Edited version of private advice

Authorisation Number: 1012650708744

Ruling

Subject: GST and nominal consideration

Question 1

What is the methodology that needs to be used in determining the cost of making a supply of tickets to events under subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Refer to reasons for Decision

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 an endorsed charity registered for goods and services tax (GST).

• You present a variety of ticketed events.

• You are principally funded by a State Government; but are also funded through sponsorship and donations; as well as earned commercial income including bar sales, retail store sales and interest income.

• These income sources are used to fund the variety of artistic activities undertaken by you.

• You advise that the income received from tickets and performance income is less than 75% of the cost of producing these performances

• You are seeking clarification on the charging of GST for ticketed performances where the cost of the production exceeds the amount of ticket income.

• You acknowledge that a ruling cannot be made on all of your productions and an assessment would need to be made on each individual production to verify that ticket and performance income was less than 75% of the production cost of the performance.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 38-250

Paragraph 38-250(2)(b)

Subparagraph 38-250(2)(b)(i)

Subparagraph 38-250(2)(b)(ii)

Reasons for decision

Summary

The methodology used in determining the cost of supply test pursuant to paragraph 38-250(2)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is located in the Charities Consultative Committee Industry Issue Public ruling.

A supply of each type of ticket to an event is GST-free if the price charged is less than 75% of the cost of making a supply of that ticket to the event for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.

You cannot compare your total costs for a production of an event to your total income from tickets supplied to attend the event, to determine whether your supply of the tickets to the event are GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act.

Detailed reasoning

GST-free supplies

Section 38-250 of the GST Act deals with the non-commercial activities of charitable institutions. Subsection 38-250(2) of the GST Act states:

A supply is GST-free if:

(a) the supplier is an *endorsed charity, a *gift-deductible entity or a *government school; and

(b) the supply is for *consideration that:

(i) if the supply is a supply of accommodation - is less than 75% of the cost to the supplier of providing the accommodation; or

(ii) 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.

Note the terms with the asterisks are defined terms in the dictionary at section 195-1 of the GST Act.

Charity

Our records show that you have been endorsed by the Australian Taxation Office (ATO) as a charity for GST purposes and therefore are eligible to access certain GST charity concessions.

Subparagraph 38-250(2)(b)(ii) of the GST Act provides that a supply of something other than accommodation is GST-free where it is made by an endorsed charity, a gift-deductible entity or a government school and the consideration for the supply is less than 75% of the consideration the supplier provided, or was liable to provide, for acquiring the thing supplied (referred to as the cost of supply test).

Cost of Supply Test

The ATO has issued a public ruling on the cost of supply test to assist charities and other organisations in establishing whether a supply is GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act. This ruling can be found in the Charities Consultative Committee Industry Issue Public ruling which is located in the ATO website at ato.gov.au. The ruling states that in determining the consideration that a charity provided or was liable to provide in making a supply, the charity works out the amounts paid or payable by it. Those amounts will include all direct and a reasonable proportion of indirect costs incurred by the charity in making the supply. The ruling also provides that in working out these amounts, the following things cannot be included because they do not involve an actual outlay by the charity:

1. Depreciation of assets and

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

In order to determine whether or not a supply of tickets to the events you make is GST-free, you need to ascertain whether or not the consideration you receive for the supply is less than 75% of the consideration provided by you for making the supply.

Projected costs

Subparagraph 38-250(2)(b)(ii) of the GST Act states, amongst other things, that "consideration a supplier paid or was required to pay to acquire the thing supplied". We consider that these words mean in applying that subparagraph, a supplier must use costs which the supplier has incurred. For the performing arts sector, tickets or admissions are sold in advance before they incur all the costs for holding an event.

To establish whether or not you should charge GST on a supply of admissions, you need to apply subparagraph 38-250(2)(b)(ii) of the GST Act when you price your admission fees. This requires you to apply this subparagraph by using projected costs rather than actual costs. However, the use of projected costs may result in GST-free supplies whereas the use of actual costs may result in taxable supplies.

The ATO considers that it is not desirable for the sector to determine the GST on their supplies by applying subparagraph 38-250(2)(b)(ii) to projected costs of making the supplies first and then to actual costs later. This is because such an approach will create uncertainty for the suppliers and impose compliance costs to them.

The ATO has published a methodology for applying the cost of supply test for supplies made by charities in the cultural and performing arts sector where they cannot establish their actual costs at the time of supply. The methodology also provides that where actual costs are available, then those figures should be used.

The Charities Consultative Committee Industry Issue Public ruling under Section E. Cultural and performing arts sector discusses these issues and provides several examples. The following information (below) has been taken from this ruling and additional details added to assist you in following the appropriate methodology:

Methodology

To correctly calculate whether a supply is GST-free or taxable, charities must go through the following steps.

Step 1: Working out the cost of making the supply

Estimate the projected costs for a cultural program or event (eg for the 2014 year). Do this when the actual costs will not be known until after the supplies have been made. However, if actual costs are available they must be used.

We consider that when applying the cost of supply test, charities can include all direct costs and a reasonable apportionment of indirect costs. However, costs used must be real costs. In calculating the direct and indirect costs, you must not include any depreciation and imputed costs for things such as labour, donations and rent where you have not actually provided any consideration or incurred any real costs.

All projected costs must be realistic and must be aligned with other costing conducted when the charity determines admission prices and the costs of holding an event or program.

