Edited version of your private ruling

Authorisation Number: 1012459240138

Ruling

Subject: GST and input tax credits for second hand goods

Questions

1. Can you use 'the accounts approach' for all acquisitions from unregistered GST suppliers for the purposes of Division 66 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. Is the example that you provided as a proposed method in identifying the quantum of purchases from unregistered GST suppliers that are exported acceptable and hence the apportionment of GST credits available to be claimed on purchases from unregistered GST suppliers acceptable?

Answers

1. No, you cannot use 'the accounts approach' for acquisitions from all unregistered GST suppliers for the purposes of Division 66 of the GST Act. This is because acquisitions from the unregistered GST suppliers do not satisfy the requirement in subsection 66-5(1) of the GST Act.

2. Not applicable as you cannot use 'the accounts approach' as stated in question 1.

Relevant facts

You are an Australian company and are registered for GST.

You operate a business. You purchase a diverse range of materials from GST registered and unregistered GST suppliers.

All materials purchased are sorted then amalgamated with other purchases of the same which are then processed by shredding and/or compaction before sale to either domestic GST registered entities or exported overseas GST-free.

Further, the materials purchased is often identified on the purchase documentation and when processed will form another, hence the identity of what is purchased is lost through processing and amalgamation.

You have difficulty to trace the specific materials purchased to its final sale transaction and given the processing and amalgamation that occurs, it is impossible to do a record keeping of this activity. Further as the sale of materials to export markets does not have GST added to the sale price due to the exemption for exported goods, it is therefore not possible to individually identify the materials purchased to that sold as either domestic or exported goods.

The sale of materials to export markets does not have GST added to the sale price due to the exemption for exported goods. It is therefore not possible to individually identify the materials purchased to that sold as either domestic or exported goods.

As you are unable to separately identify the value of materials purchased from unregistered GST entities through your sale and therefore to directly determine the amount of non registered acquisitions to which no GST credit is available for the second hand goods acquired and then exported, you are considering to apply the 'accounts approach' which is a method in identifying the quantum of purchases from unregistered GST suppliers that are exported purchases, hence enabling the apportionment of GST credits available to be claimed on purchases from unregistered GST suppliers.

You advised that under the accounts approach:

· you will for each reporting period determine the value of goods sold and exported compared to total sales for the period.

· the credit for purchases from unregistered GST suppliers will be reduced in direct proportion to the ratio of exported sales to total sales excluding applicable GST.

You have provided the following example in regard to your proposed accounts approach and you are asking us to confirm whether the approach in the given example is in accordance with the relevant legislation and acceptable to us.

Example

Assume for the period

· total purchases from unregistered GST entities were $1,100;

· purchases from GST registered entities were $5,500;

· sales exported were $11,000 (no GST applicable); and

· total domestic sales including GST were $22,000.

Ignoring credits from other acquisitions, the GST payable would be:

· on sales exported - nil

· on other sales (22000/11) $2,000 less

GST paid on GST registered entities' acquisitions (1/11 x $5,500) $500 less

a credit for the purchases from unregistered GST entities adjusted for export sales ($1,100/11 x 20.000/31,000) $65

total GST payable is therefore $1,435 (ignoring rounding).

Under the accounts method, this would be reported in the BAS as G1 33,000, G2 11,000, G11 6.600, 1A 1935 and 1B as 500.

Should the credit from unregistered GST entities exceed taxable sales then nil GST on sales will be reported and the credit carried forward to the next period. It is extremely unlikely this will ever occur.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 66-5;

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 195-1.

Reasons for decisions

Question 1

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) contains the basic rules about whether an acquisition is a 'creditable acquisition'. Under section 11-20 of the GST Act an entity is entitled to an input tax credit for any creditable acquisition they make provided the entity satisfies section 11-5 of the GST Act. Paragraph 11-5(b) requires that the supply of the thing to the entity is a 'taxable' supply within the meaning of section 9-5 of the GST Act.

The sale by an unregistered GST entity of second-hand goods to a registered entity is not a taxable supply under section 9-5 of the GST Act. As it is not a taxable supply, the acquisition of the second-hand goods by the registered entity is not a creditable acquisition under section 11-5 of the GST Act.

However, if subsection 66-5(1) of the GST Act is satisfied and the requirements of section 11-5 of the GST Act are otherwise met, the acquisition of second-hand goods by a registered entity will be a creditable acquisition to the extent that subsection 66-5(2) of the GST Act does not apply.

The special rules covered under Division 66 of the GST Act are for entities that acquired second-hand goods for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business (that is second hand goods dealers) and allowing them to claim GST credits for second hand goods that they purchase for resale from sellers who has not charged GST in the price of the goods.

In this instance we need to determine whether you satisfy the requirements in subsection 66-5(1) of the GST Act before considering your use of the 'accounts approach' for acquisitions from all unregistered GST suppliers.

Creditable acquisition of second-hand goods

Section 66-5 of the GST Act is about creditable acquisition of second-hand goods and states:

66-5 Creditable acquisition of second-hand goods

1. If you acquire *second hand goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of * business, the fact that the supply of the goods to you is not a *taxable supply does not stop the acquisition being a *creditable acquisition.

2. However, this section does not apply, and is taken never to have applied, to the acquisition if:

(a) the supply of the goods to you was a *taxable supply, or was *GST-free; or

(b) you *imported the goods; or

(c) the supply of the goods to you was a supply by way of hire; or

(d) subdivision 66-B applies to the acquisition; or

(e) you make a supply of the goods that is not a taxable supply.

(* denotes a defined term in section 195-1 of the GST Act)

Second-hand goods

The term 'second hand goods' is defined in section 195-1 of the GST Act as:

second-hand goods does not include:

(a) *precious metal; or

(b) goods to the extent that they consist of gold, silver, platinum or any other substance which would be precious metal if it were of the required fineness; or

(c) animal or plants.

