House of Representatives

Tax Laws Amendment (2009 GST Administration Measures) Bill 2009

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Creating a consistent four-year period for claiming input tax credits and fuel tax credits

Outline of chapter

1.1 Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the Fuel Tax Act 2006 (Fuel Tax Act) , the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953) to require that input tax credits and fuel tax credits are claimed within a four-year period.

Context of amendments

1.2 This measure implements recommendation 20 of the Board of Taxation's Review of the Legal Framework for the Administration of the Goods and Services Tax .

1.3 Under the GST Act, input tax credits (including reduced input tax credits) are attributable to the first tax period in which either any consideration is provided by the recipient, or an invoice is issued. If the taxpayer accounts on a cash basis, input tax credits will only be attributable when and to the extent that the recipient provides consideration.

1.4 Two exceptions exist to this basic rule. Firstly, input tax credits cannot be attributed to a tax period unless a relevant tax invoice is held by the taxpayer in that tax period. Such input tax credits will instead be attributable to the first tax period in which the taxpayer holds a tax invoice (see subsection 29-10(3) of the GST Act). Secondly, if the GST return for a tax period does not take into account an otherwise attributable input tax credit, the input tax credit is not attributable to that tax period. Such credits are attributable to the first period in which a return is provided taking the credit into account (see subsection 29-10(4) of the GST Act).

1.5 Similar provisions exist for fuel tax credits (see section 65-5 of the Fuel Tax Act).

1.6 The TAA 1953 establishes a four-year limitation period for indirect tax liabilities and entitlements, including input tax credits (subject to special rules in situations involving fraud and evasion or where notice of the liability or entitlement has been provided). The four-year period for claiming input tax credits and fuel tax credits starts from the end of the tax period to which the relevant credit is attributable (see section 105-55 of Schedule 1 to the TAA 1953).

1.7 As outlined above, the four-year period is imposed by reference to the tax period or fuel tax return period to which the credit was attributable. However, the attribution rules permit taxpayers to defer the attribution of credits until a later tax period. As a consequence there is no effective limitation period for claiming input tax credits and fuel tax credits.

1.8 Flexibility in attributing input tax credits and fuel tax credits benefits taxpayers and the Commissioner of Taxation (Commissioner) by minimising the need for revisions to prior returns. Removing this flexibility would increase compliance costs. However, it is also important to balance certainty and consistency generally for GST and fuel tax credits by limiting the time for revising liabilities and entitlements. Flexibility in attributing credits should not result in input tax and fuel tax credit entitlements existing indefinitely, including where the entity's liabilities for the same period are no longer due and payable because of the four-year limitation period.

Summary of new law

1.9 Schedule 1 amends the GST Act, Fuel Tax Act and TAA 1953 to provide that a taxpayer will cease to be entitled to an input tax credit (including a reduced input tax credit) or fuel tax credit if the credit has not been claimed within four years. The four-year period starts from the date to which it would be attributable under the basic attribution rules in subsections 29-10(1) and (2) of the GST Act for input tax credits and subsections 65-5(1) to (3) of the Fuel Tax Act for fuel tax credits.

1.10 However, entitlements will not cease where:

·
the Commissioner has issued a notice under section 105-50 or 105-55 of Schedule 1 to the TAA 1953 concerning refunds or additional liability and a credit arises from the circumstances of the taxpayer's refund or liability;
·
the Commissioner is satisfied that the taxpayer was engaged in GST or fuel tax credit related fraud or evasion and a credit arises from those circumstances; or
·
the taxpayer has issued a notice under section 105-55 of Schedule 1 to the TAA 1953,

unless the taxpayer has not borne tax on the acquisition to which the credit relates.

1.11 The amendments also address the situation where taxpayers are contractually required to make extra payments (by what is often termed a 'gross-up clause') after the expiry of four years due to the supplier being liable for GST. Such taxpayers may have had no opportunity to claim these input tax credits (or partial input tax credits where the acquisition has previously been treated as partly creditable).

