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  • Issue 19 General

    19.1 Is it intended that the ATO will announce that the ruling on what constitutes an enterprise (MT 2000/1) will be a public ruling for GST purposes?

    It is intended that the new tax system legislation will have one meaning for all terms used, whatever the taxing statute. This is part of the integrated tax code announced in the ANTS statement, and it continues the approach to simplifying definitions used by the former Tax Law Improvement Project.

    The ruling on what constitutes an enterprise was released on 10 May 2000. As the definition of enterprise is the same in the ABN Act and the GST Act, the ruling may be relied on in interpreting the definition of enterprise in the GST Act.

    Goods and services tax ruling GSTR 2000/11, which deals with GST and grants, comments that taxation ruling MT 2000/1 explains the definition of 'enterprise' under section 38 of the A New Tax System (Australian Business Number) Act 1999, and this reflects our interpretation of the definition of 'enterprise' under section 9-20 of the GST Act. Guidelines for business indicators are also contained in taxation ruling TR 97/11.

    19.2 What is the process for making ministerial determinations?

    The relevant Minister signs a statement to the effect:

    "I make the following determination under section xxxxx of the A New Tax System (Goods and Services Tax) Act 1999."

    The body of the determination follows.

    Some determinations are disallowable instruments under the Acts Interpretation Act 1901, which means they are very similar to regulations. That is, the making of a determination must be notified in the Commonwealth Gazette and laid before the Houses of Parliament.

    19.3 How do you find regulations on the internet?

    A quick and easy way to find the GST and related regulations is on ScalePlus (that is the internet) is as follows

    i. type in www.ato.gov.au/Law in the URL address at the top of the screen

    ii. at the next screen ensure the that heading All Commonwealth legislation is the only one ticked, then click on the BROWSE button.

    iii. at the next screen, click on the heading Commonwealth Regulations (all current consolidations)

    iv. the next screen will then give you an alphabetical listing of all the current consolidated regulations.

    The GST, WET, LCT and GST Transition Regulations are "A New Tax System, [etc] regulations" and consequently they appear early in the alphabetical list.

    19.4 What happens to a refund where the entity has not provided bank account details to allow the refund to be paid?

    How does the ATO notify that a refund has been paid?

    Any refund resulting from an activity statement for a business will be stored by the ATO where financial account details have not been provided.

    The ATO will automatically issue a letter to the client requesting the financial account details. The refund will not issue until the details are supplied.

    If these details are not supplied and the activity statement refund amount has not been offset against another taxation debt, it will be offset against the next activity statement.

    It should be noted that delayed refund interest (DRI) is NOT payable for the period between lodgment of the activity statement and 14 days after the ATO is supplied with the financial account details.

    19.5 In ruling GSTR 2000/29, the ATO takes the view that where there is a "sale or return" basis supply, the GST liability will only arise in the tax period in which the supply is certain. The ruling's concept of "sale or return" would apply to a many items taken on "consignment".

    Is this deferral also intended to apply in the case of imported goods? Many imported books will come from overseas and will be acquired under a consignment stock arrangement. As the rules relating to taxable importations currently apply (as per s.13-5) the goods imported will be subject to GST at the time of importation (subject to the proposed concession). From a perusal of the Customs Act, it appears that goods are regarded as being entered for home consumption regardless of the fact that they have not been imported by the legal owner of the goods (so long as the importer has some interest in the goods). When goods are imported on consignment, the publisher is not the legal owner at that stage (title does not pass until the goods are onsold). In determining whether a GST liability is to arise on these goods will the Australian Customs Service take into account the ATO's comments on "sale and return"?

    Otherwise, there will be 2 sets of rules applying to these goods - one rule applying to domestic dealings in consignment stock and another rule whether is an acquisition of consignment stock from overseas. .

    The application of the basic attribution rules in s29-5 results in the GST payable on these types of supplies being attributable to the tax period in which title in the goods passes only because there is typically no payment or invoice issued until passing of title. There is no attribution rule that links attribution to passing of title. This is the result simply because, in most 'sale or return' sales, those things that trigger attribution (that is, receipt of consideration or issuing an invoice) do not usually happen in practice for these sales until legal title is transferred.

    The attribution rules in s 29-5 apply to taxable supplies but not to taxable importations.

    GST on taxable importations is not attributed to tax periods. It is required to be paid by the importer to the Commonwealth at the same time as customs duty is paid, or within a further time in circumstances specified in the regulations (s33-15)

    In summary, there are two sets of rules as to when and how GST is paid - one set for taxable supplies and one for importations.

    19.6 A particular problem arises in relation to section 9-15 concerning the words "in connection with" in para.1a this is a very broad based problem and covers many contractual arrangements. Given that the consideration does not necessarily have to be made by the recipient of the supply, difficulties may arise where there are series of supplies made in a supply chain and it is unclear which supply the payment is consideration for.

    For example, Company A (say a U.S. company) may licence an Australian company to use say intellectual property. B then sub-licences the intellectual property to C. Often a royalty or payment is made back from B to A which is calculated and occurs only in response from the supply from B to C, for example, a percentage of the sub-licence fee or a royalty in respect of goods sold, produced or performed etc. In these circumstances it is unclear which supply the money paid from B to A would be "in connection with".

    The final of the ruling on GST and grants (GSTR 2000/11) provides some guidance on whether consideration is in connection with a supply. Regard should also be had to whether an item of consideration is 'in response to' or 'for the inducement of' a supply.

    In broad terms, we take the approach in the ruling that the test is one of sufficient relationship or nexus to the supply, which is similar to the test that was espoused in the New Zealand decisions in the New Zealand Refining case. However, the test has to be applied having regard to the structure of the definitions of consideration and supply and the transaction based nature of the GST. Whether this relationship will exist so that consideration is for a supply will generally be a matter to be determined on the facts of the particular situation. Both form and substance of a transaction are relevant.

    Because the definitions of supply and consideration are so broad, the question will commonly arise as to which of the identifiable supplies an item of consideration will be most connected with. Again, this will be a matter that depends on the facts of the case, having regard to the structure of the GST as a tax on transactions.

    In the case of the example, there is a clear supply for consideration made from A to B and from B to C. While the question will always depend on the facts of the case, it is likely that the royalty paid by B to A for the licence from A to B will be consideration for that licence. In the case of the sub-licence or other supply from B to C the royalty paid by C to B would ordinarily be consideration for the supply by B to C.

    The fact that the payment from B to A is calculated by reference to the volume of the supply from B to C will not be sufficient to lead to the conclusion that it is consideration for the supply to B to C. If A's entitlement to payment arises under the contract between B and A and forms part of that transaction then it is very unlikely to be consideration for some other supply.

    19.7 Are diesel fuel grants going to be subject to GST? Any rebate received is likely to affect the extent of the input tax credit already claimed in previous tax periods on diesel fuel.

    The final ruling on GST and grants, GSTR 2000/11, provides guidance in working out whether grants are consideration for a supply.

    Where a taxpayer completes an application for an entitlement and there is no binding or enforceable obligation entered into in exchange for the application, there is no supply for which the grant is consideration. There is nothing 'given up' by the grantee in exchange for the grant, and the grant is not paid in exchange for the supply of information in the application. The application is typically machinery to take advantage of an existing right.

    On this basis we consider that neither diesel fuel rebates nor diesel fuel grants will be consideration for a supply that is subject to GST.

    19.8 Deferred GST scheme

    The issue of disputes arising pursuant to this scheme has been discussed at a previous TPIP meeting and that the ATO view is that the issues must be resolved with Customs as they are the only ones with access to source information. A number of members have raised concerns with the "prepopulated" Deferred GST numbers disclosed on their first BAS and the process required to validate the amount disclosed. I am advised that in order to view the transaction list from Customs which makes up the number disclosed on the BAS a fee of $66 is required by Customs. Once received the transaction list shows that Customs has not cut off transactions into the correct tax period thereby resulting in one case in an additional $100,000 being incorrectly attributed to the July BAS.

    Can the ATO comment on whether it conducts any integrity checks on the data supplied by Customs before issuing the BAS? In addition, if cutoff problems continue then transaction listings from Customs will be required monthly for reconciliation purposes at a cost exceeding $700 pa. At the minimum it would seem that there should be a refund mechanism if the transaction details support the fact that the GST number supplied by Customs is incorrect.

    ATO position

    The ATO has been in contact with Customs regarding client queries in relation to disputes over the amount of deferred GST for July.

    To date, there have been 30 queries and in all cases, the data Customs have provided to the ATO proved to be correct. There were a number of transactions in July that occurred outside of the 'normal' Customs processing for deferred GST. All of these transactions have been verified by Customs' Internal Audit team. Customs have advised they are routinely conducting checks of data sent to the ATO.

    At this stage, the ATO has no reason to doubt the integrity of the data from Customs and therefore do not intend to conduct integrity checks on the data supplied by Customs.

    The ATO's deferred GST team will investigate the overstatement of 100,000 on the July BAS, if the relevant ABN can be supplied.

    19.9 Deferred GST scheme

    The ATO relies on Customs details to pre-populate the relevant field on the BAS for GST on imports. Taxpayers need to be able to reconcile this number to their records and currently have no detail behind the number provided by the ATO or Customs. A transaction list can be obtained from customs which costs $66 per report - an annualised cost of $792. No other source is available for taxpayers to reconcile this number as customs agents records may contain errors or timing differences. We submit that a detailed listing of the transactions making up the pre-populated BAS number should be distributed free of charge to affected taxpayers with their monthly BAS to enable them to verify the BAS correctly.

    Customs response

    The GST legislation obliges importers to keep records relating to their importations for 5 years (section 70 Taxation Administration Act 1953). Import documentation shows the amount of deferred GST. It is expected that importers approved for deferral (or their service providers) will maintain a system that is able to provide the appropriate reconciliation information. If you are unable to reconcile your records with the BAS, you should confirm with your Customs Broker(s) that you have all import documentation for the period of the statement. The Australian Customs Service is, however, able to provide a detailed report confirming import information for the period. As this service is provided to assist importers in their record keeping, it is provided on a cost for service basis.

    19.10 Novated lease arrangements

    Where an employee leases a motor vehicle and novates that lease to the employer, the finance company usually provides an invoice to the employee. That is, it is in the employee's name. As the employee is unregistered for GST, is it possible to treat that invoice as being received by the employer? Is the employee an agent of the employer when he or she novates the lease to the employer?

    Contributed by NIA

    Where the arrangement does not involve the legal assumption of the employee's obligations under the lease and is merely a reimbursement or payment by the employer on behalf of the employee, Division 111 of the GST Act may apply.

    Where the requirements of Division 111 of the GST Act are met, the reimbursement is treated as consideration for an acquisition that the employer has made from the employee and the employer may claim input tax credits even where it holds a tax invoice issued to the employee (section 111-15 of the GST Act). The tax invoice will also meet the information requirements of the GST law if it identifies the employee, and not the employer, as the recipient of the taxable supply (paragraph 74 of GSTR 2000/17).

    However, where the novation in question is a full novation, all rights and obligations under an agreement are novated (or transferred) by an employee to an employer. This may be done by a tripartite agreement involving the lessor, lessee (employee) and employer. In this case, the employee is not considered to be acting in the capacity of an agent of the employer. Where there is a new agreement to effect the novation, the tax invoice will need to be issued to the employer (and specifically state the recipient's name) for the invoice to be a valid tax invoice. Division 111 of the GST Act is not applicable in this scenario.

    However, the Commissioner may, under subsection 29-70(1) of the GST Act treat a fully novated lease agreement (in the form of a tripartite agreement) as a tax invoice provided it satisfies the other information requirements for tax invoices as outlined in the GST law and paragraph 69 of GSTR 2000/17. In addition, under subsection 29-70(1) of the GST Act the Commissioner can exercise his discretion to treat a tax invoice held by the employer but issued to the employee with the employee's name and address (instead of the employer's name and address), as a tax invoice issued to the recipient of the supply. The Commissioner will ordinarily treat such documents as tax invoices where he believes there would be large compliance costs on entities to reissue such documents to employers (paragraphs 25 and 39 of GSTR 2000/17).

    19.11 What is my income tax deduction if I am a GST registered taxpayer who incurs an expense partly for business purposes and partly for private purposes?

    Jim is a GST-registered sole trader. He incurs telephone expenses of $1100 (including $100 GST). For GST purposes, the creditable purpose portion of the outgoing is 50%, resulting in him claiming an input tax credit of $50 in relation to the outgoing. For income tax purposes, the outgoing also has a 50% business use purpose. Is Jim's income tax deduction equal to 50% of $1,050 (ie $525) or is Jim's tax deduction limited to $500?

    Section 27-5 of the Income Tax Assessment Act 1997 ("the Act") states that you cannot deduct a loss or outgoing you incur to the extent that the loss or outgoing includes an amount relating to an input tax credit to which you are entitled. The section requires you to firstly work out the deductible portion of the outgoing under the relevant provision of the Act. The deductible outgoing is then reduced by the amount of input tax credit that relates to that outgoing.

    The amount of the deductible outgoing in the example (before considering the effect of Division 27) is $550 (that is, 50% of $1100). This amount needs to be reduced by the input tax credit of $50 that relates to the outgoing. Therefore, the amount of deduction that Jim is entitled to claim is $500.

    19.12 Date of effect for rulings other than 1 July 2000

    Members queried the possible implications where the release of a draft ruling had been delayed and the ruling might be applicable retrospectively. Members requested ATO to consider adopting dates of effect for rulings other than 1 July 2000.

    ATO response

    It is the ATO view that dates of effect other than 1 July 2000 may apply where the relevant circumstances require such alteration, for instance, where law on a subject area has been introduced or amended or a published ATO view has changed. An example of this latter case is, GSTR 2001/2 at paragraph 10 that had the following date of effect:

    This ruling commences on and from 1 July 2000. However, to the extent that this ruling is inconsistent with draft goods and services tax ruling GSTR 2000/D15, the draft ruling applies up until the date of issue of this ruling. Refer to paragraphs 45 and 46 for transitional concessions in relation to approved form requirements for tax invoices and adjustment notes.

    19.13 Rulings removed from website

    It would appear GST rulings that have been withdrawn/removed (for example transitional rulings) from the website are difficult to obtain. Practitioners are advised that they cannot obtain hard copies of these when ringing the ATO. They are referred back to the website, which no longer has these on there.

    Could the ATO please confirm how a taxpayer can obtain rulings that have been removed from the website?

