Chapter 7: Non-Commercial Activities of Charities


The Government’s policy

The Government announced in Tax Reform: not a new tax, a new tax system that non-commercial supplies of goods or services by certain charities and public benevolent institutions would be GST-free. However, to avoid unfair competition, their commercial activities will be taxed. While the Government’s intention to have the Committee consider the precise meaning of the term ‘non-commercial supplies’ does not appear in the main document, the associated published Fact Sheet number 223 notes that non-commercial activities of charities would be GST-free, provided the charities are eligible for income tax deductibility.

  • Whilst the Committee has confined its recommendations to gift deductible charities, consistent with its terms of reference, the Committee considers that this has the potential to create some anomalies between those charities that have gift deductibility and those that do not. These issues may need to be further considered by the Government at a later stage.

Fact Sheet 223 goes on to note that commercial activities of these bodies will be subject to GST to avoid unfair competition with other businesses. For example, sales by a charity bookshop selling new books on a commercial basis to the public will be subject to GST in the same way as sales from other bookshops.

The Committee’s framework for assessing the scope of GST-free services by charities

The distinction between commercial and non-commercial activities is not a simple one, if taken in isolation. On the one hand, it might be argued that things that are ultimately done in pursuit of a benevolent end thereby lack a commercial purpose, even if they result in a profit in a commercial or accounting sense. On the other hand, the fact that goods are sold or services provided at a price, as businesses do, creates a commercial activity, notwithstanding that any profit is ultimately directed not to the proprietors of the business, but to charitable ends.

The Committee notes that many of the submissions it has received tend to support the former approach. A number of submissions put the proposition that all charitable and income generating activities of charities should be GST-free simply because the funds raised are re-invested in the community.

However, Government policy on the GST makes it clear that the ultimate purpose or end of an activity is not the determinant of the commercial/non-commercial distinction. The bookshop example given above makes it clear that, although the profits from the bookselling activity may be directed towards charitable ends, that activity does not become GST-free, if it is the kind of activity that may be conducted by others as a business for profit. However, the Committee considers that where the services provided have no commercial equivalent, then it is appropriate for them to be GST-free.

Many charities operate businesses that provide employment for people with intellectual or physical disabilities. The businesses providing ‘sheltered’ employment are many and varied and include: marine supplies, manufacture of textile products, garden supplies and wholesale nursery, packing, instant printing, contract packaging (eg shrink wrapping and blister packing), mailing (eg envelope insertion, labeling and folding), laundry services and leisure furniture manufacture. As noted in Chapter 4, the Committee considered that sales from these enterprises should be subject to GST. However the Committee was particularly concerned about the possible impact of the GST on ‘sheltered workshop’ services, and noted that the impact should be monitored and that Governments give careful consideration to providing additional compensatory assistance if necessary.

In a number of submissions, charities argued that these activities are charitable, not commercial, because their prime objective is to provide a service to disabled people and not to raise revenue. However, the Committee’s view is that, when goods and services supplied by charitable businesses are supplied at commercial rates and are competing against other businesses, then those goods and services should be subject to GST.

It is worth noting that many of these businesses sell goods or services to other businesses. Where goods or services are supplied to businesses registered for GST, then there would be no disadvantage for the charities if GST was imposed on the sale of these goods and services as the purchasers would be able to claim credit for the GST paid. It would also be simpler for their customers if GST was included in their prices as the business customers would not need to distinguish between GST-inclusive and GST-free goods when completing GST returns.

The Committee notes that in Tax Reform: not a new tax, a new tax system and other public announcements, the Government has made it clear that a charity for GST purposes is a body that is eligible to receive donations for which the donor is entitled to income tax deductions. The Committee has therefore not examined the definition of ‘charity’ for GST purposes.

The Committee recognises that certain aspects of the GST may impinge on charities’ ability to fund services. For example, a number of submissions received from the charitable sector highlight concerns about the cost to charities of becoming familiar with and developing internal processes for administration of the GST. The Committee regards these impacts as establishing grounds for a legitimate call on the pool of funds that the Government has set aside for small and medium businesses to upgrade their recording keeping for GST purposes.

Key issues for consideration

The nature of the activities of tax deductible organisations

The Committee received a large number of submissions, outlining the extensive range of activities undertaken by the charitable sector. While charities engage in substantial fundraising activities, they do so only to fund their benevolent activities.

Outlined below as background are brief descriptions of benevolent activities undertaken by these organisations, as well as their commercial activities. Of course, given the size of the charitable sector, these will not be an exhaustive statement of categories of people helped or of services provided by the charitable sector.

Benevolent activities

Benevolent activities seek to help people in numerous categories including:

  • aged people suffering from dementia;
  • at-risk children (such as children suffering physical or sexual abuse, and the children of substance abusers);
  • disabled people and their families;
  • disadvantaged children (such as those in low income families);
  • families in crisis;
  • frail aged;
  • homeless people; people living in remote communities;
  • people affected by natural disasters; people suffering from mental illness; people suffering from long term illness;
  • people on very low incomes;
  • problem gamblers;
  • substance abusers;
  • the unemployed; and
  • victims of domestic violence.

