• Section B. Market value guidelines

    The market value guidelines provide methodologies which allow charities to determine a market value that is acceptable to the ATO, when applying the non-commercial supply rules.

    A supply made by a charity is GST-free if the supply is either:

    • a supply of accommodation and the consideration for the supply is less than 75% of the GST-inclusive market value of the supply, or
    • a supply of something other than accommodation and the consideration for the supply is less than 50% of the GST-inclusive market value of the supply.
    Attention

    When working out a market value (for the purpose of subsection 38-250(1)), charities do not have to obtain a professional valuation by a licensed valuer. However, if a charity chooses to use the service of a licensed valuer, the valuer must apply the market value guidelines when working out the market value.

    End of attention
    Further information

    For more information on the non-commercial supply rules, refer to subsection 38-250(1) of the GST Act.

    End of further information

    The market value guidelines address the following matters:

    • market value
    • the 'same supply test'
    • the 'similar supply test'
    • other methods approved by the Commissioner
    • the use of the successive tests
    • market value benchmarks
    • record keeping, and
    • reviewing the application of the non-commercial supply rules.
    Attention

    In these guidelines, all references to consideration, market values, prices and amounts are GST-inclusive.

    End of attention

    1. Market value

    The term 'market value' is not defined in the GST Act. For the purposes of the non-commercial supply rules, we consider that the market value of a thing is the price that would be negotiated between:

    • a knowledgeable, willing and not anxious buyer, and
    • a knowledgeable, willing and not anxious seller acting at 'arm's length' in an appropriate market.

    Example 1

    Based on this definition, if a charity sells assets or real property at public auction or on the open market, the consideration received for the supply will be taken to be the market value.

    In determining the market value of a supply of a thing for the purposes of subsection 38-250(1), the definition of market value above must always be used. Therefore, if the amount determined by the charity is not an amount that a willing but not anxious purchaser is prepared to pay for the thing supplied, then the amount does not represent the market value of the supply.

    End of example

    In determining the market value of a supply, a charity must apply the following successive tests:

    • the charity must work out whether the same supply exists within the market they operate in - referred to as the 'same supply test'
    • if no 'same supply' exists, the charity must then work out whether a similar supply exists within the market they operate in - referred to as the 'similar supply test'
    • if no 'same supply' or 'similar supply' exists, the charity may seek approval from the Commissioner to use another methodology to calculate the market value of the supply.
    Attention

    These tests are successive tests for working out the market value of a supply, they are not alternative tests. If a charity identifies a 'same supply' in the market, the price charged by this other supplier is then the market value of the charity's supply. The charity cannot calculate the market value of the supply it makes by reference to the second or third tests. We consider that the first two tests would generally establish a market value and the last test would be rarely used.

    End of attention

    Benchmark market values for certain supplies made by charities are provided in GST and non-commercial rules – benchmark market values. Those charities eligible to use the benchmarks for their supplies will only need to use the above successive tests to work out the market values if they choose not to use the benchmarks.

    2. The 'same supply' test

    The same supply test requires a charity to work out whether a supply, the same as the one it makes, exists within the market they operate in. That is, in applying the same supply test, the charity compares its supplies to those in the market. The comparison is made between the supplies made by the charity and those by other suppliers. It is not made between the recipients of the supply or the suppliers.

    The other suppliers in the market can be charities or profit making organisations.

    Attention

    If the same supply exists in the market, the price of this supply is the market value that the charity should use in their calculations.

    End of attention

    Charities needs to take into account the following when making the comparison:

    • identifying the market
    • the locality of the supply or area of the market
    • the quality or nature of supply
    • the size, quantity or duration of supply
    • the conditions of supply
    • other charitable or commercial suppliers, and
    • the number of comparisons.

    Although these factors are considered separately below, they can often be interrelated.

    Identifying the market

    Charities must ensure they make their comparison in the same market they operate in.

    Example 2: residential accommodation versus commercial accommodation

    A charity provides affordable rental housing to low income households and it operates in the market for longer term residential accommodation. It cannot compare its supplies with accommodation provided by hotel operators. The charity and the hotel operators may be providers of 'accommodation', but they operate in different markets.

    Broadly speaking, the charity operates in a market of residential tenancies and the hotel operates in the commercial accommodation market offered to travellers as transient guests.

    The charity may choose to use the 'benchmark market values' instead of using the 'same supply test'.

    Example 3: second-hand goods retail market versus the new goods retail market

    A charity buys various items of traded-in electrical appliances from retailers for the purpose of selling them to low income households. Their sales are made in the second-hand goods retail market.

    A sale of a new appliance by a retailer is not the same supply as the charity makes. However, as a sale of a traded-in appliance by the retailer to a consumer is made in a second-hand goods retail market, it is considered the same supply as the one the charity makes.

    Example 4: food retail market

    Students of a government school pay a fee to go on a zoo excursion. During the excursion, the government school purchases sandwiches from a lunch bar and supplies them to the students and staff. Sales of sandwiches by the lunch bar to other customers are the same supplies as those made by the school to the students or staff.

    End of example

    Locality of the supply/area of the market

    The market value of the supply made by the charity is the price of the same supplies made by other suppliers in the market within which the charity operates. Therefore the area the market covers or the locality of the supplies can be an important factor in working out whether the comparison is acceptable. This factor is clear when there is a strong correlation between the geographic location and the price that can be charged.

    The geographic location of the market or the supply is an important factor for the same supply test for the supplies of:

    • residential accommodation
    • leasing of commercial premises, and
    • car parking.

    Example 5

    A charity rents two bedroom apartments to low income households in certain suburbs. In order to establish a market value for the rent it charges, the charity should compare its apartments to other two bedroom apartments offered for rent in the residential tenancy market in those particular suburbs.

    The charity should not compare its apartments to those located in other suburbs in other parts of the city. The charity may choose to use the 'benchmark market values' instead of using the 'same supply test'.

    End of example

    It should be noted that the GST treatment (taxable, input taxed or GST-free) of some supplies made by charities for the same consideration may depend on the location the charity makes the supplies.

    The location of the market or supply is an important factor in applying the same supply test.

    Example 6

    A charity leases two bedroom apartments to low income households in two different states for the same weekly rent. If the weekly rent is less than 75% of the weekly market rent of a two bedroom apartment in one state, (worked out under the same supply test), then the supply in that state is GST-free. If the weekly rent is above 75% of the weekly market rent of a two bedroom apartment in the other state, (worked out under the same supply test), then the supply in the other state is input taxed.

    This result can occur if the weekly market rent in one state is considerably higher than that in the other state. The charity may choose to use the benchmark market values instead of using the same supply test.

    End of example

    There are, however, other supplies that a charity may make where the locality of the supply does not have a material impact on the market value of the supply. In these circumstances, the charity can look beyond their geographic location in working out the market value of their supply.

    Food is an example of the type of supplies where the geographic location of the market or supply may not be a material factor in the 'same supply test'.

    Quality or nature of supply

    For the same supply test, the supply made by the charity must have the same quality or nature as the supplies in the market it is being compared with. Quality may include such things as:

    • brands
    • durability, functionality, workmanship and reliability
    • expertise
    • facilities
    • fashion
    • materials, packaging or surrounding
    • obsolescence
    • professionalism
    • technology
    • warranty.

    Example 7

    A government school holds a performance of a well known play performed by its drama class. It charges $20 a ticket to attend. The 'same supply' would be a supply to attend a performance by other local amateur theatre or drama groups.

    The school cannot use a supply to attend a performance of the same play performed by a professional theatre company as the same supply because of the difference in the quality of those supplies.

    This means the school cannot use the ticket price charged by the professional theatre company to attend the same play as the market value of the supply it makes.

    Example 8

    Fashion changes for clothing. Therefore, the price charged for an item of clothing as new season fashion at the beginning of a season cannot be used as the market value of those items that are new but out of season. Items that are new but out of season will have a different market value.

    In identifying the same supply, a charity cannot compare its supply with another supply that is clearly of a better quality. However, such a strict application of the same supply test may make the test difficult to apply in practice and may impose large compliance costs.

    In a case where there are genuinely identifiable differences in the quality of the 'same supply', the charity needs to take into account those differences in establishing the market value of the supply it makes. For this purpose, the charity needs to adjust the price of the 'same supply' by taking the following steps:

    • identify the 'same' supply and its price
    • identify all the differing characteristics shown in the quality of the 'same supply' when comparing with the supply the charity makes
    • quantify those differing characteristics on a reasonable basis, and
    • use the quantified values of those differing characteristics to adjust the price of the 'same supply'.

    Charities must maintain documentary evidence of conclusive and tangible proof for each of these steps.

    We consider that for the purposes of the same supply test, this process adjusts or modifies the 'same supply' so that it has the quality which is same as that of the supply the charity makes.

    The price calculated for the modified/adjusted 'same supply' is the market value of the supply the charity makes.

    End of example
    Attention

    The market value determined must represent an amount a willing but not anxious purchaser is prepared to pay.

    End of attention

    Size, quantity or duration of supply

    The size, quantity or duration of a thing supplied are factors which have a bearing on the market value of the supply.

    Example 9 – not same supplies

    The supply of an admission for a family of two adults and two children is not the same as two single supplies of an admission for one adult and two single supplies of an admission for one child.

    The market value of this supply cannot be worked out by adding the prices of the four single supplies together.

    End of example

    Conditions of supply

    The size, quantity or duration of a supply may be viewed as a condition of the supply. That is, the terms and conditions of a supply, amongst other things, quantify the amount of the supply.

    Example 10

    A single trip bus ticket entitles the holder to take one trip whereas a multi-trip ticket entitles the holder to take a set number of trips. A daily bus pass entitles the holder to take any number of trips on a specified day. A monthly bus pass entitles the holder to take any number of trips within a particular month.

    The fees charged by the bus operator vary depending on the types of tickets supplied, that is, the conditions of the supplies.

    Example 11

    A boarding school makes a mixed supply of food and accommodation to its boarding students. The supply of food is three meals provided each day in the school dining room during a school term.

    A condition of the supply requires the boarding school to provide to a boarding student a predetermined number of meals over a period of time. An example of a 'same supply' of food in the market is a supply of food by an operator providing full board to individuals (such as tertiary students) over a longer period of time (such as a semester).

    As each boarding student is entitled to eat three meals a day during the school term, the boarding school may apply the 'same supply test' either:

    • separately – to a supply of a type of meal such as a breakfast, a lunch or a dinner, or
    • collectively – to a supply of meals encompassing breakfast, a lunch and a dinner.
    End of example

    Other charitable or commercial suppliers

    The same supply test requires a charity to compare the supply it makes to those made by other suppliers in the market.

    The other suppliers in the market can include other charities and profit making organisations. Ordinarily, profit making organisations undertake their activities in order to make a profit. Therefore, the charity can establish the market value of the supply it makes as the amount charged by profit making organisations making the same supply.

    This is based on the assumption that the amount charged by a profit making organisation for the same supply, is higher than that charged by the other charities. The charity can otherwise establish the market value by using the highest amount charged by the other charitable suppliers.

    Example 12 – other charitable and profit making operators

    A charity sells new school uniforms for a school. In the same geographic area, there are other charitable and profit making organisations selling new school uniforms for other schools.

    The charity can establish the market value of an item of new uniform it sells by using the highest amount charged for the same item, by the other charitable or profit making operators.

    End of example

    Number of comparisons

    In the market the charity operates in, there may be more than one other supplier making the same supply but for a different price. Whilst it is not practical to obtain the full range of prices (of the same supply) the charity should generally obtain more than one price.

    3. The 'similar supply' test

    If there is no same supply in the market, the charity must work out whether a 'similar supply' exists.

    Attention

    If there is a similar supply and no 'same supply' in the market, the price of the 'similar supply' is the market value the charity should use.

    End of attention

    Charities need to take into account the following when identifying a similar supply:

    • the market itself
    • the locality of the supply or area of the market
    • the quality or nature of supply
    • the size, quantity or duration of supply
    • the conditions of supply
    • other charitable or commercial suppliers, and
    • the number of comparisons.

    These factors are often interrelated. The points about these factors under the 'same supply test' are relevant to the 'similar supply test'.

    Identifying the market

    For some supplies, charities may have difficulties in identifying a supply similar to the one they make in the market. In order to reduce compliance costs, a charity can use a broad categorisation of the supply it makes as justification for using certain supplies in the market as similar supplies.

    In using the broad categorisation approach, charities must take into account the other factors such as the quality, nature and conditions of the supply.

    Some 'broad categorisations' would include clothing, education, entertainment, food and furniture.

    Example 13: broad categorisation of education

    A charity offers a half-day class in relaxation techniques to unemployed adults for a small fee. There are no comparable classes offered in the market.

    The charity would be able to use any half-day adult education course that is offered by other organisations that are similar to their half-day course in terms of nature, duration, standard of tuition and activities during the course.

    That is, the half-day class in relaxation techniques and the half-day adult education course would be accepted as similar supplies made under the broad categorisation of 'education'.

    Example 14: broad categorisation of entertainment

    A regional government school holds a performance of a well known play performed by its drama class. There is an amateur choral society and no other amateur theatre or drama group in the area serviced by the school.

    In applying the similar supply test, the school can classify the play under the category of entertainment which a choral concert of comparable duration and quality also belongs.

    In these circumstances, the supply to attend a choral concert is, a similar supply to the supply to attend its play.

    Example 15: broad categorisation and different conditions of supplies

    A university supplies daily 10 hour car parking permits to students for a fixed fee. Another car park operator in the area charges the same fee for four hour car parking. Both the university and the other operator make supplies under the broad categorisation of car parking. However, the supplies they make are not the same or similar in terms of duration.

    The university cannot compare its hourly rate with that of the other operator. This is because both of them make a supply for a specified duration regardless of how long the recipient actually occupies the parking space.

    End of example

    Accommodation

    For accommodation, broad categorisation is not appropriate. This is because a charity in identifying a similar supply of accommodation needs to take into account:

    • the type of accommodation provided – for example, a one bedroom with shared facilities, a one bedroom with an ensuite, a one bedroom apartment or dormitory style accommodation
    • the services provided with the accommodation – for example, periodic cleaning, changing linen, and
    • the conditions of occupancy – for example, a fixed term lease, a periodic lease or a licence or hire to occupy per night, per week or per period (such as a school term).

    Campsites

    A similar supply to a camping site in a church or school operated campsite can be a supply of an un-powered camping site that:

    • has similar facilities in other tourist/holiday parks, and
    • is in the same locality – advertised on for example, motoring or caravan and camping websites.

    4. Other methods approved by the Commissioner of Taxation

    We expect that the market value of most supplies made by charities can be worked out using the 'same supply test' and the 'similar supply test' successively. If no same or similar supply exists, charities can seek approval from us to use a methodology to calculate the market value of the supply.

    The charity is responsible for developing this methodology. In developing the methodology, the charity needs to take the following steps:

    • the charity must maintain evidence that shows it cannot identify a same supply or a similar supply by applying the 'same supply test' and then the 'similar supply test' to its circumstances
    • the charity will need to isolate the specific supplies for which a same supply or a similar supply cannot be identified. Charities cannot group or aggregate supplies that have same supplies or similar supplies with those that do not
    • the charity may develop an appropriate methodology to work out the market value of its supply, and
    • the charity can ask the Commissioner of Taxation to approve this methodology.

    Charities can ask the Commissioner to approve their methodology by applying for a GST private ruling by:

    The approved 'cost plus' method

    The Commissioner has approved the use by charities of the following 'cost plus' method to work out the market value of a supply. Charities can only use this method if they cannot identify a same or similar supply to the one it makes.

    The 'cost plus' method allows charities to work out the market value of their supply as the sum of:

    • direct costs incurred – for example, materials and direct labour
    • a reasonable apportionment of indirect costs incurred – for example, marketing, administration, office expenses, electricity, telephone and insurance
    • depreciation of assets used, and
    • imputed costs for things such as volunteer labour, donated goods and services and free rent.

    Direct costs, apportioned indirect costs, depreciation and imputed costs must directly relate to making the supply.

    The amount the charity works out using the approved 'cost plus' method is then considered the market value of the supply it makes.

    It is important to note that the market value that is worked out by using the approved 'cost plus' method must represent an amount a 'willing but not anxious purchaser' is prepared to pay.

    There may be strong evidence that the market value worked out by using the approved 'cost plus' method may be an amount higher than what a willing but not anxious purchaser is prepared to pay, because there is no same or similar supply in the local market. However, for the purposes of reducing compliance costs, we accept the market value worked out under the 'cost plus' method.

    The 'cost plus' method and mark-up

    It is generally not appropriate to apply a mark-up to the market value that has been worked out using this method. As there is no same or similar supply in the local market, a commercially realistic mark-up, based on industry norms, does not exist in the market in terms of the charity's supply.

    5. Applying the successive tests

    Example 16: applying the successive tests

    On a government school's open day, a group of students, supervised by the home economics teaching staff, prepare lasagne, salads, bake scones and cakes. The quality of the food and the size of each serve are comparable to that sold by the local take-away food shop and bakery. The school sells the food to visitors in the canteen.

    The school can use a serve of lasagne or salad sold by the local take-away food shop as a 'same supply' of the lasagne and salad it prepares. It can also use a scone or cake sold by the local bakery as a 'same supply' of the scones and cakes it bakes.

    Another group of students cook chickens using an east African recipe. There is no local shop selling chickens using this recipe. The school sells the food to visitors in the canteen. Using the 'broad categorisation of food' and looking at the quality and quantity factors, the school can use a supply of a 'roasted chicken' by the local take-away food shop as a 'similar supply'.

    A third group of students sell widgets, designed and made by them, under the supervision of the science and technology teaching staff. There is no same or similar supply in the local market. The school can use the 'cost plus' method approved by the Commissioner to work out the market value of the widgets.

    End of example
    Attention

    Non-profits operating a canteen on government school grounds can choose to have all its supplies of food made through the canteen treated as input taxed. Example 16 illustrates the circumstances in which the 'same supply test' and 'similar supply test' would be appropriate to use.

    Government schools can also choose to have all of their supplies they make in relation to a fundraising event, treated as input taxed, provided certain requirements are met. Example 16 illustrates the circumstances in which the 'cost plus' method approved by the Commissioner would be appropriate to use.

    End of attention

    6. Market value benchmarks

    GST and non-commercial rules – benchmark market values provides the market values of a range of supplies that charities can use as a reference point. Charities making the following supplies can use the benchmark market values to work out their market values:

    • supported accommodation and community housing (long term accommodation)
    • crisis care (short term and long term accommodation as appropriate)
    • retirement villages (long term accommodation)
    • other residential housing (long term accommodation)
    • 'meals on wheels', charity 'soup kitchens', and other charities that provide or supply meals to the frail, homeless or needy (food guidelines).

    The accommodation benchmarks do not apply to accommodation supplied by charities at:

    • campsites
    • university halls and colleges
    • boarding schools, and
    • non-residential buildings, such as halls and offices.

    7. Record keeping

    Charities must keep and maintain records that adequately document the process and information collected in working out the relevant market values which the consideration of the supplies the charity makes is to be compared to.

    For example, the market values established and the methods used may be documented or minuted in the charity's books of account. This information should be captured in a way that will allow cross-referencing to accounting statements. It should also correspond to what is recorded on the charity's business activity statements.

    8. Reviewing the application of the non-commercial supply rules

    Charities using subsection 38-250(1), the non-commercial supply rules, should monitor the market they make the supply in to ensure they will respond promptly to any material changes in the market.

    Changes in market conditions include, amongst other things:

    • suppliers entering or leaving the market
    • changes in the quality of the supplies as a result of different consumers' expectations
    • changes in input costs, and
    • changes in prices charged.
    Attention

    Input costs include real costs such as direct and indirect costs incurred depreciation and imputed costs.

    End of attention
      Last modified: 18 Nov 2013QC 27139