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Ruling

Subject: GST & supplies by a deductible gift recipient for nominal consideration

Issue 1

Question 1

Can you include your 'aggregated capital costs from 1 July 2000' as part of the consideration you provided or were liable to provide, for acquiring the thing supplied (2011/12 supplies) under subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, you cannot include your 'aggregated capital costs from 1 July 2000' as part of the consideration you provided or were liable to provide, for acquiring the thing supplied (2011/12 supplies) under subparagraph 38-250(2)(b)(ii) of the GST Act.

Question 2

Can you apportion the consideration provided for an asset over a number of years, to which the supplies relating to that asset are made, to determine the cost of supply under subparagraph 38-250(2)(b)(ii) of the GST Act for the 2012 and subsequent financial years?

Answer

Yes, this would fall within the scope of the "consideration the supplier provided for acquiring the thing supplied" under subparagraph 38-250(2)(b)(ii) of the GST Act. For the calculation for a period, you can include a portion of the asset's effective life used to make supplies in that period. The calculation would need to exclude the proportion of the asset used for other purposes.

Question 3

Can you use any "surplus" consideration for capital items incurred from 1/7/2000 to 30/6/2010, (and taken into account for determining the cost of supply for supplies made from 1/7/2000 to 30/06/2010) to determine cost of supply under subparagraph 38-250(2)(b)(ii) of the GST Act for the 2012 and subsequent financial years?

Answer

No, you cannot include the consideration for a capital item that has already been included in a previous calculation for section 38-250 of the GST Act purposes.

Question 4

Can you utilise the consideration provided for capital items before 1 July 2000 to determine the cost of supply under subparagraph 38-250(2)(b)(ii) of the GST Act for the 2012 and subsequent financial years?

Answer

Yes, as long as the asset is used to make relevant supplies it would fall under the scope of the "consideration the supplier provided for acquiring the thing supplied". For a period, the consideration you provided for a capital item before 1 July 2000 could include the portion of the consideration related to the capital item's effective life that is used to make supplies in that period. The calculation would need to exclude the proportion of the asset used for other purposes.

Question 5

Are complimentary admissions, member admissions, and sponsor admissions included in determining the cost of supply of an admission under subparagraph 38-250(2)(b)(ii) of the GST Act?

Answer

You would have incurred costs in providing these supplies. These admissions need to be included in determining the cost of supply of an admission. Alternatively, the costs incurred in providing these admissions need to be determined and excluded from determining the cost of supply of the other admissions for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.

Question 6

Can each supply of admission be considered separately to determine if the supply is GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act, and can the cost of each individual supply include the full cost of construction and operation of the attraction?

Answer

Yes, each supply of admission is considered separately to determine if the supply is GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act. However the cost of each individual supply cannot include the full cost of construction and operation of the attraction.

Issue 2

Question 1

Will the Commissioner exercise his discretion under section 105-65 of Schedule 1 to the TAA and allow a refund of GST remitted on GST-free tickets after 1 July 2011?

Answer

You have not identified an overpaid amount of GST. Section 105-65 of Schedule 1 to the TAA therefore has no application.

Relevant facts and circumstances

· You are an endorsed Deductible Gift Recipient as a public museum.

· You are a gift deductible entity for GST purposes.

· You are registered for GST.

· You advise that due to expected volatility of your future budgeted capital expenditure and to ensure certainty in planning future ticket prices and budgeting future revenue you plan to use a new methodology from 1 July 2011.

· You also advised that you will remit GST on tickets that are taxable under the old methodology from 1 July 2011, however if the new methodology is accepted by the Commissioner you will seek a refund of this GST under section 105-65 of Schedule 1 to the TAA.

· You contend that you absorbed the GST on these tickets as it is "commercially unrealistic" to increase the ticket price by 10% from 1 July 2011.

· On 1 July 2011 you provided a summary of your new methodology of determining the cost of supply for the purposes of section 38-250 of the GST Act.

· On 1 December 2011 you referred to a telephone discussion you had with the Australian Taxation Office (ATO) and provided further information and submissions involving free admissions and allocating capital costs across the effective life of the asset into your revised methodology.

· In the additional submission you contend that 'free' visitors should be excluded from the 'cost of supply' calculation because of Step 1 in Section E of the Goods and Services Tax Industry Issue: Charities Consultative Committee Non-commercial activities of charities, cost of supply and market value tests (the CCC document) states "Estimate the total number of tickets (of all classes) that will sell". You contend that providing free admission is not an admission that is sold.

