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Market value guidelines

Market Value Guidelines

Written 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).
  2. The definition of market value
  3. The principles
  4. Determining market value
    • Actual market value for a supply
    • Market value of a similar supply
    • Other methods approved by the Commissioner
    • Market value benchmarks
  5. Record keeping

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:

  • if the supply is a supply of accommodation 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.3 "
The entities to which s38-250 (1) applies are:
  • charitable institutions;
  • trustees of charitable funds;
  • gift-deductible entities4; or
  • Government schools.

3 A New Tax System (Goods and Services Tax) Act 1999
4 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:

  • the consideration in money a buyer in an open market is prepared to pay for a good or service when the transaction is at arms length; and
  • once established a market value of a supply can be used for a period that aligns with the practice of the market in which the charity operates. [Most charities currently review their prices as market forces dictate and at a minimum they should also review the appropriate market values at the same time.]

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:

  • 'the consideration in money that the supply would fetch at that date in New Zealand if freely supplied in similar circumstances between people who are not associated persons'
  • 'the consideration in money that a similar supply would fetch if freely supplied at that date in New Zealand in similar circumstances between people who are not associated persons'
  • 'Other methods approved by the Commissioner which provides a means for establishing an objective approximation of the consideration in money for a supply of the goods and services in question'
These tests are successive methods for determining market value of the supply, they are not alternative methods. The first two tests would generally establish a market value and the last test would be rarely used. The ATO has used this hierarchy as the model for the detail that appears below.

5 The Goods and Services Tax Act 1985

3. The principles

Charities 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 market.]

For example

(i) the local school may supply its school hall for functions - the market value in this case is the price charged by other halls in the locality with similar facilities, for example (but not limited to) the scout hall, RSL hall, community centre or golf club may provide the same type of supply.

(ii) for accommodation provided by University halls and colleges the market value is the price other providers charge in the locality for the same standard of accommodation. The market would include other residential colleges, boarding schools or boarding houses providing the same type of accommodation in the locality.

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.

For example

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.

For Example

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.

For Example

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.

It should be noted that some supplies may have a different GST treatment (taxable, input taxed or taxable) even where the consideration for the supply is the same, for example accommodation in different locations may be provided for the same consideration but the actual market will determine the GST treatment.

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 supplies.

For example

(i) A charity provides Auslan training that is not offered elsewhere - in this case it could use as the market value the price charged by a commercial provider for a course of similar duration.

(ii) A church or school campsite that does not have similar operators in their area could use the NRMA campsite charges for a similar standard of accommodation in other tourist parks in the same locality.

In order to make decisions on which supplies are thought to be similar charities should consider the following aspects:

  • The local market place should have priority in identifying these similar supplies.
  • Broad categorisations of things can be used as a way of substantiating the rationale to use certain supplies, such broad categorisations may include clothing, furniture, food, education and the like (such a broad categorisation is not appropriate for accommodation).
  • A charity should be able to distinguish between a service and a good they provide unless it is normal practice in the market to provide a 'bundle' of goods and services for an inclusive price, for example the provision of 'bed and breakfast'.
  • Where a service is offered a charity should seek comparisons that are similar in nature, quality, of similar size or time length and conditions of supply.
  • A charity should be able to distinguish between a second hand and new good and not make comparisons where second hand and new goods are interchangeable.
  • For the supply of accommodation, 'similar' includes consideration of the following;
    • type of premises or accommodation supplied, for example, camp site, motel, boarding house retirement village etc
    • the standard of facilities offered, for example one bedroom with shared facilities, bedsitter, dormitory style accommodation, fully contained, serviced apartment etc.
    • the conditions of use or occupancy, for example long term contract, per night, per week, per term.

For Example

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.

Other Methods Approved by the Commissioner

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.

  1. The charity must retain documentation that adequately shows that successive examination of the first two tests are unable to determine market value for supplies that are the same and supplies that are similar.
  2. The charity will need to isolate the specific supplies for which a market value cannot be determined. It is not appropriate to group nor aggregate supplies that have market values with those that do not.
  3. Then a charity may use an appropriate determination of 'cost+' to determine the market value of a supply.

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.

For example

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.

Market value benchmarks

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;

  • supported accommodation and community housing (long term accommodation rates)
  • crisis care (short term and long term accommodation as appropriate)
  • retirement villages (long term accommodation)
  • residential housing provided for the clergy (long term accommodation)
  • 'Meals on Wheels', charity 'soup kitchens' and organisations that prepare and supply meals to the frail, homeless or needy (food guidelines)

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;

  • campsite accommodation
  • university halls and colleges
  • boarding schools

5. Record Keeping

Charities 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.

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(PO Box 354 North Melbourne 3051 Victoria)
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