House of Representatives

Explanatory Memorandum

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

General Outline

Background

The Government announced, in the 1990-91 Budget, a simplification review of the Wholesale Sales Tax system. On 2 April 1992, the Treasurer announced that the Government had accepted the recommendations of the Review and that legislation to implement those recommendations should be introduced in the Parliament during the Autumn Sittings 1992.

The new sales tax legislation comprises 6 Bills:

•

Sales Tax Assessment Bill 1992

•

Sales Tax Imposition (Excise) Bill 1992

•

Sales Tax Imposition (Customs) Bill 1992

•

Sales Tax Imposition (General) Bill 1992

•

Sales Tax (Exemptions and Classifications) Bill 1992

•

Sales Tax Amendment (Transitional) Bill 1992.

This explanatory memorandum describes the Sales Tax (Exemptions and Classifications) Bill 1992 .

Main Features of Bill

The main purposes of the Exemptions and Classifications Bill will be:-

•

to identify goods which are exempt from sales tax, either unconditionally or in particular circumstances; and

•

to classify other goods for the purpose of determining the rate of tax to be imposed on those goods.

The Exemptions and Classifications Bill will replace the Sales Tax (Exemptions and Classifications) Act 1935 but not repeal it. Although the scope of existing exemptions and classifications for sales tax purposes will be preserved as nearly as possible, there are some areas of change.

The Sales Tax (Exemptions and Classifications) Bill 1992 will commence on the 28th day after it receives Royal Assent. However, it will not operate to exempt or tax any assessable dealings under the new law until the first taxing day. Under the Sales Tax Assessment Bill 1992, assessable dealings will not be taxable until the first taxing day, which will be the first day of the fourth month after the month in which the Assessment Bill receives Royal Assent. Because of the linkages between the Exemptions and Classifications Bill and the Assessment Bill, the exemptions contained in the Exemptions and Classifications Bill will also not operate to exempt assessable dealings until the first taxing day. Until then, the Sales Tax (Exemptions and Classifications) Act 1935 will continue to operate. The impact of the transitional provisions in the Sales Tax Amendment (Transitional) Bill on the new law is discussed in Chapter 23 of the explanatory memorandum for the Sales Tax Assessment Bill (Volume 1).

The Bill will mainly comprise 5 Schedules. These Schedules are:

Schedule 1: Contains the goods which will be exempt

Schedule 2: Goods taxable at 10%

Schedule 3: Goods taxable at 15%

Schedule 4: Goods taxable at 20%

Schedule 5: Goods taxable at 30%

The Bill will also contain a number of general rules for interpreting the descriptions of goods in the various exemption and classification Items.

Summary of Main Changes

The main changes to the existing law proposed by the Bill are summarised below. Where relevant, a statement of the particular revenue impact of the change has been included.

Changes of general application

Changes in structure and groupings of Schedule Items

Change: The goods covered by Items in the Schedules in the new law will be described in simpler language. Some items will be omitted and replaced with new or re-structured Items which are easier to read and cover the same goods. The order in which the Items appear will be changed, so that similar kinds of goods will be grouped more closely together.

Financial impact: Nil.

Intention to use goods in accordance with "use requirement"

Change: A person who claims an exemption for goods on the basis of an exemption Item requiring that the goods be "for use" in a particular manner will need to have an intention to use the goods in that way for a minimum period, usually 2 years or the effective working life of the goods, which-ever is shorter.

Existing law: There is no specific guidance on this point.

Financial impact: Unquantifiable.

Consistency of language

Change: Key concepts which recur in the descriptions of goods in the Schedules will be standardised and expressed in uniform or standard terminology each time they occur.

Existing law: Different terms with similar or overlapping meanings are used in the Schedules to describe very similar concepts.

Financial impact: Unquantifiable.

Exemption based on particular use of goods

Change: Many exemptions from sales tax will be conditional upon goods being for use in a particular way. Often, goods will have to be for use to the extent of more than 50% in a particular way if they are to be exempt. Other goods will be exempt if they are for use exclusively in a particular way or if they are simply for use in a certain way, without the extent of use being specified. These will be the only ways that the extent or degree of use to qualify goods for exemption will be measured.

