Edited version of your written advice

Authorisation Number: 1012933217237

Date of advice: 29 January 2016

Ruling

Subject: GST and supply of membership services to resident and non-resident members.

Question

Is X liable to pay goods and services tax (GST) on the membership fees?

Answer

X is liable to pay GST on the membership fees for Australian residents as the fees will be consideration for a taxable supply of services X makes to the Australia residents under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

X is not liable to pay GST on the membership fees for non-resident members who are not in Australia when the thing supplied is done because X's supply to the non-resident members would be a GST-free supply.

NOTE:

By the term 'Australia', we refer to the 'Indirect Tax Zone' as defined in section 195-1 of the GST Act.

Relevant facts and circumstances

X is a not for profit entity whose mission is to support the growth an open-source online learning platform, by providing users services, and giving direction and resources for new developments. X is incorporated in Australia under the Incorporations Act.

X is not registered for GST. Membership fees will be likely to reach $150,000 in the next 11 months.

X is not a charitable institution, not a charitable fund and not a gift-deductible entity.

The members of X's management committee can reside in various countries worldwide. All meetings will be conducted using online discussion and chat forums, online conference forums and online voting mechanism.

X's Management Committee will manage Association activities through

• the members area of the website;

• includes capacity to provide documents (e.g. agendas, resolution information); manage voting; setup discussion forums for members; communicate via messages, email, announcements, forums; hold online real time discussion; archive records, and so on. All business activities can occur in or through the website.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Reasons for the decision:

Summary

The membership fee is consideration for the supply of services by X to Australian members and non-resident members.

The supply of services is the dominant supply made by X to each member and the right to subscription rates and voting points for each member is ancillary/incidental to that dominant supply of services.

X is liable to pay GST on the membership fees for Australian residents as the fees will be consideration for taxable supply of services X makes under section 9-5 of the GST Act.

X is not liable to pay GST on the membership fees for non-resident members who are not in Australia when the thing supplied is done.

Detailed reasoning:

Characterisation of X's supply:

We need to consider what in substance and reality is supplied by X in return for the membership fees. Goods and Services Tax Ruling (GSTR) 2003/8 states as follows:

101. Supplies of membership subscriptions can be difficult to characterise as there may be elements of services, rights, or goods 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.

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.

Paragraphs 103-104 of GSTR 2003/8 contain an example of a membership fee which is consideration for the supply of services as follows:

Example 1 - a professional membership subscription supplied to a non-resident

103. An Australian organisation supplies a professional membership subscription to a non-resident. The entity provides its members with:

·   promotion of the interests of the profession or its members to the general public;

·   advancing the knowledge of its members by sponsoring seminars or conferences;

·   access to members-only information;

·   library service including technical references or information;

·   periodic journals or magazines;

·   discounts on registration fees for conferences or seminars in Australia; and

·   the right to use post-nominals demonstrating membership of the entity.

104. The supply is characterised as a supply of services and not a supply that is made in relation to rights. Although there are incidental components of goods and rights, the dominant part of the composite supply is the supply of services. This is the supply for consideration

Paragraphs 106-107 of GSTR 2003/8 contain an example of a membership fee which is consideration for the supply of a right:

Example 2 - a museum membership subscription for use outside Australia

106. A museum in Australia sells a membership subscription to an Australian resident. The membership subscription only entitles the Australian resident to a discount on the entry fee for specified affiliated museums in Europe.

107. The supply is characterised as a supply of rights. The Australian resident is supplied with the right to a discount for use outside Australia. The supply is GST-free under paragraph (a) of item 4

From the facts we would consider that X is an Australian incorporated entity and carries on an enterprise in Australia.

Based on the rules of X, we consider that the membership fee is consideration for the supply of the membership services by X to Australian members and non-resident members.

In addition, membership fees also entitle the members to voting points.

Paragraph 105 of GSTR 2003/8 states:

105. 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.

Goods and Services Tax Ruling (GSTR) 2001/8 states as follows:

Mixed supply

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

Composite supply

17. In this Ruling, the term 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing.

Applying the principles in GSTR 2001/8 and in paragraph 105 of GSTR 2003/8, we consider that the supply of the above services is the dominant supply made by X to each member and that the right to subscription rates and voting points are ancillary/incidental to that dominant supply of services.

