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Schemes to avoid sales tax

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NO. 95







The Treasurer, Mr John Howard, today announced that the

Government intends introducing amendments to the sales tax law directed against schemes and arrangements now being implemented to reduce or, in some cases, almost eliminate sales tax.

Mr Howard said that several highly artificial schemes are being widely and vigorously promoted for a fee of up to 25 per cent of the sales tax expected to be saved.

Apart from the substantial losses they inflict on revenue, these schemes enable those who enter into them to gain an unfair advantage in the market place over those who do not, either because they are not aware of the schemes or because they choose not to do so. Some taxpayers are faced with the dilemma of having to buy a tax avoidance scheme or lose business to

competitors who do. ·

Giving details of the various schemes, Mr Howard said that one scheme is for goods to be sold for a price substantially below their true wholesale value ostensibly under an option granted to purchase them at that price. The purchaser pays a

substantial amount to acquire the option and the aggregate of

this amount and the agreed price of the goods comes to what would ordinarily be the full wholesale price. It is claimed by promoters of the schemes that the sales tax law only applies to the much reduced price for which the goods are sold, and not at all to

the amount paid for the option to acquire them. Mr Howard noted

that new motor vehicles are being sold for as little as $20 under options to acquire at that price for which several thousand dollars are paid.


In another scheme described by Mr Howard a manufacturer sells goods to an unrelated wholesale company at a price substan­

tially below the true wholesale price, under an arrangement whereby that company re-sells the goods at much the same reduced

price to a retail company associated with the manufacturer. Sales tax is payable by the wholesale company only on the reduced price of the goods. The retail company may sell the goods to the consumer at the normal retail price, thus deriving an increased profit by reason of the lower amount of sales tax paid. Because

the manufacturer and retailer are associated, the profit would remain in the group. Alternatively, the retail company may

offer the consumer a discount or provide some other incentive

in order to gain a competitive advantage over other retailers.

Another scheme is designed to avoid tax on taxable goods

that are made from non-taxable components. There are variations of the scheme but in one form the customer of the manufacturer first buys the tax-exempt materials from the manufacturing firm or its associates and then supplies them to the manufacturer at no

cost to be made into taxable goods. By this means tax on the materials cost component in the wholesale value of the finished goods is avoided. In the absence of the arrangements tax would be payable on a sale by the manufacturer or a wholesaler on a value

that includes both materials and manufacturing cost.

The Treasurer said that these practices posed a grave threat to the sales tax system. The Government would, therefore, be introducing a number of amendments to the sales tax law as a matter of urgency.

In relation to schemes involving options, the amend­

ments would provide that, where sales tax is reduced as part of

an avoidance scheme or arrangement, and the purchaser pays money or gives other consideration in relation to a right or option to purchase goods for the purpose of making up the reduction in the wholesale price of the goods, then the sale value for

sales tax purposes will be the actual wholesale price plus the

money or consideration given in relation to the right or option.

To deal with schemes involving the sale of goods at substantially below their true wholesale value through an unrelated wholesale company, the amendments the Government had

in mind would provide that the sale value of such goods is to be


the arm's length wholesale price or, where that could not be

determined, the wholesale price of identical goods. Sales between related companies are, Mr Howard explained, the subject of an

existing anti-avoidance provision. That provision allows the

Commissioner of Taxation to levy sales tax on the fair and reasonable wholesale value of the goods.

Further amendments would provide that, in cases where

goods are manufactured from exempt materials supplied by the customer or a person associated with the customer, sales tax

will be payable on the fair and reasonable wholesale value of the finished goods. Where the manufacturer usually sells goods

of the same description as the goods in question, the taxable value will be ascertained by reference to the price which the manufacturer could be expected to ask for the goods if they were

being sold in the ordinary course of business. Where this comparison cannot be made, the taxable value will be fixed at the price at which the customer could have bought the goods from

another manufacturer in the ordinary course of that manufacturer's


Mr Howard said that these amendments to the sales tax law would be introduced into Parliament as soon as possible and would apply in determining the sale value, under the various

Sales Tax Assessment Acts, of goods sold after today, or, in a case where goods are manufactured from exempt materials supplied,

to an agreement to manufacture goods entered into after today.