Edited version of your private ruling

Authorisation Number: 1012484944023

Ruling

Subject: GST and membership fees

Question 1

Are you entitled to use section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to treat your membership fees as GST-free?

Answer

Yes, as you are endorsed as a charity you are entitled to use section 38-250 of the GST Act to treat your membership fees as GST-free.

Question 2

How should you determine whether the supply of your memberships is GST-free?

Answer

Please see Reasons for Decision.

Relevant facts and circumstances

You are registered for the goods and services tax (GST) and you are endorsed as a charity for GST purposes.

You are a member based association.

The value of membership charged is substantially less than the benefits received with membership.

Member benefits you provide are:

· Member's journal delivered to your door.

· Access to member's only library, unrestricted access to website and free or discounted publications.

· Phone access to support professionals.

· Opportunity to give and receive support from peers, through co-ordinated groups and events.

· A program of training and networking events, with substantial discounts offered to members.

· Access to education support consultants providing support.

· You are reliant on membership funds to support the services you offer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

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

A New Tax System (Goods and Services Tax) Act 1999 Section 38-250(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 38-250(2)

Reasons for decision

Summary

As you are an endorsed charity, under section 38-250 of the GST Act your membership fees will be GST-free where the consideration for the supply is less than:

50% of the GST-inclusive market value, or

75% of the cost to your organisation of making the supply.

Detailed reasoning

1. Are you entitled to use section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to treat your membership fees as GST-free?

Under the GST legislation you are liable for GST in respect of any taxable supply that you make.

You make a taxable supply if:

· you make a supply for consideration

· the supply is made 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 purposes.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. If a supply is GST-free, then no GST is payable on the supply, but you may be entitled to input tax credits for anything acquired or imported to make the supply.

Membership fees

The supply of membership by an organisation (including charities) that is registered for GST, will generally be subject to GST, as the supply of membership bestows certain rights and entitlements upon the member.

However, there are GST concessions that are available to:

endorsed charities

gift deductible entities, and

government schools

that may make certain supplies GST-free. One of these concessions is the non-commercial supply rules referred to in section 38-250 of the GST Act.

Non Commercial Supply Rules

Section 38-250 of the GST Act discusses the non-commercial activities of charities. This section states:

(1) A supply is GST-free if:

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

(b) the supply is for *consideration that:

(i) if the supply is a supply of accommodation - is less than 75% of the *GST inclusive market value of the supply; or

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

(2) 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) if the supply is a supply of accommodation - is less than 75% of the cost to the supplier of providing the accommodation; or

(ii) 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.

(Please note that the asterisks denote a defined term in the GST Act).

Therefore, the supply of membership made in the course of your enterprise will be a taxable supply unless the consideration provided for the supply is:

· less than 50% of the GST inclusive market value of the supply; or

· less than 75% of the consideration you provided to make the supply of the membership.

Only one of these conditions needs to be met to render the supply GST-free.

Example: If a supply has a market value of $5, and costs $3 to make, it will be GST-free if it is sold for less than $2.50 (market value rule) or less than $2.25 (cost of supply rule).

To apply the non-commercial supply rules (pursuant to section 38-250 of the GST Act), you need to be an endorsed charity, gift-deductible entity or a government school. (Please note, it is a requirement that charities be endorsed by the Australian Taxation Office (ATO) to access the

non-commercial supply rules and certain other charity tax concessions, thus the charity must be an endorsed charity).

2. How should you determine whether the supply of your memberships is GST-free?

Determining the market value and the cost of supply

The ATO has established the following guidelines to enable charities to determine market value for these purposes. In determining the market value of a supply a charity must apply the following successive tests:

In determining the market value of a supply, a charity must apply the following successive tests:

· the charity must work out whether the same supply exists within the market they operate in - referred to as the 'same supply test'

· if no 'same supply' exists, the charity must then work out whether a similar supply exists with the market they operate in - referred to as the 'similar supply test'

· if no 'same supply' or 'similar supply' exists, the charity may seek approval from the Commissioner to use another methodology to calculate the market value of the supply.

Firstly, the charity must establish whether the same supply exists within the market they operate in (referred to as the 'same supply test'). Where it does, the price of the supply as defined by the market is the market value that the charity should use. The other suppliers in the market may be charitable or profit making organisations.

Secondly, if no other organisation offers the same supply, the charity may identify similar supplies that exist in the open market and calculate the market value of its supply by reference to the prices charged for those supplies (referred to as the 'similar supply test'). When establishing the market value of a service, the charity should seek to compare the services it offers with services of a similar nature and quality, of similar size or time length, and with similar conditions.

Whilst it is unrealistic to place a definitive figure upon how many GST inclusive prices should be obtained, the ATO would expect that it would generally be more than one. The information collected would need to provide sufficient intelligence for the charity to be confident that the value they arrive at is representative of the supply in the market.

Lastly, in the rare circumstances that a market value cannot be established using those methods outlined above, the charity can use a 'cost-plus' method. This method allows the charity to use full absorption costing and then apply a mark-up appropriate to the general market of the particular supply. In using this method, an organisation can include an imputed cost for donated goods and voluntary labour.

