Taxation Ruling SST Ruling No. 2

SST 2

Sales Tax: taxable values under the Streamlined Sales Tax law

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FOI status:

may be releasedFOI number: I 1211639

Chapter 1: What this ruling is about

1.1 Under the Streamlined Sales Tax (^[F1]) law, the value assigned to goods that are the subject of a taxable assessable dealing (^[F2]) is known as the taxable value . The amount of tax payable on assessable goods is calculated by multiplying the taxable value of the goods by the tax rate applicable to the goods.

1.2 This ruling explains the principles for determining the taxable value of goods under the Streamlined Sales Tax law and gives practical guidance for calculating taxable value in the most common circumstances.

1.3 Chapter 3 explains the terms used in the general taxable value rules and provides information about the calculation of taxable value in the most common circumstances. Additions to the normal taxable values are dealt with in Chapter 4. Substitute values (including the special values for swimming pools and spas constructed in situ ) are dealt with in Chapter 5. Adjustments to the final taxable value to reduce it by the value of an exempt part are explained in Chapter 6. Chapter 7 deals with rulings on taxable value under the former law.

Chapter 2: Date of effect

2.1 This ruling applies to the calculation of taxable values under the Streamlined Sales Tax law which comes into operation on 1 January 1993.

Chapter 3: Normal taxable values - explanation of terms

Meaning of taxable value

3.1 The taxable value of goods is the value attributed to goods when goods are the subject of a sale or other dealing which gives rise to a liability to sales tax. Under the former law, taxable values were known as sale values . The amount of tax payable on assessable goods is calculated by multiplying the taxable value of the goods by the tax rate applicable to the goods.

General taxable value rules

3.2 The approach of the Streamlined Sales Tax law is to give to each category of assessable dealing a normal or general taxable value. In certain cases this normal taxable value is modified by:

.

adding to that value an additional amount (to account for such things as containers, royalties and customs duty if not otherwise included); or

.

reducing the final taxable value by the value of exempt parts (if any).

In certain situations the normal taxable value is replaced with a substitute value.

3.3 The amount of the taxable value may be affected by two general provisions in the new law: the general anti-avoidance provision ^[F3] and the general non-arm's length dealings provision ^[F4].

3.4 The normal taxable values, together with the assessable dealings to which they apply, are set out in Table 1 of the Sales Tax Assessment Act 1992. A summary of this table is attached as an appendix to this Ruling. The important terms used in Table 1 are discussed below.

The price for which goods are sold

3.5 The term the price for which goods are sold has the same meaning as the term the amount for which goods are sold under the former law. The price for which goods are sold means the total amount that the buyer promises, expressly or tacitly, to pay to get good title to the goods ^[F5].

3.6 In determining the amount agreed to be paid, regard must be had to the terms of each particular contract and the intention of the parties. However, for the majority of wholesale sales, the contract price will be the price for which goods are sold.

3.7 All costs charged by the seller up to the point where the property in goods passes to the buyer form part of the price for which the goods are sold. This is illustrated in the following paragraphs relating to delivery charges.

Delivery charges: freight and insurance costs

3.8 The price for which goods are sold may include charges for freight or insurance. If the vendor quotes to the purchaser an amount inclusive of the costs or charges of making delivery, that quoted amount will be the price. Thus, where goods are contracted for on the terms that they are to be shipped free on board or delivered free into store or free on rail , the price charged by the vendor will include the expenses of delivery and they will form part of the taxable value of the goods.

3.9 However, it is important to note that the vendor might be incurring freight charges as agent for the purchaser under a contract separate from that for the sale of the goods. In this case, the charges will not form part of the taxable value of the goods. Note that it is only the actual cost or expense that may be excluded. Amounts calculated as a percentage of the invoiced price of the goods (as part of a freight equalisation arrangement, for example) may only be excluded from the taxable value of the goods where they do not exceed the actual charges incurred by the vendor on the purchasers' behalf.

Trade Incentive Payments

3.10 Trade incentive payments are also known variously as trade discounts, trade price rebates, volume rebates, promotional rebates, incentive rebates, co-operative advertising allowances and deferred credits. These incentives, as their various descriptions suggest, take a variety of different forms and are allowed by suppliers in many different circumstances. As illustrated in the following paragraphs, some of these incentives will affect the price (and, therefore, the taxable value of goods) while others will not.

