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A New Tax System (Indirect Tax and Consequential Amendments) Bill (No. 2) 1999

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1998-99

 

The Parliament of the Commonwealth of Australia

 

 

 

house of representatives

 

 

 

a new tax system (indirect tax and consequential amendments) bill ( No. 2 ) 1999

 

 

 

 

 

Explanatory memorandum

 

 

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)

 



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

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

Chapter 1... Indirect Tax Acts........................................................... 9

Chapter 2... Insurance................................................................... 23

Chapter 3... Indirect Tax Transition............................................... 33

Chapter 4... Commonwealth-State financial arrangements....... 37

Chapter 5... ABNs........................................................................... 39

Chapter 6... Amendments relating to diplomatic, consular and related privileges and immunities.................................................................. 41

Chapter 7... Petroleum Resource Rent Tax Assessment

Act 1987..................................................................... 47

 

 



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

AIA 1901

Acts Interpretation Act 1901

ATO

Australian Taxation Office

Commissioner

Commissioner of Taxation

CP&I Act

Consular Privileges and Immunities Act 1972

CSFA Act

A New Tax System (Commonwealth-State Financial Arrangements) Act 1999

CTP

compulsory third party

DP&I Act

Diplomatic Privileges and Immunities Act 1967

GIC

general interest charge

GST

goods and services tax

GST Act

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

GST Transition Act

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

IO(P&I) Act

International Organisations (Privileges and Immunities) Act 1963

ITAA 1997

Income Tax Assessment Act 1997

LCT

luxury car tax

LCT Act

A New Tax System (Luxury Car Tax) Act 1999

OM(P&I) Act

Overseas Missions (Privileges and Immunities) Act 1995

PRRT

Petroleum Resource Rent Tax

PRRTAA

Petroleum Resource Rent Tax Assessment Act 1987

VAT

value added tax

WET

wine equalisation tax

WET Act

A New Tax System (Wine Equalisation Tax) Act 1999

WET and LCT Transition Act

A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Act 1999



Indirect Tax Acts

Schedule 1 to this Bill makes a number of amendments to the GST Act, the LCT Act and the WET Act. Consequential amendments to other Acts, including the ITAA 1997, are contained in Schedule 6 to this Bill. Most are minor policy and technical amendments, and include amendments to:

·          make a minor technical amendment in relation to GST-free supplies;

·          ensure that payments made to local government bodies that are specifically covered by an appropriation are not subject to GST;

·          ensure the obligation to issue an adjustment note arises only if a tax invoice has been issued or requested in relation to the supply that is the subject of the adjustment;

·          ensure that a member exiting a GST group will become responsible for adjustments relating to transactions made to entities outside the group during the time the entity was a member of the GST group. Also, that the group’s representative member will not be responsible for these adjustments;

·          adjust the provisions dealing with second-hand goods so that:

-           the input tax credit on second-hand goods that are divided and sold as separate items can be offset against the GST that would otherwise be payable on those supplies;

-           the input tax credit on second-hand goods acquired for $300 or less can be claimed for the tax period in which they are acquired;

-           livestock, other animals and plants are expressly excluded from the scope of the provisions; and

-           record keeping requirements are appropriately established for acquisitions from persons not registered for GST purposes.

·          ensure that telecommunications services that are used or enjoyed in Australia, are subject to GST regardless of whether the supplier is in Australia or offshore;

·          provide consistency with other provisions in the GST Act in relation to the transport component of the value of a taxable importation for goods that were exported from Australia for repair or renovation;

·          permit, but not require, a government entity to register for GST and allow registered government entities to group with other registered government entities;

·          clarify that the adjustment period when disposal, loss or destruction occurs in the same year as that in which the acquisition or importation is made is the period ending 30 June in that year; and

·          ensure that certain applications to own use of wine are not taxable.

Date of effect :  1 July 2000.

Proposal announced :  Not announced.

Financial impact :  Negligible.

Compliance cost impact :  Compliance costs for these measures are expected to be negligible.

Insurance

Schedules 1 and 2 to this Bill also make a number of amendments to the GST Act and the GST Transition Act in relation to the treatment of insurance, including amendments that:

·          ensure that State stamp duties on insurance premiums are not subject to GST;

·          allow prescribed statutory compensation schemes to be brought within the operation of Division 78;

·          allow certain government insurance schemes to be excluded from Division 78 through regulation;

·          amend the workers’ compensation and CTP insurance provisions to reduce compliance costs that would otherwise arise; and

·          deny input tax credits on premiums paid for CTP insurance that ensure no GST is payable on any related settlements, for the first 3 years of the GST.

Date of effect :  1 July 2000.

Proposal announced :  Not announced.

Financial impact :  Negligible.

Compliance cost impact :  These amendments are expected to reduce compliance costs.

Indirect Tax Transition

Schedule 2 to this Bill makes a number of amendments to the GST Transition Act. These include amendments to:

·          ensure that long term leases entered into between 2 December 1998 and 1 July 2000 are not subject to GST;

·          ensure that the provisions relating to rights granted for life between 2 December 1998 and 1 July 2000 operate as intended;

·          apply a special credit for certain alcoholic beverages held at 1 July 2000 that are not covered by the WET; and

·          allow for a credit for certain petroleum products held at 1 July 2000.

Date of effect :  The amendments will commence immediately after the commencement of the A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 , which is taken to commence immediately after the commencement of the GST Act.

Proposal announced :  Not announced.

Financial impact :  Nil. The amendments give effect to the measures as originally intended.

Compliance cost impact :  Negligible.

Commonwealth-State financial arrangements

Schedule 3 amends the CSFA Act to ensure that the calculation of GST revenue to be distributed to the States and Territories will include any general interest charge relating to GST and to ensure that any effect that the WET and LCT laws may have on GST revenue will not be included in the calculation.

Date of effect :  The amendments will be taken to commence immediately after the commencement of the CSFA Act.

Proposal announced :  Not previously announced.

Financial impact :  Nil.

Compliance cost impact :  Nil.

ABNs

Schedule 4 to this Bill amends the ABN Act to ensure that overseas businesses that are required to register for GST purposes are able to obtain an ABN.

Date of effect :  Royal Assent.

Proposal announced :  Not announced.

Financial impact :  Nil.

Compliance cost impact :  Negligible.

Amendments relating to diplomatic, consular and related privileges and immunities

Schedule 5 to this Bill makes a number of amendments to the CP&I Act, the DP&I Act, the IO(P&I) Act, and the OM(P&I) Act. These include amendments to:

·          ensure that Australia continues to meet its obligations in respect of taxation concessions for goods imported by diplomatic missions, consular posts, overseas missions, international organisations and their officials;

·          provide for an indirect tax concession scheme for these bodies to allow Australia to provide taxation concessions for local purchases on a reciprocal basis; and

·          make it clear that international organisations in Australia will not be able to register for GST purposes.

Date of effect :  1 July 2000.

Proposal announced :  Not announced.

Financial impact :  Minimal. There will be a net financial gain to Australia.

Compliance cost impact :  Negligible.

Petroleum Resource Rent Tax Assessment Act 1987

Schedule 6 to this Bill will exclude GST from the tax base for calculating PRRT.

Date of effect :  1 July 2000.

Proposal announced :  Not announced.

Financial impact :  Nil. The amendment prevents a distortion in collections that would otherwise occur.

Compliance cost impact :  Negligible. The GST component of receipts and expenditure are expected to be recorded for accounting and income tax purposes.



C hapter

Indirect Tax Acts

Outline of Chapter

1.1         This Chapter explains the amendments contained in Schedule 1 to this Bill. Schedule 1 contains a number of minor policy and technical amendments and is divided into the following Parts:

              Part 1 - Amendment of the A New Tax System (Goods and Services Tax) Act 1999 ;

              Part 2 - Amendment of the A New Tax System (Luxury Car Tax) Act 1999 ; and

              Part 3 - Amendment of the A New Tax System (Wine Equalisation Tax ) Act 1999 .

1.2         The remainder of this Chapter explains these amendments in more detail. An explanation of the amendments to the insurance provisions is contained in Chapter 2 of this Explanatory Memorandum.

Part 1  - Amendment of the A New Tax System (Goods and Services Tax) Act 1999

GST-free supplies

1.3         Section 13 of the GST Transition Act details instances where a supply is GST-free. For example, a supply under an agreement made before the date of Royal Assent (i.e. 8 July 1999), which identifies consideration for a supply to be made before 1 July 2005, is GST-free.

1.4         However, the GST Act, (in particular subsection 9-30(1)), does not refer to GST-free supplies made under section 13 of the GST Transition Act.

1.5         Item 1 is a minor technical amendment to correct this anomaly. Item 1 amends subsection 9-30(1) of the GST Act to ensure that GST-free transactions under a provision of another Act are also GST-free for the purposes of the GST Act.

