Analysis of GSTR 2012/2 – Financial assistance payments

Introduction

GSTR 2012/2 ‘Goods and services tax: financial assistance payments’ replaces GSTR 2000/11.  The Ruling outlines the Commissioner’s views on when a financial assistance payment is consideration for a supply made by the recipient of the payment.

The ruling is particularly important for government, community groups and not-for-profit entities as it seeks to outline when the recipients of financial assistance may have a GST liability (which would represent 1/11th of the payment).  Where GST may be payable, the recipients should seek to negotiate an increase in the payment to cover the GST cost (one would expect that in most cases the payer – where registered for GST – would be entitled to input tax credits).

In the Ruling, the Commissioner appears to take a narrower view on what constitutes a taxable supply than in GSTR 2000/11. While the distinction relied on by the Commissioner to justify this treatment may be questionable, this change in approach creates an opportunity for entities to seek refunds of overpaid GST and is an important change going forward.

Types of arrangements covered by the ruling

The ruling sees the term “financial assistance payment” as encompassing a wide range of payments, including payments made to support or aid the payee and to support or aid in the implementation of government policy and initiatives.  Further, the payee or a third party may also benefit from the arrangement.

The types of arrangements include:

  • the provision of advice or services;
  • a right or the entry into an obligation to do, or not to do, something;
  • to assist the payee to acquire goods or services;
  • sponsorships and gifts.

General principle – “supply for consideration” – establishing the nexus

The ruling considers that for a financial assistance payment to be consideration for a supply, there must be a sufficient nexus between the payment and a supply by the payee.  The nexus is an objective one and is established if the payment is “in connection with”, “in response to” or “for the inducement of” a supply.

In determining whether there is a sufficient nexus, reference must be made to all of the surrounding circumstances of the arrangement, in particular any written documentation.  These circumstances may include the following matters (although none of these factors will be determinative on its own):

  • the statutory purpose of the payer in providing the financial assistance
  • the activities which are to be undertaken by the payee
  • any other terms and conditions attached to the payment
  • the description the parties give to the arrangement

This approach is not controversial, and is consistent with cases such as Vidler v FCT [2009] AATA 395 at [61]-[70].

The ruling also considers that things will often be supplied by the payee to the payer that satisfy the broad definition of “supply”.  In some cases, these things will be merely incidental or have an insufficient nexus to the payment.

Specific issues/concepts

The Ruling discusses the GST implications of a number of specific circumstances.

Payer obtains a material benefit in return for the financial assistance payment

Where the payer obtains a material benefit in return for the payment, there is a sufficient nexus between the payment and a supply by the payee.  The material benefit appears to be generally constituted by the provision of a right to the payer in connection with something done by the payee.  For example:

  • the payer is provided with the right to commercially exploit the results of the payee’s work
  • the payer is provided with the right to use advice or information for payer’s internal purposes

Payer enters into an obligation to do or refrain from doing something

Where a supply is constituted by the payee entering into an obligation with the payer to do or refrain from doing something and the payment is made to secure that obligation, there is a sufficient nexus between the payment and a supply by the payee.

The ruling appears to look to the existence of a contractual obligation on the payee to do something in return for the financial assistance payment. The clear implication is that if the payee does not do that thing, it would be open to the payer to seek to recover the payment. In this context, the ruling considers that the making of a payment on the “understanding” that it is to be used in a particular way is not sufficient.  There must be an “enforceable obligation” to do so.  This is a consistent theme throughout the ruling.

Also, not all obligations will be sufficient to create the nexus.  For example, an obligation imposed on the recipient to provide a report to the payer outlining how the funds were used does not have a sufficient nexus with the payment.

Sponsorships

The question is whether there the payment has a sufficient nexus with the supply of promotion or advertising of the payer by the payee.

In this context, the mere acknowledgement of the payment is not sufficient, as it is not an act which has the character of advertising, or promoting the payer.  However, there will be sufficient nexus if the payee promotes the payer’s business through promotional material, programs, uniforms or advertises the payer at events and in the media.

Where to draw the line between a mere acknowledgement of payment and active promotion may in some cases be difficult.

Repayment clauses

The ruling considers that an obligation imposed on the payee to repay a financial assistance payment in specified circumstances alone is not determinative in establishing whether a financial assistance payment is consideration for a supply.  Rather, the existence of the repayment obligation is one of the matters taken into account.

