House of Representatives

Tax Laws Amendment (2011 Measures No. 9) Bill 2011

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5 - GST financial supply provisions

Outline of chapter

5.1 Schedule 3 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to implement a number of recommendations agreed to by the Government arising out of Treasury's Review of the GST financial supply provisions .

5.2 All legislative references in this chapter are to the GST Act unless otherwise stated.

Context of amendments

5.3 These measures implement three of the recommendations arising out of Treasury's Review of the GST financial supply provisions . The remaining recommendations will be implemented through amendments to the A New Tax System (Goods and Services Tax) Regulations 1999 .

5.4 Most financial supplies are input taxed and entities making financial supplies generally cannot claim input tax credits for related acquisitions.

5.5 Input taxation of financial supplies under the goods and services tax (GST) is inefficient and reduces competition. Division 70 provides access to reduced input tax credits for a defined range of acquisitions which are listed in the GST regulations. The availability of reduced input tax credits is aimed at mitigating some of the inefficiency caused by input taxation.

5.6 In addition, to reduce compliance costs for small businesses and businesses that only make limited financial supplies, the GST law contains a number of exclusions to the input taxation of financial supplies. These include:

the financial acquisitions threshold, which allows businesses, whose notional entitlements to input tax credits for financial acquisitions do not exceed a de minimis threshold, to access input tax credits (Division 189);
the borrowing concession, which excludes borrowing-related acquisitions from the financial acquisitions threshold (section 189-15); and
treating borrowing-related acquisitions as not relating to making input taxed supplies provided the borrowing itself does not relate to making input taxed supplies (subsection 11-15(5)).

Financial acquisitions threshold

5.7 In order to keep businesses that primarily make taxable or GST-free supplies out of the financial supply regime, the GST Act allows businesses that only make a small number of low value financial supplies to claim input tax credits for acquisitions relating to the making of financial supplies where the business has not exceeded the financial acquisitions threshold.

5.8 Division 189 sets out the conditions in which an entity will exceed the financial acquisitions threshold. The financial acquisitions threshold is a two-limb test. For calculation purposes, the test assumes that there is a notional input tax credit available for financial acquisitions. An entity will exceed the financial acquisitions threshold if the dollar value of notional input tax credits for current or future financial acquisitions made by the entity exceeds either:

$50,000 in the relevant period (first limb); or
ten per cent of the total amount of input tax credits the entity could claim for all its purchases (including notional input tax credits for financial acquisitions) during the relevant period (second limb).

5.9 In applying the financial acquisitions threshold, it is necessary to determine the entity's current financial acquisitions and future financial acquisitions for the relevant periods. The relevant period for current financial acquisitions is the current month plus the previous 11 months. The relevant period for future financial acquisitions is the current month plus the following 11 months.

Diagram 5.3 : The relevant time periods for testing against the financial acquisitions threshold

Diagram 5.3 :  The relevant time periods for testing against the financial acquisitions threshold

Borrowings

5.10 Subsection 11-15(5) reinstates an entity's entitlement for input tax credits for acquisitions that have been denied through paragraph 11-15(2)(a), to the extent that the acquisition relates to making a financial supply consisting of a borrowing, and the borrowing relates to the entity making supplies that are not input taxed.

5.11 This means that businesses that borrow funds to make supplies that are not input taxed are able to claim input tax credits for acquisitions that relate to the borrowing.

5.12 Borrowing is defined in the GST Act by reference to section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), as any form of borrowing, whether secured or unsecured, and includes the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness.

5.13 Currently, Australian authorised deposit-taking institutions (ADIs) make financial supplies consisting of a borrowing through the provision of deposit accounts. These entities are able to claim input tax credits for acquisitions to the extent the acquisitions relate to the financial supply consisting of a borrowing and the borrowing relates to the ADIs making supplies that are not input taxed.

Hire purchase

5.14 Under a hire purchase agreement, the entity:

purchases goods through instalment payments;
uses the goods while paying for them; and
does not own the goods until the entity has paid the final instalment.

5.15 'Hire purchase agreement' is defined in section 995-1 of the ITAA 1997.

5.16 Under the GST law, a sale and purchase of goods made under a hire purchase agreement has the same GST treatment as a sale and purchase of goods under an ordinary sale agreement.