Payments to local government authorities

1.6         Under the GST Act, a payment specifically covered by an appropriation under an Australian law and made by one Australian government agency to another Australian government agency is excluded from the definition of ‘consideration’, and is therefore not subject to GST (paragraph 9-15(3)(c)).

1.7         However, the definition of ‘Australian government agency’ does not cover a local government body. Therefore, Special Purpose and Special/Standing appropriations made directly to a local government body from a Commonwealth or State government agency may be subject to GST. This is contrary to the Government’s original intention.

1.8         Items 1 and 2 of Schedule 6 amend the definitions of ‘Australian government agency’ and ‘exempt Australian government agency’ in the ITAA 1997 to insert references to a local governing body. These amendments will ensure that payments made to local government bodies that are specifically covered by an appropriation, will not be subject to GST.

Obligation to issue adjustment notes

1.9         If an adjustment event occurs in relation to a supply (thereby affecting the GST liability in relation to the supply) the supplier is obliged by section 29-75 of the GST Act to notify the recipient by issuing an adjustment note within 28 days of the earlier of the time the supplier became aware of the adjustment or the time the recipient requested the adjustment note.

1.10       The amendment to section 29-75 will ensure that the supplier is obliged to issue an adjustment note only if a tax invoice has been issued, or requested, for the taxable supply to which the adjustment relates. [Items 9 to 11]

Precious metals

1.11       Following extensive consultation with industry it has been determined that the precious metal provisions do not reflect the way precious metals are mined and supplied in Australia. This Bill amends the precious metal provisions to reflect the following:

·          Where a precious metal producer retains title of the precious metal (the refiner is effectively an agent), the refiner does not make the first supply of the precious metal, and the transaction is not GST-free under the current provisions. Item 16 amends section 38-385 of the GST Act to allow the first supply of precious metal to be provided by an entity on whose behalf the refining has been done;

·          The current provisions limit a GST-free supply to where a dealer acquires the precious metal for investment purposes. The restriction to investment purposes is unnecessarily restrictive and will be deleted [item 54] ;

·          In order to ensure that the correct supply of precious metal is GST-free or input taxed, the definition of ‘precious metal’ has been amended to refer to sales of precious metals in an investment form. Investment form means precious metal sold in a coin, wafer, bar or other tradeable form which has an internationally accepted hallmark. In the case of gold, this means a hallmark that has been approved by the London Bullion Market and means that the gold can be traded on the international bullion market. [Items 65 and 66 ]

1.12       The amendments will ensure that the precious metal provisions contained in the GST Act better reflect the way the precious metals industry currently operates.

Financial supplies

1.13       Subdivision 40-A of the GST Act provides that all financial supplies are input taxed. Subsections 40-5(2) and (3) contain tables that set out broad categories of supplies that are financial supplies as well as supplies that are not financial supplies. Subsection 40-5(4) allows regulations to be made that have effect despite subsections 40-5(2) and (3). These regulations are intended to clarify whether a particular supply is, or is not, a financial supply.

1.14       To provide greater certainty to entities making financial supplies and to avoid potential inconsistency between the regulations and the principal Act, subsections 40-5(2) and 40-5(3) are repealed. New subsection 40-5(2) provides that ‘financial supply’ will have the meaning given by the regulations [item 18]. The regulations will, therefore, specify those supplies that are financial supplies and those that are not. Item 18 also repeals subsection 40-5(4).

1.15       Item 17 amends section 40-1 to reflect the amendments to section 40-5 and item 56 makes a related amendment to the definition of ‘financial supply’ in section 195-1.

GST groups - adjustments after ceasing to be a member of a GST group

Purpose of the amendments

1.16       The amendments ensure that an entity that ceases to be a member of a GST group will become responsible for adjustments relating to transactions made with entities outside the group during the time the entity was a member of the GST group.

Background

1.17       Division 48 of the GST Act provides special rules that enable certain companies and non-profit associations to form a GST group. A GST group is effectively treated as a single entity and as such supplies and acquisitions made wholly within a GST group are taken out of the GST system. Supplies and acquisitions that are made outside the GST group fall within the central concepts. One member of the group (the representative member) becomes responsible for paying all the GST and is entitled to all the input tax credits that the members of the GST group have that relates to supplies and acquisitions made outside the group.

1.18       Where an entity is a member of a GST group, any adjustments that the member has is made by the representative member. Adjustments may occur where a representative member has accounted for GST or input tax credits, but subsequent events may result in that GST or those input tax credits being incorrectly accounted for.

1.19       When a member of a GST group ceases to be a member of the GST group, it was intended that the exiting member would become responsible for accounting for all of its own adjustments, including those relating to transactions made to entities outside the group during the time it was a member of the group. The GST law, as currently drafted, does not give effect to this intention.

Explanation of the amendments

1.20       New Subdivision 48-D provides rules in relation to adjustments for an entity that ceases to be a member of a GST group [item 20 ] . This Bill inserts a definition of when an entity will cease to be a member of a GST group [item 51] .

1.21       New section 48-110 describes how adjustments in relation to a supply or acquisition by a group member to a non-group member will be treated when the entity subsequently ceases to be a member of the GST group. New subsection 48-110(1) stipulates that in the circumstances described, the entity exiting the group will be responsible for the adjustment and the representative member of that group will no longer be responsible. However, if the exiting entity is the representative member, the representative member will be responsible for any such adjustments.

1.22       In cases where the exiting entity becomes a member of another GST group section 48-50 will apply. That is, the representative member of the new group will be responsible for the adjustments of the new member. [New subsection 48-110(2)]

1.23       New section 48-115 describes how adjustments for a change in creditable purpose in relation to an acquisition or importation made by a member of a group to a non-group member will be treated when the entity subsequently ceases to be a member of the GST group. New subsection 48-115(2) provides that, for the purposes of calculating the amount of adjustment for a change in creditable purpose, the exiting entity will be treated as though they were not a member of the GST group when the acquisition or importation took place.

1.24       To achieve this, the exiting entity will be taken to have been entitled to the full input tax credit on the acquisition or importation and therefore will be responsible for any adjustments in relation to that acquisition or importation. However, where the exiting entity becomes a member of another GST group the representative member of the new GST group will be responsible for the adjustment. [New paragraph 48-115(2)(c)]

1.25       For the purposes of working out whether an entity has an adjustment for a change in creditable purpose under subsection 129-40, new subsection 48-115(1) provides that the intended or former application of something acquired or imported will be taken to be the creditable purpose last used to work out the amount of input tax credit to which the representative member was entitled or the amount of any adjustment the representative member had in relation to it.

Input tax credits for acquiring second-hand goods

1.26       Item 23 amends section 66-5 to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where those goods are acquired as trading stock (excluding materials used in manufacture). This is not a substantial change because in most cases under the current provisions, a credit only arises when a taxable supply of the goods is made.

1.27       Items 25 and 26 amend subsection 66-10(1) and insert new subsection 66-10(1A) to ensure that for acquisitions of $300 or less, the amount of input tax credit is not linked to the subsequent supply. For these acquisitions there is no reduction in the input tax credit if the price of the supply is less than the consideration for the acquisition. This eliminates the administrative burden of tracing supplies of small items of trading stock back to the acquisition of those items.

1.28       For most creditable acquisitions and for acquisitions of second-hand goods where the consideration is $300 or less, input tax credits can be claimed when the creditable acquisition is made. A different timing rule applies to acquisitions of second-hand goods where the consideration is more than $300. Broadly, the credit is not available until such time as a taxable supply of the goods is made. So that second-hand goods traders aren’t required to use both of these methods to attribute credits for acquisitions of second-hand goods, item 27 amends paragraph 66-15(1)(b) to allow traders to choose to account for credits for all acquisitions of second-hand goods, irrespective of the consideration, at the time a taxable supply of those goods is made. This means that the second-hand goods trader can elect to claim some credits later than otherwise entitled if it is convenient for them to do so.

1.29       Items 29 and 30 insert new sections 66-17 and 66-55 , which require records for creditable acquisitions of second-hand goods and for acquisitions of second-hand goods that give rise to Subdivision 66-B credit amounts that are similar to the tax invoice requirements to be prepared. The record must include details of the supplier, a description of the goods, the date of the acquisition and the consideration paid. As the supplier is not a GST registered person, the record must be prepared by the second-hand goods trader.

Second-hand goods that are divided for re-supply

1.30       Item 30 inserts new Subdivision 66-B which provides a global accounting method for acquisitions of second-hand goods that are divided for re-supply. In these cases, a matching of the credit on the acquisition with the GST on the subsequent supplies is impractical.

1.31       The global method can be used when it is reasonable to expect that more than one supply will be made from one acquisition [new paragraph 66-40(1)(c)] . Situations where this may occur include where:

·          component parts of an acquisition are physically broken down, for example, by motor vehicle dismantlers; and

·          an acquisition comprises several items, and one price is paid for the acquisition, rather than a separate amount for each item, for example, purchase of an auction lot, a collection, or the contents of a deceased estate.

