House of Representatives

Explanatory Memorandum

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

Leases

A. Introduction

19.1 This chapter describes how the new law will apply to a lease goods. There is no single part of the Sales Tax Assessment Bill 1992 that deals exclusively with leases. Instead, the rules for leases have been incorporated into the general scheme of the new law.

B. Explanation and Commentary

Overview

19.2 The new law will apply a different treatment to the taxation of leases than the existing law. The purpose of the change is to make leases of assessable goods the subject of a single, self-assessing assessable dealing. Under the new law, a lease of goods will be treated as an application to own use (AOU) of the goods by the lessor. This means, broadly that the first lease of assessable goods will be an assessable dealing (and also the point at which the goods become Australian-used goods, and no longer taxable). The lessor will be liable to tax on the lease unless an exemption applies at the time that the lease is granted. The taxable value of the lease will be the same value that applies to other AOUs. For example, if the lessor is the manufacturer of the goods leased, the taxable value would be the notional wholesale selling price of the goods. If the lessor purchased the goods under quote, the taxable value would be the purchase price of the goods. A subsequent lease of goods will not be an assessable dealing.

How will leases be 'taxed'?

19.3 The proposed tax treatment of leases is outlined below:

1.

Assessable dealing: A grant of a lease of goods by the lessor will be treated as an application to own use by the lessor. This will be known as a lease AOU. A lease AOU will be an assessable dealing if it satisfies the requirements of one of the AOU assessable dealings, e.g. a lease from tax-free stock.

2.

Exemption: There are 2 exemptions which will apply only to lease AOUs. These are:

(a)

the lease is an eligible long-term lease; or

(b)

the leased goods are intended for export (before use).

3.

Taxable value: The taxable value of a lease AOU will depend upon the circumstances in which the goods were obtained by the lessor.

4.

Registration: There will be no registration ground specifically for lessors. However, a lessor may be registered if the lessor satisfies one of the other registration grounds.

5.

Quotation: Lessors who obtain goods that will be the subject of an eligible long-term lease for a lease where the goods will be exported before they are used , will be entitled to obtain those goods under quote. In all other cases, lessors will be obliged to obtain the goods tax paid and to claim credits in respect of the first eligible long-term lease or lease of goods that are exported.

6.

Credits: There will be a credit for eligible long-term leases for leased goods that are exported before they are used.

1. Assessable dealing

19.4 The grant of a lease of goods is one of the dealings with goods that will be treated as an application to own use under the new law. It will be known as a lease AOU The goods will be taken to be applied to own use by the person who grants the lease (i.e. the lessor). [clause 5, definitions of 'application to own use' and 'lease AOU']

19.5 Definition of 'lease': Lease will be defined to mean a lease of goods by their owner, and will include letting or hiring goods under a hire-purchase agreement. [clause 5 definition of 'lease']

19.6 A lease AOU will be an assessable dealing only if it satisfies the requirements of one of the AOU assessable dealings (ADs 3a, 3b, 3c, 13a, and 13c). Broadly, the requirements will be that the lessor either manufactured the goods or obtained the goods under quote. In order for there to be an assessable dealing the leased goods must be assessable goods. Once assessable goods have been leased they will become Australian-used goods and, with 2 exceptions, will no longer be taxable. Therefore, only the first lease of goods is capable of being an assessable dealing.

2. Exemption

19.7 An assessable dealing will be taxable unless one of the exemptions applies. The following exemptions are capable of applying to a lease AOU:

(a)

the lease is an eligible long-term lease;

(b)

the leased goods are intended for export prior to use;

(c)

an exemption Item is unconditionally satisfied at the time of the lease i.e. the leased goods are always exempt goods (see Chapter 8);

(d)

the small business exemption applies to the lessor (see Chapter 8).

Note:

The small business exemption will apply to a manufacturer who leases goods of own manufacture. The exemption will not apply to goods obtained under quote. [paragraph 29(4)(a)]

Exemptions (a) and (b) are special exemptions applicable only to leases.

19.8 Eligible long-term lease: An eligible long-term lease must satisfy 3 conditions:

(i)

the term of the lease must be for at least as long as the statutory period.

Note:

The statutory period is also the period of time for which an exemption Item must be satisfied. It is, broadly, the period that ends 2 years after the first AOU (see Chapter 8).

(ii)

the lessee must give to the lessor, at or before the grant of the lease, a statement, in a form approved by the Commissioner, that the lessee intends to use the goods so as to satisfy an exemption Item, at least until the end of the statutory period;

(iii)

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' and clause 26]

19.9 Examples of the exemption for eligible long-term leases:

Example 1:

BTR Ltd is a leasing company holding tax-free stock. It leases to CW goods with an effective working life of 10 years. The term of the lease is 2 years. CW gives a statement to BTR Ltd , in a form approved by the Commissioner, that CW intends to use the goods so as to satisfy an exemption Item for the full period of the lease.

Result: BTR Ltd will not be taxable on the lease AOU.

Example 2:

Leasing company BTR leases an item of goods to CW . The goods have an effective working life of 10 years. The lease is for a period of 18 months with an option to renew for a further 12 months. CW gives a statement to BTR , in a form approved by the Commissioner, that CW intends to use the goods throughout the 18 month term of the lease to satisfy an exemption Item. CW also intends, at the time the lease is entered into, to take up the option and to continue to use the goods for an exempt purpose for the additional 12 months. This is also included in the statement.

