Edited version of your private ruling

Authorisation Number: 1012500886000

Ruling

Subject: GST treatment of membership fees

Question 1

Are membership fees payable by members to X consideration for supplies that are partly taxable and partly GST-free for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No, membership fees payable by members to X are not consideration for supplies that are partly taxable and partly GST-free for the purposes of the GST Act.

Question 2

If membership fees are consideration for supplies that are partly taxable and partly GST-free, should the value upon which GST is calculated on the supply of memberships be calculated pursuant to section 9-80 of the GST Act?

Answer 2

As membership fees are not consideration for supplies that are partly taxable and partly GST-free, the issue of whether the value upon which GST is calculated on the supply of memberships should be calculated pursuant to section 9-80 of the GST Act does not arise.

Question 3

If membership fees are consideration for supplies that are partly taxable and partly GST-free, should the taxable proportion in the formula specified in section 9-80 of the GST Act be determined annually according to the total GST-exclusive value of taxable supplies sold by X as a proportion of total sales (exclusive of GST) by X for the same period and updated annually and applied to supplies of memberships for the ensuing 12 months until the next year-end review is conducted?

Answer 3

As membership fees are not consideration for supplies that are partly taxable and partly GST-free, the issue of annual determination and application of the taxable proportion in the formula specified in section 9-80 of the GST Act does not arise.

Relevant facts and circumstances

Applicant:

X supplies a range of supplies to X's members. X is registered for GST in Australia.

Memberships:

X supplies memberships in return for annual GST-inclusive membership fees. A member may acquire supplies from X.

Conditions:

The terms of a membership are set out in the Conditions.

Submissions made in the ruling request:

X submitted that, based on the Conditions, X supplied the right to acquire supplies from X.

It was further submitted that the supply to the members of the right to acquire supplies from X is partly taxable and partly GST-free.

It was submitted that the supply of a membership by X should be treated as a 'mixed' supply because the taxable component and GST-free components are each sufficiently significant.

In relation to determination of the 'proportion of the actual supply that represents the value of the taxable supply' in the definition of 'taxable proportion' in subsection 9-80(2) of the GST Act the ruling request referred to Goods and Services Tax Ruling GSTR 2001/8 which (Paras 92-94) allows the use of any reasonable method to apportion consideration and (Paras 97 and 109) direct methods of apportionment based on the comparative price of each part if it were supplied on its own, relative to the whole payment received.

Further submissions:

The ATO provided a draft legal reasoning document to X's adviser which stated that:

· based on the Conditions, X supplies a number of rights to a member, but not a right to acquire supplies from X;

· applying GSTR 2003/8, a 'right' generally means an entitlement to be treated a certain way and X does not grant to a member an entitlement to acquire supplies; and

· the suggestion that X supplies to a member the right to acquire supplies is inconsistent with contract law.

X's adviser made further submissions which referred to the various rights which the ATO considered, are granted by X to a member. It was submitted that those rights can only be viewed as ancillary, integral or incidental to the dominant right to acquire supplies from X.

It was submitted that the dominant supply provided by X (for which the membership fee is consideration) is the supply to members of the right to be able to acquire supplies from X. A footnote to that submission referred to paragraph 102 of GSTR 2003/8:

102. In characterising supplies of membership subscriptions it is necessary to determine what in substance and reality is supplied in return for the subscription payment. The characterisation of the supply does not depend on what an individual member subjectively paid the subscription for.

The submissions then addressed each of the rights which the ATO considered X granted to a member based on the Conditions. It was submitted that X makes a composite supply (comprising the dominant supply of the right to acquire supplies and the ancillary rights) and that this composite supply formed part of a larger mixed supply of membership rights which includes the right to acquire supplies from X.

The draft legal reasoning document referred to the discussion of the supply of membership subscriptions in paragraph 102 of GSTR 2003/8 (see above) and to a footnote to paragraph 102 which cited British Railways Board v. Customs and Excise Commissioners [1977] WLR 588 which held that a student identity card which a student could purchase from the British Railways Board conferred the right to make any journey on the Board's network in second class at half the standard second class fare. In the further submissions X's adviser submitted that X's membership operates in a manner similar to the student identity card in British Railways Board:

In particular the membership fee is in fact part-payment in advance for supplies to be acquired…

If the membership fee is considered as a part payment in advance for supplies, the GST treatment of the membership fee should correspond with the GST treatment of the supplies subsequently acquired.

…

Accordingly, should the Commissioner disagree with our primary submission that X's membership fee is a mixed supply of rights to acquire taxable and GST-free supplies, then, in the alternative, we submit that the membership fee is a part-payment in advance for taxable and GST-free supplies pursuant to the British Railway Board case put forward by the Commissioner. The membership fee is therefore partly taxable and partly GST-free and should be apportioned in a fair and reasonable manner in accordance with section 9-80 of the GST Act.