1.32       The global method simply allows all of the input tax credits on acquisitions of second-hand goods that are to be divided for supply - worked out as if the acquisitions were creditable - to be offset against all of the GST on supplies made from this pool of acquisitions. No GST is payable on a supply until all of the credits have been absorbed. [New sections 66-45, 66-50 and 66-70]

1.33       The fact that a supply covered by Subdivision 66-B may not be taxable is disregarded in determining whether the related acquisition is creditable. [New section 66-60]

Example 1.1

A motor vehicle wrecker acquires a damaged car from an unregistered individual for $550. The Subdivision 66-B credit amount is worked out as if the acquisition is a creditable acquisition - the credit amount is $50. This credit cannot be claimed in a GST return, but is used to reduce the GST payable on any later supplies of goods made from Subdivision 66-B acquisitions.

The motor wrecker sells the car engine for $440. The Subdivision 66-B GST amount is worked out as if the supply is a taxable supply - the GST amount is $40. As this is less than the $50 credit that is available, the supply is not a taxable supply and no amount of GST is included in the wrecker’s net amount. Although the supply is not a taxable supply, this does not affect the buyer’s entitlement to an input tax credit.

Later the wrecker sells some of the car’s body panels for $330. The GST amount of $30 is reduced by the credit that is still available, that is, by $10. So the GST on the supply is reduced to $20. If the buyer of the panels is entitled to an input tax credit for the acquisition, the $30 credit is not reduced.

In a later tax period, the wrecker purchases another damaged car, and sells some more parts taken from the first car. The credit on the acquisition of the second car is offset against the GST on the supplies of parts taken from the first car - all of the credits and GST are pooled.

1.34       The global method does not always apply where an acquisition comprises more than one item:

·          where amounts are agreed for each item acquired, and these are separately itemised, the normal rules in Subdivision 66-A apply as it is possible to determine the credit that is attributable to each later supply. [New subsection 66-40(2)]

Example 1.2

A second-hand goods dealer purchases a box of watches and jewellery which is offered at an auction as a single lot. The dealer intends to place the items into his trading stock and sell them separately. This is an acquisition of second-hand goods that are divided for future supply. Subdivision 66-B applies.

If the same items were purchased in an acquisition from an unregistered supplier with prices negotiated for each piece, this transaction is not an acquisition of second-hand goods that are divided for re-supply. Subdivision 66-A applies.

·          Where the consideration is $300 or less, Subdivision 66-A applies as the credit is available upon acquisition rather than upon a supply being made. However, so that a second-hand goods dealer can apply the global method to all acquisitions that will be divided, the dealer can choose to use Subdivision 66-B where the consideration for the acquisition is less than $300. [New paragraph 66-40(1)(b)]

Example 1.3

A motor vehicle wrecker buys car wrecks for various prices. For those cars acquired for less than $300, the wrecker is entitled to Subdivision 66-A credits at the time of acquisition. However, if the Subdivision 66-A credit is claimed, then any supplies of parts made from those acquisitions are taxable, and are excluded from the Subdivision 66-B global account. The wrecker can choose to instead apply Subdivision 66-B to wrecks acquired for less than $300, rather than have to separately identify that trading stock for which a credit has already been claimed.

·          Where an acquisition to which Subdivision 66-B applies is made, but all of those goods are subsequently supplied in a single supply, then Subdivision 66-A, and not Subdivision 66-B would apply to that supply. [New paragraph 66-40(1)(d)]

1.35       Item 68 amends the definition of ‘second-hand goods’ to exclude all animals and plants. It was not intended that animals or plants be regarded as second-hand goods.

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

1.36       Item 9 of Schedule 2 amends section 18 of the GST Transition Act to ensure that second-hand goods credits and global accounting will be available even if the goods were acquired prior to 1 July 2000, provided that the goods are held as trading stock on that day, and have not been held other than as trading stock.

Telecommunication supplies

Overview

1.37       The Australian GST system is designed to tax consumption of goods, services and other things in Australia. In the case of telecommunication supplies, consumption is taken to occur where the recipient of the supply effectively uses and enjoys the supply.  Telecommunication services that are provided by an overseas supplier and are used or enjoyed in Australia may currently fall outside the scope of the GST system.

1.38       This amendment will ensure that telecommunications services that are used or enjoyed in Australia are subject to GST regardless of whether the supplier is in Australia or offshore. This is consistent with the treatment of telecommunication services in a number of other GST/VAT countries.

1.39       As the effect of the amendment is to make offshore telecommunication supplies ‘connected with Australia’, Division 84 of the GST Act (the reverse charge) will not apply where those supplies are subject to GST under the new Division 85 .

1.40       The amendments provide a definition for the term ‘telecommunication supply’.

Telecommunication supplies connected with Australia

1.41       Under the general rules, a supply of anything other than goods or real property is ‘connected with Australia’ if it is either done in Australia or made through an enterprise that the supplier carries on in Australia.

1.42       Item 43 inserts new Division 85 - Telecommunication supplies, into the GST Act. This Division provides an additional criterion for ‘connected with Australia’ specifically for telecommunication supplies. That is, if the effective use or enjoyment of a telecommunication supply is in Australia the supply will be ‘connected with Australia’. This is of particular relevance to the application of section 9-5. [New subsection 85-5(1)]

1.43       For example, where an offshore telecommunication provider supplies Internet access to a customer in Australia, the supply will be ‘connected with Australia’, even though the supply is not done in Australia or made through an enterprise that the supplier carries on in Australia.

1.44       In some circumstances a telecommunication supply may be connected with Australia as a result of the application of the new Division, but for administrative reasons it is not feasible for the Commissioner to collect the GST. New subsection 85-5(2) allows the Commissioner to determine that in these circumstances the telecommunication supply (or a class of supplies) will not be connected with Australia.

1.45       For example, the Commissioner may decide to use this discretion in relation to mobile telephone calls made by an overseas tourist visiting Australia using a mobile roaming service provided by their overseas telecommunication supplier.

1.46       New subsection 85-5(3) provides that the rules set out in new Division 85 are in addition to the general rules about ‘connected with Australia’ in section 9-25.

1.47       Item 53 modifies the definition of ‘connected with Australia’ in section 195-1 (Dictionary) to also refer to section 85-5.

1.48       Item 3 inserts a new entry in the table in section 9-39 (Special rules relating to taxable supplies) and item 15 adds a new entry to the table in section 37-1 (Checklist of special rules).

Meaning of telecommunication supply

1.49       New section 85-10 provides a definition of ‘telecommunication supply’. This definition is consistent with the definition recently enacted by the European Council. The definition is designed to capture the means of communication but not the content, where that content is clearly a different type of supply. The treatment of the content depends on the nature of the service provided.

1.50       Telecommunication supplies include the supply of:

·          telephone calls;

·          transmission element of international data exchange;

·          call back services;

·          the provision of leased lines, circuits and global networks;

·          e-mail and Internet access; and

·          satellite transmissions.

1.51       Telecommunication supplies do not include the following supplies delivered through telecommunication mediums:

·          licences to use intellectual property such as computer software; and

·          consultancy services provided via the Internet.

1.52       Item 71 inserts a new definition, ‘telecommunication supply’ in section 195-1 which refers to the new section 85-10 .

Supplies partly connected with Australia

1.53       Item 44 includes a telecommunication supply as a different kind of supply for the purposes of Division 96. This recognises that a supply consisting of both a service and a telecommunication supply, may be treated as separate supplies for the purposes of this Division.

Importations of goods that were exported for repair or renovation

1.54       Item 45 amends subparagraph 117-5(1)(b)(i) in relation to the transport component of the value of a taxable importation for goods that were exported from Australia for repair or renovation. The amendment refers to the international transport of the goods. This change is consistent with changes made to sections 13-20 and 38-355 proposed by the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999.

Timing of adjustments under Division 129

1.55       Entitlement to an input tax credit depends on the extent to which an acquisition or importation is made for a creditable purposes. Division 129 provides for adjustments to reflect a change in creditable purpose if the actual application differs from the intended or former application of the thing. Adjustments are attributed to adjustment periods, as defined in section 129-20. This section provides that an adjustment period for an acquisition or importation is at least 12 months after the acquisition or importation was made. The adjustment period is the tax period that ends on 30 June, or the closest to 30 June aligned with the taxpayer’s income tax year.

1.56       Section 129-25 provides that the adjustment period immediately after something acquired or imported is lost, stolen, destroyed, expired or disposed of is the last adjustment period for the acquisition. An amendment to the section will make clear that the adjustment period will be 30 June (or the closest to 30 June aligned with the taxpayer’s income tax year) of the year in which the acquisition was made if the disposal, loss or theft occurs in the same year. [Item 46]

Government entities

Registration of government entities

1.57       Currently the definition of entity in the GST Act and the ABN Act are different. Under the GST legislation, all government organisations would effectively be part of a single State, Territory and Commonwealth registration and each Government would decide which sub-entities it would treat as separate branches for GST purposes. The ABN Act includes a definition of ‘government entity’ which allows for separate registration of government entities at a lower level.

