Private ruling: GST and nominal consideration
Published: January 2013
Ruling period: 1 July 2009 to 30 June 2010 | The scheme commences on: | 1 July 2009

Ruling: Q1: Is the methodology you proposes to use to determine the cost of supply of your services acceptable for the purposes of section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, the methodology you proposed to use to determine the cost of supply of your services is acceptable for the purposes of section 38-250 of the GST Act.

Relevant facts and circumstances: § You are registered for goods and services tax (GST). § You are endorsed as a charitable institution for GST purposes. § You provide various services. § You have a standard sale price list for each supply type, however, prices are negotiable. These prices are the maximum amount you would charge for a certain type of supply. § Prior to making the supply to the recipient you perform a number of services. § You are using the actual costs incurred in the financial year 1 July 20XX to 30 June 20YY. § The Australian Taxation Office (ATO) issued a GST private binding ruling to you not approving your methodology in determining whether your supplies are GST-free under section 38-250 of the GST Act. § You advised the ATO that you intended to rectify the methodology by reworking your methodology to take account of the inconsistencies identified by the ATO in the previous ruling issued. This included correcting the allocation of the costs of the capital costs as a direct cost of the type of services supplied and not allocated to the supply of all types of services. You have also allocated the rent of the demountable buildings to the supply of the specific services in their respective proportion and not allocated this cost across all types of services supplied. § You have requested confirmation that the reworked proposed methodology is fair and reasonable. § You provided the following details of your new methodology for determining the cost of supply for the purposes of section 38-250 of the GST Act. § You have identified the total salaries of staff working on providing your services and compared that figure to the total salaries for your organisation. § You have identified the staff working with the supply of the different type of services and calculated the percentage of staff working with each type of service supplied and allocated the wages and super of those staff as a direct cost for the type of service supplied. § You have calculated the percentage of staff working in the supply of those services as a percentage of total salaries and super for the organisation. § You have calculated the percentage of services supplied as a percentage of the total services available for supply. § You have estimated that the total time spent by staff in provided those services is 70% and the remaining 30% of time is spent in such things as occupational health and safety training, computer training, staff management training and general administration issues. You have allocated the cost of wages and super for staff to the supply of services based on the time spent by staff in providing the different type of services. § You have allocated the total staff on-costs such as worker's compensation, payroll tax, annual leave, long service leave and sick leave to the supply of services based on the 70% of time spent by staff in supplying those services: § You have apportioned total overheads costs to the supply of services on the staff working in the supply of those services as a percentage of total salaries and super for the organisation (35.74%). These overheads include electricity, heating, uniforms and telephone. § You have allocated the overheads to the different type of services supplied based on the percentage of staff that work with the supply of those services and than allocated these overheads to the services supplied based on the percentage of services supplied. § You have incurred rent of $X for rent of demountable buildings used for assessment and training. You have apportioned this rent to the cost of those services supplied and have used the demountable buildings to supply those services, as a percentage of the total services supplied. § Your capital costs of $Y are in relation to the acquisition of capital items used in making a supply of a type of service. You have allocated the capital cost to the direct cost of that type of service. § You have determined that the area used in providing your supply of services relates to 25% of the capital costs and other areas such as administration and car parking make up the balance of the capital expenditure. § You have determined that 95% of costs are in relation to the supply of your services and a small amount used in other areas such as staff toilets. § You have calculated the total costs for each of the different services provided. § You have calculated 75% of the total cost of supply of your services and compared this to the standard price for your services supplied. § You have reported the supply of your services as a GST-free supply in your activity statements.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subparagraph 38-250(2)(b)(ii) | A New Tax System (Goods and Services Tax) Act 1999 Section 38-250

