House of Representatives

Explanatory Memorandum

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

Chapter 5

Key Concepts

A. Introduction

5.1 This chapter discusses a number of key concepts that appear throughout the new law, and which do not fall exclusively within any separate part of it. All of the key concepts are discussed in Part 2 of the Sales Tax Assessment Bill 1992.

5.2 The concepts discussed in this chapter are:

•

'Application to own use'

•

'Australia'

•

'Borne tax'

•

'Export'

•

'Manufacture' and 'manufacturer'

•

'Obtained under quote'

•

'person'

•

'Wholesale sale'

B. Explanation and Commentary

'Application to own use'

5.3 An application to own use (AOU) of assessable goods at a time when the goods are in Australia will be, in certain circumstances, an assessable dealing. It will also be the point at which goods become Australian-used goods. After goods become Australian-used goods, they will no longer be liable to tax. [clause 5, definition of 'application to own use']

5.4 There will be no primary meaning in the definition of 'AOU'. However, there will be a number of inclusions and exclusions which will identify the parameters of the expression, although they will not necessarily be exhaustive.

5.5

Inclusions: There will be 7 specific inclusions to the definition of AOU:

Inclusion 1: Consuming goods. [paragraph (a)].

Inclusion 2: Giving goods away. [paragraph (b)].

Example: A winery supplies free tasting of its wine. The supply of the wine for tasting will be an AOU by the winery.

Inclusion 3: Transferring property in goods under a contract that is not a contract for the sale of goods. [paragraph (b)]

Note: The existing law deems a person who supplies goods under a contract that is not a contract of sale of the goods to sell those goods. Under the new law, supplies of this kind will be treated as applications to own use by the supplier (unless they are barter or exchange arrangements, in which case they will be treated as sales).

Inclusion 4: Granting to another person a lease of goods or permission, or a right, to use goods. [paragraph (c)]

Note 1: With one exception (see inclusion 7), the only person who will be capable of applying goods to own use will be their owner. Therefore, if the owner permits another person to use goods, then the owner (and not the other person) will be taken to AOU the goods. The AOU will occur at the time that the permission is given.

Note 2: The permission can take a number of forms, from an informal loan to a commercial lease. In the case of a lease AOU, the lessor will be taken to AOU the leased goods at the time that the lease is entered into. A lease will include a hire-purchase agreement. The new law will apply a different treatment to lease AOUs than to other AOUs. The treatment of lease AOUs is discussed separately, in Chapter 19.

Inclusion 5: Using goods as materials in the manufacture, construction, repair, renovation or other treatment or processing whether or not it relates to or results in other goods. [paragraph (d)]

Note 1: This will be a significant change. Under the existing law, the use of materials is not generally regarded as an AOU of the materials. Instead, the materials attract the same treatment as the property into which they are incorporated. For example, if a repairer purchases materials for incorporation into goods for sale by the repairer, then the repairer is regarded as having purchased the materials for subsequent sale. Thus, the vendor of the materials to the repairer is regarded as selling the materials by wholesale. Under the new law, that sale would be regarded as a retail sale because the purchaser will be taken to AOU them when they are used in the repair process.

Note 2: The reference to 'materials' rather than 'raw materials' is deliberate, so as to apply to all materials and not just materials which satisfy the narrower definition of 'raw materials' (defined in clauses 5 and 7). There is no separate definition of 'materials'.

Note 3: The inclusion extends to processes or treatments with any property, not just goods. However, if the materials are used as raw materials in the manufacture of assessable goods, then an exemption Item will relieve the AOU from tax. This will ensure that manufacturers are taxed on their outputs and not their inputs.

Inclusion 6: Causing goods to become a container (also referred to in the new law as a 'Packing AOU'. [paragraph (e)]

Note 1: This also will be a change to the existing law. At present, a container is not taken to have been applied to own use until after their contents have been removed. Under the new law, goods will - broadly speaking - become a container at the time that the contents are put into them, and at that same time they will be taken to have been applied to own use. This change is part of the new treatment of containers proposed under the new law and is discussed in greater detail at Chapter 20.

Note 2: It is not just the placing of contents into goods that will cause the goods to become a container. It is doing anything with those goods that causes them to become a container. The definition of 'container' is discussed in detail in Chapter 20.

