Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 1 - Indirect Tax Acts
1.1 This Chapter explains the amendments contained in Schedule 1 to this Bill. Schedule 1 contains a number of minor policy and technical amendments and is divided into the following Parts:
- Part 1 - Amendment of the A New Tax System (Goods and Services Tax) Act 1999;
- Part 2 - Amendment of the A New Tax System (Luxury Car Tax) Act 1999; and
- Part 3 - Amendment of the A New Tax System (Wine Equalisation Tax) Act 1999.
1.2 The remainder of this Chapter explains these amendments in more detail. An explanation of the amendments to the insurance provisions is contained in Chapter 2 of this Explanatory Memorandum.
1.3 Section 13 of the GST Transition Act details instances where a supply is GST-free. For example, a supply under an agreement made before the date of Royal Assent (i.e. 8 July 1999), which identifies consideration for a supply to be made before 1July2005, is GST-free.
1.4 However, the GST Act, (in particular subsection 9-30(1)), does not refer to GST-free supplies made under section 13 of the GST Transition Act.
1.5 Item 1 is a minor technical amendment to correct this anomaly. Item 1 amends subsection 9-30(1) of the GST Act to ensure that GST-free transactions under a provision of another Act are also GST-free for the purposes of the GST Act.
1.6 Under the GST Act, a payment specifically covered by an appropriation under an Australian law and made by one Australian government agency to another Australian government agency is excluded from the definition of consideration, and is therefore not subject to GST (paragraph 9-15(3)(c)).
1.7 However, the definition of Australian government agency does not cover a local government body. Therefore, Special Purpose and Special/Standing appropriations made directly to a local government body from a Commonwealth or State government agency may be subject to GST. This is contrary to the Governments original intention.
1.8 Items 1 and 2 of Schedule 6 amend the definitions of Australian government agency and exempt Australian government agency in the ITAA 1997 to insert references to a local governing body. These amendments will ensure that payments made to local government bodies that are specifically covered by an appropriation, will not be subject to GST.
1.9 If an adjustment event occurs in relation to a supply (thereby affecting the GST liability in relation to the supply) the supplier is obliged by section 29-75 of the GST Act to notify the recipient by issuing an adjustment note within 28 days of the earlier of the time the supplier became aware of the adjustment or the time the recipient requested the adjustment note.
1.10 The amendment to section 29-75 will ensure that the supplier is obliged to issue an adjustment note only if a tax invoice has been issued, or requested, for the taxable supply to which the adjustment relates. [Items9 to 11]
1.11 Following extensive consultation with industry it has been determined that the precious metal provisions do not reflect the way precious metals are mined and supplied in Australia. This Bill amends the precious metal provisions to reflect the following:
- Where a precious metal producer retains title of the precious metal (the refiner is effectively an agent), the refiner does not make the first supply of the precious metal, and the transaction is not GST-free under the current provisions. Item 16 amends section 38-385 of the GST Act to allow the first supply of precious metal to be provided by an entity on whose behalf the refining has been done;
- The current provisions limit a GST-free supply to where a dealer acquires the precious metal for investment purposes. The restriction to investment purposes is unnecessarily restrictive and will be deleted [item 54] ;
- In order to ensure that the correct supply of precious metal is GST-free or input taxed, the definition of precious metal has been amended to refer to sales of precious metals in an investment form. Investment form means precious metal sold in a coin, wafer, bar or other tradeable form which has an internationally accepted hallmark. In the case of gold, this means a hallmark that has been approved by the London Bullion Market and means that the gold can be traded on the international bullion market. [Items 65 and 66]
1.12 The amendments will ensure that the precious metal provisions contained in the GST Act better reflect the way the precious metals industry currently operates.
1.13 Subdivision 40-A of the GST Act provides that all financial supplies are input taxed. Subsections 40-5(2) and (3) contain tables that set out broad categories of supplies that are financial supplies as well as supplies that are not financial supplies. Subsection 40-5(4) allows regulations to be made that have effect despite subsections 40-5(2) and (3). These regulations are intended to clarify whether a particular supply is, or is not, a financial supply.
1.14 To provide greater certainty to entities making financial supplies and to avoid potential inconsistency between the regulations and the principal Act, subsections 40-5(2) and 40-5(3) are repealed. New subsection 40-5(2) provides that financial supply will have the meaning given by the regulations [item 18]. The regulations will, therefore, specify those supplies that are financial supplies and those that are not. Item 18 also repeals subsection 40-5(4).
