House of Representatives

Explanatory Memorandum

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

Chapter 1

A. General Outline

Background

The Government announced, in the 1990-91 Budget, a simplification review of the Wholesale Sales Tax system. On 2 April 1992, the Treasurer announced that the Government had accepted the recommendations of the Review and that legislation to implement those recommendations should be introduced in the Parliament during the Autumn Sittings 1992.

The new legislation comprises 6 Bills:

Sales Tax Assessment Bill 1992

Sales Tax Imposition (Excise) Bill 1992

Sales Tax Imposition (Customs) Bill 1992

Sales Tax Imposition (General) Bill 1992

Sales Tax (Exemptions and Classifications) Bill 1992

Sales Tax Amendment (Transitional) Bill 1992.

Main features of the Bills

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The Bills will replace the existing 27 Acts that deal exclusively with Wholesale Sales Tax (WST). A comparison of the structure of the existing WST legislation and the proposed new legislation is set out at pages 4 and 5.

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The WST legislation has been restructured so that it will be easier to use. The existing rules of the WST have been examined and have been incorporated into the new structure. Where the existing rules have been found to be overly complicated or inconsistent with the new structure, then they have been simplified or modified to fit within the new structure.

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The new law has been drafted in plain English.

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The existing exemption from WST for manufacturers with only a small sales tax liability will be extended to include all taxpayers. As well, the level at which the exemption cuts out will be extended, from $1,000 of WST liability to $10,000, and there will be no exemption based on turnover level.

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The existing administrative arrangements which allow unregistered persons, who are entitled to WST exemption, to obtain goods tax-free will be enacted in the new law. At the same time, those arrangements have been streamlined to make them easier to use by both vendors and purchasers.

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There will be special provisions to ensure that all the costs incurred in connection with the manufacture of goods, and any royalty incurred in connection with goods, are included in the value of those goods for WST purposes.

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The new law will contain a general anti-avoidance provision.

Sales Tax Imposition (Excise) Bill 1992

Sales Tax Imposition (Customs) Bill 1992

Sales Tax Imposition (General) Bill 1992

These 3 Bills will formally impose the WST on the complete range of dealings with goods that are to be subject to the WST. There are 3 Bills for constitutional reasons. The WST will comprise tax:

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that is a duty of excise (Sales Tax Imposition (Excise) Bill 1992);

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that is a duty of customs (Sales Tax Imposition (Customs) Bill 1992);

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that is neither a duty of customs nor excise (Sales Tax Imposition (General) Bill 1992).

The Bills will replace the 14 separate Acts imposing the existing WST.

Sales Tax Assessment Bill 1992

This Bill will define the situations in which tax is payable and the value to be given to the goods in order to calculate the amount of the tax. It will also define the general situations in which tax will not be payable because an exemption applies (although it will not list all the goods which may be exempt from tax - these will be set out in the Sales Tax (Exemptions and Classifications) Bill 1992). As well, the Bill will set out the rules for such ancillary matters as registration, quoting, time for payment, entitlement to credits and so on.

The Bill will replace the 11 separate Assessment Acts of the existing law.

Sales Tax (Exemptions and Classifications) Bill 1992

This Bill will list the goods that are exempt from WST, either generally or in particular situations. It will also list those goods that are taxable at particular rates (rather than being taxable at the general rate of 20 percent). As well, the Bill will set out general rules for interpreting the descriptions of the goods contained in the Bill.

The Bill will replace the existing Sales Tax (Exemptions and Classifications) Act 1935.

There is a separate explanatory memorandum for this Bill.

Sales Tax Amendment (Transitional) Bill 1992

This Bill will explain when and how the new law will commence to apply, and when and how the existing law will cease to apply. As a general rule, the new law will commence to apply from the date of Royal Assent. However, the new law will not commence to impose tax until 1 October. As a general rule, the new law will impose tax on acts and transactions that occur on or after 1 October 1992 and the existing law will cease to impose tax on dealings from that date. The existing law will continue to apply to acts and transactions that occur before 1 October 1992.

There will also be specific transitional rules to apply in special cases, or where there may be some doubt as to whether particular conduct or arrangements are covered by the existing law or the new law.

The Bill will replace the traditional approach to transitional provisions, which is to include them in the main legislation. Under the new law, these provisions (which will only be relevant for a short period) will not clutter up the new law long after they have ceased to have any application.

The Bill will amend other Commonwealth Acts which contain references to the Sales Tax Acts, to ensure that they reflect the new law.

B. Revenue Impact

The enactment of the new law will provide a gain to the revenue of $61m in 1992-93 (assuming a 1 October commencement date) and $91m in 1993-94. These figures include the changes to the existing law proposed by the Sales Tax (Exemptions and Classifications) Bill 1992.

There is a separate costing for each of the main changes to be made by the existing law in the Summary of Main Changes to this explanatory memorandum (pages17 to22) and in the accompanying explanatory memorandum for the Sales Tax (Exemptions and Classifications) Bill 1992.

C. Main Features of the New Law

Overview of the new law

The fundamental principle of both the existing and the new sales tax law is that the tax should be imposed on the last wholesale sale of goods that have not been previously used in Australia. If goods are not the subject of a wholesale sale (for example, because they are sold only by retail by their manufacturer), then the law seeks to impose tax on the appropriate retail sale or use of the goods. Tax is imposed on the wholesale selling price of goods. If goods are not sold by wholesale, alternative values are used. Tax is imposed on all goods at the general rate of 20%, unless the goods are specifically listed as being exempt, or taxable at a rate other than the general 20% rate. The sales tax law includes a large number of goods that are exempt from tax, either in their own right or when they are used in particular circumstances.

Structure of the new law

Sales Tax will be imposed on assessable dealings with assessable goods , unless an exemption applies. If the dealing is taxable, tax will be calculated on the taxable value of the dealing. Tax will be imposed at the rate of tax applicable to the goods. If the goods, or some input to the goods, have already been taxed, then a credit for that earlier tax will reduce the tax payable on the later dealing.

An assessable dealing may be exempted from tax because one of the parties to the dealing has made a quote . There are general grounds for quoting. There are also special quoting grounds limited to persons who are registered under the sales tax law. Registration and quotation will not be compulsory.

Assessable goods

Broadly, goods will be assessable goods if they have not previously been applied to own use in Australia. Once goods have been applied to own use in Australia, they will no longer be subject to sales tax. This will ensure that the sales tax will not be imposed on second-hand goods.

Assessable dealings

The main assessable dealing will be a wholesale sale . A wholesale sale of goods will be taxable even if the goods have been taxed previously (although there will be a credit for the earlier tax). This ensures that tax is imposed on the final wholesale sale. There will also be a number of situations where retail sales will be assessable dealings. These will usually involve retail sales of goods which have not yet been taxed. However, there are several types of retail sales of goods (that have borne tax) which the law will seek to tax again. This ensures that goods are taxed on a full wholesale value.

The third class of assessable dealing will be application to own use of goods. Most commonly, this term means a use of goods after they have passed through the marketing chain - although its precise meaning is wider. As with retail sales, an application to own use will be an assessable dealing if the goods have not yet been taxed or, if they have been taxed, if the law regards the earlier taxable dealing as not having recouped the full wholesale sale value of the goods.

A local entry of goods at the customs barrier will also be an assessable dealing.

Exemption

If an exemption applies to an assessable dealing, sales tax will not be imposed on that dealing. There will be 4 main categories of exemption:

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an exemption Item in Schedule 1 to the Sales Tax (Exemptions and Classifications) Bill 1992 applies to the dealing;

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there is a quote given in respect of the dealing;

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the small business exemption applies to the dealing;

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the dealing is with goods that are intended for export.

Taxable values

Sales tax will be calculated on the taxable value of an assessable dealing. The most common taxable value is the price for which goods are sold by wholesale. If the assessable dealing is not a wholesale sale, then there are alternative taxable values which will apply. The most common alternative taxable value is the notional wholesale selling price of the goods. Goods which are taxable at the customs barrier have a taxable value of 120% of the sum of the value of the goods for customs duty and the amount of customs duty payable.

Sometimes, not all the costs of goods are reflected in their taxable value. When this happens, there will be additional amounts specifically included in the taxable value. A royalty paid separately by the taxpayer is a situation where an additional amount will be added.

There will also be situations where the law will substitute different taxable values for dealings with particular goods.

In some other cases there will be certain amounts of the taxable value which will be exempt. In these cases, sales tax is imposed on the amount of the taxable value less the amount of that exempt part.

Rate of tax

In most cases, tax will be imposed on goods at the general rate of 20%. However, certain types of goods will be taxed at one of the other rates that can apply. The other rates are 10, 15 and 30 per cent. Goods covered by these rates are listed in separate Schedules to the Sales Tax (Exemptions and Classifications) Bill 1992.

Credits

There will be a range of situations in which credits will be available for tax paid on goods. Tax may have been overpaid on goods or paid when there was no liability. Alternatively, tax may have been paid on goods but the goods may subsequently qualify for exemption or again be the subject of an assessable dealing. In these cases, the law will provide a credit for the tax previously paid. Credits will also be allowed for tax that has been paid on inputs to goods if the goods are the subject of a later assessable dealing.

Credits may either be direct refunds to the claimant or a reduction in a taxpayer's liability.

Collection and recovery

Persons who engage in taxable dealings (other than the local entry of imported goods) will be required to lodge returns and pay the tax within 21 days after the end of the month when the assessable dealing occurred. However, certain taxpayers whose annual sales tax liability is less than $51,200 will have the option of lodging returns and paying tax on a quarterly basis. Persons who import goods will, in all cases, be required to pay the tax at the time of the local entry.