Importantly, these tests are successive test for determining GST inclusive market value, they are not alternative tests If, therefore, the market value can be established under the first test, the charity cannot calculate the market value with reference to the second or third tests.

We consider that the first two tests would generally establish a market value and the last test would be rarely used.

An explanation for each of the successive tests is provided below, however you may wish to refer to the enclosed copy of the Goods and Services Tax - Industry Issue, Charities Consultative Committee document, (CCC document). This document provides a further explanation of the market value guidelines and discusses each of the tests in more detail. Although the factors you need to take into account when comparing your supplies to those in the market are listed below, these factors are explained individually in more detail within the CCC document. (Please refer to Section B. Market value guidelines paragraphs 29 to 114, (pages 4 to 12) of the CCC document).

Determining the market value of a supply of membership

1. The 'same supply' test

The same supply test requires you to work out whether a supply, the same as the one you make, exists within the market you operate in. That is, in applying the 'same supply' test, you would compare your supplies to those in the market. The comparison is made between the supplies made by you and those by other suppliers.

The other suppliers in the market can be charities or profit making organisations.

If the same supply exists in the market, the price of this supply is the market value that you should use in your calculations. You need to take into account the following factors when comparing your supplies to those in the market:

· identify 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, and

· the number of comparisons.

2. The 'similar supply' test

If there is no 'same supply' in the market, the charity must work out whether a 'similar supply' exists.

If there is a similar supply and no 'same supply' in the market, the price of the 'similar supply' is the market value the charity should use.

If you need to use this method, you need to take into account the same factors discussed above under the 'same supply test' when comparing your supplies to those in the market. The points about these factors under the 'same supply test' are relevant to the 'similar supply test'.

 Example: A charity offers a half-day class in relaxation techniques to unemployed adults for which it charges a small fee. There are no comparable classes offered in the market. The charity would be able to use any half-day adult education course that is offered by other organisations that are similar to their half-day course in terms of nature, duration, standard of tuition and activities during the course. That is, the half-day class in relaxation techniques and the half-day adult education course would be accepted as similar supplies made under the broad categorisation of 'education'.

3. The approved 'cost plus' method

The Commissioner has approved the use by charities of the following 'cost plus' method to work out the market value of a supply. Charities can only use this method if they cannot identify a 'same supply' or a 'similar supply' to the one it makes.

The 'cost plus' method allows charities to work out the market value of their supply as the sum of:

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

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

· depreciation of assets use, and

· imputed costs for things such as volunteer labour, donated goods and services and free rent.

Direct costs, apportioned indirect costs, depreciation and imputed costs must directly relate to making the supply.

The amount the charity works out using the approved 'cost plus' method is then considered the market value of the supply it makes.

It is important to note that the market value that is worked out by using the approved 'cost plus' method must represent an amount a 'willing but not anxious purchaser' is prepared to pay.

There may be strong evidence that the market value worked out by using the approved 'cost plus' method may be an amount higher than what a willing but not anxious purchaser is prepared to pay, because there is no same or similar supply in the local market. However, for the purposes of reducing compliance costs, we accept the market value worked out under the 'cost plus' method.

Cost of Supply test

Apart from the market value tests, you can also use the 'cost of supply' test to determine whether the supply you make is a non-commercial supply. If the supply is not a supply of accommodation and if the consideration received for the supply is less than 75% of the consideration you provided in making the supply, it will be GST-free.

Under this test, when calculating the cost of making a supply (other than the supply of accommodation) you should include only those amounts paid, or payable in the calculation. All direct costs incurred (i.e. materials, direct labour costs) and a reasonable apportionment of indirect costs incurred (i.e. administration and marketing expenses, electricity, telephone, insurance costs) can be included.

Charities cannot include the following things in the calculation as they do not involve an actual outlay by the charity:

· depreciation of assets, and

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

Example of membership fees using Cost of supply test

In applying this test, you will firstly need to identify the relevant supply. Where each category of membership entitles the members to different rights and services, a separate calculation will need to be performed for each category of membership. However, where membership entitlements are the same for all categories of membership, then the following single calculation will suffice.

Step 1

Identify the consideration payable by an individual to become a member.

Step 2

Determine the total cost of providing the memberships over the relevant period. A period of one year is appropriate for this calculation.

Step 3

Divide the total expenditure calculated in step 2 by the total number of members.

Step 4

Determine whether the consideration in step 1 is less than 75% of the figure determined in step 3. If so, the supply of the membership will be GST-free.

 Record Keeping/Documentation

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.

For example, the market values established and the methods used may be documented or minuted in the charity's books of account. This information should be captured in a way that will allow cross-referencing to accounting statements. It should also correspond to what is recorded on the charity's Business activity statements.

While you do not need to seek formal approval from the ATO where you conclude that the memberships (or other supplies or services) are GST-free, you must use the above guidelines to calculate the market value or cost of supply to make and support your decision.

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