Private ruling: GST and Nominal consideration
Date of advice: 2 September 2016
Published: October 2016

Ruling: Q1: Is a supply of a roll filled with meat and salad made by a nearby supplier a similar supply to a roll filled with sausage and salad made by you, for determining the GST inclusive market value under paragraph 38-250(1)(b))(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Please refer to the reasons for decision | Q2: Is a supply of a cup of tea or coffee (without biscuits) made by a nearby supplier a similar supply to a supply of a cup of tea or coffee with biscuits made by you, for determining the GST inclusive market value under paragraph 38-250(1)(b))(ii) of the GST Act? | A2: Please refer to the reasons for decision | Q3: Is a supply a certain activity made by you to a client for consideration a supply that has no GST inclusive market value under paragraph 38-250(1)(b))(ii) of the GST Act? | A3: No | Q4: Does the Commissioner accept that you can use the methodology designed by you to calculate a GST inclusive market value of a supply of the activity in determining whether the supply is GST-free under paragraph 38-250(1)(b))(ii) of the GST Act? | A4: Please refer to the reasons for decision | Q5: If you apply for GST registration with effect from 1 July 2015, will the Commissioner decide that date is the date your registration takes effect under section 25-10 of the GST Act? | A5: Please refer to the reasons for decision

Relevant facts and circumstances: You are a public benevolent institution. You are a registered charity with the ACNC. You are endorsed for tax concessions for GST, income tax and FBT. Your GST turnover is under $150,000. You intend to register for GST and intend to backdate their GST registration to 1 July 2015. You make supplies of certain activities to your clients. You charge a client $X for a session of attending those activities. Your clients are able to purchase multiple sessions. You do not specify that you only provide services to clients from specified localities. Your activities are performed by unpaid volunteers. Food and catering ingredients are purchased in the morning. Kitchen preparations, barbeque operation and washing up are carried out by volunteers during the day. Supplies are made for consideration to clients and carers for: • A sausage with sauce, onion and salad in a bread roll • A cup of tea or coffee, with biscuits • A can of soft drink. All of your supplies are made on your premises. There is another supplier of food nearby. This supplier does not sell sausage in a roll, or tea or coffee with biscuits. The nearby supplier sells assorted sandwiches and filled rolls (some with meat and salad). The nearby supplier also sells cups of tea or coffee with no biscuits. Another company supplies similar activities and charges $Y for a session of attending those activities. You advise that there is no same supply of the activity in the market. You have provided a methodology to calculate the market value of the supply.

Relevant legislative provisions: Subdivision 38G of the A New Tax System (Goods and Services Tax) Act 1999 Section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Detailed Reasoning - Market Value: The term 'market value' is not defined in the GST Act. For the purposes of the non-commercial supply rules, we consider that the market value of a thing is the price that would be negotiated between: • a knowledgeable, willing and not anxious buyer, and • a knowledgeable, willing and not anxious seller acting at 'arm's length' in an appropriate market. | Detailed Reasoning - Non-commercial supplies: Subdivision 38G of the GST Act provides in part, that supplies made by endorsed charities, will be GST-free if these supplies are made for nominal consideration. In particular, subsection 38-250(1) of the GST Act provides that a supply made by an endorsed charity is GST-free 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. In addition, subsection 38-250(2) of the GST Act provides that a supply made by an endorsed charity is also GST-free 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. As an endorsed charity, your supply will be GST-free if the fee received for each supply is either less than 50% of the GST inclusive market value of that supply or less than 75% of the cost of providing that supply. However, it should be noted that only one of the tests (GST inclusive market value or cost of supply) needs to be satisfied for the supply of certain supply to be GST-free. | Detailed Reasoning - GST inclusive market value guidelines: The Tax Office has published Market Value Guidelines in the Goods and Services Tax Industry Issues Charities Consultative Committee on Non-commercial activities of charities, cost of supply and market value tests (CCC Ruling) to assist charities 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. They 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. Whilst it is unrealistic to place a definitive figure upon how many GST inclusive prices should be obtained, we expect that, where possible, it would generally be more than one. The information collected would need to provide sufficient intelligence for the charity to be confident that the value they arrive at is representative of the supply in the market. 