Due to the economic impact of COVID-19 many local councils (along with the state and federal government) are providing grants to assist with the economic recovery. In particular local councils such as Melbourne City Council, City of Sydney and Brisbane City Council are providing grants to stimulate business and businesses in their locality.
A question that typically arises in relation to such grants and payments is whether they are subject to GST.
The first step in identifying whether a grant is subject to GST is to simply ask the entity making the grant, as they may have sought advice in relation to the GST treatment of the payments. The responses provided should assist with the GST treatment.
It is also possible that the grant documentation or terms and conditions may set out the GST treatment.
However, if the entity making the grant does not provide your organisation with details of the GST treatment (whether in the grant documentation or otherwise) then your organisation will need to apply the rules in relation to taxable supplies and determine whether the grants received by your organisation are subject to GST or not.
In this article we highlight some of the key considerations and issues when determining whether a grant is subject to GST.
When is a Grant subject to GST?
For a financial assistance payment (such as federal, state or local government grants) to be subject to GST, the payment must meet all of the criteria of a taxable supply, namely:
- The supply is made for consideration;
- The supply is made in the course or furtherance of an enterprise;
- The supply is connected with the indirect tax zone (i.e. Australia);
- The supplier is GST-registered or required to be GST-registered; and
- The supply is neither GST-free nor input taxed.
The key criteria on which this issue generally turns is whether the financial assistance payment is consideration for a supply. The Commissioner’s view on when a financial assistance payment is consideration for a supply is contained in GSTR 2012/2.
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 entity making the financial assistance payment and a supply made by the recipient of the payment.
Sufficient Nexus Between Supply and Payment
A financial assistance payment will be consideration for a supply if the payment is ‘in connection with’, ‘in response to’ or ‘for the inducement of’ a supply. However, not every connection between a supply made by a recipient and consideration meets the requirements for a taxable supply. Regard needs to be given to all of 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.
The definition of a supply, in the GST Act, is very broad and is wide enough to include anything (tangible or intangible) given by the recipient of a financial assistance payment to the payer of payment. However, where the payment is not for the supply of a thing, there will be insufficient nexus between the payment and a supply and therefore the financial assistance payment will not be subject to GST. This concept is illustrated by Example 6 of GSTR 2012/2, below.
“Example 6 – insufficient nexus – provision of information to substantiate expenditure
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- A business qualifies for a government financial assistance payment that is to promote the advancement of technology. For the purposes of the government agency’s own internal assurances, the business is required to provide a report to the agency outlining how the funds were expended.
- The payment is made to enable the business to improve its technological capability, not to obtain the report on how the financial assistance payment was expended. The financial assistance payment does not have a sufficient nexus with the supply of the report because the payment was not in connection with, in response to or for the inducement of the report.
- Therefore, there are no GST consequences for either party.”
Binding Agreement to do Something v Mere Expectation
Generally, where the grant is provided in return for a specific obligation under a binding agreement to do something, the financial assistance payment will be consideration for a supply. However, where the financial assistance payment is provided with the mere expectation that something is done the financial assistance payment will not be consideration for a supply.
Where a recipient of a financial assistance payment is required to meet certain eligibility criteria, the recipient meeting that criteria or providing proof of having met that criteria will not of itself result in the financial assistance payment being consideration for a supply.
Sponsorship v Mere Acknowledgement
Where the recipient of a financial assistantance payment is required to promote the payer’s organisation through the use of promotional material, programs, uniforms or advertises the organisation at events and in the media, the payment will generally have sufficient nexus with the supply of the promotion and advertising.
However, where the recipient of the financial assistant payment merely provides acknowledgement of the the the financial assistance payment this is not considered as an act of advertising or promoting the organisation that provided the financial assistance payment. Acknowledgement alone will therefore not cause a financial assistance payment to be consideration for a supply.
The distinction between whether a recipient is providing advertising or mere acknowledgement of the financial assistance payment is illustrated in examples 4 and 5 of GSTR 2012/2.
“Example 4 – sufficient nexus – sponsorships
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- Demeter Sports Goods, a sporting goods manufacturer, sponsors organisations that provide sport and recreational activities for the health and wellbeing of the community.
