Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 11 - Other amendments
11.1 This Chapter explains the amendments contained in Schedule 11 to this Bill. Schedule 11 contains a number of GST related minor policy and technical amendments to various Acts. The amendments are summarised in Table 11.1.
|Act amended||Amendment in relation to...|
|ABN Act||Application to superannuation funds.|
|GST Transition Act||
|TAA 1953||Joint and several liability.|
11.2 An amendment to section 5 of the ABN Act is required to insert a reference to superannuation funds. When the GST and ABN Acts were originally enacted, all super funds were thought to be entitled to an ABN and GST registration through the operation of the 'entity' and 'enterprise' definitions in both Acts, that is, ... a superannuation fund operating in the form of a business . As part of the ABN's purpose of replacing as many as possible other government registrations, superannuation fund numbers were also intended to be replaced. However, since the ABN and GST Acts' commencement a view has emerged that not all superannuation funds' operations could be considered to be in the form of a business .
11.3 Items 1 and 2 insert 'superannuation fund' in section 5 of the ABN Act to put beyond doubt the registration of superannuation funds for ABNs.
11.4 Livestock or game is not food, as defined by Subdivision 38-A, and its supply is not GST-free. Therefore, under the basic rules, the supply of livestock or game is a taxable supply.
11.5 Some arrangements for the delivery of livestock or game (for slaughtering or processing into food) state that title does not pass until after food has been produced. The purported effect of these arrangements is that the supply is postponed until it is a supply of food and GST-free under Subdivision 38-A. These arrangements are contrary to the Government's intention that, as far as practicable, farmers should be in a position to sell their produce subject to GST.
11.6 Item 3 inserts new subsection 9-10(3A) to make it clear that under these arrangements, the delivery of livestock is a supply under the GST Act. The supply takes place when delivery is made and not when title passes. It does not matter that the delivery is of livestock but the passing of title may relate to a carcass and by-products.
11.7 Therefore, any arrangement for the delivery of livestock or game for slaughtering or processing into food is a supply of livestock or game. It does not matter when title is relinquished under contract. This supply of livestock or game is a taxable supply. This will cover arrangements where, for example, livestock is either delivered to a processor directly or to another party who then has it processed.
11.8 Under the definition of new residential premises (residential premises that have not previously been sold), a property can be classified as new regardless of its age. Subsections 40-65(2) and 40-70(2) of the GST Act exclude a supply of new residential premises from being input taxed under subsections 40-65(1) or 40-70(1) respectively. However, the supply may nevertheless be input taxed under subsection 9-30(4), or alternatively, may be a taxable supply or a non taxable supply.
11.9 It was not intended that supplies of existing housing stock which may have been used for many years by the original owners for residential accommodation (either rental income production or for owner occupation) would be subject to GST as new residential premises when first supplied after 1 July 2000.
11.10 For example, when a State Housing Authority decides to sell a house that it has held for public housing for say, forty years, and which has not been previously sold, this supply will not be input taxed under subsection 40-65(1), and may not be input taxed under subsection 9-30(4). Such a supply, if not input taxed, would probably be a taxable supply. This was not intended.
11.11 Conversely, when a property developer constructs a new dwelling, and lets it prior to sale (it may only be rented for a period as brief as the period between exchange of contracts and settlement). Subsection 9-30(4) may apply to make the supply input taxed rather than taxable. This was not intended.
11.12 Items 7 and 8 replace the existing subsections 40-65(2) and 40-70(2) with new provisions which will restrict the operation of those subsections to new residential premises, but only if those premises were used for residential accommodation before 2 December 1998. Under the new subsections, the sale of a house that had been rented or used as residential premises by the owner prior to 2 December 1998 will be input taxed.
11.13 Item 4 amends subsection 9-30(4) to ensure that that provision does not affect supplies of new residential premises. A supply will continue to be taken to be input taxed only if it is a supply that is used solely in connection with supplies that are input taxed but not financial supplies.
11.14 Subsequent events to a taxable supply or creditable acquisition may mean that an entity has paid too much or too little GST. In these cases an adjustment event may occur, and an adjustment may need to be made. Adjustments will either increase or decrease an entity's net amount for a tax period. Where the adjustment decreases the net amount, the entity will usually need to hold an adjustment note before attributing a decreasing adjustment to a tax period.
11.15 Subsection 29-75(2) of the GST Act sets out circumstances in which an adjustment note must be issued. If an entity has issued a tax invoice, or a recipient created tax invoice, in respect of a supply, it must issue an adjustment note within 28 days of becoming aware of the adjustment event (paragraph 29-75(2)(b)).
