Private ruling: GST and methodology of the cost of supply
Published: September 2013

Ruling: Q1: What is the methodology that needs to be used in determining the cost of making a supply of participation to your program under subparagraph 38-250(2)(b)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Refer to reasons for Decision.

Relevant facts and circumstances: · You are registered for goods and services tax (GST). · You are endorsed as a charity for GST purposes and as a deductible gift recipient. · This program provides individuals and students with the opportunity to participate in music and artistic culture pursuits. · The program consists of several key activities: These include: o Developing of skills together with workshop attendance. o Participants to attend residency camps. o These camps cater for different performance ensembles and provide the opportunity to extend participants music and artistic performances. · The chosen participants pay an annual fee. · You provide each participant with food, tuition, accommodation, clothing, transportation, materials, supervision and training. · You have worked out the direct costs incurred by you in holding the program and apportioned all indirect costs incurred by you between the program and your other activities. · In working out the direct and indirect costs you have not included any accounting costs such as depreciation and voluntary labour and donations where you have not provided any consideration or incurred any real costs. · You have provided figures showing the total number of participants and costs for the program.

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 38-250 | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 38-250(2)(b) | A New Tax System (Goods and Services Tax) Act 1999 Subparagraph 38-250(2)(b)(i) | A New Tax System (Goods and Services Tax) Act 1999 Subparagraph 38-250(2)(b)(ii)

Reasons for decision: Detailed Reasoning - GST-free supplies: Section 38-250 of the GST Act deals with the non-commercial activities of charitable institutions. Subsection 38-250(2) of the GST Act states: 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. Note the terms with the asterisks are defined terms in the dictionary at section 195-1 of the GST Act. | Detailed Reasoning - Charity: Our records show that you have been endorsed by the Australian Taxation Office (ATO) as a charity for GST purposes and therefore are eligible to access certain GST charity concessions. Subparagraph 38-250(2)(b)(ii) of the GST Act provides that a supply of something other accommodation is GST-free where it is made by an endorsed charity, a gift-deductible entity or a government school and the consideration for the supply is less than 75% of the consideration the supplier provided, or was liable to provide, for acquiring the thing supplied (referred to as the cost of supply test) . | Detailed Reasoning - Cost of Supply Test: The ATO has issued a public ruling on the cost of supply test to assist charities and other organisations in establishing whether a supply is GST-free under subparagraph 38-250(2)(b)(ii) of the GST Act. This ruling can be found in the Goods and Services Tax Industry Issues which is located in the ATO website at www.ato.gov.au. The ruling states that in determining the consideration that a charity provided or was liable to provide in making a supply, the charity works out the amounts paid or payable by it. Those amounts will include all direct and a reasonable proportion of indirect costs incurred by the charity in making the supply. The ruling also provides that in working out these amounts, the following things can not be included because they do not involve an actual outlay by the charity: 1. Depreciation of assets and 2. Imputed costs for things like labour, donations, rent, etc where the organisation has not actually provided any consideration or incurred any real costs. In order to determine whether or not a supply of participation to a program you make is GST-free, you need to ascertain whether or not the consideration you receive for the supply is less than 75% of the consideration provided by you for making the supply. | Detailed Reasoning - Projected costs: Subparagraph 38-250(2)(b)(ii) of the GST Act states, amongst other things, "consideration a supplier paid or was required to pay to acquire the thing supplied". We consider that these words mean in applying that subparagraph, a supplier must use costs which the supplier has paid or is liable to pay. For the cultural performing arts sector, tickets or admissions are often sold in advance before they incur all the costs for holding an event. To establish whether or not they should charge GST on a supply of admission, they need to apply subparagraph 38-250(2)(b)(ii) of the GST Act when they price their admission fees. This requires them to apply this subparagraph by using projected costs rather than actual costs. However, the use of projected costs may result in GST-free supplies whereas the use of actual costs may result in taxable supplies. The ATO considers that it is not desirable for the sector to determine the GST on their supplies by first applying subparagraph 38-250(2)(b)(ii) to projected costs of making the supplies and then (some time later) to actual costs. This is because such an approach will create uncertainty for the suppliers and impose compliance costs on them. The ATO has published a methodology for applying the cost of supply test for supplies made by charities in the cultural and performing arts sector. This methodology uses projected costs where the actual costs of making the supplies cannot be established at the time of supply. The methodology also provides that where actual costs are available, they must be used. The Goods and services Tax Industry Issues under Section E. Cultural and performing arts sector discusses these issues and provides several examples. The following information has been taken from this ruling and additional details added to assist you in applying the methodology: | Detailed Reasoning - Methodology: To correctly calculate whether a supply to a student to participate in a program is GST-free or taxable, you need to undertake the following steps. | Detailed Reasoning - Step 1: Working out the cost of making a supply to a student to participate in the Program: Estimate the projected costs for conducting a program (say for the 2014 year). Do this when the actual costs will not be known until after the program has been conducted. However, if actual costs are available they must be used. We consider that when applying the cost of supply test, you can include all direct costs and a reasonable apportionment of indirect costs. However, costs used must be real costs. In calculating the direct and indirect costs, you must not include any depreciation and imputed costs for things such as volunteer labour, donations and free rent where you have not actually provided any consideration or incurred any real costs. Examples of projected direct costs are direct labour and materials used in conducting the program. Direct materials used may include estimated costs to be paid for food consumed by participating students, volunteer supervisors, employees, and artists attending the program. Examples of projected indirect costs may include marketing, administration, office expenses, electricity, telephone and insurance used in conducting the program and other activities (unrelated to the program). These indirect costs need to be apportioned on a reasonable basis between the program and the other unrelated activities. All projected costs must be realistic and must be aligned with other costing conducted when you determine the fees to be paid by students participating in the program and the costs of holding the program. You should maintain and retain records that adequately document the process and information collected in establishing the projected and actual costs, and the fees. Next you need to estimate the number of students expected to participate in the program. This estimated number needs to include all participating students whether they have paid a participation fee or not. Divide the projected costs (including any actual costs) by the estimated number of participating students to obtain the cost of making a supply of participation to a student. Please note that it is not a role of a private ruling to determine the accuracy of, for example, the amount of fee charged or the amount of costs incurred for making a supply. In your case, the amounts of Administration, Employment and Production costs that you have provided should be further broken down in order to include additional information to ensure that only the correct amounts of direct and indirect costs are to be used in Step 1. | Detailed Reasoning - Step 2: Working out whether a supply to a student to participate in the program is GST-free: To work out the GST status of a supply to a student to participate in the program, you should divide the participation fee the student paid by the cost of making a supply, worked out in Step 1. If the participation fee is less than 75% of the cost of making a supply, it will be GST-free. If the participation fee is at, or more than, 75% of the cost of making a supply, it will be subject to GST. For further information concerning the nominal supply rules and the methodology used please refer to the Charities Consultative Committee - Goods and Services Tax Industry Issue that can be located on the ATO website at www.ato.gov.au. A copy of this document has also been included for your reference.