Sales Tax Bulletin - No. 9

STB 9

Soft furnishings

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Date of Issue: 1 May 1997

Valid from 1 May 1997

About this bulletin

This bulletin explains how the sales tax law affects people who are in business in the soft furnishings industry. It is a public ruling for the purposes of section 77 of the Sales Tax Assessment Act 1992 and may be relied upon by any person to whom it applies. It replaces any previous private or public rulings, if they are inconsistent with the bulletin, and is current as at 1 May 1997.

If, after reading this bulletin, you need more information on how the sales tax law affects your business, contact your local Tax Office on 13 28 66 for the cost of a local call.

How does sales tax affect me?

If you are in business as a soft furnishings manufacturer, you're liable for sales tax on any taxable goods you manufacture which you sell or apply to your own use, unless an exemption applies. Under the sales tax law, a soft furnishings manufacturer can choose to be registered for sales tax purposes and receive a sales tax registration number.

Although you can choose whether or not to be registered, your choice will affect your entitlement to obtain some goods free of sales tax. If you do register, you will be entitled to obtain free of sales tax, certain goods used in your manufacturing activities by quoting your sales tax registration number to your supplier.

Who can register for sales tax?

You can apply for registration if you are in business and carry out any of the following activities (or intend to do so):

• • manufacture goods;

• • sell goods by wholesale (this generally covers sales to people who resell goods);

• • sell goods (not of your own manufacture) by indirect marketing, e.g., through commission agents;

• • sell raw materials to a manufacturer;

• • sell goods to eligible Australian or foreign travellers in accordance with prescribed export rules; and

• • carry out certain activities on behalf of manufacturers.

How do I register for sales tax?

To register for sales tax purposes, just complete an Application for Registration - Sales Tax form. These forms are available from your local Tax Office. If you don't have a tax file number, you will also need to refer to the Proof of Identity Documents Information Sheet (also available from your local Tax Office) and provide the appropriate form of identification. You'll need to send us this identification with the completed application form. Once we register you, we'll send you a letter with your sales tax registration number on it.

How do I quote my sales tax registration number?

Once registered, you can quote your sales tax registration number in the following form to buy certain business inputs free of sales tax:

Do I have to quote every time I buy goods free of sales tax?

No. You can now give your suppliers a single quotation of your sales tax registration number to cover all your tax free purchases in a period where that period does not exceed one year (called a periodic quotation), in the following form:

What happens if I don't register?

If you choose not to register, you won't be able to buy your business inputs or, in some cases, your trading stock free of sales tax. You may be able to claim a credit for sales tax paid on such goods, but you will have to wait until you have produced goods from those raw materials, or have used those business inputs and have sold the goods or applied them to your own use before you can claim a credit.

For example, an unregistered curtain manufacturer cannot buy sewing machines free of sales tax. When those sewing machines have been used in the manufacture of curtains and the first of those curtains is sold, a refund of the sales tax paid on the sewing machines becomes available by applying to the Tax Office.

Is there any small business exemption?

The sales tax small business exemption is available to those people who:

• • were liable for $10,000 or less sales tax during the last 12 months; and

• • expect to be liable for $10,000 or less sales tax during the next 12 months.

If you choose to use the small business exemption, you must pay sales tax to your suppliers when buying your business inputs or trading stock. You then do not have to charge sales tax to your customers when you sell goods, nor do you have to pay sales tax when you apply goods to your own use.

If, at any stage, you exceed the $10,000 limit, you will have to calculate and collect sales tax on the current transaction. For more information, contact your local Tax Office on 13 28 66 for a free copy of Bulletin No. 18 Sales Tax - Small Business Exemption.

What goods can I buy free of sales tax?

If you're registered, you can buy certain business inputs free of sales tax by quoting your sales tax registration number. Business inputs includes goods such as:

• • raw materials;

• • machinery, apparatus, tools, etc. used mainly in a manufacturing activity, e.g., sewing machines, overlockers etc; and/or

• • machinery, apparatus, tools etc. used mainly in an activity which directly supports the manufacturing activity, e.g., a computer used mainly to plan a production schedule, order raw materials, cost the manufacturing process etc.

What goods can't I buy free of sales tax?

Not all goods that you buy for your business qualify for sales tax exemption. You can normally only buy business inputs (see above) and in some cases, trading stock free of sales tax.

When you buy goods that don't qualify for sales tax exemption you must not quote your sales tax registration number. Your supplier must then charge you sales tax. You may wish to tell your supplier that you're not claiming exemption on that purchase.