Quoting

Quoting is a mechanism to relieve or defer tax on goods to a later assessable dealing. It is also a mechanism for completely relieving goods from tax when they are to be used in exempt circumstances. If a quote is made in respect of an assessable dealing, then the quote will be an exemption, but only for that dealing. A quote can also be made in respect of a dealing which is not assessable (for example, a retail sale of tax-paid goods). In that case, the quote will authorise the vendor to obtain a credit for the tax, provided that the tax is excluded from the sale price of the goods.

There will be 2 types of quoting:

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quoting a registration number by a registered person;

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quoting an exemption declaration by an unregistered person.

There will be general grounds for quoting which will be available to both registered and unregistered persons. Additionally, there will be special quotation grounds available only to registered persons.

Quoting will not be compulsory.

Registration

The sole purpose of registration will be to gain access to the special quotation grounds that apply only to registered persons. Quoting a registration number will be a faster and simpler quoting mechanism than quoting an exemption declaration. Only registered persons may quote a registration number.

Registration will not be compulsory. There will be no special obligations imposed on persons as a result of becoming registered.

D. Summary of Main Changes

The main changes to the existing law which will be made by the Bills are set out under the main headings of the new law. Each of these changes includes a statement of its particular revenue impact.

Assessable goods

Scope of definition

Change : The point at which goods cease to be assessable goods (and, therefore, no longer taxable) will be the time of their application to own use.

Existing law : There are two final taxing points. These are an application to own use of goods or the point at which goods go into use or consumption The difference between them is unclear. The second of the two has been removed.

Revenue impact : None.

Re-imported goods

Change : To tax all goods, new and used, that are sent overseas for repair or alteration and are subsequently returned to Australia. The goods will be taxable only on the value of the repair or alteration (and not their full wholesale value).

Existing law : Only the value of repairs (and not other improvements made to goods overseas) are taxed and only if the goods were originally imported goods that were taxed at the customs barrier.

Revenue impact : Negligible gain to the revenue.

Assessable dealings

Transfer of stock for retail sale

Change : To remove, as an assessable dealing, a transfer by a manufacturer of goods to retail selling stock.

Existing law : A manufacturer which transfers goods that it has manufactured to retail selling stock is liable to tax at the time of transfer.

Revenue impact : Negligible cost to the revenue.

Goods manufactured from a customer's materials

Change : To make the manufacture of goods from materials supplied by a customer, and their delivery to the customer by the manufacturer, an assessable dealing by the manufacturer.

Existing law : If the customer intends to use the goods, then the manufacturer is liable to tax on the delivery of the goods. If the customer intends to sell the goods, then the customer is liable to tax on the goods at the time of the later sale by the customer.

Revenue impact : Negligible cost to the revenue.

External costs goods

Change : To impose a tax liability on certain costs incurred in connection with the manufacture of goods by a person other than the manufacturer of the goods. The liability will only apply where the person who has incurred the costs sells the goods by retail or applies them to own use.

Existing law : The law does not impose tax on costs incurred by persons who contract out the physical manufacture of the goods to another person and who then apply those goods to own use or sell them by retail. However, those costs would be liable to tax if the goods were sold by wholesale.

Revenue impact : $62m gain to the revenue in a full year.

Dealings with tax-free goods

Change : To impose a liability to tax on all retail sales and applications to own use of goods that have not previously been the subject of an assessable dealing.

Existing law : The law generally only taxes dealings with goods by their manufacturer or by a registered person who purchased the goods tax-free under quote of their certificate of registration. There are situations where goods can be acquired tax-free (otherwise than because the goods are exempt from tax), but there is no general dealing which imposes tax on them.

Revenue impact : $5m gain in a full year.

Leases

Change : To treat registered and unregistered lessors equally, and to make leases the subject of a single, self-assessing assessable dealing. Specifically, this will mean that leasing stock will be taxable once only, at the time of the first lease of those goods, on a full wholesale value of the goods.

Existing law : A registered person who leases goods from tax-free stock is liable to tax on each successive lease of the goods. The taxable value of each lease is the amount which the Commissioner considers to be fair and reasonable, which is generally taken to be the value of the lease payments.

Revenue impact : $10m gain in a full year, reducing to $7m in subsequent years after the one-off nature of the change has passed.

Exemptions

Small business exemption

Change : To provide an optional sales tax exemption for all taxpayers whose total sales tax liability, over a 12 month period, does not exceed $10,000.

Existing law : There is an exemption from sales tax for Australian manufacturers:

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whose turnover of goods over a 5 year period does not exceed an average of $50,000 per annum; or

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whose sales tax liability does not exceed $1,000 per annum.

Revenue impact : $20m to $30m cost in a full year.

The conditional exemption system

Change : To legislate a body of rules to allow unregistered persons who are entitled to exemption in respect of goods to obtain those goods tax free. The new rules will include:

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the provision of exemption declarations to obtain goods tax-free; and

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the imposition of liability on persons who incorrectly claim exemption.

Existing law : There is no legislation on this issue. Administratively, exemption can be claimed through a system of exemption certificates approved by the Commissioner. However, there is no liability imposed on a person who provides a false or incorrect exemption certificate. Vendors who accept such incorrect certificates remain liable under the law.

Revenue impact : $52m gain in a full year.

Registration

Change : Registration will be made optional. It will serve only as a pre-condition to quoting a registration number to obtain goods tax-free. However, a wide range of business inputs exemptions will be limited to registered persons.

Existing law : Registration of wholesalers and manufacturers is compulsory. Failure to register is an offence.

Revenue impact : None.

Quotation

Change : Quotation of a registration number by a registered person will be optional. Additionally, registered persons will in future be entitled to quote on any purchases of goods:

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for sale to quoting purchasers; or

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for use by the registered person in exempt circumstances.

Existing law : Quotation is compulsory for dealings prescribed in the law.

Revenue impact : None.

Taxable values

Alternative taxable value for manufacturers

Change : To remove the alternative taxable value for manufacturers who use only tax-paid materials in the manufacture of goods.

Existing law : The sale value of a retail sale of goods by their manufacturer can, at the option of the manufacturer, be 120% of the wages paid in respect of the manufacture of the goods. The alternative sale value is available only where the manufacturer applies the goods to own use, all the materials used in the manufacture were tax-paid goods, and the manufacturer did not sell similar goods by wholesale.

Revenue impact : Unquantifiable gain.

Goods exported for repair or alteration

Change : The taxable value of goods exported for repair, improvement or other alteration, and then brought back into Australia, will be the value of that repair, alteration or improvement.

Existing law : The taxable value of the goods is limited to the cost of the repairs (and not the cost of any other improvement to the goods).

Revenue impact : Unquantifiable gain.

Leases

Change : The taxable value of a lease will, in broad terms, be the fair wholesale sale value of the goods.

Existing law : The taxable value of a lease is the amount that the Commissioner considers to be fair and reasonable. This is generally the amount of the lease charges.

Revenue impact : Unquantifiable gain.

Royalties

Change : The definition of 'royalty' will be amended to include single or lump sum payments that otherwise satisfy the existing definition.

Existing law : It has been argued that the existing definition does not cover certain lump sum payments.

Revenue impact : Unquantifiable gain.

Credits

Change : Retailers will be given direct access to refunds for goods that they sell tax-free to exempt purchasers.

Existing law : The retailer would have to obtain a refund from its supplier. The supplier would be able to obtain a refund from the Commissioner (or, more usually, net the amount off any sales tax liability that the supplier has).

Revenue impact : Negligible cost.

General Changes

Containers

Change : To simplify the rules governing the taxation treatment of containers for goods, while maintaining broadly the same effect.

Existing law : The broad effect of the existing law is to tax containers in the same way as their contents. However, the rules are extremely complicated and there are many exceptions to the general approach.

Revenue impact : Negligible gain.

General anti-avoidance provision

Change : To replace all the existing specific anti-avoidance provisions with a general anti-avoidance provision.

Existing law : There is no general anti-avoidance provision but there are many specific anti-avoidance provisions that operate in limited situations.

Revenue impact : Unquantifiable gain to the revenue.

Changes to the exemption of goods

The new law will also make some minor changes to the classes of goods which are exempt from tax. Additionally, there will be some changes of general application to the exemption and classification Schedules in the Sales Tax (Exemptions and Classification) Act 1935.

All of these changes are discussed in the accompanying explanatory memorandum to the Sales Tax (Exemptions and Classifications) Bill 1992.

Chapter 2

Commencement and Application

A. Introduction

2.1 This chapter discusses the commencement and special application rules of the new law. The rules dealt with are:

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Commencement provisions

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Application of the law to the external Territories

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Application of the law outside Australia

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Application of the law to things that happen before the new law starts

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Application of the law to offshore installations

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Application of the law to the States and Territories

Unless otherwise stated, clause references in this chapter are to clauses in the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

Commencement Provisions

2.2 The new law will commence on the 28th day after it receives Royal Assent. However, the new law will not commence to impose tax. on any assessable dealing until the 'first taxing day' . That term is defined to be the start of the fourth month after the month in which the new law receives the Royal Assent.

Example:

If the new law receives Royal Assent by 30 June, then the first taxing day will be 1 October.

2.3 The purpose of delaying the imposition of tax until the first taxing day is to allow the Commissioner to register the extended classes of persons entitled to register under the new law. It will also enable training and public information documents to be prepared and disseminated. [clause 2 , and clause 5, definition of 'first taxing day']

Application of the law to the external Territories

2.4 The new law will not extend to Australia's external Territories. Further, in the case of two of the external Territories (Christmas Island and Cocos (Keeling) Islands), these Territories will not be treated as part of Australia for the purpose of the sales tax law. The effect of this exclusion is to treat these two named territories as if they were foreign countries. As a consequence, goods brought to the named Territories from a place outside Australia will not be imported into Australia at that time but goods brought to Australia from a named Territory will be imported into Australia. Similarly, a dealing with goods when they are in either of the two named Territories will not be an assessable dealing for sales tax purposes. [clause 3 , and clause 5, definition of 'Australia']

2.5 Similar amendments of the Customs Act 1901. will ensure that the concept of 'import' and 'imported goods' (and related expressions) in relation to the external Territories will have the same meaning for customs and sales tax purposes.

