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Ruling

Subject: GST and nominal consideration

Question 1

Is the methodology you proposes to use to determine the cost of supply acceptable for the purposes of section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the apportionment of capital costs and the particular premises is not a fair and reasonable method of apportionment for the purposes of section 38-250 of the GST Act. See detailed reasoning.

.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

· You are registered for goods and services tax (GST).

· You are endorsed as a charitable institution for GST purposes.

· You provide various services for X

· You have a standard sale price list for each X, however, prices are negotiable. These prices are the maximum amount you would charge for a certain X.

· Prior to making X available you perform a number of services

· You are using the actual costs incurred in the financial year 1 July 2009 to 30 June 2010.

· You have identified the total salaries of staff working on providing services and compared that figure to the total salaries for your organisation.

· You have calculated the percentage of staff working with X as a percentage of total salaries and super for the organisation as 35.74% rounded to 36%.

· You have calculated the percentage of X supplied as to the total number of X on hand.

· You have estimated that the total time spent by staff in dealing with X supplied is 70% and the remaining 30% of time is spent in such things as occupational health and safety training, computer training, staff management training and general administration issues. You have calculated the total staff costs per X.

· You have calculated the total staff on-costs per X based on 70% of time spent in actual dealing with X.

· You have apportioned the staff on costs per X. This is the 70% for time spent by staff on X.

· You have apportioned total overhead costs to X supplied including electricity, heating, essential materials, uniforms, telephone, capital costs and rent:

· You have apportioned the total overheads costs to each X supplied.

· You have determined the total costs per X.

· You have calculated 75% of the total cost of supply of the various X and compared this to the standard price.

· The rent figure in the overheads is for rent of particular premises used for activities relating to X..

· The capital costs is in relation to the acquisition of items for a certain X. You acquired a number of items in the 2009/10 financial year.

· You have determined that the X area relates to 25% of the capital costs and other areas such as administration and car parking make up the balance of the capital expenditure.

· You have determined that 95% of the essential materials cost is in relation to the supply of X for sale as it only used for X in certain areas, and a small amount used in relation to staff needs.

· You have reported the supply of X as a GST-free supply in your activity statements.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - Subparagraph 38-250(2)(b)(ii)

A New Tax System (Goods and Services Tax) Act 1999 - Section 38-250

Reasons for decision

Supplies by endorsed charities and deductible gift recipients for nominal consideration

A supply made by an endorsed charity or a deductible gift recipient is GST-free under subsection 38-250(1) of the GST Act if the supply is for consideration that:

· if the supply is a supply of accommodation - is less than 75% of the GST inclusive market value of the supply, or

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

A supply made by an endorsed charity or a deductible gift recipient is also GST-free under subsection 38-250(2) of the GST Act if the supply is for consideration that:

· if the supply is a supply of accommodation - is less than 75% of the cost to the supplier of providing the accommodation, or

· if the supply is not a supply of accommodation - is less than 75% of the consideration the supplier provided, or was liable to provide, for acquiring the thing supplied.

Cost of supply guidelines

When calculating the cost of providing something an endorsed charity or a deductible gift recipient should include:

· all direct costs incurred for example materials and direct labour, and

· a reasonable apportionment of indirect costs incurred for example, marketing, administration, office expenses, electricity, telephone, insurance.

For supplies of things other than accommodation only those amounts paid or payable may be included in the calculation. This is due to the wording in subparagraph 38-250(2)(b)(ii) of the GST Act which states that it is the consideration the supplier provided or was liable to provide for acquiring the thing supplied.

The following things cannot be included because they do not involve an actual outlay by the supplier:

· depreciation of assets,

· imputed costs for things like volunteer labour, donations, and free rent where the organisation has not actually provided any consideration or incurred any real costs.

Option 1

Where a supplier makes different classes of supplies, in determining the cost of making a supply under subparagraph 38-250(2)(b)(ii) of the GST Act the supplier should:

· estimate the projected costs of making all supplies,

· determine the total number of supplies being made, and

· determine the cost of making a supply by dividing the projected costs of the supplies by the total number of supplies being made.

