House of Representatives

Explanatory Memorandum

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

Credits

A. Introduction

11.1 This chapter describes the general situations in which a credit will be available for tax that has been borne on goods. The term credit will embrace both refunds obtained directly from the Commissioner and rebates deducted from the gross tax payable in a sales tax return. Credits are dealt with in Part 4 of the Sales Tax Assessment Bill 1992. The credit entitlement grounds are set out in Table 3 of the Bill.

B. Explanation and Commentary

What is a credit?

11.2 The new law will provide an entitlement to a credit if sales tax is overpaid on a transaction, if more tax is payable on the goods than the law intends, and in some other circumstances.

11.3 There will be two methods of obtaining credits:

(i)

Direct refunds: This will be a direct payment to the person claiming the refund. These payments will be obtained by applying directly to the Commissioner;

(ii)

Rebates on returns: This will be an amount that a taxpayer will be entitled to deduct from the total amount of tax payable by them on their assessable dealings during a payment period. Only the net tax (i.e. the tax payable less the amount of the credit) will be required to be remitted with the sales tax return to the Commissioner.

Categories of credits

11.4 There will be 6 broad categories of credit grounds under the new law:

1.

Credits for overpaid tax

2.

Credits to avoid goods being taxed twice

3.

Export-related credits

4.

Import-related credits

5.

Credits where goods are leased

6.

Miscellaneous credits

How does the passing on condition apply?

11.5 A number of credit grounds will require that the amount of the credit available will be limited to the amount that the claimant has not passed on to some other person. As with the existing law, the new law will not include a comprehensive definition of what is meant by tax passed on. Tax will be considered to be not passed on if a person has passed tax on to another person, but has refunded the tax to that other person before making a claim for the credit.

Example:

A taxpayer sells certain goods by wholesale and has calculated tax on the goods at the rate of 30%. The amount of tax of $100 is included in the selling price and is identified on the sales invoice. The $100 has clearly been passed on to the purchaser of the goods at this stage. A court subsequently decides, within 3 years of the sale, that the specific class of goods concerned is always exempt. The taxpayer issues a credit note to the purchaser for $100, and then makes a credit claim within 3 years of the sale.

Result: The taxpayer will be entitled to a credit of $100 under credit ground 1, as the amount concerned will no longer be considered as having been passed on.

What does borne tax mean?

11.6 A number of credit grounds will require that the claimant must have previously borne tax on either the goods which are the subject of the dealing, or on goods (such as business inputs or raw materials) which are linked in some way to the production of other goods by the claimant. The concept of sufficient link as discussed below. A person will have borne tax on goods where the person:

(a)

has become liable to tax on an assessable dealing with the goods;

(b)

has purchased the goods for a price that included tax; or

(c)

was the customer for an assessable dealing known as a delivery of customer's materials goods (see paragraph 7.29) and did not quote in respect of the delivery.

Example:

A person purchases goods by wholesale for a total price of $120 of which $20 is the amount of tax included in the price of the goods and shown on the sales invoice. The person has not received a refund or credit for any part of the $20.

Result: The amount of tax borne on the goods by the purchaser will be $20.

What does sufficient link mean?

11.7 A number of credit grounds will require that tax has been borne on input goods which have a sufficient link with the output goods which are the subject of a subsequent assessable dealing. Inputs will satisfy the requirements necessary to characterise them as having a sufficient link with the output goods concerned in three situations, as follows:

(a)

where the inputs are raw materials, that is, goods to be so used that all, or some essential element, of the goods will form an integral part of the outputs concerned; [paragraph 52(1)(a)]

(b)

where the inputs are goods, such as machines or equipment, which are used in connection with the production of the outputs concerned, and which would be covered by an exemption [R] Item if the taxpayer was registered; or [paragraph 52(1)(b)]

(c)

where something that formed part of the inputs has become an integral part of the output goods. [paragraph 52(1)(c)]

Example:

A piece of equipment has been sold by a manufacturer to a purchaser, who has subsequently returned the goods as being faulty. The sale was an assessable dealing and the manufacturer was liable to tax on the sale. The manufacturer has recovered a part from the faulty goods and has incorporated that part in separate goods which are now subject to an assessable dealing.

Result: The manufacturer is entitled to a credit, as a consequence of the sale of the manufactured goods, to the extent of the tax borne on the goods incorporated into the manufactured goods.

1. Credits for tax overpaid

Credit Ground 1: Tax overpaid

11.8 General Description: The claimant has paid an amount as tax that was not legally payable.

Coverage:

Overpayments may occur in a number of different circumstances, including:

(i)

the amount was not legally payable because:

.

the particular dealing was not an assessable dealing;

.

an exemption applied to the dealing;

.

the taxpayer was an exempt person;

.

the goods were wrongly classified by the taxpayer, resulting in tax being calculated at a higher rate than was applicable to the goods;

.

the taxpayer made an incorrect calculation;

(ii)

liability is reduced retrospectively;

Example:

A person pays tax that was legally payable, but the law is subsequently amended to alter retrospectively the rate of tax payable on the dealing.

Result: The taxpayer will be entitled to a credit for the amount of the tax overpaid, to the extent that it was not passed on.

