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Indirect Tax Legislation Amendment Bill 2000

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1998-1999-2000

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

indirect tax legislation amendment bill 2000

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)

 



T able of contents

Glossary............................................................................................ 1

General outline and financial impact.............................................. 3

Chapter 1        Non-profit bodies ................................................... 13

Chapter 2        GST-free supplies.................................................. 19

Chapter 3        Supplies involving non-residents......................... 23

Chapter 4        Agents..................................................................... 31

Chapter 5        Financial supplies.................................................. 39

Chapter 6        Calculating amounts of GST................................ 45

Chapter 7        Joint ventures......................................................... 53

Chapter 8        Insurance................................................................ 57

Chapter 9        Administration........................................................ 61

Chapter 10     Alcoholic beverages held on 30 June 2000....... 63

Chapter 11      Other amendments................................................ 67

 



The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

Abbreviation

Definition

ABN

Australian Business Number

ABN Act

A New Tax System (Australian Business Number) Act 1999

ANTS

Government’s Tax Reform Document: Tax Reform: not a new tax, a new tax system

ATO

Australian Taxation Office

BAS

business activity statement

CGT

capital gains tax

Commissioner

Commissioner of Taxation

CTP

compulsory third party

GST

goods and services tax

GST Act

A New Tax System (Goods and Services Tax) Act 1999

GST Regulations

A New Tax System (Goods and Services Tax) Regulations 1999

GST Transition Act

A New Tax System (Goods and Services Tax Transition) Act 1999

HIA 1973

Health Insurance Act 1973

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

RBA

running balance account

STAA 1992

Sales Tax Assessment Act 1992

TAA 1953

Taxation Administration Act 1953

WET

wine equalisation tax

WET Act

A New Tax System (Wine Equalisation Tax) Act 1999

 



Non-profit bodies

Schedule 1 to this Bill makes amendments to the GST Act and the TAA 1953 that relate to non-profit bodies. They include amendments to:

·       provide charities with the choice to treat certain fund-raising events as input taxed;

·       enable certain non-profit bodies to lodge GST returns quarterly, regardless of the date on which they balance their accounts;

·       allow charities to claim input tax credits when reimbursing volunteers for expenses they incur for their charitable activities; and

·       ensure that a non-profit sub-entity can be a member of a GST group.

Date of effect :  Various.

Proposal announced :  First amendment: Treasurer’s Press Release No. 37 of 2000; second amendment: Treasurer’s Press Release No. 84 of 1999; remaining amendments not previously announced.

Financial impact :  Negligible.

Compliance cost impact :  Most amendments will reduce compliance costs, others will have no impact.

GST-free supplies

Schedule 2 to this Bill amends the GST Act to:

·       make the lease or hire of education goods GST-free;

·       expand sewerage services to include like services;

·       ensure that short term leases of farm land are GST-free where they are akin to long term leases; and

·       ensure that certain medical services such as medical reports are GST-free.

Date of effect :  1 July 2000.

Proposal announced :  The amendments to education goods and sewerage services were announced in Treasurer’s Press Release No. 37 of 2000. The other measures have not been announced.

Financial impact :  Minimal.

Compliance cost impact :  Nil.

Supplies involving non-residents

Schedule 3 to this Bill amends the GST Act in relation to certain supplies made by non-residents. It also amends the provisions related to certain services provided to non-residents.

Date of effect :  1 July 2000.

Proposal announced :  Some of the issues were announced in Treasurer’s Press Release No. 37 of 2000.

Financial impact :  Nil.

Compliance cost impact :  The amendments are expected to reduce compliance costs of non-residents in complying with the Australian GST laws.

Summary of regulation impact statement

Regulation impact on business

Impac t :  Low.

Main point :  This measure will reduce the compliance costs of affected businesses.

Policy objective :  The Government wants to ensure that services provided to businesses overseas should not be subject to GST and that non-residents are not unnecessarily drawn into the GST system.

Agents

Schedule 4 to this Bill makes a number of amendments to the GST Act and one consequential amendment to the TAA 1953. Most of the amendments are of a minor policy and technical nature, and include amendments to:

·       allow entities involved in transactions on the basis of principal and agent to enter into arrangements that simplify the way they account for GST on supplies and acquisitions; and

·       grant the Commissioner a discretion to apply these arrangements to certain industries subject to an ‘opting out’ provision.

Date of effect :  1 July 2000.

Proposal announced :  Treasurer’s Press Release No. 37 of 2000.

Financial impact :  Negligible.

Compliance cost impact :  Negligible.

Summary of regulation impact statement

Regulation impact on business

Impact :  Low.

Main point :  This measure will reduce the compliance costs of affected businesses.

Policy objective :  The Government’s policy objective is to ensure goods and services sold to and sold by entities acting as agents are subject to the correct level of GST and eligible for input tax credits whilst ensuring compliance costs are kept to a minimum.

Financial supplies

Schedule 5 to this Bill amends the GST Act to:

·       enable registered businesses to claim input tax credits for borrowing related expenses unless the borrowing relates to making other input taxed supplies;

·       change the de minimis test so that a registered entity can obtain input tax credits for acquisitions that relate to making financial supplies if the total amount of the credits that would be denied does not exceed:

-           $50,000; or

-           10% of the total input tax credits of the entity;

·       exclude borrowing related expenses from the de minimis test; and

·       clarify that an entity is not entitled to both a reduced input tax credit and an input tax credit for the same acquisition.

Date of effect :  1 July 2000.

Proposal announced :  First and third amendments: Treasurer’s Press Release No. 37 of 2000; second amendment: Treasurer’s Press Release No. 13 of 2000; remaining amendment not previously announced.

Financial impact :  Nil.

Compliance cost impact :  Nil.

Summary of regulation impact statement

Regulation impact on business

Impact :  Low.

Main point :  This measure will reduce the compliance costs of affected businesses.

Policy objective :  The Government’s objective is to provide input tax credits for expenses related to borrowing except where the borrowing is undertaken by a financial institution or where the borrowing is undertaken by the corporate treasury of a large business, for the purposes of making other financial supplies.

Calculating amounts of GST

Schedule 6 to this Bill amends the GST Act, the GST Transition Act and the TAA 1953 to:

·       provide rounding rules for GST liability;

·       allow the Commissioner to determine a transitional rounding rule for entities; and

·       allow the net amount for a tax period to be worked out from a method provided in a GST return.

Date of effect :  Various.

Proposal announced :  Treasurer’s Press Release No. 37 of 2000. Transitional rounding relief not previously announced.

Financial impact :  Negligible.

Compliance cost impact :  Minimal.

Joint ventures

Schedule 7 to this Bill makes amendments to the GST Act, the ABN Act, the ITAA 1936, the ITAA 1997 and the TAA 1953 in relation to joint ventures. They include amendments to:

·          enable entities other than companies to be part of a GST joint venture;

·          provide that the joint venture operator may choose to prepare a single GST return on behalf of all the joint ventures for which it is responsible;

·          insert a definition of ‘minerals’ in the Dictionary in the GST Act; and

·       clarify that a joint venture that does not involve the establishment of a joint venture entity is not a company or any other entity for taxation purposes.

Date of effect :  1 July 2000.

Proposal announced :  First 2 amendments: Treasurer’s Press Release No. 37 of 2000; remaining amendments not previously announced.

Financial impact :  Nil.

Compliance cost impact :  The amendments will reduce compliance costs.

Insurance

Schedule 8 to this Bill makes amendments to the GST Act and the GST Transition Act that relate to insurance. They include amendments to:

·       ensure that the insurance of certain domestic components of international transport if GST-free;

·       allow the notification of extent of input tax credit entitlement for a policy to be made at any time at or before the relevant claim is made;

·       correct the calculation of decreasing adjustment on settlement;

·       ensure that the correct entitlement to input tax credits is taken into account in calculating the decreasing adjustment for claims under statutory compensation schemes where the premium an entity was liable to pay has not been paid; and

·       provide that tax invoices do not have to be issued in relation to CTP schemes to which section 23 of the GST Transition Act applies.

Date of effect :  1 July 2000, with the exception of the policy holders’ notification requirement under the GST Transition Act, which will take effect from 8 July 1999, the date of commencement of that Act.

Proposal announced :  Policy holders’ notification requirement: Treasurer’s Press Release No. 37 of 2000; remaining amendments not previously announced.

Financial impact :  Negligible.

Compliance cost impact :  Some amendments are expected to have no impact on compliance costs. Others are expected to reduce compliance costs.

Administration

Schedule 9 to this Bill amends various tax laws to:

·       allow credits of representative members of GST groups to be offset against debts of other members of the group;

·       clarify that a GST credit entitlement arises upon notification of the credit in the GST return;

·       allow interest to be paid to entities where an amendment of an assessment gives rise to a refund of GST; and

·       make consequential amendments to GST provisions as a result of the introduction of the new uniform penalty regime in A New Tax System (Tax Administration) Bill (No. 2) 2000.

Date of effect :  The amendments will apply from 1 July 2000.

Proposal announced :  Not previously announced.

Financial impact :  The impact from the crediting and interest measures is unquantifiable.

Compliance cost impact :  Nil.

Alcoholic beverages held on 30 June 2000

Schedule 10 to this Bill amends the STAA 1992 in relation to certain alcoholic beverages not covered by the WET. The measure is primarily designed to remove an opportunity for stockpiling of alcoholic beverages which are held free of sales tax which will not be subject to the higher rates of excise after 1 July 2000. The stockpiling would provide an unintended tax windfall to certain entities while at the same time distorting the normal manufacturing schedules.

The amendment will impose a sales tax liability on certain alcoholic beverages which are held sales tax free but excise paid at 30 June 2000.

Date of effect :  Royal Assent.

Proposal announced :  Treasurer’s Press Release No. 37 of 2000.

Financial impact :  Nil.

Compliance cost impact :  Negligible, as affected entities will carry out a stocktake of products at the end of 30 June 2000 for other purposes.

Summary of regulation impact statement

Regulation impact on business

Impact :  Low.

Main point :  This measure will not impact on the compliance costs of affected businesses, but will ensure the correct amount of tax is paid by all sellers of alcoholic beverages.

Policy objective :  The Government’s policy objective is to ensure that under the new tax system, alcoholic beverages purchased free of sales tax before 1 July 2000 do not have a tax advantage over stock purchased after 1 July 2000.  

Other amendments

Schedule 11 to this Bill makes various amendments to the ABN Act, the GST Act, the GST Transition Act and the TAA 1953. The amendments to the GST Act will:

·       clarify that supplies of livestock or game for processing into food are taxable supplies;

·       ensure that supplies of existing housing stock are not subject to GST as new residential premises;

·       permit the Commissioner to relax the requirement to issue adjustment notes within 28 days of becoming aware of the adjustment;

·       alter the requirement to issue adjustment notes to limit that requirement in relation to small value adjustments;

·       ensure that the requirement to hold a tax invoice for second-hand goods is consistent with the requirement to hold a tax invoice for other goods;

·       ensure that the associates provisions operate in relation to GST branches and government related entities; and

·       provide that the amount to be included in relation to gambling supplies in the calculation of annual turnover is the difference between total amount wagered and total monetary prizes.

In addition, Schedule 11 also amends various other Acts, as follows:

·       the ABN Act will be amended to ensure that all superannuation funds are entitled to an ABN;

·       the GST Transition Act will be amended to clarify the application of that Act to rights, and ensures that consideration received prior to 1 July 2005 is GST-free where a prepaid funeral agreement was entered into before 1 December 1999; and

·       the TAA 1953 will be amended to limit the requirement for joint and several liability in the case of certain institutions that are statutorily barred from meeting that requirement.

Date of effect :  Various.

Proposal announced :  The amendments in relation to supplies of livestock, the 28-day rule for adjustment notes, gambling supplies, application of the GST Transition Act to rights, and joint and several liability were announced in Treasurer’s Press Release No. 37 of 2000; remaining amendments not previously announced.

Financial impact :  Negligible.

Compliance cost impact :  Some amendments will have no impact on compliance costs while others will reduce compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact :  Low.

Main point :  This measure will reduce the compliance costs of affected businesses.

Policy objective :  The Government considers that turnover from gambling supplies should be based on the gambling margin, which is a better overall measure of the total value of gambling supplies made by a business than the total amount wagered.  This will ensure that businesses making gambling supplies are treated comparably with other businesses where turnover is based on the value of supplies.

 



C hapter 1  

Non-profit bodies

Outline of Chapter

1.1         This Chapter explains the amendments to the GST Act and the TAA 1953 that relate to non-profit bodies. They include both minor policy and technical changes and include amendments to:

·       provide charities with the choice to treat certain fund-raising events as input taxed. Where the fund-raising event does not fit the description provided, a charity may make a request to the Commissioner to apply his discretion to treat the event as input taxed;

·       enable certain non-profit bodies to lodge GST returns quarterly, regardless of the date on which they balance their accounts;

·       allow charities to claim input tax credits when reimbursing volunteers for expenses those volunteers incur in connection with their activities for the charity; and

·       ensure that a non-profit sub-entity can be a member of a GST group so that it can form a GST group with the main entity or with other non-profit sub-entities of the same entity.

Detailed explanation of new law

Fund-raising events

1.2          Item 3 inserts new Subdivision 40-F into the GST Act to provide a charity with the choice to treat certain fund-raising events conducted by the charity as input taxed. As a result of treating certain fund-raising events as input taxed, charities may not be required to register for GST as their annual turnover may no longer be over the $100,000 annual turnover threshold. This is because the value of input taxed supplies are excluded from the calculation of annual turnover.