    Contributed by TIA

    ATO response

    The current ATO policy on draft rulings is to remove them from the website once they had been withdrawn and replaced by a final ruling. This policy was based on the premise that draft rulings represent the preliminary view of the ATO and were not intended to be relied upon. However, it is recognised that, in particular, draft GST rulings may have been relied upon. The policy has been reviewed and we will start maintaining withdrawn draft rulings on the website, with links to the relevant final ruling.

    It may take several weeks to reload the backlog of withdrawn draft rulings. In the meantime, practitioners may request a copy of a draft ruling by emailing the ATO at trurulings@ato.gov.au.

    19.14 Application of ACCC measures after 30 June 2002

    Contributed by ARA

    ATO advised that where supplies are made to the public at large and (unregistered) recipients could not be traced, the ATO will be satisfied the supplier had reimbursed recipients if it had complied with steps negotiated with the Australian Competition and Consumer Commission (ACCC) to mitigate the effect of the overcharging on consumers. How will this concession operate post 30 June 2002 when the ACCC no longer has a role in this area?

    ATO response

    The advice of the ARA is confirmed. The ACCC will not have a role to monitor price exploitation relating to the implementation of GST for supplies made on or after 1 July 2002. The ACCC will have a continuing role for supplies that may have been made up to that date although not the subject of a consumer complaint until a later time. The ATO has no role in dealing with price exploitation but rather has to be satisfied that unregistered recipients have first been reimbursed before a GST refund can be paid under section 39. The onus will fall on suppliers to demonstrate this and each case will depend on its own circumstances. This issue will be further considered when finalising the draft Practice Statement.

    19.15 When is the taxpayer advised that credits are available?

    Where no bank account details have been provided a notice will issue (usually several days after the refund has been stored) to the client advising them that they must provide their bank account details to enable any current or future credits to be refunded to them. If the client has provided their bank account details and they have been keyed within 120 days of the refund being stored, the refund will issue automatically. If more than 120 days have elapsed, the electronic refund will need to be manually generated by the ATO.

    19.16 Is interest payable on negative net amounts where no bank account details have been provided?

    No, the Delayed Refund Interest (DRI) is not applicable. If we issue the refund more than 14 days after we receive all the relevant financial institution details and there is no other reason (in law) for delaying the refund, DRI is payable from 14 days after these details are provided until the refund issues

    19.17 GSTR 2001/5 addendum

    Contributed by ICAA

    ICAA raised concerns that no explanation or background information was provided on the release of an addendum to the GSTR 2001/5. ATO advised this feedback will be forwarded on to the Rulings Unit.

    ATO response

    Feedback from ICAA has been forwarded to the Rulings Unit. In addition, the Rulings Unit has provided some comments on the addendum to GSTR 2001/5 below.

    The addendum to GSTR 2001/5 made the following alterations to the ruling:

    • Paragraph 63 was replaced with new words to clarify the different treatment between tenancies at will and periodic tenancies. The original version of paragraph 63 was silent in relation to periodic tenancies and the wording in it resulted in some misunderstanding of the ATO view.
    • Paragraph 123 was replaced to clarify a view expressed by the ATO. The new paragraph 123 now considers an additional situation and says that in circumstances as described in the paragraph, both supplies discussed may be supplies of going concerns.

    19.18 Role of State representative

    Contributed by NIA

    How does the role of the States and Territories representative on the GST Public Rulings Panel impact the issue of GST public rulings?

    NIA was of the belief that GST rulings issuing after 1 July 2001 might have to be referred to the Ministerial Council before it was released. At the September TPIP meeting, NIA advised that in accordance with the Commonwealth and States Financial Act, GST public rulings issuing after 1 July 2001 requires the sign-off of all States and Territories. NIA believed that the State representative role alone was insufficient.

    ATO response

    The Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations [1999] ["the IGA"] provides that States and Territories will be consulted on draft public rulings and there will be a representative from the States and Territories on the GST Public Rulings Panel.

    The GST Rulings Panel comprises senior ATO technical staff including the Chief Tax Counsel and Second Commissioner Michael D'Ascenzo, a representative of the State and Territory Governments, as well as academics and external tax practitioners. The panel advises the ATO and ensures that legal, practical and commercial implications are taken into account before rulings are finalised. Input from the rulings panel enables major issues to be interpreted in a coordinated and consistent manner.

    The panel members are involved in the decision making process that sometimes includes actual drafting of changes to a ruling. While the Chief Tax Counsel is ultimately responsible for the views expressed in the ruling, the practice is for the panel to reach a consensus of opinion on the correct operation of the law.1

    The IGA states [at appendix E 11] that public rulings will not be referred to the Ministerial Council.

    19.19 GSTR 2001/5 and the application of Division 165

    Contributed by NTAA

    In GSTR 2001/5 the ATO has endeavoured to apply a practical interpretation to subdivision 38-J so that businesses will be able to obtain the benefit of the subdivision.

    In some cases the ATO has provided the practical solution to some of the technical difficulties thrown up by subdivision 38-J. In other cases, the ATO has indicated or hinted at ways in which the practical difficulties of the subdivision can be overcome. However, by not specifically stating that they are acceptable to the ATO, taxpayers are uncertain as to whether the methods indicated may be struck down by the anti-avoidance provisions in Division 165.

    Example 1

    Paragraphs 83, 86 and 87 state that if the recipient of a business has their own business premises, so that the supplier supplies the whole business, except for the business premises, the conditions of subdivision 38-J will not be satisfied. If, however, the supplier leased the premises to the recipient, that would be acceptable to the ATO - refer paragraphs 89-91. Would the ATO apply Division 165 if the lease of the premises was for only one week?

    Example 2

    Paragraphs 122 and 123 confirm that if one legal entity owns the business premises, and a separate legal entity operates the business from those premises under a lease, and both entities sell their enterprises to the one recipient and settlement occurs on the same day (which is what normally happens in practice) neither will be the supply of a going concern. Consequently subdivision 38-J will not apply.

    For example, if a trust owns the business premises and a partnership operates the business. The trust sells the premises to the recipient and the partnership sells the business to the recipient.

    Would the ATO apply Division 165 if the trust sold the business premises, subject to the lease in favour of the partnership, to the recipient on one day and then the next day the partnership sold the business to the recipient and at the same time surrendered the lease? Would the ATO's answer be different if a written lease agreement had never existed between the trust and the partnership and the partnership had never paid rent throughout the time it occupied the business premises but three days prior to the sale, a written lease agreement was entered into between the trust and the partnership?

    Example 3

    In paragraphs 116 and 117, a sole practitioner can still obtain the benefits of subdivision 38-J when they sell the business even though they will not be supplying themself. Paragraphs 111 to 115 indicate that where a key person is employed by an entity, the benefit of the key employee's employment contract must be transferred to the recipient in order to comply with subdivision 38-J.

    In the case of a sole practitioner accountant which has incorporated their practice, the individual is a key employee of the supplier, being the company. In order to comply with paragraphs 111 to 115 of GSTR 2001/5, the benefit of the practitioner's employment contract must be transferred or the practitioner must agree to work for the recipient. Will the ATO apply Division 165 if the practitioner only agrees to work for the recipient for one day after the sale of the business?

    End of example

    ATO response

    Division 165 of the GST Act is similar to part IVA of the ITAA in that it is an anti-avoidance provision which must be considered on a case by case basis, having regard to all the relevant circumstances.

    The purpose of Subdivision 38-J is to allow the genuine supply of an enterprise as a going concern by one registered entity to another to be GST-free.

    We would not ordinarily consider that Division 165 would apply where a supplier of an enterprise, which is to be the subject of a genuine supply as a going concern, enters into a transaction which enables them to supply a thing which is required to comply with para 38-325(2)(a). A number of examples are provided in GSTR 2001/5 of situations where an entity has entered into a transaction which would enable it to comply with Subdivision 38-J and make a GST-free supply.

    For example, the supplier of a manufacturing enterprise who also owns the business premises may grant a lease of those premises to the recipient that is to acquire the manufacturing enterprise as a means of supplying the right to occupy those premises. Providing the supplier does no more than enter into a particular transaction to enable it to supply a thing necessary for the continued operation of an enterprise which is being genuinely supplied as a going concern, it is not considered that Division 165 will apply.

    Generally, if an entity follows the guidance provided in GSTR 2001/5 in circumstances where a genuine supply of a going concern is made, and all that has been done is to take steps to ensure that the supplier is put in a position to ensure that it can supply all things necessary for the continued operation of the enterprise which is being supplied, we do not consider that Division 165 will apply.

    19.20 Rulings and Escalation process

    Contributed by CPAA

    Is there a procedure that would allow a taxpayer or an industry body to have a GST public ruling (or part of a GST public ruling) reviewed by the ATO? If no such procedure currently exists, will the ATO consider the establishment of such a procedure?

    There are matters that are currently covered by GST public rulings (GSTR series and other public documents such as Industry Partnership Issues Logs) that taxpayers and industry bodies may feel do not properly represent the GST law.

    Because the matters are covered by a public ruling, any application for a private ruling on the topic will be met with the response that is in the public ruling. It is my understanding that ATO officers (both field officers and technical officers) are bound to follow a policy position that is published in a public ruling. This is probably also the case with appeals officers in their consideration of an objection against an assessment.

    There is a GST Escalation Process published in PS 2001/3, but this process is only available to ATO officers and only applies in somewhat limited circumstances.

    If a taxpayer or an industry body wishes to challenge an ATO interpretation published in a public ruling (at least a GSTR series public ruling) a court challenge seems to be the only option. In certain circumstances where the ATO interpretation is pivotal to the protection of the revenue, this might be appropriate. However, there are less important matters where a change in policy might be undertaken without serious revenue consequences.

    Despite the fact that most of the current GST public rulings are released as drafts for comment prior to issue as a public ruling, it is probable that comments have not addressed all of the issues that relate to a particular topic. Fact situations that seem to give an inequitable result when the published policy is applied may not have been known at the time that comments were made on drafts. This is particularly the case in a GST context where both the ATO and taxpayers (and representatives) are only now coming to grips with the impact of GST on particular fact situations.

    It would seem advantageous if the ATO was to establish a procedure by which its public rulings could be reviewed without the need for court action in all cases.

    ATO response

    Challenging the view taken in GST Public Rulings

    It is fundamental to achieving consistency in the application of tax laws that ATO staff must apply the ATO view of the provisions of the relevant law. In the GST context the ATO view of the law is expressed in GST Rulings, Determinations and Bulletins, in information booklets, guides and fact sheets, on our websites including industry logs and in ATO ID's. The question is correct in noting that it would apply to all ATO staff including those dealing with objections and litigation.

    It must be noted that this material is not the law - it is the ATO's view of how the law should be applied. Therefore it is always open to any taxpayer to challenge the view expressed by the ATO through the formal objection, review and appeal processes.

    The question notes that the GST escalation policy is set out in PS 2001/3. At paragraph 4 of PS 2001/3 it is made clear that interpretative issues arising from tax reform are to be escalated if:

    • there is an absence of, or deficiency in, ATO policy on the issue
    • nationally applicable guidelines on the issue have not been issued
    • inconsistent interpretations of the law have been given and cannot be reconciled, or
    • existing taxation policy or guidelines are subject to constant challenge.

    In this context, it is not correct to assert that a private ruling request will necessarily be met with a response based on a public ruling, although that would be the outcome if the issue is not identified as meeting the significant issues criteria for escalation.

    It is true that these guidelines and processes are intended for GST staff. This is not surprising given that most questions about, or challenges to, the ATO view of the law would arise from ruling requests, compliance activity or other taxpayer contact.

    If a professional or industry body had concerns about a view expressed in a GST public ruling, that would fall squarely within the significant issues criteria expressed in paragraph 4 of PS 2001/3. This would be on the basis that the issue is seen as having wide application - for example, the issue may concern a particular kind of supply or acquisition, or one or more industries or classes of entities. Issues dealing with only a single entity should be dealt with through the private rulings system.

    There is already a process for professional or industry bodies to have those significant issues considered or reviewed, namely through the relevant industry partnership. ATO representatives at those industry partnerships should identify issues where apparently incorrect or conflicting advice is given in public information products and escalate those issues using the same process contained in PS 2001/3. If that process is followed and the ATO view is maintained, then it is agreed that an entity may need to initiate formal review or appeal processes. As indicated earlier, the ATO view is not the law.

    We do not consider that any additional process is necessary to allow a review of GST public rulings.

    19.21 Denial of input tax credits

    Issue

    The Tax Office has outlined that 'where the recipient has not made a creditable acquisition, an input tax credit is not available.' Having a document that purports to be a tax invoice cannot change this. The Tax Office then provides suggestions as to how an entity can verify whether someone is registered for the GST for example searching the Australian Business Register. It is important to note that the methods outlined only show entities that are registered not entities required to be registered.

    Some background

    In order for a supply to be a creditable acquisition Section 11-5 of the GST Act requires the following:

    (a) you acquire anything solely or partly for a creditable purpose; and

    (b) the supply of the thing to you is a taxable supply; and

    (c) you provide or are liable to provide consideration for the supply; and

    (d) you are registered or required to be registered.

    Assuming the entity who is claiming the ITC's has met (a), (c) and (d) it then needs to establish that the requirements of (b) are met, that is, the supply of the thing to the entity is a taxable.

    For the supply to be a taxable supply under section 9-5 of the GST Act it must meet the following requirements:

    (a) the supply is made for consideration; and

    (b) the supply is made in the course of furtherance of an enterprise carried on by the supplier; and

    (c) the supply is connected with Australia; and

    (d) the supplier is registered or required to be registered.

    However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

    An issue arises for the entity claiming the input tax credits in regard to determining whether the supplier is 'required to be registered' with certainty. We believe that to determine this would be virtually impossible unless written confirmation was obtained on all the transactions undertaken by the entity. This in turn would be an administrative nightmare for all entities claiming input tax credits. Thus there is a need for discretion from the Commissioner, as previously outlined at 13.11(e) of the finalised Issues Log to remain and a more flexible approach to be adopted by the Tax Office when audits are undertaken to allow input tax credits where the entity has relied and claimed an ITC in their BAS.

    Can the Tax Office also extend these comments to consider what penalties will be applied to the entity who has issued the relevant invalid tax invoice?

    The Tax Office in considering this issue will need to make a distinction between the case where the entity that has issued the purported 'tax invoice' is in fact required to be registered for GST but is not, and the case where that entity is not in fact required to be registered for GST (for example, because it is a small business entity with a turnover of less than $50,000).