(iii)

liability had not fully crystallised at the time of the payment;

Example: A taxpayer pays tax on a wholesale sale under AD1a. The taxable value of the assessable dealing is the price (excluding sales tax) for which the goods were sold. The price is subsequently reduced because of a prompt payment discount which the taxpayer gives to the purchaser.

Result: The taxpayer is entitled to a credit for the amount of tax overpaid, to the extent that it was not passed on to the purchaser.

(iv)

liability is later reduced by an amendment of an assessment or by an appeal decision.

Example:

A taxpayer pays tax on an assessable dealing in accordance with a private ruling of the Commissioner. Subsequently, the taxpayer receives a favourable appeal decision that the assessable dealing concerned was non-taxable. The tax will be considered as having been overpaid at the time the amount was paid and not at the time of the appeal decision.

Result: The taxpayer will be entitled to a credit for the amount of tax paid on the assessable dealing, to the extent that it was not passed on.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

2. Credits to avoid goods being taxed twice

11.9 There will be circumstances where goods are either directly or indirectly subjected to sales tax more than once. This can happen when goods are taxed, but all of their inputs have also been taxed. The second broad category of credit grounds will be those designed to avoid the same goods being taxed twice, or to avoid unintended taxing where the final assessable dealing is exempt. There will be eight credit grounds to deal with the following situations:

.

failure to quote a registration number - CR2;

.

where a fully effective quotation is made ineffective - CR3;

.

avoiding the same goods being taxed twice - CR4;

.

ensuring exemption where the latest assessable dealing of the taxpayer is exempt - CR5;

.

avoiding unintended taxing where outputs are taxable - CR6;

.

avoiding unintended taxing where outputs are exempt - CR7;

.

where tax excluded from the sale price of tax-paid goods sold to quoting purchasers - CR8.

.

return of faulty goods - CR9

Credit Ground 2: Failure to quote a registration number

11.10 General Description: Tax has been borne by a registered person who was entitled to quote a registration number.

Coverage: There are two situations covered by this credit ground. The first is where the claimant was entitled to quote on a dealing, but did not quote. The second is where the claimant was entitled to quote but the quote was not accepted by the person to whom it was given. The claimant will be entitled to a credit if they have borne tax on that dealing, to the extent that they have not passed on that tax.

However, if the goods have been applied to own use by the time that the credit is claimed, then the claimant must also have been entitled to quote at the time of application to own use. This is a notional test, as the application to own use would usually not be an assessable dealing (as the goods would be tax-paid). What is intended is that the actual use of the goods at the time of the AOU would also be covered by an exemption item if the AOU had been an assessable dealing.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

Change from existing law: The credit will apply to all dealings, not just assessable dealings. The existing law also contains a number of other ad hoc restrictions.

Reason for changes: These extensions to the coverage of the existing law will remove unnecessary restrictions upon the circumstances in which these credits will be available.

Credit Ground 3: Providing credits where a fully effective quotation is made ineffective

11.11 General Description: The claimant has become liable to tax on an assessable dealing (or has lost an entitlement to a credit under CR 8) because a fully effective quotation which that person had accepted was rendered ineffective by virtue of clause 89. The supplier in these circumstances will now have a retrospective liability to pay tax on the dealing concerned.

Coverage 1: This ground will apply in the following situation:

(a)

where a supplier of goods has accepted a quotation of a registration number or an exemption declaration in respect of an assessable dealing with certain goods;

(b)

the quotation is made ineffective because of clause 89. This could include, for example, where there were reasonable grounds to believe that the purchaser was not authorised to quote, or did not quote in the form and manner approved by the Commissioner; and

(c)

nevertheless, the quote is and was a bona fide quote.

Coverage 2: A credit will also be available in these circumstances where the supplier has lost a credit entitlement under CR8 as a result of the quote being ineffective because of clause 89.

Example: A retailer makes a tax-free sale of goods for $100 out of tax-paid stock to a registered person who quotes a registration number. The retailer is entitled to claim a credit from the Commissioner under CR8 for the amount of the tax excluded from the price for which the goods were sold to the registered person (i.e. $20). The retailer has not passed the $20 on to any person.

An objective assessment of the dealing suggests that the quote is rendered ineffective under clause 89 because there were reasonable grounds for the quote being refused. Thus the retailer loses his entitlement to a credit under CR8, as the dealing can no longer be treated as having been a sale to a quoting purchaser.

Subsequently, the facts reveal that the quote was a bona fide quote.

Result: The retailer is entitled to a credit for an amount of $20, because the quote can be treated as valid and the retailer has not passed that amount of tax on.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

Change from existing law: The existing law contains a number of restrictions.

Reason for change: These extensions to the coverage of the existing law will remove unnecessary restrictions upon the circumstances in which these credits will be available.

Credit Ground 4: Avoiding the same goods being taxed twice

11.12 General description: The claimant has become liable to tax on an assessable dealing in respect of certain goods, but has borne tax on the same goods before the time of that dealing.

Coverage: The new law will impose a tax liability each time there is an assessable dealing with assessable goods, provided no exemption applies. The system of quotation is intended to ensure that, by the time goods cease to be assessable goods, tax will only have been paid on one assessable dealing. However, there will be cases in which liability to tax may be incurred twice on the same goods. This credit ground is necessary to prevent those goods being taxed twice in these circumstances.

