GST issues registers

Charities consultative committee resolved issues

Part 5 - Grants

Non-interpretative - straight application of the law

Issue 1: How will grants be treated under GST?

Principle

On 30 May 2012 the ATO issued a ruling on financial assistance payments - GSTR 2012/2 - Goods and Services Tax: financial assistance payments.

For a financial assistance payment (formerly known as a grant of financial assistance) to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. This will depend on the particular facts and circumstances of each grant program.

The term grant is not defined and the general principles of the GST Act apply in determining whether GST is payable on a grant transaction.

GST is payable in respect of taxable supplies. Supplies made in connection with the receipt of a grant will be subject to GST where the grant represents consideration for a supply which is a taxable supply.

Conditional grants made to a GST-registered grantee will usually be subject to GST.

A grant will be subject to GST if the following four tests are satisfied:

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Is the grant consideration for a supply by the recipient to the grantor?

•

Is the supply to which the grant relates made as part of the recipient's enterprise?

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Is the supply for which the grant is paid connected to Australia?

•

Is the recipient of the grant registered, or required to be registered, for GST?

Grant as consideration for a supply

For the current ATO view about whether the financial assistance payment is consideration see paragraphs 100 to 114 of GSTR 2012/2.

This part of the answer previously stated:

The first test can be answered by considering whether a grant is conditional or unconditional. If the recipient undertakes or is required to do something in exchange for the funds this is a supply by the recipient for which the grant is consideration. The grant would therefore represent consideration for that supply.

While a gift to a non-profit body is not consideration and so not subject to GST, most grants are not gifts. As mentioned above, a gift is something that is given by a donor out of generosity or benefaction, made voluntarily, and with no material benefit provided to the donor as a result of the gift. Funding grants do not generally have this character.

Enterprise

The second test asks whether the supply by the recipient is made in the course of the recipient's enterprise. Activities performed in the nature of a business, and all activities of a religious institution or a charitable institution or fund, satisfy this test. We would consider that the supply made by the Australian organisation under a conditional grant would be made in the course of its enterprise.

Connected with Australia

The third test requires that the supply is connected with Australia. The supply of anything other than goods or real property is connected with Australia if the thing is done in Australia or is made through an enterprise carried on in Australia. See GSTR 2019/1 Goods and services tax: supply of anything other than goods or real property connected with the indirect tax zone (Australia).

Is the grantee registered?

The last test requires the supplier to be registered, or required to be registered, for GST. It is assumed that the Australian organisation will be registered for GST.

Therefore, qualifying financial assistance payments made to a registered Australian organisation will be subject to GST provided the payments are connected with Australia.

Specific questions and answers

Question 1. In what circumstances will a grant made to a non-profit organisation by a philanthropic trust be considered to be a gift rather than a grant of financial assistance? What type of conditions will and will not make it a taxable supply?

Non-interpretative - straight application of the law

A gift to a non-profit body is specifically excluded as consideration for a supply. A grant by a philanthropic trust will be considered to be a gift where:

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the payment is made voluntarily, and not as a result of a prior contractual obligation

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the payer does not receive an advantage of a material character by way of return for making the payment, and

•

the payment essentially arises from benefaction.

The fact that the grant has conditions attached which establish the terms on which the grant is made will not, by itself, preclude the grant from being a gift. For example, if the grant conditions:

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stipulate the project for which the funds are to be used

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establish a date of completion for the project

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require the grantee to maintain separately in its books of account, records on how the grant has been used, and

•

require that the grantee acknowledge the assistance of the grantor in any published or display material.

The grant may still be a gift. If, however, the grant conditions provide the grantor with material benefits or impose a binding obligation on the grantee, the grant would not be considered to be a gift. The following are examples of such conditions:

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the grantor is given an interest in any resultant intellectual property that is generated from the research

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the grantor is provided with a share in the income from the commercial exploitation of the research results

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the grantor is allowed to determine how the grantee should acknowledge their assistance (which may extend beyond mere acknowledgment), or

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the grantee must repay the grant if the conditions of the grant are not satisfied.

In these cases, the grant would represent consideration for a supply by the grantee.

Question 2. Is the GST treatment the same for those grants that are made from trusts or foundations?

Non-interpretative - straight application of the law

GSTR 2012/2 deals with the treatment of financial assistance payments provided to private and community organisations. The principles enunciated in the Ruling would be applicable to grants that are made from trusts or foundations.

Question 3. Are grants that are used to provide GST-free goods and services GST-free?