1.12 Making a payment as a result of a gross-up clause may now result in an adjustment for GST. Such adjustments will reduce a taxpayer's net amount to the same extent as the relevant input tax credit (or part of an input tax credit) would have, if it had been available. However, no adjustment will be available where the taxpayer has not borne tax on the acquisition to which the adjustment relates.

Comparison of key features of new law and current law

New law Current law
Limits on claims

Taxpayers will cease to be entitled to input tax credits and fuel tax credits that they have not taken into account in a return for a tax period or fuel tax return period within four years from the date the credit would have been attributable under the basic attribution rules.

Limits on claims

No effective limitation period applies to taxpayers' claims for input tax credits or fuel tax credits.

Notice to extend limits on claims

Taxpayers remain entitled to input tax credits and fuel tax credits after the four-year period has expired if they or the Commissioner have provided notice.

Taxpayers' entitlements will also be preserved where the Commissioner has provided notice extending the claim for an amount and the input tax credit or fuel tax credit arises directly from the same circumstances.

However, these entitlements will not be preserved where the GST related to an input tax credit has ceased to be payable and the taxpayer did not have a tax invoice within the four years.

Notice to extend limits on claims

Taxpayers and the Commissioner may issue notices allowing more time to claim indirect tax amounts, including input tax and fuel tax credits.

This is generally of limited relevance to input tax credits and fuel tax credits as no effective limitation period applies.

Limits on claims related to fraud or evasion

Taxpayers can claim input tax credits and fuel tax credits after the four-year period has expired if the credits directly relate to an amount of tax not paid or a claim for a refund that the Commissioner is satisfied resulted from fraud or evasion.

However, these entitlements will not be preserved where the GST related to an input tax credit has ceased to be payable and the taxpayer did not have a tax invoice within the four years.

Limits on claims related to fraud or evasion

The Commissioner must take into account input tax credits and fuel tax credits attributable to a period in which the Commissioner is satisfied payment or non-payment of an amount results from fraud or evasion.

However, such credits cannot be taken into account to the extent they reduce a net amount to less than zero.

This is generally of limited relevance to input tax credits and fuel tax credits as no effective limitation period applies.

Adjustments for 'gross-up clauses'

An adjustment for GST will occur where a taxpayer is contractually obliged to provide an additional payment because their supplier is liable for GST or additional GST and the four-year period has expired.

The adjustment will reduce the taxpayer's net amount by the amount of the input tax credit to which they would otherwise have been entitled.

However, these entitlements will not be preserved where the GST related to an input tax credit ceased to be payable.

Adjustments for 'gross-up clauses'

An adjustment for GST may not arise where additional payment is contractually required as a result of the supplier's GST liability.

This is generally of limited relevance to input tax credits and fuel tax credits as no effective limitation period applies.

Detailed explanation of new law

Time limit on entitlements to credits

1.13 Following the amendments, input tax credits (including reduced input tax credits) and fuel tax credits must generally be taken into account in the calculation of a net amount or net fuel amount by the end of four years. This four-year period commences from the day on which the taxpayer was required to give the Commissioner a return for the tax period to which the credit would be attributable under the basic attribution rules in subsections 29-10(1) and (2) of the GST Act and subsections 65-5(1) to (3) of the Fuel Tax Act. Where an input tax credit or fuel tax credit is not taken into account in the calculation of a net amount within this time, the taxpayer generally ceases to be entitled to the credit. [Schedule 1, item 7, sections 93-1 and 93-5 of the GST Act, item 17, section 47-5 of the Fuel Tax Act]

1.14 Taxpayers must generally provide a return within 28 days (if they lodge on a quarterly basis) or 21 days (if they lodge on a monthly basis) of the end of the relevant tax period.

1.15 Following the amendments, these taxpayers will generally cease to be entitled to input tax credits if they have not taken them into account in calculating their net amount in a GST return lodged within four years of the date the return was required. For such taxpayers accounting on a non-cash basis this will be the first period in which the taxpayer provided any consideration or an invoice was issued for the acquisition (see subsection 29-10(1)). For taxpayers accounting on a cash basis, this will be the tax period in which the taxpayer provided the relevant portion of the consideration (see subsection 29-10(2)).

