Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)MAIN FEATURES
Sales Tax Laws Amendment Bill 1985
Sales Tax (No. 5) Amendment Bill 1985
As indicated above, the Sales Tax Laws Amendment Bill is the main Bill in a package of 6 Bills that is designed primarily to prevent revenue losses from certain sales tax evasion and avoidance practices.
Indirect marketing arrangements (Clause 4)
The sales tax law is structured on the traditional approach to the marketing of goods - a manufacturer/ importer sells either directly to a retailer or to a wholesaler who generally on-sells to a retailer. The sale to the retailer (the taxable sale) is for a price that includes all of the costs incurred by, and the profit margins of, each party in the distribution chain, up to, but not including, the retailer.
Indirect marketing arrangements, however, seek to eliminate the wholesaler's profit margin from the sale value of goods by technically changing the status of the wholesaler for sales tax purposes to that of a retailer.
Under one arrangement - an agency arrangement - the wholesaler appoints the normal retailer as agent with the result that the wholesaler, as principal, technically becomes the retailer. Simply stated, the effect of an agency arrangement is to move back the point in the marketing chain at which the taxable sale takes place, i.e., the taxable sale is the sale to the wholesaler (now the retailer for sales tax purposes). This arrangement eliminates the wholesaler's profit margin from the sale value of the goods sold by retail, and the sales tax payable is accordingly that much lower.
There is another equally artificial retail marketing arrangement that could produce essentially the same sales tax reduction. The wholesaler could acquire an interest in, or obtain permission to use (e.g., lease) a section of a traditional retailer's store from which goods might be sold direct to the public, in fact by the wholesaler, but ostensibly by the retail store operator. Again, the wholesaler technically acquires the mantle of a retailer and the wholesaler's profit margin is not subject to sales tax as it should be.
In practice, indirect marketing arrangements mean that goods can be sold to the public at a considerable savings in sales tax in circumstances where, from the customer's point of view, the purchase of the goods is one at the retail level from a traditional retail store. The savings in sales tax can be reflected, wholly or in part, in a price lower than that at which a competitor's comparable goods are being sold. Those who engage in these arrangements can therefore achieve an unfair competitive advantage in the market-place to the detriment of the revenue and those taxpayers who, on principle, choose not to be a party to such arrangements.
On the other hand, some businesses have for many years and for genuine commercial reasons sold their goods to the public through indirect marketing arrangements such as agency arrangements. Although sales tax reduction is not a motive for these agency sales, the revenue is affected in precisely the same manner and to the same extent.
For this reason it will not be a condition precedent to application of the indirect marketing provisions that a sales tax avoidance purpose be present. Rather, where any person (not being the manufacturer of goods) sells goods by retail under an indirect marketing arrangement after the date of Royal Assent to this Bill, that person will, under the new definition of "Wholesale Merchant", be deemed to be a wholesaler.
Under provisions in the present law, a person deemed to be a wholesaler will have 28 days to become registered with the Commissioner. By this mechanism, the existing sales tax law dealing with retail sales by registered wholesalers will ensure that the wholesale profit margin is brought into the tax base. In the case of a manufacturer of goods who sells those goods directly by retail, the existing law applies to bring into the value on which sales tax is payable the manufacturer's usual wholesale profit margin.
Some changes to the Sales Tax Regulations will be necessary to fully achieve the objective sought and these will be effected on the amendments becoming law.
Quotation of sales tax certificates (Clauses 4,6,7,8,9,10,13,14,16 and 34)
The pivotal feature of the single stage sales tax system is the procedure of quotation of certificate numbers by registered persons (manufacturers and wholesalers) at intermediate points of sale in the marketing chain. The quotation procedure is designed to ensure that sales tax is payable usually on the last wholesale sale of goods and depends for its effectiveness on two requirements. These are:
- •
- that those who are entitled to quote and obtain goods free of sales tax account to the Commissioner for the sales tax they collect when on-selling the goods at tax inclusive prices; and
- •
- that persons who are not entitled to quote do not obtain goods tax-free.
Certain sales tax evasion practices are occurring in circumstances where persons not entitled to quote when purchasing goods are doing so. On the part of vendors of these goods it is more often than not a case of complicity by studied indifference to these false quotations, with the vendors claiming that, under the present law, they need not be concerned about the genuineness of a purchaser's quotation.
A typical evasion of sales tax using this method involves an unregistered person quoting a bogus certificate number, giving a false or fictitious name and address to the vendor and tendering a substantial purchase price in banknotes or by bank cheque. The goods are sold tax-free and the purchaser is not able to be traced. Under the present law there is doubt whether the vendor is liable to make good the evaded sales tax in these circumstances. Sometimes, the number quoted is a genuine certificate number obtained, for a modest payment, from a registered person. In yet other cases, a registered person may quote in circumstances that are not permitted under the sales tax law with the intention of evading sales tax on the goods.
Measures contained in this Bill will strengthen the sales tax registration and quotation procedures in several ways to counter these methods of evasion.
