Authors: Andrew Cromb and Stephen O'Flynn, Moore Stephens Melbourne, (03) 8635 1800.
Changes to the GST Treatment of Government Appropriations are likely to impact on Education Providers
On 10 November 2010 the ATO released a draft addendum to GSTR 2006/11 'Goods and Services Tax: Appropriations' in response to the recent Full Federal Court decision in TT-Line Company Pty Ltd v Commissioner of Taxation ("TT-Line").
The draft addendum represents a significant change to the GST treatment of government appropriations, and has the potential to make a wide range of government payments subject to GST. This has major cash flow implications for the education sector, as it relies heavily on government funding to carry out its operations and will require the GST treatment of all appropriations to be reconsidered.
Context of the addendum
The GST treatment of government appropriations is dealt with in s 9-15(3)(c) of the GST Act, which provides that "a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law". Because GST is only levied on supplies for consideration, this section removes most government appropriations from the GST system.
GSTR 2006/11 is the most recent of three public rulings the Commissioner has released dealing with s 9-15(3)(c). It states that for a payment to fall within the scope of the section:
- there must be an appropriation under an Australian law;
- the payment must be from one government related entity to another;
- the payment must be specifically covered by the appropriation.
The Ruling also seems to narrow the scope of s 9-15(3)(c) by restricting it to 'payments of a funding nature' which are not commercial in character.
The Commissioner adopted a relatively broad approach to determining whether a payment is 'specifically covered by an appropriation'. Recognising that appropriation Acts generally adopt a higher-level 'outcomes' approach, the ATO accepts that it is possible to look to additional documents, such as Portfolio Budget Statements and Agency Budget Statements, together with the relevant appropriation Act to determine if the payment is specifically covered by the appropriation.
However, the addendum reflects a change in the Commissioner's approach and adopts a narrow interpretation of 'specifically covered by an appropriation' which was favoured by the Federal Court in TT-Line.
TT-Lines Company Pty Ltd v Commissioner of Taxation
The issue in TT-Line was whether a payment from the Commonwealth government to TT-Line under the Bass Strait Vehicle Equalisation Scheme fell within the scope of s 9-15(3)(c). While each of the three judges answered this question in a slightly different way, all agreed that the payment did not fall within the scope of s 9-15(3)(c).
Emmett J found that the payment was not from one government related entity to another, as the ultimate recipient of the payment was eligible passengers. Hence it fell outside s 9-15(3)(c).
Edmunds J accepted that the payment was from one government related entity to another, but found that it was not specifically covered by an appropriation under an Australian law. Significantly, he said that a payment will not be specifically covered by an appropriation if the terms of the appropriation allowed payments to be made to recipients that were not government related entities.
While Perram J generally agreed with Edmunds J, he did not comment on this criterion.
The draft addendum
The draft addendum proposes to incorporate into GSTR 2006/11 the narrow interpretation of s 9-15(3)(c) adopted by the Federal Court in TT-Line.
It incorporates the approach of Edmunds J, and states that a payment will not fall within s 9-15(3)(c) unless the terms of the appropriation restrict the class of potential recipients to government related entities. Examples in the addendum make it clear that payments through a competitive grants process will not fall within s 9-15(3)(c) if both non-government entities and government related entities compete together to obtain the funding.
The Commissioner has proposed a transition period of until 30 June 2011 to allow taxpayers time to adjust to this new approach.
How might this affect you?
The combined effect of TT-Line and the draft addendum is to render a large number of government payments to the education sector subject to GST.
Most funding in this area is obtained through a competitive grants process, where government related universities compete against private universities (e.g. Bond University and Australian Catholic University) to obtain government funding. Formerly, if such funding was obtained by a government related university, and the payment was authorised by an appropriation Act, it would fall within the scope of s 9-15(3)(c) and hence not be subject to GST. However such payments will no longer fall within s 9-15(3)(c), as the class of potential recipients includes private universities. This means that recipients of competitive grants will need to remit 10% GST to the ATO, assuming the other elements of a taxable supply are present.
Given the nature of government funding in the education sector we believe that very few payments will fall within s 9-15(3)(c). The nature of the competitive grants processes, together with the presence of private universities, means that most funding payments will be subject to GST. As many education providers currently treat these payments as not subject to GST, this represents a significant change to the treatment of funding in this area. The education sector's reliance on government funding, coupled with the size of many funding payments, makes this is a high risk area for many education providers.
A further negative implication of this change is the likely increase in compliance costs for the sector. To determine the correct GST treatment of a funding payment, taxpayers must not only determine whether it is authorised by an appropriation Act, but also whether the class of potential recipients includes non-government related entities.
If the addendum is finalised it will become part of a public ruling and override existing private rulings on this issue. This means that all existing private rulings will need to be reviewed for inconsistency.
For further information on the ATO draft addendum to GSTR 2006/11 or on GST related matters please contact the authors or your Moore Stephens relationship partner.
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