1.58       Item 57 inserts a definition of ‘government entity’ into section 195-1 of the GST Act to allow (but not require) for the separate registration of government entities. Under this definition, a government entity has the same meaning given by section 41 of the ABN Act.

1.59       Item 47 inserts new Division 149 which is about registration and grouping of government entities. The main rules that deal with registration of government entities are as follows:

·          New section 149-5 provides when a government entity may register for GST. Note that a government entity may apply to be registered even if it is not an entity and it is not carrying on an enterprise;

·          New section 149-10 provides that a government entity is not required to register separately. This would apply where a government entity is part of another entity’s registration and does not need to be separately registered in its own right;

·          New section 149-15 ensures that a government entity that is separately registered will be treated as if it were a separate legal entity and an entity for the purposes of the GST law; and

·          New section 149-20 ensures that section 25-50 and subsection 25-55(2) (which are about cancelling registration) do not apply to government entities.

1.60       Items 4 to 6, 14 and 19 insert references to new Division 149 in the GST Act.

Government entities and GST groups

1.61       Division 48 of the GST Act contains the rules that apply to GST groups. Section 48-5 provides that the Commissioner must approve 2 or more entities as a GST group if, amongst other things, the entities jointly apply in the approved form and each of the entities satisfies the membership requirements for that GST group. Section 48-10 contains the membership requirements of a GST group.

1.62       Currently, the grouping provisions only apply to a company, a partnership or trust that satisfies the requirements specified in the regulations and certain non-profit bodies. Item 47 of this Bill amends the GST Act to allow government entities to form GST groups in certain situations where the government entities satisfy the membership requirements for a GST group.

1.63       Under new section 149-25 , a government entity (including a government related entity - refer to paragraph 1.64) will satisfy the membership requirements for a GST group, or a proposed GST group, of government entities if:

·          it is registered;

·          it is not a member of any other GST group;

·          it has the same tax periods applying to it as the tax periods applying to all the other members of the GST group or proposed GST group;

·          it accounts on the same basis as all those other members; and

·          all those other members are government entities (or government related entity).

[Items 47, 57, 64 and 67]

1.64       The grouping provisions outlined in paragraph 1.63 apply to a ‘government entity’ and a ‘government-related entity’. A government related entity includes an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the ABN Act.  [Item 58]

Definition of ‘value’

1.65       Paragraph (c) of the definition of ‘value’ is repealed [items 75 and 76] . The paragraph will become redundant as a consequence of the repeal of the provision to which it refers by item 110 of Schedule 1 to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999.

Calculation of GST not to include LCT

1.66       The A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 proposes new subsection 9-75(2) be inserted into the GST Act. Subsection 9-75(2) ensures that LCT is not included when calculating the value of a taxable supply.

1.67       Items 59 to 61 contain technical amendments to the GST Act, to deal with the flow-on effects of subsection 9-75(2) being inserted. This will bring the legislation into line with the Government’s original intention and will ensure that the correct amount of LCT and GST is paid or payable.

1.68       The LCT is to be excluded from the definitions of both ‘GST exclusive market value’ and ‘GST exclusive value’ in section 195-1 [items 59 and 60] . The definition of GST inclusive market value is to include the luxury car tax [item 61] .

Part 2  -  Amendments of the A New Tax System (Luxury Car Tax) Act 1999

Definition of car

1.69       Currently, the definition of car in the LCT Act means a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 2 tonnes and fewer than 9 passengers (section 27-1). Motor vehicle is defined to mean a motor-powered road vehicle (including a 4 wheel drive vehicle).

1.70       The definition of car is intended to include all passenger cars (including station wagons), all 4 wheel drive vehicles, light trucks, motor homes, campervans and hearses.

1.71       However, some luxury passenger vehicles, such as stretched limousines, are designed to carry more than 9 passengers. Therefore, these limousines do not fall within the LCT Act. This is contrary to the Government’s original intention.

1.72       Item 78 amends the definition of ‘car’ in section 27-1 to include a limousine, regardless of the number of passengers it is designed to carry.

Part 3  -  Amendment of the A New Tax System (Wine Equalisation Tax) Act 1999

1.73       Item 79 amends the definition of ‘application to own use’ in section 33-1 of the WET Act by adding a further exclusion. Section 13-5 of the WET Act allows an entity to purchase wine free of WET if it will be used as a material in manufacture or other treatment or processing. This will allow, for example, a manufacturer that uses wine to produce other beverages to purchase the wine under quote, free of WET.

1.74       The WET Act imposes a WET liability on an application to own use by an entity that obtained the wine under quote. In the example in paragraph 1.73 this provision would apply and the manufacturer would have a WET liability at the time the wine is used. This amendment will ensure that when wine is used in that circumstance it will not be an application to own use and a WET liability will not arise. Any WET or GST will be payable at the time the goods produced are sold or applied to own use.

 



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Insurance

Outline of Chapter

2.1         This Chapter discusses the amendments that are made in relation to the treatment of insurance for GST purposes. Amendments are made to the GST Act in relation to:

·          State stamp duties;

·          statutory compensation schemes;

·          court orders and judgments;

·          the exclusion of certain insurance schemes from Division 78;

·          treatment of workers’ compensation and compulsory third party insurance;

·          supplies by insurers in settling claims;

·          excesses;

·          subrogation;

·          insurance brokers and tax invoices; and

·          insured’s GST liability on settlements.

2.2         An amendment to the GST Transition Act is made in relation to the CTP insurance and the transition to GST.

Summary

2.3         The amendments ensure that State stamp duties on insurance premiums are not subject to GST.

2.4         The amendments allow prescribed statutory compensation schemes to be brought within the operation of Division 78.

2.5         The amendments ensure that there is no difference for the purposes of Division 78 in the treatment of a settlement if it is made under a court order or judgment.

2.6         The amendments allow certain government insurance schemes to be excluded from Division 78 through regulation.

2.7         Amendments are made in relation to workers’ compensation and compulsory third party insurance to reduce compliance costs that would otherwise arise.

2.8         The amendments provide that certain supplies by insurers made as settlement of a claim are not taxable supplies.

2.9         Amendments are made to the provisions dealing with the payment of excesses to ensure consistency of treatment for GST purposes.

2.10       Amendments are made in relation to the treatment of settlements made when an insurer is making a claim in exercise of its rights of subrogation.

2.11       The amendments ensure that insurance brokers can issue tax invoices on behalf of insurers.

2.12       The amendments ensure that the insured entity’s GST liability on a settlement is proportional to its input tax credit entitlement on the premium.

2.13       The amendment has the effect that there is no input tax credits on premiums paid for compulsory third party insurance, and hence no GST liability on any related settlements, for the first 3 years of GST.

Amendments in Schedule 1

State stamp duties

2.14       State stamp duty legislation imposes a stamp duty liability on insurers in relation to insurance policies they sell. The stamp duty legislation is generally framed such that duty is calculated on the GST inclusive premium. The GST law is framed such that GST is calculated on the premium inclusive of an amount for the stamp duty the insurer has had to pay and is recovering from the insured as part of the premium. This makes it somewhat difficult to calculate the correct amount of stamp duty and the correct amount of GST.

2.15        Item 31 inserts new section 78-3 to address this issue. The effect of the new section is that GST is calculated on the stamp duty exclusive value of the premium. This is achieved by excluding the amount of any stamp duty payable under a State law or Territory law in respect of the premium.

Statutory compensation schemes

2.16       Some statutory compensation schemes do not fall within the definition of insurance in subsection 78-5(4) and therefore are not covered by Division 78. Other statutory compensation schemes are insurance and are covered by Division 78. For example, some workers’ compensation schemes are within the definition of insurance and others are not. The Government’s intention is to treat such statutory compensation schemes similarly.

2.17       New Subdivision 78-F is inserted by item 42 to deal with statutory compensation schemes.

2.18       New section 78-130 ensures that any payments towards or under a statutory compensation scheme and any settlement of a claim for compensation under such a scheme are treated in the same manner as payments for an insurance policy and a settlement of a claim under an insurance policy. Statutory compensation scheme is defined in new section 78-135 . Note that the scheme has to be specified in the regulations or of the type specified in the regulations to be brought within the operation of Division 78.

2.19       In some situations a settlement under a compensation scheme can arise even where an entity that was responsible for making payments to the scheme did not do so. For example, under some workers’ compensation schemes an employee can be entitled to compensation even if the employer did not make the payments into the scheme it was liable to make. New subparagraph 78-130(2)(c)(ii) ensures that the compensation is treated the same whether or not the employer met its liability to make payments into the scheme. It does so by providing that even if an entity did not make payments into a statutory compensation scheme but it was liable to do so, it is treated as the entity insured for the purposes of Division 78.

