Private ruling: supplies for nominal consideration
Published: February 2012

Ruling: Q1: Is the methodology you proposed for the determining the cost of supply acceptable to the Commissioner for the purposes of subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act)? | A1: No



Reasons for decision: Summary: Commercial activities of charities will generally be taxable or input taxed. However, the non-commercial activities by charities could be GST-free. A charity can make a GST-free supply under either subsection 38-250(1) of the GST Act (market value guidelines) or under subsection 38-250(2) of the GST Act (cost of supply guidelines). As you have only provided information on your costs of supplies, we will only consider whether the supplies that you make are GST-free under the cost of supply guidelines, ie: subsection 38-250(2) of the GST Act In addition as your questions relate to the supplies of services (that is, a supply other than a supply of accommodation), subsection 38-250(2) of the GST Act will be applicable. The subsection states: A supply is GST-free if: (a) the supplier is a charitable institution, a trustee of a charitable fund, 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. * denotes a defined term in the GST Act You are endorsed as a charitable institution for GST purposes. Under subparagraph 38-250(2)(b)(ii) of the GST Act, a charity may treat a supply as GST-free if the consideration received by the charity for a supply is less than 75% of the consideration for acquiring the thing supplied (ie: cost of supply). To assist charities in working out the difference between 'commercial' and 'non-commercial' activities, the Australian Taxation Office (ATO) has outlined some guidelines in a public ruling - "Non-commercial activities of charities, cost of supply and market value tests of the Charities Consultative Committee -Goods and Services Tax Industry Register" (CCC ruling). You may download a copy of this ruling from our website at www.ato.gov.au . | Detailed Reasoning - Cost of supply guidelines: Paragraphs 14 to 23 of the CCC ruling provide the guidelines for charities to work out the cost of a supply. The paragraphs state: | 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. For more information, refer to section 38-250, in particular, paragraph 38-250(2)(b). | Detailed Reasoning - 2. General Position: 18. When working out the cost of providing something, the 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, insurance. | Detailed Reasoning - 3. Cost of providing supplies - other than accommodation: 19. For supplies other than accommodation, charities should only include amounts paid or payable by them in the calculation. 20. This is because subparagraph 38-250(2)(b)(ii) states that it is 'the consideration for the supplier provided or was liable to provide for acquiring the thing supplied'. 21. The consideration the supplier provided or was liable to provide is GST-inclusive. 22. Charities cannot include the following things in the calculation as they do not involve an actual outlay by the charity: § depreciation of assets , and § imputed costs for things like volunteer labour, donations and free rent where the charity has not actually provided any consideration or incurred any real costs. Based on the above paragraphs, a charity can work their cost for a supply by using this formula Cost of = total costs (worked out under paragraphs 18 to 22 of CCC ruling) Supply total number of supplies made This formula is worked out based on the costs the charity incurs to provide a supply. | Detailed Reasoning - Your methodology to work your the costs of supplying music therapy: You propose a methodology that works out your cost of supply for your services on an hourly basis. You divide your total cost by the total hours available to provide your services. Comments on your methodology Your methodology does not comply with the rules outlined in paragraphs 14 to 22 of the CCC ruling where it requires you to work out the cost of providing a supply. Under your methodology, you work the total cost you provide to acquire the things used to in relation to your supplies. Then, you then divide your total cost by the total hours available to provide your services. We consider that the total hours available to provide your services do not reflect the actual number of supplies you made. Therefore, your methodology is not acceptable to the Commissioner. Cost of supply method Paragraphs 197 to 255 of the CCC ruling provide explanations on some examples of methodologies which are acceptable to the Commissioner for the purposes of subparagraph 38-250(2)(b)(ii) of the GST Act. Charities could adopt these methodologies if they suit their circumstance when working out the costs for their supplies. | Detailed Reasoning - Public museums, public art galleries and public libraries: Paragraphs 225 to 255 of the CCC ruling outline the instructions on how non-profit public museums, public art galleries and public libraries that are charities determine whether the price