Application of the law outside Australia

2.6 The new law will extend to acts, omissions, matters and things that occur outside. Australia. However, this rule will be displaced by any contrary intention in the new law. [subclause 3(1)]

Example 1:

Company X makes a wholesale sale of goods that are in Australia at the time of the sale, but the sale is entered into in New Zealand (and both parties are in New Zealand at the time of the sale).

Result: The new law will apply to the sale, even though it is entered into outside Australia.

Example 2:

Company Y makes a wholesale sale of goods that are in New Zealand at the time of the sale, but the sale is entered into in Australia (and both parties are in Australia at the time of the sale).

Result: The new law will not apply to the sale because it will be an essential element of every assessable dealing under the new law that the goods be in Australia at the time of the assessable dealing.

Application of the law to things that happen before the new law starts

2.7 The new law will apply to acts and omissions that happen before the law comes into operation. This is an important concept in the new law and an integral part of the transitional arrangements that will apply. [subclause3(2)]

2.8 The main purpose of these provisions is to ensure that a course of conduct (or omission) does not fall outside the new law (and the existing law) simply because one of the elements of the course of conduct happens before the new law starts.

Example:

Company A manufactures goods before the new law starts, but sells the goods by wholesale after the new law has started.

Result: The wholesale sale will be an assessable dealing under the new law.

Application of the law to off-shore installations

2.9 The existing law contains a number of provisions which impose sales tax on certain off-shore installations that are attached to waters adjacent to Australia. The purpose of the provisions is to treat the installations (and goods on them) as imported into Australia at the time of attachment and for the installations then to be treated as part of Australia. The new law will retain exactly the same effect but has been significantly simplified. [clause 6]

Application of the law to the States and Territories

2.10 The new law will bind the States, the Australian Capital Territory and the Northern Territory. This means that they will be liable to tax on most assessable dealings with goods (unless an exemption applies). [clause 4]

Chapter 3

The Imposition Bills

A. Introduction

3.1 This chapter explains the Imposition Bills. These are the Bills that will formally impose the sales tax.

B. Explanation and Commentary

Constitutional requirements

3.2 Imposition laws must be separate: The Constitution requires that laws imposing taxation deal only with the imposition of taxation. To the extent that a law imposing taxation deals with anything apart from the imposition of the tax, those other parts of the law will be of no effect. [Section 55 of the Constitution]

3.3 One subject of taxation: The Constitution requires that laws imposing a duty of customs and laws imposing a duty of excise must be in separate Acts. [Section 55 of the Constitution]

The Imposition Bills

3.4 There are 3 Imposition Bills to give effect to the new law.

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the Sales Tax Imposition (Excise) Bill 1992;

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the Sales Tax Imposition (Customs) Bill 1992; and

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the Sales Tax Imposition (General) Bill 1992.

These Bills will replace the 14 Rating Acts under the existing law. [clause 1 of each Imposition Bill]

Sales Tax Imposition (Excise) Bill 1992

3.5 This Bill will impose sales tax to the extent that it is a duty of excise. [clause 3]

Sales Tax Imposition (Customs) Bill 1992

3.6 This Bill will impose sales tax to the extent that it is a duty of customs. [clause 3]

Sales Tax Imposition (General) Bill 1992

3.7 This Bill will impose sales tax to the extent that it is neither a duty of excise nor a duty of customs. [clause 3]

Property of a State will not be taxed

3.8 Each of the Imposition Bills contains a provision to the effect that it will not impose a tax on property of any kind belonging to a State. The term 'property of any kind belonging to a State' will have the same meaning that the term has in section 114 of the Constitution. [clause 4 of each Imposition Bill]

An example of an assessable dealing under the new law that would not apply to property of a State is an application to own use by a State of goods manufactured by the State. An example of an assessable dealing under the new law that would apply to a State is a wholesale sale by a State of goods manufactured by the State.

Commencement of the Imposition Acts

3.9 The Imposition Bills will commence on the 28th day after they receive Royal Assent. This is the same commencement date for all the Bills that are a part of this package. [clause 2 of each Imposition Bill]

Chapter 4

Glossary of Commonly Used Terms

Set out below are brief descriptions of commonly used terms in the new law. At the end of each description there is a reference to where that term is discussed in detail in the explanatory memorandum.

Chapter 5

Key Concepts

A. Introduction

5.1 This chapter discusses a number of key concepts that appear throughout the new law, and which do not fall exclusively within any separate part of it. All of the key concepts are discussed in Part 2 of the Sales Tax Assessment Bill 1992.

5.2 The concepts discussed in this chapter are:

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'Application to own use'

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'Australia'

•

'Borne tax'

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'Export'

•

'Manufacture' and 'manufacturer'

•

'Obtained under quote'

•

'person'

•

'Wholesale sale'

B. Explanation and Commentary

'Application to own use'

5.3 An application to own use (AOU) of assessable goods at a time when the goods are in Australia will be, in certain circumstances, an assessable dealing. It will also be the point at which goods become Australian-used goods. After goods become Australian-used goods, they will no longer be liable to tax. [clause 5, definition of 'application to own use']

5.4 There will be no primary meaning in the definition of 'AOU'. However, there will be a number of inclusions and exclusions which will identify the parameters of the expression, although they will not necessarily be exhaustive.

5.5

Inclusions: There will be 7 specific inclusions to the definition of AOU:

Inclusion 1: Consuming goods. [paragraph (a)].

Inclusion 2: Giving goods away. [paragraph (b)].

Example: A winery supplies free tasting of its wine. The supply of the wine for tasting will be an AOU by the winery.

Inclusion 3: Transferring property in goods under a contract that is not a contract for the sale of goods. [paragraph (b)]

Note: The existing law deems a person who supplies goods under a contract that is not a contract of sale of the goods to sell those goods. Under the new law, supplies of this kind will be treated as applications to own use by the supplier (unless they are barter or exchange arrangements, in which case they will be treated as sales).

Inclusion 4: Granting to another person a lease of goods or permission, or a right, to use goods. [paragraph (c)]

Note 1: With one exception (see inclusion 7), the only person who will be capable of applying goods to own use will be their owner. Therefore, if the owner permits another person to use goods, then the owner (and not the other person) will be taken to AOU the goods. The AOU will occur at the time that the permission is given.

Note 2: The permission can take a number of forms, from an informal loan to a commercial lease. In the case of a lease AOU, the lessor will be taken to AOU the leased goods at the time that the lease is entered into. A lease will include a hire-purchase agreement. The new law will apply a different treatment to lease AOUs than to other AOUs. The treatment of lease AOUs is discussed separately, in Chapter 19.

Inclusion 5: Using goods as materials in the manufacture, construction, repair, renovation or other treatment or processing whether or not it relates to or results in other goods. [paragraph (d)]

Note 1: This will be a significant change. Under the existing law, the use of materials is not generally regarded as an AOU of the materials. Instead, the materials attract the same treatment as the property into which they are incorporated. For example, if a repairer purchases materials for incorporation into goods for sale by the repairer, then the repairer is regarded as having purchased the materials for subsequent sale. Thus, the vendor of the materials to the repairer is regarded as selling the materials by wholesale. Under the new law, that sale would be regarded as a retail sale because the purchaser will be taken to AOU them when they are used in the repair process.

Note 2: The reference to 'materials' rather than 'raw materials' is deliberate, so as to apply to all materials and not just materials which satisfy the narrower definition of 'raw materials' (defined in clauses 5 and 7). There is no separate definition of 'materials'.

Note 3: The inclusion extends to processes or treatments with any property, not just goods. However, if the materials are used as raw materials in the manufacture of assessable goods, then an exemption Item will relieve the AOU from tax. This will ensure that manufacturers are taxed on their outputs and not their inputs.

Inclusion 6: Causing goods to become a container (also referred to in the new law as a 'Packing AOU'. [paragraph (e)]

Note 1: This also will be a change to the existing law. At present, a container is not taken to have been applied to own use until after their contents have been removed. Under the new law, goods will - broadly speaking - become a container at the time that the contents are put into them, and at that same time they will be taken to have been applied to own use. This change is part of the new treatment of containers proposed under the new law and is discussed in greater detail at Chapter 20.

Note 2: It is not just the placing of contents into goods that will cause the goods to become a container. It is doing anything with those goods that causes them to become a container. The definition of 'container' is discussed in detail in Chapter 20.

Note 3: In order to give effect to the general policy of taxing containers at the same time as their contents, there will be an exemption Item which, in general terms, will exempt a packing AOU if the contents are exclusively assessable goods that are intended to be the subject of a later assessable dealing. This is discussed in greater detail in Chapter 20.

Inclusion 7: Anything done with goods by a person who locally enters them but is not the owner, provided that it would be an AOU if it were done by the owner. [paragraph (f)]

Reason: Goods are often imported by persons other than the owner (e.g. a lessee from a lessor who is a foreign resident). It is consistent with this practice that the importer/enterer should be liable to tax on anything done with the goods by them. If, therefore, the first use of the goods is by the enterer and not the owner, then the use will be an AOU by the enterer and not by the owner However, if the first use is by the owner, even though the goods were entered by another person, then the owner's use will be an AOU of the goods.

5.6 Exclusions: There will be 3 specific exclusions from the meaning of AOU:

Exclusion 1: Selling goods or consigning the goods for sale by consignment. [paragraph (g)]

Exclusion 2: Doing anything with imported goods after the time of importation and before they are locally entered. [paragraph (h)]

Reason: As a general rule, goods are not be applied to own use in bond. In some circumstances, an AOU in bond will give rise to an informal local entry - and there would be a conflict as to whether the entry, or the AOU will be the assessable dealing. To resolve this conflict there will be no AOU in bond, regardless of how the goods are treated in bond. There can be other assessable dealings with goods in bond (such as a sale), but not an AOU.