1. 3         New section 40-160 provides that a charitable institution, a trustee of a charitable fund or a gift deductible entity may choose to have all the supplies that it makes in connection with a fund-raising event treated as input taxed. This means the charity will not have to charge GST on supplies connected with that event. However, it will also not be able to claim input tax credits on acquisitions made in relation to the fund-raising event.

1. 4         The charity must also record the fund-raising event as being treated as input taxed. [New paragraph 40-160(d)]

1. 5         It should be noted that where a charity does not make the choice to treat a fund-raising event as input taxed, supplies relating to the event will be treated according to normal principles.

Meaning of fund-raising event

1. 6         New section 40-165 describes the types of fund-raising events that a charity may treat as input taxed. For all events described, the fund-raising event must be separate from and not form any part of a series or regular run of like or similar events.

1. 7         For the purposes of new Subdivision 40-F , a fund-raising event is:

·       a fete, ball, gala show, dinner, performance or similar event [new paragraph 40-165(1)(a)] . A similar event may include a charity auction;

·       an event comprising the sale of goods where the consideration received for the item does not exceed $20 or such other amount as specified by regulation. Also, where the selling of such items is not a normal part of the supplier’s business [new paragraph 40-165(1)(b)] . It is envisaged that those events that involve the selling of small fund-raising items such as flowers, confectionery and chocolates will be covered under this provision. However, an event that involves the sale of items where the items are alcoholic beverages or tobacco products will not be considered a fund-raising event under new subsection 40-165(2) ;

Example 1. 1

A major charity holds an annual flower day where it sells flowers for $2 each. This event fits the meaning of fund-raising event as each item sells for less than $20, the charity is not in the business of selling flowers and the event does not form any part of a series or regular run of like or similar events.

·       an event that the Commissioner decides is a fund-raising event. A charity may make an application in writing to the Commissioner to request that an event it is conducting be treated as input taxed [new paragraph 40-165(1)(c)] .

1. 8         In making a decision to treat a fund-raising event as input taxed, the Commissioner must be satisfied that the charity is not in the business of conducting such an event and the proceeds from the event are for the direct benefit of the charity [new subsection 40-165(3)] . It should be noted that refusing an application is a reviewable GST decision [item 11] .

1. 9         Item 8 inserts a definition of a ‘fund-raising event’ into section 195-1 of the GST Act and will have the meaning given by new section 40-165 .

Frequency of events

1. 10       New subsection 40-165(4) provides that the Commissioner may determine in writing the frequency with which events may be held without forming any part of a series or regular run of like or similar events. The determination will be used to provide clarity as to what might constitute a regular run or a series of events. For instance, an event that is held weekly would be considered to be a regular run of like events and therefore would not be a fund-raising event for the purposes of new Subdivision 40-F .

Record keeping

1. 11       Item 12 inserts new subsection 70(1B) of the TAA 1953 to stipulate that where a charity has made a choice under new section 40-160 to treat a fund-raising event as input taxed the charity is required to keep a record of the choice. Also, the charity is required to retain that record for at least 5 years after the making of the choice [new paragraph 70(1B)(b)] .

Input tax overrides GST-free in certain circumstances

1. 12       New s ubsection 9-30(3) has been amended to make it clear that where an entity chooses to treat certain supplies as input taxed, input tax credits on those supplies are denied regardless of whether the supplies would have been GST-free prior to the choice being made [item 1] . This new provision applies to both Subdivision 40-E (school tuckshops and canteens) and new Subdivision 40-F .

Substituted accounting periods

1. 13       Section 27-5 of the GST Act provides that, as a general rule, a person’s tax periods will be 3 months long and end on 31 March, 30 June, 30 September and 31 December (quarterly tax periods). Section 27-15 of the GST Act provides that the Commissioner must determine that an entity’s tax periods are monthly if certain criteria are met. Paragraph 27-15(1)(d) requires an entity to apply monthly tax periods where the income year is not the same as the financial year.

1. 14       For many non-profit bodies their income year is not the same as their financial year, hence, the requirement for these bodies to use monthly tax periods for GST purposes. It is considered by the charitable sector that this places an undue compliance burden on their organisations.

1. 15       Item 2 provides for certain non-profit bodies to choose either a quarterly or monthly tax period regardless of the date on which they balance their accounts. This is achieved by removing the requirement for certain non-profit bodies to apply monthly tax periods where their income year is not the same as their financial year (section 27-15 of the GST Act).

1. 16       New subsection 27-15(2A) provides that paragraph 27-15(1)(d) will not apply to those non-profit bodies that meet the requirement of Division 63 - non-profit sub-entities - whether or not they have chosen to apply the Division. These non-profit bodies fall into one or both of the following categories:

·       charitable institutions, trustee of charitable funds or gift-deductible entities (paragraph 63-5(2)(a)); or

·       non-profit bodies that are income tax exempt under certain provisions of the ITAA 1997 (paragraph 63-5(2)(b)).

Reimbursement of volunteer’s expenses

1. 17       Division 111 of the GST Act sets out special rules regarding an entity being entitled to input tax credits for reimbursing employees, agents, officers, or partners for expenses they incur in connection with carrying on their enterprise. The reimbursement is treated as consideration for an acquisition that the entity makes from the employee, agent, officer or partner.

1. 18       Currently, Division 111 does not enable charities to claim input tax credits on expenses incurred on their behalf by volunteers.

1.19        Item 7 inserts new section 111-18 to provide that a charity will be entitled to input tax credits for reimbursements to volunteers of expenses they incur that are directly related to the charitable activities of the charity.

Example 1. 2

A volunteer of a charity uses her car to conduct some of the charity’s activities. The charity reimburses the volunteer for the petrol expenses incurred. In this case, the charity will be able to claim input tax credits on these expenses.

1. 20       New section 111-18 only applies to volunteers acting on behalf of a charitable institution, a trustee of a charitable fund or a gift-deductible entity and the expenses must be directly related to his or her activities as a volunteer of a charity. [New subsections 111-18(a) and 111-18(b)]

1. 21       The amendment applies Division 111 to a charity as if the individual were an employee of the charity. [New subsections 111-18(c) and 111-18(d)]

1. 22       Item 6 inserts a reference to the reimbursement of volunteers by charitable bodies in section 111-1 - What this Division is about.

Non-profit sub-entities

Membership of GST groups

1. 23       Division 63 of the GST Act allows certain non-profit entities to choose to treat separately identifiable sections of their organisations as though they are separate entities for GST purposes, these are called non-profit sub-entities.

1. 24       It was intended that non-profit sub-entities could use the GST grouping arrangements in Division 48 of the GST Act to group with the main entity or with other non-profit sub-entities of the same entity if they meet the general requirements for grouping in that Division.

1. 25       Currently, a non-profit sub-entity may meet most of the membership requirements for a GST group in section 48-10 of the GST Act. However, it cannot meet the requirement in paragraph 48-10(1)(a) that the entity must be “a company; or a partnership or trust…”. Thus, a non-profit sub-entity cannot be a member of a GST group.

1. 26       Item 5 inserts new section 63-50 , which specifies the criteria that will enable a non-profit sub-entity to be a member of a GST group. A non-profit sub-entity will satisfy the membership requirements for a GST group if that non-profit sub-entity is GST registered, accounts on the same basis and has the same tax periods as all other members of the group and is not a member of any other GST group - new paragraphs 63-50(a), (b), (c) and (d) . These requirements are the same as the general requirements in section 48-10.

1. 27       Further requirements that are particular to non-profit sub-entities are outlined in new paragraph 63-50(e) . For a non-profit sub-entity, all of the other members of the GST group must either be the main entity (the entity of which the non-profit sub-entity is a branch) or other non-profit sub-entities of the same entity.

1. 28       Item 4 inserts a note after section 48-10 to highlight that different membership requirements for GST groups apply to non-profit sub-entities than those that apply to other entities. Item 9 modifies the Dictionary definition of the term ‘satisfies the membership requirements for a GST group’ in section 195-1 to include the membership requirements for non-profit sub-entities.



C hapter 2  

GST-free supplies

Outline of Chapter

2.1         This Chapter explains the amendments made by Schedule 2 to this Bill. Schedule 2 inserts a number of measures into the GST-free supplies provisions of the GST Act. These cover the following:

·       education goods;

·       sewerage services;

·       farm land; and

·       medical services.

Context of Reform

2.2         The proposed changes to the law clarify the application of the GST in line with the Government’s objectives for GST-free supplies outlined in the ANTS proposals.

Detailed explanation of new law

Medical services

2.3         Item 7 inserts a new definition of medical service into the Dictionary. The new definition makes GST-free a supply of a medical service for which a medicare benefit is payable under the HIA 1973. This expands the services which are GST-free as medical services and will include supplies such as the supply of a medical report on a person for which a medicare benefit is payable.

2.4         The types of reports (may be referred to as Treating Doctor’s Reports) that will now be GST-free include those for assessment by Centrelink in relation to social security payments such as Disability Support Pension, Carer Payment and Sickness Allowance. Other reports covered include reports for older persons and people with a disability who are required to obtain certification from a medical practitioner prior to extending their driver’s licence. [Item 7, section 195-1]

Education goods

2.5         Item 1 inserts new section 38-97 into Subdivision 38-C. This new section allows the lease or hire of goods to be GST-free where:

·       the goods are owned and leased or hired by the provider of a pre-school, primary or secondary school course;

·       the goods are leased or hired for use directly or principally by a student undertaking the course;

·       the school or course provider leasing or hiring the goods at all times retains the right to decide who uses the goods and the use to which the goods will be put; and

·       the lease or hire is not part of an arrangement to transfer ownership of the goods from the owner to any person.

2.6         The new provision is designed to allow schools to lease/hire goods such as laptop computers, textbooks, musical or sporting equipment to students GST-free. A sale or transfer of ownership of such goods to a student or other person will still attract the GST. [New section 38-97]

2.7         Item 2 is an amendment as a consequence of the insertion of new section 38-97 . This amendment ensures that the lease or hire of goods under new section 38-97 is not taxed by section 38-100.

Sewerage services

2.8         Item 4 inserts a new subsection (2) into section 38-290. The new section provides for the removal of waste matter from residential premises to be GST-free where the premises are not connected to a system of sewers. The waste matter must be of a kind that would normally be removed by sewers, that is, it cannot be toxic waste or any other waste which is not permitted to be disposed of by means of sewers. This amendment will mean that those households which use units such as ‘night cans’, sullage tanks and ‘biosystems’ will not pay GST on the service of emptying those units.

2.9         The supply of servicing a householder’s biosystem (a self-contained sewage unit, more common on rural properties) or aerated septic tank will also be GST-free [item 4] . Any chemicals which are purchased in relation to the servicing of a biosystem will not be GST-free. Item 3 amends the heading of section 38-290 as a consequence of new subsection 38-280(2) .

Farm land

2.10       Subdivision 38-O of the GST Act provides that a supply of farm land is GST-free if the supply is by way of freehold interest or long term lease. Long term lease means a lease of at least 50 years (section 195-1). There are some government leases of farm land that run for shorter periods. However, the supply under these shorter leases is akin to a sale or long term lease as it is normally renewed. The reasons for the shorter term lease (e.g. 10 years) may be to ensure compliance by the farmer with conditions of the use of the land, for example, with respect to conservation, water restrictions, etc.

2.11       Items 5 and 6 will amend subsection 38-475(1) and section 38-480 respectively to include supplies of leased farm land where the lease is for a period of less than 50 years and is a government lease.

 



C hapter 3  

Supplies involving non-residents

Outline of Chapter

3.1         Schedule 3 to this Bill amends the GST Act in relation to the following areas:

·       supplies made by non-residents where the non-resident does not carry on an enterprise in Australia;

·       supplies of ‘tooling’ to non-residents;

·       supplies of services to non-residents; and

·       supplies to Australian residents not in Australia at the time of supply.

Summary of new law

3.2         The amendments will:

·       allow non-residents and Australian recipients to agree that the GST on certain taxable supplies will be ‘reverse charged’;

·       allow the supply of ‘tooling’ to non-residents to be GST-free in certain circumstances;

·       allow a wider range of services to non-residents to be GST-free; and

·       ensure that a supply to an Australian resident is GST-free if the supply is provided to an entity outside Australia.

Detailed explanation of new law

Supplies made by non-residents

3.3         Non-resident businesses make supplies that are connected with Australia requiring them to register and pay GST. In many cases the non-resident does not have a presence in Australia. Consultations with a number of industries have suggested that there are practical difficulties in non-residents providing the details required for registration, some of which may not be relevant or available to a non-resident entity in circumstances where there is no net GST revenue. The amendments to the GST Act will help to overcome some of these difficulties.

3.4         Item 12 adds new Division 83 dealing with non-residents making supplies connected with Australia. This new Division provides that in certain circumstances a non-resident and an Australian recipient can agree for the GST payable on a taxable supply made by the non-resident to be paid by the Australian recipient. This is also referred to as a ‘reverse charge’ on the supply.

3.5         The circumstances where new Division 83 can be applied are set out in new section 83-5 . These are:

·       the supplier is a non-resident;

·       the supplier does not make the supply through an enterprise that the supplier carries on in Australia;

·       the recipient is registered or required to be registered; and

·       the supplier and the recipient agree that the GST will be paid by the recipient.

3.6         The non-resident can be registered and still utilise these provisions as long as the supply is not made through an enterprise that the supplier carries on in Australia. However, the Division does not apply if the supply is covered by Division 84 (offshore supplies other than goods or real property) or the supply made by the non-resident is through a resident agent. [New subsection 83-5(2)]

3.7         The amount of the ‘reverse charge’ is 10% of the price of the supply [new subsection 83-20(1)] . As the non-resident will not be paying the GST, their price will not include GST. Tax invoices will not be required for the Australian recipient to claim an input tax credit in relation to the taxable supply [new section 83-35] . However, the normal rules regarding creditable acquisitions and timing of input tax credits will apply.