1.15 Item 17 amends section 40-1 to reflect the amendments to section 40-5 and item 56 makes a related amendment to the definition of financial supply in section 195-1.
1.16 The amendments ensure that an entity that ceases to be a member of a GST group will become responsible for adjustments relating to transactions made with entities outside the group during the time the entity was a member of the GST group.
1.17 Division 48 of the GST Act provides special rules that enable certain companies and non-profit associations to form a GST group. A GST group is effectively treated as a single entity and as such supplies and acquisitions made wholly within a GST group are taken out of the GST system. Supplies and acquisitions that are made outside the GST group fall within the central concepts. One member of the group (the representative member) becomes responsible for paying all the GST and is entitled to all the input tax credits that the members of the GST group have that relates to supplies and acquisitions made outside the group.
1.18 Where an entity is a member of a GST group, any adjustments that the member has is made by the representative member. Adjustments may occur where a representative member has accounted for GST or input tax credits, but subsequent events may result in that GST or those input tax credits being incorrectly accounted for.
1.18 When a member of a GST group ceases to be a member of the GST group, it was intended that the exiting member would become responsible for accounting for all of its own adjustments, including those relating to transactions made to entities outside the group during the time it was a member of the group. The GST law, as currently drafted, does not give effect to this intention.
1.20 New Subdivision 48-D provides rules in relation to adjustments for an entity that ceases to be a member of a GST group [item 20] . This Bill inserts a definition of when an entity will cease to be a member of a GST group [item 51] .
1.21 New section 48-110 describes how adjustments in relation to a supply or acquisition by a group member to a non-group member will be treated when the entity subsequently ceases to be a member of the GST group. New subsection 48-110(1) stipulates that in the circumstances described, the entity exiting the group will be responsible for the adjustment and the representative member of that group will no longer be responsible. However, if the exiting entity is the representative member, the representative member will be responsible for any such adjustments.
1.22 In cases where the exiting entity becomes a member of another GST group section 48-50 will apply. That is, the representative member of the new group will be responsible for the adjustments of the new member. [New subsection 48-110(2)]
1.23 New section 48-115 describes how adjustments for a change in creditable purpose in relation to an acquisition or importation made by a member of a group to a non-group member will be treated when the entity subsequently ceases to be a member of the GST group. New subsection 48-115(2) provides that, for the purposes of calculating the amount of adjustment for a change in creditable purpose, the exiting entity will be treated as though they were not a member of the GST group when the acquisition or importation took place.
1.24 To achieve this, the exiting entity will be taken to have been entitled to the full input tax credit on the acquisition or importation and therefore will be responsible for any adjustments in relation to that acquisition or importation. However, where the exiting entity becomes a member of another GST group the representative member of the new GST group will be responsible for the adjustment. [New paragraph 48-115(2)(c)]
1.25 For the purposes of working out whether an entity has an adjustment for a change in creditable purpose under subsection 129-40, new subsection 48-115(1) provides thatthe intended or former application of something acquired or imported will be taken to be the creditable purpose last used to work out the amount of input tax credit to which the representative member was entitled or the amount of any adjustment the representative member had in relation to it.
1.26 Item 23 amends section 66-5 to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where those goods are acquired as trading stock (excluding materials used in manufacture). This is not a substantial change because in most cases under the current provisions, a credit only arises when a taxable supply of the goods is made.
1.27 Items 25 and 26 amend subsection 66-10(1) and insert new subsection 66-10(1A) to ensure that for acquisitions of $300 or less, the amount of input tax credit is not linked to the subsequent supply. For these acquisitions there is no reduction in the input tax credit if the price of the supply is less than the consideration for the acquisition. This eliminates the administrative burden of tracing supplies of small items of trading stock back to the acquisition of those items.
1.28 For most creditable acquisitions and for acquisitions of second-hand goods where the consideration is $300 or less, input tax credits can be claimed when the creditable acquisition is made. A different timing rule applies to acquisitions of second-hand goods where the consideration is more than $300. Broadly, the credit is not available until such time as a taxable supply of the goods is made. So that second-hand goods traders arent required to use both of these methods to attribute credits for acquisitions of second-hand goods, item 27 amends paragraph 66-15(1)(b) to allow traders to choose to account for credits for all acquisitions of second-hand goods, irrespective of the consideration, at the time a taxable supply of those goods is made. This means that the second-hand goods trader can elect to claim some credits later than otherwise entitled if it is convenient for them to do so. Items 29 and 30 insert new sections 66-17 and 66-55 , which require records for creditable acquisitions of second-hand goods and for acquisitions of second-hand goods that give rise
1.30 Item 30 inserts new Subdivision 66-B which provides a global accounting method for acquisitions of second-hand goods that are divided for re-supply. In these cases, a matching of the credit on the acquisition with the GST on the subsequent supplies is impractical.
1.31 The global method can be used when it is reasonable to expect that more than one supply will be made from one acquisition [new paragraph 66-40(1)(c)] . Situations where this may occur include where:
- component parts of an acquisition are physically broken down, for example, by motor vehicle dismantlers; and
- an acquisition comprises several items, and one price is paid for the acquisition, rather than a separate amount for each item, for example, purchase of an auction lot, a collection, or the contents of a deceased estate.
1.32 The global method simply allows all of the input tax credits on acquisitions of second-hand goods that are to be divided for supply worked out as if the acquisitions were creditable to be offset against all of the GST on supplies made from this pool of acquisitions. No GST is payable on a supply until all of the credits have been absorbed. [New sections 66-45, 66-50 and 66-70]
1.33 The fact that a supply covered by Subdivision 66-B may not be taxable is disregarded in determining whether the related acquisition is creditable. [New section 66-60]
Example 1.1 A motor vehicle wrecker acquires a damaged car from an unregistered individual for $550. The Subdivision 66-B credit amount is worked out as if the acquisition is a creditable acquisition the credit amount is $50. This credit cannot be claimed in a GST return, but is used to reduce the GST payable on any later supplies of goods made from Subdivision 66-B acquisitions.The motor wrecker sells the car engine for $440. The Subdivision66-B GST amount is worked out as if the supply is a taxable supply the GST amount is $40. As this is less than the $50 credit that is available, the supply is not a taxable supply and no amount of GST is included in the wreckers net amount. Although the supply is not a taxable supply, this does not affect the buyers entitlement to an input tax credit.Later the wrecker sells some of the cars body panels for $330. The GST amount of $30 is reduced by the credit that is still available, that is, by $10. So the GST on the supply is reduced to $20. If the buyer of the panels is entitled to an input tax credit for the acquisition, the $30 credit is not reduced.In a later tax period, the wrecker purchases another damaged car, and sells some more parts taken from the first car. The credit on the acquisition of the second car is offset against the GST on the supplies of parts taken from the first car all of the credits and GST are pooled.
1.34 The global method does not always apply where an acquisition comprises more than one item:
- where amounts are agreed for each item acquired, and these are separately itemised,the normal rules in Subdivision 66-A apply as it is possible to determine the credit that is attributable to each later supply. [New subsection 66-40(2)]
A second-hand goods dealer purchases a box of watches and jewellery which is offered at an auction as a single lot. The dealer intends to place the items into his trading stock and sell them separately. This is an acquisition of second-hand goods that are divided for future supply. Subdivision 66-B applies.If the same items were purchased in an acquisition from an unregistered supplier with prices negotiated for each piece, this transaction is not an acquisition of second-hand goods that are divided for re-supply. Subdivision66-A applies.
A motor vehicle wrecker buys car wrecks for various prices. For those cars acquired for less than $300, the wrecker is entitled to Subdivision66-A credits at the time of acquisition. However, if the Subdivision 66-A credit is claimed, then any supplies of parts made from those acquisitions are taxable, and are excluded from the Subdivision 66-B global account. The wrecker can choose to instead apply Subdivision 66-B to wrecks acquired for less than $300, rather than have to separately identify that trading stock for which a credit has already been claimed.
1.35 Item 68 amends the definition of second-hand goods to exclude all animals and plants. It was not intended that animals or plants be regarded as second-hand goods.
1.36 Item 9 of Schedule 2 amends section 18 of the GST Transition Act to ensure that second-hand goods credits and global accounting will be available even if the goods were acquired prior to 1 July 2000, provided that the goods are held as trading stock on that day, and have not been held other than as trading stock.
1.37 The Australian GST system is designed to tax consumption of goods, services and other things in Australia. In the case of telecommunication supplies, consumption is taken to occur where the recipient of the supply effectively uses and enjoys the supply. Telecommunication services that are provided by an overseas supplier and are used or enjoyed in Australia may currently fall outside the scope of the GST system.
1.38 This amendment will ensure that telecommunications services that are used or enjoyed in Australia are subject to GST regardless of whether the supplier is in Australia or offshore. This is consistent with the treatment of telecommunication services in a number of other GST/VAT countries.
1.39 As the effect of the amendment is to make offshore telecommunication supplies connected with Australia, Division 84 of the GST Act (the reverse charge) will not apply where those supplies are subject to GST under the new Division 85 .
1.40 The amendments provide a definition for the term telecommunication supply.
1.41 Under the general rules, a supply of anything other than goods or real property is connected with Australia if it is either done in Australia or made through an enterprise that the supplier carries on in Australia.
1.42 Item 43 inserts new Division 85 Telecommunication supplies, into the GST Act. This Division provides an additional criterion for connected with Australia specifically for telecommunication supplies. That is, if the effective use or enjoyment of a telecommunication supply is in Australia the supply will be connected with Australia. This is of particular relevance to the application of section 9-5. [New subsection 85-5(1)]
1.43 For example, where an offshore telecommunication provider supplies Internet access to a customer in Australia, the supply will be connected with Australia, even though the supply is not done in Australia or made through an enterprise that the supplier carries on in Australia.
1.44 In some circumstances a telecommunication supply may be connected with Australia as a result of the application of the new Division, but for administrative reasons it is not feasible for the Commissioner to collect the GST. New subsection 85-5(2) allows the Commissioner to determine that in these circumstances the telecommunication supply (or a class of supplies) will not be connected with Australia.
1.45 For example, the Commissioner may decide to use this discretion in relation to mobile telephone calls made by an overseas tourist visiting Australia using a mobile roaming service provided by their overseas telecommunication supplier.
1.46 New subsection 85-5(3) provides that the rules set out in new Division 85 are in addition to the general rules about connected with Australia in section 9-25.
1.47 Item 53 modifies the definition of connected with Australia in section 195-1 (Dictionary) to also refer to section 85-5.
1.48 Item 3 inserts a new entry in the table in section 9-39 (Special rules relating to taxable supplies) and item 15 adds a new entry to the table in section 37-1 (Checklist of special rules).
1.49 New section 85-10 provides a definition of telecommunication supply. This definition is consistent with the definition recently enacted by the European Council. The definition is designed to capture the means of communication but not the content, where that content is clearly a different type of supply. The treatment of the content depends on the nature of the service provided.
1.50 Telecommunication supplies include the supply of:
- telephone calls;
- transmission element of international data exchange;
- call back services;
- the provision of leased lines, circuits and global networks;
- e-mail and Internet access; and
- satellite transmissions.
Telecommunication supplies do not include the following supplies delivered through telecommunication mediums:
- licences to use intellectual property such as computer software; and
- consultancy services provided via the Internet.
1.52 Item 71 inserts a new definition, telecommunication supply in section 195-1 which refers to the new section 85-10 .
1.53 Item 44 includes a telecommunication supply as a different kind of supply for the purposes of Division 96. This recognises that a supply consisting of both a service and a telecommunication supply, may be treated as separate supplies for the purposes of this Division.
1.54 Item 45 amends subparagraph 117-5(1)(b)(i) in relation to the transport component of the value of a taxable importation for goods that were exported from Australia for repair or renovation. The amendment refers to the international transport of the goods. This change is consistent with changes made to sections 13-20 and 38-355 proposed by the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999.
1.55 Entitlement to an input tax credit depends on the extent to which an acquisition or importation is made for a creditable purposes. Division129 provides for adjustments to reflect a change in creditable purpose if the actual application differs from the intended or former application of the thing. Adjustments are attributed to adjustment periods, as defined in section 129-20. This section provides that anadjustment period for an acquisition or importation is at least 12months after the acquisition or importation was made. The adjustment period is the tax period that ends on 30June, or the closest to 30June aligned with the taxpayers income tax year.
Section 129-25 provides that the adjustment period immediately after something acquired or imported is lost, stolen, destroyed, expired or disposed of is the last adjustment period for the acquisition. An amendment to the section will make clear that the adjustment period will be 30June (or the closest to 30June aligned with the taxpayers income tax year) of the year in which the acquisition was made if the disposal, loss or theft occurs in the same year. [Item 46]
1.57 Currently the definition of entity in the GST Act and the ABN Act are different. Under the GST legislation, all government organisations would effectively be part of a single State, Territory and Commonwealth registration and each Government would decide which sub-entities it would treat as separate branches for GST purposes. The ABN Act includes a definition of government entity which allows for separate registration of government entities at a lower level.