1.16 Equivalent rules apply to entities that account for fuel tax credits under Division 65 of the Fuel Tax Act.

1.17 These changes will not affect the entitlement of taxpayers to input tax credits or fuel tax credits where these credits have been taken into account in earlier returns or assessments but the relevant liability or entitlement has not been paid (whether by the Commissioner or by taxpayers).

1.18 The changes apply only to input tax credits for fully and partially creditable acquisitions (including reduced input tax credits) and fuel tax credits. Other entitlements and liabilities such as input tax credits for creditable importations, adjustments and taxable supplies are subject to separate attribution rules that do not allow deferral. As such, they are currently subject to effective limitation periods that provide certainty within an appropriate period.

Exceptions to the time limit for credits

1.19 The amendments provide for three exceptions to the general rule that entitlements cease if a credit has not been taken into account within four years. [Schedule 1, item 7, subsection 93-10(1) of the GST Act, item 17, subsection 47-10(1) of the Fuel Tax Act]

Notices removing the time limit for liabilities

1.20 The first exception applies where the Commissioner notifies a taxpayer of an amount for which the taxpayer is liable.

1.21 The four-year limitation period will not apply to a liability if the Commissioner provides notice within the four-year period to the taxpayer requiring payment of the amount (section 105-50 of Schedule 1 to the TAA 1953).

1.22 Allowing the Commissioner to pursue liabilities where taxpayers have ceased to be entitled to the related input tax credits or fuel tax credits could cause inequities. The exception addresses this concern by preserving a taxpayer's credit entitlements where they arise as a consequence of the same circumstances that have resulted in the amount for which the Commissioner has issued the notice. [Schedule 1, item 7, subsection 93-10(2) of the GST Act, item 17, subsection 47-5(2) of the Fuel Tax Act]

1.23 For an input tax credit or fuel tax credit to meet this test it is not sufficient that the credit arise from the same business activity or the same tax period. Instead, it is necessary for the credit to arise from the same circumstances - that is, the same events and for the same reason - for which the additional payment is sought by the Commissioner from the taxpayer (see paragraphs 1.36 to 1.43 for more details). This would include where an input tax credit for an acquisition relating to a supply was treated as a financial supply despite being a taxable supply and the Commissioner has provided notice requiring payment of GST on the supply.

1.24 Input tax credits and fuel tax credits may fall within this exception even where they arise in different periods to the liability for which the Commissioner provides notice. However, where the notice is provided after entitlement to a credit has already ceased, the entitlement to the credit will not be restored.

Example 1.1 Sophie operates a business that is registered for GST, reporting monthly. In October 2006, she changed accountants and due to a mix up failed to provide a GST return or remit tax for that tax period. In May 2010, this omission was identified during an Australian Taxation Office (ATO) audit of Sophie's business. The Commissioner then provided Sophie with a notice requiring payment for the October 2006 tax period meeting the requirements of section 105-50 of Schedule 1 to the TAA 1953.Following further discussions with the ATO, Sophie determines her net amount for the relevant tax period and lodges a return for the October 2006 tax period in November 2010. Sophie holds a tax invoice to establish her entitlement to input tax credits and is able to include the input tax credits that were attributable to this tax period in this net amount, despite entitlement typically ceasing after four years. This reflects that these input tax credits arise directly from the same circumstances as the notice - the failure to lodge. As Sophie had made significant acquisitions in this period, the relevant input tax credits exceeded her GST liabilities, making her net amount negative. Following lodgment, Sophie receives a refund from the Commissioner.

