Senate

Supplementary Explanatory Memorandum

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

5. Deemed manufacturers

A. Summary of amendments to the Bills

5.1 Access to business inputs concessions will be extended to a person who supplies materials to a manufacturer to be made up into goods, provided that the made-up goods (to be referred to as 'wholesaler's-materials goods') are mainly for wholesale sale and/or for indirect marketing sale, by the supplier of the materials. The new provision will not apply if the materials supplied have been purchased from the manufacturer. [Amendment No. 3 of the E & C Bill (new definition of 'wholesaler's-materials goods' in subclause 3(2))]

5.2 The new exemptions will be:

Various manufacture-related activities: exemption will be available for equipment and consumables for use by the supplier mainly in undertaking various manufacture-related activities , such as quality testing, packaging and labelling etc, in relation to the made-up goods described above; [Amendment No's 11, 12, 13 and 14 of the E & C Bill]

Other higher-level activities: exemption will generally be available for equipment and consumables for use by the supplier mainly in carrying out a number of higher-level activities in relation to either the made-up goods concerned, or in relation to the materials wholly or partly out of which the made-up goods are to be manufactured. These higher-level activities include:

•

in-house storage, handling, transport or dispatch [existing exemption Item 28] ;

•

transporting by private railway, pipeline or conveyor [existing exemption Item 29] ;

•

research and development [existing exemption Item 33] ; and

•

engineering, or technical design [existing exemption Item 35] . [Amendment No. 2 of the E & C Bill]

Ancillary activities: exemption will be available for equipment and consumables for use by the supplier mainly in carrying out certain ancillary activities , such as ordering, storing, handling, transporting, monitoring, controlling and costing etc, carried out in relation to the materials out of which the made-up goods are to be manufactured [existing clause 10(1)(b) of the E & C Bill] ; [Amendment No. 10 of the E & C Bill]

Newspaper and magazine advertising: exemption will be available for equipment and consumables for use by a person mainly to record advertisements to be included in a newspaper or magazine which is to be manufactured out of materials supplied by that person, if the newspapers or magazines are to be sold mainly by wholesale by that person. [Amendment No. 15 of the E & C Bill]

B. Background

Existing law

5.3 It is common practice for a person to manufacture goods for a customer from materials supplied by the customer. If a significant amount of the materials used in the manufacture of goods are supplied by the customer, then the manufacturer may not legally be the owner of the goods. Consequently, the delivery of the manufactured goods to the customer may not be a sale of the goods to the customer and, therefore, not be covered by the normal taxing provisions. The existing law overcomes this problem by deeming the delivery of the made-up goods to be a sale by the manufacturer to the customer.

5.4 If the customer supplying the materials intends to re-sell the made-up goods, the customer is deemed to be the manufacturer of the goods, and the actual manufacturer is deemed not to be the manufacturer. The intention of this treatment is to postpone the taxing point so that the customer will be liable to tax on its subsequent sale of the manufactured goods as if it were a sale by the real manufacturer. The relevant sale value will be either the actual wholesale selling price or the notional wholesale selling price if the sale is by retail.

5.5 These sale values will generally include amounts to reflect the cost of any business inputs equipment for use mainly by the customer in relation to the materials supplied, or in relation to the made-up goods .

5.6 As an offset to imposing liability on the customer (i.e the 'deemed manufacturer'), the existing law allows the customer to have access to all of the business inputs concessions to which it would have been entitled if it had actually manufactured the goods.

Content of the current Bills

5.7 Under the new law, the delivery of the goods to the customer by the actual manufacturer will be treated as a separate assessable dealing (known as a delivery of customer's materials goods - see paragraphs 7.29 to 7.32 of the explanatory memorandum to the Assessment Bill). Tax will therefore be imposed, at the time of the delivery , on the actual manufacturer and not on the customer. The customer will no longer be treated as the manufacturer of the goods.

5.8 There will be a special taxable value for this dealing, which will be the manufacturer's charge (excluding sales tax) plus the value (i.e. the notional wholesale purchase price) of any always exempt materials supplied by the customer (see paragraphs 9.5 to 9.6 of the explanatory memorandum to the Assessment Bill).

5.9 In general terms, the current Bills will effectively allow business inputs costs to be excluded from the sales tax base if they are incurred by the customer, either before the supply of the materials to the manufacturer, or after the time of delivery of the made-up goods from the manufacturer to the customer. As a set off, the Bills would have withdrawn the access of the customers to business inputs concessions in relation to the supply of the materials and the receipt of the made-up goods.

C. Explanation of the amendments to the Bills

Sales Tax (Exemptions and Classifications) Bill 1992

5.10 In broad terms, access to business inputs concessions will be extended to a person who supplies materials to a manufacturer to be made up into goods, provided that the goods (to be referred to as 'wholesaler's-materials goods') are made up mainly for wholesale sale by the supplier of the materials.

Wholesaler's materials goods

5.11 These will be goods which satisfy all the conditions set out below:

(a)

the goods must have been manufactured for a person (referred to in this supplementary explanatory memorandum as the 'wholesaler') by a manufacturer in the course of a business;

(b)

the goods must have been manufactured wholly or partly out of materials supplied by the wholesaler (or supplied by a third person at the request of the wholesaler);

Note:

Materials will specifically include exposed photographic film or cinematograph film that is processed or treated so as to produce a negative, transparency or film strip. This is consistent with the approach taken in clause 22 of the Assessment Bill, which will remove any doubt about the matter by defining 'materials' to include such film.