Eligible trade incentive payments

3.11 To reduce the taxable value of goods, the granting of the incentive must relate to, so as to bring about a reduction in, the selling price of the goods under a particular transaction and the purchaser must have a right to receive the incentive from the supplier by virtue of an express or implied condition of the contract for sale.

3.12 Factors relevant to determining whether that payment effects a reduction in the taxable value of the goods include:

.

the circumstances surrounding the payment of the incentive;

.

the accounting treatment of the incentive in the financial records of the supplier and the retailer; and

.

the reasonableness of the amount of the incentive in relation to the value of the goods sold.

3.13 The following are examples of incentives which, provided the requirements of paragraphs 3.11 and 3.12 above are met, reduce the taxable value of goods.

Trade discount:

Where, because of trade practice, a supplier sells goods to a retailer at a discount and the gross price, the trade discount, the net price and the sales tax calculated on the net price are shown separately on the invoice, the trade discount will reduce the taxable value of the goods sold.

Volume rebates and deferred credits:

These rebates and credits will reduce the taxable value of the goods sold where they are calculated by reference to, and are attributable only to, the volume or value of goods and are not directed to some other end (for example, an obligation on the retailer, or employee or associate of the retailer, to do things such as incur advertising, promotion or other marketing expenses in relation to the goods).

Settlement discount:

A settlement discount will reduce the taxable value of the goods sold where it is provided by the supplier on the basis of payment being made by a retailer in cash or being received promptly and is based on the value of the goods sold under a contract of sale of the goods.

Ineligible Trade Incentive Payments

3.14 Some trade incentive payments do not reduce the taxable value of goods, either because they do not bring about a reduction in the sale price or because, in reality, they are directed at some other end ^[F6]. Ineligible incentives include those paid by a supplier to a retailer which constitute reimbursement, compensation or reward for doing things for the supplier such as advertising, promotion, warehousing, distribution or other marketing activities, accounting, bookkeeping or debt collection functions or allowing the supplier a right to use the retailer's premises or equipment for such activities.

3.15 Two examples of trade incentive payments which do not reduce the taxable value of goods are:

Promotional Rebates:

These rebates are linked to the retailer incurring advertising expenditure in relation to the supplier's products.

Gondola Ends Payments:

These payments are made by the supplier in return for the retailer (for example, a supermarket) providing end-of-aisle fixtures to promote the supplier's products.

Notional wholesale selling price

3.16 The notional wholesale selling price means the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction ^[F7]. In principle, this notional price should reflect a value which includes the manufacturing cost ^[F8], the expenses which would be associated with the wholesaling of the goods, plus an appropriate wholesale margin. The following paragraphs set out some guidelines which make calculating this amount simpler.

Manufacturer sells similar goods by wholesale

3.17 Where a manufacturer makes a retail sale from tax free stock and also sells similar goods by wholesale for one particular price, the manufacturer may use that price as the notional wholesale selling price of the goods sold by retail as an alternative to making the calculation described in 3.16.

3.18 If a manufacturer has a range of prices for the sale of similar goods by wholesale, the manufacturer may adopt the weighted average of those prices as the notional wholesale selling price of retail sales as an alternative to making the calculation described in 3.16.

3.19 As an example of the calculation of the weighted average, assume a manufacturer of wine sells by retail at the cellar door and also sells wine of the same grape variety and vintage by wholesale at different prices to distributors, hotels and restaurants. If seventy percent of the wholesale sales are made at $50 per dozen (say, to distributors) and the remaining thirty percent made at $60 per dozen (to hotels and restaurants), the weighted average price of all wholesale sales would be:

.

70/100 x 50 = 35, PLUS

.

30/100 x 60 = 18.

In this example the notional wholesale selling price for the cellar door retail sales would be $53 per dozen.

Where no similar goods are sold by wholesale

3.20 In practice a manufacturer who only sells particular goods by retail may have difficulty deciding either the apportionment of expenses or the wholesale margin for the calculation described in 3.16. In this case, the Taxation Office will accept a notional wholesale selling price calculated on the basis of:

.

manufacturing cost , PLUS

.

one third of the difference between that amount and the retail selling price (excluding tax).