Example 1.2 LLE P/L is a property investment company that is registered for GST, reporting on a monthly basis. In January 2006, it sold a motel complex, treating the sale as an input taxed supply of residential premises. LLE P/L made a number of acquisitions related to this sale, including legal services attributable to the month of sale and valuation services in August 2005. LLE P/L also made a creditable acquisition related to a sale of commercial residential premises for which it did not claim any input tax credits.In September 2009, LLE P/L is audited by the ATO. The auditors identify that the motel complex was a taxable supply of commercial residential premises. The Commissioner provides LLE P/L with a notice meeting the requirements of section 105-50 of Schedule 1 to the TAA 1953 in relation to the underpayment in January 2006 due to the treatment of the sale as input taxed.In November 2009, the Commissioner makes an assessment of LLE P/L's net amount for the November 2006 tax period. In working out the new net amount for this period, the input tax credits related to the legal costs may be taken into account. LLE P/L however, may not claim the credit for the valuation, as while it did arise from the relevant circumstances, more than four years had passed since the credit was attributable when the notice was issued. LLE P/L is also not entitled to the unrelated credit. This credit does not arise directly out of the matter for which the notice was issued.

Fraud and evasion

1.25 The second exception applies to credits linked to liabilities avoided as a result of fraud or evasion.

1.26 Under paragraph 105-50(3)(b) of Schedule 1 to the TAA 1953, the limitation period established by section 105-50 does not apply to amounts where the Commissioner is satisfied that payment was avoided or brought about by fraud or evasion.

1.27 The ability of the Commissioner to pursue such liabilities where taxpayers would have ceased to be entitled to the related input tax credits would be inequitable. This exception addresses this concern by preserving entitlements to input tax credits and fuel tax credits where they arise from the same fraudulent or evasive behaviour. [Schedule 1, item 7, subsection 93-10(3) of the GST Act, item 17, subsection 47-5(3) of the Fuel Tax Act]

1.28 The relationship required between such credits and the fraudulent or evasive activity is the same as is outlined above for notices issued by the Commissioner (see also paragraphs 1.36 to 1.43).

1.29 This exception applies to all credits arising directly from circumstances where the Commissioner is entitled to seek payment because he is satisfied that the payment was avoided because of fraud or evasion. Unlike the exception that applies where the Commissioner issues a notice to the taxpayer, this exception can result in input tax credits and fuel tax credits being available after the taxpayer had ceased to be entitled to the credit. This reflects the unlimited period over which the Commissioner may pursue liabilities arising from fraud or evasion.

Example 1.3 Fiona operates a plumbing business that has been registered for GST since January 2003. In the course of her business, Fiona will occasionally take special jobs out of hours. Payment for these special jobs must be in cash and, despite advice from her accountant, Fiona does not pay GST on these sales or claim input tax credits for parts and other supplies she obtains for these special jobs.In November 2010, the ATO uncovers these unreported transactions. The Commissioner forms the view that Fiona's behaviour in not declaring or paying tax on the special jobs constitutes evasion and assesses Fiona on the unpaid tax on these sales dating back to January 2003, relying on paragraph 105-50(3)(b) of Schedule 1 to the TAA 1953. As the acquisition of the parts and other supplies arise from the circumstances of the evasion, Fiona may still claim the relevant input tax credits despite the elapsed time.

Notices removing the time limits for refunds and credits

1.30 The third and final exception applies where taxpayers notify the Commissioner of their entitlement to a credit.

1.31 Under subsection 105-55(1) of Schedule 1 to the TAA 1953, taxpayers may notify the Commissioner of their entitlement to a refund, other payment or credit to which that section applies. Providing such a notification allows the taxpayer more time to claim the relevant amount.

1.32 This exception ensures that the taxpayer will remain entitled to the credit after four years where the required notice of the credit has been provided, despite the general time limit introduced by these amendments. [Schedule 1, item 7, paragraph 93-10(4) of the GST Act, item 14, paragraph 47-5(4) of the Fuel Tax Act]

1.33 However, the notice only preserves a pre-existing entitlement to a credit. Where a taxpayer has already ceased to be entitled to an input tax credit or fuel tax credit, the issue of a notice will not restore this entitlement. [Schedule 1, item 7, subparagraph 93-10(4) of the GST Act, item 17, paragraph 47-5(4) of the Fuel Tax Act]

