House of Representatives

Explanatory Memorandum

(Circulated by authority of the Acting Minister for Revenue and Financial Services, Senator the Hon Mathias Cormann)

Glossary

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

General outline and financial impact

GST and valuable metals

This Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to address exploitation of the goods and services tax (GST) law as it relates to precious metals. The amendments introduce a reverse charge for business to business transactions between suppliers and purchasers of gold, silver and platinum to remove the opportunity for a supplier to avoid paying GST to the Commissioner of Taxation by liquidating. The amendments also clarify the law to ensure that entities cannot exploit the special GST treatment for second-hand goods to claim input tax credits by changing the form of a precious metal they acquire.

Date of effect: These amendments apply in relation to supplies made on or after 1 April 2017.

Proposal announced: These amendments were announced by the Minister for Revenue and Financial Services on 31 March 2017.

Financial impact: This measure is estimated to have an unquantifiable gain to GST revenue over the forward estimates period comprising:

* Unquantifiable

Human rights implications: This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - paragraphs 1.82 to 1.87.

Compliance cost impact: The amendment imposes some ongoing compliance costs as affected businesses need to determine if relevant supplies should be reverse charged and if input tax credits for acquisitions of second-hand goods are affected.

Chapter 1 - GST and valuable metals

Outline of chapter

1.1 This Bill introduces a mandatory reverse charge for taxable supplies between suppliers and purchasers of gold, silver and platinum. This removes the opportunity for fraudulent input tax credit claims by the purchaser and for the supplier to avoid paying goods and services tax (GST) to the Commissioner of Taxation (Commissioner) by liquidating. These amendments also establish a framework for parties to voluntarily reverse charge their supplies of such precious metals whether or not they are required to under the GST law.

1.2 The Bill also clarifies the GST law to ensure that entities cannot exploit the special tax treatment for second-hand goods to claim input tax credits by changing the form of a precious metal. This ensures that input tax credits cannot be claimed for acquisitions of valuable metals in situations inconsistent with the policy underpinning the second-hand goods rules.

1.3 All legislative references in this Chapter are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), unless otherwise stated.

Context of amendments

1.4 On 31 March 2017, the Government announced changes to:

•

apply a reverse charge to taxable supplies of goods containing gold, silver or platinum to improve the integrity of the GST system; and

•

clarify the GST law in relation to precious metals and second-hand goods to ensure the law operates as intended.

1.5 The objective of the announced changes is to combat 'missing trader' and 'second-hand goods' schemes in the gold industry, which if left unaddressed would continue to present an integrity risk to the GST system. The changes were announced to apply from 1 April 2017 to remove the opportunity for those engaging in such activities to continue to exploit the GST law in the period between the date of announcement and the passage of legislation giving effect to the changes. The announced changes also apply to silver and platinum, so the schemes identified in the gold industry do not shift to those industries once the opportunities for exploiting the GST law in relation to gold are removed.

1.6 The schemes identified have involved entities altering gold such that it no longer meets the definition of a 'precious metal' under the GST Act. To meet the definition of a 'precious metal' in section 195-1, gold, silver, platinum and any other precious metal prescribed by regulation must be of a requisite level of fineness and be in an 'investment form'.

1.7 'Investment form' is not defined in the GST Act. However, the Commissioner considers that it means that the metal must:

•

be in a physical form that is capable of being traded on the international market for that metal by traders such as banks, bullion dealers, commodity brokers and stockbrokers. This would include bars, wafers and bullion coins;

•

bear some mark or characteristic on its face accepted by the market as identifying and guaranteeing its fineness and quality, for example, a hallmark. This would therefore exclude granules; and

•

usually be traded at a price determined by reference to the spot price of the metal it contains (refer GST Ruling GSTR 2003/10).

1.8 The 'form' of gold and other metals can readily be changed without any sophisticated process. This may include defacing, scratching off hallmarks, melting, granulating, cutting or chopping the metal, such that it is no longer in 'investment form'.

1.9 A supply of the altered metal would be treated as a taxable supply under the GST Act, whereas supplies of precious metals are input taxed under section 40-100 or GST-free under section 38-385 and are therefore not taxable supplies (refer section 9-5).

Missing trader schemes

1.10 Generally, when a taxable supply of goods is made, the purchaser (i.e. recipient of the goods) pays GST to the supplier of the goods and then later claims an input tax credit when lodging their business activity statement (BAS) with the Commissioner. The supplier typically receives the GST component as part of the sale price at the time of sale and is required to remit GST to the Commissioner later, when they lodge their BAS.

1.11 The missing trader schemes identified have involved taxable supplies of altered metal, where the supplier liquidates or otherwise goes missing without remitting the GST to the Commissioner. The purchaser of the altered metal then claims an input tax credit on the supply.

Second-hand goods schemes

1.12 The second-hand goods schemes identified have involved entities altering the 'form' of gold so that it arguably qualifies for the special GST treatment that applies to second-hand goods. The Commissioner's view of the law is that these schemes are ineffective but the law has been amended to remove any doubt.

1.13 Prior to the amendments in this Bill, the definition of second-hand goods in section 195-1 explicitly excluded 'precious metal' and 'goods to the extent that they consist of gold, silver, platinum, or any other substance which, if it were of the required fineness, would be precious metal'.

1.14 Altering the metal ensures it no longer meets the definition of a 'precious metal' and a view has been expressed that the altered metal is not otherwise excluded from being a second-hand good. However, the Commissioner takes the view that such altered metals are excluded from being second-hand goods (refer draft GST Determination GSTD 2017/D1).

1.15 The GST law allows entities to claim input tax credits for second-hand goods acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of their business, even though the supply of the goods to them was not a taxable supply. Broadly, this rule is designed to avoid cascading of GST, or GST being charged on GST, by allowing an input tax credit for any GST embedded in the price of second-hand goods that GST-registered entities acquire from unregistered entities.

1.16 As supplies of precious metals are input taxed under section 40-100 or GST-free under section 38-385, they would not be expected to carry any embedded GST. Allowing an input tax credit in such situations is not consistent with the policy underpinning the second-hand goods rules.

Summary of new law

1.17 These amendments create a new Division 86 'Valuable metals' within the GST Act. This new Division deals with supplies of goods consisting wholly or partly of gold, silver or platinum. Division 86 provides that generally the GST on such taxable supplies is 'reverse charged', such that the recipient of the supply is liable for the GST on the supply in place of the supplier. These amendments also establish a framework for parties to voluntarily reverse charge their supplies of valuable metals, whether or not the mandatory reverse charge applies to the supply.

1.18 The Bill also amends the definition of second-hand goods in section 195-1 to clarify that generally, goods to the extent that they consist of gold, silver or platinum are not second-hand goods.

Comparison of key features of new law and current law

Detailed explanation of new law

Mandatory reverse charge on supplies of gold, silver, platinum and specified substances

1.19 This Bill applies a mandatory reverse charge mechanism to taxable supplies of goods consisting of gold, silver, platinum or any other substance specified in regulations for the purposes of the definition of a 'precious metal' in section 195-1 of the GST Act. Under a reverse charge, the recipient of the supply (i.e. the purchaser) rather than the supplier is responsible for remitting GST to the Commissioner. The recipient will remit the GST to the Commissioner in lieu of the supplier when they claim their equal and offsetting input tax credit (if fully creditable) at BAS lodgement. Under this mechanism, the supplier is not liable to pay GST on the supply to the Commissioner (which negates the need for a supplier to pass on the cost of GST to the recipient by including GST in the price charged for the goods).

1.20 Applying a reverse charge to such supplies removes the opportunity for a fraudulent input tax credit claim by the recipient or for the supplier to go 'missing', to avoid paying the GST to the Commissioner (refer paragraphs 1.10 to 1.11 above for more information).

1.21 The reverse charge overrides section 9-40, which would otherwise provide that the supplier is the entity liable for the GST on a taxable supply. The reverse charge is mandatory, even where the supply could otherwise be the subject of a voluntary agreement under Division 83 if made by a non-resident (which establishes a framework for voluntary reverse charges in relation to taxable supplies made by non-residents). [Schedule1, item 6, subsection 86-5(5)]

1.22 These amendments also introduce an option for suppliers and recipients to agree in writing to voluntarily reverse charge taxable supplies containing valuable metal whether or not the mandatory reverse charge applies. In some situations given the nature of the goods and the volume of transactions it may be difficult for suppliers and recipients to work out if a particular supply of goods is subject to the mandatory reverse charge. In such situations, the voluntary reverse charge option may reduce compliance costs, as it would negate the need to undertake this assessment. See paragraphs 1.48 to 1.50 below.

Circumstances where mandatory reverse charge applies

1.23 Subject to certain exceptions (refer paragraphs 1.30 to 1.52 below), the GST on a taxable supply is payable by the recipient of the supply, and is not payable by the supplier, if:

•

the supply is of goods that consist wholly or partly of valuable metal; and

•

the recipient is registered or required to be registered.

[Schedule 1, item 6, paragraphs 86-5(1)(a) and (b)]

1.24 The reverse charge applies to taxable supplies, which are supplies connected with the 'indirect tax zone' (i.e. broadly Australia) and made for consideration in the course of an enterprise by an entity that is registered or required to be registered for GST (refer section 9-5). A reverse charge mechanism does not apply if no GST is payable.

1.25 As the reverse charge only applies to taxable supplies, the supplier must be registered or required to be registered. The additional requirement for the recipient to be registered or required to be registered ensures the reverse charge applies to business to business transactions (i.e. between entities carrying on an enterprise - see section 23-5).

1.26 'Valuable metal' means gold, silver, platinum or any other substance specified in regulations for the purposes of the definition of a precious metal. This includes 'precious metal' within the meaning of section 195-1 of the GST Act, as well as metals of a kind that would be 'precious metal' if they were of the requisite fineness and in an investment form (see paragraphs 1.6 to 1.7 above regarding the definition of precious metal). [Schedule 1, item 11, section 195-1, definition of 'valuable metal']

1.27 The references to 'gold', 'silver' and 'platinum' in the definition of a 'valuable metal' are to their ordinary meaning. For example, whilst gold is generally alloyed with other metals to increase its strength, the ordinary meaning of gold refers to the part of the alloy that is the chemical element Au.

1.28 The goods supplied do not need to be entirely comprised of valuable metal to be subject to the mandatory reverse charge. Subject to the exceptions below, GST on supplies of all goods which consist wholly or partly of gold, silver, platinum or a substance specified by regulations is payable by the recipient of the goods, and not by the supplier in a business to business transaction.

1.29 A supply of goods that only contain valuable metal and no other non-valuable metal material is a supply consisting 'wholly' of valuable metal (for example, a supply of goods consisting of a gold bar of 99.99 per cent fineness). A supply of goods consisting 'partly' of valuable metal could be a supply of goods that contain valuable metal where non-valuable metal material is also found in the goods (for example, a supply of a gold watch). Another supply of goods consisting 'partly' of valuable metal could be a supply that includes both goods that contain valuable metal and goods that do not contain any valuable metal (for example, a supply of a gold watch and a plush toy). However, generally, if goods containing valuable metal and other goods that do not contain valuable metal are supplied together, it is expected that each should be treated as a separate supply. The mandatory reverse charge is not intended to apply to goods that do not contain valuable metal.

Circumstances where mandatory reverse charge does not apply

Exception for goods exceeding valuable metal threshold

1.30 These amendments introduce a valuable metal threshold test to ensure that the reverse charge is appropriately targeted. The reverse charge is not intended to be required to be applied to all goods containing valuable metal. Where the goods containing valuable metal should properly be characterised as consisting of the value-added product, rather than the constituent metal it is not intended that it be required to be applied.

1.31 For example, a supply of a computer containing gold plating in its circuit board should properly be characterised as a supply of a computer rather than a supply of gold.

1.32 Specifically, the mandatory reverse charge does not apply to a supply of goods containing valuable metal if the value of the goods exceeds the 'valuable metal threshold'. Generally, the value of goods containing valuable metal exceeds the valuable metal threshold if the market value of the goods exceeds the market value of any constituent valuable metals in the goods by ten per cent or more. Special rules apply where the supply is a supply consisting of separately suppliable goods (refer paragraphs 1.46 to 1.47 below). [Schedule 1, items 6 and 11, subparagraph 86-5(1)(c)(i), subsection 86-10(1) and section 195-1, definition of 'valuable metal threshold']

1.33 If the value of the goods meets this threshold test, this is a reasonable indication that the goods should be characterised as consisting of the value-added product, rather than the constituent metal.

Valuable metal threshold and market value

1.34 These amendments allow a threshold other than ten per cent to be determined by the Minister by legislative instrument. This ensures the threshold test can be prospectively changed by a Treasury portfolio Minister to ensure it is set at an appropriate threshold based on experience in the operation of the threshold. [Schedule 1, item 6, subsections 86-10(4) and (5)]

1.35 For the purposes of applying the valuable metal threshold test, both the value of the goods containing valuable metal and the value of the valuable metal in the goods is to be worked out at the time of the supply. Working out these values at the time of the relevant supply ensures that the parties to a particular transaction have certainty about these values at the time they are making a final decision to proceed with the transaction. This provides certainty about whether or not the supply needs to be reverse charged before the supply takes place. [Schedule 1, item 6, subparagraph 86-5(1)(c)(i)]

1.36 The market value of the goods containing valuable metal is to be worked out disregarding any amount of GST payable on the supply of the goods. This means the market value must be reduced if there is an amount of GST relating to the supply that is included in the market value. The reduction is equal to any such GST component included in the market value of the good. There is no reduction if no GST is included in the market value of the good. [Schedule 1, item 6, subparagraph 86-10(2)(a)(i)]

1.37 These rules ensure that the market value of goods containing valuable metal is a GST exclusive amount, regardless of whether a GST inclusive or GST exclusive price is charged for the goods. This is because the valuable metal threshold test needs to be applied to determine whether a supply should be reverse charged and at the time of applying the test, the parties to a transaction may not know whether a GST inclusive or GST exclusive price will be charged for the goods.

1.38 Ordinarily, where a GST inclusive price is charged for the goods, the market value would be equal to the GST inclusive price of the goods. In this situation, these amendments would require the market value to be discounted such that the market value of the goods containing valuable metal is the GST exclusive price.

1.39 Ordinarily, where a GST exclusive price is charged for the goods, the market value would be equal to the GST exclusive price of the goods. No discounting would be required, as no GST is included in the market value of the goods.

1.40 In other cases, a price above or below market value could be charged for the goods. This might be because the parties are not dealing at arm's-length or there is another compensating transaction that provides that overall market value of both transactions is achieved. In such situations, the market value is different to the price of the goods, but must be reduced (if required) such that the market value is GST exclusive.

1.41 The market value of any valuable metal in the goods is to be worked out disregarding any amount of GST which would be payable if there were a supply of the valuable metal. This rule ensures that the market value of any valuable metal is a GST exclusive amount. [Schedule 1, item 6, subparagraph 86-10(2)(a)(ii)]

1.42 The Commissioner may by legislative instrument, prospectively determine methods of how to work out the market value of goods containing valuable metal and the valuable metal. Unless the Commissioner has determined a method for working out the market value of goods or valuable metal, the parties to a transaction are required to apply the ordinary meaning of market value. [Schedule 1, item 6, paragraph 86-10(2)(b) and subsection 86-10(3)]

1.43 The Commissioner is expected to determine methods to work out the market value of valuable metal to provide greater certainty for parties to a transaction. Specifically, the Commissioner is expected to provide instructions on how to determine the market value by reference to the fineness of the metal and the prices available on particular metal exchange markets, as well as specific instructions about the time for assessing the market value.

1.44 The Commissioner may also determine methods to work out the market value of goods containing valuable metal. For example, the Commissioner may choose to exercise this power where it would mitigate the risk of entities manipulating the prices of goods containing valuable metal to avoid being subject to the mandatory reverse charge.

1.45 The Commissioner could also choose to determine such methods in relation to classes of goods where there may be some uncertainty about what constitutes an acceptable valuation methodology, to provide greater certainty for parties to a transaction. For example, there may be uncertainty associated with working out the value of a metal alloy containing valuable metals and palladium (which is a metal that has a high market value but is not classified as a 'valuable metal' for GST purposes), as the market value of palladium may vary depending on the reference point chosen.

Example 1.1 Goods exceeding the valuable metal threshold

Eve Lynch Mit Ltd supplies a computer to Ed Ltd with a market value of $400 (after disregarding any GST relevant to the supply). The market value of the gold plating in the computer's circuit board at the time of the supply is $50 (after disregarding any GST which would be payable if there were a supply of the gold).

The market value of the computer exceeds the market value of the gold plating in its circuit board by 700 per cent (100%*($400 - $50)/$50). The market value of the computer therefore exceeds the market value of the constituent gold by more than ten per cent, exceeding the valuable metal threshold. The reverse charge is not required to be applied to the supply.

Example 1.2 Goods that do not exceed the valuable metal threshold

Banhjon Ny Ltd supplies a gold figurine to Emily Pty Ltd with a market value of $540 (after disregarding any GST relevant to the supply). The market value of the gold in the figurine at the time of the supply is $500 (after disregarding any GST which would be payable if there was a supply of the gold).

The market value of the gold figurine exceeds the market value of its gold content by 8 per cent (100%*($540-$500)/$500). The market value of the gold figurine therefore does not exceed the market value of the constituent gold by ten per cent or more. The market value of the good does not exceed the valuable metal threshold and the supply is therefore subject to the reverse charge.

Valuable metal threshold test and supplies involving goods that can be separately supplied

1.46 The valuable metal threshold test operates differently for supplies involving goods that can be separately supplied to ensure the test cannot be exploited by an entity combining goods that would not individually pass the threshold test, but without special rules, when supplied together would pass the threshold test. For such supplies, the market value of the supply of goods is only taken to exceed the valuable metal threshold if each separately suppliable good containing valuable metal that forms part of the supply exceeds the intrinsic value of valuable metal in those separately suppliable goods by ten per cent or more. [Item 6, paragraph 86-10(1)(b)]

Example 1.3 Application of valuable metal threshold test to a supply consisting of goods which could be separately supplied

Victor Ltd is a jewellery manufacturer which supplies a prestige brand gold watch and a 22 carat necklace with a broken clasp to another jewellery manufacturer, Yien-she Ltd. This supply consists of two goods which contain valuable metal and which could be separately supplied. Therefore the valuable metal threshold test requires the market value of each separate good to exceed the market value of valuable metals in that good by ten per cent or more.

The market value of the gold watch clearly exceeds the market value of any constituent valuable metals in the watch by ten per cent or more.

However, the market value of the necklace does not exceed the market value of the gold it contains by ten per cent or more, as the market value of the gold necklace with a broken clasp is only marginally higher than the market value of the gold it contains. The gold necklace fails to pass the valuable metal threshold test.

This means the supply of the gold watch and necklace does not exceed the valuable metal threshold. Unless the supply is otherwise excluded, the reverse charge would apply.

An alternative for Victor Ltd is to split the supply into two supplies. In which case, only the supply of the necklace would be subject to the mandatory reverse charge.

Without this integrity rule in relation to supplies consisting of goods which could be separately supplied, the market value of the supply of the gold watch and the necklace would probably exceed the market value of the gold in the gold watch and the necklace by ten per cent or more. This would mean that the supply would pass the valuable metal threshold test and the reverse charge would not apply.

1.47 Given the Commissioner has expressed views about mixed and composite supplies in other contexts, these amendments clarify that the amendments introducing the valuable metal threshold test should not be taken to have any broader application within the GST Act. [Schedule 1, item 6, subsection 86-10(6)]

Voluntary reverse charge

1.48 In most cases, it is expected that the valuable metal threshold test would be straightforward to apply. For example, it is clear that the market value of a car exceeds by more than ten per cent the market value of any valuable metal it contains.

1.49 However, some suppliers and recipients have a large number of transactions involving the supply of goods containing valuable metal, where it would be difficult (i.e. impose significant compliance costs given the nature of the goods in those transactions) for the parties to work out if a particular supply of goods meets the valuable metal threshold test. In such a situation, the intent is to allow the entities to voluntarily reverse charge the transaction, negating the need to apply the valuable metal threshold test to their supplies.

1.50 These amendments provide that whether or not a supply meets the valuable metal threshold test, the GST on taxable supplies made by a supplier of goods containing valuable metal may, with the written agreement of the supplier and the recipient, be 'reverse charged' to the recipients. The written agreement of both parties is required to ensure there is certainty for both parties about whether a reverse charge applies to the transaction. [Schedule 1, item 6, subparagraph 86-5(1)(c)(ii)]

Example 1.4 Voluntary reverse charge

Prashant Ltd is a jewellery manufacturer that frequently supplies metal goods that are alloys containing gold of varying fineness combined with varying amounts of low-value metals, such as copper to Vitali Ltd. It would impose significant compliance costs to require Prashant Ltd and Vitali Ltd to distinguish between supplies which fall above and below the valuable metal threshold.

In such a situation Prashant Ltd could agree in writing with Vitali Ltd to reverse charge all their supplies containing gold, negating the need to apply the valuable metal threshold test to each of those supplies.

Exception for class of supplies by determination

1.51 The Commissioner may, by legislative instrument, provide an exception to the reverse charge for a class of supplies. When exercising this determination making power, the Commissioner may have regard to (but is not limited to having regard to) the following:

•

the likelihood that recipients and suppliers of that class of supply will comply with their obligations under the GST law and any risk of GST on such taxable supplies not being paid; and

•

the compliance costs for such suppliers and recipients associated with a reverse charge.

[Schedule 1, item 6, subsections 86-5(2), (3) and (4)]

1.52 This determination making power is designed to enable the Commissioner to deal prospectively with any situations where experience shows that having regard to the above factors, reverse charging certain classes of supplies is inappropriate.

The amount of GST payable on a reverse charged supply

1.53 These amendments provide that the amount of GST payable by the recipient of a taxable supply that is reverse charged under these amendments is ten per cent of the price of the supply. [Schedule 1, item 6, subsection 86-25(1)]

1.54 This overrides the standard rule in section 9-70, which would otherwise provide that the GST payable is 1/11 of the price (i.e. ten per cent of the value of the taxable supply). [Schedule 1, item 6, subsection 86-25(2)]

1.55 As the supplier is no longer liable to pay the GST on the supply under a reverse charge, it is expected that the price the supplier receives for the goods would not include a component for GST. Therefore, ten per cent of the price of the supply essentially applies the percentage to the pre-GST sale price, allowing the right amount of tax to be levied.

Grouping interaction rules

1.56 The GST Act contains rules to assign liability for GST, where a supplier is a member of a GST group or a participant in a joint venture. GST on a supply made by a supplier that is attributable to a tax period during which the supplier is a member of a GST group is payable by the representative member and is not payable by the supplier (unless the supplier is the representative member) (refer subsection 48-40(1)). GST on a supply made by a supplier (that is the joint venture operator of a GST joint venture making the supply on behalf of a participant in the joint venture) is payable by the joint venture operator and is not payable by the participant (refer subsection 51-30(1)).

1.57 Under the reverse charge mechanism introduced by these amendments, liability for GST has shifted from the supplier to the recipient of goods. Accordingly, these amendments ensure that entities associated with the recipient (representative member or joint venture operator) are liable for GST in place of the recipient under the analogous circumstances to those set out in subsections 48-40(1) and 51-30(1) in relation to the supplier. [Schedule 1, item 6, sections 86-15 and 86-20]

1.58 These amendments also ensure that where suppliers are members of a GST group, or a participant in a joint venture, the 'reverse charged' GST should also not be payable by the representative member of the group, or the joint venture operator, as appropriate. [Schedule 1, item 6, subsection 86-5(5) and subsections 86-15(2) and 86-20(2)]

Goods containing valuable metal excluded from being 'second-hand goods'

1.59 These amendments clarify the definition of 'second-hand goods' to remove the opportunity for an entity to change the form of a valuable metal (refer paragraphs 1.26 to 1.27 above for the meaning of 'valuable metal') to exploit the different tax treatment available for second-hand goods. The amendments are designed to prevent an entity accessing input tax credits in situations inconsistent with the policy intent of the second-hand goods rules. Refer paragraphs 1.12 to 1.16 above for information about the policy intent of the second-hand goods rules and the schemes which attempt to circumvent that intent that have been identified in the precious metals industry.