(c)

the goods must not have been manufactured from materials obtained by the wholesaler from the manufacturer or an associate of the manufacturer. This requirement will ensure that a wholesaler cannot obtain business inputs concessions simply by purchasing the manufacturer's raw materials under a separate contract; and

(d)

it must be likely, at the time of delivery of the made-up goods by the manufacturer, that the made-up goods are to be sold by the exemption user mainly by wholesale sale and/or by indirect marketing sale. To satisfy this test, it will be necessary that more than half of the sales of all goods manufactured for the exemption user (as mentioned in paragraph (a)), out of the materials supplied by the exemption user (as mentioned in paragraphs (b) and (c)), will be sold either by wholesale and/or by indirect marketing sale by the exemption user. Made-up goods intended for retail sale by the supplier of the materials will not be able to be taken into account in this calculation.

Manufacture-related activities

5.12 Exemption will be available for equipment and consumables for use by the wholesaler mainly in undertaking the full range of manufacture-related activities in relation to the wholesaler's materials goods.

5.13 Specific amendments of the definition of 'manufacture-related activity' contained in exemption Item 18(5) will only be necessary in relation to the following activities:

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applying a process or treatment to the wholesaler's materials goods for the purpose of bringing them into the form or condition in which they are to be marketed or used by the wholesaler; [Amendment No. 11 of the E & C Bill (Item 18(5)(c))]

•

packaging or labelling the wholesaler's materials goods (except where the packaging or labelling is carried out mainly for purposes connected with the delivery of the wholesaler's materials goods); [Amendment No. 11 of the E & C Bill (Item 18(5)(d)]

•

testing or checking the quality or specifications of the wholesaler's materials goods; and [Amendment No. 12 of the E & C Bill (Item 18(5)(e))]

•

cleaning, sterilising or repairing receptacles that the wholesaler uses mainly in the storage or marketing of the wholesaler's materials goods. [Amendment No. 13 of the E & C Bill - Item 18(5)(g)]

5.14 The definition of 'manufacture-related activity' will be extended to include supplying materials, wholly or partly out of which wholesaler's-materials goods in relation to the exemption user are to be manufactured. This is to allow the full range of exemptions for ancillary activities to be available as discussed below. [Amendment No. 14 of the E & C Bill - new Item 18(5)(ha)]

Other higher-level activities

5.15 Exemption will generally be available for equipment and consumables for use by the wholesaler mainly in carrying out a number of other higher-level activities in relation to either the made-up goods concerned, or in relation to the materials wholly or partly out of which the made-up goods were manufactured. These higher-level activities will include:

•

in-house storage, handling, transport or dispatch [see exemption Item 28];

•

transporting by private railway, pipeline or conveyor [see exemption Item 29] ;

•

research and development [see exemption Item 33] ; and

•

engineering, or technical design [see exemption Item 35] ;.

5.16 The higher-level activities listed above are able to be undertaken in relation to a class of goods referred to as 'qualifying goods'. In order to allow these wholesalers to obtain exemption for equipment and consumables for use mainly to undertake these activities (whether carried out in relation to the wholesaler's materials goods, or in relation to the materials concerned), the definition of 'qualifying goods' will be extended to include:

•

wholesaler's materials goods; and [Amendment No. 2 of the E & C Bill - new paragraph (aa) in the definition of 'qualifying goods' in subclause 3(2)]

•

materials to be supplied by the wholesaler (or by someone else at the request of the wholesaler) wholly or partly out of which wholesaler's materials goods are to be manufactured for the wholesaler. [Amendment No. 2 of the E & C Bill - new paragraph (ab) in the definition of 'qualifying goods' in subclause 3(2)]

Ancillary activities

5.17 Exemption will be available for equipment and consumables for use by the wholesaler mainly in carrying out the full range of ancillary activities either in relation to the wholesaler's materials goods , or in relation to the materials wholly or partly out of which those goods are to be manufactured.

5.18 Equipment and consumables for use in carrying out ancillary activities may only qualify for exemption where those ancillary activities are carried out in relation to higher-level activities. The following two changes will be necessary to ensure that exemption will be available for equipment and consumables for use by the wholesaler mainly in undertaking ancillary activities in relation to the materials, out of which wholesaler's materials goods are to be manufactured:

•

the supply of materials, wholly or partly out of which wholesaler's materials goods are to be manufactured for the wholesaler, will be included as a manufacture-related activity (and therefore the supply of the materials will be a higher-level activity); [Amendment No. 14 of the E & C Bill (new paragraph 18(5)(ha))]

•

in relation to the second category of ancillary activities - [see clause 10(1)(b) of the E & C Bill] - the five types of goods that can be ordered, stored, handled, transported, monitored, controlled or costed etc. will be extended to include materials wholly or partly out of which wholesaler's materials goods are to be manufactured for the wholesaler. Therefore the ordering, costing etc of these materials will be an ancillary activity. [Amendment No. 10 of the E & C Bill - new subparagraph 10(1)(b)(iia)]

Newspaper and magazine advertising

5.19 Background: Exemption will be available under the current Bills for equipment or materials for use by a person mainly to record advertisements that are to be included in a newspaper, periodical or magazine manufactured by that person [exemption item 23(1)(b)] .

However, in circumstances where the publisher of a magazine supplies materials (such as paper) to a printer who will manufacture the magazine for the publisher, the magazine will not have been manufactured by the publisher. In such a case, the publisher will no longer be entitled to exemption for the equipment used to record the advertisements for the magazine.

5.20 Change: It is intended that exemption will be available for equipment and consumables for use by a person (to be referred to as the wholesaler) mainly to record advertisements to be included in a newspaper, periodical or magazine which is to be manufactured by another person out of materials supplied by the wholesaler. This will only apply where the newspapers, periodicals or magazines are to be sold mainly by wholesale by the wholesaler.

5.21 A reference to 'wholesaler's materials goods' in relation to the exemption user will be inserted in paragraph 23(1)(b) to make this change. [Amendment No. 15 of the E & C Bill (Item 27(1)(b))]