Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Special transitional credits for rental cars
Outline of chapter
2.1 Part 2 of Schedule 1 to this bill amends the GST Transition Act to provide a special one-off input tax credit to businesses that held rental cars on 1 July 2000.
Context of amendments
2.2 Rental car businesses rent out cars on a short term basis and usually hold their cars for a period not exceeding 18 months. The introduction of the GST resulted in these businesses:
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- paying both sales tax on the purchase of the vehicle and GST on the sale of the vehicle; and
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- being denied GST input tax credits until 23 May 2001 on the purchase of new replacement vehicles.
2.3 The introduction of the GST resulted in a reduction in car prices and consequently the value of cars held by rental car businesses. Rental cars constitute a high proportion of the asset base for a rental car business and as these rental cars are turned over in a very short time frame the rental car businesses were forced to absorb the losses in a short time period. These car rental businesses were not able to pass on all of their costs to consumers. For those businesses that leased their cars the credit will still be available to them as the increased costs were also borne by rental car businesses. This special input tax credit will provide some transitional relief for rental car businesses.
Summary of new law
2.4 The amendment will allow a special input tax credit to an entity that in the course of carrying on an enterprise holds cars for the purposes of rental.
2.5 This provision will apply to businesses that own, lease or hold cars under a hire purchase agreement. The entitlement to the credit applies to cars that were held at the start of 1 July 2000 and disposed of before 1 July 2002. The amount of the special credit is generally equal to the GST payable on the first sale of a car on or after 1 July 2000. [Schedule 1, item 7]
Detailed explanation of new law
Entitlement to the special credit
2.6 Where, in relation to the supply of a car, all of the conditions specified in subsection 19B(1) are met, the entity referred to in subsection 19B(6) will be entitled to a special credit.
2.7 The criteria that must be satisfied in relation to the supply of a car for entitlement to a special credit are:
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- the supply takes place on or after 1 July 2000 and before 1 July 2002;
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- the car was held by the entity at the start of 1 July 2000;
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- the supply was the first sale of the car on or after 1 July 2000;
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- during the entire period from 1 July 2000 until the car was disposed of, the car was held for the purposes of supply by way of rental in the course or furtherance of the entitys enterprise and was covered by the appropriate third party insurance for this use; and
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- the car has been the subject of sales tax.
[Schedule 1, item 7, subsection 19B(1)]
2.8 It is a requirement in all States and Territories for rental cars to have the appropriate category of compulsory third party insurance (e.g. as a hire and drive yourself vehicle). If the car does not have this category of compulsory third party insurance no credit will be available in relation to the supply of the vehicle. [Schedule 1, item 7, subsection 19B(4)]
2.9 Paragraph 19B(4)(b) is designed to cover situations such as the case in Tasmania where utilities and vans held by rental car businesses are not required to be insured as hire and drive yourself vehicles (the type of compulsory third party insurance required for rental cars). However, in other States and Territories utilities and vans are required to have this type of compulsory third party insurance. This will allow car rental businesses holding these types of vehicles in Tasmania to be covered by the special credit provisions where all of the other conditions for claiming the credit are met (including the vehicles falling under the definition of car).
2.10 For the purposes of section 19B, car means a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne or fewer than 9 passengers. [Schedule 1, item 7, definition of car in subsection 19B(13)]
2.11 A supply by way of rental does not include a supply of a car that involves passengers being transported by or on behalf of the supplier. For example, taxis and chauffeur driven cars are not included. [Schedule 1, item 7, paragraph 19B(14)(a)]
Example 2.1
Rainsford Rental is a rental business which operates through 3 branches in Adelaide. It rents out cars, trucks (over 1 tonne) and minibuses (designed to carry more than 9 passengers) to customers who drive the rental cars themselves. At the start of 1 July 2000 it held 100 cars, 20 trucks and 5 minibuses for the purposes of rental. All of the vehicles are registered in South Australia with the compulsory third party insurance category for hire and drive yourself vehicles. All of the cars, trucks and minibuses held at 1 July 2000 were disposed of before 30 June 2002. The requirements for the special credit have been met only for the cars held by Rainsford on 1 July 2000. A credit is not available in relation to the trucks and minibuses because they are designed to carry a load of more than 1 tonne or more than 9 passengers. The provision only applies to cars.
Example 2.2
Kristen owns several old prestige cars which she hires out for use at weddings and other formal occasions. On the day of the hire either Kristen or her partner Murray drive the cars. Kristen is not entitled to the special credit because the supply involves the transport of passengers by the supplier. Also as Kristen and Murray drive the cars the compulsory third party insurance that they hold for the cars is not the type of compulsory third party insurance required under subsection 19B(4).
