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Help Sheet

What Flexibility Exists for Non-Profits Registering for GST?

Principle

The GST legislation allows organisations to either group or branch but not to do both. Organisations would need to look at their structural arrangements to determine what arrangements would best suit their operation with respect to the costs of compliance, particularly the costs of actioning internal transactions. Certain non-profit organisations may also form non-profit sub entities.

Grouping

The requirements for non-profit bodies to apply to be treated as a group are that all members of the group:

  • are non-profit bodies and all members are of the same non-profit association;
  • have the same tax periods and the same accounts basis.
  • Are all registered for GST

Branching

The Commissioner may register a branch of a registered entity if:

(a) the entity applies, in the *approved form, for registration of the branch and

(b) the entity has an *ABN or has applied for one; and

(c) the Commissioner is satisfied that the branch maintains an independent system of accounting, and can be separately identified by reference to:

(i) the nature of the activities carried on through the branch or

(ii) the location of the branch and

(d) the Commissioner is satisfied that the entity is *carrying on an enterprise through the branch or intends to carry on an enterprise through the branch, from a particular date specified in the application.

A branch that is so registered is a "PAYG withholding branch".

Note: A branch may be both a PAYG withholding branch under this Subdivision and a GST branch under the GST Act.

Sub-entities

An entity choosing to apply Division 63 must be registered and must be:

  • A charitable institution, trustee of a charitable fund or a gift deductible entity or, a government school;
  • A non-profit body that is exempt from income tax under any of these provisions of the ITAA 1997:
    • s50-5 (charity, education, science and religion);
    • s50-10 (community service);
    • s50-15 (employees and employers);
    • s50-40 (primary and secondary resources, and tourism);
    • item 9.1 or 9.2 of s50-45 (sports, culture and recreation).

These non-profit organisations with small independent branches (units) have the option of treating their units as if they were separate entities for GST purposes and not part of the main organisation.

A unit will be considered to be independent if it;

  • maintains an independent system of accounting; and
  • can be separately identified by the nature of its activities or by its location.

If an entity chooses this option it must record each unit that is being treated as a separate entity for the purposes of GST.

It means that where the sub-entity turnover is less than a $ 100 000 it can choose whether it registers or not. Where the sub-entity has a turnover of $ 100 000 or more it will be required to register separately for GST and will have the same rights and obligations as other GST registered entities, except for the ability to form other non-profit sub-entities.

The liability for all GST obligations of the unit will be imposed on the persons responsible for the management of the sub-entity.

Other important points:

  • Non-profit sub-entities are separate entities for GST purposes.
  • Non-profit sub-entities are for GST purposes only not PAYG, FBT, IT.
  • An organisation cannot create a sub-entity for its core activities such as membership of the main organisation.
  • Where an organisation creates multiple sub-entities and the turnover of the main organisation is reduced to below $ 100,000 the main organisation cannot elect to cancel their registration. In order to enjoy the flexible options under Div 63 the main organisation must remain registered for GST.

S63-50 will allow a nonprofit sub-entity to be a member of a GST group provided:

  • it is registered;
  • it accounts on the same basis and has the same tax periods as all other members of the group;
  • it is not a member of another GST group; and
  • the other members of the group are the main nonprofit entity or another brnach that is a nonprofit sub-entity.

The second option is to allow charities to treat certain fundraising activities as input taxed. These fundraising events may include a fete, ball, gala show, dinner performance or similar event. The event must be separate from and not forming any part of a series, or regular run, of like, or similar events. It may also include an event that involves the sale of small fundraising items such as flowers, confectionery and chocolates (not alcoholic beverages or tobacco products), provided the charitable entity is not in the business of making such supplies. It will also include events such as 'Red Nose Day' and 'Daffodil Day'.

Where the fundraising event does not meet this description, a charitable entity may make a request to the Commissioner to apply his discretion to allow the charitable entity to treat the activity as input taxed. In applying his discretion the Commissioner would need to have broad regard to whether the charitable entity is in the business of making such supplies. Given the difficulty of establishing whether a particular activity or series of activities constitutes a business, it is appropriate to leave this matter for the Commissioner to decide on a case by case basis. In addition, the Commissioner must be satisfied that the proceeds of the fundraising are for the direct benefit of the charity.

Specific Questions and Answers

  1. If a number of non-profit organisations apply to be treated as a group can they use the ABN of the nominated representative member of the group on all the tax invoices they issue?
  2. The Tax invoice regulations state that the ABN of the supplier must be provided on a tax invoice. The entity providing the supply therefore must use their own ABN on their tax invoices. The GST grouping provisions do not mean that the grouped entities lose their own status as an entity and form one larger entity. For this reason the ABN of the nominated group representative cannot be used by the other entities in the group.