Exclusion 3: If exposed film is processed to produce a negative, transparency or film strip for a customer then anything done with the negative transparency or strip before it is delivered to the customer will be excluded. [paragraph (i)]

Reason: The purpose of this exclusion is to ensure that tax will be imposed on the processor's delivery of the negative to the customer, as a delivery of customer's materials goods. In the absence of this exclusion, the customer would be liable on an AOU of the negative by the processor (i.e. for allowing the processor to use the negative). The tax treatment of photography is discussed in detail in Chapter 21.

'Australia'

5.7 The primary significance of 'Australia' in the new law is that references to a dealing with goods can only be an assessable dealing if the goods are in Australia at the time of the dealing.

5.8 The definition of Australia will be different to that which applies generally in most other Commonwealth laws. For sales tax purposes, Australia will exclude the Territory of Cocos (Keeling) Islands and the Territory of Christmas Island.

5.9 The effect of this change will be that goods brought to the two named Territories will not be taken to be imported into Australia (and goods sent from 'Australia' to these Territories will be treated as exported from Australia).

5.10 The meaning of 'Australia' will also be modified to include certain offshore installations attached to the seabed of waters adjacent to Australia. These installations are deemed, under the Customs Act, to be part of Australia. Consequently, the installations (and any goods on them) are treated as imported at the time of attachment. Movements of goods between the installations and other parts of Australia will not involve the import or export of 'goods'.

'Borne tax' and 'tax borne'

5.11 The purpose of this definition is to identify situations in which particular persons are taken to have borne tax on goods. Persons, rather than goods, will be taken to have borne tax under the new law. Tax will be borne by a person in 3 situations:

(a)

the person has become liable to tax on an assessable dealing (unless the person is entitled to a credit, in which case the amount of tax covered by the credit is not counted);

(b)

the person has purchased the goods for a price that included tax (unless the person has had any of that tax refunded or credited, in which case the amount of tax covered by the credit is not counted);

(c)

the person is the customer under an assessable dealing that is a delivery of customers materials goods, and the customer has not quoted on the dealing.

[clause 5, definitions of ''borne tax', 'tax borne' and tax-bearing dealing', and clause 11]

The term is used frequently in the new law, particularly in the credit rules.

'Export'

5.12 Export, in its general meaning, requires more than merely taking goods outside Australia. There may sometimes be some doubt as to whether goods are truly 'exported'. The new law will seek to include 2 situations which might not otherwise qualify as an export of goods. These situations are:

(i)

the accompanied baggage of an Australian traveller going overseas. As the accompanied baggage is usually intended to be brought back into Australia, it could be argued that the baggage is not exported. However, the sales tax and customs duty-free concessions are based on these goods being exported;

(ii)

Australian-used goods sent overseas for repair or alteration. If these goods are also intended to be brought back into Australia, the new law will tax those goods again at the time of their return to Australia. In order to ensure that they are treated as imported goods at that time, the sending of the goods out of Australia will be treated as an export of such goods. [clause 5, definition of 'export']

'Manufacture'

5.13 Manufacture: The concept of manufacture will be a key element of the definition of Australian goods one of the two classes of goods that can be assessable goods. It will also be a key element of the descriptions of several assessable dealings with goods, although manufacture by itself will not be an assessable dealing. Manufacture in the course of a business will be a registrable activity and certain inputs to manufacture will be exempt from tax.

5.14 There will be no primary meaning in the definition of 'manufacture'. The term is intended to be interpreted according to its ordinary meaning, as modified by a number of inclusions and exclusions to the definition. [clause 5, definition of 'manufacture']

5.15 Inclusions: There will be 6 specific inclusions to the definition of 'manufacture':

Inclusion 1: Production. [paragraph (a)]

Reason: This represents no change to the existing law. 'Manufacture' and 'production' are often used interchangeably, although production is often thought to be the wider term (e.g. applying to primary production). The inclusion of 'production' is to remove any suggestion that there are production processes that are not within the general meaning of 'manufacture'.

Inclusion 2: The combination of parts or ingredients to produce something that is commercially distinct from the parts or ingredients. [paragraph (b)]

Reason: No change to the existing law. The inclusion is important in its demonstration of the breadth of the intended meaning of manufacture. It will catch any combination of parts or ingredients that results in goods being brought into existence for the first time, for example, the assembly of chair components to form a chair.

Note:

Not all combinations will be manufacture. The existing law excludes from the meaning of 'manufacture' a combination of parts or ingredients if it is of a kind customarily undertaken by persons who use the 'combined' goods for the purpose for which the combined goods are intended to be used. This is to prevent combinations ordinarily carried out by consumers from coming within the law e.g. the assembly of goods purchased by retail in kit form. These kinds of combinations will be excluded from the new definition of 'manufacture' (and are discussed in exclusion 3).

Inclusion 3: Treatment of food for human consumption. [paragraph (c)]

Reason: No change to the existing law. It was inserted in the existing law following the High Court's decision that cooking fish and chips was not manufacture or production.

Inclusion 4: The processing of exposed film so as to produce a negative, transparency or film strip. [paragraph (d)]

Reason: No change to the existing law. The inclusion is necessary to ensure that tax is imposed on the costs of producing both the negative, transparency and film strip as well as the print of the film. The negative, transparency and film strip are different goods from the exposed film.

Inclusion 5: Duplicating a computer program. [clause 5, definition of 'duplicate' and paragraph (e)]

Reason: No change. This inclusion was inserted for clarification purposes only. The tax treatment of computer programs is explained separately, and in detail, in Chapter 22. 'Duplicate' and 'computer program' are defined terms which are discussed in that chapter.

Inclusion 6: Duplicating visual images or sounds, or both. [clause 5, definition of 'duplicate' and paragraph (f)]

Reason: No change. This inclusion was inserted for clarification purposes only.

5.16 Exclusions: There are 3 exclusions from the definition of 'manufacture'.

Exclusion 1: Producing goods incidentally to the performance of work of which the principal character is the performance of skilled services. [paragraph (g)].

Reason: This exclusion is intended to be a legislative statement of the rule in Adams v. Rau (1931) 46 CLR 572. Although the exclusion is not set out in the existing law, the effect under the new law is intended to be the same. The exclusion will not apply if the essential character of the performance of the work is to bring the goods into existence for the purpose of sale or application to own use.

Examples: A solicitor who makes a will for a client, a shorthand writer who transcribes notes and supplies a transcript, an architect who prepares a set of building plans, and photocopying the minutes of a meeting for distribution within a business.

Exclusion 2: Duplicating a computer program onto a tax-paid carrying medium by a person who is not the manufacturer of the medium but who intends to sell it by retail. [paragraph (h)].

Reason: No change to existing law. The new law will not tax non-manufacturing retailers who program computer software onto other goods 'the carrying medium' that they intend to sell by retail and on which tax has already become payable. This is a normal activity by retailers of computer equipment and it is not intended to bring them within the WST solely because of it. However, if the carrying medium is a microchip, the exclusion will not apply and the duplication will be treated as manufacture. This is because the duplication onto a microchip is treated differently under the law to duplication on a floppy or hard disk.

Exclusion 3: Any prescribed combination of parts or ingredients. [paragraph (i)].

Reason: The existing law excludes from the definition of 'manufacture' a combination of parts or ingredients if it is of a kind customarily undertaken by persons who use the 'combined goods' for the purpose for which the combined goods are intended to be used. This is a difficult and uncertain concept to come to grips with. It also has had very little application. Consequently, to provide greater certainty, the regulations will set out the combinations to be excluded from the definition.

'Manufacturer'

5.17 The term 'manufacturer' will mean nothing more in the new law than the person who manufactured particular goods. Unlike the existing law, it will not be restricted to a person who carries on the business of a manufacturer. A person's abstract status as a manufacturer will not be relevant under the new law except in relation to a dealing with particular goods (e.g. is the person the manufacturer of particular goods?).

5.18 Manufacture using customer's materials: The existing law deems a person who supplies materials to be made up into goods by a manufacturer to be the manufacturer if the person intends to resell the goods. The 'real' manufacturer is deemed not to be the manufacturer. As a consequence, the sale by the deemed manufacturer becomes a taxable dealing rather than the sale by the real manufacturer. In this complicated way, the value of the materials and the deemed manufacturer's other costs are brought within the sales tax base. Under the new law, the delivery of the made-up goods by the real manufacturer to the supplier of the materials will be an assessable dealing ( delivery of customer's materials goods). The manufacturer will be liable on this assessable dealing and the taxable value of the goods will include both the manufacturer's charge as well as the value of any tax-free materials supplied by the customer.

'Obtain goods under quote'

5.19 The concept of 'obtaining goods under quote' is an important element of several assessable dealings which will be in the new law. As a general principle, if a person obtains goods for a tax-exclusive price on the basis of a quotation of a registration number or an exemption declaration then the person should be liable to tax on those goods if the person deals with them otherwise than in accordance with an exemption. This will be achieved by making any sale, or application to own use, of goods obtained under quote an assessable dealing.

5.20 There will be 4 situations in which a person will be treated as having obtained goods under quote:

•

if the person quoted on a purchase of the goods;

Note:

For the goods to be treated as having been obtained under quote, one of two further conditions must be satisfied. First the sale must have been an assessable dealing (and it must have been freed from tax by reason only of the quote). Second if the sale was not an assessable dealing (e.g. because it was a retail sale of goods that had already borne tax) then the seller must have excluded tax from the selling price on the basis of the purchaser's quote.

•

if the person quoted on a customs dealing of the goods;

Note:

In this case, the customs dealing must be an assessable dealing that is freed from tax only because of the quote.

•

if the person quoted on the delivery of customer's materials goods;

Note:

This case will attract the same conditions as apply for a quote on a purchase of goods.

•

if the person has obtained goods tax paid and has then obtained a credit for the tax on the basis that the person could have quoted on the goods.

Note:

This is a reference to Credit ground 2. [clause 5, definitions of 'purchase goods under quote', 'locally enter goods under quote', 'obtain goods under quote' and clause 15]

'Person'

5.21 The sales tax law applies to persons. The existing law defines 'person' to include a company. A more comprehensive definition will be included in the new law. Person will mean;

(a)

a company;

Note:

'Company' will be defined to include any body or association (whether or not incorporated). Therefore, a company will include an unincorporated association. [clause 5, definition of 'company']

(b)

a partnership;

(c)

a person in a particular capacity of trustee;

(d)

a body politic (e.g. the Crown in right of the Commonwealth or a State); or

(e)

any other person. [clause 5, definition of 'person']

'Wholesale sale'

5.22 Most wholesale sales of assessable goods will be assessable dealings. 'Wholesale sale' will be generally defined to mean a sale to a person who buys the goods for the purpose of resale. The general meaning, which is not in the existing law, will remove uncertainty which has arisen over the extent of the definition (e.g. whether 'wholesale sale' includes a sale in bulk quantity to a person who does not intend to resell them - under the new law, it will not). However, the general meaning will be modified by 3 exclusions:

Exclusion 1: 'Accommodation sales'. [paragraph (a)]

Reason: No change to the existing law. An accommodation sale is a sale made to accommodate a temporary stock shortage by another retailer of those goods or by a manufacturer of those goods. The exclusion will be limited to sales from a retail store or a retail section of a store. If the sale is to a manufacturer, the goods must be of a kind that are usually manufactured by the manufacturer. These terms will have their ordinary meaning and will not be affected by the definition of 'retail sale'.

Exclusion 2: A sale of school requisites or sporting equipment to a school, (for resale to students). [paragraph (b)]

Reason: No change to a long-standing exclusion.

Exclusion 3: A sale of sporting equipment to a sporting club (for resale to members). [paragraph (c)]

Reason: No change to a long-standing exclusion.

5.23 Omissions from existing definition: There are a number of omissions from the existing definition of 'sale of goods by wholesale' that should be noted.

(i) Under the existing law, the definition included a sale of goods to a person who intends to use them as raw materials in the manufacture of goods. This inclusion will be omitted because the manufacturer's use of the raw materials will be regarded under the new law as an application to own use of the materials in the manufacturing process. This is not generally the case under the existing law, leading to the result that the materials are regarded as being on-sold by the manufacturer as part of the finished goods (so that the vendor to the manufacturer is regarded as making a wholesale sale). This is not a consistent approach to the use of goods and gives rise to a class of goods that cannot be applied to own use.

(ii) The omission of the exclusion of cash order sales by retailers. This long-standing exclusion is inconsistent with the general approach of the sales tax law i.e. that a sale to a person who buys the goods for resale is a wholesale sale. It is unlikely that there are many (if any) sales of this kind still made.

(iii) The omission of the exclusion of a sale of building materials that are not for resale by the buyer. Materials for use in the construction process will be regarded as applied to own use by the builder. Consequently, for the same reason as in (i) above, the exclusion will no longer be necessary.

(iv) The omission of the exclusion of a sale of raw materials by a retailer to a clothing manufacturer. The use of the raw materials by the clothing manufacturer will be an application to own use. Consequently, the exclusion will no longer be necessary, for the same general reason mentioned in (i) above.

(v) The omission of the exclusion of a deemed supply of goods. The existing law deems a person who supplies goods in the course of a contract (other than a contact for the sale of goods) to be deemed to sell the goods. Under the new law, supplies of this kind (to the extent that they are not barter or exchange arrangements) will be treated as an application to own use of the goods by the supplier. If they are barter or exchange arrangements, they will be treated as sales under the new law.

Example: A builder contracts to build a house for a client. The builder supplies all the materials used in the construction of the house and, on completion, sells the house to the client.

Result: Under the existing law, the goods used in the construction of the house are deemed to be sold to the client (even though they may have lost their character as goods by incorporation into the house). Under the new law, the goods used in the construction will be taken to be applied to own use by the builder. To the extent that the goods are supplied in return for other goods or in return for the provision of services, they will be taken to be sold (as 'sale' will be defined to include barter or exchange).

5.24 No definition of 'wholesaler': There will be no need for a definition of 'wholesaler' in the new law. A wholesaler will simply be a person who sells goods by wholesale.

5.25 Definition of 'wholesale merchant' in existing law: The definition of 'wholesale merchant' in the existing law consists mainly of inclusions of persons who are not wholesale merchants but who need to be registered under the law - either to impose a liability on them or to allow them to acquire business inputs tax-free (or both). An explanation of the inclusions, and the reasons why they are not necessary in the new law, are set out below:

(i)

A trustee who sells goods in the course of winding-up a wholesale business.

Reason for omission: Any person who sells goods by wholesale in the course of a business will be liable on the wholesale sale and will be entitled to register.

(ii)

A person who manufactures goods from materials supplied by a customer and is deemed not to be the manufacturer (because the customer requires the made-up goods for sale).

Reason for omission: These persons will be manufacturers under the new law.

(iii)

Any person who applies certain processes or treatments to goods to be further used by a manufacturer.

Reason for omission: These will all be persons who will be entitled to registration on the basis of their entitlement to acquire business inputs tax-free (see Registration Ground 6 - Chapter 13).

(iv)

An indirect marketer.

Reason for omission: An indirect marketing sale will be an assessable dealing in its own right and indirect marketers will have their own registration ground (see Registration Ground 3 - Chapter 13).

C. Summary of Main Changes

5.26 The main changes proposed to the existing law which are discussed in this chapter are:

Chapter 6

Assessable Goods

A. Introduction

6.1 This chapter describes the class of goods that can be taxable. They are referred to as assessable goods. The chapter also describes the classes of goods that are not taxable. Assessable goods are dealt with in Part 2 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

6.2 The general framework of the new legislation is that assessable goods which are the subject of an assessable dealing will be taxable, unless an exemption applies. Assessable goods are the only goods which are taxable.

6.3 Assessable goods: These are defined as goods which either have been manufactured in Australia ( Australian goods or which have been imported ( imported goods , but do not include goods which have been applied to own use in Australia ( Australian-used goods . [clause 5, definition of 'assessable goods']

6.4 Australian-used goods: These are goods which have been applied to a person's own use in Australia. They can either be Australian goods or imported goods. They are the main class of goods which are not taxable, because they have passed the last taxing point for goods i.e. application to own use.

6.5 Australian-used goods - imported containers: There will be one case where goods will become Australian-used goods without first being assessable goods. This will happen with containers which are imported with contents in them. Under the new rules for containers, all containers will be taken to be applied to own use at the time that goods are first put into them. If the contents are exclusively assessable goods (and certain other conditions are satisfied), the container will be exempt from tax but its value will be included in the taxable value of the assessable goods when they are the subject of an assessable dealing. In the case of containers packed overseas, there would be some doubt about when the goods would be taken to be applied to own use in Australia. To remove that doubt, containers imported with contents in them will be taken to be Australian-used goods at the time of their importation.

6.6 Australian-used goods - special features: As a general rule, once assessable goods are applied to own use and become Australian-used goods, they will never again be assessable goods. There are two exceptions to this rule:

Exception 1: Australian-used goods which are taken or sent out of Australia for alteration and are subsequently imported (after being altered outside Australia). When the goods are returned to Australia any application to own use of the goods before they left Australia is to be ignored. This means that they will once again be assessable goods. However, the goods will only be taxed on the value of the alteration. 'Alteration' will be defined to include any repair, renovation or upgrading.

Reason: While Australian-used goods that are altered in Australia are not taxable, the materials used in the alteration are taxable. The purpose of the exception is to apply broadly the same tax treatment to goods altered in Australia and those which are sent out of Australia for alteration.

Note:

This exception will make two changes to the existing law. First it will apply to both Australian-used and imported goods which are sent out of Australia. The existing law applies only to imported goods which are sent out of the country. Second the exception will extend to any goods sent overseas for any alteration (including repair, renovation or upgrading), whereas the existing law applies only to goods sent overseas for repair. [clause 5, definition of 'Australian-used goods' and clause 9]

Exception 2: Australian-used goods imported into Australia after previously having been exported, where:

(i)

the first application to own use of the goods was the grant of a lease; and

(ii)

the application to own use (AOU) was an assessable dealing which was exempted from tax by the special exemption for goods exported by the lessee.

If this happens, the goods will once again be treated as assessable goods. [clause 5, definition of 'Australian-used goods' and clause 10 ]

Reason: Under the new law, the granting of a lease is to be treated as an application to own use of the goods (referred to as a lease AOU and, therefore, in certain circumstances, an assessable dealing which will be taxable unless an exemption applies. Also under the new law, there will be an exemption for a lease AOU if the lessee has the intention of exporting the goods before using them. If the lease of the goods is exempted from tax by reason of the export exemption (or, if tax has been paid, and the lessor subsequently becomes entitled to a credit by reason of the lessee's export of the goods), no tax will be payable on the goods. Without the exception, if the leased goods were to be subsequently brought back to Australia, they would be Australian-used goods and not taxable. This would not be the correct result, particularly if the goods were only out of Australia for a short period. [clause 32 and CR19]

6.7 Definition of 'goods': Goods are defined to mean any form of tangible personal property (which would include things such as gases and electricity). There is one class of goods that is excluded from the definition:

Exclusion: Property that is:

(i)

sold as second hand; and

(ii)

is manufactured principally from Australian-used goods which, as parts of the property, retain their character as such. Unlike 'Australian goods', which must be manufactured in Australia, manufacture in this context can occur anywhere in the world. [clause 5, definition of 'goods']

6.8 Definition of goods: application to newspaper inserts: Inserts to news-papers, magazines and certain other printed matter will be specifically treated as separate goods from the goods into which they are inserted. The purpose of the separation is to clearly distinguish the inserts, which are usually taxable, from the newspapers, magazines etc., which are usually exempt. The result will be that the inserts generally will be taxable while the newspaper etc. into which they are inserted generally will be exempt. [clause 5, definition of 'goods' and clause 12]

6.9 Summary of defined terms: Table 6A summarises the definitions of the key terms used in this chapter.

C. Summary of Main Changes

6.10 The main changes to the existing law proposed by the measures discussed in this chapter are summarised below.

D. Transitional Arrangements

6.11 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision in the Bill for Australian used goods.

