Show download pdf controls
  • Issue 4 Transitional

    4.1 How widely will the refund entitlement under section 16 of the Transition Act be applied?

    The refund entitlement under section 16 is dealt with in GST ruling GSTR 2000/8, which deals with the special credit for sales tax paid on stock. Paragraphs 8-17, reproduced below, provide for its application. Further explanation of these aspects appears at paragraphs 34-81 of the ruling [not reproduced].

    '8. You are entitled to the special credit if you are registered as at 1 July 2000 and you have on hand, goods you have acquired or imported that are held for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business.

    9. Goods that you hold for disposal under hire purchase agreements are held for purposes of sale or exchange (see paragraph 32 below). However, goods that you hold for lease are not eligible for the special credit because they are not held for purposes of sale or exchange. If you hold stocks of goods that are either for sale or for lease, you are only entitled to the special credit for that part of your stock that you reasonably expect will be sold (see paragraph 33 below).

    10. If you are a tradesperson, repairer or a similar service provider, you may hold materials and spare parts for supply as an essential part of performing your services. When the services are performed, the goods will be disposed of and property in them will pass to your customer. Goods that come within the meaning of trading stock for the purposes of the Income Tax Assessment Act 1997 (the ITAA 1997) are held for sale or exchange. If you hold them at the start of 1 July 2000, and you satisfy the other criteria explained in this ruling, you are entitled to the special credit (see paragraphs 34-37 below).

    11. If you are a builder constructing a building or civil engineering work on land owned by another person, you may hold goods with the intention of permanently incorporating them in or affixing them on the site of the building or work. Provided you own them (that is, they have not become the property of the person with whom you have contracted), these goods are held for the purposes of sale or exchange until they are permanently incorporated or affixed. If you hold them at the start of 1 July 2000, and you satisfy the other criteria explained in this ruling, you are entitled to the special credit (see paragraphs 38-40 below).

    12. If you are a builder constructing on your own land, goods that you hold with the intention of permanently incorporating in or affixing on the site of the building or civil engineering work, are held for sale or exchange where the real property will be sold by you. If you hold them at the start of 1 July 2000, and you satisfy the other criteria explained in this ruling, you are entitled to the special credit (see paragraphs 38-40 below).

    13. You are entitled to claim the special credit on alcoholic beverages listed in subsection 15A(1) of the Sales Tax (Exemptions and Classifications) Act 1992 (the ST(E&A) Act) that have not been opened. GST ruling GSTR 2000/6 provides information on special credits for alcoholic beverages. You are entitled to the special credit for low alcoholic wine, cider, mead, perry, sake or similar fermented beverages under this ruling (see paragraphs 77-78 below).

    14. However, the special credit does not apply to second-hand goods , other than if you imported second-hand goods and:
    nobody could quote under the Sales Tax Assessment Act 1992 for their importation; and
    you did not hold them prior to 1 July 2000 for a purpose other than sale or exchange.

    15. Second-hand goods are those goods that are not new or have been previously used. They do not have to be previously owned. Demonstration goods and used plant and equipment that are held for purposes of sale or exchange are second-hand and are not eligible for the special credit (see paragraphs 57-76 below).

    16. Consumable goods (for example, office stationery or cleaning rags) by their very nature are not held for purposes of sale or exchange and are not stock on hand. They are not eligible for the special credit (see paragraph 41-42 below).

    17. Goods held for sale under a retention of title clause, under lay-by terms and as returned goods are eligible for the special credit. However, goods held under consignment or similar arrangements are not eligible for the special credit (see paragraphs 43-55 below)'.

    4.2 Will stock on hand for use in what might have been 'applications to own use' because of paragraph (b) of the definition in the Sales Tax Assessment Act 1992 qualify for a refund?

    The explanation section of GST ruling GSTR 2000/8 comments as follows in this regard:

    36. If you are a tradesperson, repairer or similar service provider, goods held by you (for example, materials or spare parts) are stock on hand for the purposes of section 16 of the Transition Act where they are:

    (a) to be supplied in the course of, and as an essential part of performing the services; and
    (b) separately identifiable things which retain their character or nature before and after the services are provided, that is, they are not used up or significantly changed in performing the services; and
    (c) disposed of under a contract in which a separate charge is made for the materials and spare parts supplied; and
    (d) disposed of, that is, property in them passes to the customer.