2.20       New section 78-125 ensures that GST is calculated on the stamp duty exclusive value of the premium of a statutory scheme. This is achieved by excluding the amount of any stamp duty payable under a State law or Territory law in respect of the premium .

Effect of judgments and court orders on GST and insurance

2.21       In some circumstances when there is a court ordered settlement there will be a different treatment for GST purposes than if the settlement had been reached without the intervention of the court. Item 42 inserts new section 78-150 to ensure that if there is a judgment or order of the court in relation to an insurance claim the outcome for GST purposes is the same as if the settlement had been made without the intervention of the court.

2.22       New section 78-150 also applies in relation to claims made by insurers in exercising their rights of subrogation (see 2.36 for a discussion of subrogation). That is, if the outcome of such a claim is determined by a judgment or order of the court it will be treated in the same way as if the outcome had been reached through an out of court settlement.

Exclusion of certain insurance schemes

2.23       There may be certain government schemes of insurance or statutory compensation schemes to which it is not appropriate to apply Division 78. For this reason, new section 78-155 is inserted to provide that Division 78 does not apply to types of insurance or statutory compensation scheme specified in the regulations. The insurance or compensation scheme has to be one established by a law of the Commonwealth, State or Territory. For example, it may not be appropriate to treat a loss making statutory insurance scheme as insurance under Division 78.

Workers’ compensation and compulsory third party insurance schemes

2.24       Under workers’ compensation and CTP schemes it is common for there to be settlements that take place over a long period of time. For example, under workers’ compensation, income replacement payments may be made fortnightly for 30 to 40 years.

2.25       The current application of Division 78 leaves the insured with a GST liability on the settlement to a third party for the period of settlement. For workers’ compensation income replacement payments this would mean that an employer could have a GST liability arising fortnightly for up to 30 to 40 years for the payment to the injured employee. This would be administratively burdensome for both the insured and the insurer as the insurer would have to keep the insured informed about the payments and the insured would have to account for them.

2.26       New Subdivision 78E will remove the insurer’s credit entitlement and the insured’s GST liability for workers’ compensation and CTP schemes. It will instead allow the insurer a decreasing adjustment [new section 78-105] . The decreasing adjustment would be equal to the difference between:

·          what would have been the insurer’s credit entitlement on the settlement; and

·          what would have been the insured’s GST liability on the settlement.

[New subsection 78-105(3)]

2.27       This has the same revenue effect as allowing the credit and imposing the liability while removing the administrative and compliance burden from both the insurer and the insured.

Example 2.1

Bronte injures her hand at work and makes a claim for compensation against her employer, XYZ Limited. XYZ Limited has a workers’ compensation policy with ABC Insurance Company and pays $11, 000 per annum for the cover. The supply of the policy is a taxable supply by ABC Insurance Company.

XYZ Limited is registered for GST purposes. It only makes taxable supplies. It is entitled to an input tax credit on the premium payment of $1,000.

Under the terms of the compensation arrangement, ABC Insurance Company agrees to pay Bronte $550 per week for the next 260 weeks (i.e. 5 years).

The GST liability XYZ Limited would have had on the payments is 1/11 of each payment ($50) as it was entitled to a full input tax credit on the premium. The credit that ABC Insurance Company would have been entitled to is 1/11 of each payment ($50) as the policy was fully taxed. ABC Insurance Company has a decreasing adjustment rather than a credit on the payments. XYZ Limited has no GST liability on the payments. The amount of the decreasing adjustment is the $50 input tax credit less the $50 GST liability, which is zero.

If, on the other hand, XYZ Limited also made input taxed supplies and was therefore only entitled to part of the credit on the premium, the amount of the decreasing adjustment would be different. If XYZ Limited was entitled to 60% of the input tax credit on the premium, its GST liability would have been 60% of 1/11 of each payment ($30). The amount of the decreasing adjustment that ABC Insurance Company is entitled to would be $50 less $30, which is $20.

2.28       ‘Workers’ compensation scheme’ and ‘compulsory third party scheme’ are defined in new section 78-110 .

2.29       Items 32 and 38 make minor amendments consequential upon treating workers’ compensation and CTP schemes differently from the rest of Division 78.

Supplies by insurers in settling claims

2.30       It is common in certain types of insurance for the insurer to acquire goods, services or anything else and supply it to the insured in settlement of a claim. For example, if an entity’s business premises burn down, it is common for the insurer to pay the builder directly for the cost of rebuilding. If the insurer has acquired the services of the builder under a contract for the builder to supply building services to the insurer, it would be a creditable acquisition in the hands of the insurer. The insurer would be entitled to an input tax credit under Division 11 for that acquisition. If it then supplies those services to the insured in settlement of the claim, that supply by the insurer could be a taxable supply under Division 9. If the claim had been settled in money it would not be a taxable supply. The treatment of the claim settlement should be no different if it is a supply of goods, services or anything else. For this reason, item 35 inserts new section 78-12 to provide that a supply an insurer makes in settling a claim is not a taxable supply.

2.31       Item 33 repeals paragraph 78-10(1)(b) and replaces it with a provision to take account of the effect of new section 78-12 .

Excesses

Excess paid to the insurer

2.32       If an excess is paid to an insurer, it is necessary to ensure that the insurer has the correct entitlement to input tax credits and the insured has the correct GST liability on the settlement.

Example 2.2

Michael has an accident in his business vehicle. Michael had been entitled to a full input tax credit on the premium. The cost of the repairs is $5,555. The insurer pays $5,555 directly to the repairer. Michael pays an excess of $55 to the insurer. The insurer has in effect only paid out $5,500 in settlement of the claim. The input tax credit the insurer is entitled to on the settlement should therefore not be 1/11 of $5,555, but 1/11 of $5,500 ($500). Paragraph 78-10(1)(c), as amended by item 34 , ensures that this occurs. Continuing the example, Michael’s liability to GST on the settlement would be 1/11 of $5,500 ($500). This is the effect of subsection 78-40(1) as amended by item 40 .

Payment of excess to insurer is not consideration for a supply

2.33       If an insured entity makes a payment of an excess to an insurer, the general rules of the GST Act under Division 9 could apply such that that payment would be consideration for a taxable supply made by the insurer. In Example 2.2 the insurer pays the repairer $5,555 and receives an excess of $55 from Michael. It is entitled to an input tax credit of 1/11 of $5,500 ($500). If the payment of the excess was consideration for a taxable supply, the insurer would also be liable to GST of 1/11 of the $55 excess payment. This would mean that the insurer’s net position in relation to that settlement was a net credit of $500 less $5, or $495. Its net position should be $500.

2.34       However, if the insured entity pays the excess to a third party, such as a repairer, that payment forms part of the consideration for the supply of repair services the repairer is making. In this situation it should continue to be consideration for a supply.

2.35       This was the intended operation of section 78-35. However, it was not limited to payments of excesses to insurers. Item 39 amends subsection 78-35(1) to ensure that only where the excess is paid to the insurer that it is not treated as consideration for a supply.

Subrogation

2.36       A subrogation payment is a payment made by a third party to an insurer in respect of a liability owed by the third party to the insured. For example, an insurer makes a settlement to an insured. It takes over the insured’s right to recover from the third party who caused the damages to the insured. The insurer then seeks to make recovery from the third party. As a result of that action, the third party makes a payment to the insurer. The payment is the subrogation payment. The payment should be treated as consideration for a supply made by the insurer, that is, the insurer is making a supply of giving up the right to recover from the third party.

2.37       Item 36 adds new section 78-20 which has the effect that if an insurer has made a claim in exercising its rights of subrogation and a third party makes a payment, a supply or both in settlement of that claim, it is consideration for a supply made by the insurer. This is the case even if the payment or supply is not made to the insurer.

2.38       Item 41 adds new section 78-75 to provide that if an insurer has made a claim in exercising its rights of subrogation and a third party makes a payment, a supply or both in settlement of that claim, it is consideration for an acquisition made by the third party. It is consideration for a creditable acquisition if:

·          the third party is registered or required to be registered;

·          has made the settlement for a creditable purpose; and

·          the settlement was consideration for a taxable supply made by the insurer as discussed at paragraph 2.37.

This follows the general rules about creditable acquisitions in Division 11.

Insurance brokers and tax invoices

2.39       Under Division 153 of the GST Act, tax invoices can be issued by an agent of an entity that makes a taxable supply. As insurance brokers are generally not acting as agents of the insurer when they arrange an insurance policy, they are not able to issue tax invoices in relation to the supply of that policy. This has the result that whilst the broker generally issues all other documents to the insured in relation to that policy, they cannot issue the tax invoice.

