What should not-for-profits be aware of in accounting for GST?

Principle

The GST legislation allows for two alternative tax periods one of three months and the other of one month. If a not-for-profit has an annual turnover of $20 million or more they must elect to have a one-month tax period under s27-15. All not-for-profits with a turnover below $20 million can elect whether to account monthly or three monthly. Not-for-profits that have substituted accounting periods (those that do not match the financial year) are also able to account on three-month or monthly tax periods.

The GST legislation allows for entities to account for GST on either a cash or non-cash basis. Charitable institutions, trustees of charitable funds or gift deductible entities may choose to account on a cash basis even if their annual turnover exceeds the threshold of $1 million under s29-40 (2).

The GST legislation states that certain information must be specified on tax invoices in order to make them valid tax invoices. This information can be found in various ATO publications including the industry booklets. You should also be aware of the Ruling GSTR 2000/17 on tax invoices.

Specific Questions and Answers

1. Is there potential for a hybrid accounting approach that incorporates both cash and accruals for processing GST payments and refunds?

   There is no provision to allow a hybrid form of accounting, an organisation must choose either cash or accrual. The legislation makes concessions to allow charitable institutions to account on a cash basis even if their turnover exceeds the cash accounting turnover. The accounting method chosen by an entity may be different for GST from their established accounting method.

2. What tests will be applied to "tax input credits"?

   Entities making taxable or GST-free supplies will be able to claim input tax credits for any purchases that are creditable acquisitions which are made as part of their enterprise. Where the supplies are input taxed the entity is not entitled to input tax credits that relate to that supply.

   If you are exempt from income tax, an acquisition that you make that would be a non-deductible expense under the Income Tax Assessment Acts is not a creditable acquisition, for example, entertainment, club and leisure facilities.

3. Will lease rentals charged to charities on motor vehicles be subject to GST, or will this depend upon the use to which the vehicle is put?

   Lease rentals will be subject to GST. Normally the charity will be entitled to an input tax credit if the vehicle is used in the enterprise.

4. Where you have an entity registered for GST offering goods and/or services that are GST free, GST taxable and GST input taxed, do you have to identify which inputs relate to which outputs?

   A registered entity will be entitled to input tax credits in respect of GST paid, provided what was acquired was used in carrying on their enterprise. The only exceptions to this are where the acquisition relates to the provision of input taxed supplies, or where the acquisition is of a private or domestic nature.

   Accordingly, it is not necessary to distinguish between acquisitions utilised in making taxable supplies and those utilised in making GST free supplies. In either case, input tax credits are allowable provided the above conditions are met.

   It will be necessary however to identify any acquisitions that were wholly or partly put toward the provision of input taxed supplies. Where an acquisition was wholly utilised in generating input taxed supplies, no part of the GST paid in respect of the acquisition may be claimed as an input tax credit. Where an acquisition was partly used for making input taxed supplies, it will be necessary to apportion the use between taxable/GST free supplies on the one hand and input taxed supplies on the other. The extent to which the acquisition relates to the provision of input taxed supplies would not give rise to an input tax credit.

   Draft Goods and Services Tax Ruling GSTR 1999/D14 sets out the apportionment methodologies which the ATO considers are acceptable for calculating input tax credits where an acquisition or importation is used partly for a creditable purpose and partly in the provision of input taxed financial supplies.

5. Are there any advantages in accrual accounting for GST versus cash accounting to the smaller operator? Is it necessary for an organisation to change their accounting system?

   Any advantage of one accounting method against the other would be dependent on the type of organisation, its structure and the accounting system it currently has in place. Charitable institutions, trustees of charitable funds and gift deductible bodies may choose to account on a cash basis whether or not their turnover exceeds the cash accounting turnover threshold of $1 000 000. Charities registered for GST will be able to choose the accounting method that best suits the requirements and circumstances of the organisation.

6. Can the return be missed one month if there was not much to claim back and added to the next month to avoid a claim for what might be only a small amount?

