Supplementary Explanatory MemorandumAmendments to be moved on behalf of the Government (Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 3 - Non-profit sub-entities
3.1 Amendments to this Bill will introduce special rules that enable certain non-profit entities to have greater structural flexibility with regard to GST registration.
3.2 As part of negotiations over the passage of the GST Act, the Prime Minister and the Australian Democrats agreed that the ATO should establish a Charities Consultative Committee to examine implementation and administration issues. An issue was raised by the Committee in relation to the inflexibility of the GST Act in relation to the grouping and branching provisions, arguing that the current legislation did not provide for the significant diversity of organisations and structural arrangements within this sector.
3.3 Many charitable organisations have numerous divisions, branches or committees which do not meet the definition of an entity as defined in the GST Act. Often, these smaller units of the organisation work independently of the core entity. The core entity will often exercise little or no effective control over the unit, with the unit producing its own accounts and otherwise managing its own affairs. Given the large numbers of these independent units (thousands in some cases), the current law imposes a large compliance burden on these organisations, requiring them to bring together GST accounts for all of the units at the end of each tax period. Further, the core entity often will have little capacity to ensure that the accounts of the units are correct due to the limited control that they exercise over them.
3.4 Although the problem was first identified in the charities sector, other non-profit bodies such as sporting organisations experience similar structural constraints for GST purposes as those described above.
3.5 The amendments allow certain non-profit entities to treat separately identifiable units of their organisations as though they are separate entities for GST purposes.
3.6 Amendment 43 inserts new Division 63 into the GST Act. This new Division gives certain non-profit entities the choice to treat separately identifiable units of their organisations as though they are separate entities for GST purposes. [New section 63-1]
3.7 Entities listed in new subsection 63-5(2) that are registered for GST may choose to apply the rules of new Division 63 [new subsection 63-5(1)] . These entities may fall into one or both of the following categories:
- charitable institutions, trustees of charitable funds or gift-deductible entities [new paragraph 63-5(2)(a)] ; or
- non-profit bodies that are income tax exempt under certain provisions of the ITAA 1997 [new paragraph 63-5(2)(b)] .
3.8 As the categories are not mutually exclusive, there will be significant overlap. However, there are some differences. New paragraph 63-5(2)(a) will allow charities and other gift-deductible entities that are not income tax exempt to use the special rules. New paragraph 63-5(2)(b) will allow the special rules to be used by certain non-profit entities such as sporting organisations that are not considered to be charities or gift-deductible entities.
3.9 A choice to apply new Division 63 will have effect from the time the entity has made the choice [new subsection 63-10(1)] . The choice will cease to have effect if the entity becomes unregistered, is no longer income tax exempt or otherwise does not meet the requirements of subsection 63-5(2) [new paragraph 63-10(2)(b)] .
3.10 The choice to apply new Division 63 will also cease to have effect if the entity revokes the choice [new paragraph 63-10(2)(a)] . However, a choice cannot be revoked within 12 months of making that choice, and a further choice cannot be made within 12 months of revoking a previous choice [new subsection 63-10(3)] .
3.11 An eligible entity will be able to apply new Division 63 in respect of any branch of the entity (which could include a committee, chapter, section etc.) that meets certain requirements and as such the branch will be treated as a separate entity for GST purposes [new subsection 63-15(1)] . The branch in these cases will be called a non-profit sub-entity [new subsection 63-15(3)] . This definition of a 'non-profit sub-entity' will be inserted into section 195-1 of the GST Act, and will have the meaning given by new subsection 63-15(3) [amendment 78 (item 64C)] . References to non-profit sub-entities will be inserted in various tables in the GST Act and ABN Act [amendments 9 (item 3D), 20, 21, 22 and 24 (item 14A)] .
3.12 For a branch to be considered a non-profit sub-entity it must:
- maintain an independent system of accounting which allow all of its transactions to be clearly identified [new paragraph 63-15(1)(a)] ;
- be separately identifiable either because the activities carried on by the branch differ from other activities carried on by the entity, or because the branch is in a different location from other parts of the entity (being located on separate floors of the same building does not in itself constitute a different location) [new paragraph 63-15(1)(b)] ; and
- be referred to in the entity's records as a separate entity for the purposes of the GST law [new paragraph 63-15(1)(c)] . If an entity does not want a branch to be treated as a non-profit sub-entity it need not record it as such in its records.
3.13 It should be noted that the branch's treatment as a non-profit sub-entity ceases if the choice ceases to have effect or the branch no longer meets the requirements mentioned above [new subsection 63-15(2)] . In cases where the branch is registered its treatment as a non-profit sub-entity continues until its registration is cancelled under new section 63-30 or 63-35 .
