House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J.S. Dawkins, M.P.)

Chapter 1

A. General Outline

Background

The Government announced, in the 1990-91 Budget, a simplification review of the Wholesale Sales Tax system. On 2 April 1992, the Treasurer announced that the Government had accepted the recommendations of the Review and that legislation to implement those recommendations should be introduced in the Parliament during the Autumn Sittings 1992.

The new legislation comprises 6 Bills:

Sales Tax Assessment Bill 1992

Sales Tax Imposition (Excise) Bill 1992

Sales Tax Imposition (Customs) Bill 1992

Sales Tax Imposition (General) Bill 1992

Sales Tax (Exemptions and Classifications) Bill 1992

Sales Tax Amendment (Transitional) Bill 1992.

Main features of the Bills

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The Bills will replace the existing 27 Acts that deal exclusively with Wholesale Sales Tax (WST). A comparison of the structure of the existing WST legislation and the proposed new legislation is set out at pages 4 and 5.

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The WST legislation has been restructured so that it will be easier to use. The existing rules of the WST have been examined and have been incorporated into the new structure. Where the existing rules have been found to be overly complicated or inconsistent with the new structure, then they have been simplified or modified to fit within the new structure.

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The new law has been drafted in plain English.

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The existing exemption from WST for manufacturers with only a small sales tax liability will be extended to include all taxpayers. As well, the level at which the exemption cuts out will be extended, from $1,000 of WST liability to $10,000, and there will be no exemption based on turnover level.

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The existing administrative arrangements which allow unregistered persons, who are entitled to WST exemption, to obtain goods tax-free will be enacted in the new law. At the same time, those arrangements have been streamlined to make them easier to use by both vendors and purchasers.

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There will be special provisions to ensure that all the costs incurred in connection with the manufacture of goods, and any royalty incurred in connection with goods, are included in the value of those goods for WST purposes.

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The new law will contain a general anti-avoidance provision.

Sales Tax Imposition (Excise) Bill 1992

Sales Tax Imposition (Customs) Bill 1992

Sales Tax Imposition (General) Bill 1992

These 3 Bills will formally impose the WST on the complete range of dealings with goods that are to be subject to the WST. There are 3 Bills for constitutional reasons. The WST will comprise tax:

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that is a duty of excise (Sales Tax Imposition (Excise) Bill 1992);

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that is a duty of customs (Sales Tax Imposition (Customs) Bill 1992);

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that is neither a duty of customs nor excise (Sales Tax Imposition (General) Bill 1992).

The Bills will replace the 14 separate Acts imposing the existing WST.

Sales Tax Assessment Bill 1992

This Bill will define the situations in which tax is payable and the value to be given to the goods in order to calculate the amount of the tax. It will also define the general situations in which tax will not be payable because an exemption applies (although it will not list all the goods which may be exempt from tax - these will be set out in the Sales Tax (Exemptions and Classifications) Bill 1992). As well, the Bill will set out the rules for such ancillary matters as registration, quoting, time for payment, entitlement to credits and so on.

The Bill will replace the 11 separate Assessment Acts of the existing law.

Sales Tax (Exemptions and Classifications) Bill 1992

This Bill will list the goods that are exempt from WST, either generally or in particular situations. It will also list those goods that are taxable at particular rates (rather than being taxable at the general rate of 20 percent). As well, the Bill will set out general rules for interpreting the descriptions of the goods contained in the Bill.

The Bill will replace the existing Sales Tax (Exemptions and Classifications) Act 1935.

There is a separate explanatory memorandum for this Bill.

Sales Tax Amendment (Transitional) Bill 1992

This Bill will explain when and how the new law will commence to apply, and when and how the existing law will cease to apply. As a general rule, the new law will commence to apply from the date of Royal Assent. However, the new law will not commence to impose tax until 1 October. As a general rule, the new law will impose tax on acts and transactions that occur on or after 1 October 1992 and the existing law will cease to impose tax on dealings from that date. The existing law will continue to apply to acts and transactions that occur before 1 October 1992.

There will also be specific transitional rules to apply in special cases, or where there may be some doubt as to whether particular conduct or arrangements are covered by the existing law or the new law.

The Bill will replace the traditional approach to transitional provisions, which is to include them in the main legislation. Under the new law, these provisions (which will only be relevant for a short period) will not clutter up the new law long after they have ceased to have any application.

The Bill will amend other Commonwealth Acts which contain references to the Sales Tax Acts, to ensure that they reflect the new law.

