House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

Chapter 3 - Cars for display by public institutions

Outline of chapter

3.1 Schedule 3 to this Bill amends the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) to provide relief from luxury car tax (LCT) to certain public institutions that import or acquire luxury cars for the sole purpose of public display. The changes apply to public museums, galleries, and libraries that are registered for goods and services tax (GST) and that have been endorsed as a deductible gift recipient (DGR).

Context of amendments

Luxury car tax

Importations of luxury cars

3.2 An entity that makes a taxable importation of a luxury car is required to pay LCT on the importation. The definition of 'luxury car' is contained in the LCT Act and covers cars whose value exceeds the LCT threshold.

3.3 An entity makes a taxable importation of a luxury car if:

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the car is imported; and

•

the entity enters the car for home consumption.

3.4 'Entry for home consumption' is a concept used in the customs law and generally means that particular imported goods have passed out of customs control.

3.5 There are a number of exemptions in the current law that can prevent an importation from being a taxable importation. As such, an entity that would otherwise make a taxable importation does not have to pay LCT if:

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the entity quotes their ABN for the importation;

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LCT has already become payable in respect of the car;

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the car is an import covered by items 10, 11, 15, 18, 21 or 24 in Schedule 4 to the Customs Tariff Act 1995; or

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the car is re-imported after being subject to LCT.

3.6 An entity that quotes their ABN for the importation of a luxury car is generally registered for GST and the car is usually held as trading stock, used in research and development, or exported.

3.7 In broad terms, items 10, 11, 15, 18, 21 and 24 in Schedule 4 to the Customs Tariff Act 1995 cover duty-free importations of goods relating to foreign government use, foreign military service use, personal effects of travellers or crew, warranty and safety recalls, repair and export, and deceased estates.

Supplies of luxury cars

3.8 Similarly, a supplier that makes a taxable supply of a luxury car is required to pay LCT on the supply. A supply of a luxury car is a taxable supply if:

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the supply is made in the course of an enterprise that the supplier carries on;

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the supply is connected with the indirect tax zone; and

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the supplier is registered for GST or required to be registered.

3.9 There are a number of exceptions in the current law that can prevent a supply from being a taxable supply. As a result, the supplier of a luxury car does not have to pay LCT if:

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the recipient quotes their ABN for the supply;

•

the car is more than two years old; or

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the car is exported, and the export is GST free.

3.10 As with the quotation exemption for the importation of luxury cars, a recipient that quotes their ABN for a supply of a luxury car is generally registered for GST, and the car is usually held as trading stock, used in research and development, or exported.

3.11 For the purposes of the LCT Act, a car is more than two years old at the time of a supply if:

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where the car was not imported - it was manufactured more than two years before the time of supply; or

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where the car was imported - it was entered for home consumption more than two years before the time of supply.

LCT adjustments

3.12 Particular events or changes in circumstances that occur after a car is imported or supplied can mean that too much or too little LCT was paid by the importer or supplier at the time of the importation or supply.

3.13 To ensure that the correct amount of LCT is ultimately imposed on an importation or supply, adjustments are made to increase or decrease an entity's net amount for a tax period. Depending on the circumstances, these adjustments can be made by the importer, supplier, or recipient of a car.

3.14 Examples of adjustments that can occur are:

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An increasing LCT adjustment for the importer of a luxury car, where no LCT was payable on the importation because the importer quoted for the importation, but the importer later used the car for a purpose other than a quotable purpose (such as no longer holding the car as trading stock).

•

A decreasing LCT adjustment for the supplier of a luxury car, where LCT was payable on the supply but no consideration for the supply was received, and the supplier writes-off the consideration owed as a bad debt.

Works of art and collectors' items

3.15 While LCT is payable on a luxury car that is imported or supplied for the purpose of public display (unless one of the existing exemptions apply), the importation of a luxury car is exempt from customs duty if:

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the car is a work of art or a collectors' item;

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the car is consigned to certain public institutions (including museums, galleries, and libraries); and

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the institution is endorsed as a DGR under Subdivision 30-BA of the Income Tax Assessment Act 1997 (ITAA 1997).