    37. For both income tax and GST purposes, these requirements:

    (a) include as trading stock, for example, oil and grease held by a motor mechanic for supply in the ordinary course of business of maintaining or servicing motor vehicles; and
    (b) exclude from trading stock, for example, paint held by an artist (see paragraph 15 taxation ruling TR 98/8), paint held by a panel beater or materials used by a tyre repairer to retread tyres.

    4.3 What is the meaning of 'review opportunity' for the purposes of section 13 of the GST Transition Act?

    A "review opportunity" as defined in section 13 GST Transition Act is an opportunity that arises under the agreement for the supplier:

    to change the consideration directly or indirectly because of the imposition of GST; or
    (b) to conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration; or
    (c) to conduct, before 1 July 2000, a general review, renegotiation or alteration of the consideration that takes account of the imposition of the GST.

    Generally, a review opportunity will arise because the parties to the agreement include a clause that allows for a change in the consideration to take into account a tax in the nature of a goods and services tax. Alternatively, they may have included a clause that allows for a general or market review of the consideration after 1 July 2000, or to a review that allows for the GST to be included in the consideration.

    4.4 In section 13 of the Transition Act, it specifies that a review opportunity will occur for an agreement where the supplier can 'change the consideration directly or indirectly...' What is the meaning of 'indirectly' in this context?

    GST ruling GSTR 2000/16 deals with when a "review opportunity" will arise for the purposes of section 13 of the GST Transition Act. Paragraphs 134 - 143 of GSTR 2000/16 deal with 'change the consideration directly or indirectly because of the imposition of GST' as follows:

    Paragraph 13(5)(a): 'change the consideration directly or indirectly because of the imposition of GST'

    134 An opportunity for the supplier 'to change the consideration directly or indirectly because of the imposition of GST' will be a review opportunity under paragraph 13(5)(a).

    135 A change to only a part of the consideration because of the imposition of GST will not come within paragraph 13(5)(a) if it is merely incidental to the total consideration.

    Example

    136 Annette, a consultant, agreed to supply specified consultancy services to Lawrie under an agreement which satisfies subsection 13(1). The consideration is $500 per day plus $1 per page faxed to Lawrie. Under the agreement Annette can unilaterally make any reasonable change to the amount charged per page. This is an opportunity to change part of the consideration for the supply because of the imposition of GST. However, the consideration is merely incidental to the total consideration for the supply and will not give rise to a review opportunity under paragraph 13(5)(a).

    137 If the agreement provides for a change in the consideration as a result of the existence of certain circumstances, and the imposition of GST is the predominant cause of that change, this will be an opportunity to change the consideration 'directly or indirectly because of the imposition of GST'. The change must be because of the imposition of GST on the supply identified in the agreement. There will not be a review opportunity if the change is because of the imposition of GST on another supply. See also paragraphs 178 to 180 of this ruling.

    End of example

     

    Example

    138 Liz, a real estate agent, enters into a property management agreement with Tom to manage the leasing of Tom's commercial building. The agreement meets the requirements of section 13. The consideration for Liz's supply is 7.5% of the rent received for the building. From 1 July 2000 the rent is increased to take account of the GST payable on the supply of the premises.

    139 The change in the consideration for the supply of the property management services is not because of the imposition of GST on that supply. It is because of the imposition of GST on the supply under the lease of the commercial building. Therefore it does not give rise to a review opportunity under paragraph 13(5)(a).

    140 'Indirectly' in paragraph 13(5)(a) does not mean any change, however remote. In order for an opportunity to be a review opportunity under paragraph 13(5)(a), there should be a link between the imposition of GST on the supply identified in the agreement and the change in the consideration.

    141 The change would need to be predominantly due to GST and not a range of factors. For example, a CPI increase does not satisfy paragraph 13(5)(a) because the increase may be the result of a combination of a range of factors, and not predominantly because of the imposition of GST on the particular supply. An example of an indirect change in the consideration is where the supply, rather than the consideration, is adjusted to take into account the imposition of GST.

    End of example

     

    Example

    142 Chalk has an agreement to provide 500kg of widgets a month to Cheese for three years. Cheese pays Chalk $1,000 per month. The agreement provides that Chalk can reduce the amount of widgets it supplies for the same consideration if and when a GST is introduced.

    143 This is a review opportunity because Chalk has an opportunity to change the consideration indirectly because of the imposition of GST, by changing the amount of widgets it supplies to Cheese.