    One matter that this distinction will probably highlight is that, in the case where the entity has issued the 'tax invoice' is not in fact required to be registered for GST, there is no provision in the GST Act or Tax Administration Act ('TAA') which will operate to apply any penalty to this entity. In sales tax ( and in other GST regimes) there are penalties which apply which would make this entity subject to a 'false or misleading statement penalty' (for issuing a document that is not in fact a tax invoice) and/or a requirement to remit to the Crown the 'GST' he has purported to collect. It appears that there are no such penalties in our GST law as such, although it may be possible to argue that Crimes Act provisions or trade practices penalties might apply.

    The false or misleading statement penalty in the TAA (section 284-75) only appears to apply to statements made to an entity that is exercising powers or performing functions under the GST law, an example is a tax officer or a tax agent.

    If there are no express penalties that can be applied to the non-GST registered entity that has issued the invalid tax invoice, this appears to be a matter which should be considered by the Government. The net result is that under the present law the real wrongdoer escapes penalties (other than perhaps an action against him under the trade practices legislation) while the entity that has relied on the tax invoice to claim ITCs is subject to penalties (being the denial of those ITCs with associated penalties etc).

    ATO response

    Question 1

    This issue primarily focuses on the exercise of the Commissioner's discretion under section 29-70 to treat a document that does not meet the requirements of a tax invoice as a tax invoice and draws a reference to the Tax Office response to Issue 13.11(e) of the Tax Practitioners' Issues Register.

    Response

    The Commissioner is drafting a Practice Statement to provide staff with guidance on when it is appropriate to exercise the discretion to treat a document that is not a tax invoice as a tax invoice. As with most Practice Statements, this one will be published on the Tax Office web site and be available to the public when it is finalised.

    The Practice Statement will broadly follow the principles outlined in the answer to question 13.11(e) on the Issues Register. The exercise of the Commissioner's discretion depends very much on the individual circumstance of the case. Generally, the Commissioner will exercise the discretion when he is satisfied that the recipient has made a creditable acquisition and that it is appropriate in the circumstances. For example, where the recipient has been unsuccessful in obtaining a correct tax invoice despite making a reasonable attempt, the recipient can approach the Tax Office before making the claim and request the exercise of the discretion.

    However, it is important to note that the exercise of the discretion in section 29-70 will not help a recipient of a supply where the supplier is neither registered for GST nor required to be registered.

    As the submission pointed out, one of the essential elements for an entitlement to an input tax credit is that the acquisition must be a creditable acquisition (section 11-20) and to be a creditable acquisition, the supply to the recipient must be a taxable supply (section 11-5).

    One of the requirements for a supply to be taxable is that the supplier must be either registered, or required to be registered, for GST. Where a supplier is not registered or required to be registered for GST, the supply to the recipient will not be a taxable supply. Therefore, the acquisition cannot be a creditable acquisition and there cannot be any entitlement to an input tax credit. This is the case even if the recipient acts in good faith and exercises reasonable care.

    In these situations, even if the Commissioner were to exercise his discretion to treat the document as a tax invoice, it would have no impact as there is still no entitlement to an input tax credit. The treatment of a document as a tax invoice does not make the acquisition a creditable acquisition as there has not been a taxable supply.

    Where a supplier is required to be registered for GST, but is not registered, the supply to the recipient will be a taxable supply when the other elements of section 9-5 of the GST Act are met. Therefore, it is possible for the recipient to make a creditable acquisition and be entitled to an input tax credit in these circumstances. If the recipient does not have a document that meets all of the requirements of a tax invoice, the recipient may request the Commissioner to exercise his discretion to treat the document as a tax invoice. The Practice Statement will provide guidance on the Commissioner's policy in these circumstances.

    Question 2 (part 1)

    Members have asked for the Commissioner's intention in relation to penalties where a recipient has relied on a document to claim an input tax credit when in fact the supplier is not registered or required to be registered for GST.

    Response

    The relevant penalty provisions are found in Division 284 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

    Where an entity makes a claim for input tax credits to which they are not entitled or where an entity makes a claim for input tax credits and they do not hold a tax invoice at the time they make the claim (for acquisition greater than $55), the entity has made a false and misleading statement that may result in a shortfall amount for penalty purposes.

    Section 285-215 of the TAA provides that there is no shortfall to the extent that the entity has exercised reasonable care in making the claim.

    The Commissioner expects that an entity will exercise reasonable care in making all claims for input tax credits. This includes exercising reasonable care in deciding in deciding that the supply is a taxable supply to the entity.

    What amounts to reasonable care will depend upon the individual circumstances of the claim. The following examples illustrate what would amount to reasonable care being exercised by the recipient in relation to determining if the supplier is registered, or required to be registered for GST:

    Supplier is a public company or the supplier has a high public profile and is a major supplier to the industry

    Where the recipient has a document that appears to meet all the elements of tax invoice, it is reasonable for the recipient to expect that the supplier will be registered or required to be registered for GST and that the supply is taxable supply.

    Acquisition results in a significant claim for ITC

    Where the amount of input tax credit for an acquisition is substantial the Commissioner expects the recipient to exercise an appropriate amount of care in ascertaining that the supply is taxable supply to the recipient (including being certain that the supplier is registered or required to be registered for GST) and that the document meets the requirements of a tax invoice.

    This may require the recipient checking the Australian Business Register to ensure the supplier is registered for GST. If the supplier is not registered, then the recipient would be expected to make inquiries with the supplier to verify that the supplier is either registered or required to be registered for GST.

    Regular trading relationship with supplier

    Where the recipient has an ongoing trading relationship with the supplier, the Commissioner expects the recipient to take reasonable steps to verify that the ongoing supplies are taxable supplies (including that the supplier is registered or required to be registered).

    This may require the recipient checking the Australian Business Register to ensure the supplier is registered for GST. If the supplier is not registered, then the recipient would be expected to make inquiries with the supplier to verify that the supplier is either registered or required to be registered for GST.

    One off acquisitions that result in small claims for input tax credit

    Where, on the face of it, the document satisfies the requirements of a tax invoice and the recipient has no reason to suspect differently, it is reasonable for the recipient to assume that the supplier is registered for GST and that the supply is a taxable supply.

    Where, on the face of it, a document does not meet the requirements of a tax invoice, the recipient is expected to make inquiries with the supplier to obtain a correct document. This may include asking for confirmation that the supplier is registered or required to be registered for GST.

    Similarly, where the recipient has reason to suspect that the supplier is not registered for GST, the recipient is expected to make reasonable inquiries to verify that the supplier is either registered for GST or required to be registered for GST.

    This may require the recipient checking the Australian Business Register to ensure the supplier is registered for GST. If the supplier is not registered, then the recipient would be expected to make inquiries with the supplier to verify that the supplier is either registered or required to be registered for GST.

    Where the recipient has not exercised reasonable care in making the claim for input credit, the recipient is liable for an administrative penalty. Any remission of this penalty will be in accordance with the Commissioner's normal policy for remission of penalties for false and misleading statements.

    Where a supplier is required to be registered but is not, and you become aware of this fact, reporting this information to the ATO will improve the integrity of the new tax system. This information can be reported on our toll free hotline 1800 060 062.

    Question 2 (part 2)

    Members also raise the question of what penalties apply to a supplier who issues tax invoices when they are not registered or required to be registered for GST.

    Response

    Members are correct in stating that there are no provisions within the GST Act or Schedule 1 of the TAA that allow for penalties to be applied to a supplier who issues a document that falsely represents a supply as being taxable when they are not registered or required to be registered for GST.

    However, there are offences that are applicable in these circumstances. Under sections 8K and 8N of Schedule 1 of the TAA, it is an offence to make a false or misleading statement to a tax officer (section 8N requires the statement to be made recklessly).

    Subsection 8J(9) provides that a statement made to a tax officer includes a reference to such a statement made to a person other than a tax officer for a purpose in connection with the operation of a tax law.

    Subsection 8J(10) makes it clear that a statement includes a statement made in a tax invoice or an adjustment note given to a person other than a tax officer.

    The combined effects of these provisions is that a person who is not registered or required to be registered for GST will be guilty of an offence if they provide a recipient with a document (a tax invoice) that is false or misleading in relation to the GST included in the price.

    19.22 Private use for Individuals and Partnerships

    Can the goods own use amounts specified in TD 2002/26 be used for GST purposes to determine private use for individuals and partnerships?

    ATO response

    No. The amounts specified in Taxation Determination TD 2002/26 are assessable income for purposes of section 70-110 of the Income Tax Assessment Act 1997. The amounts are GST-exclusive amounts - see paragraph 7 of TD 2002/26.

    The GST treatment of goods applied solely to private or domestic use is provided for in Division 130 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Division 130 provides for an increasing adjustment for goods (for example, trading stock) that are applied solely to private or domestic use on which an input tax credit (ITC) has been allowed. It effectively 'claws back' the ITC that has been allowed on the creditable acquisition of those goods.

    The amounts specified in TD 2002/26 have no relevance to determining the extent of ITCs on the creditable acquisition of goods applied to a private or domestic use as:

    • the amounts are GST-exclusive;
    • the amounts do not reflect the value or price (in a GST context) of the goods; and
    • there is no significance for income tax purposes as to whether the goods are GST-free or otherwise, but for GST purposes, this is significant. The nature of the industries for which amounts have been specified (for example, bakeries, mixed businesses or restaurants) would include goods that have GST embedded in the cost of them and others that are GST-free.

    19.23 Simplified Accounting for Food Retailers

    To simplify accounting for food retailers, three simplified GST accounting methods are available. When assessing whether or not the retailer's annual turnover is at or below the relevant threshold, is the GST-inclusive or GST-exclusive turnover relevant?

    We assume it is the GST-exclusive turnover accounted for, based on the principles set out in Division 188 of the GST Act. There does not appear to be clear guidance in the Commissioner's written information or Division 123 of the GST Act.

    Does Division 17 and Division 27 ITAA 1997 operate for food retailers who use one of the simplified accounting methods under Division 123 of the GST Act? If yes, can the Commissioner provide guidance on how these Divisions operate with respect to these retailers.

    ATO response

    The turnover thresholds for purposes of Division 123 is GST-inclusive, however we will accept a 10% tolerance which ensures that the threshold amounts net of GST are in line with other GST-exclusive thresholds. 'Simplified GST Accounting Methods for Food Retailers' Second Edition June 2001 (NAT 3185-6.2001) provides in the Glossary:

    Annual turnover does not exceed a threshold

    The turnover threshold for using a simplified accounting method will be either $1 million if you use business norms or $2 million if you use the stock purchases or snapshot methods.

    You only have to apply the turnover threshold to your sales to work out whether you are eligible to use a SAM. If you know that your annual turnover is clearly below the relevant threshold, there will be no need to perform any calculations to determine your eligibility.

    If you do need to apply the simplified accounting methods turnover threshold to your sales, the way in which this threshold is applied is slightly different to other GST thresholds - even though its application will give you similar results. There are three points to remember in applying the relevant simplified accounting methods threshold to your sales.

    (1) The threshold amounts are GST-inclusive-meaning that your sales include GST when you work out whether your sales are lower than the relevant threshold. However, we will accept a 10% tolerance when you apply the threshold to your sales (that is, your effective GST-inclusive threshold will be either $1.1 million or $2.2 million). This tolerance ensures that the published threshold amounts net of GST (that is, $1 million and $2 million) are in line with other GST-exclusive thresholds.

    Does Division 17 and Division 27 ITAA 1997 operate for food retailers who use one of the simplified accounting methods under Division 123 of the GST Act?

    If yes, can the Commissioner provide guidance on how these Divisions operate with respect to these retailers.

    Yes. Division 17 and 27 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to all taxpayers, irrespective of whether a simplified accounting method (SAM) is used in calculating their GST liability.

    Divisions 17 and 27 ensure that the calculation of a taxpayer's taxable income disregards the GST payable on the taxpayer's taxable supplies, the input tax credits on the taxpayer's creditable acquisitions and any adjustments of that GST amount or those credits.

    Division 17 sets out the way in which the GST affects the calculation of assessable income. It ensures that a taxpayer's assessable income does not include the GST component of the consideration for the taxpayer's taxable supplies. However, it requires that the amount of any decreasing adjustment of GST is included in assessable income.

    Division 27 sets out the way in which the GST affects the calculation of deductions. It denies a deduction for the GST component of a loss or outgoing on an acquisition to the extent that the taxpayer is entitled to an input tax credit for the acquisition or a decreasing adjustment. The effect of the Division is that where there is an entitlement to an input tax credit, a deduction which is otherwise allowable must be reduced by the amount of the input tax credit.

    SAM is a simplified way of calculating GST liability for small retailers selling a mix of taxable and GST-free supplies. It allows small retailers to estimate their total GST-free sales at the end of each tax period rather than having to record each GST-free product when it is sold. It is for small retailers who may have difficulty accounting for GST on their taxable supplies due to lack of adequate point of sale equipment. Three simplified GST accounting methods are available. They are applied only to purchases and sales of trading stock.

    Any amount of GST (as calculated by using a SAM) that is included in sales, or input tax credits imbedded in purchases, is respectively excluded from assessable income or allowable deductions.

    Division 17 and 27 apply to taxpayers irrespective of how they work out their GST liability and entitlement to the input tax credit. The taxpayer's GST liability and input tax credit entitlements are excluded from the calculation of their assessable income. As such, whether a taxpayer uses one of the three methods to calculate their GST liability does not affect the application of Division 17 and 27 of the ITAA 1997.

    19.24 GSTR 2003/6 and Family Law court orders

    Issue

    GSTR 2003/6 states that where there is a transfer of property under a Family Law Court order from an entity to a spouse (or ex-spouse), it will not be treated as a supply for consideration. That is, the entity is not required to charge the spouse GST.

    However, the ruling states that the transfer may require that the entity makes an adjustment to the Input Tax Credit it has claimed. The ruling states that it does not matter what the spouse uses the asset for.

    The entity will not have to make an adjustment if:

    • the acquisition was a pre-GST asset; or
    • the acquisition is outside the adjustment period when the transfer occurred, that is:

    This ruling is inconsistent with the roll-over relief which is available under the Income Tax Assessment Act (1997) in the event of a property transfer resulting from a Court Order of the Family Law Act. These being:

    • subdivision 126-A Marriage breakdown for Capital Gains Relief.

