Senate

Supplementary Explanatory Memorandum

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

4. Leases

A. Summary of amendments to the Bills

Sales Tax Assessment Bill 1992

4.1 The changes to the proposed treatment of leases are as follows:

Exemption for certain short-term leases: There will be an exemption for assessable goods which are to be leased on a short-term basis exclusively in exempt circumstances throughout the statutory period.

Reduced taxable value for certain short-term leases: There will be a reduction in the taxable value of assessable goods which are for short-term lease partially in exempt circumstances. The reduction will be equal to the likely use of the goods in exempt circumstances.

Quotation grounds: A lessor of short-term leasing stock will be entitled to obtain the leasing stock on a tax-free basis.

Credit Ground 18A - Eligible short-term lease: There will be a new credit ground available for tax-paid short-term leasing stock for lease in exempt circumstances. The amount of the credit will be based on the likely use of the goods in exempt circumstances.

Agreements with the Commissioner: The changes outlined above will only apply to lessors who have entered into an agreement with the Commissioner identifying the extent of likely use of short-term leasing stock in exempt circumstances.

Credit Ground 18B - Trial loan or trial lease: A credit will be available if there is an initial short-term lease or loan of assessable goods, followed by a sale (or another lease) of the goods, to the same person for use in exempt circumstances for a combined period of 2 years or more from the date of the first lease or loan.

Sub-leases: The new rules will apply to sub-leases in broadly the same way that they will apply to leases.

Sales Tax (Exemptions and Classifications) Bill 1992

4.2 The changes to the proposed treatment of leases will be as follows:

Exemption for associated goods:

There will be an exemption for associated goods (such as parts) which are for use by a lessor exclusively in relation to:

•

short-term leasing stock, provided the agreed exempt percentage for those associated goods is 100%; or

•

goods to be leased under an eligible long-term lease.

Exemption for certain repair equipment:

There will be an exemption for equipment which is for use by a lessor exclusively in repairing:

•

short-term leasing stock which has an agreed exempt percentage under business inputs exemption Items of 100%; or

•

goods to be leased as business inputs under an eligible long-term lease.

Pallets:

The proposed unconditional exemption for certain pallets will be withdrawn.

B. Background

Existing law

4.3 The existing law relating to leases is complex and difficult to apply. A registered lessor who leases goods from tax-free stock is liable to tax on each successive lease of the goods. However, the tax is not self-assessing, as the taxable value of each lease is the amount the Commissioner considers to be fair and reasonable. Liability to tax continues until an amount equal to the tax on the notional wholesale value of the goods is recouped. On the other hand, unregistered lessors would buy in their stock tax-paid with no further accounting for tax.

4.4 Short term hire pools: The Commissioner has entered into individual agreements with many registered lessors of multiple short term hire stock who cannot track individual items of goods between taxable and exempt leases. Under these agreements, percentages of exempt use of particular classes of goods are calculated and agreed. The lessors are then entitled to either quote their registration number on that percentage of purchases for the hiring pool, or to quote for all stock and then account for tax on the taxable percentage of the new acquisitions in each month. The Commissioner then requires no tax to be levied on the individual short term leases of the goods.

4.5 Similar agreements have been entered into with unregistered lessors of short term hire stock in order to place them on an equal footing with their registered competitors. These lessors are then either entitled to provide an exemption certificate for the exempt percentage of purchases for the hiring pool, or they purchase all stock on a tax-paid basis and claim a refund for the exempt percentage of new acquisitions each month. (Some of these refund agreements set minimum capital costs below which no refund is allowed).

Content of the current Bills

4.6 Assessable dealings: Under the new law, a lease of goods will be treated as an application to own use by the lessor. This means that only the first lease of assessable goods will be an assessable dealing. The lessor will be liable to tax on that lease, unless an exemption applies at the time the lease is granted.

