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Monday, 20 May 1985
Page: 2148


Senator GRIMES (Minister for Community Services)(4.05) —I move:

That the Bills be now read a second time.

I seek leave to have the seconding reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-

SALES TAX LAWS AMENDMENT BILL 1985

This is the main Bill in a package of 6 Bills that together will amend the sales tax law in a number of important respects.

Included in this Bill are measures necessary to counter arrangements under which wholesalers are avoiding sales tax by selling goods by retail under agency and other marketing arrangements.

The Bill also reflects this Government's firm resolve to stamp out tax evasion.

Substantial sales tax evasion has recently come to light based on abuses of the present procedures for registration of sales taxpayers and their right to obtain goods free of tax by quotation of a certificate number.

The Bill therefore contains a number of measures designed to strengthen the existing sales tax registration and quotation procedures.

Some proposals of the former Government announced on 20 August 1981 that will correct deficiencies in the existing machinery and liability provisions of the sales tax law are also covered by this Bill. I turn now to the details of each measure.

Indirect Marketing Arrangements

Mr President, this Government's views on tax avoidance are well known. We came to office on a promise to smash tax avoidance in all its forms.

Sales tax has not been immune from the influence of the promoters of tax avoidance schemes. But sales tax avoidance is, once it takes hold in a particular industry, cancerous in its growth. The level of sales tax payable directly affects the ultimate price of goods and its avoidance by one firm in an industry gives an unwarranted competitive advantage in the marketplace to that firm. Others in direct competition with that firm are often forced to engage in similar sales tax avoidance or go under.

One particular avoidance arrangement that has gained currency relies on the fact that sales tax is generally payable on the last wholesale sale in the marketing chain. The amount on which the liability for tax is calculated is intended to include all the costs and profit-margins of those in that chain up to, but not including, the retailer.

Known as agency schemes, these arrangements are based on a wholesaler appointing a normal retailer as agent. As a result the wholesaler technically becomes the retailer for the purposes of the sales tax law.

Prior to entering into the scheme, the wholesaler's goods would be sold to the retailer who, as owner of the goods, would sell them to customers of the retailer's store. Under the scheme, the wholesaler retains ownership of the goods, but places them in the retailer's store alongside the retailer's normal stock. The retailer, as agent of the wholesaler, then sells the goods to those same customers of the retailer.

This complex and highly artificial arrangement is claimed to have the result under the existing sales tax law that sales tax is payable, not on the wholesaler's former price to the retailer, but on the price at which the wholesaler purchases the goods. This price is, of course, much lower and excludes all of the marketing costs of the wholesaler and the wholesaler's profit margin.

The cost to the revenue of these arrangements is estimated to be at least $200 million per annum.

There is another variation on the same theme.

In this case, the wholesaler obtains permission to use a section of the retailer's store from which the wholesaler's goods are sold direct to the public. Again the goods are displayed alongside the retailer's goods. From the retail customer's point of view there is no distinction to be seen between the two.

As with an agency arrangement, the wholesaler assumes for sales tax purposes the mantle of a retailer.

Floor-plan arrangements, like agency arrangements, are claimed to exclude from the taxable sale value of the goods concerned the wholesaler's costs and profit margin.

The considerable savings in sales tax sought to be obtained by these schemes are used to achieve a competitive edge in the particular market for the wholesaler's product and to inflate the profits of those firms engaging in them. Those wholesalers who, on principle, resist the temptation to enter such schemes and who continue to market their goods in the traditional manner suffer as a result.

That is not a situation that this Government will tolerate.

At the same time, the Government recognises that some businesses have for many years, and for genuine commercial reasons, sold their goods to the public through agents and, to a lesser extent, under floor-plan arrangements.

While there is no sales tax avoidance purpose present in this situation, the revenue is affected in the same manner and to the same degree.

The Government sees no valid reason for excluding from the amendments those who, although their use of agency and floor-plan arrangements can be justified on sound commercial grounds, benefit from similar reductions in the amount of sales tax payable. For this reason, the amendments will not require that there be a sales tax avoidance purpose, nor will they be retrospective in effect.