5.17 Therefore, under the existing law, the attribution of GST liabilities and input tax credits for the taxable component of a hire purchase agreement depends on whether the taxpayer accounts on a cash or non-cash basis.

5.18 Taxpayers who account on a cash basis attribute their GST liabilities and input tax credits when they make or receive each instalment payment.

5.19 On the other hand, taxpayers who account on a non-cash basis account for their GST liabilities upfront when the first payment is received or an invoice is issued (whichever is earlier). Similarly, they are able to claim their input tax credits upfront at the earlier of when the first payment is made (if they hold a valid tax invoice for the acquisition) or when the tax invoice is obtained.

Summary of new law

5.20 This Schedule increases the first limb of the financial acquisition threshold from $50,000 to $150,000, excludes financial supplies consisting of a borrowing that are made through the provision of a deposit account by an Australian ADI from the current concession for borrowings, and allows taxpayers who account on a cash basis to treat an acquisition made under a hire purchase agreement as though they do not account on a cash basis.

Comparison of key features of new law and current law

New law Current law
An entity will exceed the financial acquisitions threshold if the dollar value of notional input tax credits for current or future financial acquisitions made by the entity exceeds $150,000 in the relevant period. An entity will exceed the financial acquisitions threshold if the dollar value of notional input tax credits for current or future financial acquisitions made by the entity exceeds $50,000 in the relevant period.
Australian ADIs who make financial supplies consisting of a borrowing through the provision of deposit accounts are not able to claim input tax credits for acquisitions that relate to the financial supply consisting of a borrowing, even where the borrowing relates to making supplies that are not input taxed. Australian ADIs who make financial supplies consisting of a borrowing through the provision of deposit accounts are able to claim input tax credits for acquisitions to the extent that the acquisitions relate to the financial supply consisting of a borrowing and the borrowing relates to making supplies that are not input taxed.
Input tax credits on acquisitions made under a hire purchase agreement are available to cash basis taxpayers as if they had accounted on a non-cash basis for that transaction. This means that input tax credits are available upfront. Input tax credits on acquisitions made under a hire purchase agreement are not available to cash basis taxpayers upfront and are only available when each instalment payment is made.
Supplies or acquisitions of goods or credit made under a hire purchase agreement are not supplies or acquisitions made on a progressive or periodic basis. The attribution rules contained in Division 156 provide that supplies or acquisitions made on a progressive or periodic basis are to be treated as if each progressive or periodic component of the supply or acquisition is a separate supply or acquisition.

Detailed explanation of new law

Financial acquisitions threshold

5.21 Part 1 amends Division 189 to increase the first limb of the financial acquisitions threshold from $50,000 to $150,000.

5.22 This means that from 1 July 2012, an entity is able to claim input tax credits for acquisitions that relate to the making of financial supplies if the dollar value of notional input tax credits for current or future financial acquisitions made by the entity does not exceed $150,000 in the relevant period. [Schedule 3, item 1, paragraphs 189-5(1)(a) and (2)(a ); item 2, paragraphs 189-10(1)(a) and (2)(a)]

5.23 This new threshold means that an entity can now make up to $1,650,000 of financial acquisitions in the relevant period before exceeding this limb of the financial acquisitions threshold. This compares with up to $550,000 of similar acquisitions prior to 1 July 2012.

5.24 The relevant periods in which financial acquisitions made (current financial acquisitions), or anticipated to be made (future financial acquisitions), by the entity remain the same.

Example 5.13 Alpha Co provides financial services to its clients. In the 12 months leading up to and including July 2012, Alpha Co has $80,000 worth of notional input tax credits (in respect of $880,000 of current financial acquisitions). It predicts that for July 2012 and the subsequent 11 months (future financial acquisitions), it will have $85,000 worth of notional input tax credits. Alpha Co satisfies the first limb of the financial acquisitions threshold at the time of undertaking the test in July 2012, as neither its entitlement to notional input tax credits for current or future financial acquisitions exceed $150,000.

5.25 The 10 per cent threshold (second limb of the financial acquisitions threshold) remains unchanged. If an entity's notional input tax credits for its current or future financial acquisitions exceed 10 per cent of the total amount of notional input tax credits for all of its purchases (including financial acquisitions) during the relevant period, then the financial acquisitions threshold will have been breached even if the dollar value of input tax credits does not exceed $150,000.

