House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 2 GST treatment of appropriations

Outline of chapter

2.1 Schedule 2 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to restore the policy intent that the non-commercial activities of government related entities are not subject to goods and services tax (GST).

2.2 All legislative references in this chapter are to the GST Act unless otherwise stated.

Context of amendments

2.3 Under paragraph 9-15(3)(c), a payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered by an appropriation under an Australian law.

2.4 This exclusion of certain types of payments from the definition of 'consideration' is intended to give effect to the policy that government payments made under an appropriation to fund the non-commercial activities of government are excluded from GST.

2.5 The Full Federal Court of Australia in TT-Line Co Pty Ltd v FCT [2009] FCAFC 178 considered the application of paragraph 9-15(3)(c). In considering when a payment was 'specifically covered by an appropriation' in the context of paragraph 9-15(3)(c), the Court held that the payment must be made pursuant to an appropriation, the terms of which specify the government related entity by name or a class of government related entities. Therefore, paragraph 9-15(3)(c) will only apply to a payment where, under the terms of the appropriation, the payment can only be made to a government related entity. The exception will not apply where, under the terms of the appropriation, the payment can be made to a government related entity or a non-government related entity.

2.6 Accordingly, the effect of the Court's decision is that payments made to government related entities that undertake non-commercial activities in circumstances where they do not charge for supplies in excess of the cost of making those supplies, will potentially be subject to GST if, under the terms of the relevant appropriation, the payments can be made to both government related entities and non-government related entities. Following the Court's decision in TT-Line Co Pty Ltd v FCT [2009] FCAFC 178, the provision only covers payments made pursuant to an appropriation, the terms of which specify the government related entity by name or a class of government related entities. This is in contrast to the policy intent.

2.7 The amendments contained in this Schedule are intended to restore the policy intent that the non-commercial activities of government related entities are not subject to GST.

Summary of new law

2.8 These amendments ensure that non-commercial activities of government related entities are not subject to GST. This is achieved by treating a payment which meets certain conditions as not being the provision of consideration and therefore not subject to the basic GST rules.

2.9 A payment is not the provision of consideration where:

•

the payment is made by a government related entity to another government related entity for making a supply;

•

the payment is paid under a government appropriation or pursuant to specified intergovernmental health reform arrangements; and

•

the payment satisfies a non-commercial test.

Comparison of key features of new law and current law

Detailed explanation of new law

2.10 These amendments ensure that the non-commercial activities of government related entities are not subject to GST. This is achieved by treating payments which meet certain criteria as not being the provision of consideration.

2.11 The government related entity that receives the payment for a supply is referred to in the detailed explanation section of this explanatory memorandum as the government related entity supplier .

2.12 A payment will not be the provision of consideration if:

•

the payment is made by a government related entity to a government related entity supplier for making a supply;

•

the payment is covered by an appropriation under an Australian law, or is made under the National Health Reform Agreement or an agreement to implement the National Health Reform Agreement; and

•

the payment is calculated on the basis that the sum of the payment received by the government related entity supplier and anything else received by it from another entity in connection with the supply (or any other related supply), does not exceed the actual or anticipated costs of making those supplies (non-commercial test).

2.13 A payment is also not the provision of consideration if the payment is made from a government related entity to a government related entity supplier and is of a kind specified in the regulations.

2.14 If the above conditions are satisfied, a payment made by a government related entity to a government related entity supplier is not subject to GST. In contrast, payments made by a government related entity to a non-government related entity supplier are, subject to the basic GST rules, potentially subject to GST. This outcome accords with the policy intent of the amendments.

Is the payment made by a government related entity to a government related entity supplier for making a supply?

2.15 These amendments require that the payment is made by a government related entity supplier for making a supply. It is not necessary that the supply is made to the government related entity making the payment. The supply may be made to the government related entity making the payment or to a third party. 'Government related entity' is defined in section 195-1 of the GST Act. [ Schedule 2, item 2, paragraph 9-17(3)(a )]

2.16 GST will not apply to the payment made by a government related entity to another government related entity if the payment is not made for a supply. This is achieved under the basic rules in the GST Act, which require a supply to be made for GST to apply.