   There is no provision for such an arrangement. If you are registered you must give the Commissioner a Business Activity Statement (BAS) for each tax period. You must provide a BAS whether or not your net amount is zero for the tax period or whether or not you are liable for GST on any taxable supplies in that period. However, if during a particular tax period you are not liable for any GST or entitled to a refund, you may only be required to provide information in a modified form (see subsection 31-15(2)).

7. What is the likelihood of there being simplified accounting for charities?

   Currently there are no simplified accounting methods specifically for charities. Division 123 of the GST legislation provides that the Commissioner may make a determination for retailers who make supplies under subdivision 38-G of the GST Act. A retailer is defined as someone who supplies goods. Consequently charitable institutions, trustees of charitable funds and gift deductible entities that make non-commercial supplies of goods under sections 38-250 or 38-255 may be able to take advantage of the provisions in Division 123.

   At this point in time the Commissioner has not made a determination about simplified accounting methods for the charitable sector. Negotiations between several larger charities that run family stores or thrift shops and the ATO are currently underway and it is anticipated that a determination on a simplified accounting method for the sector will follow this process.

8. An organisation undertaking a wide range of service delivery may have to deal with a variety of GST treatments. Given that organisations within this sector have limited resources what options are available to help reduce the cost of compliance for these different treatments?

   Compliance costs for such organisations should only be marginally higher than for those organisations that attract only one kind of GST treatment. Once market value is determined (and hence what is commercial/non-commercial) then for the purposes of claiming input tax credits there is only a need to apportion where a charity makes input taxed supplies. Where an entity makes a combination of GST-free and taxable supplies the entity is entitled to full input tax credits for all their acquisitions that relate to taxable and GST-free supplies and there would not be any need to match inputs to the different supplies. The charity would need to record the GST collected in making taxable supplies.

9. To larger charitable organisations the cost of tracking internal transactions for GST purposes will be substantial. Are there options available that might reduce this compliance cost?

   Complex organisations will need to think carefully as to the best way to structure their operations in order to minimise their overall compliance cost. Where organisations have a large volume of internal transactions they may decide to group for GST in order to minimise the cost of accounting for these transactions. Alternatively, using the GST branch option may be more appropriate where the entity operates through a divisional or branch structure.

10. What about increased costs incurred as a result of loss of sales tax exemption especially in the purchase of motor vehicles?

    Currently Wholesale Sales Tax (WST) exempt organisations are not completely free from WST because there is a degree of imbedded WST in the goods and services they purchase. Also, the cost of motor vehicles should decrease as a result of the introduction of GST, so it is unlikely there will be an increase in costs as a result of a loss of the WST exemption. Entities will pay GST on vehicle purchases and where they are a registered entity they may claim an input tax credit on their creditable acquisitions. While there will be a phasing in of input tax credits for motor vehicles, WST exempt organisations, will be able to claim full input tax credits from the date of implementation.

11. Compliance costs for community housing associations could be very high since there will need to be monitoring of income and expenditure across the three classes of transaction, GST-liable, GST-free or input taxed.

There are a number of options by which community housing organisations can be examined to determine whether their operations are commercial or not. Each involves different compliance costs and varies depending upon location and movements in the rental markets. The options are:

• Examine each rental transaction on a case by case basis.
• Average the total number of rents for that organisation and determine the overall "commerciality" by comparison with the 75% rule.
• Assess the overall operations of the entire community-housing sector and determine the commerciality of the sector as a generality.

What is the position of the ATO with regard to these three options?


The GST is a transaction-based tax. It applies each time a thing is supplied. Compliance costs associated with the nature of the tax cannot be addressed by allowing averaging of the consideration of supplies. It is important to recognise that input tax credits will be available regardless of whether the supply is commercial or non-commercial provided the supply is not input-taxed. A concession of averaging would allow commercial supplies to become GST-free which is not appropriate.

