Hidden GST in government grants
15 September 2022
It is not uncommon to receive a government grant and particularly lately there have been an increase in grants handed as a means of insulating the economy from the impacts of the pandemic. Outside COVID-19, many other grants are available for businesses such as job creation grants, business opportunity grants, and Callaghan Innovation grants to name a few.
Reading about the GST requirements of government grants is not a priority for most people and while we can’t blame you for that, there are some things on this topic you need to be aware of if you’re considering paying a grant or you will be receiving one.
While some COVID-19 grants were specifically excluded from GST as part of the COVID-19 measures, many, if not most, Government grants are specifically deemed to be subject to GST. The Government’s resurgence grant payment for example is a case in point.
Under GST law, whenever a payment in the nature of a grant or subsidy is paid by a public authority or the Crown to a GST registered person (whether a non-profit or otherwise), the grant is deemed to be consideration for a supply of goods or services by that person and GST output tax is payable.
Recall the latest resurgence support payment was paid from late-February 2021 for eligible businesses if there was a move to Alert Level 2 or above for 7 or more consecutive days. This was a one-off payment to help businesses affected by the Alert Level upgrade with fixed costs. Unlike wage and leave subsidies, the resurgence payment is subject to GST and recipients had a GST output tax liability on receipt of these grants – unfortunately, there was no actual warning that they were GST inclusive. While IRD’s website did cover this, unless people thought to actively seek out this detail, people could be forgiven for thinking the same rule would apply as was the case with the wage and leave subsidies.
Other confusion in this area stems from grants paid by local authorities. Local authorities make grants to many organisations to assist with local authority responsibilities or obligations. These payments are not subject to the deemed supply rules as discussed above as they are not made by the Crown or a Public Authority. However, in some cases, a GST liability will still exist on local authority grants as they may have been paid for services provided by a GST registered person in the ordinary course of that person’s activities. For example, a local authority may provide assistance to entities undertaking a project to reduce green-house gas emissions. If Company A applies for funding for its project of reducing gas emissions and invoices the local authority for this, there is a risk that this is consideration for the services of reducing green-house emissions.
In some cases recipients of this funding treat it as a gift and not subject to GST. That is understandable because a grant is a gift out of public funds for a purpose deemed beneficial to the community. However, the line between a gift and consideration for a supply can be a very fine one, and any grant conditions that go beyond merely ensuring that a grant is applied to its purpose of funding can tip it over that line. The best advice is to get advice when establishing new grants or you receive, or anticipate receiving, a grant.
The clean car rebate provides an interesting current example. When a registered person receives the clean car rebate from NZTA, as NZTA is a public authority, the grant is consideration for a deemed supply and subject to GST if the purchaser is a GST registered person. That also applies to local authorities in receipt of the rebate as they are GST registered, so the deemed supply rule applies equally to them. Like the resurgence payment, those in receipt of the clean care rebate may not think that GST applies. This may well determine whether the rebate is paid on a GST inclusive or exclusive basis
In summary, when in receipt of a grant from the Crown or a Public authority (i.e. a Ministry or Government Department) there is likely to be a GST requirement unless specifically excluded. If a grant is received from a local authority (or a local business or charity), there is no similar deeming rule, but care still needs to be taken to ensure the grant is not an amount paid for services provided to the grant provider, with a GST liability arising in the normal course.
For more information on GST and government grants, or questions about establishing or receiving grants of any kind, get in touch with us at Findex.