4.7 Exemptions: A lease of assessable goods will only be exempt if:

(a)

the lease is an eligible long-term lease ;

(b)

the leased goods are intended for export prior to use;

(c)

the leased goods are always exempt goods; or

(d)

the small business exemption applies to the lessor.

4.8 An eligible long-term lease is a lease of assessable goods for at least two years (or the effective working life of the goods, if less than 2 years), provided that the lessee gives the lessor evidence of its intention to use the goods so as to satisfy an exemption Item. There is a requirement that any tax borne by the lessor on the goods must not have been passed on to any person.

4.9 Short term hire: The Bills do not provide a quotation ground, reduced taxable value or exemption for goods to be placed in short term hire pools or to be leased short term (ie for less than 2 years) to exempt bodies or for exempt uses (such as for business inputs purposes).

C. Explanation of the amendments to the Bills

Sales Tax Assessment Bill 1992

Agreements with the Commissioner

4.10 The Bill will enable the Commissioner to enter into an agreement with any person (referred to as 'the lessor') who grants leases of goods in the course of a business . It will not be necessary that the lessor is carrying on a business of leasing goods. The agreements will relate to goods of a particular kind , and may relate to more than one such class of goods which are leased out by the lessor. [Amendment No. 4 of the Assessment Bill (new subclause 15A(2))]

4.11 A short-term lease of goods (i.e. a lease of less than the statutory period) will be an 'eligible short-term lease' if the goods are of a particular kind covered by such an agreement. [Amendment No. 4 of the Assessment Bill (new subclause 15A(1))]

4.12 Exempt percentage: The key objective of these agreements will be to establish a percentage (referred to as the 'exempt percentage') which will be the percentage of the statutory period during which it is agreed that it is likely that goods of that particular kind will be leased out (or sub-leased) in exempt circumstances. In this context, 'exempt circumstances' means circumstances in which the lessee, or sub-lessee, would have been entitled to quote for the purchase in reliance on one or more exemption Items, if the lessee, or sub-lessee, had purchased the goods instead of leasing them.

4.13 The exempt percentage for any particular class of goods may be up to, and including, 100% of the statutory period.

4.14 The agreement will usually take into account past leasing patterns in order to determine the percentage of the statutory period during which it could reasonably be expected that those goods will be leased out in exempt circumstances.

4.15 The Commissioner and the lessor may agree upon a method of measuring exempt use which will accurately establish likely percentages of exempt use in the future. The appropriate method may vary depending upon the character of the particular goods concerned.

Example 1:

Exempt percentages for small value, large volume items of leasing stock, such as pallets, may be determined by reference to the number of units held on lease by exempt end-users at a particular point in time when a survey is conducted.

Example 2:

Exempt percentages for high value items, such as forklift trucks, may be determined by reference to the proportion of leasing revenue received from exempt end-users compared with receipts from taxable end-users.

4.16 Any likely eligible long-term leases (i.e. single leases in exempt circumstances for the whole of the statutory period) may not be taken into account in determining the exempt percentage for short-term leases of any particular class of goods. This is to prevent exempt percentages from being distorted by possible eligible long-term leases for which exemption will be available separately.

4.17 Sub-leases: Sub-leases of the goods may be taken into account in determining the exempt percentage for a particular class of goods.

Example 3:

A is a lessor who regularly leases goods of a particular kind to B (who is the lessee of the goods). B , who is also the first sub-lessor, does not use the goods, and regularly sub-leases the goods to C who uses the goods in exempt circumstances.

Result:

A is entitled to take C 's use of the goods into account when reaching agreement with the Commissioner regarding the exempt percentage that will apply to that class of goods. The Commissioner may require A to provide evidence of C 's intended use of the goods before taking that use into account. The evidence concerned may be obtained by A either via B , or directly from C .