3.14 As a result of being treated as an entity, a non-profit sub-entity can register for GST purposes. The Commissioner must allow a non-profit sub-entity to register for GST, even if it does not carry on an enterprise or intend to carry on an enterprise [new section 63-20] . The ABN Act will be amended to enable a non-profit sub-entity to obtain an ABN [amendments 105 and 107] .
3.15 Non-profit sub-entities will be subject to a registration threshold of $50,000, although regulations may specify a higher amount [new section 63-25] . Non-profit sub-entities with an annual turnover of less than $50,000 will not be required to register for GST, although they may do so if they wish. If a non-profit sub-entity with an annual turnover below the turnover threshold decides not to register, it will not be liable for GST and will not be able to claim input tax credits. Equally, the core entity will not be liable for the GST and will not be entitled to claim the input tax credits of the unregistered non-profit sub-entity.
3.16 Non-profit sub-entities that have an annual turnover of $50,000 or more will be required to register for GST and account for all GST payable and input tax credits on their transactions. GST will be applicable on those transactions the registered sub-entity undertakes with the core entity or with another sub-entity. Also, the non-profit sub-entity will be required to make a separate GST return in respect of their GST transactions.
3.17 As a registered entity, a non-profit sub-entity will have the same rights and obligations under the GST law as any other registered entity, except for the ability to apply new Division 63 . For example, a registered non-profit sub-entity may choose to group with the core entity or with other registered non-profit sub-entities if they meet the general requirements for grouping in Division 48 of the GST Act. This will enable an organisation to effectively eliminate the GST effects of transactions between grouped members.
3.18 Amendment 79 (item 66B) amends the definition to include a reference to a 'registration turnover threshold' (in section 195-1 of the GST Act) for a non-profit sub-entity. A note into the definition of an 'entity' for GST purposes is inserted into section 184-1 of the GST Act, which explains that a non-profit sub-entity is treated as an entity. [Amendment 67]
3.19 For non-profit sub-entities, the rules in new Division 63 will apply in relation to cancellation of registration instead of Subdivision 25-B. [New subsections 63-30(2) and 63-35(3)]
3.20 A registered non-profit sub-entity must apply to the Commissioner for cancellation of their registration if it does not meet the requirements of new subsection 63-15(1) . The application for cancellation must be lodged within 21 days after the day on which it ceased to meet the requirements [new subsection 63-30(1)] .
3.21 The Commissioner must cancel a registration if he or she is satisfied that the non-profit sub-entity does not meet the requirements in new subsection 63-15(1) [new subsection 63-35(2)] . If the Commissioner has cancelled the registration of a non-profit sub-entity, he or she must notify the sub-entity of the cancellation and the date of its effect [new subsection 63-35(2)] . The cancellation of the registration of a non-profit sub-entity is a reviewable GST decision under the TAA 1953 [amendment 117] .
3.22 It should be noted that if a non-profit sub-entity's registration has been cancelled, the entity will resume accounting for the branch's GST obligations.
3.23 If an entity chooses to apply new Division 63 , new paragraph 70(1A)(a) of the TAA 1953 stipulates that it must keep records of that choice and must ensure that it documents all branches which it chooses to treat as non-profit sub-entities (see also new paragraph 63-15(1)(c)) . An entity is also required to keep a record of those branches that cease to be treated as separate entities.
3.24 These records must be retained for at least 5 years after the choice has been revoked. [New paragraph 70(1A)(b) of the TAA 1953] .
3.25 New section 52A of the TAA 1953 provides that the liability for all obligations under the GST law on the non-profit sub-entity will be imposed on each person responsible for the management of the non-profit sub-entity. The core entity will have no legal liability in respect of the GST dealings of a non-profit sub-entity.
3.26 When a branch becomes a non-profit sub-entity, their GST obligations will include making adjustments where necessary. If the branch undertook a transaction while it was a part of the core entity and a GST adjustment is required for that transaction after the branch has become a non-profit sub-entity, the non-profit sub-entity will be responsible for making the adjustment [new subsection 63-40(1)] . For the purposes of calculating an adjustment for a change in creditable purpose, the previous extent of creditable purpose in relation to the acquisition or importation will be assumed by the non-profit sub-entity [new subsection 63-40(2)] .
3.27 If a branch ceases to be a non-profit sub-entity (see new subsection 63-15(2) ), the core entity will again be responsible for the GST obligations of that branch, including adjustments. Any adjustments that arise in respect of transactions that the branch has made while it was a non-profit sub-entity will become the responsibility of the core entity [new subsection 63-45(1)] . For an adjustment for a change in creditable purpose, the extent of creditable purpose that was previously attributable to the acquisition or importation will be assumed by the core entity [new subsection 63-45(2)] .