3.16 This exemption from customs duty is provided by item 7 of Schedule 4 to the Customs Tariff Act 1995 (referred to subsequently as item 7). The exemption in item 7 is not specific to luxury cars - it applies to works of art and collectors' items generally.

3.17 While the DGR condition is set out in item 7 itself, the considerations that are relevant in determining when a work of art or collectors' piece is covered by item 7 are determined by reference to the following international agreements 'applying' to the work of art or collectors' piece:

•

Annex B to the Agreement on the Importation of Educational, Scientific and Cultural Materials 1950; and

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Annex B to the Protocol to the Educational, Scientific and Cultural Materials Agreement, being the Protocol concluded at Nairobi on 26 November 1976.

Summary of new law

3.18 Schedule 3 to this Bill amends the LCT Act to provide an exemption from LCT for the importation of luxury cars. The amendments also provide a decreasing LCT adjustment to recipients of luxury cars for LCT paid on the supply of a luxury car.

3.19 The changes apply to importations and acquisitions by public museums, galleries and libraries that are registered for GST and that have been endorsed as a DGR. In order for an exemption or adjustment to apply, the luxury car that is imported or acquired must be either a work of art or collectors' piece, and must have been imported or acquired for the sole purpose of public display.

3.20 These amendments also introduce other adjustment rules to increase the importer or recipient's liability to LCT where the car is used for a purpose other than public display, or supplied to another entity.

Comparison of key features of new law and current law

Detailed explanation of new law

LCT exemption for luxury cars imported for public display

3.21 These amendments provide an additional exception to when an importation is a taxable importation under the LCT rules.

3.22 This exception applies to the importer of a luxury car if particular conditions are satisfied. Where the exemption applies to an entity, the importer does not make a taxable importation for the purposes of the LCT Act. [Schedule 3, item 1, paragraph 7-10(3)(ba)]

3.23 Some of these conditions are directly linked to the requirements for the exemption from customs duty in item 7. To the extent the two exemptions are aligned, the considerations for determining if the customs exemption applies are relevant in determining if the importation of the car is exempt from LCT.

3.24 As a result of these amendments, the importer of a luxury car does not make a taxable importation if:

•

the importer is a public museum, gallery, library or institution that is registered for GST and endorsed as a DGR under items 12.1.2 to 12.1.5 of the table in subsection 30-100(1) of the ITAA 1997;

•

the car is consigned to the importer;

•

the car is a work of art or collectors' piece; and

•

the car is imported for the sole purpose of public display.

[Schedule 3, item 1, paragraph 7-10(3)(ba)]

3.25 The conditions about the car being a work of art or collectors' piece are due to the requirement that the car must be 'covered by item 7 in Schedule 4 to the Customs Tariff'. [Schedule 3, item 1, subparagraph 7-10(3)(ba)(i)]

3.26 Item 7 requires that Annex B to the Agreement on the Importation of Educational, Scientific and Cultural Materials 1950, or Annex B to the Agreement on the Importation of Educational, Scientific and Cultural Materials 1950 apply to a particular work of art or collectors' piece. The requirement about the car being a work of art or collectors' piece ensures that the exemption is restricted to the types of luxury cars that are typically placed on public display by a museum, gallery or library. The annexes to those agreements describe the types of works of art or collectors' pieces to which they apply. Although these parts of the relevant agreements are not specific to luxury cars, they are applicable to cars that are works of art or collectors' pieces. Whether a particular car qualifies for this LCT exemption depends on the nature of the car. It is expected that in most cases the reason that a gallery, museum or library will display a car is because of its cultural or historic significance. Given this, there is expected to be a very strong correlation between the types of cars that are imported by such institutions for this purpose, and the status of these cars as a work of art or collectors' piece under item 7. However, the mere fact of public display is not of itself sufficient to determine that a particular car satisfies the conditions in item 7- it must be able to be objectively determined that the car is a work of art or collectors' piece.

