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Ruling

Subject: GST and nominal consideration

Question

1. For the purpose of determining the methodology on whether the supply of membership services is GST-free under sub-paragraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for a particular year:

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?

If you are 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?

Answer

1. (a) For the purpose of determining the methodology on whether the supply of membership services is GST-free under sub-paragraph 35-250(2)(b)(ii) of the GST Act for a particular year you can include as the cost of acquiring each capital item:

· an amount equivalent to the decline in value amount for the capital item for that period consistent with Division 40 of the Income Tax Assessment Act 1997 (ITAA), or

· the consideration provided for the capital item in that period.

In either case, an apportionment of the consideration provided is required if the capital item is not used solely for the making of membership services in that period.

1. (b) You can use the effective life of the assets as a basis of apportionment.

Relevant facts and circumstances

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 late 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 late 2011 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 Y% but you have rounded it up to X%.

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:

· Members' monthly journal

· Members' technical information booklets; and

· 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:

· Board meetings;

· Board committee meetings;

· Committees;

· Member Annual and General meetings;

· State managers' meetings; and

· 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:

· Members' functions;

· Members' Communication;

· Membership Advocacy; and

· 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:

· Merchant fees; and

· 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

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.

Cost of supply guidelines

The things used to make the supply may include both recurring (direct or revenue) items (such as the member journal and salaries of staff providing member services) and capital items (such as buildings, or plant and equipment).

Where the entity uses a recurring (direct or revenue) item to make supplies of a kind, such as in your case membership services, the consideration provided is generally the price you pay for the item. Where such an item is only partly used to make supplies of a kind, the consideration provided is only a proportion of the price paid. This proportion equals the proportion of the item used to make those supplies.

For capital items, the consideration provided is often not so clear.

The Goods and Services Tax Industry Issues document: Charities Consultative Committee Resolved Issues Document (the CCC document) in the section titled Non-commercial activities of charities, cost of supply and market value tests, provides the methodology for working out the 'cost of supply' for purposes of subparagraph 38-250(2)(b)(ii) of the GST Act. It states that when applying the cost of supply test, entities can include all direct costs and a reasonable apportionment of indirect costs. However, costs used must be real costs.

Under this methodology, the consideration provided for acquiring capital items used to make supplies of a kind is included in the period in which the consideration is paid (or is liable to be paid). For example, if a capital item used to make supplies of a kind is acquired in a period and the total consideration of $1m is paid in that period, an entity can include $1m in the calculation for that period (even though the item may relate to making supplies over a number of periods into the future).

However, capital items are not generally consumed in making supplies in the period in which they are acquired. They normally have an effective life and are used by the entity to make supplies over a number of periods.

To reflect this, for purposes of subparagraph 38-250(2)(b)(ii) of the GST Act, where the entity uses a capital item to make supplies of a kind in a period, the consideration provided is a proportion of the price paid. This proportion is generally equal to the portion of the effective life of the item falling within the period. For example, if a capital item acquired on 1^st July has an effective life of ten years, the consideration provided in that period for acquiring the item is 1/10^th of the cost of the item (where a capital item is only partly used to make supplies of a kind, the consideration provided needs to be apportioned further to take into account the proportion of the item used to make those supplies).

In that regard, the decline in value for income tax purposes is a good example of apportioning the total consideration provided over the effective life of an asset.

Therefore, for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act, in calculating the consideration provided for acquiring capital items used in making the supplies of a kind in a period, it is reasonable, as an alternative to the method currently provided for in the CCC document, for an entity to include an amount equivalent to the decline in value amount for that capital item for that period consistent with Division 40 of the ITAA.

Entities must use one method or the other for each capital item.

Entities cannot include in a calculation any amount for a capital item that has been included in a previous calculation.

Example 1

Entity ABC, an endorsed charitable institution, uses the financial year as the period for its subparagraph 38-250(2)(b)(ii) of the GST Act calculations. On 1 July 2013 it pays $1m for a capital item.

If the capital item is used solely for making the supplies being considered, it can choose to include in the calculation for the 2013/2014 financial year:

· the whole $1m, or

· an amount equivalent to the decline in value amount for that capital item over its effective life, for example $25,000 per annum over 40 years effective life.

If the capital item is used only 60% in making the supplies being considered and 40% for other purposes, then only $600,000 or $15,000 respectively can be included in the calculation.

Your application of the methodology to determine cost of supply

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

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

In relation to your capital costs, 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. Further you have apportioned that portion of the capital purchases that relate to the supply of membership services over the effective life of the capital assets.

In accordance with the CCC document and ATO Interpretative Decision ATO ID 2012/78 you may use this methodology to apportion your capital costs in determining your cost of supply of membership services. Therefore, you are entitled to determine your cost of supply based on the consideration provided for acquiring your capital items used to make your supplies of membership services in the period in which the consideration is incurred (or is liable to be paid) or a proportion of the consideration incurred that is equal to the portion of the effective life of the capital item for that period.

In that regard, the decline in value for income tax purposes is a good example of apportioning the total consideration provided over the effective life of an asset.

Therefore, for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act, in calculating the consideration provided for acquiring capital items used in making your supplies of membership services, it is reasonable, as an alternative to the method currently provided for in the CCC document, for you to include an amount equivalent to the decline in value amount for your capital items for that period consistent with Division 40 of the ITAA. However, an apportionment of the consideration provided is required if the capital item is not used solely for the making of membership services in the period.

You should note that you must use one method or the other for each capital item.

You cannot include in a calculation any amount for a capital item that has been included in a previous calculation or period.