Private ruling: GST and appropriations
Published: June 2012

Ruling: Q1: Are you entitled, prior to 1 July 2012, to an input tax credit in relation to the payment of a fee to public sector employers under a Government program? | A1: No, you are not entitled, prior to 1 July 2012, to claim an input tax credit in relation to the payment of the fee to public sector employers who have chosen and are eligible to apply the transitional arrangements in Goods and Services Tax Ruling GSTR 2011/2. This is because, when the transitional arrangements apply, the fee is not consideration for a taxable supply made by the public sector employer to you. | Q2: What adjustments, if any, are you required to make in respect of tax invoices received from public sector employers for payments made after 1 July 2011 that did not include GST? | A2: Where the transitional arrangements in GSTR 2011/2 apply, no GST is applicable to the payments made to public sector employers prior to 1 July 2012 and therefore, no adjustments are necessary if GST was not originally included in the payments made after 1 July 2011.

Relevant facts and circumstances: You are a Commonwealth Government agency which is registered for GST. You administer a Government program. To engage in the program, employers (both public sector and private sector) must enter into an agreement with you. The terms and conditions that each of the parties to the agreement agree to abide by are listed in an annexure to that agreement. Clauses in the agreement list the specific obligations that the employer and you have agreed to do. Once executed, the agreement is binding on the parties involved and it is only once the agreement has been approved/executed by you that the employer becomes eligible for financial assistance. The agreement specifies the financial assistance payable under the program and while you pay all of the financial assistance under the program to the employer, the agreement specifies that the employer is to forward most of this payment to another party. Under the agreement you are to include GST for taxable supplies but the fee was only subject to GST for private sector employers. You advised that the exclusion for public sector employers was based on Goods and Services Tax Ruling GSTR 2006/11 which treated funding to public sector employers as an appropriation and thus, not subject to GST. You have advised that the terms of the appropriations for the program only refer to an outcome rather than mentioning government related entities either by name or generically and that the payments can be made to both private and public sector employers. You have advised that some payments to public sector employers after 1 July 2011 have included GST.

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 Paragraph 9-15(3)(c) | A New Tax System (Goods and Services Tax) Act 1999 Section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 Division 19 | A New Tax System (Goods and Services Tax) Act 1999 Subsection 19-10(1) | A New Tax System (Goods and Services Tax) Act 1999 Division 149 | A New Tax System (Goods and Services Tax) Act 1999 Section 184-1

Reasons for decision: Summary: According to the current legislation and the views expressed in GSTR 2011/2, the payment of the fee to public sector employers is not excluded from being consideration under paragraph 9-15(3)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore, where all of the requirements of section 9-5 of the GST Act are satisfied the fee will be consideration for a taxable supply, and thus, subject to GST. However, GSTR 2011/2 contains transitional arrangements which provide that government related entities may continue to rely on GSTR 2006/11 for payments made before 1 July 2012 rather than 1 July 2011 as previously set out in GSTR 2006/11DA. Under GSTR 2006/11 payments between government related entities that were 'specifically covered' by an appropriation were excluded from being consideration under paragraph 9-15(3)(c) of the GST Act. Based on the information provided, we accept that the payment of the fee to public sector employers was 'specifically covered' by an appropriation according to the test in GSTR 2006/11. Therefore, where a public sector employer chooses and is eligible to apply the transitional arrangements in GSTR 2011/2, the fee received by that public sector employer will not be subject to GST until 1 July 2012 (based on current legislation) as the fee is not consideration for a taxable supply. Where this is the case, you are not entitled, prior to 1 July 2012, to claim an input tax credit in relation to the payment of the fee to that public sector employer. However, where the transitional arrangements in GSTR 2011/2 do not apply and the payment of the fee to a public sector employer is consideration for a taxable supply, you will be entitled to claim an input tax credit where the payment of the fee is a creditable acquisition. In respect of the payment of the fee on or after 1 July 2012, the public sector employers and you will need to take into account the views in GSTR 2011/2, the current legislation and any new legislation that may apply from that date. | Detailed Reasoning - Detailed reasoning: Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make. The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally. However, in