Taxable supply

GST is payable on a taxable supply. Section 9-5 of the GST Act provides that:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a term defined in section 195-1 of the GST Act.)

Based on the facts provided, X satisfies the requirements under paragraphs 9-5(b) and 9-5(c) of the GST Act as the supply of services is made by X, an Australian entity, in the course of an enterprise that it carries on in Australia, hence the supply is connected with Australia (paragraph 9-25(5) (b)).

Therefore, we need to consider whether the membership fee is consideration for the supply of services, and whether X is required to be registered for GST (paragraph 9-5((a) and (d) of the GST Act).

Paragraph 9-5(a) of the GST Act

Paragraph 9-5(a) of the GST Act requires that you make a supply for consideration.

The term 'consideration' for GST purposes is defined in section 9-15 of the GST Act as follows:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

…

(2B) For the avoidance of doubt, the fact that the supplier is an entity of which the *recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment, act or forbearance from being consideration.

Paragraph 67 in Goods and Services Tax Ruling (GSTR) 2001/6 provides that the nature of the nexus required between supply and consideration is as follows: a payment will be consideration for the supply if the payment is 'in connection with", in response to", or 'for the inducement of the supply".

In determining whether a sufficient nexus exists between a supply and a consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

We consider that members pay membership fees to receive X's services (as mentioned in the characterisation of the supply).

In this instance there is sufficient nexus between X's services to the members and the fee payments made by the members.

Accordingly paragraph 9-5(a) of the GST Act is satisfied.

Paragraph 9-5(d) of the GST Act:

Under section 23-5 of the GST Act, you are required to be registered if:

a) you are carrying on an enterprise, and

b) your GST turnover meets the registration turnover threshold.

Your GST turnover is your gross business income (not your profit), excluding any:

• GST you included in sales to your customers,

• sales that are not for payment and are not taxable,

• sales not connected with an enterprise you run,

• input-taxed sales you make, and

• sales not connected with Australia.

You reach the GST turnover threshold if either:

• your 'current GST turnover' - your turnover for the current month and the previous 11 months - totals $75,000 or more ($150,000 or more for non-profit organisations).

• your 'projected GST turnover' - your total turnover for the current month and the next 11 months - is likely to be $75,000 or more ($150,000 or more for non-profit organisations).

X's membership fees will be likely to exceed $150,000 in the next 11 months. In this instance X will be required to be registered for GST as its projected GST turnover will be above the GST registration threshold of $150,000 for non-profit organisations. Paragraph 9-5(d) of the GST Act is therefore satisfied.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Since the supply of membership services is not input taxed under the GST legislation, the next step is to consider if the supply is GST-free.

GST-free

Section 38-190 of the GST Act specifies the circumstances where the supply of things other than goods or real property for consumption outside Australia is GST-free. We consider that X's supply is neither supply of goods nor real property.

If your supply is a supply of services, items 2 and 3 in the table in subsection 38-190 (1) of the GST Act allow certain supplies to be made GST-free.

Under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2), a supply is GST-free where it is:

a supply that is made to a *non-resident who is not in Australia when the thing supplied is done; and

(a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with *real property situated in Australia; or

(b) the *non-resident acquires the thing in *carrying on the non-resident's *enterprise, but is not *registered or *required to be registered.

Under item 3 in the table in subsection 38-190(1) of the GST Act (Item 3), a supply is GST-free where it is:

a supply:

(a) that is made to a *recipient who is not in Australia when the thing supplied is done; and

(b) the effective use or enjoyment of which takes place outside Australia; other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with *real property situated in Australia.

We consider the supply of services listed in the characterisation of the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia.

Item 2 is applicable to supplies made to non-resident recipients. Item 3 is applicable irrespective of the residency of the recipient.

Precondition of Item 2 and Item 3

For the supply to be GST-free under Items 2 and 3 there is a condition that the recipient must not be in Australia in relation to the supply when it is done.

Goods and Services Tax Ruling GSTR 2004/7 (GSTR 2004/7) discusses when an entity is not in Australia when the thing supplied is done.

Paragraph 200 of GSTR 2004/7 as follows:

200. In this Part, we explain, in terms of specific entity types namely, individuals, companies, partnerships, corporate limited partnerships and trusts, when an entity is 'not in Australia'. We do this by describing when an entity is in Australia in relation to the supply.

