Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
CHAPTER 1 - EXECUTIVE SUMMARY
This chapter gives you a brief summary of what is the Goods and Services Tax.
The GST is a broad based indirect tax introduced by the Government to replace the wholesales sales tax and a number of State indirect taxes. Broadly speaking, the GST is a tax on private consumption in Australia. The GST taxes the consumption of most goods, services and anything else in Australia, including things that are imported. Generally the GST will not apply to consumption outside Australia, which is why the GST does not apply to exports.
This is generally achieved by:
- imposing tax on supplies made by entities registered for GST; but
- allowing those entities to offset the GST they are liable to pay on supplies they make against input tax credits for the GST that was included in the price they paid for their business inputs.
GST is effectively a tax on final private consumption in Australia. These are the general rules on how it works.
GST is a tax on a supply or importation of anything (goods, services or anything else), except to the extent that the supply or importation is input taxed or GST-free.
However, the supplier or importer (except an importer of goods) must be registered under this Act. Anyone carrying on an enterprise (a term that includes a business) may be registered.
A thing can attract GST each time it is supplied or imported along the commercial chain to its final consumption in Australia.
GST is effectively borne by consumers when they acquire anything to consume.
GST is remitted by suppliers who make supplies in carrying on their enterprise. Suppliers do not bear the GST because the tax is included in the price of what they supply.
Importations of goods are different. The Australian Customs Service collects the GST, from the importers, on imported goods when they are imported. There is no requirement for the importer to be registered or even carrying on an enterprise.
To ensure that GST is effectively borne by consumers, anyone who is registered is generally entitled to an input tax credit for the GST on what they acquire or import for the purpose of their enterprise. Generally, the amount of the input tax credit is the same as the amount of GST that was:
- included in the purchase price of the acquisition; or
- paid to Customs on the importation.
In effect, the input tax credit is a reimbursement of the GST paid on the acquisition or importation.
However, there is no input tax credit for anything acquired or imported for private consumption. The effect of this is that consumers are not reimbursed for the GST paid on their acquisitions or importations. Consumers therefore bear the GST.
This diagram shows how GST generally works by using a simple example of a chain of supplies leading to a sale to a consumer. The diagram is followed by a discussion of the example.
The timber merchant sells timber to the furniture manufacturer for $220. That purchase price includes the $20 GST payable on the supply. The timber merchant must remit $20 to the Commissioner. He is not out of pocket for the $20 because it was included in the price he charged.
Because the furniture manufacturer acquired the timber for the purpose of her enterprise, she is entitled to an input tax credit from the Commissioner for that acquisition. The amount of the input tax credit is $20. This is the amount of tax included in the price that she paid for the timber, so she is not out of pocket for the GST included in the purchase price.
The furniture manufacturer makes a table out of the timber and sells it to the furniture retailer for $440. That purchase price includes the $40 GST payable on the supply. The furniture manufacturer must remit $40 to the Commissioner, but she is not out of pocket for it because it was included in the price she charged.
Because the furniture retailer acquired the table for the purpose of his enterprise, he is entitled to an input tax credit for that acquisition from the Commissioner. The amount of the input tax credit is $40. This is the amount of GST included in the price that he paid for the table, so he is not out of pocket for the GST included in the purchase price.
The furniture retailer sells the table to the consumer for $550. That purchase price includes the $50 GST payable on the supply. The furniture retailer must remit $50 to the Commissioner, but he is not out of pocket for it because it was included in the price he charged.
The consumer is not entitled to an input tax credit for buying the table because she did not buy it for the purpose of an enterprise. Therefore she bears the $50 GST included in the purchase price she paid for the table.
The Commissioner is paid a total of $110 GST for the supplies by the timber merchant ($20), the furniture manufacturer ($40) and the furniture retailer ($50).
However, the Commissioner pays in total $60 in input tax credits to the furniture manufacturer ($20) and the furniture retailer ($40).
The difference between the amount the Commissioner is paid and the amount the Commissioner pays equals $50, which corresponds to the GST that was included in the purchase price paid by the consumer.
Enterprise is defined widely because the GST is intended to have a broad base. Certain things are included as enterprises so that input tax credits are available to them. Enterprise includes:
- a business, trade, or profession;
- a lease, licence or other grant of interest in property;
- certain activities of gift deductible funds, authorities or institutions;
- certain activities of charitable institutions;
- certain activities of religious institutions; and
- certain activities of governments and government corporations.
Certain things are excluded from being an enterprise. For example, hobbies, private recreational pursuits and employee wages are not subject to GST. For individuals and partnerships there must also be a reasonable expectation of profit or gain.
If you have an enterprise, whether you are an individual, partnership, company, trust or other entity, you are required to register if your annual turnover is $50,000 or more. Non-profit bodies are only required to register if their annual turnover (including membership fees, but not donations) is $100,000 or more.
If your annual turnover is below these thresholds you do not have to register, but you can choose to register. If you do not register, you do not charge GST on your supplies and you are not entitled to input tax credits.
Generally, you account for GST when an invoice is issued, or payment received if the payment is received before an invoice is issued. If your annual turnover is less than $500,000 you can choose to account for GST on a cash basis. That is, when and to the extent that payments are received.
Rather than remitting GST or receiving an input tax credit whenever you made a taxable supply or a creditable acquisition, you attribute GST and input tax credits to tax periods and work out a total.
Your net amount for a tax period is a total of your GST, input tax credits and adjustments that are attributable to that tax period.
The accounting rules tell you to which tax period you attribute GST, input tax credits and adjustments.