Note 3: In order to give effect to the general policy of taxing containers at the same time as their contents, there will be an exemption Item which, in general terms, will exempt a packing AOU if the contents are exclusively assessable goods that are intended to be the subject of a later assessable dealing. This is discussed in greater detail in Chapter 20.

Inclusion 7: Anything done with goods by a person who locally enters them but is not the owner, provided that it would be an AOU if it were done by the owner. [paragraph (f)]

Reason: Goods are often imported by persons other than the owner (e.g. a lessee from a lessor who is a foreign resident). It is consistent with this practice that the importer/enterer should be liable to tax on anything done with the goods by them. If, therefore, the first use of the goods is by the enterer and not the owner, then the use will be an AOU by the enterer and not by the owner However, if the first use is by the owner, even though the goods were entered by another person, then the owner's use will be an AOU of the goods.

5.6 Exclusions: There will be 3 specific exclusions from the meaning of AOU:

Exclusion 1: Selling goods or consigning the goods for sale by consignment. [paragraph (g)]

Exclusion 2: Doing anything with imported goods after the time of importation and before they are locally entered. [paragraph (h)]

Reason: As a general rule, goods are not be applied to own use in bond. In some circumstances, an AOU in bond will give rise to an informal local entry - and there would be a conflict as to whether the entry, or the AOU will be the assessable dealing. To resolve this conflict there will be no AOU in bond, regardless of how the goods are treated in bond. There can be other assessable dealings with goods in bond (such as a sale), but not an AOU.

Exclusion 3: If exposed film is processed to produce a negative, transparency or film strip for a customer then anything done with the negative transparency or strip before it is delivered to the customer will be excluded. [paragraph (i)]

Reason: The purpose of this exclusion is to ensure that tax will be imposed on the processor's delivery of the negative to the customer, as a delivery of customer's materials goods. In the absence of this exclusion, the customer would be liable on an AOU of the negative by the processor (i.e. for allowing the processor to use the negative). The tax treatment of photography is discussed in detail in Chapter 21.

'Australia'

5.7 The primary significance of 'Australia' in the new law is that references to a dealing with goods can only be an assessable dealing if the goods are in Australia at the time of the dealing.

5.8 The definition of Australia will be different to that which applies generally in most other Commonwealth laws. For sales tax purposes, Australia will exclude the Territory of Cocos (Keeling) Islands and the Territory of Christmas Island.

5.9 The effect of this change will be that goods brought to the two named Territories will not be taken to be imported into Australia (and goods sent from 'Australia' to these Territories will be treated as exported from Australia).

5.10 The meaning of 'Australia' will also be modified to include certain offshore installations attached to the seabed of waters adjacent to Australia. These installations are deemed, under the Customs Act, to be part of Australia. Consequently, the installations (and any goods on them) are treated as imported at the time of attachment. Movements of goods between the installations and other parts of Australia will not involve the import or export of 'goods'.

'Borne tax' and 'tax borne'

5.11 The purpose of this definition is to identify situations in which particular persons are taken to have borne tax on goods. Persons, rather than goods, will be taken to have borne tax under the new law. Tax will be borne by a person in 3 situations:

(a)

the person has become liable to tax on an assessable dealing (unless the person is entitled to a credit, in which case the amount of tax covered by the credit is not counted);

(b)

the person has purchased the goods for a price that included tax (unless the person has had any of that tax refunded or credited, in which case the amount of tax covered by the credit is not counted);

(c)

the person is the customer under an assessable dealing that is a delivery of customers materials goods, and the customer has not quoted on the dealing.

[clause 5, definitions of ''borne tax', 'tax borne' and tax-bearing dealing', and clause 11]

The term is used frequently in the new law, particularly in the credit rules.

'Export'

5.12 Export, in its general meaning, requires more than merely taking goods outside Australia. There may sometimes be some doubt as to whether goods are truly 'exported'. The new law will seek to include 2 situations which might not otherwise qualify as an export of goods. These situations are:

(i)

the accompanied baggage of an Australian traveller going overseas. As the accompanied baggage is usually intended to be brought back into Australia, it could be argued that the baggage is not exported. However, the sales tax and customs duty-free concessions are based on these goods being exported;

(ii)

Australian-used goods sent overseas for repair or alteration. If these goods are also intended to be brought back into Australia, the new law will tax those goods again at the time of their return to Australia. In order to ensure that they are treated as imported goods at that time, the sending of the goods out of Australia will be treated as an export of such goods. [clause 5, definition of 'export']

'Manufacture'

5.13 Manufacture: The concept of manufacture will be a key element of the definition of Australian goods one of the two classes of goods that can be assessable goods. It will also be a key element of the descriptions of several assessable dealings with goods, although manufacture by itself will not be an assessable dealing. Manufacture in the course of a business will be a registrable activity and certain inputs to manufacture will be exempt from tax.

