Edited version of your private ruling

Authorisation Number: 1012044401125

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Ruling

Subject: GST and nominal consideration

Question 1

Is the supply of 2011 membership services by you a GST-free supply for the purposes of section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

See detailed reasoning under reasons for decision

Question 2

For the purpose of determining the methodology on whether the supply of membership services is GST-free under sub-paragraph 28-250(2)(b)(ii) of the GST Act for a particular year:

(a) Are you required to take account of the entire amount paid for capital assets during the membership service or should you apportion the cost of acquiring the capital assets over the period in which the assets will be applied to provide membership services?

(b) Are you entitled to apportion the cost of acquiring the capital assets over a period, can you use the effective life of the asset as a basis of apportionment?

(c) Can you determine your cost by reference to your forecast (projected) costs (calculated in September of the year of membership), consistent with the Commissioner's statement in Charities Consultative Committee Resolved Issues Document (CCCRID) Part 3, Issue 1, Section E?

(d) Is the methodology adopted and set out in Appendix 1 a reasonable methodology which the Commissioner will accept for the purposes of the 2012 membership subscriptions?

Answer

(a) As agreed, we will advise you in due course of our decision relating to whether you are required to take account of the entire amount paid for capital assets during the membership service or whether you should apportion the cost of acquiring the capital assets over the period in which the assets will be applied to provide membership services, in a separate private binding ruling.

(b) As agreed, we will advise you in due course of our decision relating to whether you can use the effective life of the asset as a basis of apportionment, in a separate private binding ruling.

(c) You may use projected or forecast costs to calculate the consideration you provided or you are liable to provide to acquire the supply of membership services.

(d) Subject to the comments made in our detailed reasoning, we have determined that the methodology you used for the 2011 calendar year is acceptable for calculating cost of supplying a membership service. The same methodology will be acceptable when applied to other years.

Question 3

If you are not entitled to use forecast and project costs and the actual costs result in you being below the 75% threshold (resulting in the supply of membership services being GST-free), will the Commissioner exercise his discretion (pursuant to section 105-65 of Schedule 1 to the Taxation Administration Act) to withhold a refund of any GST overpaid by you where it does not refund that goods and services tax (GST) to the members?

Answer

You are entitled to use forecast and projected costs.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

§ You are registered for GST.

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

§ You supply membership services for the payment of an annual membership fee.

§ You currently offer three levels of membership.

§ The benefits received by members are similar for all levels of membership and include:

- Membership of the body

- Access to the provision of relevant and up to date public training and tailored in-house learning;

- Access to the industry's leading professional development programs;

- A monthly journal;

- Access to significant discounts for professional development courses and conferences;

- Access to technical resources via Member only section; and

- Access to products and services through the Members benefits program

§ You have a head office and regional offices.

§ You do not apportion your expenses between the different membership classes.

§ You have derived the costs for the supply of membership services for the 2011 calendar year.

§ You have derived membership income other income. Your 2010 annual report provides that other income is derived from education, training and events.

§ You have undertaken a line by line review of the expense account in the trial balance to a specific month in 2011 to determine if the cost relates to the supply of membership services and if so to what extent that expense relates to the supply of membership services.

§ You have used the actual costs up to the specific month and forecast the expenses you expect to incur for the remaining months up to the end of the calendar year 31 December 2011.

§ You have reviewed the work undertaken by individual staff members and have applied the consideration provided in relation to the supply of membership services for salaries and wages on the following basis:

- If staff members work solely in relation to the supply of membership services, than the whole of the cost of the salaries and wages has been included in the cost of supply calculation;

- If work of the staff member in the head office does not relate solely to the supply of membership services, then the cost of salary and wages has been apportioned based on an estimate of the amount of time the staff member spends in relation to the supply of membership services;

- If staff members work in a regional office, the cost of salary and wages for these staff members has been apportioned to the supply of membership services based on the percentage of revenue derived by you from membership subscriptions as a percentage of total revenue for the 2011 calendar year.

- You estimate that you have or will incur capital costs in the 2011 calendar year.

§ You have apportioned the capital purchases that relate to the supply of membership services based on the percentage of revenue derived by you from membership subscriptions as a percentage of total revenue for the 2011 calendar year. The percentage for the 2011 calendar year is X% (which is income from membership subscriptions divided by total income as a percentage). This equates to X% but you have rounded it up.

§ You have calculated that X% of capital costs related to the supply of membership services.

§ You have not allocated the X% of capital costs to the 2011 calendar year.

§ You have allocated the capital purchases over the effective life of the assets.