3.8         New sections 83-10 and 83-15 provide special rules in relation to recipients that are members of GST groups or joint ventures. These sections provide for the GST to be payable by the representative member or joint venture operator where appropriate. New section 83-25 ensures that a non-resident does not have to register if the only reason they are required to register is because of supplies covered by new Division 83 .

3.9         New section 83-30 provides that the Commissioner does not have to register the non-resident if the only reason they are required to be registered is because of supplies that are covered by new Division 83 . This does not affect the status of the non-resident being required to be registered for the purposes of section 9-5 (taxable supplies).

3.10       Item 13 adds new section 188-23 to make it clear that the supplies that are ‘reverse charged’ to the Australian recipient do not count towards their turnover threshold.

Supplies of tooling to non-residents

3.11       Australian manufacturers under certain arrangements supply plant and equipment to non-residents to be used exclusively in Australia to manufacture goods that will be exported. These supplies are not GST-free as the plant and equipment remains in Australia. If the non-resident is not able to obtain an ABN they will not be able to claim back the GST and this cost may ultimately be borne in the cost of goods to be exported.

3.12       New section 38-188 [item 6] provides that the supply of ‘tooling’ to a non-resident that is not registered or required to be registered, is GST-free if the ‘tooling’ is to be used in Australia solely to manufacture goods that will be exported.

3.13       The goods (or ‘tooling’) covered by this provision are jigs, patterns, templates, dies, punches and similar machine tools.

Supplies of services to non-residents

3.14       Australian businesses will also make supplies of things (other than goods or real property) to non-residents that have the following common features:

·       the recipient is not an Australian resident;

·       the recipient is not in Australia when the thing supplied is done; and

·       the supply is directly connected with goods situated in Australia when the thing supplied is done, or with real property situated in Australia.

3.15       These supplies are not GST-free because of their connection with goods or real property in Australia. In many cases the non-resident cannot access input tax credits because of the current operation of the ABN registration process.

3.16       Items 7 and 9 amend items 1, 2 and 3 in the table in subsection 38-190(1) in relation to the meaning of the term ‘directly connected with goods’. The test is changed to ‘work physically performed on goods’ to clarify the intended scope of the term.

3.17       Item 8 also incorporates the change to the meaning of ‘directly connected with goods’ in the substituted item 2 in the table in subsection 38-190(1). This will clarify the scope of services that are GST-free where the supply is being made to a non-resident recipient who is not in Australia when the thing supplied is done.

3.18       Item 2 in the table in subsection 38-190(1) has the same effect as the current item with the exception of the change from ‘directly connected with goods’ to ‘work physically performed on goods’. In addition, item 2 now provides further tests where a supply is not GST-free because of the connection with goods or real property in Australia.

3.19       The further tests in item 2 provide that a supply (other than goods or real property) to a non-resident who is not in Australia when the thing supplied is done is GST-free where:

·       the non-resident is not registered or required to be registered; and

·       the non-resident acquires the thing in carrying on their enterprise.

3.20       The limitation in subsection 38-190(3) still affects the scope of item 2. Therefore, even if the requirements of item 2 are met, a supply will not be GST-free where the supply is provided to another entity in Australia.

3.21       This change effectively recognises that these supplies are being made to non-residents who would otherwise be entitled to claim input tax credits. However, under the current operation of the ABN registration process, these non-residents cannot register to access these input tax credits. This amendment provides an alternative to allowing these non-residents to register only for the purpose of claiming input tax credits.

3.22       The amendment potentially affects a range of services that would be provided to non-residents not in Australia at the time of supply that would be GST-free except for their connection with goods or real property situated in Australia. The range of services that may now be GST-free includes testing and certification of goods, warranty services, research and development, market research, advertising and consultancy services.

The requirement that non-residents are not registered or required to be registered

3.23       The amendments in relation to the supply of ‘tooling’ and also to item 2 in subsection 38-190(1) have a requirement that the non-resident is not registered and not required to be registered. The Australian supplier will need to be satisfied that this is the case before they can treat a supply as GST-free. The requirement for an Australian supplier to determine whether a non-resident is registered will not be as difficult as determining whether the non-resident is required to be registered.

3.24       While a statement to this effect from the non-resident is not required in the legislation, in some cases it may be appropriate for the Australian supplier to obtain some notification to the effect that the non-resident is not registered and also that they do not make supplies connected with Australia. The Australian supplier needs to be reasonably satisfied that the non-resident they are dealing with is not registered or required to be registered. A statement or knowledge to the effect that the non-resident does not make supplies connected with Australia will generally be sufficient for the Australian supplier to be satisfied that the non-resident is not required to be registered.

Supplies to Australian residents outside Australia

3.25       Supplies that are made to a recipient in Australia but where the supply is performed outside Australia are currently not GST-free because the recipient is both in Australia and overseas at the time of supply. However, if the recipient is an individual, they can be outside Australia when the thing is done and the supply can be GST-free. There is therefore an inconsistency in the legislation depending whether the entity is an individual or a company. In both circumstances, the supply is made outside Australia and the effective use and enjoyment of the supply is outside Australia.

3.26       Subsection 38-190(3) ensures that GST is payable in the reverse situation (i.e. the recipient is overseas but the supply is provided to another entity in Australia).

3.27       Item 11 adds new subsection 38-190(4) and provides that for the purposes of item 3 in the table in subsection 38-190(1) a supply will be taken to be made to a resident who is not in Australia when the thing supplied is done if the supply is provided to another entity outside Australia. Some examples of the types of supplies covered are:

·       a supply of mobile telephone roaming to an Australian business with an employee overseas; and

·       a supply to an Australian business of a training course to be conducted overseas.

Rights connected with Australia

3.28       Subsection 38-190(2) is designed to ensure that the supply of a right in Australia to a non-resident is not GST-free if the right will ultimately be redeemed in Australia. This provision is appropriate where the ultimate supply for which the right is effectively consideration, is or would otherwise be, a taxable supply. However, where the right is redeemed for a GST-free supply (e.g. financial supplies made to non-residents), the result is inconsistent (e.g. financial supplies to non-residents would be input taxed rather than GST-free).

3.29       Item 10 amends subsection 38-190(2) to make it clear that the provision does not apply where the supply underlying the right would be GST-free.

Regulation impact statement

Policy objective

3.30       The Government’s policy objective is to ensure that services provided to businesses overseas should not be subject to GST in the same way that exported goods are GST-free.  In addition, the Government wants to ensure it does not unnecessarily draw non-residents into the GST system.

3.31       There are 4 situations where this policy objective has not been achieved.

3.32       First, there are situations where non-residents will make supplies connected with Australia but in many cases will not carry on an enterprise in Australia or have a presence in Australia.  This will make it difficult for the non-resident to comply with the Australian GST laws or the ATO to enforce the law.

3.33       Second, some Australian manufacturers have contracts with non-residents to manufacture goods to be exported.  A feature of these arrangements can be that the manufacturing plant (referred to as ‘tooling’) is supplied to the non-resident but remains in Australia and is used to manufacture the goods for export.  Such a supply is not GST-free as the plant and equipment is not exported.

3.34       Third, there are some circumstances where the goods needed to provide exported services are located in Australia, which results in the service being subject to GST.

3.35       Fourth, there are situations where supplies can be made outside Australia, but because the recipient is technically in Australia when the supply takes place, the supply is taxable.  An example is where a company is located in Australia, but a supply is made to one of its employees outside Australia - strictly speaking the supply is made to the company, which is in Australia. 

Implementation options

3.36       To achieve the Government’s objective in relation to the situations noted above, the appropriate options are to either extend the GST-free provisions or provide more flexibility for overseas entities to register for GST and claim input tax credits.  There is also an option for the first measure to allow the non-resident supplier and the Australian recipient to utilise a ‘reverse charge’ rule.  A ‘reverse charge’ rule is only appropriate for the first option, given this is the only option dealing with supplies being made in Australia. 

Assessment of impacts

Impact groups

3.37       These measures impact both Australian businesses making supplies to entities overseas and the overseas entities themselves.  The Government does not have reliable estimates of the number of businesses affected by these measures, but it is advised that in relation to the third circumstance there are at least 12,000 overseas recipients of services that would, in the absence of any legislative change, need to register in order to claim input tax credits.

Costs and benefits

3.38       Extending the GST-free provisions will keep the overseas entities out of the GST system.  This will have compliance benefits for them as they will not need to become part of the Australian GST and keep records and lodge returns consistent with the system.  It will also be less costly for administrators as they may otherwise, if no change is made, need to examine and possibly audit a wider range of transactions occurring outside Australia. 

3.39       On the other hand, allowing overseas entities to register will ensure the supplies are made effectively GST-free as the overseas entity will be able to claim input tax credits, but it will also result in a net increase in compliance costs because, as noted above, they will need to keep appropriate records and lodge GST returns consistent with the requirements of the GST.

3.40       Neither option has a revenue impact.

3.41       The ‘reverse charge’ rule for the first circumstance is appropriate, given that it deals with a supply that is actually made to Australian businesses (and so would usually be eligible for an input tax credit).  In such a case, the compliance costs benefits of forcing the overseas entity to register simply to collect and remit GST is not justified, given that all GST remittances can be made by the Australian company.

Consultation

3.42       Consultation occurred with a range of stakeholders, particularly those in the resources industry.

Conclusion and recommended option

3.43       The Government proposes to extend GST-free treatment to deal with the last 3 situations. 

3.44       That is, the Government proposes to allow the supply of ‘tooling’ to be GST-free in certain circumstances, allow a wider range of services to be GST-free and will ensure that a supply to an Australian resident is GST-free if the supply is provided to an entity outside Australia.

3.45       To cover the first situation, the Government proposes to allow non-residents and Australian recipients to agree that the GST on certain taxable supplies will be subject to a ‘reverse charge’ rule so that the Australian resident can account for the GST.  Similar to the other situations, this will allow the non-resident to remain outside the GST system.

 



C hapter 4  

Agents

Outline of Chapter

4.1         This Chapter describes arrangements that entities involved in transactions on the basis of principal and agent may enter to simplify the way they account for GST in relation to both supplies to, and acquisitions from, third parties.

Detailed explanation of new law

What are the arrangements under which agents are treated as suppliers or acquirers?

4.2         New section 153-50 provides that entities may enter into an arrangement under which an agent will be treated as a supplier or acquirer (i.e. they will be treated as though they were a principal in their own right). To enter this arrangement there must be a written agreement under which:

·       the agent agrees that they are making supplies and/or acquisitions on behalf of the principal [new paragraph 153-50(a)] ;

·       the kinds of supplies and/or acquisitions to which the arrangement applies are specified [new paragraph 153-50(b)] ;

·       the agent will be treated as a principal in making supplies or acquisitions [new paragraph 153-50(c)] ;

·       the agent will issue tax invoices and adjustment notes to third parties in the agent’s name and the principal will not issue such documents [paragraph 153-50(d)] ; and

·       both parties have to be registered or else the arrangement ceases to have effect [paragraph 153-50(e)] .

4.3         This Subdivision is not restricted to applying only to principals and agents who make supplies in simple arrangements involving one principal, one agent and one third party. It may be accessed by those in more complex arrangements involving, for example, a number of sub-agents. However, the arrangements will only apply to entities which agree to adopt the arrangements or who do not opt out of them in the case of the application of the Commissioner’s determination under new section 153-65 .

What are the effects of the arrangements on supplies?

4.4         The general effect of entering into a new Subdivision 153-B arrangement in respect of supplies is that the principal and agent treat the supply of goods or services as 2 separate supplies as though they were acting as principal to principal.

4.5         Under an arrangement, the principal will be taken to have made a taxable supply to the agent [new subsection 153-55(2)] . The value of that supply is determined by reference to the amount the agent is actually required to pay the principal [new paragraph 153-55(2)(b)] . Usually this amount will be the amount the third party is charged for the supply less the amount the agent is permitted, under the contract with the principal, to keep as a commission or similar payment for agency services.

4.6         As the supply by the principal to the agent would be considered a taxable supply under the arrangement, the principal will be required to remit 1/11 of the price of the supply to the ATO. The agent will be able to claim 1/11 of that amount as an input tax credit.

4.7         In some cases, the principal will require the agent to pay the principal the entire amount the third party is charged for the supply but then, in a separate transaction, pays the agent a commission or similar payment for agency services. If this situation occurs, new subsection 153-55(3) provides that the amount the agent has already been required to pay will be reduced by the amount of the commission or similar payment for agency services. The agent’s supply of services is then not considered to be a taxable supply in its own right.

4.8         When the agent sells the goods to the third party, the supply is a taxable supply made by the agent and the agent will be required to remit to the ATO 1/11 of the price they charged the third party. [New subsection 153-55(1)]

4.9         The normal attribution rules would then apply to the supply from the principal to the agent and agent to the third party.

Example 4.1

Before making a Subdivision 153B arrangement

Without an agreement to adopt the arrangements provided under new Subdivision 153-55 , The House of Robert supplies perfume priced at $143 (GST inclusive) to Heather through an agent, Baxters. The House of Robert delivers the perfume to Baxters with an invoice that states that if Baxters sells the goods, they must pay the House of Robert $100 plus $13 to cover the GST which is payable on the supply to Heather. Baxters is entitled to receive a commission from the House of Robert for the selling service of $33 (GST inclusive).