1.34 Taxpayers will not be able to preserve their entitlement by issuing notices where section 105-55 does not apply, such as input tax credits that are not attributable as no tax invoice is held. However, if the taxpayer makes a request to the Commissioner to treat another document as a tax invoice within the four-year period and the Commissioner later agrees to the request, the request becomes a valid notice for the purposes of section 105-55 of Schedule 1 to the TAA 1953. This will ensure that the entitlement to the credit will not cease. This may be the case even where the Commissioner's agreement to the request occurs after the end of the four-year period. [Schedule 1, item 16, subsection 105-55(2A)]

1.35 Where an entitlement to an input tax credit or fuel tax credit is preserved as a result of this exception, the credit may be attributed and claimed in a tax period under the rules in the GST Act or Fuel Tax Act. Typically, taxpayers may include the input tax credit or fuel tax credit in the net amount or net fuel amount for either the current tax period or fuel tax return period or the period to which it was attributable under the rules in the relevant Act.

Example 1.4 Matthew operates a toy store and is registered for GST, reporting on a quarterly basis. In June 2006 he purchased and paid for a stock of dolls and action figures. This was a creditable acquisition. However, Matthew did not receive a tax invoice.In May 2010 Matthew realised he had not obtained the relevant input tax credit. He applied to the Commissioner to treat the invoice he held as a tax invoice. In July 2010, the Commissioner agrees to this request. At this point, Matthew's request becomes a valid notification as a result of new subsection 105-55(2A) of Schedule 1 to the TAA 1953. Had Matthew not made this request or not made it within the four-year period he would not have been entitled to this credit. However, as he is treated as having notified the Commissioner at the time he made the request, Matthew is still entitled to the credit, which clearly arises from the same circumstances as the notification (subject to the other requirements of the legislation), and can include it in the net amount for the original period or the current period (due to the notice).

Meaning of input tax credits 'arising from circumstances'

1.36 Where any of the three exceptions outlined above (see paragraphs 1.19 to 1.35) apply, taxpayers can generally disregard the four-year limit on claiming credits. For one of those exceptions to apply, the credit must have arisen from the same circumstances that gave rise to a liability or entitlement that is not subject to the limitation period.

1.37 This concept differs from the current rules which apply to input tax credits and fuel tax credits under sections 105-50 and 105-55 of Schedule 1 to the TAA 1953. In these two provisions, input tax credits may only be taken into account beyond the limitation period if they form part of a liability or entitlement for which the Commissioner has issued a notice or an entitlement in relation to which the taxpayer has issued a notice.

1.38 For the above exceptions on the four-year limit on input tax credits, such a concept would not, however, result in the correct outcome being achieved. If an acquisition relates to a supply which the taxpayer incorrectly treats as input taxed, then whether or not the taxpayer made the acquisition in the same period should not restrict a taxpayer's entitlement to recover the credit. [1] Similarly, if an acquisition has no connection with the issue that gave rise to a notice, but merely occurs in the same period that the net amount is revised, then it should not receive special treatment.

1.39 For this reason, the appropriate focus for the exceptions is not the amount but the underlying circumstances that gave rise to the change in the amount. For example, the Commissioner may issue a notice as tax has been underpaid in a period. The reason for this underpayment is that the taxpayer wrongly treated a supply of new residential premises as input taxed. If input tax credits were available at the time of the issue of the notice, the taxpayer will remain entitled to the credits even after the four years expires.

1.40 To arise from the same circumstances, credit must stem from both the same events and same reason that gave rise to an amount in a notice or an amount avoided by fraud or evasion. The measure does not apply to a credit that arises from the same event but not for the same reason (for example, if a taxpayer makes an acquisition, half of which relates to a supply they treat as being input taxed, but omits to claim the portion of credits for which they are clearly entitled, the provisions may allow the portion not claimed as a result of the input tax treatment out of time but will not allow the claim of the portion the taxpayer forgot to claim).