4.18 Other conditions: The agreement may also include other conditions that are to be complied with for the agreement to have effect. [Amendment No. 4 of the Assessment Bill - new subclause 15A(6)]

Example 4:

The lessor may be required to advise the Commissioner of any significant changes of leasing patterns which arise unexpectedly in the period of time covered by the agreement.

Example 5:

Appropriate stock control systems may be required to be kept where differing exempt percentages have been agreed for the same kind of goods at different locations of the one lessor.

4.19 The Commissioner may also require that patterns of exempt usage be surveyed at specified time intervals e.g. quarterly or half-yearly, and that the exempt percentage specified in the agreement be reviewed at that time. The regularity of the reviews may be determined by the history of the lessor's business. A fledgling leasing business may be required to review its emerging patterns of exempt usage more frequently than a well established leasing operation.

4.20 Associated goods: The agreement may also specify a separate exempt percentage for particular kinds of 'associated goods'. These could be parts, fittings, accessories or attachments for, or materials for use so as to become an integral part of, the goods covered by the leasing agreement. The associated goods must be for use by the lessor exclusively in relation to the goods covered by the leasing agreement. [Amendment No. 4 of the Assessment Bill (new subclause 15A(3))]

4.21 These separate exempt percentages may be necessary to take account of the differences in the treatment of parts etc across the various exemption Items, and also to recognise that different lessees of the same goods may rely on different exemption Items. This will ensure that the treatment of parts for leased goods is broadly the same as if the goods had been purchased by an exempt user.

Example 6:

A leases out a particular class of goods under short term leases exclusively to exempt lessees for use in activities covered by a certain exemption Item. However, that exemption Item does not provide exemption for attachments for goods covered by the Item. The leasing agreement in relation to the goods concerned may specify that the exempt percentage applicable to the goods is 100%. However, the agreement will not specify an exempt percentage for the attachments for those goods (this is consistent with the position of the lessee, who would have been denied exemption for purchases of attachments for goods for use under that exemption Item).

Result:

The first lease of assessable goods covered by the leasing agreement will be exempt [Amendment No. 7 of the Assessment Bill (New paragraph 26(b)] . However, purchases of attachments for those goods will not be exempt under new exemption Item 195(1) [Amendment No. 17 of the E & C Bill] .

4.22 In other cases, the leasing agreement may specify a different exempt percentage for associated goods than applies to the goods covered by the leasing agreement.

Example 7:

A particular kind of forklift truck is leased out 60% to stevedoring companies for transporting sea cargo within wharf precincts (i.e. as 'business inputs') and 40% to retailers in taxable circumstances. One specialised attachment for use with that type of forklift truck is used to secure shipping containers and if used 100% under leases to the stevedoring companies, but never to retailer lessees.

Result:

The Commissioner may agree with the lessor that although a 60% exempt percentage applies to the kinds of forklift trucks concerned, a 100% exempt percentage will apply to the specialised sea cargo attachments for use exclusively with those forklift trucks. Exemption will be available for these attachments under proposed new exemption Item 195(1). This is consistent with the situation under which the stevedores could have obtained an exemption for such attachments under exemption Item 30.

4.23 Repair equipment: A leasing agreement may also specify a separate exempt percentage for 'repair equipment' which is for use by the lessor exclusively to repair or maintain the goods covered by the leasing agreement. [Amendment No. 4 of the Assessment Bill (new subclause 15A(4))]

4.24 A separate exempt percentage for repair equipment may only be specified in a leasing agreement where the goods covered by the agreement are leased out more than 50% in exempt circumstances under one or more of business inputs exemption Items 1, 2, 18, 23, 28, 29, 30, 33, 34, 35, 36 and 38. [Amendment No. 4 of the Assessment Bill (new subclauses 15A(4) (and 15A(5))]

Example 8:

A lessor leases out a particular line of goods, such as certain collapsible boxes, which are used:

•

60% in exempt circumstances under business inputs exemption Items (e.g. by manufacturers whose use of the goods would satisfy exemption Item 28);

•

30% in exempt circumstances under non-business inputs exemption Items (e.g. by public hospitals whose use of the goods would satisfy exemption Item 140); and

•

10% in taxable circumstances (e.g. by retailers).

