Edited version of private advice

Authorisation Number: 1051694231456

Date of advice: 29 July 2020

Ruling

Subject: GST and the non-commercial activities of a charity

Question 1

Is the proposed method for apportioning overheads fair and reasonable for the purposes of applying subsection 38-250(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to your supplies for the period commencing from xx/yy/zzzz?

Answer 1

Yes

Question 2

Will section 142-10 of the GST Act apply to restrict a refund of GST paid to the ATO commencing from xx/yy/zzzz?

Answer 2

Yes

This ruling applies for the following period:

July 2020 to July 2024

Relevant facts and circumstances

Please note that all legislative references are to the GST Act.

You are a registered charity with the Australian Charities and Not-for-profits Commission. You are also a gift-deductible recipient and an endorsed charity for the purposes of the GST Act.

You provide services to people.

You make two types of supplies.

Reasons for decision

Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 1

Under section 38-250, non-commercial activities of an endorsed charity, gift deductible entity or government school may be GST-free. Of relevance to your circumstances, subsection 38-250(2) provides that 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.

You are an endorsed charity and a gift-deductible entity for GST purposes, so you satisfy paragraph 38-250(2)(a). You are not supplying accommodation, so your supplies may be GST-free if subparagraph 38-250(2)(b)(ii) is satisfied. That is, your supplies will be GST-free if the consideration you receive for making those supplies is 75% or less than the consideration you provide to acquire the supplies you make.

The ATO accepts that charities can use the cost of providing a thing supplied when determining whether subparagraph 38-250(2)(b)(ii) is satisfied (see paragraphs 14 to 16 of Non-commercial activities of charities, cost of supply and market value tests).

Paragraph 18 states:

When working out the cost of providing something, a charity 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 and insurance.

You have allocated direct costs where appropriate but need to apportion indirect costs or overheads to your supplies.

Based on the information provided by you, we accept that the proposed apportionment method for allocating overhead costs that cannot be directly allocated for the purposes of subparagraph 38-250(2)(b)(ii), is fair and reasonable.

You will need to review the application of the apportionment method regularly, at least annually, to determine if your supplies continue to satisfy subparagraph 38-250(2)(b)(ii).

Question 2

Where an entity has treated a GST-free supply incorrectly as taxable and included an amount of GST in their GST return, Division 142 applies. In such circumstances, this GST is referred to as 'excess GST'. Broadly, Division 142 provides that excess GST that has been passed on is taken to be payable on a taxable supply until the supplier reimburses the other entity for the passed-on GST.

Refunding excess GST that has been passed on will give a windfall gain to the supplier if the supplier has not reimbursed the recipient.

Goods and Services Tax Ruling GSTR 2015/1: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999, (GSTR 2015/1), provides guidance in relation to the meaning of the term 'passed on'.

Paragraphs 24-27 of GSTR 2015/1 state:

24. The Explanatory Memorandum to the Tax Laws Amendment (2014 Measures No 1) Bill 2014 states that the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply. This simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is treated as a taxable supply.

25. If excess GST is included on a tax invoice, this is prima facie evidence that the excess GST has been passed on.

26. However, while there is a general expectation that, in ordinary circumstances, excess GST has been passed on, particular facts and circumstances of an individual case may demonstrate that excess GST has not been passed on.

27. A supplier claiming a refund, because it considers that the excess GST has not been passed on, will need to clearly substantiate the grounds on which it claims the refund. In any dispute, the taxpayer would have the onus of proving that its circumstances are outside the ordinary and that it did not pass on the excess GST.

As outlined in paragraph 24 of GSTR 2015/4 the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply.

Paragraph 29 of GSTR 2015/1 states that "the question of passing on is one of fact and not of fairness...".

Under section 142-25, if an entity issues a tax invoice which contains enough information to enable some or all of an amount of GST to be clearly ascertained, the tax invoice is prima facie evidence of GST having been passed on. However, GST may have been passed on even if a tax invoice is not issued.

You provided copies of documents that have been issued to your clients since zzzz. These documents are not tax invoices.

You are a not-for-profit entity and have stated that GST was not considered when setting the price of your supplies. Rather, you set prices so as not to price out some people.

However, in setting those prices, you were of the understanding that GST was payable to the ATO and included GST in your activity statements in respect of your supplies.

As outlined above, there is a general expectation that excess GST will have been passed on and a supplier will need to clearly substantiate the grounds on which it claims a refund of excess GST and that their circumstances are outside the ordinary. On the whole, you have not been able to clearly substantiate that you have not passed on the excess GST in respect of your supplies.

Therefore, under section 142-10, any excess GST that you have passed on to your clients is taken to be payable and on a taxable supply until you reimburse those clients.

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