Importer must be registered for GST and endorsed as a DGR

3.27 Item 7 also requires that the relevant work of art or collectors' piece be consigned to a museum, gallery, or library that is endorsed as a DGR. In broad terms, the endorsement rules referred to in item 7 cover public museums, public art galleries and public libraries, as well as institutions consisting of two or more of these types of organisations.

3.28 In contrast to the customs duty exemption provided by item 7 (which can apply to any entity that imports a work of art or collectors' piece, provided the thing imported is consigned to a public institution), the LCT exemption for importations only applies to importations of luxury cars in relation to which the importer is also the relevant public institution to which the car is consigned. [Schedule 3, item 1, subparagraph 7-10(3)(ba)(ii)]

3.29 The LCT exemption for importations is restricted in this way because of the additional public display requirements that must be satisfied by a public institution and the fact that the increasing LCT adjustments for changes in use or a supply of the car to another entity (explained in further detail below) only apply to the public institution.

3.30 In addition, the importer must be registered for GST. Because they affect an entity's net amount, increasing and decreasing LCT adjustments can only apply to entities that are registered for GST. Requiring an importer to be registered for GST aligns the public display exemption for imports with the decreasing LCT adjustment for supplies of luxury cars that are publicly displayed. It also ensures that the increasing LCT adjustment rules for changes in use or on-supplies can be applied to the importer (the decreasing LCT adjustment and increasing LCT adjustment rules introduced by these amendments are explained in further detail below).

Luxury car must be imported for the sole purpose of public display

3.31 For the exemption from LCT to apply, the importer of the car must import the car for the sole purpose of public display. [Schedule 3, item 1, subparagraph 7-10(3)(ba)(iii)]

3.32 The term 'public display' takes its ordinary meaning, and means that the car must be exhibited or shown in an environment that is accessible to the general community (for example, it must be displayed in a museum that is open to the general public).

3.33 While a reasonable fee for entry (for example, to enter the relevant institution or to access an event that was organised by the institution) for viewing the car would be within the scope of the public display requirement, prohibitive conditions such as an exclusive membership requirement or an excessive fee for viewing the car would not constitute public display.

3.34 Because the exemption prevents a car from being a taxable importation, the question about intended use must be answered at the time that the importer enters the car for home consumption. The test is forward looking in the sense that it relates to intended use rather than evidence of the way the car is ultimately used. While an importer must take a reasonable position about their intended use of the car after it is imported, any future changes in use that take the car outside of the scope of the public display requirement will be picked up by the increasing LCT adjustment rules (explained below).

3.35 The requirement that the car is imported for the 'sole' purpose of publicly displaying it precludes the car from being used for other purposes (for example, by staff or associates of the relevant public institution using the car for private transport or enjoyment). However, it does permit uses of the car that are ancillary to the public display purpose, for example:

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staff of the public institution transporting the car to a place where it is to be publicly displayed;

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incidental storage of the car whilst not on public display; or

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restoration or maintenance of the car in preparation for public display.

3.36 In such cases, an ancillary use of the car that supports the public display purpose would be consistent with a sole purpose of public display, and would not prevent the LCT exemption from applying.

Decreasing LCT adjustment for luxury cars acquired solely for public display

3.37 These amendments also provide a decreasing LCT adjustment to the recipient of a taxable supply of a luxury car. [Schedule 3, item 2, subsection 15-30(1A)]

3.38 Providing relief from LCT on the supply of a luxury car through an adjustment for the recipient of the supply is a different approach to the exemption provided for importations. Despite this difference, the outcome for the entity that acquires the car is ultimately the same. The reason for taking this different approach is that, in contrast to the exemption for importations (which only applies where the importer is the institution that publicly displays the car), the acquisition of a luxury car involves an additional party (being the supplier).

3.39 The conditions for when relief from LCT is available for the acquisition of a luxury car are essentially the same as when an importation is exempt from LCT. Some of these conditions will be difficult for the supplier of a luxury car to easily or objectively ascertain at the time of supply as they relate to the status of the recipient, and their subjective purpose in acquiring the car.