Existing law: The existing law also contains many conditional exemptions. The degree of use that qualifies goods for a particular conditional exemption is described in many different ways. For instance, some goods have to be for use "exclusively or primarily and principally" in a specified way, for use "primarily and principally", for use "primarily", "principally" or "exclusively" in a specified way.

Financial impact: Unquantifiable.

Favourable treatment for some Australian goods removed

Change: The following goods will be exempt:-

Food for poultry;

briquettes consisting principally of coal dust and marketed principally as fuel;

charcoal;

coke;

firewood;

certain goods for use exclusively as fuel in internal combustion engines (except power alcohol);

hydraulic power;

electric power; and

printed matter issued by a non-profit body to advertise tourist resorts or to disseminate information concerning tourist traffic.

Existing law: These goods are only exempt if they are manufactured or produced in Australia. With regard to fuels for internal combustion engines, some goods such as petrol and crude oil are exempt whether they are produced in Australia or overseas. However, other substances for use as fuel for internal combustion engines are only exempt if they are of Australian origin.

Financial impact: A negligible cost.

Certain exemptions and classifications omitted

Change: Exemptions and classifications for organisations no longer operating in Australia or goods no longer used in Australia will be omitted. Some other exemptions will also be omitted because the mechanism for granting these exemptions will now be found in the Assessment Bill. These include the exemptions for small business, for exports and for certain containers. Omitted items are further discussed in Chapter 9.

Financial impact: Negligible.

Changes to Business Inputs exemptions

Vehicles for use in agricultural industry

Change: There will be an exemption for certain kinds of vehicles that are used in agricultural industry. The exemption will not include certain trucks.

Existing law: The existing exemption for certain kinds of 4-wheel drive vehicles requires the Commissioner to exercise a discretion as to which vehicles are, and are not, of a kind used in agricultural industry. Certain trucks have recently been ruled to be exempt under this item.

Financial Impact: Negligible cost.

Food making at retail outlets

Change: The exemption for certain inputs used in the manufacture of biscuits, pizzas and thick-shakes in retail premises or vehicles, for sale from those premises, will be removed.

Existing law: Some inputs to the manufacture of these goods are taxable and some are exempt. Biscuit mixes and special purpose biscuit making machines for use on retail premises are taxable, while general purpose equipment used in the manufacture of biscuits for sale at retail outlets is exempt. Equipment for use in the manufacture of pizzas for retail sale is currently taxable. However, exemption is available for pizza manufacturers who establish wholesale entities to own the pizza making equipment. In these cases the pizza makers are manufacturers who make wholesale sales of the pizzas to the retail part of their operation. The wholesale part of the operation can obtain exemption for equipment used to make the pizzas. Mixes used by registered persons in the manufacture of thick-shakes are exempt, whether the thick-shakes are made at retail premises or not. Some large retailers of take-away food, who have obtained registration in respect of some of their taxable activities, have incidentally obtained inputs to the manufacture of thick-shakes tax free.

Revenue impact: A maximum gain of $2m in a full year.

Specific agricultural industry exemptions

Change: A stricter main use (i.e. more than 50%) test will be imposed on various agricultural, fishing and pearling exemption Items.

Existing law: Exemption on the basis of an unquantified use of goods in certain activities in agricultural, pearling and fishing industry has allowed exemption to be obtained in some cases of 20-30% use of goods in exempt circumstances.

Revenue impact: A maximum gain of $2m in a full year.

Mining vehicles used in townships

Changes: (a) To extend exemption to general-purpose road vehicles used in mining when used in connection with domestic or staff facilities other than townships or accommodation complexes or similar places. (b) For consistency with the mining industry, general-purpose road vehicles used in townships or accommodation complexes located within manufacturing premises will be taxable.

