House of Representatives

Explanatory Memorandum

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

Chapter 9 Taxable Values

A. Introduction

9.1 This chapter describes the value to be assigned to goods that are the subject of a taxable assessable dealing. These values will be known as taxable values. Under the existing law they are known as sale values. The amount of tax payable on assessable goods will be calculated by multiplying the taxable value by the tax rate applicable to the goods.

9.2 Taxable values are dealt with in Part 3 and Table 1 of the Sales Tax Assessment Bill 1992. [clause 5, definition of 'taxable value']

B. Explanation and Commentary

9.3 The approach of the new law will be to:

•

give to each assessable dealing a general taxable value;

•

add to that taxable value, where applicable, certain additional amounts; and

•

in certain situations, replace the general taxable value with a substitute taxable value.

The final taxable value calculated after following these steps will be the value on which tax is payable.

9.4 Additionally, the amount of the taxable value will be capable of adjustment by two general provisions which will be included in the new law. These will be a general anti-avoidance provision [clauses 92 and 93] and the general non-arm's length dealings provision [clause 94] .

Normal taxable values

9.5 Each assessable dealing will attract a normal taxable value. In most cases, this will be the value on which tax will be calculated. The normal taxable values are set out in the table below, together with the assessable dealing to which they apply. [subclause 34(1) and Table 1]

Changes to normal taxable values

9.6 The following changes will be made to the sale value provisions of the existing law:

(a)

Application to own use (AOU) by the manufacturer : The existing law provides an alternative sale value if all the materials used in the manufacture of goods have borne tax and the manufacturer does not sell similar goods by wholesale. The value is 120% of the wages paid by the manufacturer. The alternative value will not be included in the new law.

Reason For Change : The alternative value is inconsistent with the general approach of taxing actual or notional wholesale values. It has little current application. [Table 1, AD3b]

(b)

AOU or a retail sale of untaxed goods not obtained under quote : The taxable value will be the notional wholesale selling price.

Reason For Change : These will be new assessable dealings. There are ways in which goods can be acquired tax-free other than by a person manufacturing them or purchasing them under quote, eg. transfers of goods by court order under a company group restructuring. These dealings will close a gap in the existing law (see paragraphs 7.21 and 7.22). In many cases there is no value attributable to the goods at the time when they were obtained.

Note:

The notional wholesale selling price is the price for which the goods could reasonably have been expected to have been sold by wholesale under an arm's length transaction. [Table 1, AD2e, AD12e, AD3a and AD13a]

(c)

Lease AOU: The taxable value of a lease AOU will be the same taxable value that would apply to the goods if the assessable dealing was a non-lease AOU. This will replace the existing requirement that the Commissioner form an opinion in each case of what is a fair and reasonable value.

Reason For Change : This will bring leases into line with all other assessable dealings in the sales tax law, in that tax in full will be payable when the goods are AOU in Australia. It will also enable the taxpayer to self assess the amount of tax payable. [Table 1, ADs 3a, 3b, 3c , 13a or 13c]

(d)

Delivery of customer's materials goods: Under the existing law, if a customer supplies materials to be made up into goods, the manufacturer's sale value is the price charged by the manufacturer plus the wholesale value of any exempt materials supplied by the customer.

However, if a customer supplying materials intends to re-sell the made up goods by retail, the customer is deemed to be the manufacturer and is liable for the tax. The sale value for the goods sold by the customer is the amount for which the customer could have sold the goods by wholesale.

Under the new law, the physical manufacturer will be treated as the manufacturer in all cases and will be liable to pay sales tax on the delivery of the customer's materials goods. The taxable value of the goods that are the subject of that dealing will be the amount charged by the manufacturer to the customer for manufacturing the goods, plus the notional wholesale purchase price of any always exempt materials supplied by the customer.

Reason For Change : The existing rules are inconsistent with the general approach of taxing manufacturers and wholesalers rather than retailers and end users. The rules are also complicated by a number of deeming provisions that have been used to give effect to the existing law.

Note 1:

The cost of any 'always exempt' materials that are supplied by a customer are included in the taxable value of the goods to reflect the true value of the made up goods. Taxable materials that are supplied by a customer would have already borne tax either:

(i)

because the customer purchased the goods for a tax-inclusive price; or

(ii)

if they have been purchased for a tax-free price, the supply of the materials to the manufacturer would amount to an AOU by the customer and tax would be payable at that time.

Note 2:

The notional wholesale purchase price is the price (excluding sales tax) for which the taxpayer could reasonably have been expected to buy the goods by wholesale under an arm's length transaction. [Table 1, AD4a]

Additions to taxable value

9.7 The normal taxable value of assessable dealings will be increased in certain circumstances. Additional amounts will be added to the taxable value of assessable dealings with goods which:

•

are in a container which has not been the subject of a taxable dealing;

•

are subject to an associated royalty payment;

•

occur while the goods are in bond under Customs control.

9.8 These additions to taxable value are set out in table 9B, together with a comparison to the existing law. [clause 38]

Addition 1 : The container component

9.9 If assessable goods are the subject of an assessable dealing while they are in a container, then the value of the container will be included in the taxable value of the assessable dealing with the contents. The value to be attributed to the container (the container component) will vary depending on the nature of the assessable dealing with the contents. If the container is used more than once then the value may be included more than once. For a more detailed discussion on containers see Chapter 20.

9.10 The taxable values that will apply to containers are discussed below:

(i)

if the assessable dealing is a wholesale sale: the container component will be so much of the value of the container as is recouped in the sale of the contents;

Note:

Generally, there will be no need to add a container component to the taxable value of the contents, as the contents would usually be sold for a single price that includes a recoupment component for the container. [subclause 35(2)]

(ii)

if the assessable dealing is not a wholesale sale: the container component will be so much of the value of the container as might reasonably be expected to be recouped if the assessable dealing with the contents was a wholesale sale. [subclause 35(3)]

9.11 Exceptions to the addition of a container component: A container component will not be included in the taxable value of goods if:

(i)

the container has been the subject of a taxable dealing at, or before, the time when it becomes a container in relation to its contents; or

Reason : The general position is that the value of the container will form part of the taxable value of the contents. If tax has already been paid on the container as a separate assessable dealing before it becomes a container, then tax should not be paid again on the value of the container.

(ii)

the container is a shipping container covered by exemption Item 60.

Reason: These containers will always be exempt where they are for repeated use on ships for transporting cargo by sea, are designed to be loaded from one mode of transport to another without the contents being re-packed and have a minimum capacity of 14 cubic metres. The containers are used principally with the exporting and importing of goods and it is proposed that tax should not be imposed on this form of transportation of goods. [subclause 35(4)]

Addition 2 : Associated royalty component

9.12 In certain circumstances, the value of any royalty that is paid or payable in connection with goods will be included in the taxable value of those goods. If a royalty is paid or payable in connection with a triggering event for particular goods, such as:

(a)

the manufacture of goods;

(b)

the importation or local entry of goods;

(c)

a sale of goods;

(d)

the granting of a lease of goods; or

(e)

an AD4a delivery of the goods

then that part of the royalty that is paid in relation to the goods will form part of the taxable value for any assessable dealing with the goods. [clause 36]

9.13 Some royalties relate to other matters such as the use of a trade name. Where a royalty is paid for something other than goods it does not form part of the taxable value.

9.14 A royalty may be paid as a lump sum or as a fixed or variable amount per article. A lump sum is generally apportioned over the number of goods produced and sold under the royalty agreement. In calculating the taxable value it is only the part of the lump sum royalty that is apportioned to each article that will be included. Eventually all the lump sum royalty will be recouped and included in the taxable value of goods. In the event that the full lump sum of the royalty is not recouped, eg. insufficient sales, then the unrecouped portion is not taxable. It simply remains as an unrecouped expense of selling the goods. [subclause 36(1)]

9.15 It has been suggested that the existing definition of 'royalty' in certain situations, may not cover a lump sum payment as being a royalty. The new law will put beyond doubt that royalty means any amount which is paid or payable (whether or not periodically) as consideration to a person, for a right to use a product belonging to that person, without a reference to quantity or value of the product. [subclause 36(2)]

Example:

KN Videos pays Film Productions Ltd $100,000 for the right to produce one of its films as a video. KN Videos then produce 20,000 videos, each of which it sells by wholesale for $20.

Result: The taxable value of each video sold will include $5 per video as the cost of the royalty.

Addition 3 : Assessable dealings with goods in bond

9.16 The inclusion in the taxable value of the amount of customs duty or excise applicable to the goods represents no change to the existing law. These amounts would be included in the taxable value of goods when they are entered for home consumption. Therefore, it is necessary to include these amounts in the taxable value when an assessable dealing occurs while the goods are in bond which is before the goods are entered for home consumption. [clause 5, definition of 'customs duty' and 'excise duty', and clause 37 ]

Substitute Taxable Values

9.17 There are some situations under the new law where it is difficult to determine a clear value for certain goods and a substitute taxable value may be used. These substitute taxable values are set out in Table 9C, together with a comparison to existing substitute values.

9.18 Pre-fabricated buildings: While building materials are generally exempt from sales tax and buildings themselves are not taxable because they are not goods, there is no exemption for pre-fabricated buildings that have an identity as goods. To place pre-fabricated buildings on the same tax footing as buildings erected on site, the law operates to apply tax only to the taxable value of any taxable goods used in producing the pre-fabricated building. For example, if a pre-fabricated building or pre-fabricated building section includes any taxable materials such as ductwork, fittings, accessories or attachments for air conditioning systems, then these goods are included in the taxable value of the building or section.

9.19 The taxable value of a pre-fabricated building or a building sections will, therefore, be limited to the value of any taxable goods incorporated in the building or building section. The value will be calculated by adding together the taxable value of each taxable good as if that taxable good had been sold separately. The effect of this provision will be the same as under the existing law. [clause 39]

9.20 Sale of Newspaper and magazine inserts: The existing law deems newspaper and magazine inserts to be separate goods from the newspaper or magazine in which they are inserted. The sale value of the insert is calculated by reference to the provisions relating to application to own use under each Assessment Act. If the goods are printed and inserted by the manufacturer, then the sale value is the notional wholesale selling price. If the inserts are sold to a printer for inclusion in the newspaper/magazine, then the sale value is the amount for which the goods are purchased.

9.21 Under the new law, there will be no change to the treatment of the inserts as separate goods, nor will there be any change to the taxable value rules. [clause 40]

9.22 AD2a sale of photographs exposed in the camera by seller: If a photographer produces photographs (i.e. exposes, develops and prints the photographs) to the order of a particular customer then the taxable value of the goods will be 40% of the amount (excluding tax) payable by the customer to the photographer. This is a change to the existing law where tax is calculated on a tax inclusive retail price. This taxable value does not apply to film exposed by a person who then sends it to a laboratory for processing. Photography is discussed in more detail in Chapter 21. [clause 41]

Reason For Change: It is easier to calculate the tax payable on the basis of the price being exclusive of tax rather than on a retail price which is inclusive of tax.

9.23 Goods imported after being exported for alteration: Under the existing law, imported goods that are re-imported after being exported for repair have a sale value equal to the value of the repair plus any customs duty, if applicable. There is, however, no tax liability imposed on goods produced in Australia that are sent overseas for repair and returned to Australia.

9.24 The new law will not distinguish between imported goods and Australian goods sent overseas for repair. It will impose tax on both Australian goods and imported goods that are exported for repair and re-imported. The taxable value rules will also apply to goods that have been sent overseas for alteration, additions or renovations. The taxable value will be:

(i)

the value of the repair, alteration, addition or renovation; plus

(ii)

if any customs duty is payable, the value of the duty. [clause 42]

Reason For Change : The new law will treat both Australian manufactured goods and imported goods on the same basis. This will bring imported goods and Australian manufactured goods sent overseas for repair broadly into line with goods repaired, restored or altered in Australia. Sales tax will be payable on the value of any repairs, alterations, additions or renovations to the goods when they are re-imported.

9.25 Agreement with the Commissioner: The Commissioner may enter into an agreement with a taxpayer to determine a method of calculating a taxable value or values for certain goods. The manner of calculating the taxable value or values for the goods that are specified in the agreement will apply to all assessable dealings with those goods and will override all the taxable value provisions. This represents no change to the existing law. [clause 43]

Miscellaneous Rules Affecting Taxable Value

9.26 There are also three miscellaneous rules that will affect the taxable value of assessable goods.

Taxable value excludes tax

9.27 The taxable value of an assessable dealing will not include any amount of sales tax that has been paid on that assessable dealing. This represents no change from the existing law. [Table 1, AD1a and 1b and definition of 'notional wholesale selling price]

The arm's length rule

9.28 Under the existing law, each sale value provision in each Assessment Act has its own complicated arm's length rule. Each of these arm's length rules provides that the Commissioner may alter the sale value of goods if the Commissioner is satisfied that the seller and the purchaser have entered into an agreement to reduce the sale value of the goods, or they are not dealing with each other at arm's length. The Commissioner may alter the sale value to be either:

(i)

an arm's length price;

(ii)

a price for which identical goods could have been purchased (the alternative price); or

(iii)

the lesser of the arm's length price and the alternative price.

9.29 Under the new law there will be an automatic rule that will apply to all taxable values. If a taxpayer, or an associate, is a party to a non-arm's length transaction then the taxable value of the goods will be recalculated to reflect a price for which the goods could reasonably have been expected to be sold, or purchased, under an arm's length transaction. This rule also extends to transactions that are not directly involved in the calculation of liability.

9.30 For example, if a taxpayer is able to sell goods under an arm's length transaction at a low price because of having bought the goods under a non-arm's length transaction at a reduced price then the taxable value of the goods must be increased to an arm's length price.

9.31 Under the new law the onus is on the taxpayer or the person making the sale to ensure that tax is paid on an arm's length taxable value. This is a major change from the existing law where the arm's length provisions rely on the Commissioner being satisfied that the sale value is less than a true arm's length value, and if not, then determining what the sale value will be.

9.32 If a taxpayer lodges a return and pays tax on a basis that fails to apply the arm's length rule, there will be a 200% penalty under the untrue and misleading statement provision and a late payment penalty for the underpaid tax.

Reason For The Change : There will be less reliance on the Commissioner having to determine the arm's length value for goods that are the subject of a taxable dealing. The onus will be on the person making the sale to ensure that tax is paid on an arm's length price. [clause 94]

Apportionment of amounts

9.33 If taxable and exempt goods, or goods that are taxed at different rates are packaged and sold together for one inclusive price, then the goods will be treated separately for the purpose of calculating the taxable value. The value for each item will be the value for which that item could reasonably have been expected to have sold for separately. This represents no change to the existing law. [subclause 95(1)]

Example 1:

A gift pack containing a watch and a fountain pen sold by wholesale for one inclusive price of $125.

Result: The pen has a taxable value of $50 and is taxed at 20% and the watch has a taxable value of $75 and is taxed at 30%. The goods would be treated separately to calculate the taxable value of the gift pack and the total amount of tax payable would be $32.50.

Example 2:

A gift pack containing clothing and perfume sold by wholesale for one inclusive price of $50.

Result: The clothing has a taxable value of $40 and is exempt from tax, and the perfume is valued at $10 and is taxed at 20%. The goods would be treated separately and the total amount of tax that will be payable is $2.

9.34 If goods are sold as part of a package which involves payment for something that is not goods, e.g. goodwill, installation charges or a maintenance agreement, then the elements that are not goods will be treated separately for the purpose of calculating the taxable value of the goods. The value of each element will be the amount that could reasonably have been expected to be allocated to the element if it had been the only transaction. This represents no change to the existing law. [subclause 95(2)]

Example 1:

A wholesale business is sold for a single price that includes all stock on hand and goodwill.

Result: The goodwill and any other non-taxable elements are separately valued and tax is not payable on them. Tax is payable only on the stock and other goods that are liable to sales tax.

Example 2:

A bag of golf clubs and free golf lessons are packaged together for one inclusive price.

Result: The taxable value attributable to the golf clubs will be taxable at 20% and the value attributable to the lessons will not be taxable as it represents an element that is not taxable.

C. Summary of Main Changes

9.35 The main changes to the existing law discussed in this chapter are:

D. Transitional Arrangements

9.36 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision in the Bill for the taxable value of containers. Additionally, the general principle that the new law will apply to acts, transactions or operations that occur before the first taxing day has particular relevance to taxable values.

Example:

Before the first taxing day, JL Ltd pays a royalty in connection with the proposed manufacture of goods. JL manufactures and sells those goods by retail after the first taxing day.

Result: The royalty will be included in the taxable value of the sale of those goods, even though the royalty was paid before the first taxing day.

9.37 Containers: The taxable value of any assessable dealing with assessable goods will include the value of any associated container, except if the container has been the subject of a previous taxable dealing in its own right [clause 35] . 'Taxable dealing' does not, in its ordinary meaning, include a dealing on which tax was imposed under the existing law. There will be a special provision that will alter the meaning of taxable dealing, for the purpose of clause 35 only, to include a dealing that attracted tax under the existing law. [clause 8, Sales Tax Amendment (Transitional) Bill 1992]