· Further you contend that paragraph 38-250(2)(b)(ii) of the GST Act compares the 'consideration' for a supply with the 'consideration the supplier provided, or were liable to provide, for acquiring the thing supplied.' Therefore supplies for no consideration should be excluded from determining the cost of supply.

· You provide complimentary passes for free admission to an attraction. These complimentary passes are typically issued to members of the public for various reasons. You contend that these admissions should be excluded from determining the cost of supply.

· You provide membership. There are varying charges for membership depending on the type of membership. Members are entitled to free admission to your attraction as well as a number of other benefits.

· You treat the membership as a taxable supply and remit GST on the membership fees.

· You contend that admissions to members are made for no consideration because the rights and benefits of membership are sold to members rather than the individual admissions to the attraction.

Therefore admission for members should be excluded from the 'cost of supply' calculation because these admissions are not made for consideration.

Relevant legislative provisions

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

Taxation Administration Act 1953 105-65 to schedule 1

Reasons for decision

Issue 1 Question 1

Summary

You cannot include your 'aggregated capital costs from 1 July 2000' as part of the consideration you provided or were liable to provide, for acquiring the thing supplied (2011/12 admissions) under subparagraph 38-250(2)(b)(ii) of the GST Act.

Prior year capital expenditures (as you have determined) cannot be taken into account in determining the costs of making a supply (other than accommodation). Under subparagraph 38-250(2)(b)(ii) of the GST Act, the only amounts included in the costs of making the supply is the "consideration the supplier provided, or was liable to provide, for acquiring the thing supplied".

Detailed reasoning

Supplies by endorsed charities and deductible gift recipients for nominal consideration

A supply made by an endorsed charity or a deductible gift recipient is GST-free under subsection 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 a deductible gift recipient is also GST-free under subsection 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

When calculating the cost of providing something an endorsed charity or a deductible gift recipient 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 subparagraph 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 cannot be included because they do not involve an actual outlay by the supplier:

· depreciation of assets,

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

Option 1

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

Option 2

Alternatively for each class of supplies, the supplier can also determine the cost of making a supply under subparagraph 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, the CCC document at Section E provides examples of using the above methodologies for organisations in the cultural and performing arts sector making supplies of tickets to concerts and performances. The CCC document has the status of an ATO Public Ruling.

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

The methodology you propose to use for the 2011 / 12 financial year

You advise that you intend to include prior year capital expenditures in determining the 'cost of supply' for future financial years to determine whether the supply of admissions is GST-free under section 38-250 of the GST Act.

You contend that the prior year capital costs of constructing capital assets should be part of the "consideration the supplier provided" for acquiring the "thing supplied" being admissions.

You contend that the 'consideration' to which subparagraph 38-250(2)(b)(ii) of the GST Act refers is not limited to the consideration provided in a particular year. Therefore you propose to include the capital costs of constructing capital assets (on a reducing basis) in the 'cost of supply' for all admission tickets in a particular financial year while that asset is still in use.

The CCC document provides guidelines on determining the cost of supply, the relevant paragraphs on cost of providing supplies other than accommodation are reproduced below.

3. Cost of providing supplies - other than accommodation

19. For supplies that are not accommodation, charities should only include amounts paid or payable by them in the calculation.

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

21. The consideration the supplier provided or was liable to provide is GST-inclusive.

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

23. For more information, refer to section 38-250, in particular subparagraph 38-250(2)(b)(ii).

In your proposed methodology, you determine the cost of making a supply in a particular year by:

· including, amongst other things, the same capital costs of the assets (on a reducing basis) in determining the total 'consideration [you] provided, or was liable to provide, for acquiring the thing[s] supplied', and

· dividing the total 'consideration [you] provided, or was liable to provide, for acquiring the thing[s] supplied' by the projected number of ticketed admission supplies to be made in that year. You have not included free admissions, complimentary admissions, member admissions, and sponsor admissions to determine the cost of supply of an admission.

Your proposed methodology uses the consideration provided for the asset (on a reducing basis) more than once. This is not an accurate method of determining the cost of making each supply of admission and is not acceptable to the Commissioner.

Further your methodology excludes certain supplies that the expenditure relates to. We are referring to the supply of admissions to members and complimentary admissions. To ensure an accurate methodology to determine the cost of supply of ticketed admissions, the costs of providing these 'free' admissions need to be to taken into account and separated from the costs of providing the other admissions.