Existing law: Vehicles used in the mining industry, if they travel to any extent within areas used mainly in connection with any domestic or staff facilities, are excluded from exemption. There is also an anomaly by which the exclusion in the mining industry for vehicles used in connection with domestic or staff amenities does not apply to the manufacturing sector.

Revenue impact: A maximum cost of $2m in a full year.

Excluded property

Change: The exemption for ancillary equipment used mainly in connection with other property which is specifically excluded from the business inputs exemptions will be removed.

Existing law: Exemption is allowed for ancillary equipment, such as repair and maintenance equipment, used in relation to plant and equipment which is expressly excluded from the business inputs exemptions.

Revenue impact: A maximum gain of $3m in a full year.

Airports on mining leases

Change: The exclusion for general-purpose road vehicles used in connection with the operation of airports on mining leases will be removed. The exclusion for rehabilitation equipment used in connection with airports on mining leases will be removed.

Existing law: General-purpose road vehicles and rehabilitation equipment used to any extent in connection with an airport on a mining lease are excluded from exemption.

Revenue impact: Negligible cost.

Print-related activities

Change: Allow exemption for certain printing equipment used in the preparation of technical manuals and documentation for use in non-manufacturing business inputs activities, such as cargo handling.

Existing law: Exemption is only available for equipment used in connection with the preparation of technical manuals for use in actual manufacturing activities.

Revenue impact: A maximum cost of $3m in a full year.

Cargo handling activities

Change: To exempt goods for use mainly in connection with handling qualifying cargo, even if the goods are located at premises which are not mainly used for handling that cargo.

Existing law: Exemption is only available if the exemption goods are located at premises that are used mainly for carrying out eligible cargo handling activities.

Revenue impact: A maximum cost of $15m in a full year.

Engineering and Technical design

Change: To exempt equipment and materials used in the engineering and technical design of business inputs which support actual manufacturing activities (such as scheduling equipment).

Existing law: Exemption is available only for equipment and materials used in the engineering and technical design of final products, goods used in the manufacture of those products, the processes of manufacturing those products or computer instructions for manufacturing equipment.

Revenue impact: A maximum cost of $5m in a full year.

Changes to Other Exemptions and Classifications

Plastic and rubber sheeting

Change: The specific exemption for plastic and rubber sheeting will be removed. Plastic and rubber sheeting will only be exempt if it is to be used in certain ways, e.g. as raw materials in the manufacture of other goods.

Existing law: Plastic and rubber sheeting is always exempt, no matter how it is used or who uses it.

Financial impact: A maximum gain of $10m in a full year.

Containers for take-away food

Change: Containers for take-away food will generally be taxable at the rate of 20%.

Existing law: Containers for take-away food are taxable at the rate of 10%.

Financial impact: A maximum gain of $4m in a full year.

Pet food for dog breeders etc

Change: Food for guide dogs and for animals kept in animal shelters will be exempt; however, pet food used by breeders of domestic pets, and by greyhound breeders and trainers, boarding kennels and catteries will usually be taxable at 20%.

Existing law: These pet foods have been treated as exempt.

Financial impact: A maximum gain of $3m in a full year.

Crockery and glassware

Change: Crockery, glassware and other goods will only attract the concessional rate of 10% if they are used in cooking, preserving, storing, preparing, serving or consuming of food or beverages (and are of a kind ordinarily used for household purposes).

Existing law: The extent of the concession for crockery, glassware and other goods used for similar purposes is unclear.

Financial impact: A maximum gain of $3m in a full year.

Imports of Australian manufactured goods

Change: Goods imported into Australia that:-

* were originally manufactured in Australia;

* were exempted from tax because they were exported; and

* if they had not been exported would have been exempt will not be

exempt unless they fall within an exemption for imported goods.

Existing law: The goods described above are exempt; however, the exemption has little practical effect.

Financial impact: Negligible gain.

Sensors and thermostats

Change: Sensors, thermostats and other goods used to control electrical appliances will be specifically excluded from the exemption for electrical fittings, accessories and materials. They will generally be taxable at the rate of 20%.