Non-interpretative - straight application of the law

No, the GST treatment of grants does not depend on the final purpose to which the funds received are applied. Some supplies are GST-free, such as most supplies of food and medical services. However, generally only the goods and services themselves are GST-free. Grants provided to an organisation that makes GST-free supplies will be subject to GST even though the funds were used to make GST-free supplies. Of course, a registered entity that makes the grant will be entitled to an input tax credit equal to 1/11 of the grant.

Question 4. Will services provided to the community under CACP's, HACC or similar funding arrangements likely to be subject to GST?

Non-interpretative - straight application of the law

Where a grant is consideration for a supply the grant will be subject to GST. Where the provision of a grant is based upon the charity entering into an obligation to do something the supply by the grantee will be the entry into the obligation. How the charity uses that grant money and whether the activities are then considered to be GST-free, taxable or input taxed supplies does not affect the provision of the grant as being consideration for a taxable supply.

Question 5. Will the funding by auspice bodies to unincorporated organisations (if both are registered for GST) be taxable? Will the funding provided to auspices from government bodies be subject to GST?

Non-interpretative - straight application of the law

The general principles set out above apply to grants that are made by auspice bodies and grants that are made to unincorporated organisations.

Question 6. Is GST payable on grants provided by overseas organisations?

Non-interpretative - straight application of the law

The general principles outlined above apply to grants to and from foreign entities. The relevant question is whether the supply for which the grant is received is connected with Australia.

Question 7. Are grants made prior to 1 July 2000 but which provide payment for a 12 month period subject to GST under s12 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) (namely should they be treated as periodic and progressive and the portion that relates to post 1 July be subject to GST)?

Non-interpretative - straight application of the law

Application of GST Transition Act

As many government grants programs apply to particular financial years, we expect the transitional rules in the GST Transition Act to have limited operation. However, in some cases a grant agreement that is entered into before 1 July 2000 will involve the making of a supply or supplies that are subject to GST.

The GST is only payable on a taxable supply or taxable importation to the extent that it is made on or after 1 July 2000.^[1] The general rules for determining whether a supply or importation is made on or after 1 July 2000 are to be found in section 6 of the GST Transition Act.

The application of section 6 of the GST Transition Act will depend on the nature of the supply or supplies for which the grant is consideration.

Supply of goods, services or real property to the grantor

Where goods are supplied to the grantor in exchange for the grant, the goods will be subject to GST to the extent that the goods are removed or made available to the grantor on or after 1 July 2000.^[2]

If a supply of real property^[3] is made in exchange for the grant the supply is made when the property is made available.

Where a grant is paid in exchange for the supply of services the supply of those services will be subject to GST to the extent that the services are performed on or after 1 July 2000^[4]

Where a supply of goods or services is made for a period that begins before 1 July 2000 and ends on or after 1 July 2000, section 12 of the GST Transition Act treats the supply as having been made continuously or uniformly over the period. GST will be payable in respect of the proportion of the supply made on or after 1 July 2000.

Supply of things other than goods, services or real property

A supply of something other than goods, services or real property will be made when the thing is 'performed or done'^[5].

The expressions in subsection 9-10(2) refer to two aspects of a supply; the thing which passes, which can include a right, an obligation or some information; and the means by which it passes, which could be by its provision, creation, grant, assignment, surrender or release, or by some other means^[6].

In many cases, a grant of funding will be made in exchange for a supply established by entering into an obligation to do something with the granted funds. However, while the entry into the obligation is the means by which the supply is made, the supply is the fulfilment or performance of the obligation and this will occur when the obligation is performed or done. When an obligation is performed or done will depend on the nature of the obligation entered into.

There may be situations where the supply will be made under an agreement or enactment for a period that begins before 1 July 2000 and ends on or after 1 July 2000. Section 12 of the GST Transition Act treats the supply as having been made continuously or uniformly over the period. GST will be payable in respect of the proportion of the supply made on or after 1 July 2000.

Several things supplied in exchange for a grant

Where a number of things are supplied for which the grant is consideration, the amount of the grant should be apportioned according to the value of the things that are supplied to the grantor for which the grant is consideration. Supplies for which the grant is not consideration may be ignored.

The question is one of what is the thing or things for which the supply is consideration, and what are the respective values of those supplies.

Example

Under an enrichment program, an education department makes a grant to the Debrowe Academy. In exchange for the grant, the academy enters into an obligation, on 1 April 2000, to provide remedial reading services to children in the town of Bambrenko for the period from 1 June 2000 to 30 May 2001. Debrowe also supplies information to the Department by providing periodic reports on the use of the funds in September 2000, December 2000, January 2001 and June 2001.