Services provided include:

  • advocacy (such as lobbying governments on behalf of disadvantaged sectors of society);
  • aged care;
  • counselling and support;
  • crisis and longer term supported accommodation;
  • disaster relief (such as, drought and flood relief in various forms, both domestically and internationally);
  • drop-in centres;
  • employment services (such as job searching and sheltered employment);
  • financial assistance;
  • food and clothing;
  • home visits;
  • information services (such as providing information for the charity’s particular client groups);
  • life skills education;
  • nursing services;
  • palliative care; research (such as research into major causes of illness in the community); and
  • resp
    ite services for individuals and families.

Many of these activities will be provided at no cost, so no question of GST arises. However, as described in Chapter 3, notwithstanding the lack of a taxable supply, organisations will be entitled to credits for tax paid on inputs to all these activities.

Commercial activities

Charities also undertake various activities to raise funds to support their benevolent activities. These include business-like activities such as running conference centres, bookshops, selling greeting cards and operating farms, as well as fund raising through raffles. (The Committee notes that donations, not being payments in return for goods or services will not be subject to GST).

When a charity provides (for example, sells) charitable goods or services at a commercial price, those goods or services should be subject to GST. However, on some occasions the charity provides goods or services at a price that is so nominal that it is effectively given away. In this context, it would be a strange result to regard the provision of goods or services at a nominal or perhaps even voluntary charge, as commercial supplies.

Opportunity shops

An activity commonly undertaken by charities is the running of Opportunity Shops. A significant proportion, and possibly all, of the goods sold in these shops have been donated to the charities as second-hand goods.

Submissions received argue that these shops are not truly commercial ventures. As the prices are set because the stock has been donated, the goods are being disposed of well below any commercial price. The shops are effectively an extension of charities’ welfare services by providing good quality used clothing and household items at an affordable price to people of limited means. These sales should be GST-free.

In addition to selling donated clothing through Opportunity Shops, many charities reprocess unwanted clothing and clothing not suitable for sale into industrial rags. Some charities take this recycling further by reprocessing material waste into blankets, domestic and industrial cleaning cloths, insulation products and carpet underlay. Most of these products are sold to other businesses rather than direct to final consumers. Therefore these sales have a much more significant commercial flavour, and so the Committee considers such sales should be subject to GST.

That is, goods that are reprocessed should be subject to GST because the reprocessing effectively creates new goods. For example, clothing that has been cleaned and repaired before sale would be GST-free while clothing that has been recycled into industrial cleaning rags would be subject to GST.

Further to this issue, the Committee considered whether or not the sale of unwanted or abandoned animals by animal welfare agencies should be treated the same as donated second-hand goods under the GST. The Committee considered that such sales should be considered equivalent to sales of donated used goods, and so should be GST-free.

Sales by charities of donated new goods would be subject to GST. This is to maintain neutrality between charitable and commercial suppliers.

Fee for service

Several submissions expressed concern over the possible GST treatment of fees for service. Many charities derive some degree of income from charging fees for service, including fees for accommodation services. Fees for service rarely if ever attempt to cover the full cost of the service. Rather, the fees are seen as a contribution towards costs incurred, a means of ensuring that individuals recognise that services do come at a cost, or a means of making charity acceptable to the dignity of the recipient. Charities claim that full cost recovery is often not feasible in the light of the financial resources available to those seeking assistance.

The Committee acknowledges the range of charitable activities that raise money and yet are not fundraising or commercial activities. An example of such a service that was discussed by the Committee is that of a women’s refuge.


Case Study: women’s refuges

Women’s refuges provide emergency short term accommodation to women in need. The accommodation may be charged at up to 25 per cent of the woman’s income. The women using these services often have young children that need to be accommodated with them.

When the women have children with them, shared accommodation, of the like found in backpacker hostels, is not appropriate for them as they require privacy and a certain amount of space to themselves as a family unit.

If the woman was seeking short term accommodation in the commercial sector, then, on the basis of accommodation alone, the equivalent service would be a room in a hotel. Such a room would be financially out the reach of the average woman seeking assistance at a refuge.

The service provided to clients of women’s refuges is not limited to accommodation but will often include counselling, advocacy and information services, as well as financial assistance.

In situations like that of the women’s refuge, because a whole package of services are provided in addition to the accommodation, there are no implications for competitive neutrality between charitable and commercial providers, unless the charge for the accommodation itself is close to that available elsewhere. The Committee would therefore recommend that such services be provided GST-free, where are fees charged at ‘non-commercial’ rates.

The Committee considers that a fee that is less than 50 per cent of the normal market price is not commercial. Therefore, where a charity charges a fee for a supply that is less than 50 per cent of the normal market value (that is, a ‘sale’ or discounted price is not considered to be ‘normal’ market value for these purposes), that supply will be GST-free.


