House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 6 - Indirect Tax Transition Acts

Detailed explanation of new law

Supply of rights exercisable on or after 1 July 2000

6.1 Section 11 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) provides that to the extent a right granted on or after 2 December 1998 could reasonably be expected to be exercised after 1 July 2000, it will be subject to the goods and services tax (GST). This requires an apportionment of the value of the right relating to pre and post 1July 2000. There may be some unintended consequences arising from the application of this section. These amendments will make it clear that certain rights do not fall within this provision.

Warranties included in the price of goods and services

6.2 The GST transitional provisions provide that the supply of a right that has been granted on or after 2 December 1998 is subject to GST to the extent that the right could reasonably be expected to be exercised on or after 1 July 2000. The sale price of goods and services may include a value that relates to a warranty. Where goods sold before 1 July 2000 have a warranty included in the purchase price it will not be appropriate to subject part of the warranty value to GST.

6.3 An amendment is required to ensure that the value of warranties included in the price of goods and services sold prior to 1 July 2000 are not subject to GST. Where the warranty is the subject of a separate contract and the warranty period spans 1 July 2000, part of the warranty value will be subject to GST. A warranty will be considered to be included in the purchase price where the warranty normally forms part of the purchase price (e.g. the value of statutory warranties). [Item 2, new paragraph 11(1A)(a)]

6.4 New subsection 11(4) provides a definition of warranty for the purposes of section 11. [Item 3]

Rights to purchase under hire purchase agreements

6.5 Liability for GST under a hire-purchase agreement will arise at the commencement of the agreement and not continuously throughout the period of the agreement. If a hire-purchase agreement is entered into prior to 1 July 2000, it will not be subject to GST.

6.6 The GST transitional provisions provide that the supply of a right which has been granted on or after 2 December 1998 is subject to GST to the extent that the right could reasonably be expected to be exercised on or after 1 July 2000. Where a hire-purchase agreement is entered into prior to 1 July 2000 it may under some State legislation involve an option to purchase at the completion of the contract and this may occur after 30June2000. Where this occurs the effect of the transition provisions appears to bring a pre-1 July 2000 hire-purchase contract within the GST. This result is not intended and an amendment is required to ensure that the correct outcome is achieved. [Item 2, new paragraph 11(1A)(b)]

Indefinite rights included in the price of software

6.7 Computer games and software sold before 1 July 2000 are not expected to be subject to GST. However, similar to the warranties, there is concern that the value of the right to use a computer game or software after 1 July 2000 granted by the software licence would also be caught under the GST transition provisions. This would require retailers of computer games and other software to account for GST in the price of software sold between 2 December 1998 and 30 June 2000.

6.8 This result would be inappropriate and an amendment is required to ensure that computer games and other software sold before 1 July 2000 are not subject to GST. The GST treatment should, in principle, be no different from any other good that is purchased. In the case of computer games and other software what is being sold is the computer game or software. Attached to that sale is a licence (usually an indefinite licence) to use the software. In effect, there is only one transaction, the sale of the computer game or software, and the appropriate result is that sales prior to 1 July 2000 are not subject to GST.

6.9 There may be some situations where it is appropriate for GST to be paid on the value of the right to use the software purchased before 1 July 2000. This will be where the software licence is granted for a finite period that spans the GST implementation date. For example, if a licence is granted to an organisation for multiple use of certain software on their network for a 3 year period, it would be appropriate for the value of that licence which relates to a period after 1 July 2000, to be subject to GST. [Item 2, new paragraph 11(1A)(c)]

Apply the principles in section 177-1 to the transition arrangements

6.10 Section 13 and 14 of the GST Transition Act provide concessional treatment to supplies involving agreements spanning 1 July 2000 where the recipient of the supply is entitled to full input tax credits. New subsections13(4A) and 14(5) are inserted to ensure that Commonwealth entities that are notionally entitled to a full input tax credit, are treated as though they are entitled to a full input tax credit in the same way as any other registered entity. [Items 4 and 7]

Review opportunities

6.11 A review to market price is a review opportunity. However, a review to market price that takes place before 1 July 2000 will not allow indirect tax changes, such as the GST, to be reflected in subsequent contract payments.

