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.
The proposed changes will amend s 9-15(3)(c) to remove the
requirement that a payment be "specifically covered" by
Instead, a payment will not be the provision of consideration
it is made by one GRE to another GRE; and
the payment is covered by an appropriation under an Australian
the payment is not made for a supply which is commercial in
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).
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.
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.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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