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 6 - GST and associates provisions

Outline of chapter

6.1 Schedule 6 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure the goods and services tax (GST) treatment of a supply to an associate without consideration is as an input taxed supply, a GST-free supply, or a financial supply where appropriate.

6.2 The amendments also ensure that a supply to an associate that would be a sale (or some other particular kind of supply) if made for consideration will be taken to be a supply of such a kind, despite there being no consideration. Similarly, an acquisition from an associate that would be by way of sale (or some other particular means) if consideration was provided will be taken to be an acquisition by that means despite there being no consideration.

6.3 These provisions take effect from the date of Royal Assent.

Context of amendments

6.4 One of the conditions for a supply being a taxable supply is that it is made for consideration. However, associates can make supplies for no consideration. Specific rules in the GST law provide that if a supply is made to an associate for no consideration and the associate is not entitled to a full input tax credit, the supply may still be a taxable supply with GST payable calculated by reference to the GST inclusive market value of the thing that is transferred.

6.5 The GST law further provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed. However, there are a number of provisions dealing with GST-free and input taxed supplies that require that the supply is 'for consideration' or refer to a 'sale'.

6.6 As a result, an otherwise input taxed or GST-free supply to an associate (if made for consideration) may be treated as a taxable supply if it is for no consideration.

6.7 The Board of Taxation, in its review of the legal framework for the administration of the GST, recommended that the GST law be amended to remedy the interaction of the associate provisions and other provisions such as those relating to input taxed and GST-free supplies (recommendation no. 46).

6.8 The Government's response to the Board of Taxation review measures was announced in the then Assistant Treasurer's Media Release No. 042. of 12 May 2009 in the context of the 2009-10 Budget. In particular, the Government accepted the majority of the Board's recommendations, including in relation to the associate provisions.

Summary of new law

6.9 Schedule 6 to the Bill inserts new sections 72-20 and 72-25 in the GST Act in relation to supplies and acquisitions between associates without consideration.

6.10 Section 72-25 provides that in the case of supplies between associates, the fact that there may be no consideration does not prevent such supplies from being input taxed, GST-free supplies, or financial supplies.

6.11 Subsection 72-20(1) provides that where a supply between associates would be a sale or some other kind of supply apart from a lack of consideration, it will be taken to be a supply of that kind. Subsection 72-20(2) provides that if an acquisition from an associate would be by sale or some other means apart from a lack of consideration, the acquisition is taken to be an acquisition by that means.

6.12 Schedule 6 also amends section 38-185 of the GST Act in relation to the export of goods that are GST-free if certain conditions are met. In particular, new item 2A is inserted into the table in subsection 38-185(1) to provide that a supply of goods without consideration to an associate is GST-free if the supplier exports the goods from Australia.

6.13 New subsection 38-185(4) sets out the conditions where a supplier is treated as having exported the goods from Australia where they are supplied to an associate who is not registered or required to be registered who in turn exports the goods from Australia.

6.14 The amendments in Schedule 6 to the Bill commence on the date of Royal Assent.

Comparison of key features of new law and current law

New law Current law
Input taxed and GST free supplies

A supply to an associate may be an input taxed, GST-free, or a financial supply despite the supply being without consideration.

Input taxed and GST free supplies

The interaction between the provisions dealing with supplies between associates and the provisions providing that certain supplies are input taxed or GST-free may result in anomalous GST treatment.

In particular, the current provisions may apply to treat an otherwise input taxed or GST-free supply to an associate (if it had been made for consideration) as a taxable supply where it is made for no consideration.

Sales between associates

A supply to an associate may be taken to be a sale or some other kind of supply despite being without consideration.

Similarly, if an acquisition from an associate would be by sale or some other means, the acquisition may be taken to be an acquisition by that means despite being without consideration.

Sales between associates

A supply between associates may not be a sale or a supply of some other kind if the supply is made for no consideration.

An acquisition between associates that would be an acquisition from an associate by sale or some other means may not be taken to be an acquisition by that means if there is no consideration.

GST-free export of goods

A supply is GST-free where there is a supply of goods between associates without consideration and the supplier has exported the goods from Australia.

GST-free export of goods

Where a supply of goods between associates is without consideration and the supplier exports the goods, the operation of the GST-free export rule is uncertain (as the 60-day time period for export never starts).

Detailed explanation of new law

6.15 The interaction between the provisions dealing with supplies between associates and the provisions providing that certain supplies are input taxed or GST-free may result in anomalous outcomes.

6.16 Section 9-5 of the GST Act sets out the requirements for a supply to be a taxable supply, including that the supply is made for consideration. Section 9-5 further provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed. Section 9-30 provides that a supply is GST-free if it is GST-free under Division 38 and is input taxed if it is input taxed under Division 40 including financial supplies. There are a number of provisions dealing with GST-free and input taxed supplies that require that the supply is 'for consideration' or refer to a 'sale'.

6.17 Subsection 72-5(2) specifically provides that a supply to an associate without consideration may be a taxable supply despite the requirement in paragraph 9-5(a) that a taxable supply must be for consideration. Division 72 creates a GST liability on a supply by deeming a value of the supply equal to the GST exclusive market value of the supply but does not deem any consideration for the supply (see section 72-10). Therefore, an otherwise input taxed or GST-free supply to an associate (if made for consideration) may be treated as a taxable supply if it is without consideration.