Is the payment covered by an appropriation under an Australian law?

2.17 These amendments require that the payment must be covered by an appropriation under an Australian law. This requirement is met if the payment is made pursuant to an appropriation. [ Schedule 2, item 2, subparagraph 9-17(3)(b)(i )]

2.18 The payment need not be 'specifically covered' by an appropriation under an Australian law. The term 'specifically' has not been included in these amendments. This is to clarify that this exception has been expanded.

2.19 The government related entity supplier does not need to be specified under the terms of the appropriation, either by name, or as part of a class of government related entities, for subparagraph 9-17(3)(b)(i) to be satisfied. Subparagraph 9-17(3)(b)(i) is satisfied where the terms of the appropriation state the purpose for which funds are appropriated, rather than the entities to which the funds can be paid. A payment is therefore covered by an appropriation for the purposes of subparagraph 9-17(3)(b)(i), if the terms of the appropriation authorise the payment to be made.

2.20 Furthermore, the exception can apply where the terms of the appropriation under which the payment is made do not confine the payment to government related entities, either by name or to a class of government related entities. Accordingly, a payment is covered by an appropriation where the terms of the appropriation authorise payments to be made to both government related entities and non-government related entities.

Is the payment made under the National Health Reform Agreement or under an agreement to implement the National Health Reform Agreement?

2.21 The amendments apply, subject to the other conditions being met, if the payment is made under:

•

the National Health Reform Agreement agreed by the Council of Australian Governments on 2 August 2011, as amended from time to time; or

•

an agreement entered into to implement the National Health Reform Agreement.

These payments do not need to be covered by an appropriation under an Australian law to satisfy these amendments. [ Schedule 2, item 2, subparagraphs 9-17(3)(b)(ii) and (iii )]

2.22 The inclusion of the National Health Reform Agreement payments reflects that not all payments between government related entities that are made under the National Health Reform Agreement, are made pursuant to an appropriation.

Does the payment meet the non-commercial test?

2.23 These amendments ensure that the non-commercial activities of government are not subject to GST. This is achieved by requiring that the payment for the supply be calculated on the basis that the sum of the payment and anything else the government related entity supplier receives from another entity in connection with, or in response to, or for the inducement of, the supply or any other related supply, does not exceed the government related entity supplier's anticipated or actual cost of making the supplies. [ Schedule 2, item 2, paragraph 9-17(3)(c )]

2.24 The requirement that the thing received by the government related entity supplier from another entity be in connection with, or in response to, or for the inducement of, a supply is consistent with the requirements set out in section 9-15.

2.25 If the payment made by the government related entity to the government related entity supplier for a supply is made in instalments, paragraph 9-17(3)(c) requires the aggregate of the instalment payments for that supply to be tested against the anticipated or actual costs of making the supply or supplies. Instalment payments are not tested separately.

2.26 The reference to 'anything' in subparagraph 9-17(3)(c)(ii) ensures that the GST-inclusive value of things of a non-monetary nature received by the government related entity supplier from another entity are taken into account in determining whether the sum of the payment and things received by the government related entity supplier in connection with, or in response to, or for the inducement of, the supply, or for any other related supply, does not exceed the anticipated or actual costs of making the supplies.

2.27 Whether or not the amount of the payment exceeds the government related entity supplier's anticipated or actual costs of making the supply, or supplies, is determined at the time at which the amount to be paid is worked out rather than at the time of payment (if it is later). If the determination of the amount of the payment to be made takes place before the relevant supply, or supplies, are made, it will be necessary to base the calculation on the anticipated costs of making the supply, or supplies. The amount of the payment will commonly be calculated in consultation between the government related entity making the payment and the government related entity supplier. If the payment is calculated after the relevant supply, or supplies, are made, the calculation is based on the actual costs of making the supply, or supplies. Where the calculation is based on the anticipated costs of making the supply, or supplies, it is not necessary to subsequently determine the actual costs of making the supply, or supplies.