    Subdivision 126-A provides roll-over concessions where assets are transferred between spouses or from a company to a spouse because of a court order under the Family Law Act 1975.

    The consequences of this roll-over are as follows:

    • the capital gain or loss the transferor makes from the transfer will be disregarded; and
    • the transferee will be deemed to acquire the asset or interests in the asset at the transferor's cost base at the time at which the transferee acquires the asset or interest.

    It is a requirement of the roll-over that:

    • the transfer must occur because of a court order under the Family Law Act 1975; and
    • the transfer must be to a spouse, that is, the transferee cannot be an entity such as a company.

    Section 40-340, Item 3 for Roll-over Relief relating to depreciating assets.

    Transfers or disposals of depreciating assets normally result in a balancing adjustment. A balancing adjustment is an amount which is included in the transferor's assessable income calculated as the difference between the termination value (in this case, market value) and the adjustable value (the written down value) at the time of the transfer.

    There is however automatic roll-over relief. The automatic roll-over relief occurs where a transferor disposes of a depreciating asset provided that the depreciating asset is transferred between spouses or from a company to a spouse because of a court order under the Family Law Act 1975.

    The consequences of this roll-over are as follows:

    • the transferor will not have a balancing adjustment to be included in its assessable income; and
    • the transferee (eg spouse/wife) will depreciate the asset using the same method and values as the transferor.

    GST implications of the Court Order:

    As per Paragraphs 50 to 58, it is the Tax office view that the assets and interest in assets would have been applied for a private use and therefore require an adjustment under Division 129 if:

    • the acquisition was post GST; and
    • the application occurred within the adjustment period.

    Example 4 in paragraph 56, the use by the transferee is irrelevant.

    Considerations

    The Ruling is inconsistent with the roll-over relief which is available under the Income Tax Assessment Act (1997) in the event of a property transfer resulting from a Court Order of the Family Law Act. The ICAA recommend that the Ruling be amended to provide roll over relief for these instances. This would achieve consistency across all the Tax Laws.

    If an acquisition was GST-free under Division 38 (Going Concern), will an adjustment still be required under Division 129? Clarity is also required on this issue as the final Ruling currently stands.

    Additional Information

    The ICAA is concerned that the Tax Office view expressed in the GST Ruling would result in GST been paid twice where the transferee is using the asset in their business. Once through an increasing adjustment, and the other through a taxable supply:

    As per Paragraphs 50 to 58, it is the Tax Office view that the assets and interest in assets would have been applied for a private use and therefore requires an adjustment under Division 129 if:

    • the acquisition was post GST; and
    • the application occurred within the adjustment period.

    Example 4 in paragraph 56, the use by the transferee is irrelevant.

    The entity transferring the asset to the spouse it would have an increasing adjustment for the input tax credits that it has claimed; and when the transferee later disposes of the asset - they will be charging GST on the supply of the asset.

    In relation to the Tax Office statement that; 'Roll-over relief delays the timing of possible exposure to income tax consequences, whereas an increasing adjustment under Division 129 of the GST Act, in marital breakdown circumstances, effectively returns input tax credits.' In our view the CGT Provisions do not necessarily delay the income tax consequences, in fact it may actually result in no income tax being paid on a particular transaction.

    Example:

    The entity has a depreciating asset which has a cost of $50,000, an adjustable value at the time of transfer of $9,000 and a market value of $20,000. (Note: fishing vessels and patents tend to retain their value and they are depreciating assets).

    Under the court order the entity transfers the asset to the wife who is not carrying on a business. Under Division 40 Roll-Over: There is no balancing adjustment for the entity (would have normally been $11,000). Wife deemed to acquire the depreciating asset for $9,000. Assume wife later disposes of depreciating asset for $20,000. CGT Event K7 then applies, however because this is a person use asset to the wife and has a cost of less than $10,000, not CGT consequences. Tax free to the wife.

    The ICAA recommend that this issue be referred to Treasury for legislative amendment.

    End of example

    ATO response

    This draft response from the August forum remains unchanged. The response cannot change without an amendment to legislation.

    This issue raises the point as to whether there is inconsistency between the Goods and Services Tax Ruling GSTR 2003/6 and the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the treatment of the transfer of assets as a result of property distributions under the Family Law Act.

    The ITAA 1997 provides for roll-over relief in appropriate circumstances in relation to transfers following marital breakdowns in both CGT and on disposals of depreciating assets. There is no 'roll-over' relief as such under the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') but designated supplies are made GST-free under that Act. Supplies emanating from a marital breakdown are not included amongst those which are made GST-free under the GST Act.

    GSTR 2003/6 considers that supplies made from a related enterprise to one of the spouses as a result of Family Law Court Orders are not taxable supplies. This is because they do not meet the requirements of a taxable supply under section 9-5 of the GST Act as it is considered that such supplies are not made in the course or furtherance of the related enterprise and are made for no consideration.

    GSTR 2003/6 deals with enterprise assets or things for which the entity claimed input tax credits used by it in the enterprise. When that asset or thing is transferred to a spouse in marital breakdown circumstances it is applied for private or domestic use by the entity and is a change in creditable purpose. The asset has gone into final consumption and logically input credits previously claimed should be returned. Division 129 of the GST Act provides for this increasing adjustment.

    If there is any perceived inconsistency it is because the ITAA 1997 provides for roll-over relief and the GST Act does not. Such a concept is not present in the GST regime. Roll-over relief delays the timing of possible exposure to income tax consequences, whereas an increasing adjustment under Division 129 of the GST Act, in marital breakdown circumstances, effectively returns input tax credits. There is no opportunity to 'roll-over' such an adjustment as there is no inherent GST liability of the supplier passing to the recipient when the asset is transferred.

    The second issue raised in relation to GSTR 2003/6 concerns the application of Division 129 of the GST Act in circumstances where a family company or partnership transfers an asset to a spouse on marital breakdown , such asset having been earlier acquired GST-free as part of the purchase of a going concern by that family entity.

    Any increasing adjustment under Division 129 is calculated on the amount of input tax credit claimed. No input tax credit is claimed by the entity as the acquisition forms part of a GST-free supply of a going concern, so that there can be no adjustment under Division 129 when the asset is later supplied by the entity to the spouse in the circumstances of GSTR 20003/6.

    19.25 GST and Division 162

    Issue

    If a taxpayer who has elected to use the Division 162 Instalment option makes a large capital purchase such that the annual return results in a net refund of GST, can that capital purchase be ignored in determining the 'current GST lodgment record' and an instalment for the next year?

    If the capital purchase cannot be ignored such that the taxpayer is denied access to the instalment option, does that option become available for the first tax period that commences 12 months after the capital purchase?

    ATO response

    Question 1

    If a taxpayer who has elected to use the Division 162 Instalment option makes a large capital purchase such that the annual return results in a net refund of GST, can that capital purchase be ignored in determining the 'current GST lodgment record' and an instalment for the next year?

    In order to pay GST by instalments, an entity must generally elect on or before 28 October in the financial year to which the election relates.

    However, the Commissioner has discretion to allow an entity eligible to pay GST by instalments to elect on a specified day occurring after 28 October if that entity requests to do so in the approved form. A decision by the Commissioner to refuse this request is a reviewable decision.

    In determining eligibility for paying GST by instalments, the Commissioner assesses the most current information he has on hand, that is the latest lodged GST returns. It should be noted that an entity's annual GST return is due by the time their income tax return is due. If that entity lodges their income tax return through a tax agent, this return is not due until after the date an election to pay GST by instalments must be made (28 October).

    Consequently an entity, while being in a GST net refund position for the previous financial year may still be able to elect to pay GST by instalments in the current financial since the entity has not yet lodged their annual GST return, and hence the Commissioner does not know the entity was in a net refund position. It should be noted that once this return has been lodged, the entity must still pay GST by instalments for the remainder of the financial year. However the entity's notified instalment amount would nil for the quarter's following lodgment of the annual return. This may lead to the entity being liable for a large GST net amount at the end of the instalment tax period.

    Note that this would also mean that the entity would not be eligible to pay GST by instalments in the next financial year. This is because the Commissioner's latest information shows the entity in a GST net refund position, hence making it ineligible to elect to pay GST by instalments. However, if the entity lodges its GST annual return by 28 October the Commissioner's information would updated to show the entity no longer in a net refund position, thus being eligible to pay GST by instalments for that financial year as well.

    Question 2

    If the capital purchase cannot be ignored such that the taxpayer is denied access to the instalment option, does that option become available for the first tax period that commences 12 months after the capital purchase?

    No, a large capital purchase cannot be ignored in determining whether or not the entity is in a net refund position and thus able to elect to pay GST by instalments.

    Since the entity lodged an annual GST return, it must have paid GST by instalments for the previous financial year. Eligibility for paying GST by instalments is assessed on a year by year basis (section 162-30 of the GST Act).

    To be eligible to pay quarterly GST instalments, an entity must:

    • have an annual turnover of $2 million or less,
    • account for GST on a quarterly or annual basis,
    • have lodged a BAS for at least two quarters (or four months if you previously lodged your BAS monthly),
    • have lodged all your previous BAS returns, and
    • not be in an overall GST net refund position in the previous year.

    An entity will be in a net refund position of the sum of its net amounts is less than zero for the 12 months preceding the entity's current tax period. In this situation, the purchase of a large capital acquisition means that the entity is in a net refund position for the 12 months preceding its current tax period. Since the entity is in a net refund position for their last annual GST return, it is not eligible to pay GST by instalments in the next financial year. Assuming the entity is otherwise eligible, it will have to wait until it is no longer in a GST net refund position in the previous year before being eligible to elect to pay GST by instalments.

    19.26 GST and motor vehicles

    Issue

    The ATO's publication a 'Guide to the Goods and Services Tax for Small Business' outlines the following:

    'How does the GST system work?

    GST is paid at each step in the supply chain. GST-registered businesses must include GST in the price of goods and services they supply or sell. If you're registered for GST, you can claim back the GST included in the price of your business purchases as input tax credits.

    Registered businesses collect GST from sales to their customers, and then claim back the GST on business purchases as input tax credits. The cost of GST therefore, flows along the supply chain and is finally included in the price paid by the end consumer.

    Consumers can't claim input tax credits, so while the liability for paying the GST rests with GST-registered businesses and organisations, the economic cost is borne by the end consumer.

    Example: including GST in sales of goods

    Timber merchant sells timber for $110, including $10 GST

    business activity statement

     

    Tax Office

     

    GST on sales

    $10

     

     

    less input tax credit

    $0

     

     

    GST to pay

    $10

    $10 GST paid by timber merchant to Tax Office

    Furniture manufacturer sells table for $220, including $20 GST

    business activity statement

     

     

     

    GST on sales

    $20

     

     

    less input tax credit

    $10

     

     

    GST to pay

    $10

    $10 GST paid by manufacturer to Tax Office

    Retailer sells table for $330, including $30 GST

    business activity statement

     

     

     

    GST on sales

    $30

     

     

    less input tax credit

    $20

     

     

    GST to pay

    $10

    $10 paid by retailer to Tax Office

    Consumer pays $330 (including $30 GST to the retailer)

    $30 total GST paid

    The example on page 2 shows how three businesses, each registered for GST, charge and pay the GST. The timber merchant sells timber to a furniture manufacturer for $110, including $10 GST. The manufacturer uses the timber to make a table, which he sells to a furniture retailer for $220, including $20 GST. The retailer then sells the table to a consumer for $330 including $30 GST.

    The timber merchant pays $10 GST to the Tax Office. The furniture manufacturer, who is registered for GST, is entitled to an input tax credit for the $10 GST, which is included in the price paid to the timber merchant. The manufacturer will offset that $10 against the $20 collected on the sale of the table to the furniture retailer, and pay $10 GST to the Tax Office.

    The furniture retailer, who is registered for GST, is entitled to an input tax credit for the $20 GST included in the price paid to the furniture manufacturer. The retailer will offset that $20 against the $30 GST collected on the sale of the table to the consumer, and pay $10 GST to the Tax Office. The consumer who buys the table pays the GST, as consumers can't register for GST and can't claim input tax credits.'

    In general as stated above 'the cost of GST therefore, flows along the supply chain and is finally included in the price paid by the end consumer'. Although this is ideally what should happen this is not the case in relation to motor vehicles that exceed the 'car limit'.

    Let us assume a car dealer sells a car for $110,000 including GST. The car dealer collects and pays the GST of $10,000 to the ATO. The entity purchasing the car will use the car for 100% business purposes. The entity purchasing the car pays $110,000 however the input tax credits will be limited to 1/11th of the 'car limit' amount of $57,009, ie $5,182.64. In effect the ATO in our view is making a GST windfall gain of $4,817.54.

    In summary the cost of the GST does not always flow along the supply chain for all businesses and there may be cases where it is thus not fully borne by the end private consumer.

    This issue is similar to the agenda item tabled in August 2003 ie issues log item 10.5 Car Limit - Depreciable Value Variance between Registered and Unregistered Entities.

    The ICAA recommend that the GST charged by the dealer on sale should be limited to the 'car limit' amount as well and be subject to a similar limitation as outlined in section 69-10(c) of the GST Act to neutralise this outcome and perceived inequity. Could the ATO please confirm its position on this issue?

    End of example

    ATO response

    GST payable on a taxable supply

    Section 9-70 of the GST Act specifies that the amount of GST on a *taxable supply is 10% of the *value of the taxable supply.

    Under section 9-75 of the GST Act the value of taxable supplies is:

                 10                         
    Price x  ---                        
                 11                        

     

    Price is the sum of the GST-inclusive consideration for the supply.

    However, if the taxable supply is of a *luxury car, the value of the taxable supply is as follows:

                                          10
    Luxury car tax value x  ---
                                          11

    The luxury car tax value has the meaning given by section 5-20 of the A New Tax System (Luxury Car Tax) Act 1999. Under Section 5-20 of the LCT Act, the LCT value is the price of the car excluding any LCT on the supply and any other tax, fee or charge, other than GST and customs duty.

    Example

    Under this legislation, if a car dealer sells a car for $110,000 (not subject to luxury car tax), the value of the taxable supply is $100,000 and GST is $10,000.

    Input tax credit for cars that exceed the car limit

    Under section 69-10 of the GST Act, the maximum input tax credit that can be claimed for a car that exceeds the car limit is 1/11th of the limit. The car limit for 2003-04 is $57,009.