Issue 1 Question 2

Summary

You can include as the consideration provided for 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 1997), or

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

In either case, an apportionment of the consideration provided is required to the extent the capital item is not used for the making of admission supplies in the period.

Detailed reasoning

Applying the consideration provided for capital assets to supplies for determining the cost of supply.

You contend that the 'consideration' to which subparagraph 38-250(2)(b)(ii) of the GST Act refers is not limited to the supplies provided in a particular period and the 'consideration' provided should be applied to supplies in future periods to determine the cost of future supplies.

The CCC document provides guidance on applying the cost of supply test to tickets supplied by organisations in the cultural and performing arts sector. The methodology outlined in Section E uses an estimate of the projected costs for a season of performances, exhibition or event rather than supplies made in a particular period of time.

It is arguable that the provision of consideration for a capital expense can relate to cost of making supplies. A methodology that accurately applies this consideration to a reasonable estimate of the total supplies made by the asset would be acceptable for determining the cost of making the supply.

Consideration that has already been included in a calculation to determine the cost of a supply cannot be used again.

"Depreciation" is not allowed to be used to determine the cost of supply for non-accommodation supplies because it is an arbitrary cost rather than being 'consideration provided for acquiring the thing supplied'.

However ATO Interpretative Decision ATO ID 2012/78 Goods and Services Tax: GST and supplies made by endorsed charitable institutions for nominal consideration provides guidance on how a charity can include the consideration provided for a capital asset to determine the cost of making a supply under section 38-250 of the GST Act.

Subparagraph 38-250(2)(b)(ii) of the GST Act provides that a supply (that is not a supply of accommodation) made by an endorsed charitable institution is GST-free if the supply is for consideration that is less than 75% of the consideration the supplier provided, or was liable to provide (the consideration provided), for acquiring the thing supplied.

A strict literal interpretation of the phrase 'acquiring the thing supplied' would mean that subparagraph 38 250(2)(b)(ii) would only apply where the things acquired are the things supplied. This would restrict the operation of the provision to a narrow ambit (such as an endorsed charitable institution acquiring a blanket for the purposes of making an on-supply of the blanket).

Accordingly, we consider the phrase 'acquiring the thing supplied' should be interpreted to include both things that are acquired and on-supplied and things that are acquired and 'used' in combination in making a supply of something else.

The calculation of whether a supply is GST-free under subparagraph 38-250(2)(b)(ii) is relatively straight forward if the thing acquired is the same thing as that supplied.

However, this may not be the case for supplies made in the performing arts or similar sectors. This is because the thing supplied (however described) is not necessarily the thing acquired, but is often made up of a combination of a number of things.

For example with a zoo admission, the visitor's experience is a combination of the animals, the enclosures, the parks and gardens and other facilities. In making the supplies of zoo admissions you need to acquire these and other things. Most are not on supplied to the visitors of the zoo. Rather, they are 'used' by the zoo to make a supply of a zoo admission.

The things used to make the supply may include both recurring (or revenue) items (such as animal feed and services of zoo keepers) and capital items (such as buildings, or plant and equipment).

Where you use a recurring (or revenue) item to make supplies of a kind, such as zoo admissions, 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 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 1st July has an effective life of ten years, the consideration provided in that period for acquiring the item is 1/10th 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 in a period, 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 that capital item for that period consistent with Division 40 of the ITAA.

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.

Issue 1 Question 3

Summary

Consideration that has already been included in a calculation to determine the cost of a supply for section 38-250 purposes cannot be used again later to determine the cost of supply for subsequent supplies.

Detailed reasoning

ATO ID 2012/78 states that "entities cannot include in a calculation any amount for a capital item that has been included in a previous calculation." It provides a choice of methods for determining the consideration provided for each capital item for the purposes of determining the cost of supply under s38-250. These are:

1. an amount equivalent to the decline in value amount for the capital item for that period consistent with Division 40 of the ITAA 1997, or

2. 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 admission supplies in the period.

These methods do not allow the carrying over of a 'surplus'. Either one method or the other must be used for each relevant capital item.

Issue 1 Question 4

Summary

You can utilise a proportion of the consideration provided for capital assets before 1 July 2000 used to make admission supplies to determine the cost of supply under subparagraph 38-250(2)(b)(ii) of the GST Act for the 2011 and subsequent financial years. The consideration for the capital asset will need to be apportioned to exclude the portion that was used for any unrelated and previous admission supplies.