Mr President, under amendments proposed in this Bill, where any person other than the manufacturer of goods, sells goods by retail under these arrangements-referred to in the Bill as indirect marketing arrangements-sales tax will in future be payable on the fair wholesale market value of the goods. In other words, the sales tax advantage sought to be achieved will be removed.

This is to be done by treating persons who sell goods under indirect marketing arrangements as wholesale merchants for sales tax purposes.

A similar result to this is already achieved in the case of a manufacturer under the existing law.

Some consequential changes to the Sales Tax Regulations will be required and these will be submitted to the Federal Executive Council for approval after this Bill has been passed by the Parliament.

The new basis for taxing sales for goods under indirect marketing arrangements will apply to sales of goods made after the date of Royal Assent to the Bill. This will allow time for those who will, under the Bill, be now treated as wholesalers to become registered for sales tax purposes.

Registration and Quotation Procedures

Mr President, once a person becomes registered as a sales taxpayer, that person has to meet a number of obligations that arise under the sales tax law.

There are, also, certain privileges associated with being a registered sales taxpayer. The most significant is the ability to purchase goods sales ''tax-free'', in certain circumstances, by quoting the number of the sales tax certificate that is issued upon registration.

Substantial sales tax evasion is occurring because registered persons are abusing this privilege by quoting, or purporting to quote, a certificate number when purchasing goods in situations where they ought not to do so because they do not intend to meet their sales tax obligations.

At the same time, unregistered persons are known to be quoting bogus numbers when purchasing goods and obtaining those goods without payment of the sales tax due on them.

So far as the vendors of the goods are concerned, it is more often than not a case of complicity by studied indifference to the false quotation. Those vendors claim that, under the present law, they need not be concerned about whether or not the purchaser's quotation is lawful.

A feature common to such practices is that payment is made in cash of a substantial amount and the purchaser often gives a false name and address to avoid being traced.

These fraudulent practices are of the worst kind. Every taxpayer in Australia is a victim of the unprincipled participants in these frauds. The cost to the revenue is estimated to be upwards of $200 million annually.

Action is currently being pursued by the taxation office, with the assistance of the Australian Federal Police and the Director of Public Prosecutions, to bring the participants in the frauds before the criminal courts.

That is, however, a long and complex task and the Government cannot, and will not, stand idly by while the criminal law takes its course.

Stricter administrative arrangements are, in the Government's view, called for. Measures in this Bill will, therefore, strengthen the registration and quotation procedures in several ways to counter these evasion practices.

First, the maximum level of security that the Commissioner may require from a registered taxpayer, or a person seeking registration, where he considers the revenue is at risk, will be increased from its present level-set in 1930-of $2,000 to $25,000.

Secondly, the Commissioner will be authorised to refuse or revoke a sales tax registration where the basis of the application was false or misleading, or where the security is not provided when called for.

Thirdly, the Commissioner has to be given the authority to prohibit a registered person from quoting his certificate where the Commissioner is satisfied that the person has abused, or has aided or abetted others to abuse, the certificate quotation procedures.

Another feature of the new arrangements will be that the Commissioner will be authorised to publish in the Government Gazette, or to circulate vendors with, details of certificate numbers that have been cancelled, revoked or withdrawn.

The most significant measure against evasion to be put in place by this Bill, Mr President, will be a positive duty on vendors of goods not to accept quotations for sales tax purposes if the circumstances surrounding the transaction appear to be suspicious. More particularly, in future a person will be liable to make good any sales tax evaded where, upon receiving a quotation from a purchaser of goods, there are reasonable grounds for believing that-

the purchaser is not a registered sales taxpayer;

the quotation is unlawful;

the quotation is false or misleading; or

the certificate number quoted has been published or circulated by the Commissioner.

Where a suspected quotation turns out to have been valid, the Commissioner will be able to remit or refund any tax payable or paid by the vendor.