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 same supply test, the charity cannot calculate the market value by reference to the similar supply test or 'cost plus' test. It is expected that charities would maintain and retain records that adequately document the process and information collected in establishing the relevant GST inclusive market values of the supplies they make for the purposes of subsection 38-250(1) of the GST Act. | Detailed Reasoning - Nominal Consideration: Under section 38-250 of the GST Act, any non-accommodation supply by an endorsed charity will be GST-free if it is supplied for consideration that is less than either: (a) 50% of the GST-inclusive market value of the supply; or (b) 75% of the consideration provided for acquiring the thing supplied (referred to as the 'cost of supply test'). Section B of the CCC Ruling outlines the guidelines determining the GST-inclusive market value of a supply. Determining the GST inclusive market value of a supply of a sausage on a roll, tea and coffee (biscuits) or a certain activity provided to disabled clients Same Supply Test To determine the GST inclusive market value of a supply under the 'same supply test' it is important that you identify the relevant market in which you make the supply. You need to take into account the following factors when comparing your supplies to those in the market: • Identify the market • the locality of the supply or area of the market • the quality or nature of the supply • the size, quantity or duration of the supply • the conditions of the supply • other charitable or commercial suppliers, and • the number of comparisons. These factors are explained in more detail within the CCC Ruling (Section B). No single factor is determinant on its own and often the factors can be interrelated. For the same supply test, the supply made by the charity must have, amongst other things, the same quality or nature as the supplies in the market it is being compared with. In a case where there are genuinely identifiable differences in the quality of the 'same supply', the charity needs to take into account those differences in establishing the market value of the supply it makes. For this purpose the charity needs to adjust the price of the same supply by taking the following steps: • identify the same supply and its price • identify all the differing characteristics shown in the quality of the 'same supply' when comparing the supply the charity makes • quantify those differing characteristics on a reasonable basis, and • use the quantified values of those differing characteristics to adjust the price of the 'same supply'. You must also maintain documentary evidence of conclusive and tangible proof for each of these steps. Similar Supply Test In accordance with the Market Value Guidelines if you are unable to find a same supply for the purposes of applying the same supply test, you must consider whether the 'similar supply test' applies to your circumstances. Reference is made to the factors discussed above under the 'same supply test' when comparing your supplies to those in the market. The points about these factors under the 'same supply test' are relevant to the 'similar supply test'. In identifying the market, under the similar supply test a charity can use a broad categorisation of the supply it makes as justification for using certain supplies in the market as similar supplies. Charities should take into account factors such as the quality, nature and conditions of the supply. The CCC Ruling illustrates the concept of 'broad categorisation' of certain types of supplies with three examples. They are: | Detailed Reasoning - Example 13: broad categorisation of education: A charity offers a half-day class in relaxation techniques to unemployed adults for a small fee. There are no comparable classes offered in the market. The charity would be able to use any half-day adult education course that is offered by other organisations that are similar to their half-day course in terms of nature, duration, standard of tuition and activities during the course. That is, the half-day class in relaxation techniques and the half-day adult education course would be accepted as similar supplies made under the broad categorisation of 'education'. | Detailed Reasoning - Example 14: broad categorisation of entertainment: A regional government school holds a performance of a well-known play performed by its drama class. There is an amateur choral society and no other amateur theatre or drama group in the area serviced by the school. In applying the similar supply test, the school can classify the play under the category of entertainment which a choral concert of comparable duration and quality also belongs. In these circumstances, the supply to attend a choral concert is, a similar supply to the supply to attend its play. | Detailed Reasoning - Example 15: broad categorisation and different conditions of supplies: A university supplies daily 10 hour car parking permits to students for a fixed fee. Another