Institute of Certified Bookkeepers

The Principles and the Law

(some relevant extracts)

When a grantee makes a taxable sale

https://www.ato.gov.au/Business/Government-entities/In-detail/GST-and-grants

A grantee will be required to remit 1/11th of a grant of financial assistance and funding payment it receives to the ATO as GST, where the grantee makes a taxable sale.

The GST treatment of grants depends primarily on whether the grant represents consideration that has the relevant connection with a taxable sale. This will depend on the particular facts and circumstances of each grant program.

Generally, a grant is not a consideration that has a relevant connection with a taxable sale, unless something of value is provided by the grantee in return for the payment. Providing something of value for the payment includes entering into a legally binding obligation to do something or refrain from doing something in order to receive the payment.

Example 1 extract

The payment is made to provide financial support to ease the pressures faced by small business impacted by COVID-19. Franco does not enter into any legally binding obligations in return for the provision of the payment. The fitness centre only needs to meet eligibility requirements as stipulated in the funding application. The payment is not for any supply provided by Franco to the state government.

Franco does not have to pay GST on the cash payment received.

Whether a Financial Assistance Payment is consideration for a Supply

https://www.ato.gov.au/law/view/document?docid=GST/GSTR20122/NAT/ATO/00001

In this Ruling the term 'financial assistance payment' is intended to encompass a wide range of payments. This includes payments:

  • made to provide support or aid to the payee; and/or
  • provided to support or aid in the implementation of government policy and initiatives.

No supply

55. There will be some arrangements that do not involve the making of any supply whatsoever. If no supply has been made a key element of the definition of taxable supply is not met.

56. In particular, there is no supply where the agreement between the parties is not binding and creates expectations alone. However, the payee may still make a supply in the absence of enforceable obligations. Where there is an agreement that does not bind the parties in some way there may still be a supply where there is something else, such as goods or some other benefit, passing between the parties.

Other Extracts

15. For a financial assistance payment 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. A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one.

15A. Further, in identifying the character of the connection, the word 'for' ensures that not every connection between supply and consideration meets the requirements for a taxable supply. That is, merely having any form of connection of any character between a supply and payment of consideration is insufficient to constitute a taxable supply

18. In some arrangements the payer obtains a material benefit in return for the financial assistance payment. This may occur where the payer is provided with the right to commercially exploit the results of the payee's work in return for the financial assistance payment. In this circumstance, the payment has a sufficient nexus with the supply of the right because the payment is made in connection with, in response to or for the inducement of the supply of the right.

44. An arrangement may include an obligation to repay a financial assistance payment in specified circumstances. The existence of a repayment clause alone is not determinative in establishing whether a financial assistance payment is consideration for a supply.

Government Grants and Payments during COVID-19

Payments to support business

A government payment to assist a business to continue operating is included in assessable income. This will include assistance provided as a one-off lump sum or a series of payments. For businesses operating on:

  • an accruals accounting method – the income will be derived when the right to the government payment arises
  • a cash accounting method – the income will be derived when the government payment is received.

Generally, you don’t have to pay GST on grant funding unless you provide something of value in return for the payment. Providing something of value for the payment can include entering into a binding legal obligation to do something or refrain from doing something in order to receive the payment.

Example 1 – cash payment for running business

Boris operates a local café which employs five full time and 10 casual workers. As a result of COVID-19 the café is closed for two months and operates at reduced capacity for 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. Boris applies for and receives the $10,000 payment which he spends on paying outstanding business utility bills, replacement stock and deep cleaning the premises so he can reopen.

Income tax implications

In his 2021 tax return, Boris includes the $10,000 payment from government as assessable income, and is included at T1, on the BAS. He also includes the stock expenses in his trading stock calculation, and he 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 received.

Resources

  • Updated: 21st July 2021
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