GST treatment of appropriations
On 1 March 2011, the Government introduced Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012 into Parliament. One of the amendments introduced through the Bill is the changes to the GST treatment of appropriations. The amendments are substantially the same as the Exposure Draft legislation released in November last year (see "Changes to GST and appropriations are a victory for common sense") and will apply from the date the legislation receives Royal Assent.
These changes should provide certainty that non-commercial activities of Government related entities ("GRE") are not subject to GST. This was an area of uncertainty as a result of the TT Line Company Pty Ltd v Commissioner of Taxation case.
Proposed changes
The proposed changes will repeal the current GST provision subdivision 9-15(3)(c) of the GST Act which provides that certain payments between government related entities will not be "consideration" for GST purposes if specifically covered by an appropriation under an Australian law.
Sections 9-17(3) and (4) of the GST Act will be introduced in its place. Broadly, a payment will not be considered a provision of consideration under these provisions if (s.9-17(3)):
- A payment is made by a GRE to another GRE for making a supply;
- The payment is covered by an appropriation under an Australian law or pursuant to a specific intergovernmental health reform arrangement; and
- The payment satisfies a non-commercial test.
Furthermore, a payment made by a GRE to a GRE supplier that is of a kind specified in the Regulation is not the provision of consideration (s.9-17(4)). This provision was included in the new law to allow for some flexibility to specifically include certain payment in the Regulations to provide certainty that GST is not required to be charged on such payments.
Removal of the "specifically covered" requirement
The term "specifically covered" in subsection 9-15(3)(c) is not included in the new law. This ensures the following:
- 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 entities). All that is required is for the terms of the appropriation to state the purpose for which funds are appropriated.
- The terms of the appropriation do not need to be restricted to government related entities. This is particularly useful for universities and schools where the terms of the appropriation often includes private entities as eligible for the funding.
Non-commercial test
Broadly, the non-commercial test will be satisfied where the sum of the payment and anything else (non-monetary) received by the GRE does not exceed the GRE suppliers anticipated or actual cost of making the supply. The test should be assessed at the time at which the amount of the payment is determined. The costs include direct and indirect costs of making the supply or supplies (using an absorption costing methodology for example) but not return on capital or opportunity costs. Where a GRE receives a payment to make a supply to a third party, the cost of making such a supply would also be included.
Unfortunately the examples in the Explanatory Memorandum do not provide much detail regarding the application of the non-commercial test. GREs should ensure that their systems are appropriate to accurately calculate actual costs or anticipated costs associated with a particular supply for which they receive payments in order to ensure that the non-commercial test is satisfied. In most circumstances it is envisaged that payments made to GREs for supplies would not exceed the costs and hence should satisfy the non-commercial test. This will provide certainty that such payment would not be subject to GST.
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