Private ruling: GST and government funding
Published: March 2013

Ruling: Q1: Are you making a taxable supply for which you receive a payment? | A1: Yes, you are making a taxable supply.

Relevant facts and circumstances: You are a government related entity that is registered for GST. You carry on an enterprise. The price imposed by you on your supplies includes a profit component. You became eligible to receive a payment from Department A and entered into a deed with Department A to receive that payment. The deed outlined your obligations.

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: You are making a taxable supply for which the payment from Department A is a consideration because there is a sufficient nexus between the specific obligations that you are required to comply with and the payment received. | Detailed Reasoning - Detailed reasoning: Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (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: · the entity makes the supply for consideration · the supply is made in the course or furtherance of an enterprise that the entity carries on · the supply is connected with Australia, and · 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. To be a taxable supply all of the requirements of section 9-5 of the GST Act must be satisfied. Goods and Services Tax Ruling GSTR 2012/2 provides the Commissioner's views on when a financial assistance payment is consideration for a supply. In particular, GSTR 2012/2 explains at paragraph 5 that financial assistance payments includes payments provided 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 when you receive a payment from Department A, it is first necessary to consider whether you have made a supply for consideration. The term 'supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes: · a supply of goods · a supply of services · the creation, grant, transfer, assignment or surrender of any right, and · an entry into, or release from an obligation: · to do anything · to refrain from an act, or · to 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 to this case is proposition 9 which provides that the creation of expectations alone does not establish a supply. Proposition 9 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. As outlined in section 9-10 of the GST Act, a supply is not just goods and services. Rights, obligations and information can also be a supply for GST purposes. In the context of financial assistance payments, GSTR 2012/2 provides at paragraph 7 that the types of arrangements that are covered by this ruling include the entry into an obligation to do, or not to do, something. An example of where a provision of an 'obligation to do something' is binding on the parties involved is given in the table in Appendix 2 of GSTR 2012/2 (paragraph 144). This example states: Payee enters into an obligation with the payer, under which the payee is required to deliver specified services to the community. The payer makes the payment to the payee for the purpose of those services being delivered in pursuit of the payer's objects. It is clear from the facts that your obligations under the deed are more than just 'mere expectations' that you will do certain things. When viewed as a whole, the obligations under the deed are 'binding obligations' and consequently, the entry into these obligations by you is a supply under section 9-10 of the GST Act. As there is a supply it is necessary to consider if the payment received by you 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. However, subsection 9-17(3) of the GST Act provides that a payment is not the provision of consideration if all of the following requirements are satisfied: · the payment is made by a government related entity to another government related entity · the payment is covered by an appropriation under an Australian law, and · the payment satisfies the non-commercial test. To satisfy the non-commercial test, the amount of the payment must be calculated on the basis that the payment or payments relating to the supply do not exceed the anticipated or actual cost of making that supply. In this case, the price includes a profit component and therefore, the non-commercial test will not be satisfied. 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 received by you under the deed will constitute consideration for the purposes of section 9-15 of the GST Act. It is not sufficient that there just be a 'supply' and 'consideration'. To satisfy the first requirement of section 9-5 of the GST Act, the supply must be made for consideration. As stated in paragraph 15 of GSTR 2012/2: For a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A 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. Following on from this, paragraph 16 of GSTR 2012/2 discusses the factors that are to be taken into account when examining an arrangement and states: 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 be considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative. In relation to payments for an entry into an obligation to do something, paragraph 28 of GSTR 2012/2 states: 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. In addition, paragraphs 29 to 31 of GSTR 2012/2 provide an example of where there is a sufficient nexus for payments for an entry into an obligation. It states: 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. Therefore, the payment is consideration for your supply of entering into the obligations contained in the deed. Consequently, the first requirement of section 9-5 of the GST Act (a supply for consideration) is satisfied. As stated previously, to be a taxable supply all of the requirements of section 9-5 of the GST Act must be satisfied. As determined above, the first requirement of section 9-5 of the GST Act (a supply for consideration) is satisfied. In relation to the other requirements of section 9-5 of the Act, the supply made by you under the deed will be 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 that would make the supply in this case either GST-free or input taxed. Therefore, you are making a taxable supply for which the payment from Department A is consideration. As such, you are liable to remit GST in relation to this payment.