Private ruling: GST and nominal consideration
Published: November 2013

Ruling: Q1: Is the supply of residential accommodation in respect to your premises at Area A and Area B GST-free? | A1: Yes. Where the supply of each individual accommodation is made for less than 75% of the GST inclusive market value. | Q2: Are you entitled to claim 100% of the goods and services tax (GST) input tax credits (ITCs) available on the supply to you of: (i) Maintenance and repair work to your rental property at Area B, and (ii) Building and construction costs of 2 new units on Area B, and (iii) Capital costs of future improvements to the existing rental accommodation for the aged or needy persons on Area B, and (iv) All inputs that have GST input tax credits available for Area B and in respect to your premises at Area A? | A2: Yes, where the supply of each individual accommodation is less than 75% of the GST inclusive market value at the time of supply then the supply will be GST-free and where this is a creditable acquisition to you, you will be entitled to the ITCs. Refer to reasons for decision for further information. | Q3: Will you be required to pay increasing adjustments by way of repayments of GST input tax credits that may be claimed by you for? (i) Building and construction costs of 2 new units on Area B, and (ii) Capital costs of future improvements to the existing rental accommodation on Area B, should the answer to all questions in Question 2 be 'Yes'? | A3: Refer to reasons for decision for further information.

Relevant facts and circumstances: · You are an incorporated not-for-profit body. · You are endorsed as a Deductible Gift Recipient under Division 30 of the Income Tax Assessment Act 1997 . You are also a Charitable Institution endorsed to access GST concessions and are registered for GST. · Your main objectives are to provide housing at nominal rental for the aged or needy and to purchase land and buildings for those purposes and to let it out. · You are the registered proprietor of land and residential buildings known as Area A comprising a number of one bedroom units and 2 split house residences along with land and residential building known as Area B comprising one house. · You have appointed a registered Real Estate Agent (Agent) for the purposes of rent collection and selection of tenants and other associated matters. · You have rented out Area A and Area B for the weekly rentals as set out in the letter you have provided from your Agent. · The rental charged to the tenants is between 26.3% and 35.3% of the market rental value for accommodation at Area A. This is less than 75% of the market rental value obtainable. · The rental charged to the tenant in Area B is 85% of the market rental value for the accommodation. This is more than 75% of the market rental value. · You currently treat the supply of residential accommodation in Area B as an input taxed supply. · When all rentals charged for both Area A and Area B are accumulated they are 36% of the total market rental value, which is less than 75% of the market value rental obtainable for both properties. · You intend to build 2 new units (New Units) upon Area B. The New Units will be let to persons who are aged or needy at a rental less than 75% of the market rental obtainable. · One of the conditions of the local council to the Planning Approval obtained for the proposed two new units is the consolidation of the titles of Area A and Area B thus making it one parcel of land. · You propose to continue to maintain and repair the existing premises at Area B and continuously let them out to the aged and needy persons in accordance with your Constitution. · You also propose to make future capital improvements to the premises at Area B and Area A that will continuously be let out to the aged and needy persons in accordance with your Constitution. The proposal is to split the existing single dwelling on Area B into two dwellings with an additional bathroom and fencing. · You do not propose to sell the premises at Area A and Area B for the foreseeable future.