After making a Subdivision 153B arrangement

As the diagram below shows, if the House of Robert and Baxters enter into an agreement that the new Subdivision 153-B arrangements apply, Baxters will pay the House of Robert $110 (as the supply by the House of Robert to Baxters will be considered a taxable supply the price of the supply is the amount Baxters is obliged to pay, i.e. $100 plus GST). The House of Robert will be required to remit $10 to the ATO when they delivered the perfume with an invoice to Baxters. Baxters will be able to claim $10 as an input tax credit.

When Baxters sells the perfume to Heather, the supply will be a taxable supply so Baxters will be required to remit $13 to the ATO.

 

 

 

 

 

 

 

 

 

 

 



What are the effects of the arrangements on acquisitions?

4.10       The general effect of entering into a new Subdivision 153-B arrangement in respect of acquisitions is that the principal and agent treat acquisitions as 2 separate acquisitions as though they were acting as principal to principal.

4.11       Under the arrangements, when an agent makes an acquisition from a third party on behalf of the principal it will be taken to have made an acquisition in its own right. The agent will be entitled to claim input tax credits on that acquisition. [New subsection 153-60(1)]

4.12       The agent will then be taken to have made a taxable supply to the principal [new subsection 153-60(2)] . The value of that acquisition is determined by reference to the amount that the principal is required to pay the agent [new paragraph 153-60(2)(b)] . Usually this amount will be the amount the third party charged for the supply plus the amount the agent is permitted, under the contract with the principal, to charge as a commission or similar payment for agency services.

4.13       As the supply by the agent to the principal would be considered a taxable supply under the arrangement, the agent will be required to remit 1/11 of the price of the supply to the ATO. The principal will be able to claim 1/11 of that amount as an input tax credit if they would have otherwise been making a creditable acquisition from the third party had new Subdivision 153-B not applied.

4.14       In some cases, the agent will be paid the entire amount the third party charged for the supply but then, in a separate transaction, the principal will pay the agent a commission or similar payment for agency services. If this situation occurs, new subsection 153-60(3) provides that the amount the principal has already been required to pay will be increased by the amount of the commission or similar payment for agency services. The agent’s supply of services is then not considered to be a taxable supply in its own right.

4.15       The normal attribution rules would then apply to the supply from the third party to the agent and agent to the principal.

Limitations of the scope of the arrangements

4.16       The arrangements provided for under new Subdivision 153-B do not impact the application of other taxation laws except where specifically noted. Nor do the arrangements impact upon other laws or contractual arrangements between the parties. They merely simplify the way in which agents and principals may account for GST.

Commissioner’s determinations

4.17       The Commissioner has a discretion in relation to the application of the arrangements to certain industries. The discretion will allow the Commissioner to make a determination that agents and principals in a particular industry would be considered to have agreed to adopt the arrangements unless one or both notify the other that they do not wish to be a part of the arrangements. [New section 153-65]

4.18       It is intended that this discretion may be used by the Commissioner in relation to industries which have one or more of the following features:

·       a significant number of agents, for example, the newsagency and hair care industries;

·       a significant number of principals, for example, sectors of the tourism industry involving wholesale travel agents; and

·       other difficulties in obtaining written agreements, for example, industries in which the agents and principals involved are geographically isolated.

Example 4.2

The Commissioner may make a determination in relation to agents and principals involved in making supplies of hair care products through hairdressing salons. This determination will mean that all the agents and principals involved in that industry will be considered to have agreed to adopt the arrangements in Subdivision 153-B and so they will account for GST on a principal to principal basis. However, if any hairdressing salon or hair care product supplier is not satisfied that the arrangement is appropriate for their business, they can notify the other party in writing that they do not want to continue under the arrangement and therefore both parties will have to account on the agent to principal basis required under the general GST law.

Turnover

4.19       New section 188-24 gives the agent the option of calculating their turnover with reference to their turnover before they entered the arrangements or with reference to their turnover after they entered the arrangements. In this way, choosing to enter the arrangements will not disadvantage the agent in relation to their turnover.

Example 4.3

Usha carries on a large newsagency business. She and her principals have agreed to account for GST under the new Subdivision 153-B arrangements. If Usha wanted to, she could work out her turnover by including the supplies she makes as a principal under the arrangements. However, in Usha’s case including all those supplies would mean her turnover was too large to continue to account on a cash basis. So Usha can choose to work out her turnover by ignoring the effects of new Subdivision 153-B and referring to what would have otherwise been included in her turnover.

Record keeping

4.20       The TAA 1953 is amended by the insertion of 2 new subsections to provide for record keeping responsibilities for those involved in new Subdivision 153-B arrangements. The principal involved in such an arrangement by agreement will be required to keep the written agreement [new subsection 70(1AA)] , however in the situation where a party opts out of an arrangement which had applied as the result of a Commissioner’s determination, both parties will be required to keep that notice [new subsection 70(1AB)] .

Regulation impact statement

Policy objective

4.21       The Government’s policy objective is to ensure goods and services sold to and sold by entities acting as agents are subject to the correct level of GST and eligible for input tax credits whilst ensuring compliance costs are kept to a minimum.

Implementation options

4.22       It has come to the Government’s attention that the provisions for agents in the GST Act may not recognise some of the agency arrangements that are in place between businesses.  As a result, affected entities may have higher than necessary compliance costs, in absence of any action by the Government.  In some cases, these higher compliance costs would arise due to the business having to separate out the supplies they make as principals and those they make as agents.  For a large number of retailers this could be a significant problem. 

4.23       As there are no administrative solutions to cover the range of agency arrangements that have come to light, the only practicable option to provide greater flexibility is to amend the legislation to allow entities to enter into an arrangement under which an agent can elect to be treated as a supplier or acquirer (i.e. they will be treated as though they were a principal in their own right). 

4.24       To enter this arrangement there must be a written agreement under which:

·       the agent agrees that they are making supplies and/or acquisitions on behalf of the principal;

·       the kinds of supplies and/or acquisitions to which the arrangement applies are specified;

·       the agent will be treated as a principal in making supplies or acquisitions;

·       the agent will issue tax invoices and adjustment notes to third parties in the agent’s name and the principal will not issue such documents; and

·       both parties have to be registered.

4.25       It would also be possible to treat all agency arrangements in this fashion, but the Government recognises that the current rules actually benefit some agency arrangements and so it considered an option was the appropriate method.

Assessment of impacts

Impact groups

4.26       The changes to the agency provisions will only impact on entities that choose to enter into the above arrangements.  The general effect of entering into these arrangements in respect of both supplies and acquisitions is that the principal and agent treat them as though they were acting as principal to principal.  Due to the nature of the measure, the Government is not able to quantify how many agency arrangements will utilise the proposed option.

Costs and benefits

4.27       Given that this measure provides an option for businesses to enter into agreements, the Government expects that only those entities that gain from entering into the arrangements will do so.  Accordingly, the Government expects that the amendments to the agency provisions will lead to a reduction in compliance costs for the businesses that use these arrangements.  Compliance costs will be reduced for these entities because they will not face the situation where they would need to identify which sales they make as agents and which they make as principal. 

4.28       Administration costs of the GST remain unaltered and there is no impact on revenue.

Consultation

4.29       There has been widespread industry consultation and the Government anticipates that the proposed solution will be acceptable.

Conclusion and recommended option

4.30       The Government has decided to amend the GST Act to enable principals and agents to enter into arrangements to simplify the way they account for the GST.

 



C hapter 5  

Financial supplies

Outline of Chapter

5.1         The amendments in Schedule 5 to this Bill change the de minimis test for financial supplies. Under the new test, a registered entity can obtain input tax credits for acquisitions related to making financial supplies if the total amount of those credits does not exceed the lesser of either $50,000 or 10% of the total input tax credits of the entity.

5.2         The amendments further allow registered businesses to claim input tax credits for borrowing related expenses unless the borrowing relates to making other input taxed supplies.

5.3         The amendments also clarify that reduced input tax credits can only be claimed where an entity is not otherwise entitled to an input tax credit for a particular acquisition.

5.4         The amendments will apply from 1 July 2000.

Detailed explanation of new law

De minimis threshold and input tax credits

5.5         Under section 11-15 of the GST Act, an entity acquires a thing for a creditable purpose to the extent it is acquired in carrying on an enterprise of that entity. An acquisition is not made for a creditable purpose to the extent that it relates to making supplies that would be input taxed or is of a private or domestic nature.

5.6         Subsection 11-15(4) provides that an acquisition is not treated as relating to supplies that would be input taxed if:

·       the only reason it would be input taxed is because it relates to making financial supplies; and

·       the entity does not make financial supplies in excess of a de minimis threshold.

5.7         The de minimis threshold is reached if an entity’s turnover of financial supplies does not exceed the lesser of either $50,000, or 5% of its annual turnover. If an entity meets the threshold, it is denied input tax credits to the extent its acquisitions are not acquired for a creditable purpose.

5.8         The current de minimis threshold has the effect that many entities making only a small number of financial supplies are denied input tax credits for acquisitions that relate to making those supplies.

Financial acquisitions threshold

5.9         The amendments will allow businesses to make a higher level of financial supplies before they are denied input tax credits for acquisitions that relate to making those supplies.

5.10       Item 1 amends subsection 11-15(4) so that if the only reason the acquisition would be input taxed is because it relates to making financial supplies then it will not be treated as input taxed provided that the entity does not exceed the financial acquisitions threshold . [Paragraph 11-15(4)(b)]

5.11       Item 7 inserts new Division 189 which sets out when an entity will exceed the financial acquisitions threshold . An entity would exceed the threshold if it has made, or is likely to make, financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of either:

·       $50,000 or such other amount as specified in the regulations; or

·       10% of the total amount of input tax credits to which the entity would be entitled.

If either or both of these levels are met, an entity will have exceeded the financial acquisitions threshold.

Example 5.1

MoneyLender calculates that over a 12 month period it will have spent a total of $220,000 on acquisitions in carrying on its enterprise. Moneylender calculates that $44,000 of that $220,000 was spent on acquiring new computers, software and labour hire services for processing, recording and tracking loans it makes to other businesses. MoneyLender’s total input tax credits for the 12 month period would be $20,000. Its input tax credits related to making financial supplies amount to $4,000, which is 20% of its total input tax credits. MoneyLender will be required to treat those acquisitions as relating to making input taxed supplies and is denied those input tax credits to that extent.

Example 5.2

Najbout Corporation calculates that it will have spent a total of $2,200,000 on acquisitions in carrying on its enterprise. Najbout Corporation calculates that $660,000 of that $2,200,000 was spent on acquiring new computers, software and labour hire services for processing, recording and tracking loans it makes to other businesses. Najbout’s total input tax credits for the 12 month period would be $200,000. Its input tax credits related to making financial supplies amount to $60,000. As this is more than $50,000 Najbout Corporation will be required to treat those acquisitions as relating to making input taxed supplies and is denied input tax credits to that extent.

5.12       An entity will determine whether it exceeds the financial acquisitions threshold in a way similar to how it determines whether it meets the annual turnover threshold under Division 188. That is, the entity will determine whether it exceeds the financial acquisitions threshold in a given month based on its acquisitions in:

·       that month and the previous 11 months; and

·       that month and the next 11 months.

The new term ‘exceed the financial acquisitions threshold’ replaces the definition of ‘annual turnover of financial supplies’ in section 195-1 . [Items 8 and 9, section 189-1, subsections 189-5(1) and 189-10(1)]

5.13       Under new section 189-15 a financial acquisition is an acquisition that relates to the making of a financial supply (other than a financial supply consisting of a borrowing). The Dictionary in section 195-1 is amended to include a reference to this new definition. [Item 10]

GST groups

5.14       For members of a GST group, the de minimis threshold is a combined threshold. That is, the threshold for the whole group is the same as if they were a single entity. Therefore, if one member of the group makes financial acquisitions exceeding the threshold, then the GST group as a whole will exceed the financial acquisitions threshold. [New subsections 189-5(2) and 189-10(2)]

Creditable importations

5.15       Item 3 amends paragraph 15-10(4)(b) so that, if the only reason an importation would be input taxed is because it relates to making financial supplies, then it will not be so treated provided that the entity making the supply does not exceed the financial acquisitions threshold .

Change in extent of creditable purpose

5.16       Item 6 amends subsection 129-5(2) to reflect the change to the de minimis test (in relation to how to calculate whether an adjustment arises under Division 129).

Borrowing related expenses

5.17       Section 40-5 of the GST Act provides that a financial supply has the meaning given by the GST Regulations. Provided the other elements of regulation 40-13 are met, borrowing is a financial supply under item 2 of those regulations. If an entity exceeds the de minimis threshold and incurs borrowing related expenses, they are denied input tax credits for those expenses as they relate to making a financial supply.

5.18       Borrowing related expenses would be included in the calculation of a de minimis test based on denied input tax credits. This would impact negatively on many businesses that borrow funds in making taxable and GST-free supplies.

5.19       In addition to the cost imposed by the denial of input tax credits, non-financial institutions have expressed concern about the compliance costs associated with attributing their inputs to their borrowing activities.

5.20       New subsections 11-15(5) and 15-10(5) provide that a borrowing related acquisition or importation is not treated as relating to making input taxed supplies provided the borrowing itself does not relate to making input taxed supplies [items 2 and 4] . Therefore, if an entity borrows money and uses it in making taxable or GST-free supplies, it will be entitled to input tax credits for its borrowing related expenses.

Example 5.3

Usha Ultimate Properties (UUP) owns several residential and commercial rental properties. It borrows $5,000 to renovate the bathroom of one of its rental properties and $20,000 to refurbish one of its commercial properties. In borrowing the 2 sums of money, UUP pays $3,300 for legal and investment advice.

UUP would not be entitled to input tax credits in relation to the borrowing expenses to the extent they relate to the supply of the residential rental premises. However, it would be entitled to input tax credits for the borrowing related expenses incurred in relation to the commercial premises.

