Edited version of private ruling

Authorisation Number: 1011475375973

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Ruling

Subject: GST and the sale of donated goods

Question 1

Where you receive donated second-hand clothing which you classify as rags (due to its substandard and poor condition) and sell them to the public, will the sale of these items be subject to goods and services tax (GST) or will they be GST-free pursuant to section 38-255 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice/Answers

Where you receive donated second-hand clothing and you classify it as rags (due to its substandard and poor condition), the sale of those rags will be GST-free pursuant to section 38-255 of the GST Act.

Question 2

Where you receive donated second-hand clothing that you classify as rags (due to its substandard and poor condition) but prior to selling it you remove the buttons and/or sleeves, will the sale of these items be subject to GST or will they be GST-free pursuant to section 38-255 of the GST Act?

Advice/Answers

Where you receive donated second-hand clothing and you classify it as rags (due to its substandard and poor condition), the sale of those rags will be GST-free pursuant to section 38-255 of the GST Act, despite the removal of the buttons and/or sleeves.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

You are endorsed as a charitable institution for GST purposes.

You receive a variety of donated second-hand goods for re-selling.

A large proportion of the donated goods is used clothing which is not suitable for re-selling due to the poor condition it is in.

At the time of the donation, the donor will generally be aware that the goods they donate can be used as clothing or cannot be used as clothing.

You sort the various donated goods into items that may be sold as clothing and items which cannot be sold as clothing due to its poor condition.

Those items which qualify as substandard and in a poor condition are classified as rags.

When an item is sold as a rag, it may either be sold in the condition that it is, or it may be sold with the buttons removed or the sleeves cut off.

The funds generated from the sale of these items are applied to the charitable purpose of your organisation.

Question 1

Summary

Where you receive donated second-hand clothing and you classify it as rags (due to its substandard and poor condition), the sale of those rags will be GST-free pursuant to section 38-255 of the GST Act.

Detailed reasoning

Taxable Supplies

You are required to remit GST on taxable supplies that you make. Section 9-5 of the GST Act provides that you make a taxable supply if:

§ you make a supply for consideration

§ you make the supply in the course or furtherance of an enterprise that you carry on

§ the supply is connected with Australia, and

§ you are registered or required to be registered for GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the information you have provided, the sale of donated second-hand clothing is not input taxed under Division 40 of the GST Act.

GST-free supply of second-hand goods

The sale of donated second-hand goods will be GST-free pursuant to section 38-255 of the GST Act. This section states:

(1) A supply of *second-hand goods is GST-free if:

a) the supplier is a charitable institution, a trustee of a charitable fund, a *gift-deductible entity or a *government school; and

b) the goods were supplied to the institution, trustee, gift-deductible entity or government school:

I. as a gift; or

II. by way of a supply that was GST-free because of a previous application of this section.

However, the supply is not GST-free if the institution, trustee, gift-deductible entity or government school has dealt with the goods in such a way that the goods no longer have their original character.

(2) Subsection (1) does not apply in relation to a charitable institution or a trustee of a charitable fund unless the institution or trustee is an *endorsed charitable institution or an *endorsed trustee of a charitable fund.

(Note that the asterisks (*) denote a defined term in the GST Act)

In your case:

§ you are endorsed as a charitable institution for GST purposes

§ the goods are provided to you by way of donation, and

§ the goods donated are second-hand goods.

The issue that we need to look at next, is to ascertain what the original character of the donated item is. That is, whether a donated item is in a condition that an individual can wear as clothing or whether the item is in a condition whereby its use would only be suitable as a rag.

We consider that where a donated item is in a condition that is suitable for use as clothing by an individual, the original character of the item is clothing. However, where a donated item is in a poor and substandard condition (for example, a badly stained shirt that is not fit to be worn as clothing) we consider that the original character of the item is a rag and is not clothing.

You have also confirmed that prior to selling the donated second-hand items, you sort them into two groups. The first group consists of items that may be sold as clothing. The second group consists of items that are in a standard that cannot be sold as clothing due to their poor condition. We consider that the sorting process you carry out does not cause or result in any change to the original character of the sorted items.

Please note that it does not make any difference in this instance whether the donated second-hand item is sorted as clothing (say a shirt) or rag. As they are to be sold in their original condition, without any modifications or alterations having taken place, the sale will be GST-free.

Question 2

Summary

Where you receive donated second-hand clothing and you classify it as rags (due to its substandard and poor condition), the sale of those rags will be GST-free pursuant to section 38-255 of the GST Act, despite the removal of the buttons and/or sleeves.

Detailed reasoning

As explained in question 1, the supply of second-hand goods is GST-free under section 38-255 of the GST Act if:

§ the supplier is an endorsed charitable institution, an endorsed trustee of a charitable fund, a gift-deductible entity or a government school

§ the goods were provided to the supplier as a donation or by way of a previous GST-free supply under this provision, and

§ the supplier has not dealt with the goods in such a way that the goods no longer have their original character.

You satisfy the first two dot points, however, we need to confirm that the final dot point is also satisfied. That is, you have not dealt with the items in such a manner that the items no longer have their original character.

Generally, where you sell donated second-hand goods that you have altered or modified so that they no longer retain their original character, you will not satisfy the criteria contained in section 38-255 of the GST Act. The supply of these goods for consideration will constitute a taxable supply made by you in the course of your enterprise and will be subject to GST.

In your case, you advise that during the sorting process you determine whether a donated item is a rag rather than clothing. For an item that is badly stained and/or severely ripped you will determine the item as not one suitable for wear by an individual, but as having the characteristic of a rag.

As previously mentioned, once the original character of the item is identified as a rag, any removal of buttons and/or cutting of sleeves by you will not change the original character of the rag. The subsequent sale of the item by you will be GST-free pursuant to section 38-255 of the GST Act.

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