It is clear that volunteers are vitally important to charities in their service delivery and administration. While some organisations attempt to put a dollar value on the contribution made by volunteers, it would not be appropriate for such valuations to be included in any calculations relating to a GST. This is because it would be extremely difficult to devise a simple, consistent and fair value for time. It would also create pressures for individuals to be able to claim income tax deductions for volunteer time and other expenses incurred while performing unpaid work.

Other issues

Various submissions raised concerns about the general operation of the GST as they relate to charities. Such concerns included whether charities would be eligible to receive input credits where they made no sales, whether services provided free of charge would be subject to GST, the GST treatment of contracted services, sponsorships, donations, Government grants, fundraising activities and membership fees.

Input tax credits depend upon the entity being registered

One of the most common misunderstandings of the GST was the impression that eligibility to receive credit for GST paid on inputs was dependent upon the input being used in a GST-free activity, or being somehow incorporated into something that is sold. This is incorrect. The Committee has been advised that entitlement to input credits arises from the fact that a registered entity has purchased goods or services for use in their activities. For example, the GST included in the price of blankets purchased by a charity, that is totally funded by donations, and then given away to a recipient, will still be creditable to the charity.

GST applies to the price paid

The Committee understands that a basic principle of the GST is that GST is only imposed on the price paid for goods or services. Where goods or services are given away, then aside from any tax avoidance issues, there will be no GST impl

Contracted services

The GST will only have a net impact when there is a sale to an unregistered entity, which will include private individuals. Where a transaction takes place between registered entities, for example, between a GST registered charity and the Government, then even though GST is paid, it will simply be a credit for the Government.

For example, a government might contract with a charity to provide employment services. The charity will need to include GST in the bill they charge the government. The charity will need to remit to the Tax Office the GST payable by the government. The government will be entitled to a credit for the GST paid for the employment services provided by the charity, as that is simply another input to its activities. So if there were $20,000 worth of employment services, the charity would charge $22,000, the government would pay $22,000 and the charity would remit $2,000, leaving it with $20,000. The government would get a credit of $2,000 leaving it with net outgoings of $20,000. Therefore, the net position of both the government and the charity is the same as if there were no GST.

Sponsorships are subject to GST

Sponsorships in the usual sense are payments for services. That is, sponsorships are payments in return for the service of advertising or other benefits. However, because a sponsorship transaction will typically take place between two registered entities, the impact of the GST will net out as in the example above. That is, if a business sponsors a charity then the charity will need to remit GST on the amount of sponsorship provided. But the business will get a credit for that amount. So if the sponsorship was worth $10,000, the business would pay $11,000, the charity would pay $1,000 tax, and be left with $10,000. The business would be entitled to a credit of $1,000 and so be in the same position as if they had provided sponsorship of $10,000 pre-GST.

A number of submissions from charities wanted sponsorships in the charitable sector to be GST-free. However, this would provide an incentive for business to direct its advertising through charitable entities. The concern of the charitable entities seemed to rest on a belief that if GST was payable on sponsorship, then the attraction of using the charity as an advertising vehicle would be reduced. This, however, is incorrect. All sponsorships will be subject to GST, and so the attractiveness of using a charitable entity as compared with another entity will not be affected by the GST. Moreover, the net financial position of the sponsor will not be affected because the transactions will be taking place between two GST-registered entities.

Donations are not subject to GST

Unlike sponsorships, donations are not payments in return for goods or services. Therefore they do not come into the GST system and no GST is payable upon the receipt of genuine donations.

Government grants

Similarly, government grants are not payments in return for goods or services and so remain outside the GST. However, some payments by governments are called grants but are in fact payments for providing specified services. In these cases, they will be subject to GST, but where the recipient is a registered entity, the transaction will be one between two registered entities and so will have no net GST implications.

Fundraising activities will be subject to GST

Fundraising activities by all registered entities will be subject to the GST. A general tenet of the GST is that the supplier should not need to know the status of the recipient and should not need to know the purpose of the supply. All that matters is that the supply is for consideration and then, generally, GST is paid on the consideration.

Memberships will be subject to GST

A number of submissions from charities argued that memberships to their organisations and similar organisations should not be subject to GST. The Government has determined that membership fees are payments in return for services.


The Government has determined that the commercial activities of charities will be subject to GST to avoid unfair competition with other businesses.

In determining the appropriate line for non-commercial activities, the Committee has decided that it is not the purpose of the activity but the nature of the activity itself that is important.

Accordingly, the Committee recommends that the Government adopt an approach that defines a ‘non-commercial’ supply by a gift deductible body as:

  • a supply of donated second-hand goods, or
  • a supply that is for nominal or insubstantial consideration.

‘Nominal or insubstantial consideration’ is a payment of a price that is less than 50 per cent of the normal market value of the supply.