    Example

    If a customer makes a creditable acquisition of a car as a capital asset for $110,000 (not subject to luxury car tax) the maximum input tax credit is 1/11th of $57,009, ie $5,182.64.

    End of example

    ATO position

    The ICAA has suggested that the GST charged by the dealer on the supply of a car that exceeds the car limit should be limited to 1/11th of the car limit, similar to section 69-10 for input tax credits. The ICAA has asked the ATO to confirm its position on this issue.

    Under the legislation outlined above the GST payable is 1/11th of the consideration that the dealer receives for the car. In the example provided that is, 1/11th of $110,000 being $10,000 (or 1/11th of the luxury car tax value if applicable). The GST payable cannot be limited to 1/11th of the car limit.

    19.27 GST treatment of non-resident tour operators

    Issue

    The ATO has announced that its view on the treatment of the on-supply of holiday packages by non-resident tour operators to other foreign suppliers or to overseas travellers has changed. This new view is expressed in Issue 44 of the Tourism and Hospitality Issue log which was updated on 28 November 2003, which refers in turn to ATO ID 2003/1058.

    Can the ATO please provide an update on this matter, covering the following issues?

    a. Will the ATO's new view be applied retrospectively to non-resident tour operators who had no private binding ruling on this issue prior to November 2003, but who may have relied on other material issued by the ATO?

    b. Why was the new view expressed via an issue log update and ATO ID and not as an amendment to GSTR 2003/7?

    c. Will the ATO be taking steps to amend GSTR 2003/7 which is now arguably in conflict with the issue 44 response on this matter?

    d. What activities will the ATO be carrying out to ensure that its new view is being complied with by non-resident foreign tour operators?

    ATO response

    a. The Tax Office's view on supplies by non-resident tour operators applies on a prospective basis from 28 November 2003. This view also applies to any revisions or amendments made on or after 28 November 2003 to activity statements for periods prior to 28 November 2003. This is in line with the principles set out in Taxation Ruling TR 92/20.

    The general rule is that all activity statements lodged, revised or amended after 28 November 2003 regardless of the period to which they relate must comply with the Tax Office's new view in order to avoid making a false or misleading statement.

    The exceptions to this general rule are the initial lodgment of activity statements for the:

    - December 2003 quarter

    • provided that GST payable is attributed on the Australian accommodation component of December 2003 supplies (for which there was a deferral for lodgment until 28 April 2004), and
    End of example

    - November 2003 month

    • no GST payable is attributed for November 2003 supplies, provided the non-resident tour operator had previously lodged activity statements without attributing GST on Australian accommodation supplies.
    End of example

    Any subsequent requests for revisions or amendments of these activity statements (that is, December 2003 quarter and November 2003 month) are expected to comply with the Tax Office's view and will be dealt with on a case-by-case basis.

    b. Prior to the change, Issue 44 dealt with supplies of inbound tour packages by resident tour operators. The decision was that these supplies are partly taxable supplies. Additionally, the Tax Office issued GST private binding rulings to non-resident tour operators. The decision was that supplies by non-resident were supplies of rights that were not connected with Australia and thus not a taxable supply.

    Goods and Services Tax Ruling GSTR 2003/7 (published 9 April 2003) at paragraphs 94 and 95 discusses the supply of hotel accommodation in Australia. Paragraph 96 did note that similar supplies within the tourism industry would depend on the exact nature of transactions undertaken.

    In a Tourism and Hospitality Industry Partnership meeting, the Tax Office recommended to the industry that it seek written advice if it was unsure as to the application of the GST law to their circumstances. After an extensive strategic review and analysis by the Tax Office, it became apparent that the industry took the view that there was no change to the Tax Office's view in relation to the supplies of accommodation in Australia.

    In light of this development, the Tax Office decided to clarify its position in a more proactive manner. Issue 44 had been partly withdrawn by three subsequent public rulings. Therefore, steps needed to be taken to amend Issue 44. An ATO ID - 2003/1058 - reflects the interpretative decision of the Tax Office. Steps also needed to be taken to withdraw prior private binding rulings explicitly. These steps were taken at one point in time (28 November 2003) so that there was a consistent outcome for all taxpayers for tax administration purposes.

    c. No, GSTR 2003/7 will not be amended. The Tax Office has issued GSTD 2004/3 as part of its compliance strategy on 31 March 2004. GSTD 2004/3 follows the view taken in GSTR 2003/7. Issue 44 has been updated to reflect this view.

    d. The Tax Office is undertaking a range of compliance and education activities. Resources have been allocated to verifying information provided by non-resident tour operators in their activity statements. The Tax Office is also working closely with representatives of resident and non-resident tour operators to resolve issues and ensure compliance.

    19.28 Relying on suppliers' private rulings

    Issue

    As retailers in the Australian market, we are faced with making decisions on product classifications for GST purposes on a daily basis. In many instances, the retailer will accept the GST rate applied to the goods by the supplier of those goods. Particularly, where the supplier possesses a private ruling from the ATO in respect of the goods being sold.

    As part of its review activities, the ATO may withdraw a private ruling issued to a supplier, which has the effect of changing a GST-free classification to taxable. In these circumstances, the supplier will not be liable for payment of any back taxes that may be owing as a result of the rate change, due to the fact that the supplier has protection under section 37 of the Taxation Administration Act 1953.

    However, the retailer is not protected by the private ruling as the protection accorded to taxpayers under section 37 only apply to the person to which the ruling has been issued. The concern that we have is that our members may be liable for payment of GST for past supplies in respect of a product which was accepted by the retailer as being GST-free as a result of an ATO ruling, albeit a ruling issued to another party ie the supplier.

    If the ATO policy is to pursue payment of GST from retailers in these circumstances, then we will be forced to advise our members that they should, in such instances, seek a private ruling from the ATO in their own name. You would agree that if this were the outcome, then the ATO would be inundated with ruling requests from retailers and, this is not in the best interests of both taxpayers and the ATO.

    We request that you provide an update of the ATO's policy for dealing with this type of scenario and, advise if the ATO intends to release a practice statement.

    ATO response

    The protection offered by section 37 of the Taxation Administration Act 1953 (TAA) only applies to the particular entity to which the Tax Office issued the private ruling and that relied on that private ruling. Paragraph 37(3)(a) of the TAA provides that :

    'a private ruling applies only to the entity to whom it was given'.

    As the application of the law is clear, the Tax Office does not intend to allow another party to rely on a ruling issued to a supplier. Nor does the Tax Office intend to issue a Practice Statement on this issue.

    However, the Tax Office recognises the need for suppliers and retailers to have certainty in relation to the classification of food and grocery items. To this end, we have developed several products to help provide certainty to suppliers in the food and retail industry.

    In conjunction with the Australian Food and Grocery Council and EAN Australia (a non-profit trade organisation), we have included GST information in the EANnet electronic catalogue system. When this initiative was announced in the August 2002, the Tax Office gave a guarantee that people who rely on it will not be penalised or face retrospective adjustments if changes or errors arise.

    The Tax Office has also published several fact sheets to assist suppliers in the food and retail industry, for example, the GST food guide (publication number NAT 3338-04.2004). This guide provides a comprehensive list of the GST classification of food items. It is a public ruling for the purposes of Section 37 of TAA and therefore provides a person who relies on it the protection offered by section 37.

    This publication, and other information to assist with the classification of goods for the food and retail industries, can be found on our website.

    19.29 WET 2002/2 and the definition of 'mead'

    Issue

    We have a client who is suffering from what appears to be an error in the drafting of the definition of 'mead' in the above ruling.

    The problem

    'Wine' and 'mead' definitions have one element in common, that is that they must be 'pure'. The thrust of the definitions is that wine must be made from grape juice only, and mead must be made from honey only.

    Our client's dilemma is that he has been making mead in the traditional way (as used by the Australian industry) and in accordance with Australian Food Standards. That is, it is based on honey, but, of necessity, includes other substances. Apparently this is necessary, as pure honey will never ferment, and needs other liquids (in our client's case wine), to make mead.

    Private ruling

    Our client has applied for a private ruling on the matter, but at present, the private ruling appears to be on hold. We have been in touch with the members of the Tax Office's WET team who appear to have a much clearer understanding of the problem. It appears that the problem is in the definition of mead in the ruling.

    How many are affected

    If our understanding is correct, all producers of mead in Australia are affected.

    The solution

    The definition of mead in WETR 2002/2 should be amended.

    More details

    Our client has submitted full details to Mr John Gregory of the ATO's WET team.

    ATO response

    A taxpayer requested a ruling on the definition of mead for the purposes of the wine equalisation tax, and what the impact of the addition of spices and juices would be. Considerable research and communication was undertaken by the WET team prior to the private ruling being issued due to the fact that the addition of such materials excluded it from the definition of 'mead' in the legislation, yet they were considered to be traditionally manufactured mead products. This results in these products becoming subject to the Excise tax regime rather than WET.

    The taxpayer was kept informed during the progress of the case and an ATOid has also been completed and is pending for publishing.

    The taxpayers representative contends that there was an error in the drafting of the definition of 'mead' in the ruling WETR 2002/2, but in fact it is the correct interpretation of the definition of mead as stated in the A New Tax System (Wine Equalisation Tax) Act 1999.

    19.30 WET credits

    Issue

    The ATO issued ID 2003/941 which deals with the calculation of wine equalisation tax credits in respect of exported wines. The crux of the ruling is that if the retailer cannot prove the amount of WET that was paid on wine that was exported, then no credit for WET is allowed.

    This ruling has the impact of denying the retailer a credit which in turn will lead to an increase in the price of the wine sold to the customer, as a credit for wines exported will not be available. This may lead to a reduction in exports. The absurdity of this scenario is that a customer will continue to be entitled to a refund claim under the tourist refund scheme, but a retailer will not be entitled to any credit claim where he arranges the export of the wine on behalf of the customer.

    The logic in the ruling would more than likely also apply to wines that are purchased at auction and sold by wholesale, whereby a WET liability will accrue on the sale of the wine, yet a WET credit in respect of the purchase will be denied.

    The ruling justifies the result on the following basis:

    Where wine is purchased from a person not registered for GST (for example wine was purchased at auction from a private individual not registered for GST) it is not possible to accurately estimate the amount of WET borne on the wine. This is because it is difficult to determine the point where WET was paid in the chain of transactions that occurred before the wine was purchased.

    Accordingly, where the wine was purchased from persons not registered for GST the amount of WET must be determined using documentary evidence which shows the actual amount of WET charged on the wine at some point in the chain of transactions. In these circumstances, where documentary evidence of the WET borne cannot be supplied a credit claim will not be allowed.

    Given the nature of buying wines at auction from private individuals, it is impossible to acquire the appropriate evidence that WET was paid. In this regard, the individual would, more than likely, have purchased the wine from a retailer and would have received an invoice. In the unlikely event that the customer kept this invoice it would not show the amount of WET paid by the retailer at the time of acquisition. Notwithstanding this problem, the customer is not likely to retain the invoice let alone provide it to the auctioneer for delivery to the purchaser of his wines. Therefore, the affect is that retailers will never be entitled to claim a credit for WET on the export of the wine.

    Although we concede that it is impossible to prove the amount of WET paid by the customer, we strongly argue that by the very nature of the auction process, the customer would have an amount of WET included in his purchase price of the wine as he would, more than likely, have acquired the wine from a retail outlet and that wine would have been taxed for WET purposes during the supply chain process ie the time of purchase by the retailer, or time of sale at the cellar door.

    In addition to the above, where some older wines are purchased via auction from private individuals ie wines that have not been subjected to WET, these wines would have gone through a taxing point under the now defunct wholesale sales tax system (WST) and, as a result, would have been taxed at 41%.

    Because these wines were held by private collectors at 30 June 2000, they would not have been subject to the special GST credit rules that applied to stock on hand which was held by retailers at that time. As you are aware, retailers were entitled to claim 12/41 of the 41% WST that was included in the purchase price of their stocks of wine. The remaining 29/41 of the 41% was meant to equate to the 29% WET. Therefore, as none of the 41% WET was claimed by the private collectors, it would be fair to say that this type of wine is WET paid wine for the purposes of the GST law. Hence, as a matter of principle, retailers should be able to treat this type of wine as WET paid.

    If this was agreed, then the only issue is one of proof of the quantum of WET included in the price. Given that this cannot be proven, we would suggest, as a matter of equity, that retailers should be entitled to claim a part of the product cost as WET for the purposes of the WET law.

    Currently, retailers are entitled to claim an effective rate of 14.5% of their cost price as an amount of WET in accordance with WETR 2002/2. This is the equivalent to the amount payable as a refund under the tourist refund scheme, which is governed by Regulation 25-5-03 of the A New Tax System (Wine Equalisation Tax) Regulations 2000. However, the Commissioner has the power under Division 17-40(1) of the A New Tax System (Wine Equalisation Tax) Act 1999, to enter in to an agreement with taxpayers in relation to the methodology for claiming WET credits in respect of exported wines. In this regard, a rate of 7.5% would, in our opinion, be fair and reasonable.

    This outcome would represent a compromise which achieves the following:

    • Acceptance by the Commissioner that WET is included in wine exported.
    • A reduction in the amount normally claimable under reg 25-5-03 ie 50%, which makes allowance for the WET that may have been paid on a lower cost some time in the past. This will protect the revenue and ensure that the Commissioner is not paying any more WET credits than what is necessary.
    • Ensures that the wine export market is not impacted.
    • Helps to alleviate the difference that applies to wine exported by a retailer and wine which is exported by a customer under the tourist refund scheme.

    We request that the Commissioner review this issue and consider our solution, which would provide a fairer methodology at no cost to the revenue.

    ATO response

    ATOids 2003/940 and 2003/941 covered the entitlement to a WET credit where wine is purchased from persons not registered for GST and is subsequently exported.

    The credit grounds in the WET legislation provide for a credit of the amount of WET borne on wine that is exported. Where wine is purchased from a person not registered for GST, it is not possible to accurately estimate the amount of WET borne because it is difficult to determine the point where WET was paid in the chain of transactions prior to the purchase.

    The ATOids stated that unless there was documentary evidence to show the actual amount of WET borne on the wine, a credit claim would not be allowed.

    Subsequent to the publication of these interpretive decisions, a submission was made by the Australian Retailers Association requesting that the decisions should be reviewed in the context of section 17-40 of the WET legislation. They proposed that a credit of 7.5% of the purchase price be allowed in the circumstances detailed above. The ATO considered that the proposal was reasonable and has produced ATOids referenced 2004/16 and 2004/30 to reflect this and have been published. ATOids 2003/940 and 2003/941 have been withdrawn.

