An important GST ruling has been issued dealing with 'apportioning the consideration for a supply that includes taxable and non-taxable parts', providing much-needed guidance on a tricky issue for taxpayers.
Ken Fehily, national leader of PricewaterhouseCoopers' (PwC) GST practice, says that, based on the ruling (GSTR 2001/8), if a composite supply is taxable, notwithstanding that there may be some incidental aspects of the supply which would not otherwise be taxable, GST is payable on the whole supply.
However, if a composite supply is non-taxable, notwithstanding that some incidental aspect of the supply may otherwise be taxable, no GST is payable on the supply.
The ruling gives as an example of a non-taxable composite supply, a supply by a hospital of GST-free hospital treatment to patients who are also provided with the free use of newspapers and TV sets during their hospital stays.
As the free use of newspapers and TV sets is merely incidental and ancillary to the hospital treatment, the entire supply of hospital treatment and use of goods will be GST-free.
Dealing with mixed supplies
Fehily notes that the position will be different where there is a mixed supply – that is, if it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.
"The distinction between parts of a supply that are separately identifiable and those that are integral, ancillary or incidental, is a question of fact and degree. The ruling recommends taking a 'common sense approach'," he reports.
"The ruling suggests, as an example of a mixed supply, the provision by a private health fund of a six month's gym membership with every purchase of its premium cover package. As the health cover and the gym membership are both of significant value and the gym membership is not integral, ancillary or incidental to the health fund membership, each must be viewed separately as different parts of a mixed supply."
The ruling, Fehily points out, provides that a supplier may choose to treat something (or things taken together) as integral, ancillary or incidental if the consideration apportioned to the part (if it were part of a mixed supply) does not exceed the lesser of $3 or 20% of the consideration of the total supply.
Direct or indirect apportionment method
Depending on the particular circumstances of each taxpayer, Fehily adds that the ruling provides for either a direct or indirect apportionment method where there is a mixed supply, and part of the supply is taxable and another part non-taxable.
"This contrasts with the draft ruling, which provided that indirect methods could only be used if direct methods were not practicable," he says.