Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for which the payment received under the grant agreement with Entity B is consideration?
No.
You are registered for the goods and services tax (GST), effective from 1 July 20YY. You and Entity B signed a Grant agreement (grant agreement) to assist you in staging certain events.> The grant agreement contained clauses that covered: • use of the grant • conduct of the grant activity • acknowledgment of the grant • reporting • withholding funding • unspent and misused grant funding • termination • GST The grant agreement provided that the grant was exclusive of GST.
A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 9-10 A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(2) A New Tax System (Goods and Services Tax) Act 1999 section 9-15 A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Taxable supply The requirements of a taxable supply are set out in section 9-5, which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with indirect tax zone; and (d) you are *registered or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) All the above requirements must be met for a supply you make to be taxable. Relevantly, to satisfy the first requirement in section 9-5, an entity must first make a 'supply' for which payment is 'consideration'. The Commissioner has considered when a financial assistance payment is consideration for a supply in Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2) . In GSTR 2012/2, the term 'financial assistance payment' is intended to encompass a wide range of payments including those made to provide support or aid to the payee.
It is considered that the grant received by you is a financial assistance payment. An entity that receives a financial assistance payment is liable for GST in respect of that payment if the entity has made a taxable supply in accordance with section 9-5. GSTR 2012/2 focuses on the first requirement of a taxable supply that there is a 'supply for consideration' in relation to a financial assistance payment and outlines that for there to be a 'supply for consideration' there must be: • a supply; • consideration; and • a nexus between supply and consideration. The definition of 'supply' provided by section 9-10 includes 'any form of supply whatsoever', such as the 'supply of goods', or the 'supply of services', or 'a provision of advice or information', or 'an entry into...an obligation... 'to do anything' or any combination of any 2 or more of the matters referred to in subsection 9-10(2). In this case, we consider you are making a supply when staging the events. However, as the Commissioner comments at paragraph 40 of GSTR 2012/2:
40. Things are often supplied by the payee to the payer that satisfy the statutory definition of a 'supply', given the broad meaning of 'supply'. In some circumstances, things may be supplied by the payee that are merely incidental or have an insufficient nexus to the financial assistance payment. ... 'Consideration' is defined under section 9-15. The definition extends beyond payments to include such things as acts and forbearances. The term 'financial assistance payment' as used in GSTR 2012/2 covers the grant received from Entity B. In the context of financial assistance payments, paragraph 15 of GSTR 2012/2 explains that for a payment to be consideration for a supply there must be a sufficient nexus between the payment made by the payer and a supply made by the payee. The payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply under an objective test.
Further, in establishing if there is a sufficient nexus between a payment and a supply, paragraphs 15A and 16 of GSTR 2012/2 explain that not every connection between supply and consideration meets the requirements for a taxable supply. Merely having any form of connection of any character between a supply and payment is insufficient to constitute a taxable supply. Reference is to be made to all the surrounding circumstances of the arrangement, in particular any written documentation. The circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must be considered as a whole. Therefore, it needs to be determined whether there is a sufficient nexus between the supply of staging the events and the consideration (being the grant payment). Taking into consideration the key conditions attaching to the grant, paragraph 28 of GSTR 2012/2 about the payment for the entry into an obligation to do or not to do something is relevant to your circumstances:
28. 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 the obligation. This is because the financial assistance payment is made in connection with, in response to, or for the inducement of the entry into the obligation. Example 3 at paragraphs 29 to 31 of GSTR 2012/2 provides an explanation of when there is a sufficient nexus for the entry into an obligation: Example 3 - sufficient nexus - payment for entry into an obligation 29. Snake Glass Jugglers is a commercial dance troupe that develops and presents performance art in South Australia. It enters into an arrangement with Gooseville Arts Foundation, a body that is established for the purpose of fostering the arts. Under that arrangement, in return for a financial assistance payment from the Foundation, the troupe enters into a binding agreement under which it is obligated to expand its activities - by presenting three performances outside South Australia during the following year.
30. By entering into this obligation to present three performances outside South Australia, the troupe has made a supply to the Foundation. The payment by the Foundation has been made in connection with, in response to, or for the inducement of this supply. Therefore, there is a sufficient nexus between the entry into the obligation and the financial assistance payment such that the financial assistance payment is consideration for that supply. 31. Snake Glass Jugglers is liable for GST on the supply of the entry into the obligation. The Gooseville Arts Foundation is entitled to an input tax credit on their acquisition of the right to require Snake Glass jugglers to present the performances. Unlike example 3 above, in your circumstances, the grant is merely provided to assist in the cost of you running the events that have been held for several years. Under the grant agreement certain terms and conditions to the grant broadly obligate you to use the grant funds only in the agreed way and to carry out the grants purpose.
The grant is not made 'for' your entry into these obligations but to appropriate the grant in an agreed way, and for a particular purpose. These terms and conditions are merely incidental to the grant by setting out the uses and purposes for which the grant may be appropriated. As the grant agreement includes clauses to acknowledge Entity B's contributions, we need to consider where there is a supply of sponsorship or promotion for the payer. Grants for the payee to promote the payer will have a sufficient nexus with the supply of the promotion and advertising. Paragraph 32 of GSTR 2012/2 states: 32. Where, in return for a financial assistance payment, the payee promotes the payer's business through promotional material, programs or uniforms or advertises the business at events and in the media, the payment will have a sufficient nexus with the supply of the promotion and advertising. That nexus is established where the payment is in connection with, in response to or for the inducement of the promotion/advertising. However, paragraph 38 of GSTR 2012/2 notes that:
38. The mere acknowledgement of the financial assistance payment is not an act which has the character of advertising, or promoting the company'. ... The acknowledgment of Entity B's financial assistance is not an act which has the character of advertising or promoting the payer. Accordingly, there is not a sufficient nexus between the supply and consideration. You are not making a supply of promoting or advertising to or for Entity B. The grant agreement also includes a repayment clause and a requirement to report on how the grant was used. For completeness, we will address whether these clauses in the grant agreement constitute a supply and if there is a sufficient nexus between that supply and the relevant payment. With regards to repayment clauses, paragraphs 134 and 135 GSTR 2012/2 provide that: 134. ... The existence of a repayment clause is not determinative in establishing whether a financial assistance payment is consideration for a supply. This is because it cannot be said in such circumstances that the payment was made in connection with, in response to or for the inducement of the entry into the repayment obligation.
135. However, the repayment obligation is to be taken into account in the broader context of the arrangement as a whole and may be relevant in determining whether the financial assistance payment is consideration for a supply made by the payee. With regards to the requirement to report on how the grant money was used, paragraph 132 of GSTR 2012/2 states: 132. Things are often supplied by the payee to the payer that are merely part of the mechanism of making or accounting for the financial assistance payment. These things are considered to form part of the circumstance in which a supply is made but are not of themselves the supplies for which the consideration is provided. Applying the guidance provided by GSTR 2012/2 to your circumstances, any conditions imposed on you as part of the receiving the grants in particular, • those restricting the use of funds provided, and • the requirement to prepare and provide progress and final reports and accounting for the use of the funds do not amount to a supply that you made for the receipt of the grants. Summary
Considering the grant agreement as a whole, it is considered that there is an insufficient nexus between the grant provided and your staging of the festivals. You are not making a taxable supply under section 9-5 for which the payment received under the grant agreement with Entity B is consideration. No GST is payable on the grant payments received from Entity B.