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

Ruling: Q1: Do payments made by a Government Department (Department) satisfy paragraph 9-17(3)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, payments made by the Department satisfy paragraph 9-17(3)(c) of the GST Act.

Relevant facts and circumstances: The Department is registered for goods and services tax (GST). Under a State Act the Minister of the Department may make an order that relates to the payment of fees for services. The order specifies the fees that are to be paid to the Department for the services. The order also details the distribution of the fees between the Department and the other government related entity which will provide the actual services. The Department has advised that the distribution payments it makes to the other government related entity have been calculated on the basis that the payments will not exceed the anticipated costs of making the supply of services. Another decision has determined that the payments are covered by an appropriation under an Australian law such that paragraph 9-17(3)(b) of the GST Act is satisfied.

Relevant legislative provisions: A New Tax System (Goods and Services) Tax Act 1999 subsection 9-17(3). | A New Tax System (Goods and Services) Tax Act 1999 paragraph 9-17(3)(c)

Reasons for decision: Summary: Subsection 9-17(3) of the GST Act provides that a payment is not the provision of consideration if: • the payment is made by one government related entity to another government related entity for making a supply (paragraph 9-17(3)(a) of the GST Act) • the payment is (amongst other things) covered by an appropriation under an Australian law (paragraph 9-17(3)(b) of the GST Act), and • the payment satisfies what is referred to as the non-commercial test (paragraph 9-17(3)(c) of the GST Act). The issue that arises under subsection 9-17(3) of the GST Act in the present circumstances is whether paragraph 9-17(3)(c) of the GST Act is satisfied. That is, whether the payment by the Department was calculated on the basis that the sum of: • the payment (including the amounts of any other such payments) relating to the supply, and • anything (including any payments 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. This is achieved by requiring that the payment for the supply in question (in this case a supply of services) be calculated on the basis that the sum of the payment and anything else received from another entity in connection with, or in response to, or for the inducement of, the supply of services or any other related supply, does not exceed the anticipated or actual cost of making the supplies. Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2012 Measures No.1) Bill 2012 ( EM) explains at paragraphs 2.27 and 2.31 that: 2.27 Whether or not the amount of the payment exceeds the government related entity supplier's anticipated or actual costs of making the supply, or supplies, is determined at the time at which the amount to be paid is worked out rather than at the time of payment (if it is later). If the determination of the amount of the payment to be made takes place before the relevant supply, or supplies, are made, it will be necessary to base the calculation on the anticipated costs of making the supply, or supplies. The amount of the payment will commonly be calculated in consultation between the government related entity making the payment and the government related entity supplier. If the payment is calculated after the relevant supply, or supplies, are made, the calculation is based on the actual costs of making the supply, or supplies. Where the calculation is based on the anticipated costs of making the supply, or supplies, it is not necessary to subsequently determine the actual costs of making the supply, or supplies. … 2.31 In the context of these amendments, 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. Also, as noted at paragraph 2.25 of the EM, if the payment is made in instalments, paragraph 9-17(3)(c) of the GST Act requires the aggregate of the instalment payments for the supply to be tested against the anticipated or actual costs of making the supply or supplies. On the facts provided, the Department determines the amount of funding to be allocated and advises that those funding payments have been calculated on the basis that the payments will not exceed the anticipated costs of the supplies. As the payments have been calculated on the basis that the payments will not exceed the anticipated costs of the supplies made, the payments by the Department satisfy the requirements of paragraph 9-17(3)(c) of the GST Act. In relation to the other two requirements of subsection 9-17(3) of the GST Act, the Department has advised that both the Department and are government related entities. Accordingly, the payment made by the Department for making the supply satisfies paragraph 9-17(3)(a) of the GST Act. In addition, the payments made by the Department satisfied the requirement that the payments were covered by an appropriation under an Australian law such that paragraph 9-17(3)(b) of the GST Act is satisfied. As all three of the requirements of subsection 9-17(3) of the GST Act are satisfied the payments made by the Department are not the provision of consideration. Consequently, the supply of services was not a 'supply for consideration' and therefore not a taxable supply under section 9-5 of the GST Act on which GST is payable. It follows, that as no taxable supply is made to the Department, the Department is not entitled to an input tax credit.