This method of calculation may be used by a manufacturer in any industry where that manufacturer does not sell similar goods by wholesale.

3.21 By way of example, if a manufacturer produces a unit at a cost of $50 and the retail price for that unit is $80 (without tax), then the taxable value would be:

.

$50 (fully absorbed cost of manufacture), PLUS

.

1/3 of [retail price] ($80 - $50) [cost as above]

Thus the notional wholesale selling price of the goods in this example would be $60. (NB. For simplicity the manufacturer may convert the result of this calculation to the Retail Selling Price less a percentage of that figure. In this example, that would be RSP (80) less (20/80 x 100), being RSP less 25%.)

3.22 In some industries, where manufacturers commonly produce goods for sale by retail only, the Taxation Office has given approval for taxpayers to adopt a standard RSP less a specified percentage as the notional wholesale selling price. One example of this is the acceptance of the figure of RSP less 7.5% for printed matter sold by printers by retail. Appropriate industry bodies may wish to forward submissions for consideration by the Taxation Office for similar agreements in their industries.

Non-manufacturers

3.23 Where people other than manufacturers have no equivalent wholesale selling price or manufacturing cost and must account for tax on the notional wholesale selling price of goods, they may use the formula given in paragraph 3.20, but replacing the manufacturing cost with their into store cost.

Notional wholesale purchase price

3.24 The notional wholesale purchase price is the price (excluding sales tax) for which the taxpayer could reasonably have been expected to buy the goods by wholesale under an arm's length transaction.

3.25 In the case of goods manufactured from materials supplied by the customer, the notional purchase price (of always exempt materials) will usually be the actual price advised to the manufacturer by the customer. However, where the actual purchase price is unknown or the manufacturer believes the stated price is doubtful or unreasonable, the manufacturer may use an amount which reflects a reasonable wholesale purchase price. This should be determined by the manufacturer by finding an arm's length price for which comparable goods can be purchased.

Miscellaneous rules

3.26 The normal taxable value rules and the explanation of terms given in this Ruling should be read in conjunction with the following miscellaneous rules.

Arm's length rule

3.27 As mentioned at paragraph 3.3, an automatic rule applies if a taxpayer, or an associate, is a party to a non-arm's length transaction. For these purposes, taxpayers are taken to be parties to non-arm's length transactions where one of them has the ability to exert personal influence or control over the other ^[F9].

3.28 In a non-arm's length transaction, the taxable value of the goods must reflect a price for which the goods could reasonably be expected to be sold under an arm's length transaction. The best evidence of this price is the price for which comparable goods are sold by that person under an arm's length transaction. Where comparable arm's length prices do not exist, the ATO accepts the following :

for manufacturers selling to non-arm's length retailers - the manufacturing cost ^[F10] PLUS one third of the difference between that amount and the retail selling price (excluding tax) of the associate;

for wholesalers selling to non-arm's length retailers (but who have purchased from an arm's length vendor) - either, the wholesaler's into store cost PLUS one third of the difference between that amount and the retail selling price (excluding tax) of the associate or, the wholesaler's into store cost PLUS 10% of that cost, whichever is the less;

for wholesalers (who have not purchased from an arm's length vendor) selling to non-arm's length retailers - the wholesaler's into store cost PLUS one third of the difference between that amount and the retail selling price (excluding tax) of the associate;

provided that, where the goods involved are imported goods , the resultant taxable value is not below that set out in AD10 in Table 1 to Sales Tax Assessment Act 1992 viz. 120% of (customs value + customs duty). Other figures have been (and may continue to be) approved on application by the relevant taxpayers or industry association representatives.

Apportionment of amounts

3.29 If taxable and exempt goods, or goods that are taxed at different rates, are packaged and sold together for one inclusive price, then the goods will be treated separately for the purposes of calculating the taxable value. The value for each item will be the value for which that item could reasonably have been expected to have been sold if sold separately ^[F11].

3.30 If goods are sold as part of a package which involves payment for something in addition to the goods (for example, goodwill, installation charges or a maintenance agreement) then the additional element will be treated separately from the goods for the purpose of calculating the taxable value of the goods. The value of each element of the transaction will be the amount that could reasonably have been expected to have been allocated to the element if it had been the only transaction ^[F12].

