Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - GST-free supplies and input taxed supplies

Outline of Chapter

1.1 Schedule 1 to this Bill amends the GST Act to:

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ensure that an entity will be able to claim an input tax credit on an acquisition or importation that it uses in making input taxed supplies through an enterprise, or part of an enterprise, that it carries on outside Australia;

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update the provisions that relate to child care;

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provide for the GST-free treatment of travel agent fees for arranging overseas supplies such as accommodation, rail transport, car hire, entertainment and sight-seeing tours;

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provide that the supply of a freehold interest or long-term lease made after a short-term lease is also GST-free;

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provide that the sale of residential premises that have been used as residential premises for at least 5 years will be input taxed;

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clarify that reduced input tax credits are only denied to the extent that the entity is entitled to an input tax credit for that acquisition under another provision of the GST Act; and

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allow certain low-value supplies through coin-operated devices to be treated as input taxed.

Detailed explanation of new law

Export of input taxed supplies

1.2 Currently, an input tax credit cannot be claimed on an acquisition or importation that relates to the making of input taxed supplies, other than financial supplies, through an enterprise, or part of an enterprise, that an entity carries on outside Australia. This is inconsistent with the treatment of other acquisitions used to make supplies through an enterprise, or part of an enterprise, carried on outside Australia.

1.3 Items 1 and 2 replace subsections 11-15(3) and 15-10(3). New subsections 11-15(3) and 15-10(3) will allow an entity to claim an input tax credit on an acquisition or importation that is used in the making of input taxed supplies, including a financial supply, through an enterprise, that it carries on outside Australia.

1.4 Item 10 replaces subsection 60-20(3). New subsection 60-20(3) allows a company to claim an input tax credit to the extent that an acquisition or importation relates to making input taxed supplies through an enterprise, or a part of an enterprise, that the company will carry on outside Australia.

Example 1.1

BigBank Australia carries on an enterprise both in Australia and London. BigBank Australia has acquired precious metals (gold) in Australia and provides the gold to its London branch. The London branch supplies the gold to another entity in London. BigBank Australia is entitled to input tax credits on acquisitions that relate to making the supply of the gold in London.

Child care (Subdivision 38-D)

1.5 Certain supplies of child care are GST-free under Subdivision 38-D. As part of ANTS, child care was restructured so that it was part of the new family assistance regime which commenced on 1 July 2000. This restructure was given effect by repealing various child care provisions that existed in the Childcare Rebate Act 1993 and the Child Care Act 1972 and replacing them with new provisions in the family assistance laws.

1.6 Consequently, item 3 updates the existing references to child care provisions in the GST Act with the correct references from the new family assistance laws.

Registered carer

1.7 As a result of the new family assistance regime, registered carers now apply for approval under family assistance law. The supply of child care by a registered carer (approved under family assistance law) is GST-free. [Item 3, section 38-140]

Approved child care service

01 Eligible child care centres must now apply to be an approved child care service under family assistance law. A supply of child care by an approved child care service (approved under family assistance law) is GST-free. Excursions directly related to this GST-free supply are also GST-free. [Item 3, section 38-145]

Consequential amendments

1.9 Items 13 to 15 make consequential amendments to sections 165-1 and 195-1 (definitions of family and Child Care Minister) as a result of changes to family assistance. The definition of family in the GST Dictionary is defined by reference to the Childcare Rebate Act 1993 . As this Act has since been repealed, item 15 repeals the definition of family. Family will take its ordinary meaning.

1.10 Item 14 updates the definition of Child Care Minister in the GST Act to ensure that the Child Care Minister is also the Minister that administers family assistance law (as defined in section 3 of the A New Tax System (Family Assistance) (Administration) Act 1999 ).

International travel provisions - commission

1.11 The GST Act generally treats commission paid to travel agents for agency services the same way as the GST treatment of the travel. Under the current GST legislation, travel agent fees that relate to overseas air transport are GST-free while those that relate to other overseas supplies such as accommodation, rail transport, car hire, meals, entertainment and sight-seeing tours are taxable.

1.12 Item 4 inserts new section 38-360 into the GST Act. This new section allows for the supply of arranging overseas supplies to be GST-free where the effective use or enjoyment of the supply is to take place outside Australia. New section 38-360 only applies to the arranging of overseas supplies made by a supplier in the course of carrying on an enterprise as a travel agent.

Example 1.2

Dale and her cousin Lauren are planning an overseas trip. They booked a holiday package through their local travel agent. The package includes return air fares (Sydney, London, Sydney), accommodation and car hire in London and a European tour which includes dinner and a show at a night club in Paris. The travel agent fees relating to all the components of the overseas trip are GST-free, that is, the overseas air transport and the other overseas supplies.