Example 5.14 Assuming the same facts as in Example 5.1, if the total amount of notional input tax credits Alpha Co could claim for all of its purchases is $150,000, then Alpha Co would exceed the financial acquisitions threshold as the amount of notional input tax credits for its current or future financial acquisitions is more than 10 per cent of the total amount of input tax credits (including notional input tax credits) for all of its purchases.

5.26 The amendment to the threshold applies when working out whether the financial acquisitions threshold has been exceeded during July 2012 or later months. When working out whether the threshold has been exceeded in June 2012 and prior months, the old threshold of $50,000 applies. [Schedule 3, item 3]

Diagram 5.4 : Applicable thresholds at June 2012 and July 2012

Diagram 5.4 :  Applicable thresholds at June 2012 and July 2012

Example 5.15 On 15 June 2012, Beta Co calculates its notional input tax credit entitlement for its current financial acquisitions to be $45,000 and its notional input tax credit entitlement for its future financial acquisitions to be $60,000. As Beta Co's notional input tax credit entitlement for its future financial acquisitions exceed the threshold of $50,000, it will have exceeded the financial acquisitions threshold and will be denied input tax credits for acquisitions that relate to the making of financial supplies.On 15 July 2012, Beta Co tests its current and future input tax credit entitlement for its financial acquisitions again. Its notional input tax credit entitlement for its current financial acquisitions is $48,000 and for its future financial acquisitions is $55,000. As neither Beta Co's current nor future input tax credit entitlement for its financial acquisitions exceed the new threshold of $150,000, it satisfies the first limb of the financial acquisitions threshold.

Borrowings

5.27 Part 2 amends section 11-15 to restrict the financial supply consisting of a borrowing referred to in paragraph 11-15(5)(a) by excluding borrowings made through a deposit account.

5.28 This means that input tax credits denied under paragraph 11-15(2)(a) for acquisitions that relate to the Australian ADI making a financial supply consisting of a borrowing through a deposit account are not re-instated under subsection 11-15(5). [Schedule 3, item 4, paragraph 11-15(5)(a)]

Example 5.16 RDC Bank makes deposit accounts available to its customers. Rob has an account with RDC Bank and deposits $50,000 into the account on 1 August 2012. RDC Bank makes a financial supply consisting of a borrowing through the provision of the deposit account to Rob. It therefore does not satisfy paragraph 11-15(5)(a) and is not able to claim input tax credits denied under paragraph 11-15(2)(a) for acquisitions made on or after 1 July 2012, that relate to it providing the account to Rob.

5.29 Deposit account is defined to mean an account that is made available by an Australian ADI in the course of carrying on a banking business, where amounts credited to the account represent money taken by the ADI on deposit, other than as part-payment for identified goods or services. 'Australian ADI' is defined in the Corporations Act 2001 and 'banking business' is defined in the Banking Act 1959 . [Schedule 3, item 5, definition of 'deposit account' in section 195-1]

5.30 The exclusion only applies to deposit accounts made available by Australian ADIs and does not apply where a debenture (as defined in section 9 of the Corporations Act 2001) issued by the ADI relates to any of the amounts credited to the account. [Schedule 3, item 5, definition of 'deposit account' in section 195-1]

5.31 These amendments apply in relation to acquisitions made on or after 1 July 2012. [Schedule 3, item 6]

Hire purchase agreements

5.32 Part 3 inserts Division 158 which establishes a special rule for taxpayers who account on a cash basis to attribute their input tax credits on acquisitions made under hire purchase arrangements as though they do not account on a cash basis. [Schedule 3, item 10, Division 158]

5.33 This means that taxpayers who account on a cash basis are now able to claim input tax credits for acquisitions they make under a hire purchase agreement upfront instead of waiting until each instalment payment is made. This removes the current distortion that exists between hire purchase and other forms of financing for cash-based taxpayers.