1.60 Specifically, the amendments provide that goods to the extent that they consist of valuable metal are not second-hand goods under the GST law, unless these amendments otherwise provide that the goods may still be considered second-hand goods (refer below). [Schedule 1, item 10, section 195-1, definition of 'second-hand goods']

1.61 These amendments replace the existing exclusions to the second-hand goods definition relating to metals. As a result of the amendments, it is no longer necessary to explicitly exclude from the second-hand goods definition 'precious metal' and 'goods to the extent that they consist of gold, silver, platinum, or any other substance which, if it were of the required fineness, would be precious metal'. This is because the term 'valuable metal' is broad, including both these exclusions. 'Valuable metal' includes gold, silver, platinum or any other substance specified in regulations for the purposes of the definition of a precious metal, regardless of the fineness or form of the relevant substance. [Schedule 1, item 10, section 195-1, definition of 'second-hand goods']

1.62 The use of the expression 'to the extent that' in the amendments indicates that for the purposes of determining an entity's input tax credit entitlement, apportionment of the consideration paid for the goods between that part of the goods which qualifies as second-hand goods, and that part which is excluded may be required. It should be noted that goods of the kind described below (goods that may still be considered second-hand goods), are intended to qualify in full for input tax credits when acquired, provided the other requirements for full entitlement to input tax credits under the GST Act are satisfied.

Goods that may still be considered second-hand goods

1.63 The amendments excluding goods containing valuable metal from being second-hand goods operate very broadly to allow the Commissioner to address the range of mischief observed in the precious metals industry. However, without special rules, a range of goods would be inappropriately excluded from the second-hand goods definition.

1.64 These are goods which contain valuable metal but are properly characterised as consisting of the value-added product, rather than the constituent metal. Examples of such goods may include a piece of electronic equipment, antique jewellery, a prestige brand gold watch or a collector's edition proof coin.

1.65 These amendments provide special rules for such goods ('incidental valuable metal goods'), to ensure that these goods may continue to be treated as second-hand goods under the GST law if the goods are second-hand goods within the ordinary meaning of the expression. [Schedule 1, item 9, section 195-1, definition of 'incidental valuable metal goods']

1.66 The first class of goods that are not precluded from being second-hand goods are goods that consist wholly or partly of valuable metal, where the value of the goods exceeds the valuable metal threshold. The valuable metal threshold test is the same test as applies for the compulsory reverse charge (refer paragraphs 1.30 to 1.47 above). However, for the purposes of applying the valuable metal threshold test in this context, the market value of the goods containing valuable metal and the market value of the valuable metal is worked out at the time of the supply of 'second-hand' goods to a recipient seeking to claim input tax credits. In other words, the calculations are to be worked out at the time of an acquisition for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business. This is also the supply that is relevant for determining whether any GST component is included in the market price of the goods, which must be disregarded. [Schedule 1, items 6 and 9, subparagraphs 195-1(c)(ii), definition of 'incidental valuable metal goods' and 86-10(2)(a)(i) and paragraphs 195-1(a) and 195-1(b), definition of 'incidental valuable metal goods']

1.67 Satisfying the valuable metal threshold test is considered a reasonable indication that the good should properly be characterised as consisting of the value-added product, rather than the constituent metal.

1.68 The second class of goods that is not precluded from being second-hand goods are goods that consist wholly or partly of valuable metal, that are acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business, where the goods are collectables or antiques. [Schedule 1, item 9, subparagraph 195-1(c)(i) and paragraphs 195-1(a) and 195-1(b), definition of 'incidental valuable metal goods']

1.69 For the purposes of these rules, the ordinary meaning of the terms 'collectables' and 'antiques' applies. However, goods that meet the definition of 'precious metal' within the meaning of the GST Act cannot qualify as 'collectables or antiques' for the purposes of these rules. This qualification ensures that goods cannot be considered to be both precious metal and a collectable or antique and hence qualify for input taxed credits under the second-hand goods rules, despite the supply being GST-free or input taxed. [Schedule 1, item 9, subparagraph 195-1(c)(i), definition of 'incidental valuable metal goods']

1.70 Goods that are collectables or antiques may also satisfy the valuable metal threshold test and thereby not be precluded from being second-hand goods. Specific rules for collectables and antiques are provided as the market value of particular collectables or antiques may not be greater than the market value of any constituent valuable metal by at least ten per cent.

