Edited version of your written advice

Authorisation Number: 1051321518333

Date of advice: 19 December 2017

Ruling

Subject: GST and non-profit sub-entities

Question 1

Can the Club treat its ‘Unit A’, ‘Unit B’ and ‘Unit C’ (the Units) as non-profit sub-entities pursuant to Division 63 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No, the Units cannot be treated as non-profit sub-entities because the requirements under section 63-15 have not been satisfied.

Question 2

Are supplies made by the Club subject to goods and services tax (GST)?

Answer 2

Yes, any taxable supplies made by the Club, including those made through its Units, are subject to GST.

Relevant facts and circumstances

The Club is an incorporated association under the Association Incorporation Act 1984. The Club is registered for goods and services tax (GST) and is a non-profit entity that must apply its funds and assets solely in pursuance of its objects, and must not conduct its affairs so as to provide a pecuniary gain for any of its members.

The Club’s objects are to encourage and promote a particular sport and to gather like-minded people together.

The Club is not registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC). However, the Club has self-assessed to be an income tax exempt non-profit body under item 9.1 of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997). This means that the Club is established for the encouragement of a game or sport and satisfies the special conditions under section 50-70 of the ITAA 1997.

The Club’s regular activities include racing, sport’s schools, sport’s clinics, social dinners, raffles, hall hire, operating a bar and kitchen, and an annual sports competition. The Club has categorised these activities into three units: ‘Unit A’, ‘Unit B’ and ‘Unit C’.

There is a small committee of people running the Club and its activities, with club meetings held every month. A part-time manager is also employed to assist with racing and the operation of the bar and kitchen.

At present, each unit has its own Australian Business Number (ABN) but none of the units are currently registered for GST.

Unit A

Through Unit A, the Club conducts regular races for members, and runs a School to the general public from the clubhouse. Students of the School receive automatic membership to the Club.

Unit B

Through Unit B, the Club runs a one day fund raising activity. It includes a full day of racing and events promoting the sport along with food, entertainment, refreshments and activities for participants and the general public. The proceeds of the fund raising activity contribute to the Club’s operation.

Unit C

Through Unit C the Club organises most of the following activities including:

● social dinners, including the Club’s Presentation Night (award giving), Australia Day BBQ and Christmas Party

● clinics – guest speakers are organised to come and talk to interested members about different sport related topics

● raffles – a raffle will be held after racing. Prizes are merchandise or a bottle of wine

● hall hire – to externals for private functions (e.g. birthday parties or weddings), and the Club’s bar and kitchen.

The Club maintains an independent system of accounting by using accounting software which allows it to split the transactions of each unit into separate reporting journals or financial statements.

The Club has not produced any evidence that it has recorded any choice to treat the three units as non-profit sub-entities (for example, in Club Minutes).

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 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 division 63

A New Tax System (Goods and Services Tax) Act 1999 section 63-5

A New Tax System (Goods and Services Tax) Act 1999 section 63-15

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 section 50-45 item 9.1

Reasons for decision

(For ease of reading, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise specified. Also, the Club may be described as the ‘core entity’ and the Unit A, Unit B and Unit C described as ‘Units’ of the core entity.)

Question 1

Summary

The Club does not satisfy the requirements in section 63-15 and therefore cannot treat its Unit A, Unit B and Unit C as non-profit sub-entities. The nature of the activities carried on by those units cannot be separately identified by reference to the nature of the activities carried on by the Club as the core entity. This is because the nature of the activities of Unit A and Unit B revolve around the particular sport that the Club promotes – regular and annual races for members and non-members, lessons for the general public and events promoting the sport. The nature of the activities of the Club are all of a kind, sort or class that promotes, fosters and develops that particular sport and sporting competition.

The nature of some of the activities of the Unit C, namely the social dinners, raffles, hall hires and bar and kitchen may be separately identifiable by their nature to the activities of the Club, however, Unit C also conducts sporting clinics which are not separately identifiable to the nature of the activities of the Club.