Reasons for decision: Detailed Reasoning - Supplies by endorsed charities and deductible gift recipients for nominal consideration: A supply made by an endorsed charity or a deductible gift recipient is GST-free under subsection 38-250(1) of the GST Act if the supply is for consideration that: · if the supply is a supply of accommodation - is less than 75% of the GST inclusive market value of the supply, or · if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of the supply. A supply made by an endorsed charity or a deductible gift recipient is also GST-free under subsection 38-250(2) of the GST Act if the supply is for consideration that: · if the supply is a supply of accommodation - is less than 75% of the cost to the supplier of providing the accommodation, or · 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. | Detailed Reasoning - Cost of supply guidelines: When calculating the cost of providing something an endorsed charity or a deductible gift recipient 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. For supplies of things other than accommodation only those amounts paid or payable may be included in the calculation. This is due to the wording in subparagraph 38-250(2)(b)(ii) of the GST Act which states that it is the consideration the supplier provided or was liable to provide for acquiring the thing supplied. The following things cannot be included because they do not involve an actual outlay by the supplier: § depreciation of assets, § imputed costs for things like volunteer labour, donations, and free rent where the organisation has not actually provided any consideration or incurred any real costs. | Detailed Reasoning - Option 1: Where a supplier makes different classes of supplies, in determining the cost of making a supply under subparagraph 38-250(2)(b)(ii) of the GST Act the supplier should: § estimate the projected costs of making all supplies, § determine the total number of supplies being made, and § determine the cost of making a supply by dividing the projected costs of the supplies by the total number of supplies being made. | Detailed Reasoning - Option 2: Alternatively for each class of supplies, the supplier can also determine the cost of making a supply under subparagraph 38-250(2)(b)(ii) of the GST Act by: § estimating the projected costs of making supplies of that class, § determining the total number of supplies being made for that class, § determining the cost of making a supply by dividing the projected costs of the supplies by the total number of supplies being made for that class. For guidance, the Goods and Services Tax Industry Issue: Charities Consultative Committee Non-commercial activities of charities, cost of supply and market value tests (the CCC document) at Section E provides examples of using the above methodologies for organisations in the cultural and performing arts sector making supplies of tickets to concerts and performances. Section E also explains that an endorsed charitable institution or a deductible gift recipient making different types or classes of supplies can choose which of the above two options to use in determining the cost of making a supply. | Detailed Reasoning - Your application of the methodology to determine cost of supply: You advised that you make supplies of a variety of services. In the 20YY financial year you used the following methodology to determine the cost of making each supply of your services: You determined the direct cost of staff wages and super for staff working with the supply of those services. You then determined the percentage of wages and super for staff working with the supply of those servicers as a percentage of total wages and super for your organisation. Further, you have determined that staff working with the supply of those services, spend 70% of their time in the supply of those services, with the balance spent on training and other administrative issues. If these training and other administrative activities of staff are a part of their duties in the supply of those services, than 100% of their wages and super costs may be included as a cost of making the supply of those services, under section 38-250 of the GST Act. You have determined the percentage of services supplied as a percentage of total services available for supply by you. This is acceptable for the purposes of section 38-250 of the GST Act. When apportioning the costs between the various supplies, the cost must be directly related to the supply and any apportionment must be made on a reasonable basis. To the extent that the costs are not directly related to the supply in question or the basis of apportioning the cost is unreasonable, the consideration for that supply must be adjusted accordingly. The concept of apportioning costs to recognise the underlying supply being made is outlined in paragraph 75 of Goods and Services Tax Ruling GSTR 2006/3 where it considers the application of a fair and reasonable method to determine input tax credits and states; | Detailed Reasoning - Fair and reasonable method: 75. The extent of your planned use of an acquisition for a creditable purpose must be established on a fair and reasonable basis having regard to the nature of the acquisition and the circumstances of your enterprise. Any apportionment method should aim to achieve an accurate reflection of the input tax credits available for acquisitions or importations acquired in carrying on your enterprise. The criteria used in relation to any expense must therefore recognise the nature of the underlying supply to be made. Paragraph 76 of GSTR 2006/3 provides an example for paragraph 75: 76. An example of this is to be found in the decision of the New Zealand High Court in Commissioner of Inland Revenue v. BNZ Investment Advisory Services Ltd (BNZ case). The Court was required to consider the New Zealand GST 'principle purpose' test, under which an initial entitlement to input tax credits arises only if the principal purpose of the acquisition is to make taxable supplies. In that case the