Edited version of your written advice

Authorisation Number: 1013131050708

Date of advice: 25 November 2016

Ruling

Subject: Goods and Services Tax (GST) and Nominal Consideration

Question 1

Is the methodology designed by you to determine the cost of making a supply in accordance with paragraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the methodology that you designed to determine the cost of making a supply is in accordance with paragraph 38-250(2)(b)(ii) of the GST Act.

Question 2

Is the methodology designed by you to determine whether a supply in a specific service line is GST-free in accordance with paragraph 38-250(2)(b)(ii) of the GST Act?

Answer

No, the methodology that you designed to determine whether a supply in a specific service line is GST-free is not in accordance with paragraph 38-250(2)(b)(ii) of the GST Act.

Relevant facts and circumstances

You are an endorsed charity registered for GST.

You operate an specified clinic and offer a range of general practice services.You offer different discounts, ranging from 10% to 30%, for different categories of recipients.

In calculating the cost of providing your services, you based your calculation and methodology on your previous year audited results.

You split the revenue for each specific service line into 'total revenue not eligible for a discount' and 'total revenue eligible for a discount'.

For wages costs, you either allocated them directly to specific service line items or apportioned them based on the average time spent by unit for each service item of revenue.

You allocated direct costs of goods sold (COGS) to each respective line item of revenue.

You then assigned indirect costs to each revenue line based on the percentage of revenue earned.

You assigned a portion of marketing and administration expenses to each revenue line through a combination of number of employees and time spent by support functions.

For each specific line of services, you totalled up the costs of delivery (not eligible for discount) and costs of delivery (eligible for discount). The total revenue for each specific line of services is divided by the corresponding total cost of delivery for each specific line of services. Where the result is less than 75%, you then treat all services in that specific line of services GST-free. For example:

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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

A New Tax System (Goods and Services Tax) Act 1999 Division 38

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-250(2)

A New Tax System (Goods and Services Tax) Act 1999 subparagraph 38-250(2)(b)(ii)

A New Tax System (Goods and Services Tax) Act 1999 Division 40

Reasons for decision

Section 7-1 of the GST Act provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides that a supply is a taxable supply if:

● it is for consideration; and

● it is made in the course or furtherance of an enterprise that the supplier carries on; and

● it is connected with the indirect tax zone; and

● the supplier is 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.

Input taxed supplies are outlined in Division 40 of the GST Act and do not apply to non-commercial supplies by a charitable institution.

GST-free supplies are outlined in Division 38 of the GST Act and section 38-250 deals with the non-commercial activities of charitable institutions. Subsection 38-250(2) of the GST Act states that 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 GST inclusive market value of the supply; 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.

You are an endorsed charity for GST purposes. Your supplies of general practice services are not supplies of accommodation.

Under subparagraph 38-250(2)(b)(ii) of the GST Act, each supply you provide would be GST-free if the consideration for that supply is less than 75% of the consideration you provided for acquiring the thing supplied.

The Tax Office has issued the GST Industry Issues - Non-commercial activities of charities, cost of supply and market value tests (the Guidelines) to assist charities and other organisations in establishing whether their supplies are GST-free under section 38-250 of the GST Act.

Working out the cost of providing supplies

Paragraph 18 of the Guidelines states that 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

You have advised that in calculating the costs of providing your supplies, you used the previous year audited results (revenues). You allocated your direct costs, such as wages and direct COGS, to the particular supply of general practice services.

For the indirect costs you apportioned these across the different types of services based the percentage of revenue earned. For the marketing and administration expenses you apportioned these expenses to each revenue line based on the number of employees and time spent supporting the functions of that revenue line.

We consider that your methodology used in determining the cost of making a supply of general practice services is in line with the Guidelines and therefore is in accordance with paragraph 38-250(2)(ii) of the GST Act.

Determining whether a supply is GST-free

Section E of the Guidelines outlines the methodology to determine whether a supply by a charity is GST-free or taxable. The methodology highlights two steps:

1. working out the cost of making the supply; and

2. working out whether a supply is GST-free.

Section E also provides examples of applying the methodology in circumstances involving different classes of a type of supply where discounts and concessions are given. For examples different classes of tickets where there is a class of ticket for pensioners and students or different classes of admission which include concessional admission. In both of the examples, the price for each ticket or admission regardless of the class that it falls in is assessed against the cost of providing that particular ticket or admission (the supply).

Your previous year audited results (revenues) and your methodology of determining the cost of making a supply show that it is possible and reasonable for you to compare what you charge, including with or without discounts, for making a supply with the cost of making that supply.

Using the methodology outlined in Section E of the Guidelines, the results for each class of a particular general practice supply for a weekday would be as follows:

As the fees for 'consultation' on the weekend and at night time are different to the fees for weekday, you would need to perform similar calculations as per the table above to ascertain whether each supply of the different types of consultation including different discounts is GST-free in accordance with paragraph 38-250(2)(b)(ii) of the GST Act.

Furthermore, as you provide other types of general practice services with and without discounts, you would need to perform similar calculations to the table above to ascertain whether each supply of the different types of general practice services with different discounts is GST-free according to paragraph 38-250(2)(b)(ii) of the GST Act.

Therefore based on the above explanation, the methodology you designed to determine whether a supply in a specific service line is GST-free is not in accordance with paragraph 38-250(2)(b)(ii) of the GST Act.