  1. Will parishes (or their equivalent) be able to register as branches (section 54-5) while behaving as a group such as a diocese (or their equivalent) in order to minimise the number of internal transactions attracting GST? Could this approach be applied more broadly across the charitable sector?

    s54-5(3) precludes registering a branch separately if you are a member of a GST group. Members of a group are required to charge GST and the representative member completes the Business Activity Statement on behalf of the group. Branches are required to charge and complete individual Business Activity Statements.

  2. There are numerous transactions occurring between bodies of a charity that are separately incorporated and registrable for GST purposes. Often sales between entities within a charity constitute a taxable supply between the bodies, with the purchaser entitled to an input tax credit. Given there is no risk to the revenue in these cases and higher compliance costs there should be provision to allow entities to be grouped.
  3. Entities can group subject to s48-10, charities will need to examine their own structural arrangements in order to ascertain what level best suits the organisation to register as entities.

    An entity means any of the following:

    • an individual
    • a body corporate
    • a corporation sole
    • a body politic
    • a partnership
    • any other unincorporated association or body of persons
    • a trust
    • a superannuation fund.
  1. Can overseas organisations, which give grants for conservation in Australia, form a GST group with the Australian organisation?
  2. A non-profit body can apply to the Commissioner to form a GST group with other non-profit bodies that belong to the same non-profit association. If the bodies do not belong to the same non-profit association, they cannot form a GST group.

    The Commissioner must approve the application provided that:

    1. the entities apply in the approved form;
    2. each of the entities satisfy the membership requirements for the group and
    3. the application nominates one of the entities, which must be an Australian resident, to be the representative member for the group

    To satisfy the membership requirements, a non-profit body must:

    1. be registered for GST;
    2. have the same tax periods applying to it as the tax periods applying to all those other members;
    3. account for GST on the same basis as all those other members; and
    4. not be part of another GST group

    A non-profit body must be registered if it carries on an enterprise and its annual turnover meets the registration turnover threshold, currently $100 000. A non profit body which carries on an enterprise but does not meet the registration threshold can still choose to register if desired.

    Therefore, if the overseas organisations belong to the same non-profit association as the Australian organisation, all the organisations are registered for GST, have the same tax periods and method of accounting for GST, and are not part of another GST group they will be able to form a GST group. If any of the requirements discussed above are not met, they cannot form a GST group. The Representative member of the group must be an Australian resident.

  1. What is required for an independent system of accounting for Div 63?

    An independent system of accounting does not necessarily require that a separate bank account be kept or that a separate set of books be kept. It is essential however that the records of the sub entity can be clearly and easily distinguished from the records of the main entity. They should be easy to access and extract. It is recommended that the best means of maintaining clearly identifiable records is to establish separate cash receipts and cash payments books and possibly a separate bank account. Please note that a separate bank account is not essential.

  2. Does a sub-entity have the same income tax status as its parent entity? (Is it a charitable institution or gift deductible entity if the main organisation has this status?)

    Sub-entities only exist for GST purposes. As such for income tax purposes the sub-entity remains part of the main organisation. For this reason the sub-entity enjoys the same status for income tax purposes as the main organisation and does not need to apply for endorsement in its own right.

    Section 38-250 provides that supplies will be GST-free where the supplier is a charitable institution, trustee of a charitable fund or gift deductible entity. Where the supplier is a sub-entity which is part of a charitable institution etc the sub-entity has the same status for income tax purposes and the section will apply assuming all the provisions within the section are satisfied.

  3. What is the impact of PAYG as a result of creating a sub-entity?

    Where a sub-entity is created it only exists for GST purposes. As such all PAYG withholding will be conducted by the parent organisation not by the sub-entity.

    The exception to this would be where a sub-entity has been created and it has all the attributes required for a PAYG branch. In this case it is possible for the sub-entity to be a GST sub-entity and to choose to be treated as a PAYG branch at the same time. If this is the case the sub-entity will account for PAYG withholding under the requirements for a PAYG branch.

    The requirements to create a PAYG branch are contained in section 16-142 of Schedule 1 to the Taxation Administration Act (1of 1953).

  4. What is the position with regard to joint ventures and the charitable sector?
  5. The basic features of a joint venture are;

    • the participants hold their interest in the assets of the venture in common and their liability is several;
    • an operator or manager is interposed between the participants and the operation (or may be one of the participants); and
    • the participants receive the fruits of the venture separately and in kind.

