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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051259111959

Date of advice: 27 July 2017

Ruling

Subject: GST-free supplies and or services

Question 1

Are your sales of goods to Entity B GST-free under section 38-45 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), which deals with medical aids and appliances?

Answer 1

No, your sales of goods to Entity B are not GST-free medical aids or appliances.

Question 2

Are your sales of goods to Entity B GST-free under subsection 38-250(1) of the GST Act, which deals with supplies made for nominal consideration?

Answer 2

Based on the information provided, your sales of goods are not GST-free under subsection 38-250(1) of the GST Act. To be GST-free under this provision, the goods must be sold for less than 50% of their GST inclusive market value. To date, you have not provided enough evidence to support a conclusion that you sold your goods for less than 50% of their GST inclusive market value.

Question 3

Are your services of running shows for Entity B GST-free under section 38-25 of the GST Act, which deals with residential care?

Answer 3

No, your services of running shows are not GST-free supplies of residential care services.

Question 4

Are your services of running shows for Entity B GST-free under subsection 38-250(1) of the GST Act, which deals with supplies made for nominal consideration?

Answer 4

Based on the information provided, your services of running shows are not GST-free under subsection 38-250(1) of the GST Act. To be GST-free under this provision, the services must be supplied for less than 50% of their GST inclusive market value. To date, you have not supplied enough evidence to support a conclusion that you provided your karaoke shows for less than 50% of their GST inclusive market value.

Relevant facts and circumstances

    ● You, Entity A, have an Australian Business Number (ABN) and you are registered for Goods and Services Tax (GST).

    ● You are an Australian Charities and Not-for-profits Commission (ACNC)-registered charity.

    ● You are also an endorsed charity for the purposes of the GST Act.

    ● You sell goods to Entity B.

    ● You also present shows to Entity B.

    ● The goods are designed specifically for people suffering from medical conditions. They are not otherwise widely used.

    ● You consider that your goods may come under one or more of item numbers 4, 8, 14, 44 or 48 of Schedule 3 of the GST Act.

    ● Your supplies of the goods and shows are invoiced to Entity B.

    ● No government funding of any kind is, or has been, received by you in relation to your activities.

    ● You sell your goods for $X each. You consider that such an item would ordinarily retail for $Y inclusive of GST. However, you cannot be absolutely sure of this figure.

    ● You usually charge $X for running your shows. You estimate the full retail market commercial value, to be at least $Y inclusive of GST. However, you cannot be absolutely sure of this figure.

    ● You have not set out the methodology that you have relied upon to support your conclusion that subsection 380-250(1) of the GST Act would apply to make your supplies GST-free, nor have you provided any supporting calculations or evidence. You advised that you are unable to provide any supporting data or evidence.

Relevant legislative provisions

All references below are to the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act):

      Section 9-5

      Section 9-20

      Section 9-25

      Section 9-30

      Section 38-25

      Section 38-45

      Subsection 38-250(1)

      Section 176

      Subsection 182-10(2)

      Section 182-15

      Section 195-1

      Schedule 3

All references below are to the A New Tax System (Goods and Services Tax) Regulations 1999 (the GST Regulations):

      Regulation 30-45.01

      Schedule 3

Reasons for decision

Summary

Your goods are not medical aids or appliances, and thus are not GST-free under section 38-45 of the GST Act.

Nor are your supplies of goods GST-free under subsection 38-250(1) of the GST Act. To date, you have not provided enough evidence to show that you sell the goods for less than 50% of the GST inclusive market value.

Your services of running shows are not GST-free supplies of residential care under section 38-25 of the GST Act. You are contracting with Entity B to deliver residential care services on their behalf, not with the individuals who receive the services, and the exception contained in section 38-60 of the GST Act does not apply in your case.

Nor are your services of running shows GST-free under subsection 38-250(1) of the GST Act. To date, you have not provided enough evidence to show that what you charge is less than 50% of the GST inclusive market value.

Detailed reasoning

Section 9-5 of the GST Act provides that you make a taxable supply if: you make the supply for consideration; the supply is made in the course or furtherance of an enterprise that you carry on; the supply is connected with the indirect tax zone (essentially Australia); and you are registered or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the facts provided, you satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

    (a) you make supplies of goods to, and run shows for Entity B in return for monetary consideration;

    (b) the supplies are made in the course or furtherance of an enterprise that you carry on (activities done by a charity are included in the definition of an enterprise in accordance with section 9-20 of the GST Act);

    (c) the supplies are connected with the indirect zone in accordance with section 9-25 of the GST Act (the goods are delivered/made available to Entity B, and the shows are run in Entity B’s premises in Australia); and

    (d) you are registered for GST.

