Comments on Draft GSTR 2011/D4 – Financial assistance payments

Introduction

On 2 November 2011 the ATO published draft GST Ruling GSTr 2001/D4 on financial assistance payments.  When finalised, the ruling will replace GSTR 2000/11. The ATO is inviting comments on the ruling by 16 December 2011.  While I will not be forwarding these comments to the ATO, my initial comments on reading the draft ruling are detailed below.

As a preliminary matter, the draft ruling seeks to update the views of the ATO to take into account Australian GST cases in the period since 2000.  While the 2000 ruling focuses on overseas cases, the draft ruling seeks to focus very much on Australian law, which is a welcome development.

I consider the following issues to be noteworthy:

  • the draft ruling helpfully seeks to deal with matters not directly covered by GSTR 2000/11, such as sponsorship and tripartite agreements;
  • the draft ruling appears to take a narrower view on what constitutes a taxable supply for a financial assistance payment than in GSTR 2000/11; and
  • the draft ruling sets out detailed transitional rules which appear to envisage the potential for refund claims for those taxpayers who have relied on the broader scope of taxable supply in GSTR 2000/11.

The scope of “taxable supply” for a financial assistance payment

Both GSTR 2000/11 and the draft ruling consider that for there to be a taxable supply, there must be a sufficient nexus between the supply and the consideration which is a financial assistance payment.  The draft ruling takes a broad view on the matters which can be considered in determining this issue.  The scope of enquiry goes beyond any agreement (whether written or oral) and includes applications, legal instruments, letters of offer, memoranda of understanding, Acts of Parliament, legislative instruments, Ministerial directions and Departmental guidelines.

Consistent with GSTR 2000/11, the draft ruling considers that the payment of financial assistance in return for the entry into an obligation to do or not do something has the requisite nexus for there to be a taxable supply.  Also, GSTR 2000/11 and the draft ruling consider that a payment in return for a mere expectation that something will be done does not have the requisite nexus.

Where the draft ruling appears to part ways with GSTR 2000/11 is the effect of a binding obligation on the payee to refund the payment if the thing which is the subject of the expectation does not proceed.

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 draft ruling contains the following example (example 3):
  • A local tennis club is seeking funding to enable them to resurface their tennis courts.  The local council provides a financial assistance payment to a local tennis club.  The payment is intended to provide funds to allow the tennis club to resurface its courts.  The tennis club has agreed to carry out the resurfacing but if it does not it must return the funds. As there is no obligation on the tennis club to carry out the resurfacing of the courts it does not make a supply of entering into an obligation to the local council

At paragraph 44 the draft ruling appears to explain the change in approach by treating the entry into an obligation to repay a financial assistance payment as “a peripheral thing” where the subject of the payment is to enable the payee to undertake some activity (but without any obligation to do so).

This is a substantial shift and this will likely mean that many arrangements for financial assistance which were treated as taxable under GSTR 2000/11 will potentially not be taxable if the draft ruling is finalised on this basis.

Transitional arrangements

The proposed transitional arrangements in the draft ruling are that entities can continue to rely on the views expressed in GSTR 2000/11 for payments made before 31 December 2002 if:

  • the arrangement between the parties was entered into before the date of issue of the final ruling; and
  • the GST consequences of those payments is impacted by a conflict between the views expressed in the final ruling and GSTR 2000/11.
Refunds
The draft ruling envisages the potential for parties to have overpaid GST where they have relied on GSTR 2000/11 to treat an arrangement as taxable but it is not taxable under the final Ruling.  Also, payers may not have claimed input tax credits where such arrangements were properly regarded as taxable.
Each of these positions is sought to be dealt with in the draft ruling as follows:
Refunds of overpaid GST

The draft ruling states as follows (at paragraph 102):

  • Where entities have relied on GSTR 2000/11 to treat a supply as a taxable supply and the supply is not a taxable supply under the views expressed in this draft Ruling, they may seek a refund for past overpaid GST if it is within relevant time limits and the payer is first refunded the overpaid amount.
What is interesting about this statement is that the entire draft ruling is premised on the assumption that both parties are registered for GST.  In this regard, the paragraph implies that a refund will (or at least may) be paid if the payer is first refunded the overpaid amount.  Such an approach would appear to be in conflict with the views of the Commissioner in MT 2009/2 on the exercise of the discretion in s 105-65 where the recipient is registered for GST.  It may be that the Commissioner considers that the fact that the taxpayer acted in reliance on GSTR 2000/11 is a factor justifying the payment of the refund.  Alternatively, it may be that more will need to be done in order to claim a refund.
Recovery of input tax credits
The draft ruling states as follows (at paragraph 103):
  • Where entities have relied on GSTR 2000/11 to determine that they did not make a taxable supply and the supply is a taxable supply under the views expressed in this draft ruling, then no GST is payable on that supply.  This means the amount of input tax credit the recipient is entitled to is zero.
This view may well be correct from 1 July 2010 (by virtue of the amendments to s 11-25 of the GST Act and the introduction of subsection 357-60(3) of Schedule 1 to the TAA).  However, notwithstanding the stated view of the Commissioner in the draft ruling that s 11-25 of the GST Act and s 105-60 of Schedule 1 to the TAA apply to provide the same outcome “that is the amount of input tax credit the recipient is entitled to in respect of that payment is zero”, I do not consider that the issue is clear.    This is because the effect of s 105-60 was that the “underpaid net amount or indirect tax” ceased to be payable, whereas s 11-25 refers to “the GST payable on the supply of the thing acquired”.  These are quite different concepts and one could argue that it would be open to claim input tax credits for the period up to 1 July 2010.
In any event, given the contents of the draft ruling and the acknowledgment by the Commissioner that there may be scope for refund claims, one would expect taxpayers who may be affected to consider lodging “stop the clock” notices to protect those claims, pending the finalisation of the ruling.

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