1.41 Likewise, a credit that arises for the same reason but different events will not fall within the exceptions (for example, if the Commissioner issues a notice in relation to one sale as it was wrongly treated as input taxed residential property, the taxpayer will not be able to use this notice to claim credits arising from five other similar sales where notices were not issued in time even though the same error was made).

1.42 In some circumstances the 'arise from the same event' requirement will achieve the same result as the present test for the limitation period provisions. In particular, if a notice is issued in relation to a period as there has been no return or payment provided for that period, then all of the credits attributable to the period may arise from the same circumstances as the notice.

1.43 Unlike the situation that exists under the limitation period rules in sections 105-50 and 105-55 of Schedule 1 to the TAA 1953, the exceptions relating to notices for liabilities and fraud or evasion can apply to credits that have not been attributed to any tax period. As a result, the attribution rules in section 29-10 of the GST Act apply, typically allowing the credit to be attributed in the current tax period.

Where the exceptions do not apply

1.44 The exceptions to the four-year limitation period on input tax credits are subject to a qualification. Entitlement to an input tax credit will not be preserved beyond the four-year period despite the exceptions applying (see paragraphs 1.19 to 1.35) if:

·
the Commissioner is no longer able to obtain payment of the GST from the supplier of the taxable supply which relates to the recipient's input tax credits sought to be claimed; and
·
a tax invoice was not issued for the supply within four years.

[Schedule 1, item 7, section 93-15]

1.45 The qualification is required as the exceptions potentially allow the taxpayer to claim input tax credits on acquisitions where the limitation period has expired for the Commissioner to seek payment from suppliers of any GST on the related taxable supply.

1.46 Input tax credits are intended to relieve registered businesses of GST borne on their creditable acquisitions. Where there has never been any GST borne on an acquisition, it is not appropriate that the acquirer should be able to claim an input tax credit. At the same time, however, it is the responsibility of the supplier, not the recipient, to pay GST on taxable supplies they make.

1.47 The qualification addresses both these concerns. Taxpayers will generally not be able to claim input tax credits where tax has not been paid and has ceased to be payable by the supplier. However, where they have evidence that they have borne tax in the form of a tax invoice issued within the four-year period, then their entitlement will be preserved.

1.48 A similar measure is not required for fuel tax credits because it does not contain a taxing and crediting mechanism as applies for GST.

Adjustments for payments resulting from gross-up clauses

1.49 This measure also amends the GST Act to create an adjustment rule. Taxpayers must adjust their net amount where they are contractually required to provide payment as a result of a supplier being liable to pay GST after the taxpayer has ceased to be entitled to the relevant input tax credit. [Schedule 1, item 11, section 133-5]

1.50 It is the responsibility of suppliers to determine what, if any, GST liabilities they may incur as a result of their commercial activities. However, it is common for clauses to be included in commercial agreements entitling the supplier to additional amounts should supplies made under the contract prove to be subject to GST. Such clauses, termed GST gross-up clauses, are standard practice in many contracts. Depending on the drafting of the clause, they may require an extra amount to be paid in the event the supply is subject to GST or provide that the consideration under the contract includes the stated amount plus any applicable GST.

1.51 As a result, where the Commissioner is entitled to pursue liabilities beyond four years, the supplier may be entitled to rely upon such a gross-up clause to pass on the burden of the tax to the recipient.

1.52 In this situation, where the nature of the gross-up clause means that this payment does not result in an adjustment under Division 19 of the GST Act, the recipient is left bearing the burden of the tax. Despite the Commissioner seeking payment outside of the limitation period, the entitlement to an input tax credit on the acquisition is not preserved.

1.53 The exceptions outlined above (see paragraphs 1.19 to 1.35) will not allow recipients affected by a gross-up clause to claim an input tax credit. The exceptions apply where taxpayers are notified of a liability or are engaged in fraud or evasion. Where a gross-up clause applies, a notice has not been issued to the taxpayer only to the taxpayer's supplier. Such a third party notice does not prevent the cessation of entitlement for the recipient of the supply.