Therefore, the Club cannot choose to treat any of the Units as non-profit sub-entities as it has not met the requirement in paragraph 63-15(1)(a). Further, as the Club has not made a record of its choice to treat any of these units as non-profit sub-entities, it also does not meet the requirement in paragraph 63-15(1)(c).

Detailed reasoning

Certain entities can choose to treat some (or all) of the separately identifiable branches of their organisation as if they were separate entities for GST purposes under Division 63. When this occurs, the core entity ceases to be responsible for these branches, for GST purposes.

You can choose to apply Division 63 if you satisfy the requirements of sections 63-5 and 63-15.

The Club meets the requirements in section 63-5 because it is exempt from income tax under item 9.1 of section 50-45 of ITAA 1997 and is currently registered for GST.

The issue remaining is whether the requirements in section 63-15 are met.

Subsection 63-15(1) requires that the branch:

(a) maintain an independent system of accounting; and

(b) can be separately identified by reference to:

(i) the nature of the activities carried on through the branch; or

(ii) the location of the branch; and

(c) is referred to in the entity’s records to the effect that it is to be treated as a separate entity for the purposes of the GST law.

If the requirements of paragraphs (1)(a), (b) and (c) are not met, the choice to treat the branch as a separate sub-entity for GST purposes ceases to have effect.

Independent system of accounting

In your case, the Club and its Units use an accounting system that allows it to maintain an independent system of accounting records, enabling it to extract required individual branch accounts (various income and expenses transactions) into separate reporting journals and financial statements. The accounting system allows the flexibility to easily distinguish and access all records held, thereby satisfying the requirement to maintain an independent system of accounting under paragraph 63-15(1)(a).

Separately identifiable by reference to the nature of the activities carried on through the branch, or by location

As Unit A, Unit B and Unit C are all conducted from the clubhouse; they cannot be separately identified by reference to their location.

The issue then is whether each Unit can be separately identified by reference to the nature of the activities carried on through the Unit.

The phrase ‘separately identifiable by reference to the nature of the activities’ and the individual words in that phrase are not defined in the GST Act. Therefore, it is necessary for us to consider the ordinary meaning of these words and their surrounding context.

The Australian Oxford Dictionary, 2004, 2nd edn, Oxford University Press defines ‘nature’ to be ‘things of a kind, sort or class’. So, ‘nature of the activities’ as a phrase indicates activities of a kind, sort or class.

The Supplementary Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill (No. 2) 1999 (the Supplementary EM) provides that Division 63 was inserted to enable certain non-profit entities to have greater structural flexibility with regard to GST registration. It states in paragraph 3.3 that:

“Many charitable organisations have numerous divisions, branches or committees which do not meet the definition of an entity as defined in the GST Act. Often, these smaller units of the organisation work independently of the core entity. The core entity will often exercise little or no effective control over the unit, with the unit producing its own accounts and otherwise managing its own affairs. Given the large numbers of these independent units (thousands in some cases), the current law imposes a large compliance burden on these organisations, requiring them to bring together GST accounts for all of the units at the end of each tax period. Further the core entity often will have little capacity to ensure that the accounts of the units are correct due to the limited control that they exercise over them”. (Bold added for emphasis).

The Supplementary EM suggests that the intention of Division 63 is to reduce compliance costs for organisations with a large number of independent units over which the organisation has little or no control, to ensure that the GST accounts of the units are correct. It is not intended to operate as a mechanism allowing an entity to divide its activities amongst non-profit sub-entities, each then coming under the GST registration turnover threshold.

Further, paragraph 3.12 of the Supplementary EM states:

for a branch to be considered a non-profit sub-entity it must be...separately identifiable either because the activities carried on by the branch differ from other activities carried on by the entity, or because the branch is in a different location…(bold added for emphasis).

In this case, the following activities carried on through the Units cannot be separately identifiable by reference to the nature of their activities:

● Unit A - races and school

● Unit B – one day fund raising activity (including races)

● Unit C - clinics.

