House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

12-month export period for the GST-free supply of new recreational boats

Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to allow supplies of particular types of new recreational boats to be GST-free if the boats are exported within a specified 12-month period.

Date of effect: 1 July 2011.

Proposal announced: This measure was announced in the then Assistant Treasurer's Media Release No. 088 of 11 May 2010.

Financial impact: A reliable estimate cannot be provided. However, the impact is expected to be small.

Compliance cost impact: Low. This impact comprises a low implementation impact and a low increase in ongoing compliance costs relative to the affected group.

General interest charge

Schedule 2 to this Bill amends the Income Tax (Transitional Provisions) Act 1997 to remove a technical deficiency that prevents the ongoing imposition of the general interest charge in some circumstances.

Date of effect: These amendments apply from 1 July 2010.

This application date ensures that all unpaid amounts of income tax and shortfall interest charge are treated equally under the law and that the Commissioner of Taxation's ability to collect the general interest charge remains uninterrupted. The technical deficiency arose from the rewrite and transfer of the relevant provisions from the Income Tax Assessment Act 1936 to the Income Tax Assessment Act 1997 which commenced on 1 July 2010.

These amendments only affect some taxpayers that have unpaid income tax or shortfall interest charge liabilities.

Proposal announced: These amendments were announced in the 2011-12 Budget.

Financial impact: Nil.

Compliance cost impact: Negligible.

Chapter 1 - 12-month export period for the GST-free supply of new recreational boats

Outline of chapter

1.1 Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to allow supplies of particular types of new recreational boats to be goods and services tax (GST) free if the boats are exported within a specified 12-month period.

Context of amendments

Current law

1.2 The supply of a ship is GST-free if the supplier exports the ship from Australia within 60 days after the supplier receives any payment for the supply or gives an invoice for the supply (whichever is earlier).

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Under the GST Act a ship means any vessel used in navigation other than air navigation.

1.3 If the payment is by instalments, the supply is GST-free, provided the supplier exports the ship within 60 days of receiving any of the final instalment or issuing an invoice for the final instalment.

1.4 The supply of a ship is also GST-free if the recipient exports the ship from Australia under its own power within 60 days after taking physical possession of the ship. In addition, there are circumstances where the supplier will be treated as having exported the ship, notwithstanding that the recipient exports the ship.

1.5 If the payment is by instalments, the supply is GST-free if the recipient exports the ship from Australia under its own power within 60 days of the earlier of:

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paying any part of the final instalment;

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the supplier giving the recipient an invoice for the final instalment; or

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the supplier delivering the ship to the recipient or to another person as requested by the recipient.

1.6 In each case, the Commissioner of Taxation (Commissioner) has the discretion to extend the 60-day export period to take account of the particular circumstances of the export.

Summary of new law

1.7 Certain types of new ships will be able to be supplied as GST-free supplies if they are exported within a specified 12-month period and are not used in a disqualifying way before they are exported. This rule is in addition to the existing rules that allow for ships that are exported to be supplied GST-free, subject to satisfying any other conditions, within a specified 60-day period. As with the existing rules concerning the export of ships, the Commissioner may, under the new rule, extend the period in which a ship must be exported.

Comparison of key features of new law and current law

Detailed explanation of new law

General purpose

1.8 The intended effect of the new provision is to provide a 12-month period within which certain types of ships can be exported from Australia without affecting the GST-free treatment of the supply of the ship. Broadly, to be a GST-free supply, the ship will need to be a new ship of a type used for recreational purposes. In addition the ship will need to be used only for recreational/non-commercial purposes while it is in Australia.

1.9 Under the existing law, a purchaser or the supplier must export the ship from Australia within a specified 60-day period (unless the period is extended by the Commissioner) in order for the supply to be treated as a GST-free supply. Introducing an additional 12-month export period to apply to the supply of a 'recreational boat' (boat) enables the purchaser of such a boat to gain experience operating the boat in Australian waters before having to remove it from Australia. Sailing or 'motoring' the boat out of Australia is expected to be the most common means of exporting the boat, although there is no requirement for the boat to be exported in this way. Further, it is consistent with the amendments that the boat need not be sailed or motored at all within Australia for up to 12 months before being exported. The supply will still be a GST-free supply, as long as there is no commercial use of the boat. For the supplier or the recipient to export the boat, it will be enough for them to direct a third party to remove the boat from Australia on their behalf (for example, the master of the ship may sail or motor the boat directly out of Australia on behalf of the purchaser or alternatively, an agent may organise the loading of the boat onto another ship for export).