    19.31 GST and WET

    Issue

    Could the ATO please clarify the following GST and WET issues. Based on paragraph 104 of the WET ruling WETR 2002/2, it appears that supplies to staff and shareholders at discounted prices may not be considered at arm's length and may therefore be subject to GST under Division 72 of the GST Act. Most companies supply goods (and services) to staff at discounted prices where the discount falls short of constituting a fringe benefit. It is of concern to us to suggest that these sales are not at arm's length - see paragraph 104.

    1. Would the ATO please explain the rationale behind its ruling at paragraph 104 of WETR 2002/2 that 'Sales to staff, shareholders and grape growers at discounted prices are considered to be non-arm's length sales?'

    2. Where a retailer makes sales of wine to staff and shareholders at discounted prices are such sales regarded as non-arm's length dealings?

    3. Does Division 72 of the GST Act apply to sales of wine to staff and shareholders at discounted prices? How about similar sales of goods other than wine (and services) at discounted prices?

    ATO response

    Wine Equalisation Tax and non-arm's length sales

    Question 1

    The legislation

    Section 27-10 in the A New Tax System (Wine Equalisation Tax) Act 1999 provides as follows:

    27-10 Alteration of wine tax liability or wine tax credit if affected by non - arm's length transaction

    (1) This section applies to you if:

    (a) you (or your associate) has been a party to a non-arm's length transaction; and

    (b) if the transaction had instead been an arm's length transaction, it would have been the case (or could reasonably be expected to have been the case) that:

    (i) your liability to wine tax on the non-arm's length transaction, or any other transaction, would have been increased; or

    (ii) your entitlement to a wine tax credit in connection with the non-arm's length transaction, or any other transaction, would have been reduced.

    (2) The liability or wine tax credit is taken always to have been the amount that it would have been (or could reasonably be expected to have been) if it had been based on an arm's length transaction instead of on the non-arm's length transaction.

    The Explanatory Memorandum to the Wine Equalisation Tax Bill in paragraph 10.9 states:

    'The parties to a transaction will be required at all times to ensure that wine is sold at an arm's length price. Where the wine is not sold at an arm's length price the law will operate to apply an arm's length price to the sale or other taxable dealing.'

    The intention of the provision is therefore quite clear. The WET liability for an assessable dealing is always the amount it would have been (or could reasonably expected to have been) if it had been based on an arm's length transaction.

    What is a non-arm's length transaction?

    In relation to non-arm's length transactions the courts have held that a transaction is not at arm's length where the parties are not dealing with each other as arm's length parties normally would, with the result that the outcome of their dealing is not a matter of real bargaining (see Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287; Barnsdall v FC of T 88 ATC 4565; 19 ATR 1352; The Trustee for the Estate of the late AW Furse No 5 Will Trust v FC of T 91 ATC4007; 21 ATR1123; Granby Pty Ltd v FC of T 95ATC 4240; (1995) 30 ATR 400; Copperart Pty Ltd v FC of T 93 ATC 4779; (1993) 26 ATR 327; Pontifex Jewellers (Wholesale) Pty Ltd v FC of T (1999) 2000 ACT 4642).

    It should be noted that the body of case law supports the view that a transaction is not necessarily a non-arm's length transaction merely because the parties to the transaction are not at arm's length. However, the fact that the parties are not at arm's length may have some relevance in concluding that the transaction is not at arm's length.

    WET approach

    It is common in the wine industry for wine manufacturers to sell wine to employees, shareholders, and growers at heavily discounted prices. Where this occurs it is our view that the price of the transactions has not been determined as a result of real bargaining and hence the transactions are considered to be non-arm's length. This is supported by the fact that a relationship exists between the parties (although it is accepted that the existence of the relationship does not, of itself, mean the dealings are non-arm's length).

    In these circumstances the WET liability is the amount it would have been (or could reasonably expected to have been) if it had been based on an arm's length transaction.

    Question 2

    From a WET perspective a retailer would be regarded in the same manner as a producer or wholesaler. However, the retailer will only have a liability to WET on a retail sale if the sale is an 'untaxed sale' of wine or the wine was purchased WET-free.

    In normal circumstances a retailer purchases wine at prices which include WET and then does not have a further liability when the wine is sold by retail. This means that the amount of WET paid on wine sold by a retailer from WET-paid stock is the same whether sold at the normal retail price or at a discounted price. Section 27-10 achieves the same position in relation to a producer or wholesaler who chooses to sell wine at discounted prices and the transaction is non-arm's length.

    Question 3

    Division 72 of the GST Act does not apply to sales of wine (or other goods or services) to staff and shareholders unless they are 'associates' of the supplier. For the purposes of GST, 'associate' takes the meaning given by Section 318 of the ITAA 1936. Under that section, staff who are merely employees are not 'associates'. Shareholders are only considered to be 'associates' where they are in a position to 'sufficiently influence' a company or exercise a 'majority voting interest' {see subsection 318(2)}. This means that, in the vast majority of cases where staff or shareholders are entitled to a discount, Division 72 of the GST Act would not be applicable and GST would simply be payable on the actual amount they paid for the supply of the wine (or other goods or services).

    19.32 GSTR 2003/1 GST-free education courses

    Issue

    In general the supply of an education course is GST-free under Section 38-85 of the GST Act. Paragraph (j) of the definition of "education course" in Section 195(1) of the GST Act includes a "professional or trade course". A "professional or trade course" is in general a course leading to a qualification that is an "essential prerequisite". A qualification is an "essential pre-requisite" in relation to the entry to or the commencement of the practice of a particular profession or trade if the qualification is imposed by 'and includes (a) an industrial instrument'.

    Paragraph 50 of GSTR 2003/1 states that an 'industrial instrument means an Australian Law or an award, order, determination or industrial agreement in force under an Australian Law'.

    Bearing this in mind there arises an issue in our view with Example 9 in the GST Ruling. The GST Ruling assumes that because Graeme already holds a heavy vehicle drivers license, for Graeme to obtain a dangerous goods heavy vehicle drivers license, the training would only constitute a course providing additional skills and would not be considered an "essential pre-requisite" in relation to the entry to or the commencement of the practice of a particular profession or trade. However it has been brought to our attention that this is not necessarily the case. It is our understanding that Graeme even though he has the heavy vehicle license cannot drive a dangerous goods heavy vehicle unless he obtains a further "essential prerequisite" ie this new license and that this is a condition set out in an industrial instrument eg an Australian Standard requires this license. If Graeme does not obtain this license he cannot and is not permitted to drive a heavy vehicle carrying these dangerous goods.

    It is thus our view that the conclusion reached in this GST Ruling needs re-consideration in light of this information.

    An additional example

    To illustrate the concern further lets take the example of electricians. The electrician's award outlines nine different grades of electricians of which the "base" electrician is a grade 5 leading all the way up to grade 9. For the electrician to be able to enter that grade and thus undertake that occupation/job there is a pre-requisite in the award that requires the person to undertake an additional course. If the ATO example is correct then each course offered to increase from the base electrician would be treated as a taxable supply and not GST-free.

    The ICAA is also concerned as to how a supplier of education courses will be able to establish whether a supply of an education course to an entity is an "essential pre-requisite" for the entities acquiring the benefit and thus fulfilling the requirements for GST-free status for the purposes of Section 38-85 of the GST Act. For example in the example above what if the initial heavy vehicle license was obtained by an accountant who was interested in driving a truck on weekends for pleasure. How would the supplier be able to establish that this is not an "essential pre-requisite" for a trade for this person? Or do they simply assume it is and thus automatically assume a GST-free status on these transactions. To do otherwise in our view would seem to be creating a huge compliance burden for taxpayers. Could the ATO please clarify its views on this issue?

    The ICAA would also like some additional guidance and examples of what would satisfy the definitions of an order and determination for the purposes of the definition of an "industrial Instrument".

    Further

    In the Joint Professional Bodies submission to the above Ruling the below concerns were raised:

    • Introduction

    The professional bodies welcome the draft goods and services tax ruling and its attempt to clarify the meaning of 'professional or trade course' in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999. However we raise the following concerns that require addressing.

    • Essential prerequisite

    The ATO at paragraph 54 and following would appear to be applying a very narrow interpretation for the term "essential prerequisite". The ATO states that there can only be one professional or trade association at the national level imposing the "essential prerequisite".

    In section 195-1 of the GST Act paragraph (b) states that:

    "If there is no industrial instrument for that profession or trade association but there is a professional or trade association that has uniform national requirements relating to the entry to, or the commencement of the practice of, the profession or trade concerned - by the association; or"

    Section 195-1 of the GST Act does not set any limits to the number of professional associations.

    There are instances where two professional associations can exist in tandem however they offer very different and varied "essential prerequisite" qualifications that lead to specific employment opportunities in a trade area within the profession. Furthermore it is not possible in these instances for only one of these professional or trade associations to impose the "essential prerequisites".

    It is thus recommended that paragraph 54 and following be amended to reflect commercial reality that there may be instances where two or more professional or trade associations could meet the "essential prerequisite" requirements.

    • Entry into a profession or trade

    The issue of what constitutes entry into a trade or profession is unclear in the draft ruling. For example often a person can work in a trade or profession while preparing for or awaiting for the opportunity to undertake the course that is finally required for entry into the profession. For example, in New South Wales a person may work for a firm of solicitors while awaiting a place in the "College of Law" program, which is required to become a Legal Practitioner of the Supreme Court of NSW.

    When is the time that they have entered the profession in question? Was it when they started to work for the firm of solicitors? If so, then they would have already entered the profession and so it would be arguable that the "College of Law" program would not be GST-free. This is obviously not the intention of the provision.

    A clarifying statement explaining that working in the profession while waiting for or undertaking the essential prerequisite course will not effect the operation of Subdivision 38C of A New Tax System (Goods and Services Tax) Act 1999 would be of assistance to taxpayers.

    The ICAA and the TIA have recently had a look at the final version of GSTR Ruling 2003/1 dealing with professional or trade courses which are GST-free. Paragraph 60 of this ruling states the following:

    If more than one professional or trade association, either at national level or for a particular State or Territory, has requirements relating to the entry to, or the commencement of the practice of, the profession or trade concerned, no qualification, set by any of the associations as a requirement for entry or commencement, would be "an essential prerequisite".

    This was also in the draft ruling issued in October 2002 and the Professional Bodies made comments to get this view amended.

    At face value, this interpretation of the meaning of the term "professional or trade course" in the GST Act would appear to mean that none of the courses run by the various accounting bodies which lead to entry into the profession of accounting or commencement of practice would now qualify for GST-free status as a "professional or trade course". This is on the assumption that the relevant "profession" for the purposes of the trade and professional course concession in the GST Act is that of an accountant, rather than that of a "chartered accountant", CPA etc. The definition in section 195-1 does use the term "particular" profession but the way the ATO is interpreting this term is as per paragraphs 65 to 68 of GSTR 2003/1.

    Can the ATO please clarify its position on this issue and why the comments in the joint submission were not reflected in the final Ruling? The ICAA and the TIA are further calling for the recommendations made in the Joint submission to be reflected in the final ruling and for the final ruling to be amended.

    Additional information

    The ICAA are of the view that in some cases the course will constitute an "essential prerequisite" into a particular trade and not merely as the ATO has outlined as "merely recognising additional skills".

    For example in the case of an electrician the award outlines separate courses that need to be undertaken for an electrician to be able to undertake the particular trade.

    The ICAA have attached the award for an electrician and the different types of courses it requires for an electrician or an alarm installer etc to undertake to be able to undertake the trade. These have been highlighted and begin at 2.5.6. In summary there are nine grades of electrical trades and in order to undertake a different electrical related trade the person is required to undertake a specified course outlined in the award.

    The ICAA are of the view that these courses meet the definition of an essential prerequisite for they are required by an industrial instrument. If the course is not undertaken the person cannot enter the respective trade. Therefore they should be GST-free.

    Could the ATO reconsider its response taking the award into account by way of an example?

    ATO response

    Goods and Services Tax Ruling GSTR 2003/1: supplies that are GST-free as professional or trade courses

    In response to questions and issues raised by members of the Tax Practitioners' Industry Partnership (TPIP) in relation to the above ruling, the following advice is provided:

    Question 1:

    Is a course which provides a base electrician (grade 5 qualification) with a grade 6 or above electrician qualification GST-free as a professional or trade course?

    Question 2:

    Is a course which provides a licensed heavy vehicle driver with a license to carry dangerous goods GST-free as a professional or trade course?

    Response to Questions 1 and 2

    Paragraphs 92-94 of GSTR 2003/1 and the example at paragraph 95 deal with specialisations within a particular profession or trade as opposed to separate professions or trades.

    Once you have entered a profession or trade, any additional qualifications gained need to be examined to determine whether they are for entry into a different profession or trade or are merely recognising additional skills.

    The two examples above (heavy vehicle driver and electrician) are both situations where the person has already entered the profession or trade. The qualifications obtained (dangerous goods, above-base level grade electrician), albeit covered by an industrial instrument, are not for entry into the particular profession or trade (heavy vehicle driver, electrician). Therefore, courses which lead to either of these qualifications will not be GST-free as a professional or trade course.

    Only the heavy vehicle license and the base grade electrician qualification are essential prerequisites for entry into the profession or trade of heavy vehicle driver and electrician respectively. Example 9 at paragraph 95 of GSTR 2003/1 deals sufficiently with this scenario.

    It is important to note that although a qualification may be imposed under an industrial instrument, it is not necessarily an essential prerequisite for entry to a particular profession or trade. For example, the NSW Electrical, Electronic and Communications Contracting Industry (State) Award sets the qualification levels for various classifications within that industry for the purposes of remuneration only. The qualifications set out in the Award are not essential prerequisites as they are not legal requirements for entry into, or commencing the practice of, the profession or trade of 'electrician'. Such a requirement is set out in the "NSW Electricity Safety Act 1945."

    Question 3:

    Is a course that leads to a heavy vehicle driver's license GST-free as a professional or trade course if the recipient has no intention of entering, or commencing the practice of, the profession or trade of a heavy vehicle driver?