    There are now regulations (51-5.01(m)) which allow charities to form joint ventures if they should wish to do so. To take advantage of the joint venture provisions an organisation undertaking charitable activities would need to satisfy the following participation requirements:

    • participate or intend to participate in a joint venture;
    • be party to a joint venture agreement with the other participants or intended participants of the joint venture;
    • be registered; and
    • use the same accounting basis as all other participants.

    One participant (the joint venture operator) of the joint venture would be responsible for paying the GST and would be entitled to the input tax credits that relate to supplies, acquisitions and importations it makes for the purposes of the joint venture on behalf of the other participants of the GST joint venture. Supplies made by the joint venture operator to another participant of the GST joint venture would not be treated as being subject to GST. The joint venture operator would make the GST return of the GST joint venture on behalf of the participants of the joint venture.

  1. Community Rents and Tenancy Schemes - Do private individuals leasing residential premises to providers of community housing need to have an Australian Business Number (ABN)? Will organisations leasing premises from private individuals have to withhold 48.5% of rental payments if these landlords do not have an ABN?

    Residential landlords do not require an ABN when they are making supplies that are predominantly residential accommodation. In a press release dated 29 May 2000 the Commissioner said

    "Clearly, renting out a commercial property falls within the ABN quotation requirements, but some confusion has arisen where a rental agreement is predominantly for residential purposes and there is some business use of those premises - for example, a freelance journalist working from home."

    "I want to make it clear that where the basis of the arrangement is a residential rental agreement, owners will not have to quote an ABN to their tenant even if there is some minor business use of the property by the tenant."

    There will also be no requirement for residential rental property owners to quote an ABN to an organisation that is providing residential accommodation for its own employees -for example, through the Defence Force Housing Authority."

    This treatment will extend to situations where the landlord is leasing residential premises to organisations that will use the premises to provide low cost housing. The organisation providing the housing is providing low cost residential accommodation and as such is using the premises predominantly for residential purposes.

  2. Will the definition of turnover include donations received by a charitable institution?

    Turnover is the sum of the values of all the supplies that a charitable institution has made within a 12 month period. It does not include input taxed supplies or supplies for no consideration. If a payment of money or goods is truly a gift the charitable institution is not providing a supply in return for the payment. The gift is not included in annual turnover.

  3. What is the definition of an associate?

  4. The GST legislation applies the definition of an associate contained in section 318 of the Income Tax Assessment Act 1936.

    An associate of a taxpayer is broadly defined to mean:

    • A relative or partner of the taxpayer
    • A trustee of a trust estate where the taxpayer or a relative is capable of benefiting under the trust, or
    • A company that is effectively under the direction or control of the taxpayer or a relative or that is capable of being controlled by the taxpayer and/or associates.

    The definition of an associate does not extend to a non-profit sub-entity as they are treated as entities for the purposes of the GST law only.

  1. Where one entity purchases items on behalf of a group of legally separate entities with whom they are co-located what is the situation with regards to claiming input tax credits and holding a valid tax invoice?
  2. The entity that purchases on behalf of the groups is acting as an agent for the other members of the group. Each member of the group makes a creditable acquisition and is entitled to claim input tax credits but only to the extent that the supply relates to them.

    In order to claim an input tax credit you must hold a valid tax invoice. In this case this requirement is satisfied if either the entity claiming the input tax credit or their agent holds a valid tax invoice for a supply.

  1. GST grouping - how exactly will it work?
  2. The effect of forming a GST group is that transactions between entities within the group are not treated as taxable supplies, that is, no GST is payable and no input tax credit can be claimed.

    One entity, known as the 'representative member' manages the GST affairs of the group and is responsible for lodging the Business Activity Statement on behalf of all members.

    The representative member is also responsible for all the GST payable and is entitled to all input tax credits that the members of the group are entitled to for supplies and acquisitions made outside the GST group.

    While the representative member is responsible for paying GST, the members of a GST group are jointly and severally liable to pay any amount payable under the GST law by the representative member.

    Companies can form a GST group if each company:

    • Is a member of the same 90 per cent owned group as all other members of the GST group or proposed GST group
    • Is registered for GST
    • Has the same tax periods
    • Accounts for GST on the same basis (that is, cash or non-cash), and
    • Does not belong to any other GST group

    A GST group can also be formed by some or all of the non-profit bodies that are members of the same non-profit association. The 90 per cent beneficial ownership requirement does not apply to GST groups formed by non-profit bodies.

Our Community Pty Ltd   www.ourcommunity.com.au   ABN 24 094 608 705
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(PO Box 354 North Melbourne 3051 Victoria)
Telephone (03) 9320 6800   Fax (03) 9326 6859   Email service@ourcommunity.com.au