5.34 The special rules relating to acquisitions made under hire purchase agreements also apply to representatives of incapacitated entities that are entitled to input tax credits or are required to make adjustments under subsection 58-10(1). [Schedule 3, item 10, paragraph 158-5(2)(b)]

5.35 The non-cash basis treatment also applies if there are other GST consequences that relate to the relevant acquisitions. For example, the entity will be treated as accounting on a non-cash basis when determining if a bad debt adjustment arises under Division 21 for the relevant acquisitions.

5.36 The attribution rules contained in Division 156 currently treat supplies and acquisitions made on a progressive or periodic basis as if each progressive or periodic component of the supply or acquisition is a separate supply or acquisition.

5.37 In order to ensure that GST and input tax credits are attributable upfront for supplies and acquisitions of credit made under a hire purchase agreement, section 156-23 is inserted to provide that supplies or acquisitions of goods or credit under hire purchase agreements are not treated as supplies or acquisitions made on a progressive or periodic basis. [Schedule 3, item 9, section 156-23]

5.38 The section clarifies that the existing treatment of goods supplied and acquired under a hire purchase agreement as not being made on a progressive or periodic basis is not changed by these amendments. It further ensures that the credit component supplied and acquired under a hire purchase agreement is also not treated as a supply made on a progressive or periodic basis.

5.39 Division 158 will override the operation of the following provisions in respect to acquisitions made under a hire purchase agreement where an entity accounts on a cash basis:

paragraph 19-10(2)(c) (Adjustment events);
subsection 21-15(2) (Bad debts written off (creditable acquisitions));
subsection 29-10(2) (Attributing the input tax credits for your creditable acquisitions);
subsection 29-20(2) (Attributing your adjustments);
subsection 66-15(2) (Attributing input tax credits for creditable acquisitions of second-hand goods); and
subsections 90-35(1) and (2) (Amalgamating companies accounting on a cash basis).

5.40 The following provisions may apply in respect to acquisitions made under a hire purchase agreement as a result of Division 158, even though the entity accounts on a cash basis in respect to other transactions:

section 19-10 (Adjustment events);
subsection 21-15(1) (Bad debts written off (creditable acquisitions);
subsection 29-10(1) (Attributing the input tax credits for your creditable acquisitions);
subsection 29-20(1) (Attributing your adjustments);
subsection 66-15(1) (Attributing input tax credits for creditable acquisitions of second-hand goods); and
section 90-25 (Entitlement after amalgamation to input tax credits for amalgamating company's acquisitions).

5.41 Hire purchase agreements are also added to the list of special rules relating to attribution rules and the list of special rules relating to accounting on a cash basis. [Schedule 3, items 7 and 8, sections 29-39 and 29-69]

5.42 These amendments apply in relation to hire purchase agreements entered into on or after 1 July 2012. [Schedule 3, item 11]

Example 5.17 Melissa owns a small fashion business with a turnover of $1.5 million. The business is registered for GST and accounts on a cash basis. On 15 April 2012, Melissa enters into a hire purchase agreement (where the credit component is not disclosed) with Patrick to purchase a new sewing machine for her business for $3,300 and pays her first instalment of $110. As Melissa accounts for GST on a cash basis, her input tax credit entitlement is limited to $10 (1/11 of $110) for the first instalment, in the period she actually pays the instalment. Had Melissa been accounting for GST on a non-cash basis she would have been able to claim an input tax credit of $300 (1/11 of $3,300) in the tax period in which she first holds a tax invoice for acquisition.After 1 July 2012, Melissa must continue to account for input tax credits on the purchase of the sewing machine when each instalment payment is made. The amendments do not apply because she has entered into the hire purchase agreement before 1 July 2012.On 20 July 2012, Melissa enters into another hire purchase agreement (with an undisclosed credit component) with Patrick to purchase a delivery vehicle for her business for $55,000. As the agreement was entered into after 1 July 2012, Melissa can claim a full input tax credit of $5,000 (1/11 of $55,000) for the tax period in which she first holds a tax invoice, irrespective of whether Melissa accounts for GST on a cash or non-cash basis.

Application and transitional provisions

5.43 The amendments in Part 1 apply when working out whether an entity has exceeded the financial acquisitions threshold for months commencing on or after 1 July 2012.

5.44 The amendments in Part 2 apply in relation to acquisitions made on or after 1 July 2012.

5.45 The amendments in Part 3 apply in relation to hire purchase agreements entered into on or after 1 July 2012.


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