In September 2012 the Commissioner published nearly 60 private rulings dealing with GST issues on the Private Rulings Register. A list of the rulings can be accessed here.
This month I would like to focus on a private ruling made on the difficult issue of whether grants of financial assistance are consideration for taxable supplies and a private ruling made on the perennial issue of GST refunds.
Private ruling No. 1012140548318 – grants of financial assistance
This private ruling deals with the difficult issue of whether grants of financial assistance are consideration for taxable supplies. The private ruling is interesting because it involves the application of the Commissioner’s views in GSTR 2012/2 ‘Goods and services tax: financial assistance payments which was published earlier this year. My analysis of that ruling can be accessed here.
The facts of the private ruling were as follows. The applicant (A) was registered for GST and under the terms of a deed, B made a grant to A for the approved purpose, being the design, construction, delivery and installation of an item to be used in a specified location.
Clause A provided the following conditions for the grant:
- to use the grant only for the approved purpose
- to store, maintain, transport, clean, erect and dismantle the item
- to make the item available to authorised users
- to maintain proper financial records in relation to the grant
- to disclose the grant as a separate and identifiable item in your financial statements
- to provide annual audited financial statements
- to keep the other party informed on progress and provide other information as agreed
Clause B provided that A was required to publicly acknowledge the assistance of the grant from the other party
Clause C dealt with the possible repayment of the grant, at the option of the other party, if A failed to apply the grant for the approved purposes.
Clause D stated that the grant did not include GST, but B agreed that if GST was payable the additional amount for GST would be paid.
Having regard to GSTR 2012/2, the Commissioner concluded that, viewing the arrangement as a whole, A made a supply to B for consideration and GST was payable on the grant. The basis for this conclusion is that the terms of the deed go beyond providing a grant to enable A to acquire the item, which on its own could result in a mere expectation only (and no supply). The additional clauses (including the obligation to make the item available to authorised users and to store, maintain, transport, clean, erect and dismantle the item) evidence that there is more than a mere expectation. Further, it is only be building the item that the express obligations to maintain them and make them available to users can be fulfilled.
In coming to this conclusion, the Commissioner referred to the following example in GSTR 2012/2 where it was considered no supply was made because there is a mere expectation:
- A local tennis club is seeking funding to enable them to resurface their privately owned tennis courts. The local council provides financial assistance to the tennis club on the basis that the money is only used for the resurfacing of the tennis courts.
- The local council has an expectation that the works will be carried out. However, as there is no binding obligation on the tennis club to actually carry out the resurfacing of the courts, and there are no other goods or services passing between the parties there is no supply to the local council
As discussed in my analysis of the Ruling, the reasoning behind this example appears to be that the agreement with the local tennis club is not binding and it creates expectations alone. This may be a simplification of the arrangement between the parties, which in my view would necessarily involve a binding agreement, including the following terms (whether express or implied):
- the funds will be used for no other purpose than to resurfacing the tennis courts; and
- the funds will be repaid if the funds were not used for that purpose
If not, the payment would simply be a gift and the tennis club would be free to spend the money as it saw fit, including retaining the money.
The justification for departing from this example in the private ruling appears to the presence of additional obligations on A. However, those obligations only come into effect if A actually uses the grant to acquire the item. There are no obligations on A to actually acquire the item, and in this regard it is difficult to see how a distinction can properly be made with the example of the local tennis club.
What this private ruling does show is the difficulty of drawing a line between those arrangements which, while being enforceable legal arrangements, involve no supply because there is simply an expectation on a recipient of the funds to do something, and those arrangements where there is an obligation on the recipient to do something.
The recent decision of the High Court in Commissioner of Taxation v Qantas Airways Ltd  HCA 41 may also raise difficulties with the Commissioner’s approach in GSTR 2012/2. Where a party receives a grant in return for entering into a deed (and thereby entering into legal obligations), applying the reasoning of the majority (that the airline made a taxable supply upon entry into contractual obligations), it is difficult to see how there could not a be a taxable supply.
Private Ruling No. 101224509666 – GST refunds
The register shows that a number of private rulings were published on whether the Commissioner would exercise his discretion in s 105-65 of Schedule 1 to the TAA to refund overpaid GST. This ruling is interesting because it deals with the difficult question of taxpayers having to reimburse recipients for the overpaid GST before being entitled to a refund of the GST (and thereby be exposed to the cash flow issues and also the risk of the Commissioner refusing to pay the refunds).
In this case, where the recipients were not registered nor required to be registered for GST, the applicant proposed the following arrangement because it claimed that it was not in a financial position to first reimburse its customers:
- the applicant would send a letter to each recipient notifying them of their entitlement to a refund of GST, to which those recipients must respond within a specified time frame and also agree to being charged an administration fee, which would be offset against the refund entitlement
- based on the response of the customers, the applicant could confirm the exact quantum of the GST refund to be claimed (i.e., the refund claim would equate to the claims made by recipients)
- any refund paid by the Commissioner would be held in an audited trust account for the benefit of customers and the funds would be solely used to refund GST to customers (subject only to the administration fees)
The Commissioner denied to exercise the discretion to pay the refunds, for the following reasons:
- the Commissioner will generally not exercise the discretion in cases where the supplier has not reimbursed the unregistered recipients a corresponding amount of the overpaid GST, unless there are countervailing reasons for doing so
- the applicant has not presented any countervailing reasons why the discretion should be exercised – in citing cash flow reasons, the applicant has not demonstrated that its circumstances are exceptional or different to any other entity that may refer to receive a refund in advance.
- if the Commissioner was to exercise the discretion, it would result in increased costs of administration for the Commissioner – he would need to take appropriate measures to ensure that all the terms of the arrangement were complied with both before and after the refund was paid, otherwise there was a risk that the refund would not be passed on to end consumers and this would result in a windfall gain to the applicant.
In denying the discretion, the Commissioner was clearly concern about setting a precedent. As noted in the private ruling:
If the Commissioner were to exercise the discretion in your circumstances, then all future requests for similar arrangements would have to be considered accordingly. The wording of the legislation, and the public ruling, indicate that this is not the scope or intention of the legislation.
The Commissioner was also clearly concerned about having to assume an administrative burden in ensuring that the refund was eventually paid to the recipients. In circumstances where the applicant has entered into legally binding arrangements to pay the refunds to customers, and the refunds are placed in a trust account solely for the benefit of those customers, whether the Commissioner should properly undertake this administrative burden may be doubted.
In any event, this private ruling shows that the Commissioner is taking a very strict approach to the requirement that the overpaid GST first be reimbursed to the customers before any refund is paid to the supplier.