The lessor purchases certain welding equipment which is used exclusively to repair and maintain the collapsible boxes.

Result:

The leasing agreement will specify that the exempt percentage for the collapsible boxes is 90% (i.e. 60% business inputs exempt use plus 30% non-business inputs exempt use). The agreement will also specify that the exempt percentage for the repair equipment is 60% (i.e. the business inputs percentage applicable to the collapsible boxes). If the leases by business inputs exemption users had only been agreed to be 40%, then no proportional exemption will be available for the repair equipment, as a minimum use of 50% in business inputs circumstances is required.

Exemption for certain short-term lease AOU's etc

4.25 Leasing goods: An additional exemption will apply to a lease AOU where:

•

the lease is an eligible short-term lease; and

•

the exempt percentage specified in the leasing agreement covering that particular kind of goods is 100%. [Amendment No. 7 of the Assessment Bill (paragraph 26(b))]

Example 9:

A is a lessor of goods which are leased out on a short-term basis and which have an exempt percentage of 100% under a leasing agreement with the Commissioner. A obtains replacement stock for the short-term leasing pool under quotation.

Result:

The first lease AOU of the goods will be exempt.

Reduced taxable value for certain short-term leases

4.26 Goods to be leased: A reduced taxable value will apply to a dealing with goods if:

(a)

the first AOU in Australia of the goods consisted of the grant of a lease of the goods;

(b)

the lease is an eligible short-term lease; and

(c)

the exempt percentage specified in the leasing agreement in relation to that particular class of goods is less than 100%. [Amendment No. 8 of the Assessment Bill (new subclause 50A(1))]

4.27 In these circumstances, the exempt part of the taxable value will be an amount equivalent to the taxable value multiplied by the exempt percentage that applies to the goods under the leasing agreement. This amount will be deducted from the taxable value before applying the appropriate rate of tax. The net amount will be the taxable value for the dealing, regardless of the actual percentage of the statutory period during which the goods happen to be leased out in exempt circumstances.

4.28 Associated goods: A reduction in taxable value will also be available for goods for use by a lessor exclusively as parts, fittings, accessories or attachments for, or so as to become an integral part of, goods covered by a leasing agreement where the exempt percentage for the parts etc is specified in the agreement to be less than 100%. This reduction in taxable value will only be available if the parts etc are of a kind, and for use in a way, that complies with the conditions of the leasing agreement concerned. [Amendment No. 8 of the Assessment Bill (new subclause 50A(2))]

4.29 Repair equipment: A reduction in taxable value will also be available for goods exclusively for use by a lessor in repairing or maintaining goods leased under a leasing agreement where the agreed exempt percentage for the leased goods as business inputs is between 50% and 100%.

4.30 This reduction in taxable value will only be available if the repair equipment is of a kind, and for use in a way, that complies with the conditions of the leasing agreement concerned. [Amendment No. 8 of the Assessment Bill (new subclause 50A(2))]

Quotation for goods covered by leasing agreements

4.31 Lessors who have concluded leasing agreements with the Commissioner will be entitled to obtain the following goods tax-free under quotation:

•

the goods to be leased out in accordance with the terms of the agreement;

•

certain associated goods (such as parts etc) for the leased goods; and

•

certain repair equipment for use exclusively in repairing those lines of leased goods which are to be leased out more than 50% as business inputs.

