Supplementary Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 4 - Other amendments
4.1 This Chapter explains various technical amendments to the GST Act. They include amendments to:
- clarify the GST treatment of goods sold through inwards duty free shops [amendments 26 and 27] ;
- make some technical corrections to the Bill relating to supplies involving non-residents [amendments 28 and 29] ;
- deny input tax credits for goods and services acquired or imported for the purpose of providing fringe benefits to employees of a financial supplier that is wholly or partially denied input tax credits on its acquisitions [amendments 30 and 33 to 35] ;
- technical corrections to the Bill for borrowing related importations [amendments 31 and 32] ;
- further clarify the application of GST to supplies made by entities to their members and provide that partnerships, the members of which are principally individuals, are not carrying on an enterprise if they do not have a reasonable expectation of profit or gain [amendments 42 and 43] ;
- ensure that complying superannuation funds are carrying on an enterprise for GST purposes [amendment 43] ;
- clarify the calculation of GST for a mixed supply [amendment 44] ;
- technical correction to the Bill relating to the supply of real property by way of long-term lease [amendment 49] ;
- ensure that goods that have entered Australia under temporary importation provisions are subject to GST if reimported [amendments 50 and 51] ;
- ensure that input tax credits can only be claimed once by a partnership in respect of partner reimbursements [amendment 52] ;
- enable employers to claim input tax credits where they pay an expense on behalf of an employee and that expense is related to that person's activities as an employee [amendment 53] ;
- ensure that an entity that enters goods for home consumption but is not the importer of the goods can claim input tax credits in respect of the taxable importation [amendments 45, 54 and 55] ; and
- ensure that the rules which provide for an increasing adjustment where things are taken out of the GST system will not disadvantage executors and beneficiaries of deceased estates who continue to carry on an enterprise of the deceased [amendments 56 to 60] .
4.2 In addition, there are amendments to the ABN Act, the GST Transition Act and the LCT Act that:
- amend the ABN Act to further clarify the application of the ABN to entities that only make supplies to their members and provide that partnerships, the members of which are principally individuals, are not carrying on an enterprise if they do not have a reasonable expectation of profit or gain [amendment 41] ;
- amend the GST Transition Act to clarify the application of the phasing in of input tax credits for acquisitions of motor vehicles and where motor vehicles are the subject of an eligible short term lease [amendments 61 and 62] ; and
- amend the LCT Act to ensure that the LCT applies to all campervans and motor homes with a value above the LCT threshold [amendment 63] .
Supplies through inwards duty free shops
4.3 Amendments 26 and 27 insert new items 4A and 8 into Schedule 2 to the Bill. New item 4A repeals section 38-415 of the GST Act and inserts a new section 38-415. The new section will grant GST-free status to all airport shop goods sold through an inwards duty free shop to a relevant traveller. At present, only imported and excisable goods are GST-free.
4.4 New item 8 makes a consequential amendment to the definition of 'relevant traveller' in section 195-1 of the GST Act.
Supplies to Australian residents outside Australia
4.5 Amendment 28 removes item 7 in Schedule 3 to the Bill. This item amended item 1 in the table in subsection 38-190(1) of the GST Act. This item removed the words directly connected with goods and replaced them with the words a supply of work physically performed on goods. This was consistent with the changes to items 2 and 3 in the table in subsection 38-190(1). However, this has the unintended consequence of narrowing the range of GST-free supplies that are connected with goods outside Australia. This technical correction ensures that item 1 remains in its current form.
4.6 Amendment 29 makes a technical correction to item 11 in Schedule 3 to the Bill to ensure that the amendment operates as intended. The explanatory memorandum to the Bill at paragraphs 3.25 to 3.27 outlines the operation of this amendment.
Interaction of GST and FBT
4.7 The Government announced on 22 December 1999 that 2 different FBT gross-up rates would apply. A GST-inclusive FBT gross-up rate will apply to a situation where input tax credits have been allowed on the acquisition of the fringe benefit and the existing FBT gross-up rate will apply where no GST is payable or no input tax credits are claimable on the acquisitions.