Result: BTR is taxable on the lease. The lease is only entered into for a period of 18 months, which is less than the statutory period. While CW intends to take up the option for the additional 12 months, there is no guarantee that this will happen and so the exemption does not apply.

19.10 The leased goods are intended for export: The general export exemptions only apply if the goods intended for export are assessable goods. In the case of a lease AOU, the leased goods cease to be assessable goods at the time of the grant of the lease. This will be before the goods have been physically used by the lessee. Therefore, there will be a special exemption for leased goods intended for export. The exemption will apply if:

(i)

the lease agreement requires the lessor to export the goods before they are used; or

(ii)

at the time of the lease AOU, the lessee intends to export the goods before using them.

Note:

The lessee will be required to provide the lessor with evidence, (in a form approved by the Commissioner), of the lessee's intention to export the goods. [clause 32]

19.11 If goods are exported in accordance with the export exemption, and are subsequently brought back into Australia, they will be treated again as assessable goods (and tax may be payable on them). This is one of the two exceptions to the general rule that once goods have been applied to own use in Australia they will never again be assessable goods.

Reason: When goods are exported in this manner they have never been physically used and they have never borne tax (or if they have borne tax a credit has been obtained). It is therefore appropriate that if the goods are brought back into Australia, they be capable of being the subject of an assessable dealing. [clauses 5 and 10, definition of 'Australian-used goods']

19.12 Evidence of lessee's intention: In order to satisfy an exemption or become entitled to a credit in respect of a lease AOU, the lessor must hold evidence of the lessee's intention to deal with the goods in qualifying circumstances. The evidence must be in a form approved by the Commissioner. Unlike a normal 'quote', the lessee does not become potentially liable to sales tax on the goods leased if the evidence given to the lessor is false. This is because the goods cease to be 'assessable goods' at the time of the first lease AOU. However, lessees who make false statements in connection with lease AOUs will be subject to the normal penalty provisions applicable to false statements made for a purpose in connection with the operation of the sales tax law. [clause 97, penalty for making false statements] .

3. Taxable value

19.13 If a lease AOU is an assessable dealing and no exemption applies, it will be necessary to calculate the taxable value of the lease AOU. Unlike the existing law, it will be calculated once only and will not be linked to the term of the lease or the amount of the lease payments. The lease AOU will attract the ordinary taxable value rules applicable to AOUs of assessable goods, and the taxable value applicable to a particular lease will therefore vary, depending on the exact nature of the dealing. The possible taxable values are set out in the table below:

4. Registration

19.14 The leasing of goods will not of itself be a ground for registration. A lessor will only be entitled to be registered if one of the other grounds for registration is satisfied e.g. the manufacture of assessable goods in the course of carrying on a business. [clause 78]

5. Quoting rules

19.15 Whether a lessor is registered or unregistered, the only quoting grounds for goods intended for lease will be where the lessor is obtaining the goods for lease to a person under an eligible long term lease, or for lease where the goods will be exported before use. The practical consequence of this is that a lease AOU will only be an assessable dealing where:

(i)

the leased goods have been obtained under quote by the lessor on the above grounds;

(ii)

the leased goods have been manufactured by the lessor;

(iii)

the leased goods have been acquired under quote by the lessor under one of the general quoting grounds (e.g. for sale by wholesale), and the lessor has a change of intention and decides to lease the goods;

(iv)

the leased goods have been obtained tax-free (otherwise than by quoting) but they have not previously passed a taxing point.

Therefore, a significant number of leases will be freed from tax via the credit rules rather than the exemption rules. [subclauses 82(1)(g) and 83(1)(c)]

6. Credits

19.16 The credit rules will ensure that the first eligible long-term lease, and leased goods exported before being used, will be tax-free. A credit will be available where:

(i)

the first AOU of the goods consisted of the granting of an eligible long-term lease, and the lessor has borne tax on the goods before the time of the grant of the lease. In this case, the credit will be available to the lessor. [CR18]

Note:

This credit will only be available if the lessor has not passed the tax on to another person.

(ii)

the first AOU of the goods consisted of the granting of a lease, and the goods were exported before being used by the lessee of that lease. Again, the credit will be available to the lessor if the lessor has previously borne tax on the leased goods before export. [CR19]

C. Summary of Main Changes

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

D. Transitional Arrangements

19.18 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 applicable to leases

19.20 The existing law will not. mpose sales tax on any act, transaction or operation with goods that happens on or after the first taxing day. The single exception to the general principle will apply to goods that have been leased before the first taxing day. For goods in this category, the existing law will continue to apply for a period of 2 years after the first taxing day. In broad terms, this means that the existing law will continue to impose tax on the grant of subsequent leases of those goods if the grant occurs within 2 years after the first taxing day. [subclause 4(2) of the Sales Tax Amendment (Transitional) Bill 1992]

19.21 Reason for exception: The sale value of the grant of a lease of goods to which the existing law applies is the amount that the Commissioner determines to be fair and reasonable. The Commissioner has, as a general rule, determined that amount to be the amount of the lease payments, rather than the fair wholesale value of goods (as applies for other dealings with goods). However, tax on a fair wholesale value will ultimately be paid because subsequent leases of the goods are also subject to tax. At the first taxing day there will be many leased goods which will not yet have borne tax on the equivalent of a fair wholesale sale value. However, subsequent leases of these goods would not otherwise be subject to sales tax under the new law because the general approach of the new law is to impose tax only on the first lease of assessable goods. The extension is necessary, therefore, to prevent a windfall gain to some lessors.