First, the level of security for compliance with the conditions of registration is to be increased to a maximum of $25,000 - the present level of $2,000 was set in 1930. The Commissioner will be authorised to call for security where he considers the revenue is at risk.
Secondly, a power is to be given to the Commissioner to refuse or revoke a sales tax registration where the application for registration was false or misleading, or where security is not provided when required by the Commissioner. The quotation procedures are also to be strengthened by authorising the Commissioner to withdraw permission for a registered person to quote where the Commissioner has reason to believe that the quotation procedures have been abused by the person in the past or that the person has aided or abetted others to abuse those procedures.
The Commissioner is also to be authorised to publish in the Gazette, or to provide vendors with, details of cancelled revoked or withdrawn sales tax certificate numbers. This will, for example, allow the Commissioner to circulate cancelled, revoked or withdrawn certificate numbers to wholesale vendors generally or vendors of particular classes of goods along the lines at present in use by some credit card organisations.
Under arrangements being put in place by this Bill, a vendor will not after the date of Royal Assent be able to rely simply on the fact that a purchaser has quoted a sales tax certificate number in the correct form. Before the vendor will be authorised to sell goods tax free on the basis of the quotation, it will be necessary for the vendor to be satisfied that -
- •
- the purchaser is a registered person;
- •
- the quotation is authorised by law;
- •
- the quotation is not false or misleading; and
- •
- the Commissioner has not notified the certificate number as being one that has been cancelled, revoked or withdrawn.
If a vendor sells goods tax-free and has reasonable grounds to believe that any of the above requirements are not met in respect of the quotation, the vendor will be liable to pay the tax.
It is, of course, quite possible that even though a vendor may have reasonable grounds to doubt the bona fides of a purchaser's quotation, the Commissioner may subsequently be satisfied that the quotation was, in fact, lawful. In these cases, the Commissioner will be able to refund or remit the tax paid or payable by the vendor.
Where the Commissioner makes a decision to refuse or revoke a person's registration, to seek an amount of security from a person or to withdraw a registered person's entitlement to quote, the person affected by the decision will have a right of objection against the decision. A person dissatisfied with the outcome of an objection will, subject to the Administrative Appeals Tribunal Act 1975, be able to make an application to the Administrative Appeals Tribunal for review of the decision.
Definition of "Manufacture" (Clause 4)
By paragraph (b) of the present definition of "manufacture" the combination of parts or ingredients whereby an article or substance is formed that is commercially distinct from those parts or ingredients is specifically brought within the expression. There is, however, an exception to paragraph (b) that excludes any combination of parts or ingredients that it is customary or reasonably practicable for users or consumers to undertake.
This exclusion has been exploited by some manufacturers in an unintended way, thus resulting in a substantial reduction in the sales tax payable on the sale of the finished goods.
One example is a firm that had previously been importing particular articles that were taxable at the highest rate of tax. Arrangements were made to import the articles in unassembled component form instead of fully manufactured. The separate components carried a lower rate of tax as can occur under the existing rate schedules.
The firm then assembled the components in Australia and sold the completed articles to an associated company, claiming that there was no liability to sales tax as a manufacturer of the articles, because the associated company also had employees with the necessary expertise to carry out the assembly of the components and it was therefore reasonably practicable for it to do so.
A re-drafted exception to paragraph (b) of the definition, that will have effect in relation to goods manufactured after 20 August 1981 - the date on which the former Treasurer announced the proposed change in the law - will make it clear that the exception will only apply where the combination of parts or ingredients is of a kind customarily undertaken by persons who ultimately use or enjoy the articles or substances so formed. In this regard, the use or enjoyment of the articles or substances will mean for the purpose for which the articles or substances were formed. The re-drafted exception is designed to ensure that goods derived for commercial purposes from component parts that are purchased unassembled are treated as manufactured goods for sales tax purposes. However, goods that are often sold to the public by way of unassembled components (e.g., children's play equipment, some kinds of furniture, etc) will not treated as being manufactured simply if pre-assembled by the vendor.
Sales Tax on Imported Goods (Clauses 24 to 33 and 35 to 38 inclusive)
The Sales Tax Assessment Act (No. 5) 1930 relates to the imposition and collection of Sales tax on imported goods. Sales tax on imported goods is generally collected by Customs when the goods are entered for home consumption.
At present, the liability for, and rate of, sales tax on imported goods is determined at the date of importation of the goods into Australia, although payment of the tax is not due until the goods are entered for home consumption under the Customs Act. Where a change in the rates of sales tax occurs between the date of importation and the date of entry for home consumption, administrative difficulties arise for Customs.
To overcome these administrative difficulties, this Bill proposes to bring the sales tax provisions into line with the Customs Act so that the rate of sales tax applicable to goods entered for home consumption will be the rate fixed by the Parliament on the date that the goods are so entered. It will also remove an anomalous situation that has arisen in the past when compensating changes are made to the rates of sales tax and the Customs Tariff.
