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ATO Interpretative Decision

ATO ID 2003/8

Goods and Services Tax

GST and creditable acquisition of second hand goods that are reconditioned and sold
FOI status: may be released
  • With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the entity, a second-hand goods dealer, making a creditable acquisition of second-hand goods under section 66-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it acquires second-hand goods that are then reconditioned and sold?

Decision

Yes, the entity is making a creditable acquisition of second-hand goods under section 66-5 of the GST Act when it acquires second-hand goods that are then reconditioned and sold.

Facts

The entity is a second-hand goods dealer. The entity purchased second-hand goods. The supply of the goods to the entity was neither a taxable nor GST-free supply. The entity provided consideration for this supply. The entity did not import the goods.

The entity then reconditioned the second-hand goods (restored them to a good and satisfactory condition) prior to selling them. This sale was a taxable supply. The entity did not divide the goods prior to selling them.

The entity is registered for goods and services tax (GST).

Reasons for Decision

Division 66 of the GST Act allows an entity, in some circumstances, to claim an input tax credit for an acquisition of second-hand goods even though the supply to the entity was not a taxable supply.

Subsection 66-5(1) of the GST Act provides that when an entity acquires second-hand goods for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business, the fact that the supply to the entity is not a taxable supply does not stop the acquisition being a creditable acquisition.

The entity purchased the second-hand goods for the purpose of sale in its second-hand goods business. However, the entity reconditioned the second-hand goods prior to selling them. Therefore, it is necessary to consider whether the reconditioning of the goods by the entity amounts to manufacture.

Goods and Services Tax Ruling GSTR 2000/8 outlines the meaning of 'not for manufacture'. Paragraph 80 of GSTR 2000/8 provides that the word 'manufacture' must be given its ordinary meaning. The Macquarie Dictionary (1997) defines 'manufacture' to mean 'to make or produce by hand or machinery, esp on a large scale; to make in any manner; to work (material) into form for use....'

Further, paragraph 81 of GSTR 2000/8 provides that:

'Whether goods you acquired or imported are held for manufacture depends upon whether a different thing has been produced. If the work done is more than a repair renovation or modification of old material and changes the goods into something of a different character, there has been a manufacture of goods (see FC of T v. Jack Zinader Pty Ltd (1949) ATD 46; (1949) 78 CLR 336 and FC of T v. Jax Tyres Pty Ltd 85 ATC 4001; (1985) 5 FCR 257).'

The reconditioning of the goods by the entity merely restored the goods to a good and satisfactory condition; it did not alter the goods into something different. Therefore, the entity did not acquire the goods for the purpose of manufacture and the requirements in subsection 66-5(1) of the GST Act are met.

However, subsection 66-5(2) of the GST Act provides that subsection 66-5(1) of the GST Act does not apply where:

•
the supply of the second-hand goods to the entity was a taxable or GST-free supply
•
the entity imported the goods into Australia
•
the supply of the goods to the entity was a supply by way of hire
•
the entity divided the second-hand goods prior to re-supplying them.
•
the entity's supply of the goods is not a taxable supply.

The supply of the goods to the entity was neither a taxable nor GST-free supply. The entity did not import the goods. The supply of the goods to the entity was not a supply by way of hire as the entity purchased the goods. The entity did not divide the goods prior to selling them and the subsequent sale of the goods was a taxable supply. Accordingly, the exclusions in subsection 66-5(2) of the GST Act do not apply to exclude the application of subsection 66-5(1) of the GST Act.

Therefore, the entity is making a creditable acquisition of second-hand goods under section 66-5 of the GST Act when it acquires second-hand goods that are then reconditioned and sold.

[Note 1: Although GSTR 2000/8 is a ruling on the operation of section 16 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act), section 16 of the Transition Act and subsection 66-5(1) of the GST Act use the phrase 'for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business' in the same context. Therefore, it is appropriate to apply the meaning given to 'not for manufacture' under section 16 of the Transition Act to subsection 66-5(1) of the GST Act.
Note 2: The acquisition of the second-hand goods, in this case, satisfies paragraphs 11-5(a), 11-5(c), and 11-5(d) of the GST Act. In addition, the acquisition is a creditable acquisition of second-hand goods under section 66-5 of the GST Act. Therefore, the entity is entitled to an input tax credit for the acquisition of those second-hand goods under section 11-20 of the GST Act.
Note 3: The amount of input tax credits for creditable acquisitions of second-hand goods is determined in accordance with section 66-10 of the GST Act (see ATO ID 2002/8).]

Date of decision:  13 December 2002

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 11-5
   paragraph 11-5(a)
   paragraph 11-5(c)
   paragraph 11-5(d)
   section 11-20
   Division 66
   section 66-5
   subsection 66-5(1)
   subsection 66-5(2)
   section 66-10

A New Tax System (Goods and Services Tax Transition) Act 1999
   section 16

Case References:
FC of T v Jack Zinader Pty Ltd
   (1949) 9 ATD 46
   (1949) 78 CLR 336

FC of T v Jax Tyres Pty Ltd
   85 ATC 4001
   (1984) 16 ATR 97
   (1984) 5 FCR 257

Related Public Rulings (including Determinations)
GSTR 2000/8

Related ATO Interpretative Decisions
ATO ID 2002/8
ATO ID 2003/9

Other References:
The Macquarie Dictionary 1997, 3rd edn, The Macquarie Library Pty Ltd, New South Wales

Keywords
Goods & services tax
GST second hand goods
GST supplies & acquisitions
Creditable acquisition

Siebel/TDMS Reference Number:  3419373A

Business Line:  Indirect Tax

Date of publication:  24 January 2003

ISSN: 1445-2782


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