Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 12 GST treatment of gift-deductible entities

Outline of chapter

12.1 Schedule 12 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that:

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the goods and services tax (GST) charity concessions apply as originally intended; and

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charities operating retirement villages, like other charities, are required to be endorsed in order to access the GST charitable retirement village concession.

Context of amendments

12.2 There are a number of provisions in the GST Act which allow various GST concessions only to an entity that is either a charitable institution, a trustee of a charitable fund, a gift-deductible entity or a government school. For example, section 38-250 of the GST Act provides that supplies by such entities may be treated as GST-free where they are made for nominal consideration.

12.3 Division 129 of the GST Act is another concession that applies to gift-deductible entities. Division 129 provides that where there is a difference between the actual use and the planned use of a thing acquired by an entity for a creditable purpose, that entity is required to make an adjustment. Where the entity acquires something for its enterprise and then donates the item to a gift-deductible entity, no adjustment is required under section 129-45. However, in certain situations, this may not be an appropriate outcome.

12.4 For GST purposes, an entity is a gift-deductible entity if gifts or contributions made to it can be deductible under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997).

12.5 It has been suggested that the definition of 'gift-deductible entity' in the GST Act arguably makes it possible for an entity that operates a fund, authority or institution for which gifts or contributions made to it are tax deductible (but is not itself such a fund, authority or institution), to apply the GST charity concessions to its entire operations. This is despite some of its activities being in no way related to the fund, authority or institution that the entity operates.

12.6 As part of its response to the Report of the Inquiry into the Definition of Charities and Related Organisations , the Government decided that charities, public benevolent institutions and health promotion charities would need to be endorsed by the Commissioner of Taxation (Commissioner) in order to access the relevant tax concessions. This requirement was intended to apply to all charities. Although the GST Act was amended to reflect this, the requirement for charities operating retirement villages to be endorsed was inadvertently omitted.

Summary of new law

12.7 Schedule 12 to this Bill amends the GST Act to clarify that:

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the GST concessions available to an entity only because it operates a fund, authority or institution that has gift-deductible status does not apply to the activities of the entire entity;

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an entity that supplies a thing as a gift to an entity that operates a fund, authority or institution that has gift-deductible status may have an adjustment under Division 129 of the GST Act if the gift is made other than for the principal purpose of the endorsed fund, authority or institution; and

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charitable retirement villages must be endorsed by the Commissioner in order to access the GST charitable retirement village concession under section 38-260 of the GST Act.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments relating to gift-deductible entities

12.8 There are a range of provisions in the GST Act that provide specific GST treatment for gift-deductible entities. These include provisions concerning:

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cash accounting under Subdivision 29-B;

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eligibility for GST-free supplies under Subdivision 38-G;

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the choice to elect to input tax fundraising events under Subdivision 40-F;

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the ability to create non-profit sub-entities under Division 63;

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the ability to treat certain reimbursements as creditable acquisitions under Division 111; and

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no denial of input tax credits for gifts made to gift-deductible entities under section 129-45.

12.9 The amendments in this Bill relating to gift-deductible entities do not apply to gift-deductible entities that are also charitable institutions, trustees of charitable funds or government schools. In addition, the amendments do not apply to entities that are endorsed as gift-deductible recipients in their own right. These entities continue to qualify for concessional GST treatment.

Accounting on a cash basis

12.10 An entity may account for GST on a cash basis if it meets certain eligibility criteria. For instance, an entity may account for GST on a cash basis if its annual turnover does not exceed $1 million. However, certain entities can account for GST on a cash basis regardless of the general eligibility criteria. These entities are currently prescribed under subsection 29-40(2) of the GST Act and include charities, trustees of charitable funds, gift-deductible entities and government schools.

12.11 Given the limited range of entities that can apply this rule it is appropriate that it be situated in that part of the GST Act which deals with special rules. Accordingly, this Bill amends the GST Act to insert a new Division into the GST Act. The amendment essentially transfers the special rules contained within Subdivision 29-B into the new Division. This Bill also includes signposts to the special rules in the GST Act. [Schedule 12, items 1, 3 to 5 and 14, subsections 29-40(2) and (2A), subsections 29-50(5) and (6), sections 29-69, 37-1 and 157-1]

12.12 The current definition of 'gift-deductible entity' in the GST Act includes an entity that operates a fund, authority or institution that is endorsed under paragraph 30-120(b) of the ITAA 1997 to receive tax deductible gifts or contributions. Such an entity is therefore entitled to account for GST on a cash basis. However, eligibility for cash accounting for this type of entity is available irrespective of the fact that its major activities may bear no relationship to the activities of its endorsed fund, authority or institution. Accordingly, this Bill amends the GST law to ensure that such an entity is not entitled to account for GST on a cash basis simply because it operates an endorsed fund, authority or institution. [Schedule 12, item 14, subsections 157-5(3) and 157-10(3)]

12.13 However, the amendment does not prevent these entities from accounting for GST on a cash basis if they meet the existing general eligibility criteria.

12.14 These amendments ensure that an entity's election to account for GST on a cash basis prior to the amendments coming into effect is made as if the choice was made under the new Division. This ensures that existing elections can continue to have effect if they meet the requirements of the new Division. [Schedule 12, item 2]

GST-free and input taxed supplies by gift-deductible entities

12.15 Sections 38-250, 38-255, 38-270 and 40-160 of the GST Act provide that certain supplies made by a gift-deductible entity can be treated as GST-free or input taxed. Section 111-18 provides that a gift-deductible entity may be entitled to input tax credits for certain reimbursements made to its volunteers.