1.54 Where no gross-up clause exists, the denial of input tax credits will be appropriate. The recipient will have borne no GST and require no relief. It is the supplier that bears the responsibility and the cost for their own error.

1.55 However, it is not an appropriate outcome where a gross-up clause exists allowing the cost of the GST to be passed on to the recipient. These amendments address this situation by providing that where a taxpayer must pay more as a result of a gross-up clause and they have ceased to be entitled to the input tax credit for the acquisition, the taxpayer will have a decreasing adjustment, reducing their GST liability. [Schedule 1, item 11, subsection 133-5(1)]

1.56 In some circumstances gross-up clauses in contracts may be drafted in such a way as to allow the supplier to seek an extra payment if the supply is potentially taxable even where the supplier can no longer be required to pay tax on the supply (such as where the limitation period for the Commissioner to seek payment of the liability has passed). In this case the matter is purely a contractual one between the supplier and recipient and no adjustment will be available as a result of these amendments. [Schedule 1, item 11, paragraph 133-5(1 )( c)]

1.57 There will also be no adjustment under the provisions where the underpayment occurred for some reason unrelated to tax. [Schedule 1, item 11, paragraph 133-5(1 )( a)]

1.58 The amount of the decreasing adjustment will be equal to the difference between the amount of the input tax credit claimed and the amount which the taxpayer would have been entitled to claim (had the taxpayer held a relevant tax invoice). For example, where no input tax credit has been claimed in a fully creditable transaction then the adjustment will be equal to the full amount of the credit. [Schedule 1, item 11, subsection 133-5(2)] .

1.59 To avoid doubt, additional consideration is defined so as to include the payment of part of the consideration that parties may have treated as not being payable. [Schedule 1, item 11, subsection 133-5(3) and item 12]

Example 1.5 Michael operates a business selling ski gear and winter sports accessories that is registered for GST. In May 2005, he entered an agreement with Eli, who was closing his ski gear business (also registered for GST), to purchase Eli's remaining stock. The sale was treated as the supply of a GST free going concern. The contract of sale contained a GST gross-up clause.Eli was audited in November 2008. The auditor identified that the sale did not qualify as a going concern and the Commissioner assessed Eli in relation to the GST owing on the sale of the ski gear. In January 2009 Eli was issued with a notice requiring payment that met the requirements of section 105-50 of Schedule 1 to the TAA 1953. Eli sought to have the decision of the auditor reviewed, but in June 2009 was told the decision had been confirmed. Eli then paid the outstanding GST and recovered the additional amount from Michael under the gross-up clause.Michael was entitled to an input tax credit in relation to this sale, but this credit was attributable to May 2005 and so his entitlement has ceased. Michael will however have a decreasing adjustment to his GST liability or entitlement. He acquired the stock on the basis it was GST free, has provided additional consideration due to the supply being found to be taxable, tax on the supply has been paid and Michael is no longer entitled to the input tax credit.The amount of this decreasing adjustment will be the difference between the input tax credit Michael claimed, in this case zero, and the input tax credit to which Michael was entitled.

1.60 Under some circumstances a payment under a gross-up clause might constitute a change in consideration for the acquisition. In these circumstances, the payment could potentially result in an adjustment under both Division 19 and Division 133.

1.61 To avoid this potential complexity, the amendments provide that where a payment would result in a taxpayer having a decreasing adjustment under both these provisions and Division 19, no adjustment will result under Division 19. Other taxpayers (such as the supplier) may still have an increasing adjustment under Division 19 as a result of the same payment. [Schedule 1, item 11, section 133-10]

Application and transitional provisions

Application provisions

1.62 The amendments impose a four-year limit on the claiming of credits (subject to the exceptions outlined above) in GST returns and assessments for GST lodged or issued from the time of announcement (7.30 pm Australian Eastern Standard Time on 12 May 2009) and revisions to such returns and revised assessments issued or made after this time. [Schedule 1, item 19]

1.63 The amendments also apply to returns and assessments for the purpose of fuel tax law lodged or issued from 1 July 2010 and revisions to such returns and revised assessments issued or made after this time. [Schedule 1, item 20]

1.64 As the amendments apply to returns and assessments lodged after Budget night, it will affect taxpayers based on when they lodge a return not the tax period to which the return relates. Taxpayers will also be subject to the four-year restriction when claiming input tax credits in tax periods that ended before 12 May 2009 but for which they had not previously lodged returns or been assessed or by seeking to amend earlier returns or assessments after 12 May 2009.

