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Is your community energy project leaking GST?

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By Gerald Arends

Community renewable energy groups might be left short-changed for the – often – significant GST component on supplies made on community renewable energy projects.  A challenge for Government funding bodies, community renewable energy groups and suppliers alike. 

The background

Government financial support for community renewable energy groups (“CoRE Groups”) is a worthwhile way to support communities in a, literally, empowering journey that allows them to be part of and shape the future energy sector. 

We have recently seen that there is a lack of understanding in CoRE Groups and funding bodies as to their GST status and the impact on the CoRE Groups’ ability to meet their obligations to their suppliers. 

The main distinction at work here is whether a CoRE Group is registered for GST or not.  CoRE Groups have many good reasons not to register for GST, even if they have the ability to do so:  The revenue threshold for compulsory GST registration is $75,000 for businesses and $150,000 for not-for-profit organisations.  Below that threshold, registration is voluntary. 

The turnover of most CoRE Groups will typically be below that compulsory registration threshold.  There are good reasons (beyond the topic of this article) why CoRE Groups will and should be hesitant to register for GST.  If that means that CoRE Groups are not GST registered, Government funding bodies and CoRE Groups ought to be aware what the lack of GST registration might mean. 

CoRE Group registered for GST

Let us first look at the more unusual case, namely a CoRE Group that is registered for GST.  Let us assume that this CoRE Group receives government funding to support the engagement of a consultant or contractor to deliver a service or product to the CoRE Group worth $10,000 (exclusive of GST).  The payment flows are shown below.  

In this scenario, the supplier provides an invoice for the services or supply and charges GST on top.  The CoRE Group charges the same underlying amount under the Funding Agreement and adds GST on top. 

When the funds flow, the Government funding body will pay the invoice from the CoRE Group including GST and this cash amount is sufficient for also the CoRE Group to pay for the services or supply including GST to its supplier. 

When it comes to GST reporting, the CoRE Group will owe the ATO an amount of $1,000 in respect of the invoice raised under the Funding Agreement, but it will also have a credit of $1,000 arising from the invoice raised by the supplier.  The GST position is neutral and no further payment has to be made by the CoRE Group.  Importantly, the CoRE Group has been able to satisfy its obligations to pay GST and it has not suffered a liquidity shortfall.  It is financially protected.

CoRE Group not registered for GST

Let us next look at the more typical case, namely a CoRE Group that is not registered for GST.  Using the same example, the payment flows are as shown below. 

In this scenario, the supplier again provides an invoice for the services or supply and charges GST on top.  The CoRE Group charges the same underlying amount under the Funding Agreement but in this case, not being GST registered, it is not allowed to GST on top.

When the funds flow, the Government funding body will pay the invoice from the CoRE Group and not add GST on top.  The cash amount received by the CoRE Group is sufficient to cover the underlying amount, but the CoRE Group is not funded for the GST component.

While most businesses can ultimately recover GST paid on supplies made to them from the ATO through the Business Activity Statement (BAS), a CoRE Group that is not registered for GST cannot recover GST through a BAS.  It is in the same position as an individual that makes a private purchase and has to carry the cost of GST. 

The projects that many CoRE Groups pursue can be of significant scale, yet the CoRE Groups are typically not financially equipped to carry the GST mismatch that funding mechanisms may create.

Where to from here?

We strongly encourage CoRE Groups to communicate their GST status to their suppliers and for suppliers to investigate and understand the GST status and financial position of the CoRE Groups.  This allows both parties to work towards a solution that leaves everyone in a tenable position. 

If there is a risk of ‘GST leakage’ as described above, parties can consider a range of strategies, including:

  • The CoRE Group might consider its GST status and whether, on balance, it should register for GST. We recognise that this may not be a suitable pathway for many CoRE Groups.
  • The CoRE might incorporate a special purpose vehicle (an “SPV”) to undertake the community renewable energy project outside the CoRE Group. The SPV can then register for GST and avoid any complications.  It might be necessary, however, to novate the Funding Agreement to the SPV. 
  • The CoRE Group might seek to raise additional funding for GST from outside parties, which may include the supplier in the first instance.

Pegasus Legal is a boutique law firm with an exceptional level of expertise in the renewable energy sector. Our lawyers have worked on a large number of solar, battery, biomass and wind projects in a wide range of countries. For further information please contact director Gerald Arends.

Pegasus Legal has worked extensively alongside several community renewable energy groups and Komo Energy on community renewable energy projects.

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