11.16 In some circumstances, such as where an electricity supplier reads a meter every 3 months, suppliers normal business practices may not comply with the requirement to issue an adjustment note within the required 28 days. New subsection 29-75(3) will allow the Commissioner to relax the 28 day time limit specified in paragraph 29-75(2)(b) in circumstances that the Commissioner determines.
11.17 However, where a recipient of a supply requests from a supplier an adjustment note for an adjustment relating to the supply, the supplier is obliged to give the recipient an adjustment note within 28 days of the request. The Commissioner will not be given a discretion to relax this rule.
11.18 New subsection 29-75(4) clarifies the circumstances in which the Commissioner may vary the 28 day rule in paragraph 29-75(2)(b). These circumstances may relate to a particular kind of taxable supply, such as a supply of utilities. However, subsection 29-75(4) does not limit the circumstances to supplies of a particular kind, as it may be appropriate to relax the requirement in other circumstances. [Item 5]
Example 11.1 Pham Energy is a gas supplier which issues its bills, that are also its tax invoices and adjustment notes, every 3 months. For this reason the Commissioner has permitted Pham Energy to issue adjustment notes on a 92 day cycle. Therese's Treasures, a client of Pham Energy, had its meter read soon after the last billing cycle, and does not wish to wait for 92 days for its adjustment note. If Therese's Treasures requests Pham Energy to issue an adjustment note, Pham Energy must do so within 28 days of their request.
11.19 A supplier does not have to issue an adjustment note if the value of the taxable supply to which the decreasing adjustment relates was $50 or less (subsection 29-80(2) of the GST Act). Because this de minimis rule is based on the value of the taxable supply, rather than the amount of the adjustment, entities may be required by this rule to issue adjustment notes for very small adjustments, or may not be required to issue adjustment notes for large adjustments.
11.20 For example, where the value of a taxable supply is $500, but the adjustment is only $2, an adjustment note is required for that adjustment because the value of the original supply is greater than $50. On the other hand, where the value of the taxable supply is $2, but the adjustment is $500, the supplier is not required to issue an adjustment note.
11.21 Item 6 amends subsection 29-80(2) so that the $50 rule in that subsection relates to the amount of the adjustment instead of the value of the original taxable supply. Under the new rule, an entity will not need to issue an adjustment note where the amount of the adjustment is $50 or less. In the examples above, an adjustment note is not required for the $2 adjustment to the $500 supply, but is required for the $500 adjustment to the $2 supply.
11.22 One of the principal objectives of the GST grouping arrangements in Division 48 of the GST Act is to eliminate the administrative and cash-flow costs associated with transactions between related entities. Currently, an entity will only meet the membership requirements for a GST group if that entity is a company, partnership or trust - paragraph 48-10(1)(a) of the GST Act.
11.23 However, many small businesses involving sole traders use company or trust structures to facilitate their business operations, in the same way as a partnership might use these structures. Sole trader entities are commonly used in many business sectors including primary production, legal and accounting firms and medical practices. Often, there will be transactions of considerable magnitude between the sole trader and the other operating entity (or entities). Allowing sole traders to become members of a GST group will enable these individuals to substantially reduce administrative and cash-flow problems associated with accounting for these transactions.
11.24 Item 9 amends subparagraph 48-10(1)(a)(ii) to include an individual as an entity that can be a member of a GST group. Further requirements in relation to individuals will be specified in regulations.
11.25 Division 66 contains special rules about acquisitions of second-hand goods from unregistered persons for the purposes of sale or exchange.
11.26 Section 66-17 requires records for creditable acquisitions of second-hand goods. The record must include the name and address of the supplier, the goods acquired and the date and consideration for the acquisition. This record must be prepared by the second-hand goods trader. If the trader does not have this record, then subsection 29-10(3) provides that the trader cannot claim the input tax credit.
11.27 Item 10 provides that for acquisitions of second-hand goods, where the value does not exceed $50, then subsection 29-10(3) does not apply. This is consistent with the treatment of other creditable acquisitions for under $50.
11.28 Item 10 also provides a similar provision for decreasing adjustments relating to a creditable acquisition of second-hand goods.
11.29 Consequently, if a second-hand trader acquires second-hand goods from an unregistered supplier and the value of the supply does not exceed $50, the trader may claim the input tax credit provided that the other conditions of Division 66 are met. Note that some other records, similar to income tax (e.g. a diary entry), will be necessary to substantiate the acquisition.