Meeting with X and X's adviser:

At this meeting X's adviser submitted that, notwithstanding the terms of the Conditions, X supplies to each member a right that was so obvious that it was unnecessary to refer to it in the Conditions.

The ATO stated that the ATO considered that the terms and conditions of membership were set out exclusively in the Conditions and that the Conditions do not indicate that X grants to each member an enforceable right to acquire supplies. In fact the only time the Conditions refer to rights is where X reserves certain rights (e.g. to refuse membership). In relation to the acquire supplies by members the Conditions merely state that members 'may' acquire supplies.

Relevant legislative provision:

A New Tax System (Goods and Services Tax) Act 1999 9-30(1)(b).

Reasons for decision:

Question 1

Summary

The reference in paragraph 9-30(1)(b) to a supply of a 'right' means an entitlement to be treated a certain way and includes both proprietary and personal rights.

The Conditions do not state that X supplies to each member the right to acquire supplies from X. Nor are the rights granted to each member by the Conditions ancillary to the supply of a right to acquire supplies from X. The omission from the Conditions of any grant of a right to acquire supplies is deliberate and made for sound commercial reasons.

The further submission confuses what a member subjectively pays a membership fee for with what in substance and reality is supplied by X in return for the membership fee.

The ATO does not agree with the alternative submission that X's membership operates in a manner similar to the facts in British Railways Board v Customs and Excise Commissioners [1977] WLR 588 and that consequently the membership fee is part-payment in advance for taxable and GST-free supplies.

Detailed reasoning

Paragraph 9-30(1)(b):

In the ruling request it was submitted that, to the extent that the supply by X to X's members constitutes the right to acquire GST-free supplies in Australia, the supply of such rights is GST-free pursuant to paragraph 9-30(1)(b) of the GST Act. Paragraph 9-30(1)(b) states:

A supply is GST-free if:

(a) it is GST-free under Division 38 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

ATOID 2005/184 states that the grant of a call option over land which could be supplied GST-free is GST-free pursuant to paragraph 9-30(1)(b) of the GST Act because the supply of the call option was the supply of a right to receive a supply of property which would be GST-free.

Goods and Services Tax Ruling GSTR 2003/8 discusses the meaning of 'right' in the GST Act:

What is a right?

50. The word 'right' is not defined for GST purposes and has a very broad meaning under the general law. A 'right' has been defined as 'generally, a benefit or claim entitling a person to be treated in a certain way'.

Alternative view

51. Some commentators have raised whether supplies of rights for GST purposes should be restricted to supplies of proprietary rights. Reference has been made to cases decided in a stamp duty context where personal rights have been held not to be 'property' as defined under the relevant legislation.

52. In the Commissioner's view, there is no basis for limiting the operation of item 4 to supplies of proprietary rights. The stamp duty cases were decided in the context of provisions containing specific references to property and against the background of conveyance duty applying generally to instruments transferring interests in property.

53. For instance, under the general law certain licences (such as grocer, tavern and fishing licences) have been held to involve merely personal rights. Supplies of these types of licences in the Commissioner's view would involve supplies of rights for the purposes of item 4.

Footnote 14AB to Para 50 in GSTR 2003/8 indicates that the definition referred to in Para 50 appears in the Australian Legal Dictionary (Butterworths, 1997).

The material referred to above indicates that a 'right' generally means an entitlement to be treated a certain way and includes both proprietary and personal rights.

The supply made by X:

It was submitted in the ruling request that X supplies the right to acquire supplies from X.

Goods and Services Tax Ruling GSTR 2006/9 includes Proposition 16 - the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply - and states (Para 222):

Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

In the present case the agreement between X and a member is set out in writing in the conditions of membership. GSTR 2003/8 states (Paras 101 and 105):

Supplies of membership subscriptions can be difficult to characterise as there may be elements of services, rights, or supplies provided by the supplier. The principles outlined in GSTR 2001/8 are relevant in analysing a supply to determine whether it comprises separately identifiable parts that should be treated as supplies in their own right.

There may be situations where the supply for consideration in respect of membership subscriptions is the supply of a right, or a combination of a supply of a right and a supply of services that are to be treated as separately identifiable parts of the supply. It will be a case of weighing up what is supplied in each case to determine the supply for which the subscription amount is consideration

GSTR 2003/8 contains examples of a membership fee which is consideration for the supply of services (e.g. sponsoring conferences for members, a library service for members, plus periodic journals issued to members (Para 103)) and a membership fee which is consideration for the supply of a right (a museum membership subscription which entitles the member to enter affiliated museums (Paras 106-7)).