In this example the timing of the supply of reporting information is irrelevant, as it is not a supply for which the grant is consideration. The grant is referable wholly to the obligation to provide community services.

For the purposes of the GST Transition Act, the fulfilment of this obligation to provide services is supplied when the obligation is performed or done, being when the services are provided. It is performed continuously and uniformly over the period that the services are provided, being 1 June 2000 to 30 May 2001, and 335/365 of the grant will be subject to GST.

Where the grant is consideration for the supply of a right that has been granted or is granted on or after 2 December 1998 but before 1 July 2000, which could reasonably be expected to be exercised on or after 1 July 2000, and section 13 does not apply, section 11 will apply.^[7]

Supplies under existing agreements

Special rules in section 13 of the GST Transition Act may apply to make a supply, when it is specifically identified in a written agreement, GST-free until the earlier of 1 July 2005 or when a review opportunity arises.

For section 13 to apply the written agreement must be made before 8 July 1999 if the recipient would be entitled to a full input tax credit for the supply. Otherwise, the written agreement must be made before 2 December 1998^[8].

Question 8. How will devolved grants be affected by the GST? If a regional organisation gets $500 000 and then distributes smaller grants - will the regional organisation or the recipients or both have to pay GST on the grants?

Non-interpretative - straight application of the law

Where a GST-registered organisation supplies a binding undertaking, obligation or promise to do something, such as provide a range of services, in return for grant monies, they are making a taxable supply for which the grant is consideration, and will be required to remit 1/11th of the grant monies to the ATO. The payer of the grant (if registered or required to be registered for GST) is making a creditable acquisition, and may be entitled to claim an input tax credit for the same amount.

Where the recipient of the government grant in turn makes grants to smaller bodies, each grant is a separate transaction, and separate again to the transaction between the government agency and the recipient of the government grant. For each grant transaction the question posed in the above paragraph must be answered in determining the GST consequences. Each smaller body that is registered or required to be registered and makes a taxable supply to the payer for which the grant is consideration must remit 1/11th of the grant monies to the Commissioner of Taxation. If the payer of the grant monies is GST-registered, it may claim an input tax credit for the same amount.

Question 9. How are grants treated that are for say a book or publication that are paid before 1 July 2000 but the publication is not completed and published until after this date?

Non-interpretative - straight application of the law

The answer to this question depends on the terms of the grant agreement. Each agreement would have to be considered separately. The following examples provide guidance:

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If the monies were provided in return for a 'book' full stop, the supply of the book will be subject to GST if the book is removed (handed over to the grantor) on or after 1 July 2000. The date of payment will not be relevant.

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If the monies were provided in return for the carrying out of research over the period 1 July 1999 to 30 June 2000, and the research paper is merely an incidental outcome of this research activity, GST will not be payable. This is because the recipient of the grant is primarily providing services (in the form of research activities) over a specified period (ending 30 June 2000). The delivery of the research paper is merely an incidental product of this research.

Question 10. How are grants treated where the grantee organisation has to 'match the grant'? That is say they get a grant for $1000 and they have to agree to provide volunteer labour or other services worth $2000.

Non-interpretative - straight application of the law

The application of GST to grants depends primarily on whether the grantee is registered, and whether there is a supply for which the grant is consideration. The amount of GST on a taxable grant will depend on the amount of the grant.

A condition that the grantee has to provide resources of its own in proportion to the grant will not change the application of GST to the supply for which the grant is consideration. Generally the amount of the grant determines the amount of GST on the supply.

Question 11. How are 'lumpy' grants treated in the transition?

Non-interpretative - straight application of the law

In determining whether supplies are made before or after 1 July 2000, it is the timing of the supply of goods or services rather than the payment that is relevant. For 'lumpy' grants, it will still be necessary to determine whether the grant is for the provision of specific supplies or for supplies that are to be provided over a defined period. The general transitional rules discussed in question 7 of this part apply.

What is the position where an organisation applies for a grant for 1 July 1999 to 30 June 2000 but the grantor does not pay the grant until say January 2000? [Because of the absence of the funds, the organisation is not able to commence their work until payment date, in which case the work will be completed after 30 June 2000].

The application of the transitional rules will not depend on when the money is paid, but on what supply the grant is consideration for. The transitional timing rules discussed in question 7 of this part apply.

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