ATO ID issued on charitable institutions making GST-free supplies

On Friday the ATO published ATO ID 2012/78 ‘GST and supplies made by endorsed charitable institutions for nominal consideration’ which determined that an endorsed charitable institution can include the cost of acquiring capital items when calculating the cost of making a supply under sub-paragraph 38-250(2)(b)(ii) of the GST Act, being a supply (other than of accommodation) that is for consideration less than 75% of the consideration provided for acquiring the thing supplied.

The facts used in the ID relate to an entity which operates a zoo and makes supplies of zoo admissions for consideration.  The entity acquires a number of things such as the animals, the enclosures, the parks and gardens.

The ID acknowledges that the section has an easy operation where the entity supplies the same thing as acquired (eg, a blanket).  However, it is more difficult where the entity “uses” acquisitions in making supplies, including capital items.  On “a strict literal interpretation” the sub-paragraph would only apply where the same thing is supplied as was acquired, however the ID accepts that the phrase “acquiring the thing supplied” should be interpreted to include both things acquired and on-supplied and things that are acquired and ‘used’ in combination in making a supply of something else.

In the context of the zoo, the things used to make the supply include recurring (revenue) items such as animal feed and the services of zoo keepers, and capital items such as buildings, or plant and equipment.

A further issue with capital items is that they are not generally consumed in making supplies in the period in which they are acquired – they have an effective life and are used by the entity to make supplies over a number of periods.  To reflect this, the ID takes the view that the consideration used to make supplies is a proportion of the price paid, generally equal to the portion of the effective life of the item. The ID considers that entities must use methodology outlined in the Goods and Services tax Industry Issues: Charities Consultative Committee Resolved Issues Document (the consideration provided for the capital item in that period) or an amount equivalent to the decline in value for the capital item for that period consistent with Division 40 of the ITAA 1997.

ATO issues ruling on “charities”

The ATO has issued TR 2011/4 ‘Income tax and fringe benefits tax: charities’ which sets out the Commissioner’s views on the meaning of ‘charitable’ in the terms of ‘charitable institution’ wherever those terms are used in the Income Tax Assessment Act 1997 (Cth), the Income Tax Assessment Act 1936 (Cth) and the Fringe Benefits Tax Assessment Act 1986 (Cth).  The ruling is very extensive and runs to some 106 pages!

While the ruling does not expressly say that it deals with the term ‘charitable institution’ in the GST Act (e.g., see subdivision 38-G Activities of charitable institutions etc), the term ‘charitable institution’ is not defined in the GST Act and one would expect that the views stated in the ruling would also be relevant in the GST context.