some cases, a government entity will not meet the definition of 'entity' in section 184-1 of the GST Act but the special rules in Division 149 of the GST Act apply to enable government entities, that are technically not entities, to register for GST. Once registered for GST, a government entity, like other GST registered entities, will be liable for GST on the taxable supplies that it makes and entitled to input tax credits for its creditable acquisitions. In relation to creditable acquisitions, section 11-5 of the GST Act provides that you make a creditable acquisition if: · you acquire anything solely or partly for a creditable purpose · the supply of the thing to you is a taxable supply · you provide, or are liable to provide, consideration for the supply, and · you are registered or required to be registered for GST. To be entitled to claim input tax credits all of the above requirements must be satisfied. One of the requirements for a creditable acquisition is that the supply of the thing to you is a taxable supply. Under section 9-5 of the GST Act, you make a taxable supply if: · 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. In this case, you in your role of administrator of the program, enters into agreements with eligible employers. Once the agreement is approved by you, the employer becomes eligible for the financial assistance payments provided under the program. Guidance on the application of GST to grants of financial assistance was previously contained in Goods and Services Tax Ruling GSTR 2000/11 but this ruling was withdrawn on 30 May 2012 and replaced with Goods and Services Tax Ruling GSTR 2012/2. GSTR 2012/2 takes into account recent Australian case law on GST and provides further explanation and clarification of the GST law in respect of financial assistance payments. As explained in paragraph 99 of GSTR 2012/2, for a payee to have a GST liability in relation to a financial assistance payment and for a payer to be entitled to an input tax credit, it must be established that: · the financial assistance payment is consideration, and · there is a sufficient nexus or connection between the payment and a supply. This means that the GST treatment of financial assistance payments depends primarily on whether the payments represent consideration that has the relevant connection with a supply and all of the other requirements for a taxable supply are met. In this case, it is the employers that will be liable for GST on receipt of the payments from you if those payments represent consideration for a supply which is a taxable supply. Where the employer is liable for GST in respect of all or part of the payment, you which made the payment may be entitled to claim an input tax credit for that GST if it makes a creditable acquisition. Therefore, in order for you to be able to claim an input tax credit it is first necessary to determine if the employer is making a taxable supply for which all or part of the payment is consideration. To be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied. The first requirement to be satisfied is that 'you make 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 · 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. 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 5 which provides that to 'make a supply' an entity must do something and proposition 9 which provides that the creation of expectations alone does not establish a supply. Proposition 5 is outlined in paragraphs 71 to 91 of GSTR 2006/9. In particular, paragraph 72 of GSTR 2006/9 provides that the use of the word 'make' in the context of section 9-5 of the GST Act, indicates that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier', had there been 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. To engage in the program the employer must do something. That 'something' is that the employer must enter into an agreement with you. The agreement sets out the terms and conditions of the arrangement and the obligations that the employer has agreed to abide by. 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. However, according to paragraph 55 of GSTR 2012/2, there will be some arrangements that do not involve the making of any supply whatsoever. As outlined in paragraph 56 of GSTR 2012/2 this can be in situations were the agreement between the parties is not binding and merely creates expectations. This is further explained in paragraph 119 of GSTR 2012/2 which states: A further example of where there is 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. This means that, as per proposition 9 in GSTR 2006/9, to be a 'supply' under the GST Act, the supply must be binding on the parties involved. The mere creation of expectations between the parties is not a supply for GST purposes. However, 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. In this case, the terms and conditions of the arrangement between the employer and you are set out in the agreement. In general terms, the employer has an overall obligation to assist you. In addition, the agreement lists a number of specific obligations that the employer has agreed to do in order to fulfil this overall obligation. Furthermore, there are some incidental reporting obligations in the agreement. Therefore, it is clear that the employer obligations under the