1.10 In order for the supply of a boat to be treated as a GST-free supply, there are two sets of tests that must be satisfied. These tests can be broadly described as the 'new recreational boat' test and the 'disqualifying activity' test.

New recreational boat

1.11 The first test that must be satisfied in order to treat the supply of a boat as a GST-free supply is that the boat must be a 'new recreational boat'. Broadly, a boat must not be a substantially reconstructed boat and not have been previously sold, leased or used since the completion of its construction. In addition there are requirements about the character of the boat that must be satisfied. These include that the boat is designed and fitted out principally for activities done as private recreational pursuits or hobbies and that the boat not be a commercial ship. These requirements reflect the intention of making the 12-month export period available only for newly constructed boats and not for the supply of second-hand boats, including boats that are substantially reconstructed. They also reflect the intention of ensuring the boat is of a type used primarily for recreational purposes.

Disqualifying activity

1.12 The introduction of a new 12-month export period provides a benefit to both suppliers and purchasers of qualifying boats. Suppliers will be able to supply the boat as a GST-free supply in circumstances that are not available under the existing export provisions. Purchasers could normally be expected to actively use the boat in recreational pursuits while it is in Australia, but the holding of a boat at its mooring without further use is also permitted.

1.13 For the extended export period to be available, use of a boat in an Australian enterprise is not permitted, with only limited use of a boat in an enterprise that is carried on outside Australia being allowed. In addition, and subject to two exceptions, no boat can be used to obtain consideration within the 12-month export period. The general effect of these restrictions is that within the 12-month export period a boat should not be used for profit or gain or be used for commercial purposes. This means that most purchasers who wish to take advantage of the 12-month export period would be expected to be acquiring the boat in a private, non-enterprise, capacity.

Explanation of amendments

1.14 A new item is inserted into the table in subsection 38-185(1) of the GST Act. Essentially, the item treats the supply of a ship as a GST-free supply if the ship is a 'new recreational boat' on the 'receipt day'. Additionally, the supplier or recipient must export the boat within 12 months after the receipt day and the boat must not be used within that export period in a disqualifying activity. [Schedule 1, item 1, subsection 38-185(1), item 4A]

Receipt day

1.15 The receipt day is defined as the earliest day on which one or more of the following occurs:

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when the recipient takes physical possession of the boat;

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if consideration for the supply is provided by instalments under a contract that requires the boat to be exported - the supplier receives any of the final instalment; or

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if consideration for the supply is provided by instalments under a contract that requires the boat to be exported - the supplier gives an invoice for the final instalment.

[Schedule 1, item 1, subsection 38-185(1), item 4A, paragraph (a)]

1.16 The action or activity that occurs in order to establish the receipt day is one that is currently reflected in existing export provisions in subsection 38-185(1) of the GST Act and does not introduce any new action or activity relevant to establishing the commencement day for the export period.

Criteria for a new recreational boat

1.17 In order for the supply of a boat to be a GST-free supply under the new item in subsection 38-185(1), the boat must satisfy the definition of a 'new recreational boat'. A new recreational boat is a ship that:

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has not been substantially reconstructed; and

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has not been sold, leased or used since the completion of its construction except in connection with:

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the supply or acquisition of the boat as stock held for the purpose of sale or exchange in carrying on an enterprise; or

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the supply mentioned in item 4A or acquisition of the ship by the recipient of the boat as mentioned in item 4A; and

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was designed and is fitted out principally for use in activities done as private recreational pursuits or hobbies; and

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is not a commercial ship.

[Schedule 1, item 1, subsection 38-185(1), item 4A, paragraph (a) and item 2, subsection 38-185(5)]

1.18 The first condition ensures that the supply of a substantially reconstructed boat will not be a GST-free supply under item 4A (but may be GST-free under another export provision within subsection 38-185(1) of the GST Act). This requirement, taken with the other requirements in subsection 38-185(5), is to ensure that only supplies of essentially newly constructed boats qualify for the 12-month export period. [Schedule 1, item 2, paragraph 38-185(5)(a)]

1.19 However, a boat that is newly constructed and subsequently modified to meet the requirements of a customer may still be a GST-free supply under item 4A. The modification must not amount to a substantial reconstruction of the boat. For example, a boat dealer may undertake modification of a new boat they hold in order to meet the needs of a customer, the boat otherwise meeting all of the criteria to qualify as a new recreational boat.

1.20 The second condition ensures that a boat that has been used before its sale to the recipient, including use by way of a sale or lease, cannot be treated as a GST-free supply to which the 12-month export period can apply. This requirement supports the intention that only suppliers and purchasers of new or unused boats can take advantage of the 12-month export period but allows existing boats that have not been used to qualify. [Schedule 1, item 2, paragraph 38-185(5)(b)]

1.21 However, a boat that has been sold, leased or acquired as stock held for the purpose of exchange or sale by an entity in the carrying on of an enterprise will qualify as a new recreational boat. This exception will apply, for instance, to circumstances where a boat builder disposes of its stock of boats to various dealers (and financiers) who then on-supply the boats to other dealers or end purchasers. The boat remains a new recreational boat throughout the supply chain. This caters for common financing arrangements entered into by suppliers and financiers. [Schedule 1, item 2, subparagraph 38-185(5)(b)(i)]

1.22 In addition, a boat that is constructed by a supplier otherwise than as stock held for the purpose of sale or exchange may qualify as a new recreational boat. This would include circumstances where any use of a boat is considered only to have occurred in connection with the supply or acquisition by the recipient of the boat referred to in item 4A. For example, a boat that has been sold by the supplier to the recipient before the receipt day will not be treated as a sold or used boat and may still qualify as a new recreational boat. [Schedule 1, item 2, subparagraph 38-185(5)(b)(ii)]

1.23 The final two conditions specify that the boat be principally designed and fitted out for use in activities done as private recreational pursuits or hobbies and that the boat not be a commercial ship [Schedule 1, item 2, paragraphs 38-185(5)(c) and (d)] . A boat, fully constructed and fitted out in this way, will satisfy these requirements. The requirements are directed at ensuring that the 12-month export period under item 4A is only available for supplies of recreational boats. This would include boats that are generally referred to as sailing boats, motorised pleasure craft and similarly designed and fitted out vessels. These types of boats will generally be designed and fitted out in such a way that principally supports private use by individuals rather than commercial use. Whether a particular individual boat is within the meaning of a recreational boat will depend on the design features of the boat and the nature of its fit out [Schedule 1, item 2, paragraph 38-185(5)(c)] .

1.24 Commercial ships are excluded from the definition of 'new recreational boat'. For example, a boat that is constructed and fitted out for large scale commercial fishing (a fishing trawler with the capability of storing large volumes of fish and with other related processing facilities) may have elaborate sleeping quarters and a designer galley included to enhance crew comfort. The boat would be regarded as a commercial ship, even though it is designed and fitted out in a way that could support activities done as private recreational pursuits or hobbies of the crew members. A commercial ship is one that is designed and fitted out for use in commercial activity, such as deriving income from paying passengers or for the movement of cargo. These types of ships will not be new recreational boats and the 12-month export period under item 4A will not apply to supplies of such ships. [Schedule 1, item 2, paragraph 38-185(5)(d)]

1.25 It could be considered that the criteria in paragraphs (c) and (d) will be assessed against a spectrum of ships. At one end of the spectrum will be boats that are designed and fitted out wholly or principally for the conduct of private recreational activities and will evidently not be a commercial ship readily used to any degree for commercial purposes (for example, relatively small sailing boats with minimal facilities). At the other end of the spectrum will be ships that are clearly commercial ships (for example, a purpose built cruise ship or cargo vessel), even though these ships may have various features in design and fit out that could be attributed to private recreational activities (such as cabins with sleeping quarters). Other boats may be designed and fitted out principally in support of activities of a private or domestic nature but have features that render the boat capable of a degree of commercial activity (for instance, motor boats that are fitted out for private recreational fishing but to varying degrees may be fitted out in a way that supports commercial fishing activities). It will be a question of fact determined on an objective basis whether a particular boat satisfies the requirement of being designed and fitted out principally for use in activities done as private recreational pursuits or hobbies and is not a commercial ship.