5.14 There will be no primary meaning in the definition of 'manufacture'. The term is intended to be interpreted according to its ordinary meaning, as modified by a number of inclusions and exclusions to the definition. [clause 5, definition of 'manufacture']

5.15 Inclusions: There will be 6 specific inclusions to the definition of 'manufacture':

Inclusion 1: Production. [paragraph (a)]

Reason: This represents no change to the existing law. 'Manufacture' and 'production' are often used interchangeably, although production is often thought to be the wider term (e.g. applying to primary production). The inclusion of 'production' is to remove any suggestion that there are production processes that are not within the general meaning of 'manufacture'.

Inclusion 2: The combination of parts or ingredients to produce something that is commercially distinct from the parts or ingredients. [paragraph (b)]

Reason: No change to the existing law. The inclusion is important in its demonstration of the breadth of the intended meaning of manufacture. It will catch any combination of parts or ingredients that results in goods being brought into existence for the first time, for example, the assembly of chair components to form a chair.

Note:

Not all combinations will be manufacture. The existing law excludes from the meaning of 'manufacture' a combination of parts or ingredients if it is of a kind customarily undertaken by persons who use the 'combined' goods for the purpose for which the combined goods are intended to be used. This is to prevent combinations ordinarily carried out by consumers from coming within the law e.g. the assembly of goods purchased by retail in kit form. These kinds of combinations will be excluded from the new definition of 'manufacture' (and are discussed in exclusion 3).

Inclusion 3: Treatment of food for human consumption. [paragraph (c)]

Reason: No change to the existing law. It was inserted in the existing law following the High Court's decision that cooking fish and chips was not manufacture or production.

Inclusion 4: The processing of exposed film so as to produce a negative, transparency or film strip. [paragraph (d)]

Reason: No change to the existing law. The inclusion is necessary to ensure that tax is imposed on the costs of producing both the negative, transparency and film strip as well as the print of the film. The negative, transparency and film strip are different goods from the exposed film.

Inclusion 5: Duplicating a computer program. [clause 5, definition of 'duplicate' and paragraph (e)]

Reason: No change. This inclusion was inserted for clarification purposes only. The tax treatment of computer programs is explained separately, and in detail, in Chapter 22. 'Duplicate' and 'computer program' are defined terms which are discussed in that chapter.

Inclusion 6: Duplicating visual images or sounds, or both. [clause 5, definition of 'duplicate' and paragraph (f)]

Reason: No change. This inclusion was inserted for clarification purposes only.

5.16 Exclusions: There are 3 exclusions from the definition of 'manufacture'.

Exclusion 1: Producing goods incidentally to the performance of work of which the principal character is the performance of skilled services. [paragraph (g)].

Reason: This exclusion is intended to be a legislative statement of the rule in Adams v. Rau (1931) 46 CLR 572. Although the exclusion is not set out in the existing law, the effect under the new law is intended to be the same. The exclusion will not apply if the essential character of the performance of the work is to bring the goods into existence for the purpose of sale or application to own use.

Examples: A solicitor who makes a will for a client, a shorthand writer who transcribes notes and supplies a transcript, an architect who prepares a set of building plans, and photocopying the minutes of a meeting for distribution within a business.

Exclusion 2: Duplicating a computer program onto a tax-paid carrying medium by a person who is not the manufacturer of the medium but who intends to sell it by retail. [paragraph (h)].

Reason: No change to existing law. The new law will not tax non-manufacturing retailers who program computer software onto other goods 'the carrying medium' that they intend to sell by retail and on which tax has already become payable. This is a normal activity by retailers of computer equipment and it is not intended to bring them within the WST solely because of it. However, if the carrying medium is a microchip, the exclusion will not apply and the duplication will be treated as manufacture. This is because the duplication onto a microchip is treated differently under the law to duplication on a floppy or hard disk.