4.8 It is acknowledged that this measure does not specifically deal with entities that make input taxed supplies but where partial input tax credits are allowed (i.e. for fringe benefits). In the absence of any change, they would be subject to the higher gross-up rate on purchases even where only a small proportion of the input tax credit is claimable. Conceptually, they should be subject to the higher gross-up on that part of the fringe benefit that they could claim an input tax credit for. However, it will be difficult to determine the extent of input tax credit entitlement for the goods and services acquired for the purpose of the fringe benefit.
4.9 To address this issue, amendment 35 inserts new Division 71 into the GST Act to deny input tax credits for goods and services acquired or imported for the purpose of providing fringe benefits to employees of a financial supplier that is wholly or partially denied input tax credits on its acquisitions. The input tax credits are only denied under this Division where the supplier exceeds the financial acquisitions threshold contained in Division 189. [New subsections 71-5(2) and 71-10(2)]
4.10 Where suppliers are denied input tax credits under new Division 71 , the existing (i.e. the lower) FBT gross-up rate will apply to the fringe benefit.
4.11 Amendments 30, 33 and 34 insert references to new Division 71 in the GST Act.
4.12 Items 2 and 4 of Schedule 5 of the Bill insert subsections 11-15(5) and 15-10(5) to specifically provide that a borrowing related acquisition or importation is not treated as relating to making input taxed supplies provided that the borrowing itself does not relate to making input taxed supplies. Amendments 31 and 32 make a technical correction to item 4 of Schedule 5 to ensure that subsection 15-10(5) applies to borrowing related importations.
Definition of enterprise
Complying superannuation funds
4.13 In formulating the GST, it was intended that superannuation funds would satisfy the definition of carrying on an enterprise and be able to register for GST. However, whether or not a superannuation fund is carrying on an enterprise will depend on the facts of each individual case. This could mean that there will be superannuation funds which cannot register for the GST.
4.14 Amendment 43 ensures that all 'complying superannuation funds' are carrying on an enterprise for GST purposes, thus making it clear that such funds can be registered for GST. Providers of financial services are entitled to register and claim reduced input tax credits for certain specified acquisitions. It was intended that all superannuation funds should be eligible for reduced input tax credits.
4.15 Amendment 60 inserts a definition of 'complying superannuation fund' into the GST Act.
4.16 The definition of 'enterprise' in section 9-20 of the GST Act and section 38 of the ABN Act was amended by A New Tax System (Indirect Tax and Consequential Amendments) Act (No. 2) 1999 to remove any doubt that mutual organisations were considered to be carrying on an enterprise even if they only made supplies to their members.
4.17 Amendment 41 amends section 38 of the ABN Act by removing subsection 38(3) and inserting new subsection 38(2B) . This amendment changes the term body to entity and also includes a reference to the activities being in the form of a business [new subsection 38(2B)] . The new subsection corrects incorrect numbering in relation to subsection 38(3). A similar amendment is made to subsection 9-20(3) of the GST Act [amendment 43] .
4.18 Amendment 42 also makes a consequential amendment to subsection 9-15(2B) of the GST Act using the wider term entity rather than body . This subsection makes it clear that payment made by members of an entity to that entity can be consideration.
Clarifying the treatment of partnerships
4.19 Individuals who are undertaking a hobby or private recreational pursuit are not carrying on an enterprise for ABN or GST purposes. They are not able to register for ABN or GST in relation to those activities. This means that they are not entitled to input tax credits and therefore bear the GST in relation to those activities.
4.20 For ABN and GST purposes, partnerships of individuals are separate and distinct entities from the individual members. An entity other than an individual cannot have a private recreational pursuit or hobby. Therefore, to prevent individuals from being able to register, and obtain input tax credits, in relation to hobbies or private recreational pursuits, the definition of enterprise for GST and ABN purposes provides that partnerships where all the members are individuals are not carrying on an enterprise if they do not have a reasonable expectation of profit or gain.
