Private ruling: GST and nominal consideration
Date of advice: 1 April 2022
Published: June 2022
Ruling period: 1 January 20XX till quarter ending 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Is the proposed methodology, described in the facts, to determine the 'cost of supply' of the Services you supply to Artists acceptable to the Commissioner for the purposes of determining if the supplies are GST-free under subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, the methodology as described in the facts to determine the cost of supply of your Services to Artists is not considered acceptable for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.

Relevant facts and circumstances: The description of the scheme is based on information provided by the applicant in the following documents, which are to be read in conjunction with the facts as set out below: • A copy of the Artist Agreement. • Entity X's budget spreadsheet (Budget) • Tax invoices issues by Entity X in respect of the some of the Services provided to an Artist. Entity X (you) is registered for GST. You are registered charity and is endorsed by the Commissioner of Taxation to access GST concessions. You enter into an agreement with performers (Artists) known as the Artist Agreement. The Artist Agreement sets out the terms on which an Artist will be registered with you to participate as an independent artist. Pursuant to the terms of the Artist Agreement, you provide services to Artists for which you receive consideration. The consideration, which will be discussed below, arises from three sources which can be summarised as follows: • Artist Registration Fees • Booking Fees • Transaction Fee. You charge Artists a registration fee (Artist Registration fee) to participate in an event that you organise. In accordance with the Artist Agreement, you have exclusive rights to sell tickets to a performance of the Artist. Therefore any sale of tickets by you is made as agent (authorised seller) for the Artist. You charge a Booking Fee and Transaction Fee which you retain pursuant to the terms of the Artist Agreement. Proposed Cost of supply calculation methodology Broadly the proposed methodology adopts a process where the projected income of Entity X is used as the basis for apportioning and estimating projected costs of supplies. Therefore, you have not directly allocated any costs to a particular supply, except for costs in relation to Government grants and sponsorship which is discussed below. In addition, as the Booking Fee may vary depending on a ticketed price the proposed methodology does not take into account the supplies made on an artist-by-artist basis as it is considered administratively difficult for you to determine GST liability on an artist-by-artist basis. Income You have provided a copy of you (Budget). The Budget shows your total gross income. This amount is then reduced by income received from Government grants and sponsorships leaving an Adjusted Gross Projected Income which is broken down into: (a) $X1 from Artist Registrations (represents X1% of the Adjusted Gross Projected Income); (b) $X2 from Transaction Fees (represents X2% of the Adjusted Gross Projected Income); and (c) $X3 from Booking Fees (represents X3% of the Adjusted Gross Projected Income); (d) $X4 from other unspecified income source (Other) (represents X4% of the Adjusted Gross Projected Income); Costs The Budget shows your total operating expenses. You have reduced your total operating expenses by costs allocated to obtaining Government grants and sponsorship to derive a net projected operating expense. As the adjusted gross projected income has been allocated and broken down above, so too has the net projected operating expenses in the same respective proportions as those for the adjusted gross projected income. From these expenses, the cost per supply is derived.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-250

Reasons for decision: Summary: Section 38-250 of the GST Act provides that non-commercial activities of an endorsed charity, gift deductible entity or government school may be GST-free. Of relevance to your circumstances is subsection 38-250(2) which provides 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 cost to the supplier of providing the accommodation; 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 and a gift-deductible entity for GST purposes, so you satisfy paragraph 38-250(2)(a). You are not supplying accommodation, therefore your supply of Services will be GST-free if the consideration you receive for making those supplies to an Artist is 75% or less than the consideration you provide to acquire the supplies you make. You have submitted that the supplies by you (for which the Artist Registrations, Booking Fees and Transaction Fees are consideration) are GST-free supplies under subparagraph 38-250(2)(b)(ii) of the Act in accordance with the principles set out in Section E of the public ruling titled Charities consultative committee, Non-commercial activities of charities, cost of supply and market value tests . We do not agree with your submission. Relevantly we consider that the proposed methodology is not in accordance with paragraphs 14 to 18 in the public ruling Non-commercial activities of charities, cost of supply and market value tests which states: | Detailed Reasoning - 1. Working out the cost of providing something: 14. A supply of accommodation by a charity is GST-free if it is for consideration that is less than 75% of the cost to the charity of providing the accommodation. 15. If the supply is not a supply of accommodation, the supply is GST-free if it is for consideration that is less than 75% of the consideration the charity provided, or was liable to provide, for acquiring the thing supplied. 16. We consider these two points allow the charity to use the cost of providing the thing supplied when making this calculation. 17. ... | Detailed Reasoning - 2. General position: 18. 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. Further Section E of the public ruling which sets out a methodology for applying the cost of supply test that is approved for use by charities in the cultural and performing arts sector that cannot establish their actual costs at the time of supply at paragraphs 202 to 212 states: | Detailed Reasoning - Methodology for applying the cost of supply test - supplies made by charities in the cultural and performing arts sector: 202. The following methodology for applying the cost of supply test is approved for use by charities in the cultural and performing arts sector that cannot establish their actual costs at the time of supply. 203. This methodology is within the scope of the GST legislation and uses the principles explained in the cost of supply guidelines - section A. It simplifies the administrative and compliance requirements for the sector. 204. To correctly calculate whether a supply is GST-free or taxable, charities must go through the following steps. | Detailed Reasoning - Step 1: working out the cost of making the supply: 205. Estimate the projected costs for a season of performances, exhibition or event. Do this when the actual costs will not be known until after the supplies have been made. However, if actual costs are available they must be used. 206. Estimate the total number of tickets (of all classes) that will sell. 207. Divide the projected costs by the total number of tickets to obtain the cost of supplying a ticket. 208. We accept that when applying the cost of supply test, charities can include all direct costs and a reasonable apportionment of indirect costs. However, costs used must be real costs. Things like voluntary labour, donations, other imputed costs and depreciation can not be included. All projected costs must be realistic and must be aligned with other costing conducted when the charity determines ticket prices and the costs of holding an event or performance. | Detailed Reasoning - Step 2: working out whether a supply is GST-free: 209. For each class of ticket, the charity should divide the price that is charged for a ticket in that class by the cost of supplying a ticket, worked out in step 1. 210. If the price charged for that ticket is less than 75% of the cost of supplying the ticket, it will be GST-free. 211. If the price charged is at or more than 75% of the cost of supplying the ticket, it will be subject to GST. 212. All tickets in a class of tickets will be treated in the same way. In this case the proposed methodology by you uses the adjusted gross projected income which is divided into three classes. Each class of income represents a different supply/service made under the Artists Agreement. Collectively these services are referred to as the Services. Upon apportioning the adjusted gross projected income across the three categories, the net projected operating expenses are then allocated based on the same income percentage. For example, where the income from the Transaction Fees accounts for 15% of the adjusted gross projected income, 15% of the net projected operating expenses will be allocated to the service for which the Transaction Fee is consideration. This approach therefore does not isolate an acquisition to determine whether there is a direct or indirect relationship of the particular Service (or supply) being made. Further, as provided under paragraph 208 of section E, all projected costs must be realistic and must be aligned with other costing conducted when the charity determines ticket prices and the costs of holding an event or performance. In light of the above we do not consider that the proposed methodology meets the principles discussed above and therefore the methodology as described in the facts to determine the cost of your supplies of your Services to Artists is not considered acceptable for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act.