In this context, the ruling arguably takes a different view to GSTR 2000/11 which appeared to take the view that the existence of a binding obligation to repay the funds was sufficient.

GSTR 2000/11 contained the following example (examples 3 and 4):

  • Expectation but no obligation. The Jasonush foundation makes a grant to the Wallflower Dance Company to provide dancing classes for children in the town of Mattargot.  The grant agreement provides that the grantee will receive periodic funding if it is continuing to provide dancing classes for children in the town of Mattargot on specified dates.  In this case there is no supply by the grantee because there is no binding commitment to provide classes in exchange for the money.
  • Binding obligation. The Jasonush foundation makes a further grant to the Flybynight Circus.  The grant agreement is similar in its terms to the agreement with the Wallflower Dance Company above, but the agreement also includes a provision requiring repayment of the grant if the Circus ceases to provide its performances.  In this case, there is a supply by the grantee to the grantor for which the grant is consideration.  The provision requiring repayment goes to the purpose for which the money was granted and establishes the supply by the Flybynight circus of an obligation to provide performances.
The Ruling contains the following example (example 8):
  • A local government body introduces a financial assistance initiative to assist local community groups.  A Scout Group requests funds from the local government body in relation to the purchase of gymnasium equipment.
  • Over several months the Scout Group enters into further negotiations with the local government body in relation to the purchase of the gymnasium equipment. The local government body agrees to provide the Scout Group with financial assistance. However, the payment must be returned if the gymnasium equipment is not purchased by the Scout Group by a particular date.
  • Taken as a whole, the agreement does not indicate that the Scout Group is obligated to purchase the gymnasium equipment.  It merely requires the repayment of the funds if the equipment is not purchased.  The financial assistance payment is made to the Scout Group to facilitate the purchase of the gymnasium equipment. There is no taxable supply made by the Scout Group to the local government or any third party when it purchases the equipment. The existence of the repayment clause does not alter this conclusion.

No supply

The ruling considers that some arrangements will not involve the making of a supply by the payee – essentially because the agreement between the parties is not binding and creates expectations only.

A simple example used in the ruling is the settlement of a charitable trust.  The trust has not provided anything in return for the settlement.

A more difficult example is found in the following:

  • 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
Given the views in the Ruling, it would appear that the existence of a clause requiring repayment of the funds would not affect the conclusion in this example.
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.
It must be implicit in the Commissioner’s reasoning that the entry into these obligations (which clearly fall within the broad definition of “supply”) does not provide a sufficient nexus with the payment so as to constitute a taxable supply.
Considered in this light, the Commissioner’s approach of founding the existence of a supply on whether there is a binding obligation on the payee to actually undertake the task for which the money is paid may be questionable.

Gifts

Gifts to a non-profit body are not consideration for a supply.  The ruling considers that the term “gift” takes its ordinary meaning, which has the following characteristics:

  • there is a transfer of a beneficial interest in property;
  • the transfer is made voluntarily
  • the transfer arises by way of benefaction
  • no material benefit or advantage is received by the giver by way of return.
The ruling acknowledges that the mere acknowledgement for the gift (e.g., an honour board for contributors to a hospital wing) does not prevent the payment from being a gift.  The test appears to be whether the giver receives some “material benefit”.  In this context, the approach appears to be similar to that taken for sponsorships (discussed above).  As with sponsorships, in some cases it may be difficult to draw the line between a voluntary payment that is a gift and one that is not (noting that a payment may be “consideration” whether it is voluntary or not).

Assistances in kind

Financial assistance may be provided other than in money. That raises the issue of barter transactions and mutual supplies and acquisitions.

Transitional arrangements

The ruling applies before and after its date of issue.  Under the transitional regime, entities can continue to rely one GSTR 2000/11 for payments made prior to 1 January 2013 in certain circumstances.

GST outcome summary

Appendix 2 to the ruling provides a helpful summary of the GST outcomes for both the payer and payee in the context of particular arrangements.  Thankfully, there is no disconnect between the GST treatment – where GST is payable the payer is entitled to an input tax credit, where GST is not payable the payer is not entitled to an input tax credit.

Of course, the liability to pay GST falls on the payee, so it will be important for payees to determine the GST impact of arrangements at the time they are negotiated.  Where appropriate, payees should negotiate for the payments to be “grossed up” for GST.


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