§ You have allocated the cost of capital purchases over a number of years and not in the 2011 year when the capital costs were incurred. You are of the view that the cost of capital assets are allocated over the effective life of the assets to reflect that the assets will be applied to the supply of membership services in subsequent years.

§ You advise that the total costs for the 2011 calendar year included the following expenses:

Publication and printing

Governance and management

Profile

International

Finance

Compliance and audit

Administration - Payroll

Facilities and operating expenses

Other expenses

Capital expenses

§ Publication and printing expenses relate to publications released by you and include:

o Members' monthly journal

o Members' technical information booklets; and

o Members' Annual Report

Each member receives a monthly journal and a free copy of the technical information booklets as part of their membership. You have included the total costs incurred (e.g. printing, editing, publishing, author fees) on publication and printing as a direct cost of supplying membership services.

§ You have received some income from the sale of publications, journals and merchandise in the year ended 31 December 2010.

§ Management costs incurred by you include:

o Board meetings;

o Board committee meetings;

o Committees;

o Member Annual and General meetings;

o State managers' meetings; and

o Related travel costs.

These costs relate to the managing and providing advice on the affairs of members and are therefore directly related to the supply of membership services. You have apportioned State managers' meetings between the supply of membership services and other matters on a time occupied basis. You have included this cost as an indirect cost of the supply of membership services based on the percentage of membership income as a proportion of total income (X%). other meetings involving the State managers which include matters relating to the supply of membership are apportioned on a percentage of revenue(X%) basis. State managers meetings are apportioned on a time occupied basis.

You have not included the cost of committee meetings relating to education, training or professional development.

§ Profile costs are costs incurred by you in undertaking marketing activities and include:

o Members' functions;

o Members' Communication;

o Membership Advocacy; and

o The costs of printing relating to the above.

You have included all the direct costs relating to the supply of membership services and apportioned any indirect costs based on the percentage of membership income to total income.

§ International costs relate to membership of an international association (ie travel costs, meeting expenses and membership fees). These costs are considered direct costs for the supply of membership services.

§ Finance costs include:

o Merchant fees; and

o Bank fees and charges.

You have included the finance costs that relate to the supply of membership services based on the percentage of time staff of each department spend on membership issues. For finance costs that are not related to a particular department you have allocated these costs based on the membership income as a percentage of total revenue (X%).

§ Compliance and audit include costs incurred by you in relation to audit and other compliance activities. All legal cots, tax advisory services that relate to the supply of membership services by you have been included as a direct cost. General compliance fees have been apportioned based on the percentage of time spent by staff on membership issues.

§ Administration - Payroll include salaries and wages paid to staff and other associated costs such as superannuation. These costs have been apportioned based on time spent by individual staff performing activities related to the supply of membership services. If staff members work in a State office, their payroll costs have been apportioned based on the percentage of membership income as a proportion of total income (X%).

§ Facilities and operating expenses include the maintenance and upkeep of your facilities and offices such as rent, insurance, council rates, utility fees. You have allocated these overhead expenses on the basis of the proportion of activities undertaken by you in each of their offices that relate to the supply of membership services.

§ Other expenses include other miscellaneous expenses such as benchmark surveys. You have undertaken a line-by-line review of each individual expense to determine the extent to which it relates to the supply of membership services.

Relevant legislative provisions

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

Reasons for decision

Question 1

Is the supply of 2011 membership services by you a GST-free supply for the purposes of 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

See detailed reasoning under reasons for decision

Detailed reasoning

Supplies by endorsed charities and gift-deductible entities for nominal consideration

A supply made by an endorsed charity or gift-deductible entity is GST-free under sub-section 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 gift-deductible entity is also GST-free under sub-section 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.

GST inclusive market value

We have published the Market Value Guidelines in the Charities Consultative Committee Resolved Issues Document (CCCRID) to assist endorsed charities or gift deductible entities in establishing the GST inclusive market values of their supplies under subsection 38-250(1) of the GST Act. These guidelines are available on our website at www.ato.gov.au. They provide that in determining the GST inclusive market value of a supply, a charity must apply the following successive tests.

Firstly, the charity must establish whether the same supply exists in the open market (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. It is the supply that is compared in the market not the recipient of the supply or the provider of the supply. The comparison should be based on quality, quantity and conditions of supply.

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 (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, we expect that, where possible, 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.

Thirdly, in the unusual event that a market value cannot be established using the same supply test and the similar supply test 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, the charity can include an imputed cost for donated goods and voluntary labour. The 'cost plus' method is used as a last resort to determine the GST inclusive market value of a supply. This method has no application in determining the consideration charities provided, or were liable to provide for acquiring the thing supplied.