12.16 By virtue of the current GST definition of 'gift-deductible entity', an entity that operates a fund, authority or institution that is endorsed under paragraph 30-120(b) of the ITAA 1997 to receive tax deductible gifts or contributions, may argue that it is entitled to access each of the above concessions for its entire operations. This is despite some of its activities being in no way related to the activities of the endorsed fund, authority or institution. This outcome is inconsistent with the original policy of restricting access to these concessions to charitable and charitable-like activities.

12.17 Accordingly, this Bill amends the GST law to ensure that a gift-deductible entity can only apply these concessions for a supply or reimbursement if the supply or reimbursement relates to the principal purpose of the endorsed fund, authority or institution that the entity operates and not to some other purpose. This Bill amends the GST Dictionary to include the term 'gift-deductible purpose' to refer to the concept of the principal purpose of an endorsed fund, authority or institution. [Schedule 12, items 6, 7, 9, 10, 12 and 15, subsections 38-250(4), 38-255(3), 38-270(3), 40-160(3) and 111-18(3) and section 195-1]

Example 12.1

Sara Pty. Ltd. operates an enterprise buying and selling books. As part of its enterprise, Sara Pty. Ltd. operates a public art gallery. Sara Pty. Ltd. is endorsed solely under paragraph 30-120(b) of the ITAA 1997 as a deductible gift recipient (DGR) for the operation of the public art gallery. The public art gallery is entitled to receive tax deductible gifts and contributions. Sara Pty. Ltd. is thus a gift-deductible entity for GST purposes.

If Sara Pty. Ltd. sells tickets to enable people to visit the art gallery, then the sale of the tickets may be GST-free under section 38-250 of the GST Act. The sale of the tickets relates only to the principal purpose of the public art gallery. However, section 38-250 cannot apply to the sale of the books as these sales relate to a purpose other than the principal purpose of the public art gallery; that is, they relate to the purpose of the book selling enterprise.

Example 12.2

Ely Pty. Ltd. operates both a swimming pool and a public museum. Ely Pty. Ltd. is endorsed solely under paragraph 30-120(b) of the ITAA 1997 as a DGR for the operation of the public museum. Ely Pty. Ltd. is a gift-deductible entity for GST purposes.

Ely Pty. Ltd. sells a single ticket for entry to both the swimming pool and public museum. Assuming that this amounts to a mixed supply for entry to the swimming pool and the public museum, the GST law can apply differently to the two aspects of the transaction.

The supply of a right of entry to the swimming pool is not GST-free under the relevant provisions because the supply relates to a purpose other than the principal purpose of the public museum. On the other hand, the supply of a right of entry to the museum can be GST-free because that supply relates only to the principal purpose of the museum.

Ely Pty. Ltd. needs to apportion the consideration for the ticket between the two components on a reasonable basis when determining its GST liability.

Example 12.3

Ian Inc. is an environmental organisation listed on the Register of Environmental Organisations stemming from Subdivision 30-E of the ITAA 1997. Ian Inc. is not a charitable institution but through its public fund, Ian Fund, is endorsed to receive tax deductible gifts.

Ian Inc. decides to hold a fundraising event to raise funds to support its principal purpose of preserving the local national park. As the supplies involved in this event relate only to the principal purpose of the endorsed fund, Ian Inc. is entitled to access the relevant concessions in the GST Act for this event.

Non-profit sub-entities

12.18 Division 63 of the GST Act allows charitable institutions, trustees of charitable funds, gift-deductible entities, government schools, and certain non-profit entities exempt from income tax (such as non-profit sporting bodies) to create non-profit sub-entities. Such entities are treated as separate entities for GST purposes. This concession was intended to only apply to entities that are set up on a non-profit basis.

12.19 A gift-deductible entity may not necessarily operate on a non-profit basis other than for the purposes of the fund, authority or institution it operates. Therefore, this Bill amends the GST law to ensure that only a gift-deductible entity that is a non-profit body is able to choose to apply the non-profit sub-entity concession. [Schedule 12, item 11, paragraph 63-5(2)(a)]

Change in use of an acquisition

12.20 Division 129 provides that where there is a difference between the actual use and the planned use of a thing acquired by an entity for a creditable purpose, that entity is required to make an adjustment. However, where the entity donates the item to a gift-deductible entity, no adjustment is required under section 129-45.

12.21 As noted earlier, a gift-deductible entity includes an entity that only operates an endorsed fund, authority or institution. Therefore, an entity can supply a gift to this type of entity, with no adjustment under Division 129, even though the gift is not made for the purpose of the endorsed fund, authority or institution.

12.22 The amendment ensures that the concession only applies where the gift is made by an entity for the principal purpose of an endorsed fund, authority or institution that a gift-deductible entity operates. [Schedule 12, item 13, subsection 129-45(3)]

Endorsement of charities operating retirement villages

12.23 A charitable institution or a trustee of a charitable fund that operates a retirement village can make certain supplies of accommodation, related services and food GST-free under section 38-260 of the GST Act. Unlike other provisions in the GST Act which require charities to be endorsed by the Commissioner in order to access the GST concessions, the requirement for charitable retirement village operators to be endorsed was omitted. Therefore, this Bill amends the GST law to ensure that such entities are required to be endorsed, ensuring consistency with other provisions applying to charitable institutions and trustees of charitable funds. [Schedule 12, item 8, paragraph 38-260(a)]

Application and transitional provisions

12.24 These amendments apply to net amounts for tax periods that commence on or after the day this Bill receives Royal Assent. [Schedule 12, item 16]