Supplementary Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon J. Dawkins M.P.)6. Exempt use
This chapter will cover three areas of exempt use of goods:
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- donations to and by exempt bodies;
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- repair of goods owned by exempt bodies and exempt users; and
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- buildings owned or leased by exempt bodies.
Donations to and by exempt bodies
A. Summary of changes
6.1 A new exemption item will be introduced to provide exemption for goods donated to an always-exempt person (exempt body) if the goods are still assessable goods at the time of donation. This will restore the position under the existing law. Exemption will not apply to donations of Australian-used goods because they are outside the sales tax law. An always-exempt person will be defined to mean a person who is entitled to exemption on goods used by them, irrespective of the kind of use. Examples of always-exempt persons are government departments and authorities, local councils, schools and public hospitals and public benevolent institutions.
6.2 A new clause will also be introduced to provide that goods donated by an exempt body to another person or for use as a prize or award will be covered by the exemption item relevant to the exempt body. The effect of the clause will be that the act of donation by the exempt body will result in the goods being exempted, because all conditions for exemption will have been satisfied. The same position will apply to goods used as prizes or awards by the exempt body. The use of goods in such manner will make them exempt goods.
6.3 The changes will also extend to goods for use by foreign governments. These bodies also are entitled to a general exemption on goods for their own use but they do not strictly fit into the definition of always-exempt persons because use of the goods by diplomatic and consular posts and Trade Commissioners is excluded from the exemption. The change makes separate provision for foreign governments so that the exemptions available under new Items 192, 193 and 194 to always-exempt persons will also apply to similar transactions involving a foreign government.
B. Background
6.4 Under the existing law goods for use and not for sale by an exempt body qualify for sales tax exemption. The exemption is wide enough to cover goods donated to exempt bodies, goods given away by exempt bodies and goods for use as prizes in raffles etc or awards by exempt bodies.
6.5 The wording of the exemption items does not specify how far exemption extends. In drafting the new law the extent to which goods have to be used by exempt bodies to qualify for exemption has been clarified, including whose use is relevant to exemption.
6.6 Under the new law a donation of goods will be an AOU by the donor and exemption will depend on the status of the donor and not the recipient. Also, for goods to qualify for exemption they must satisfy a statutory use period of at least two years or the effective working life of the goods. Goods given away new by exempt bodies or used by them as prizes in fund raising ventures would not ordinarily satisfy the statutory use test.
6.7 Thus, as the new law is drafted exemption would not apply to:
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- goods donated to exempt bodies by taxable persons;
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- goods given away by exempt bodies; or
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- goods used as prizes in raffles or as awards to staff.
It is possible that these goods may qualify for exemption under the Bills as originally drafted but it would depend on the exercise of a discretion by the Commissioner that the statutory use period did not apply to such transactions. However, it is not clear that this would be the situation and the amendments proposed are designed to ensure that exemption does apply.
C. Explanation of the changes
6.8 It was not intended to deny exemption to exempt bodies in the situations set out in paragraph 6.7 above. This resulted from a restructuring and clarification of the law as to the meaning of "use" which, in the existing law, is very uncertain. The change to the Bill will restore these exemptions which exempt bodies enjoy under the existing law. However, exemption will be by means of a separate exemption for the goods. The structure of the new law under which the donation of goods is an application to own use by the donor will be retained. This is because there are other situations where goods are donated and the new structure is necessary to deal with these situations. It is simpler to determine liability on the status of the donor rather than the recipient. [Amendments Nos. 1, 9 and 17 of the Exemptions and Classifications Bill (proposed new Item 193 in the First Schedule)]
Goods repaired for exempt bodies and exempt users
A. Summary of changes
6.9 A new exemption Item will be introduced to provide exemption for goods that are incorporated by a repairer into other goods that are for use by another person in exempt circumstances.
6.10 To qualify for exemption, property in the goods has to pass under a contract (other than a contract of sale) from the repairer to the other person where the other person would have been entitled to exemption had the goods been purchased by that other person. For example, a manufacturer is entitled to purchase parts for use in the repair of exempt business inputs free of sales tax. If, instead of purchasing the goods direct, the manufacturer arranges for an external repairer to supply the parts and repair the goods, then exemption will also apply to the parts in the hands of the repairer. The same position will apply if an external repairer repairs goods owned by exempt bodies.
B. Background
6.11 Under the existing law, if parts and materials are used by professional repairers in the repair of goods owned by other persons (i.e. the customer), then the law deems the parts and materials used in the repair to be sold to the customer. If the customer is entitled to exemption for the goods that it acquires by the deemed sale, the repairer can claim exemption for the parts and materials used to repair the goods. Exempt bodies and exempt users such as manufacturers, miners and primary producers can obtain exemption on parts etc that are incorporated into exempt goods owned by them by professional repairers.
