Edited version of your written advice

Authorisation Number: 1013110843514

Date of advice: 20 October 2016

Ruling

Subject: GST and supply of membership

Question 1

Is the supply of the Membership by the Australian entity GST-free to the extent that it is a supply of rights for use offshore, pursuant to item 4(a) of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

Yes, based on the information given the supply of the Membership by the Australian entity is GST-free under item 4(a) in the table in subsection 38-190(1) of the GST Act to the extent that the rights are for use offshore.

Question 2

If the answer to question 1 is yes, then is the proposed apportionment methodology a fair and reasonable methodology for determining the extent to which the supply of the Membership is GST-free.

Advice

Yes, based on the facts given the proposed apportionment methodology is a fair and reasonable methodology for determining the extent to which the supply of the Membership is GST-free.

However, the Australian entity is required to review its proposed methodology on a regular basis.

Relevant facts

You are an Australian entity and are registered for the goods and services tax (GST). You carry on the enterprise of sale and management of a membership program (“the Membership”).

The Membership is currently supplied to customers located in Australia (“Members”) for an annual fee.

Members receive a Membership card, which is required to be presented each time a Member seeks to redeem any of the privileges to which it is entitled to under the Membership.

The privileges which may be redeemed by Membership holders from international participants of the membership program, including Australia are:

n Accommodation benefits, which are a flat percentage discount on all room rates and a free one night stay (per member, per year).

n Food and beverage benefits, which are discounted dining for meals consumed at certain hotels and discounted beverages.

● Member for a Day Certificate, which allows the holder to receive all Membership rights (excluding the free one night stay).

The privileges supplied under the Membership are redeemable at participating international hotels, restaurants and bars including Australia.

The Membership is a supply of rights for use in Australia and outside Australia. The rights provided under the Membership are not directly attributable to any particular supply made, but are exercisable at the discretion of the Member, which may occur either inside or outside of Australia.

You advised that you wish to apportion the consideration of your membership supplies to the GST-free component by referring to the past history of how the various rights have been used for a specified period.

You will use the apportionment methodology given to us and you have provided a calculation worksheet based on the proposed apportionment methodology. You consider that the extent to which the supply of Memberships is partially a GST-free supply of rights for use offshore, will be accurately reflected in the historical usage patterns of the various rights granted.

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 38-190

Reasons for decisions

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Question 1

Characterisation of supply

Supplies of membership subscriptions can be difficult to characterise as there may be elements of services, rights or goods provided by the supplier. There may be situations where the supply for consideration in respect of membership subscriptions is the supply of a right, or a combination of a supply of a right and a supply of services that are to be treated as separately identifiable parts of the supply. It will be a case of weighing up what is supplied in each case to determine the supply for which the subscription amount is consideration.

According to example 2 in Goods and Services Tax Ruling GSTR 2003/8, a museum membership subscription for use outside Australia is characterised as a supply of rights where the membership subscription only entitles the Australian resident to a discount on the entry fee for specified affiliated museums in Europe. The Australian resident is supplied with the right to a discount for use outside Australia.

In this case we consider that you are making a supply of rights to the Members for GST purposes since from the facts given, the Members are supplied with a right to a discount on the acquisitions of accommodation, food and beverages, a right for a free night stay and right for a day certificate from specified participating international hotels, restaurants and bars including Australia.

The next step is to consider the GST status of the supply of rights to the Members located in Australia at the time of the supply.

GST status of supply of rights

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act if:

a) you make the supply for consideration; and

b) the supply is made in the course or furtherance of an enterprise that you carry on; and

c) the supply is connected with Australia; and

d) you are registered or required to be registered for GST.

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

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

From the information received, when you supply the Membership paragraphs 9-5(a) to 9-5(d) of the GST Act are satisfied as:

a) you receive consideration for its supply; and

b) the supply is made in the course of your business; and

c) the supply is connected with Australia as the rights are created at the time when you through your Australian business, supply the Membership to the Members located in Australia; and

d) Allegiance is registered for GST.

However, your supply is not a taxable supply to the extent that it is GST-free or input taxed. There is no provision in the GST Act that makes your supply of rights (Membership) input taxed.

The next step is to determine whether your supply of rights is GST-free.

GST-free supply

Relevant to your supply of rights is item 4 in the table in subsection 38-190(1) of the GST Act (item 4).