Exclusion: Goods altered or repaired overseas: The credit ground will not apply if the later assessable dealing is with goods that were exported from Australia for repair or alteration and which are subsequently imported back into Australia. The importation causes the goods to again become assessable goods. The reimportation, while a taxable dealing, will have a taxable value that is limited to the value of the repairs or alterations. It is not intended, in these cases, that the taxpayer should be entitled to a credit for the tax previously borne on the goods.

Example: Certain goods have been manufactured, sold and used in Australia. The purchaser of the goods has borne $300 tax on the goods. The used goods have been sent overseas by the purchaser for repair. The goods are subsequently reimported by the purchaser. The taxable value rules will apply so that the taxable value for the purposes of the importation will only be the value of the repair, plus the value of any customs duty payable on the importation of the goods - see paragraph 9.23. Tax of $100 is payable on the importation of the repaired goods.

Result: The purchaser will not. e entitled to a credit under CR4 for any part of the $300 tax borne on the original purchase of the goods before the goods were sent overseas for the repair.

Requirement that the tax not be passed on: No.

Change from existing law: The existing law does not have the same exclusion for repair of re-imported goods.

Reason for change: To be consistent with new approach to re-imported goods sent overseas for repair.

Credit Ground 5: Ensuring exemption where the latest assessable dealing is exempt

11.13 General description: The claimant is the taxpayer for an assessable dealing with goods that is exempt, and the claimant has borne tax on the same goods before the time of the assessable dealing.

Coverage: The purpose of this credit ground is to ensure that, if a taxpayer has borne tax on goods (for example, purchasing them for a tax-inclusive price), then that amount of tax can be credited to the taxpayer when the taxpayer has an assessable dealing with those goods that is exempt. An example of a subsequent assessable dealing with tax-paid goods would be a wholesale sale. There will be three exclusions from this credit ground.

Exclusion 1: Small business exemption: The credit ground will not apply if the subsequent assessable dealing with the goods was exempt by reason only that the small business exemption applied. A central element of the small business exemption is that it will not apply to goods that have been acquired tax-free under quote by the taxpayer. To provide a credit in these cases would mean that the exemption would be applied in cases where, ultimately, the goods were acquired tax-free.

Exclusion 2: Goods taxed in bond: The credit ground will not apply if the goods have been taxed while in bond, and the later assessable dealing is a local entry. That local entry will not be taxable because there will be an exemption for goods that previously have been taxed in bond.

Exclusion 3: Goods altered or repaired overseas: The credit ground will not apply if the later assessable dealing is with goods that were exported from Australia for repair or alteration and which are subsequently imported back into Australia. The importation causes the goods to again become assessable goods. The reimportation, while a taxable dealing, will have a taxable value that is limited to the value of the repairs or alterations plus any customs duty payable. It is not intended, in these cases, that the taxpayer should be entitled to a credit for the tax previously borne on the goods.

Requirement that the tax has not been passed on: No.

Change from existing law: The new law will be wider than the existing law in at least 2 respects. First there is no passing on requirement. Second the new law will apply to all assessable dealings, whereas a credit is available under the existing law only if the second transaction is a wholesale sale.

Reasons for change: These extensions to the coverage of the existing law will remove unnecessary restrictions upon the circumstances in which these credits will be available.

Credit Ground 6: Avoiding taxing inputs where outputs are taxable

11.14 General description: The claimant is liable to tax on an assessable dealing with goods and has borne tax on other goods (such as raw materials or business inputs) which have a sufficient link (as discussed in paragraph 11.7) with the goods which are the subject of the dealing.

Coverage: This credit ground will operate to avoid goods being inappropriately taxed indirectly. It will prevent inputs being taxed where outputs are taxable. Otherwise tax could be collected indirectly on taxable outputs where tax was imposed on that component of the selling price which represented some or all of the tax included in the price for which the goods producer purchased the inputs concerned. An entitlement under this credit ground will arise if the following two conditions are present:

(a)

the claimant is liable to tax on an assessable dealing with goods (e.g. where manufactured goods are taxable and

(b)

the claimant has borne tax on other goods, such as business inputs or raw materials, which have a sufficient link with the production of the first-mentioned goods (or outputs) for which the claimant is liable to tax.

Requirement that the tax not be passed on: No.

Change from the existing law: This credit ground will cover the same subject matter as seven separate refund provisions in the existing law. Some of the equivalent refund provisions of the existing law contain restrictions that will not be present in the new law. Unlike the existing law, the new law will:

(a)

apply to all assessable dealings;

(b)

entitle the claimant to either a rebate or a refund and

(c)

not be limited to the amount of tax payable on the assessable dealing with the output goods.

Reason for changes: These changes will remove unnecessary restrictions on both the circumstances in which an entitlement to a credit will arise, and the means of obtaining the credit.

Credit Ground 7: Avoiding taxing inputs where outputs are exempt

11.15 General description: The claimant is the taxpayer for an exempt assessable dealing in respect of goods, and has borne tax on other goods (such as business inputs or raw materials) which have a sufficient link (as discussed in paragraph 11.7) with the goods which are the subject of the dealing.

Coverage: This credit ground will prevent inputs being taxable where outputs are exempt. If a credit were not available in these circumstances, the law would not be fully giving effect to the exemption concerned, because some tax would have been paid indirectly on the goods which are the subject of the exemption. A credit entitlement will arise where the following two conditions are present:

(a)

the claimant is the taxpayer for an assessable dealing with certain goods where that dealing is exempt and

(b)

the claimant has borne tax on other goods, such as business inputs or raw materials, that have a sufficient link with the first-mentioned output goods.

