Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Industrial safety equipment
Outline of Chapter
1.1 The modification Bills modify Item 20 in Schedule 1 to the ST (E & C) Act, which deals with industrial safety equipment. The modification has the effect that, to be exempt from sales tax, industrial safety equipment must be of a kind that is mainly used to protect persons engaged in industrial operations.
Background to the legislation
1.2 On 5 October 1999 the Government announced that it would amend the sales tax law to ensure that exemption from sales tax for industrial safety equipment will only apply to equipment which is of a kind mainly used to protect persons engaged in industrial operations.
1.3 The Government's announcement followed decisions of the Federal Court that have meant that goods which would not ordinarily be regarded as industrial safety equipment, have been held to be exempt from sales tax.
1.4 In the decision Commissioner of Taxation v. NSW Cancer Council (1999) FCA 1146, the Federal Court held that sunglasses were exempt as safety equipment because it could be demonstrated that some outdoor workers used them to protect their eyes from glare and cancer. The effect of that decision is that all sunglasses that meet Australian Standard AS 1067.1 and that are not fashion spectacles would be exempt from sales tax, even though most sunglasses are used as personal protection in activities unrelated to industrial operations or used as fashion accessories. That decision is also in direct conflict with the policy underlying the sales tax exemption for spectacles in Item 85 in Schedule 1 to the ST (E & C) Act which specifically excludes sunglasses from the exemption.
1.5 This modification will restore the position that applied before the sales tax law was streamlined in 1992 and which was intended to be the position under the current law. Under the pre-1992 legislation, industrial safety equipment had to be of a kind that was used 'exclusively, or primarily and principally' as industrial safety equipment to be exempt from sales tax. This meant that only goods which had the predominant purpose of protecting persons engaged in industrial operations were exempt from sales tax.
1.6 Examples of the types of goods intended to be covered by the exemption are masks, respirators, shields, goggles, visors, helmets, belts and machine guards. The explanatory memorandum to the ST (E & C) Act stated that the new Item 20, using the phrase 'of a kind ordinarily used' in place of 'of a kind used exclusively, or primarily and principally', represented 'no substantive change' from the previous exemption. There was a clear intention by the Parliament in 1992 that the scope of the exemption for industrial safety equipment was not intended to be widened from its narrow scope.
1.7 If the Government does not ensure that this modification has effect back to the commencement of the ST (E & C) Act, there is potential for a significant loss of sales tax revenue in granting credits in relation to equipment that was never intended to qualify for sales tax exemption as industrial safety equipment.
1.8 The threat to the revenue base is significant because taxpayers are entitled to claim credits going back 3 years from the date of the claim. The scheme of the sales tax legislation requires that credits can only be claimed where the sales tax has not been passed on by the person claiming the credit. This ensures that manufacturers and wholesalers do not obtain windfall gains from credits where they have passed the sales tax on in the price charged to their customers. However, in many cases their customers and the ultimate beneficiaries of any sales tax credits are retailers who have also passed on the sales tax in the price charged to their customers who are the end users of the goods.
1.9 There is no obligation under the sales tax law for a retailer in those circumstances to pass on the benefit of any sales tax credit to the final consumers. Given that the types of goods which could potentially qualify as industrial safety equipment have always been subject to sales tax, it is clear that in many cases the benefit of any credit of sales tax would not benefit the final consumers who have effectively borne the cost of the sales tax.
1.10 The Constitution requires that a law imposing taxation should only deal with one subject of taxation. Sales tax is therefore imposed by 4 Acts, the sales tax imposition Acts. There are separate Acts imposing sales tax to the extent that it is a duty of customs, a duty of excise, a tax on in situ swimming pools, or a tax that is none of these. The Constitution also requires that a law imposing taxation should only deal with that imposition, and a part of the law relating to any other matter will be invalid.
1.11 There is a view that the measures contained in the modification Bills impose taxation. For this reason, they have been included in separate Bills. Each Bill will modify the effect of the ST (E & C) Act in so far as it applies to sales tax imposed by the corresponding sales tax imposition Act.
1.12 The modification Bills modify the effect or operation of the ST (E & C) Act, but do not amend it. It will therefore be necessary to read the ST (E & C) Act together with earlier modifying Acts, and these Bills, to discover how the sales tax laws are to be applied in relation to the goods affected by these measures.
Detailed explanation of new law
1.13 Item 1 in each of the modification Bills modifies the effect of Item 20 of Schedule 1 to the ST (E & C) Act by substituting the word 'ordinarily' with 'mainly'. This will have the effect that an item of equipment must be of a kind that is mainly used to protect persons engaged in industrial operations to be exempt from sales tax.
1.14 Subsection 3(2) of the ST (E & C) Act defines mainly to mean to the extent of more than 50%. In the context of Item 20 an item of equipment will have to be of a kind that is used more than 50% of the time for protecting persons engaged in industrial operations. Where an item of equipment has a number of uses, these will have to be compared to determine whether the mainly used test is satisfied. Most goods commonly described as industrial safety equipment will have a clear use in protecting persons engaged in industrial operations and will easily satisfy the 'mainly' test.
1.15 There are many goods which can be said to protect persons engaged in industrial operations. For example, an ergonomic chair can be said to protect workers from poor posture and its related health problems. Clearly, this is not the main purpose for which these chairs are used, being to seat the person using them. Therefore, a chair does not satisfy the test of being of a kind mainly used to protect persons.
1.16 By way of contrast, a welding shield has a main purpose of protecting the welder's eyes from damage. As it is of a kind that is mainly used to protect persons engaged in industrial operations it is exempt from sales tax under Item 20. Not only is this type of equipment mainly used by persons engaged in industrial operations, it is also mainly used to protect persons.
1.17 Item 4 ensures that the modification is taken to be an amendment for the purposes of section 129 of the STAA 1992. Section 129 has the effect of deferring a liability imposed by an Act that amends the sales tax law to 28 days after the sales tax amendment Act receives the Royal Assent.
1.18 Item 5 defines 'first taxing day' as having the same meaning as in the STAA 1992. The first taxing day for the STAA 1992 was 1 January 1993.
1.19 Item 6 provides that the modification made by Schedule 1 to this Bill applies to dealings with goods on or after the 'firsttaxing day', being 1 January 1993.
Application and transitional provisions
1.20 The modifications will apply to dealings made on or after 1 January 1993.
1.21 The Sales Tax (Industrial Safety Equipment) (Transitional Provisions) Bill 2000 deals with transitional issues to ensure that the modifications made by this Bill do not affect certain credit claims lodged before 5 October 1999, or liabilities for certain dealings before 5 October 1999. This Bill therefore needs to be read in conjunction with that Bill.