    End of example

    4.5 In the context of s.13, what will constitute a 'written agreement?' Where an agreement is entered into by a particular date but there is a reduction in what is supplied under the agreement, will the Tax Office accept that the same agreement is still in place albeit for a different amount?

    What is the situation where instead of reduction in what is supplied under the agreement there is an increase in what is supplied under the contract? Does the previous agreement still continue in relation to the original amount to be supplied? Is there a new agreement entered into only in relation to the additional amount supplied?

    Ruling GSTR 2000/16 sets out which agreements will satisfy section 13 of the Transition Act. In particular paragraphs 20-26 deal with written agreements, although paragraphs 6-13 and 36-56 may contain relevant information depending on the particular aspect of the question.

    Written agreement made before the relevant date

    The agreement must be a written agreement. For the purposes of section 13, an agreement will be considered to be a written agreement if all the essential terms of the agreement are in writing. For this purpose, the agreement must at least specifically identify the supply and identify the final consideration in money, or a way of working out the consideration in money, for the supply.

    In the context of section 13, we consider that a written agreement is required for the purpose of ensuring that written evidence exists before the relevant date that the supplier was bound to make a specified supply for an identified consideration. Section 13 will not just apply to contracts executed by all parties before the relevant date. If the parties can demonstrate that they had a binding agreement that identified the supply, the consideration, and other essential terms and those elements of the agreement are evidenced in a written form, the requirement for a written agreement will be satisfied. It must be clear from that writing or other supporting writing that there was an agreement before the relevant date.

    Written confirmation, before the relevant date, of the oral acceptance of a written offer is considered to be a written agreement for section 13 purposes, provided the documents contain the necessary details of the supply and the consideration. For this purpose, correspondence between the parties and receipts given by one party which can only be consistent with the existence of the agreement may be sufficient written evidence to prove the oral acceptance. We interpret the written requirement in this way because it best accords with the policy which is that there should be sufficient written evidence created before the relevant date to prove the existence of the agreement.

    Example

    Vlad called for tenders, to be provided in a standard document, to carry out detailed services over a period of four years. The document specified that the work would be awarded verbally and on award the terms of the tender document would form the contract terms. Joe submits a tender to Vlad. The document specifically identified the supply Joe would make and specified the consideration in money. On 1 January 1999, the day after the tender period closed, Vlad telephoned Joe and awarded him the work. Joe started work immediately. On 30 January 1999 Joe sent Vlad a claim for payment for services completed. Vlad sent Joe a letter referring to Joe's claim enclosing a cheque as payment for the services on 15 February 1999.

    Even though Joe and Vlad did not have an executed contract before the relevant date there was a written agreement for the purposes of section 13. This is because the essential terms of the agreement were contained in Joe's tender documents, acceptance of which was evidenced by the claim for payment, and all documents were created before the relevant date. Joe was bound before the relevant date to make a specified supply and has written evidence, created before the relevant date, of the agreement with Vlad.

    End of example

     

    Example

    On 1 July 1999, Ian and Sally orally agreed that Ian would lease commercial premises to Sally for a period of three years for an annual rental to be paid monthly in advance. They agree that the lease is to start immediately. Sally pays Ian one month of rent in advance and begins occupancy of the premises. On 2 July 1999 Ian sends Sally a letter enclosing a lease agreement for her to sign and a receipt for the first month's rent. After the relevant date, on 1 October 1999, Ian receives the signed written lease agreement from Sally, signs the agreement and sends her a copy.

    Section 13 will apply because there was evidence of the agreement in writing before the relevant date. Therefore, the supply made by Ian under the agreement will be GST-free under section 13 until the earlier of a review opportunity or the end of the lease period on 1 July 2002.

    End of example

    Variation of an agreement

    The question of a variation to the agreement is dealt with at paragraphs 68-80 of GSTR2000/16.

    As a general proposition any variation to an essential term of the agreement on or after the relevant date means that a new agreement would be created for the purposes of s13 of the Transition Act and the GST-free period otherwise available would come to an end.

    Alternatively, the parties may enter a separate agreement for any increase in the original amount to be supplied. This separate agreement, if made after the relevant date, would be subject to GST. However, the original agreement for the original supply would retain any benefit granted by s13.