4.21 This exclusion can be avoided by including an entity other than an individual as a member of the partnership, such as a shelf company. This would allow individuals to avoid GST by obtaining input tax credits on a hobby or private recreational pursuit.
4.22 Amendment 41 amends paragraph 38(2)(c) of the ABN Act and amendment 42 amends paragraph 9-20(2)(c) to provide that partnerships, the members of which are principally individuals, are not carrying on an enterprise if they do not have a reasonable expectation of profit or gain.
Valuing mixed supplies
4.23 Section 9-80 of the GST Act provides the method for working out the value of the taxable part of a supply that is partly a taxable supply and partly a GST-free or input taxed supply. Amendment 44 corrects this method to ensure that the value is correctly calculated. The value of the total supply is calculated as:
(Price * 10) / (10 + taxable proportion)
where taxable proportion is expressed as a decimal (e.g. 40% is 0.4). [New subsection 9-80(2)]
4.24 The value of the taxable part is calculated as the proportion of the value of the total supply that the taxable part represents (i.e. the taxable proportion).
Andrea makes a supply for a $104. The taxable proportion represents 40% of the total value of the supply. The value of the total supply is worked out as:
($104 * 10) / (10 + 0.40) = $100
4.25 Amendment 49 makes a technical correction to item 8 of Schedule 11 to the Bill to ensure that the amendment operates as intended. The amendment ensures that the supply by way of long-term lease of a residential property that had been rented or used as residential premises by the owner prior to 2 December 1998 will be input taxed.
4.26 Under the current terms of subsection 42-5(1B) an importation of goods is a non-taxable importation if the goods are covered by item 17 of Schedule 4 to the Customs Tariff Act 1995 (Customs Tariff item 17), and the importer:
- is the manufacturer of the goods;
- has previously acquired the goods by means of a taxable supply; or
- previously imported the goods and the previous importation was a taxable importation.
4.27 Customs Tariff item 17 provides duty free importation to goods that have been exported from Australia and are reimported in an unaltered condition where there is no outstanding duty liability attaching to the goods.
4.28 To clarify the application of the GST exemption to these goods amendment 50 repeals subsection 42-5(1B). Amendment 51 replaces that subsection with new section 42-10 whichremakes subsection 42-5(1B) with 3 new elements as follows:
- the link to Customs Tariff item 17 is removed and the elements of Customs Tariff item 17 that must be satisfied if an importation is to be treated as a non-taxable importation are included on the face of proposed section 42-10. That is, the provision now includes the requirement that the goods were exported from Australia and are returned to Australia without having been subject to any treatment, industrial processing, repair, renovation, alteration or any other process since their export. This change removes anomalies that are created by other elements of Customs Tariff item 17 that are necessary for customs duty purposes;
- to be regarded as a non-taxable importation under proposed section 42-10, the importer must also not be entitled to, nor have claimed, a refund of GST under the tourist refund scheme when the goods were exported; and
- any previous importation of goods by the importer must have been a taxable importation on which GST has been paid.
Reimbursement of partners
4.29 An acquisition or importation made by a partner in their capacity as a partner is treated as though the partnership made that acquisition or importation and not the partner - subsection 184-5(1) of the GST Act. This means that the partnership will be entitled to any input tax credits for acquisitions or importations made by a partner in their capacity as a partner of that partnership.
4.30 However, Division 111 of the GST Act also allows GST registered partnerships to claim input tax credits when they reimburse partners for expenses that they incur in connection with their activities as a partner. Thus, if a partnership reimburses a partner for partnership expenses, it could be argued that the partnership is entitled to double input tax credits in respect of that acquisition or importation.