6.18 There are two main areas where a supply, that would otherwise be an input taxed supply if made for consideration, may be a taxable supply where the supply is to an associate without consideration:

·
a transfer of residential premises (that is, not new residential premises or commercial residential premises) to an associated entity that is either not registered or has acquired the supply for a purpose that is not solely creditable; and
·
a financial supply made to an associated entity that is either not registered or has acquired the supply for a purpose that is not solely creditable.

6.19 A supply is input taxed under section 40-65 if it is a sale of residential premises (other than new residential premises or commercial residential premises). It is arguable that a supply between associates without consideration is not a 'sale' (for example, an in specie distribution of residential premises). Under this view, such a supply is not a 'sale', cannot be an input taxed supply under section 40-65 and may be treated as a taxable supply.

6.20 A similar outcome to the sale of residential premises arises in relation to financial supplies. A financial supply is defined in regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 to be the provision, acquisition or disposal of a financial interest for, inter alia, consideration. Therefore, a transaction between associates involving a financial interest cannot be an input taxed financial supply if it is without consideration and may instead be subject to GST. This can arise, for example, by way of an in specie distribution of a parcel of shares from a trust (registered) to a beneficiary of the trust (not registered or required to be registered).

6.21 The result in the case of residential premises and financial supplies is inconsistent with the intention of the GST law. That is, the fact that a supply to an associate is without consideration should not result in an otherwise input taxed supply being treated as a taxable supply.

6.22 The amendments ensure that Division 72 of the GST Act applies such that, provided all other conditions are satisfied, a supply to or from an associate may be an input taxed supply, a GST-free supply, or a financial supply despite being without consideration. [Schedule 6, item 3, section 72-25]

6.23 The reference to a financial supply in section 72-25 ensures that a supply between associates that would have been an input taxed financial supply had it been made for consideration, is both an input taxed supply and a financial supply for the purposes of the GST law. If section 72-25 did not contain this reference, it would operate to ensure that such a supply was input taxed, but it would not expressly specify that the supply was also a financial supply. This may have given rise to some uncertainty in applying a number of provisions in the GST law, such as section 189-15 (regarding the financial acquisitions threshold), which require an entity to establish whether an acquisition it makes relates to the making of financial supplies.

6.24 In addition, the amendments ensure that a supply to an associate, that would otherwise be a sale or some other kind of supply if it was for consideration, is taken to be a sale or that other kind of supply despite the lack of consideration. Similarly, if, apart from a lack of consideration, an acquisition from an associate would be by sale or some other means, the acquisition is taken to be an acquisition by that means. [Schedule 6, item 3, subsections 72-20(1) and ( 2)]

6.25 However, these amendments may not be sufficient to ensure the appropriate GST treatment in relation to the supply of goods between associates without consideration where the supplier has exported the goods from Australia.

6.26 Under Subdivision 38-E of the GST law, one of the conditions for a supply to be GST-free is that the supplier exports goods from Australia before, or within 60 days after, the day on which the supplier receives any of the consideration for the supply (see subitem 1(a) in the table in section 38-185). However, if before any of the consideration for the supply is received, the supplier gives an invoice for the supply, then the supplier must export the goods within 60 days of the day the invoice was given (see subitem 1(b) in the table in section 38-185). Broadly, the 60 day requirement in item 1 in the table in subsection 38-185(1) begins from an event that could trigger attribution of any GST payable (in the event the relevant supply is taxable) or any input tax credit entitlement.

6.27 In circumstances where the supply is between associates without consideration, neither of the conditions in item 1 in section 38-185 can be satisfied. This is because the first condition requires that the supplier actually receive consideration (see subitem 1(a)). Further, the second condition refers to an invoice issued by the supplier before any consideration is received - that is, it is referring to a day that occurs before the day on which the supplier received consideration (see subitem 1(b)). In addition, the term invoice is defined in section 195-1 of the GST Act to mean a document notifying an obligation to make a payment. Thus, in cases involving no consideration, the second condition in item 1 could not be satisfied in any event.

6.28 As a result, such a supply could be treated as a taxable supply if all the other conditions in section 9-5 are met. This outcome is inconsistent with the broad proposal that a supply between associates should not be prevented from being an input taxed or GST-free supply on the basis that it is without consideration.

6.29 In order to address this outcome, the amendments provide that a supply of goods without consideration to an associate is GST-free if the supplier exports the goods from Australia. [Schedule 6, item 1, item 2A in the table after subsection 38-185(1)]

6.30 Under the current law, if a supply of goods is made between associates without consideration and the supplier exports the goods, any GST payable on the supply would be attributable in accordance with the attribution rule in section 72-15. Under this section, any GST payable on the supply would be attributable to the tax period in which the supplier exports the goods. As a result, a 60-day period is not required as, at the time a supplier would be required to attribute any GST, the supplier (and recipient) would know whether the supply is taxable or GST-free, that is, they would know whether the goods have been exported.

6.31 The amendments also set out the conditions where a supplier is treated as having exported the goods from Australia despite the goods actually being exported by the supplier's associate. These conditions include that the goods are supplied to an associate who is not registered or required to be registered who in turn exports the goods from Australia. This ensures that a supply made from an entity to an unregistered associate without consideration will still be GST-free if the acquiring associate exports the goods within 60 days after the goods were delivered or made available in Australia to the associate whichever is the earliest. [Schedule 6, item 2]

Application and transitional provisions

6.32 The amendments made by Schedule 6 commence on the date of Royal Assent. [Schedule 6, item 4]


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