Importantly, these tests are successive tests for determining GST inclusive market value, they are not alternative tests. Therefore, if the market value can be established under the same supply test, the charity cannot calculate the market value by reference to the similar supply test or 'cost plus' test.

It is expected that charities would maintain and retain records that adequately document the process and information collected in establishing the relevant GST inclusive market values of the supplies they make for the purposes of subsection 38-250(1) of the GST Act.

A link to the Market Value Guidelines in the CCCRID has been provided to you.

Cost of supply guidelines

When calculating the cost of providing something an endorsed charity or gift-deductible entity 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 sub-paragraph 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 can not be included because they do not involve an actual outlay by the charity:

§ depreciation of assets, and

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

Where a supplier makes different classes of supplies, in determining the cost of making a supply under sub-paragraph 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.

Alternatively for each class of supplies, the supplier can determine the cost of making a supply under sub-paragraph 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 Section E of the CCCRID provides examples of using the above options for organisations in the cultural and performing arts sector making supplies of tickets to concerts and performances.

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

You should use the above methodologies to determine the cost of making a supply.

Your application of the methodology to determine cost of supply

You advised that you make supplies of membership services at three different levels of membership.

In the 2011 calendar year you used the following methodology to determine the cost of making a supply:

§ You determined the cost of providing membership services by taking a line-by-line analysis of your expense accounts in the trial balance up to the middle of a specific month to determine whether the cost relates to the supply of membership. For the remaining months in the calendar year you have forecast the expenses you expect to incur.

§ You then determined the direct costs that relate to the supply of membership.

§ You then determined the indirect costs that relate to the supply of membership. Cost that relate to the supply of membership as well as other supplies you have apportioned these costs to the supply of membership based on the revenue received from membership as a percentage of total revenue received. You have calculated a percentage of X%.

§ You have determined the cost for the supply of salaries, wages and other staff costs for the staff members in your head office based on an estimate of the time spent by individual staff that relate to the supply of membership.

§ You have determined the cost for the supply of salaries, wages and other staff costs for the staff working out of other State offices based on the membership revenue as a percentage of total revenue (X%).

You advise that the total costs for the 2011 calendar year included the following expenses:

Publication and printing

Governance and management

Profile

International

Finance

Compliance and audit

Administration - Payroll

Facilities and operating expenses

Other expenses

Capital expenses

You have not included depreciation in determining the cost of supply of membership.

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.

We have the following concerns in relation to the apportionment of specific expense items in your calculations for the 2011 year:

§ You have included the total costs incurred on publication and printing (eg printing, editing, publishing, author fees) in the 2011 year, as a direct cost of supplying membership services. However, you have received some income from the sale of publications, journals and merchandise in the year ended 31 December 2010. We consider that some of the expenses incurred on publications and printing is in relation to the supply of publications, journals and merchandise and not a direct cost of the supply of membership. You have not provided the income received from the sale of publications, journals and merchandise for the 2011 year. However, based on the information supplied it is considered that the costs incurred on publication and printing is not totally related to the supply of membership services. A part of these costs are in relation to the supply of publications, journals and merchandise. Therefore your need to adjust the consideration for the supply of membership services accordingly.

§ You have included the total cost of annual general meetings to the supply of membership services. It is common practice that other matters in relation to the operation of an organisation are presented at the annual general meetings. In your case this would include other supplies such as education and training, a review of result of other operating revenue and other matters not all related to the supply of membership. As not all the costs of annual general meetings are related to the supply of membership services, you should apportion the cost on a reasonable basis.

§ You have calculated the percentage of membership revenue in relation to total revenue as X%. The actual figure is X% which you have rounded up. For accuracy, you should use the percentage calculated and not round it up to the neared percent.

§ You have included the total of international expenses as a direct cost of the supply of membership services. The international costs are costs incurred by you in maintaining your membership with international associations. These costs are not considered to directly relate to any of the supplies made by you. The international expenses are considered to be an indirect cost that should be apportioned between all of the supplies made by you on a reasonable basis.

§ You have included a number of facilities and operating expenses as a direct cost of the supply of membership services. Costs such as rent, insurance, council rates, utility fees are not considered to directly relate to any of the supplies made by you. These costs are considered to be overhead costs that should be apportioned between all of the supplies made by you on a reasonable basis.

§ You have included the consideration provided by you for the salaries, wages and other staff costs for staff working out of other State offices based on the membership revenue as a percentage of total revenue (X%). It is considered that some of these staff members may only provide education or training services which are a direct cost for these supplies. You will need to remove any salaries, wages and associated costs that are not associated with the supply of membership services.