taxpayer's employees spent approximately 90% of their time giving taxable financial advice, and the taxpayer argued that this meant the principal purpose of its acquisitions was to provide taxable supplies. However, the High Court considered that an apportionment based on time spent was not an appropriate measure as the income and expenses did not directly relate to the giving of advice. The Commissioner states in paragraph 77 of GSTR 2006/3 that the principles in the BNZ case are relevant in considering the apportionment methodologies: 77. Although the legislation in that case is not identical to the Australian GST legislation, the Commissioner considers that the principles are relevant. The BNZ case confirms the importance of selecting the most appropriate criteria when applying an apportionment method. As outlined in paragraph 103 of GSTR 2006/3 indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. However, in all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise. Examples of indirect methods which may be appropriate are outlines in GSTR 2006/3 and include the following: · an overall, Entity - based general formula , based on the proportion of input taxed and non-input taxed revenues of the entity as a whole; · Revenue - based formulas which are more narrowly targeted than the entity-based general formula; · a combination of revenue-based formulas with direct methods; and · non-revenue-based indirect estimation methods. You have allocated 36% of overhead costs such as electricity, heating, uniforms, telephone and rent to indirect costs for the supply of your services. You have based your allocation of the overheads as the percentage of staff working in the supply of those services compared to the total salaries of your organisation. This indirect method may be appropriate in your circumstances if the staff costs are an appropriate measure of the income and expenses related to the supply of your services. You have allocated 95% of the cost is in relation to the supply of the services. This is based on a direct estimation method which is appropriate in your circumstances and therefore acceptable for the purposes of section 38-250 of the GST Act. Australian Taxation Office Interpretative Decision ATO ID 2012/78 provides guidance to endorsed charities or gift deductible entities on how the consideration provided for acquiring capital items is taken into account in calculating the cost of making a supply in a period under subparagraph 38-250(2)(b)(ii) of the GST Act. As provided in ATO ID 2012/78, for the purpose of calculating the cost of making a supply in a period, you can include as the cost of acquiring a capital item: · an amount equivalent to the decline in value amount for the capital item for that period consistent with Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), or · the consideration provided for the capital item in that period. You have allocated 25% of the capital costs to the supply of the services which you have based on area occupied by the buildings that you use for making the supply of those services and the balance of the area is for administration purposes and car parking. This is a direct basis of apportionment and it would be an appropriate basis of apportionment as long as the cost is directly related to the supply and any apportionment made is on a reasonable basis. For the 2009/10 financial year the capital costs incurred relate to the acquisition of capital items for the total cost of $4,295. You have allocated this cost of $Y to the direct cost of the supply of a type of service. Therefore for the 20YY0 financial year, the methodology you have used in the allocation of the capital costs to those services is acceptable for the purpose of section 38-250 of the GST Act. You have incurred rent of $X for demountable buildings used for assessment and training. You have apportioned this rent to the cost of those services supplied and have used the demountable buildings to supply those services, as a percentage of the total services supplied. You have apportioned 36% of this rent cost to the cost of supply of those type of services. You have further apportioned this rent to the cost of the specific service provided based on the percentage of each type of service provided as a percentage of the total services supplied. Therefore for the 20YY financial year, the methodology you have used in the allocation of the rent cost to the supply of your services is acceptable for the purpose of section 38-250 of the GST Act. You have used the figures for the 20YY financial year to determine the consideration provided for the different type of supplies made and have compared this as a percentage of the service fee to determine if the service fee is less than 75% of the consideration provided. Based on the information provided by you, for the 20YY financial year, we have determined that the methodology you propose to use is acceptable for the purpose of sub-paragraph 38-250(2)(b)(ii) of the GST Act. You have determined that some of the services you supply are GST-free as they are for consideration that is less than 75% of the consideration you provided (as calculated by you) for acquiring the services under subparagraph 38-250(2)(b)(ii) of the GST Act. However you have stated that you have reported all your supplies of the services on your activity statement as GST-free. As you do not supply all your services for a nominal consideration under subparagraph 38-250(2)(b)(ii) of the GST Act, not all your supplies of services are GST-free. You need to remit GST on your taxable supplies.

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.