Example 1.6 Rui operates a book binding business that is registered for GST, reporting on a monthly basis. In January of 2004 and again in September of 2008, Rui purchased additional book binding machines. Both of these purchases were creditable acquisitions and Rui received a tax invoice and provided payment in the same month.In June 2009, Rui realises that she has yet to claim an input tax credit for either purchase. As more than four years have elapsed since the end of the January 2004 tax period, Rui is no longer entitled to that input tax credit. She remains entitled to the input tax credit related to the September 2008 purchase.

Example 1.7 Sophie operates a restaurant that is registered for GST, reporting on a quarterly basis. In 2004 and 2005, she refurbished her restaurant, acquiring new tables, purchasing (and receiving a tax invoice) some in the December 2004 quarter and the remainder in the June 2005 quarter. Sophie did not claim any input tax credits for these acquisitions.In May 2009, Sophie identified these unclaimed input tax credits and sought to claim them in her return for the April 2009 quarter, which she lodged on 20 May 2009. As this return has been lodged after 12 May 2009, the restriction applies. As a result, Sophie has ceased to be entitled to the credits for the tables acquired in the December 2004 quarter, as this input tax credit has not been taken into account in the calculation of a net amount in the required time. Sophie may, however, still claim the input tax credits for the tables acquired in the June 2005 quarter.

Example 1.8 Anthony operates a tree surgery business, accounting for GST monthly on a cash basis. In 2005, he purchases new tree felling equipment, providing payment in two instalments, one in April 2005 (when he receives the tax invoice for the whole transaction) and one in June 2005. He takes delivery of the equipment in July 2005. Anthony does not seek to claim the input tax credits for acquisitions at that time.In his return for May 2009, Anthony seeks to claim the input tax credits for the acquisition. As this claim is made in a return after 12 May 2009, the restriction applies. As a result, Anthony may not claim that part of the input tax credits attributable to the April 2005 period under the rules in subsection 29-10(2). He has ceased to be entitled to this portion of the credit as he has not included it in the calculation of his net amount in the required time. He may, however, still claim the portion of the credit attributable under the basic rules to June 2005 by taking them into account in a GST return lodged on or before 21 July 2009.

Consequential amendments

1.65 There are also amendments to a number of headings, definitions and several notes that need to be removed or changed because of amendments to the GST Act, Fuel Tax Act, the ITAA 1997 and Schedule 1 to the TAA 1953. [Schedule 1, items 1 to 6, 8, 13 to 15 and 18]

1.66 Consequential amendments have been made to ensure that adjustments resulting from the amendments to address gross-up clauses interact appropriately with the rules for adjustments currently operating in the GST Act. [Schedule 1, items 9 and 10] .

1.67 This measure does not repeal paragraph 105-55(1)(c) of Schedule 1 to the TAA 1953. However, it has significant implications for the operation of this section.

1.68 Paragraph 105-55(1)(c) allows for the inclusion of input tax credits and fuel tax credits in the net amount for a tax period where they are taken into account in determining an amount the Commissioner may recover from a taxpayer outside the limitation period as payment of some or all of the amount has been avoided as a result of fraud or evasion.

1.69 These provisions will cease to have any effect for GST and fuel tax credits following the commencement of this measure. As taxpayers' entitlement will cease after the four-year period has passed, it will not be possible for them to be taken into account in working out any net amount. Where appropriate, the amendments preserve the entitlement to input tax credits and fuel tax credits to the extent they arise from the circumstances of the fraud or evasion.

1.70 However, the provision remains relevant for wine equalisation tax and luxury car tax and so has been retained.


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