12. Will organisations which provide both GST-free and input taxed services need to use full cost allocation systems for all their overheads to ensure they are not claiming GST reimbursement on that proportion associated with input taxed activities?

    An organisation providing both GST-free and input -taxed supplies would be required to allocate overheads between these types of supplies. Where acquisitions or overheads cannot be directly attributed to supplies then they would need to apportion on a reasonable basis.

13. It is our understanding that transactions that are less than $50 may not be required to have a tax invoice. If no tax invoice is provided on transactions such as petrol purchases and such transaction relates to religious services, how can credits be claimed?

    Under s.29-80, it is not necessary to have a tax invoice in order to claim input tax credits where the tax exclusive value of the acquisition does not exceed $50.

    Despite this, it is still necessary for the recipient to be able to verify purchases made. For example, a standard cash register receipt or hand written receipt should be retained.

14. What will happen if one part of the organisation makes an error? Will there be a penalty for the entire organisation, the CEO/public officer or the Managing Director?

    Generally, the organisation is responsible for the errors made by its officers and employees. For example, if an employee who is responsible to issue tax invoices has failed to do so, then the organisation is liable to penalty under the Taxation Administration Act 1953.

    An organisation may consist of a number of discrete parts. Those parts may elect to be members of a GST group. The members of a GST group are jointly and severally liable to pay any amount that is payable under the GST law by the representative member of the group. Any offence against the GST law that is committed by the representative member of the group is taken to have been committed by each of the members of the group.

    Where a GST branch has been established, liability for GST errors made by officers in that branch remains with the parent entity.

    Where a GST sub-entity has been established liability for GST errors by officers in that sub-entity rests with the sub-entity.

15. Where a "GST tax invoice" is not received from the supplier, are there any circumstances where I can still claim the input credit?

GSTR 1999/2 is a draft Ruling that outlines the transitional arrangements in relation to claiming an input tax credit without a tax invoice.

You are entitled to an input tax credit for a creditable acquisition without holding a tax invoice where you hold a document issued before 1 July 2000 for a taxable supply made on or after that date and the document contains the following information:

• the supplier's name or trading name;
• the supplier's address;
• the date of issue; and either:
• the price of the taxable supply and a statement indicating that the price includes GST (if the supply is for a period that spans 1 July 2000, the taxable supply is that part of the supply to be made on or after 1 July 2000); or
• the amount of the GST payable.

To claim an input tax credit you can rely on any document that satisfies these requirements. This includes documents such as insurance renewal notices and subscription notices, for example, subscriptions for trade magazines, online legal research and information, motor registration and subscriptions to professional associations.

16. Where a supplier fails to provide a tax invoice what documentation will need to be maintained for compliance purposes? What will the audit procedures be?

    Every taxpayer that makes a taxable supply taxable importation, creditable acquisition or creditable importation, must keep records that record and explain all transactions and other acts engaged in by the taxpayer that are relevant to that supply, importation, acquisition or dealing.

    Taxpayers must maintain their records for five years from the time of completion of the transactions or acts to which they relate.

17. Is it true that we can lodge our GST return by the first of the month and the ATO must pay our refund within fourteen days or pay interest?

    If the amount of input tax credit owed to you is greater than the GST on your supplies you will receive a refund. Any refund due will be applied against your other tax liabilities before an amount is refunded. The Commissioner must pay the refund within 14 days of you lodging your Business Activity Statement (GST return) for that tax period. Interest is payable under the Taxation (Interest on overpayment, Early payments) Act 1983. The Commissioner may offset your refund against other liabilities you may have.

18. Is an insurance claim when made by a charitable institution registered for GST considered to be a taxable supply?

    Settlements made under insurance policies are not subject to GST as long as the insured entity has informed the insurer of the extent of input tax credit it is entitled to on the premium. If the insured entity, such as a charitable institution, does not inform its insurer of its extent of input tax credit, or understates the extent, it will have a GST liability on a settlement to the extent of the understatement.