3.40 Given this, providing a decreasing LCT adjustment to the recipient of the car is appropriate because it means that the recipient, rather than the supplier, is responsible for obtaining relief from LCT on the supply of a luxury car.

3.41 As a result of these amendments, the recipient of a supply of a luxury car has a decreasing LCT adjustment if:

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the recipient is registered for GST at the time of the supply;

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LCT is payable on the supply;

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had the recipient imported the car for the same purpose that they have in acquiring it, LCT would not have been payable on the importation because of the public display exemption introduced by these amendments; and

•

the recipient does not intend to use the car, or permit it to be used, for any other purpose.

[Schedule 3, item 2, subsection 15-30(1A)]

3.42 The requirement that the recipient be registered reflects that LCT adjustments are only available to registered entities because they affect net amounts. Similarly, the increasing adjustments that apply for a change in use or supply of the luxury car to another entity can only apply to registered entities, and as such it is appropriate to limit the relief from LCT to entities that can also have an increasing LCT adjustment.

3.43 The requirement that LCT is payable on the supply ensures that the recipient of a luxury car does not have a decreasing LCT adjustment in respect of a supply that also qualified for an exemption from LCT (for example, the supply of a luxury car that was more than two years old). Providing a decreasing adjustment in such circumstances would provide the recipient with a double benefit because they would not have been charged LCT on the supply, and would also benefit from a decreasing adjustment.

3.44 Requiring the recipient of the luxury car to determine whether they would have qualified for an exemption for the car as a result of these amendments if they had imported the car ensures that the primary considerations for the importation exemption and obtaining a decreasing LCT adjustment are aligned.

Solely for public display

3.45 In working out whether the public display exemption would have applied to the importation of the luxury car, the recipient must satisfy all of the conditions contained in that exemption. These conditions are that:

•

the car being consigned to the recipient, and the recipient being a public museum, gallery, library or an institution that is endorsed as a DGR under items 12.1.2 to 12.1.5 of the table in subsection 30-100(1) of the ITAA 1997;

•

the car's status as a work of art or collectors' piece; and

•

the car being imported for the sole purpose of public display.

3.46 Whether the car is a work of art or collectors' piece, or the recipient is a public museum, gallery, library, or institution endorsed as a DGR under the relevant provisions will be determined by its actual status at the time of importation.

3.47 In contrast, the requirement about the sole purpose of public display relies on the recipient's purpose for importing the car in the hypothetical importation. To determine whether these conditions are satisfied, the purpose for which the recipient actually acquired the car is taken to be the purpose for which it imported the car in the hypothetical importation.

Amount of the decreasing LCT adjustment

3.48 Where the recipient of a supply of a luxury car has a decreasing LCT adjustment because of these amendments, the amount of the adjustment is equal to the amount of LCT that was payable on the supply through which the recipient acquired the car.

3.49 The amount of this decreasing LCT adjustment is determined through the existing provisions in section 15-30. Specifically, subsection 15-30(2) already states that the amount of a decreasing LCT adjustment is equal to the amount of LCT that was payable on a supply - this existing rule extends appropriately to the decreasing LCT adjustment introduced by these amendments.

Increasing LCT adjustments for luxury cars

3.50 Increasing LCT adjustments apply to an importer or recipient of a luxury car if there is a change in circumstances that would have prevented the importer or recipient from qualifying for an exemption from LCT or a decreasing LCT adjustment for public display.

3.51 These adjustments apply where either no LCT was payable by the importer of a car because of the importation exemption for public display, or where the recipient of a car had a decreasing LCT adjustment for acquiring the car for the sole purpose of public display. [Schedule 3, items 3 and 4, subsection 15-30(3A) and subsection 15-35(3A)]

3.52 An increasing LCT adjustment can apply where there is a change in use or a supply of the luxury car to another entity. In such circumstances, the amendments ensure that the importer or recipient of a luxury car that benefits from these amendments continues to hold the car, and use it for the sole purpose that qualified it for the exemption or decreasing adjustment.

