Private ruling: GST and financial assistance payments and taxable supplies
Published: October 2013

Ruling: Q1: In the course of satisfying its obligations pursuant to a funding agreement, are payments made to an entity (you) by a government entity consideration for taxable supplies made by that entity to the government entity? | A1: No, the payments made to you by a government entity are not consideration for taxable supplies made by you to the government entity.

Relevant facts and circumstances: You are registered for goods and services tax (GST). You executed a funding agreement (Agreement) with a government entity. You provided a copy of the Agreement. That Agreement sets out the terms and conditions under which annual payments are to be made to you by the government entity. The Agreement further sets out the government entity's purpose in making the payments to you. The Agreement provides that funds provided to you are only to be used to maintain various aspects of your operations. That clause further provides that you must provide reports on, among other things, how the funds have been spent, as specified in the Schedule to the Agreement (Schedule). Under the terms of the Agreement the government entity annually calculates the amount of funds to be paid to you in respect of your operation, subject to receiving each year a completed second progress report which doubles as an application for funding from you that meets the requirements of the Agreement. The calculation is undertaken in accordance with the Schedule. The Agreement deal with the repayment of funds where there is a cessation of operation or the funds have not been spent or otherwise clearly allocated or committed for expenditure in accordance with the terms of the Agreement. Where your operations are not maintained at a level that is at least consistent with what is agreed the subsequent payment to you will be reconciled if, amongst other things, the government entity becomes aware that productions from your operations has fallen below what was agreed. You advise that the first payment of funds was paid to you in accordance with the Schedule which comprised an amount of funding assistance and a GST component. In accordance with the Schedule you issued a tax invoice in relation to the first payment made to you by the government entity. You provided a copy of that tax invoice. The tax invoice shows an amount of GST of $XX and an invoice amount of $XXX. Accordingly, you reported and remitted an amount of $XX of GST in the relevant activity statement and issued a tax invoice. Subsequent payments are to be made to you annually for five years on the dates set out in the table to the Schedule with the second payment due this year. You lodged a second progress report and application for funding for each operation as stipulated under the Schedule. You issued an invoice to the government entity that was not a tax invoice in relation to the payment of funds.

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

Reasons for decision: Summary: Having regard to the Agreement and the Guidelines and surrounding circumstances of the arrangement between you and the government entity there is an insufficient nexus between the payments made by government entity and a supply or supplies of obligations by you for the payments to constitute consideration for those supplies. The obligation to maintain production levels consistent with what was agreed or the requirement to provide progress reports answer the description of a supply but do not go to the purpose of the funding payments. According to the Guidelines and the Agreement the payments are made to ease the transition to the introduction of government initiative. | Detailed Reasoning - Detailed reasoning: Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and entitlements to input tax credits arise on creditable acquisitions. Under section 9-40 of the GST Act an entity must pay the GST payable on any taxable supply it makes. A supply is a taxable supply if pursuant to section 9-5 of the GST Act: · you make the supply for consideration · the supply is made in the course or furtherance of an enterprise that you carry on · the supply is connected with Australia, and · you are 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 supplies contemplated under the Agreement are not GST-free or input taxed. | Detailed Reasoning - Supply: The meaning of 'supply' is given in section 9-10 of the GST Act. Subsection 9-10(1) of the GST Act states that a supply 'is any form of supply whatsoever'. Without limiting subsection 9-10(1) of the GST Act, subsection 9-10(2) of the GST Act provides that a supply includes: · a supply of goods · a supply of services · a provision of advice or information · the creation, grant, transfer, assignment or surrender of any right, and · an entry into, or release from an obligation: o to do anything o to refrain from an act, or o to tolerate an act or situation · or any combination of any 2 or more of the matters referred to in subsection 9-10(2) of the GST Act. However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money (subsection 9-10(4) of the GST Act). | Detailed Reasoning - Consideration: The term 'consideration' for a supply or acquisition is defined in section 195-1 of the GST Act to have the meaning given by sections 9-15 and 9-17 of the GST Act. Subsection 9-15(1) of the GST Act provides that consideration includes: · any payment, or any act or forbearance, in connection with a supply of anything, and · any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. On the facts provided, you are registered for GST and you carry on an enterprise in Australia. Under the terms of the Agreement you a have a number of obligations and responsibilities and you receive payments from a government entity. This is the setting in which section 9-5 of the GST Act is to be applied. The concepts of 'supply' and 'consideration' are important because if there is no supply or if there is no 'consideration' for a supply, paragraph 9-5(a) of the GST Act will not be satisfied and there is no taxable supply on which GST is payable. The Commissioner has explored the issues of a 'supply for consideration' and 'nexus between supply and consideration' in relation to financial assistance payments in Goods and Services Tax Ruling GSTR 2012/2. Paragraph 5 of GSTR 2012/2 explains that the term 'financial assistance payment' (FAP) is intended to encompass a wide range of payments including payments made to provide support or aid to the payee or to support or aid in the implementation of government policy and initiatives. Paragraph 15 of GSTR 2012/2 explains that for the FAP to be consideration for a supply there must be a sufficient nexus between the FAP made by the payer (government entity) and a supply made by the payee (you). The FAP is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply of anything. The test is an objective one. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether the FAP is 'in connection with', 'in response to' or 'for the inducement of' a supply. 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. An entity that receives the FAP 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. Paragraphs 24 and 28 of GSTR 2012/2 states: 24. Providing advice or information is a supply. A financial assistance payment has a sufficient nexus with such a supply where the payment is made for the purpose of obtaining the information. 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. Under the Guidelines, to be eligible for the funding assistance, you must satisfy the eligibility criteria. Applications are assessed against the eligibility criteria and the assistance determination criteria. This entry into an obligation to do something or to provide information in progress reports meets the statutory definition of a 'supply'. For the payments to be consideration for the entry into this obligation, the payment paid to you must have a sufficient nexus with the obligations undertaken by you under the terms of the Agreement. As such, it must be determined whether the entry into the obligations to maintain operations or to provide progress reports goes to the purpose for which the funding payment is paid. The key outcomes of the program, as specified in the Guidelines and the Agreement, outline the purpose for which the funding payments are paid. The obligation to maintain production levels consistent with what is agreed or the requirement to provide progress reports does not go to the purpose of the funding, as specified in the key outcomes set out in the facts above. The three points above indicate that the funding assistance will still be made even if the eligible recipients do not operate at a level consistent with what was agreed. As described in the Guidelines and Agreement, the purpose of the payment is to provide transitional assistance in recognition of the costs associated with the implementation of a government initiative. The payments under the program are to 'ease your transition to the introduction of a government initiative. The obligations imposed on you under the Agreement are the result of the government's requirement to ensure accountability and assess your initial and ongoing eligibility for the funding payments. As such, there is an insufficient nexus between the supply of entering into the obligation to maintain production levels and provide progress reports and the payments, for the payments to constitute consideration for those supplies. Therefore, there is no taxable supply made by you for the payments. Hence, you have no GST liability in respect of the payments.