Relevant legislative provisions: All references are to the A New Tax System (Goods and Services Tax) Act 1999 : Section 9-5 | Section 11-5 | Section 11-15 | Section 38-250

Reasons for decision: Detailed Reasoning - Question 1: Summary You have advised that your supplies of accommodation in the individual residences at Area A are GST-free under section 38-250 of the GST Act. In particular, you have advised that the supplies are made for less than 75% of the GST inclusive market value. Where this is the case the supplies will be GST-free. You have advised that your supply of accommodation in the individual residence at Area B is provided for 85% of the Market Value. Where this is the case the supply will be input taxed. Detailed reasoning Commercial activities of charities will generally be taxable or input taxed. However, the non-commercial activities by charities will be GST-free under Sub-division 38-G -'Activities of charities etc' of the GST Act. As you are the supplier of accommodation and you are also a charitable institution and your questions relate to the supply of accommodation (residential premises) for less than the market value, subparagraph 38-250(1)(b)(i) of the GST Act may apply, Relevantly, subsection 38-250(1)(b)(i) of the GST Act provides that a supply is GST-free if the supplier is an endorsed charitable institution and the supply is a supply of accommodation that is for less than 75% of the GST inclusive market value of the supply. Subparagraph 38-250(1)(b)(i) of the GST Act states that: (1) 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) … *an asterisk denotes a defined term in the GST Act. As an endorsed charity, your supply of residential premises is GST-free if the consideration received for your supply is less than 75% of the market value of the supply. The ATO have published the Market Value Guidelines in the Charities Consultative Committee Resolved Issues Document to assist endorsed charities or gift deductible entities in establishing the GST inclusive market values of their supplies under subsection 38-250(1) of the GST Act. These guidelines are available on our website at www.ato.gov.au. 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 (the same supply test). 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 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 (the similar supply test). 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 use a 'cost plus' method. This method allows the charity to use full absorption costing and then apply a mark-up appropriate to the general market of the particular supply. In using this method, the charity can include an imputed cost for donated goods and voluntary labour. The cost plus method is used as a last resort to determine the GST inclusive market value of a supply. This method has no application in determining the consideration charities provided, or were liable to provide for acquiring the thing supplied. Importantly, these tests are successive tests for determining GST inclusive market value, they are not alternative tests. If, therefore, 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 URL of the Market Value Guidelines in the Charities Consultative Committee Resolved Issues Document is provided below. http://atogov/Business/GST/In-detail/GST-industry-partnerships/Charities-consultative-committee-resolved-issues-document/?anchor=SectionBmarketvalueguidelines#SectionBmarketvalueguidelines. In your case there are a number of facilities that provide the same supply of residential accommodation that you do, therefore the same supply test would apply when calculating the cost of your supply of residential accommodation. | Detailed Reasoning - The same supply test: The same supply test requires a charity to work out whether a supply, the same as the one it makes, exists within the market they operate in. That is, in applying the same supply test, the charity compares its supplies to those in the market. The comparison is made between the supplies made by the charity and those by other suppliers. It is not made between the recipients of the supply or the suppliers. The other suppliers in the market can be charities or profit making organisations. If the same supply exists in the market, the price of this supply is the market value that the charity should use in their calculations. You have provided a valuation report from your Agent which provides the current market rental values for Area A and Area B which you contend provides the basis for treating your supplies as GST-free. On the facts provided the consideration received for all the Area A properties is less than 75% of the Market Value and would therefore be GST-free. However, the consideration received for the Area B property is greater than 75% of the Market Value and would therefore be an input taxed supply of residential accommodation. Where you have acted in accordance with the information from the valuation report (if that report shows the supplies as being GST-free) and the Guidelines in determining that your supply of accommodation is for consideration that is less than 75% of the GST inclusive market value of the supply, we accept that the supply is a supply for nominal consideration and is GST-free. Where you are entitled to treat the supplies as GST-free under section 38-250 of the GST Act, this GST treatment overrides any other possible treatment (such as whether the underlying supplies may otherwise be an input taxed supply)(see subsection 9-30(3) of the GST Act). When a supply is GST-free no GST is payable on the supply, and an entitlement to an input tax credit for anything acquired to make the supply is not affected. Please note that as the GST is a transaction based tax you will need to look at each individual transaction/supply to determine the GST status of the