    Response to Question 3

    If the course meets all the criteria of a professional or trade course, it will be GST-free, regardless of who the supply is being made to and the recipient's underlying intention for undertaking the course. Paragraph 19 of GSTR 2003/1 states:

    The definition of a 'professional or trade course' in section 195-1 requires you to examine the characteristics of the particular course you supply. Your examination does not need to consider the recipients' intention, nor whether the participants actually enter or practise a particular profession or trade.

    Question 4:

    Is the ATO able to provide additional guidance and examples of what would satisfy the definitions of an order and a determination for the purposes of the definition of an 'industrial instrument'?

    Response to Question 4

    The definition of 'industrial instrument' for the purposes of the definition of an 'essential prerequisite' and subsequently the definition of a 'professional or trade course' was taken in its entirety from the Income Tax Assessment Act 1997 (ITAA). Paragraph (b) of the ITAA definition relates principally to allowable work-related deductions based around various amounts received by employees under awards, orders, determinations or industrial agreements, and has little or no practical application to the setting of essential prerequisites for entry into professions or trades.

    The ATO is yet to come across an essential prerequisite that has been documented in an award, order, determination or industrial agreement. This is not to say that one doesn't exist or that one may never appear in the future, hence the retention of the whole definition for the purposes of the definition of a 'professional or trade course'.

    The vast majority of essential prerequisites for entry into professions or trades are set down in Australian laws (as per paragraph (a) of the definition of 'industrial instrument').

    Question 5:

    Why has the ATO stated at paragraph 60 of GSTR 2003/1 that there can only be one professional or trade association imposing an 'essential prerequisite'?

    Question 6:

    How does the ATO's interpretation of 'essential prerequisite' and 'professional or trade course' affect the GST status of courses run by the various accounting bodies for entry into, or commencement of the practice of, the accounting profession?

    Background to Questions 5 and 6

    In the joint Professional Bodies' submission to the draft Ruling, the following comment was made:

    'The ATO at paragraph 54 and following would appear to be applying a very narrow interpretation for the term "essential prerequisite". The ATO states that there can only be one professional or trade association at the national level imposing the "essential prerequisite".

    In section 195-1 of the GST Act paragraph (b) states that:

    "If there is no industrial instrument for that profession or trade association but there is a professional or trade association that has uniform national requirements relating to the entry to, or the commencement of the practice of, the profession or trade concerned - by the association; or…"

    Section 195-1 of the GST Act does not set any limits to the number of professional associations.

    There are instances where two professional associations can exist in tandem however they offer very different and varied "essential prerequisite" qualifications that lead to specific employment opportunities or a trade area within the profession. Furthermore it is not possible in these instances for only one of these professional or trade associations to impose the "essential prerequisites".

    It is thus recommended that paragraph 54 and following be amended to reflect commercial reality that there may be instances where two or more professional or trade associations could meet the "essential prerequisite" requirements.'

    Response to Questions 5 and 6

    The joint Professional Bodies' submission was considered by the ATO in the preparation of the final ruling GSTR 2003/1, but the ATO did not agree with the submission on this point, the practical effect (of more than one association imposing entry requirements) being that persons could enter a particular profession or trade without the qualification imposed by one of a number of associations.

    However, a new footnote was added in paragraph 60 of the final ruling to note that where more than one association imposes entry requirements for specific employment opportunities in different areas within a broader field or industry, the requirements may relate to specialisations. The footnote reads:

    13 However, two associations that, at first, may seem to be imposing qualifications for the same profession or trade, may in fact be representing specialisations that are different professions or trades. Paragraphs 92 to 97 discuss specialisations.

    Consistent with the footnote to paragraph 60 of GSTR 2003/1, whether chartered accountants and certified practising accountants are in a separate profession to that of an 'accountant' - and to each other - is a matter of fact and degree.

    The ATO is currently reviewing GST private rulings - issued prior to the release of GSTR 2003/1 - which considered the definition of a professional or trade course. Where the advice given in a private ruling is inconsistent with the Public Ruling, the ATO will contact the relevant entity.

    Question 7:

    Can the ATO provide a clarifying statement explaining that working in the profession while waiting for or undertaking the essential prerequisite course will not affect the operation of Subdivision 38C of GST Act?

    Background to Question 7

    In the joint Professional Bodies' submission to the draft Ruling, the following comment was made:

    'The issue of what constitutes entry into a trade or profession is unclear in the draft ruling. For example often a person can work in a trade or profession while preparing for or awaiting for the opportunity to undertake the course that is finally required for entry into the profession. For example, in New South Wales a person may work for a firm of solicitors while awaiting a place in the 'College of Law' program, which is required to become a Legal Practitioner of the Supreme Court of NSW.

    When is the time that they have entered the profession in question? Was it when they started to work for the firm of solicitors? If so, then they would have already entered the profession and so it would be arguable that the 'College of Law' program would not be GST-free. This is obviously not the intention of the provision.'

    Response to Question 7

    The ATO recognised the importance of this point made in the joint Professional Bodies' submission, and inserted into the final ruling paragraph 82 which states:

    'In other cases, a person may work in a profession or trade on a supervised basis without a qualification, pending the gaining of a qualification that will enable the person to enter or commence the practice of a profession or trade. A course leading to such a qualification will also be a professional or trade course providing the qualification is an essential prerequisite.'

    19.33 GST and rebates

    Issue

    In its ruling/tax facts Rebates and GST, the ATO has taken the view that promotional rebates and warehousing rebates are supplies which are made by the purchasers (recipients) of goods acquired. That is, they are payments made by a supplier of goods to a recipient which under the terms of the arrangement the acquirer is required to provide services to the supplier (eg advertising, storage etc).

    Question 1

    Is this still the ATO's considered position?

    The importance of the above question is that in negotiating its trade agreements many purchasers are now moving to bundled terms type arrangements. Under the bundled terms arrangements the volume rebate amount has been increased to incorporate any 'former' promotional rebate and early settlement discount amounts, eg the volume rebate has moved from 3% to 9% to reflect the 3% plus the 'former' promotional rebate of 3% and early settlement discount of 3%.

    In line with these bundled terms arrangements, the discount provided is being treated as a reduction in the price of the goods to which the discount has been applied. As a consequence, the discount is also applied to any GST that was charged in relation to the relevant goods thus creating a decreasing GST adjustment.

    Prior to moving to bundled terms the volume rebate and early settlement discount were treated as reductions in price and the promotional rebate was treated as consideration for a taxable supply by the purchaser of promotional services.

    Question 2

    Is the bundling of terms into a total amount labelled as a volume discount sufficient to treat the whole rebate amount as a reduction in price (ie 9% is the reduction in price) or should it be construed that the volume rebate, under bundled terms is a mixed supply? Or put another way, is the essential character of the bundled discount one of the supplying entity granting discounts/rebates together with the provision by the supplying entity of separate consideration for a supply by the purchaser (a promotional rebate component), ie 6% reduction in price due to previous 3% for volume discount and 3% early settlement discount and 3% consideration for promotional services or advertising?

    Alternatively, is the total rebate amount in fact consideration for promotional services supplied by the purchaser and therefore, the total discount/rebate amount granted under bundled terms by the supplying entity consideration for a taxable supply by the purchaser? Where this is the case, the supplying entity would be entitled to claim an input tax credit equal to 1/11th of the total discount/rebate amount. Under this scenario, the total 9% would be consideration for the promotional services or advertising.

    ATO response

    Question 1

    Yes, this fact sheet still contains the ATO's considered position on rebates such as promotional rebates and warehousing rebates for GST purposes.

    Question 2

    The bundling of terms into a total amount under one label is not sufficient to treat the whole rebate amount as a reduction in price or as consideration for a separate supply, where the essential character of the 'bundled discount' is one of the supplying entity granting discounts together with the provision by the supplying entity of separate consideration for a supply by the purchaser. The bundled rebate is not a mixed supply.

    Discussion

    The ATO's view on promotional rebates is set out in the fact sheet, Rebates and GST and Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events. Such rebates are considered not to adjust the price of goods but are consideration for a separate taxable supply of services. The recipient is considered to supply services for consideration equal to the amount of the rebate received.

    The ATO view as set out in GSTR 2000/19 and the fact sheet, distinguishes between volume and payment discounts as a reduction in price leading to an adjustment event, and the promotional rebate being consideration for a taxable supply. The label given to the bundled terms, eg a volume discount does not determine the essential character of the component discounts or rebates. Due to the different nature of each type of discount or rebate a change in label is not sufficient to treat the total bundled components as if they are all a reduction in consideration or all consideration for a separate supply.

    The treatment of the discount or rebate for GST purposes is dictated by the identification of the essential nature or substance of the bundled discount/rebate. In this case the bundled term can be identified as a combination of separate volume discount, early settlement discount and consideration for promotional services or advertising. The relevant GST treatment must be given to each of those separate components. A case by case analysis of the bundled terms must be undertaken to determine the GST treatment of the treatment of the discount or rebate. There may be cases where are the separate components of the bundled terms are the same (that is, adjustment event or consideration for a taxable supply). In other cases the relevant GST treatment for each component may be different and the components will need to be separated so that the applicable GST treatment is given to each of the separate components.

    The bundling cannot be treated as a mixed supply as a combination of a supply and adjustment event is not considered to be a mixed supply.

    19.34 Definition of an asset for GST purposes

    Issue

    Question 1

    Does TR 2002/20 have any application to determining assets under Division 138? It would appear to be a public ruling upon which a taxpayer may rely for GST purposes.

    Previously the ATO has come to the conclusion under Division 138 that in respect of assets that have no market value (where for example they have been wasted or incorporated into other assets) then a market value can be constructed from an accumulation of the various cost components (see issue 6.5 Division 138 and substantive renovations on TPIP issues register).

    TR 2002/20 takes the approach that for income tax purposes (thin capitalisation) an asset can be defined by reference to the Accounting Concept of asset, whether or not this is ultimately correct at law will always be an issue but it seems a preferable and consistent definition for the purposes of Division 138.

    Question 2

    Is there a definition of asset?

    Further information

    There are many instances where, over a period of time, goods are added to or removed from an asset or when services have been performed upon an asset. Therefore there is a need to define what actually is an asset or what constitutes an asset.

    If the ATO proceeds to assess a market value of an asset by adding to its cost base all accumulated expenses, then there will be non-commercial outcomes if the ATO applies its previously expressed valuation methodology.

    The following examples are provided.

    Example 1

    A mining company has certain plant and equipment at a mine site when it ceases business. The equipment cost say $5M and has had various repairs and spare parts added to it over its life. These amount to say $0.5M over a five year life.

    As the mine is uneconomic, the company ceases business and abandons the plant and equipment as its scrap value is zero. In effect the plant and equipment would be written off as an asset; however under the ATO's previous scenario an adjustment would be required at the end of the period. According to the ATO's methodology, an adjustment would be required on $5.5 M.

    Example 2

    A hotel has been owned by an entity for the last 10 years and was purchased prior to 1 July 2000. Since July 2000 there have been a number of repairs including painting on three occasions and a change of floor coverings. The painting and floor coverings costs exceeded $5,000. At least in respect of one of the painting makeovers and floor coverings, the costs have been fully expensed and the things (ie floor coverings, painting) exist no more.

    That is, they have been completely extinguished or wasted.

    Five years later the business ceases and the hotel business is not transferred or carried on further as a hotel, ie the business ceases and the GST registration is cancelled.

    In this example there are a number of wasted assets or refurbishments costs which are now completely defunct or have no economic value.

    Example 3

    A farm was purchased under the farmland provisions, (ie no GST paid) and after purchase extensive fencing of the property was undertaken together with construction of a dam. The farmland cost was $500,000, fencing was $25,000 and dam cost $5,000. Three years elapses and the farmer decides to retire and cease farming activities but decides to remain on the land. The business ceases and GST registration is cancelled.

    Is the adjustment under section 138 calculated on $500,000 + $25,000 + $5,000 or only on $25,000 + $5,000?

    What is the asset for GST purposes and what is the thing?

    Example 4

    A farm was purchased under the farmland provisions, (ie no GST paid) and after purchase extensive fencing of the property was undertaken together with construction of a dam. The farmland cost was $500,000, fencing was $25,000 and dam cost $5,000. Fifteen years elapses and the farmer decides to retire and cease farming activities but decides to remain on the land. The business ceases and GST registration is cancelled.

    Is the adjustment under section 138 calculated on $500,000 + $25,000 + $5,000 or only on $25,000 + $5,000?

    What is the asset for GST purposes and what is the thing?

    End of example

    ATO response

    Question 1

    It is our view that Taxation Ruling TR 2002/20 is limited to the operation of Division 820 of the Income Tax Assessment Act 1997. It therefore does not have any application in determining the value of assets for purposes of Division 138 of the A New Tax System (Goods and Services Tax) Act 1999.

    Reason for decision

    TR 2002/20 deals with the definition of assets and liabilities for the purposes of Division 820. It specifically states that the definition of assets in that ruling is for Division 820 purposes only. For example, paragraph 4 states:

    In the thin capitalisation provisions the term 'assets' is not defined, and accordingly takes its ordinary meaning in law relevant to the context. In this particular context we consider that the term 'assets' for the purposes of Division 820 carries its accounting meaning.

    Paragraph 16 of TR 2002/20 reinforces this where it states that:

    The term 'assets' is not defined in the ITAA 1997. The EM states, at paragraph 1.72, that the term is used in its 'normal, legal meaning', in other words its ordinary meaning in law relevant to this context. … In the context of thin capitalisation it is our view that the appropriate context from which to take definitions is an accounting context, so that the term 'assets' adopts its accounting meaning in all areas of Division 820 where that unqualified term is used.

    Question 2

    The term 'asset' is not defined in the GST legislation. In the absence of a statutory definition of asset for GST purposes, the term takes on its ordinary meaning. This is a well established rule of statutory interpretation. Usually, this means referring to current dictionary definitions. The application of dictionary definitions must, in all circumstances, be guided by popular usage and common knowledge. Other matters to be taken into account when giving asset its ordinary meaning are the legislative context in which the term is used and any comments by judges interpreting statutes that have provisions which incorporate the concept of an asset.

    An entity has an increasing adjustment under Division 138 of the GST Act, where the entity's registration is cancelled and immediately before the cancellation takes effect, its assets include anything in respect of which the entity was, or is, entitled to an input tax credit. The existence of an asset for GST purposes is a matter of fact and not based on any write-off provisions of Income Tax legislation or accounting concepts.

    The entity will not have an adjustment in respect of a thing if there was one or more adjustment periods for the thing acquired and the last of those adjustment periods has ended before the cancellation of registration takes effect.