Existing law: Many sensors and thermostats are exempt under the equivalent provision in the existing law.

Financial impact: A maximum gain of $2m in a full year.

Dried hops

Change: The specific exemption for dried hops will be removed. Dried hops will only be exempt if they are dried naturally or if they are to be used in certain ways, for example as ingredients in the commercial production of beer. Some dried hops for sale to home brewers will be taxable at 20%.

Existing law: Dried hops are always exempt.

Financial impact: Negligible gain.

Pest killers

Change: Appliances for use with insecticides will only be exempt if they are for use exclusively in the course of business or industrial operations.

Existing law: Commercial type appliances of a kind used with insecticides are unconditionally exempt, even if they are actually used in the home.

Financial impact: Negligible gain.

Switch lampholders

Change: The specific exemption for switch lampholders will be removed and these goods will only be exempt if they are used for an exempt purpose.

Existing law: Switch lampholders are always exempt.

Financial impact: Negligible gain.

Water tanks

Change: Domestic hot water tanks, water tanks for sewerage systems and water tanks for motor vehicles will be specifically excluded from the general exemption for water tanks. Hot water tanks and sewerage tanks will generally be taxable at the rate of 10%. Water tanks for motor vehicles will generally be taxable at 20%.

Existing law: There is an exemption for water storage tanks but it overlaps with provisions covering domestic hot water tanks and water tanks for sewerage systems. Similarly, it is intended that water tanks for motor vehicles be taxed at 20%. Without this specific exclusion, the position is unclear.

Financial impact: Negligible gain.

Tea, coffee, chocolate and malt drinking preparations

Change: There will be two main changes to the sales tax treatment of tea, coffee, chocolate, cocoa, malt and drinking preparations. First, manufactured ready-to-drink beverages will be specifically excluded from the exemption. Secondly, substitutes for these goods will be exempt.

Existing law: It is not clear whether the existing exemption only covers the ingredients for making beverages or whether it applies to the beverage itself. Coffee substitutes made of cereals are exempt, but substitutes for other beverages are not.

Financial impact: Negligible gain.

Clothing

Change: Goods such as hair nets, hat bands and bust improvers, which might not normally be considered to be clothes will generally be taxable at 20%.

Existing law: There are specific exemptions for a number of goods, such as those noted above, which are not normally considered to be clothes.

Financial impact: A maximum gain of $1m in a full year.

Fish and other marine animals

Change: Fish and other marine animals will be exempt if they fall within the exemptions for primary produce or food for human consumption. There will however be no specific exemption for these goods. Unprocessed fish used as bait by recreational fishermen will remain exempt but processed bait will generally be taxable at 20%.

Existing law: Fish, oysters, crayfish, prawns, crabs and other marine animals are always exempt, regardless of how they are used. Bait for recreational fishermen is therefore exempt if it is made of fish.

Financial impact: Negligible gain.

Earthmoving equipment for local government contracts

Change: There will be an exemption for machinery, implements and apparatus for use for earth-moving in the course of carrying out a contract with a local government authority.

Existing law: Machinery and equipment is exempt if it is for use for earth-moving in the course of carrying out a contract with a local government authority.

Financial impact: Nil.

Bottled water

Change: Water marketed as mineral water will be exempt from tax if it has not been subject to a manufacturing process (other than filtration and bottling).

Existing law: Water marketed as mineral water is subject to tax at the rate of 20%.

Financial impact: A maximum cost of $5m in a full year.

Building materials - Glass and glass substitutes

Change: There will be an exemption for glass and substitutes for glass which are of a kind ordinarily used as raw materials in building work.

Existing law: There is an exemption for various forms of glass but no exemption for glass substitutes.

Financial impact: Negligible cost.

Pallets

Change: Pallets for storing or transporting goods will always be exempt.

Existing law: Pallets are only exempt if they are used in certain circumstances.

Financial impact: A maximum cost of $2m in a full year.

Bitumen mixtures

Change: Substances used in a plastic or fluid condition as raw materials in the construction of roads, paths, buildings or fixtures will be exempt, regardless of the composition of those substances.