Some examples of goods you can't buy free of sales tax are:

• • general-purpose road vehicles except in certain limited circumstances;

• • mobile phones used mainly for general business or private purposes;

• • staff amenities (such as tea and coffee making equipment, toilet paper etc.); and

• • goods for use mainly in connection with administrative or selling activities (such as general stationery, fax machines, certain computers etc.).

What if I've already given my supplier a periodic quotation?

Where you've given your supplier a periodic quotation, but you're buying goods for which you're not entitled to quote, you must tell your supplier that you are not claiming exemption. The notice should be in the following form:

If you buy goods free of sales tax and then use them in such a way that they don't qualify for exemption, you will have to pay sales tax to the Tax Office.

When must I charge sales tax?

Unless you are able to use the small business exemption, you will have to charge sales tax if you:

• • manufacture goods using materials supplied by your customer (whether a retailer, interior designer or private customer);

• • sell goods by wholesale;

• • sell goods through indirect marketing arrangements;

• • sell goods you have manufactured in the course of any business;

• • sell by retail goods that you bought or obtained free of sales tax by quoting a sales tax number; or

• • apply to your own use goods that you have manufactured in the course of a business or obtained free of sales tax (for example, if a curtain manufacturer makes curtains for their own office, they must account for sales tax as if the goods were sold).

When don't I charge sales tax?

You don't have to charge sales tax when:

• • the goods themselves are exempt (e.g. curtain material on the roll);

• • the person buying the goods quotes an exemption declaration (e.g. a non-profit school, a government department or a public benevolent institution declares that the goods are for their own use);

• • the person buying the goods quotes their sales tax registration number;

• • the small business exemption applies to you;

• • the goods are second hand; or

• • the goods are sold by retail and you have already paid tax when you bought the goods.

How do I calculate sales tax payable on my transactions?

When a taxable product is sold or applied to your own use and no exemption applies, you calculate sales tax by multiplying an amount known as the taxable value by the rate of tax applicable to the goods. The usual taxable values as they apply to the soft furnishings industry are discussed below.

Taxable value - where the manufacturer supplies the materials and sells the completed goods by wholesale

A wholesale sale is a sale to a person who is purchasing goods to resell them, such as a retailer. The taxable value of a wholesale sale is the price for which the goods were sold. As a general rule, this will include all amounts you charge the purchaser, up to the point when the purchaser owns the goods.

Example

You sell bedspreads to a retailer for $200 before tax. This is a wholesale sale, as the retailer will resell the goods. The taxable value of the goods will be $200, as this is the price for which the goods were sold.

Taxable value - where the manufacturer supplies the materials and sells the completed goods by retail

A retail sale is a sale to an end user. When you sell by retail, the taxable value is the price for which you could reasonably have been expected to sell the goods by wholesale under an arm's length transaction. This is known as the notional wholesale selling price.

The taxable value is readily determined when you sell the same type of goods by wholesale in significant quantities in comparable circumstances as your retailed goods. The following paragraphs give some methods of arriving at this value.

What if I sell by both wholesale and retail?

To arrive at the taxable value of the goods you have sold by retail, you can use one of the following 2 methods, depending upon the circumstances:

• 1. The actual wholesale price of similar goods sold in significant quantities to arm's length retailers in comparable circumstances.

Example

You sell bedspreads by retail for $290 (excluding tax). If you also sell similar goods to arm's length retailers for $200 before tax in comparable circumstances, the taxable value of the goods you sell by retail will be $200 (ie the wholesale price), as this is the price for which you could reasonably have been expected to sell the goods by wholesale.

• 2. If you sell by wholesale at a range of selling prices, you can use the weighted average of your wholesale prices to arrive at the taxable value. For more details about this, contact the Tax Office on 13 28 66 for the cost of a local call.

What if I only sell by retail and I don't sell similar goods by wholesale?

The Tax Office would expect that you would normally sell by wholesale at a price reflecting the sum of manufacturing cost, any research and development costs, wholesale selling expenses and a fair wholesale profit.

A simplified formula (known as a Safe Harbour) for finding this figure is available for soft furnishing manufacturers who sell goods by retail but do not sell significant quantities of similar goods by wholesale in comparable circumstances. It is calculated easily by taking the manufacturing cost plus one third of the difference between that amount and the retail selling price (excluding tax) of the goods. A Safe Harbour is a statement of how to calculate taxable value that the Tax Office accepts as completely discharging a taxpayer's liability.