Option 2

Alternatively for each class of supplies, the supplier can also determine the cost of making a supply under subparagraph 38-250(2)(b)(ii) of the GST Act by:

· estimating the projected costs of making supplies of that class,

· determining the total number of supplies being made for that class,

· determining the cost of making a supply by dividing the projected costs of the supplies by the total number of supplies being made for that class.

For guidance, the Goods and Services Tax Industry Issue: Charities Consultative Committee Non-commercial activities of charities, cost of supply and market value tests (the CCC document) at Section E provides examples of using the above methodologies for organisations in the cultural and performing arts sector making supplies of tickets to concerts and performances.

Section E also explains that an endorsed charitable institution or a deductible gift recipient making different types or classes of supplies can choose which of the above two options to use in determining the cost of making a supply.

Your application of the methodology to determine cost of supply

You advised that you make supplies of X.

In the 2010 financial year you used the following methodology to determine the cost of making each supply of X:

You determined the direct cost of staff wages and super for staff working with X for sale. You then determined the percentage of wages and super for staff working with X for sale as a percentage of total wages and super for your organisation. You have not supplied any details of how you have identified the staff working with X for sale and thus the cost of wages and super of those staff. As you have not provided details of how you determined the direct cost of staff working with X for sale we are not in a position to provide any advice on whether the methodology you have applied is acceptable for the purpose of section 38-250 of the GST Act.

Further, you have determined that staff working with X for sale, spend 70% of their time in actual dealing with X, with the balance spent on training and other administrative issues. If these training and other administrative activities of staff are a part of their duties dealing with X, then 100% of their wages and super costs may be included as a cost of making the supply of X for sale, under section 38-250 of the GST Act.

You have determined the percentage of X sold as a percentage of total X. This is acceptable for the purposes of section 38-250 of the GST Act.

When apportioning the costs between the various supplies, the cost must be directly related to the supply and any apportionment must be made on a reasonable basis. To the extent that the costs are not directly related to the supply in question or the basis of apportioning the cost is unreasonable, the consideration for that supply must be adjusted accordingly.

The concept of apportioning costs to recognise the underlying supply being made is outlined in paragraph 75 of Goods and Services Tax Ruling GSTR 2006/3 where it considers the application of a fair and reasonable method to determine input tax credits and states;

Fair and reasonable method

75. The extent of your planned use of an acquisition for a creditable purpose must be established on a fair and reasonable basis having regard to the nature of the acquisition and the circumstances of your enterprise. Any apportionment method should aim to achieve an accurate reflection of the input tax credits available for acquisitions or importations acquired in carrying on your enterprise. The criteria used in relation to any expense must therefore recognise the nature of the underlying supply to be made.

Paragraph 76 of GSTR 2006/3 provides an example for paragraph 75:

76. An example of this is to be found in the decision of the New Zealand High Court in Commissioner of Inland Revenue v. BNZ Investment Advisory Services Ltd (BNZ case). The Court was required to consider the New Zealand GST 'principle purpose' test, under which an initial entitlement to input tax credits arises only if the principal purpose of the acquisition is to make taxable supplies. In that case the taxpayer's employees spent approximately 90% of their time giving taxable financial advice, and the taxpayer argued that this meant the principal purpose of its acquisitions was to provide taxable supplies. However, the High Court considered that an apportionment based on time spent was not an appropriate measure as the income and expenses did not directly relate to the giving of advice.

The Commissioner states in paragraph 77 of GSTR 2006/3 that the principles in the BNZ case are relevant in considering the apportionment methodologies:

77. Although the legislation in that case is not identical to the Australian GST legislation, the Commissioner considers that the principles are relevant. The BNZ case confirms the importance of selecting the most appropriate criteria when applying an apportionment method.

As outlined in paragraph 103 of GSTR 2006/3 indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. However, in all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Examples of indirect methods which may be appropriate are outlines in GSTR 2006/3 and include the following:

· an overall, Entity - based general formula , based on the proportion of input taxed and non-input taxed revenues of the entity as a whole;

· Revenue - based formulas which are more narrowly targeted than the entity-based general formula;

· a combination of revenue-based formulas with direct methods; and

· non-revenue-based indirect estimation methods.