car park operator in the area charges the same fee for four hour car parking. Both the university and the other operator make supplies under the broad categorisation of car parking. However, the supplies they make are not the same or similar in terms of duration. The university cannot compare its hourly rate with that of the other operator. This is because both of them make a supply for a specified duration regardless of how long the recipient actually occupies the parking space. | Detailed Reasoning - Sausage on a roll, or tea or coffee with biscuits: You have identified a supply of a roll filled with meat and salad by a nearby supplier to be similar to a supply of a sausage on a roll by you. This supplier also makes a supply of tea or coffee, which you have identified to be similar to a supply of tea or coffee with biscuits by you. On the facts provided, we accept that both supplies may be considered similar to the respective supplies made by you. In both cases, where there are genuinely identifiable differences in the quality of the items in the supplies you are comparing to, you need to make reasonable adjustments to the respective prices charged by the other supplier in order to reflect the higher (or lower) quality of the sausage on a roll, or tea or coffee (with biscuits) you supply. The adjusted prices are the GST inclusive market values of the respective supplies you make. A supply of the sausage on a roll (or a supply of coffee or tea (with biscuits)) will be GST-free under subparagraph 38-250(1)(b)(ii) of the GST Act where the fee you charge for the supply is less than 50% of the GST inclusive market value of the supply. | Detailed Reasoning - Supplies of activities: Identifying the market In relation to the determination of a market value of a supply the CCC Ruling states: The term 'market value' is not defined in the GST Act. For the purposes of the non-commercial supply rules, we consider that the market value of a thing is the price that would be negotiated between: • a knowledgeable, willing and not anxious buyer, and • a knowledgeable, willing and not anxious seller acting at 'arm's length' in an appropriate market. You have contended that no market value exists for the supply of the activities. However, as there are 'willing buyers and sellers' of those activities, a market exists. It is therefore necessary to determine the market value of a supply of those activities by utilising the same and similar supply rules outlined above. Same and Similar supplies We agree that there is no same supply of the activities in the market. We do, however, consider that another company makes a similar supply of comparable activities in the market. Where there are genuinely identifiable differences in the quality of the comparable activities supplied by the other company, you need to make reasonable adjustments to the price charged by them in order to reflect the higher (or lower) quality of the activities you supply. The adjusted price is the GST inclusive market value of the supply you make. Your supply will be GST-free under subparagraph 38-250(1)(b)(ii) of the GST Act where the fee you charge for the supply is less than 50% of the GST inclusive market value of the similar supply made by the other company. | Detailed Reasoning - Cost plus method: Paragraph 109 of the CC ruling states that: The Commissioner has approved the use by charities of the following 'cost plus' method to work out the market value of a supply. Charities can only use this method if they cannot identify a same or similar supply to the one it makes. As explained, you can apply the similar supply test to determine the GST inclusive market value of your supply. Therefore, you cannot use the methodology designed by you to calculate the GST inclusive market value of a supply of the activities. | Detailed Reasoning - Application for GST registration: PS LA 2011/8 outlines the Commissioner's approach to backdating GST applications. The Commissioner may backdate your GST registration, subject to the following limitations: • Where no registration application is made, the date of effect cannot be before the day on which you became required to be registered. • Where you apply for registration, the date of effect cannot be before the date you specified in the application, unless the Commissioner is satisfied that the entity was required to be registered as of an earlier date. For tax periods that commence on or after 1 July 2012, the Commissioner cannot backdate the date of effect to a date that is more than four years before the date on which the Commissioner decides the date of effect of the entity's registration Therefore in your circumstances, if you apply for GST registration within the 4 year period specifying a start date of 1 July 2015, the Commissioner will accept this as their registration date. If your GST registration is backdated it will result in you being required to pay GST on taxable supplies and taxable importations made from that earlier date. You will be entitled to claim input tax credits on creditable acquisitions or importations from the earlier date, provided the appropriate documentation is held.