House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Amendment of the goods and services tax law

Overview

2.1 This Chapter explains the amendments to the goods and services tax (GST) law as a consequence of the adjustment to the fringe benefits taxable amount proposed by the A New Tax System (Fringe Benefits) Bill 2000.

2.2 The amendments are contained in Schedule 2 to the A New Tax System (Fringe Benefits) Bill 2000.

Summary of amendments

Purpose of amendments

2.3 In the outline of the indirect tax reforms in the policy document Tax Reform: not a new tax, a new tax system the Government indicated that input tax credits will be allowed where goods and services are provided to employees as fringe benefits, but fringe benefit tax (FBT) will be adjusted so that there will be no advantage for the employer in providing benefits rather than providing salary.

2.4 A corollary of this is that there should also be no GST advantage to the employee in acquiring goods or services by way of employer-provided benefits. To the extent an employee provides consideration (other than services as an employee) for goods or services provided by an employer, that amount is to be treated as the price of a taxable supply.

2.5 The amendments to the A New Tax System (Goods and Services Tax) Act 1999 (GSTA 1999) will ensure that the supply of goods and services by an employer to an employee is not subject to GST if the supply is also a benefit that is subject to the FBT rules.

2.6 Consideration given by the recipient, other than the services provided by the employee as an employee, is to be treated as the price of a supply which has not been subject to FBT. GST will therefore be payable on taxable supplies that are fringe benefits and exempt benefits but only if the recipient does give consideration of that kind. The amount of GST will be calculated by reference to the consideration given by the recipient.

Date of effect

2.7 The amendments will apply from 1 July 2000, the commencement of the GST.

Background to the legislation

Current law

2.8 GST is payable on taxable supplies, that is, supplies made:

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for consideration;

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in the course or furtherance of an enterprise carried on;

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that are connected with Australia; and

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by an entity registered for GST purposes.

2.9 Ordinarily goods and services provided by an employer to an employee or associate of an employee would be taxable supplies, unless the supplies are input taxed or GST-free. Services provided by an employee would constitute 'consideration' within the broad definition of that term in section 9-15 of the GSTA 1999.

2.10 Goods and services may be provided by an employer wholly in consideration for services provided as part of an employee's remuneration package. On the other hand, goods and services may be provided partly for consideration other than services of the employee, for example, a cash contribution by the recipient.

2.11 Goods and services provided by an employer are also subject to the provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) which contain particular exemptions and rules for the calculation of the taxable value of the various types of fringe benefit. The adjustment to the fringe benefits taxable amount proposed by this Bill maintains the policy preferences that inhere in those rules. The adjustment approach thereby provides an efficient mechanism to consistently apply those rules in the GST context. The GST law consequently needs to be amended to ensure that taxable supplies that are subject to the FBT rules are not also subject to GST.

Explanation of the amendments

When a taxable supply that is a fringe benefit is subject to GST

2.12 The provisions of the FBTAA 1986 apply to determine the FBT liability for goods and services provided by an employer to an employee, or associate of an employee. In calculating the taxable value of the benefit certain amounts have the effect of diminishing the liability to FBT. These include the giving of consideration other than services provided as an employee. Such amounts are to be treated as the price of a taxable supply that is subject to GST.

2.13 A recipient's payment (in the case of a car fringe benefit), and recipients contribution (in the case of a benefit other than a car fringe benefit), are both amounts taken into account in calculating the taxable value of a fringe benefit. 'Recipient's payment' is to be defined in the Dictionary to the GSTA 1999 by reference to the meaning of that term in paragraphs 9(2)(e) and 10(3)(c), FBTAA 1986 [item 4] . Similarly, 'recipients contribution' is to be defined in the Dictionary to the GSTA 1999 in a way that includes exempt benefits, as well as the meaning of that term in subsection 136(1), FBTAA 1986 [item 3] .

2.14 The price of a taxable supply that is a fringe benefit is to be defined as the amount that corresponds to the recipient's payment or recipients contribution, as appropriate, that is made in a tax period. It does not matter if the payment or contribution is in the form of money or takes some other form. [Item 1, new subsection 9-75(3)]

2.15 The amount of GST on such a taxable supply is to be calculated as 1/11 of that price.

2.16 This means that amounts that are taken into account as recipient's payment for FBT purposes, but do not constitute consideration for the supply will not be subject to GST. For example, expenditure incurred by an employee for fuel will be subject to GST at the time of purchase. This expenditure will not be included in the calculation of the employer's GST liability for a taxable supply in accordance with the new rule.

2.17 The new rule will also apply to a taxable supply that is an exempt benefit. The term 'fringe benefit' will be defined in the Dictionary to the GSTA 1999 in a way that includes exempt benefits [item 2] . A taxable supply, to the extent it is an exempt benefit, will not be subject to GST.

The tax period in which GST is payable on a fringe benefit

2.18 Division 29 of the GSTA 1999 contains the basic rules for attributing GST payable on taxable supplies and input tax credit entitlements to particular tax periods. These rules will apply to a taxable supply that is a fringe benefit so that GST payable will be attributable to the tax period in which an amount that is included in the recipient's payment or recipients contribution is received as consideration for that supply.