After arranging their tour package, Dale and Lauren hear that a particular travel agent in Sydney can arrange for them to bungy jump off the le Tour Lansprie while they are in Paris. Dale and Lauren decide to take up this opportunity and make a booking. The travel agent fee charged for booking the bungy jump is also GST-free as the fee relates to a separate supply, the effective use or enjoyment of which takes place outside Australia.

Grants of land by governments

1.13 A government may supply unimproved land to a developer by way of short-term lease, subject to conditions which, if satisfied, will lead to the granting of freehold title or long-term lease to the developer. The supply of the short-term lease and the subsequent supply of the freehold title or long-term lease will be subject to GST.

1.14 This Bill inserts new section 38-450 which will allow the supply of the short-term lease to be GST-free. New subsection 38-445(1A) allows the subsequent supply of the freehold interest or long-term lease to also be GST-free. [Items 5 to 7]

1.15 Under the margin scheme the developer in the above circumstances would have to calculate the margin using the sale price and the purchase price of the land. The purchase price of the land will not take into account the improvements made on the land prior to 1 July 2000. This Bill inserts new table item 2A into subsection 75-10(3) to allow the developer to calculate the margin on the supply relating to the period from 1 July 2000.

Sales of rented housing

1.16 An entity that constructs rental premises after 2 December 1998 which it subsequently rents out for a number of years will be denied input tax credits for the construction costs of the premises. This is because the acquisitions relate to an input taxed supply of a lease of residential premises under subsection 40-35. Upon the eventual sale, the premises will fall into the definition of new residential premises and the sale will be subject to GST. The eventual sale of the premises may occur too far into the future to claim the original input tax credits on construction.

1.17 Item 9 inserts new section 40-75 into the GST Act. New subsection 40-75(2) will ensure that premises which have been used solely for the purpose of rental accommodation for a period of at least 5 years are not included in the definition of new residential premises. The effect of this is that any subsequent sale of the premises which have been used solely as residential premises for at least 5 years will be input taxed. Item 16 substitutes the definition of new residential premises.

Example 1.3

ABC Builders constructs a residential premise for the purposes of providing rental accommodation and therefore is not entitled to claim input tax credits for the acquisitions in relation to the construction costs. ABC Builders supplies short-term leases for residential accommodation in the premises to various tenants for a period of 7 years. The premises is then sold by ABC Builders. This amendment will allow the sale by ABC Builders of the residential premises to be input taxed rather than subject to GST.

Input tax credits and reduced credit acquisitions

1.18 A reduced input tax credit should only be denied to the extent that the entity is entitled to an input tax credit for that acquisition under another provision of the GST Act. Subsection 70-5(1A) treats an acquisition as not being a reduced credit acquisition under Division 70 if an entity is entitled to an input tax credit under another section, regardless of the extent of that input tax credit.

1.19 Item 11 amends subsection 70-5(1A) to clarify that an acquisition is not a reduced credit acquisition under Division 70 to the extent of any entitlement to an input tax credit for that acquisition under another provision of the GST Act.

Low-value supplies from coin-operated devices

1.20 Item 17 inserts new section 24C in the GST Transition Act to allow certain supplies from coin-operated devices to be input-taxed. This is a transitional measure which will only apply to supplies made before 1 July 2005. It is designed to provide some relief to operators of coin-operated devices where the device only accepts one denomination of coin and does not give change. In addition, the consideration for supplies from the device cannot exceed $1 by inserting a maximum of 2 coins in the device. The device must have been in operation on 1 July 2000 and must not relate to a gambling supply.

1.21 A supplier can choose to have all supplies from such a device treated as input taxed. A choice under this section will apply to supplies made by the supplier from the device on or after 1 July 2000. Once a supplier revokes a choice made under this section to treat the supplies as input taxed, they cannot apply the section again in relation to that device. The concession is designed to allow operators of coin-operated devices further time to convert the device to accept a wider range of coins or payment options. The measure could apply, for example, to devices from which supplies of confectionery and novelties are made or to devices which provide childrens rides.

Example 1.4

Carmen operates coin-operated devices which dispense confectionery. One item of confectionery is dispensed when a single 20 cent coin is inserted. The devices only accept 20 cent coins and could be changed to accept up to 2 coins. Carmen chooses to treat all supplies from the devices as input taxed until she is able to convert the devices to accept other denominations. This choice will only apply to supplies made before 1 July 2005.

Application and transitional provisions

1.22 The amendments in Schedule 1 to this Bill apply in relation to net amounts for tax periods starting on or after 1 July 2000. [Item 18]