Are your supplies excluded from being taxable because they are input taxed?

Your supplies of the abovementioned goods and services are not input taxed under any section of the GST Act.

Are your supplies excluded from being taxable because they are GST-free?

Your supplies of the abovementioned goods and services also do not meet the requirements of any of the provisions under Division 38 of the GST Act or under another Act that would make your supplies GST-free to any extent.

Specifically, your supplies of the goods are not GST-free under section 38-45 of the GST Act. This is because the goods are neither covered by Schedule 3 (medical aids and appliances) of the GST Act nor specified in the A New Tax System (Goods and Services Tax) Regulations 1999 (the GST Regulations).

Also, your supplies of running shows are not GST-free under section 38-25 of the GST Act. This is because your supplies of running shows do not meet the requirements for supplying GST-free residential care etc. under that provision.

You also suggested that both your supplies of goods and your supplies of running shows are GST-free under subsection 38-250(1) of the GST Act. However, you have been unable to provide any evidence to show that either supply is made for nominal consideration as is required under that provision.

Supplies of Medical Aids and Appliances

Section 38-45 of the GST Act states as follows:

    (1) A supply is GST-free if:

      (a) it is covered by Schedule 3 (medical aids and appliances), or specified in the regulations; and

      (b) the thing supplied is specifically designed for people with an illness or disability, and is not widely used by people without an illness or disability.

As seen from above, it is not sufficient simply for the thing supplied to be designed specifically for people with an illness or disability, and not to be widely used by people without an illness or disability. The thing supplied must also be covered either by Schedule 3 of the GST Act or be specified in the GST Regulations.

Your goods are not covered by any of the items listed in the table in Schedule 3 of the GST Act as being a medical aid or appliance. Nor are your goods covered by any of the items listed in the table in Schedule 3 of the GST Regulations.

As such, although your goods are designed specifically for people with an illness or disability and not widely used by those without; your goods are not GST-free medical aids or appliances under section 38-45 of the GST Act because they are not listed in Schedule 3 of the GST Act or the GST Regulations.

Supplies of Residential care etc.

Residential care services are generally only GST-free under section 38-25 of the GST Act where the contractual recipient of the supply is an individual who receives the services.

If you are contracting with another entity to deliver residential care services on behalf of that other entity, your supply to that entity is generally not GST-free. The exception (contained in section 38-60 of the GST Act) is where your underlying service to the resident is GST-free, and the supply you are making is to:

    ● an insurer settling a claim under an insurance policy

    ● an operator of a statutory compensation scheme

    ● an operator of a compulsory third party scheme, or

    ● an Australian government agency.

In cases where section 38-60 of the GST Act is relevant, the parties are however allowed to agree with each other not to treat the supply as GST-free (see subsection 38-60(4) of that section).

In your situation, your contractual supply is not with an individual who receives the services; it is with the entity that you contract with. Also, the abovementioned exception in section 38-60 of the GST Act does not apply to you.

As such, your supplies of the services of running shows are not GST-free supplies but are taxable supplies.

Supplies for nominal consideration

Section 38-250 of the GST Act provides that supplies for nominal consideration by endorsed charities, etc. are GST-free. Specifically, subsection 38-250(1) of the GST Act states as follows:

      (1) A supply is GST-free if:

      (a) the supplier is an *endorsed charity, a *gift-deductible entity or a *government school; and

      (b) the supply is for *consideration that:

        (i) ... ; or

        (ii) if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of the supply.

You are an endorsed charity for the purposes of the GST Act. Therefore you meet the requirements of paragraph 38-250(1)(a) of the GST Act.

To meet the requirements of paragraph 38-250(1)(b) of the GST Act, where you supply something other than accommodation, the consideration for your supply must be less than 50% of the GST inclusive market value of your supply.

The GST Industry Issues Charities Consultative Committee: Non-commercial activities of charities cost of supply and market value tests (CCC), sets out market value guidelines which provide methodologies allowing charities to determine a market value that is acceptable to the Commissioner when applying the non-commercial supply rules.

The term 'market value’ is not defined in the GST Act. The Commissioner considers that the market value of a thing is a price that would be negotiated between:

      ● a knowledgeable, willing and not anxious buyer, and

      ● a knowledgeable and not anxious seller acting at 'arm’s length’ in an appropriate market.

