Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 1 - Amendment of the Sales Tax (Exemptions and Classifications) Act 1992
1.1 This Chapter deals with an amendment of the Sales Tax (Exemption and Classifications) Act 1992 (ST(EC)A 1992). The measure deals with property owned or leased by always exempt bodies.
1.2 Item 1 of Schedule 1 to the Bill will remove the unintended access to sales tax exemption for certain goods used in the construction or repair of property owned by, or leased to, an always exempt person (AEP) or the government of a foreign country (foreign government) unless:
- the property is principally occupied by the AEP or the foreign government; or
- the occupant has a contract to provide services to the AEP or the foreign government and the property is used principally for the provision of those services.
1.3 Item 1 also provides details of properties which will be ineligible for the exemption regardless of the occupier or owner.
Purpose of the amendments
1.4 The amendment proposes to overcome a deficiency in the sales tax law which allows a private entity who has a contract with an AEP or foreign government to obtain the benefit of sales tax exemption for certain goods incorporated into properties owned by, or leased to, that AEP or foreign government.
Date of effect
1.5 The amendment will apply to any dealing after 2 April 1998, unless the goods concerned were acquired on or before 2 April 1998. This ensures that goods acquired on or before 2 April 1998 will continue to be exempt from sales tax. [Item 2]
1.6 Item 192 of Schedule 1 to the ST(EC)A 1992 provides a sales tax exemption for certain goods incorporated into any property owned or leased by an AEP or foreign government.
1.7 It is a condition of the exemption that a contract must exist between the AEP or foreign government and the person who incorporates the goods into the property. Alternatively, where the property is privately owned and leased by the AEP or foreign government, the contract would be between the lessor and the person carrying out the work. In the latter case the exemption only covers work that is required to be done under the lease with the AEP or foreign government.
1.8 This exemption is available regardless of whether the AEP or foreign government is ever to occupy the property, and regardless of whether the activity to be conducted from the property is related to the purposes of the AEP or foreign government.
1.9 The broad scope of Item 192 of the ST(EC)A 1992 is being used for commercial development on land owned by, or leased to, an AEP or foreign government. This is not consistent with the original intention of the exemption. In particular it is being used to ensure that at least part of the exemption is going to private sector commercial developments at the expense of the Commonwealth revenue. This provides unfair competitive advantages to these developments.
1.10 Examples of the types of private sector projects benefiting from the Item 192 exemption by taking advantage of being located on land leased from or owned by State and local governments (AEPs) include:
- the building of residential apartments by private consortia;
- the refurbishment of shopping centres;
- the building and refurbishment of private sports facilities; and
- the fitout of major hotels and casinos.
1.11 The amendment was originally contained in Taxation Laws Amendment Bill (No. 4) 1998 which was introduced into the House of Representatives on 2 April 1998. That Bill lapsed when Parliament was prorogued.
1.12 Item 1 provides that where exemption is currently available under the existing Item 192 of the ST(EC)A 1992, it will only continue to be available where:
- the property constitutes housing which is provided by an AEP at a rate below market rate; or
- the property is
- occupied principally by an AEP or foreign government; or
- used by a service provider to an AEP or foreign government where the property is used principally for providing those services; and
- not ineligible Item 192 property.
1.13 Concern was raised with the use of the term occupied (in Item1) when this measure was before the Senate Economics Legislation Committee on 5 August 1998, as Schedule 1 to the Taxation Laws Amendment Bill (No. 4) 1998. Whether a property is occupied principally by an AEP or foreign government will generally be a question of fact. As such it will be necessary to look at factors such as ownership, possession and control of the property.
1.14 In relation to various infrastructure projects the amendment is not intended to impede the private sector provision of public sector infrastructure projects such as: toll roads, prisons, hospitals and water and sewerage treatment plants. In normal circumstances, where the private sector is involved in the provision of these types of projects it would be expected that they would fall within the scope of providing services to the AEP or foreign government and continue to qualify for exemption by virtue of the proposed new subparagraph 4(a)(ii) in Item 1 .
1.15 The following properties are ineligible Item 192 properties:
- shops and shopping centres;
- apartment blocks;
- any properties mainly consisting of a kind which are similar to the above type of properties; and
- any properties of a type prescribed by regulation as ineligible Item 192 properties. [Item 1]
1.16 The application of Item 192 is illustrated by the following chart:
1. Specification of policy objective
1.17 The policy objective of this measure is to remove unintended access to the sales tax exemption, under Item 192 of the ST(EC)A 1992, for goods used in the construction or repair of property owned by, or leased to AEP or foreign government.
2. Identification of implementation options
1.18 The objective can only be achieved by an amendment to the ST(EC)A 1992.
3. Assessment of impacts (costs and benefits) of each option:
Impact group identification
1.19 The following groups will be impacted by the proposed amendment:
- some AEPs eg. Public Benevolent Institutions, Commonwealth, State and local Governments, public and private non-profit hospitals, public and private non-profit schools and universities where these bodies own or construct properties that are unlikely to satisfy the new requirements of Item 192, exemption will no longer be available for goods used to construct or repair those properties;
- some contractors and subcontractors who purchase goods, after 2 April 1998, for use in the building or refurbishment of properties for AEPs or foreign governments;
- some private businesses currently receiving sales tax exemption for goods used in the construction or repair of properties on land belonging to, or leased by an AEP or foreign government, will lose that entitlement as a result of the proposed amendment;
- the Australian Taxation Office (ATO); and
- some private sector tax professionals.
Assessment of costs
1.20 The compliance costs for this measure are difficult to quantify as the prevalence of arrangements structured to gain the unintended access to the sales tax exemption is uncertain. Additional compliance costs may be incurred as people need to ensure that they satisfy the new tests before claiming the exemption.
1.21 The compliance costs to taxpayers due to this change involve:
- learning about the change to the law; and
- incurring costs in obtaining professional advice as to their tax status.
1.22 The administrative costs to the ATO of this change relate mainly to advising clients on the application of the proposed amendments to various construction projects.
Assessment of benefits
1.23 This measure will result in an estimated gain to revenue of $10million in 1997-98 and $50 million in 1998-99.
1.24 The exemption was wide enough to provide a sales tax exemption for goods incorporated into properties owned by, or leased to, AEPs and foreign governments but used by people other than AEPs or foreign governments. However, some private sector firms have captured the benefit of this exemption for projects in a manner not envisaged by the Parliament eg. casinos, shopping centres etc. The amendment will have the effect that private entities who have contracts with AEPs or foreign governments will no longer be entitled to the sales tax exemption for goods attached to land owned by, or leased to, AEPs or foreign governments but which are not used by the AEP or foreign government. The amendment will not apply where the private entity carries out the kind of function ordinarily performed by the AEP or foreign government on their behalf.
1.25 This amendment incorporates competitive neutrality between functions performed directly by AEPs or foreign governments and functions carried out by a private entity on behalf of an AEP or foreign government.
1.26 Entities operating on properties owned by or leased to an AEP or foreign government will no longer enjoy the competitive advantage of obtaining sales tax free goods compared to other parties who conduct similar business on other properties and do not enjoy access to sales tax free goods.
1.27 This measure is designed to remove unintended access to the sales tax exemption, under Item 192 of the ST(EC)A 1992, and as such it was not possible to engage in public consultation prior to the measure being introduced into the Parliament.
1.28 The benefit of removing unintended access to the exemption outweighs the costs of this measure. The ATO will monitor this measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and through other taxpayer consultation forums.