In a previous article (from the June TaxEd Update), we considered the GST and income tax treatment of fundraising events from the perspective of both fundraisers and attendees. In this article, we consider the GST implications associated with raising funds through raffle tickets and the non-profit sub-entity rules.
A raffle is a lottery where entrants purchase tickets for the chance to win prizes. The prizes can be either goods or cash (or a combination of the two). Raffles can be run as part of a fundraising event or as a standalone fundraiser outside of an event. In some instances, to promote the sales of raffle tickets, a purchaser of a raffle ticket will also receive a token gift. The token gift could be a lapel badge/pin, acknowledgement in a newsletter, periodical advertising, chocolates, pens and so on. Generally, the token gift cannot be purchased alone and can only be obtained with the purchase of a raffle ticket. The actual retail value of the token gift may or may not be nominal.
Under s. 38-270 of the GST Act, where the supplier of tickets in a raffle is an endorsed charity, a gift-deductible recipient (DGR) or a government school, the supply will be GST-free if it does not contravene a state or territory law. GST-free supplies are counted towards an entity’s GST turnover. However, the entity is entitled to claim GST credits for any purchases associated with the raffle.
However, if the sale of raffle tickets is in connection with a fundraising event, and the endorsed charity/DGR has chosen to treat that event as an input taxed fundraising event, all sales made in connection with that event (including the supply of raffle tickets) are input taxed. Input taxed supplies are excluded from an entity’s GST turnover and are not subject to GST. However, the entity will not be entitled to claim GST credits for any purchases for that event, including purchases associated with the raffle.
Raffle tickets with token gifts: A single supply or multiple supplies?
Where the purchase of a raffle ticket comes with a token gift, the supply of the raffle ticket and the token gift may not have the same GST treatment, even if they are provided at the same time. That is, there are two components to the transaction that, if supplied separately, may lead to different GST outcomes. It is, therefore, necessary to determine whether the transaction should be characterised as a single supply or multiple supplies.
GSTR 2001/8 provides guidance to help work out when a supply is a mixed supply or a composite supply. A mixed supply is a supply of separately identifiable taxable and non-taxable parts that need to be individually recognised. A mixed supply is treated as more than one supply, with the correct GST treatment being applied to each of the individual parts. In the context of raffle tickets that come with token gifts, if the transaction is treated as a mixed supply, then the raffle ticket component of the transaction will be GST-free under s. 38-270 (if the relevant state or territory law is not contravened) while the token gift component of the transaction is taxable.
A composite supply is treated as a supply of just one thing. A composite supply comprises a dominant part and a minor part (or parts) that is integral, ancillary or incidental to the main thing supplied. As the minor parts of a composite supply are not treated as separate supplies, they receive the same GST treatment as the main part of the supply. In deciding whether a supply consists of more than one part, the Commissioner adopts a common-sense approach and states the following in GSTR 2001/8:
’21. You may choose to treat something (or things taken together) as integral, ancillary or incidental if the consideration that would be apportioned to it (if it were a separately identifiable part of a mixed supply) does not exceed the lesser of:
- $3.00; or
- 20% of the consideration for the total supply.
22. If you choose not to apply this approach, then you need to make an objective assessment about whether the thing is integral, ancillary or incidental.’
Accordingly, where the GST-inclusive retail value of the token gift is less than 20% of the cost of the raffle ticket or less than $3, the supply of the token gift can be treated as ancillary to the dominant part of the supply, being the supply of the raffle ticket. In this case, the supply of the raffle ticket and the token gift jointly would be GST-free if it does not contravene a state or territory law.
Non-profit sub-entity rules
For other NFP organisations the supply of raffle tickets is included in their GST turnover and is subject to GST if the NFP is registered or required to be registered for GST, regardless of whether the raffle is run as part of a fundraising event. However, Division 63 of the GST Act introduces special rules that give certain NFPs some flexibility with regard to their GST obligations by allowing them to create a separate entity (known as a non-profit sub-entity) for GST purposes.
A non-profit sub entity is a separate entity for GST purposes. This means that if a non-profit sub-entity’s GST turnover is less than the NFP GST registration turnover threshold (i.e. $150,000), it is not required to register for GST (even if the main NFP organisation is registered for GST). This allows some flexibility for the GST-registered NFP in the situation, for example, where the anticipated sales from raffle tickets is expected to be less than $150,000 and the NFP elects to treat this activity as a non-profit sub-entity. In this case, the non-profit sub-entity is not required to register for GST nor is it required to charge GST on the sale of raffle tickets. However, it will not be able to claim GST credits on expenses it incurred.
It is worth noting that a non-profit sub-entity is a separate entity for GST purposes only. Other obligations like FBT and income tax (e.g. PAYGW) are not affected by this arrangement.
NFP organisations choosing to apply Division 63 must be registered for GST and remain registered and must either be an endorsed charity, a DGR, a government school or be exempt from income tax under any of these provisions of the ITAA 1997:
- Section 50-5 (charity, education and science)
- Section 50-10 (community service body)
- Section 50-15 (employees and employers associations or trade unions)
- Section 50-40 (a society or association for the purpose of promoting aviation, tourism or Australian resources)
- Section 50-45 (a sports, culture or recreation body)
The non-profit sub-entity must be separately identifiable by the nature of its activities or by its location, and it must keep an independent accounting system. The ATO has stated that Division 63 can be interpreted broadly enough to allow separate activities like lamington drives and fundraising dinners to each be treated as a non-profit sub-entity, provided those activities are not related to the main purpose of the organisation (e.g. membership activities of the main organisation). (Refer to QC 16960 – GST branches, groups and non-profit sub-entities).
The non-profit sub-entity does not need to maintain a separate bank account or set of books, but the records of the sub-entity must be clearly and easily distinguished from the records of the main GST-registered NFP organisation. The decision to treat certain activities as a non-profit sub-entity must also be recorded by the main GST-registered NFP organisation, for example, by way of minutes or written election(s). An election to treat a particular area or activity as a non-profit sub-entity will continue until the time an election to revoke that decision is made. The election to revoke a sub-entity election should be clearly recorded in the NFP’s records. A decision to treat an area or activity as a non-profit sub-entity cannot be revoked for at least twelve months. Further, having revoked an election, the main GST-registered NFP cannot re-elect for the activity to be a sub-entity for a further twelve months.
When an activity ceases to be a non-profit sub-entity, either by election or because the activity no longer meets the criteria to be a non-profit sub-entity, the non-profit sub-entity must also consider cancelling its GST registration (if the activity is separately registered for GST).
For GST purposes, the main GST-registered NFP organisation and the non-profit sub-entity are treated as separate entities, but they are also considered to be associated entities. The GST Act contains specific provisions regarding supplies between associates. Broadly, if the main GST-registered NFP organisation provides items or supplies to the non-GST registered non-profit sub-entity for no consideration or inadequate consideration, it is deemed to have made a taxable supply at market value.
Where the non-profit sub-entity is not GST registered, no GST credits are available to be claimed by the sub-entity. This factor should be closely considered before opting to use the non-profit sub-entity rules.
Where NFPs are not endorsed charities, DGRs or government schools, it may be worth considering splitting their raffle fundraising activities into a non-profit sub-entity if the GST turnover of that sub-entity is anticipated to be less than $150,000. For endorsed charities, DGRs or government schools, the non-profit sub-entity option may still be relevant for activities that are otherwise subject to GST.