House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 3 - GST amendments to third party payment adjustment provisions

Outline of chapter

3.1 Schedule 3 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act) to ensure the third party payment adjustment provisions operate appropriately, irrespective of whether relevant parties in the supply chain are members of the same goods and services (GST) group, GST religious group or GST joint venture.

Context of amendments

3.2 Where a registered entity supplies a thing to another entity (intermediary) and that intermediary on sells that thing to a third party, the original supplier (the payer) of the thing sometimes makes a payment (a third party payment) to the third party (the payee). Under Division 134, the third party payment adjustment provisions, which come into effect on 1 July 2010, the payer remits GST based on the price for which it sells the thing to the intermediary but can also claim a decreasing adjustment for the third party payment. If the payee is a registered entity it is required to make an increasing adjustment to reflect the effective decrease in the consideration paid for the thing. No increasing adjustment arises if the payee is not registered for GST. The net outcome should be that the appropriate amount of GST is collected throughout the supply chain - that is, in the case of taxable supplies, one-eleventh of the final (GST-inclusive) purchase price.

3.3 Due to their interaction with existing GST grouping, GST religious grouping and GST joint venture rules, the third party payment adjustment provisions can have unintended consequences for third party payments involving members of the same GST group or GST religious group and operators and participants in a GST joint venture.

Payer and intermediary grouped

3.4 Paragraph 134-5(1)(b) states that, for a decreasing adjustment to arise for a payment to a third party, the supply to the intermediary must be a taxable supply. However, sections 48-40 and 49-30 of the GST Act provide that a supply made between members of the same GST group, or GST religious group, will be treated as if it were not a taxable supply. This results in payers who are members of the same GST group, or GST religious group, as the intermediary to which the supply is made, being unable to claim a decreasing third party payment adjustment where they would otherwise be entitled to do so if the supply had been taxable under the general rules. Further, an increasing adjustment will arise in respect of the third party payment (unless the payee is also a member of the same group). As a result, too much GST is collected through the supply chain.

Intermediary and payee grouped

3.5 Conversely, paragraph 134-10(1)(b) states that, for an increasing adjustment to arise for a payment to a third party, the payee's acquisition from the intermediary must be a creditable acquisition. However, sections 48-45 and 49-35 of the GST Act provide that an acquisition from a member of the same GST group, or GST religious group, is not a creditable acquisition. This results in payees who are members of the same GST group, or GST religious group, as the intermediary from which the acquisition is made, not being required to make an increasing adjustment where they would otherwise be required to do so if the acquisition would have been a creditable acquisition under the general rules. Further, a decreasing adjustment will arise in respect of the third party payment (unless the payer is also a member of the same group). As a result, too little GST is collected through the supply chain.

GST joint ventures

3.6 Similar unintended consequences arise for third party payments involving participants in a GST joint venture. Subsection 51-30(2) of the GST Act provides that a supply that a joint venture operator makes to a participant in the GST joint venture is treated as if it were not a taxable supply in certain circumstances. If the GST joint venture operator subsequently makes a third party payment to another entity then it will be unable to claim a decreasing adjustment where it would otherwise be entitled to do so if the supply had been taxable under the general rules. However, an increasing adjustment may still arise in respect of the third party payment resulting in too much GST being collected through the supply chain.

3.7 Conversely, a participant in a GST joint venture may acquire a thing from its GST joint venture operator. As the acquisition is not a creditable acquisition (because the supply to it is treated as if it were not a taxable supply as a result of subsection 51-30(2) of the GST Act) it is not required to make an increasing adjustment where it would have otherwise been required to if the acquisition would have been a creditable acquisition under the general rules. However, a decreasing adjustment may still arise in respect of the third party payment resulting in too little GST being collected through the supply chain.

3.8 An example of where the overall GST collected would exceed one-eleventh of the price of the final supply is illustrated in Example 3.1.

Example 3.1 : GST groups: Payer and intermediary grouped - no decreasing adjustment available

In this example the manufacturer (the payer) is in a GST group with the wholesaler. The manufacturer makes a supply of goods to the wholesaler for $660 and pays a rebate of $110 to the retailer of the goods. The supply from the manufacturer to the wholesaler is not treated as a taxable supply as they are members of the same GST group. Consequently the manufacturer is not required to remit GST on the supply and cannot claim a decreasing adjustment in respect of the rebate.