2.40       Item 50 amends Division 153 to permit insurance brokers to issue tax invoices on behalf of the insurer. This will be the case even though the broker is not acting as agent of the insurer [new section 153-25 ] . Item 49 amends the guide and item 48 the heading to Division 153 to reflect the amendment and item 62 amends the Dictionary to the GST Act. Items 7, 12 and 13 make consequential cross referencing amendments.

2.41       New subsection 153-25(2) ensures that the insured can still claim input tax credits if it does not hold a tax invoice but its insurance broker as its agent holds the tax invoice.

Example 2.3

Wilfred employs the services of Owen, an insurance broker, to arrange insurance for his poetry publishing business. Both are registered for GST. Owen arranges for Wilfred to be covered by Donne and Browning Insurance Co. Owen is agent of Wilfred in arranging the cover. Donne and Browning Insurance Co issues all the insurance documentation to Owen and he deals with Wilfred. The amendments allow Owen to issue the tax invoice for the supply of the insurance policy from Donne and Browning Insurance Co to Wilfred even though he is not its agent.

If, along with all the other policy related documentation Donne and Browning Insurance Co sent to Owen, it also sent a tax invoice for its supply of insurance to Wilfred, Wilfred would be able to claim his input tax credit on the policy if Owen holds the tax invoice rather than himself. This is because Owen is Wilfred’s agent.

Insured entity’s GST liability on settlements

2.42       Under section 78-30, insured entities can have a GST liability on an insurance settlement. That liability should be proportional to the input tax credit they were entitled to on the premiums paid for the policy the settlement is made under. For example, if an insured entity acquired a policy 60% for a creditable purpose and 40% for a private purpose, it would be entitled to an input tax credit equal to 60% of 1/11 of the price of the policy. If it has a settlement under that policy it should only be liable to GST of 60% of 1/11 of the GST inclusive value of the settlement.

2.43       Item 37 amends subsection 78-30(2) so that the insured’s GST liability on a settlement is proportional to the input tax credit it was entitled to on the premium.

Definitions

2.44       Items 55, 69, 74, and 77 make amendments to the definitions in section 195-1 consequential upon the amendments discussed above.

Amendments in Schedule 2

Compulsory third party insurance transitional arrangements

2.45       CTP insurance is usually paid as part of vehicle registration. There is often only a statement on the registration renewal documentation that a certain amount of the registration fee was for CTP. There are also other difficulties faced by CTP insurers in relation to repricing CTP cover. For example, there are difficulties in distinguishing between consumers and businesses that are taking out CTP.

2.46       Item 10 makes an amendment to section 23 of GST Transition Act to provide that there be no input tax credit for the acquisition of CTP cover for the first 3 years of GST. That is, if you pay a premium, or make a similar payment, for CTP before 1 July 2003, you are not entitled to an input tax credit on that payment. This applies whether or not the CTP cover is insurance or a statutory compensation scheme.

2.47       As there is no input tax credit, there is no GST liability on any CTP settlement for events occurring in the first 3 years of GST. This provides time for CTP to be repriced to take account of GST.

 



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Indirect Tax Transition

Outline of Chapter

3.1         This Chapter explains the amendments made to the GST Transition Act in relation to:

·          long-term leases;

·          rights granted for life;

·          transitional credits for alcoholic beverages;

·          transitional credits for petroleum products; and

·          second-hand goods.

Detailed explanation of the amendments

Long-term leases

3.2         Items 1 and 2 amend sections 11 and 12 of the GST Transition Act to make it clear that those sections do not apply to a supply of a long-term lease made before 1 July 2000. A long-term lease is defined in the GST Act to be a lease for at least 50 years.

3.3         Section 11 applies to a supply of rights exercisable on or after 1 July 2000. This section, if applied to long-term leases entered into between 2 December 1998 and 1 July 2000, would subject to GST that portion of the lease that relates to post 1 July 2000 rights. This would be inconsistent with the treatment of long-term leases in the GST Act which treats them in the same manner as a sale of property.

3.4         Section 12 applies to progressive or periodic supplies made over the GST transition period. As with the application of section 11 it would be inappropriate to apply section 12 to long-term leases entered into between 2 December 1998 and 1 July 2000.

Rights granted for life

3.5         Item 3 replaces subsection 14(2) of the GST Transition Act. Section 14 of that Act operates to subject to GST all of the consideration paid for the grant of a right for life that is entered into after 2 December 1998. This would include any supplies made from the date of the agreement to 1 July 2000. There may be some situations where other services are provided along with the life membership (e.g. counselling services or food). Under the current provisions these goods or services provided prior to 1 July 2000 and included in the supply of the right granted for life would be subject to GST. This amendment will ensure that it is only the extent to which a supply relates to the right granted for life that will be taken to be made after 1 July 2000 and subject to GST.

Special credit for alcoholic beverages

3.6         Section 16 of the GST Transition Act provides a special GST credit for sales tax paid on certain stock held at the start of 1 July 2000. The section currently excludes a credit being claimed in respect of alcoholic beverages. These amendments including the addition of new sections 16A and 16B will be added to allow a credit to be claimed for certain alcoholic beverages.

3.7         Items 5 and 6 amend paragraph 16(2)(b) and add paragraph 16(2)(c) so that the exclusion in section 16 only applies to stocks of alcoholic beverages that have been opened and alcoholic beverages covered by the WET. Products covered by the WET have a special credit entitlement contained in section 3 of the WET and LCT Transition Act.

3.8         The above changes mean that if you hold unopened stocks of alcoholic beverages that are not covered by the WET and satisfy the other conditions of section 16, you will be entitled to claim a special credit for the sales tax included in the price of the goods. However, the amount of the special credit may be reduced by the operation of new sections 16A or 16B .

3.9         Item 8 inserts new section 16A which will apply to certain alcoholic beverages where the rate of duty will increase from 1 July 2000. As an example, spirits are likely to fall into this category with their rate of duty likely to increase with the removal of sales tax and the introduction of GST on 1 July 2000.

3.10       New section 16A operates to reduce the section 16 credit by an amount equal to the difference between the new duty amount and the old duty amount. If this amount equals or exceeds the amount of the section 16 credit, no credit is available. [New subsection 16A(3)]

3.11       If the new duty amount is less than the old duty amount there will be no reduction in the section 16 special credit and a full credit will be available.

3.12       In some cases beverages will not currently be subject to duty but will be subject to duty after 1 July 2000 (e.g. certain designer drinks). Item 8 also inserts new section 16B which will operate to ensure that the section 16 special credit for these products is reduced by the amount of the new duty amount. If the new duty amount equals or exceeds the amount of the section 16 special credit, no section 16 credit is allowed. [New subsection 16B(3)]

3.13       The following examples explain the operation of these provisions:

Example 3.1

John is a retailer and holds stocks of spirits for resale at the start of 1 July 2000. The amount of excise that was included in the price of the spirit was $125.03 and the amount of sales tax was $80.88. The amount of excise that would have been paid if the stock was subject to excise after 1 July 2000 is $178.75. John satisfies the conditions set out in section 16 and would be entitled to claim a special credit of $80.88 if section 16A did not apply. However, section 16A will operate to reduce the special credit by $53.72 (i.e. $178.75 - $125.03). John will be able to claim a section 16 special credit of $27.16 (i.e. $80.88 - $53.72).

Example 3.2

Dianne is a retailer and holds stocks of spirit based pre-mix beverages for resale at the start of 1 July 2000. The amount of excise that was included in the price of the beverages was $16.74 and the amount of sales tax was $15.70. The amount of excise that would have been paid if the stock was subject to excise after 1 July 2000 is $14.80. Dianne satisfies the conditions set out in section 16 and would be entitled to claim a special credit of $15.70 if section 16A did not apply. In Dianne’s situation section 16A will operate but there will be no reduction to the special credit as the new excise amount is less than the old excise amount. Dianne will be able to claim a section 16 special credit of $15.70. (Note: the special credit cannot be increased by the difference between the old excise amount and the new excise amount as the special credit is limited to the amount of sales tax borne in respect of the goods).

Example 3.3

Margaret is a retailer and holds stocks of designer drinks for resale at the start of 1 July 2000. These drinks were not subject to excise prior to 1 July 2000 and the amount of sales tax included in the purchase price was $12.30. The amount of excise that would have been paid if the stock was subject to excise after 1 July 2000 is $14.33. Margaret satisfies the conditions set out in section 16 and would be entitled to claim a special credit of $14.33 if section 16B did not apply. However, section 16B will operate to deny a special credit as the new excise amount exceeds the amount of the special credit [new subsection 16B(3)] . Margaret will not be able to claim a section 16 special credit in respect of these goods.

