Is this inappropriate or what?

This evening – 23 November 2011 – Treasury released exposure draft amendments to the GST law dealing with the treatment of appropriations.

The exposure draft EM states that the amendments are to restore the policy intent that the non-commercial activities of government related entities are not subject to GST.

It appears that the decision in TT-Line established an interpretation, in Treasury’s view, that was not intended.  Consequently, paragraph 9-15(3)(c) is proposed to be amended to state:

(c)  a payment is not the provision of consideration if:

(i)  the payment is made by a *government related entity to another government related entity; and

(ii)  the payment is covered by an appropriation under an *Australian law; and

(iii)  the payment is not made for a supply which is commercial in nature.

Note 1:       A payment by a State Department of Health to a State hospital to fund its operations, where the hospital commits to achieving certain health outcomes, is a payment for a supply which is not commercial in nature.

Note 2:       A payment by a Department to a government entity, which provides legal services on a fee for service basis, for the provision of legal services is a payment for a
supply which is commercial in nature.

Where is this stuff coming from?

The ATO have issued a recent draft ruling on “financial assistance” and a final ruling on the treatment of appropriations.  While we are still in the process of commenting on the former, it is apparent that neither ruling specifies the position under the Australian law where there is merely a funding paid by one government entity to another.  We no longer have, it seems, an understanding that a contribution to costs is NOT consideration for a supply!  The approach following TT Line seems to be an acceptance that there is consideration for a supply unless para 9-15(3)(c) applies!

What is going on?  NZ Refining was established law at the time of our GST legislation.  Our legislation reflects almost exactly the NZ  definition of consideration.

NZ amended its law prior to NZ Refining being decided and prior to the Australian law being introduced to deem subsidies to be for a supply made to the payer.  We have no such provision, so we should assume that the general rules do not capture a mere funding of operations.

Para 9-15(3)(c) is to handle the rare event where there may be an appropriation which would otherwise be consideration.  As DoT shows, TT-Line is NOT the norm.  If a government payment is made in circumstances where it is for the doing of something, the relevant supply is likely to be made to the payer – not to the third party as was found in TT-Line.

Lastly, it is not correct that Australia adopted a “commercial” vs “non-commercial” division.  Originally, charges made by Government were taxable unless excluded by Div 81 determination.  This is how “commercial activities” of Government were defined – if the Treasurer determined it wasn’t taxable, it was excluded.  Otherwise, Government charges were taxable.

The idea that funding or subsidies between government agencies will be treated as taxable ignores the fact that in almost all cases the payer will obtain a credit – under the correct analysis applied in DoT rather than the unusual finding in TT-Line.

If the supply and acquisition are made between Government entities, there is no change to the tax base – it is only household consumption (i.e., the spending of passenger in TT-Line) that is the subject matter of a value added tax.

If we tax funding by one Government entity to another, it is fully creditable to the payer – no  tax revenue – do not pass go – do not collect $200!  Taxing these things is just churning – inefficient and costly.  It was never intended that government to government funding should be taxed – this is clear from the 1998 White paper.

Can someone please stop this madness and ensure we return to the simple, logical object of the law as it was drafted?

Proposals of this nature ridicule the entire GST system.