Grant funding represents a significant proportion of the expenditure measures in the annual budgets of our federal and state governments. However, there are no provisions in the GST Act that expressly exclude grants from being subject to GST.
Who is at risk?
This means the risk whether GST is payable on a grant always rests with the recipient. If that risk is not dealt with in the grant arrangements and GST is found to be payable, the grant is deemed to be GST inclusive, and the recipient must account for the GST liability – by paying 1/11th of the grant received to the ATO.
Often, however, it is the grant provider that actually dictates to the recipient how the arrangements will be treated for GST. In real terms, while the grant recipient might believe the arrangements are subject to GST, the grant provider may be reluctant to gross up the grant.
What grants are subject to GST?
For a grant recipient to have a GST liability in relation to the grant there must be a sufficient nexus between the grant and a supply, such that the grant is consideration for the supply.
A grant is generally not consideration having a relevant connection with a taxable supply unless something of value is provided by the recipient in return for the payment. This was the case with the Jobkeeper payments – whilst there were certain obligations on those who met the criteria, these were considered to be peripheral to the real purpose of the grants.
Relevant consideration for the grant
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. It may involve providing something to a third party, or the community as a whole. This will depend on the particular facts and circumstances of each grant program.
There may be no GST consequences where the grant agreement states the grant is for the purposes or project set out in an application. However, the grant may be subject to GST if the grant agreement is really an agreement for the recipient to carry out a project as directed or required by the grant provider – i.e. the agreement is not a grant agreement but more like a service agreement and the grant is more like a payment for services or supplies.
A requirement to report on how the grant recipient has spent the money will not itself make the grant subject to GST. However, the grant will be subject to GST if the obligation goes further than just accounting for the grant, and requires the grant recipient to provide information which is of a material benefit to the grant provider, such as the research results which are relevant to the grant provider’s business.
Requiring public recognition of the grant will also not itself make the grant subject to GST. However, the grant will be subject to GST if detailed requirements are made by the grant provider in relation to acknowledgement, so it is similar to sponsorship.
Keep your grant ‘whole’
Therefore, there are a number of important factors to take into account when determining whether a grant is subject to GST and therefore should be treated as inclusive or exclusive of GST. Unexpectedly losing 1/11th of your grant funding will hurt – it is counter-productive to your purpose for the grant.
We encourage you to contact us if you are entering into any agreements with the Commonwealth or a state regarding a grant you are to receive, to determine whether the arrangement could give rise to a GST liability to you as the grant recipient. Contact: