Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

General outline and financial impact

GST-free supplies and input taxed supplies

Schedule 1 to this Bill amends the GST Act to:

•

ensure that an entity will be able to claim an input tax credit on an acquisition or importation that it uses in making input taxed supplies through an enterprise, or part of an enterprise, that it carries on outside Australia;

•

update the provisions that relate to child care;

•

provide for the GST-free treatment of travel agent fees for arranging overseas supplies such as accommodation, rail transport, car hire, entertainment and sight-seeing tours;

•

provide that the supply of a freehold interest or long-term lease made after a short-term lease is also GST-free;

•

provide that the sale of residential premises that have been used as residential premises for at least 5 years will be input taxed;

•

clarify that reduced input tax credits are only denied to the extent that the entity is entitled to an input tax credit for that acquisition under another provision of the GST Act; and

•

allow certain low-value supplies through coin-operated devices to be treated as input taxed.

Date of effect : Various.

Proposal announced : Not announced.

Financial impact : Negligible.

Compliance cost impact : Minimal.

Imports

Schedule 2 to this Bill amends the GST Act, LCT Act, WET Act and the Customs Act to:

•

ensure that the conversion rate used for the international transport and insurance component of a taxable importation or re-importation is the same rate used for the customs value of the importation or re-importation;

•

ensure that the re-importation of goods that were acquired prior to 1 July 2000 and are returned to the original owner, without having being subject to any change since their export, are not subject to GST;

•

ensure that re-imported breeding livestock is only subject to GST on the increase in value;

•

exempt certain goods, imported temporarily into Australia without payment of Customs duty, GST and LCT from having to be exported from Australia; and

•

ensure that the re-importation of goods that have been previously subject to WET or LCT is not subject to WET or LCT a second time. Date of effect : 1 July 2000 except the conversion rate for international transport and insurance which applies from date of introduction.

Proposal announced : Not announced.

Financial impact : Negligible.

Compliance cost impact : Nil.

Fringe benefits

Schedule 3 to this Bill amends the GST Act to:

•

extend Division 71 to operate to deny input tax credits for acquisitions or importations that are provided as fringe benefits on which FBT will be payable and where the acquisition or importation also relates to making input taxed supplies;

•

ensure that entities can only claim input tax credits to the extent that an acquisition or importation in relation to entertainment is deductible under income tax law;

•

allow entities to make a GST election in relation to their meal entertainment and entertainment leasing expenses and include a new adjustment event for these expenses to minimise an entitys compliance costs caused by the timing differences between GST and FBT; and

•

extend the application of Division 111 so that an entity can claim input tax credits for all expense payment benefits that are fringe benefits.

Date of effect : Various.

Proposal announced : Not announced.

Financial impact : Negligible.

Compliance cost impact : These measures will substantially reduce compliance costs.

Adjustments

Schedule 4 to this Bill amends the GST Act to:

•

ensure that a decreasing adjustment will be available where an entity makes a taxable supply, in the course of carrying on its enterprise, of a thing that has been used solely or partly for a private or domestic purpose;

•

provide special rules for adjustments for bad debts that are not fully taxable or creditable;

•

provide an increasing adjustment to the recipient of a going concern where the going concern is used to make solely input taxed supplies; and

•

provide rules for adjustments occurring after a representative has been appointed but relate to supplies made by the incapacitated entity.

Date of effect : 1 July 2000

Proposal announced : Not announced.

Financial impact : Negligible.

Compliance cost impact : Minimal.

Administration

Schedule 5 to this Bill amends the GST Act and the TAA 1953 to:

•

allow the Commissioner, in certain circumstances, to cancel an entitys GST registration where it has applied to the Commissioner for cancellation before it has been registered for 12 months;

•

allow the Commissioner, in certain circumstances, to revoke an entitys one month tax period election before 12 months after it came into effect and the entity requests it to be revoked;

•

make minor technical amendments to the provisions on reviewable decisions relating to GST, wine tax and indirect tax;

•

ensure that those persons responsible for the management of a non-profit sub-entity are jointly and severally liable for amounts payable under the GST law by that sub-entity;

•

extend the indirect tax record-keeping requirements to special transitional credits;

•

ensure that where an entity has delayed claiming their entitlement to an input tax credit (see Chapter 6), the entity must keep records relating to that acquisition for 5 years from the date it lodged its GST return; and

•

give the Commissioner the discretion to be able to refund an RBA surplus or credit rather than apply it against a tax debt where:

-

the debt, other than a BAS amount, is due but not yet payable;

-

the taxpayer has complied with an arrangement to pay the debt by instalments; or

-

the Commissioner has agreed to defer recovery of the debt.

Date of effect : Various.

Proposal announced : Not announced.

Financial impact : Negligible.

Compliance cost impact : These amendments are expected to decrease compliance costs.

Other amendments

Schedule 6 to this Bill makes various amendments to the GST Act, GST Transition Act, LCT Act, WET and LCT Transition Act and the ITAA 1997. They include amendments to:

•

treat returnable containers as second-hand goods;

•

allow an entity to attribute input tax credits to a tax period later than one in which it holds a tax invoice;

•

ensure that an entity is able to claim its correct entitlement to input tax credits where it leases or hires a car, acquires a GST-free or partly GST-free car or acquires a car only partly for a creditable purpose;

•

ensure the definitions of representative and incapacitated entity are aligned with the Corporations Law and Bankruptcy Act 1966;

•

ensure that a car manufacturer is subject to the correct amount of LCT where they supply a luxury car by way of lease or hire;

•

align the time to claim special credits provided for under the WET and LCT Transition Act with other special credits in the GST Transition Act;

•

treat the special credits provided for under the WET and LCT Transition Act as assessable income;

•

ensure that an entity that has a GST branch or branches cannot become a member of a GST group;

•

allow partnerships, trusts and individuals to apply to be approved as additional members of existing GST groups;

•

ensure that all partnerships, trusts and individuals, that satisfy the membership criteria in relation to a particular GST group, are not required to apply to be members of that GST group;

•

stipulate that all partnerships, trusts and individuals, that are GST group members, must have the same tax periods and accounting basis as all other members of the GST group;

•

ensure that companies cannot form GST groups with unrelated entities;

•

ensure that the associates provisions operate in relation to non-profit sub-entities;

•

ensure that an input tax credit is available to a GST group where the reverse charge rules have applied to make supplies within the group taxable;

•

provide that an entity will not be required to provide a tax invoice to a recipient, where the supply is a taxable supply of real property under the margin scheme;

•

ensure that there is no denial of input tax credits for acquisitions or importations made by insurers directly for the purpose of settling claims under policies that would have been subject to GST if supplied after 1 July 2000 that were supplied before 1 July 2000;

•

ensure that the denial of input tax credits for acquisitions or importations made by insurers directly for the purpose of settling claims under GST-free policies applies for things other than goods;

•

correct the notification requirement in relation to insurance policies acquired by members of GST-groups;

•

clarify the application of the treatment of settlements made to third parties injured or damaged by the insured;

•

provide for an increasing adjustment for insurers in relation to the excess paid to them in certain circumstances;

•

remove the GST reverse charge from payments in relation to the provision of an employee share scheme by a non-resident entity;

•

remove the GST registration requirement for a non-resident entity that is only making supplies of employee services to a wholly-owned subsidiary in Australia;

•

extend the concessional treatment of long-term accommodation to accommodation provided at marinas; and

•

the GST Transition Act to ensure that the correct amount of GST is calculated on the supply of a construction project in progress at 1 July 2000.

Date of effect : Various.

Proposal announced : Not announced.

Financial impact : Negligible.

Compliance cost impact : Minimal.

Technical corrections

Schedule 7 to this Bill contains a number of minor technical corrections to the GST Act, the A New Tax System (Indirect Tax and Consequential Amendments) Act 1999, the A New Tax System (Indirect Tax and Consequential Amendments) Act (No. 2) 1999, the A New Tax System (Tax Administration) Act (No. 2) 2000, the Indirect Tax Legislation Amendment Act 2000 and the Taxation (Interest on Overpayments and Early Payments) Act 1983.

Date of effect : Various.

Proposal announced : Not announced.

Financial impact : Nil.

Compliance cost impact : Nil.

Chapter 1 - GST-free supplies and input taxed supplies

Outline of Chapter

1.1 Schedule 1 to this Bill amends the GST Act to:

•

ensure that an entity will be able to claim an input tax credit on an acquisition or importation that it uses in making input taxed supplies through an enterprise, or part of an enterprise, that it carries on outside Australia;

•

update the provisions that relate to child care;

•

provide for the GST-free treatment of travel agent fees for arranging overseas supplies such as accommodation, rail transport, car hire, entertainment and sight-seeing tours;

•

provide that the supply of a freehold interest or long-term lease made after a short-term lease is also GST-free;

•

provide that the sale of residential premises that have been used as residential premises for at least 5 years will be input taxed;

•

clarify that reduced input tax credits are only denied to the extent that the entity is entitled to an input tax credit for that acquisition under another provision of the GST Act; and

•

allow certain low-value supplies through coin-operated devices to be treated as input taxed.

Detailed explanation of new law

Export of input taxed supplies

1.2 Currently, an input tax credit cannot be claimed on an acquisition or importation that relates to the making of input taxed supplies, other than financial supplies, through an enterprise, or part of an enterprise, that an entity carries on outside Australia. This is inconsistent with the treatment of other acquisitions used to make supplies through an enterprise, or part of an enterprise, carried on outside Australia.

1.3 Items 1 and 2 replace subsections 11-15(3) and 15-10(3). New subsections 11-15(3) and 15-10(3) will allow an entity to claim an input tax credit on an acquisition or importation that is used in the making of input taxed supplies, including a financial supply, through an enterprise, that it carries on outside Australia.

1.4 Item 10 replaces subsection 60-20(3). New subsection 60-20(3) allows a company to claim an input tax credit to the extent that an acquisition or importation relates to making input taxed supplies through an enterprise, or a part of an enterprise, that the company will carry on outside Australia.

Example 1.1

BigBank Australia carries on an enterprise both in Australia and London. BigBank Australia has acquired precious metals (gold) in Australia and provides the gold to its London branch. The London branch supplies the gold to another entity in London. BigBank Australia is entitled to input tax credits on acquisitions that relate to making the supply of the gold in London.

Child care (Subdivision 38-D)

1.5 Certain supplies of child care are GST-free under Subdivision 38-D. As part of ANTS, child care was restructured so that it was part of the new family assistance regime which commenced on 1 July 2000. This restructure was given effect by repealing various child care provisions that existed in the Childcare Rebate Act 1993 and the Child Care Act 1972 and replacing them with new provisions in the family assistance laws.

1.6 Consequently, item 3 updates the existing references to child care provisions in the GST Act with the correct references from the new family assistance laws.

Registered carer

1.7 As a result of the new family assistance regime, registered carers now apply for approval under family assistance law. The supply of child care by a registered carer (approved under family assistance law) is GST-free. [Item 3, section 38-140]

Approved child care service

01 Eligible child care centres must now apply to be an approved child care service under family assistance law. A supply of child care by an approved child care service (approved under family assistance law) is GST-free. Excursions directly related to this GST-free supply are also GST-free. [Item 3, section 38-145]

Consequential amendments

1.9 Items 13 to 15 make consequential amendments to sections 165-1 and 195-1 (definitions of family and Child Care Minister) as a result of changes to family assistance. The definition of family in the GST Dictionary is defined by reference to the Childcare Rebate Act 1993. As this Act has since been repealed, item 15 repeals the definition of family. Family will take its ordinary meaning.

1.10 Item 14 updates the definition of Child Care Minister in the GST Act to ensure that the Child Care Minister is also the Minister that administers family assistance law (as defined in section 3 of the A New Tax System (Family Assistance) (Administration) Act 1999).

International travel provisions - commission

1.11 The GST Act generally treats commission paid to travel agents for agency services the same way as the GST treatment of the travel. Under the current GST legislation, travel agent fees that relate to overseas air transport are GST-free while those that relate to other overseas supplies such as accommodation, rail transport, car hire, meals, entertainment and sight-seeing tours are taxable.

1.12 Item 4 inserts new section 38-360 into the GST Act. This new section allows for the supply of arranging overseas supplies to be GST-free where the effective use or enjoyment of the supply is to take place outside Australia. New section 38-360 only applies to the arranging of overseas supplies made by a supplier in the course of carrying on an enterprise as a travel agent.

Example 1.2

Dale and her cousin Lauren are planning an overseas trip. They booked a holiday package through their local travel agent. The package includes return air fares (Sydney, London, Sydney), accommodation and car hire in London and a European tour which includes dinner and a show at a night club in Paris. The travel agent fees relating to all the components of the overseas trip are GST-free, that is, the overseas air transport and the other overseas supplies.

After arranging their tour package, Dale and Lauren hear that a particular travel agent in Sydney can arrange for them to bungy jump off the le Tour Lansprie while they are in Paris. Dale and Lauren decide to take up this opportunity and make a booking. The travel agent fee charged for booking the bungy jump is also GST-free as the fee relates to a separate supply, the effective use or enjoyment of which takes place outside Australia.

Grants of land by governments

1.13 A government may supply unimproved land to a developer by way of short-term lease, subject to conditions which, if satisfied, will lead to the granting of freehold title or long-term lease to the developer. The supply of the short-term lease and the subsequent supply of the freehold title or long-term lease will be subject to GST.

1.14 This Bill inserts new section 38-450 which will allow the supply of the short-term lease to be GST-free. New subsection 38-445(1A) allows the subsequent supply of the freehold interest or long-term lease to also be GST-free. [Items 5 to 7]

1.15 Under the margin scheme the developer in the above circumstances would have to calculate the margin using the sale price and the purchase price of the land. The purchase price of the land will not take into account the improvements made on the land prior to 1 July 2000. This Bill inserts new table item 2A into subsection 75-10(3) to allow the developer to calculate the margin on the supply relating to the period from 1 July 2000.

Sales of rented housing

1.16 An entity that constructs rental premises after 2 December 1998 which it subsequently rents out for a number of years will be denied input tax credits for the construction costs of the premises. This is because the acquisitions relate to an input taxed supply of a lease of residential premises under subsection 40-35. Upon the eventual sale, the premises will fall into the definition of new residential premises and the sale will be subject to GST. The eventual sale of the premises may occur too far into the future to claim the original input tax credits on construction.

1.17 Item 9 inserts new section 40-75 into the GST Act. New subsection 40-75(2) will ensure that premises which have been used solely for the purpose of rental accommodation for a period of at least 5 years are not included in the definition of new residential premises. The effect of this is that any subsequent sale of the premises which have been used solely as residential premises for at least 5 years will be input taxed. Item 16 substitutes the definition of new residential premises.

Example 1.3

ABC Builders constructs a residential premise for the purposes of providing rental accommodation and therefore is not entitled to claim input tax credits for the acquisitions in relation to the construction costs. ABC Builders supplies short-term leases for residential accommodation in the premises to various tenants for a period of 7 years. The premises is then sold by ABC Builders. This amendment will allow the sale by ABC Builders of the residential premises to be input taxed rather than subject to GST.

Input tax credits and reduced credit acquisitions

1.18 A reduced input tax credit should only be denied to the extent that the entity is entitled to an input tax credit for that acquisition under another provision of the GST Act. Subsection 70-5(1A) treats an acquisition as not being a reduced credit acquisition under Division 70 if an entity is entitled to an input tax credit under another section, regardless of the extent of that input tax credit.

1.19 Item 11 amends subsection 70-5(1A) to clarify that an acquisition is not a reduced credit acquisition under Division 70 to the extent of any entitlement to an input tax credit for that acquisition under another provision of the GST Act.

Low-value supplies from coin-operated devices

1.20 Item 17 inserts new section 24C in the GST Transition Act to allow certain supplies from coin-operated devices to be input-taxed. This is a transitional measure which will only apply to supplies made before 1 July 2005. It is designed to provide some relief to operators of coin-operated devices where the device only accepts one denomination of coin and does not give change. In addition, the consideration for supplies from the device cannot exceed $1 by inserting a maximum of 2 coins in the device. The device must have been in operation on 1 July 2000 and must not relate to a gambling supply.

1.21 A supplier can choose to have all supplies from such a device treated as input taxed. A choice under this section will apply to supplies made by the supplier from the device on or after 1 July 2000. Once a supplier revokes a choice made under this section to treat the supplies as input taxed, they cannot apply the section again in relation to that device. The concession is designed to allow operators of coin-operated devices further time to convert the device to accept a wider range of coins or payment options. The measure could apply, for example, to devices from which supplies of confectionery and novelties are made or to devices which provide childrens rides.

Example 1.4

Carmen operates coin-operated devices which dispense confectionery. One item of confectionery is dispensed when a single 20 cent coin is inserted. The devices only accept 20 cent coins and could be changed to accept up to 2 coins. Carmen chooses to treat all supplies from the devices as input taxed until she is able to convert the devices to accept other denominations. This choice will only apply to supplies made before 1 July 2005.

Application and transitional provisions

1.22 The amendments in Schedule 1 to this Bill apply in relation to net amounts for tax periods starting on or after 1 July 2000. [Item 18]

Chapter 2 - Imports

Outline of Chapter

2.1 This Chapter explains the amendments contained in Schedule 2 to this Bill that relate to importation of goods. Schedule 2 contains a number of minor policy changes and technical amendments to the GST Act, LCT Act, WET Act and the Customs Act. These amendments will:

•

ensure that the conversion rate used for the international transport and insurance component of a taxable importation or re-importation is the same rate used for the customs value of the importation or re-importation;

•

ensure that the re-importation of goods that were acquired prior to 1 July 2000 and are returned to the original owner, without having being subject to any change since their export, are not subject to GST;

•

ensure that re-imported breeding livestock is only subject to GST on the increase in value;

•

exempt certain goods, imported temporarily into Australia without payment of Customs duty, GST and LCT from having to be exported from Australia; and

•

ensure that the re-importation of goods that have been previously subject to WET or LCT is not subject to WET or LCT a second time.

Detailed explanation of new law

Conversion rate for international transport and insurance on taxable importations and re-importations

2.2 Subsection 13-20(2) of the GST Act provides that the value of a taxable importation is the customs value of the goods plus the cost of bringing those goods into Australia.

2.3 The customs value is defined in section 195-1 of the GST Act by reference to Division 2 of Part VIII of the Customs Act. Section 161J of this Division stipulates that the customs value of the goods are to be expressed in Australian currency based on the ruling rate of exchange on the day of exportation of the goods.

2.4 The customs value is basically the value of imported goods for customs duty. Customs duty is currently related to the free on board value of the goods. That is the value of the goods, excluding the cost of bringing those goods into Australia. The cost of bringing goods into Australia is the cost of transport, the cost of insurance and the cost of the customs duty.

2.5 Division 117 of the GST Act sets out the value of a taxable importation of goods that were exported for repair or renovation. The Division ensures that the value of a taxable importation of goods that have been sent overseas for repair or renovation, or that are part of a batch repair process, is not the entire value of the goods. GST will only apply to the increase in value of the goods. The increase in value of the goods is the sum of:

•

the cost of the repair or renovation;

•

the amount paid or payable for the international transport and insurance of the goods; and

•

any customs duty, other than GST, payable on the importation.

2.6 In order to determine the cost of the repair or renovation of re-imported goods, the customs value of the goods is ascertained (see paragraphs 20 and 2.4

2.7 It is common for the cost of international transport of goods and the cost to insure the goods for that transport to be expressed (and often paid for) in a foreign currency. Where this is the case, it is not clear what conversion rate should be used to convert the amounts to Australian dollars as there is no link to the exchange rate referred to in the Customs Act.

2.8 Item 1 inserts new subsection 13-20(2A) into the GST Act and item 8 inserts new subsection 117-5(1A) . These new subsections ensure that the rate used to convert the cost of international transport of goods and the cost to insure the goods for that transport is calculated using the same rate used to convert the customs value of the goods imported or re-imported.

2.9 The rate to be used to convert the transport and insurance components of a taxable importation or re-importation to Australian dollars is ascertained in the way provided in section 161J of the Customs Act. That is, according to the ruling rate of exchange on the day of exportation of the goods. The Australian Customs Service provides a list of the ruling rate of exchange for each currency for each day.

Re-importation of goods acquired prior to 1 July 2000

2.10 The GST Act (section 42-10) allows goods originally purchased in Australia, which are exported by their owners, to be re-imported into Australia by their owners as non-taxable importations where the goods were originally acquired as a taxable supply or a taxable importation. However, goods acquired prior to 1 July 2000 would have been subject to WST or some other similar tax at the time of their acquisition. The re-importation of these goods will not be a non-taxable importation under the current legislation because the acquisition of these goods was not a taxable supply or a taxable importation as required by section 42-10 of the GST Act.

2.11 Item 5 inserts new subsection 42-10(2) to provide that the re-importation of goods acquired prior to 1 July 2000 is a non-taxable importation where the following conditions are met:

•

the importer manufactured, acquired or imported the goods prior to 1 July 2000;

•

the ownership of the goods has not changed;

•

the goods have been exported and then imported without alteration; and

•

the importer did not and was not entitled to claim a refund under the tourist refund scheme when the goods were exported.

2.12 This amendment ensures that goods owned by an entity prior to 1 July 2000 which are exported and then re-imported in the same condition will not be subject to GST. The goods were subject to the taxation system in existence prior to 1 July 2000 and should not also be subject to GST where there is no change in ownership.

Re-importation of breeding live-stock

2.13 Where goods are exported from Australia and re-imported, GST is only payable where the goods have been altered (e.g. subject to repair or renovation). Division 117 provides that where goods have been subject to repair or renovation, GST only applies to the value of the repair or renovation and not the full value of the goods. This is on the basis that GST was paid in Australia when the owner originally acquired the goods.

2.14 In the case of breeding animals that are sent overseas and serviced (e.g. brood mares) the current GST legislation treats the re-importation as fully taxable because the animal is re-imported in an altered state (i.e. in foal). However, such a breeding service does not fit within the scope of repair or renovation currently in the law. In accordance with the principle of Division 117, only the increased value of the horse (i.e. the value of the foal carried by the horse) should be subject to GST.

2.15 Item 9 inserts new subsection 117-10 to ensure that animals such as horses which are exported for the purpose of being serviced at stud and re-imported in a pregnant state are only subject to GST on the increased value of the horse (i.e. the value of the foal carried by the horse) provided the animal is re-imported by the same owner/owners who exported it. [Item 9]

2.16 In some circumstances the value of the re-imported live animal may change after importation. An example is where a mare in foal does not produce a live foal. In some cases it may be appropriate for a refund to be made to the amount of GST paid at the time of re-importation. Item 9 inserts new subsection 117-15 which allows regulations to specify circumstances where a refund of the GST paid on importation should be refunded. Items 2 to 4 are consequential amendments to the tables in sections 13-99 and 37-1. Items 6 and 7 replace the heading for Division 117. Item 12 amends the definition of value in section 195-1 to include reference to new section 117-10 .

Temporary importation concessions

2.17 The temporary imports amendments will:

•

amend sections 162 and 162A of the Customs Act to provide that the regulations may specify conditions and circumstances whereby goods that have been imported temporarily without payment of Customs duty do not need to be exported from Australia if those conditions or circumstances apply to those goods;

•

amend section 171-5 of the GST Act to provide that goods that have been imported temporarily without payment of GST need not be exported from Australia if the conditions or circumstances prescribed for the purposes of sections 162 and 162A of the Customs Act apply to the goods; and

•

amend section 13-25 of the LCT Act to provide that luxury cars that have been imported temporarily without payment of LCT need not be exported from Australia if the conditions or circumstances prescribed for the purposes of sections 162 and 162A of the Customs Act apply to the cars.

2.18 Sections 162 and 162A of the Customs Act allow the Collector of Customs to give permission to an importer to take delivery of goods being temporarily imported into Australia, if the importer gives a security or undertaking for the payment of duty on the imported goods.

2.19 Under those sections the duty is not payable if the conditions set out in the regulations are complied with and the goods are exported within a specified period. Otherwise, the security may be enforced or, if an undertaking was given, the amount of the duty may be recovered in a court of competent jurisdiction.

2.20 The amendments to sections 162 and 162A of the Customs Act will allow further conditions and circumstances to be prescribed, which will exempt the importer from the export requirement. For example, the destruction of temporarily imported goods while the goods are in Australia (where that destruction is beyond the control of the person who took delivery of the goods) may be such a circumstance. Hence, if a car is temporarily imported into Australia without payment of duty and the car is destroyed while in Australia, duty will not be payable on the car.

2.21 These amendments to section 162 will mean that if a Collector of Customs has granted permission to a person to take delivery of goods upon the giving of security or undertaking, the duty is not payable if:

•

the provisions of the regulations are complied with; and

•

the goods are either exported from Australia within the relevant time period or one or more of the circumstances or conditions that will be specified in the regulations applies to those goods.

2.22 If both those conditions are met no duty is payable, otherwise, duty will be payable. [Items 21 and 22]

2.23 The amendments to section 162A will mean that duty will not be payable on goods delivered under that section unless:

•

the goods have been dealt with in contravention of the regulations; or

•

the goods are not exported within the relevant time and none of the circumstances or conditions specified in the regulations apply in relation to the goods. [Items 23 and 24]

2.24 Subsection 171-5(1) of the GST Act provides that GST is not payable on a taxable importation if:

•

a security or undertaking described in section 162 of the Customs Act has been given;

•

the provisions of the regulations mentioned in paragraph 162(3)(a) of the Customs Act are complied with; and

•

the goods are exported within the relevant period.

2.25 Subsection 171-5(1) of the GST Act will be amended to provide that GST will not be payable if the first 2 conditions set out in paragraph 20 are met and the goods are either exported within the relevant period, or one or more of the circumstances or conditions that will be specified in the regulations mentioned in paragraph 162(3)(b) of the Customs Act, apply in relation to the goods. [Item 10]

2.26 Similarly, subsection 171-5(1A) of the GST Act provides that GST is not payable on a taxable importation if:

•

a security or undertaking described in section 162A of the Custom Act has been given;

•

the goods are not dealt with in contravention of the regulations made for the purposes of section 162A; and

•

the goods are exported within the relevant period.

2.27 Subsection 171-5(1A) of the GST Act will be amended to provide that GST will not be payable if the first 2 conditions set out in paragraph 20 are met and the goods are either exported within the relevant period, or one or more of the circumstances or conditions that will be specified in the regulations mentioned in paragraph 162A(5)(b) of the Customs Act apply in relation to the goods. [Item 11]

2.28 Subsections 13-25(1) and (1A) of the LCT Act are being amended in the same way. [Items 16 and 17]

Re-importation of luxury cars and wine

2.29 Goods that would be subject to LCT or WET that are exported before they have passed a taxing point for the LCT or WET can, in some cases, currently be reimported as non-taxable importations and evade the application of LCT or WET. A similar issue arose in respect of the GST Act which was addressed by inserting section 42-10 which limits non-taxable importations for the GST to goods that were acquired by way of a taxable supply or taxable importation where there has been no refund of GST. A similar restriction is necessary under the LCT and WET to ensure that non-taxable importations for re-imported goods are limited to those goods where LCT or WET has been paid and no refund subsequently allowed.

2.30 Item 13 removes the reference to item 17 in Schedule 4 to the Customs Tariff Act from paragraph 7-10(3)(c) in the LCT Act. This item in the Customs Tariff Act provided too broad an exemption that was not appropriate for LCT. The new subsection 7-20(1) reflects the aspects of item 17 that are appropriate for non-taxable importations.

2.31 Item 15 inserts new subsection 7-20(1) in the LCT Act which is similar to section 42-10 of the GST Act and ensures that the re-importation of a luxury car is a non-taxable re-importation only if the importer manufactured the car or acquired the car through a taxable supply or taxable importation. The car must be returned to Australia in an unaltered state.

2.32 Paragraph 20 deals with the application of GST to re-imported goods that were owned by the importer prior to 1 July 2000. The same issue is relevant for cars owned prior to 1 July 2000 that are exported by the owner and re-imported in an unaltered state. Without a particular provision these cars may be subject to LCT even though the owner previously paid WST.

2.33 Item 15 inserts new subsection 7-20(2) in the LCT Act to ensure that the re-importation of a car acquired before 1 July 2000 will be a non-taxable re-importation where it is re-imported in an unaltered state by the person who owned the car prior to 1 July 2000. Item 14 amends subsection 7-10(3) of the LCT Act to provide than an importation is not taxable if it is a non-taxable re-importation. Item 18 inserts a definition of non-taxable re-importation in section 27-1.

2.34 Item 19 removes the reference to item 17 in Schedule 4 to the Customs Tariff Actfrom section 7-15 in the WET Act. This item in the Customs Tariff Act provided too broad an exemption that was not appropriate for WET. The new subsection 7-25(1) reflects the aspects of item 17 that are appropriate for non-taxable importations.

2.35 Item 20 inserts new subsection 7-25(1) in the WET Act which is similar to section 42-10 of the GST Act and ensures that the re-importation of wine is not taxable only if the importer manufactured the wine or acquired or imported the wine through a taxable dealing. The wine must be returned to Australia in an unaltered state and the importer must not have claimed or be entitled to claim a refund of WET through the tourist refund scheme.

2.36 Paragraph 20 deals with the application of GST to re-imported goods that were owned by the importer prior to 1 July 2000. The same issue is relevant for wine owned prior to 1 July 2000 that is exported by the owner and re-imported in an unaltered state. Without a particular provision wine imported in these circumstances may be subject to WET even though the owner previously paid WST.

2.37 Item 20 inserts new subsection 7-25(2) in the WET Act to ensure that the re-importation of wine acquired before 1 July 2000 will not be taxable where it is re-imported in an unaltered state by the person who owned the wine prior to 1 July 2000. The importer must also not have claimed or be entitled to claim a WET refund through the tourist refund scheme.

Application and transitional provisions

2.38 The temporary import amendments will apply to any goods imported on or after 1 July 2000. The measures relating to conversion rates for transport and insurance [items 1 and 8] apply to importations into Australia on or after the date the Bill is introduced into the House of Representatives. The other measures apply to importations into Australia on or after 1 July 2000. [Item 25]

Chapter 3 - Fringe benefits

Outline of Chapter

3.1 Schedule 3 to this Bill explains the amendments to the GST Act to fine tune the interaction of the FBT and the GST. The amendments:

•

extend Division 71 to apply to all entities that make input taxed supplies;

•

ensure that entities can only claim input tax credits to the extent that an acquisition or importation in relation to entertainment is deductible under income tax law;

•

allow entities to make a GST election in relation to their meal entertainment and entertainment leasing expenses and include a new adjustment event for these expenses to minimise an entitys compliance costs caused by the timing differences between GST and FBT; and

•

extend the application of Division 111 so that an entity can claim input tax credits for all expense payment benefits that are fringe benefits.