Chapter 4: Additions to taxable value

4.1 The normal taxable values of assessable dealings are increased in the circumstances set out below unless the amount to be added has otherwise been included in the normal taxable value ^[F13].

Containers

4.2 Under the Streamlined Sales Tax law, the general approach is to tax containers at the same rate (if any) as their contents, by ensuring that the value of the container is included in the value of the contents on their sale.

4.3 Where the vendor sells the goods and the containers for one inclusive price the value of the container will automatically be included in the taxable value of any assessable dealing with the contents. If a separate value is allocated to the container, the law requires that the taxable value of the contents must be increased by the amount of the container component (whether or not tax has previously been paid in respect of the container).

4.4 The amount of the container component to be added to the taxable value of the contents in these cases is:

if the assessable dealing is a wholesale sale, so much of the value of the container as is recouped in connection with the sale of the contents; or

in any other case, so much of the value of the container as could reasonably be expected to have been recouped in connection with a sale of the contents at the time of the assessable dealing with the contents.

4.5 By way of example, suppose a manufacturer quotes a sales tax registration number for boxes in which he intends to package soap for sale by wholesale. If the packaged soap is sold for a single price of $10, it is not necessary to add a separate amount for the container component. However, if the manufacturer sells the soap for $8 and charges $2 for the container, then the $2 is added to the taxable value of the soap and tax is payable on the total of $10.

4.6 Where containers are purchased tax-paid (or tax was paid at the time of an AOU) and the subsequent inclusion of the value of the container in the taxable value of the contents results in double taxation, a credit is available for the amount of any tax the taxpayer has previously borne on the container.

Associated royalty component

4.8 If not otherwise included in the normal taxable value, the value of any royalty ^[F14] that is paid or payable in connection with:

.

the manufacture of the goods;

.

the importation or local entry of the goods;

.

a sale of the goods;

.

the granting of a lease of the goods; or

.

a delivery of customer's materials goods

must be added to the taxable value of the goods.

4.9 A royalty may be paid as a lump sum or as a fixed or variable amount per article. A lump sum is generally apportioned over the number of goods produced and sold under the royalty agreement. In calculating the taxable value, it is only the part of the lump sum royalty that is apportioned to each article that will be included.

4.10 It is possible that a liability to pay tax on a particular royalty payment could arise under both the former law and the Streamlined Sales Tax law. To overcome the possibility of double taxation, a transitional provision provides that if tax was or is payable under Sales Tax Assessment Act (No 10) , then no liability to tax on the royalty payment will arise under the new law.

Goods held in bond

4.11 When goods are entered for home consumption, the normal taxable value is based on a value inclusive of customs duty or excise. If an assessable dealing occurs while the goods are in the control of Customs, a provision of the new law ^[F15] requires that the taxable value of the goods be increased by the amount of customs duty or excise duty to which the goods would have been subject if they had been entered for home consumption at the time of the taxable dealing.

Chapter 5: Substitute and special taxable values

Table of substitute taxable values

5.1 In the situations listed below, the new law sets out substitute taxable values.

In situ swimming pools and spas

5.2 Swimming pool, spa pool and hot tub shells constructed in situ have a special taxable value, being the price for which the pool builder could have purchased a comparable fibreglass pool shell by wholesale under an arm's length transaction. In practice this value can be calculated using the following formula:

Water surface area of pool in square metres * Cost of comparable fibreglass pool shell per square metre


5.3 On current information, the cost of a comparable fibreglass pool shell is $100 per square metre of surface area ^[F16]. As the rate of tax on pool shells is 20 per cent, a taxable value calculated using the current value will result in tax payable of $20 per square metre of surface area.

5.4 This special taxable value only applies to in ground swimming pool shells that are constructed on site (such as concrete pools). It does not apply to pool shells manufactured elsewhere and transported to the site of the pool.

Taxable value of very large in situ pools

5.5 In the case of a very large pool, such as an Olympic sized pool or the lagoon style pools in some resorts, comparable fibreglass pool shells may not exist. In these cases, the taxable value of the pool shell will be the price (excluding sales tax) for which the in situ pool shell could have been purchased from another builder.

Chapter 6: Exempt parts of taxable value

6.1 For certain goods, amounts must be deducted from the taxable value before tax is calculated on them. The goods to which this treatment applies and the amount of the reduced taxable value when they are the subject of an assessable dealing are set out in the following paragraphs.

