GST and Third Party Payments: What are they and when do they impact the usual GST outcomes?

We recently received a Q&A from a member asking about the GST implications of providing emergency natural disaster funding assistance to homeowners.

Background

As described to us, an entity (Entity A) pays grants of financial assistance to individual homeowners who qualify for support to assist them recover from natural disasters. The assistance is to help the individual with remaining out-of-pocket costs for repairs and clean up to their property after they have claimed available insurance pay-outs through their insurer.

The homeowner applies for the grant and provides tax invoices (for repairs and clean up), insurance claims documentation and photographs to support the claim. If approved  Entity A pays the funding amount to the homeowner. The homeowner provides nothing to Entity A other than completing the application and providing supporting documentation. The grant is paid once the homeowner has completed the repairs.

By way of example:

• a homeowner suffers damage to their property due to flooding;
• estimated costs for a builder to repair the house is $220,000 (including GST);
• the homeowner has insurance but is only covered to $165,000 (including GST) leaving a shortfall of $55,000 (including GST) to be funded by the resident directly;
• homeowner applies for and is approved for the support.

As some homeowners may not have the financial capacity to pay for their out-of-pocket expenses (prior to receiving the grant) Entity A is considering as an option to pay the repairer/builder directly instead of paying the homeowner and for the homeowner to remain responsible for paying the repairer.

We have assumed Entity A and the builder are GST-registered, but the homeowner is not GST-registered.

Question 1: If Entity A pays the builder directly, would the builder be making a taxable supply to Entity A?

Question 2: If the builder is making a taxable supply can the tax invoice be made out to Entity A?

Question 3: Would this be a creditable acquisition for Entity A if the tax invoice is made out to Entity A or the homeowner?

Analysis

Taxable Supply?

For something to be a taxable supply it needs to meet all of the following conditions:

An entity makes a taxable supply if:

• the entity makes the supply for consideration; and
• the supply is made in the course or furtherance of an enterprise the entity carries on; and
• the supply is connected with the indirect tax zone (i.e., Australia); and
• the entity is registered, or required to be registered.

Application

In the above example, we have assumed that, in the first instance, the builder would be entering into an agreement with the homeowner to provide the building services. Based on this, the homeowners would be liable to pay the builder the full amount ($220,000) and having applied for insurance, $165,000 of this would be paid for via the insurance pay-out. The balance to be dealt with is $55,000. Assuming the homeowner has met the application requirements, Entity A would be making a grant payment to the homeowner of $55,000, and the homeowner would be paying this to the builder.

The GST implications of these transactions would be:

Builder: makes a taxable supply of building services, received $220,000 and pays $20,000 GST to the ATO.

Homeowner: Is liable to pay $220,000 to the builder – $165,000 is covered by the insurer and $55,000 is covered by the grant from Entity A.

Insurer: Pays $165,000 under the insurance claim (and then would have a GST decreasing adjustment via the GST insurance provisions – likely to be 1/11^th of the amount paid – so net cost to the insurer is $150,000).

Entity A: Pays $55,000 to the homeowners as a grant of financial assistance. Assuming no nexus between the payment and any supply by the homeowner, no GST liability or GST credit arises. Net cost to Entity A is $55,000.

The Proposed Option

Under the proposed option Entity A would seek to pay the builder directly the $55,000.

If all that is happening is that Entity A makes the payment directly to the builder instead of to the homeowner (who would the be required to pay the builder), there would be no change to the GST implications. That is, the builder has still entered into a contract to provide its building services to the homeowner, and the homeowners is still liable to pay for these services. Based on this, the builder is not making any taxable supply to Entity A, and the answers to the questions would be as follows:

Question 1: No (the builder is not making any taxable supply to Entity A).

Question 2: No (the builder would still make the tax invoice out to the homeowner, and not to Entity A).

Question 3: No, it would not be a creditable acquisition of Entity A.

For an acquisition to be a creditable acquisition, the following conditions need to be met:

• the entity makes the acquisition solely or partly for a ‘creditable purpose’ (Note: An entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on an enterprise, but not to the extent that the acquisition relates to making input taxed supplies or is private or domestic in nature.);
• the supply of the thing to the entity is a taxable supply;
• the entity provides or is liable to provide consideration for the supply; and
• the entity is registered or required to be registered.

In the example, the builder would be making the taxable supply of building services to the homeowner, and the homeowner is the entity liable to pay the builder, so conditions (b) and (c) would not be met.

This is referred to by the ATO as a ‘third party payer’. Refer to paragraphs 179 to 186, and specifically paragraph 183 (see below) in the ATO’s public ruling GSTR 2006/9.

183. If you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to in this Ruling as a ‘third party payer’. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

If instead, there is a contractual relationship between Entity A and the builder, and the builder is making a supply to Entity A, and Entity A provides, or is liable to provide, consideration to the builder for that supply, then the builder would likely be making a taxable supply to Entity A. Refer to paragraph 153 of GSTR 2006/9. (Note: Ignore for the moment that practically this would require the builder to have two contracts: one with the homeowner for the part covered by the insurer, and another with Entity A. Assume the homeowner had no insurance and Entity A entered into a contract with the builder for the full amount.)

If this is the true nature of the transaction, and Entity A holds a tax invoice for this supply, and is making the acquisition in the course of carrying on its enterprise, then Entity A should be entitled to claim a GST credit as a creditable acquisition.

Application

Based on this option, the answers to the questions would be as follows:

Question 1: Yes (the builder is making a taxable supply to Entity A).

Question 2: Yes (the builder would make the tax invoice out to Entity A, and not to the homeowner).

Question 3: Yes, it would be a creditable acquisition of Entity A if the tax invoice is made out to Entity A.

The net position for Entity A under this option would be: Entity A pays $55,000 to the builder; Entity A claims a GST credit of $5,000. Net cost to Entity A is $50,000.

The net position for Entity A under this option would be a cost of $50,000

Conclusion

Once again, the application of the GST rules will depend on the facts and circumstances. Also, the way the transaction is carried out may give rise to different GST implications.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.