1.26 The dictionary in the GST Act will direct the reader to the definition of 'new recreational boat' contained within subsection 38-185(5). [Schedule 1, item 3, section 195-1]

Export

1.27 The recipient or the supplier must export the boat within 12 months after the receipt date (the export period), or within such further period provided by the Commissioner [Schedule 1, item 1, subsection 38-185(1), item 4A, paragraph (b)] . If the boat is exported by the recipient, the supplier will need to gather sufficient evidence of the export from the recipient to satisfy themselves that the export of the boat occurred within the export period.

Disqualifying uses

1.28 For the supply of a boat to be treated as a GST-free supply, the boat must not be used for certain activities during the export period. These activities, with the exception of the use of a boat in connection with a supplier supplying the boat to the recipient, are:

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use of the boat as security for the performance of an obligation (other than an obligation to repay a loan relating to the acquisition of the boat);

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use of the boat in carrying on an enterprise in Australia;

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use of the boat in carrying on an enterprise outside Australia, other than the boat being used in way that is private or domestic in nature or in a series of activities done as a private recreational pursuit or hobby; and

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use of the boat for obtaining consideration, other than consideration that consists of the provision of services by an employee of an enterprise carried on outside Australia by the recipient of the boat or consideration that is in respect of a race or other sporting event in which the recipient of the boat competes.

[Schedule 1, item 1, subsection 38-185(1), item 4A, paragraph (c) and item 2, subsection 38-185(6)]

1.29 The aim of these restrictions is to prevent commercial use of a boat or use of the boat for financial gain by the recipient or any other person while the boat is in Australia.

1.30 The first condition is to prevent a boat, within the 12-month export period, from being used in financial dealings of the recipient of the boat or others that have little or nothing to do with the purchase of the boat and its subsequent export from Australia. However, the purchaser is permitted to use the boat as security for a loan in order to purchase the boat itself. [Schedule 1, item 2, paragraph 38-185(6)(a)]

1.31 Furthermore, some suppliers under the contract of sale may retain the boat as security until final payment of the boat is made or the boat is exported. This will not disqualify the purchaser from accessing the extended export period.

1.32 The second condition is to prevent a boat from being used to carry on an enterprise in Australia within the 12-month export period. The condition also applies to circumstances where the boat is used in an enterprise that is carried on by a person other than the recipient of the supply of the boat. For instance, a recipient cannot lend the boat to another person who makes use of the boat in their enterprise and still access the 12-month export period. [Schedule 1, item 2, paragraph 38-185(6)(b)]

1.33 The third condition prevents the use of a boat within the 12-month export period in an enterprise that is being carried on outside Australia. For instance, this means the boat cannot be used to advertise the purchaser's business outside Australia or to entertain the business' overseas clients. Alternatively, a recipient that acquires a boat as part of carrying on an enterprise outside of Australia may choose to register for GST and claim any input tax credit to which it is entitled. [Schedule 1, item 2, paragraph 38-185(6)(c)]

1.34 However, a boat may be used in a limited way in relation to the carrying on of an enterprise outside of Australia without affecting the GST-free treatment of the supply of the boat. A boat may be used in a way that is private or domestic in nature or alternatively, it may be used in an activity or series of activities done as a private recreational pursuit or hobby. For example, a person who acquires a boat as part of their enterprise carried on outside of Australia may, nevertheless, choose to hold the boat for a short period in Australia and live aboard the boat or use it to undertake a holiday within Australia. This non-enterprise or non-commercial use will not disqualify the supply of the boat from being a GST-free supply. [Schedule 1, item 2, subparagraphs 38-185(6)(c)(i) and (ii)]