Detailed explanation of new law

Fringe benefits provided by input taxed suppliers

3.2 Following the introduction of the GST, a new FBT gross-up rate was introduced. A GST-inclusive FBT gross-up rate applies to a situation where input tax credits have been allowed on the acquisition of a thing provided as a fringe benefit and the existing (lower) FBT gross-up rate applies where no GST was payable on the supply or no input tax credits are claimable on the acquisitions. Under the FBT gross-up rules, where an entity is entitled to an input tax credit, or even part of an input tax credit, for a thing acquired or imported to be provided as a fringe benefit, the employer would be subject to the higher gross-up rate.

3.3 Division 71 was inserted to deny input tax credits for things acquired or imported for the purpose of providing fringe benefits to employees of a financial supplier that is partially denied input tax credits on its acquisitions. As a result, the lower FBT gross-up rate applies to the fringe benefits. This ensured that these entities were not denied input tax credits and then required to calculate FBT at the higher gross-up rate.

3.4 However, Division 71 is limited to acquisitions or importations that relate to making financial supplies by entities which exceed the financial acquisitions threshold in Division 189. It does not apply in relation to entities which make other input taxed supplies, such as supplies of residential premises or precious metals. Acquisitions and importations that relate to making these supplies are subject to the higher GST-inclusive FBT gross-up rate, even though only a small proportion of the input tax credit might be allowed for these acquisitions or importations.

3.5 Items 14 and 16 amend the GST Act to extend Division 71 to apply to acquisitions or importations to the extent that they relate to making input taxed supplies that are not financial supplies. However, where acquisitions or importations relate to making financial supplies, the entity is still required to be over the financial acquisitions threshold before Division 71 applies.

3.6 The Division denies an input tax credit for the acquisition or importation where it is provided as a fringe benefit and the acquisition or importation also relates solely or partly to making supplies that are input taxed.

3.7 In addition, the wording of the current provisions contained in Division 71 has been amended to ensure the correct operation of the Division. There are certain things that must be satisfied before Division 71 applies to deny an input tax credit on the acquisition or importation. These are as follows:

•

the acquisition or importation solely or partly relates to making input taxed supplies;

•

the acquisition or importation must be of a kind referred to in paragraph 149A(2)(b) of the FBTAA 1986; and

•

the acquisition or importation specifically relates to the provision of a particular benefit on which FBT is or will be payable.

[Subsections 71-5(1) and 71-10(1)]

3.8 Division 71 only applies where the person providing the benefit is denied input tax credits because the acquisition or importation relates to making input taxed supplies. Therefore, where acquisitions or importations relate to making financial supplies, the entity must be over the financial acquisitions threshold contained in Division 189 before Division 71 will operate to deny input tax credits. [Subsections 71-5(2) and 71-10(2)]

3.9 New paragraphs 71-5(1)(a) and 71-10(1)(a) provide that the acquisition or importation is one that is referred to in paragraph 149A(2)(b) of the FBTAA 1986. Generally, an acquisition or importation is of a kind referred to in paragraph 149A(2)(b) where there is an entitlement to input tax credits arising from the acquisition or importation of the thing to the person providing the benefit (or to another member of the GST group to which the person providing the benefit belongs).

3.10 In addition, the acquisition or importation must specifically relate to the provision of a particular benefit on which FBT is or will be payable at the end of the FBT year [paragraphs 71-5(1)(b) and 71-10(1)(b)] . Thus, where no FBT is or will be payable on the provision of the benefit, the supplier will not be denied input tax credits on the acquisition or importation under Division 71. The entitlement to input tax credits will be determined under the general rules contained within Divisions 11 and 15. Generally, where the benefit is an exempt benefit or has no taxable value either because it is otherwise deductible or because of a recipients contribution, there will be no FBT payable.

3.11 If at the time of acquisition or importation of the thing to be provided as a fringe benefit, the fringe benefit is one on which FBT will be payable, then the employer is denied input tax credits on the acquisition or importation if it also relates to making input taxed supplies [sections 71-5 and 71-10] . If the employer subsequently discovers that the taxable value of the fringe benefit has been reduced to nil because of an employee contribution, the employer should not be denied input tax credits under Division 71, and is entitled to claim an input tax credit subject to the general rules. Another amendment in this Bill allows an entity to claim an input tax credit in a later tax period than that in which the entity received a tax invoice. Thus, the employer can claim the input tax credit in the tax period that the employer discovers that no FBT will be payable on the provision of the fringe benefit, even though the employer received the tax invoice in an earlier tax period. This amendment is discussed further in paragraphs 60 to 6.11.

Example 3.1

EasyStay Co makes supplies of commercial accommodation. Some of the supplies it makes are of long-term accommodation which is eligible to have GST calculated at a concessional rate. Instead of applying Division 87, EasyStay Co has chosen to supply eligible long-term commercial accommodation as input taxed supplies.

EasyStay Co has a managing director who is provided with a car as a fringe benefit. However, the car is also used in the business and relates to some extent to making the input taxed supplies of long-term commercial accommodation. Under the general rules, EasyStay Co is not entitled to an input tax credit relating to the acquisition of the car to the extent that it relates to making the input taxed supplies.

EasyStay Co is denied all of the input tax credit for the acquisition of the car because it relates to making input taxed supplies and is also to be provided as a fringe benefit on which fringe benefits tax is payable. As a result, the lower FBT gross-up rate applies to the fringe benefit.

Reimbursements

3.12 Subsection 111-5(3) is amended to ensure that reimbursements that are provided as fringe benefits are not creditable acquisitions, if the acquisition would not have been a creditable acquisition because of Division 71, to the entity making the reimbursement. [Item 25, paragraph 111-5(3)(c)]

Consequential amendments

3.13 Items 1, 2, 6 and 7 correct references to Division 71 as a result of the change to the Division heading.

3.14 Items 11 to 13 and 15 amend the headings and descriptions for Division 71 to reflect that the Division applies to all entities that make input taxed supplies.

3.15 Item 31 repeals the definition of GST-creditable benefit. As a result of the changes to the wording of Division 71, the definition is no longer needed.

Application date

01 The amendments to Division 71 and subsection 111-5(3), as described in paragraph 3.12, will apply to acquisitions and importations that are attributable to the tax period in which the amendments were introduced. That is, from the tax period beginning 1 October 2000. [Item 34]

Amount of input tax credits for non-deductible expenses

3.17 A benefit must be provided to an employee or associate to be a fringe benefit under the FBTAA 1986 and will not arise when provided to a non-employee or client. However, meal entertainment benefits are frequently provided to employees and clients together. As a consequence of this, the FBTAA 1986 allows the taxable value of meal entertainment benefits to be calculated by way of an election. If no election is made, the taxable value is determined on the basis of actual expenditure.

3.18 Under Division 9A of the FBTAA 1986, the taxable value of a fringe benefit for meal entertainment may be calculated on a:

•

50/50 split (where the employer makes an election under section 37AA of the FBTAA 1986). The taxable value is one-half of the expenses incurred in providing the meal entertainment benefits to all persons; and

•

12-week register method (where the employer makes a further election under section 37CA of the FBTAA 1986). The taxable value is calculated with reference to the proportion of meal entertainment fringe benefits provided to employees over a 12 week period over the total meal entertainment expense incurred in that 12 week period.

3.19 An employer may also elect under section 152B of the FBTAA 1986 to use the 50/50 split method for calculating the taxable value of their total entertainment facility leasing costs.

3.20 Where an employer elects to use the 50/50 split method or the 12-week register method for determining the taxable value of meal entertainment and entertainment facility fringe benefits, only a corresponding proportion of the meal entertainment expenditure is deductible under sections 51AEA to 51AEC of the ITAA 1936.

3.21 In most cases, an input tax credit is not allowed for acquisitions to the extent that the entity cannot deduct the expense for income tax under Division 69 of the GST Act.

3.22 An acquisition or importation of meal entertainment and entertainment facilities will only be creditable to the extent that it is deductible under sections 51AEA to 51AEC of the ITAA 1936 [Item 9, subsection 69-5(3A)] . This new subsection ensures that an entity can only claim input tax credits for acquisitions and importations to the same extent that these expenses are deductible under income tax law.

3.23 If an employer does not make an election under section 37AA, 37AC or 152B of the FBTAA 1986, the entity can only claim input tax credits for acquisitions or importations for entertainment to the extent that it relates to benefits provided to an employee or associate of an employee. This is because an acquisition or importation is only creditable to the extent it is deductible in Division 32 of the ITAA 1997 (paragraph 69-5(3)(f) of the GST Act). Division 32 of the ITAA 1997 does not allow a deduction for such expenditure when it is incurred in providing a benefit to a client.

Elections for meal entertainment and entertainment facility expenses

3.24 An employer that elects that the taxable value of its meal entertainment expense or entertainment facility leasing cost is calculated by way of an election, will ordinarily do so after the end of the FBT year when they fill in their FBT return for that year. The election will apply retrospectively from 1 April of that FBT year and can potentially apply to a period covering up to 12 previous tax periods for GST purposes.

3.25 To alleviate an entitys compliance costs in having to lodge amended GST returns after it has made its FBT election, item 10 inserts new Subdivision 69-B into the GST Act to allow an entity to make a similar GST election in respect of these acquisitions or importations and then adjust the amount of previously attributed input tax credit after the end of the FBT year where it no longer reflects the corrected input tax credit amount through the new adjustment event in the Subdivision. New subsection 69-15 explains what new Subdivision 69-B is about.

Making an election under Subdivision 69-B

3.26 An entity may elect to have acquisitions or importations treated as non-deductible expenses for the purposes of paragraphs 69-5(3A)(a), 69-5(3A)(b) and 69-5(3A)(c) under new sections 69-25, 69-30 and 69-35 respectively.

3.27 Where an entity makes an election under new Subdivision 69-B , the entitys net amount will be worked out on the basis of that election, until the election ceases to have effect. [Sections 69-20 and 69-45]

3.28 If an entity wishes to work out the extent to which meal entertainment acquisitions or importations are creditable using the 50/50 split method, it will make an election under new section 69-25 . If instead the entity wishes to use the 12-week register method, it will make an election under new section 69-30 . An entity will make an election under new section 69-35 if it wishes to use the 50/50 split method to work out the extent its entertainment facility leasing acquisitions are creditable.

Example 3.2

Sui Chee Industries incurs a substantial amount of meal entertainment expenses throughout an FBT year and usually calculates its taxable value by way of an election under section 37AA of the FBTAA 1986 (i.e. by the 50/50 split method). It accounts for GST on a quarterly basis. It decides to make an election under new section 69-25 from 1 October, as it believes it will make a corresponding FBT election at the end of the FBT year. In that tax period Sui Chee Industries incurred $26,400 of meal entertainment expenses. As it has an election in place under new section 69-25 , the amount of input tax credits Sui Chee Industries can claim in respect of acquisitions and importations relating to meal entertainment is ($26,400/11) 50% or $1,200.

3.29 In order for an entity to make an election under new section 69-30 , it must have a valid meal entertainment register [subsection 69-30(2)] . Item 33 amends section 195-1 to insert the definition of valid meal entertainment register in the GST Dictionary. A valid meal entertainment register means a valid meal entertainment register within the meaning of section 37CA of the FBTAA 1986. Section 37CA of the FBTAA 1986 has certain requirements for a meal entertainment register to be valid. These include:

•

the register must be kept for a continuous period of at least 12 weeks throughout which meal entertainment is provided;

•

it must not contain any entry that is false or misleading;

•

it must include various details; and

•

it will not remain valid where the total meal entertainment expenditure in the FBT year is greater than 20% of the total meal entertainment expenditure for the first year in which the register was valid.

3.30 Apart from the requirement to have a valid meal entertainment register in new section 69-30 , there are no other requirements an entity must follow in order to make these elections. However an entity is only able to make an election for a current or future tax period, and is not able to make one for a past tax period. [Section 69-40]

3.31 An entitys election will cease to have effect from the start of the following tax periods:

•

the tax period in which it specifies in a notice of withdrawal that it withdraws the election (the tax period may be a current or future tax period but must not be a past tax period);

•

the tax period in which a different GST election takes effect;

•

the tax period in which it ceases to have a valid meal entertainment register (and the entity has an election under section 69-30); or

•

the tax period in which an election is made under sections 37AA, 37CA or 152B of the FBTAA 1986.

[Section 69-45]

Example 3.3

On 15 January, after closely examining its meal entertainment expenses, Sui Chee Industries believes it would be better to claim input tax credits on its actual meal entertainment fringe benefit. Sui Chee Industries is able to withdraw its election under new section 69-45 . It withdraws its election on 15 January under new section 69-25 with effect from 1 January (the start of the tax period specified in the withdrawal).

Adjustment events

3.32 Since an election under new Subdivision 69-B is able to be frequently changed during the FBT year, or may be different to the entitys FBT election, new section 69-50 includes these events as adjustment events. The adjustment event occurs only once a year and is aligned with the time an entity has to lodge its FBT return (or would have lodged its FBT return if it were so required). [Subsection 69-50(2)]

3.33 The adjustment event has been linked to an entitys FBT return lodgement date since an entity will not know the extent an acquisition is creditable under section 69-5 until after its FBT return is lodged. An entity that calculates its taxable value by way of an election under sections 37AA, 37CA or 152B of the FBTAA 1986 must make that election in their FBT return before lodging their return.

3.34 This election (or lack thereof) directly affects how much an entity can deduct under income tax laws, and consequently, to what extent an acquisition or importation is creditable under the GST Act. It is only after this FBT election is made that the entity can calculate their corrected input tax credit amount under Subdivision 19-C. New subsection 69-50(3) ensures that where more than one adjustment event occurs during the FBT year in section 69-50, all of the adjustment events are compared together with the corrected input tax credit amount to determine the entitys adjustment under Subdivision 19-C.

3.35 Under subsection 29-20(3), an entity is generally required to hold an adjustment note before attributing decreasing adjustments to a tax period. However, if that decreasing adjustment arises because of an adjustment event under new section 69-50 , the entity will not need an adjustment note to attribute that adjustment to a tax period. [Section 69-55]

3.36 The following events will be adjustment events under new subsections 69-50(1) :

•

a change in an entitys GST election at any time other than the start of the FBT year [paragraph 69-50(1)(a)] ;

•

an election is made under sections 37AA, 37CA or 152B of the FBTAA 1986 without a corresponding GST election covering all of the tax periods in the FBT year being made [paragraph 69-50(1)(b)] ; and

•

a GST election covering one or more of the tax periods in the FBT year and no election under sections 37AA, 37CA or 152B of the FBTAA 1986 was made for that FBT year [paragraph 69-50(1)(c)] .

3.37 Subsection 69-50(4) sets out the election under new Subdivision 69-B that corresponds to an election under the FBTAA 1986. Item 30 amends section 195-1 to insert the meaning of FBT year in the GST Dictionary. FBT year is a year beginning on 1 April.