Manufacturing cost means the sum of:

• • the cost of materials used to manufacture the particular goods;

• • the cost of labour used directly in the manufacturing operations; and

• • production, manufacturing or factory overheads.

Example

You manufacture and sell car seat covers by retail for $80 (before tax). If the manufacturing cost of the goods is $50, the taxable value is $60, calculated as follows:

50 + ⅓ of (80 - 50) = 50 + 10 = 60.


For simplicity, once a taxable value has been calculated in this way, it can then be expressed as a percentage off the retail selling price. In this particular example, it is retail selling price (before tax) less 25% (ie $80 - 25% = $60).

Some soft furnishing manufacturers may only have a retail price that includes sales tax and may therefore have difficulty in using the previous calculation. If you know only the tax inclusive retail selling price and the manufacturing cost of the goods, the taxable value can be calculated as:

(2C + RSP) / (3 + R)


where:

In the above example the tax inclusive retail selling price of goods taxed at 22% would be $93.20 ($80 plus $13.20 being 22% of notional wholesale price of $60). Applying the formula produces the same taxable value of $60 as follows:

(2 * 50) + 93.20 divided by (3 + 0.22)
= 193.20 divided by 3.22
= $60.


Taxable value - where goods are manufactured from materials supplied by retailers or interior designers

If you manufacture goods using raw materials supplied by customers such as retailers or interior designers, the taxable value is the amount charged to the customer plus the notional wholesale purchase price of any always exempt goods supplied by your customer. Always exempt goods are usually unprocessed fabrics. e.g., selvage to selvage fabric on the roll.

The notional wholesale purchase price is the price (excluding sales tax) for which you could reasonably have been expected to buy the goods by wholesale. The price paid by your customer for the materials or the landed cost of imported materials is satisfactory. This price must be added to the amount of your charge to calculate the tax. You should try to get this price in writing from your customer, but an oral quote of the price will be satisfactory.

Example

You manufacture curtains using curtain fabric supplied by a retailer which cost $200. The amount charged to the retailer for making up the curtains is $100 (before tax). The taxable value of the made-up curtains is $300, being the sum of the amount charged to the customer ($100) plus the notional wholesale purchase price of the fabric ($200). The tax payable on the made-up curtains is 12% of $300 which is $36.

If your customer is unable or unwilling to provide you with the actual purchase price of the exempt materials supplied, or you believe the stated price to be unreasonable, you should make an estimate of your customer's purchase price based on your general knowledge of prices of comparable goods in the industry. Alternatively, you may use the price for which you can purchase comparable goods at arm's length.

You do not include in the taxable value calculation, the value of taxable materials supplied by your customer such as tapes, hooks and weights, cornelli or embroideries.

Taxable value - where goods are manufactured from materials supplied by private customers e.g., householders

In principle, the taxable value is arrived at in the same manner as if a retailer supplies you with the always exempt material. However, if you make soft furnishings for private customers for their own use and you have difficulty establishing the notional wholesale purchase price of the exempt materials supplied to you by the customer, the Tax Office will allow you to use a special value. This value will be the price paid by the customer for the materials less 40%.

Alternatively, if your customer is unable or unwilling to provide you with the actual purchase price of the exempt materials supplied, or you believe the stated price to be unreasonable, you may use the price for which you can purchase comparable goods at arm's length.

Again, you do not include the value of taxable materials supplied by your customer.

Taxable value - applying goods to your own use

If you've manufactured soft furnishings and applied them to your own use in circumstances where an exemption doesn't apply, the taxable value is the notional wholesale selling price of the goods. Where you sell similar goods by wholesale or retail, you can calculate the taxable value using one of the methods described above.

If you buy in goods free of sales tax by quoting your sales tax registration number and then apply them to your own use in circumstances where an exemption doesn't apply, the taxable value is the purchase price of the goods.

Answers to common questions about sales tax from the soft furnishing industry

Question 1

Where two or three persons with separately registered business names share premises and costs, etc. but charge clients independently, the combined work undertaken in the shared premises may be over the small business exemption limit, but individually, may not. Are they entitled to the small business exemption?

Answer

If each person manages a separate business entity and if the requirements for the small business exemption are satisfied by each of them individually, then each of them would be entitled to the small business exemption.

Question 2

If 'A', a manufacturer registered for sales tax, subcontracts whole jobs or parts of jobs to 'B', another manufacturer registered for sales tax, who is responsible for collecting the sales tax and sending it to the Tax Office?