2.28 For example, a Commonwealth department enters into an agreement with a government related entity supplier for the government related entity supplier to supply administration services during the period 1 July 2012 to 30 June 2013. If the amount paid for the services by the Commonwealth department is determined in April 2012, it is necessary to consider the anticipated costs of making the supply at the time the amount is worked out in determining whether the non-commercial test is satisfied. It is not necessary to subsequently consider the actual costs of making the supply. If, on the other hand, the amount of the payment is determined after the services have been performed, for example in August 2013, it is necessary to consider the actual costs of making the supply in determining whether the non-commercial test is satisfied.

2.29 In some situations the payment may be determined by reference to both actual costs incurred and further anticipated costs where the amount of the payment is determined during the course of a supply being made. In these circumstances, both the actual and further anticipated costs will be considered in determining whether the non-commercial test is satisfied.

2.30 A government related entity may make a payment to a government related entity supplier to make a supply to a third party for an amount that is below the market value of the supply. This may occur, for example, under subsidy programs. Depending upon the details of the arrangement, the government related entity supplier may only be making a supply to the third party, or alternatively it may be making supplies to both the government related entity making the payment and the third party. Where the arrangement involves the government related entity supplier making a supply to the government related entity that made the payment and also a supply to a third party, the supply made to the third party will relate to making the supply to the government related entity. Consistent with the policy intent that non-commercial activities of government are not subject to GST, payments or any other thing that the government related entity supplier receives from the third party under the arrangement, are included in the calculation set out in paragraph 9-17(3)(c).

2.31 In the context of these amendments, the concept of cost includes the government related entity supplier's direct and indirect costs of making the supply or supplies, but does not include a return on capital or concepts of cost which are measured based on opportunity cost or forgone revenue. An absorption costing methodology is an example of a methodology that may be used to calculate the anticipated or actual costs of making the supply or supplies. [ Schedule 2, item 2, paragraph 9-17(3)(c )]

Is the payment of a kind specified in a regulation?

2.32 A payment made by a government related entity to a government related entity supplier that is of a kind specified in a regulation, is not the provision of consideration. This regulation making power provides flexibility to add, in appropriate circumstances, other government payments (made under other Commonwealth and State or Territory arrangements that operate on a model similar to the National Health Reform Agreement) to ensure that non-commercial activities of government are not subject to GST. [ Schedule 2, item 2, subsection 9-17(4 )]

2.33 Where the above conditions are satisfied, the payment is not the provision of consideration despite section 9-15, and is therefore not subject to GST. [ Schedule 2, item 2, subsection 9-17(5 )]

Example 2.4 : Non-commercial activity - funding education outcomes

A Territory Department of Education (the Department) has funding arrangements with government and non-government schools. Funding payments are made pursuant to an appropriation under that Territory's law, the terms of which allow for payments to be made to both government and non-government schools. Government and non-government schools which receive funding commit to achieving certain education outcomes as part of the funding arrangements.

A payment is made by the Department to a government school to fund its general operations pursuant to an appropriation under that Territory's law. The appropriation under the Territory law states the total amount of money that is authorised to be paid to both government and non-government schools. The Department determines the amount of funding to be allocated to each school based on objective criteria. Funding arrangements are entered into between the Department and both government and non-government schools. The objective criteria by which the amount of funding is determined are based on the anticipated costs of the school in meeting the education outcomes that it has undertaken to achieve.

The payment satisfies the requirements set out in subsection 9-17(3) as the payment:

•

is a payment from a government related entity (the Department) to a government related entity supplier (the government school) for a supply of certain education outcomes, thereby satisfying paragraph 9-17(3)(a);

•

is covered by an appropriation under an Australian law as the appropriation under the Territory law authorises the payment to be made. It does not matter that the appropriation under the Territory law also authorises payments to be made to non-government related entities. Accordingly, subparagraph 9-17(3)(b)(i) is satisfied; and

•

the amount of the payment is calculated on the basis that it does not exceed the government related entity supplier's anticipated costs of making the supply. The amount of the payment under the funding arrangement is calculated only to meet the anticipated costs of delivering the education outcomes that the school has undertaken to meet. Paragraph 9-17(3)(c) is therefore satisfied.