Under item 4 a supply that is made in relation to rights is GST-free if:

a) the rights are for use outside Australia; or

b) the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

Paragraph (a) of item 4

Goods and Services Tax Ruling GSTR 2003/8 (available at www.ato.gov.au) provides guidance on supply of rights for use outside Australia. The following paragraphs are from GSTR 2003/8

36. The requirement that 'the rights are for use outside Australia' in paragraph (a) of item 4 is an intention test. That is to be covered by this paragraph, it must be established that the intentions is that the rights will be used outside Australia.

37. The actual use of the rights is not relevant, other than as evidence of the intended use,

108A. A supply does not fall within item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.

From the facts given, the rights are for use in and outside Australia.

Where the rights are for use outside Australia, the supply is GST-free under paragraph (a) of item 4.

Where the rights are for use in Australia, the supply is a taxable supply under section 9-5 of the GST Act.

Paragraph (b) of item 4

This paragraph is not applicable as the supply is made to individuals located in Australia at the time of the supply.

Summary

You are making a mixed supply (taxable and GST-free) when supplying the Membership to the Members located in Australia at the time of the supply. You will need to apportion the consideration between the taxable and GST-free parts on a reasonable basis.

Question 2

As discussed in question 1 the membership fees are consideration for supplies that are partly taxable and partly GST-free. You therefore need to apportion the consideration for the mixed supply between the taxable and GST-free parts to find the consideration for the taxable part.

Goods and Services Tax Rulings GSTR 2001/8 and GSTR 2003/8 provide guidance on the 'apportionment of the consideration for a mixed supply' and 'reasonable method of apportionment for mixed supply'.

Paragraphs 26, 27, 95 and 96 in GSTR 2001/8 state:

26. Apportionment must be undertaken as a matter of practical common sense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.

96. Where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application.

Paragraphs 124 to 129 in GSTR 2003/8 state:

Supply that is made in relation to rights that are partly for use outside Australia

124. Section 9-5 provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed. Accordingly, a supply that is made in relation to rights is GST-free under paragraph (a) of item 4 to the extent that the rights were intended, at the time they were created, granted, transferred, assigned or surrendered, to be used outside Australia.

125. You work out the GST payable on a supply that is made in relation to rights that are partly for use outside Australia by apportioning the consideration between the part of the supply that is made in relation to rights for use in Australia and the part that is made in relation to rights for use outside Australia. Apportionment of the consideration for a supply that includes taxable and non-taxable parts is discussed in Goods and Services Tax Ruling GSTR 2001/8.

126. You may use any reasonable method of apportioning the consideration between the part of the supply that is made in relation to rights for use in Australia and the part that is made in relation to rights for use outside Australia.

Reasonable method of apportionment

127. What is a reasonable method of apportioning the consideration for a supply to reflect the extent to which rights are for use outside Australia depends on the nature of the supply and all the surrounding circumstances. In some cases, this may be evident to the supplier of the rights from the contract that the supplier has entered into.

128. However, in many cases it is the recipient of the supply who will have the best information available to it to determine the extent to which the rights are for use outside Australia. It is expected that, in these circumstances, the supplier will consult with the recipient to obtain that information or to be satisfied that the recipient has made a genuine attempt to determine the extent to which the rights are for use outside Australia.

129. Factors that may be relevant to forming a judgment as to the extent of intended use of rights for the purposes of paragraph (a) of item 4 include:

• expectations of the recipient, based on reasonable grounds, as to the likely use of the right over the period for which the right is granted, or if the right has been granted for an unspecified period, the expectations of the recipient as to the likely use over the anticipated period of use;

• economic, social, cultural and political conditions the nature of the right itself, for example, the language of a written work or its relevance to a particular culture, may influence where the right will be used;

• past revenue, royalty or profitability patterns evident from the use of similar rights this may come from industry statistics or from past experience in the recipient's business; and

• projected use of the right in and outside Australia based on market research.

You advised that you wish to apportion the consideration of your membership supplies to the GST-free component by referring to the past history of how the various rights have been used for a specified period. You will use the apportionment methodology given to us and have provided a calculation worksheet based on past information.

Based on the information given, we consider your proposed methodology to be a fair and reasonable method.

If your circumstances should change, or an economic event occurs which results to a distortion of the percentage you are required to review the methodology to determine if it remains fair and reasonable.

While there is no prescriptive for how often a review of the process is necessary, any significant impact on the enterprise or a shift in the business of the enterprise may require a detailed review process. Accordingly, you are required to review its proposed methodology on a regular basis.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).