Exclusion: Small business exemption: The credit ground will not apply if the subsequent assessable dealing with the goods was exempt by reason only that the small business exemption applied. A central element of the small business exemption is that it will not apply to goods that have been acquired tax-free under quote by the taxpayer. To provide a credit in these cases would mean that the exemption would be applied in cases where, ultimately, the input goods were acquired tax-free. Otherwise, for example, a manufacturer whose total sales are below the small business threshold would be able to obtain the benefit of the small business exemption on the outputs of its production process, and would also be entitled to obtain a credit for the tax included in the price for which the manufacturer purchased the raw materials or business inputs used in connection with the production of those outputs. This would not be the correct result.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

Changes from existing law: This credit ground covers the same subject matter as 2 separate refund provisions in the existing law. However, the new law will be wider than the existing law in at least one respect. The new law will apply to all assessable dealings, whereas a refund is available under the existing law only in limited situations, e.g. where tax has been borne in respect of raw materials for goods manufactured in Australia, sold by the manufacturer or treated by the manufacturer as stock for sale by retail or applied to the manufacturer's own use.

Reasons for change: This change will remove unnecessary restrictions on the circumstances in which an entitlement to a credit will arise.

Credit Ground 8: Tax excluded from sale price to quoting purchasers

11.16 General description: Tax has been excluded from the sale price of tax-paid goods sold to a purchaser who quotes either a registration number or an exemption declaration.

Coverage: This ground will provide a mechanism for allowing persons to quote or to obtain goods for a tax-exclusive price from a seller, such as a retailer, who holds tax-paid stock. It will enable unregistered persons to obtain a refund from the Commissioner if they sell tax-paid goods at a tax-free price to a quoting purchaser.

Requirement that the tax has not been passed on: No specific requirement. However, the amount of the credit will only be the amount of the tax excluded from the sale price to the quoting purchaser.

Change from existing law: First this ground is much wider than the scope of the existing law, which limits refund entitlements to situations where tax was paid on goods that are sold free of tax to a person (who is not a manufacturer of exempt goods) who quotes a certificate of registration. The existing law does not generally apply where the sale is to a person who provides a conditional exemption certificate. Second administrative practices under the existing law referred to above will no longer apply.

Reasons for change: First this change will significantly increase the opportunities for exemption users to obtain goods at tax free prices from retail outlets. Under the existing law, retailers holding tax-paid stocks are often reluctant to sell goods at tax-free prices to purchasers who provide conditional exemption certificates, as there is currently no statutory basis for retailers selling in these circumstances to obtain refunds of the amounts of tax included in the price for which they purchased the goods. Second the new range of credit grounds will be more comprehensive than apply at present, and past administrative practices will no longer be required.

Credit Ground 9: Return of faulty goods

11.17 General description: The claimant has borne tax on replacement parts used to replace (free of charge and under warranty) the whole, or any part, of faulty goods on which the claimant has already been liable for tax.

Coverage: This credit ground will operate to avoid the taxing of replacement parts used to repair goods under warranty. It will be a requirement that the repair must be free of charge and under warranty.

Example:

Certain goods have been sold by a manufacturer to a purchaser, who has subsequently returned the goods as being faulty. The sale was an assessable dealing, and the manufacturer was liable to tax on the sale. The manufacturer has borne tax on the replacement parts which are used to repair the faulty goods. The goods are repaired free of charge and under warranty.

Result: The manufacturer will be entitled to a credit for the amount of tax borne on the replacement parts.

A credit under this ground will be subject to the condition that if the claimant later sells the faulty goods which were replaced under warranty, then the claimant will be liable to pay an amount in accordance with the formula set out in clause 58. This formula will operate to clawback the amount of the original credit to the extent that the claimant has recouped some or all of the tax borne on the replacement parts by later selling the faulty goods which were replaced. [clause 58]

Requirement that the tax has not been passed on: No specific requirement. However, the credit entitlement will only arise where the repairs are carried out free of charge.

Changes from existing law: The new law removes the existing requirement that a refund is only available if the claimant can satisfy the Commissioner that the faulty goods replaced will not be used for a purpose, or similar purpose, for which they were manufactured. The new law will also only operate if the goods are replaced under warranty.

Reasons for change: First to simplify the operation of the provision by removing the need for claimants to satisfy the Commissioner about possible future uses of the faulty goods. Second to prevent possible abuse e.g. where the labour costs of the repair are inflated to allow for the parts to be provided 'free of charge'. Such arrangements could potentially result in a credit being payable for the tax borne on all parts used in repair situations.

3. Export-related credits

11.18 There is a general principle that goods should not be subject to tax where they are exported as assessable goods. This is to ensure that goods which have not been applied to own use in Australia are able to be sold on the international market at prices which do not directly include sales tax. This is consistent with the international convention that goods sold between countries will be subject to the taxes that apply in the country of the destination (this principle is known as the "destination principle").