1.35 The fourth condition prevents the boat from being used within the 12-month export period for consideration. This restriction includes those circumstances where the boat is used by a recipient that is not carrying on an enterprise. For instance, a boat that is disposed of by a recipient within the 12-month export period for consideration will result in the supply of the boat to the recipient not being a GST-free supply. [Schedule 1, item 2, paragraph 38-185(6)(d)]

1.36 The restriction on the use of a boat in return for consideration does not include circumstances where the consideration derived by the recipient is represented by the supply of services of an employee of the recipient's enterprise carried on outside of Australia. For instance, an employee may travel to Australia to use an employer's boat in Australia for a holiday. The employee may be permitted to use the boat on the basis that the boat is made available in return for the employee's services that have, or will be, performed for the employer. Such use of the boat by the employer within the 12-month export period will not disqualify the supply of the boat from being a GST-free supply. [Schedule 1, item 2, subparagraph 38-185(6)(d)(i)]

1.37 In addition, the restriction on the use of a boat within the 12-month export period in return for consideration does not include circumstances where the consideration arises from the recipient competing in a race or other sporting event with the boat. A recipient (including boat crew) will be able to enter and participate with their boat in Australian races and sporting events where prizes are offered to successful competitors without affecting the supply of the boat to the recipient as a GST-free supply. [Schedule 1, item 2, subparagraph 38-185(6)(d)(ii)]

1.38 None of the disqualifying tests concerning the use of a boat within the 12-month export period apply to the use of a boat by the supplier in connection with the supply of the boat to the recipient. This exclusion ensures that any use of the boat by the supplier in its enterprise and relevant to the supply of the boat to the recipient that occurs after the receipt day will not prevent the supply of the boat from being a GST-free supply. For example, the exclusion pertains where the supplier continues to have rights and/or access to the boat that are relevant to ensuring continuing terms and conditions of the sale contract are complied with by the recipient. [Schedule 1, item 2, subsection 38-185(6)]

1.39 A supplier that makes a supply of a boat to which item 4A applies should obtain and hold evidence to confirm that the tests set out in subsection 38-185(6) are satisfied. That evidence may be obtained from the recipient and others as necessary.

Application and transitional provisions

1.40 These amendments apply to supplies of ships made under contracts entered into on, or after, 1 July 2011. The supplies also must not be made pursuant to rights or options granted before 1 July 2011. [Schedule 1, item 4, paragraphs (a) and (b)]

Chapter 2 - General interest charge

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax (Transitional Provisions) Act 1997 (Transitional Provisions Act) to remove a technical deficiency that prevents the ongoing imposition of the general interest charge (GIC) in some circumstances.

Context of amendments

2.2 The tax law imposes an interest charge, known as the GIC, for the late payment of income tax and shortfall interest charge liabilities.

2.3 The Tax Laws Amendment (Transfer of Provisions) Act 2010 (Transfer of Provisions Act) rewrote and transferred the GIC imposition provisions for outstanding amounts of income tax and shortfall interest charge from the Income Tax Assessment Act 1936 (ITAA 1936) to the Income Tax Assessment Act 1997 (ITAA 1997). The purpose of this rewrite was to simplify the expression of, and remove any ambiguity in, the provisions without making any policy changes.

2.4 This change took effect from 1 July 2010 with transitional arrangements ensuring the transfer did not affect the ongoing imposition of the GIC on outstanding amounts of income tax and shortfall interest charge.

2.5 However, there is a technical deficiency with the transitional arrangements. This means that in some circumstances the tax law does not impose the GIC on outstanding income tax and shortfall interest charge liabilities.

2.6 The Government undertook public consultation between 5 November 2009 and 18 December 2009 on the draft legislation that rewrote and transferred the GIC provisions. None of the six submissions that the Government received from this consultation identified this specific deficiency in the draft legislation.

2.7 These amendments restore the ongoing imposition of the GIC on outstanding amounts of income tax and shortfall interest charge by removing this technical deficiency. To ensure the equal treatment of unpaid amounts of income tax and shortfall interest charge under the law and to ensure the Commissioner of Taxation's (Commissioner) ability to collect the GIC remains uninterrupted, these amendments commence immediately after the rewritten provisions commenced, which was 1 July 2010.