of a ticket or an admission to a performance and exhibition (a supply) is less than 75% of their costs to provide the supply and thereby making the supply GST-free. Paragraph 236 of the CCC ruling in particular outlines the methodology where charities, making similar supplies to non-profit public museums, public art galleries and public libraries, could adopt to work out the cost for their supplies. Paragraph 236 of the CCC ruling lists the methodology as follows: If public museums or public art galleries hold special exhibitions in addition to their general operations (of exhibiting their collections), they may apply Step 1 to calculate the cost of supplying an admission to the special exhibitions by using the following options. Option 1: treat the general operations and special exhibition together when estimating the projected costs and the total number of admissions. The cost of supplying an admission to the general operations is the same as the cost of supplying an admission to the special exhibition. Option 2 : treat the general operations and the special exhibition separately. If a public museum or public art gallery chooses this option, they will be required to isolate the projected costs and admissions for the special exhibition in working out a separate cost of supplying an admission to the special exhibition. In allocating costs to the special exhibition, both direct costs and an appropriate proportion of indirect costs must be taken into account. To the extent that projected costs and number of admissions have been included in the calculation of the cost of supplying an admission for the special exhibition, they will not be included in the calculation of the cost of supplying an admission for the general operations. Therefore, the cost of supplying an admission to the special exhibition may not be the same as the cost of supplying an admission to the general operations. We consider that your supplies are similar to supplies made by non-profit public museums, public art galleries and public libraries and therefore you may adopt the methodology outlined in paragraph 236 of the CCC ruling to work the cost of providing a supply. Therefore, you may use Option 1 to work out your cost of supply. Under Option 1 you divide the total costs by the total number of supplies you provide as given in the above formula. This is illustrated in paragraph 244 of the CCC ruling (example 3) as shown below: | Detailed Reasoning - Option 1: treating the general operations and special exhibition together: The estimated costs are $4,200,000. The estimated total number of admissions to the general operations and special exhibition is 180,000 (165,000 + 15,000). The cost of supplying an admission is $23.33 ($4,200,000/180,000). 75% of the cost of supply is $17.50 ($23.33 x 75%). Admissions for less than $17.50 will be GST-free. Looking at the different classes of admissions: § All admissions to the general operations will be GST-free as the admission fees of $5 and $12 are less than 75% of the cost of supplying an admission. § The concessional admissions to the special exhibition will be GST-free as the admission fee of $10 is less than 75% of the cost of supplying an admission. § The general admissions to the special exhibition will be taxable because the admission fee of $25 is greater than 75% of the cost of supplying an admission ($(25/23.33) x 100% = 107%). The next step is to work out the percentage of the consideration you receive for your supply against the cost of supply. Where the consideration you receive for your services is less than 75% of the cost of supply, the supply will be a GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act. You have made that supply for nominal consideration. However, where the consideration you receive for your supply equals or exceed 75% of your cost of supply, the supply will not be a GST-free supply and you will be liable for GST. Often a charity may make more than one type of supplies. The charity may choose to adopt Option 2 (listed on paragraph 236 of the CCC ruling), to work out the cost of supply. Option 2 allows the charity to calculate the cost of supply individually for each type of supply using the same formula as above. After a charity has worked out the cost of supply for each type of supply, the charity then works out the percentage of the consideration received against their costs to provide the supply. Where the consideration received is less than 75% of the cost of supply, the supply will be a GST-free supply under subparagraph 38-250(2)(b)(ii) of the GST Act. However, where the consideration you receive for a supply equals or exceed 75% of the cost of supply, that supply will not be a GST-free supply.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are registered for the goods and services tax (GST). | You carry on an enterprise of providing services. | You proposed a methodology to work out the cost of supply on the time basis (per hour). | You divide your total costs by the total hours where services are available.