11.30 Division 72 provides special rules that apply to certain supplies between associates (the associates rules). Essentially, these rules ensure that supplies to an entity's associates without consideration are brought within the GST system and that supplies to an entity's associates for inadequate consideration are properly valued for GST purposes.
11.31 The GST Act provides that certain types of entities may separately seek registration of independent parts of that entity. An entity may register branches of the entity under Division 54, and the consequence is that each branch lodges a separate return and pays GST separately to the parent entity. Similarly, 'government entities' as defined in section 47 of the ABN Act, may apply for separate registration from the government which they form part. A government entity which so registers is a government related entity, as defined in section 195-1 of the GST Act.
11.32 The term 'associate', as used by the GST Act, is defined in section 318 of the ITAA 1936. The term is defined widely to include entities with specified relationships to the primary entity for natural persons, companies, certain trusts and partnerships. For example, relatives and partners of a natural person are associates of that person.
11.33 However, because the current definition of associate in section 195-1 of the GST Act adopts the definition in Section 318 of the ITAA 1997, the term associate, as used in Division 72 of the GST Act, does not acknowledge the separate existence of separately registered GST branches or government related entities. GST branches, government entities and government related entities are not recognised entities in the income tax regime.
11.34 The amendmentsalter the operation of Division 72 so that the division applies to entities which obtain separate registrations for branches, and government related entities which separately register. [Item 11, new sections 72-90 to 72-100]
11.35 New section 72-90 treats GST branches of an entity as associates of the parent entity and other GST branches of the parent entity. A GST branch will also be an associate of any entity of which the parent entity is an associate.
Example 11.2 Branch A makes a supply for no consideration to Branch B, which is a GST branch of the same entity. If there was consideration for the supply it would be taxable. Branch B did not acquire the thing solely for a creditable purpose.Subdivision 72-A treats the supply by Branch A to Branch B as a taxable supply, because section 72-10 makes the value of that supply its GST-exclusive market value, rather than nil.Subdivision 72-B treats this acquisition by Branch B as a creditable acquisition but only to the extent to which it was for a creditable purpose. The input tax credit is a proportion of the GST amount, which is based on the market value.
11.36 New sections 72-95 and 72-100 deal with government related entities, which are entities that are separately registered on behalf of an Australian government. New section 72-95 applies the associates rules to supplies between each government related entity for which the Commonwealth obtains separate registration. Similarly, new section 72-100 applies the associates rules to supplies between each separately registered government related entity for which a State or a Territory obtains separate registration. Government related entities will also be associates of any entity which the relevant government is an associate of. However, the associates rules do not apply to supplies between an entity registered by one government to an entity registered for another.
Example 11.3 Supplies between each of the State of Victoria's separate registrants are subject to Division 72 where made without consideration and otherwise for a creditable purpose. The same situation applies to supplies among Queensland's registrants. However, the associates rules do not apply to supplies between a Victorian registrant and a Queensland registrant.
11.37 An entity's annual turnover is relevant for several turnover tests. Division 188 sets out how to calculate annual turnover. The calculation takes into account the value of all the supplies an entity makes, excluding certain supplies (see sections 188-15 and 188-20).
11.38 Under section 9-70, GST is generally calculated as 1/11 of the total consideration for a taxable supply. However, for gambling supplies, GST is not calculated this way. Under Division 126, GST on gambling supplies is calculated as 1/11 of the difference between the total amount wagered and the total monetary prizes in a tax period. This is because of the high volume of gambling supplies that can occur in a tax period and the administrative difficulty in accounting for each supply. For example, with a poker machine, a $1 coin can be placed in the machine as a bet placed and if $10 is won, that amount can remain in the machine and continue to be played. A total of eleven $1 bets can be placed in a matter of minutes. Under the current provisions, $11 would be included in the determination of annual turnover. However, under Division 126, GST is not 1/11 of $11, but 1/11 of the difference between the bets and the prizes: $11 less $10, which equals $1.
11.39 Items 12 and 13 amend Division 188 and section 195-1 to, in effect, provide that the amount to be included for gambling supplies in the calculation of annual turnover is the difference between the total amount wagered and total monetary prizes paid out.