You have allocated 36% of overhead costs such as electricity, heating, uniforms, telephone and rent to indirect costs for X available for sale. You have based your allocation of the overheads as the percentage of staff working with X compared to the total salaries of your organisation. This indirect method may be appropriate in your circumstances if the staff costs are an appropriate measure of the income and expenses related to the supply of X for sale. However without further details of the relationship between staff costs and overheads, we can not determine whether the methodology you have applied is fair and reasonable and therefore acceptable for the purpose of section 38-250 of the GST Act.

You have allocated 95% of the cost of a particular product is in relation to the supply of X. This is based on a direct estimation method which is appropriate in your circumstances and therefore acceptable for the purposes of section 38-250 of the GST Act.

You have allocated 25% of the capital costs to the supply of X which you have based on area occupied by the buildings that you use for X for sale and the balance of the area is for administration purposes and car parking. This is a direct basis of apportionment and it would be an appropriate basis of apportionment as long as the cost is directly related to the supply and any apportionment made is on a reasonable basis.

For the 2009/10 financial year the capital costs incurred relate to the acquisition of a number of items for certain X. You have allocated 25% of this cost to the indirect costs of X for sale and allocated a portion to each X type sold based on a percentage of X sold. As a result you have allocated a portion of the cost to certain X supply, to other X for sale. This is not a fair and reasonable basis of apportionment as the cost is for items for a certain X and therefore a direct cost for that X. Therefore the capital cost in this case should only be taken into account in calculating the cost of certain X and not allocated other X . This has distorted your figures for all your supplies of X. Therefore for the 2009/10 financial year, the methodology you have used in the allocation of capital costs to X for sale is not acceptable for the purpose of section 38-250 of the GST Act.

Australian Taxation Office Interpretative Decision ATO ID 2012/78 provides guidance to endorsed charities or gift deductible entities on how the consideration provided for acquiring capital items is taken into account in calculating the cost of making a supply in a period under subparagraph 38-250(2)(b)(ii) of the GST Act.

As provided in ATO ID 2012/78, for the purpose of calculating the cost of making a supply in a period, you can include as the cost of acquiring a capital item:

· an amount equivalent to the decline in value amount for the capital item for that period consistent with Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), or

· the consideration provided for the capital item in that period.

In either case, an apportionment of the consideration provided is required if the capital item is not used solely for the making of the supplies in the period.

You have incurred rent cost, which is rent of demountable buildings used for activities related to certain X. You have apportioned 36% of this rent cost to the cost of supply of X for sale. However, as the demountable buildings are only used for the activities relating to certain X, this cost can only be taken into account in calculating the cost of supply of certain X and is not a cost for the supply of all X for sale. Therefore for the 2009/10 financial year, the methodology you have used in the allocation of rent cost to X for sale is not acceptable for the purpose of section 38-250 of the GST Act.

Based on the figures calculated by you for the 2019/10 financial year, you have determined the consideration provided for X and have compared this as a percentage of the sales price to determine if the supply of an X is less than 75% of the consideration provided.

As we have a number of concerns on the methodology you propose to use to determine the cost of supply for the acquisition of X you supply in the 2009/10 financial year, we have determined that the methodology is not acceptable for the purpose of sub-paragraph 38-250(2)(b)(ii) of the GST Act.

Based of your methodology you have determined that some X you supply are GST-free as they are for consideration that is less than 75% of the consideration you provided (as calculated by you) for acquiring X under subparagraph 38-250(2)(b)(ii) of the GST Act. However you have stated that you have reported all your supplies of X on your activity statement as GST-free.

As you do not supply all your X for a nominal consideration under subparagraph 38-250(2)(b)(ii) of the GST Act, and as the methodology you propose to use to determine the cost of supply of X you acquire is not acceptable under subparagraph 38-250(2)(b)(ii) of the GST Act, not all your supplies of X are GST-free. You need to remit GST on your taxable supplies of X.

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