Goods incorporating tax-advantaged computer programs

6.2 A tax-advantaged computer program is:

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any program that is not embodied in a microchip; or

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a program for entertainment or educational use, that is embodied in a microchip and enclosed by a cartridge, to use in a personal computer or home electronic device ^[F17].

6.3 The taxable value of these computer programs is reduced by so much of the taxable value of the goods as is attributable to the computer program contained on the disc or cartridge ^[F18]. In practice this means that tax will only be payable on the wholesale value of the carrying medium.

Goods incorporating videotex equipment

6.4 The taxable value of a television set which incorporates videotex equipment for a person who is certified as being profoundly deaf is reduced by the value of the videotex equipment ^[F19].

Goods incorporating solar panels

6.5 Where solar panels are incorporated into other goods then the taxable value of those goods is reduced by the value of the solar panels ^[F20].

Goods incorporating milk tanks

6.6 Tanks for bulk milk tankers that are used to collect milk from farms are exempt from tax ^[F21]. Where such tanks are attached to a road vehicle and the complete vehicle is taxable, the taxable value of the vehicle is reduced by the value of the tank ^[F22].

Luxury motor vehicles for certain disabled persons

6.7 Where a person with disabilities would have been entitled to an exemption on a motor vehicle ^[F23] if the vehicle had not been classified as a luxury motor car ^[F24] then part of the taxable value is exempt. The taxable value is reduced by 44.733% of the motor vehicle depreciation limit for the financial year of the dealing ^[F25].

Goods partly exempt from customs duty

6.8 Eligible Australian travellers may bring in $400 worth of new taxable (personal) goods tax free. The taxable value of new taxable goods is therefore reduced by $400, whether purchased overseas or tax free in Australia prior to departure ^[F26].

Goods leased under eligible short term leases

6.9 Where the Commissioner and a person who grants leases of goods in a course of a business agree on a percentage as the exempt percentage in relation to goods of a particular kind, the taxable value of goods is reduced by the agreed percentage ^[F27].

Chapter 7: Previous advice affected by this Ruling

7.1 SST Ruling No 1 expressly provided that a private ruling on sale value which was obtained under the old sales tax law and was still current as of 31 December 1992 would be treated as remaining effective from 1 January 1993 until a later private or public ruling is issued conflicting with it. It is therefore not necessary for you to seek a new private ruling on the taxable value of goods you manufacture, sell or apply to own use simply because the terms used in the legislation have changed. However, this Ruling will prevail over a previous ruling to the extent that there is any conflict with the prior ruling.

7.2 If you are unsure whether the principles in this Ruling apply in your circumstances, you should seek clarification from the Taxation Office. Agreements with taxpayers or industry associations for specific sale values under the former law ^[F28] will be treated as applying from 1 January 1993 unless they are inconsistent with the principles contained in this Ruling.

7.3 As for private rulings, current rulings on the sale value of goods in the 2000 series of Sales Tax Rulings will be treated as if they applied to the Streamlined Sales Tax law unless they are inconsistent with the principles contained in this Ruling.

Commissioner of Taxation
31 December 1992

Appendix A

References

ATO references:
NO Not known

Subject References:
taxable value
delivery charges
trade incentive payments
arm's length transactions
apportionment of amounts
containers
royalty
swimming pools
exempt parts

Legislative References:
Sales Tax Assessment Act 1992; sections 5,
14,
37,
38,
46,
47,
48,
49,
50,
50A,
92,
93,
94,
95.
Sales Tax (Exemptions and Classifications) Act 1992; Schedule 1, items 5,
95,
96,
97;
Schedule 5, item 1.
Sales Tax Amendment (Transitional) Act 1992; subsection 5(2),
section 8.
Sales Tax Assessment Act (No 1) 1930; section 18(5B).
Customs Tariff; item 15 of Part 1 in Schedule 4.

Case References:
- Australian Trade Commission v W.A. Meat Exports Pty Ltd
(1987) 75 ALR 287

- Barnsdall v FC of T
88 ATC 4565
19 ATR 1352
- EMI (Australia) Limited v FC of T
(1971) 71 ATC 4112
2 ATR 325
- Queensland Independent Wholesalers Ltd v FC of T
(1991) 91 ATC 4492
100 ALR 215