Based on the conditions we consider that the membership fee is consideration for the supply of rights by X to each member. Applying the principles in Goods and Services Tax Ruling GSTR 2001/8, we consider that the conditions do not state that X supplies to members the right to acquire supplies from X. The only reference to acquisition of supplies in the Conditions is that only members 'may' acquire supplies.

Further submissions - the rights identified by ATO are merely ancillary, integral, or incidental:

In further submissions X's adviser submitted that the rights which the ATO considers that X supplies to each member pursuant to the Conditions are merely ancillary, incidental, or integral to the dominant supply of a right to acquire supplies from X and have no inherent value without that dominant supply.

We consider that all of the terms of the arrangement between X and each member are recorded in the Conditions.

We also consider that if X agreed to supply to each member a right to acquire supplies which was the dominant supply to which all other rights supplied by X to each member were merely ancillary then that supply of a right to acquire supplies would have been included in the Conditions. It would be odd for X to include in the Conditions the grant to each member of a number of ancillary rights but to omit any reference to the dominant right to which those other rights are ancillary.

We further consider that the omission from the Conditions of any grant of a right to acquire supplies is deliberate and made for sound commercial reasons. Chitty on Contracts (31^st Edition) deals with the formation of a contract via offer and acceptance and, in relation to the offer, discusses the distinction between an offer and an invitation to treat (Para 2-008):

A communication by which a party is invited to make an offer is commonly called an invitation to treat. It is distinguishable from an offer primarily on the ground that it is not made with an intention that is to become binding as soon as the person to whom it is addressed simply communicates his assent to its terms.

Further submissions - composite supply:

In the further submissions it was submitted that X makes a composite supply to each member, i.e. a dominant supply of a right to acquire supplies plus certain ancillary rights (i.e. those rights identified in the ATO's analysis of the Conditions).

In our view X does not supply to each member the right to acquire supplies, so the issue of whether other rights are merely ancillary to the supply of such a right does not arise.

Further submissions - what members are paying their membership for:

This further submission in our view confuses what a member subjectively pays the membership fee for with what in substance and reality is supplied by X in return for that membership fee. GSTR 2003/8 states that the test in relation to membership subscriptions is what in substance and reality is supplied, not what an individual member subjectively thinks he or she is paying the subscription for:

102. In characterising supplies of membership subscriptions it is necessary to determine what in substance and reality is supplied in return for the subscription payment. The characterisation of the supply does not depend on what an individual member subjectively paid the subscription for.

A footnote to the second sentence in paragraph 102 of GSTR 2003/8 refers to British Railways Board v Customs and Excise Commissioners [1977] WLR 588. There the VAT Tribunal had held that VAT was payable on the student card supplied for £1.50 because, as a question of fact, Miss Owen paid the £1.50 for the right to obtain supplies of transport at reduced prices (p. 591D) and the Divisional Court upheld the VAT Tribunal's decision as one of fact for which the Tribunal was the final authority (p. 591E). The British Railways Board successfully appealed to the Court of Appeal where Denning MR rejected the Divisional Court's approach (p. 591F):

I do not myself think that it is a matter of fact for the tribunal….Either value added tax is payable on all these sums of £1.50, or on none of them. It cannot depend on the state of mind of any individual student by asking him or her: what did you pay the £1.50 for? It must depend on the legal affect of the transaction considered in relation to the words of the statute. And that is a question of law.

Browne LJ also decided that the Divisional Court was incorrect to treat the question to be decided as one of fact (p. 595D):

I think the first question in this case is whether the value added tax tribunal and the Divisional Court were right in treating the question to be decided as simply a question of fact. In my opinion they were not. Of course, the tribunal has the duty and responsibility of deciding all questions of fact and an appeal to the Divisional Court and this court lies only on questions of law. In some cases, there may be a dispute as to the primary facts, on which the decision of the tribunal cannot be challenged on appeal. But in this case there is no dispute as to the primary facts. The question is whether, on the true construction of the Finance Act 1972 as applied to the undisputed facts and documents, this was a zero rated supply. This is a question of law.

Denning MR rejected a subjective test in favour of the 'legal effect of the transaction entered into' and Browne LJ referred to the application of the relevant legislation 'to the undisputed facts and documents'. In our view in the present case the relevant document is the Conditions which are stated to describe the conditions of membership and the 'legal effect of the transaction entered into' comprises the rights expressly granted to each member pursuant to the Conditions which do not include a right to acquire supplies. Although a member may consider, subjectively, that he or she pays the membership fee to X in return for the right to acquire supplies, that is not the legal effect of the transaction as set out in the Conditions.