Example 5.4

Monolith Enterprises borrows $250,000 from AmberCo for the purchase of a warehouse. Monolith pays a valuation fee of $1,100 to an independent valuer and also pays Lefal Solicitors $5,500 in legal fees for negotiating the loan contract. Monolith would be entitled to an input tax credit of $600 (1/11 of $6,600) for those expenses provided that the money borrowed does not relate to making input taxed supplies.

Reduced input tax credits

5.21       Division 70 allows for reduced input tax credits to be claimed for certain prescribed acquisitions, known as reduced credit acquisitions. Reduced input tax credits should only be available where an input tax credit would otherwise not be available for an acquisition. Item 5 inserts new subsection 70-5(1A) to clarify that reduced input tax credits can only be claimed if an entity is not otherwise entitled to an input tax credit for a particular acquisition.

Regulation impact statement

Policy objective

5.22       The objective is to provide input tax credits for expenses related to borrowing except where the borrowing is undertaken by a financial institution or where the borrowing is undertaken by the corporate treasury of a large business for the purposes of making other input taxed supplies.

Implementation options

5.23       Two implementation options were considered.

5.24       The first was to list financial institutions that would be denied input tax credits for borrowing expenses, and to allow input tax credits for borrowing expenses for businesses above the de minimus levels except where the borrowing is related to making input taxed supplies.

5.25       The second option considered was to exclude borrowing related expenses from the de minimis provision, and to allow input tax credits for borrowing expenses for businesses above the de minimus levels where the borrowing is not related to making an input taxed supply.  Businesses that exceed the de minimis would be allowed to claim input tax credits for borrowing expenses where the borrowing is not related to making an input taxed supply. For example, where a large sum is borrowed to make a physical investment.

Assessment of impacts

5.26       The first option would have required the listing of financial institutions.  The Government is not attracted to this option as it is against the basic design of the GST, which is to identify the nature of supplies made rather than the entity making them.  In addition, it would be administratively complex as such lists would have to be initially compiled and then regularly updated.

5.27       The second option allows businesses falling above the de minimis levels to claim full input tax credits for borrowing expenses provided the borrowing is not related to making an input taxed supply.  This approach reduces the compliance costs of affected businesses.  Businesses required to apportion input tax credits will be able to use their required record keeping to claim input tax credits for borrowing expenses not related to making input taxed supplies.

Consultation

5.28       There has been extensive consultation with representatives of business and the financial sector. There has been general support for the proposal.

Conclusion and recommended option

5.29       The second option provides the most benefits to businesses and is administratively more simple, whilst ensuring the correct policy objective is achieved.

 



C hapter 6  

Calculating amounts of GST

Outline of Chapter

6.1         This Chapter explains amendments to the GST Act and the GST Transition Act to:

·       provide rounding rules for GST liability;

·       allow the Commissioner to determine a transitional rounding rule for entities; and

·       allow the net amount for a tax period to be worked out from a method provided in a GST return.

Detailed explanation of new law

Rounding

6.2         Under the current GST legislation, the GST Act provides that a registered entity’s GST liability is 1/11 of the price paid for a taxable supply. It does not have rules for rounding amounts of GST that run into fractions of a cent. As the law currently stands, an entity’s GST liability needs to be calculated to an infinite number of decimal places.

6.3         There is an obvious need to provide a rounding rule for GST liability to enable entities to adequately calculate their net amount. To provide entities with both certainty and flexibility, item 1 inserts 2 rounding rules into the GST Act. Entities may round using the ‘total invoice rule’ or ‘taxable supply rule’.

6.4         A supplier and a recipient of a supply need not use the same rounding rules [new subsection 9-90(3)] . It does not matter if the supplier chooses to round using the total invoice rule but the recipient chooses to round using the taxable supply rule (or vice versa).

6.5         Both rounding rules provide entities with a method of rounding where there is:

·       only one taxable supply recorded on a particular invoice [new subsection 9-90(1)] ;

·       two or more taxable supplies recorded on a particular invoice [new subsection 9-90(2)] ; and

·       a taxable supply or supplies broken into a number of items or articles on a particular invoice [new subsection 9-90(5)] .

6.6         One or more taxable supplies may be broken into a number of items or articles on a particular invoice. In these situations the total amount of GST on the taxable supply or supplies is worked out as if each item or article were a separate taxable supply. [New subsection 9-90(5)]

6.7         In situations where an entity does not receive an invoice for a taxable supply or supplies, the entity should treat the document that records the details of the supply or supplies as an invoice for the purposes of this section [new subsection 9-90(6)] . ‘Document’ is broadly defined in the Acts Interpretation Act 1901 and would include any of the following things:

·       receipts;

·       a recipient’s record of the expense (for small expenses);

·       cash register totals; and

·       electronic data.

Total invoice rule

6.8         New subsection 9-90(1) and new paragraph 9-90(2)(a) provides a method for rounding the GST on an invoice using the total invoice rule. In following this rule an entity must round the GST on an invoice relating to one or more taxable supplies to the nearest cent, with 0.5 cents being rounded upwards.

One taxable supply recorded on an invoice

6.9         Where there is only one taxable supply on an invoice, the amount of GST on that supply should be rounded to the nearest cent (rounding 0.5 cents upwards). [New subsection 9-90(1)]

Several taxable supplies recorded on an invoice

6.10       If there is more than one taxable supply on an invoice, the unrounded amounts of GST for each taxable supply should be totalled and then rounded to the nearest cent (rounding 0.5 cents upwards). [New paragraph 9-90(2)(a)]

6.11       Alternatively, if all the taxable supplies on an invoice include an amount of GST that is exactly 1/11 of the price, an entity may choose to add up the GST-exclusive value of each taxable supply, calculate GST on that amount and then round to the nearest cent (rounding 0.5 cents upwards). [New paragraph 9-90(2)(a)]

Taxable supplies divided into items

6.12       A taxable supply on the invoice may be recorded as a number of items or articles (e.g. an invoice for a supply of nails, glue and paint). In this situation the amount of GST is worked out as if each item were a separate taxable supply. This effectively means that the invoice is treated as having more than one taxable supply on it. Therefore, in these situations the total amount of GST will be worked out using new subsection 9-90(2) .

Example 6.1

Amber and Co sells romance novels to consumers. An extract of an invoice to one of its client, is as follows:

                                                         Price (includes GST)

Margot’s Dilemma                                     $10.84

Keeping up with Nigel                               $14.08

Amelia’s Dream                                        $17.00

3  ×  wrapping paper @ $2.20 each                      $6.60

Amber and Co uses the total invoice rule to round their GST liability. The amount of Amber and Co’s GST liability can be worked out by:

·          adding the unrounded amounts of GST on each of the items on the invoice:

(0.9854545  +  1.28  +  1.5454545  +  0.6  =  $4.410909)

and then rounding this amount to the nearest cent. The amount of GST for the taxable supply is $4.41; or

·          adding the GST-exclusive values of each item:

($9.85  +  12.80  +  $15.45  +  $6  =  $44.10),

calculating the total GST amount for the invoice ($4.41) and then rounding this amount to the nearest cent. The amount of GST for the taxable supply is $4.41. 

Taxable supply rule

6.13       New paragraph 9-90(2)(b) provides a method statement for rounding the total amount of GST on 2 or more taxable supplies under the taxable supply rule. Where an invoice has one or more taxable supplies broken down into a number of items, the total amount of GST on the taxable supplies recorded on the invoice will also be calculated using new paragraph 9-90(2)(b) . Using this new paragraph, an entity will work out the amount of GST as follows:

·       calculate the amount of GST on each taxable supply [step 1] ;

·       where the amount of GST includes more decimal places than the number of decimal places that the entity’s accounting system is able to capture and record, the amount should be rounded up or down as appropriate.  If the last number is 5 or above, the amount should be rounded up [step 2 and new subsection 9-90(4)] ;

·       add the individual amounts of GST for each taxable supply on the invoice as worked out in the above 2 points [step 3] ; and

·       where the aggregate amount of GST includes a fraction of a cent, round this amount to the nearest cent (rounding 0.5 upwards) [step 4] .

The result of step 4 is the total amount of GST on the taxable supplies recorded on the same invoice.

6.14       The taxable supply rule requires entities to record amounts of GST to as many decimal places as their accounting systems can capture. Where an entity’s accounting system only allows amounts to be recorded in whole cents, the amount of GST will be rounded to the nearest cent (rounding 0.5 upwards). [Step 2 and subsection 9-90(4)]

Example 6.2

In Example 6.1, instead of using the total invoice rule, assume Amber and Co chooses to use the taxable supply rule. Amber and Co’s accounting system records amounts to 4 decimal places.

Amber and Co’s GST liability for the supply is calculated as follows:

Steps 1, 2 and subsection 9-90(4):

Margot’s Dilemma             $0.9855 ($0.98545 rounded up)

Keeping up with Nigel       $1.28

Amelia’s Dream                $1.5455 ($1.54545 rounded up)

3 × wrapping paper           $0.60

Step 3:    totalled amount  =  $4.411

Step 4:    total amount of GST  =  $4.41

Consequential amendment

6.15       Items 4 to 6 amend subsections 66-50(3), 75-10(4) and 84-12(2) to insert notes into those subsections. The notes clarify that the new rounding rule will apply regardless of whether or not the amount of GST has been calculated with reference to section 9-70 of the GST Act.

Transitional relief

6.16       The GST Regulations about tax invoices (notified in the Commonwealth Gazette on 21 October 1999) currently compel entities to round the total amounts of GST on a tax invoice down to the nearest cent (this rule is to be amended to bring it in line with the new rounding rule for GST liability).

6.17       These Regulations do not affect an entity’s GST liability. A tax invoice is merely an evidentiary document to enable a recipient to substantiate its input tax credit claim. To provide some flexibility and assist in the smooth implementation of GST, item 7 allows the Commissioner to make a determination relating to rounding amounts of GST. 

6.18       New subsection 24B(5) of the GST Transition Act allows entities to apply to the Commissioner in writing for transitional relief in using the total invoice rule and taxable supply rule discussed in paragraphs 6.8 to 6.14. Where the Commissioner grants transitional relief, it will only be:

·       to the entity listed in the determination [new paragraph 24B(2)(a)] ;

·       for the time specified in the determination (with this time ending on or before 30 June 2002) [new paragraph 24B(2)(b) and new subsection 24B(4)] ; and

·       to allow the entity to use the rounding rule specified by the Commissioner in the determination [new paragraph 24B(3)(a)]

6.19       New subsection 24B(3) provides that the entity listed in the determination will have the choice of using the rounding rule specified by the Commissioner or the rounding rules in new sections 9-90 and 13-30 of the GST Act. 

6.20       However, the Commissioner is restricted in the rounding method he can allow entities to use in the transition. The method an entity can request as acceptable in the transition must round the total amount of GST on an invoice [new subsection 24B(1)] . This means that the Commissioner is unable to make a determination in respect of a rounding method that does not round the total amount of GST on an invoice but instead rounds the GST liability on each of the items on an invoice.

6.21       In situations where the entity does not receive an invoice for a taxable supply or supplies, the entity should treat the document that records the details of the supply or supplies as an invoice for the purposes of this section. [New subsection 24B(6)]

6.22       This rule is only available until 30 June 2002 [new subsection 24B(4)] . After such time all entities must calculate their GST liability in accordance with the new rounding rules in the GST Act. The 2 year period of transitional relief from following the rounding rules in the GST Act is expected to minimise compliance costs by assisting in the smooth implementation of GST.

Reviewable GST transitional decision

6.23       Items 8 to 10 amend the TAA 1953 to ensure that the Commissioner’s decision under new section 24B of the GST Transition Act is a reviewable GST transitional decision.

6.24       There are currently no reviewable GST transitional decisions in the TAA 1953. Consequently item 8 inserts new paragraph 62(1)(c) to allow an entity to object against a reviewable GST transitional decision relating to it. Item 9 directs an entity to the relevant subsection that lists what decision in the GST Transition Act is a GST transitional decision.

6.25       New subsection 62(3A) provides that the Commissioner’s decision to allow, or refusing to allow, an entity to round amounts of GST in a manner different to that which is specified in the GST Act is a reviewable GST transitional decision under the GST Transition Act. 

Working out net amounts using approved forms

6.26       A GST registered entity must give to the Commissioner a GST return for each tax period. This return must, among other things, be in the approved form and show the entity’s net amount for the tax period. 

6.27       When an entity notifies the Commissioner of its net amount in an approved form, item 2 allows the entity to work out their net amount for a tax period in the way specified in the approved form. The net amount that the entity works out using the form will be their net amount for the tax period [new subsection 17-15(1)] . This amount will be the entity’s net amount even if they are able to calculate a different net amount using section 17-5 of the GST Act [new subsection 17-15(2)] .

6.28       Item 3 clarifies that the GST return does not need to state an entity’s section 17-5 net amount for the tax period. An entity may, instead, show their net amount as calculated under new section 17-15 . The approved form of the GST return may allow an entity to use the form to report their net amount worked out under either section 17-5 or section 17-15 of the GST Act.

 



C hapter 7  

Joint ventures

Outline of Chapter

7.1         This Chapter explains the amendments to the GST Act, the ABN Act, the ITAA 1936, the ITAA 1997 and the TAA 1953 in relation to joint ventures. These minor policy and technical amendments will:

·       enable entities other than companies to be participants or joint venture operators of a GST joint venture;

·       provide that a joint venture operator of a GST joint venture may choose to prepare a single GST return on behalf of all the joint ventures for which it is responsible;

·       insert a definition of ‘minerals’ in the Dictionary in the GST Act; and

·       clarify that a joint venture that does not involve the establishment of a joint venture entity is not a company or any other entity for taxation purposes.

