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Ruling

Subject: GST and non-profit sub-entities

Question 1

Can you treat your branches (units) as non-profit sub-entities pursuant to Division 63 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), if you are registered for goods and services tax (GST) purposes?

Answer

Yes.

Relevant facts and circumstances

You are a non-profit body.

You are currently not registered for GST but intend to register in the near future.

You have confirmed that you are exempt from income.

You carry out some of your activities through branches (units). The branch's activities can be separately identified from your core activities.

The separately identifiable branch's GST turnover is less than $150,000.

You will be making reference in your records (minutes of meeting) to treat these separately identifiable branches as non-profit sub-entities (for GST purposes).

The branches have their own independent system of accounting.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 63-1

A New Tax System (Goods and Services Tax) Act 1999 Section 63-5

A New Tax System (Goods and Services Tax) Act 1999 Section 63-15

Reasons for decision

Under Division 63 of the GST Act certain non profit bodies have the option to treat branches or units of their organisation as if they were separate entities for GST purposes and not part of the main organisation.

An entity choosing to apply Division 63 of the GST Act must be registered for GST purposes and must be:

(1) a charitable institutions, trustees of charitable funds, gift-deductible entities or government schools; or

(2) a non-profit bodies that are exempt from income tax under any of the following specified provisions of the Income Tax Assessment Act 1997:

(i) section 50-5 (charity, education, science and religion);

(ii) section 50-10 (community service);

(iii) section 50-15 (employees and employers);

(iv) section 50-40 (primary and secondary resources, and tourism);

(v) item 9.1 or 9.2 of section 50-45 (sports, culture and recreation).

As you are a non profit body, then if you register for GST purposes you may form a non-profit sub-entity in respect of branches (units) providing you are exempt from income tax under one of the provisions listed above.

You have confirmed that that you are exempt from income tax. We are therefore satisfied that you satisfy this criterion.

Sub-section 63-15(1) of the GST Act requires that the branch which you choose to treat as a non-profit sub-entity must also satisfy the following criteria, that is, it:

(a) maintains an independent system of accounting; and

(b) can be separately identified by reference to:

(i) the nature of the activities carried on through the branch; or

(ii) the location of the branch; and

(c) is referred to in the entity's records to the effect that it is treated as a separate entity for the purposes of the GST law.

Independent system of accounting

The Australian Taxation Office (ATO) view on independent system of accounting is provided on the Charities Consultative Committee Resolved Issues Document (CCC Report) which you can download from the ATO website at www.ato.gov.au.

The CCC Report provides that an independent system of accounting does not necessarily require that a separate bank account be kept or that a separate set of books be kept. It is essential however that the records of the sub-entity can be clearly and easily distinguished from the records of the main entity. They should be easy to access and extract. It is recommended that the best means of maintaining clearly identifiable records is to establish separate cash receipts and cash payment books and possibly a separate bank account. Please note that a separate bank account is not essential.

You have advised that the branches have an independent and separate system of accounting for its activities. Therefore the separately identifiable branches satisfy this criterion as it maintains an independent system of accounting.

Separately identifiable activities

In determining those activities that are separately identifiable by their nature from the main entity it may be necessary to identify the main purpose of the entity, by inspection of the entity's governing documents, use of funds and history if necessary. Those activities that are separately identifiable from the activities undertaken by the entity pursuant to its main purpose can be treated as non-profit sub-entities provided that the other aspects of the test for eligibility are satisfied.

Our records indicate that your core activities can be separately identified from the activities of the branch.

Recording of the choice

You have advised that you will be making a choice in your records (minutes of meeting) that will make reference to the effect that you will be treating the branches as separate non-profit sub-entities. From the date of the election, the activities at the branch are treated as a non-profit sub-entity for GST purposes, unless you revoke your choice or the branch ceases to meet the criteria discussed earlier. Please note that you cannot revoke the choice to treat the branch as a non-profit sub-entity within 12 months after the day on which you make the choice.

Other important points

If the non-profit sub-entity GST turnover is less than $150,000 it can choose whether it registers or not. Where the sub-entity has a GST turnover of $150,000 or more it will be required to register separately for GST and will have the same rights and obligations as other GST registered entities, except for the ability to form other non-profit sub-entities.

The liability for all GST obligations of the unit will be imposed on the persons responsible for the management of the non-profit sub-entity.

Non-profit sub-entities are separate entities for GST purposes.

Non-profit sub-entities are for GST purposes only not PAYG, FBT, IT.

An organisation cannot create a sub-entity for its main activities such as membership of the main organisation.

An organisation's decision to treat a branch or unit as a non profit sub-entity can only apply prospectively. This means transactions that occurred prior to the decision may not be treated as having been undertaken by the non-profit sub-entity.

Where an organisation creates multiple sub-entities and the turnover of the main organisation is reduced to below $150,000 the main organisation cannot elect to cancel their registration. In order to enjoy the flexible options under Div 63 the main organisation must remain registered for GST.