Further submissions - membership fee is part payment for GST-free and taxable supplies:

As noted above, GSTR 2003/8 refers (Para 102, footnote) to British Railways Board v Customs and Excise Commissioners in support of the propositions that it is necessary to determine what in substance and reality is supplied in return for payment of a membership subscription and that the characterisation of that supply does not depend on what an individual member subjectively paid the subscription for (refer British Railways Board per Denning MR (p. 591F) and Browne LJ (p. 597 H)).

X's adviser made the following further submission:

X's membership fee operates in a manner very similar to the facts presented in British Railways Board. In particular, the membership fee entitles the member to acquire supplies…Based on the outcome of British Railways Board, it may be determined that the membership fee paid by members is in fact a part-payment in advance for supplies to be acquired from X…

We do not agree with the submission that X's membership operates in a manner similar to the facts in British Railways Board. In British Railways Board Denning MR described the student card scheme as the supply of a right (p. 590E):

…the board in 1974 promoted a scheme by which a student should pay £1.50 down and in return get a right to travel half-fare for the next six months

and referred to the first condition appearing in the booklet of conditions issued with the card (p. 591B):

Upon presentation of a valid student identity card…together with a properly completed request form…at station ticket offices, single/return tickets are issued to the student named on the card at a special reduced price, which will normally be half the second-class ordinary adult price appropriate to the required journey…

Similarly, Browne LJ stated (p. 598 D):

…there is a lot to be said for the Tribunal's view that the consideration for Miss Owens' payment of £1.50 was the grant of a right to obtain tickets in the future at a reduced rate.

and Pennycuick J stated (p. 599D):

The Card conferred upon her the right over the current half-year to make any journey on the board's system second class at half the standard second class fare.

Thus the Court of Appeal considered that the Board made a supply of a right. X's Conditions do not state that X supplies to the member a right to acquire supplies from X and do not contain a term equivalent to the first condition in the booklet issued with the student card in British Railways Board, i.e.

Upon presentation of a valid student identity card…together with a properly completed request form…at station ticket offices, single/return tickets are issued to the student named on the card at a special reduced price

Rather than stating that X supplies a right to acquire supplies to a member, X's Conditions merely state that members 'may' acquire supplies and that membership is revocable without cause, is subject to any and all rules adopted by X, and may be terminated at X's discretion.

The United Kingdom Court of Appeal then rejected the submission made on behalf of the Commissioners that the £1.50 was not consideration for the supply of transport (which was zero rated) but consideration for the grant of a right to buy railway tickets at a reduced rate, which was the supply of a service (taxable) (p. 597E). Denning MR stated that it was not correct to treat the £1.50 as if it was a separate payment for a separate service as the £1.50 was really part and parcel of the payment which the student makes for travelling on the railway (p. 592F). Browne LJ agreed with Denning MR (p. 598D):

…there is a lot to be said for the tribunal's view that the consideration for Miss Owen's payment of £1.50 was the grant of a right to obtain tickets in the future at a reduced rate. But I think that this is too narrow a view, and that the transaction should be looked at as a whole, including both the issue of the card and the later taking of a ticket. Looked at in this way, I agree with Lord Denning MR that the £1.50 should be regarded as part payment in advance for the supply of transport by rail.

Pennycuick J stated (p. 599E):

It is, of course, true that the card did not of itself alone entitle Miss Owen to make any journey at all. But equally the payment of half the standard fare for any particular journey…would not of itself alone have entitled her to make that journey. It was the card and the payment of half the standard fare which together enabled Miss Owen to travel half-price…It seems to me that the card was an integral part of the consideration for which transport was supplied and as such its supply fell to be zero rated….

In our view the decision in British Railways Board that the £1.50 was part payment for a supply of travel was predicated on the Court of Appeal's finding that the Board made a supply of a right, i.e. as the student card conferred a right to travel for half fare, the £1.50 was considered to be part of the consideration for any supply of travel purchased using the student card. For the reasons set out above, we do not consider that X's Conditions grant a right to each member to acquire supplies. Consequently, we do not accept the alternative submission that the membership fee paid to X operates in a manner similar to the facts in British Railways Board and is part-payment in advance for taxable and GST-free supplies.

Question 2

As membership fees are not consideration for supplies that are partly taxable and partly GST-free, the issue of whether the value upon which GST is calculated on the supply of memberships should be calculated pursuant to section 9-80 of the GST Act does not arise.

Question 3

As membership fees are not consideration for supplies that are partly taxable and partly GST-free, the issue of annual determination and application of the taxable proportion in the formula specified in section 9-80 of the GST Act does not arise.