agreement are more than just 'mere expectations' that the employer will do certain things. Rather, the agreement includes specific obligations that the employer has agreed to do. As such, the obligations are 'binding obligations' and consequently, the entry into these obligations by the employer (irrespective of whether it is a public sector employer or a private sector employer) is a supply under section 9-10 of the GST Act. As there is a supply by the employer to you, it is necessary to consider if the payments constitute '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 the context of financial assistance payments, 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. However, paragraph 9-15(3)(c) of the GST Act provides that payments between government related entities do not constitute consideration if the payments are specifically covered by an appropriation under an Australian law. Based on the information provided, we accept that you and the public sector employers would constitute government related entities and that payments from you to these public sector employers would be payments between government related entities. The other requirement to be satisfied in paragraph 9-15(3)(c) of the GST Act is that the payments between the government related entities must be 'specifically covered' by an appropriation. Guidance on the application of paragraph 9-15(3)(c) of the GST Act was previously provided in GSTR 2006/11 which was withdrawn on 13 July 2011. Under this ruling, the non-commercial activities of government related entities were excluded from the operation of GST and the ruling also provided that to be 'specifically covered' by an appropriation, only the purpose and the amount of the payment had to be specified (paragraph 48 of GSTR 2006/11). Following on from this, GSTR 2006/11 also acknowledged that the purpose and amount of the payment were generally not specified in an Appropriation Act and therefore, the ATO considered, at that time, that a payment could be specifically covered by an appropriation where the information was provided in relevant supporting documents to the Appropriation Act (paragraph 53 of GSTR 2006/11). However, a draft Addendum to GSTR 2006/11 (GSTR 2006/11DA) was issued by the ATO following the Full Federal Court's decision in TT-Line Company Pty Ltd v Commissioner of Taxation [2009] FCAFC 178 (TT Line). The Court in the TT Line case held that the exclusion in paragraph 9-15(3)(c) of the GST Act did not apply to payments for services which, under the terms of an appropriation, could be supplied by a government related entity or a non-government related entity. In addition, the Court held that paragraph 9-15(3)(c) of the GST Act is confined to payments pursuant to an appropriation the terms of which specify the government related entity by name or generically to those entities having that status. GSTR 2006/11DA inserted paragraph 48A into GSTR 2006/11 which endorsed the Court's reasoning and provided that if the payment made by a government related entity under an appropriation could be paid to either a government related entity or a non-government related entity then paragraph 9-15(3)(c) of the GST ACT would not apply. The draft Addendum also included transitional arrangements for the proposed changes which allowed government related entities to continue to rely on GSTR 2006/11 so that they had sufficient time to make the necessary changes to their practices and systems. However, both GSTR 2006/11 and GSTR 2006/11DA were withdrawn on and replaced with GSTR 2011/2. GSTR 2011/2 also deals with appropriations as well as the application of paragraph 9-15(3)(c) of the GST Act and makes it clear that it has been prepared to reflect the reasoning in the TT-Line case. Paragraph 16 of GSTR 2011/2 provides that not all payments between government related entities fall under paragraph 9-15(3)(c) of the GST Act and goes on to state: … A payment is not 'specifically covered by an appropriation' for the purposes of paragraph 9-15(3)(c) if the relevant terms of an appropriation authorise the government related entity to make payments that can be made to either a government related entity or a non-government related entity. Therefore, if a payment could, under the terms of the appropriation, be payable to either a government related entity or a non-government related entity, paragraph 9-15(3)(c) does not apply to the payment. In addition, paragraph 20 of GSTR 2011/2 states: For a payment to be specifically covered by an appropriation under an Australian law for the purposes of paragraph 9-15(3)(c), the terms of the appropriation must specify that the payment be made to a government related entity or entities, by name or generically. Furthermore, paragraph 21 of GSTR 2011/2 states: If the 'specifically covered' requirement is not met the basic GST rules apply to determine whether the payment is consideration for a taxable supply. We have been advised that the terms of the appropriation for the program only refers to an outcome rather than mentioning government related entities either by name or generically and that the program can be undertaken by both private and public sector employers. Therefore, as the payments are not restricted to government related entities which are specified either by name or generically, the payments are