The third broad category of credit grounds are export-related credits. The six credit grounds which deal with the relief of sales tax on exported goods are as follows:

•

tax excluded from the sale price of tax-paid goods sold to a purchaser for export otherwise than as accompanied baggage - CR10;

•

tax borne directly on assessable goods that are exported - CR11;

.

tax borne on inputs which have a sufficient link with exported goods - CR12;

.

tax borne on containers for exported goods - CR13;

.

tax excluded from the sale price of goods exported by eligible Australian travellers as accompanied baggage - CR14;

.

tax excluded from the sale price of goods to be exported by eligible foreign travellers - CR15.

Credit Ground 10: Tax excluded from the sale price of tax-paid goods sold to a purchaser for export

11.19 General description: The claimant has excluded tax from the sale price of tax-paid goods sold to a purchaser who, at the time of the sale, had the intention of exporting the goods (otherwise than as accompanied baggage).

Coverage: This ground will allow exemption users (whether registered or unregistered) to obtain goods for export for a tax-exclusive price from a seller, such as a retailer, who holds tax-paid stock.

Change from existing law: There is no equivalent refund provision in the existing law.

Reason for change: To provide a simpler, more effective mechanism for enabling the benefit of the exemptions to be obtained by all exporters. This will also minimise the circumstances in which purchasers of goods for export will have to obtain the goods at tax-inclusive prices and then apply for refunds directly from the Commissioner under CR11 (discussed below).

Credit Ground 11: Tax borne directly on assessable goods that are exported

11.20 General description: The claimant has borne tax on goods which the claimant has exported while those goods are still assessable goods.

Coverage: This credit ground will relieve exports from any direct sales tax burden. Under this ground a credit is available for a person in the following circumstances:

(a)

the claimant has borne tax on goods;

(b)

the claimant has personally exported those goods; and

(c)

the goods were assessable goods at the time of export.

Requirement that the tax has not been passed on: No.

Change from existing law: The existing law requires that the tax borne on the goods by the claimant must not have been passed on by the claimant to another person. This restriction will be omitted in the new law.

Reason for change: This extension to the coverage of the existing law will remove an unnecessary restriction.

Credit Ground 12: Tax borne on inputs which have a sufficient link with exported goods

11.21 General description: The claimant has borne tax on raw materials or business inputs that have a sufficient link as discussed in paragraph 11.7) with assessable goods which are exported.

Coverage: This credit ground will operate to prevent tax being paid indirectly. on assessable goods which are exported. If a credit was not available in these circumstances, the law would not be fully giving effect to the principle of freeing exports from sales tax, because some tax would have been paid on inputs used in the production of the exported goods. No tax will be payable on the assessable goods exported (because of the exemption for exported goods). However, the price for which the goods were sold would include a component to recover the cost of the tax included in the price for which the exporter purchased the raw materials or equipment used to manufacture the exported goods. This credit ground will enable that tax to be refunded.

Requirement that the tax has not been passed on: No.

Changes from existing law: First the equivalent refund provisions of the existing law have a requirement that the tax borne on the goods by the claimant must not have been passed on by the claimant to another person. Second the new credit ground will apply to all assessable dealings, whereas the existing refund provisions only apply to a limited range of taxable transactions.

Reasons for change: This extension to the coverage of the existing law will remove unnecessary restrictions.

Credit Ground 13: Tax borne on containers for exported goods

11.22 General description: The claimant has borne tax on a container which is exported containing wholly assessable goods, and the first AOU in Australia of the container was a packing AOU involving those assessable goods.

Coverage: A special credit ground is necessary for the export of containers for assessable goods because, at the time of export, the container will be Australian-used goods.

The conditions to be satisfied before a credit entitlement will arise under this credit ground are as follows:

(a)

the first AOU in Australia of the container must have been a packing AOU by the claimant;

(b)

the contents of the container must have consisted wholly of assessable goods;

(c)

the container must have been exported while still a container for those assessable goods; and

(d)

the claimant must have borne tax on the container before the time of export.

These conditions are necessary to ensure that credits will only be available for amounts of tax borne on containers which have not been used for any purpose other than the packing of assessable goods for export.

Requirement that the tax has not been passed on: No.

Changes from existing law: There is no equivalent refund provision in the existing law.

Reasons for changes: This ground is part of the changed treatment of containers under the new law.

Credit Ground 14: Tax excluded from the purchase price of goods exported by eligible Australian travellers

11.23 General description: The claimant has sold goods for a tax-exclusive price to an eligible Australian traveller in accordance with the prescribed rules for export sales and the traveller has subsequently exported the goods.

Coverage: This credit ground will operate where vendors sell tax-paid goods for a tax-inclusive price in the following situation:

(a)

the claimant has sold goods to an eligible Australian traveller;

(b)

the sale was in accordance with the prescribed rules for export sales;

(c)

the selling price excluded some or all of the tax previously borne by the claimant on the goods; and

(d)

the goods have been exported by the purchaser within the time, and in the manner, prescribed by the regulations.

Requirement that the tax has not been passed on: No.

Change from existing law: There is no equivalent refund ground under the existing law.

Reason for change: To ensure that tax-free sales of goods to Australian residents departing on international voyages may only be made where there is adequate proof of the export of the goods while the goods are still assessable goods. The regulations will ensure that a credit entitlement will only arise where the goods have been exported from Australia, and where the goods have not been used prior to export.

Credit Ground 15: Tax excluded from the purchase price of goods to be exported by eligible foreign travellers

11.24 General description: The claimant has sold goods for a tax-exclusive price to an eligible foreign traveller in accordance with the prescribed rules for export sales.

