House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

MAIN FEATURES

Sales Tax (Exemptions and Classifications) Amendment Bill 1988

The present wholesale sales tax (WST) operates, as was explained earlier in these notes, to tax all goods at the general rate of 20% unless they are specified to be taxed at that rate, at a different rate or are exempt. There are five Schedules of goods contained in the Sales Tax (Exemptions and Classifications) Act 1935 - referred to in these notes as the Exemptions and Classifications Act - for this purpose.

The WST's multiple tax rate structure (exempt, 10%, 20% or 30%) and the various detailed descriptions of goods in the five Schedules to the Exemptions and Classifications Act cause problems in its application and administration.

This Bill, in conjunction with the Sales Tax Assessment (No.1) Amendment Bill 1988, is designed to remove certain classification anomalies and inconsistencies and to broaden the sales tax base.

Exempt goods to become taxable

Plastic envelopes, courier bags, bags and wrappings (Schedule, Part I - Amendment of First Schedule, and Part III - Amendment of Third Schedule)

Item 96 in the First Schedule to the Exemptions and Classifications Act exempts certain goods of a kind used to wrap up or secure goods for marketing or delivery. It was introduced in 1954 to assist retailers who purchased goods in bulk and marketed them in paper bags.

Paper bags are still widely used by retailers, but with many items now packaged by manufacturers, their use has diminished. Further, while the item was intended to exempt wrappings used by retailers, it has been ruled that plastic envelopes and courier type bags used to deliver documents are also exempt under this item. An anomaly exists between courier type envelopes and padded postal bags which are exempt, and ordinary postal and stationery type envelopes which are taxable at 20%. It is also difficult to distinguish plastic bags of the kind exempt under item 96 (such as plastic bags used at supermarket check-outs) from carry plastic bags and shopping bags which are taxable at 20% yet perform the same function.

Item 96 also exempts a range of general purpose wrapping materials. General purpose goods, which include goods that are close substitutes for the kind of wrapping materials exempt under item 96, are taxable at 20%.

Item 13 in the Third Schedule to the Principal Act covers the same wrapping materials as item 96 but effectively taxes them at the 10% rate when they are marketed exclusively or principally for household purposes.

This Bill will overcome these anomalies by removing item 96 from the First Schedule and item 13 from the Third Schedule to effectively tax all wrapping materials at the general rate of 20%.

Containers used by retailers to market certain foodstuffs (Schedule, Part I - Amendment of First Schedule and Part III - Amendment of Third Schedule)

Containers for packaged biscuits and ice cream are currently taxable at the same rate as the products they contain, i.e., the 10% rate. While biscuits and ice creams manufactured in retail outlets which sell them directly to the public for consumption are not taxable, the materials and equipment used in producing the exempt product are taxable.

However, unlike other materials and equipment used in the production process, containers used to market biscuits and ice creams manufactured in retail outlets are currently exempt from sales tax.

This Bill will remove these anomalies by imposing tax at the 10% rate on containers used by retailers to market biscuits and ice cream manufactured in retail outlets for sale direct to the public.

Containers, including plastic spoons, serviettes and refresher towels, used in marketing take-away food are currently exempt from tax if the product they contain is exempt. However, eating utensils used by eat-in restaurants are taxable at the 10% rate.

The Bill will remove this anomaly by removing the exemption available for containers used in marketing take-away food and taxing the containers at the 10% rate.

Thick shakes and ice cream (Schedule, Part I - Amendment of First Schedule and Part III - Amendment of Third Schedule)

When ice cream became taxable at the 10% rate in 1985, ice cream mixes marketed exclusively or principally for use in the manufacture on retail premises of ice cream for sale direct to the public also became taxable at the 10% rate. However, due to an oversight, not all ice cream mixes became taxable. Ice cream mixes which contain at least 95% milk remain exempt under item 26(2) of the First Schedule to the Exemptions and Classifications Act.

A further anomaly is that the 1985 amendment did not make thick shake mixes taxable. Thick shakes compete directly with soft serve ice cream and packaged flavoured milk which is also taxable at 10%. Exempt thick shake mixes are now being used in place of taxable ice cream mixes by retailers in the manufacture of ice cream.

This Bill will bring the sales tax treatment of all ice cream and thick shake mixes into line by removing the exemptions for ice cream mixes which contain at least 95% milk and thick shake mixes and by including these products in the Third Schedule to the Exemptions and Classifications Act.

Packaged flavoured milk (Schedule, Part I - Amendment of First Schedule)

Packaged flavoured milk products containing less than 95% milk are taxable at the general rate (20%) and products containing not less than 95% milk are taxable at 10% under item 4A in the Third Schedule to the Exemptions and Classifications Act.

However, it has been argued that packaged chocolate, coffee and malt flavoured milk containing less than 95% milk may be exempt under the present sales tax law.

This Bill proposes an amendment of the First Schedule to the Exemptions and Classifications Act to ensure that chocolate, coffee and malt flavoured preparations that contain less than 95% milk are subject to tax at the 20% rate.