6.12 The provision which deems a sale of goods to take place in a repair situation will not be incorporated into the new law. Rather, under the new law [definition of "application to own use", clause 5 of the Assessment Bill] the use of parts and materials in a repair contract will be regarded as an AOU of the parts etc by the repairer. Exemption for the repair parts and materials will depend on the status of the repairer. Ordinarily repairers are not entitled to any exemption which means that the parts and materials provided by them would normally be taxable. The fact that the owner of the goods may be entitled to exemption will not be relevant.
C. Explanation of the changes
6.13 The new exemption Item is modelled largely on the provision in the existing law which deems the supply of parts etc in the course of repairing goods to be a sale of the parts. It will effectively restore the position under the existing law by providing a specific exemption for the goods in the hands of the repairer. In this way the structure of the new law, under which parts and materials used in the repair of goods is an AOU of the parts and materials by the repairer, can be retained.
6.14 The new Item will provide exemption for parts held tax-free by repairers and it will allow repairers to purchase repair parts tax-free where the repairer is aware that the parts will be for use in the repair of goods owned by exempt bodies or exempt users. [Amendments Nos. 1 and 17 of the Exemptions and Classifications Bill (proposed new Item 194 in the First Schedule)]
Buildings owned or leased by exempt bodies
A. Summary of changes
6.15 A new exemption Item will be introduced to provide exemption for goods incorporated into buildings and other structures (property) where the buildings etc are either owned by the exempt body, held under lease by the exempt body or are in the course of construction, improvement or other preparation for an exempt body.
B. Background
6.16 Under the existing law, exemption is allowed for materials and goods purchased for use by a contractor in the construction or repair of buildings and other structures owned by exempt bodies. Exemption is allowed whether the building is occupied by the exempt body or leased out to another exempt body or a taxable body or person. With private buildings, exemption is allowed for materials used in the repair of such buildings if the building is fully leased by an exempt body. Exemption is also allowed for a private building during the course of construction if the owner has a lease with an exempt body for the building. However, exemption is not allowed if, at the time of construction, the private owner does not have a lease with an exempt body even though the building, on completion or at a later date, may be leased to an exempt body.
6.17 Under the new law all goods incorporated into buildings and other structures in the course of construction or repair will be treated as an application to own use of those goods by the person carrying out the construction, repair etc work. This is consistent with the concept of AOU in the new law. Unless the builder or repairer is entitled to exemption, the goods will be taxable. The fact that property in the goods may pass to an exempt body, or an exempt body will lease the building and thus have use of the goods, will not affect the position.
C. Explanation of the changes
6.18 The new Item is designed to largely restore the exemptions available under the existing law and to clarify the situation with buildings or other structures owned or leased by exempt bodies or in the course of construction, improvement or other preparation for an exempt body which, under the existing law, is not clear.
6.19 There are, broadly, two kinds of situations in which exemption will apply. The first situation is where the goods are provided under a contract with an exempt body. Exemption will be provided for goods that are, under the contract, either incorporated into buildings that are owned or leased by exempt bodies or incorporated into buildings in the course of construction, improvement or other preparation for ownership or lease by an exempt body. The essential feature is that the contract must be with the exempt body. In effect, the exemption places the exempt body in the same position as if it had purchased the goods separately, for which an exemption would apply.
6.20 Exemption is also extended under this first situation to a sub-contractor to the primary contractor. In the construction or repair of buildings it is common practice for the primary contractor to contract out part of the work to sub-contractors. If the primary contract is with the exempt body, and the goods incorporated would qualify for exemption in the hands of the primary contractor, then any goods provided by a sub-contractor under the primary contract and which become part of the building owned or leased by the exempt body will also qualify for exemption.
6.21 The second situation is where the building is privately owned and leased to an exempt body. In this situation the contract is between the contractor and the lessor. While there is no direct contract with the exempt body, there is still a use of the building and the goods incorporated into it by the exempt body. Exemption will be provided for goods that become part of buildings that are privately owned but leased to exempt bodies, subject to the condition that the work carried out is required to be done under the lease. This condition is to ensure that any exemption available to the lessor is on the basis of the contract (lease) with the exempt body. It is not intended that an exemption should apply to a private lessor for general improvements made to the building while leased to an exempt body, but which are neither required under the lease nor the cost of which is required to be met by the exempt body. Any general improvements outside the conditions of the lease are a matter for the lessor only and do not qualify for any sales tax exemptions.
6.22 The exemption will apply to the person who incorporates the goods into the building or other property. It is that person who uses the goods and consistent with the structure of the new law it will be an AOU of the goods by that person. Exemption will also apply if the goods are incorporated by a sub-contractor under the contract between the lessor and contractor and the conditions applying to the lessor for exemption are met.
6.23 The exemption will apply to goods held in tax-free stock by the builder/repairer contractor or sub-contractor and used in accordance with the exemption Item. It will also allow such persons to obtain goods tax-free where they are purchased specifically for use in circumstances covered by the new exemption Item. [Amendments Nos. 1 and 17 of the Exemptions and Classifications Bill (proposed new Item 192 in the First Schedule)]