3.53 These increasing LCT adjustments apply to changes in circumstances that occur after the time of importation or acquisition, but are subject to the four year limitation in subsection 13-10(2) that applies to LCT adjustments generally.

Increasing LCT adjustment for changes in use

3.54 An importer or recipient has an increasing LCT adjustment in relation to their importation or acquisition of a luxury car if:

•

they use the car, or allow it to be used; and

•

had that use been the purpose for which they imported or acquired the car, the importer or recipient would not have qualified for the public display exemption or decreasing LCT adjustment.

[Schedule 3, items 3 and 4, subparagraph 15-30(3A)(c)(i) and subparagraph 15-35(3A)(c)(i)]

3.55 The increasing adjustments for changes in use ensure that an entity that imports or acquires a luxury car for the sole purpose of public display does not retain the benefit of an exemption from LCT, or a decreasing LCT adjustment, if they subsequently use the car in a way that is inconsistent with the purpose for which the relevant public display concession from LCT was obtained.

3.56 An example of a change in use that would cause an increasing LCT adjustment of this kind is where a public museum qualifies for an exemption from LCT on the importation of a luxury car for the sole purpose of public display, but permits the director of that museum to use the car for private purposes. In such circumstances, the importer would be required to make an increasing adjustment to negate the effect of the exemption from LCT that was originally claimed.

3.57 However, consistent with the explanation above about the requirement that a luxury car be imported solely for the purpose of public display, uses of a particular luxury car that are ancillary to the purpose of public display (for example, transport of the car to a venue for the purpose of publicly displaying it) are consistent with a purpose of public display of the car. In such circumstances, the ancillary use would not result in a decreasing LCT adjustment of the kind imposed by these amendments.

Increasing LCT adjustment for supplies to other entities

3.58 An importer or recipient will also have an increasing LCT adjustment in relation to their importation or acquisition of a luxury car if they supply the car to another entity. [Schedule 3, items 3 and 4, subparagraph 15-30(3A)(c)(ii) and subparagraph 15-35(3A)(c)(ii)]

3.59 The increasing adjustment for supplies to other entities ensures that the importer or recipient of a luxury car does not retain the benefit they obtained through an exemption or decreasing LCT adjustment that they received on importing or acquiring the car if they subsequently decide to supply it to another entity (subject to the exception below). In such cases, the importer or recipient will have an increasing adjustment to negate the effect of the exemption or decreasing LCT adjustment that was originally claimed.

Increasing LCT adjustments do not apply to certain supplies made to other public institutions

3.60 The increasing LCT adjustments for supplies to other entities do not apply if, had the other entity imported the car for the same purpose that they acquired it from the first entity, LCT would not have been payable on that importation because of the public display exemption introduced by these amendments. [Schedule 3, items 3 and 4, subsection 15-30(3B) and subsection 15-35(3B)]

3.61 This restriction prevents the increasing LCT adjustments introduced by these amendments from applying to a public institution that supplies a luxury car to another public institution that also acquires the car for the sole purpose of public display.

3.62 The considerations outlined above in relation to decreasing LCT adjustments for the recipients of luxury cars are also relevant in determining if a supplier is required to make an increasing LCT adjustment for supplying a luxury car to another entity.

3.63 In contrast to decreasing LCT adjustments (which are assessed by the recipient), the supplier of a luxury car will need to make this assessment. Requiring the supplier to make this assessment is appropriate given that the restriction on increasing LCT adjustments is intended to be limited to circumstances in which the supplier is actually aware that they are supplying the car to another public institution that is endorsed as a DGR, and that acquires the car for the purpose of publicly displaying it.

3.64 For supplies of cars that are less than two years old (within the meaning of the LCT Act), the recipient will also need to make this assessment in order to have a decreasing LCT adjustment for the supply.

Amount of the increasing LCT adjustments

3.65 The existing rules for determining the amount of an increasing LCT adjustment relate to adjustments related to an exemption from LCT that was claimed because the importer quoted for the importation, and for a decreasing adjustment that applied.