The nature of the activities of the Club are all of a kind, sort or class that promotes, fosters and develops a particular sport and also has a distinctive competitive nature as a sporting club.

In addition, there seems to be no independence of control over the Units where a small committee run the whole Club with club meetings held every month. This suggests that it is ultimately the same small committee who approves and manages the affairs of all of the Units. As such, the Units are less likely to be separate to the core entity.

Recording of choice or decision

Since Unit A, Unit B and Unit C do not meet the requirements under either sub-paragraphs 63-15(1)(b)(i) or (ii), any choice made by the Club to treat these Units as non-profit sub-entities is not effective as per subsection 63-15(2).

In any case, the Club is required to have made and recorded the choice in its records. The Club has produced legal advice received as evidence of its choice to treat the Units as non-profit sub-entities. However, unless and until the Club makes a decision to follow that advice, and that decision is reflected in the records of the Club (for example in the Club’s minutes), the requirement in paragraph 63-15(1)(c) is not met.

Overall, none of the Units can be treated as non-profit sub-entities because the requirements under section 63-15 have not been satisfied. As such, the Units remain a part of the core entity.

Question 2

Summary

The Club is the entity that is treated as the legal entity for GST purposes. The Club is registered for GST. Unit A, Unit B and Unit C are not capable of being treated as non-profit sub-entities and are part of the Club for GST purposes. Any supplies that the Club makes, including those supplies made through Unit A, Unit B and Unit C, will be subject to GST where the requirements in section 9-5 are met.

Detailed reasoning

Under section 9-5 you make a taxable supply if:

(a) you make the supply for consideration

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

(c) the supply is connected with Australia; and

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

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

Section 23-5 provides that you are required to be registered if:

(a) you are carrying on an enterprise; and

(b) your GST turnover meets the registration turnover threshold.

The term ‘enterprise’ is defined in subsection 9-20(1) of the GST Act to include, amongst other things, ‘an activity, or series of activities, done in the form of a business’. Your GST turnover meets the registration turnover threshold if your current and projected GST turnover for a financial year is over the turnover threshold of $150,000 for a non-profit body.

The Club is correctly registered for GST because:

● it is conducting an enterprise in the form of a business as a non-profit sporting club that has trading activities (e.g. bar facilities), provision of services to members (school, social dinners and clinics) and the nature of the activities are businesslike; and

● its GST turnover is also above the registration turnover threshold.

From the facts provided, the Club’s supplies are taxable under section 9-5 provided that:

(a) it makes all supplies for payment

(b) the supplies are made in the course or furtherance of its enterprise to support continuing operation of the Club

(c) the supplies are connected with Australia

(d) it is registered and required to be registered for GST, and

(e) the supplies are not GST-free or input taxed.

The Club is required to remit GST to the Australian Taxation Office (ATO) on taxable supplies it makes, but is also entitled to claim GST credits for GST paid on purchases it makes in carrying on its enterprise.

Additional Information

Please note that paragraph 155 of Miscellaneous Taxation Ruling MT 2006/1The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides that an entity is only entitled to one ABN even though the activities or series of activities it conducts may amount to several separate enterprises. It is the entity and not the enterprise that is entitled to an ABN.

However, there are two exceptions to this rule. The first exception is if a part of the entity is taken to be an entity itself. For example, a non-profit sub-entity is part of a larger entity. A non-profit sub-entity is, for the purposes of the ABN Act, taken to be an entity and is taken to carry on an enterprise. The second exception is if the entity is a legal person that acts in different roles or capacities.

Based on the information provided, there is only one entity which is the Club. For the reasons expressed above, Unit A, Unit B and Unit C do not qualify as non-profit sub-entities.

Accordingly, Unit A, Unit B and Unit C are not entitled to individual ABNs, but are considered part of the Club. This means the ABNs for Unit A, Unit B and Unit C must be cancelled and all supplies accounted for through the ABN of the Club.