Answer

If A is entitled to quote their sales tax registration number to B and obtains the goods tax free, then A is responsible for charging the sales tax when the made up goods are sold or delivered to the retailer. A sends the tax to the Tax Office.

If A chooses not to quote, B must charge tax on the sale of the goods and send it to the Tax Office. When A sells or delivers the made up goods to the retailer, they still have an obligation to charge sales tax on the transaction and send the tax to the Tax Office. However, A can claim a credit for the tax paid when the goods were bought from B.

Question 3

A retailer/manufacturer covered by the small business exemption with no sales tax number may choose to undertake some jobs in their own premises and send out some jobs to a registered manufacturer who would charge sales tax. At the time of quoting a price to the customer (the end user), should sales tax be estimated and incorporated into quotes by the retailer/manufacturer on all work regardless of where the work is manufactured?

Answer

If you know which jobs will be sent to a registered manufacturer, then only those jobs should have sales tax included in the quotation of a price to the customer.

Where tax is charged by the manufacturer to the retailer, the manufacturer will send the tax to the Tax Office and the retailer's final charge to their customer will include all their costs, including the sales tax component. The retailer is not required to charge tax to the end user on the sale of the goods.

You should note that it is an offence for a retailer to collect tax on goods where the retailer/manufacturer with the small business exemption has done the job themselves, and not charged sales tax. The quoted price to the customer should be reduced by any sales tax component included in the original quoted price.

Question 4

Why are the words 'sales tax' not shown on quotations and invoices for the end user?

Answer

Tax is usually paid on the last wholesale sale. In most cases this is the sale from the wholesaler or the manufacturer to the retailer. Generally, the tax is payable on the full amount for which the goods are sold and the tax is charged to the retailer. The law requires the amount of sales tax to be shown only on the invoice issued to the retailer.

Question 5

Wholesale fabric suppliers who sell taxable fabric and other taxable raw materials (cornelli, embroideries, tapes, hooks, etc.) to retailers will charge sales tax on those goods. When this taxable fabric or taxable raw materials is later made into a curtain by a curtain manufacturer for the retailer, is another 12% , i.e., the current sales tax rate on the materials, to be charged on the taxable fabric or taxable raw materials?

Answer

No. The taxable value is the amount (excluding sales tax) charged by the manufacturer to the customer for the goods, plus the notional wholesale purchase price for any always exempt goods included in the materials supplied by the customer. Taxable materials supplied by the customer are not included in the calculation of the taxable value.

Question 6

Can a curtain retailer arrange to have all their curtains manufactured by manufacturers who do not charge sales tax because they have the small business exemption?

Answer

Yes. A curtain retailer can choose to have the curtains made by workshops which are separate legal entities and which individually qualify under the small business exemption, provided the transactions between the retailer and the workrooms are at arm's length and are not part of a tax avoidance scheme.

Rates of sales tax

The current rates of sales tax for various goods sold in the soft furnishing industry are shown below.

Goods Sales tax rate

How do I pay sales tax to the Tax Office?

If you're liable for sales tax, you must calculate the tax payable and send a return in the approved form with full payment to your local Tax Office. You will receive a booklet of return forms each year if you are registered. If you are not registered, return forms are available from your local Tax Office.

Can I pay my sales tax quarterly?

If you had an annual sales tax liability of less than $56,441 during the financial year 1995/96 and you have no sales tax payments outstanding, you can lodge returns and pay sales tax on a quarterly basis. The relevant quarters are the three months ending 31 October, 31 January, 30 April and 31 July.

If your sales tax liability during 1995/96 was more than $56,441 you must lodge returns and pay sales tax each month.

When is the return and payment due?

The return with full payment is due 21 days after the end of the month or quarter in which the transaction(s) took place. Payment may be made at any branch of the Tax Office.

Can I pay through Australia Post?

You can make your payments at any branch or agency of Australia Post. However, you must use the pre-printed returns from your Sales Tax Return Book and Guide and pay the total of the amount due. Payment will only be accepted where the amount paid matches exactly the amount of liability shown on the sales tax return. Otherwise, the amount must be paid to the Tax Office.

Do you need more information?

If you have any questions or need more information about how the sales tax laws apply to you, please contact your local Tax Office:

• • by phone - on our national enquiry number 13 28 66. You can ring this number from anywhere in Australia for the cost of a local call; or

• • in person - by visiting the enquiry counter at your nearest Tax Office. Tax Office addresses are listed in TaxPack, as well as in your White Pages telephone directory.

ATO references:
NO NAT 2018.05.97