3.66 Where the recipient of a supply of a luxury car has an increasing LCT adjustment because of these amendments, the amount of the adjustment is equal to the amount of the decreasing LCT adjustment to which the recipient was entitled when they acquired the luxury car.

3.67 The amount of this increasing LCT adjustment is determined through the existing rules in section 15-30. Specifically, paragraph 15-30(4)(b) already provides for increasing LCT adjustments that arise because a decreasing LCT adjustment previously applied. The amount of increasing LCT adjustment of this kind is equal to the amount of the recipient's original decreasing LCT adjustment.

3.68 However, the existing rules are not relevant to the increasing LCT adjustment introduced by these amendments that relates to importers that claimed the public display exemption from LCT.

3.69 To ensure that increasing LCT adjustments of this kind are dealt with appropriately, the amount of these increasing LCT adjustments is equal to the amount of LCT that would have been payable by the importer had the public display exemption not applied.

3.70 This approach ensures that the importer is returned to the position that they would have been in had they not claimed the LCT exemption. [Schedule 3, item 5, paragraph 15-35(4)(c)]

Example 3.1: Supply to another entity with no increasing LCT adjustment

Public Museum is registered for GST and endorsed as a DGR. Public Museum imports a luxury car that is a collectors' item, and is entitled to an exemption from LCT for the import because it intends to use the car solely for the purpose of publicly displaying it.

Public Museum uses the car solely for the purpose of public display but then sells it to Public Gallery. Public Gallery is also registered for GST and endorsed as a DGR, and acquires the car solely for the purpose of publicly displaying it.

Despite supplying the luxury car to another entity, Public Museum does not have an increasing LCT adjustment.

This is because Public Museum has, based upon information it has received from Public Gallery, determined that if Public Gallery had imported the luxury car for the purpose that it acquired it (that is, for the sole purpose of publicly displaying the car), LCT would not have been payable by Public Gallery because of the exemption from LCT in paragraph 7-10(3)(ba).

In addition, if the supply of the luxury car is a taxable supply (for example, because the supply is made within two years of Public Museum importing the car), the supply may be a taxable supply for LCT purposes. In such circumstances, although Public Museum will charge Public Gallery for the LCT payable on the supply, Public Gallery will also be entitled to a decreasing LCT adjustment in relation to the supply.

Example 3.2: Supply to another entity with an increasing LCT adjustment

Public Institution is registered for GST and endorsed as a DGR. Public Institution imports a luxury car that is a collectors' item, and is entitled to an exemption from LCT for the import because it intends to use the car solely for the purpose of publicly displaying it.

Public Institution initially uses the car solely for the purpose of public display but then sells it to a private collector. The collector acquires the car for a private purpose, and does not satisfy the public display, GST registration, or DGR requirements. As a result, Public Institution has an increasing LCT adjustment when it supplies the car to the private collector.

However, if the supply of the luxury car is a taxable supply (for example, because the supply is made within two years of Public Institution importing the car), the LCT payable by Public Institution on the supply is reduced by the amount of the increasing LCT adjustment that Public Institution has as a result of supplying the car. This is because subsection 5-15(2) results in the LCT payable on a supply being reduced by any LCT applied to a previous sale or importation of a luxury car, and the increasing LCT adjustment has the effect of applying LCT to the importation.

Application and transitional provisions

3.71 These amendments apply to importations and supplies that are made, and importations that occur from the day after which this Schedule receives Royal Assent. [Schedule 3, item 6]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Luxury car tax - exemption for cars for display by public institutions

3.72 Schedule 3 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.73 Schedule 3 to this Bill amends the A New Tax System (Luxury Car Tax) Act 1999 to allow certain public institutions that have been endorsed as a deductible gift recipient to acquire cars, either by supply or importation, free of luxury car tax.

3.74 The exemption only applies to luxury cars that constitute a work of art or collector's piece which are acquired for the sole purpose of public display, consigned to the collection and not used for private purposes.

Human rights implications

3.75 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.76 This Schedule is compatible with human rights as it does not raise any human rights issues