Limitation of Item 2

As mentioned, Item 2 is applicable to supplies made to non-resident recipients. The scope of Item 2 is limited by subsection 38-190(3) of the GST Act which provides that a supply covered by Item 2 is not GST-free if:

• it is a supply under an agreement entered into, whether directly or indirectly with a non-resident and

• the supply is provided or the agreement requires it to be provided, to another entity in Australia.

We consider that M enters directly into an agreement with a non-resident when the Association grants a non-resident entity the membership

Is M's supply provided to another entity, and if yes, is the supply provided to that other entity in Australia?

Paragraphs 59 and 61 of GSTR 2005/6 provide guidance in relation to the expression "provided to another entity". Generally a supply is made to whoever you are contractually liable to perform the services for. However, a supply is provided to whoever obtains the actual effective use or enjoyment of the supply, that is, the actual beneficiary.

Paragraph 509 of GSTR 2005/6 provides that for the purposes of applying subsection 38-190(3), the focus is on the nature of the supply and the actual flow of that supply.

According to X's rules, X enters into an agreement with non-resident members to make supply of services to the non-resident members. There were no clauses in the rules indicating that non-members are eligible to receive the services or have voting rights. Hence subsection 38-190(3) of the GST Act does not apply to prevent the GST-free status of X's supply to the non-resident members.

In conclusion, so long as the non-resident members satisfy the condition that the non-resident members are not in Australia in relation to the supply when it is done, X's supply to the non-resident members should be GST-free under paragraph (a) of Item 2.

Item 3

Item 3 is applicable irrespective of the residency of the recipient.

Paragraph (a) of Item 3 has already been addressed above.

Paragraph (b) of Item 3 requires the place of effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia). We take a two-step approach to work out whether effective use or enjoyment of a supply takes place outside Australia. Firstly, we determine the entity to which the supply is provided (the providee entity). We then determine whether provision of the supply to the providee entity is outside Australia.  

As paragraph (b) of Item 3 refers to the effective use or enjoyment of the supply, it is necessary to inquire as to the entity that has the actual use or enjoyment of the supply. According to paragraph 41 in GSTR 2007/2, a supply is made to a recipient and provided to another entity if in the performance of the service (or in the doing of some thing) the actual flow of that supply is to an entity that is not the recipient entity with which the supplier made the agreement for the supply. That is while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity. 

The next step is to determine whether the effective use or enjoyment of the supply takes place outside Australia. Effective use or enjoyment of a supply only takes place outside Australia if there is provision of the supply to the providee entity outside Australia.  

We already consider that the supply of X's services is not a supply of work physically performed on goods situated in Australia or a supply directly connected with real property situated in Australia.

Hence if the recipient is not in Australia when the thing supplied is done, and the effective use or enjoyment takes place outside Australia, then Item 3 would be satisfied and M's supply will be GST-free.

In addition, subsection 38-190(4) of the GST Act extends the scope of item 3 by treating a supply that is made to a recipient who is in Australia in relation to the supply as being made to a recipient who is not in Australia if: 

a. it is a supply under an agreement entered into, whether directly or indirectly, with

an Australian resident; and

b. the supply is provided, or the agreement requires it to be provided, to

another entity outside Australia. 

Subsection 38-190(4) recognises that a supply under an agreement with an Australian resident may be provided, or be required by an agreement to be provided, to another entity. If that other entity is located outside Australia, subsection 38-190(4) requires the location test in paragraph (a) of Item 3 to take account of the location of that other entity. Paragraphs 54 to 58 and 186 to 197 of GSTR 2004/7 explain the application of subsection 38-190(4) with respect to Item 3 further. 

We consider that X enters into an agreement directly with an Australian resident when the X grants an Australian resident the membership.

It seems from X's rules that X enters into an agreement with members to make supply of services to the members. There were no clauses in the rules indicating that non-members are eligible to receive the services or have voting rights. Hence in the case of Australian resident members, subsection 38-190(4) of the GST Act does not apply to extend the GST-free status of X's supply.

In summary, the members need to satisfy the condition that they are not in Australia in relation to the supply when it is done and the effective use or enjoyment takes place outside Australia. Otherwise X's supply to the members will be taxable under section 9-5 of the GST Act.