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Ruling

Subject: GST-free membership services

Question 1

Is the methodology you have used for determining the consideration for acquiring things to supply membership services in the years in question (relevant years) (and to be applied to subsequent years) acceptable to the Commissioner for the purposes of subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

By applying the costing methodology specified in the relevant years in question 1, is the supply of membership services by you to your members in the relevant years GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act?

Answer

Yes

Relevant facts and circumstances

You are an organisation established within an institution (the main institution) and are endorsed as a charitable institution.

You are registered for GST and are entitled to access GST concessions.

You provide services to your own members, staff of the main institution, members of the main institution (your own members are also members of the main institution) and members of the public who pay the prescribed annual fee to you.

You receive cash funding from the main institution to subsidise your operating costs.

Under your constitution, there are different categories of memberships.

In return for the membership fee (full, free or discounted), all categories of members are entitled to receive the same membership benefits.

You currently remit 1/11 of the membership fees as GST to the Australian Tax Office in the quarter you receive payments.

In determining the portion of indirect costs incurred in providing membership services, you have used the following methods

Apportionment methodology for staff related expenses - indirect costs

You have adopted a Full time equivalent (FTE) method to apportion salaries & wages and staff amenities costs.

On this basis, the estimated apportionment percentage for employee related costs to the membership program is a percentage of the total salaries and wages and staff amenities costs incurred for the relevant years.

You have adopted a revenue method in apportioning for all indirect costs other than staff related expenses for the relevant years.

Under the revenue method, you have sought to identify the proportion of revenue that your activities generate from your member program as a percentage of the revenue you generate from all your activities for the relevant years. In this regard, the allocation percentage is determined by the total annual membership fees received divided by the total revenue excluding the subsidy you received from the main institution.

The funding amount has been excluded from the revenue formula as you consider the funding amount does not have a direct connection with any supplies made by you. Rather, this amount simply represents a subsidy to support all of your activities and overall operations. Therefore, to include the subsidy amount in the calculation would itself require an apportionment of the subsidy funding between your member and non-member supplies.

You have provided the figures for the revenue received from your own members and total annual revenue for the relevant years excluding the subsidy.

You have excluded depreciation and imputed costs from the calculation.

You have provided your summarised calculations on the costs of services per class of membership for the relevant years.

Relevant legislative provisions

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

Reasons for decision

Question 1

Summary

Yes, your methodology used in determining the cost of supplying memberships for the relevant years is in accordance with the Cost of Supply Guidelines provided in the Charities Consultative Committee Resolved Issues Document (CCC) for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.

Detailed reasoning

Commercial activities of charities will generally be taxable or input taxed. However, the non-commercial activities by charities will be GST-free.

As question one relates to the supply of membership services (that is, a supply other than the supply of accommodation), subparagraph 38-250(2)(b)(ii) of the GST Act will apply.

Subparagraph 38-250(2)(b)(ii) of the GST Act provides that your supply of membership services is GST-free if the consideration received for your supply is less than 75% of the consideration you provided or was liable to provide, for acquiring the thing supplied.

To assist charities in working out the difference between 'commercial' and 'non-commercial' activities, the Australian Taxation Office (ATO) have developed guidelines in the CCC.

Under Issue 1 of the CCC, the 'Cost of Supply' guidelines have been developed for the purposes of applying subsection 38-250(2) of the GST Act.

The term 'cost of supply' in the CCC means either the cost to the supplier of providing accommodation or where the supply is not a supply of accommodation, the consideration the supplier provided or was liable to provide, for acquiring the thing supplied for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.

Cost of supply guidelines

Where a supply by a charity is not a supply of accommodation, the supply in this instance (membership services) is GST-free if it is made for consideration that is less than 75% of the consideration the charity provided or is liable to provide, for acquiring the thing supplied or things to make the supply.

In determining the consideration the charity provided or was liable to provide in acquiring the thing supplied, the ATO considers the following points allow the charity to use the cost of providing the thing supplied when making the calculation: The CCC provides that:

When working out the cost of providing something, the 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, insurance.

For cost of providing supplies - other than accommodation

For supplies other than accommodation, charities should only include amounts paid or payable by them in the calculation.

This is because subparagraph 38-250(2)(b)(ii) states that it is 'the consideration for the supplier provided or was liable to provide for acquiring the thing supplied'. The consideration the supplier provided or was liable to provide is GST-inclusive.

Charities cannot include the following things in the calculation as they do not involve an actual outlay buy 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.

Your methodology used for determining the costs of supplying member services

In determining the costs of supplying membership services provided to your members in the relevant years, you have calculated:

Direct costs

Apportionment of indirect costs

You have applied two different methods for two categories of indirect costs:

Indirect costs related to salary & wages and staff amenities

Indirect costs other than salary & wages and the cost of staff amenities

Direct costs

You have provided a list of the expenses directly related to the provision of membership services for the relevant years.

Indirect costs

Apportionment of indirect costs related to salaries & wages and staff amenities

You have applied the Full Time Equivalent (FTE) method to apportion salary & wages and the cost of staff amenities for the relevant years.

Apportionment of indirect costs other than staff related expenses

You have further provided that under the revenue method, you have sought to identify the proportion of revenue that your activities generate from your member program as a percentage of the revenue you generate from all your activities. The allocation percentage is determined by the total annual membership fees received divided by the total revenue excluding the subsidy you received

To simplify the application of the methodology, you only propose to include the membership fee revenue, rather than all sources of revenue derived by you through the member programs in the calculation. Therefore, you believe this method represents a conservative apportionment.

You have provided a list of indirect costs other than staff related costs for the relevant years.

Apportionment of indirect costs

Goods and Services Tax Ruling GSTR 2001/8, focuses on apportioning the consideration for a supply that includes both a taxable and non-taxable part. Paragraphs 92 to 95 provide some general principles to be adopted in choosing a basis of apportionment.

What is a reasonable method of apportioning depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

Depending on your circumstances, you may use a direct or indirect method when apportioning.

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.

Furthermore, in GSTR 2006/4, although provides guidance on how to determine the extent of creditable purposes to claim the correct amount of input tax credits, also provides examples of apportionment methods.

Paragraph 101 of GSTR 2006/4 provides that the most appropriated method depends on the circumstances of each case and should consider:

· the nature of the acquisition and the ways of directly measuring its use, and

· the value of the acquisition and the cost of directly measuring its use.

You have applied two methods to apportion the indirect costs:

FTE method (a direct method) to apportion the costs related to wages & salaries and staff amenities.

Revenue method (output based, indirect method) to apportion the indirect costs other than staff related costs.

We consider that your methodology in determining the cost of supply of memberships for the relevant years is in accordance with the Cost of Supply Guidelines provided in the CCC for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.

Question 2

Summary

Yes, by applying the costing methodology specified in question 1 for the relevant years, the supply of membership services by you to your members in the relevant years is GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act.

Detailed reasoning

The Cost per membership is determined by the formula below. In return for the membership fee (full, free or discounted), all categories of members are entitled to receive the same membership benefits. Therefore, it is not necessary to separately calculate the cost of supply for each class of membership.

Total consideration (direct + indirect costs) provided for supplying membership

Total number of memberships

You have provided your summarised calculations on costs of services per membership for the relevant years.

Under subparagraph 38-250(2)(b)(ii) of the GST Act, you are required to compare the consideration you receive for the supply against the cost of making the supply to determine whether your supply is GST-free.

It is determined from your comparison that the consideration received for all categories of membership for the relevant years was less than 75% of the cost of making the supply.

Therefore, the supply of your membership services to different categories of memberships was GST-free for the relevant years.