B. Revenue Impact

The enactment of the new law will provide a gain to the revenue of $61m in 1992-93 (assuming a 1 October commencement date) and $91m in 1993-94. These figures include the changes to the existing law proposed by the Sales Tax (Exemptions and Classifications) Bill 1992.

There is a separate costing for each of the main changes to be made by the existing law in the Summary of Main Changes to this explanatory memorandum (pages17 to22) and in the accompanying explanatory memorandum for the Sales Tax (Exemptions and Classifications) Bill 1992.

C. Main Features of the New Law

Overview of the new law

The fundamental principle of both the existing and the new sales tax law is that the tax should be imposed on the last wholesale sale of goods that have not been previously used in Australia. If goods are not the subject of a wholesale sale (for example, because they are sold only by retail by their manufacturer), then the law seeks to impose tax on the appropriate retail sale or use of the goods. Tax is imposed on the wholesale selling price of goods. If goods are not sold by wholesale, alternative values are used. Tax is imposed on all goods at the general rate of 20%, unless the goods are specifically listed as being exempt, or taxable at a rate other than the general 20% rate. The sales tax law includes a large number of goods that are exempt from tax, either in their own right or when they are used in particular circumstances.

Structure of the new law

Sales Tax will be imposed on assessable dealings with assessable goods , unless an exemption applies. If the dealing is taxable, tax will be calculated on the taxable value of the dealing. Tax will be imposed at the rate of tax applicable to the goods. If the goods, or some input to the goods, have already been taxed, then a credit for that earlier tax will reduce the tax payable on the later dealing.

An assessable dealing may be exempted from tax because one of the parties to the dealing has made a quote . There are general grounds for quoting. There are also special quoting grounds limited to persons who are registered under the sales tax law. Registration and quotation will not be compulsory.

Assessable goods

Broadly, goods will be assessable goods if they have not previously been applied to own use in Australia. Once goods have been applied to own use in Australia, they will no longer be subject to sales tax. This will ensure that the sales tax will not be imposed on second-hand goods.

Assessable dealings

The main assessable dealing will be a wholesale sale . A wholesale sale of goods will be taxable even if the goods have been taxed previously (although there will be a credit for the earlier tax). This ensures that tax is imposed on the final wholesale sale. There will also be a number of situations where retail sales will be assessable dealings. These will usually involve retail sales of goods which have not yet been taxed. However, there are several types of retail sales of goods (that have borne tax) which the law will seek to tax again. This ensures that goods are taxed on a full wholesale value.

The third class of assessable dealing will be application to own use of goods. Most commonly, this term means a use of goods after they have passed through the marketing chain - although its precise meaning is wider. As with retail sales, an application to own use will be an assessable dealing if the goods have not yet been taxed or, if they have been taxed, if the law regards the earlier taxable dealing as not having recouped the full wholesale sale value of the goods.

A local entry of goods at the customs barrier will also be an assessable dealing.

Exemption

If an exemption applies to an assessable dealing, sales tax will not be imposed on that dealing. There will be 4 main categories of exemption:

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an exemption Item in Schedule 1 to the Sales Tax (Exemptions and Classifications) Bill 1992 applies to the dealing;

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there is a quote given in respect of the dealing;

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the small business exemption applies to the dealing;

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the dealing is with goods that are intended for export.

Taxable values

Sales tax will be calculated on the taxable value of an assessable dealing. The most common taxable value is the price for which goods are sold by wholesale. If the assessable dealing is not a wholesale sale, then there are alternative taxable values which will apply. The most common alternative taxable value is the notional wholesale selling price of the goods. Goods which are taxable at the customs barrier have a taxable value of 120% of the sum of the value of the goods for customs duty and the amount of customs duty payable.

Sometimes, not all the costs of goods are reflected in their taxable value. When this happens, there will be additional amounts specifically included in the taxable value. A royalty paid separately by the taxpayer is a situation where an additional amount will be added.

There will also be situations where the law will substitute different taxable values for dealings with particular goods.

In some other cases there will be certain amounts of the taxable value which will be exempt. In these cases, sales tax is imposed on the amount of the taxable value less the amount of that exempt part.

Rate of tax

In most cases, tax will be imposed on goods at the general rate of 20%. However, certain types of goods will be taxed at one of the other rates that can apply. The other rates are 10, 15 and 30 per cent. Goods covered by these rates are listed in separate Schedules to the Sales Tax (Exemptions and Classifications) Bill 1992.

Credits

There will be a range of situations in which credits will be available for tax paid on goods. Tax may have been overpaid on goods or paid when there was no liability. Alternatively, tax may have been paid on goods but the goods may subsequently qualify for exemption or again be the subject of an assessable dealing. In these cases, the law will provide a credit for the tax previously paid. Credits will also be allowed for tax that has been paid on inputs to goods if the goods are the subject of a later assessable dealing.