In determining the market value of a supply for the purposes of subsection 38-250(1) of the GST Act, the above definition of market value must always be used (refer to paragraphs 35 and 37 of the CCC).

The guidelines provide the following successive tests that a charity must follow in determining the market value of a supply.

● the 'same supply test’ where a charity must work out whether the same supply exists within the market they operate in and if no same supply exists then

● the 'similar supply test’ is applied where the charity must then work out whether a similar supply exists within the market they operate in and if no similar supply exists then

● another methodology that the charity has sought approval from the Commissioner to use to calculate the market value of the supply.

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. The Commissioner considers that the first two tests would generally establish a market value and the last test would be rarely used (refer to paragraph 39 of the CCC).

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 (refer to paragraph 87 of the CCC).

With the 'same supply’ test, the comparison is made between the supplies made by the charity and those by other suppliers. The other suppliers in the market can be charities or profit making organisations (refer to paragraphs 41 and 42 of the CCC).

Paragraph 44 of the CCC provides that charities need to take into account the following factors (which can be interrelated) when making the comparison:

    ● the identity of the market

    ● the locality of the supply or area of the market

    ● the quality or nature of the supply

    ● the size, quantity or duration of the supply

    ● the conditions of the supply

    ● other charitable or commercial suppliers

    ● the number of comparisons.

Where there is no 'same supply’ but there is a 'similar supply’, the price of the 'similar supply’ is the market value the charity should use. The factors listed above also need to be taken into account when identifying a 'similar supply’.

For some supplies, charities may have difficulties identifying a supply similar to the one they make in the market. In such a case, 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 (refer to paragraph 92 of the CCC).

However, 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 (refer to paragraphs 93 and 94 of the CCC).

As mentioned above, the Commissioner expects that the market value of most supplies made by charities can be worked out using the 'same supply test’ or 'similar supply test’ successively.

If no same or similar supply exists, charities can seek approval from the ATO to use some other methodology to calculate the market value of the supply. The charity is responsible for developing such other methodology (see paragraphs 106 and 107 of the CCC).

Where a charity cannot identify a same or similar supply to the one it makes, the Commissioner has also approved a 'cost plus’ method to work out the market value of a supply. The 'cost plus’ method is discussed in paragraphs 109 to 115 of the CCC.

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. Charities should also monitor the market they make the supply in to ensure they will respond promptly to any material changes in the market (refer to paragraphs 124 and 127 of the CCC).

How this applies to you

You have estimated that your goods would ordinarily retail for $X, and that your shows would have a full retail market value of $Y. You have not however provided any evidence of the prices other charities or profit making organisations charge for the same or similar goods or shows.

You have advised that there are no supplies in the market place which are the same as your goods or shows, and that you would have difficulty in identifying similar supplies in the market and that you therefore wish to use the 'broad categorisation’ of the supply approach as justification for using certain supplies in the market as similar supplies.

However, you have not provided any supporting evidence or data. Also, you have not, for example, stated: which broad categorisation you wish to use, what the prices of supplies in that broad categorisation are, or how you have taken other factors such as the quality, nature and conditions of the supply into account in determining the market value of your supplies. You have also not provided any information or evidence to establish whether you can rely on the 'cost plus’ method.

Paragraphs 68 onwards of the CCC provide some practical guidance as to the steps a charity should undertake in order to establish the market value of its supplies. The steps include the following:

    ● identify other same or similar supplies in the market and the related prices

    ● identify all the differing characteristics shown in the quality of the same or similar supplies when comparing with the supplies the charity makes

    ● quantify those differing characteristics on a reasonable basis to adjust the prices of the same or similar supplies, and

    ● use the quantified values of those differing characteristics to adjust the prices of the same or similar supplies.

The information that you have provided to date does not adequately establish that your supplies of goods or shows are for consideration less than 50% of the GST inclusive market value of the supply of each good/show.

Therefore at this stage, you have not satisfied the Commissioner that your supplies of goods and shows are GST-free under subsection 38-250(1) of the GST Act.

Based on the information provided to date, your supplies are taxable.

Additional information:

We note that in addition to the GST exemption for supplies by endorsed charities for less than 50% market value, there is an additional exemption under subsection 38-250(2) of the GST Act for supplies by endorsed charities for less than 75% of the cost of acquisition.

Please refer to the information that has already been provided to you, containing detailed information on the various methods available to review whether your supplies fall within the GST-free exceptions in subsection 38-250(1) or (2) of the GST Act and your supporting evidence. Specifically, please review whether you can satisfy any of the 'market value’ tests and/or the Commissioner’s approved 'cost plus’ method.