Coverage: This credit ground will operate where vendors sell tax-paid goods for a tax-exclusive price in the following situation:

(a)

the claimant sold goods to an eligible foreign traveller;

(b)

the sale was in accordance with the prescribed rules for export sales; and

(c)

the selling price excluded some or all of the tax previously borne by the claimant on the goods.

This ground will effectively apply where the goods are intended to be exported as accompanied baggage by an eligible foreign traveller who is departing Australia on an international air or sea voyage. The prescribed rules for export sales will ensure that a credit entitlement will only arise where the correct procedures have been followed at the point of sale to ensure that the purchaser is a bona fide overseas visitor.

Requirement that the tax has not been passed on: No.

Change from existing law: There is no equivalent refund ground under the existing law.

Reasons for change: The introduction of this new credit ground will allow a wider range of unregistered retailers to make tax-free sales to foreign travellers who are visiting Australia and are departing on international voyages.

4. Import-related credits

11.25 There will be two credit grounds relating to imported goods as follows:

•

destruction of imported goods - CR16; and

•

drawback of sales tax where imported goods are exported while still assessable goods - CR17.

Credit Ground 16: Destruction of imported goods

11.26 General description: The claimant has become liable to tax on a local entry, but the claimant has rejected the goods for non-compliance with the sale contract and the goods have been destroyed under Customs' supervision.

Coverage: This credit ground will operate in those rare cases where the following four conditions are satisfied:

(a)

the claimant has become liable to tax on a local entry of goods that were imported under a contract of sale;

(b)

the claimant rejected the goods for non-compliance with the contract;

(c)

the goods were destroyed under Customs' supervision; and

(d)

the Commissioner is satisfied that the destruction is or would be grounds for remission of customs duty on the goods.

It will be a requirement that the Commissioner is satisfied that the customs duty paid on the importation of the goods will be remitted because of the destruction. In the case of non-dutiable goods, the Commissioner must be satisfied that if customs duty had been paid on the goods, then that duty would have been remitted by Customs as a result of the destruction of the goods.

Requirement that the tax has not been passed on: No.

Change from existing law: There will be no passing on requirement, whereas the equivalent refund provision of the existing law has a requirement that the tax borne on the goods by the claimant must not have been passed on by the claimant to another person.

Reason for change: To remove an unnecessary restriction upon the circumstances in which these credits will be available.

Credit Ground 17: Drawback of customs duty on imported goods

11.27 General description: The claimant is an importer who is entitled to a drawback of customs duty on the goods on which tax was paid.

Coverage: This ground will operate to provide a credit in those cases where:

(a)

drawback of customs duty has been allowed in respect of certain goods under section 168 of the Customs Act; or

(b)

if the goods are non-dutiable, the Commissioner is satisfied that a drawback of duty would have been allowed if the goods had been liable to duty.

Drawback: A drawback of customs duty will be allowed where imported goods are exported without being used in Australia. In this context, goods which have only been used for the purpose of being inspected or exhibited will not be treated as having been used in Australia (see Customs Regulation 129).

Requirement that the tax not be passed on: No.

Changes from existing law: The existing provision that refund claims may be made at any time will be replaced with the general requirement that a claim must be made within 3 years from the time when the drawback was allowed (or would have been allowed).

Reasons for changes: To provide consistency for all credit claimants. Potential claimants will not be disadvantaged by this change.

5. Credits where goods are leased

11.28 There will be two credit grounds dealing with leases of goods:

.

eligible long-term lease - CR18;

.

export of leased goods - CR19.

Credit Ground 18: Eligible long-term lease

11.29 General description: The claimant has borne tax on goods before the granting of an eligible long-term lease, and the first AOU in Australia of the goods consisted of the granting of that lease.

Coverage: This credit ground will ensure that, if the claimant has borne tax on goods (e.g. purchasing the goods for a tax-inclusive price), then the claimant will be entitled to a credit for the amount of tax borne on the goods where there is a subsequent eligible long-term lease of the goods. The credit ground will only be satisfied where the following conditions are met:

(a)

the first AOU of the goods in Australia is the granting of a lease by the claimant;

(b)

that lease is an eligible long-term lease; and

(c)

the claimant has borne tax on the goods before the time of the granting of the lease.

(i)

the term of the lease is at least for as long as the statutory period (e.g. it is for a period exceeding two years, or exceeding the effective working life of the goods, whichever is the less);

(b)

the lessee intends to use the goods so as to satisfy an exemption Item during that period (e.g. the leasing of equipment by a manufacturer for use in the processing of raw materials); and

(c)

if the lessor has previously borne tax on the goods, no part of that tax must have been passed on to any person. [clause 5, definition of 'eligible long-term lease']

Requirement that the tax has not been passed on: No. However, a lease of goods will not be an eligible long-term lease if any part of the tax borne by the lessor on the goods before the grant of the lease has been passed on to any person.

Change from existing law: There is no equivalent refund provision in the existing law.

Reasons for change: This ground is part of the changed treatment of leases under the new law.

Credit Ground 19: Tax borne on goods exported to an overseas lessee

11.30 General description: The claimant has borne tax on leased goods which are exported before being used by the lessee, and the first AOU in Australia of the goods consisted of the granting of that lease.