Credits may either be direct refunds to the claimant or a reduction in a taxpayer's liability.

Collection and recovery

Persons who engage in taxable dealings (other than the local entry of imported goods) will be required to lodge returns and pay the tax within 21 days after the end of the month when the assessable dealing occurred. However, certain taxpayers whose annual sales tax liability is less than $51,200 will have the option of lodging returns and paying tax on a quarterly basis. Persons who import goods will, in all cases, be required to pay the tax at the time of the local entry.

Quoting

Quoting is a mechanism to relieve or defer tax on goods to a later assessable dealing. It is also a mechanism for completely relieving goods from tax when they are to be used in exempt circumstances. If a quote is made in respect of an assessable dealing, then the quote will be an exemption, but only for that dealing. A quote can also be made in respect of a dealing which is not assessable (for example, a retail sale of tax-paid goods). In that case, the quote will authorise the vendor to obtain a credit for the tax, provided that the tax is excluded from the sale price of the goods.

There will be 2 types of quoting:

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quoting a registration number by a registered person;

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quoting an exemption declaration by an unregistered person.

There will be general grounds for quoting which will be available to both registered and unregistered persons. Additionally, there will be special quotation grounds available only to registered persons.

Quoting will not be compulsory.

Registration

The sole purpose of registration will be to gain access to the special quotation grounds that apply only to registered persons. Quoting a registration number will be a faster and simpler quoting mechanism than quoting an exemption declaration. Only registered persons may quote a registration number.

Registration will not be compulsory. There will be no special obligations imposed on persons as a result of becoming registered.

D. Summary of Main Changes

The main changes to the existing law which will be made by the Bills are set out under the main headings of the new law. Each of these changes includes a statement of its particular revenue impact.

Assessable goods

Scope of definition

Change : The point at which goods cease to be assessable goods (and, therefore, no longer taxable) will be the time of their application to own use.

Existing law : There are two final taxing points. These are an application to own use of goods or the point at which goods go into use or consumption The difference between them is unclear. The second of the two has been removed.

Revenue impact : None.

Re-imported goods

Change : To tax all goods, new and used, that are sent overseas for repair or alteration and are subsequently returned to Australia. The goods will be taxable only on the value of the repair or alteration (and not their full wholesale value).

Existing law : Only the value of repairs (and not other improvements made to goods overseas) are taxed and only if the goods were originally imported goods that were taxed at the customs barrier.

Revenue impact : Negligible gain to the revenue.

Assessable dealings

Transfer of stock for retail sale

Change : To remove, as an assessable dealing, a transfer by a manufacturer of goods to retail selling stock.

Existing law : A manufacturer which transfers goods that it has manufactured to retail selling stock is liable to tax at the time of transfer.

Revenue impact : Negligible cost to the revenue.

Goods manufactured from a customer's materials

Change : To make the manufacture of goods from materials supplied by a customer, and their delivery to the customer by the manufacturer, an assessable dealing by the manufacturer.

Existing law : If the customer intends to use the goods, then the manufacturer is liable to tax on the delivery of the goods. If the customer intends to sell the goods, then the customer is liable to tax on the goods at the time of the later sale by the customer.

Revenue impact : Negligible cost to the revenue.

External costs goods

Change : To impose a tax liability on certain costs incurred in connection with the manufacture of goods by a person other than the manufacturer of the goods. The liability will only apply where the person who has incurred the costs sells the goods by retail or applies them to own use.

Existing law : The law does not impose tax on costs incurred by persons who contract out the physical manufacture of the goods to another person and who then apply those goods to own use or sell them by retail. However, those costs would be liable to tax if the goods were sold by wholesale.

Revenue impact : $62m gain to the revenue in a full year.

Dealings with tax-free goods

Change : To impose a liability to tax on all retail sales and applications to own use of goods that have not previously been the subject of an assessable dealing.

Existing law : The law generally only taxes dealings with goods by their manufacturer or by a registered person who purchased the goods tax-free under quote of their certificate of registration. There are situations where goods can be acquired tax-free (otherwise than because the goods are exempt from tax), but there is no general dealing which imposes tax on them.

Revenue impact : $5m gain in a full year.

Leases

Change : To treat registered and unregistered lessors equally, and to make leases the subject of a single, self-assessing assessable dealing. Specifically, this will mean that leasing stock will be taxable once only, at the time of the first lease of those goods, on a full wholesale value of the goods.