11.40 Both sections 11 and 12 of the GST Transition Act may apply to rights. At present, the legislation does not make clear which provision has precedence where both sections 11 and 12 apply to a right which is supplied on a periodic or progressive basis. Section 11 provides that the supply of a right that was granted on or after 2 December 1998 is supplied on or after 1 July 2000 to the extent that the right could reasonably be expected to be exercised after 1 July 2000. However, where a right is supplied over a period, or progressively over a period, section 12 of the GST Transition Act may also apply. The latter provision apportions the supply of a right on the basis that the supply was made continuously and uniformly throughout that period.
11.41 New paragraph 11(1A)(a) will make it clear that section 11 does not apply to a right to which section 12 applies. To the extent that both provisions may apply, then section 12 applies rather than section 11. [Items 14 and 15]
11.42 Under the current GST legislation, a prepaid funeral agreement entered into prior to 1 December 1999 is GST-free if paid in full before 1 July 2000. Any consideration received prior to 1 July 2005, or an earlier review date (if one exists) will be GST-free.
11.43 There are a number of difficulties in applying GST to prepaid funerals over the transitional period.
11.44 Item 16 amends section 15 of the GST Transition Act to ensure practical application of the GST to prepaid funeral agreements.
11.45 The amendment ensures that all consideration received in respect of a prepaid funeral agreement entered into prior to 1 December 1999 should be GST-free until 1 July 2005, irrespective of whether the agreement has been subject to a review opportunity.
11.46 Item 17 allows certain financial institutions to group by removing the requirement of joint and several liability for cases where the entity is statutorily barred from meeting this requirement.
11.47 The purpose of the amendment is to allow entities to form a GST group where they otherwise meet the requirements for a GST group but are unable to be jointly and severally liable due to the operation of a state or commonwealth law.
11.48 The GST grouping provisions allow closely related entities to form a GST group. Under subsection 53(1) of the TAA 1953 the members of such a GST group are jointly and severally liable to pay any amount that is payable by the representative member under an indirect tax law.
11.49 Some entities are statutorily barred from meeting such a requirement. Under the Life Insurance Act 1995 , for example, the assets of a statutory fund are only available for expenditure related to the conduct of the business of the fund. This means that these entities are unable to be jointly and severally liable as required under subsection 53(1) of the TAA 1953 and therefore are unable to be members of a GST group.
11.50 Item 17 inserts new subsections 53(1A) and 53(IB) . Under new subsection 53(1A) joint and several liability does not apply to a member of a GST group if an Australian law has the effect of prohibiting that member from entering into any arrangement under which they become liable for another entity's debts. However, under new subsection 53(1B) , that member will remain liable for any amount payable under an indirect tax law that arises from its own acts or omissions.
11.51 Division 126 of the GST Act currently provides that gambling suppliers calculate their turnover based on the total amount wagered, rather than on the gambling margin (i.e. the total amounts wagered less the value of monetary prizes paid out). This has unintended consequences for a wide range of small to medium sized businesses such as clubs and hotels that provide gambling services, often through poker machines which may see them treated as if they were larger businesses when they are assessed against the turnover thresholds in the GSTAct. These turnover thresholds are:
- the $1 million cash accounting turnover threshold (section 29-40) that determines at what point a business must account for GST on an accruals basis; and
- the $20 million tax period turnover threshold (section 27-15) used to determine at what point a business must remit GST on a monthly basis.
11.52 The Government considers that turnover from gambling supplies should be based on the gambling margin, which is a better overall measure of the total value of gambling supplies made by a business than the total amount wagered. This will ensure that businesses, especially small businesses, making gambling supplies are treated comparably with other businesses where turnover is based on the value of supplies.
11.53 Turnover, in respect of a gambling supply, would be defined as follows:
total amount wagered - total monetary prizes
11.54 This measure would affect small and medium sized businesses, such as clubs and hotels, that provide gambling services, often through poker machines and smaller bookmakers. It will have no effect on larger gambling operators, which will generally have turnover well in excess of the turnover thresholds, even under the proposed definition.
11.55 The measure will have no impact on GST liabilities or on GST revenue.
11.56 The measure will, however, result in some reduction in the compliance costs of small businesses that provide gambling services by ensuring that they do not prematurely lose the choice of remitting GST on a quarterly basis, which would provide reduced transaction costs.
11.57 Only one option is recommended, that gambling turnover be measured as the value of the gambling margin. This will ensure that small businesses that provide gambling services are assessed against the GST turnover thresholds on the basis of total value of the gambling services they provide, in the same manner as turnover for other businesses reflects the total value of the goods or services they supply.