4.32 Leased goods: New quotation grounds will enable a registered person to quote a registration number for a dealing with goods, and an unregistered person to quote an exemption declaration for a dealing with goods if, at the time of quoting, there is:

•

a leasing agreement relating to that particular class of goods; and

•

the person has the intention of granting an eligible short-term lease of the specific goods subject to the quote. [Amendment No's. 9 and 10 of the Assessment Bill (new paragraphs 82(1)(g) and 83(1)(c))]

4.33 Associated goods and repair equipment: New quotation grounds will also enable a registered person to quote a registration number for a dealing with goods, and an unregistered person to quote an exemption declaration for a dealing with goods if, at the time of quoting, there is:

•

a leasing agreement relating to that particular class of associated goods or repair equipment; and

•

the person quoting (i.e. the lessor) has the intention of either:

-

using the associated goods exclusively as associated goods (such as parts or attachments) for goods covered by a leasing agreement; or

-

using the repair equipment exclusively to repair a particular line of leased goods which is covered by a leasing agreement and which is to be leased out more than 50% as business inputs. [Amendment No's. 9 and 10 of the Assessment Bill (new paragraphs 82(1)(h) and 83(1)(ca))]

Credit Ground 18A: Eligible short-term lease

4.34 General description: The first lease of goods is an eligible short-term lease and the claimant has previously borne tax on the goods. [Amendment No. 23 of the Assessment Bill (new credit ground CR18A)]

Coverage: This ground will provide a mechanism to enable a lessor who has a leasing agreement with the Commissioner relating to a particular class of goods to claim a credit where goods to be leased out in accordance with the agreement are acquired on a tax-paid basis e.g. where the lessor did not quote on the acquisition of the goods. A credit will be available if:

(a)

the first AOU in Australia of goods consisted of the lessor granting a lease of the goods;

(b)

the lease is an eligible short-term lease (i.e. the goods are of a particular kind covered by a leasing agreement); and

(c)

the lessor has previously borne tax on the goods.

The amount of the credit will be the amount of tax previously borne on the goods by the lessor multiplied by the exempt percentage specified in the leasing agreement in relation to goods of that particular kind. This will be the claimant's credit entitlement, regardless of the actual percentage of the statutory period during which the goods happen to be leased out in exempt circumstances.

Example:

The exempt percentage applicable to a particular class of goods under a leasing agreement is 40%. The lessor has obtained all the goods on a tax-paid basis. One such piece of equipment happens to have been leased out only 30% in exempt circumstances during the statutory period. A second similar piece of equipment happens to have been leased out 60% in exempt circumstances during the statutory period.

Result:

The lessor is entitled to a credit of 40% of the tax previously borne on both pieces of equipment. The credit entitlement is not affected by the actual use of leasing goods while the goods are covered by a leasing agreement and the lessor is complying with the conditions of that agreement. However, a consistently higher or lower actual exempt usage of the leasing stock than the percentage that has been agreed may lead to a review of the agreed exempt percentage.

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

Change from existing law: Some of the existing administrative arrangements which the Commissioner has entered into with lessors of short-term hire pools require the lessor to acquire the leasing stock on a tax-paid basis. The lessor is then allowed to claim a credit for the agreed exempt percentage applicable to goods of that particular kind under the agreement. There is no specific refund provision in the existing law. This credit ground will be broadly consistent with those arrangements.

Credit Ground 18B: Trial lease or trial loan

4.35 General description: The claimant has borne tax on goods which are the subject of an initial short-term lease or loan, followed by a sale (or a second lease) of the goods, to the same person for use in exempt circumstances for a combined period equal to or greater than the statutory period. [Amendment No. 23 of the Assessment Bill (new credit ground CR18B)]

Coverage: This credit ground will operate where the following conditions are satisfied:

(a)

the claimant grants a short-term lease (referred to as a 'trial-lease'), or makes a loan, of assessable goods to another person;

(b)

immediately after the end of the trial-lease or loan, the claimant sells the goods, or leases them for at least the remainder of the statutory period, to that other person;

(c)

at or before the end of the trial-lease or loan, the other person gives the claimant evidence, in a form approved by the Commissioner, of the other person's:

•

use of the goods during the period of the trial-lease or the loan; and

•

intended use of the goods during the remainder of the statutory period;

so as to satisfy an exemption Item; and

(d)

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

Requirement that the tax has not been passed on: Yes.