Exclusion 3: Any prescribed combination of parts or ingredients. [paragraph (i)].

Reason: The existing law excludes from the definition of 'manufacture' a combination of parts or ingredients if it is of a kind customarily undertaken by persons who use the 'combined goods' for the purpose for which the combined goods are intended to be used. This is a difficult and uncertain concept to come to grips with. It also has had very little application. Consequently, to provide greater certainty, the regulations will set out the combinations to be excluded from the definition.

'Manufacturer'

5.17 The term 'manufacturer' will mean nothing more in the new law than the person who manufactured particular goods. Unlike the existing law, it will not be restricted to a person who carries on the business of a manufacturer. A person's abstract status as a manufacturer will not be relevant under the new law except in relation to a dealing with particular goods (e.g. is the person the manufacturer of particular goods?).

5.18 Manufacture using customer's materials: The existing law deems a person who supplies materials to be made up into goods by a manufacturer to be the manufacturer if the person intends to resell the goods. The 'real' manufacturer is deemed not to be the manufacturer. As a consequence, the sale by the deemed manufacturer becomes a taxable dealing rather than the sale by the real manufacturer. In this complicated way, the value of the materials and the deemed manufacturer's other costs are brought within the sales tax base. Under the new law, the delivery of the made-up goods by the real manufacturer to the supplier of the materials will be an assessable dealing ( delivery of customer's materials goods). The manufacturer will be liable on this assessable dealing and the taxable value of the goods will include both the manufacturer's charge as well as the value of any tax-free materials supplied by the customer.

'Obtain goods under quote'

5.19 The concept of 'obtaining goods under quote' is an important element of several assessable dealings which will be in the new law. As a general principle, if a person obtains goods for a tax-exclusive price on the basis of a quotation of a registration number or an exemption declaration then the person should be liable to tax on those goods if the person deals with them otherwise than in accordance with an exemption. This will be achieved by making any sale, or application to own use, of goods obtained under quote an assessable dealing.

5.20 There will be 4 situations in which a person will be treated as having obtained goods under quote:

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if the person quoted on a purchase of the goods;

Note:

For the goods to be treated as having been obtained under quote, one of two further conditions must be satisfied. First the sale must have been an assessable dealing (and it must have been freed from tax by reason only of the quote). Second if the sale was not an assessable dealing (e.g. because it was a retail sale of goods that had already borne tax) then the seller must have excluded tax from the selling price on the basis of the purchaser's quote.

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if the person quoted on a customs dealing of the goods;

Note:

In this case, the customs dealing must be an assessable dealing that is freed from tax only because of the quote.

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if the person quoted on the delivery of customer's materials goods;

Note:

This case will attract the same conditions as apply for a quote on a purchase of goods.

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if the person has obtained goods tax paid and has then obtained a credit for the tax on the basis that the person could have quoted on the goods.

Note:

This is a reference to Credit ground 2. [clause 5, definitions of 'purchase goods under quote', 'locally enter goods under quote', 'obtain goods under quote' and clause 15]

'Person'

5.21 The sales tax law applies to persons. The existing law defines 'person' to include a company. A more comprehensive definition will be included in the new law. Person will mean;

(a)

a company;

Note:

'Company' will be defined to include any body or association (whether or not incorporated). Therefore, a company will include an unincorporated association. [clause 5, definition of 'company']

(b)

a partnership;

(c)

a person in a particular capacity of trustee;

(d)

a body politic (e.g. the Crown in right of the Commonwealth or a State); or

(e)

any other person. [clause 5, definition of 'person']

'Wholesale sale'

5.22 Most wholesale sales of assessable goods will be assessable dealings. 'Wholesale sale' will be generally defined to mean a sale to a person who buys the goods for the purpose of resale. The general meaning, which is not in the existing law, will remove uncertainty which has arisen over the extent of the definition (e.g. whether 'wholesale sale' includes a sale in bulk quantity to a person who does not intend to resell them - under the new law, it will not). However, the general meaning will be modified by 3 exclusions:

Exclusion 1: 'Accommodation sales'. [paragraph (a)]

Reason: No change to the existing law. An accommodation sale is a sale made to accommodate a temporary stock shortage by another retailer of those goods or by a manufacturer of those goods. The exclusion will be limited to sales from a retail store or a retail section of a store. If the sale is to a manufacturer, the goods must be of a kind that are usually manufactured by the manufacturer. These terms will have their ordinary meaning and will not be affected by the definition of 'retail sale'.