4.31 Amendment 52 inserts new subsection 111-5(3A) , which provides that when a partnership is entitled to an input tax credit in relation to an expense, a further input tax credit will not be allowable when reimbursing a partner for that expense.
Payments made by employers on behalf of employees
4.32 It is common for employers to directly pay for work related expenses of employees. For example, an employer may pay for the membership of the professional associations of an employee.
4.33 Currently, the GST Act does not allow an employer to claim an input tax credit in relation to these payments. To be entitled to input tax credits under general principles, the payment must have been in respect of a taxable supply to the employer - subsection 11-5(b) of the GST Act. Since the relevant supply is to the employee, the employer cannot claim an input tax credit under this provision.
4.34 However, if an employee pays for a work related expense and their employer reimburses them for that expense, the employer will be entitled to an input tax credit - paragraph 111-5(1)(a). Thus, when an employer directly pays for a work related expense of an employee, they are at a disadvantage when compared to an employer who reimburses their employee for the same expense.
4.35 Amendment 53 inserts new section 111-25 , which provides that an employer that makes a direct payment of a work related expense of an employee will be entitled to the same GST treatment as an employer that reimburses an employee for the same expense. Therefore, an employer may claim input tax credits where payments are made on behalf of employees for employment related expenses.
Input tax credits for goods purchased in bond
4.36 Section 15-15 of the GST Act provides that a person who makes a creditable importation can claim an input tax credit. Under the current legislation creditable importations can only be made by a person who imports goods into Australia. An entity that purchases goods in bond from an importer can not claim the input tax credit for the amount of GST paid in taking the goods out of bond because the entity does not import goods into Australia.
4.37 New section 114-25 has been added to allow a purchaser of goods in bond to claim an input tax credit for the amount of GST paid by them in taking goods out of bond. [Amendments 45, 54 and 55]
4.38 Where an individual who is registered for GST dies, the Commissioner must cancel the deceased entity's registration, and the entity's concluding tax period will end on the day before the individual's death. The enterprise will be liable to an increasing adjustment under Division 138.
4.39 If goods or services are being taken out of the GST system, this is analogous to final consumption, and input tax credits should not be available. Where an entity ceases to be registered, the assets of the entity immediately before it ceases to be registered have effectively been taken out of the GST system. In these situations the entity will have an increasing adjustment to their net amount in relation to these assets pursuant to Division 138 of the GST Act.
4.40 There may be circumstances where the executor of a deceased estate passes assets to the beneficiaries to carry on the enterprise of the deceased. As the executor has not acquired the assets as a taxable supply (as there is no consideration and it was not transferred in the course of furtherance of an enterprise) the executor and beneficiary will effectively be denied input tax credits even though it will be making taxable supplies.
4.41 The effect of the increasing adjustment is that the assets which continue to be used in an enterprise would have been be taxed twice. Similar inequities exist for beneficiaries that continue to carry on the enterprise of a GST registered deceased individual.
4.42 Amendment 57 inserts new section 138-17 into the GST Act to ensure that Division 138 does not apply where:
- the executor of a deceased estate continues to carry on the enterprise of a deceased individual who was registered for GST [new paragraph 138-17(1)(a)] ; or
- a beneficiary of a deceased estate continues to carry on the enterprise that was carried on by an executor or trustee who was registered for GST and that enterprise was the enterprise of the deceased individual [new paragraph 138-17(1)(b)] .
4.43 New section 138-17 does not affect adjustments that may occur due to changes in creditable purpose under Division 129 [new subsection 138-17(2)] . Where an asset that has a GST exclusive value of more than $1,000 is acquired, the acquiring entity must continue to track its use so that any changes in creditable purpose continue to give the entity an adjustment under Division 129. The tracking period continues as long as it would have continued for the deceased individual.