Beer (Schedule, Part 1 - Amendment of First Schedule)

Sub-item 36(1) in the First Schedule of the Exemptions and Classifications Act exempts from tax beer manufactured for sale in Australia that contains more than 1.15% by volume of alcohol.

Sub-item III(1) operates to extend this exemption to cover beer of similar strength that is manufactured in New Zealand, Fiji, Norfolk Island, Papua New Guinea, or the Territories of Christmas Island or Cocos (Keeling) Islands and imported into Australia.

This Bill will remove the sales tax exemption for beer so that all beer will be subject to tax at the 20% rate irrespective of volume of alcohol or country of manufacture.

Bathroom fittings and sanitary ware (Schedule, Part III - Amendment of Third Schedule)

Household fittings and sanitary ware of a kind installed in houses or other buildings so as to become fixtures are currently taxable at the rate of 10%.

However, the wording (which dates from the early 1950s) of the item covering these goods does not readily extend to the variety of bathroom fittings and sanitary ware marketed today. It has been argued that some fittings intended to be covered by the item are exempt.

This Bill will ensure that all bathroom fittings and sanitary ware installed in buildings so as to become fixtures are taxable at the 10% rate.

Muesli bars and health food bars (Schedule, Part I - Amendment of First Schedule)

At present, muesli bars and health food bars are not included in the confectionery, snack food or biscuit categories for the purposes of sales tax and are therefore exempt.

This Bill will bring muesli bars and similar foodstuffs into line with confectionery, snack foods and biscuits by making them taxable at the 10% rate.

Taxable goods to become exempt

Aircraft (Schedule, Part I - Amendment of First Schedule)

At present aircraft are exempt from sales tax only when used principally for business purposes. There are, in fact, very few taxable sales of aircraft but the costs of administering the current law is high.

This Bill will exempt all aircraft other than gliders (including motorised gliders, hang gliders and motorised hang gliders).

Soy milk (Schedule, Part I - Amendment of First Schedule and Part III - Amendment of Third Schedule)

Plain milk is currently exempt from sales tax. Soy milk is sold in competition with milk and in many cases it is used as a substitute.

This Bill will exempt beverages consisting wholly or principally of soy milk.

Packaged flavoured milk is currently taxable at the rate of 10% provided it consists of not less than 95% milk. In line with this, the Bill will tax at the rate of 10% packaged flavoured beverages consisting principally of soy milk.

Fish food for use by fish breeders (Schedule, Part I - Amendment of First Schedule)

At present the sales tax law provides exemption for food for livestock, poultry and birds. The exemptions are limited to food for use by persons engaged in business. Pet food for feeding to domestic dogs and cats and pet birds is taxable.

In recent years there has been a considerable expansion in the fish farming industry. However, there is no exemption for food for fish.

This Bill will bring the sales tax treatment of food for fish into line with food for animals and birds by exempting food for aquatic and marine animals bred or farmed in a commercial environment.

High rate goods reduced from 30% to 20% (Schedule, Part II - Amendment of Second Schedule)

Personal care products

The Second Schedule to the Principal Act specifies categories of goods that are taxable at the highest rate, i.e. 30%. Goods covered by that Schedule are, in general, 'luxury' goods such as furs, jewellery, high-priced motor vehicles and audio and visual equipment. However, the Schedule also covers everyday personal care products such as perfume, shampoo, body powder, cosmetics and deodorants while similar products such as soap, toothpaste, shaving creams and after shave lotions are taxed at the 20% rate.

This Bill will resolve these anomalies by removing the everyday personal care products from the Second Schedule. As the goods will not then be specified in any Schedule to the Principal Act, they will be taxed at the general rate of 20%, rather than the 30% rate.

Photographs and photographic material

At present photographs and photographic materials such as photographic film, photographic paper and mounts are taxable at the 30% rate under the Second Schedule, while negatives, transparencies and film strips are taxed at the general rate of 20%. Thus, where an exposed film is developed and printed, two different tax rates apply - 20% for developing and 30% for printing.

With modern printing techniques, it is becoming more difficult to distinguish between photography, printing and photocopying. Printing and photocopying are taxed at the 20% rate.

Consistent with the broad objective of rationalising the WST, this Bill will bring the sales tax treatment of these goods into line by removing photographs and photographic materials from the Second Schedule. The goods (currently taxable at 30%) will then be taxed at the general rate of 20%.

Sales Tax Assessment (No.1) Amendment Bill 1988

This Bill will amend the sale value provisions of Sales Tax Assessment Act (No.1) 1930 so that where a manufacturer sells goods only by retail or only retails goods through an agent, the sale value is based on the manufacturer's own costs and profit and not, as is currently the case, the price charged by another manufacturer selling identical goods by wholesale.

The broad scheme of the WST tax is for tax to be paid on the final wholesale selling price of goods. In the case of a manufacturer selling by wholesale, tax is paid on the price for which the goods are sold, i.e., on a value which reflects the operating costs and profit of the manufacturer. That situation is also to apply to a manufacturer selling by retail. To achieve this, the Bill will amend the relevant sale value provisions to provide that tax is payable on the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale.

More detailed explanations of the Schedules of each of the Bills are contained in the notes that follow.