Summary of new law

2.8 These amendments modify the Transfer of Provisions Act's transitional arrangements to remove this technical deficiency in the GIC provisions.

Detailed explanation of new law

Operation of the existing transitional arrangements

2.9 With effect from 1 July 2010, the Transfer of Provisions Act inserted Division 5 of the ITAA 1997 as part of the rewrite and transfer of the GIC provisions from section 204 of the ITAA 1936.

2.10 Section 5-15, which is contained in Division 5, of the ITAA 1997 imposes the GIC on outstanding amounts of income tax or shortfall interest charge.

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However, section 5-5 of the Transitional Provisions Act limits the application of this section to income tax and shortfall interest charge that is payable for the 2010-11 and subsequent financial years.

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In addition, section 5-10 of the Transitional Provisions Act provides that all unpaid amounts of the GIC as at 30 June 2010 which were imposed under former subsection 204(3) of the ITAA 1936 will continue to accrue after this date under section 5-15 of the ITAA 1997. This ensures that unpaid amounts of the GIC already imposed under subsection 204(3) of the ITAA 1936 are not extinguished.

2.11 Item 56 of Schedule 1 to the Transfer of Provisions Act provides that, with the exception of subsection 204(3) of the ITAA 1936, former section 204 of the ITAA 1936 will continue to operate in relation to any income tax or shortfall interest charge that is not covered by Division 5 of the ITAA 1997.

2.12 However, the exclusion of subsection 204(3) of the ITAA 1936 from these transitional arrangements means the law does not impose the GIC on any income tax or shortfall interest charge liabilities from the 2009-10 or earlier financial years if these liabilities did not exist on 30 June 2010. This exclusion also means that:

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the law does not impose the GIC on income tax and shortfall interest charge liabilities that did not exist just before 1 July 2010 but subsequently become due for payment on 30 June 2010 or earlier due to an original or amended assessment; and

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the law does not impose the GIC on income tax and shortfall interest charge liabilities that relate to a substituted accounting period which ends before 30 June 2010 and the liabilities are due for payment on or after 1 July 2010.

Modifying the application of these transitional arrangements

2.13 These amendments modify the application of section 5-15 of the ITAA 1997 so that it applies to an amount of income tax or shortfall interest charge that is due for payment on or after 1 July 2010, regardless of the financial year that the income tax or shortfall interest charge relates to. [Schedule 2, items 1 and 3]

Example 2.1

On 1 November 2010 Jamie receives his notice of assessment from the Australian Taxation Office (ATO) for the 2009-10 financial year stating he has an income tax liability of $14,000 which is due for payment by 25 November 2010. However, Jamie misplaces the notice and forgets to pay the liability. Jamie subsequently finds the notice of assessment in April 2011 and contacts the ATO to arrange payment.

Jamie is liable to pay the GIC on this unpaid liability.

2.14 These amendments clarify that it does not matter when the liability that attracts the GIC has been assessed for the purposes of working out whether the GIC is imposed under the former subsection 204(3) of the ITAA 1936 or section 5-15 of the ITAA 1997. [Schedule 2, items 2 and 4]

Example 2.2

Phillippa lodges her 2007-08 income tax return with the ATO on 21 March 2011. The ATO subsequently issues Phillippa with a notice of assessment on 20 April 2011 stating that Phillippa's outstanding income tax liability of $5,000 was due for payment on 21 November 2008.

Phillippa is liable to pay the GIC on this unpaid liability.

Application and transitional provisions

2.15 These amendments commence on 1 July 2010, immediately after the commencement of the Transfer of Provisions Act.

2.16 This commencement date ensures the ongoing effective imposition of the GIC and that the Commissioner's ability to collect the GIC remains.

2.17 These amendments only affect some taxpayers that have unpaid income tax or shortfall interest charge liabilities.

Index

Schedule 1: 12-month export period for the GST-free supply of new recreational boats

Schedule 2: General interest charge