not 'specifically covered' by an appropriation. As such, the payments to public sector employers do not satisfy the requirements of paragraph 9-15(3)(c) of the GST Act and thus, are not excluded from being consideration. Accordingly, the payments made to employers (both public sector employers and private sector employers) under the program constitute consideration for the purposes of section 9-15 of the GST Act. As determined above, an employer under the program is making a supply to you when that employer enters into an agreement and the payments paid by you are consideration. However, 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. This means that there must be a necessary relationship between the supply and the consideration. In relation to payments for the entry into an obligation to do something, GSTR 2012/2 at paragraph 28 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, example 3 in paragraphs 29 to 31 of GSTR 2012/2 specifically deals with 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. In this case, by entering into the agreement, the employer has agreed to carry out a number of specific obligations and to abide by the terms and conditions of that agreement. In return for entering into these obligations the employer is eligible to receive financial assistance in the form of payments. By agreeing to carry out the obligations specified in the agreement in return for the payments, the employer is entering into obligations for which the payments are consideration. This means that there is a sufficient connection between the obligations entered into by the employer and the payments paid by you to establish a link or nexus between the substance of the obligations and the payments received. Therefore, the payments are consideration for the supply by the employer of entering into the obligations contained in the agreement. Hence, the first requirement of section 9-5 of the GST Act (a supply for consideration) is satisfied. However, the necessary relationship or nexus between the supply made by the employer to you and the consideration paid by you exists only in relation to that part of the payment that is retained by the employer, being the fee. This is because under the agreement, the employer is obliged to pay the other components of the payment it receives from you directly to another party. Therefore, it is considered that the employer is not making a supply to you for which the other components is consideration. Furthermore, we also consider that the other party is not making a supply to you. 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, it is considered that the supply by the employer of an entry into an obligation to do something will be made in the course or furtherance of the employer's enterprise, the supply is connected with Australia and, in most cases, the employer would be registered for GST. In addition, there are no provisions that would make the supply in this case either GST-free or input taxed. Therefore, accordingly to the current legislation, if all of the requirements of section 9-5 of the GST Act are satisfied the employer (irrespective of whether it is a public sector employer or a private sector employer) is making a taxable supply for which the fee is consideration. Where this is the case, you are obliged, under the agreement, to include GST when paying the fee. Notwithstanding the advice provided above, GSTR 2011/2 also contains transitional arrangements which extend the previous transitional arrangements set out in GSTR 2006/11DA from 1 July 2011 to 1 July 2012. In particular, paragraph 53 of GSTR 2011/2 states: … Entities may continue to rely on GSTR 2006/11 for payments made before 1 July 2012 to allow sufficient time to make necessary changes to their practices and systems. Budget preparations for payments made on or after 1 July 2012 need to consider the views in this ruling that has replaced GSTR 2006/11. In respect of the reliance on GSTR 2006/11, paragraph 54 of GSTR 2011/2 states: If a supplier relies or has relied on GSTR 2006/11 to determine that paragraph 9-15(3)(c) applies to a payment made for a supply, then no GST is payable on that supply. This means that the recipient cannot claim an input tax credit in respect of that payment. This means that where the transitional arrangements apply, government related entities can choose to continue to rely on GSTR 2006/11 for payments made before 1 July 2012 rather than 1 July 2011 as previously set out in GSTR 2006/11DA. In this case, only subject to GST for private sector employers. You advised that the exclusion for public sector employers was based on GSTR 2006/11 which previously treated the payment of the fee to public sector employers as an appropriation and as such, it was excluded from being consideration under paragraph 9-15(3)(c) of the GST Act. GSTR 2006/11 provided similar guidance to that now provided under GSTR 2011/2 but the interpretation of 'specifically covered' has been narrowed in the revised ruling due to the decision in the TT Line case. In particular, GSTR 2006/11 at paragraphs 46 and 47 explained 'specifically covered', paragraphs 48 and 49 explained what was to be specified, and paragraphs 50 to 62 explained where this information had to be specified. Based on the information provided, we accept that the payment