As subsection 9-17(3) is satisfied, the payment is not the provision of 'consideration', as defined in section 195-1, and is therefore not subject to GST.

Example 2.5 : Commercial activity - legal services

A Commonwealth Department (the Department) enters into a contract with a government agency (the government related entity supplier) to supply legal services. The government related entity supplier is subject to an internal policy which requires it to charge a price that exceeds the government related entity supplier's actual costs for supplying the legal services. The government related entity supplier calculates the amount, after the supply is made to the Department, on this basis. The Department pays this amount to the government related entity supplier.

The payment made by the Department to the government related entity supplier is made pursuant to an appropriation made under a Commonwealth law that authorises the payment to be made.

The payment does not satisfy all of the requirements of subsection 9-17(3).

•

Paragraph 9-17(3)(a) is satisfied as the payment is made from a government related entity (the Department) to a government related entity supplier for the supply of legal services.

•

Subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law as the terms of the appropriation authorise the making of the payment.

•

However paragraph 9-17(3)(c) is not satisfied as the payment is calculated on the basis that it exceeds the government related entity supplier's actual costs of making the supply of legal services.

As subsection 9-17(3) is not satisfied, the payment is not excluded from being the provision of 'consideration', as defined in section 195-1, and therefore, if the basic GST rules are met, is subject to GST.

Example 2.6 : Non-commercial activity - memorandum of understanding

Two Commonwealth Departments enter into a memorandum of understanding (memorandum). A section of the memorandum sets out business administration services that a Department (the government related entity supplier) will provide to the other, and the terms on which the services will be provided.

The funds which are paid under the memorandum are appropriated under a Commonwealth law which authorises the payment to be made. The amount of the payment is calculated to equal the anticipated cost of providing the services.

The agreement allows for the payments to be made in instalments throughout the duration of the agreement.

The payment satisfies the requirements set out in subsection 9-17(3) as the payment:

•

is a payment from one government related entity (the Department) to a government related entity supplier for the supply of administration services, thereby satisfying paragraph 9-17(3)(a);

•

is covered by an appropriation under an Australian law as the terms of the appropriation authorise the making of the payment, thereby satisfying subparagraph 9-17(3)(b)(i); and

•

is calculated on the basis that the payment (being the aggregate of the instalment payments) does not exceed the government related entity supplier's anticipated costs of making the supply. This is because the amount of the payment equals the amount of the government related entity supplier's anticipated costs of making the supply.

As subsection 9-17(3) is satisfied, the payment is not the provision of 'consideration', as defined in section 195-1, and is therefore not subject to GST.

Example 2.7 : Commercial activity - transport services

A State government related entity (the government related entity supplier) is engaged to supply transport services to the general public. The standard fare is calculated on the basis that it exceeds the government related entity supplier's anticipated costs of supplying the transport.

The State Government has a policy of subsidising the fares for pensioners who reside in that State (eligible customers). A State Department (the Department) has established a program to deliver this policy objective. Under the program, an eligible customer pays only half of the fare to the government related entity supplier. The government related entity supplier then reports the subsidised transport journey to the Department, which then pays an amount (subsidy) equivalent to half of the fare to the government related entity supplier. Payments under the program are made pursuant to an appropriation under a State Act that authorises the payments to be made.

The sum of the amount of the subsidy and the subsidised fare is equal to the fare that the government related entity supplier would charge in the absence of the subsidy. This is an amount which is greater than the government related entity supplier's anticipated costs of supplying the transportation services.

Depending upon the specific details of the subsidy program, the government related entity supplier may only make supplies of transport services to eligible customers or alternatively may make supplies to both the eligible customers and the Department.