Detailed reasoning

Subparagraph 38-250(2)(b)(ii) of the GST Act makes no reference to when the consideration needs to be provided to determine the cost of supply. While the provision applies from 1 July 2000, and is used to determine the cost of making a supply from that date there is no statutory restriction in using the consideration provided before 1 July 2000 to determine the cost of supply.

The CCC document refers to consideration provided for making a non-accommodation supply as "For supplies of things other than accommodation only those amounts paid or payable may be included in the calculation"

ATOID 2012/78 provides that a charity can include the consideration provided for a capital asset by an amount equivalent to the decline in value amount for the capital item for that period consistent with Division 40 of the ITAA.

For the 2012 financial year, to determine the cost of supply for subparagraph 38-250(2)(b)(ii) purposes, the relevant consideration provided before 1 July 2000 would need to be apportioned for part of the asset;

· used to make supplies prior to 1 July 2000,

· used for admission supplies made from 1 July 2000 to 30 June 2011,

· used for all other supplies not related to admission supplies, and

· used for making future supplies.

Issue 1 Question 5

Summary

You have incurred costs in providing supplies of all admissions. To accurately determine the cost of supply of providing an individual admission the total relevant costs need to be divided between all supplies including ones made for no consideration.

Alternatively, consideration incurred in providing admission to members and complimentary admissions would need to be excluded from determining the cost of supply for the other classes of admission.

Detailed reasoning

The CCC document does not explain the appropriate treatment of supplies provided for no consideration in determining the cost of supply for section 38-250 purposes.

Paragraph 233 of the CCC document states in step 1 of calculating cost of making a supply to "Estimate the total number of admissions (all classes) that will sell". You contend that complimentary admissions and member admissions are provided for no consideration and therefore are excluded from the cost of supply calculation because they are not 'sold'. Further, some of these admissions relate to consideration provided for separate taxable supplies of memberships and therefore should be excluded from determining the cost of supply for ticketed admissions.

Paragraph 234 of the CCC document states in step 1 of calculating cost of making a supply to "Divide the projected costs by the total number of admissions to obtain the cost of supplying an admission." This suggests that admissions don't necessarily need to be 'sold' to be included in determining the cost of supplying an admission.

Paragraphs 213 to 215 of the CCC document outline the cost of supply calculation for 'season tickets'. The CCC document regards season tickets as a separate class of ticket where the cost of supply of a season ticket needs to be determined on the number of admissions the season ticket allows. Your provision of membership admissions has a similar characteristic to a season ticket where members are entitled to multiple admissions. The consideration provided for the membership is for supplies of all the benefits of membership including admission. You will incur costs for providing these admissions that need to be taken into account when determining the cost of supply of ticketed admissions.

To accurately determine the cost of supply for admissions all the direct costs related to the supply of admission need to be included as well as a reasonable apportionment of indirect costs. These costs need to be divided by all supplies of admission (including the 'free' supplies).

Alternatively the cost of supply for member and other complimentary admissions would need to be excluded from the calculation of the cost of supply of the other classes of admission.

Issue 1 Question 6

Summary

Each individual supply is assessed separately when determining the cost of supply for section 38-250 of the GST Act purposes. However the apportionment of costs to determine the cost of supply must be done on a reasonable basis. Including the full cost of construction and operation of the attraction against the supply of each individual admission is not a reasonable apportionment of costs.

Detailed reasoning

Sub-paragraph 38-250(2)(b)(ii) of the GST act refers to 'acquiring the thing supplied'.

Paragraph 18 of the CCC document 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.

'Acquiring the thing supplied' and the 'cost of providing something' refers to an individual supply. In your case this would be an individual admission.

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.

Including the full cost of construction and operation of the attraction to each individual supply of admission is not a reasonable basis of apportionment of costs and would be a methodology that would not be acceptable to the Commissioner.

Issue 2 Question 1

Detailed reasoning

Section 105-65 of Schedule 1 to the TAA only has application when there has been an overpayment of GST.

The Commissioner has not accepted your proposed methodology outlined in Issue 1 question 1 of deciding the 'cost of supply' used to determine if the supply of admissions is GST-free under section 38-250 of the GST Act. As a result an overpaid amount of GST has not been identified and accordingly, section 105-65 of Schedule 1 to the TAA does not apply.