6.12 The definition of review opportunity in section 13 of the GST Transition Act is amended to ensure that a review that does not allow indirect tax changes to be reflected in contract payments (either directly or indirectly) is not a review opportunity. [Items 5 and 6]

6.13 This restores the original policy intent that GST should apply to existing contracts only if the supplier can alter the consideration to pass on GST.

Life memberships

6.14 Where life memberships are purchased by businesses (e.g.football club life memberships) between 2 December 1998 and Royal Assent, the supply is GST-free to the extent that the supply occurs before 1 July 2005, unless consideration is paid before 2 December 1998. This imposes a difficult apportionment task upon the suppliers of these memberships.

6.15 Section14 of the GST Transition Act is amended to provide that where a supply of a life membership is made to an entity that would be entitled to a full input tax credit, any consideration paid before 1 July 2005 (or an earlier review opportunity) is for a GST-free supply. The amendment removes compliance costs for businesses offering such memberships. [Item 7]

Ensure wholesale sales tax (WST) credit for second hand goods is confined to stock for resale

6.16 Section 16 of the GST Transition Act allows a credit for WST paid on goods held for sale or exchange on 1 July 2000. However, the credit is not available for second hand goods unless the goods were imported. This is because imported second hand goods are the only type of second hand goods to which WST applies. Currently, that Act could allow a credit where an entity imports goods, pays sales tax, uses the goods as plant or equipment and then holds them for resale.

6.17 Item 8 amends section 16 of the GST Transition Act so that the credit will be available for imported second hand goods where:

•

nobody was entitled to a sales tax exemption for the importation; and

•

you held the goods solely for sale or exchange in the ordinary course of business.

Vehicles used in operating leases pre-2 December 1998

6.18 Where a vehicle is purchased by a business for the purposes of an operating lease, WST is borne by the purchaser and effectively recouped as an element of the lease payments and the residual value. Some operating lessors who incurred WST on vehicles at the time of purchase will also incur GST where they sell those vehicles after 1 July 2000. These lessors will not have been able to adjust the lease payments to take account of the GST on the sale of the vehicle and thereby recoup this additional cost.

6.19 The GST Transition Act is amended to provide transitional relief similar to transitional credits for sales tax on trading stock. The amendment provides a notional input tax credit to operating lessors in certain circumstances so that they are able to offset GST payable on the sale of the vehicle.

6.20 Item 10 adds a new section 19A to the GST Transition Act so that a special credit will be available on the supply of a motor vehicle in certain circumstances. The credit will be available if all of the following conditions are met:

•

the vehicle is first sold on or after 1 July 2000;

•

the supplier was, immediately before the sale, the lessor of the motor vehicle under an operating lease;

•

the supplier bought the vehicle prior to 2 December 1998 for the purpose of leasing it under an operating lease; and

•

the vehicle has been subject to sales tax.

6.21 The credit will be equal to 1/11 of the price of the supply. It is treated as an input tax credit and is attributable to any one tax period of your choice.

6.22 An operating lease is a lease whereby the lessor substantially retains all risks and benefits incidental to the ownership of the motor vehicle.

6.23 No relief will be available for vehicles purchased free of sales tax by lessors. The measure also does not apply to finance leases or hire purchase agreements.

Prevent grouping provisions being used to circumvent the phasing in of credits for motor vehicles

6.24 Section 20 of the GST Transition Act denies input tax credits for motor vehicle purchases between 1 July 2000 and 1 July 2002. These provisions are not effective for certain intra-group transactions, such as where a motor vehicle manufacturer sells to a financing arm within the same GST group who then leases the vehicle.

