Edited version of private advice

Authorisation Number: 1052214009342

Date of advice: 13 February 2024

Ruling

Subject: GST - costing of supply

Question 1

Is the methodology you provided to determine the GST inclusive market value of a supply fair and reasonable for the purposes of section 38-250 of the A New System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, your methodology to determine the GST inclusive market value of the supply is fair and reasonable. Please refer to Reasons for Decision for more detail.

Question 2

If the answer to Question 1 is yes, is the proposed method for determining the cost of item X provided to you appropriate for inclusion in the "cost-plus" method?

Answer

Yes, the proposed method for determining the cost of item X provided to you is appropriate for inclusion in the "cost-plus" method.

Relevant facts and circumstances

You are a charity that is registered with the Australian Charities and Not-for-profits Commission and endorsed for goods and services tax (GST) concession.

You are registered for GST.

Relevant legislative provisions

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

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

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

Reasons for decision

Detailed reasoning

All legislative references in this ruling are of the GST Act unless otherwise stated.

Question 1

Subsection 38-250 discusses the GST treatment of non-commercial activities of charities. Relevantly, it explains that a supply is GST-free if:

•         the supplier is an endorsed charity, a gift deductible entity or a government school (paragraph 38-250(1)(a)); and

•         if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of that supply if it is not supply of accommodation (subparagraph 38-250(1)(b)(ii)).

In this case, you are an endorsed charity. Therefore, your supply will be GST-free provided the consideration you received for the supply is less than 50% of the GST inclusive market value of the supply.

Consideration for the supply

Consideration is defined in section 195-1 to mean any consideration within the meaning of section 9-15 in connection with the supply or acquisition. Subsection 9-15(1) provides that consideration includes any payment, or any act or forbearance, in connection with a supply of anything or in response to or for the inducement of a supply of anything.

Therefore, the amounts you charge each of the recipients for your supply are consideration received by you for making a supply to each of the recipients.

The methodology

The ATO has issued a Market Value Guidelines in the Charities Consultative Committee Resolved Issues Document (the Guidelines) to assist charities and other organisations in establishing the GST inclusive market values of their supplies under subsection 38-250(1).

The Guidelines provide that in determining the GST inclusive market value of a supply, a charity must apply the following successive tests:

•         Firstly, the charity must establish whether the same supply exists in the open market. Where it does, the price of the supply as defined by the market is the market value that the charity should use. The other suppliers in the market may be charitable or profit-making organisations. It is the supply that is compared in the market, not the recipient of the supply or the provider of the supply. The comparison should be based on quality, quantity and conditions of the supply.

•         Secondly, if no other organisation offers the same supply, the charity may identify similar supplies that exist in the open market and calculate the market value of its supply by reference to the prices charged for those supplies. When establishing the market value of a service, the charity should seek to compare the services it offers with services of a similar nature and quality, of similar size or time length, and with similar conditions.

•         Thirdly, in the unusual event that a market value cannot be established using the same supply test and the similar supply test outlined above, the charity can seek approval from the Commissioner of Taxation to use a methodology to calculate the market value of the supply. However, in accordance with the Guidelines the Commissioner has approved the use by charities of the 'cost plus' method to work out the market value of a supply. Charities can only use this method if they cannot identify a same or similar supply to the one it makes.

It's important to note that these tests are successive tests for determining GST inclusive market value, they are not alternative tests. If the market value can be established under the first test, the charity cannot calculate the market value with reference to the second or third tests.

The approved 'cost plus' method

The 'cost plus' method is used as a last resort to determine the GST inclusive market value of a supply. Charities can only use this method if they cannot identify a same or similar supply to the one it makes.

The 'cost plus' method allows charities to work out the market value of their supplies as the sum of:

1)    direct costs incurred - for example material and direct labour

2)    a reasonable apportionment of indirect costs incurred - for example, marketing, administration, office expenses, electricity, telephone and insurance

3)    depreciation of assets used, and

4)    imputed costs for things such as volunteer labour, donated goods and services and free rent.

Direct costs, apportioned indirect costs, depreciation and imputed costs must directly relate to making the supply. The amount the charity works out using the approved 'cost plus' method is then considered the market value of the supply it makes.

It is expected that charities would maintain and retain records that adequately document the process and information collected in establishing the relevant GST inclusive market values of the supplies they make for the purposes of subsection 38-250(1).

As the GST inclusive market value cannot be established for the supply by using the same supply test or the similar supply test outlined in the Guidelines, you propose to use the 'cost plus' method to calculate the GST inclusive market value of the supply you make for the purposes of subparagraph 38-250(1)(b)(ii).

In this case, the Commissioner accepts the use of the proposed "cost plus" method.

On the basis that your supply is for a consideration that is less than 50% of the GST inclusive market value of your supply, it will satisfy subparagraph 38-250(1)(b)(ii). In such cases your supply may be GST-free under subparagraph 38-250(1)(b)(ii). However, where the fee charged is 50% or more than the GST inclusive market value, then the supply will not be GST-free.

Question 2

As explained above, we accept your proposed use of the 'cost plus' method to determine whether your supply will satisfy the requirements of subparagraph 38-250(1)(b)(ii). However, you have also asked us to confirm whether the method proposed for determining the cost of item X provided to you is appropriate for inclusion in the "cost-plus" method.

As discussed in our response to question 1, as part of a charity working out the market value of their supplies it includes its imputed costs for things such as volunteer labour, donated goods and services and free rent.

In this case, we consider your approach is fair and reasonable for the purposes of using the 'cost plus' method.