6.12 Australian used goods: As mentioned in paragraph 23.7, the new law will be capable of applying to acts and omissions that occur before the first taxing day. Consequently, at the first taxing day, goods can be regarded as Australian-used goods because of an application to own use (as defined in the new law) that occurred before the first taxing day. However, if those goods have not been regarded as applied to own use (or have not gone into use or consumption) as defined in the existing law, then they will not be taxable under either the new law or the existing law.

6.13 To overcome this problem, a special transitional provision will apply to treat, as assessable goods, goods which were applied to own use (as defined in the new law) before the first taxing day. This rule will apply unless:

•

tax was imposed on the AOU under the existing law; or

•

tax would have been imposed on the AOU except that it was exempted under the Sales Tax (Exemptions and Classifications) Act 1935 or because the applier could not be taxed for any reason.

There will be one exception to this rule. Any packing AOU that occurred before the first taxing day will result in the container being Australian-used goods on the first taxing day. There will be no tax payable on that packing AOU. However, the normal taxable value rules will apply if any of the contents are assessable goods that are the subject of a later assessable dealing. In that case, the taxable value of the contents will include the value of the container.

Example:

Goods (as defined in the existing law) are packed into a container before the first taxing day and the goods, and their container, are sold by wholesale after the first taxing day. At the time of the sale the contents are assessable goods.

Result: The container will be treated as Australian-used goods on the first taxing day. When the contents are sold by wholesale, the taxable value of the contents will include the value of the container. [Clause 6 of the Sales Tax Amendment (Transitional) Bill 1992]

Chapter 7

Assessable Dealings

A. Introduction

7.1 This chapter describes those acts, operations and transactions with goods which will be taxable under the new law. They are referred to as assessable dealings . Assessable dealings are dealt with in Part 3 of the Sales Tax Assessment Bill 1992 and in Table 1 to that Bill.

B. Explanation and Commentary

7.2 Under the new law, assessable dealings with assessable goods will be taxable unless an exemption applies. Only acts, operations or transactions with goods which are assessable dealings will be taxable. [clause 5, definition of 'assessable dealing']

Structure of assessable dealings

7.3 There will be five broad kinds of dealing which, in certain circumstances, will be an assessable dealing. These dealings are:

(i)

sale

(ii)

application to own use

(iii)

delivery

(iv)

local entry

(v)

removal from customs clearance area

To be an assessable dealing, the dealing must occur at a time when the goods are in Australia, although the dealing itself can occur anywhere in the world. [clause 16 and Table 1]

Sale

7.4 There are two kinds of sale: wholesale and retail. Generally, most wholesale sales will be assessable dealings but only certain types of retail sales will be assessable dealings. The definition of 'wholesale sale' is discussed in Chapter 5 (paragraphs 5.21-5.22). In general terms, it will be any sale to a person who purchases goods for the purposes of resale. A 'retail sale' will be defined as any sale that is not a wholesale sale. 'Sale' will be defined essentially to have its ordinary meaning, but will specifically include both barter and exchange. In this context, exchange could include an exchange of goods for other goods or for the provision of services. Apart from barter and exchange, there will be no deemed sales under the new law. [clause 5, definitions of 'wholesale sale', 'retail sale' and 'sale']

Sale: wholesale sale [ADs 1a, 1b, 11b]

7.5 The general design of both the existing and new sales tax law is that the tax should fall on the last wholesale sale.

7.6 There will be three situations in which a wholesale sale will be an assessable dealing:

(i)

if the sale is of Australian goods manufactured by the seller in the course of any business carried on by the seller; [Table 1: AD1a]

Note:

The manufacture does not have to occur in the course of carrying on a manufacturing business. The carrying on of any business will be sufficient to satisfy the test. Moreover, there will be no requirement that the sale must be made in the course of any business. The definition of 'manufacture' is discussed in Chapter 5 (paragraphs 5.13-5.16).

(ii)

if the sale is of Australian goods and the seller did not manufacture them. [AD1b]

Note:

There will be no business test.

(iii)

if the sale is of imported goods. [AD11b]

Note 1:

There will be no business test.

Note 2:

Small business exemption: This will be a special exemption, which will exempt from tax persons whose total tax liability over the previous 12 months is $10,000 or less. It will apply to all of the assessable wholesale sales (except for those discused in the note to paragraph 7.7), including those which occur otherwise than in the course of a business. The exemption is discussed in greater detail in Chapter 8.

The net effect is that the only wholesale sale of assessable goods that will not be an assessable dealing will be a sale of Australian goods manufactured by the seller otherwise than in the course of any business.

Example:

A person who manufactures goods at home as a hobby and may, from time to time, sell some of those goods to a retailer.

7.7 There will be no requirement that any of the sales must occur in the course of a business. However, there will be a requirement, if the seller is the manufacturer of Australian goods that the goods must have been manufactured in the course of a business carried on by the seller (although it does not have to be a manufacturing business). This test will also apply in the case of retail sales and applications to own use by the person who manufactured the goods.

Sale: retail sale

7.8 A retail sale is any sale that is not a wholesale sale. While the majority of retail sales will not be assessable dealings (mainly because the goods would already have been the subject of a wholesale sale that was an assessable dealing), there will be five situations in which a retail sale will be an assessable dealing. These will be:

(i)

a retail sale of Australian goods manufactured by the seller in the course of carrying on any business

(ii)

a retail sale of goods obtained under quote

(iii)

an external costs sale

(iv)

an indirect marketing sale

(v)

a sale of goods which have not previously passed a taxing point, provided that, in the case of Australian goods the seller did not manufacture them

Retail sale: 'Australian goods' manufactured by the seller [AD2a]

7.9 The conditions attaching to this sale are identical to the conditions attaching to the wholesale sale of goods manufactured by the seller. The reason for making this sale an assessable dealing is that there would not have been an earlier wholesale sale that would have been the subject of an assessable dealing. Without this dealing, the goods would not be taxable. [Table 1: AD2a]

Retail sale: goods obtained under quote [ADs 2b, 12b]

7.10 Any retail sale of goods obtained under quote will be an assessable dealing. Under the existing law, a person may acquire goods tax-free by providing a certificate to the effect that the person intends to satisfy an exemption item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 in relation to those goods. If the person subsequently sells those goods without satisfying that item, there is no sanction in the law apart from prosecution for giving a false or misleading statement. Under the new law, if a person obtains goods under quote (either by quote of a registration number or an exemption declaration) then any subsequent retail sale of those goods by that person will be an assessable dealing. If no exemption applies at the time of that sale, then the person will be liable to pay tax.

Retail sale: External costs sale [ADs 2c, 12c]

7.11 There will be a new approach to the taxation of dealings with goods by persons who have either:

•

incurred certain costs in connection with the design, formulation or development of the goods, but who do not manufacture the goods; or

•

paid a royalty in connection with the goods.

A general principle of the new law is that expenditure of this kind should be included in the taxable value of those goods. There is, however, a problem with the existing law. Broadly, there is no liability to tax on a retail sale of goods that have already borne tax. They are regarded as having passed the last taxing point. As a general rule, that would be the correct result. However, if the retailer has also incurred costs in connection with manufacture, those costs will be excluded from the tax base. That would not be the correct result.

7.12 The new dealing will be directed, in particular, towards arrangements (regardless of their purpose) that have the effect of only taxing goods on the basis of the costs incurred in connection with the physical manufacture of the goods, rather than other costs that are necessarily incurred in connection with the design, formulation or development of the goods and which are reflected in the price of the goods to the consumer. These arrangements can be easily achieved by contracting out the physical manufacture of the goods to a person who has not incurred those other costs. Without this new assessable dealing, the person who incurred those other costs would have no liability on any subsequent retail sale because the goods would already have borne tax.

7.13 The following examples will illustrate the anomaly that the new dealing is designed to address. They are based on the operation of the existing law.

Example 1: Company X incurs costs in designing new goods, which it also manufactures and sells (both by wholesale and retail

Result: X is liable to tax on the sale. Tax will be payable on a value that reflects both the manufacturing and the design costs, regardless of whether the sale is by wholesale or retail. This is the correct result.

Example 2: X contracts with company Y for Y to design new goods. X pays Y for the design. X manufactures the goods and sells them (both by wholesale and retail).

Result: The same result as for example 1 - X will be liable on a sale value that includes both the manufacturing and the design costs (regardless of whether the sale is by wholesale or retail). Y is not liable to tax. This is the correct result.

Example 3: X designs a new product. X engages Y to manufacture the product, which Y sells to X . X sells the goods (both by wholesale and retail). X does not quote and Y charges X tax on the sale.

Result:

(a)

Y is liable to tax on the sale of the goods that it has manufactured. The sale value will reflect only Y's manufacturing costs, and not X's design costs.

(b)

If X , in turn, sells the goods by wholesale. X will be liable to tax on the sale. The sale value will include both the design costs and the manufacturing costs. There will be a credit for the tax paid by Y This is the correct result.