    Generally, a variation on or after the relevant date to:

    • the supply;
    • the consideration (or the way of working out the consideration, for example a formula); or
    • other essential terms,
    • will mean that, for the purposes of section 13, there is a new agreement and section 13 ceases to apply. This should be contrasted with a change or review of the consideration that was provided for under the agreement (rather than by a variation) which will result in section 13 ceasing to apply only if the change or review constitutes a review opportunity. (See paragraphs 94 to 184 of this ruling.)

    Where both parties agree that a supply identified in an agreement to which section 13 applies will be subject to GST, it is open to them to do this by entering into a new agreement or varying an existing agreement to achieve this result. Section 13 will cease to apply when the variation is made because this will result in a new agreement.

    If a supplier is required to make variations to the specifications of a supply, under an agreement which contemplates that the specifications of the supply can be varied, section 13 will still apply provided the variation does not alter the essential character of the supply. Agreements which contemplate that the specifications of a supply can be varied are commonly used in the construction industry. Whether the essential character is altered in a particular case will be a question of fact and degree. The essential character of the identified supply is determined by reference to the specifications of the supply identified in the original agreement.

    In addition, section 13 will still apply where such a variation to the supply results in a variation to the consideration in accordance with the terms of the agreement. However, if a review opportunity arises under the agreement for the supplier as a result of the variation, the supply would cease to be GST-free.

    A variation to the supply, such that the essential character of the supply is different to that set out in the original agreement will, if this occurs on or after the relevant date, result in section 13 not applying to the varied agreement.

    Example

    On 1 June 1999 Bruce made an agreement with Kathleen that satisfies subsection 13(1). Under the agreement Bruce is to construct commercial premises to the specifications set out in the agreement. The agreement contemplates that variations to the supply can be made and provides for how the consideration is to be changed to reflect the variations.

    On 1 May 2000 Kathleen told Bruce to install several extra light fittings in the showroom. The schedule to the agreement stipulates an agreed rate per fitting for extra light fittings. As the essential character of the supply did not change, section 13 can continue to apply to the supply under the varied agreement.

    On 1 June 2000 Kathleen decided that she wanted a different type of floor covering. In accordance with the schedule to the agreement the type and price of the new floor covering was as agreed by the parties. As the essential character of the supply did not change, section 13 can continue to apply to the supply under the varied agreement.

    End of example

     

    Example

    Assume in the above Example that on 1 September 1999, before construction commenced, Kathleen had decided that she wanted a different design for the premises and had new plans drawn and approved by the local authority, and Bruce had agreed to build according to the new plans. The variation would have resulted in section 13 ceasing to apply to the agreement. In this case, notwithstanding that the agreement was still for the provision of commercial premises, the specifications of the varied supply indicate that the essential character of the supply, as specified in the original agreement, has changed. These changes are considered to have created a new agreement for the purposes of section 13.

    A variation to an agreement that changes the consideration at some time in the future will result in section 13 ceasing to apply from the date of the variation rather than ceasing to apply from the time the changed consideration takes effect.

    Example

    Alana has an agreement to lease premises to Bob until 31 December 2007. The agreement satisfies subsection 13(1). The parties agree on 1 June 2000 to vary the agreement so that the consideration payable by the recipient is increased by 10% from 1 July 2005.

    As this is a variation of the consideration identified in the agreement after the relevant date, section 13 ceases to apply to the supply made under the agreement from the date of the variation, and not from 1 July 2005.

    However, if the parties enter into a separate agreement to provide for the additional consideration from 1 July 2005, rather than varying the original agreement, section 13 would continue to apply to the supply under the original agreement.

    End of example

    4.7 What is the current position regarding lay-by sales agreements that span 1 July 2000?

    The rule for working out whether a supply of goods under a lay-by sale agreement is subject to GST under the GST Transition Act is the same as for any other supply of goods. A supply of goods is subject to GST:

    • if the goods are removed on or after 1 July 2000, or
    • if the goods are not to be removed, if the goods are made available to the purchaser on or after 1 July 2000.

    In response to comments received from industry representatives, the Commissioner made a determination on 26 May 2000 to vary the application of the basic attribution rules for supplies and acquisitions under lay-by sale agreements.

    In this regard the term 'lay-by sale agreement' refers to an agreement under which goods are agreed to be sold on terms that the purchase price of the goods is to be paid by instalments and the goods will not be delivered to, or available for collection by, the purchaser until the purchase price is paid in full.