4.44 An executor or beneficiary that continues to carry on the enterprise of the deceased must continue to track the creditable purpose of acquisitions or importations with a GST exclusive value of over $1,000. The executor or beneficiary is taken to have made the acquisition or importation to the same extent and with the same application as the GST registered deceased individual. [New subsection 138-17(3)]
Example 4.2 Owen, a beneficiary of a deceased estate, continues to carry on the enterprise of the deceased and registers for GST. Included in the distribution of the estate to him is a computer that was previously acquired for $2,500. The computer had previously been used by the deceased for both business and private use. The deceased had used the computer for 80% business use and claimed input tax credits accordingly.Owen is taken to have acquired the computer for a creditable purpose at an application rate of 80%. As he already has a computer at home which he uses for private purposes, he intends to use the other computer wholly for business purposes. At the end of the adjustment period he has worked out that his actual application of the computer is 100%. Owen is entitled to a decreasing adjustment since the former application of the computer was 80%.
4.45 Section 129-25 provides that where a thing is disposed of, the last adjustment period is the tax period immediately after the disposal. Amendment 56 inserts subsection 129-25(3) to ensure that where a person who is registered for GST dies and the GST registered executor or beneficiary of the deceased's estate continues to carry on the enterprise, the adjustment periods for any acquisitions or importations will continue.
4.46 Section 138-20 provides that Division 138 does not affect the operation of Division 129. As subsections 138-17(2) and (3) modify the operation of Division 129 in relation to enterprises continued to be carried on by an executor or beneficiary, amendment 58 ensures that section 138-20 does not apply to those sections.
4.47 Amendment 59 inserts new Division 139 . Under this Division, where the trustee or executor of a deceased estate distributes an asset to the beneficiary that does not relate to an enterprise of the deceased that the beneficiary intends to continue carrying on, the estate will be subject to an increasing adjustment similar to that which would have occurred under Division 138. The new Division restores the intended application of Division 138 in that where an asset is no longer used for a creditable purpose the asset has been removed from the GST system and the input tax credits previously claimed by the entity should be paid back.
4.48 New section 139-5 cancels the input tax credits that a deceased person who was registered for GST had previously claimed in respect of assets that are now going to be used for other than creditable purposes. The reason for the adjustment is that the assets are being taken out of the GST system, which is like going into final consumption. No input tax credits are available in respect of things outside of, or taken out of, the GST system.
4.49 Some of the assets used in the enterprise of the GST registered deceased individual may have lost value. This is the value used in the enterprise while the thing was in the GST system. The entity should be entitled to an input tax credit in relation to value used in the enterprise for a creditable purpose. New subsection 139-5(2) ensures that the adjustment takes account of this value and so only relates to value that the entity has not used while in the GST system.
4.50 The amount of the adjustment under subsection 139-5(2) is 1/11 of the applicable value , which is the lesser of the consideration for the acquisition or importation of the asset and its GST-inclusive market value, multiplied by the actual application of the thing , which is the extent to which the thing has been applied for a creditable purpose.
4.51 Any adjustments arising out of the operation of new Division 139 are attributable to the tax period in which they occur. [New section 139-10]
4.52 Where the asset is supplied to a beneficiary and relates to the enterprise the beneficiary intends to continue to carry on, an increasing adjustment will not arise under Division 139 [new subsection 139-5(3)] . The reason for this is that the asset is not being taken out of the GST system, as it will still be used in the enterprise previously carried on by the GST registered deceased individual, and as such, input tax credits should still be available for the asset.