1.58 Item 57 inserts a definition of government entity into section 195-1 of the GST Act to allow (but not require) for the separate registration of government entities. Under this definition, a government entity has the same meaning given by section 41 of the ABN Act.
1.59 Item 47 inserts new Division 149 which is about registration and grouping of government entities. The main rules that deal with registration of government entities are as follows:
- New section 149-5 provides when a government entity may register for GST. Note that a government entity may apply to be registered even if it is not an entity and it is not carrying on an enterprise;
- New section 149-10 provides that a government entity is not required to register separately. This would apply where a government entity is part of another entitys registration and does not need to be separately registered in its own right;
- New section 149-15 ensures that a government entity that is separately registered will be treated as if it were a separate legal entity and an entity for the purposes of the GST law; and
- New section 149-20 ensures that section 25-50 and subsection 25-55(2) (which are about cancelling registration) do not apply to government entities.
1.60 Items 4 to 6, 14 and 19 insert references to new Division 149 in the GST Act.
1.61 Division 48 of the GST Act contains the rules that apply to GST groups. Section 48-5 provides that the Commissioner must approve 2 or more entities as a GST group if, amongst other things, the entities jointly apply in the approved form and each of the entities satisfies the membership requirements for that GST group. Section 48-10 contains the membership requirements of a GST group.
1.62 Currently, the grouping provisions only apply to a company, a partnership or trust that satisfies the requirements specified in the regulations and certain non-profit bodies. Item 47 of this Bill amends the GST Act to allow government entities to form GST groups in certain situations where the government entities satisfy the membership requirements for a GST group.
1.63 Under new section 149-25 , a government entity (including a government related entity refer to paragraph 1.64) will satisfy the membership requirements for a GST group, or a proposed GST group, of government entities if:
- it is registered;
- it is not a member of any other GST group;
- it has the same tax periods applying to it as the tax periods applying to all the other members of the GST group or proposed GST group;
- it accounts on the same basis as all those other members; and
- all those other members are government entities (or government related entity). [Items 47, 57, 64 and 67]
1.64 The grouping provisions outlined in paragraph 1.63 apply to a government entity and a government-related entity. A government related entity includes an entity that would be a government entity but for subparagraph (e)(i) of the definition of government entity in the ABN Act. [Item 58]
1.65 Paragraph (c) of the definition of value is repealed [items 75 and 76] . Theparagraph will become redundant as a consequence of the repeal of the provision to which it refers by item 110 of Schedule 1 to the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999.
1.66 The A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 proposes new subsection 9-75(2) be inserted into the GST Act. Subsection 9-75(2) ensures that LCT is not included when calculating the value of a taxable supply.
1.67 Items 59 to 61 contain technical amendments to the GST Act, to deal with the flow-on effects of subsection 9-75(2) being inserted. This will bring the legislation into line with the Governments original intention and will ensure that the correct amount of LCT and GST is paid or payable.
1.68 The LCT is to be excluded from the definitions of both GST exclusive market value and GST exclusive value in section195-1 [items 59 and 60] . The definition of GST inclusive market value is to include the luxury car tax [item 61] .
1.69 Currently, the definition of car in the LCT Act means a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 2 tonnes and fewer than 9 passengers (section 27-1). Motor vehicle is defined to mean a motor-powered road vehicle (including a 4wheel drive vehicle).
1.70 The definition of car is intended to include all passenger cars (including station wagons), all 4wheel drive vehicles, light trucks, motor homes, campervans and hearses.
1.71 However, some luxury passenger vehicles, such as stretched limousines, are designed to carry more than 9 passengers. Therefore, these limousines do not fall within the LCT Act. This is contrary to the Governments original intention.
1.72 Item 78 amends the definition of car in section 27-1 to include a limousine, regardless of the number of passengers it is designed to carry.
1.73 Item 79 amends the definition of application to own use in section 33-1 of the WET Act by adding a further exclusion. Section 13-5 of the WET Act allows an entity to purchase wine free of WET if it will be used as a material in manufacture or other treatment or processing. This will allow, for example, a manufacturer that uses wine to produce other beverages to purchase the wine under quote, free of WET.
1.74 The WET Act imposes a WET liability on an application to own use by an entity that obtained the wine under quote. In the example in paragraph 1.73 this provision would apply and the manufacturer would have a WET liability at the time the wine is used. This amendment will ensure that when wine is used in that circumstance it will not be an application to own use and a WET liability will not arise. Any WET or GST will be payable at the time the goods produced are sold or applied to own use.