The term 'precious metal' is defined in section 195-1 of the GST Act to mean:

(a) gold (in an investment form) of at least 99.5% fineness; or

(b) silver (in an investment form) of at least 99.9% fineness; or

(c) platinum (in an investment form) of at least 99% fineness; or

(d) any other substance (in an investment form) specified in the regulations of a particular fineness specified in the regulations).

Goods and Services Tax Ruling GSTR 2003/10 discusses what is precious metal for the purposes of GST. Paragraph 11 of GSTR 2003/10 states:

11. To be the metal gold, silver or platinum, the item must have the character of the metal rather than the character of a thing made from the metal. Items such as jewellery that happen to be made of gold, silver or platinum are not gold, silver or platinum for the purposes of the definition of precious metal in the GST Act. They no longer have the character of the metal gold, silver or platinum. They have the character of jewellery made from gold, silver or platinum. They are therefore not precious metal for the purposes of the GST Act.

A summary of 'what is an investment form' is in paragraph 29 of GSTR 2003/10 which states:

29. To summarise the above, for gold, silver or platinum to be in an investment form for the purposes of the GST Act, it must be in a form that:

· is capable of being traded on the international bullion market, that is, it must be a bar, wafer or coin;

· bears a mark or characteristic accepted as identifying and guaranteeing its fineness and quality; and

· is usually traded at a price that is determined by reference to the spot price of the metal it contains.

The meaning of 'second-hand goods' is discussed at paragraphs 57 to 76 in Goods and Services Tax Ruling GSTR 2000/8 and at paragraphs 37 to 42 of Goods and Services Tax Ruling GSTR 2005/3. According to paragraph 41 of GSTR 2005/3, we consider, in the context of Division 66 of the GST Act, that 'second hand' to mean 'previously used' or 'not new'. Usually goods are second-hand only if they have been used for their intrinsic purpose. However, goods that have been used for another purpose are also second-hand.

You advised that you purchase a diverse range of materials and these materials are sorted into various classes and grades. In this instance, the materials you purchased are made from metal and do not have the character of the metal itself as explained in paragraph 11 of GSTR 2003/10. The materials you purchase therefore satisfy the definition of 'second hand goods' as defined in section 195-1 of the GST Act.

Acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business

Paragraphs 80 to 81 of Goods and Services Tax Ruling GSTR 2000/8 provide guidance on 'not for manufacture' and state the following:

Not for manufacture

80. Paragraph 16(1)(b) of the Transition Act excludes goods you acquired or imported that are held for manufacture. The word 'manufacture' is not defined in the 'A New Tax System (Goods and Services Tax) Act 1999'. Accordingly, it must be given its ordinary understood meaning. The Macquarie Dictionary, 3^rd Ed., defines 'manufacture', when used as a verb, 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…'. Also, Williams J stated in Adams v. FC of T (1948) 8 ATD 332, at 334-335 that:

'The question of the meaning of an ordinary English word such as 'manufacture' used in a Statute is one of fact and the question whether the facts proved in evidence come within this meaning is also one of fact.'

81. 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 materials 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). Therefore, if you are a repairer, renovator or reconditioner who is not involved in manufacture and hold goods for the purposes of sale or exchange at the start of 1 July 2000, you are eligible for the special credit.

Paragraphs 43 to 45 in GSTR 2005/3 further state:

Acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business

43. Section 66-5 of the GST Act requires that the second hand goods are acquired for the purposes of sale or exchange in the ordinary course of business. We consider that this means the acquirer must be in the business of buying and selling these goods. If second-hand goods are acquired for any other purpose, for example, for use and eventual sale in the course of the business, the acquisition of the goods does not meet this requirement.

44. Further, section 66-5 was amended to ensure that input tax credits for acquisitions of second hand goods from unregistered suppliers can only be claimed where those goods are acquired for sale or exchange in the ordinary course of business (excluding materials used in manufacture). This is confirmed by paragraph 1.26 of the Explanatory memorandum to the A New Tax System (Indirect Tax and Consequent Amendment) Bill (No 2) 1999 which says:

Item 77 amends section 66-5 to ensure that input tax credits for acquisitions of second-hand goods from unregistered suppliers can only be claimed where these goods are acquired as trading stock (excluding materials used in manufacture).

45. Although 'trading stock' is not mentioned in Division 66, the words in section 66-5 that are similar to the meaning of trading stock in the Income Tax Assessment Act 1997, reflect this intention of Parliament. That is, to limit the application of the division to second-hand goods acquired by entities in the business of trading in those goods.

Accordingly, whether goods that are acquired are held for manufacture depends upon whether a different thing has been produced. If the work is more than a repair, renovation or modification of old materials and changes the goods into something of a different character, there has been a manufacture of good.

Based on the information received, we consider you have acquired the materials for other purpose that is for use and eventual sale in the course of your business. This is because the original character of the materials have changed when they are processed by shredding and/or compaction before sale and the identity of the materials is lost as something different has been produced from the materials

Accordingly, the requirement to 'acquire second hand goods for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business' in subsection 66-5(1) of the GST Act is not satisfied. Your acquisition of second hand goods from unregistered GST suppliers is not a creditable acquisition under subsection 66-5(1) of the GST Act and therefore you are not entitled to an input tax credit for these acquisitions.

Summary

You cannot use 'the accounts approach' for acquisition from all unregistered GST suppliers for the purposes of Division 66 of the GST Act. This is because your acquisitions from the unregistered GST suppliers do not satisfy the requirement in subsection 66-5(1) of the GST Act.

Question 2

Not applicable as you cannot use 'the accounts approach' as explained in question 1.