If you are registered, you pay GST or claim refunds in relation to either quarterly or monthly tax periods. If your annual turnover is less than $20 million you may choose to have quarterly or monthly tax periods. If your annual turnover is $20 million or more you must have monthly tax periods. Generally, the Commissioner will only pay your refunds directly into your bank account.
If you are required to have monthly tax periods you must lodge GST returns and pay GST to the Commissioner electronically.
Private sales by registered or unregistered people, such as at a garage sale, are not subject to the GST.
Displayed prices will include GST.
Some things will not be taxed, such as most health, education and childcare services.
There are two types of non-taxable supplies under the GST:
- GST-free; and
- input taxed.
If a supply is GST-free, you do not charge GST on the supply, and you are entitled to input tax credits on the things you acquired to make the supply.
If a supply is input taxed, you do not charge GST on the supply, but you are not entitled to input tax credits on the things you acquired to make the supply.
Generally supplies are input taxed where it is technically difficult to impose GST on the supply, but it is not appropriate to allow the supply to be GST-free.
Exports will be GST-free. Exported goods must be physically exported from Australia and exported services must be performed outside Australia.
Goods and services consumed by tourists in Australia, such as meals and hotel accommodation are subject to GST under the general rules. International air and sea travel is GST-free, as is any domestic air travel purchased overseas by non-residents. Tourists and Australian residents going overseas are able to recover the GST they pay on goods purchased in Australia and taken away with them when they leave. It is proposed that refunds apply to purchases of at least $300 made from any one business within 28 days of departure.
However, if the goods are subsequently brought back, that is, imported into Australia, GST will be payable at that time as for all imports.
Generally, medical and hospital care services and health insurance are GST-free.
Medical services are GST-free if they are provided by a medical practitioner or an approved pathology practitioner, or are commonly used health services supplied by a recognised professional. Examples of GST-free health services are listed below:
- general practitioner and specialist consultations;
- ambulance services; and
- diagnostic, surgical and therapeutic procedures (for example, ophthalmology, neurology, optometry, radiation oncology, anaesthetics, radiology, ultrasound etc) and pathology.
- Other medical services that are GST-free include:
- Aboriginal or Torres Strait Islander health;
- audiology, audiometry;
- occupational therapy;
- speech pathology;
- speech therapy; and
- social work.
Health care provided at hospitals, nursing homes, hostels and similar establishments is GST-free, as is nursing care services supplied to patients at home. The concession extends to accommodation, drugs, dressings and meals supplied to patients or nursing home residents in the course of their treatment or care. Supplies of items not related to health care, such as food served in hospital cafeterias, or televisions rented to patients, are subject to GST under the general rules.
The supply of certain medical appliances for use by people with medical conditions or disabilities, such as wheel chairs, crutches, artificial limbs and modifications to motor vehicles for the disabled, is GST-free.
The supply of certain drugs and medicines that can only be provided on prescription or Pharmaceutical Benefits Scheme and Repatriation Pharmaceutical Benefits Scheme medicines provided on prescription will be GST-free. This includes drugs prescribed by medical practitioners, dental practitioners and pharmacists.
Generally, the following educational services are GST-free:
- tuition at or through a pre-school, primary or secondary school;
- tuition provided at a college, TAFE, university or other recognised institution that leads to a degree, diploma, certificate or other similar qualification; and
- the provision of accommodation at boarding schools.
Supplies that would normally be subject to GST will not become GST-free simply because a school acts as a purchasing agent. Things other than educational services, such as computers and books, supplied to students by an educational institution are subject to GST in the normal way. However, goods loaned to students free of charge will not be taxed.
Examples of supplies that are not GST-free include:
- the food component of boarding fees, and food and beverages sold to students (eg in tuck-shops);
- school bus services and uniforms;
- fees charged for equipment hire (eg musical instruments); and
- supplies for fundraising purposes.
Childcare supplied by a registered childcare provider is GST-free.
Non-commercial supplies by charities and gift-deductible entities are GST-free.
Generally, religious services will be GST-free. Churches and other institutions that supply religious services will not charge tax on those services and will be able to claim input tax credits for tax paid on their inputs.
Religious items for use in private devotion are subject to GST under the general rules.
Other GST-free supplies include:
- supplies of going concerns;
- water and sewerage;
- domestic air travel by non-residents;
- precious metals;
- supplies through inwards duty free shops;
- grants of freehold and similar interests by governments; and
- cars for use by disabled people.
In general financial supplies are input taxed. Some financial supplies for which there is a readily identifiable fee or charge, such as investment advice, are subject to GST.
Exports of financial services will be GST-free, in line with the treatment of other exports.
Residential rents will be input taxed to ensure comparable treatment for renters with owner-occupiers.
Supplies of residential premises other than the sale of a new house are input taxed.
The first supply of precious metal after refinement is GST-free. Subsequent supplies are input taxed.
There are special rules that modify the general rules. The special rules tailor the operation of the GST to particular situations or provide concessions. Three examples of the special rules are discussed below.
In line with the treatment of new goods, the supply of second hand goods by registered persons is generally subject to GST, but not if the supply is of a private nature. For example, generally you will not charge GST when you sell your family car.
GST applies to the operator's margin of these activities, not to the prizes paid out. That is, GST applies to the difference between total ticket sales or bets taken and the value of the prizes or winnings paid out. Input tax credits are available to the operator.
Diesel fuel credits are available to offset the excise or customs duty included in the price of diesel and like fuels for certain transport and off-road use.
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