Acquisitions at the end of a lease
2.12 Where a lessee acquires a car at the end of the lease this supply is not treated as a sale of the car [Schedule 1, item 7, subsection 19B(2)] . Accordingly the special credit is calculated on the sale of the car after it has been acquired by the lessee. This exception to the criteria in subsection 19B(1) has been inserted in recognition of the fact that a residual amount provided for at the end of a lease is usually less than market value.
Example 2.3
LB Rental Cars is a rental car business. At 1 July 2000 LB holds 150 cars, all of which are under lease. LB holds the appropriate compulsory third party insurance for these cars as required by subsection 19B(4). At the end of the lease LB acquires the cars for an agreed residual amount and then sells the cars on the private market. At 30 June 2002, 140 of the cars that were held at 1 July 2000 have been sold by LB, the rest were sold by 31 December 2002. LB is entitled to the special credit for the 140 cars that were sold. LB is not entitled to a special credit in relation to the other 10 cars because the first sale of these cars occurred after 30 June 2002.
2.13 Where a car is supplied to an insurer in settlement of a claim under an insurance policy, this supply will be treated as a sale [Schedule 1, item 7, subsection 19B(3)] . This provision recognises that rental car businesses that disposed of cars in this way were impacted by the introduction of the GST in a similar way to those that disposed of their cars by way of sale.
No entitlement where section 19A credit claimed
2.14 If any entity has claimed a special input tax credit under section 19A of the GST Transition Act in relation to the supply of the car then a credit cannot be claimed under section 19B. [Schedule 1, item 7, subsection 19B(5)]
Who is entitled to the special credit
2.15 The entity entitled to the special credit is the entity that held the car for supply by way of rental [Schedule 1, item 7, subsection 19B(6)] . For the purposes of section 19B the entity will have held the car where it owned, leased or held the car under a hire purchase agreement [Schedule 1, item 7, definition of held in subsection 19B(13)] .
2.16 Only the entity that supplied the car by way of rental is entitled to the credit. A supply by way of rental does not include a supply of a car to an entity that acquires the car for the purposes of supply by way of rental. Accordingly businesses that lease cars to rental car businesses are not entitled to this credit (e.g. finance companies) [Schedule 1, item 7, paragraph 19B(14)(b)] . The intent of this amendment is to provide transitional relief to rental car businesses.
Calculation of the special credit
2.17 The credit will be equal to 1/11th of the price of the supply [Schedule 1, item 7, subsection 19B(7)] . If the supply is made in settlement of an insurance claim then the price of the supply is taken to be the sum of the payment for the settlement and the value of any supplies received from the insurer in settlement of the claim [Schedule 1, item 7, subsection 19B(11)] .
2.18 If the supply of the car is included as part of the supply of something else, then the price of the supply of the car is only that part of the consideration for the supply that represents the supply of the car. [Schedule 1, item 7, subsection 19B(10)]
2.19 If a lessee is unable to find out the price at which the car was sold then the price of the supply is taken to be an amount worked out in the way determined in writing by the Commissioner. [Schedule 1, item 7, subsection 19B(9)]
Example 2.4
Pfeiffer Rental Cars holds cars under finance lease provided by Atkinson Finance. When the cars are either 12 months old or have travelled 50,000 kilometres they are sold at public auction and are replaced by new cars. At 1 July 2000 Pfeiffer held 80 cars which were 6 months old. All of these cars were registered and had appropriate third party insurance for rental cars. Provided that the cars are sold prior to 30 June 2002 Pfeiffer is entitled to a special credit equal to 1/11th of the price Atkinson Finance received on the sale of these cars. If the cars were not disposed of at a public auction and Pfeiffer is not able to obtain the sale price of these cars from Atkinson, Pfeiffer can work out their credit in a way determined by the Commissioner.
2.20 The amount of the special credit is reduced if the car is covered by an eligible short-term lease agreement with the Commissioner under the sales tax legislation. The credit is reduced by the exempt percentage that was specified in the agreement that was in place at 30 June 2000. Subsection 5(3) of the GST Transition Act refers to the meaning of eligible short-term lease. [Schedule 1, item 7, subsection 19B(8)]
Example 2.5
Goodwin Co operates a rental car business. At 1 July 2000 it held 200 cars. These cars all have the appropriate compulsory third party insurance for rental cars as required by subsection 19B(4). Twenty of these cars were the subject of an eligible short-term lease agreement with the Commissioner. The exempt percentage specified in the agreement in place at 30 June 2000 was 5%. The 20 cars were disposed of before 1 July 2002 for $220,000. Goodwin is entitled to a special credit of $19,000 in relation to these 20 cars ((1/11 $220,000) (100% - 5%)).
2.21 The special credit is treated as an input tax credit and is attributable to any one tax period of choice ending on or after the day on which this bill receives Royal Assent and on or before 7 January 2003 or such later day as the Commissioner determines in writing. [Schedule 1, item 7, subsection 19B(12)]
Consequential amendments
2.22 The special credit is assessable income in the year in which the credit is attributed [Schedule 1, item 8] . This treatment is consistent with other similar transitional input tax credits.
