Market Value GuidelinesWritten by the ATO
The purpose of this document is to provide guidance to charities in the establishment of market value when used with respect to s38-250 (1) of A New Tax System (Goods and Services Tax) Act 1999. The paper arises as a result of discussions with the Charities Consultative Committee 2 seeking clear definition on the processes the ATO will require when determining the market value of supplies.
Charities are seeking guidance on how to establish the market value of the supplies they make, thereby enabling charities to determine whether those supplies are taxable, input taxed or GST-free by the application of s38-250(1). In some cases the supplies made by charities may not have a readily identifiable equivalent in the commercial arena and thus it is inherently difficult for charities to determine a market value for such supplies. This paper will set out a clear process that charities may follow to both identify and apply the market value test to supplies they make.
2See the minutes of the August 1999 Charities Consultative Committee meeting.
About these guidelines
The guidelines address the following;
1 The application of s38-250(1)
The GST law provides that the commercial activities of charities will be taxable (or input taxed) but the non-commercial supplies provided by charities will be GST-free. Where a charity registered for GST makes a supply in return for consideration, this will be a taxable supply, unless it is provided for nominal consideration.
"A supply is GST-free if the supply is for consideration that:
3 A New Tax System (Goods and Services
Tax) Act 1999
2. The Definition of Market Value
Market value is not a defined term in the legislation but it is an important concept because of the concession provided to charities under s38-250 (1). Market value is generally taken to be the price a buyer in the open market is prepared to pay for a good or service. Market value using this broad definition is not a static thing but one that is determined by economic forces that are dynamic in nature.
In applying such a definition in the context of s38-250 (1) means that charities would have to monitor the consideration they receive for their supplies with respect to the market constantly. It is proposed, therefore, that the definition of market value be defined in such a way as to allow greater certainty to charities in using s38-250 (1).
Market value with respect to the application of s38-250 (1) will be taken to be:
Charities have argued that many of the supplies they make do not have commercial equivalents, hence there is no market for the charity to compare against and the consideration paid for the supply is the market value. New Zealand 5 offers a hierarchy of three tests in the determination of market value that states:
5 The Goods and Services Tax Act 1985
3. The principlesCharities will need to establish whether they are making a taxable supply by using the first four tests in s9-5 6.
A charity needs to look to the actual market it operates in, in the first instance to establish a market value. It is the supply that is compared in the market not the recipient of the supply or the provider of the supply. That is an organisation would compare their supplies based on, quality, quantity and conditions of supply.
If there is no market for the supplies the charity makes then it should look at similar supplies in the market place. Again using comparable features of the supply.
As a last resort where no commercial equivalent exists for a particular supply the charity could calculate its own market value for that supply.
The benchmarks provided by the ATO for certain supplies may only be used by the types of organisations specified below.
6 A New Tax System (Goods and Services Tax) Act 1999
4. Determining Market Value - The Process
The actual market value for a supply in the open market
A charity will need to
establish whether the same supply exists in the open market. Where
it does the price of the supply as defined by the market is the market
value that should be used in the application of s38-250. The supplier
needs to determine what it is actually supplying to determine the relevant
market. [In court cases dealing with the valuation of trading stock it has
been held that the 'market selling value' contemplates a sale in the
ordinary course of an organisation's business. Further, the 'market
selling value' is the current selling value of the goods (or services) in
the particular organisation's own selling
The same types of "items" may exist as different things when defined by the market. An end of season item of clothing is a different thing from a new season item of clothing and therefore has a different market value.
A retail outlet donates a large number of out of season shirts to the local opportunity shop. The market value of the shirts is not the GST inclusive price of the new shirts. A different market value exists for these shirts that are new but out of season.
While the above distinguishes between the same types of items and the difference in their market value this does not mean a charity would be required to value individually everything they supply. A charity can choose to group a range of things together within the one comparison where they are confident the market value of those supplies can indeed be compared. This would allow a charity to make a judgement as to which things in a group of supplies is representative of the group and therefore use this as the overall basis from which to establish the market value.
The opportunity shop above may apply a single market value to a range of men's shirts, including long sleeve and short sleeve rather than seek a market value for each shirt.
A charity will need to ensure the market they are comparing with is a market within which they operate. Therefore, the locality becomes a necessary component in deciding the reasonableness of the market value that has been derived by the charity for most types of supply.
A charity makes supplies of meals to homeless people in the western suburbs of Sydney. In order to establish a market value for those supplies the charity should examine those establishments that are within a reasonable distance of where the charity makes its supplies.
This outcome may only affect a small number of the larger charities that operate over a very wide and diverse range of market locations. The smaller charities would tend to operate in a well-defined market that would have no or minimal variance of market values so all similar supplies would receive the same GST treatment.
Larger charities that do make the same supplies in a number of different locations will be permitted to use a representative sample in order to establish market value for all the locations concerned. This approach is different to the accommodation benchmarks that have been provided by the ATO where location is the primary consideration in establishing market value.
A charity will need to consider the degree to which the prices they are comparing its supplies against are representative of the market value. Whilst it is unrealistic to place a definitive figure upon how many GST inclusive prices should be obtained the ATO would expect that it would generally be more than one. The information collected would need to provide sufficient intelligence for the charity to be confident in stating the supplies are a representative sample of the market.
Market value of a similar supply
Where a charity is unable to
use the first test to determine a market value of their supplies, for
example there is no commercial equivalent, it may seek to identify similar
supplies that exist in the open market and use that consideration/s to
establish the GST inclusive market value for its
A charity offers a half-day class in relaxation techniques to unemployed adults for which it charges a small fee. The charity would be able to use any half-day adult education course that is offered by other organisations that is akin to their half-day course in terms of nature, duration, standard of tuition and activities during the course.
The ATO would expect that this test would rarely be used as the market value of most supplies made by charities could be determined using one of the first two tests. In using this last test the onus for developing a methodology lies with the charity under a broad framework that is outlined below.
The determination of market value using 'Cost+'
This method allows a charity
to use full absorption costing and then apply a mark-up appropriate to the
general market of the particular supply. Full absorption cost includes the
cost of labour and materials, plus an appropriate proportion of variable
and fixed overheads, for example power, rent, rates, insurance and
administration costs. In using this method (as distinct from determining
the cost of supply for the purposes of the 'cost of supply test' in
s38-250) an organisation can also include an imputed cost for donated
goods and voluntary labour.
The use of this method may be appropriate in determining the market value of meals prepared on the premises of the school or church campsites above. In that case the costs would include food, electricity, wages equipment etc. The markup applied would be that appropriate to the take-away food industry.
However where the organisation purchases food and then provides it to someone else, for example on a school excursion the school purchases hamburgers for the participants, then the market value is the cost of the food.
The ATO has provided benchmark market values for a range of supplies including accommodation and meals. The use of the benchmarks is limited to the following types of organisations (and supplies) by those organisations;
The accommodation benchmarks are not for use by organisations where there is a market value that can be established using the first two test above, that is actual market value for a supply or a market value of a similar supply. That is the benchmarks do not apply to the following types of organisations or supplies;
5. Record KeepingCharities should maintain and retain records that adequately document the process and information collected in establishing the relevant market values to which consideration of their own supplies are to be compared. For example, the market values established and the methods used may be diarised or minuted in the organisation's books of account. This information should be captured in such a way that will enable cross-referencing to accounting statements and therefore what will be recorded on Business Activity Statements.