of the fee to public sector employers was 'specifically covered' by an appropriation according to the test in GSTR 2006/11. Therefore, where a public sector employer chooses and is eligible to apply the transitional arrangements in GSTR 2011/2, the fee received by that public sector employer will not be subject to GST until 1 July 2012. However, in respect of the payment of the fee on or after 1 July 2012, the public sector employers and you will need to take into account the views in GSTR 2011/2, the current legislation and any new legislation that may apply from that date. If the transitional arrangements in GSTR 2011/2 apply to the payment, prior to 1 July 2012, of the fee to a public sector employer, the payment will not be subject to GST. Where no GST is payable on the fee paid by you to public sector employers, you will not be entitled to claim an input tax credit in respect of that payment as you will not be making a creditable acquisition under section 11-5 of the GST Act. However, if the transitional arrangements in GSTR 2011/2 do not apply or the public sector employer chooses not to rely on GSTR 2006/11, you will be entitled to claim an input tax credit for the GST applicable to the fee paid to that public sector employer as it is considered that, in these circumstances, all of the requirements of section 11-5 of the GST Act will be satisfied. Specifically, you have acquired a supply of obligations from the public sector employer solely or partly for a creditable purpose. That is, the acquisitions have been acquired in carrying on your enterprise and the acquisitions are not in relation to making supplies that are input taxed or private or domestic. In addition, the supply of the obligations is a taxable supply to the public sector employer (only if the transitional arrangements in GSTR 2011/2 do not apply), you provide or are liable to provide consideration in the form of payments and you are registered for GST. The Government has issued an exposure draft proposing an amendment to the GST legislation from 1 July 2012 to restore the policy intent that the non-commercial activities of government related entities should not be subject to GST. However, we are unable to provide any advice in relation to expected legislation. | Summary: An adjustment is only required if GST has been incorrectly included in the payment of the fee to a public sector employer. As determined in Question 1, where a public sector employer chooses and is eligible to apply the transitional arrangements in GSTR 2011/2, no GST is applicable to the payment of the fee to that public sector employer prior to 1 July 2012 and therefore, no adjustments are necessary if GST was not originally included in the payment of the fee after 1 July 2011. | Detailed Reasoning - Detailed reasoning: Division 19 of the GST Act deals with adjustments for adjustment events. The term 'adjustment event' is defined in subsection 19-10(1) of the GST Act as any event which has the effect of, among other things, causing a supply or acquisition to become, or stop being, a taxable supply or a creditable acquisition. However, an adjustment is only necessary in these circumstances (wrong classification) if there is a change in the consideration as a result of correcting the error. As determined above in Question 1, where a public sector employer chooses and is eligible to apply the transitional arrangements in GSTR 2011/2, GST is not applicable to the fee paid to that public sector employer prior to 1 July 2012. This is because, where the transitional arrangements in GSTR 2011/2 apply, a public sector employer is not making a taxable supply to you for which the fee is consideration and consequently, you are not entitled to claim an input tax credit for the payment of that fee. You advised that prior to 1 July 2011, GST was not applicable to the fee paid to public sector employers as the payment was treated as an appropriation in line with GSTR 2006/11 but GST was applicable to the fees paid to some public sector employers after 1 July 2011. It should be noted that the transitional arrangements in GSTR 2011/2 are not compulsory. This means that a supplier, being the public sector employer, can choose not to rely on GSTR 2006/11 if, from a certain date, it has already made the necessary changes to its practices and systems to accommodate the views previously expressed in GSTR 2006/11DA and now expressed in GSTR 2011/2. Therefore, if a public sector employer chooses not to apply the transitional arrangements in GSTR 2011/2 from a certain date, the payment of the fee will be consideration for a taxable supply from that date and thus, subject to GST where all of the requirements of section 9-5 of the GST Act are satisfied. Where this is the case, you would have been required to include GST with the payment of the fee and as such, would have been entitled to claim an input tax credit for that GST where all of the requirements of section 11-5 of the GST Act are satisfied. Accordingly, there will only be a requirement to make an adjustment in respect of the payment of the fee to a public sector employer after 1 July 2011 if the payment has been incorrectly treated as consideration for a taxable supply and you have incorrectly claimed an input tax credit.

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