REGULATION IMPACT STATEMENT
2.23 This provision will provide a special input tax credit for car rental businesses in relation to cars that the businesses held at 1 July 2000. The introduction of the GST resulted in these businesses paying both sales tax on the purchase of cars before 1 July 2000 and GST on the sale of the cars. In addition, until 23 May 2001 GST input tax credits were denied on the purchase of new replacement cars. The introduction of the GST resulted in a reduction in car prices and consequently the value of cars held by rental car businesses. The transitional provisions of the GST had a severe impact on rental car businesses because of the high proportion of their assets that rental cars comprise and the frequent turnover of these cars.
2.24 The following 2 options represent the new provision proposed by this bill and the major alternative. Both options propose a one-off special input tax credit to businesses that held rental cars at the start of 1 July 2000.
2.25 This option is to provide a special input tax credit equal to the GST on the sale of rental cars that were held at the start of 1 July 2000 and disposed of before 1 July 2002. This proposal will apply to businesses that own, lease or hold rental cars under a hire purchase agreement. These cars must have been the subject of sales tax.
2.26 The rental car market largely consists of 4 major companies and their franchisees. Most of this groups cars are leased and are disposed of at public auction. Accordingly the proposal will impact on auction houses and lessors that provide rental car leases.
2.27 All rental car businesses will be required to determine the sale price on the disposal of rental cars that were held at the start of 1 July 2000. Those businesses that either own or acquire the car at the end of a lease will have this information in their own records.
2.28 Lessees will be required to obtain this information from their lessors. Most rental cars leased by large rental car companies are disposed of by the same auction house. The consultation process has highlighted that these businesses will be able to obtain the information they require from this auction house. Smaller rental car businesses that lease cars have similarly indicated through consultation that they will also be able to obtain the information required to calculate their credit entitlement. However the law does provide a discretion for the Commissioner to provide a calculation method where the rental car business is unable to obtain the relevant sales data. Accordingly it is expected that the compliance cost impact on those businesses impacted will be minimal.
2.29 The ATO will need to provide information to businesses eligible for this one-off special credit as well as respond to requests for any advice. Requests for information may be reduced as:
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- industry representatives have undertaken to provide information to their members; and
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- industry has also indicated through consultation that the calculation of the credit would not be difficult.
2.30 This measure will create some additional verification activity for the ATO to ensure that correct claims are made. The ATO will also be required to provide some businesses with a calculation method where the rental car business is unable to obtain the relevant sales data. This proposal is for a one-off credit, which is simple to calculate and will impact on a limited group of businesses. Accordingly administration costs will be minimal.
2.31 The total net revenue impact of this proposal is $36 million over 2 years. This estimate takes into account the assessability of the credit for income tax purposes.
2.32 The second option was to provide a special input tax credit based on the market value of the rental cars held at 1 July 2000. This option was also applicable to businesses that own, lease or hold rental cars under a hire purchase agreement.
2.33 The group impacted under Option 2 is similar to that impacted under Option 1. However there would not be an impact on auction houses or finance companies.
2.34 The compliance costs of this proposal are similar to Option 1. However as the credit is based on the market value of rental cars held at 1 July 2000, businesses would be required to undertake a valuation for such cars on that date. The valuation method would be by reference to an accepted industry valuation guide. Accordingly business would be required to gain access to 1 July 2000 data in that guide. They would also need to determine not only cars on hand at that date but also make an estimate of market value based on the guide and the kilometres travelled by the car.
2.35 The administration costs to the ATO of this proposal are similar to the first proposal and are minimal. However for this option verification by the ATO would be more extensive because the credit is determined by reference to more information than GST on disposal.
2.36 The total net revenue impact of this proposal is $43 million over 2 years. This estimate takes into account the assessability of the credit for income tax purposes.
2.37 Some consultation was undertaken prior and during the course of drafting legislation. Groups involved in consultation included large and small rental car businesses and their tax advisers. Particular consultation was sought on the application of the proposal to leased cars. Small and large rental car businesses with leased cars both indicated that they would be able to obtain the sale price of the leased car for the purposes of calculating the credit. Industry representatives also gave an undertaking that they would provide assistance to industry members to calculate this credit.
Conclusion and recommended option
2.38 The preferred option for providing this measure is Option 1. Whilst both options present minimal impact on compliance costs, Option 1 would be marginally easier for business to comply with and the ATO to administer. Option 2 requires business to gather more information retrospectively to be able to determine their credit. This means that any verification activity by the ATO would be more extensive. Whilst Option 1 does require some businesses to obtain information from other parties, consultation with industry representatives indicated that this would not present a problem.
2.39 Option 1 also provides a calculation method which is closer to achieving the policy intent because it is based on sale price on disposal rather than on an industry estimation. Option 1 also has a lower revenue impact.