost based on forgone revenue. Paragraph 2.31 of the EM, discussed above, explains that the concept of cost does not include a measurement of cost based on forgone revenue. Tripartite arrangements and supplies As all of the conditions in subsection 9-17(3) of the GST Act are not satisfied, the payment is not excluded from being consideration. Therefore, the basic GST rules must be applied. To satisfy the first requirement of a taxable supply in section 9-5 of the GST Act, the supply must be made for consideration. It is not sufficient that there just be a 'supply' and 'consideration'. In your case, it is necessary to examine if the payment you received from the Department constitutes 'consideration' for a supply. You have advised that you receive the payment from the Department as supplement funding for the revenue you have foregone in providing exemptions from service charges under a scheme. This type of arrangement is a tripartite arrangement. Proposition 14, at paragraphs 177 to 216 of GSTR 2006/9, is relevant in your case and discusses circumstances where a third party may pay for a supply but not be the recipient of the supply. In particular, Example 10A, at paragraphs 212A to 212D of GSTR 2006/9, provides guidance in relation to administrative arrangements for subsidy programs and explains at paragraph 212D that: 212D. While there is a pre-existing framework which requires the supplier and the Department to act in a particular way under the arrangement, the payment by the Department to the supplier is merely an administrative arrangement to pay on behalf of the individual…. In your circumstances, we consider an examination of the total facts provided indicates there is sufficient nexus between the payment you receive from the Department and the actual individual supplies to eligible customers. The payment can be characterised as a subsidy payment which reduces the price charged to the eligible customers for the supply of services you make. Such payments are directly referrable to the number of individual service charge exemptions / concessions provided to eligible customers. Accordingly, the payment you receive from the Department is part consideration for the supplies you make to eligible customers. Under this tripartite arrangement, the Department is a third party payer for those supplies, although not being the recipient of the supplies, and the payment to you is made as merely an administrative arrangement. GST-free supplies The supply of the services is GST-free under Division 38 of the GST Act. Payment 8 You receive a payment from Department B to reimburse you for remissions provided to State residents. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by the Department to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment has been calculated in consultation between you and the Department and is the estimate of revenue forgone for providing the remissions. The payment is a subsidy to reduce costs to eligible customers and represents the difference foregone by you for the actual price charged to the eligible customer. We consider the payment satisfies only some of the conditions set out in subsection 9-17(3) of the GST Act, in particular: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation. However, the payment does not satisfy the non-commercial test set out in paragraph 9-17(3)(c).of the GST Act as the cost methodology used as a basis for calculating the payment includes a measurement of cost based on forgone revenue. Paragraph 2.31 of the EM, discussed above, explains that the concept of cost does not include a measurement of cost based on forgone revenue. Tripartite arrangements and supplies As all of the conditions in subsection 9-17(3) of the GST Act are not satisfied, the payment is not excluded from being consideration. Therefore, the basic GST rules must be applied. To satisfy the first requirement of a taxable supply in section 9-5 of the GST Act, the supply must be made for consideration. It is not sufficient that there just be a 'supply' and 'consideration'. In your case, it is necessary to examine if the payment you received from the Department constitutes 'consideration' for a supply. You have advised that you receive the payment from the Department to reimburse you for remissions provided to State residents. The amount of the payment is the difference foregone by you for the actual price charged to the eligible customer and is a subsidy to reduce costs to eligible customers. This type of arrangement is a tripartite arrangement. Proposition 14, at paragraphs 177 to 216 of GSTR 2006/9, is relevant in your case and discusses circumstances where a third party may pay for a supply but not be the recipient of the supply. In particular, Example 10A, at paragraphs 212A to 212D of GSTR 2006/9, provides guidance in relation to administrative arrangements for subsidy programs and explains at paragraph 212D that: 212D. While there is a pre-existing framework which requires the supplier and the Department to act in a particular way under the arrangement, the payment by the Department to the supplier is merely an administrative arrangement to pay on behalf of the individual…. In your circumstances, we consider an examination of the total facts provided indicates there is sufficient nexus between the payment you receive from the Department and the individual supplies of services to customers eligible for remissions. The payment can be characterised as a subsidy payment which reduces the price charged to the eligible customers for the supply of services made by you. Such payments are directly referrable to the number of individual remissions provided to eligible customers. Accordingly, the payment you receive from the Department is part consideration for the supplies you make to eligible customers. Under this tripartite arrangement, the Department is a third party payer for those supplies, although not being the recipient of the supplies, and the payment to you is made as merely an administrative arrangement. GST-free supplies The supply of the services is GST-free under Division 38 of the GST Act. Payment 9 You receive a payment from Department A as supplement funding for the shortfall in revenue you collect from eligible customers as a result of a rebate scheme. The rebate will be automatically calculated and credited to customer bills and will be displayed as a separate item. In relation to the conditions set out in subsection 9-17(3) of the GST Act you have advised that: • the payment is made by the Department to you • the authorisation of expenditure of money has occurred under State appropriation legislation which specifies an appropriated amount to the Administered Items for the Department, which includes an amount for the payment • the amount of the payment has been calculated on the basis of forgone revenue and is the estimate of revenue not collected from eligible customers as a result of the rebate. The rebate is, basically, a subsidy program for eligible customers. We consider the payment satisfies only some of the conditions set out in subsection 9-17(3) of the GST Act, in particular: • paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity to another government related entity, being paid by the Department to you; and • subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, being the State appropriation legislation. However, the payment does not satisfy the non-commercial test set out in paragraph 9-17(3)(c).of the GST Act as the cost methodology used as a basis for calculating the payment includes a measurement of cost based on forgone revenue. Paragraph 2.31 of the EM, discussed above, explains that the concept of cost does not include a measurement of cost based on forgone revenue. Tripartite arrangements and supplies As all of the conditions in subsection 9-17(3) of the GST Act are not satisfied, the payment is not excluded from being consideration. Therefore, the basic GST rules must be applied. To satisfy the first requirement of a taxable supply in section 9-5 of the GST Act, the supply must be made for consideration. It is not sufficient that there just be a 'supply' and 'consideration'. In your case, it is necessary to examine if the payment you received from the Department constitutes 'consideration' for a supply. You have advised that you receive the payment from the Department as supplement funding for the shortfall in revenue you collect from eligible customers as a result of a rebate scheme. The amount of the payment is the difference foregone by you for the actual price charged to the eligible customer and is a subsidy to reduce costs to eligible customers. This type of arrangement is a tripartite arrangement. Proposition 14, at paragraphs 177 to 216 of GSTR 2006/9, is relevant in your case and discusses circumstances where a third party may pay for a supply but not be the recipient of the supply. In particular, Example 10A, at paragraphs 212A to 212D of GSTR 2006/9, provides guidance in relation to administrative arrangements for subsidy programs and explains at paragraph 212D that: 212D. While there is a pre-existing framework which requires the supplier and the Department to act in a particular way under the arrangement, the payment by the Department to the supplier is merely an administrative arrangement to pay on behalf of the individual…. In your circumstances, we consider an examination of the total facts provided indicates there is sufficient nexus between the payment you receive from the Department and the individual supplies to customers eligible for the rebate. The payment can be characterised as a subsidy payment which reduces the price charged to the eligible customers for the supply of services made by you. Accordingly, the payment you receive from the Department is part consideration for the supplies you make to eligible customers. Under this tripartite arrangement, the Department is a third party payer for those supplies, although not being the recipient of the supplies, and the payment to you is made as merely an administrative arrangement. GST-free supplies The supply of the services is GST-free under Division 38 of the GST Act.