Existing law : A registered person who leases goods from tax-free stock is liable to tax on each successive lease of the goods. The taxable value of each lease is the amount which the Commissioner considers to be fair and reasonable, which is generally taken to be the value of the lease payments.

Revenue impact : $10m gain in a full year, reducing to $7m in subsequent years after the one-off nature of the change has passed.

Exemptions

Small business exemption

Change : To provide an optional sales tax exemption for all taxpayers whose total sales tax liability, over a 12 month period, does not exceed $10,000.

Existing law : There is an exemption from sales tax for Australian manufacturers:

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whose turnover of goods over a 5 year period does not exceed an average of $50,000 per annum; or

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whose sales tax liability does not exceed $1,000 per annum.

Revenue impact : $20m to $30m cost in a full year.

The conditional exemption system

Change : To legislate a body of rules to allow unregistered persons who are entitled to exemption in respect of goods to obtain those goods tax free. The new rules will include:

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the provision of exemption declarations to obtain goods tax-free; and

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the imposition of liability on persons who incorrectly claim exemption.

Existing law : There is no legislation on this issue. Administratively, exemption can be claimed through a system of exemption certificates approved by the Commissioner. However, there is no liability imposed on a person who provides a false or incorrect exemption certificate. Vendors who accept such incorrect certificates remain liable under the law.

Revenue impact : $52m gain in a full year.

Registration

Change : Registration will be made optional. It will serve only as a pre-condition to quoting a registration number to obtain goods tax-free. However, a wide range of business inputs exemptions will be limited to registered persons.

Existing law : Registration of wholesalers and manufacturers is compulsory. Failure to register is an offence.

Revenue impact : None.

Quotation

Change : Quotation of a registration number by a registered person will be optional. Additionally, registered persons will in future be entitled to quote on any purchases of goods:

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for sale to quoting purchasers; or

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for use by the registered person in exempt circumstances.

Existing law : Quotation is compulsory for dealings prescribed in the law.

Revenue impact : None.

Taxable values

Alternative taxable value for manufacturers

Change : To remove the alternative taxable value for manufacturers who use only tax-paid materials in the manufacture of goods.

Existing law : The sale value of a retail sale of goods by their manufacturer can, at the option of the manufacturer, be 120% of the wages paid in respect of the manufacture of the goods. The alternative sale value is available only where the manufacturer applies the goods to own use, all the materials used in the manufacture were tax-paid goods, and the manufacturer did not sell similar goods by wholesale.

Revenue impact : Unquantifiable gain.

Goods exported for repair or alteration

Change : The taxable value of goods exported for repair, improvement or other alteration, and then brought back into Australia, will be the value of that repair, alteration or improvement.

Existing law : The taxable value of the goods is limited to the cost of the repairs (and not the cost of any other improvement to the goods).

Revenue impact : Unquantifiable gain.

Leases

Change : The taxable value of a lease will, in broad terms, be the fair wholesale sale value of the goods.

Existing law : The taxable value of a lease is the amount that the Commissioner considers to be fair and reasonable. This is generally the amount of the lease charges.

Revenue impact : Unquantifiable gain.

Royalties

Change : The definition of 'royalty' will be amended to include single or lump sum payments that otherwise satisfy the existing definition.

Existing law : It has been argued that the existing definition does not cover certain lump sum payments.

Revenue impact : Unquantifiable gain.

Credits

Change : Retailers will be given direct access to refunds for goods that they sell tax-free to exempt purchasers.

Existing law : The retailer would have to obtain a refund from its supplier. The supplier would be able to obtain a refund from the Commissioner (or, more usually, net the amount off any sales tax liability that the supplier has).

Revenue impact : Negligible cost.

General Changes

Containers

Change : To simplify the rules governing the taxation treatment of containers for goods, while maintaining broadly the same effect.

Existing law : The broad effect of the existing law is to tax containers in the same way as their contents. However, the rules are extremely complicated and there are many exceptions to the general approach.

Revenue impact : Negligible gain.

General anti-avoidance provision

Change : To replace all the existing specific anti-avoidance provisions with a general anti-avoidance provision.

Existing law : There is no general anti-avoidance provision but there are many specific anti-avoidance provisions that operate in limited situations.

Revenue impact : Unquantifiable gain to the revenue.

Changes to the exemption of goods

The new law will also make some minor changes to the classes of goods which are exempt from tax. Additionally, there will be some changes of general application to the exemption and classification Schedules in the Sales Tax (Exemptions and Classification) Act 1935.

All of these changes are discussed in the accompanying explanatory memorandum to the Sales Tax (Exemptions and Classifications) Bill 1992.