    What is the thing?

    GST is a transaction based tax. Fundamental to its application is the making of supplies, acquisitions and importations. Section 11-10 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) gives the meaning of acquisition as any form of acquisition whatsoever. An acquisition includes goods or services. Importations relate to goods.

    The word 'thing' is defined in section 195 of the GST Act as 'anything that can be supplied or imported'. The thing referred to in Division 138 is the thing which was supplied to the entity or imported by the entity for which the entity was or is entitled to an input tax credit, and which is included in the assets of the entity immediately before the cancellation of registration takes effect.

    GST inclusive market value

    GST inclusive market value of a thing, or supply or acquisition of a thing as defined in section 195 means the market value of the consideration or thing, without any discount for any amount of GST or luxury car tax payable on the supply.

    'Market value' is not a defined term but an objective test.

    GSTR 2001/6 which is about non-monetary consideration gives some guidance as to what market value represents. At paragraph 141 the ruling states:

    'Market value is regarded as the price that would be negotiated at a specified time between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm's length in an appropriate market…'

    You may determine the GST inclusive market value of the thing by applying a method that produces a reasonable GST inclusive market value. There will be situations where the method will differ according to the particular circumstances.

    Examples of reasonable valuation methods as outlined in GSTR 2001/6 are:

    • the market value of an identical good, service or thing;
    • the market value of a similar good, service or thing;
    • the market value of the supply; or
    • a professional appraisal.

    These valuation method guidelines have also been referred to in other ATO public rulings in the context of valuing supplies.

    Examples

    Example 1

    (Assumption: the entity was or is entitled to input tax credits for its acquisitions).

    In determining an increasing amount, Division 138 will apply to each item of plant and equipment that is included immediately before the cancellation takes effect, in the assets of the entity. However, in applying Division 138 the adjustment may result in a zero amount. This will occur, for example, when the GST inclusive market value of the item of plant and equipment, immediately before the cancellation takes effect is zero. (See above for examples of reasonable methods for determining the GST-inclusive market value.)

    If the repairs and spare parts used over the life of the assets do not exist as an asset at the time of cancellation, there is no increasing adjustment under Division 138 for these acquisitions. Where the spare parts are included in the entity's assets on hand at the cessation of registration, Division 138 will have application in determining an increasing adjustment.

    Example 2

    Division 138 does not apply where assets are no longer in existence. Refurbishment costs such as painting and floor covers that have been replaced will not give rise to an increasing adjustment under Division 138 when the entity's registration is cancelled. If the existing floor covers are included in the entity's assets immediately before the cancellation takes effect there will be an increasing adjustment through the application of Division 138.

    Example 3

    Farm

    There is/was no entitlement to an input tax credit on the acquisition of the farm due to it being a GST-free acquisition. Therefore, there is no increasing adjustment under Division 138 relating to the acquisition of the farm.

    Fencing and dam

    The fencing and dam were included in the assets of the entity immediately before the cancellation of registration takes effect and are separate acquisitions to the acquisition of the farm. The entity had an entitlement to input tax credits on the separate acquisitions of the fencing and the dam. They are separate things for the purposes of calculating an increasing adjustment under Division 138.

    Example 4

    Subsection 138-5(3) provides that the entity will not have an adjustment in respect of a thing if there was one or more adjustment periods, as defined in Subdivision 129-B for the thing acquired and the last of those adjustment periods has ended before the cancellation of registration takes effect.

    Farm

    There is/was no entitlement to an input tax credit on the acquisition of the farm due to it being a GST-free acquisition. Therefore there is no increasing adjustment under Division 138 relating to the acquisition of the farm.

    Fencing and dam

    As the last of the adjustment periods for the acquisitions of fencing and dam ended before the cancellation of the farmer's registration takes effect, there is no increasing adjustment under Division 138.

    The ATO response to TPIP issue 6.5 (Division 138 and substantive renovations), applies to the situation outlined in that issue. The formula provided in this response is a reasonable method to determine the value of the improvement reflected in the value of the property immediately before cessation of registration relevant to those circumstances.

    End of example

    19.35 GST and ETPs

    Issue

    What is the GST liability of an employer who provides goods (eg a motor vehicle) to an employee as, or as part of, a termination payment? Is the answer the same regardless of whether or not the termination payment is an ETP?

    Employers at times give departing employees goods rather than cash in satisfaction of the employee's entitlement to a termination payment.

    For example, an employer may give an employee a motor vehicle with a GST-inclusive market value of $22,000 as part of the employee's termination payment.

    Where the termination payment is an ETP, the statement to the employee will have a gross value of $28,820 ($22,000 x 1.31), the employer's PAYG liability will be $6,820 with the employee receiving an after tax 'payment' valued at $22,000.

    Does the employer have a GST liability on the supply of the motor vehicle?

    Alternatively, if the termination payment does not qualify as an ETP, the statement to the employee will have a gross value of $32,670 ($22,000 x 1,485 - assuming the top marginal rate), the employer's PAYG liability will be $10,670 with the employee receiving an after tax 'payment' of $22,000.

    Does the employer have a GST liability on the supply of the motor vehicle?

    It might be argued that the supply will be a taxable supply by the employer. However, if the supply of the motor vehicle is the provision of a fringe benefit by the employer, the valuation rules in section 9-75(3) will apply.

    I understand that the supply of the motor vehicle is not regarded as the provision of a fringe benefit in either of the circumstances outlined above.

    Therefore, it could be argued that the employer in each case would have a GST liability of $2,000. Technically, that liability should be calculated by reference to the GST-inclusive market value of the services the employer has received from the employee as consideration for the supply. However, in accordance with GSTR 2001/6, that liability can be calculated as 1/11th of the GST-inclusive market value of the motor vehicle supplied by the employer to the employee.

    Alternatively, it might also be argued that the motor vehicle has been supplied to the employee as salary and wages. The employer would have a PAYG (Withholding) obligation but would have no liability for payment of GST on the supply of the motor vehicle. Clearly, the employee is not carrying on an enterprise in connection with the provision of services as an employee. To treat the supply of the motor vehicle to the employee as the payment of salary and wages without any GST liability brings some symmetry to the relative positions of the employer and the employee.

    ATO response

    Questions

    1. Is an employer making a taxable supply when it provides goods (eg a motor vehicle) to an employee as, or as part of, a termination payment?

    2. Is an employer making a taxable supply when it provides goods (eg a motor vehicle) to an employee and that payment is not an eligible termination payment?

    Background

    Eligible termination payments

    An eligible termination payment (ETP), as defined by section 27A of the Income Tax Assessment Act 1936 (ITAA 1936), means, amongst others 'any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer'.

    Subsection 27A(8) of the ITAA 1936 provides that the transfer of property to, or for the benefit of, a person is deemed to be a payment of an amount equal to the value of the property. Therefore, the transfer of property can be an 'eligible termination payment'.

    Fringe benefits

    When an employer provides a car fringe benefit to an employee, the employer is making a supply. The consideration for the supply is the employee's services. Therefore, the employer is making a taxable supply of the motor vehicle (assuming the other requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met). However, the amount of GST payable on the taxable supply is calculated by reference to section 9-75 of the GST Act.

    Where the supply is a fringe benefit, subsection 9-75(3) of the GST Act applies in determining the 'price' of the supply. Subsection 9-75(3) states:

    In working out under subsection (1) the value of a taxable supply made in a tax period, being a supply that is a fringe benefit, the price is taken to be the sum of:

    (a) to the extent that, apart from this subsection, paragraph (a) of the definition of price in subsection (1) would be applicable:

    (i) if the fringe benefit is a car fringe benefit - so much of the amount that would be worked out under that paragraph as represented the recipient's payment made in that period, or

    (ii) if the fringe benefit is a benefit other than a car fringe benefit - so much of the amount that would be worked out under that paragraph as represented the recipients contribution made in that period, and

    (b) to the extent that, apart from this subsection, paragraph (b) of the definition of price in subsection (1) would be applicable:

    (i) if the fringe benefit is a car fringe benefit - so much of the amount that would be worked out under that paragraph as represented the recipient's payment made in that period, or

    (ii) if the fringe benefit is a benefit other than a car fringe benefit - so much of the amount that would be worked out under that paragraph as represented the recipient's contribution made in that period.

    In order to calculate the amount of GST payable on that taxable supply, the price of the supply must be determined. Section 9-75 of the GST Act provides that the price is the amount of consideration (where the consideration is expressed as an amount of money). Subsection 9-75(3) of the GST Act does not change the 'consideration' provided for the supply, it merely alters the price of the supply to equal the amount of the recipient's payment in relation to that supply.

    Therefore, where an employer provides a car fringe benefit, the employer is making a taxable supply to the employee. However, where the employee does not make any recipient's payments, the price of the supply is nil and the amount of GST payable is nil.

    Question 1

    For the purposes of the GST Act, a 'fringe benefit' is defined by section 195-1 of the GST Act to have the meaning:

    'given by section 995-1 of the ITAA 1997 but includes a benefit within the meaning of subsection 136(1) of the Fringe Benefits Assessment Act 1986 that is an exempt benefit for the purposes of that Act'.

    Paragraph 136(1)(k) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) specifically excludes a payment that would be an eligible termination payment (ETP) from the definition of a fringe benefit.

    The supply of a motor vehicle by an employer as part of an ETP is not a fringe benefit within the meaning given by section 995-1 of the ITAA 1997, nor is it an exempt benefit within the meaning of subsection 136(1) of the FBTAA. As a consequence, the supply of the motor vehicle is not a 'fringe benefit' for the purposes of the GST Act. For a supply that is not a fringe benefit within the meaning of the GST Act, subsection 9-75(3) of the GST Act does not apply.

    Consideration

    Paragraph 9-5(a) of the GST Act requires a taxable supply must be 'for consideration'. The term 'consideration' is used both in subsection 27A(8A) of the ITAA 1936 and also in section 9-5 of the GST Act. However, it does not follow that the word must have the same meaning in each. Whilst section 27 of the ITAA 1936 does not define 'consideration', for GST purposes, it is defined by section 9-15 of the GST Act and includes:

    • any payment, or any act or forbearance, in connection with a supply of anything, and
    • any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

    This response reflects the Tax Office view in respect of the meaning of 'consideration' for the purposes of section 9-15 of the GST Act only. It does not reflect the Tax Office view of the meaning of 'consideration' for any other purpose, particularly in regard to subsection 27A(8A) of the ITAA 1936. The Tax Office is in the process of issuing an ATO ID in regard to the meaning of consideration for the purposes of subsection 27A(8A) of the ITAA 1936 which should be released in the near future.

    The Explanatory Memorandum (EM) to the A New Tax System (Goods and Services Tax) Bill 1998 (GST Bill) states:

    Consideration

    3.9 Section 9-15 defines consideration. Consideration for GST is broader than it is for contractual purposes. Consideration for GST is intended to be very broad and includes any:

    • payments, acts, refraining from acting or forbearance that are made for a supply
    • payments, acts, refraining from acting or forbearance that are made in response to a supply
    • payments, acts, refraining from acting or forbearance that are made to induce a supply, and
    • payment for a supply even if paid by a person other than the recipient of the supply.

    As stated in the EM to the GST Bill, the term 'consideration', for the purposes of GST, is intended to be very broad and includes more than a monetary payment.

    When amending the GST Act, the Parliament was of the opinion that 'services provided by an employee would constitute 'consideration' within the broad definition of that term in section 9-15'. The EM to the A New Tax System (Fringe Benefits) Bill 2000 states:

    2.4 … To the extent an employee provides consideration (other than services as an employee) for goods or services provided by an employer, that amount is to be treated as the price of a taxable supply.

    2.6 Consideration given by the recipient, other than the services provided by the employee as an employee, is to be treated as the price of a supply which has not been subject to FBT. GST will therefore be payable on taxable supplies that are fringe benefits and exempt benefits but only if the recipient does give consideration of that kind. The amount of GST will be calculated by reference to the consideration given by the recipient.

    2.9 Ordinarily goods and services provided by an employer to an employee or associate of an employee would be taxable supplies, unless the supplies are input taxed or GST-free. Services provided by an employee would constitute 'consideration' within the broad definition of that term in section 9-15 of the GSTA 1999.

    Even though the A New Tax System (Fringe Benefits) Act 2000 makes amendments to the GST Act in relation to the supply of fringe benefits, the assertion that the services provided by an employee would constitute 'consideration' applies equally to supplies that are not fringe benefits. Goods and Services Tax Ruling, GSTR 2001/3 discusses how GST applies to supplies of fringe benefits. Paragraph 19 of GSTR 2001/3 articulates the view that the consideration for the supply of a fringe benefit is the services provided by the employee and states that the 'services of an employee can be consideration for the supply of a fringe benefit to that employee'.

    Therefore, for the purposes of the GST Act, the employer is making a taxable supply when it provides a motor vehicle to a former employee as part payment of an eligible termination payment. The consideration for the supply (as it is with the supply of a fringe benefit) is the employee's services. The price of the supply (when determining the GST payable), when the consideration is not expressed as an amount of money, is the market value of the consideration (services) because subsection 9-75(3) of the GST Act does not apply.

    Goods and Services Tax Ruling GSTR 2001/6 provides guidance when determining the price of a supply where the consideration is not expressed as an amount of money. Paragraph 151 of GSTR 2001/6 states:

    Where the consideration is difficult to value (for example, an intangible) and where the market value of the supply is readily ascertainable, you may determine the market value of the consideration by reference to the market value of the supply. Using this method, the market value of the non-monetary consideration will be determined by reference to the market value of the supply. However, if there is any monetary consideration provided in addition to any non-monetary consideration in relation to that supply, you need to make an appropriate adjustment.

    Therefore, the supply of a motor vehicle as part of an ETP is a taxable supply made by the employer. The GST payable on the supply may be determined by reference to the market value of the supply.

    Question 2

    The second question raises the issue of whether the response is the same if the payment is not an ETP. If the supply of the motor vehicle is not an ETP, then it will presumably be a fringe benefit. The supply will be a taxable supply and the consideration for the supply will still be the employee's services. However, as the supply is a fringe benefit, subsection 9-75(3) of the GST act will apply to reduce the 'price' on which the GST is calculated, to the amount of the recipient's payment.

    Therefore, where the employee does not make any recipient's payments, the price of the taxable supply is nil and the GST payable is also nil where the supply of the motor vehicle is a fringe benefit.

      Last modified: 22 May 2014QC 28063