Concepts
Subsidy
A subsidy is a payment that reduces the cost of something for a buyer or supports a producer, and it may or may not be consideration for a supply under GST.
A subsidy is money paid, usually by government, to lower the price of a product or service or to support an activity. It may be paid to a business to help it keep prices down, to a customer to help them buy something, or to a provider of a service on behalf of the person receiving it. Examples include subsidised child care fees, energy or training programs and funding that reduces the price of a service. For GST, the important question is whether the subsidy is payment for a supply.
If a payment is made in return for a supply, even when the payer is not the person who receives the goods or services, it may be consideration for that supply. A registered business that supplies a taxable product to a customer and receives part of the price from a third party is generally treated as receiving consideration from both, and the total consideration forms part of the GST-inclusive price. The business reports GST on the total, not only the portion paid by the customer.
Other subsidies are not tied to a particular supply. If a payment is made to help an organisation continue operating and is not linked to something it provides to the funder or to specific customers, it may be treated more like a grant or gift and not consideration for a taxable supply. The way the program is described in legislation or in its guidelines is a good guide, and GST law has specific rules for some government payments, so a business should check its program documents.
Taking the type of supply into account is also essential. If the supply the subsidy relates to is GST-free, such as certain child care or education services, the subsidy follows the same treatment as the underlying supply and no GST is added. If the supply is taxable, the subsidy contributes to the taxable price. For input-taxed supplies, no GST is charged, but costs also come without credits.
Subsidies are usually assessable income for income tax unless the law says otherwise, and they can affect the amount of a deduction or the calculation of costs. GST and income tax timing may differ. A registered business that uses accrual accounting reports GST when it invoices or is paid, whichever is earlier, whereas one on a cash basis generally reports when payments arrive. Records of subsidy payments should be kept for five years.
Typical mistakes include reporting only the customer-paid portion of a price as sales when a subsidy also relates to the supply, assuming that all government payments are GST-free, and not matching subsidy payments to the correct period on the BAS. Another is failing to separate a subsidy from a loan or a repayable advance, which has a different treatment.
Because each subsidy scheme works in its own way, this is general information only. Please confirm your situation with the ATO or a registered tax professional.
Worked example
A registered training provider charges $1,100 including GST for a taxable workshop. A government program pays $550 of this on behalf of the student, and the student pays $550. The total consideration is $1,100, so GST is $1,100 divided by 11, which is $100. The provider reports $1,100 as sales and $100 as GST on sales, even though only half came from the customer.
Practical tips
- Include third-party subsidy payments in the total price when they are payment for your supply, rather than ignoring them on the BAS.
- Read program guidelines to learn whether the payment is consideration or a separate funding arrangement.
- Keep subsidy statements and remittance advices, as they show how much was paid by whom and for what.