(c)

If X sells the goods by retail, X will not be liable to tax on the sale. As a result, there will be no tax payable on the design costs. This is not the correct result.

7.14 Royalties: The external costs dealing will be one of the measures under the new law which are designed to replace the present taxation treatment of royalties under the Sales Tax Assessment Act (No. 10) 1985. Under that Act, it is the person who makes the royalty payment, and not necessarily the person who deals with the goods, who is liable to tax. Under the new law, royalties paid before the last assessable dealing with goods will be covered by the special taxable value rules for royalty payments. If that payment is made after that time, then the payment of the royalty will be included in the value of any retail sale or AOU of those goods.

7.15 An 'external costs sale' will occur if the following conditions are met:

(i)

the sale must occur in the course of a business carried on by the seller;

Note 1:

The reason for including a business test is to broadly match the dealing with dealings by the physical manufacturer of goods. In those cases, the manufacturer will not be liable unless the manufacture occurs in the course of a business.

Note 2:

The dealing will apply to both Australian goods and imported goods.

(ii)

the sale is not covered by another category of assessable dealing;

Note:

If the sale is covered by another assessable dealing, then the taxable value of that dealing would include all the costs incurred in connection with the manufacture of the goods.

(iii)

the seller must incur either:

•

expenditure, directly or indirectly, in connection with the design, formulation or development of the goods; or

Note:

Examples of expenditure of this kind include design and research and development costs.

•

a royalty, that is paid or payable, in connection with the goods;

Note:

Any royalty payable in connection with goods will be covered. It does not have to be incurred in connection with the design, formulation or development of the goods, as do other external costs.

(iv)

the seller must incur expenditure or pay a royalty at or before the time of the sale, or might reasonably be expected to incur such expenditure or royalty after that time. Alternatively, the expenditure or royalty must be incurred by an associate of the seller or by any person (except the manufacturer) under an arrangement with either the seller or the associate of the seller;

(v)

if the taxpayer had manufactured the goods, it would be reasonable to expect that the expenditure would be included in the taxable value of the retail sale of the goods by the taxpayer.

Note 1:

This condition will not apply if the external cost is a royalty.

Note 2:

Small business exemption will apply to this dealing.

Note 3:

'external costs' do not include costs incurred in the manufacture or purchase of materials that are supplied to a manufacturer to be made up into goods that will be the subject of an assessable dealing under AD4a (i.e. a delivery of customer's materials goods). The reason is that the law will adequately deal with the costs of these goods in other places. [clause 19]

7.16 It will not be necessary for all external costs to be identified before the dealing can apply. The identification of at least one external cost will cause the sale to become an assessable dealing. The taxable value for the dealing (the notional wholesale selling price of the goods) will automatically include all of those costs.

7.17 The extent of the new dealing will be modified by the requirement that the expenditure must be of a kind which, if the taxpayer had manufactured the goods and then sold them by retail, it would be reasonable to expect that the expenditure would be reflected in the taxpayer's taxable value (which would be the notional wholesale selling price of the goods). This is intended to exclude expenditure that is of its nature quite clearly connected only with things that normally occur after the point of last wholesale sale. With external costs being restricted to costs that are directly or indirectly incurred in connection with the design, formulation or development of the goods, it is unlikely that expenditure of this kind would be incurred after the last wholesale sale. However, some expenditure may be of a retail nature, and where this is the case it will not form part of the taxable value. The modification will not apply to royalties because any royalty payable in connection with goods will be an external cost.

7.18 The dealing is intended to include expenditure (including a royalty) by an associate of the seller or by a person who incurs the expenditure pursuant to an agreement with the seller.

Example:

* Company A (a retailer) contracts with company B (a manufacturer) for B to manufacture recorded compact discs for A;

* Company C (an associate of A ) has paid a royalty to Company D (the copyright holder) for the right to manufacture compact discs of the copyrighted material;

* C supplies the mastercopy of the copyrighted material to B ;

* A pays C a management fee, which includes a component for re-imbursement of the royalty payment;

* A sells the compact discs by retail.

Result: A will be liable on the retail sale or AOU of the compact discs on a taxable value equal to the notional wholesale selling price of the discs (which will reflect the royalty paid).

Note: The payment of the royalty is not itself an assessable dealing - it merely means that the later dealing with the goods by A will be an assessable dealing (by which time the royalty costs will be reflected in the taxable value).

Retail sale: Indirect marketing sale

7.19 These are sales pursuant to certain arrangements that have the technical, but generally artificial, effect of converting what would have been a wholesale sale into a retail sale. As a consequence, the taxing point in the marketing chain is pushed back so that it applies to the sale to the person who is 'really' the wholesaler, rather than the sale by that person. This arrangement eliminates the 'real' wholesaler's profit margin from the sale value of the goods and the sales tax payable is, accordingly, that much lower. As that tax saving can be transferred, in whole or in part, to the consumer, those who engage in these arrangements can achieve an unfair competitive position in the market place. Indirect marketing sales have been taxable under the existing law since 1985. The new law will treat these sales according to their true nature as retail sales. (Under the existing law, they are deemed to be wholesale sales). The retail sale will be a separate assessable dealing and its taxable value will be the notional wholesale selling price of the goods. [AD2d and 12d]

7.20 There will be an indirect marketing sale if the sale occurs in either of the following circumstances:

(i)

the sale must be made by the seller through another person, other than an employee of the seller, who is acting for the seller under an arrangement to that effect; or

(ii)

the sale must be made from premises that are:

•

used by a person, other than the seller, mainly for making retail sales of goods; and

•

are held out to be the premises of, or premises used by, that other person.

The dealing will not apply if the seller is the manufacturer of the goods. This is because there is no one in the marketing chain behind the manufacturer to push the taxing point back to. Regardless of whether the sale is by retail or wholesale, the law will bring the wholesaler's profit margin into the taxable value of the goods.

Retail sale: goods that have not previously passed a taxing point

7.21 The existing law assumes that a person will be liable to tax on goods not previously taxed, either because the person has manufactured them or has purchased them under quote. Tax is, therefore, only imposed on persons who have acquired goods in this way. There are other ways in which goods may be acquired tax-free by a person. For example, transfers of goods by court order (no sale, lease or application to own use is involved), which can be common in company mergers and group restructurings.

7.22 The new law will close that gap, in the case of a retail sale, by making all retail sales of goods assessable dealings, (known as an untaxed goods sale unless any of the following conditions is satisfied:

(i)

the goods have previously passed through a taxing point;

Note:

Goods will be taken to have previously passed a taxing point if:

•

tax became payable on an earlier assessable dealing (i.e. there was no exemption to liability); or

•

the goods were the subject of an earlier assessable dealing but tax did not become payable on them because:

•

they unconditionally satisfied an exemption Item (see paragraphs 8.5-8.7);

•

the taxpayer concerned could not be taxed or was entitled to an exemption arising outside the sales tax law. For example, the taxpayer could have been a Commonwealth Department or a Commonwealth authority which is made exempt from sales tax by the legislation which established it.

(ii)

the goods were obtained under quote. There is a separate assessable dealing for those cases;

(iii)

the sale is an indirect marketing sale. There is a separate assessable dealing for those sales;

(iv)

the goods are Australian goods manufactured by the seller. There is a separate assessable dealing for those goods if they were manufactured by the seller in the course of carrying on a business. If they were manufactured by the seller outside any business, then the sale is not an assessable dealing. [AD2e and AD12e and clause 21]

Application to own use

7.23 Application to own use (AOU) in Australia will be the last point at which goods can be the subject of an assessable dealing, as is the case under the existing law. Once goods have been applied to own use in Australia they will, with two exceptions, no longer be assessable goods and no longer taxable.

7.24 The definition of 'application to own use' is discussed in detail in Chapters 5. In broad terms it includes:

(i)

consumption;

(ii)

gifts;

(iii)

transferring property in goods under a contract that is not a contract of sale;

(iv)

the grant of a lease of goods or the giving of permission to another person to use the goods;

(v)

packing goods into a container (AOU of the container);

(vi)

using goods as raw materials (in the manufacture, construction, repair etc of goods and other property).

The definition will exclude sale and anything done with imported goods before they are locally entered. [clause 5, definition of 'application to own use']

7.25 An AOU will only be an assessable dealing if it happens at a time when the goods are in Australia. Therefore, even though goods may have been applied to own use outside Australia they will still be liable to tax at the time of importation and local entry. [clause 5, definition of 'AOU in Australia']

7.26 Leases: An important change to the existing law will be the treatment of leases. Under the existing law, a lease of goods by a registered person is a separate taxable dealing. The dealing is not self-assessing, as the sale value is the amount that the Commissioner considers to be fair and reasonable. Subsequent leases of the goods are also taxable. The time for payment of the tax is determined by the Commissioner. Under the new law, a grant of a lease of goods will be treated as an AOU of the goods by the lessor. The lessor will be liable to tax on the goods (unless an exemption applies). The taxable value will be the same as for other AOUs in similar circumstances. Subsequent leases will not be an assessable dealing with the goods.

7.27 There will be four situations in which an application to own use will be an assessable dealing:

(i)

an AOU of Australian goods Manufactured by the applier in the course of carrying on any business; [Table 1: AD3b]

(ii)

an AOU of any goods obtained under quote; [AD3c and AD13c]

(iii)

an external costs AOU of any goods; [AD3d and AD13d]

(iv)

an AOU of goods which have not previously passed a taxing point and which are not covered by any other assessable dealing. [AD3a and AD13a]

7.28 Each of these situations is identical to the corresponding situation for retail sales. The only difference is that there will not be an AOU that corresponds to an indirect marketing sale. Dealing (ii), however, will be a major change to the existing law. It is this dealing which will impose tax on persons who obtain goods under quote (either of an exemption declaration or a registration number) but who deal with the goods in a taxable manner (i.e. they do not intend to satisfy an exemption Item).