A supply that is not a supply of accommodation is GST-free under sub-paragraph 38-250(2)(b)(ii) of the GST Act if the supply is for consideration that is less than 75% of the consideration the supplier provided for acquiring the thing supplied.

Based on the figures supplied by you for the 2011 year, the cost per membership supplied is determined by dividing the total costs by the number of members.

As we have some concerns on the methodology you used to determine the consideration you provided in acquiring membership services in 2011, we are not able to determine if the supply of membership services by you is GST-free under sub-paragraph 38-250(2)(b)(ii) of the GST Act.

Question 2

For the purpose of determining the methodology on whether the supply of membership services is GST-free under sub-paragraph 28-250(2)(b)(ii) of the GST Act for a particular year:

(a) Are you required to take account of the entire amount paid for capital assets during the membership service or should you apportion the cost of acquiring the capital assets over the period in which the assets will be applied to provide membership services?

(b) Are you entitled to apportion the cost of acquiring the capital assets over a period, can you use the effective life of the asset as a basis of apportionment?

(c) Can you determine your costs by reference to your forecast (projected) costs (calculated in September of the year of membership), consistent with the Commissioner's statement in Charities Consultative Committee Resolved Issues Document (CCCRID) Part 3, Issue 1, Section E?

(d) Is the methodology adopted and set out in Appendix 1 a reasonable methodology which the Commissioner will accept for the purposes of the 2012 membership subscriptions?

Summary

(a) As agreed, we will advise you in due course of our decision relating to whether you are required to take account of the entire amount paid for capital assets during the membership service or whether you should apportion the cost of acquiring the capital assets over the period in which the assets will be applied to provide membership services, in a separate private binding ruling.

(b) As agreed, we will advise you in due course of our decision relating to whether you can use the effective life of the asset as a basis of apportionment, in a separate private binding ruling.

(c) You may use projected or forecast costs to calculate the consideration you provided or are liable to provide to acquire the supply of membership services.

(d) Subject to the comments made in our detailed reasoning, we have determined that the methodology you have used for the 2011 calendar year is acceptable for calculating cost of supplying a membership service. The same methodology will be acceptable when applied to other years.

Detailed reasoning

Question 2 (a)

As agreed, we will advise you in due course of our decision relating to whether you are required to take account of the entire amount paid for capital assets during the membership service or whether you should apportion the cost of acquiring the capital assets over the period in which the assets will be applied to provide membership services, in a separate private binding ruling.

Question 2 (b)

As agreed, we will advise you in due course of our decision relating to whether you can use the effective life of the asset as a basis of apportionment, in a separate private binding ruling.

Question 2 (c)

Cost of supply guidelines

When calculating the cost of providing something an endorsed charity or gift-deductible entity 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 sub-paragraph 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 can not be included because they do not involve an actual outlay by the charity:

§ depreciation of assets, and

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

Where a supplier makes different classes of supplies, in determining the cost of making a supply under sub-paragraph 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.

Alternatively for each class of supplies, the supplier can determine the cost of making a supply under sub-paragraph 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 Section E of the CCCRID provides examples of using the above options for organisations in the cultural and performing arts sector making supplies of tickets to concerts and performances.

The CCCRID provides further that this methodology has wide application and can be used by charities making other kinds of non-accommodation supplies.

In accordance with the CCCRID you may use this methodology in determining your cost of supply of membership services. Therefore, you are entitled to determine your cost of supply based on your estimated projected costs where actual costs are not available. As provided in the CCCRID all projected costs must be realistic and must be aligned with other costing conducted when you determine your membership subscriptions. However, if actual costs are available they must be used.

Question 2 (d)

Subject to the comments made under our reasons for decision in question 1, we have determined that the methodology you have used for the 2011 calendar year is acceptable for calculating cost of supplying your membership services. The same methodology will be acceptable when applied to the 2012 or any other years.

Question 3

If you are not entitled to use forecast and project costs and the actual costs result in you being below the 75% threshold (resulting in the supply of membership services being GST-free), will the Commissioner exercise his discretion (pursuant to section 105-65 of Schedule 1 to the Taxation Administration Act) to withhold a refund of any GST overpaid by you where it does not refund that GST to the members?

Summary

You are entitled to use forecast and projected costs where actual costs are not available.

Detailed reasoning

As outlined under our reasons for decision in question 2, you are entitled to use forecast and projected costs where actual costs are not available. As you are entitled to use projected costs there are no further issues to address under this question.