individual supplies and not the totality of the supplies as a whole. | Detailed Reasoning - Records: Charities must keep and maintain records that adequately document the process and information collected in working out the relevant market values which the consideration of the supplies the charity makes is to be compared to. For example, the market values 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 residential accommodation (or other supplies or services) are GST-free, you must use the above guidelines to calculate the market value or cost of supply to make and support your decision. | Detailed Reasoning - Review of valuation: Charities should monitor the market in which they make the supply to ensure that they will respond promptly to any material changes in the market. Changes in market conditions include, amongst other things: · suppliers entering or leaving the market · changes in quality of the supplies as a result of different consumers' expectation · changes in input costs, and · changes in prices charged. Input costs include real costs such as direct and indirect costs incurred, depreciation and imputed costs. | Detailed Reasoning - Question 2: Summary Your acquisition of goods and services for your rental property at Area B are a creditable acquisition for the purposes of section 11-5 of the GST Act where those supplies to you are a taxable supply and you have acquired them for a creditable purpose. However, your acquisitions that relate to making input taxed supplies are not for a creditable purpose and are therefore not creditable acquisitions. Detailed reasoning General An entity is entitled to the input tax credit for any creditable acquisition that it makes. Section 11-5 of the GST Act states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered. Note: the * denote a defined term within the GST Act. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or is of a private or domestic nature. Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make. Subsections 11-15 (1) and (2) of the GST Act provides that: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be input taxed; [emphasis added] or (b) the acquisition is of a private or domestic nature. Creditable acquisition In your case you are acquiring the goods and services in relation to the construction of the residential accommodation in the course of your enterprise. The New Units are designed for residential accommodation for the aged and needy and the construction of the New Units is not of a private or domestic nature. However, section 11-5 of the GST Act denies an input tax credit where a supply would be input taxed. The supply of residential accommodation is normally input taxed, however section 38-250 of the GST Act and section 9-30 of the GST Act may apply to make the supply GST-free, thereby entitling you to an input tax credit. At the time of construction of the residential accommodation , you would therefore determine whether the supply of accommodation will be either GST-free or input taxed. However, at a later date, there may be a change in the extent to which you have applied the accommodation for a creditable purpose. i.e. it may no longer be GST-free or input taxed. Therefore, in any subsequent year, you need to consider whether or not there is a change in creditable purpose. GST-free or Input Taxed As mentioned above, the acquisition will be a creditable acquisition if the supply is GST-free. A supply of residential accommodation is normally input taxed, however where a supply is both GST-free and input taxed, Section 9-30 of the GST Act operates to treat the supply as GST-free. Subsection 9- 30(1) of the GST Act states: GST-free (1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a). Where a supply is both GST free and input taxed the supply is treated as being GST free pursuant to subsection 9-30(3) of the GST Act. Subsection 9- 30(3) of the GST Act states: Supplies that would be both GST-free and input taxed (3) To the extent that a supply would, apart from this subsection, be both *GST-free and *input taxed: (a) the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed; or (b) the supply is input taxed and not GST-free, if that provision requires the supplier to have so chosen Nominal consideration Subsection 38-250(1) states that the supply will be GST-free if: (1) 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 50% of the GST inclusive market value of the supply. Maintenance and repair work to the rental property at Area B that is rented to the aged and needy persons. On the facts provided the supply of the residential accommodation at Area B is an input taxed supply as the consideration you are receiving is greater than 75% of the Market Value for the supply. Accordingly for the reasons outlined above as the supply is an input taxed supply of residential accommodation you are unable to claim ITCs in relation to the maintenance and repair work on this property. Building and construction costs of 2 new two bedroom units on Area B which are intended to be rented to the aged or needy persons. The supply of residential accommodation is normally input taxed, however section 38-250 of the GST Act and section 9-30 of the GST Act may apply to make the supply GST-free, thereby entitling you to an input tax credit. At the time of construction of the New Units , you would therefore determine whether the supply of the New Units will be either GST-free or input taxed. That is, you would need to ensure the consideration you will receive for the supply of the individual units will each be less than 75% of the Market Value. If this is the case you will be entitled to the ITCs in relation to the building and construction costs. However, at a later date, if there is a change in the extent to which you have applied the accommodation for a