It is also expected that you would maintain and retain records that adequately document the process and information collected in establishing the cost of supply made for the purposes of subsection 38-250(2) of the GST Act.

Next you need to estimate the number of tickets (admissions) of all classes that will sell.

Divide the projected costs by the total number of tickets to obtain the cost of supplying a ticket.

Step 2: Working out whether a supply is GST-free

For each class of ticket, the charity should divide the price that is charged for a ticket in that class by the cost of supplying a ticket, worked out in step 1.

For example, you may have different classes of tickets selling for different prices (as follows):

a) student and pensioner tickets $25

b) Silver Reserve tickets $50

c) Gold tickets $100

If the price charged for a ticket of a class is less than 75% of the cost of supplying the ticket, it will be GST-free.

If the price charged is at or more than 75% of the cost of supplying the ticket, it will be subject to GST.

EXAMPLE - In relation to the proposed events

Working out the cost of making the supply

Estimate the projected costs in relation to the supply of the tickets to the events. Do this when the actual costs will not be known until after the supplies have been made. However, if actual costs are available they must be used.

The methodology requires that for each financial year, you need to:

• prepare a statement of your operating costs

• calculate all direct costs incurred by you in holding the event (for example direct labour and materials used, including costs of food consumed by participating entrants, volunteer supervisors and other paid employees). Expenses that do not directly relate to the events must be excluded from the calculation, and

• apportion any indirect costs that you may have incurred on a reasonable basis between the program and other activities undertaken by you (for example, this may include marketing, administration, office expenses, electricity, telephone and insurance).

In calculating the direct and indirect costs, you must not include any depreciation and imputed costs for things such as labour, donations and rent where you have not actually provided any consideration or incurred any real costs.

Next calculate the total number of tickets (admissions) in the event in the financial year. This number will include all tickets to the event.

Next divide the total expenditure (explained above) by the number of tickets to the event. This calculation will give you the cost of making a supply for each individual ticket.

For each financial year, the cost of making a supply of a ticket to an event is:

(Cost of making supplies)

(Total no. of tickets)

= [X] (say).

Please note that it is not a role of the private ruling to determine the accuracy of, for example, the amount of fee charged or the amount of costs incurred. In relation to the total actual costs, these costs should be broken down and detailed to ensure that only those direct and indirect expenses have been used that relate to the supply of tickets to the event. Also, that the indirect costs have been apportioned accordingly so that only expenses incurred in relation to making supplies of tickets to the events are included in the calculations.

Apportioning the costs

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.

Paragraph 76 of GSTR 2006/3 provides an example for paragraph 75:

76. An example of this is to be found in the decision of the New Zealand High Court in Commissioner of Inland Revenue v. BNZ Investment Advisory Services Ltd (BNZ case). The Court was required to consider the New Zealand GST 'principle purpose' test, under which an initial entitlement to input tax credits arises only if the principal purpose of the acquisition is to make taxable supplies. In that case the taxpayer's employees spent approximately 90% of their time giving taxable financial advice, and the taxpayer argued that this meant the principal purpose of its acquisitions was to provide taxable supplies. However, the High Court considered that an apportionment based on time spent was not an appropriate measure as the income and expenses did not directly relate to the giving of advice.

The Commissioner states in paragraph 77 of GSTR 2006/3 that the principles in the BNZ case are relevant in considering the apportionment methodologies:

77. Although the legislation in that case is not identical to the Australian GST legislation, the Commissioner considers that the principles are relevant. The BNZ case confirms the importance of selecting the most appropriate criteria when applying an apportionment method.

As outlined in paragraph 103 of GSTR 2006/3 indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. However, in all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Examples of indirect methods which may be appropriate are outlines in GSTR 2006/3 and include the following:

an overall, Entity - based general formula , based on the proportion of input taxed and non-input taxed revenues of the entity as a whole;

Revenue - based formulas which are more narrowly targeted than the entity-based general formula;

a combination of revenue-based formulas with direct methods; and

non-revenue-based indirect estimation methods.

Working out whether a supply is GST-free

If the price charged for each type of ticket to an event is less than 75% of the cost of making a supply of that ticket to the event (calculated above as [X]), then the supply will be GST free.

If the price charged for each type of ticket is at or more than 75% of the cost of making a supply of that ticket to the event, the supply will be subject to GST.

You cannot compare your total costs for a production of an event to your total income from tickets supplied to attend the event, to determine whether your supply of the tickets to the event are GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act.

Records

Charities must keep and maintain records that adequately document the process and information collected in working out the relevant cost of supply which the consideration of the supplies the charity makes is to be compared to.

For example, the cost of supply established and the methods used may be documented or minuted in the charity's books of account. This information should be captured in a way that will allow cross-referencing to accounting statements. It should also correspond to what is recorded on the charity's activity statements.

While you do not need to seek formal approval from the ATO where you conclude that the supplies of tickets to the events are GST-free, you must use the above guidelines to calculate the market value or cost of supply to make and support your decision.

Review of cost of supply

Charities should monitor the costs incurred in making the supply to ensure that they will respond promptly to any material changes in those costs in calculating their cost of supply.

Changes in conditions include, amongst other things:

n suppliers entering or leaving the market

n changes in quality of the supplies as a result of different consumers' expectation

n changes in input costs, and

n changes in prices charged.

Input costs include real costs such as direct and indirect costs incurred.