    The determination applies only if you account for GST on a basis other than cash. It varies the basic attribution rules to provide that:

    • The GST payable by you on a taxable supply of goods that you make under a lay-by sale agreement is attributable to the tax period in which the final instalment of consideration is received, and
    • The input tax credit to which you are entitled for a creditable acquisition of goods that you make under a lay-by sale agreement is attributable to the tax period in which you provide the final instalment of consideration.

    For a taxpayer who accounts for GST on a cash basis (and is entitled to do so) the GST or input tax credit on a lay-by sale continues to be attributable to the tax periods in which relevant payments are made.

    The determination does not modify the 'time of supply' rules in the GST Transition Act. Under that Act, a supply or acquisition of goods is made on or after 1 July 2000 if the goods are removed or made available to the purchaser on or after 1 July 2000.

    For a supply or acquisition of goods made under a lay-by sale agreement, the goods are considered to be removed or made available to the purchaser when the final payment is made by the purchaser under the lay-by sale agreement and the goods cease to be trading stock of the supplier.

    The application of the attribution rules to lay-by sales is explained fully in goods and services tax ruling GSTR 2000/12, which appends the relevant determination.

    4.8 There is a ruling on the operation of s.19 of the Transition Act re valuing WIP of head contractors in the construction industry. Is this a re-release of the bulletin on the same subject released last year? If so, are there any significant changes to this earlier document?

    We issued GSTR 2000/14 on 8 June 2000. This ruling deals with the transitional valuation of work-in-progress for head contractors in the building or civil engineering industries. As well as replacing the draft ruling GSTR 2000/D3, this ruling replaces the earlier bulletin GSTB 1999/2 on the same subject.

    The ruling largely updates the bulletin, focusing on valuation methodologies for work in progress for head contractors in the construction and civil engineering fields (section 19 of the Transition Act). However, it adds flexibility by providing an extra valuation methodology, which in particular should assist residential house builders. It also slightly expands the list of recognised persons who can conduct an independent valuation.

    The ruling appends the Commissioner's specification as to how work in progress is to be valued for the purposes of section 19 of the GST Transition Act. Three basis options are now available, being:

    Option A - total of approved progress claims;
    Option B - uniform increase between approved progress claims; and
    Option C - independent valuation by a recognised person.

    In relation to option C, a recognised person is a person who is a member of:

    • the Australian Institute of Quantity Surveyors
    • the Royal Australian Institute of Architects
    • the Australian Property Institute (as a Certified Practising Valuer)
    • the Institution of Engineers Australia (Civil or Structural College)
    • the Association of Consulting Engineers Australia
    • the Institution of Surveyors Australia
    • the Australian Institute of Building

    or a person who is registered as a quantity surveyor, architect, valuer, civil engineer, or surveyor under a State or Territory law.

    4.9 Does a review opportunity mean that the entire contract is a reviewable agreement?

    There are some cases where an agreement will allow for the review of one element of the consideration. For example, a rental agreement may have a base rent component and a component based on the turnover. The rental agreement may only have a review opportunity in relation to the base rent, but not the turnover component.

    The following are relevant paragraphs from GST ruling GSTR 2000/16 which deals with the application of section 13 to existing agreements.

    135 A change to only a part of the consideration because of the imposition of GST will not come within paragraph 13(5)(a) if it is merely incidental to the total consideration.

    152 A 'general review, renegotiation or alteration of the consideration' does not need to enable the supplier to review the total consideration. It is sufficient if the supplier can review most of the value of the consideration.

    On this basis, if the review opportunity which arises in respect of the base rent is a general review and is for most of the consideration identified in the agreement, the supply identified in the agreement will cease to be GST-free under section 13.

    While it will depend on the terms of the agreement, in general a contract will be for one supply rather than a number of supplies. A supply by way of a lease will generally be for one supply. Subsection 9-10(2)(h) GST Act provides that a supply is also any combination of 2 or more supplies.

    Paragraphs 147-154 of GSTR 2000/16 deal with 'general review, renegotiation or alteration of the consideration' as follows:
    Paragraphs 13(5)(b) & 13(5)(c): 'general review, renegotiation or alteration of the consideration...'

    147 Whether an opportunity 'to conduct a general review, renegotiation or alteration of the consideration' is a review opportunity will depend on whether that opportunity arises before 1 July 2000 or on or after that date. Where such an opportunity arises on or after 1 July 2000, it will constitute a review opportunity. Where the opportunity arises before 1 July 2000, it will only be a review opportunity if the imposition of GST can be taken into account.