Coverage: This credit ground will operate to ensure that leased goods exported will be treated on the same basis as goods exported for sale - i.e. the goods will be relieved of any direct sales tax burden where they have not been used before export. If a credit was not available in these circumstances, then the law would not be fully giving effect to the general exemption for exported goods. This would be because the leasing charges would most likely include a component to recover the cost of the tax previously borne by the lessor on the goods.

The credit ground will only be satisfied where the following 3 conditions are met:

(a)

the first AOU of the goods in Australia is the granting of the lease by the claimant;

(b)

the leased goods were exported before being used by the lessee; and

(c)

the claimant has borne tax on the goods prior to export.

Requirement that the tax has not been passed on: No.

Changes from the existing law: There is no equivalent refund ground under the existing law.

Reasons for change: To allow lessors to lease equipment at internationally competitive rates to persons outside of Australia.

6. Miscellaneous credits

11.31 There will be two credit grounds of a miscellaneous nature as follows:

.

retrospective credits for approved R & D bodies - CR20; and

.

credits for bad debts - CR21.

Credit Ground 20: Retrospective R & D registration or approval

11.32 General description: The claimant has borne tax on a tax-bearing dealing for which the claimant would have been entitled to quote an exemption declaration if the claimant had been registered with the Industry, Research and Development Board or had entered into an agreement under the Industry Research and Development Act 1986 (IR & D Act) at the time of the dealing.

Coverage: This credit ground recognises that many persons who will qualify as an approved R & D body as described in business inputs exemption Item 34) will not have obtained their registration with the Industry Research and Development Board, or entered into the relevant agreements with the Board, until after the time at which they will have acquired the equipment and materials necessary to undertake their research and development activities.

These persons will not be entitled to quote an exemption declaration under Item 34 at the time of acquisition of the goods. This credit ground will enable these persons to obtain a credit for the tax borne on these goods where the following conditions are satisfied:

(a)

the claimant has borne tax on a tax-bearing dealing;

(b)

after the dealing, the claimant either obtained registration under section 39F, 39J or 39P of the IR & D Act, or entered into an agreement under section 28 or 31 of that Act; and

(c)

the claimant would have been entitled to quote an exemption declaration on the dealing if that registration had been obtained, or that agreement had been entered into and had been in force at the time of the dealing.

Requirement that the tax has not been passed on: No.

Changes from existing law: None.

Credit Ground 21: Bad debts

11.33 General description: The claimant has paid tax on a taxable dealing with goods and some or all of the amount owed to the claimant in respect of that dealing is subsequently written off as a bad debt.

Coverage: This credit entitlement will apply where a claimant has paid tax on an assessable dealing such as a sale and the claimant has subsequently written off some or all of the price for which the goods were sold.

Requirement that the tax has not been passed on: No.

Changes from existing law: There is no time limit under the existing law for claiming refunds where bad debts have been written off. Under the new law there will still be no time limit as to when a debt can be classified a bad debt. However, the general three year time limit for claiming credits under the new law will apply. In this case, it will be 3 years from the time of the writing off of the debt.

Reason for change: To provide consistency for all credit claimants.

7. General rules for obtaining a credit

11.34 The general rules for obtaining a credit will be broadly similar to the provisions of the existing law. Any significant changes from the existing law are discussed below.

What are the general entitlements to credits?

11.35 Methods of claiming credits: There will be two methods of obtaining a credit:

(a)

Direct refunds: This will be a direct payment to the person claiming the credit. These payments will be obtained by applying directly to the Commissioner;

(b)

Rebates on returns: This will be an amount that a taxpayer will be entitled to deduct from the total amount of tax payable by them on their assessable dealings during a payment period. Only the net tax (i.e. the tax payable less the amount of the credit) will be required to be remitted with the sales tax return to the Commissioner.

11.36 Refund procedures: With the exception of the new minimum monetary limit discussed below, the requirements and procedures affecting the claiming of refunds will be substantially the same as under the existing law:

(a)

Offset against other liabilities: The Commissioner will be able to apply the credit against any outstanding tax liabilities of the claimant before paying as a refund the remaining amount of the credit. [paragraph 55(a)]

(b)

Minimum monetary claims: Refunds will not be available for amounts totalling less than $200. Individual claims may be aggregated to reach the minimum amount. This new requirement is necessary to reduce the likely administrative costs of processing large numbers of small refund claims from a much larger group of potential claimants than exists under the existing law. [subclause 54(1)]

Note:

There will be no minimum monetary limit for credits claimed as rebates on returns.

(c)

A taxpayer will be able to obtain a direct refund from the time a credit arises, independently from the return process.

Example: A credit entitlement arises 2 months before the next quarterly return is due, and the taxpayer wishes to apply for a cash refund rather than wait to deduct the credit from the next return.

Result: The taxpayer is entitled to lodge a credit claim immediately the credit entitlement arises.