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 enable a credit to be obtained where, in effect, assessable goods are for use by the one person in exempt circumstances during the whole of the statutory period (which commences at the time of the grant of the trial-lease or loan). This will deal with those various situations where, for reasons of commercial practice, the goods are not the subject of an eligible long-term lease, or are used on a trial basis before a sale is completed.

Eligible long-term leases which are sub-leases

4.36 The Bill will extend the definition of 'eligible long-term lease' to include a situation where there is a lease of assessable goods with an immediate sub-lease of the goods to a sub-lessee. It will be necessary that, at or before the time of the grant of the lease, the head-lessor is given evidence, in a form approved by the Commissioner, of the intention of the sub-lessee to use the goods in exempt circumstances for the whole of the statutory period. [Amendment No. 2 of the Assessment Bill (paragraph (b) of the definition of 'eligible long-term lease in clause 5)]

Example:

A grants a lease of assessable goods to B , who grants an immediate sub-lease of the goods to C . B does not use the goods, and is in fact only a financial intermediary between the other two parties. C intends to use the goods during the whole of the statutory period in exempt circumstances. No part of any tax borne by A on the goods before the time of the grant has been passed on by A to any person. Evidence of C 's intention is given to A , in a form approved by the Commissioner, at or before the time of the grant of the head-lease by A (this evidence may have been passed through B , or obtained directly from C ).

Result:

The grant of the head-lease by A is an eligible long-term lease, and is exempt.

Sales Tax (Exemptions and Classifications) Bill 1992

Item 31: Pallets

4.37 The Item will be omitted. The proposed unconditional exemption for certain pallets will be withdrawn, as pallets used in exempt circumstances by manufacturers etc. are usually leased on a short-term basis, and therefore these goods will be covered by the new rules for eligible short-term leases. [Amendment No. 16 of the E & C Bill]

Item 195: Parts, repair equipment etc. for use in relation to certain leases

4.38 General description: Goods for use exclusively :

(a)

as parts, accessories, fittings or attachments for, or so as to become an integral part of, other goods which are covered by a short-term leasing agreement. Exemption will only apply where the agreed exempt percentage for the parts or materials is 100%; [Amendment No. 17 of the E & C Bill (new subitem 195(1))]

(b)

in repairing or maintaining other goods which are covered by a short-term leasing agreement. Exemption will only apply where the agreed exempt percentage of the leased goods as business inputs is 100%; [Amendment No. 17 of the E & C Bill (new subitem 195(1))]

(c)

by the lessor as parts, accessories, fittings or attachments for, or so as to become an integral part of, other goods which are subject to an eligible long-term lease. It will be a requirement that the lessee, or sub-lessee, would have been entitled to quote for the purchase of the parts or materials in reliance on one or more exemption Items, if the lessee, or sub-lessee, had purchased the parts or materials for use in the same manner as the lessor; [Amendment No. 17 of the E & C Bill (new subitem 195(2))]

(d)

by the lessor in repairing or maintaining goods leased as business inputs under an eligible long-term lease. [Amendment No. 17 of the E & C Bill (new subitem 195(3))]

Change: Exemption for certain of these goods is available under existing administrative arrangements which the Commissioner has entered into with some short-term lessors. This exemption Item will clarify the requirements that must be satisfied for exemption to apply in these circumstances.

Existing item: There is no equivalent existing exemption Item.

Links with other Items: Under exemption Item 194 [Amendment No. 17 of the E & C Bill] , a contract repairer who repairs leasing stock for a lessor will, in effect, be eligible for exemption for the parts and materials used in the repair, if the goods being repaired are the subject of:

•

an eligible long-term lease; or

•

an eligible short-term lease with an agreed exempt percentage of 100%.