    148 Whether a general review gives an opportunity to take GST into account will depend on the terms of the agreement and, where the consideration is set by a valuer, the instructions given by the supplier to the valuer and the valuer's guidelines. Where the agreement does give the supplier an opportunity to take GST into account in conducting the general review, renegotiation or alteration, a failure to do so will not prevent the opportunity being a review opportunity. For the circumstances in which a market review before 1 July 2000 will give rise to a review opportunity see paragraphs 181 and 183 of this ruling.

    149 An opportunity to make a fixed increase to the consideration, either by a dollar or percentage amount or based on an economic indicator (for example, the CPI) is not an opportunity to conduct a 'general review, renegotiation or alteration of the consideration'. However it will be a review opportunity if the increase is for purpose of taking account of the imposition of GST.

    Example

    150 Alan, an athlete, enters into a sponsorship agreement that satisfies subsection 13(1) with Sponsor Ltd. The agreement provides for monthly payments of $1,000. In the event that Alan wins an Olympic gold medal the agreement requires the monthly payment to increase to $5,000 per month for each medal.

    151 The review of the consideration is not a 'general review, renegotiation or alteration of the consideration'. Therefore a review opportunity will not arise if Alan wins a gold medal.

    152 In paragraphs 13(5)(b) and 13(5)(c) the word 'general' in the phrase 'general review, renegotiation or alteration' is considered to qualify all three terms, ie a renegotiation or alteration will only satisfy paragraphs 13(5)(b) and 13(5)(c) if it is a general renegotiation or a general alteration. A 'general review, renegotiation or alteration of the consideration' does not need to enable the supplier to review the total consideration. It is sufficient if the supplier can review most of the value of the consideration.

    153 In Case M583 the New Zealand Taxation Review Authority ('TRA') considered whether an agreement to lease which provided the landlord with a right to review the rent on a specified day during the lease period and on renewal could be described as a 'general review' under the New Zealand legislation.

    154 The TRA found that the rent was to be reviewed, in the sense that it was to be renegotiated, within certain limits. It also found that the review could be described as 'a general review of the consideration in money' because it was a review of most or nearly all the consideration for the supply under the lease. It was stated: 'A 'general review' means ... a review generally, rather than of a specific part or parts of the consideration payable under the lease. A 'general' review is not the same as a 'total' review of all the consideration, nor is it in certain circumstances the same as a 'partial' review of some of the consideration.'4 The TRA considered that a review of a minor component of the consideration should be classified as a 'special review'.

    End of example

    4.10 Lease and sales tax

    There will be instances where standard or novated leases were entered into prior to 1 July 2000. Depending on the dates that these contracts were entered into and the application of the transitional provisions, there will be cases where some of these lease payments will be subject to GST.

    In addition to the GST, the employee or entity would also be liable to continue to pay the embedded sales tax.

    For example: an entity enters into a motor vehicle lease after 2 December 1998. The contract is reviewable and the recipient is not entitled to full input tax credits because they are not an "enterprise". Thus the lease payments would be subject to GST.

    Is there any mechanism for the entity to claim back the embedded sales tax? If not, what is the ATO's view on introducing a mechanism for the sales tax to be claimed back.

    Section 16 of the GST Transition Act provides a mechanism to allow a credit of the sales tax embedded in the price of goods held for sale or exchange at the start of 1 July 2000. This provision does not apply to goods where sales tax was paid but which are leased on or after 1 July 2000 (because the leased goods are not held for sale or exchange). The law does not provide for a credit in the circumstances described in your example, as the motor vehicle was not held for sale or exchange as at 1 July 2000. The issue of any change to the law would be a matter for Government.

    4.11 Trailer and ITC entitlements

    Their client, who is registered for GST, purchased a new trailer (it is called a float in the industry) for their excavator. The trailer is used in the business to transport the excavator from site to site.

    Our member (the client's accountant) has been told by an officer of the ATO that an input tax credit cannot be claimed in respect of the new trailer because of s.20 GST Transition Act. In particular the ATO officer says paragraph 20(1)(b) applies to deny the ITC claim.

    Our member has stated to the ATO officer that paragraph 20(1)(b) only refers to a "detachable trailer designed to be towed by a prime mover of a kind prescribed in the regulations". Trailers prescribed by the regulations are "any kind of detachable trailer designed to be towed by a prime mover (except a kind of detachable trailer designed to be towed by a car and commonly used for private or domestic purposes)". The trailer in point is not "designed to be towed by a prime mover". It is fact towed by a normal gravel truck.