creditable purpose. i.e. they may no longer be GST-free if the consideration received is greater than 75% of the Market Value. Therefore, in any subsequent year, you need to consider whether or not there is a change in creditable purpose. Capital costs of future improvements to the existing rental accommodation for the aged or needy persons on Area B. As mentioned previously, where the consideration received for the supply of residential accommodation in the Area B property is greater than 75% of the Market Value you will not be entitled to the ITCs in relation to goods and services received in relation to this property. All inputs that have GST input tax credits available for Area B and in respect to your premises at Area A that are both currently rented to the aged and needy persons? This question has been answered in the reasons for decision to the questions given above. | Detailed Reasoning - Question 3: Detailed reasoning Where you have determined that your supply of residential accommodation is GST-free under section 38-250 of the GST Act, the final provision of Section 11-5 of the GST Act will be met and you will be making creditable acquisitions. Section 38-1 of the GST Act provides that: If a supply is GST-free, then: · no GST is payable on the supply; · an entitlement to an input tax credit for anything acquired or imported to make the supply is not affected. Therefore, you would be entitled to ITCs for things acquired to make the GST-free supply of residential accommodation. In order to determine whether the supply to the residential tenant is GST-free or input taxed and therefore whether you are entitled to ITCs for the construction costs of the New Units, you need to determine, amongst other things, whether supplying accommodation in the New Units at the commencement of construction is GST-free for the purposes of subparagraph 38-250(1)(b)(i) & (2)(b)(i) of the GST Act by applying the principles explained in question 1. At the time of construction of the New Units, you would therefore determine whether the supply of accommodation is either GST-free or input taxed. However, at a later date, there may be a change in the extent to which you have applied the unit for a creditable purpose i.e. they may no longer be GST-free if the consideration received is greater than 75% of the Market Value. Therefore, in any subsequent year, you need to consider whether or not there is a change in creditable purpose. | Detailed Reasoning - Change in Creditable Purpose: Division 129 of the GST Act provides that, amongst other things, you may have an adjustment for an acquisition where there is a change in the extent of a creditable purpose. The adjustment is made in a tax period called an adjustment period. It only applies where there is a later event that causes the actual use of a thing to be different from the intended use of it. Adjustments include increasing and decreasing adjustments. An increasing adjustment arises if the original input tax credit claimed was too much, whereas a decreasing adjustment occurs if the original input tax credit claimed was not enough. An adjustment period is a tax period in which an entity makes an adjustment under Division 129 of the GST Act. Adjustment periods generally occur once a year. The number of adjustment periods for a thing depends on its value and whether or not it relates to business finance. An adjustment period for an acquisition (or importation) is a tax period applying to an entity that: starts at least 12 months after the end of the tax period to which an input tax credit for the acquisition is attributable and ends on 30 June, or, if none of an entity's tax periods end on 30 June, the tax period which ends closer to the 30 June than any other tax period. The following example clarifies how an entity determines its first adjustment period: Farmco Ltd is registered and has quarterly tax periods. It acquires some machinery on 15 March 2001 for its agricultural business. The GST exclusive value of the machinery was $ 100,000. An input tax credit of $10,000 was attributable to the tax period ending 31 March 2001. Farmco's first adjustment period is the tax period 1 April to 30 June 2002. This is the first tax period that ends on the 30 June and starts at least 12 months after the end of the tax period to which the input tax credit for the acquisition is attributable. The adjustment periods for acquisitions that are a non-business acquisition are as follows: GST-exclusive value of the acquisition or importation Adjustment periods $5,000 or less Two $5,001 to $499,999 Five $500,000 or more Ten Goods and Services Tax Ruling GSTR 2000/24 explains, amongst other things, what are the adjustment periods for an acquisition and how to work out the amount of an adjustment for an acquisition in an adjustment period. | Detailed Reasoning - GST private ruling and facts: In a GST private ruling, we provide specific advice to a particular rulee about how the law applies to its circumstances. In doing so, we use the facts provided by the rulee. Therefore, if the rulee advises that it: o charges a fee which confers a particular right to a payer o incurs a particular type of expenditure, or o determines the imputed costs for donated services or volunteer labour in a particular manner; We will determine how the law applies to those facts as provided. It is not a role of the private ruling to determine the accuracy of, for example, the amount of a fee charged or the amount of cost incurred. However, we may comment on the appropriateness of the use of the particular method in determining the imputed costs. The rulee can rely on the advice provided in the private ruling on the operation of the GST law to its circumstances unless the rulee has made a material misstatement of fact or suppressed a material fact.