4.53 New section 139-15 ensures that new Division 139 does not affect the operation of Division 129.
Example 4.3 Robert is an executor of the estate of Stefan, who carried on a farming business and was registered for GST. Stefan's will provides that the farming business should pass to Stephanie, but that some assets that were used in that business will pass to Amanda and Uma. Robert carries on the deceased's estate until the estate is distributed to the beneficiaries.Robert is required to register for GST as he will continue to carry on the enterprise of the deceased. As Robert is required to be registered and continues to carry on the enterprise of the deceased, new paragraph 138-17(1)(a) ensures that the deceased estate will not be subject to a Division 138 increasing adjustment.Stephanie decides that she will continue to carry on Stefan's farming business. While Robert is still administering the estate he starts to distribute the assets to the beneficiaries. The business assets Robert distributes to Amanda and Uma will be subject to a new Division 139 increasing adjustment since they are now going to be used for private purposes.Robert distributes a truck to Stephanie. Stephanie intends to continue to use the truck in the farming business. Therefore Robert will not have an increasing adjustment in respect of the truck (new subsection 139-5(3)).Robert distributes a horse float to Uma. Stefan had acquired the float for $5,500. The horse float was used solely for a creditable purpose, and Stefan had no adjustments in relation to it. The total input tax credit in respect of the horse float is $500. The GST inclusive market value of the horse float when Uma receives it is $3,300. While it was part of the GST system, $2,200 of the value of the horse float was used for creditable purposes. The amount of the adjustment is 1/11 of the actual application (100%) multiplied by the applicable value ($3,300), which equals $300. The remaining input tax credit of $200 represents the GST applicable to the value that was used up while the horse float was used for creditable purposes, being 1/11 of $2,200.
4.54 Amendment 60 makes a consequential amendment to the table in the definition of 'increasing adjustment' in section 195-1 to include reference to the increasing adjustment in new section 139-5.
Phasing in of input tax credits on motor vehicles
4.55 The phasing in of input tax credits for motor vehicles is intended to cover situations where vehicles are purchased including by way of hire purchase. However, section 20 of the GST Transition Act refers to the acquisition of a motor vehicle, which could include the lease of a vehicle.
4.56 Amendment 62 ensures that the term acquisition specifically refers to the purchase of a motor vehicle only. This means that the lessee in respect of lease payments for motor vehicles will not be subject to the phasing in rules because they have not purchased the vehicle.
Eligible short term leases
4.57 Paragraph 20(4)(c) of the GST Transition Act provides broadly that where a sales tax exemption would have applied, the phasing in rules will not apply. Effectively, partial sales tax exemptions are permitted under sales tax for eligible short term leases. These partial sales tax exemptions operate by agreement under subsection 15A(2) of the Sales Tax Assessment Act 1992 . This same pro rata treatment should also apply to the phasing in rules.
4.58 Amendment 62 inserts a formula to clarify how the reduction in input tax credits applies to partial sales tax exemptions [new subsection 20(4B)] . It also allows further agreements to be made in respect of eligible short term leases until 1 July 2002 [new subsection 20(4C)] .
Amanda Pty Ltd leases motor vehicles on a short term basis and has entered into an eligible short term lease agreement with the Commissioner to establish an exempt percentage. Under this agreement, Amanda Pty Ltd has an exempt percentage of 20%. Amanda Pty Ltd purchases a number of motor vehicles covered by this agreement for $220,000 which include GST of $20,000. The normal entitlement to input tax credits is $20,000.If these purchases are made on or after 1 July 2000 but before 1 July 2001 (the
original input tax credit
is $20,000), the entitlement to input tax credits is reduced by:
Original input tax credit * (100% - exempt percentage)
= $20,000 * (100% - 20%)
= $10,000 * (100% - 20%)
LCT on motor homes and campervans
4.59 The LCT is intended to apply to taxable supplies and taxable importations of luxury cars. Under the current legislation larger models of campervans and motor homes escape the LCT because the definition of car in section 27-1 of the LCT Act restricts the application of the tax to motor vehicles designed to carry a load of less than 2 tonnes and fewer than 9 passengers. Motor homes and campervans with load capacity of greater than 2 tonnes therefore escape the tax.
4.60 New paragraph 27-1(c) added to the definition of car in section 27(1) of the LCT Act ensures that all motor homes and campervans above the LCT threshold are subject to the luxury car tax irrespective of their load capacity. [Amendment 63]