Detailed explanation of new law

Entities other than companies

7.2         Division 51 of the GST Act allows companies engaged in joint ventures to be approved as GST joint ventures if they meet certain criteria. The joint venture operator of an approved GST joint venture will then deal with the GST matters arising from the operator’s dealings on behalf of the joint venture participants. Thus, companies approved as a GST joint venture can reduce their administrative costs.

7.3         However, there are instances where the entities involved in joint ventures are not companies - for example, a sole trader may sometimes be a participant in a joint venture. Therefore, an amendment to the GST Act is required so that entities that are not companies can be participants or operators of a GST joint venture.

7.4         Items 4 to 11 and item 19 amend Division 51 to remove the references to ‘company’ and ‘companies’ and to replace them with ‘entity’ and ‘entities’ respectively. Items 22 and 23 amend section 195-1 to refer to an entity rather than a company in relation to GST joint venture references in the Dictionary.

Definition of minerals

7.5         In the GST Act, terms marked with an asterisk are defined in the Dictionary in section 195-1.

7.6         Companies may be approved as a GST joint venture if the joint venture is for the exploration or exploitation of mineral deposits or for a purpose specified in the GST Regulations. The asterisked term mineral deposit is defined in section 195-1 to be a deposit of minerals, and includes a deposit of sand or gravel. The word ‘minerals’ in this definition is also asterisked. However, this term is not defined in section 195-1.

7.7         Item 24 inserts the definition of ‘minerals’ in section 195-1, the Dictionary. The definition refers to the definition of minerals in the ITAA 1997. This definition ensures that the term ‘minerals’ will also include petroleum.

Consolidated GST joint venture returns

7.8         Subsection 51-50(1) states that a joint venture operator must give the Commissioner a GST return in respect of each GST joint venture for which it is an operator. However, some entities may be a joint venture operator for numerous joint ventures. In this case, the lodgment of multiple GST returns for all of the joint ventures for which an entity is an operator may be an onerous task.

7.9         This amendment will reduce compliance costs for these entities, by allowing a joint venture operator to lodge one GST return in respect of all of the joint ventures for which it is the operator. New subsection 51-52 provides that a joint venture operator of 2 or more GST joint ventures may elect to consolidate all of the GST returns in relation to these joint ventures [item 14] .

7.10       To make this election, the joint venture operator must notify the Commissioner in the approved form [new subsection 51-52(1) ] . The election will take effect on the day specified in the notice, which must be the first day of a tax period that has not already ceased when the notice is given [new subsection 51-52(2)] .

7.11       New subsection 51-52(3) allows the joint venture operator to withdraw the election by notifying the Commissioner in the approved form. This withdrawal will take effect from the day specified in the notice, which must be the first day of a tax period that has not already ceased when the notice is given. The election cannot be withdrawn within 12 months from when the election took effect. [New subsection 51-52(4)]

7.12       New subsection 51-52(5) provides that the Commissioner may disallow the election if he or she is satisfied that the operator that wishes to make the election under section 51-52 has a history of failing to comply with its obligations either as a joint venture operator or in any other capacity under a taxation law. The disallowance takes effect from the start of the tax period in which the disallowance takes place [new subsection 51-52(6)] . Disallowance of the election is a reviewable GST decision under the TAA 1953.

7.13       While the section 51-52 election has effect, the joint venture operator will, for each tax period applying to it, lodge a single GST return in relation to all the joint ventures for which it is an operator [new subsection 51-50(2A), item 13] . The net amount for this GST return will be the net amount relating to all of those joint ventures [new paragraph 51-50(2A)(b)] . This net amount will be calculated by aggregating the net amounts that would have applied to the individual joint ventures if the election was not in place [new subsection 51-45(2A), item 12] . Negative and positive net amounts of the individual joint ventures will be offset against each other to reach the aggregated net amount for the joint venture operator.

7.14       Items 15-18 amend Division 51 to remove references to ‘GST joint venture’ and replacing them with ‘GST joint ventures’. Item 33 inserts a reference to new subsection 51-52(5) in the table in subsection 62(2) of the TAA 1953.

Clarification of status of joint ventures

7.15       During the registration processes for ABN and GST it has become evident that some potential registrants were unsure as to whether joint ventures could be registered as ‘unincorporated associations’ which are included in the entity definitions in the ABN and GST law.

7.16       The amendments make it clear that joint ventures that do not involve the establishment of a joint venture entity are not entities for GST or any other taxation purposes.

7.17       Items 3 and 30 insert a definition of ‘non-entity joint venture’ in the ABN Act and the ITAA 1997 and items 25, 27 and 32 insert referential definitions to the ITAA 1997 definition in the GST Act, the ITAA 1936 and the TAA 1953 respectively. 

7.18       The clarification of the status of joint ventures is achieved by excluding non-entity joint ventures from the definitions of ‘entity’ and ‘company’ in section 37 and section 41 of the ABN 1999 [items 1 and 2] , subsection 960-100(1) and subsection 995-1(1) of the ITAA 1997 [items 28 and 29] , subsection 184-1(1) and section 195-1 of the GST Act [items 20 and 21] and from the definition of ‘company’ both in section 8AAZA in the TAA 1953 [item 31] and subsection 6(1) of the ITAA 1936 [item 26] .

7.19       In determining whether an arrangement is a non-entity joint venture the Commissioner (or Registrar in the case of administering ABNs) will have regard, along the lines of the relevant parts of the current Accounting Standard AASB 1006, to the following considerations:

A ‘non-entity joint venture’ means a contractual arrangement whereby 2 or more parties undertake an economic activity which is subject to joint control. It does not involve a partnership nor establishing a separate entity and may simply be an arrangement to share assets. A non-entity joint venture has the following characteristics:

·          it uses shared assets of the venturers where each venturer uses its own property, plant and equipment, carries its own inventory, incurs its own expenses and liabilities and raises its own finance which represents its own obligations;

·          it is entered into by the venturers to obtain individual benefits as opposed to joint or collective profitability, that is, each derives a share of output from the joint venture operation rather than shared revenue or profit; and

·          it has the venturers bound by a contractual agreement, which establishes the operation, management and joint control of the joint venture.

 



C hapter 8  

Insurance

Outline of Chapter

8.1         This Chapter explains amendments to the GST Act and the GST Transition Act in relation to:

·       insuring international transport;

·       notification to insurers of entitlement to input tax credits on insurance premiums;

·       calculating the decreasing adjustment on settlements;

·       statutory compensation schemes; and

·       tax invoices for supplies under CTP schemes.

Context of Reform

8.2         The amendments:

·       ensure that the insurance of certain domestic components of international transport is GST-free;

·       allow the notification policy holders make to their insurers of the extent of their input tax credit entitlement on the premium for a policy to be made at any time at or before the relevant claim is made;

·       correct the calculation of a decreasing adjustment on settlement;

·       ensure that the correct entitlement to input tax credits is taken into account in calculating the decreasing adjustment for claims under statutory compensation schemes where the premium an entity was liable to pay has not been paid; and

·       provide that tax invoices do not have to be issued for CTP schemes to which section 23 of the GST Transition Act applies.

Detailed explanation of new law

Insurance of international transport

8.3         Item 6 of the table in section 38-355 provides that the supply of insurance of international transport of goods is GST-free.

8.4         If goods are exported in a freight container, international transport is GST-free from where the container is packed. So too is the insurance under the current provisions.

8.5         If goods are imported, the international transport is GST-free to the place of consignment. The place of consignment is the port or airport of final destination shown on the transportation documents, as defined. Generally, for marine freight, this will be the port where a container is unloaded from the ship. However, the insurance generally covers the goods until they are unpacked from the container. Often, the container makes a further domestic journey after unloading from the ship. This means that, under the current provisions, the insurance would be taxable to the extent it covered the domestic part of the transport.

8.6         This causes several difficulties. If goods are damaged, it is generally unknown at what point the damage occurred. For example, goods were intact when they were packed into the container in an overseas port. They travel several thousand kilometres to an Australian port. The container is unloaded from the ship and placed on a truck which takes it to a warehouse a few kilometres away. The container is unpacked and the goods are found to be damaged. As it is unknown where the damage occurred, it is difficult to calculate the risk of the goods being damaged during the domestic component of the transport. It is therefore difficult to determine to what extent the policy relates to the domestic component, and hence to what extent it should be taxed.

8.7         Item 1 amends item 6 of the table in section 38-355 to provide that the insurance of the international transport of goods from their place of export to a destination outside Australia will be GST-free.

8.8         Item 6 is also amended to provide that the insurance of the transport of goods from outside Australia to their place of consignment is GST-free as is the insurance of any subsequent transport within Australia if it is an integral part of the transport from outside Australia. For example, if the insurance covered goods transported in a container from the point they were packed to the point they were unpacked, the transporting of those goods in the container before it is unpacked would be an integral part of the transport from outside Australia. But the transport of the goods once they have been unpacked from the container would no longer be integral to the transport from outside Australia.

Notification of entitlement to input tax credits

8.9         Section 78-50 of the GST Act currently requires insured entities to notify the insurer of the extent to which they are entitled to input tax credits on the premium for an insurance policy. The insured is required to notify the insurer at or before the time it takes out the policy. This timing of the notification was developed in consultation with the insurance industry to enable this information to be taken into account in setting premiums. Subsequent consultation has shown that this requirement does not meet the commercial needs of all insurers. Some insurers are not interested in receiving this information unless and until the time a claim is made.

8.10       Item 3 amends section 78-50 to provide that the notification must be made at or before the time a claim is made.

Calculating the decreasing adjustment

8.11       The decreasing adjustment on settlements available under Division 78 is calculated under the rules in section 78-15. Subsection 78-15(4) provides a method statement for working out part of the calculation. That method statement is intended to provide the correct amount on which the decreasing adjustment is calculated. To provide the correct amount, the uplift factor in step 1 should be applied after taking into account the value of certain supplies as described in step 2 and any excess actually paid to the insurer as in step 3 of the current provisions.

8.12       Item 2 amends section 78-15 to provide a method statement where the uplift factor is applied after taking into account the value of those supplies and such excesses.

Statutory compensation schemes

8.13       Section 78-100 provides that Division 78 applies in relation to statutory compensation schemes. Statutory compensation schemes are those prescribed in the GST Regulations. This enables those workers’ compensation schemes, amongst others, that are not considered to be insurance at law to be brought within the operation of Division 78.

8.14       With some workers’ compensation schemes, an insured worker can receive compensation even if the employer has not paid the premiums into the scheme it was liable to pay. For this reason, subparagraph 78-100(2)(c)(ii) has the effect that the employer is treated as the entity insured if it was liable to pay the premiums, levy or contribution into the scheme.

8.15       The insurer’s entitlement to a decreasing adjustment on the settlement depends on the insured entity’s input tax credit entitlement on the premium - see sections 78-10 and 78-15. If the employer is 100% creditable and pays the premium it is required to pay into the scheme, it will be entitled to 100% of the input tax credit on the premium. The insurer will not be entitled to any decreasing adjustment on a settlement. If the employer does not pay the premium it is liable to pay, it will not, under Division 11, be entitled to any input tax credits on the premium. Its entitlement to input tax credits on the premium is 0%. This means that the insurer will be entitled to 100% of the decreasing adjustment on the settlement when it should not be entitled to any decreasing adjustment.

8.16       Items 4 and 5 amend section 78-100 to provide that it is the input tax credit entitlement that the insured entity would have had if it had paid the premium it was liable to pay that is taken into account in determining the insurer’s decreasing adjustment on settlement.

Transitional provisions

Tax invoices and CTP insurance

8.17       Section 23 of the GST Transition Act provides a special transitional treatment for CTP schemes - there is no entitlement to input tax credits on payments made into prescribed CTP schemes for the first 3 years of GST. As there is no input tax credit, there is no need for a tax invoice.

8.18       Item 6 amends section 23 of the GST Transition Act to provide that section 29-70 of the GST Act does not apply in these circumstances. This has the effect that the supplier under the CTP scheme is not required to issue tax invoices in relation to such supplies.

Section 23A notification

8.19       The notification requirement in section 78-50 of the GST Act was inserted in December 1999. There are insurance policies that were supplied before that requirement existed which extend beyond 1 July 2000. Notification was not possible at or before the time the policy was supplied. Section 23A of the GST Transition Act currently requires insured entities to notify the insurer of their input tax credit entitlement on insurance policies supplied before 1 July 2000 by that day.

8.20       As the section 78-50 notification requirement is to be amended to require notification at or before a claim is made, and decreasing adjustments can only arise where a claim is made on or after 1 July 2000 (due to the effect of section 22 of the GST Transition Act), there is no need for section 23A. Item 7 repeals section 23A.

 



C hapter 9  

Administration

Outline of Chapter

9.1         This Chapter explains the amendments made by Schedule 9 to this Bill. The amendments are of a technical and consequential nature and are necessary for the effective administration of GST.

9.2         References in this Chapter are to the GST Act, unless otherwise specified.

Detailed explanation of new law

Electronic lodgment of GST returns

9.3         This amendment varies the Commissioner’s discretion to allow certain entities to lodge their GST returns non-electronically. [Item 3, subsection 31-25(2)]

9.4         Entities with an annual turnover of $20 million or more are required to lodge their GST returns electronically. Under subsection 31-25(2), this requirement does not apply where the Commissioner is satisfied that it is not practicable for such entities to lodge electronically.