As a corollary to this measure, a collector of customs is to be authorised to retain imported goods that have been the subject of a quotation, where the collector entertains doubt about the bona fides of the quotation, until sales tax is paid.

Decisions of the commissioner in relation to registrations or quotations of certificates that will be made under these new arrangements are to be subject to the usual rights of objection by affected taxpayers with a further right of review by the Administrative Appeals Tribunal.

These changes will also operate from the date of Royal Assent to the Bill.

I turn now, Mr President, to mention certain proposals of the former government that are also the subject of the Bill. The proposals are among those announced by the Deputy Leader of the Opposition as Treasurer on 20 August 1981 and which my colleague, the present Minister for Trade, indicated in a statement of 30 March 1983 that we would proceed with. Drafting resources have not permitted some of the more complex proposals of the former government to be included in this Bill, but those of an anti-avoidance nature have been included and the remaining proposals will be made the subject of a later Bill.

The first measure I mention concerns a technical problem with the definition of ''manufacture'' contained in the sales tax law.

One particular aspect of that definition has been exploited by some manufacturers in a way at variance with the intention of the legislation. This will be overcome by a re-expression of the definition in this Bill.

This measure will, as announced by the former government, apply with effect from 20 August 1981.

This change is expected to lead to the recovery of approximately $1m in avoided sales tax.

Another measure will bring the provisions of the sales tax law relating to returns and payment of sales tax on imported goods into line with the customs law and procedures.

This is to be achieved by applying, from the date of Royal Assent to the Bill, sales tax on imported goods at the rate applicable at the time the goods are entered for home consumption under the customs law.

The transitional provisions applicable to certain anti-tax avoidance amendments of the sales tax law made in 1978 have also been found to have an unintended operation.

These transitional provisions are, as announced by the former government, to be terminated with effect from 20 August 1981.

This termination will prevent further intermediate revenue losses.

Finally, the Bill provides for a broadening of the information gathering power of the commissioner to ensure that it extends to access to goods and gives taxation officers the right to examine, take samples of and analyse goods.

The opportunity is also being taken to ensure that persons are required to provide reasonable assistance to the commissioner in the exercise of this power, thus overcoming in relation to sales tax a limitation on the information gathering powers of the taxation office imposed by a recent decision of the High Court.

Mr President, an explanatory memorandum containing detailed explanations of technical aspects of the Bill is being made available to honourable senators and I do not therefore propose to further address the matters covered by the Bill.

I commend the Bill to the Senate.

SALES TAX (No. 5) AMENDMENT BILL 1985

This Bill is closely related to one of the measures contained in the Sales Tax Laws Amendment Bill 1985, about which I have just spoken.

By part six of that Bill, the law relating to the payment of sales tax on imported goods, that is contained in the Sales Tax Assessment Act (No. 5) 1930, is, as I have explained, to be brought into line with the customs law.

Under the structure of the sales tax legislation each Assessment Act has a Complementary Taxing Act, in this instance the Sales Tax Act (No. 5) 1930.

This Bill will amend that Act to formally impose sales tax on imported goods at the rates of tax in force when the goods are entered for home consumption.

There will be no alteration by this Bill to the rates of sales tax payable.

The rates of tax to be imposed by this Bill are the same as those currently in force.

Details of the Bill are set out in the explanatory memorandum that is being circulated to honourable senators.

I commend the Bill to the Senate.

SALES TAX ASSESSMENT BILL (No. 10) 1985

This Bill contains a further measure to counter sales tax avoidance. Together with the 3 remaining Bills in this package, it will ensure that royalties paid in connection with the manufacture, sale or lease of goods, but under arrangements that have the effect of excluding them from the taxable sale value of the goods, will not escape the payment of sales tax.

Since its enactment in 1930, the sales tax law has contained a general provision designed to include in the taxable sale value of goods, royalties paid in respect of the goods.

Avoidance arrangements have developed under which the intention of the present law can be readily circumvented. The result is that royalties that ought to form part of the taxable value of goods are freed from sales tax.