6.25 Item 11 amends section 20 of the GST Transition Act by inserting new subsection 20(3A) to exclude intra-group supplies of motor vehicles that would fall within the scope of section. This item amends section 20 so that subsection 48-40(2)(a) of the A New Tax System (Goods and Services) Act 1999 (GST Act) will not apply where a motor vehicle, trailer or vehicle body is supplied by one member of a GST group to another member of the group.

6.26 The amendment has the effect of treating supplies of this type between group members as taxable supplies and ensuring that GST will be payable on the intra-group supply. Entitlement to input tax credits for the acquisition will be denied or reduced in accordance with section 20 of the GST Transition Act.

Notification of intention to claim input tax credits on insurance premiums

6.27 Division 78 of the GST Act provides that if you were entitled to an input tax credit for an insurance premium, you will be liable to GST on any settlement made under your insurance policy. Section 23 of the GST Transition Act currently provides that you are not entitled to input tax credits for premiums for insurance policies paid before 1 July 2003 unless you notify the Commissioner of Taxation (the Commissioner) that you are claiming an input tax credit for the premium. This means that you will not have any GST liability for settlements under such insurance policies unless you notified the Commissioner.

6.28 However, section 23 of the GST Transition Act does not currently provide any time in which to notify the Commissioner. Conceivably, you could notify the Commissioner that you are claiming the input tax credits after you know that there will be a settlement.

6.29 Section 23 of the GST Transition Act also only refers to notifying the Commissioner in relation to claiming an input tax credit on the premium. This could mean that to claim the input tax credits you would have to notify the Commissioner in relation to each premium you paid for each insurance policy you have.

6.30 Item 12 amends section 23 of the GST Transition Act to provide that you have a choice about when to notify the Commissioner. You can notify the Commissioner before you become registered or you can notify the Commissioner when you lodge a GST return [new subsection 23(3)] . You can only make the notification once in relation to all the input tax credits to which you are entitled on premiums paid before 1 July 2003 [new subsection 23(2)] . You will not be entitled to input tax credits on such insurance premiums unless a notification is made. The notification relates to all the input tax credits for which you are entitled for all your insurance policies [new paragraph 23(1)(b)] . The notification is only effective in relation to policies that commence on or after the notification takes effect [new paragraph 23(1)(c)] . A policy commences if it is a new policy, which includes renewal of policies.

6.31 If you notify the Commissioner before you become registered, the notification takes effect from the date of effect of your registration [new paragraph 23(4)(a)] . This means that if you take out, or renew an insurance policy before the date of effect of your registration, you are not entitled to the input tax credits in relation to that premium.

6.32 If you notify the Commissioner with a GST return, the notification takes effect from the day after you lodge that return [new paragraph 23(4)(b)] . This means that if you take out, or renew an insurance policy on or before the day you lodge that return, you are not entitled to input tax credits in relation to that premium.

Special credit for wine held for the purpose of sale or exchange at 1 July 2000

6.33 The A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Act 1999 provides a special credit for wine held for the purpose of sale or exchange at 1 July 2000. The special credit is equal to 12/41 of the amount of sales tax that you have borne in respect of the wine. For older stocks of wine where the rate of sales tax borne was between 20% and 26%, this formula will not provide for an appropriate credit amount. The special credit available in respect of stocks of wine subject to sales tax at a rate between 20% and 26% is to be calculated in accordance with the following formula:

sales tax amount X (sales tax rate - 14%) / sales tax rate


where:

sales tax amount is the amount of sales tax that you have borne in respect of the wine; and

sales tax rate is the rate at which you have borne sales tax in respect of the wine.

[Item 13, new subsection 3(3A)]

Example 6.1

Johns Liquor Store holds wine that was purchased on 15 June 1993 for $24 (including $4 sales tax). John is entitled to a special credit of $1.20 in respect of this wine, calculated as:

(4 X (0.2 - 0.14)=$1.20) / 0.2


6.34 There will be no credit entitlement for wine that was subject to a rate of sales tax of less than 20%.