When the wholesaler makes a supply of the goods to the retailer for $880 the wholesaler has a GST liability of $80. Because the acquisition from the manufacturer was an acquisition from a member of the same GST group the acquisition was not a creditable acquisition and no input tax credit entitlement arises. The wholesaler must therefore remit GST of $80.

The retailer sells the goods to a customer for $1,100 and therefore has a GST liability of $100 and an entitlement to input tax credits of $80. However, under Division 134 of the GST Act, the retailer is required to make an increasing adjustment of $10 in respect of the rebate and must therefore remit net GST of $30.

In total, $110 of GST has been remitted in relation to the supply of the goods. However, the GST normally payable on supplies with a retail value of $1,100 is $100.

Summary of new law

3.9 From 1 July 2010 third party payment adjustments will arise where there are payments which would normally give rise to such adjustments but the relevant parties in the supply chain are members of the same GST group, GST religious group or GST joint venture.

Comparison of key features of new law and current law

Detailed explanation of new law

3.10 Paragraph 134-5(1)(b) contains a provision that modifies the requirement for supplies by the payer to be a taxable supply in order to give rise to a decreasing adjustment, to include a supply that would have been a taxable supply but for a reason which is listed in subsection 134-5(3).

3.11 Paragraphs 134-5(2)(a) and (b) and subparagraph 134-5(2)(b)(ii) contain provisions that modify the method for calculating a decreasing adjustment arising under subsection 134-5(1), to take account of the GST which would have been payable on a supply that would have been a taxable supply, but for a reason which is listed in subsection 134-5(3).

3.12 Subsection 134-5(3) lists the reasons why a supply may not be a taxable supply but will still give rise to a decreasing adjustment under subsection 134-5(1). The reasons are that the payer and the other entity to which the supply is made are members of the same GST group or GST religious group or that the payer is the joint venture operator for a GST joint venture in which the other entity is a participant.

3.13 Subsection 134-5(4) provides that subsection 134-5(3) does not apply if the payer and the payee are both members of the same GST group or GST religious group at the time the third party payment is made.

3.14 Paragraph 134-10(1)(b) contains a provision that modifies the requirement for an acquisition by the payee to be a creditable acquisition in order to give rise to an increasing adjustment, to include an acquisition that would have been a creditable acquisition, but for a reason which is listed in subsection 134-10(3).

3.15 Paragraphs 134-10(2)(a) and (b) and subparagraph 134-10(2)(b)(ii) contain provisions that modify the calculation of an increasing adjustment arising under subsection 134-10(1), to take account of the input tax credit which would have been available had the acquisition, been a creditable acquisition, but for a reason which is listed in subsection 134-10(3).

3.16 Subsection 134-10(3) lists the reasons why an acquisition may not be a creditable acquisition, but still give rise to an increasing adjustment under subsection 134-10(1). The reasons are that the payee and the other entity from which the acquisition is made are members of the same GST group or GST religious group or the payee is the joint venture operator for a GST joint venture in which the other entity is a participant.

3.17 Subsection 134-10(4) provides that subsection 134-10(3) does not apply if the payer and the payee are both members of the same GST group or GST religious group at the time the third party payment is made.

3.18 Section 134-30 ensures that the single entity rules in sections 48-55 and 49-50 are not interpreted as overriding Division 134 and preventing the relevant adjustments from arising. However, sections 48-55 and 49-50 are taken into account in determining the amount of increasing adjustment under subsection 134-10(2). This means that, in determining the creditable purpose of the payee, the payee's enterprise is not considered in isolation, but rather on the basis that the GST group, or GST religious group, is a single entity.

3.19 Under the existing sections 48-50 and 51-40, the relevant adjustments will be made by the representative member of the GST group, or in some circumstances the joint venture operator, as appropriate.

Application and transitional provisions

3.20 These amendments apply to third party payments made on or after 1 July 2010.