Special credit for petroleum products

3.14       Item 8 also inserts new section 16C which provides a special credit for petroleum products of a kind specified in the regulations for this section. An entity will be entitled to a special petroleum credit if:

·          it is registered at 1 July 2000;

·          it has on hand at the start of 1 July 2000 petroleum products that are specified in the regulations, that an entity acquired or imported and hold for the purpose of sale or exchange (but not manufacture) in the ordinary course of business;

·          before 1 July 2000 an amount of excise duty or customs duty was paid in respect of the goods; and

·          the new excise duty or new customs duty on the goods applying on or after 1 July 2000 would be less than the old duty amount.

3.15       The amount of the special credit will be equal to the difference between the old duty amount and the new duty amount [new subsection 16C(2)] . The manner in which this credit can be claimed and paid will be set out in the regulations for this section [new subsection 16C(3)] .

Second-hand goods

3.16       The amendment made by item 9 to section 18 of the GST Transition Act (relating to second-hand goods) is explained at paragraph 1.36 of this Explanatory Memorandum.

 



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Commonwealth-State financial arrangements

Outline of Chapter

4.1         This Chapter explains the amendments contained in Schedule 3 to this Bill.

4.2         The amendments ensure that the calculation of GST revenue to be distributed to the States and Territories will include any GIC relating to GST and will ensure that any effect the WET and LCT laws may have on GST revenue will not be included in the calculation.

Date of effect

4.3         The amendments will be taken to commence immediately after the commencement of the CSFA Act. [Subclause 2(6)]

Background to the legislation

4.4         The CSFA Act provides for GST revenue to be distributed to the States and Territories and prescribes how the Commissioner will determine GST revenue.

4.5         The Commonwealth and the States have agreed that GST revenue will be distributed on a tax collected basis; that is, the States and Territories will bear the cost of non-payment of GST and receive the GIC collected by the ATO in respect of taxpayers defaulting on their GST liabilities - to the extent that it is attributable to GST. However, the CSFA Act, as currently drafted, does not include any GIC that is attributable to GST in the calculation of GST revenue.

4.6         Further, due to the interaction of the GST Act with the WET Act and the LCT Act, the calculation of GST revenue as currently set out in the CSFA Act may include amounts that are referrable to WET and LCT. The distribution of GST revenue to the States and Territories should not include any amounts in respect of WET or LCT.

Detailed explanation of the amendments

4.7          New paragraph 5(3)(aa) will ensure that the GIC attributable to GST will be included in the calculation of GST revenue for distribution to the States and Territories. The GIC that is included in the calculation will be any GIC collected that is attributable to unpaid GST, or any GIC collected on unpaid GIC that is attributable to unpaid GST. [Item 4]

4.8             Item 1 of Schedule 3 inserts a definition of GIC for this purpose.

4.9          Item 5 of Schedule 3 amends subsection 5(4) to ensure that refund amounts that are taken into consideration when calculating GST revenue include only those amounts that are attributable to GST. This will ensure that GST revenue calculation is not reduced by refund amounts in respect of WET or LCT.

4.10       Similarly, this Bill will insert new subsection 5(4A) , which will allow the Commissioner to adjust the GST revenue calculated under subsection 5(2) to remove any effect that the WET and the LCT might have on the calculation. [Item 6]

4.11        Items 2 and 3 of Schedule 3 provide definitions of WET and LCT for the purposes of the CSFA Act.

 



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ABNs

Outline of Chapter

5.1         This Chapter explains the amendments made to the ABN Act to ensure that overseas businesses that are required to register for GST purposes are able to obtain an ABN.

Detailed explanation of the amendments

5.2         Item 1 amends subsection 8(1) to include a further category where an entity will be entitled to have an ABN. Currently an entity must be carrying on an enterprise in Australia to have an ABN. The additional circumstance where an entity will be able to have an ABN is if in the course or furtherance of an enterprise, an entity makes supplies that are connected with Australia. The terms ‘connected with Australia’ and ‘supply’ have the meanings given by the GST Act. [Items 4 and 5]

5.3         An example of a situation where an enterprise may not be carried on in Australia, but the entity will be required to be registered for GST and therefore hold an ABN, is an overseas telecommunications supplier that is making supplies that are connected with Australia.

5.4         Item 2 repeals section 39 of the ABN Act. The application of this section would have prevented a non-resident without a permanent establishment in Australia from obtaining an ABN. This amendment removes this restriction and will allow, for example, a visiting entertainer, sportsperson or overseas telecommunication supplier to obtain an ABN where they are making supplies connected with Australia in the course of carrying on an enterprise. This will allow them to meet their GST obligations in respect of any supplies connected with Australia.

5.5         Item 3 removes the definition of ‘carried on in Australia’ from section 41 of the ABN Act.

 



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Amendments relating to diplomatic, consular and related privileges and immunities

Outline of Chapter

6.1         Australia is party to a number of international conventions and agreements which among other things provide a range of taxation concessions to various bodies and personnel in Australia. This Chapter explains the amendments made to the following Acts to ensure that Australia continues to meet its international obligations:

·          Consular Privileges and Immunities Act 1972 (CP&I Act);

·          Diplomatic Privileges and Immunities Act 1967 (DP&I Act);

·          International Organisations (Privileges and Immunities) Act 1963 (IO(P&I) Act);

·          Overseas Missions (Privileges and Immunities) Act 1995 (OM(P&I) Act);

6.2         The taxation concessions relate to the GST, WET and LCT. The concessions will be granted by way of an exemption for goods imported by the eligible body or person and by way of a payment by the Commissioner through the ‘indirect tax concession scheme’ for goods purchased in Australia. This is a departure from the way in which concessions for local purchases are currently granted under the wholesale sales tax system. However, given the wider application of the GST in terms of the range of goods and services covered and the number of businesses involved, the indirect tax concession scheme is considered the most effective way of providing these concessions. The indirect tax concession scheme will maintain the integrity of the GST system and allow Australia to meet its international obligations.

6.3         The GST also presents an opportunity to maximise benefits for Australia through reciprocal agreements to provide limited tax concessions. These are in addition to our treaty obligations and are consistent with international practice. Australia’s position on these limited reciprocal concessions is that we must maintain our global advantage, taking into account the value of foreign taxation exempted and Australian taxation forgone.

6.4         The range of taxation concessions to be granted for local purchases by International Organisations and Overseas Missions will be covered by the regulations which is consistent with the manner in which other concessions are currently granted for these bodies. The Minister for Foreign Affairs will determine the concessions for diplomatic and consular missions and personnel through a determination, (which is a disallowable instrument for the purposes of section 46A of the AIA 1901) rather than by the regulations. The privileges and immunities for diplomatic and consular missions and officials, are set out in the Conventions agreed to by Australia and have been enacted as part of the legislation rather than through regulations.

6.5         A number of taxation concessions that are currently provided for in the various Acts need to be amended to overcome the effect of section 177-5 of the GST Act. That section cancels the effect of a provision of another Act that would have the effect of exempting a person from liability to pay GST. The WET Act and LCT Act also contain similar provisions relating to WET and LCT. The cancellation in these Acts does not apply if:

·          the provision of the other Act commences after the commencement of the sections in the GST, WET and LCT Acts; and

·          refers specifically to GST, WET and LCT payable under those Acts.

6.6         The amendments to diplomatic, consular and related privileges and immunities are required for goods imported by these bodies. Without an exemption these bodies would be liable to pay GST, WET and LCT (as appropriate) on the goods imported.

6.7         In some circumstances a mission or post may make a supply for which they could be potentially liable to pay GST. This would be in breach of the Conventions. However, as diplomatic missions, consular posts, overseas missions and International Organisations are not considered to be carrying on an enterprise they will not be able to register for GST and therefore will not be subject to GST on any supplies they may make. There may be some circumstances where an International Organisation is considered to be carrying on an enterprise and the IO(P&I) Act is being amended to make it clear that in these circumstances, the organisation will not be considered to be carrying on an enterprise for the purposes of the GST Act.

Detailed explanation of the amendments

Consular Privileges and Immunities

6.8         Items 1 to 7 insert definitions of ‘acquisition’, ‘approved form’, ‘Commissioner’, ‘GST Act’, ‘indirect tax’, ‘Luxury Car Tax Act’ and ‘Wine Equalisation Tax Act’ in subsection 3(1) of the CP&I Act.

6.9         Item 8 amends section 6 of the CP&I Act to overcome the effect of:

·          section 177-5 of the GST Act;

·          section 21-5 of the LCT Act; and

·          section 27-25 of the WET Act.

6.10       This amendment will ensure that importations covered by paragraph 1 or paragraph 2 of Article 50, or Article 62, of the Vienna Convention on Consular Relations and section 5 of the CP&I Act are not subject to GST, WET or LCT.

6.11       Item 9 sets out the indirect tax concession scheme, the detail of which will be provided by a determination of the Minister for Foreign Affairs. The determination will cover the following:

·          the countries which will benefit from the concessions;

·          the types of acquisitions that will be covered;

·          the types of eligible use for acquisitions; and

·          the conditions, limitations, and the period and manner in relation to any amounts  payable.