Where the government related entity supplier only makes supplies of transport services to eligible customers under the program:

•

paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity (the Department) to a government related entity supplier;

•

subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law, as the terms of the appropriation authorise the making of the payment; and

•

paragraph 9-17(3)(c) is not satisfied as the payment is calculated on the basis that the sum of the subsidy paid by the Department and the amount paid by the eligible customer for the supply of the transport service exceeds the anticipated costs of making the supply to the eligible customer.

Where the government related entity supplier makes supplies to both the Department and the eligible customers under the program, the supply of the transport service made to an eligible customer relates to the supply the government related entity supplier makes to the Department. Accordingly:

•

paragraph 9-17(3)(a) is satisfied as the payment is made by a government related entity (the Department) to a government related entity supplier;

•

subparagraph 9-17(3)(b)(i) is satisfied as the payment is covered by an appropriation under an Australian law as the terms of the appropriation authorise the making of the payment; and

•

paragraph 9-17(3)(c) is not satisfied as the payment is calculated on the basis that the sum of the subsidy paid by the Department for the supply the government related entity supplier makes to it and the amount paid by the eligible customer for the related supply of the transport service exceeds the government related entity supplier's anticipated costs of making the supplies.

Therefore, regardless of whether the government related entity supplier only makes a single supply to the eligible customer or makes supplies to both the eligible customer and the Department, the payment will not satisfy the exception in subsection 9-17(3). The payment is therefore not excluded from being the provision of 'consideration', as defined in section 195-1 and, if the basic GST rules are met, is subject to GST.

Example 2.8 : Non-commercial activity - transport services

Assume the same facts apply as in Example 2.4, except that the standard fare charged by the government related entity supplier is calculated on the basis that it does not exceed the anticipated costs of supplying the transport service.

Where the government related entity supplier only makes supplies of transport services to eligible customers under the program:

•

as in Example 2.4, paragraph 9-17(3)(a) and subparagraph 9-17(3)(b)(i) are satisfied; and

•

in contrast to Example 2.4, paragraph 9-17(3)(c) is also satisfied as the payment is calculated on the basis that the sum of the payment made by the Department and the amount paid by the eligible customer for the supply of the transport service does not exceed the government related entity supplier's anticipated costs of making the supply.

Where the government related entity supplier makes supplies to both the Department and eligible customers under the program, the supply of the transport service made to the eligible customer relates to the supply the government related entity supplier makes to the Department:

•

as in Example 2.4, paragraph 9-17(3)(a) and subparagraph 9-17(3)(b)(i) are satisfied; and

•

in contrast to Example 2.4, paragraph 9-17(3)(c) is also satisfied as the payment is calculated on the basis that the sum of the payment made by the Department for the supply the government related entity supplier makes to it and the amount paid by the eligible customer for the related supply of the transport service does not exceed the government related entity supplier's anticipated costs of making those supplies.

Therefore, the payment will satisfy the exception in subsection 9-17(3) and is excluded from being the provision of 'consideration', as defined in section 195-1, and is accordingly not subject to GST.

Example 2.9 : Non-commercial activity - health outcomes

A State government has entered into an agreement (the Agreement) with the Commonwealth which sets out the terms on which the Commonwealth will contribute to the funding of public hospitals. In exchange for Commonwealth funding, the State undertakes to deliver certain health outcomes.

The amount of Commonwealth funding is calculated in accordance with the Agreement. The amount of Commonwealth funding for a particular public hospital service category is based on the volume of services provided multiplied by the efficient price for the current year.

The efficient price for a particular service is determined by an independent pricing authority and is set with reference to the anticipated cost of delivering the service in question.

The payment is from a government related entity to a government related entity supplier, as it is a payment from the Commonwealth to the State for a supply of health outcomes, which satisfies paragraph 9-17(3)(a).

Paragraph 9-17(3)(b) will be satisfied if:

•

the payment is covered by an appropriation under an Australian law (subparagraph 9-17(3)(b)(i));

•

the payment is made under the National Health Reform Agreement (subparagraph 9-17(3)(b)(ii)); or

•

the payment is made under an agreement entered into to implement the National Health Reform Agreement (subparagraph 9-17(3)(b)(iii)).