1.71 For example, older collectable coins, not in mint condition, are often purchased at a price only five to less than ten per cent above the market value of the metal content. Despite failing to meet the valuable metal threshold test, such goods are still properly characterised as consisting of the value-added product, rather than the constituent metal.

1.72 As such, these amendments do not prevent collectables or antiques from being second-hand goods.

1.73 Thirdly, these amendments enable the Minister to prospectively determine, by legislative instrument a class of goods that consist wholly or partly of valuable metal, that are acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business, that will not be precluded from being second-hand goods. [Schedule 1, item 9, subparagraph 195-1(c)(iii) and paragraphs 195-1(a) and 195-1(b), definition of 'incidental valuable metal goods']

1.74 This will enable Treasury portfolio Ministers to respond to assist taxpayers whose goods are of a class of goods that are inappropriately prevented from being second-hand goods as an unintended consequence of these amendments.

Consequential amendments

1.75 These amendments ensure that reverse charged supplies introduced by this Bill are disregarded in working out the current GST turnover or the projected GST turnover of the relevant recipient. This consequential amendment reflects that GST payable under the reverse charge mechanism should not affect such calculations, as the recipient is paying GST on behalf of the supplier. [Schedule 1, items 7 and 8, section 188-23 and heading to section 188-23]

1.76 These amendments include guidance material explaining the operation of Division 86-1 of the GST Act and assisting users of the legislation. [Schedule 1, items 1 to 3 and 6, sections 9-69, 9-99, 37-1 and 86-1]

1.77 The amendments also include a consequential amendment inserting a reference to the reverse charge provision introduced by these amendments in paragraph 58-10(2)(b) and subsection 58-10(6) (about circumstances in which representatives have GST-related liabilities and entitlements) to ensure they operate as intended. [Schedule 1, items 4 and 5, paragraph 58-10(2)(b) and subsection 58-10(6)]

Application and transitional provisions

1.78 The amendments introducing a reverse charge mechanism were announced by the Government on 31 March 2017 and in accordance with the announcement apply to supplies made on or after 1 April 2017. [Schedule 1, subitem 12(1)]

1.79 The amendments have retrospective application, taking effect from the day after announcement to ensure that affected taxpayers had knowledge of the measure prior to its application. The amendments address exploitation of the GST law as it relates to 'precious metal' to prevent further loss of Government revenue. This application date prevents participants in the schemes targeted by these amendments taking further advantage of the tax system and removes the opportunity for new participants to enter into such schemes during the period between announcement and commencement of the legislation. The retrospective application of the amendment is necessary to address the type of exploitation of the law identified prior to the Government's announcement on 31 March 2017.

1.80 The amendments clarifying the second-hand goods definition were also announced by the Government on 31 March 2017 and in accordance with the announcement apply to goods acquired on or after 1 April 2017. [Schedule 1, subitem 12(2)]

1.81 The amendments have retrospective application, taking effect from the day after announcement. The amendments clarify the operation of the GST law as it relates to precious metal and second-hand goods, and are consistent with the interpretation expressed in draft GST Determination GSTD 2017/D1 (which was made publicly available on 22 February 2017). The amendments are necessary for the same reasons outlined in paragraph 1.79 above.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (GST Integrity) Bill 2017

1.82 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.83 This Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to address exploitation of the GST law as it relates to precious metals.

1.84 The amendments introduce a reverse charge for business to business transactions between suppliers and purchasers of gold, silver and platinum to remove the opportunity for a supplier to avoid paying GST to the Commissioner of Taxation by liquidating.

1.85 The amendments also clarify the law to ensure that entities cannot exploit the special GST treatment for second-hand goods to claim input tax credits by changing the form of a precious metal they acquire.

Human rights implications

1.86 This Bill does not engage any of the applicable rights or freedoms. The amendments are broadly an integrity measure to address certain schemes identified in the precious metals industry.

Conclusion

1.87 This Bill is compatible with human rights as it does not raise any human rights issues.

Index

Schedule 1: GST and Valuable metals