    Prime movers have a specially designed towing connection mechanism for the trailers/rigs they tow. It is known in the industry as a "fifth wheel". It is a large metal plate. The trailer/rig the prime mover tows is also fitted with a special mechanism that attaches to this "fifth wheel". In this case the trailer for the excavator has a normal "ball" connection that you find on cars, caravans, horse floats etc. In my view the trailer in question is not designed to be towed by a prime mover and therefore does not come within paragraph 20(1)(b). In fact it could not physically be towed by a prime mover because it does not have the right connection mechanism.

    The problem arises because the regulations specify that the only prescribed trailers are those designed to be towed by a prime mover and then provides an exception being those designed to be towed by a car and commonly used for a private or domestic purpose. The ATO officer concerned has indicated that this means only those trailers towed by cars are not caught. He is interpreting the section to mean all trailers towed by trucks are caught and therefore no ITC is allowed. He is effectively interpreting prime mover to mean all trucks.

    Regulation 6 is confusing. Why include the exception? It adds nothing because if a trailer is designed to be towed by a car then it is not designed to be towed by a prime mover. Maybe it was done to make perfectly clear that box trailers, horse floats and caravans are not caught under s.20 under any circumstances.

    Is the interpretation being applied by the ATO officer in the case mentioned the official ATO view? The wording of s.20 (and regulation 6) seems quite clear to me, and it only applies to those trailers designed to be towed by a prime mover, that is with the "fifth wheel" connection mechanism and not to trailers which attach to a "ball" on cars and trucks. This is supported by the explanatory memorandum to s.20 which says s.20 applies to "detachable trailers for heavy prime movers such as semi trailers".

    Could the Tax Office please provide guidance as to what trailers it considers are caught by s.20 GST Transition Act. In particular whether a trailer that has a normal "ball" connection mechanism so that it could be towed by a car or truck is caught by s.20. What does the ATO consider to be a prime mover?

    Contributed by NTAA

    ATO response

    Section 20 of the Transition Act provides for the phasing in of input tax credits for motor vehicles. Generally, section 20 (as amended) denies input tax credits on new motor vehicles, certain types of trailers and motor vehicle bodies acquired on or before 22 May 2001.

    Section 20 of the Act stipulates:

    "Phasing in input tax credits for motor vehicles etc.

    (1) This section applies to the acquisition by way of purchase (including hire purchase), or importation, of:

    (a) a motor vehicle; or
    (b) a detachable trailer designed to be towed by a prime mover of a kind prescribed in the regulations; or
    (c) a body for a motor vehicle, including an insulated body, tank-body, or other body designed for transporting goods of particular kinds"

    Paragraph 20(1)(b) of the Transition Act stipulates that the phasing in of input tax credits is applied to a detachable trailer which is designed to be towed by a prime mover of a kind prescribed in the regulations.

    When forming our conclusion, reference has been made to A New Tax System (Goods and Services Tax Transition) Regulations 2000, reg 6.

    The regulations states:

    "Detachable trailers designed to be towed by prime movers (Act s20)

    For paragraph 20(1)(b) of the Act, any kind of detachable trailer designed to be towed by a prime mover (except a kind of detachable trailer designed to be towed by a car and commonly used for private or domestic purposes) is prescribed.

    Note Examples of detachable trailers designed to be towed by a car and commonly used for private or domestic purposes are box trailers, horse floats and caravans."

    Paragraph 20(1)(b) of the Transition Act and regulation 6 of the Transition Act both make reference to the type of vehicle which it to tow the trailer. Section 20 of the Transition Act will apply where the trailer is designed to be towed by a prime mover.

    A prime mover is designed and built for the sole purpose of towing a trailer. This type of vehicle can not carry a load in its own right. The proposed trailer is not designed to be towed by a prime mover, rather a truck. A truck is a vehicle designed for the intrinsic purpose of carrying goods. This truck can be used for a separate purpose, that is carry a load on the tray. The truck is not a prime mover.

    Our conclusion is that given that the truck is not a prime mover, and that the trailer is designed to be towed by a truck, section 20 of the Transition Act does not apply.

    You will be entitled to input tax credits for the acquisition of the trailer.

      Last modified: 22 May 2014QC 28063