On 2 November 2011 the Australian Taxation Office released Draft GST Ruling GSTR 2011/D4: Grants of Financial Assistance (the "Draft Ruling"). The draft ruling represents a substantial rewrite of an earlier ruling on the same topic, GSTR 2000/11 (the "Old Ruling"), and follows numerous court decisions which have both challenged and developed the ATO's interpretation of the GST law.
Both providers and recipients of grants should review their GST treatment in light of the Draft Ruling, as some aspects of the ATO's interpretation of the law have changed, particularly in the areas of peripheral supplies and tripartite arrangements.
Arrangements covered by the Draft Ruling
The Draft Ruling has similar scope to the Old Ruling, and covers grants of financial assistance by organisations such as governments, government bodies, not-for-profit bodies, charities and other entities. It classifies grants into payments for:
- providing advice or information;
- a right or the entry into an obligation to do, or not to do something;
- gifts; or
- tripartite arrangements (i.e. providing goods or services to third parties).
The main difference between the Draft Ruling and the Old Ruling lies in their treatment of payments for rights/obligations where the right/obligation is a peripheral supply, and the treatment of tripartite arrangements.
Providing advice or information
The Draft Ruling and the Old Ruling adopt a broadly similar approach in this area. They both indicate that when advice or information is provided in a fee for service arrangement (e.g. conducting market research for a fee) the grant will be subject to GST. By contrast,the peripheral supply of information made in order to access a grant will not be subject to GST, as there is insufficient nexus between the supply and the grant. For example, where a business supplies information on its turnover to a government organisation in order to access funding, the information supplied will be peripheral to the assistance granted, and hence the assistance will not be subject to GST.
Rights and entry into obligation
Consistent with the Old Ruling, the Draft Ruling indicates that payments for rights or for the entry into obligations will normally be subject to GST. For example, government payments to industry under an exit assistance program would be subject to GST where recipients agree to exit an industry for a set period of time. This is because there is a clear nexus between the grant and the entry into the obligation.
However, the Draft Ruling differs from the Old Ruling in its identification of 'peripheral' supplies. These are supplies of minor rights/obligation made in order to access a payment, and will not render a payment subject to GST. In particular the Draft Ruling adopts a different approach to repayment clauses (i.e. clauses requiring repayment of a grant if certain activities are not performed) by indicating that these will generally be peripheral supplies. This contrasts with the Old Ruling which indicated a repayment clause in a grant agreement would generally render the grant subject to GST.
It is unclear what triggered this change in approach, though it could be a result of the decision in Qantas Airways Ltd v Commissioner of Taxation ( see here)In any event, given the prevalence of repayment clauses, it is a practical approach by the ATO to ensure grants are not unnecessarily caught by the GST net.
Sponsorships and gifts
Both Rulings adopt a similar approach. Broadly, if the sponsor or donor receives a benefit in exchange for the payment, the payment is likely to be subject to GST.
The Draft Ruling's discussion of tripartite arrangements represents a development of the ATO's views as these were not addressed in the Old Ruling. It follows the ATO's defeat in the FCT v Secretary to the Department of Transport decision.
Such arrangements typically exist where a party provides funding (e.g. a subsidy) to a supplier in exchange for the provision of goods or services to a third party: the recipient of the supply. There are normally no legal obligations between the funder and the supplier,and the ATO previously considered there was no supply between those parties.
However, the ATO now accepts that such arrangements may involve a supply between the funder and the supplier. The Draft Ruling states that a supply is more likely to exist where there is a pre-existing framework which contemplates that the funder and the supplier act in a particular way. This arrangement should identify a mechanism for identifying the third party recipients of supplies, and specify that the funder is under an obligation to pay the supplier if they provide a supply to the third party.
Moore Stephens comment
It is pleasing to see the ATO update and reformulate its views in this complex area of the GST law. However it is noteworthy that these changes have come about due to court decisions rather than legislative amendments.
Applying the GST law in this area is made difficult by the expansive definitions adopted in the GST Act, which were deliberately designed to capture a very wide range of transactions. From a policy perspective there is also a tension between ensuring normal business transactions are subject to GST, while preventing a tax burden from falling on governments and other organisations in their delivery of social programs.
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