Example 3.4

Following on from Examples 30 and3.3, since Sui Chee Industries made an election under new Subdivision 69-B which was not effective for the whole of the FBT year, it has an adjustment event under new subsection 69-50(1) .

At the end of the FBT year, Sui Chee Industries decides to calculate the taxable value of their meal entertainment fringe benefit without an election (this causes Sui Chee Industries to have another adjustment event under new paragraph 69-50(1)(c) ). Assuming that under Division 32 of the ITAA 1997, the amount Sui Chee Industries can deduct is $56,100 and the amount of input tax credit it has previously attributed in its GST return is as follows:

tax period ending 30 June:	$500
tax period ending 30 September:	$1,500
tax period ending 31 December:	$1,200
tax period ending 31 March:	$1,400

The amount of Sui Chee Industries Subdivision 19-C adjustment is calculated as follows:

Previously attributed input tax credit amount = $4,600
Corrected input tax credit amount = $5,100 (1/11 of $56,100 due to paragraph 69-10(3)(f))


Sui Chee Industries decreasing adjustment = $5,100 - $4,600 = $500.

Sui Chee Industries will claim its decreasing adjustment of $500 in its June tax period GST return and may attribute this amount without holding an adjustment note. [Section 69-55]

Example 3.5

Prasad does not make an election under new Subdivision 69-B . Throughout the FBT year he claims input tax credits for the amount of GST included in its acquisitions relating to entertainment facility leasing fringe benefits (since an entertainment acquisition or importation relating to a client is not creditable because of paragraph 69-10(3)(f)). At the end of the FBT year Prasad decides to calculate the taxable value of this expenditure through an election under section 152B of the FBTAA 1986.

Since Prasad has made an election under 152B of the FBTAA 1986 without having made an election under new section 69-35 covering all of the tax periods in that FBT year, he has an adjustment event under new paragraph 69-50(1)(b) .

Consequential amendments

3.38 Item 8 inserts the heading for Subdivision 69-A which is as a consequence of new Subdivision 69-B being inserted into the GST Act. Items 3 to 5 insert references to Division 69 in sections 17-99, 19-99 and 29-39 respectively. This ensures that readers are aware of the special rules relating to an entitys net amount, adjustment event and attribution because of the new GST elections under Subdivision 69-B.

3.39 Item 28 amends the definition of adjustment event in section 195-1 to include reference to the new adjustment event in new section 69-50 in the definition. Item 32 amends the definition of non-deductible expense in section 195-1 to include reference to the new subsection 69-5(3A) in the definition.

Application date

3.40 The amendments concerning the amount of input tax credits for non-deductible expenses will apply to acquisitions and importations that are attributable to the tax period after the amendments were introduced. That is, from 1 November 2000 for entities with monthly tax periods and 1 January 2000 for entities with quarterly tax periods. [Item 34]

Expense payment reimbursements

3.41 The GST Act grants entitlements to input tax credits for acquisitions made by entities primarily through the operation of Division 11. Division 111 of the GST Act was enacted to resolve the problem of reimbursements to an entitys employees not being creditable acquisitions under Division 11 of the GST Act.

3.42 However, an input tax credit is only available under Division 111 of the GST Act for an expense reimbursement if the expense that the employee incurred is directly related to the employees activities as an employee.

3.43 Items 20 and 27 insert new paragraphs 111-5(1)(ab), 111-5(1)(ac) and 111-25(b) to allow an entity to obtain input tax credits for all expense payment benefits. Item 29 inserts the meaning of an expense payment benefit in section 195-1. An expense payment benefit means a fringe benefit that is a benefit of the kind referred to in section 20 of the FBTAA 1986. This definition provides that an expense payment benefit will include all reimbursements and payments made on behalf of a recipient that are fringe benefits and exempt benefits. A benefit must be provided to an employee or an associate of an employee for it to be a fringe benefit under the FBTAA 1986.

3.44 It does not matter that the reimbursement is to someone that is not the entitys employee, or is an associate of the entitys employee since the credit to the entity is recouped through the employer paying FBT at the higher rate.

3.45 Since a reimbursement that is directly related to an employees activities as an employee may not constitute a fringe benefit, entities reimbursing such expenditure will still be able to claim input tax credits under paragraphs 111-5(1)(a) and 111-25(a).

3.46 Where an employer reimburses an employee (or pays a third party on behalf of the employee) for an expense payment benefit that is related directly to the employees activities as an employee, the entity may claim input tax credits for the reimbursement under paragraph 111-5(1)(a) or new paragraph 111-5(1)(ab) . Item 18 amends subsection 111-5(1) to ensure that where an entity is able to claim input tax credits for reimbursement under more than one paragraph in section 111-5, the entity is unable to claim input tax credits for that reimbursement more than once. Items 19 and 21 make consequential amendments to paragraphs 111-5(1)(a) and 111-5(6) as a result of this change.

Example 3.6

Foreman and Fischer Enterprises makes the following reimbursements to its employees:

•

$330 to Stephanie to reimburse her for a set a gold clubs;

•

$550 to J-Accountants to pay for an employees professional body membership fees (that the employee is required to be a member of for work);

•

$55 to Paulina to reimburse her for stationery she purchased for her employer, Foreman and Fischer Enterprises; and

•

$2,420 to ABC Ltd to pay for an employees holiday to Cairns.

Foreman and Fischer Enterprises is able to claim input tax credits for all of the above reimbursements:

•

$30 by way of new subsection 111-5(1)(ab) since the reimbursement constitutes an expense payment benefit (as it is not related to the employees activities);

•

$50 by way of paragraph 111-25(a) or new paragraph 111-25(b)(i) since the payment (regarded as a reimbursement in Division 111) is directly related to the employees activities as an employee and an expense payment benefit that is otherwise deductible to the employee;

•

$5 by way of paragraph 111-5(1)(a) since the reimbursement is directly related to the employees activities as an employee; and

•

$220 by way of new paragraph 111-25(b)(i) since the payment (regarded as a reimbursement in Division 111) would constitute an expense payment benefit (as it is not related to the employees activities).

3.47 If an entity makes an expense payment benefit to a future or former employee, or to an associate of a future or former employee, the entity will be entitled to input tax credits for that reimbursement. [Section 111-30]

Example 3.7

Meng is about to start work for Webster Ltd. A motor vehicle forms part of his salary package with Webster Ltd. Meng signs the leasing agreement 2 weeks before he commences work and Webster Ltd starts paying the finance company for the car from that date. Webster Ltd can claim input tax credits for 1/11 of the amount of the lease payment even though Meng is not yet an employee of it under new section 111-30, new paragraph 111-25(b)(i) and subsection 111-10(1).

01 Item 23 rearranges paragraph 111-5(3)(a) and inserts new subparagraph 111-5(3)(a)(ii) to ensure that an entity is not able to claim input tax credits for a reimbursement for an acquisition that is not creditable because of Division 69.

Example 3.8

ABC Pty Ltd reimburses an employee $638 for library fines he incurs. The library fines include $58 of GST. ABC Pty Ltd is unable to claim input tax credits for 1/11 of the reimbursement because of new subparagraph 111-5(3)(a)(ii) as the reimbursement is in respect of a non-deductible expense under paragraph 69-5(3)(a).

Consequential amendments

3.49 Items 17, 22, and 24 make consequential amendments to section 111-1, subsection 111-5(1) and paragraph 111-5(3)(b) to include reference to associate in these sections since an entity is now able to claim input tax credits in respect of some reimbursements to an employees associate.

3.50 Subsection 111-10(2) operates to reduce the amount of input tax credit an entity may receive in respect of a reimbursement where that reimbursement does not relate directly to the activities of the person reimbursed. Item 26 rearranges subsection 111-10(2) to remove reference to employee and fringe benefits as a result of the above amendments. As an entity is now able to claim input tax credits for all reimbursements to an employee, employee should be removed from the operation of this subsection. As a consequence of this, fringe benefits may also be deleted from this subsection as it is not longer necessary as a fringe benefit is only able to be provided to an employee, and can not be provided to an agent, officer or partner.

Application and transitional provisions

3.51 The amendments in relation to expense payment benefits apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2000. [Item 34]

Chapter 4 - Adjustments

Outline of Chapter

4.1 Schedule 4 amends the GST Act to:

•

ensure that a decreasing adjustment will be available where an entity makes a taxable supply, in the course of carrying on its enterprise, of a thing that has been used solely or partly for a private or domestic purpose;

•

provide special rules for adjustments for bad debts that are not fully taxable or creditable;

•

provide an increasing adjustment to the recipient of a going concern where the going concern is used to make solely input taxed supplies; and

•

provide rules for adjustments occurring after a representative has been appointed but relate to supplies made by the incapacitated entity.

Detailed explanation of new law

Sale of assets used partly for a creditable purpose

4.2 Where a thing is acquired by an entity registered for GST and it is to be used partly for making taxable supplies and partly for a private or domestic purpose, the acquisition is only partly creditable. The entity is entitled to a partial input tax credit in respect of the acquisition of the thing in accordance with subsection 11-30(3).

4.3 Where an entity disposes of the thing, in the course or furtherance of its enterprise, section 9-5 applies and GST will be applied to the full value of the thing, except where the supply is an input taxed or GST-free supply.

4.4 Where an entity makes a taxable supply of a thing that has been used solely or partly for a private or domestic purpose, it is appropriate that it is able to claim any input tax credits it has been denied in relation to any private or domestic use of the thing.

4.5 Item 9 amends section 132-5 to allow an entity to claim a decreasing adjustment where it has previously been denied input tax credits because the thing was used for a private or domestic purpose [paragraph 132-5(1)(c)] . Item 10 amends subsection 132-5(4) to ensure that the decreasing adjustment is correctly calculated.

Example 4.1

Ian runs a plumbing business and is registered for GST. Ian has acquired a station wagon for $1,100 (including $100 GST). Ian uses the vehicle 80% in his business and 20% for private purposes. Ian has claimed an input tax credit equal to 80% of the GST included in the purchase price ($80). The vehicle is no longer subject to the adjustment provisions contained in Division 129 which relate to changes in creditable purpose.

Ian sells the vehicle for $550 (including $50 GST) in the course of his enterprise and the supply is a taxable supply. Ian now has a decreasing adjustment calculated using the formula in Division 132. That is:

1/11 * 550 * (1 - 80/100)
50 * 20% = $10
Ian claims the decreasing adjustment of $10.

4.6 Items 6 to 8 amend the headings and descriptions for Division 132 to reflect that the adjustment under the Division applies where the thing supplied has been used for a private or domestic purpose. Items 1, 3 and 5 amend references to Division 132.

Adjustments for bad debts that are not fully taxable or creditable

4.7 Where an entity accounts for GST other than on a cash basis, it may account for the GST on a taxable supply, or the input tax credit on a creditable acquisition, before it receives or pays any or all of the consideration for the supply. If debts are written off as bad or are outstanding after 12 months, adjustments are made under Division 21.

4.8 If an entity subsequently recovers an amount that relates to a bad debt adjustment, then Division 21 provides for another adjustment. This Division also provides that the amount of an adjustment in respect of a bad debt is 1/11 of the amount written off or recovered.

4.9 Where the supply or acquisition is fully taxable and creditable, but not to the extent of 1/11 of the price, the amount of the adjustment calculated under Division 21 will not correctly reflect the amount of GST included in the amount written off or recovered. Examples where this occurs include luxury cars, insurance and long-term accommodation.

4.10 Item 16 inserts new Subdivision 136-B , which provides special rules for calculating the amount of an entitys bad debt adjustment where it relates to a transaction that is taxable or creditable at less than 1/11 of the price.

4.11 An entity must still meet the rules in Division 21 for determining when it will have a bad debt adjustment and will also still make the adjustment under that Division. Note that an entity that accounts for GST on a cash basis will never have an adjustment under Division 21, therefore new Subdivision 136-B will never be applicable to the entity. New Subdivision 136-B merely provides a method for working out the amount of the adjustment where the supply or acquisition is fully taxable or creditable, but at less than 1/11 of the price. [Subsections 136-30(1), 136-35(1), 136-40(1) and 136-45(1)]

Meaning of taxable and creditable at less than 1/11 of the price

4.12 New subsection 136-50(1) defines the term taxable at less than 1/11 of the price. A taxable supply is taxable at less than 1/11 of the price if the amount of GST payable on a supply is less than an amount equal to 1/11 of the price of the supply. A creditable acquisition is creditable at less than 1/11 of the consideration where it relates to a taxable supply covered by subsection 136-50(1) [subsection 136-50(2)] .

4.13 Items 18 and 19 amend section 195-1 to include the meaning of the terms taxable at less than 1/11 of the price and creditable at less than 1/11 of the consideration in the GST Dictionary. These terms will have the meanings given by new subsections 136-50(1) and 136-50(2) respectively.

Adjustments for bad debts and taxable supplies

Writing off bad debts

4.14 New section 136-30 provides the method to calculate a decreasing adjustment for a bad debt for a taxable supply that is taxable at less than 1/11 of the price in the method statement located in new subsection 136-30(2) .

Example 4.2

Quons Prestigious Cars is a seller of luxury cars and has sold one such car to Tatiana which she uses wholly for running her delivery business. The price of the luxury car was $110,000. Tatiana has paid $99,000 of this amount but the outstanding $11,000 remains unpaid for more than 12 months. There have been no previous adjustments in respect to the car.

This overdue amount is a bad debt. It is a decreasing adjustment in relation to a taxable supply that is taxable at less than 1/11 of the price. Therefore, Quons Prestigious Cars must use the method statement in new subsection 136-30(2) to calculate its adjustment.

Quons bad debt decreasing adjustment is calculated as follows:

Step 1:	amount of GST payable for the luxury car = $9,076.33
Step 2:	$11,000
Step 3:	$110,000 - $11,000 = $99,000
Step 4:	amount of GST that would be payable if the price of the luxury car were $99,000 = $8,261.52
Step 5:	$9,0760 - $8,2610 = $8140 (the amount of the bad debt decreasing adjustment for Quons Prestigious Cars)

Recovering bad debts written off

4.15 New section 136-35 provides the method to calculate an increasing adjustment where an entity has recovered an amount previously written off for a taxable supply that is taxable at less than 1/11 of the price in the method statement located in new subsection 136-35(2) .

Example 4.3

Six months after Quons Prestigious Cars has written off the unpaid amount in respect of its supply to Tatiana, Tatiana pays the outstanding amount ($11,000) to the car dealer. Apart from the previous bad debt adjustment of $11,000, there have been no other adjustments for the car.

As this recovered bad debt relates to a supply that is taxable at less than 1/11 of the price, Quons Prestigious Cars must use the method statement in new subsection 136-35(2) to calculate its bad debt increasing adjustment.

Quons bad debt increasing adjustment is calculated as follows:

Step 1:	amount of GST payable for the luxury car, taking account of the previous bad debt (i.e. the amount of GST that would be payable if the price of the luxury car was $99,000) = $8,261.52
Step 2:	$11,000
Step 3:	$110,000 - $11,000 = $99,000
Step 4:	$99,000 + $11,000 = $110,000
Step 5:	amount of GST that would be payable if the price of the luxury car were $110,000 = $9,076.33
Step 6:	$9,0760 - $8,2610 = $8140 (the amount of the bad debt increasing adjustment for Quons Prestigious Cars)

Adjustments for bad debts and creditable acquisitions

Bad debts written off

4.16 New section 136-40 provides the method to calculate an increasing adjustment for a bad debt for a creditable acquisition that is creditable at less than 1/11 of the price in the method statement located in new subsection 136-40(2) .

Example 4.4

Following on from Example 4.2, Tatiana has a bad debt increasing adjustment and as it relates to an acquisition that is creditable at less than 1/11 of the consideration, she must use the method statement in new subsection 136-40(2) to calculate her bad debt adjustment.

Tatianas bad debt increasing adjustment is calculated as follows:

Step 1:	amount of input tax credit Tatiana was entitled for the luxury car (there have been no adjustments in respect of the acquisition) = $50120 (because of section 69-10)
Step 2:	$11,000
Step 3:	$110,000 - $11,000 = $99,000. The step 2 amount is subtracted from the consideration Tatiana has paid and is liable to pay Quons Prestigious Cars
Step 4:	amount of input tax credit Tatiana would be entitled to if the consideration for the luxury car were $99,000 = $5,012.18
Step 5:	$5,0120 - $5,0120 = $0 (in this example, there is no bad debt adjustment for Tatiana)

Bad debts recovered

4.17 New section 136-45 provides the method to calculate a decreasing adjustment for recovering amounts previously written off for a creditable acquisition that is creditable at less than 1/11 of the price in the method statement located in new subsection 136-45(2) .

Example 4.5

Following on from Example 4.3, after Tatiana has paid Quons Prestigious Cars the outstanding amount of $11,000 her bad debt decreasing adjustment is calculated through the method statement in new subsection 136-45(2) .

Her decreasing adjustment is calculated as follows:

Step 1:	amount of input tax credit Tatiana was entitled to for the luxury car, taking account of the previous bad debt (i.e. the amount of GST that would be payable if the price of the luxury car was $99,000) = $5,0120 (because of section 69-10)
Step 2:	$11,000
Step 3:	$110,000 - $11,000 = $99,000. The step 2 amount is subtracted from the consideration Tatiana has paid and is liable to pay for the car.
Step 4:	$99,000 + $11,000 = $110,000
Step 5:	amount of input tax credit Tatiana would be entitled to if the consideration for the luxury car were $110,000 = $5,012.18
Step 6:	$5,0120 - $5,0120 = $0 (in this example, there is no bad debt adjustment for Tatiana).

Consequential amendments

4.18 Item 13 amends section 136-1 to reflect the new structure of Division 136 which deals with:

•

transactions that are partly taxable or creditable in Subdivision 136-A; and

•

transactions that are fully taxable or creditable at less than 1/11 of the price in Subdivision 136-B.

4.19 Items 14 and 15 ensure that both sets of rules in Division 136 may apply to the one transaction. For example, you may have a bad debt that is overdue for 12 months or more that relates to an acquisition of insurance and is partly creditable. When this occurs, these amendments ensure that both factors are taken into account so that the bad debt is correctly calculated under Subdivisions 136-B and 136-A.

4.20 Item 12 changes the heading of Division 136 to Bad debts relating to transactions that are not taxable or creditable to the fullest extent and adds a table of Subdivisions referring to both Subdivisions.

4.21 Items 2 and 4 make consequential amendments to sections 21-99 and 37-1 to update the name of Division 136.

Going concern increasing adjustment

4.22 The supply of an enterprise as a going concern is GST-free if certain requirements within Subdivision 38-J are met. That is, no GST is payable on the supply. However, the recipient may not be entitled to the full benefit of GST-free treatment because of its planned use of the things acquired as the going concern.

4.23 If at the time of acquiring the going concern, the recipient plans to use the things acquired for private purposes or to make input taxed supplies, it will need to make an increasing adjustment under Division 135 to reflect the planned non-creditable use of the things acquired as the going concern. This is because if the supply to the recipient had been taxable, it would have been denied that proportion of the input tax credits.

4.24 Division 135 applies to provide an increasing adjustment where some, but not all, of the supplies made through the enterprise that has been acquired as a going concern will not be taxable or GST-free. However, Division 135 will not apply to provide an increasing adjustment where all supplies made by the going concern will be input taxed.

4.25 There may be circumstances where an entity that solely makes input taxed supplies will be able to be supplied GST-free. For example, an entity only making financial supplies. If the supply of the going concern had been taxable the recipient of the supply would have been denied input tax credits.

4.26 Item 11 amends section 135-5 to allow for an increasing adjustment where an entity acquires a going concern and intends to use some or all of the enterprise acquired supply to make supplies that are neither taxable supplies or GST-free supplies. [Paragraph 135-5(1)(b)]

Post-appointment adjustments relating to pre-appointment supplies

4.27 Division 147 provides that a representative of an incapacitated entity assumes the responsibilities of the incapacitated entity for the period in which the representative is entitled to act for the incapacitated entity. During this period, the representative is liable for the GST and is entitled to input tax credits attributable to that period. This is because the representative, rather than the incapacitated entity, is carrying on the enterprise.

4.28 Adjustments may arise under Division 19 (adjustments), Division 21 (bad debts), Division 100 (unredeemed vouchers), Division 129 (changes in extent of creditable purpose) and Division 130 (goods applied solely for private or domestic use).

4.29 As the law currently stands, a representative is personally liable for GST adjustments of the incapacitated entity that crystallise after the appointment of the representative, even where the adjustment relates to a pre-appointment supply because of section 147-20.

4.30 Generally, the ATO is ranked as an unsecured creditor. Making the representative personally liable may give GST a de facto priority higher than that of an unsecured creditor, which was never intended. For example, if a representative writes off a bad debt and the incapacitated entity did not account for GST on a cash basis, the representative would be personally liable for the increasing adjustment in respect of this bad debt. Personal liability may encourage the representative to pay GST before paying a secured creditor and may therefore have indirectly influenced the priority in which the representative satisfies debts.

4.31 Item 17 amends section 147-20 to ensure that an adjustment (either increasing or decreasing) that:

•

relates to a supply, acquisition or importation made before a representative was appointed; and

•

arises after that appointment of the representative

will be attributable to the incapacitated entity and not the representative where the representative has notified the Commissioner in writing of the amount and occurrence of the adjustment (if the adjustment is an increasing adjustment). [Subsection 147-20(1)]

4.32 Where the representative has not notified the Commissioner in writing of the amount and occurrence of an increasing adjustment, then the increasing adjustment is attributable to the representative and not the incapacitated entity.

4.33 Where the adjustment is a decreasing adjustment, it will always be treated as if the incapacitated entity had the adjustment (and not the representative).

Application and transitional provisions

4.34 The amendments explained in this Chapter apply in relation to net amounts for tax periods starting on or after 1 July 2000. [Item 20]

Chapter 5 - Administration

Outline of Chapter

5.1 Schedule 5 to this Bill amends the GST Act and the TAA 1953 to:

•

allow the Commissioner, in certain circumstances, to cancel an entitys GST registration where it has applied to the Commissioner for cancellation before it has been registered for 12 months;

•

allow the Commissioner, in certain circumstances, to revoke an entitys one month tax period election before 12 months after it came into effect and the entity so requests it to be revoked;

•

make minor technical amendments to the provisions on reviewable decisions relating to GST, wine tax and indirect tax;

•

ensure that those persons responsible for the management of a non-profit sub-entity are jointly and severally liable for amounts payable under the GST law by that sub-entity;

•

extend the indirect tax record-keeping requirements to special transitional credits;

•

ensure that where an entity has delayed claiming their entitlement to an input tax credit (see Chapter 6), the entity must keep records relating to that acquisition for 5 years from the date it lodged its GST return; and

•

give the Commissioner the discretion to be able to refund an RBA surplus or credit rather than apply it against a tax debt where:

-

the debt, other than a BAS amount, is due but not yet payable;

-

the taxpayer has complied with an arrangement to pay the debt by instalments; or

-

the Commissioner has agreed to defer recovery of the debt.

Detailed explanation of new law

Cancellation of GST registration

5.2 Under section 23-10 of the GST Act, an entity can choose to register for GST if it carries on an enterprise but its annual turnover is below the registration turnover threshold. Once an entity is registered for GST it must apply to the Commissioner if it wishes to have its registration cancelled. However, the current legislation does not allow the Commissioner to cancel the GST registration of such an entity unless the entity has been registered for at least 12 months at the time of application.

5.3 New subsection 25-57(1) allows the Commissioner to cancel an entitys GST registration where that entity has applied to the Commissioner in the approved form before it was registered for 12 months and that entity is not required to be registered [item 1] . In considering whether to cancel the GST registration of an entity before it has been registered for 12 months, the Commissioner may have regard to such things as:

•

how long the entity has been registered;

•

whether the entity was previously registered; and

•

any other relevant matters. [Subsection 25-57(2)]

5.4 Item 7 amends the TAA 1953 to ensure that the Commissioners decision under new section 25-57 of the GST Act is a reviewable GST decision. Since the Commissioners decision under new section 25-57 is reviewable, the Commissioner must notify an entity of a decision he makes under that section. [Item 1, subsection 25-57(3)]

5.5 Item 2 makes a consequential amendment to subsection 25-60(1) to include new section 25-57 in that section. This ensures that the Commissioner must decide the date on which an entitys GST registration is cancelled under new section 25-57 . The Commissioners decision under section 25-60 is a GST reviewable decision. However, in deciding the date on which an entitys GST registration is cancelled under new section 25-57 , the Commissioner is unable to decide on a date that is before Royal Assent of this Bill [item 18] . This policy decision reflects the impracticalities of cancelling an entitys registration at an earlier stage since this would require the unwinding of all transactions between the entity and other parties.

Revoking an election for monthly tax periods

5.6 Under section 27-5 of the GST Act, a GST registered entity will generally lodge its GST returns and pay its net amount on a quarterly basis. In certain circumstances, it must do this monthly. Entities that are not required to account for GST monthly may still elect to account monthly by applying to the Commissioner under section 27-10.

5.7 Once the monthly election commences, an entity that would be entitled to use the quarterly basis may change back to quarterly by applying to the Commissioner. However, under the current legislation, the entity must use monthly tax periods for at least 12 months before it can revert to using quarterly tax periods. The Commissioner has no discretion to reduce that period.

5.8 New subsection 27-22(1) allows the Commissioner to revoke the monthly tax period election of an entity that is not required to have monthly tax periods before 12 months after the election takes effect. However, the entity must request the Commissioner to revoke the election in the approved form. [Item 3]

5.9 This revocation will take effect from the date specified in the instrument of revocation but must be 1 January, 1 April, 1 July or 1 October. The date specified may be a retrospective 1 January, 1 April, 1 July or 1 October. [Subsection 27-22(3)]

5.10 In considering whether to revoke an entitys monthly tax period election before it has had effect for 12 months, the Commissioner may have regard to such things like:

•

how long the entity has had monthly tax periods;

•

whether the entity was previously registered, and whether monthly tax periods applied; and

•

any other relevant matters.

[Subsection 27-22(2)]

5.11 Item 8 amends the TAA 1953 to ensure that the Commissioners decision under new subsection 27-22(1) and new subsection 27-22(3) of the GST Act is a reviewable GST decision.

Reviewable decisions relating to GST, wine tax and indirect tax

5.12 Section 62 of the TAA 1953 allows an entity dissatisfied with a reviewable decision to object against the decision. Subsection 62(2) lists reviewable GST decisions that are made under provisions of the GST Act. Subsection 62(2A) lists reviewable wine tax decisions made under the WET Act. Subsection 62(3) lists reviewable indirect tax decisions that are made under this Act and only relate to indirect tax.

5.13 Items 9 to 11 make minor technical amendments to subsections 62(2) and 62(3) by updating the references in the table and notes so that it correctly reflects prior amendments already enacted.

5.14 Item 5 makes a consequential amendment to section 14ZW to correct the subsection numbers and remove the reference to item 2 of the table in subsection 62(3) because it no longer has any effect.

Joint and several liability for non-profit sub-entities

5.15 Division 5 of Part VI of the TAA 1953 imposes joint and several liability on partners of partnerships, participants in GST joint ventures, members of GST groups and representatives of incapacitated entities in respect of their indirect tax law responsibilities.

5.16 This Division also refers to the liability related to non-profit sub-entities and unincorporated associations. These provisions do not impose joint and several liability on each person responsible for the management of the sub-entity or association. Although state legislation gives recovery rights against unincorporated associations, it does not give any recovery rights in respect of non-profit sub-entities. Thus, it is necessary to insert a provision to impose joint and several liability in relation to non-profit sub-entities.

5.17 Item 6 inserts new subsection 52A(1A) of the TAA 1953, which imposes joint and several liability for amounts payable under the GST law by a non-profit sub-entity on those persons responsible for the management of the sub-entity.

Records for transitional credits

5.18 Under the current legislation there is no express requirement for entities to keep records explaining their entitlement to special GST credits claimed under sections 16, 16A, 16B, 16C and 19A of the GST Transition Act and section 3 of the WET and LCT Transition Act. An indirect requirement to keep records in respect of these credits exists under the income tax legislation as these credits form part of the taxpayers assessable income.

5.19 New paragraph 70(1)(c) expressly requires records to be maintained in respect of special credits claimed under the GST Transition Act or the WET and LCT Transition Act. [Item 12]

5.20 Item 14 inserts new subsections 70(1AAA) and 70(1AAB) . New subsection 70(1AAA) is similar to paragraph 262A(2)(b) of the ITAA 1936. It makes the record-keeping obligations for transactions under GST legislation similar to those under the income tax legislation. Since the special credits are calculated by entities with reference to other information, new subsection 70(1AAA) ensures that the entity must keep all documents relating to that calculation for at least 5 years after it was made. Where the GST law specifies circumstances in which a choice, election, etc. ceases to have effect, records must be kept for at least 5 years from the date the choice, election, etc. ceased to have effect.

5.21 Items 13 and 15 to 17 make consequential amendments to section 70 because of the amendments set out in paragraphs 50 to 5.20.

Delaying a claim for an input tax credit

5.22 New subsection 70(1AAB) is inserted to ensure that where an entity delays its claim for an input tax credit it must keep records relating to that claim for 5 years from the date it claimed the credit in its GST return (see Chapter 6).

Application of an RBA surplus or a credit to a tax debt

5.23 Section 8AAZL in Division 3 of Part IIB of the TAA 1953 requires the Commissioner to apply any payment, credit or RBA surplus to either an RBA or a non RBA tax debt. Any amount remaining after its application is the reduced balance of the payment, credit or RBA surplus which is also required to be treated in the same manner. That is, there is a diminishing circular process of applying payments, credits or RBA surpluses against tax debts until there are no tax debts remaining. This application process is mandatory. The Commissioner does not have a discretion to treat the amounts in another manner.

5.24 The Commissioner can refund an amount of a payment, credit or RBA surplus but only after the allocation process is completed and all tax debts are extinguished. Section 8AAZA defines a tax debt to include an amount due to the Commonwealth under a taxation law, including an amount that is not yet payable.

5.25 Some entities may lodge income tax returns and have assessments made early in the lodgment cycle. As most companies and individuals have a due date for payment of income tax of 1 December or later, this results in there being several months between the establishment of the tax debt and the date when the tax is due for payment. If these entities are registered for GST and lodge a BAS claiming a net credit, the expected refund cannot be issued because the Commissioner is required to offset the amount against the assessed income tax debt, even though it may not be payable for several months.

5.26 The design of the new tax system requires the Commissioner to retain any BAS credits, which can be claimed as early as the 1st of the month, to be offset against BAS debts that are due for payment on the 21st of the month. While offsetting a refund against a debt that is either outstanding or payable within a short period of time is necessary for the efficient collection of the revenue, offsetting as outlined in the above paragraph may cause cash flow problems for a business.

5.27 There are also other cases where it is inappropriate to be offsetting a credit or an RBA surplus against a tax debt. For example, the Commissioner may not want to offset where the ATO has given an undertaking to defer recovery because there is a genuine dispute about the tax debt.

5.28 Section 8AAZL of the TAA 1953 will be amended to give the Commissioner the discretion not to treat a payment, credit or RBA surplus in accordance with Division 3. That discretion will apply in relation to a tax debt where:

•

the debt, other than a BAS amount, is due but not yet payable;

•

the taxpayer has complied with an arrangement to pay the debt by instalments; or

•

the Commissioner has agreed to defer recovery of the debt.

[Schedule 5, item 4, subsection 8AAZL(3)]

5.29 BAS amounts (defined in section 995-1 of the ITAA 1997) are all the credits and debts relating to GST, LCT, WET, PAYG(W), PAYG(I), FBTI, deferred COIN and special GST credit for sales tax paid on stock. These are excluded so that the Commissioner can refund a net BAS credit claimed prior to 21st of the month, as explained in paragraph 5.26.

5.30 This amendment will enable the Commissioner to refund any net BAS credit if another non-BAS tax debt is due but not yet payable. It will also allow the Commissioner, in appropriate cases, to refund amounts where a tax debt is in dispute and finalisation of the mater is dependent on a decision of the Administrative Appeals Tribunal or a court.

Application and transitional provisions

5.31 The amendments in relation to records for transitional credits and delaying a claim for an input tax credit apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2000 [item 18] . All other amendments in Schedule 5 commence on Royal Assent.

Chapter 6 - Other amendments

Outline of Chapter

6.1 This Chapter explains the amendments contained in Schedule 6 to this Bill. Schedule 6 contains a number of GST related minor policy and technical amendments to the GST Act, GST Transition Act, LCT Act, WET and LCT Transition Act and the ITAA 1997. These amendments will:

•

treat returnable containers as second-hand goods;

•

allow an entity to attribute input tax credits to a tax period later than one in which it holds a tax invoice;

•

ensure that an entity is able to claim its correct entitlement to input tax credits where it leases or hires a car, acquires a GST-free or partly GST-free car or acquires a car only partly for a creditable purpose;

•

ensure the definitions of representative and incapacitated entity are aligned with the Bankruptcy Act 1966 and Corporations Law;

•

ensure that a car manufacturer is subject to the correct amount of LCT where they supply a luxury car by way of lease or hire;

•

align the time to claim special credits provided for under the WET and LCT Transition Act with other special credits in the GST Transition Act;

•

treat the special credits provided for under the WET and LCT Transition Act as assessable income;

•

ensure that an entity that has a GST branch or branches cannot become a member of a GST group;

•

allow partnerships, trusts and individuals to apply to be approved as additional members of existing GST groups;

•

ensure that all partnerships, trusts and individuals that satisfy the membership criteria in relation to a particular GST group are not required to apply to be members of that GST group;

•

stipulate that all partnerships, trusts and individuals that are GST group members must have the same tax periods and accounting basis as all other members of the GST group;

•

ensure that companies cannot form GST groups with unrelated entities;

•

ensure that the associates provisions operate in relation to non-profit sub-entities;

•

ensure that an input tax credit is available to a GST group where the reverse charge rules have applied to make supplies within the group taxable;

•

provide that an entity will not be required to provide a tax invoice to a recipient, where the supply is a taxable supply of real property under the margin scheme;

•

clarify the treatment of acquisitions and importations made directly for settling claims under GST-free policies;

•

clarify the treatment of settlements to injured third parties;

•

correct the notification requirement for GST groups;

•

provide an increasing adjustment for excesses in certain circumstances;

•

remove the GST reverse charge from payments in relation to the provision of employee share scheme by a non-resident entity;

•

remove the GST registration requirement for a non-resident entity that is only making supplies of employee services to a wholly-owned subsidiary in Australia;

•

extend the concessional treatment of long-term accommodation to accommodation provided at marinas; and

•

ensure that the correct amount of GST is calculated on the supply of a construction project in progress at 1 July 2000.

Detailed explanation of new law

Returnable containers as second-hand goods

6.2 Division 93 provides special rules for the GST treatment of supplies of returnable containers from unregistered entities who are not making taxable supplies. Returnable containers are those containers for which a statutory refund scheme exists to encourage recycling. South Australia is the only state which has a statutory refund scheme for certain beverage containers.

6.3 Division 66 provides special rules for the GST treatment of second-hand goods. A registered entity, which acquires second-hand goods from unregistered entities that are not making taxable supplies, is entitled to input tax credits. These rules currently apply to all containers which are not returnable containers.

6.4 In order to simplify the rules for all recyclable containers, item 31 will repeal Division 93. This reduces the compliance costs for those entities in South Australia which would have had to deal with 2 sets of rules depending on whether the recyclable containers were returnable or not.

6.5 Items 1, 3, 5, 15 and 40 make consequential amendments to sections 11-99, 29-39, 37-1, 66-20 and 195-1 (the definition of returnable container) to remove all references to returnable containers from the GST Act.

6.6 The effect of these amendments is that all recyclable containers are second-hand goods under Division 66. The acquisition of containers throughout Australia, including those previously treated as returnable containers, will entitle a registered recipient to input tax credits provided the other provisions of Division 66 are met.

Delaying a claim for an input tax credit

6.7 As the law currently stands, an entity is required to attribute an input tax credit to the first tax period in which it holds a tax invoice (subsection 29-10(3)). There may be situations where an entity does not become aware that it holds a tax invoice in respect of a creditable acquisition until after it has lodged its GST return for the tax period. For example, in the case of a larger entity, when the accounting section lodges a GST return it may not be aware that another part of the entity holds a tax invoice for a creditable acquisition, and does therefore not claim its input tax credits for that acquisition in the GST return.

6.8 In these situations the entity is unable to claim their entitlement to the input tax credit in the next tax period but must instead lodge an amended GST return for the tax period in which it should have claimed the input tax credit.

6.9 Item 2 inserts new subsection 29-10(4) in the GST Act to allow an entity to postpone the attribution of an input tax credit to any tax period after it holds a tax invoice. Where the GST return for the tax period states a net amount that does not take account of an input tax credit that was attributable to that tax period, then the input tax credit is:

•

not attributable to that tax period; and

•

attributable to the first tax period for which the entity takes it into account in its GST return.

[Subsection 29-10(4)]

6.10 Where an entity has attributed its input tax credits to a tax period later than the one in which it first held the tax invoice, that entity must keep records that record and explain the acquisition to which the claim relates for at least 5 years from the time it claimed its entitlement to the input tax credit. [Item 14 in Schedule 5, subsection 70(1AAB) of the TAA 1953]

6.11 New subsection 29-10(4) does not affect the operation of subsection 29-10(3). An entity can still claim input tax credits in the first tax period in which it holds a tax invoice. Where an entity attributes its input tax credits to the first tax period in which it held a tax invoice, the entity is still only required to keep records that record and explain the creditable acquisition for 5 years after the completion of the transaction or act relating to the acquisition. New subsection 70(1AAB) of the TAA 1953 does not in any way vary or amend this requirement.

GST groups and branches

6.12 Subsection 54-5(3) of the GST Act stipulates that a branch of an entity (the parent entity) cannot be registered as a GST branch if the parent entity is a member of a GST group. Clearly, this provision was intended to prevent an entity using both the GST grouping provisions in Division 48 of the GST Act and the GST branching provisions in Division 54.

6.13 However, there is no parallel provision in Division 48 that prevents an entity that has GST branches from using the GST grouping provisions. This means that an entity that is a member of a GST group cannot use the GST branching provisions by virtue of subsection 54-5(3), but an entity that first chooses to register a GST branch can subsequently become a member of a GST group.

6.14 Item 9 inserts a new condition that an entity must fulfil in order to satisfy the membership requirements of a GST group. New paragraph 48-10(1)(g) stipulates that in order to satisfy the membership requirements of a GST group or proposed GST group, an entity must not have any registered GST branches.

6.15 The amendment made by item 9 commences on the day the Bill receives Royal Assent. On commencement of this Act, if an entity that is a member of a GST group has any registered GST branches, that entity will no longer meet the membership requirements of a GST group. The representative entity of the GST group would therefore be required to notify the Commissioner within 21 days of Royal Assent of this Act that a member of the group no longer satisfies the membership requirements for the GST group (see section 48-80). The Commissioner will then revoke the approval of that group member (see subsection 48-70(2)) and will decide the date of effect of that revocation (see section 48-85).

GST groups - references that only apply to companies

6.16 The GST grouping provisions in Division 48 of the GST Act make several references that only apply to companies. This does not take into account that other entities (partnerships, trusts and individuals) can be members of a GST group.

Approval of additional members

6.17 Paragraph 48-70(1)(a) provides for approval of an additional member of a GST group only if that additional member is another company that satisfies the membership requirements for the GST group. This means that a partnership, trust or individual cannot apply to become a new member of an existing GST group.

6.18 Item 14 amends paragraph 48-70(1)(a) to remove the reference to company and to replace it with entity. This will ensure that partnerships, trusts and individuals can apply to be approved as additional members of existing GST groups.

Entities not required to apply to be a member

6.19 Subsection 48-5(2) specifies that an application for approval of a GST group need not include all the companies of the 90% owned group to which the 2 or more companies belong. It may be inferred by the inclusion of this provision that an application for approval of a GST group must include all partnerships, trusts and individuals that meet the membership requirements in relation to that GST group.

6.20 Item 7 repeals subsection 48-5(2), but not the note at the end of that subsection. The subsection is replaced by new subsection 48-5(2) , which states that an application for approval as a GST group need not include all entities that satisfy the membership requirements of that GST group. This will ensure that all partnerships, trusts and individuals that satisfy the membership criteria in relation to a particular GST group are not required to apply to be members of that GST group.

Membership requirements

6.21 Paragraph 48-10(1)(d) specifies that an entity will meet one of the membership requirements for a GST group if the entity has the same tax periods applying to it as the tax periods applying to all those other members. Paragraph 48-10(1)(e) specifies that another membership requirement will be met by an entity if that entity accounts on the same basis as all those other members.

6.22 The only previous circumstance in subsection 48-10(1) that refers to other members is in paragraph 48-10(1)(b). In this paragraph, it refers to all the other members of the GST group or proposed GST group that are also companies. Thus, it may be inferred that when paragraphs 48-10(1)(d) and (e) refer to all those other members, this term refers to all those other members that are companies. As a result, partnerships, trusts or individuals with differing tax periods or accounting basis may argue that they can form a GST group if they meet the other criteria specified in Subdivision 48-A.

6.23 Item 8 amends paragraphs 48-10(1)(d) and (e) to change the wording those other members to the other members of the GST group or proposed GST group. This will ensure that all partnerships, trusts and individuals must have the same tax periods and accounting basis as all other members of the GST group in order to satisfy the membership criteria in relation to that GST group.

Companies forming GST groups with unrelated entities

6.24 Division 48 of the GST Act was designed to enable related entities to form GST groups if they meet certain eligibility criteria. When a GST group is formed, the group is effectively treated as a single entity for GST purposes and transactions between group members are not subject to GST.

6.25 The specific membership criteria for companies in a GST group stipulates that the company must be a company of the same 90% owned group as all the other members of the GST group or proposed GST group that are also companies - paragraph 48-10(1)(b). Thus, group members that are companies are not required to satisfy any relationship with partnerships, trusts or individuals that are members of the GST group. Unrelated entities may therefore exist within one GST group, in conflict with the original policy intention of the legislation.

6.26 Item 11 inserts new subsection 48-10(3) , which stipulates that a company will not satisfy the membership requirements of a GST group or proposed GST group when certain circumstances apply. These circumstances will occur when one or more members of the GST group are not companies [paragraph 48-10(3)(a)] and none of the companies that are members of the GST group satisfy any of the criteria laid out in new section 48-15 [paragraph 48-10(3)(b)] . Item 10 makes a change to subsection 48-10(2) to reflect that another subsection has been added.

6.27 The criteria in new section 48-15 outline certain relationships that a company may satisfy in relation to the non-company group members. In most respects, these criteria mirror the requirements in Division 48 of the GST Regulations, which sets out the GST group membership requirements for partnerships, trusts and individuals. [Item 12]

6.28 A company will meet the requirements of new section 48-15 if it satisfies any of the following criteria:

•

A partnership, trust or individual that is a member of the GST group or proposed GST group has at least a 90% stake in the company. Whether or not any of these entities has at least a 90% stake in a company will be determined in accordance with section 190-5 of the GST Act, as though the non-company entity was the holding company referred to in that section [paragraph 48-15(1)(a)] ;

•

If the company is a single-shareholder company, that shareholder is either:

-

a partner in a partnership that is a member of the GST group;

-

an individual that is a member of the GST group; or

-

a family member of that partner or individual [paragraph 48-15(1)(b)] ;

•

If the company has more than one shareholder, all of those shareholders are either a partner of the same partnership, where that partnership is a member of the GST group or a family member of any of those partners [subparagraphs 48-15(1)(c)(i) and (ii)] . Further, the shareholding of the company must be such that ensures at least 2 partners of the partnership are represented as shareholders either personally or by a family member [subparagraphs 48-15(1)(c)(iii), (iv) and (v)] ;

•

If the company has more than one shareholder, each of those shareholders are either an individual that is a member of a GST group or a family member of that individual [paragraph 48-15(1)(d)] ;

•

A trust that is a member of the GST group only makes distributions of income or capital to either companies that are members of the GST group [subparagraphs 48-15(1)(e)(i) and (ii)] or a charity [subparagraph 48-15(1)(e)(iii)] . New subparagraph 48-15(1)(e)(iia) enables a company to satisfy the criterion outlined in paragraph 48-15(1)(e) if the trust referred to in that paragraph makes distributions to shareholders, or family members of shareholders, of a company that is a member of the GST group [item 12] . New subsection 48-15(1A) stipulates that if the company has more than one shareholder, at least 2 shareholders of the company must be represented as beneficiaries of the trust in question either personally or by a family member [item 12] .

6.29 It should be noted that the requirement in paragraph 48-10(1)(b) will continue to apply in addition to the requirement in new subsection 48-10(3) . That is, all of the companies that are members of the GST group must be members of the same 90% owned group, as described in Division 190 of the GST Act.

6.30 Item 36 inserts a definition of a family member in the Dictionary in section 195-1. This term has the meaning given by new subsection 48-15(2) . In new subsection 48-15(2) , a family member of an individual is defined by reference to section 272-95 of Schedule 2F to the ITAA 1936. This is the same as the definition of family as used in the GST Regulations. It will include any parent, grandparent, brother, sister, nephew, niece, child, or child of a child of either the individual or the individuals spouse. It will also include the individuals spouse and the spouses of any person mentioned in the previous sentence. [Item 12]

6.31 The amendments made by items 6 to 12 and item 36 commence on the day the Bill receives Royal Assent . On commencement of this Act, if a company or companies that are members of a GST group do not meet the requirements of new section 48-10 , they will no longer satisfy the membership requirements of that GST group. As a result, the representative member of the GST group must notify the Commissioner within 21 days of Royal Assent of this Act that a member or members of the group no longer satisfy the membership requirements for the GST group (see section 48-80). The Commissioner will then revoke the approval of that group member or members (see subsection 48-70(2)) and will decide the date of effect of that revocation (see section 48-85).

Input tax credits for motor vehicles

6.32The ITAA 1997 limits the costs of a car for working out the amount an entity can claim as an income tax deduction for depreciation. The car depreciation limit also applies for working out the amount of input tax credits an entity can claim for a creditable acquisition of a car (section 69-10). Vehicles above this limit are generally subject to LCT.

6.33 Section 69-10 provides a special rule which limits the amount of input tax credits available on some creditable acquisitions or creditable importations of cars. Items 16 and 17 amend section 69-10 to ensure that this section operates as intended and calculates the correct amount of input tax credit for a creditable acquisition of a car.

6.34 Item 16 ensures that the amount of input tax credit for a creditable acquisition or importation of a car is equal to the amount of GST included in the price of the car, but must not exceed 1/11 of the car depreciation limit. [Item 16, subsection 69-10(1)]

Luxury cars acquired by way of lease or hire

Section 69-10 does not apply to a car that was acquired by way of lease or hire [paragraph 69-10(4)(b)] . If an entity acquires a car by way of lease or hire, the amount of input tax credit to which the entity is entitled to will be calculated under the normal rules in Division 11 of the GST Act.

Example 6.1

Mohammed leases a luxury car wholly for his enterprise and makes monthly payments of $13,200. The input tax credit to which Mohammed is entitled to is $1,200.

Partly creditable

6.36 If an entity's acquisition of a car is partly creditable, the entitys input tax credit entitlement for the car is proportionately reduced to the extent of its creditable purpose. [Subsection 69-10(3)]

Example 6.2

In August 2000, Emily acquires a motor vehicle for which she is not entitled to quote an ABN for the purposes of LCT. In the financial year in which she first used the car for any purpose, the car had a GST inclusive market value of $66,000. She uses the car but only 25% is for a creditable purpose.

If Emily used it 100% for a creditable purpose, then Emily is entitled to input tax credits of $5,012, which is 1/11 of the car depreciation limit. However, since she uses the car for a partly creditable purpose, her entitlement is reduced to 25% of $5,012 (i.e. $1,253).

Vehicles that are non-taxable under Subdivision 38-P

6.37 New subsection 69-10(2) denies input tax credits for vehicles which are GST-free under Subdivision 38-P or non-taxable importation by virtue of Subdivision 38-P. This is necessary because under Subdivision 38-P, a vehicle is GST-free (and non-taxable) to the extent that it is below the car depreciation limit. Since any GST included in the price of a Subdivision 38-P car relates to its luxury component, the entity should not be able to claim input tax credits in respect of this component. This will ensure that the treatment of these cars is the same as other luxury cars under section 69-10.

Vehicles excluded from LCT

6.38 Certain motor vehicles are excluded from both LCT and section 69-10. These vehicles are non-passenger commercial vehicles and motor homes or campervans. However, as the law currently stands, emergency vehicles and non-GST-free vehicles for transporting disabled people are included in the operation of section 69-10 even though they are not subject to LCT.

6.39 New subsection 69-10(4)(a) will align section 69-10 with the rules for LCT. The provision will ensure that all vehicles that are not luxury cars because of subsection 25-1(2) of the LCT Act are also excluded from the operation of section 69-10. Therefore, the amount of input tax credits that an entity may claim for these vehicles is not reduced to 1/11 of the car depreciation limit but will be equal to the amount of GST included in the price of the vehicle.

Associates of non-profit sub-entities

6.40 Division 72 of the GST Act provides special rules that apply to certain supplies between associates. Essentially, these rules ensure that supplies to an entitys associates without consideration are brought within the GST system and that supplies to an entitys associates for inadequate consideration are properly valued for GST purposes.

6.41 Division 63 of the GST Act provides that certain types of non-profit entities may treat separately identifiable units of their organisation as though they are separate entities for GST purposes. These separately identifiable units are called non-profit sub-entities. As a result of being treated as an entity, a non-profit sub-entity is not required to register for GST (although it may choose to register) where its annual turnover is below the registration turnover threshold.

6.42 The term associate , as used in the GST Act, is defined in section 195-1 by reference to section 318 of the ITAA 1936. The term is defined widely to include entities with specified relationships to natural persons, companies, certain trusts and partnerships. For example, relatives and partners of a natural person are associates of that person.

6.43 However, because the current definition of associate in section 195-1 of the GST Act adopts the definition in section 318 of the ITAA 1936, the term associate does not acknowledge the separate existence of non-profit sub-entities as they are not recognised entities in the income tax regime.

6.44 Item 18 inserts new section 72-92 into the GST Act to alter the operation of Division 72 so that the Division will apply to non-profit sub-entities. New section 72-92 treats non-profit sub-entities as associates of:

•

the parent entity [paragraph 72-92(a)] ;

•

every other non-profit sub-entity of the parent entity [paragraph 72-92(b)] ; and

•

any other associate of the parent entity [paragraph 72-92(c)] .

6.45 Consequently, supplies between non-profit sub-entities or between a non-profit sub-entity and the parent entity or associates of the parent entity for nil or inadequate consideration will attract GST.

Example 6.3

A registered non-profit organisation acquired books for $3,300 (including $300 GST, which it is entitled to claim as an input tax credit). The organisation then supplied the books for no consideration to one of its unregistered non-profit sub-entities. If there was consideration for the supply, the supply would be a taxable supply.

Subdivision 72-A operates to treat the supply for no consideration by the registered non-profit organisation to its unregistered non-profit sub-entity as a taxable supply. Section 72-10 makes the value of that taxable supply its GST exclusive market value of $3,000, rather than nil.

Tax invoices and Division 75 margin scheme

6.46 Subsection 29-70(2) provides that an entity is required to provide a tax invoice to a recipient of a taxable supply where it is requested to do so by the recipient. A tax invoice must be held by a recipient of a taxable supply before the recipient is entitled to claim any input tax credits on the acquisition (subsection 29-10(3)). The recipient is only entitled to claim input tax credits on the acquisition where the acquisition is a creditable acquisition.

6.47 Under section 75-20 of the GST Act, the supply of real property by an entity cannot give rise to a creditable acquisition where the GST liability is calculated using the margin scheme in Division 75 of the GST Act. Therefore, the recipient of the supply does not need to hold a tax invoice in relation to the acquisition because the recipient is not entitled to claim any input tax credits for the acquisition.

6.48 Item 19 inserts new section 75-30 to ensure that a supplier of real property will not be required to issue a tax invoice to the recipient of the supply, where the GST liability has been calculated using the margin scheme within Division 75. Item 4 inserts a reference to the new provision in section 29-99. Section 29-99 contains a list of special rules relating to tax invoices and adjustment notes.

Excesses

6.49 Section 78-55 currently provides that an excess paid to an insurer is not consideration for a taxable supply. It is not subject to GST. This provides the correct treatment where the insurer makes a payment, a supply or both in settlement of the claim. That is, where the insurer is entitled to a decreasing adjustment under Division 78 of the GST Act (or would have been so entitled if not for the fact that the insured had been entitled to a full input tax credit on the premium). This is because the excess is taken into account when calculating the decreasing adjustment in step 2 of the method statement in subsection 78-15(4).

6.50 However, insurers will not always settle claims by making payments or supplies. Insurers can also make acquisitions in order to settle claims. For example, an insurer may acquire from a supplier the undertaking to make supplies to the insured. Such acquisitions can be creditable acquisitions by the insurer for which it will be entitled to input tax credits.

Example 6.4

An insured not registered for GST has a motor vehicle accident and acquires the services of a tow truck operator to tow the vehicle to a repairer. The insurer reimburses the insured for the costs of the tow. The insurer will have a decreasing adjustment on this cash reimbursement. If the insurer then makes a creditable acquisition from the repairer it will be entitled to an input tax credit.

6.51 If the insurer is entitled to input tax credits on such acquisitions made in order to settle the claim, a payment of an excess to it is not taken into account when calculating the input tax credit, unlike when the insurer has a decreasing adjustment under Division 78.

6.52 Items 20 and 21 make amendments to allow a payment of excess to the insurer to be taken into account regardless of whether the insurer settles the claim in a way that entitles it to a decreasing adjustment under Division 78 or an input tax credit under the general rules in Division 11 of the GST Act.

6.53 The effect of the amendments is to provide that if the insurer has made payments or supplies in settlement of a claim and has made creditable acquisitions or creditable importations directly for the purpose of settling the claim, and an excess is paid to the insurer, the excess is apportioned. The excess is apportioned between the payments and supplies made in settlement of the claim and the creditable acquisitions or creditable importations made directly for settling the claim.

6.54 That portion that relates to the payments or supplies made by the insurer in settling the claim is taken into account in calculating the decreasing adjustment. This is done by amending step 2 of the method statement in subsection 78-15(4) to provide that the payment of excess to the insurer is only taken into account to this extent. [Item 20]

6.55 That portion that relates to the acquisition or importations made directly for the purpose of settling the claim is taken into account by providing that the insurer has an increasing adjustment on that portion. Item 21 makes amendments to provide for the increasing adjustment. Item 38 adds this new increasing adjustment to the list of increasing adjustments in section 195-1. The increasing adjustment occurs where the insurer only makes acquisitions or importations directly for the purpose of settling the claim. In this case the amount of the increasing adjustment is 1/11 of the excess paid to the insurer.

6.56 The increasing adjustment also occurs where the insurer makes both payments or supplies in settlement of a claim and acquisitions or importations directly for the purpose of settling the claim. In this case the amount of the increasing adjustment is calculated using the method statement in new subsection 78-18(2) .

Example 6.5

An insurer settles a claim by paying $1,100 cash settlement to the party damaged by the insured. The insurer also arranges with a supplier to make supplies to that party. The insurers arrangement with the supplier is such that it constitutes an acquisition by the insurer. It is a creditable acquisition by the insurer. It cost the insurer $2,200 (including GST). The insured paid an excess of $660 to the insurer. As the insurer has made both a payment in settlement of the claim and an acquisition directly for the purpose of the claim, it has an increasing adjustment on the payment of excess to it. The amount of the increasing adjustment is calculated as follows: 1,000 + 2,000 = 3,000. The excess, $660 is multiplied by 2,000 and divided by 3,000, which equals 440. This 440 is then multiplied by 1/11 to give the amount of the increasing adjustment, $40.

GST-free policies

6.57 Section 78-30 currently provides that insurers are not entitled to input tax credits for acquisitions of goods made for the purpose of supplying those goods in settlement of the claim where the supply of the insurance policy was not subject to GST. Insurers can acquire things other than goods directly for the purpose of settling claims. For example, a private health insurer could acquire an undertaking from a doctor to provide services to the insurers client. The amendments extend the operation of section 78-30 to include things other than goods. [Items 22 to 24]

6.58 Section 78-30 currently applies where the supply of the policy was not a taxable supply. This could therefore include policies that were supplied before 1 July 2000, or, for policies that span 1 July 2000, that part of the policy that occurs before 1 July 2000. This is not the intended application of the provision. Item 25 makes amendments to provide that the section only applies where the supply of the policy was GST-free.

Notification of extent of input tax credit on insurance premiums for GST groups

6.59 Section 78-50 currently provides that a settlement of an insurance claim is subject to GST if the entity that paid the premium did not inform the insurer of the extent to which it is entitled to an input tax credit on the premium, or in so informing the insurer understated that extent. In relation to GST groups the representative member of the group is the entity entitled to input tax credits. Hence, it is not necessarily the entity paying the premium that will be entitled to the input tax credits on the premium. Items 26 and 27 make amendments to section 78-50 so that for GST groups the GST liability on a settlement will arise if the entity that paid the premium does not inform the insurer of, or understates, the extent of input tax credit entitlement of the representative member on the premium.

Settlements to injured third parties

6.60 Items 28 and 29 amend section 78-65 to clarify that it applies, as for section 78-70, to the situation where the insured has a liability to a third party. This could be because of damage caused by the insured to the third party, and the settlement from the insurer is made to enable that liability to be discharged.

Interaction of Division 48 and Division 84

6.61 Under Division 48 of the GST Act, transactions within GST groups are generally not treated as taxable supplies. An exception to this general rule arises under subsection 48-40(2) where the reverse charge rules under Division 84 apply because an offshore supply of services is made from one group member to another. Supplies falling within this exception are treated as taxable supplies between GST group members.

6.62 Under subsection 48-45(3) of the GST Act an acquisition an entity makes from another member of the same GST group is treated as if it were not a creditable acquisition. This does not recognise that supplies between group members are taxable because of subsection 48-40(2) and Division 84. For an entity that is not a member of a GST group, input tax credits are generally available for acquisitions that relate to a supply that is a taxable supply because of section 84-5 to the extent that the acquisition is acquired for a creditable purpose.

6.63 Item 13 replaces subsection 48-45(3). New subsection 48-45(3) provides that an acquisition one member of the GST group makes from another member of the same GST group is not a creditable acquisition unless the thing acquired was a taxable supply as a result of the reverse charge rule under Division 84. However, the extent to which the acquisition is acquired for a creditable purpose will still be determined with regard to sections 11-15 and 11-30.

Supply of employees by offshore entity to an onshore subsidiary

6.64 Paragraph 9-20(2)(a) of the GST Act provides that employee services are generally not subject to GST. Similarly, subsection 84-15(2) of the GST Act provides that where a non-resident entity makes a transfer of the services of an employee to its Australian enterprise, the transfer is not subject to GST under the reverse charge rules. However, this exclusion from the reverse charge rules only applies where the payments from the Australian enterprise to the overseas enterprise would be withholding payments if they were payments made from the Australian enterprise to the employee. Where the services of an employee are provided by a registered entity to another entity, it will generally be a taxable supply under section 9-5 of the GST Act.

6.65 Where a non-resident entity makes a supply of employee services, in Australia, to its 100% owned subsidiary that supply will be a supply that is connected with Australia and be included in the calculation of the non-residents annual turnover. Where an entity is carrying on an enterprise and its annual turnover exceeds $50,000, the entity is required to be registered for GST. If the non-resident entity is required to register, the supply of employee services performed in Australia will be a taxable supply and subject to GST.

6.66 Item 32 inserts new section 188-40 to remove, in limited circumstances, the requirement for a non-resident entity making supplies of employee services in Australia to its 100% owned subsidiary, to register for GST.

6.67 New section 188-40 provides that when determining whether a non residents current annual turnover or projected annual turnover meets the registration turnover threshold, the entity can disregard a supply, to the extent that:

•

the supply consists of employee services performed in Australia and provided to a 100% subsidiary of the non-resident entity; and

•

the payments that the non-resident entity makes to the employee for its services would be withholding payments, if they were made by the Australian entity.

[Section 188-40]

6.68 However, when determining your annual turnover in relation to other turnover thresholds, these supplies are still included in your annual turnover. [Subsection 188-40(2)]

6.69 Item 33 inserts a definition of 100% subsidiary into section 195-1 of the GST Act. 100% subsidiary is defined as having the meaning given to that term by section 975-505 of the ITAA 1997.

Example 6.6

GlobalBank Corp (GBC) is a global bank with its headquarters in New York. It carries out its Australian operations through AustBank Corp (ABC) which is a wholly-owned subsidiary of GBC. GBC seconds to ABC an information technology (IT) manager to oversee the development and introduction of ABCs new computer system for 4 years on a salary of $200,000 per year. GBC pays the IT managers salary and recovers this cost from ABC.

The supply of the manager by GBC is a supply that is connected with Australia because the manager performs their duties in Australia. This is the only supply that GBC makes to ABC. Even though GBCs annual turnover of supplies connected with Australia exceeds the registration threshold of $50,000, GBC is not required to register for GST.

In the second year, GBC also supplies specialised personnel services to other financial institutions in Australia. The services are performed on site at the financial institution for a period of 2 weeks. The fee charged for this supply is $40,000. GBC does not need to take into account the continuing supply of the IT manager to ABC in determining whether it needs to register for GST. Therefore, GBC has not exceeded the registration threshold and is not required to be registered.

In the third year, GBCs supplies of specialised personnel services performed within Australia will increase and the fee received will be $110,000 over the next 12 months. Again, GBC does not need to take into account the continuing supply of the IT manager to ABC in determining whether it needs to register for GST. However, GBC will make other supplies connected with Australia over the next 12 months, the value of which will exceed the registration threshold. GBC is required to register for GST. Therefore, where all the conditions of section 9-5 are satisfied, both the supply of the specialised personnel services and the IT manager, by GBC will be taxable supplies.

Employee share ownership schemes

6.70 Imported services used to make input taxed supplies are subject to a GST reverse charge under Division 84. That is, the Australian recipient of the supply, rather than the overseas supplier, is liable for the GST on the imported service.

6.71 The supply of an employee share scheme by an overseas enterprise to an Australian branch, or by an overseas entity to a subsidiary of the entity, is currently subject to a GST reverse charge. For a variety of reasons, employee share schemes provided by international financial institutions to employees engaged at the Australian enterprise or subsidiary, involve the share scheme being provided outside of Australia. The cost of providing the employee share scheme is charged to the Australian branch or subsidiary.

6.72 A GST reverse charge, in these circumstances, places non-resident entities making input taxed supplies though their Australian operations at a potential competitive disadvantage compared to domestic suppliers. This is because domestic employee share schemes are usually provided directly by the employing entity to the employee and therefore, will not be subject to GST.

6.73 Item 30 inserts new section 84-14 which removes the GST reverse charge from a supply that relates to an employee share scheme:

•

by an overseas enterprise to its Australian branch; or

•

by an entity to its wholly-owned subsidiary.

6.74 New section 84-14 only excludes from the reverse charge those supplies relating to employee share schemes that are subject to Division 13A of Part III of the ITAA 1936. [Paragraph 84-14(b)]

6.75 Item 33 inserts a definition of 100% subsidiary into section 195-1 of the GST Act. 100% subsidiary is defined as having the meaning given to that term by section 975-505 of the ITAA 1997.

6.76 Item 35 inserts a definition of employee share scheme into section 195-1 of the GST Act. Employee share scheme is defined as having the meaning given to that term by section 139C of the ITAA 1936.

Example 6.7

DallasUSA is a non-resident of Australia and carries on an enterprise both in the United States of America and in Australia through a branch located in Sydney. The employees engaged through the Sydney branch are eligible to participate in an employee share scheme which is a scheme within Division 13A of Part III of the ITAA 1936. The shares are supplied to the employees by DallasUSA and provided in the United States. The cost of providing the scheme to the Australian employees is recovered by DallasUSA from the Sydney branch. The provision of the scheme is not subject to GST under the reverse charge rules.

Long-term commercial accommodation provided at a marina

6.77 Operators of commercial residential premises providing long-term commercial accommodation have the option to treat their supplies of long-term accommodation as either input taxed or to include GST in the price at a concessional rate under Division 87 of the GST Act.

6.78 Currently, the supply of a berth at a marina that is to be occupied by a ship that is used as a residence is not covered by the definition of commercial residential premises and the supply is fully taxable. Therefore, there is a disparity between the treatment of a supply of long-term commercial accommodation by way of the use of a berth at a marina and the supply of long-term commercial accommodation at other commercial residential premises, including caravan parks.

6.79 Item 34 inserts new paragraph (da) into the definition of commercial residential accommodation contained within section 195-1 of the GST Act. New paragraph (da) provides that a marina at which one or more of the berths is occupied, or are to be occupied, by ships used as residences, is a commercial residential premise . Division 87 then provides that supplies of long-term accommodation through these marinas are eligible to calculate the GST payable on the supply at the concessional rate.

6.80 Division 87 also allows the supplier of long-term commercial accommodation to choose that the Division doesnt apply to the supply. Where this choice is made, supplies of long-term commercial accommodation become input taxed under Subdivision 40-B. Item 8 of Schedule 1 inserts new subsection 40-35(1A) to ensure that the supply of a berth at a marina will be input taxed where the berth is, or is to be occupied by a ship that is used as a residence. The supply is only input taxed if the supply would have been subject to Division 87 if the supplier had not made the choice. That is, the supply must be a supply of long-term commercial accommodation.

6.81 The term marina has its ordinary meaning and will include a single berth. For example, where individual marina sites are provided by a supplier and the sites are not co-located, these marina sites will be commercial residential premises under the definition in section 195-1.

Definition of incapacitated entity and representative

6.82 An incapacitated entity is defined in section 195-1 of the GST Act to mean an individual who is bankrupt or an entity that is in liquidation or receivership. A representative is also defined in section 195-1 to mean a trustee in bankruptcy, a liquidator or a receiver.

6.83 These definitions do not include interim managers, like controlling trusteeships, arrangements under Part X of the Bankruptcy Act 1966, voluntary administrations or administrations of a deed of company arrangement, even though the Bankruptcy Act 1966 and the Corporations Law regard entities with interim management as insolvent.

6.84 The Bankruptcy Act 1966 and the Corporations Law broadly consider an entity to be insolvent when it is unable to pay all its debts as and when they become due and payable.

6.85 Items 37 and 39 amend the definition of incapacitated entity and representative in section 195-1 to ensure that the GST law is consistent with the Bankruptcy Act 1966 and the Corporations Law.

6.86 Item 39 extends the definition of representative to:

•

all persons appointed or authorised under Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable;

•

an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Law; or

•

an administrator of a deed of company arrangement executed by the entity.

6.87 While new paragraph (e) of the definition of representative in section 195-1 will cover most of the interim arrangements (since most entities will be unable to pay their debts thereby meeting this paragraph) it does not cover all administrators. As an administrator may be appointed to an entity that is still solvent under a deed of company arrangement or Division 2 of Part 5.3A of the Corporations Law, these circumstances have also been included in the definition of representative. This ensures that all interim managers are covered by the definitions and therefore subject to Division 147 of the GST Act.

6.88 Item 37 amends the definition of incapacitated entity in section 195-1 so that when a representative is appointed to manage the affairs of the entity, then the entity becomes an incapacitated entity at the same time. This ensures that the appointment of an interim manager to an entity will bring the entity under the application of Division 147 of the GST Act.

GST Transition Act

Construction agreements made before 1 July 2000

6.89 Under subsection 19(3) of the GST Transition Act, GST is payable to the extent that the value of the supply exceeds the value of the construction project as at 1 July 2000. The definition of value of the supply could, in certain circumstances, link back to section 9-75 of the GST Act and provide that the value is calculated as 10/11 of the entire GST inclusive consideration received. However, because GST is only payable on the proportion of the total consideration that relates to construction from 1 July 2000, the formula does not correctly calculate the value of the supply.

6.90 Item 41 amends subsection 19(3) to ensure that GST is only payable on the supply to the extent that the price of the supply (less the amount of any GST payable on the supply) exceeds the value of the construction project as at 1 July 2000.

6.91 The amendment in item 41 is taken to have commenced on 1 July 2000.

Amendments to the LCT Act

Lease or hire of luxury cars

6.92 As a general rule, the LCT value is the price of the car. Under this rule, where there is a lease or hire of a luxury car, then the LCT value is the total of all lease or hire payments under the arrangement. This may make the LCT value too high (since lease or hire payments include other indirect charges like administration, finance and fuel consumption charges) or too low (if the residual value of the lease is a large component of the agreement).

6.93 Item 42 amends the LCT Act to ensure that the LCT value is the GST inclusive market value of the car excluding any LCT payable, any other Australian taxes, fees or charges (other than GST and customs duty) and the price of certain modifications. [Subsection 5-20(6) of the LCT Act]

Example 6.8

In October 2000, Wendy acquires a luxury car. The LCT value (which includes GST) is $60,634. The LCT threshold is $55,134.

Using subsection 5-15(1), the amount of LCT payable is:

25/100 * 10/11 * [$60,634 - $55,134] = $1,250


The price of the luxury car is $61,884 (i.e. $60,634 + $1,250).

In November 2000, she leases the same luxury car to Justin. The GST inclusive market value is $61,884. As calculated above, this value comprises LCT value of $60,634 and LCT payable of $1,250 on the supply of the car to Justin.

Since LCT has already been paid, then the amount of LCT payable is calculated using subsection 5-15(2).

The amount of LCT payable ($1,250) is reduced by the amount of LCT payable in respect of the previous supply of the car ($1,250). Therefore, there is no amount of LCT payable on the lease of the luxury car.

Example 6.9

In October 2000, Motors Pty Ltd finishes making a luxury car in Australia. There is no LCT payable because as yet there is no taxable supply of a luxury car.

In November 2000, Motors Pty Ltd leases its luxury car to Usha. The GST inclusive market value is $61,884. Using subsection 5-15(1), the amount of LCT payable is $1,250. There is no reduction under subsection 5-15(2) because there has been no previous taxable supply or taxable importation.

Attributing LCT payable

6.94 At present, the attribution of LCT on taxable supplies and taxable importations follows the basic rules for attribution of supplies and importations under the GST Act. As the law currently stands, a manufacturer which leases a luxury car that it makes in Australia would have to attribute LCT on a periodic or progressive basis. Consequently, these manufacturers would be given an unintended advantage over lease companies which are subject to the full amount of LCT when they purchase the car.

6.95 Item 43 ensures that where there are supplies of a car by way of lease or hire, the LCT is attributable to the first tax period to which the supply of the car is attributable. This has effect despite the fact that the GST on supplies of cars under lease arrangements are attributable on a periodic or progressive basis under GST law. [Subsection 13-15(1A)]

Example 6.10

Following on from Example 6.9, when Motors Pty Ltd leases the luxury car to Usha, the LCT payable of $1,250 is attributable to the first tax period in which the supply of the car is attributable.

Amendments to the WET and LCT Transition Act

Special GST credit for sales tax paid on wine stock

6.96 Under subsection 3(4) of the WET and LCT Transition Act, an entity can only claim the special GST credit on wine stock by identifying the stock in one (and only one) GST return that it lodges before 22 January 2001. The Commissioner has granted a concession which provides small businesses with an extension of time for lodging their GST return under section 31-10 of the GST Act. Item 45 amends subsection 3(4) to ensure this concession also applies to special GST credits on wine tax by aligning the date of lodgment of an entitys special GST credit claim for wine tax with the concession granted by the Commissioner.

6.97 It is anticipated that many retailers will claim the special GST credit as soon as possible. However, later events such as discounts and returns may alter the amount the entity is entitled to claim. If, after making the claim, the entity receives any discounts or rebates, or accepts any return or returns goods to their supplier which leads to the entitlement to the special credit changing, the entity must lodge an amended GST return. The entity must do this on or before the 21st day of the month following the end of the tax period in which the change happens. [Items 44 and 46, subsections 3(3B) and 3(4A)]

6.98 The amendments made to the WET and LCT Transition Act are taken to have commenced on 1 July 2000.

Amendments to the ITAA 1997

Special credits under the WET and LCT Transition Act 1999

6.99 Item 48 amends the ITAA 1997 to include an amount equal to a special GST credit for sales tax paid on wine stock in assessable income. It will be treated as assessable income in the income year in which the end of the tax period the special credit is attributed to occurs. For example, if a special credit is attributed to a tax period ending 30 November 2000, and the entity has a calendar year substituted accounting period for income tax purposes, an amount equal to the special credit will be included in assessable income for the 2000 calendar year. [Item 48, subsection 17-30(2)]

6.100 Item 47 makes a change to the heading of section 17-30.

6.101 These amendments to the ITAA 1997 apply to assessments from the 2000-2001 income year. [Item 49]

Application and transitional provisions

6.102 Unless otherwise mentioned, the amendments made in Schedule 6 generally apply in relation to net amounts for tax periods starting on or after 1 July 2000. The amendments in items 20, 21 and 38 apply in relation to net amounts for tax periods starting on or after 17 August 2000. This is the date of Treasurers Press Release No. 85. [Item 49]

Chapter 7 - Technical corrections

Outline of Chapter

7.1 Schedule 7 to this Bill contains a number of minor technical corrections to the GST Act, the A New Tax System (Indirect Tax and Consequential Amendments) Act 1999, the A New Tax System (Indirect Tax and Consequential Amendments) Act (No. 2) 1999, the A New Tax System (Tax Administration) Act (No. 2) 2000, the Indirect Tax Legislation Amendment Act 2000 and the Taxation (Interest on Overpayments and Early Payments) Act 1983.

Detailed explanation of new law

Amendment to subsection 72-45(2) GST Act

7.2 Subsection 72-40(1) of the GST Act allows an acquisition without consideration from an entitys associate to be a creditable acquisition if the entity acquires the thing supplied otherwise than solely for a creditable purpose. Subsection 72-45(1) provides that an input tax credit may be claimed on the acquisition from the entitys associate that is without consideration, to the extent that the acquisition is for a creditable purpose.

7.3 The provisions apply despite the general rule relating to input tax credits on partly creditable acquisitions. This rule is contained in subsection 11-30(3). However, subsection 72-45(2) incorrectly refers to subsection 11-30(2). Item 4 corrects this reference.

Amendment to definition of recognised professional in section 195-1 of the GST Act

7.4 The term recognised professionalis defined in section 195-1 of the GST Act. A person is a recognised professional, in relation to the supply of a service of the kind specified in the table in subsection 38-10(1), if certain conditions are satisfied.

7.5 Paragraph (c) of the definition at section 195-1 is intended to apply to hearing related services. The provision contains an incorrect reference to item 2 in the table at 38-10(1) which lists acupuncture services. The definition should refer to item 3 which lists audiology, audiometry services. Item 6 corrects this reference.

Technical correction to section 17-30 of the ITAA 1997

7.6 Item 13 ensures the proper application of a definition which was inadvertently omitted, when section 17-30 was originally inserted into the ITAA 1997.

Other amendments

7.7 Item 7 amends the definition of registered in section 195-1 of the GST Act to include a reference to the registration of branches. The other amendments correct cross-referencing errors and references to defined terms. [Items 1 to 3, 5, 7 to 12 and 14 to 21]