Paragraph 9-17(3)(c) is satisfied as the amount of the funding is calculated on the basis that the funding payment does not exceed the anticipated costs of the State delivering the health outcomes.

Example 2.10 : Non-commercial activity - health services

A State Government establishes Local Health Districts under State legislation as government related entities. A State Department (the Department) enters into an agreement with each of them.

The agreement governs the funding of a Local Health District and the type and volume of activities to be delivered by the Local Health District. The amount of funding is determined by the State and is set at a level that is calculated to only cover the Local Health District's anticipated costs of delivering the services that it has undertaken to provide under the contractual agreement.

Funds are paid from the State to a Local Health District in accordance with the agreement.

The payment is from a government related entity (the Department) to a government related entity supplier (Local Health District) for a supply of health outcomes, thereby satisfying paragraph 9-17(3)(a).

Paragraph 9-17(3)(b) will be satisfied if:

•

the payment is covered by an appropriation under an Australian law (subparagraph 9-17(3)(b)(i));

•

the payment is made under the National Health Reform Agreement (subparagraph 9-17(3)(b)(ii)); or

•

the payment is made under an agreement entered into to implement the National Health Reform Agreement (subparagraph 9-17(3)(b)(iii)).

Paragraph 9-17(3)(c) will be satisfied if the amount of the funding is calculated on the basis that the sum of the payment and anything else the Local Health District receives from another entity in connection with the supply, or for any other related supply, does not exceed the Local Health District's anticipated costs of making those supplies. Payments expected to be made by patients for health services that relate to the Local Health District's supply to the Department, and the anticipated costs of making those supplies, are therefore required to be taken into account in determining whether paragraph 9-17(3)(c) is satisfied.

Application and transitional provisions

2.34 The amendments made by this Schedule apply, and are taken to have applied, on or after 1 July 2012. [ Schedule 2, item 14 ]

2.35 These amendments therefore apply to a payment made on or after 1 July 2012, regardless of whether the payment is in connection with a supply that was made before 1 July 2012.

Consequential amendments

2.36 Subsection 9-15(3), which provides certain exemptions from the meaning of 'consideration', has been repealed and the exemptions are included in new section 9-17. [ Schedule 2, items 1 and 2, subsections 9-17(1) and (2 )]

2.37 Amendments have been made to the following provisions to reflect that section 9-17 now includes exemptions from the meaning of 'consideration' formerly contained in subsection 9-15(3):

•

paragraph 63-27(2)(a);

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subsection 78-50(4);

•

section 81-20;

•

section 100-1 (note);

•

subsection 100-10(3); and

•

section 195-1.

[ Schedule 2, items 3 and 8 to 13 ]

2.38 Consequential amendments are also made to Division 72. Broadly, Division 72 sets out rules concerning supplies between associates without 'consideration', or for inadequate 'consideration'. It also sets out rules for acquisitions without 'consideration'.

2.39 Division 72 has the potential to operate where subsection 9-17(3) excludes payments from being the provision of 'consideration'. This may have the result that there is a supply between associates which is without 'consideration'. These consequential amendments clarify how Division 72 interacts with subsections 9-17(3) and (4).

2.40 Section 72-95 is amended to ensure that Division 72 does not apply to Commonwealth government entities where a payment for a supply or acquisition is covered by subsection 9-17(3) or (4). [ Schedule 2, items 4 and 5 ]

2.41 Section 72-100 is also amended to ensure that Division 72 does not apply to State and Territory government entities where a payment for a supply or acquisition is covered by subsection 9-17(3) or (4). [ Schedule 2, item 6 to 7 ]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

GST treatment of appropriations

2.42 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.43 The amendments contained in this Schedule are intended to restore the policy intent that the non-commercial activities of government are not subject to GST.

Human rights implications

2.44 This Schedule does not affect any of the applicable rights or freedoms.

Conclusion

2.45 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, Senator the Hon Mark Arbib