The arrangements in question, which are particularly prevalent in the recording industry, were described in some detail in statements by the Deputy Leader of the Opposition on 20 August 1981 and 6 January 1982, when, as Treasurer, he announced the then Government's intention to amend the sales tax law to counter these particular avoidance arrangements.

Under one arrangement a retailer engages a manufacturer to manufacture goods to order and the retailer sells the goods either by mail order or direct to the public, often via an agency or floor plan arrangement. I have spoken earlier about these practices.

Under the arrangement the retailer has the responsibility for payment of, and pays, the royalty on the goods. The amount of the royalty is therefore not included in the taxable price for which the goods are sold to the retailer by the manufacturer.

Under measures contained in the Sales Tax Laws Amendment Bill 1985, royalties paid by retailers who sell goods under indirect marketing arrangements will be subject to tax under the present scheme of the sales tax law.

This Bill will cater for the additional situation where a royalty is paid in respect of goods, but the person who pays the royalty is someone other than a person who has dealt with the goods. Without such a measure, the royalty amendments in the Sales Tax Laws Amendment Bill could be easily circumvented.

Because of the definition of 'royalty' in that Bill which is to be applied for the purposes of this Bill, royalties paid for the performance or exhibition of matter subject to copyright, such as a musical work or a motion picture, will not be subject to tax under the measures in either Bill.

The cost to date to the revenue in relation to goods sold under royalty arrangements (other than indirect marketing arrangements) has been around $25m. This Bill, because it is not retrospective in its effect, will not recoup that lost revenue, but it will prevent further revenue losses.

For constitutional reasons, and to conform with the existing structure of the sales tax law which is contained in 9 separate Assessment Acts each with its complementary Taxing Act, this Bill proposes the enactment of a further Assessment Act that will be entitled the Sales Tax Assessment (No. 10) Act. It contains the necessary machinery provisions for the assessment, collection and administration of the new tax on royalties.

The measures contained in the Bill will apply to royalty payments made on or after 10 May 1985 in respect of goods, notwithstanding that the goods may have gone into use or consumption in Australia, provided that the goods on which the royalty is paid were the subject of a taxable transaction or act for sales tax purposes under one of the other Sales Tax Assessment Acts.

Explanations of technical aspects of the Bill are contained in the explanatory memorandum that is being circulated to honourable senators.

I commend the Bill to the Senate.

SALES TAX BILL (NO. 10A) 1985

This is the first of 3 Taxing Bills that I mentioned in introducing the Sales Tax Assessment Bill (No. 10) 1985.

It is a requirement of the Constitution that a law imposing taxation shall deal only with one subject of taxation and that laws imposing customs duties and laws imposing excise duties deal only with those duties.

This Bill will, respecting that requirement of the Constitution, formally impose sales tax payable under the (No. 10) Assessment Bill on Royalties in cases where that sales tax is technically a duty of excise.

As I explained in introducing that Bill, the sales tax will be payable by the person who pays the royalty.

The rate of tax on such royalties is declared by the Bill to be the rates of tax applicable to the goods in respect of which the royalty is paid.

I commend the Bill to the Senate.

SALES TAX BILL (NO. 10B) 1985

This is the second of the Taxing Bills associated with the new tax on royalties.

By this Bill, sales tax will be formally imposed on royalties paid on goods where the tax is in the nature of a customs duty. This could occur, for example, where the payment of the royalty is connected with the importation of the goods.

In other respects, the Bill is identical in effect with the Sales Tax Bill (No. 10A) 1985.

I also commend this Bill to the Senate.

SALES TAX BILL (NO. 10C) 1985

Finally, Mr President, I come to the sixth Bill in this package of Sales Tax Bills and the third Taxing Bill associated with the new tax on royalties.

In cases where the sales tax on royalties is neither a duty of excise nor a duty of customs it will be imposed by this Bill.

With the exception of the nature of the tax, the Bill has the same effect as the last two Bills.

I commend the Bill to the Senate.

Debate (on motion by Senator Kilgariff) adjourned.