19. How is interest treated on deposits made by financial institutions under GST?

A supply is a taxable supply if it is made for consideration, it is made in the course of or furtherance of an enterprise that the supplier carries on, it is connected with Australia and the supplier is registered (or required to be registered). However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

A supply of money is not a supply for GST purposes unless that money is provided as consideration for a supply that is a supply of money.

The payment of interest by a financial institution is not a supply by the institution because it is a supply of money. However, the interest is consideration for a financial supply made by the depositor, being an interest in a debt.

Therefore, it is possible that a depositor who is registered for GST who makes a deposit of money into a financial institution and receives interest in return is making a supply for which consideration is payable. That supply would be then considered to be a taxable supply but for the fact that financial supplies are deemed to be input taxed. The supply is a financial supply and no GST is payable on the transaction. Equally, a depositor who is not registered for GST cannot make a financial supply and therefore the transaction is excluded from the GST system.

In the case of a registered depositor, the issue of entitlement to input tax credits may arise given that the enterprise has made a financial supply. Normally, an entity that makes input taxed supplies cannot claim input tax credits for its acquisitions or importations to the extent that it relates to making input taxed supplies. However, where the annual turnover of the financial supplies made does not exceed the lesser of $50 000 or 10% of the entity's annual turnover (including the financial supplies), the entity will still be entitled to full input tax credits. Annual turnover does not include the value of supplies that are input taxed (s188-15).

20. Will purchasers be able to find out which foods on a supermarket tape have a GST component in their price? This would be required for claiming input tax credits on function refreshment expenses.

If the value of a sale is more than $50, a supplier must prepare and issue a tax invoice within 28 days of being requested to do so. The invoice will show the items subject to GST, and the total amount of GST payable.

If the value of a sale is less than $50 a supplier does not have to issue a tax invoice and the customer does not need one to claim the input tax credit. However, documentary evidence (for example, cash register receipts) must be retained. To claim credits in this situation, the customer should ascertain from the shopkeeper whether a) the business is registered for GST and b) which item(s) and amount(s) were subject to GST. Most supermarkets will provide this information on their receipts.

21. How do we deal with non-registered clients over small consultant payments (only a few hundred dollars)?

Under the Pay As You Go legislation, where one business acquires goods or services from another business, it is required to deduct 48.5% of the payment if

• the supplier does not quote an ABN; and
• The amount of the payment is greater than $50; and
• The amount received by the supplier is not exempt income.

Any consultants who intend to provide their services to other businesses should therefore obtain an ABN so that their business customers are not required to withhold tax.

22. When can input tax credits be claimed?

An entity operating on the cash basis may claim an input tax credit to the extent that consideration is paid to its suppliers in the tax period. However, it must hold a tax invoice at the time the credit is claimed.

An entity operating on the non-cash (accruals) basis may claim an input tax credit in the tax period corresponding to the earlier of;

• Receiving an invoice from a supplier; or
• Paying any part of the consideration to the supplier.

However, it must hold a tax invoice at the time the credit is claimed.

23. What means are available to alleviate the lack of capacity of smaller community groups to deal with the GST (eg: regarding start-up & ongoing compliance).

    In addition to the above measures, the ATO has field officers available to visit charities and other non-profit entities. Each ATO office has field officers that have received specialised training in the issues confronting charities etc.

    Assistance is also available from the ATO Hotline (telephone 13 24 78). If rulings are required in respect of specific issues, requests may be emailed to replyin5@ato.gov.au.

    The ATO is also producing a computerised cashbook (called E-record). The final version will soon be available free of charge. Orders may be placed by phoning 13 24 78.

24. Embedded cost savings - how will the ATO require that they be calculated?

It is not an ATO requirement that embedded cost savings be taken into account in setting prices. The ACCC (Australian Competition and Consumer Commission) and some funding bodies may require you to identify these savings.