Key Points

On 24 November 2011 the Government released exposure draft legislation which will provide much needed clarity to the GST treatment of government appropriations.  The proposed amendments are designed to ensure that payments by Government related entities ("GREs") pursuant to an appropriation will generally only be subject to GST if they are made in the context of a commercial transaction.

If passed, the changes will apply from 1 July 2012.

Background to the changes

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 GRE to another GRE 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 made for consideration, this section was intended to remove most government appropriations from the GST system.

However the 2009 decision in TT-Line Company Pty Ltd v Commissioner of Taxation complicated previous understandings of how this provision worked. Following the decision it seemed that a payment by one GRE to another GRE would not be "specifically covered" by an appropriation if the terms of the appropriation also allowed a non-government related entity to receive payment. The ATO confirmed this view by issuing an addendum to GSTR 2006/11 "Appropriations" (refer to our previous article for further discussion on this addendum)

As the potential recipients for Government funding often include non-GRE entities, this gave rise to concerns that a large range of Government funding will be subject to GST. This would cause significant cash flow issues for GREs.

The Government's exposure draft recognises that this was not the intended application of the GST appropriation provisions which were introduced to ensure that payments under any appropriation to fund the non-commercial activities of Government be excluded from GST.  Hence, the proposed changes seek to address this.

Proposed changes

The proposed changes will amend s 9-15(3)(c) to remove the requirement that a payment be "specifically covered" by an appropriation.

Instead, a payment will not be the provision of consideration if:

  • it is made by one GRE to another GRE; and
  • the payment is covered by an appropriation under an Australian law; and
  • the payment is not made for a supply which is commercial in nature.

The exposure draft explanatory memorandum makes it clear that supplies will be commercial supplies if the consideration received goes further than covering the cost of making the supply (i.e. a margin is also charged).

Example

A government department enters into a memorandum of understanding with another GRE under which it will provide business administration services to the GRE. In return it will receive a payment equal to its costs for providing those services.  The supply is not commercial in nature as the price charged does not go beyond recovery of costs.  Hence the payment will not be "consideration" for a supply, and, assuming it is covered by an appropriation, it will not be subject to GST.  However, if the payment was equal to its cost for providing those services plus a margin, the payment will be consideration for a supply and hence GST would be payable.

Implications

The changes will significantly reduce the risk of payments between GREs being subject to GST. However as the changes will only apply from 1 July 2012, there is uncertainty as to whether payments made prior to this date will continue to be at risk.  For example, prior to this legislative fix there was a risk that certain appropriations made to Universities (that were GREs) would have been subject to GST as there were Universities that were not GREs that would also receive the payment.

Furthermore, the changes broaden the number of payments which will be GST-free (as compared to the previous law).  Hence, taxpayers will need to re-consider whether they should continue to be charging GST on certain payments.

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