The Operation of Certain Anti-avoidance Amendments (Clauses 11, 12 and 54 to 56 inclusive)
The Sales Tax Assessment (No. 1) Amendment Act 1978 introduced certain anti-avoidance measures including provisions designed to secure payment of sales tax on the full value of goods manufactured for a person out of exempt materials supplied by that person to the manufacturer. Prior to this, tax was payable on the manufacturer's charge only, and thus did not reflect the value of the exempt materials.
Those amendments had effect after 20 September 1978. To avoid any retrospective operation in relation to contracts entered into before that date the amendments were expressed to apply only in respect of goods manufactured under an agreement to manufacture the goods entered into after 20 September 1978. Further, transitional provisions in the amending Act provided that the amendments did not apply to goods that were deemed to have been sold (the manufacturer who did not own the materials was deemed to have sold the manufactured goods to the owner of the materials) after 20 September 1978 under a contract to manufacture the goods entered into before that date.
These provisions can have an effect beyond their intention as transitional provisions. For example, in one particular case under long-standing but unwritten arrangements between two closely associated companies, one company manufactures articles made with timber for the other company out of exempt timber supplied by that other company. These arrangements were operating before 20 September 1978 and are likely to continue indefinitely. There are no fixed contractual prices. These are adjusted from time to time as costs increase. These were the types of manufacturing arrangements that the amendments were aimed at, but because of the transitional provisions, goods manufactured under these arrangements are not caught by the 1978 amendments.
This Bill will provide a cut-off date of 20 August 1981 - date of announcement by former Treasurer of this proposal - to the operation of transitional provisions applicable to the 1978 anti-avoidance amendments, to prevent further losses of revenue.
Information gathering power (Clauses 17 and 59)
Section 71 of the Sales Tax Assessment Act (No. 1) 1930 which applies as appropriate in each of the other Sales Tax Assessment Acts, provides that the Commissioner, or any duly authorised officer, has full and free access to all buildings, places, books, documents and other papers for any purpose of the sales tax law and may make extracts from or copies of any such books, documents or papers.
It is, however, often necessary for the Commissioner or his authorised officers to examine goods to determine the appropriate sales tax classification of them. The most obvious example of the need to have a power of access to, and examination of, goods is at the time of entry of goods at Customs, but it occurs daily in the administration of the sales tax law. This Bill will provide a power of access to goods by ensuring that the Commissioner or his authorised officers are able to examine, remove or take samples of any goods.
The Bill will also remove the necessity for the Commissioner to specify the Assessment Act(s) under which the information gathering power is being exercised before ascertaining the nature of the transactions into which enquiries are being made to ascertain the liability of a taxpayer to tax. The Bill will achieve this by repealing section 71 and inserting a similar but expanded section (proposed section 12E) in the Sales Tax Procedure Act 1934.
Sales Tax Assessment Bill (No.10) 1985
Sales Tax Bill (No. 10A) 1985
Sales Tax Bill (No. 10B) 1985
Sales Tax Bill (No. 10C) 1985
It is a general principle of sales tax to levy tax on wholesale values that reflect all costs attributable to the production, wholesale distribution and sale of goods. To this end, the sales tax law has, since its enactment in 1930, contained a provision designed to include in the taxable sale value of goods all "royalties" paid in connection with the manufacture, purchase, sale, etc. of those goods.
Arrangements have developed, particularly in the recording industry, whereby responsibility for payment of various royalties is assumed by a company that is technically the retailer of the goods. The retailer engages a manufacturer to manufacture goods to order and the retailer sells the goods either by mail order or direct to the public, or through large retail stores under indirect marketing arrangements (see earlier notes).
As sales tax is payable on the sale price (exclusive of royalties) of the goods by the manufacturer to the retailer, royalty costs are, under these arrangements, effectively excluded from the sale value of the goods.
Under the provisions being put in place by this Bill to counter sales tax avoidance through indirect marketing arrangements, royalties paid by a retailer who sells goods under such arrangements will be subject to tax under the present scheme of the sales tax law. However, retailers who continue to sell their goods by mail order or direct to the public, or who arrange for the royalties to be paid by an associated company, would still be able to effectively exclude the royalties from the sale value of the goods.
This Bill (together with 3 associated Taxing Bills) will therefore ensure that, in cases where the present law (as proposed to be amended by clauses 4,5,19,21,23,39,44,47,49 and 53) does not bring any royalties into the sales tax base, the person who actually pays the royalty will have a sales tax liability on the royalty payment.
A new Sales Tax Assessment Act (No. 10) and 3 Taxing Acts are necessary for constitutional reasons, and will apply to royalty payments made after the date of introduction in respect of goods including those that have gone into use and consumption in Australia. This latter inclusion will ensure that the new provisions cannot be circumvented by structuring the royalty arrangements in a way that technically imposes the royalty after the retail sale has taken place. The Assessment Bill contains machinery provisions for the assessment, collection and administration of the new tax. Taxpayers affected by the new Act will be required to be registered with the Commissioner and to pay sales tax on royalty payments under the same rules that now apply to other registered sales taxpayers.
More detailed explanations of the clauses of each of the Bills are contained in the notes that follow.