6.12       The indirect tax concession scheme in new section 10A of the CP&I Act provides for the Commissioner to pay to the head of the consular post an amount equal to the GST, WET and LCT payable in respect of acquisitions covered by the determination. A claim for an amount must be in the approved form, which has the meaning given in section 995-1 of the ITAA 1997.

6.13       New subparagraph 10A(1)(b)(i) refers to the official use of the consular post. Official use is use that has a direct relation with the exercise of the functions of the post in accordance with the Vienna Convention on Consular Relations or other related international agreements or arrangements.

Diplomatic Privileges and Immunities

6.14       Items 10 to 16 insert definitions of ‘acquisition’, ‘approved form’, ‘Commissioner’, ‘GST Act’, ‘indirect tax’, ‘Luxury Car Tax Act’ and ‘Wine Equalisation Tax Act’ in subsection 4(1) of the DP&I Act.

6.15       Item 17 amends section 8 of the DP&I Act to overcome the effect of:

·          section 177-5 of the GST Act;

·          section 21-5 of the LCT Act; and

·          section 27-25 of the WET Act.

6.16       This amendment will ensure that importations covered by paragraph 1 of Article 36, or paragraph 1 or paragraph 2 of Article 37, of the Vienna Convention on Diplomatic Relations and section 7 of the DP&I Act are not subject to GST, WET or LCT.

6.17       Item 18 sets out the indirect tax concession scheme, the detail of which will be provided by a determination of the Minister for Foreign Affairs. The determination will cover the following:

·          the countries which will benefit from the concessions;

·          the types of acquisitions that will be covered;

·          the types of eligible use for acquisitions; and

·          the conditions, limitations, and the period and manner in relation to any amounts  payable.

6.18       The indirect tax concession scheme in new section 10B of the DP&I Act provides for the Commissioner to pay to the head of the diplomatic mission an amount equal to the GST, WET and LCT payable in respect of acquisitions covered by the determination. A claim for an amount must be in an approved form, which has the meaning given in section 995-1 of ITAA 1997.

6.19       New subparagraph 10B(1)(b)(i) refers to the official use of the diplomatic mission. Official use is use that has a direct relation with the exercise of the functions of the mission in accordance with the Vienna Convention on Diplomatic Relations or other related international agreements or arrangements.

International Organisations

6.20       Items 19 to 26 insert definitions of ‘acquisition’, ‘approved form’, ‘Commissioner’, ‘enterprise’, ‘GST Act’, ‘indirect tax’, ‘Luxury Car Tax Act’ and ‘Wine Equalisation Tax Act’ in subsection 3(1) of the IO(P&I) Act.

6.21       Item 27 adds new section 11B to the IO(P&I) Act to overcome the effect of:

·          section 177-5 of the GST Act;

·          section 21-5 of the LCT Act; and

·          section 27-25 of the WET Act.

6.22       This amendment will ensure that importations covered by an immunity from taxation conferred by the regulations are not subject to GST, WET or LCT.

6.23       Item 27 also sets out the indirect tax concession scheme, the detail of which will be covered by regulations made for the purposes of the indirect tax concession scheme. The regulations will cover the following:

·          the organisations which will benefit from the concessions;

·          the types of acquisitions that will be covered;

·          the types of eligible use for acquisitions; and

·          the conditions, limitations, and the period and manner in relation to any amounts  payable.

6.24       The indirect tax concession scheme in new section 11C of the IO(P&I) Act provides for the Commissioner to pay to the organisation an amount equal to the GST, WET and LCT payable in respect of acquisitions covered by the regulations. A claim for an amount must be in an approved form, which has the meaning given in section 995-1 of the ITAA 1997.

6.25       New subparagraph 11C(1)(b)(i) refers to the official use of the international organisation. Official use is use that has a direct relation with the exercise of the functions of the organisation in accordance with the United Nations Convention on Privileges and Immunities or other related international agreements or arrangements.

6.26       Item 28 inserts new section 12B in the IO(P&I) Act which relates to registration under the GST Act. As the regulations confer the privileges and immunities for international organisations, which will be, either provided by way of exemption or by payment by the Commissioner, there will be no need for these organisations to be registered for GST purposes. New section 12B states that an international organisation will not be considered to be carrying on an enterprise for the purposes of the GST Act when acting in the capacity for which the organisation or person was granted those privileges and immunities. As such, International Organisations will not register for GST and therefore will not be liable to pay GST in respect of any supplies they may make in Australia (e.g. for providing any expert services).

Overseas Missions

6.27       Items 29 to 35 insert definitions of ‘acquisition’, ‘approved form’, ‘Commissioner’, ‘GST Act’, ‘indirect tax’, ‘Luxury Car Tax Act’ and ‘Wine Equalisation Tax Act’ in section 3 of the OM(P&I) Act.

6.28       Item 36 adds new subsection 9(2) to the OM(P&I) Act to overcome the effect of:

·          section 177-5 of the GST Act;

·          section 21-5 of the LCT Act; and

·          section 27-25 of the WET Act.

6.29       This amendment will ensure that importations covered by an immunity from taxation conferred by the regulations are not subject to GST, WET or LCT.

6.30       Item 37 sets out the indirect tax concession scheme, the detail of which will be covered by regulations made for the purposes of the indirect tax concession scheme. The regulations will cover the following:

·          the overseas missions which will benefit from the concessions;

·          the types of acquisitions that will be covered;

·          the types of eligible use for acquisitions; and

·          the conditions, limitations, and the period and manner in relation to any amount payable.

6.31       The indirect tax concession scheme in new section 12A of the OM(P&I) Act provides for the Commissioner to pay to the head of a designated overseas mission an amount equal to the GST, WET and LCT payable in respect of acquisitions covered by the regulations. A claim for an amount must be in an approved form, which has the meaning given in section 995-1 of the ITAA 1997.

6.32       New subparagraph 12A(1)(b)(i) refers to the official use of the overseas mission. Official use is use that has a direct relation with the exercise of the functions of the mission in accordance with international agreements or arrangements.



C hapter

Petroleum Resource Rent Tax Assessment Act 1987

Outline of Chapter

7.1         This Chapter explains the amendments to PRRTAA necessary to ensure that GST is excluded from the tax base for calculating PRRT. The amendments are contained in Schedule 6 to this Bill.

Context of Reform

7.2         Participants in a petroleum project are liable for PRRT on taxable profits from the project. A taxable profit will result if project-related assessable receipts for a financial year exceed deductible expenditure. From 1 July 2000, the receipts derived and expenditure incurred may include GST. These amendments will ensure that GST components embedded in the receipts and expenditure will be excluded from the calculation of the taxable profit that is subject to PRRT.

Summary of amendments

Purpose of the amendments

7.3         The amendments to the PRRTAA will remove a distortion to the PRRT tax base that might otherwise arise as a consequence of the introduction of the GST.

Date of effect

7.4         The amendments will apply from 1 July 2000, the commencement of the GST.

Detailed explanation of amendments

7.5         The taxable profit of a person for a financial year in relation to a petroleum project is defined in Part V of the PRRTAA as the excess of the assessable receipts derived over deductible expenditure incurred (including any transferred amounts).

Excluding GST components from assessable receipts

7.6         The calculation of amounts that are included in the defined categories of assessable receipts are to exclude amounts corresponding to any GST, or increasing adjustments (representing additional GST liability), that would otherwise be included in those amounts. [Item 11, new subsection 22B(1)]

7.7         An amount equal to the GST component of the sale price of property, or any increasing adjustment relating to the sale, is similarly excluded in calculating the assessable receipt [item 11, new subsection 22B(2)] . An amount equal to the input tax credit entitlement, or any decreasing adjustment (representing reduced GST liability), relating to sale expenses is also to be excluded from that calculation [item 11, new subsection 22B(3)] .

Excluding GST components from deductible expenditure

7.8         Expenditure or liabilities incurred that are included in the defined categories of deductible expenditure are to exclude amounts corresponding to any input tax credit entitlement, or decreasing adjustment, relating to that expenditure or liability. [Item 12, new section 31B]

Excluded expenditure

7.9         The list of excluded expenditure in section 44 of the PRRTAA will be amended to put beyond doubt that payments of GST are within the category of excluded expenditure. [Items 13 and 14, new paragraph 44(i)]

Defined terms

7.10       The amendments refer to terms that have particular meanings in the GST Act. These meanings will be adopted by including the relevant terms in the list of defined terms in section 2 of the PRRTAA. [Items 3 to 9]

7.11       One of the defined terms to be inserted in section 2 is market value [item 10] . This term will account for the input tax credit that a person would be entitled to if they had acquired the property at the time the market value is determined. This reflects the net impact on an entity’s resources if it acquired the property. The consideration given would be offset by the input tax credit the entity would be entitled to.