- In return for a financial assistance payment, a payee must:
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- display the logo of Demeter Sports Goods on event signage;
- place Demeter Sports Goods’ signage at optimal locations for media and public exposure; and
- display the logo of Demeter Sports Goods on uniforms, invitations/tickets, event programs, advertisements, newsletters and award certificates.
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- As Demeter Sports Goods is making the financial assistance payment in connection with, in response to or for the inducement of the above supplies, there is a sufficient nexus between the payment and those supplies.
- The payee is liable for GST in respect of these supplies. Demeter Sports Goods is entitled to an input tax credit for acquiring these supplies.
Example 5 – insufficient nexus – mere acknowledgement of payment
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- A local art gallery receives a financial assistance payment from a major Australian company to enable them to acquire an artwork. The financial assistance payment is provided on the understanding that it be used to acquire artwork but the local art gallery is not under an enforceable obligation to use the payment in the way specified. The artwork is acquired and the director of the art gallery decides to install a plaque below the artwork to acknowledge the support of the company.
- The mere acknowledgement of the financial assistance payment is not an act which has the character of advertising, or promoting the company. There is nothing else supplied by the art gallery. The payment by the company is not in connection with, in response to or for the inducement of any supply.
- There will be no GST consequences for either party arising from this arrangement.”
Repayment Clauses
A clause in the agreement for the financial assistant payment that imposes a requirement for the recipient to repay the assistance payment under specified circumstances does not, of itself, mean that the financial assistance payment is consideration for a supply.
Example 8 of GSTR 2012/2, below, outlines circumstances under which a repayment clause will not result in a taxable supply.
“Example 8 – repayment clause – no taxable supply
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- A local government body introduces a financial assistance initiative to assist community groups. A Scout Group requests funds from the local government body in relation to the purchase of gymnasium equipment.
- Over several months the Scout Group enters into further negotiations with the local government body in relation to the purchase of the gymnasium equipment. The local government body agrees to provide the Scout Group with financial assistance. However, the payment must be returned if the gymnasium equipment is not purchased by the Scout Group by a particular date.
- Taken as a whole, the agreement does not indicate that the Scout Group is obligated to purchase the gymnasium equipment. It merely requires the repayment of the funds if the equipment is not purchased. The financial assistance payment is made to the Scout Group to facilitate its purchase of the gymnasium equipment. There is no taxable supply made by the Scout Group to the local government or any third party when it purchases the equipment. The existence of the repayment clause does not alter this conclusion.
- Therefore, there are no GST consequences for the payee or the local government body.”
Application – Example
The ATO website has included a range of examples relating to different types of COVID-19 grants. This document is worth reviewing to see if the types of grants received are consistent with any of the examples provided. By way of illustration, we have included below a business assistance example:
Example 1 – Cash payment for running a business
Boris operates a local café which employs five full time and 10 casual workers and he is registered for GST. As a result of COVID-19 the café is closed for two months and operates at reduced capacity for another two months after re-opening.
The state government provides a $10,000 cash payment to businesses like Boris’s to help them cope with the impacts of COVID-19. Eligibility for the grant included Boris verifying that he was eligible for JobKeeper and that he carried on a business.
Boris applies for and receives the $10,000 payment. He spends this on paying outstanding business utility bills, replacement stock and deep cleaning the premises so he can reopen.
Income tax implications
In his 2020 tax return, Boris:
includes the $10,000 payment from government as assessable income
includes the stock expenses in his trading stock calculation
claims the utility bills and cleaning expenses as a deduction.
GST implications
The payment is made to provide financial support to ease the pressures faced by small business impacted by COVID-19. The café only needs to meet eligibility requirements as stipulated in the funding application. Boris is not providing anything of value to the state government in return for the payment. He does not have to pay GST on the cash payment he receives.
Conclusion
When determining whether a financial assistance payment is subject to GST consideration needs to be given to the totality of the agreement and whether anything is being supplied by your organisation to the provider of the financial assistance payment.
Further information on the GST consequences of financial assistance payments can be found on the ATO’s website here and in relation to COVID-19 grants here.