9.5         This discretion is inconsistent with the requirements for notifications of other BAS amounts in section 288-5 of the TAA 1953 and may cause problems for the general administration of the BAS. The amendment will modify the discretion to remove practicability as a reason for large entities not to lodge electronically. The Commissioner will still have a discretion to allow businesses to lodge in a different manner, but only where the Commissioner considers that there are valid reasons for excluding a large entity from this requirement.

9.6         The effect of this amendment is to widen the Commissioner’s discretion. It will no longer be limited to one specified circumstance.

Timing of GST credit entitlement

9.7         Under the GST law, the Commissioner must pay an entity a refund if the net amount of tax for a period is less than zero. As the law is currently silent on the timing of the entitlement to a credit, an amendment is required to specify when the entitlement arises.

9.8         This amendment clarifies that entitlement to a GST credit arises at the time when the entity notifies the Commissioner of a net amount of tax for a period that is less than zero. The entitlement will arise upon lodgment of a return under section 31-5 or upon lodgment of a further or fuller return under section 31-20. [Item 7, new section 35-10]

Credits of representative members of GST groups

9.9         Under Division 48, companies may elect to group, so that one company within the group (the representative member) deals with all the GST obligations of the group. The representative member is liable for all the GST debts of the group and is entitled to all the input tax credits of the members of the group.

9.10       The current RBA provisions of Part IIB of the TAA 1953 require the Commissioner to refund to the representative member any RBA surplus or excess credit of that entity, even though other members of the group may have a tax liability.

9.11       The amendments to the TAA 1953 allow the Commissioner to apply the representative member’s RBA surplus or excess credit against any tax debt of other members of the group. This will prevent entities in a GST group from claiming credits through the representative member, while accruing debts in another entity of the group. [Items 12 to 14, section 8AAZA and subsections 8AAZLA(1) and 8AAZLB(1) of the TAA 1953]

Interest on overpayments of GST

9.12       The Taxation (Interest on Overpayments and Early Payments) Act 1983 provides for payment of interest where an amendment is made that reduces an entity’s liability to tax. The definition of ‘relevant tax’ in subsection 3(1) of that Act needs to be amended to allow for the payment of interest where an assessment of GST is amended. [Item 17]

New penalty regime

9.13       A new uniform penalty regime is to be introduced by the A New Tax System (Tax Administration) Bill (No. 2) 2000 . As a consequence, existing administrative penalties in the GST Act and in Part VI of the TAA 1953 are being moved into Part 4-25 of Schedule 1 to the TAA 1953. [Items 4, 6, 8, 15 and 16, sections 288-40, 288-45 and 288-50]

9.14       A new Part 5-25 is being inserted into Schedule 1 to the TAA 1953 that deals with record keeping and other obligations of taxpayers. This includes uniform taxation requirements about approved forms, declarations and signatures. Consequential amendments are being made by this Bill to reflect the new generic provisions. [Items 1, 2, 5 and

9 to 11]



C hapter 10

Alcoholic beverages held on 30 June 2000

Outline of Chapter

10.1       Changes introduced by the new tax system include changes to the amount of customs duty or excise duty payable on alcoholic beverages other than wine. The duty on most alcoholic beverages will increase as a result of the changes.

10.2       Under the wholesale sales tax system persons who are registered for sales tax are able to hold stocks of alcoholic beverages free of sales tax. Where these goods are also subject to customs duty or excise duty, the duty is imposed when the goods are entered into home consumption. Goods that have been entered are past the point where duty can be imposed.

10.3       The combined effect is that goods held in stock at the start of 1 July 2000 may be sales tax free and, if they have passed the point at which duty is levied, will only have duty paid on them at the old duty rate. After the start of 1 July 2000, where these goods have gone past the point at which duty is levied, the manufacturer or wholesaler can sell these goods with the addition of GST only. This will result in less total tax being collected on these goods than is payable under the current tax system and less than is intended to be paid under the new tax system.

10.4       In addition, certain alcoholic beverages which are not currently subject to customs duty or excise duty will become subject to duty after 1 July 2000. These goods may also be held sales tax free at the start of 1 July 2000 and hence achieve a tax advantage when they are sold.

10.5       The loss of revenue in respect of stocks that would normally be held at the end of 30 June 2000 may not be significant but if stockpiling occurs to take advantage of the tax differential the revenue loss could be significant.

Detailed explanation of new law

The amendments

10.6       Items 4 and 5 add 2 new assessable dealings to Table 1 in Schedule 1 to the STAA 1992. New dealing AD4c relates to Australian goods and AD14c to imported goods. Both dealings relate to holding for sale increased duty alcoholic goods immediately before 1 July 2000. The sales tax liability is imposed on the person holding the goods for sale. The taxable value of the dealing is the purchase price. The time of the dealing is immediately before 1 July 2000.

10.7       Sales tax payable under these dealings will be included in sales tax returns for the period ending 30 June 2000 (or 31 July 2000 for quarterly taxpayers). The normal time for payment of sales tax is the 21 st  day after the end of the month. However, the Commissioner has the power in a particular case to extend the time for payment of tax or allow it to be paid in instalments.

10.8       The amendments relate to increased duty alcoholic goods . These are goods mentioned in subsection 15A(1) of the Sales Tax (Exemptions and Classifications) Act 1992 , other than those products covered by the WET Act. In addition the products must meet the tests in either of the subsections in new section 23A . New subsection 23A(1) relates to goods which have not borne sales tax but have had duty levied at the old rate and new subsection 23A(2) relates to goods which are currently not subject to duty but which will become subject to duty from the start of 1 July 2000. Products which will be subject to a lower rate of duty after 1 July 2000 are not increased duty alcoholic goods.

10.9       Persons holding increased duty alcoholic goods at the start of 1 July 2000 may also be entitled to a special GST credit (section 16 GST Transition Act) for a portion of the sales tax borne on these goods. The combined effect of the new assessable dealing and the GST Transition Act is that sales tax will be payable based on the person’s purchase price of the goods but part of that amount may be able to be claimed as a special GST credit.

10.10     Goods held by retailers under a consignment arrangement are also covered by this amendment.

10.11     New subsection 51(3A) provides that a credit in respect of increased duty alcoholic goods sold before 1 July 2000 cannot arise from a return of the goods to the seller after 30 June 2000. This is because the seller will be entitled to treat the goods as being on hand at 30 June 2000 and claim any appropriate special GST credit under section 16 of the GST Transition Act.

10.12     Wine within the meaning of the WET Act will be subject to the WET from the start of 1 July 2000 and will not be affected by this amendment.

Regulation impact statement

Policy objective

10.13     The Government’s policy objective is to ensure that under the new tax system, alcoholic beverages purchased free of sales tax before 1 July 2000 do not have a tax advantage over stock purchased after 1 July 2000.

10.14     Two situations have been identified where wholesalers of alcoholic beverages will be able to avoid taxation in the transition to the new tax environment. Both situations result from the ability of wholesalers to hold wholesale sales tax free stock by quoting their sales tax number when purchasing from manufacturers.

10.15     The first situation involves currently excisable products such as spirits and beer.  Prior to 1 July 2000, wholesalers may purchase these products from the manufacturer, excise duty paid but wholesale sales tax free. Wholesale sales tax will not apply to beverages sold from 1 July 2000. For example, for stock on hand of spirits as at 30 June 2000, the wholesaler will have only paid the old excise duty rate which will be approximately $50 per carton (for spirits) less than the new duty rate. No additional duty can be imposed as the products will have passed out of Excise control. It is also possible that manufacturers may be able to benefit from stockpiling in some instances.

10.16     The second situation involves fermented beverages and hybrid ready-to-drink products that are not currently subject to excise duty.  Prior to 1 July 2000, wholesalers may purchase these products from the manufacturer wholesale sales tax free. These products are not currently subject to excise but they will be under the new tax arrangements. From 1 July 2000 wholesales sales tax will not apply, so for stock held by the wholesaler as at 30 June 2000, the only tax that will be collected will be GST.

Implementation options

10.17     The Government considers only one option is available - to amend the STAA 1992 to impose a wholesale sales tax liability on alcoholic products which are not subject to the WET and that are held sales tax free for wholesale sale at 30 June 2000. 

Assessment of impacts

10.18     This measure will remove the incentive to stockpile alcoholic beverages which have been purchased sales tax free prior to 1 July 2000 such as beer, spirits, fermented beverages, and hybrid ready-to-drink products. 

Impact groups

10.19     This measure will impact on wholesalers of alcoholic beverages, estimated to be around 250 in number.

Costs and benefits

10.20     Affected taxpayers will be able to claim, after 1 July 2000, part of the sales tax paid as a special GST credit under the GST transitional provisions.

10.21     The compliance costs on firms trading alcoholic beverages will be minimal reflecting that a stocktake would routinely take place on 30 June 2000.

10.22     This measure has no revenue impact against the forward estimates.  If the measure did not proceed there would be a risk to revenue. 

Consultation

10.23     The alcohol industry has been consulted and supports the amendment.

Conclusion and recommended option

10.24     The Government has decided to pursue an amendment to ensure the appropriate tax liability accrues on alcoholic beverages in the transition to the new tax system.  

 



C hapter 11

Other amendments

Outline of Chapter

11.1       This Chapter explains the amendments contained in Schedule 11 to this Bill. Schedule 11 contains a number of GST related minor policy and technical amendments to various Acts. The amendments are summarised in Table 11.1.

Table 11.1

Act amended

Amendment in relation to…

ABN Act

Application to superannuation funds.

GST Act

·       Supplies of livestock or game;

·       New residential premises;

·       Adjustment notes;

·       Individuals and GST groups;

·       Second-hand goods;

·       Associates of GST branches and government related entities; and

·       Turnover of gambling supplies.

GST Transition Act

·       Application to rights; and

·       Funerals.

TAA 1953

Joint and several liability.

Detailed explanation of new law

Amendment to the ABN Act

Application to superannuation funds

11.2       An amendment to section 5 of the ABN Act is required to insert a reference to superannuation funds. When the GST and ABN Acts were originally enacted, all super funds were thought to be entitled to an ABN and GST registration through the operation of the ‘entity’ and ‘enterprise’ definitions in both Acts, that is, “... a superannuation fund operating in the form of a business ”. As part of the ABN’s purpose of replacing as many as possible other government registrations, superannuation fund numbers were also intended to be replaced. However, since the ABN and GST Acts’ commencement a view has emerged that not all superannuation funds’ operations could be considered to be in the form of a business .

11.3        Items 1 and 2 insert ‘superannuation fund’ in section 5 of the ABN Act to put beyond doubt the registration of superannuation funds for ABNs.

Amendments to the GST Act

Delivery of livestock or game

11.4       Livestock or game is not food, as defined by Subdivision 38-A, and its supply is not GST-free. Therefore, under the basic rules, the supply of livestock or game is a taxable supply.

11.5       Some arrangements for the delivery of livestock or game (for slaughtering or processing into food) state that title does not pass until after food has been produced. The purported effect of these arrangements is that the supply is postponed until it is a supply of food and GST-free under Subdivision 38-A. These arrangements are contrary to the Government’s intention that, as far as practicable, farmers should be in a position to sell their produce subject to GST.

11.6       Item 3 inserts new subsection 9-10(3A) to make it clear that under these arrangements, the delivery of livestock is a supply under the GST Act. The supply takes place when delivery is made and not when title passes. It does not matter that the delivery is of livestock but the passing of title may relate to a carcass and by-products.

11.7       Therefore, any arrangement for the delivery of livestock or game for slaughtering or processing into food is a supply of livestock or game. It does not matter when title is relinquished under contract. This supply of livestock or game is a taxable supply. This will cover arrangements where, for example, livestock is either delivered to a processor directly or to another party who then has it processed.

New residential premises

11.8       Under the definition of new residential premises (residential premises that have not previously been sold), a property can be classified as new regardless of its age. Subsections 40-65(2) and 40-70(2) of the GST Act exclude a supply of new residential premises from being input taxed under subsections 40-65(1) or 40-70(1) respectively. However, the supply may nevertheless be input taxed under subsection 9-30(4), or alternatively, may be a taxable supply or a non taxable supply.

11.9       It was not intended that supplies of existing housing stock which may have been used for many years by the original owners for residential accommodation (either rental income production or for owner occupation) would be subject to GST as new residential premises when first supplied after 1 July 2000.

11.10     For example, when a State Housing Authority decides to sell a house that it has held for public housing for say, forty years, and which has not been previously sold, this supply will not be input taxed under subsection 40-65(1), and may not be input taxed under subsection 9-30(4). Such a supply, if not input taxed, would probably be a taxable supply. This was not intended.

11.11     Conversely, when a property developer constructs a new dwelling, and lets it prior to sale (it may only be rented for a period as brief as the period between exchange of contracts and settlement). Subsection 9-30(4) may apply to make the supply input taxed rather than taxable. This was not intended.

11.12     Items 7 and 8 replace the existing subsections 40-65(2) and 40-70(2) with new provisions which will restrict the operation of those subsections to new residential premises, but only if those premises were used for residential accommodation before 2 December 1998. Under the new subsections, the sale of a house that had been rented or used as residential premises by the owner prior to 2 December 1998 will be input taxed.

11.13     Item 4 amends subsection 9-30(4) to ensure that that provision does not affect supplies of new residential premises. A supply will continue to be taken to be input taxed only if it is a supply that is used solely in connection with supplies that are input taxed but not financial supplies.

Adjustment notes

11.14     Subsequent events to a taxable supply or creditable acquisition may mean that an entity has paid too much or too little GST . In these cases an adjustment event may occur, and an adjustment may need to be made. Adjustments will either increase or decrease an entity’s net amount for a tax period . Where the adjustment decreases the net amount, the entity will usually need to hold an adjustment note before attributing a decreasing adjustment to a tax period.