Exclusion 2: A sale of school requisites or sporting equipment to a school, (for resale to students). [paragraph (b)]

Reason: No change to a long-standing exclusion.

Exclusion 3: A sale of sporting equipment to a sporting club (for resale to members). [paragraph (c)]

Reason: No change to a long-standing exclusion.

5.23 Omissions from existing definition: There are a number of omissions from the existing definition of 'sale of goods by wholesale' that should be noted.

(i) Under the existing law, the definition included a sale of goods to a person who intends to use them as raw materials in the manufacture of goods. This inclusion will be omitted because the manufacturer's use of the raw materials will be regarded under the new law as an application to own use of the materials in the manufacturing process. This is not generally the case under the existing law, leading to the result that the materials are regarded as being on-sold by the manufacturer as part of the finished goods (so that the vendor to the manufacturer is regarded as making a wholesale sale). This is not a consistent approach to the use of goods and gives rise to a class of goods that cannot be applied to own use.

(ii) The omission of the exclusion of cash order sales by retailers. This long-standing exclusion is inconsistent with the general approach of the sales tax law i.e. that a sale to a person who buys the goods for resale is a wholesale sale. It is unlikely that there are many (if any) sales of this kind still made.

(iii) The omission of the exclusion of a sale of building materials that are not for resale by the buyer. Materials for use in the construction process will be regarded as applied to own use by the builder. Consequently, for the same reason as in (i) above, the exclusion will no longer be necessary.

(iv) The omission of the exclusion of a sale of raw materials by a retailer to a clothing manufacturer. The use of the raw materials by the clothing manufacturer will be an application to own use. Consequently, the exclusion will no longer be necessary, for the same general reason mentioned in (i) above.

(v) The omission of the exclusion of a deemed supply of goods. The existing law deems a person who supplies goods in the course of a contract (other than a contact for the sale of goods) to be deemed to sell the goods. Under the new law, supplies of this kind (to the extent that they are not barter or exchange arrangements) will be treated as an application to own use of the goods by the supplier. If they are barter or exchange arrangements, they will be treated as sales under the new law.

Example: A builder contracts to build a house for a client. The builder supplies all the materials used in the construction of the house and, on completion, sells the house to the client.

Result: Under the existing law, the goods used in the construction of the house are deemed to be sold to the client (even though they may have lost their character as goods by incorporation into the house). Under the new law, the goods used in the construction will be taken to be applied to own use by the builder. To the extent that the goods are supplied in return for other goods or in return for the provision of services, they will be taken to be sold (as 'sale' will be defined to include barter or exchange).

5.24 No definition of 'wholesaler': There will be no need for a definition of 'wholesaler' in the new law. A wholesaler will simply be a person who sells goods by wholesale.

5.25 Definition of 'wholesale merchant' in existing law: The definition of 'wholesale merchant' in the existing law consists mainly of inclusions of persons who are not wholesale merchants but who need to be registered under the law - either to impose a liability on them or to allow them to acquire business inputs tax-free (or both). An explanation of the inclusions, and the reasons why they are not necessary in the new law, are set out below:

(i)

A trustee who sells goods in the course of winding-up a wholesale business.

Reason for omission: Any person who sells goods by wholesale in the course of a business will be liable on the wholesale sale and will be entitled to register.

(ii)

A person who manufactures goods from materials supplied by a customer and is deemed not to be the manufacturer (because the customer requires the made-up goods for sale).

Reason for omission: These persons will be manufacturers under the new law.

(iii)

Any person who applies certain processes or treatments to goods to be further used by a manufacturer.

Reason for omission: These will all be persons who will be entitled to registration on the basis of their entitlement to acquire business inputs tax-free (see Registration Ground 6 - Chapter 13).

(iv)

An indirect marketer.

Reason for omission: An indirect marketing sale will be an assessable dealing in its own right and indirect marketers will have their own registration ground (see Registration Ground 3 - Chapter 13).

C. Summary of Main Changes

5.26 The main changes proposed to the existing law which are discussed in this chapter are: