House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5: Non-profit sub-entities

Outline of chapter

5.1 Schedule 5 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to allow non-profit sub-entities to access the goods and services tax (GST) concessions available to their parent entity.

5.2 All legislative references in this chapter are to the GST Act unless otherwise stated.

Context of amendments

5.3 This Schedule implements Recommendation 43 of the Board of Taxation's Review of the Legal Framework for the Administration of the Goods and Services Tax , which stated that the GST law should be amended to ensure that non-profit sub-entities are able to access the same GST concessions as their parent entity.

5.4 Under the GST Act, non-profit bodies are eligible for several concessions, including a higher registration turnover threshold of $150,000 compared with $75,000 for other entities, and the ability to treat supplies of food at school tuckshops and canteens as input-taxed.

5.5 In order to avoid unfair competition, the activities of charities are generally treated the same as other entities under the GST Act.

5.6 However, the non-commercial activities of endorsed charitable institutions and certain other entities - endorsed trustees of charitable funds, gift-deductible entities and government schools - are GST-free. Additionally, these endorsed charitable institutions and other entities can access a number of other GST concessions:

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GST-free raffles and bingo;

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input taxed fund-raising events;

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accounting on a cash basis;

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input tax credits for reimbursement of volunteer expenses; and

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GST-free supplies of donated second-hand goods.

5.7 In addition, the making of a gift to a non-profit body is not the provision of consideration and providers of gifts to certain non-profit bodies are not required to make adjustments in relation to those gifts.

5.8 Division 63 of the GST Act describes how the GST law operates for non-profit sub-entities. Under Division 63, registered entities that are charitable institutions, trustees of charitable funds, government schools, gift-deductible entities that are non-profit bodies, or non-profit bodies that are exempt from income tax under certain parts of Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997), may be entitled to split some of their separately identifiable operations into separate independent units called 'non-profit sub-entities' for GST purposes. These non-profit sub-entities are then considered separate entities for GST purposes, as long as the parent entity remains registered for GST.

5.9 One of the benefits of splitting the operations into separate independent units for GST purposes is that the non-profit sub-entity will only need to register for GST if the GST turnover of that non-profit sub-entity exceeds the registration threshold for non-profit bodies.

5.10 The GST concessions that apply to charitable institutions and trustees of charitable funds only apply to institutions or trustees that are endorsed under Division 176 of the GST Act. Division 176 requires that the Commissioner of Taxation (Commissioner) endorse charitable institutions and trustees of charitable funds that are entitled to be, and have applied to be, endorsed in accordance with Division 426 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

5.11 As a non-profit sub-entity is only an entity for GST purposes and is not entitled to be separately endorsed under Division 426 of the TAA 1953, there have been questions about whether a non-profit sub-entity of an entity endorsed under Division 176 of the GST Act can access the same GST concessions as the endorsed entity. To date, the Commissioner has interpreted the law to allow them to access these concessions.

5.12 This Schedule will provide clarity to taxpayers by inserting into the GST law provisions that allow non-profit sub-entities to access the GST concessions available to their parent entity.

Summary of new law

5.13 These amendments to the GST Act allow non-profit sub-entities to access the GST concessions available to their parent entity.

Comparison of key features of new law and current law

Detailed explanation of new law

5.14 This Schedule allows non-profit sub-entities to access the GST concessions available to their parent entity.

5.15 All non-profit sub-entities will be able to access the higher registration turnover threshold that applies to non-profit bodies. [ Schedule 5, item 1, subsection 63-25(1) ]

5.16 A non-profit sub-entity of a parent entity will, if the parent entity is a body of the type listed in subsection 63-27(1), be able to apply the provisions mentioned in subsection 63-27(2) as though it were a body of that type.

5.17 A non-profit sub-entity will be taken to be a body of the type of its parent if the parent entity is one of the following types:

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a non-profit body [ Schedule 5, item 3, paragraph 63-27(1)(a) ];

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charitable institutions, trustees of a charitable funds or gift-deductible entities [ Schedule 5, item 3, paragraph 63-27(1)(b) ];

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government schools [ Schedule 5, item 3, paragraph 63-27(1)(c) ];

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endorsed charitable institutions or endorsed trustees of charitable funds; [ Schedule 5, item 3, paragraph 63-27(1)(d) ];

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gift-deductible entities endorsed as deductible gift recipients under section 30-120 of the ITAA 1997 [ Schedule 5, item 3, paragraph 63-27(1)(e) ]; and

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funds, authorities or institutions of a kind referred to in paragraph 30-125(1)(b) of the ITAA 1997 [ Schedule 5, item 3, paragraph 63-27(1)(f) ].

5.18 Additionally, a non-profit sub-entity will, if its parent entity is a particular school, operates a particular retirement village or has a particular gift-deductible purpose, be taken (for the purposes of the provisions listed in subsection 63-27(2)) to be that particular school, operate that particular retirement village or have that particular gift-deductible purpose.

5.19 Among other things, this will ensure that a supply made by a non-profit sub-entity to a resident of a particular retirement village may, if that retirement village is operated by its parent entity, qualify as GST-free (supplies of retirement village accommodation). This is despite the fact that, strictly speaking, the supplier (the non-profit sub-entity) would not itself operate a retirement village. [ Schedule 5, item 3, paragraph 63-27(1)(h) ]

5.20 The provisions (for which the non-profit sub-entity will be treated as being a body of the same type as the parent entity) are in relation to:

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gifts to non-profit bodies not for consideration [ Schedule 5, item 3, paragraph 63-27(2)(a) ];

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a supply covered by Subdivision 38-G ('Activities of charitable institutions etc.') [ Schedule 5, item 3, paragraph 63-27(2)(b) ];

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school tuckshops and canteens [ Schedule 5, item 3, paragraph 63-27(2)(c) ];

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fund-raising events conducted by charitable institutions [ Schedule 5, item 3, paragraph 63-27(2)(d) ];

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reimbursements of volunteers' expenses [ Schedule 5, item 3, paragraph 63-27(2)(e) ];

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gifts made to gift deductible entities [ Schedule 5, item 3, paragraph 63-27(2)(f) ]; and

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the accounting basis of charitable institutions [ Schedule 5, item 3, paragraph 63-27(2)(g) ].

5.21 The non-profit sub-entity of the parent entity can choose to access provisions, even if the parent entity has not chosen to apply those provisions to its own activities.

Example 5.19: Fund-raising events conducted by charitable institutions

The Moonshine Kids Foundation is an endorsed charitable institution that is registered for GST and runs a number of fund-raising events such as sausage sizzles, fetes, concerts and morning teas to raise funds for sick and disadvantaged children. Its total turnover is $200,000 per year. Under Subdivision 40-F, Moonshine is entitled to and chooses to have all supplies it makes in connection with each event treated as input taxed.

The Moonshine Kids Foundation sets up a non-profit sub-entity, Sunnyside, to organise a charity concert. The accounts for Sunnyside are kept separate to those of Moonshine. Section 63-27 will allow Sunnyside to access all the GST concessions that are available to endorsed charitable institutions, providing it satisfies any requirements of those concessions. In the case of Subdivision 40-F, these requirements include the fact that the supplier must have chosen to have all of the supplies it makes in connection with the fund-raising event (the concert) input taxed. To satisfy this requirement, Sunnyside (as the supplier) must itself make the choice. It does not matter whether or not the Moonshine Kids Foundation has chosen to apply Subdivision 40-F to its fund-raising activities.

Application and transitional provisions

5.22 This measure will apply from the start of the first tax period after Royal Assent.