28 day rule

11.15     Subsection 29-75(2) of the GST Act sets out circumstances in which an adjustment note must be issued. If an entity has issued a tax invoice, or a recipient created tax invoice, in respect of a supply, it must issue an adjustment note within 28 days of becoming aware of the adjustment event (paragraph 29-75(2)(b)).

11.16     In some circumstances, such as where an electricity supplier reads a meter every 3 months, suppliers normal business practices may not comply with the requirement to issue an adjustment note within the required 28 days . New subsection 29-75(3) will allow the Commissioner to relax the 28 day time limit specified in paragraph 29-75(2)(b) in circumstances that the Commissioner determines.

11.17     However, where a recipient of a supply requests from a supplier an adjustment note for an adjustment relating to the supply, the supplier is obliged to give the recipient an adjustment note within 28 days of the request. The Commissioner will not be given a discretion to relax this rule.

11.18      New subsection 29-75(4) clarifies the circumstances in which the Commissioner may vary the 28 day rule in paragraph 29-75(2)(b) . These circumstances may relate to a particular kind of taxable supply, such as a supply of utilities. However, subsection 29-75(4) does not limit the circumstances to supplies of a particular kind, as it may be appropriate to relax the requirement in other circumstances. [Item 5]

Example 11.1

Pham Energy is a gas supplier which issues its bills, that are also its tax invoices and adjustment notes, every 3 months. For this reason the Commissioner has permitted Pham Energy to issue adjustment notes on a 92 day cycle. Therese’s Treasures, a client of Pham Energy, had its meter read soon after the last billing cycle, and does not wish to wait for 92 days for its adjustment note. If Therese’s Treasures requests Pham Energy to issue an adjustment note, Pham Energy must do so within 28 days of their request.

Adjustment notes for small adjustments

11.19     A supplier does not have to issue an adjustment note if the value of the taxable supply to which the decreasing adjustment relates was $50 or less (subsection 29-80(2) of the GST Act). Because this de minimis rule is based on the value of the taxable supply, rather than the amount of the adjustment, entities may be required by this rule to issue adjustment notes for very small adjustments, or may not be required to issue adjustment notes for large adjustments.

11.20     For example, where the value of a taxable supply is $500, but the adjustment is only $2, an adjustment note is required for that adjustment because the value of the original supply is greater than $50. On the other hand, where the value of the taxable supply is $2, but the adjustment is $500, the supplier is not required to issue an adjustment note.

11.21      Item 6 amends subsection 29-80(2) so that the $50 rule in that subsection relates to the amount of the adjustment instead of the value of the original taxable supply . Under the new rule, an entity will not need to issue an adjustment note where the amount of the adjustment is $50 or less. In the examples above, an adjustment note is not required for the $2 adjustment to the $500 supply, but is required for the $500 adjustment to the $2 supply.

Individuals and GST groups

11.22     One of the principal objectives of the GST grouping arrangements in Division 48 of the GST Act is to eliminate the administrative and cash-flow costs associated with transactions between related entities. Currently, an entity will only meet the membership requirements for a GST group if that entity is a company, partnership or trust - paragraph 48-10(1)(a) of the GST Act.

11.23     However, many small businesses involving sole traders use company or trust structures to facilitate their business operations, in the same way as a partnership might use these structures. Sole trader entities are commonly used in many business sectors including primary production, legal and accounting firms and medical practices. Often, there will be transactions of considerable magnitude between the sole trader and the other operating entity (or entities). Allowing sole traders to become members of a GST group will enable these individuals to substantially reduce administrative and cash-flow problems associated with accounting for these transactions.

11.24     Item 9 amends subparagraph 48-10(1)(a)(ii) to include an individual as an entity that can be a member of a GST group. Further requirements in relation to individuals will be specified in regulations.

Second-hand goods

11.25     Division 66 contains special rules about acquisitions of second-hand goods from unregistered persons for the purposes of sale or exchange.

11.26     Section 66-17 requires records for creditable acquisitions of second-hand goods. The record must include the name and address of the supplier, the goods acquired and the date and consideration for the acquisition. This record must be prepared by the second-hand goods trader. If the trader does not have this record, then subsection 29-10(3) provides that the trader cannot claim the input tax credit.

11.27     Item 10 provides that for acquisitions of second-hand goods, where the value does not exceed $50, then subsection 29-10(3) does not apply. This is consistent with the treatment of other creditable acquisitions for under $50.

11.28     Item 10 also provides a similar provision for decreasing adjustments relating to a creditable acquisition of second-hand goods.

11.29     Consequently, if a second-hand trader acquires second-hand goods from an unregistered supplier and the value of the supply does not exceed $50, the trader may claim the input tax credit provided that the other conditions of Division 66 are met. Note that some other records, similar to income tax (e.g. a diary entry), will be necessary to substantiate the acquisition.

Associates of GST branches and government entities

11.30     Division 72 provides special rules that apply to certain supplies between associates (the associates rules). Essentially, these rules ensure that supplies to an entity’s associates without consideration are brought within the GST system and that supplies to an entity’s associates for inadequate consideration are properly valued for GST purposes.

11.31     The GST Act provides that certain types of entities may separately seek registration of independent parts of that entity. An entity may register branches of the entity under Division 54, and the consequence is that each branch lodges a separate return and pays GST separately to the parent entity. Similarly, ‘government entities’ as defined in section 47 of the ABN Act, may apply for separate registration from the government which they form part. A government entity which so registers is a government related entity, as defined in section 195-1 of the GST Act.

11.32     The term ‘associate’, as used by the GST Act, is defined in section 318 of the ITAA 1936. The term is defined widely to include entities with specified relationships to the primary entity for natural persons, companies, certain trusts and partnerships. For example, relatives and partners of a natural person are associates of that person.

11.33     However, because the current definition of associate in section 195-1 of the GST Act adopts the definition in Section 318 of the ITAA 1997, the term associate, as used in Division 72 of the GST Act, does not acknowledge the separate existence of separately registered GST branches or government related entities. GST branches, government entities and government related entities are not recognised entities in the income tax regime.

11.34     The amendments alter the operation of Division 72 so that the division applies to entities which obtain separate registrations for branches, and government related entities which separately register. [Item 11, new sections 72-90 to 72-100]

11.35      New section 72-90 treats GST branches of an entity as associates of the parent entity and other GST branches of the parent entity. A GST branch will also be an associate of any entity of which the parent entity is an associate.

Example 11.2

Branch A makes a supply for no consideration to Branch B, which is a GST branch of the same entity. If there was consideration for the supply it would be taxable. Branch B did not acquire the thing solely for a creditable purpose.

Subdivision 72-A treats the supply by Branch A to Branch B as a taxable supply, because section 72-10 makes the value of that supply its GST-exclusive market value, rather than nil.

Subdivision 72-B treats this acquisition by Branch B as a creditable acquisition but only to the extent to which it was for a creditable purpose. The input tax credit is a proportion of the GST amount, which is based on the market value.

11.36     New sections 72-95 and 72-100 deal with government related entities, which are entities that are separately registered on behalf of an Australian government. New section 72-95 applies the associates rules to supplies between each government related entity for which the Commonwealth obtains separate registration. Similarly, new section 72-100 applies the associates rules to supplies between each separately registered government related entity for which a State or a Territory obtains separate registration. Government related entities will also be associates of any entity which the relevant government is an associate of. However, the associates rules do not apply to supplies between an entity registered by one government to an entity registered for another.

Example 11.3

Supplies between each of the State of Victoria’s separate registrants are subject to Division 72 where made without consideration and otherwise for a creditable purpose. The same situation applies to supplies among Queensland’s registrants. However, the associates rules do not apply to supplies between a Victorian registrant and a Queensland registrant.

GST turnover for clubs and similar premises

11.37     An entity’s annual turnover is relevant for several turnover tests. Division 188 sets out how to calculate annual turnover. The calculation takes into account the value of all the supplies an entity makes, excluding certain supplies (see sections 188-15 and 188-20).

11.38     Under section 9-70, GST is generally calculated as 1/11 of the total consideration for a taxable supply. However, for gambling supplies, GST is not calculated this way. Under Division 126, GST on gambling supplies is calculated as 1/11 of the difference between the total amount wagered and the total monetary prizes in a tax period. This is because of the high volume of gambling supplies that can occur in a tax period and the administrative difficulty in accounting for each supply. For example, with a poker machine, a $1 coin can be placed in the machine as a bet placed and if $10 is won, that amount can remain in the machine and continue to be played. A total of eleven $1 bets can be placed in a matter of minutes. Under the current provisions, $11 would be included in the determination of annual turnover. However, under Division 126, GST is not 1/11 of $11, but 1/11 of the difference between the bets and the prizes: $11 less $10, which equals $1.

11.39     Items 12 and 13 amend Division 188 and section 195-1 to, in effect, provide that the amount to be included for gambling supplies in the calculation of annual turnover is the difference between the total amount wagered and total monetary prizes paid out.

Amendments to the GST Transition Act

Supplies of rights

11.40     Both sections 11 and 12 of the GST Transition Act may apply to rights. At present, the legislation does not make clear which provision has precedence where both sections 11 and 12 apply to a right which is supplied on a periodic or progressive basis. Section 11 provides that the supply of a right that was granted on or after 2 December 1998 is supplied on or after 1 July 2000 to the extent that the right could reasonably be expected to be exercised after 1 July 2000. However, where a right is supplied over a period, or progressively over a period, section 12 of the GST Transition Act may also apply. The latter provision apportions the supply of a right on the basis that the supply was made continuously and uniformly throughout that period.

11.41     New paragraph 11(1A)(a) will make it clear that section 11 does not apply to a right to which section 12 applies. To the extent that both provisions may apply, then section 12 applies rather than section 11. [Items 14 and 15]

Prepaid funerals

11.42     Under the current GST legislation, a prepaid funeral agreement entered into prior to 1 December 1999 is GST-free if paid in full before 1 July 2000. Any consideration received prior to 1 July 2005, or an earlier review date (if one exists) will be GST-free.

11.43     There are a number of difficulties in applying GST to prepaid funerals over the transitional period.

11.44      Item 16 amends section 15 of the GST Transition Act to ensure practical application of the GST to prepaid funeral agreements.

11.45     The amendment ensures that all consideration received in respect of a prepaid funeral agreement entered into prior to 1 December 1999 should be GST-free until 1 July 2005, irrespective of whether the agreement has been subject to a review opportunity.

Amendment to the TAA 1953

Grouping - joint and several liability

11.46      Item 17 allows certain financial institutions to group by removing the requirement of joint and several liability for cases where the entity is statutorily barred from meeting this requirement.

11.47     The purpose of the amendment is to allow entities to form a GST group where they otherwise meet the requirements for a GST group but are unable to be jointly and severally liable due to the operation of a state or commonwealth law.

11.48     The GST grouping provisions allow closely related entities to form a GST group. Under subsection 53(1) of the TAA 1953 the members of such a GST group are jointly and severally liable to pay any amount that is payable by the representative member under an indirect tax law.

11.49     Some entities are statutorily barred from meeting such a requirement. Under the Life Insurance Act 1995 , for example, the assets of a statutory fund are only available for expenditure related to the conduct of the business of the fund. This means that these entities are unable to be jointly and severally liable as required under subsection 53(1) of the TAA 1953 and therefore are unable to be members of a GST group.

11.50     Item 17 inserts new subsections 53(1A) and 53(IB) . Under new subsection 53(1A) joint and several liability does not apply to a member of a GST group if an Australian law has the effect of prohibiting that member from entering into any arrangement under which they become liable for another entity’s debts. However, under new subsection 53(1B) , that member will remain liable for any amount payable under an indirect tax law that arises from its own acts or omissions.

Regulation impact statement

Policy objective

11.51     Division 126 of the GST Act currently provides that gambling suppliers calculate their turnover based on the total amount wagered, rather than on the gambling margin (i.e. the total amounts wagered less the value of monetary prizes paid out).  This has unintended consequences for a wide range of small to medium sized businesses such as clubs and hotels that provide gambling services, often through poker machines which may see them treated as if they were larger businesses when they are assessed against the turnover thresholds in the GST Act.  These turnover thresholds are:

·       the $1 million cash accounting turnover threshold (section 29-40) that determines at what point a business must account for GST on an accruals basis; and

·       the $20 million tax period turnover threshold (section 27-15) used to determine at what point a business must remit GST on a monthly basis.

11.52     The Government considers that turnover from gambling supplies should be based on the gambling margin, which is a better overall measure of the total value of gambling supplies made by a business than the total amount wagered.  This will ensure that businesses, especially small businesses, making gambling supplies are treated comparably with other businesses where turnover is based on the value of supplies.

Implementation options

11.53     Turnover, in respect of a gambling supply, would be defined as follows:

total amount wagered   -   total monetary prizes

Assessment of impacts

11.54     This measure would affect small and medium sized businesses, such as clubs and hotels, that provide gambling services, often through poker machines and smaller bookmakers.  It will have no effect on larger gambling operators, which will generally have turnover well in excess of the turnover thresholds, even under the proposed definition.

11.55     The measure will have no impact on GST liabilities or on GST revenue.

11.56     The measure will, however, result in some reduction in the compliance costs of small businesses that provide gambling services by ensuring that they do not prematurely lose the choice of remitting GST on a quarterly basis, which would provide reduced transaction costs.

Conclusion and recommended option

11.57     Only one option is recommended, that gambling turnover be measured as the value of the gambling margin.  This will ensure that small businesses that provide gambling services are assessed against the GST turnover thresholds on the basis of total value of the gambling services they provide, in the same manner as turnover for other businesses reflects the total value of the goods or services they supply.