11.37 Rebate procedures: There will be no changes to the procedures by which taxpayers will be able to deduct credits to which they are entitled from the tax payable in their (monthly or quarterly) sales tax returns. [clause 53]

11.38 Additional requirements: Additional requirements regarding the operation of the credit provisions will be as follows:

(a)

Approved form: Claims for credits will be required to be made in a form approved by the Commissioner, and will be required to be accompanied by such supporting evidence as the Commissioner requires. [subclause 51(4)]

(b)

Avoiding 'doubling up of credits': There will be a non-discretionary rule that an entitlement to a credit will not arise to the extent that it would result in a double credit in respect of the same tax (whether for the claimant or another person). [subclause 51(2)]

(c)

Recovery of excess credits: There will be a provision to ensure repayment by the claimant of excess or overpaid credits. This will cover cases not only where refunds have been incorrectly overpaid by the Commissioner, but also where credits have been improperly deducted from the tax payable in respect of a return. The amount of the excess will be treated as if it were tax due and payable, and due for payment at the time when it was overpaid or deducted. [clause 56]

(d)

Agreements relating to calculation of credits: The Commissioner will be allowed to enter into agreements with any person regarding substitute methods of calculating credit entitlements. Such agreements will override the legislation. [clause 59]

Who cannot apply for credits?

11.39 Unregistered exemption users: There may be situations in which an unregistered person who is entitled to quote an exemption declaration fails to do so, and consequently makes a tax-inclusive purchase. Such a person will generally not be entitled to obtain a refund directly from the Commissioner under the new law.

11.40 There will be a number of exceptions to the general rule. Unregistered exemption users will be entitled to claim credits directly from the Commissioner for tax borne on certain business inputs (see discussion of CR6 or CR7) or for tax borne on goods exported (see discussion of CR11). Subject to these two credit grounds, the availability of direct access credits under CR8 to retailers (and other persons holding tax-paid stock) as discussed in paragraph 11.16, will remove the need for unregistered exemption users to be entitled to apply directly to the Commissioner for credits in any other circumstances.

11.41 Removal of existing refund provisions: The existing law allows direct refunds for only a very limited number of exemption users. There will not be any equivalent credit grounds in the new law. The existing refund provisions concerned are:

(a)

Public hospitals and public benevolent institutions etc: Direct access refunds are available under the existing law to public hospitals, public benevolent institutions or other organisations covered by Item 81 in the First Schedule to the E & C Act for amounts of tax included in the price for which those organisations purchased goods;

(b)

Persons with impaired hearing: Direct access refunds are available to profoundly deaf persons for amounts of tax included in the price for which those persons purchased broadcast teletext or closed caption decoding devices or other goods covered by Item 123A in the First Schedule to the E & C Act.

Reasons for change: These refund provisions are very rarely used. The purchases concerned are almost always made at tax-exclusive prices from retailers who either write-off the small amounts involved, or who obtain credits from their suppliers for the amount of the tax excluded from the sale price. Under the new law, retailers who make sales in these circumstances will be able to make refund claims directly to the Commissioner under CR8 for the amounts of tax excluded from the sale price. This change will ensure consistent treatment for all exemption users.

(c)

Bakers and pastrycooks donating to charity: The existing law provides for a rebate of tax payable on the sale value of goods manufactured by a baker or a pastrycook and donated to charitable institutions and certain public organisations. There will be no equivalent credit ground in the new law.

Reason for change: Under the new law there will be no assessable dealing for the placing of manufactured goods into stock for retail sale. The donation of such goods would be an AOU which would be an assessable dealing. However these goods are always exempt goods, and no tax is payable.

11.42 Removal of credit ground for tax paid under protest: The existing law provides refund grounds under which tax may be paid under protest. There is no time limit applicable to these refund claims, and the Commissioner is not required to be satisfied that the claimant has not passed on the tax. There will not be a specific credit ground in the new law for tax paid in these circumstances, as such amounts will be recoverable as tax overpaid under CR1.

Reason for change: The existing refund grounds for tax paid under protest are rarely used. The provision only applies where the items in respect of which tax was paid were not 'goods manufactured in Australia' (e.g. because the operation concerned did not constitute manufacture), or because the end result of the operation did not bring 'goods' into existence. The removal of the specific provision will ensure greater consistency between the credit provisions.

Within what time limits must credit claims be made?

11.43 All claims for credits will be required to be made within 3 years of the time when the credit entitlement arises. [subclause 51(3)]

Change from existing law: This will alter the current situation under which there is unlimited time within which to apply for refunds in relation to a number of situations, including:

(i)

bad debts;

(ii)

the quotation of bona fide registration certificates which have been deemed not quoted;

(iii)

sales to Commonwealth and State Governments; and

(iv)

drawback of customs duty.

Reasons for change: The change to a uniform three year period within which all credits must be claimed will ensure greater consistency between different credit grounds. Three years is regarded as sufficient time within which to make credit claims.

Objections against credit decisions

11.44 The provisions of the Taxation Administration Act concerning rights to object against refund decisions will apply to the new law.

C. Summary of main changes

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

D. Transitional Arrangements

11.46 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 special transitional provisions applicable to credits. These will:

(a)

ensure that tax that is paid or payable under the existing law, or that is borne under the existing law, will be treated as if it is tax paid, payable or borne under the new law for the purposes of the credit rules. Consequently, if a taxpayer pays tax on a dealing with goods under the existing law and then becomes liable to tax under the new law on a subsequent dealing with the same goods, then the taxpayer will be entitled to a credit under the new law for the tax paid under the existing law. This is discussed in paragraph 23.15;

(b)

exclude from the credit grounds under the new law situations that more appropriately relate to acts, transactions or operations under the existing law. These are discussed in paragraphs 23.16 and 23.17.