Existing law: Substances which are used in a plastic or fluid condition in constructing or repairing roads, paths, buildings or other fixtures are only exempt if they are mixtures of asphalt, tar and bitumen.

Financial impact: Nil.

Gases

Change: All gases except for carbon dioxide, refrigerant gases and gases marketed principally for inflating balloons will always be exempt.

Existing law: There are exemptions for specified gases and gases used as business inputs are exempt, but no general exemption for gases.

Financial impact: Negligible cost.

Yarns and threads

Change: Any yarns or threads marketed principally for knitting, weaving, crocheting, embroidery, sewing or mending, rug-making or tapestry will be exempt.

Existing law: The exemption for some yarns and threads, in particular cotton and sewing thread, is restricted to goods marketed for household purposes.

Financial impact: A maximum cost of $1m in a full year.

Surgical appliances

Change: Goods such as dispensing plant, drip feed lamps, eye droppers, scales and staining bottles will now qualify for exemption if they are marketed principally as surgical instruments or appliances and are of a kind ordinarily used in hospitals or by medical practitioners.

Existing law: There is a range of exclusions, including the goods named above, from the exemption for medical and surgical goods.

Financial impact: A maximum cost of $1m in a full year.

Veterinary prescriptions

Change: Instruments, appliances and materials ordinarily used by veterinary surgeons and preparations ordinarily prescribed by veterinary surgeons for the treatment of animals will be exempt.

Existing law: Exemption is limited to instruments etc ordinarily used by veterinary surgeons. Certain medications prescribed for animals may not be technically used by vets.

Financial impact: Negligible cost.

Radio receivers

Change: Radio receivers of the kind used in public commercial telecommunication services will generally be taxable at 20%. These are radio receivers which have characteristics particularly adapted to use in public commercial telecommunication services.

Existing law: Radio receivers which are for use in public commercial telecommunication services are taxable at 20%. These can be any kind of radio receiver, provided they are actually used in that way. This is a wider class of goods than that proposed by the new law.

Financial impact: Negligible cost.

Works of art

Change: All works of art will be exempt.

Existing law: Virtually all works of art are exempt, except for works of art produced overseas by overseas artists, which are neither paintings, sculptures nor engravings.

Financial impact: Negligible cost.

Lubricants

Change: Lubricants will be exempt when they are for use exclusively as raw materials in the construction or repair of ships and aircraft, or when they are for use mainly in sound recording or film developing in producing motion picture films.

Existing law: These goods are taxable at 20%.

Financial impact: Negligible cost.

Goods for use by the State governments

Change: It will not be a requirement that State and Territory governments enter into agreements to pay tax on goods sold by their trading enterprises, before they can claim exemption on goods for their own use.

Existing law: There is a provision that requires State and Territory governments to enter into agreements to pay tax on goods sold by their trading enterprises before they can claim exemptions on goods for use by them. However, there is no evidence that these agreements have ever been entered into.

Financial impact: Nil.

Thick-shakes

Change: Thick-shakes or similar goods made on retail premises or vehicles will be exempt from tax.

Existing law: Tax is not presently collected on the sale of thickshakes made in retail premises as these sales are considered to be outside the scope of the sales tax legislation. Nevertheless, this specific exclusion is thought to be necessary to put the matter beyond doubt.

Financial impact: Nil

Warranty goods

Change: There will be a credit entitlement in the Assessment Bill for goods for use as replacements, under warranty, for faulty goods.

Existing law: These goods are exempt by virtue of an exemption in the Sales Tax (Exemptions and Classifications) Act.

Financial impact: Nil.

Financial Impact

The new sales tax legislation will provide a gain to the revenue of $61m in 1992-93 (assuming a 1 October 1992 commencement date) and $91m in 1993-94. These figures include changes to the existing law proposed by the Sales Tax (Exemptions and Classifications) Bill 1992.

The more important changes are briefly described in the Summary of Main Changes above. There is a separate costing for the revenue effect of each of the main changes which can be quantified.