Delivery of customer's materials goods

7.29 It is common practice for a person to manufacture goods for a customer from materials supplied by the customer. If most, or all, of the materials used in the manufacture of goods are supplied by the customer, then the manufacturer may not legally be the owner of the goods. Consequently, the delivery of the manufactured goods to the customer may not be a sale of the goods to the customer and, therefore, not covered by any assessable dealing. The existing law overcomes this problem by deeming the delivery to be a sale by the manufacturer to the customer. Under the new law, delivery of the goods in this situation will be treated as a separate assessable dealing (known as a delivery of customer's materials goods. This is consistent with a general approach of removing deeming provisions from the law and treating concepts according to their true identity. [Table 1: AD4a]

7.30 A 'delivery of customer's materials goods' will occur if the following conditions are satisfied:

(i)

the goods are manufactured in Australia for a customer;

(ii)

some or all of the materials used in the manufacture of the goods were:

•

supplied by the customer;

•

supplied by a third person at the request of the customer;

•

were purchased from the manufacturer by the customer; or

•

were purchased from the manufacturer by a third person at the request of the customer; and

(iii)

the goods were delivered to:

•

the customer; or

•

to a third person at the request of the customer.

Note 1:

The dealing will be restricted to Australian goods the case of materials supplied to an overseas manufacturer, their value would automatically be included in the taxable value of the imported goods, either at the time of local entry or at the time of a later dealing with the goods.

Note 2:

There will be no business test.

Note 3:

Small business exemption: The exemption will apply to this dealing. [clause 5, definition of 'delivery of customer's materials goods' and clause 22]

7.31 This dealing will make a major change to the existing treatment of goods manufactured from materials supplied by a customer. Under the existing law, the manufacturer in these situations is often deemed not to be the manufacturer while another person is deemed to be the manufacturer. The result of all the existing deeming provisions is that the 'real' manufacturer is not liable in the following situations:

(i)

if the customer wants the goods for resale. In this case, the customer is deemed to be the manufacturer and is liable to tax on the subsequent sale; and

(ii)

if a third person has arranged the manufacture of the goods from the customers materials. In this case, the third person is deemed to be the manufacturer and is liable to tax on the delivery of the goods to the customer.

This is an artificial and confusing set of rules. The policy intention of the deeming provisions, however, is clear: to postpone the taxing point if some of the costs of production are incurred by a person who is not the physical manufacturer of the goods, so that those costs are brought within the tax base.

7.32 Under the new law, every delivery of goods by the manufacturer will be an assessable dealing. There will be a special taxable value for this dealing which will include both the manufacturer's charge plus the value of any always exempt materials supplied by the customer (see paragraphs 9.5-9.6).

Local entry

7.33 Local entry is a dealing that applies only to imported goods and is the new name for the dealing referred to under the existing law as an 'entry for home consumption'. In general terms, 'local entry' can be described as an act or activity that takes imported goods out of the control of the Collector of Customs. The most common local entry will be an entry for home consumption under the Customs Act 1901. Under the new law, these will be known as 'formal local entries'. There are other acts or activities under the Customs Act which are also treated under the existing law as 'entries for home consumption' even though they are not technically entries. These will also be treated as local entries under the new law and will be known as 'deemed local entries'. Formal and deemed local entries are distinguished because there can be more than one entry for goods. If this happens, there will be rules governing which entry will take priority (see paragraphs 7.34-7.36). [Table 1: AD10, clause 5, definition of 'local entry' and clause 23]

7.34 Formal local entries: The following will be treated as formal local entries under the new law:

(i)

an entry for home consumption given to a Collector of Customs under section 36 of the Customs Act; and

(ii)

an advance entry for home consumption under section 37 of that Act. [clause 23 and clause 5, definition of 'Customs Act']

7.35 Deemed local entries: These are listed in the new law in table form. [Table 2]

7.36 Priority of multiple local entries:Goods can often be the subject of more than one entry. In particular, an entry can be withdrawn and a second entry made. The existing law sets out rules as to which of the multiple entries takes priority. The new law will maintain the existing rules, which are set out in Table 7A (below).

7.37 Small Business exemption: The exemption will not apply. If it did, it would give every person in Australia a $10,000 tax exemption on goods that they import into Australia each year. The present exemption (for international travellers) is $400 value. On the other hand, these dealings are not included among the dealings that are taken into account under the small dealings exemption in determining whether the $10,000 threshold has been met.

Removal from a customs clearance area

7.38 This is a dealing which will be limited in its application to goods ( airport shop goods which are the trading stock of an inwards duty-free shop at an Australian international airport. It applies to both Australian goods and imported goods as both kinds of goods are sold from airport shops. These goods are taxable under the existing law and the new law will make no change to their treatment. [clause 5, definitions of 'airport shop goods' and 'inwards duty-free shop', and Table 1: AD4b and AD14b]

7.39 Background: In 1986 the sales tax law was changed to allow international passengers arriving in Australia (relevant travellers) to have access to inwards duty-free shopping facilities at Australian international airports. This change enabled both foreign and returning Australian tourists to make duty-free and sales tax-free purchases from these facilities in Australia. The airport shops are all bonded warehouses under the Customs Act 1901 and are located in the international terminals between the point of disembarkation and the customs barrier. They are permitted to sell only tobacco products, spirituous liquors and perfume. The sales tax treatment of goods in these shops under the existing law is as follows:

(i)

There is a sales tax exemption which enables the proprietor of the airport shop to acquire airport shop goods tax-free for sale to international travellers arriving at the airport (item 114(3) in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935).

(ii)

There is a sales concession for certain goods brought into Australia by international travellers that was extended in 1986 to include goods purchased from airport shops (item 114(1)).

(iii)

The sales tax law was amended to impose sales tax on Australian manufactured airport shop goods that were:

•

sold to a relevant traveller (in this case the traveller, and not the proprietor, is the taxpayer. Liability arises if the traveller exceeds the exemption limit under item 114(1));

•

sold to a person who was not a relevant traveller (in which case the proprietor is liable); and

•

applied by the proprietor to own use (in which case the proprietor is liable).

7.40 The 1986 amendments applied only to Australian manufactured goods in airport shops. Imported airport shop goods will always be taxable at the point of entry for home consumption, which is not reached until after the time of the dealings at the airport shop.

7.41 Definition of 'relevant traveller': A 'relevant traveller' will be defined as a person who has arrived in Australia on an international flight as a passenger, or member of the crew of an aircraft. The person must also not have been questioned by a Customs officer about goods carried on that flight. [clause 5, definition of 'relevant traveller']

7.42 Liability of a relevant traveller: The purpose of this dealing is to impose a liability on a relevant traveller for any goods purchased from an airport shop. This will ensure that the goods will be taxable if, when added to the goods in the traveller's personal baggage, they exceed the traveller's exemption limit. This will be achieved by creating a new assessable dealing: removal of goods from a customs clearance area. A relevant traveller who purchases goods from an airport shop must pass through a customs clearance area before exiting the terminal. This is the same point at which goods imported by the traveller as personal baggage will be deemed to be entered for home consumption, so the exemption can be applied against all the value of all the travellers goods.

7.43 Customs clearance area: This will be any place set aside for the performance of functions under the Customs Act. For example:

(i)

questioning passengers disembarking from an aircraft;

(ii)

examining the baggage of those passengers; or

(iii)

as a holding place for passengers. [clause 5, definition of 'customs clearance area']

7.44 Proprietor's liability: Under the new law, the dealings listed in paragraph 7.39 will be dealt with as follows:

(i)

the sale by the proprietor to the relevant traveller will be an assessable dealing by the proprietor. In the case of Australian goods it will be a retail sale of goods acquired under quote (AD 2b). In the case of imported goods it will be a retail sale of goods not previously taxed (AD 12e). However, because the goods will be exempt if they are sold to relevant travellers, the dealing will not be taxable (exemption Item 190);

(ii)

the sale by the proprietor to a person who is not a relevant traveller will also be an assessable dealing (identical to (i) except that the sale will be taxable because the goods will not be always exempt goods).

(iii)

the AOU by the proprietor will be a taxable assessable dealing - either of Australian goods acquired under quote (AD3c) or imported goods which have never been taxed (AD13a).

The proprietor's liability will not be part of the assessable dealing of removing goods from a customs clearance area.

C. Summary of Main Changes

7.45 The main changes proposed to the existing law which are discussed in this chapter are:

D. Transitional Arrangements

7.46 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision in the Bill for assessable dealings .

Application of the new law

7.47 General principle: The new law will apply only to assessable dealings that occur on or after the first taxing day. [subclause 16(2)]

7.48 The new law can apply before the first starting day: Although the new law cannot impose tax on a dealing with goods that occurs before the first taxing day, it is capable of applying (for other purposes) to acts and omissions that occur before that day. This provision is essential to ensure that tax is imposed on dealings with goods either under the new law or the existing law. In the absence of this provision, there would be a number of acts, transactions or operations with goods which might fall outside either law. The broader purpose of this provision is to ensure that when the new law refers to a course of conduct or series of events, and some (but not all) elements of that conduct or those events occur before the first taxing day, then the conduct or events will be covered by the new law. However, there are exceptions to that general purpose in a number of areas [subclause 3(2)]

7.49 Examples of the application of the new law:

Example 1: Company X. Manufactures goods before the first taxing day and sells them by wholesale after the first taxing day.

Result: The new law will impose tax on this dealing, even though one of its essential elements (the manufacture of the goods) occurs before the first taxing day.

Example 2: Company X. Purchases goods, for a tax-inclusive price, and makes a payment of royalty in connection with the goods before the first taxing day. X then sells the goods by retail after the first taxing day.

Result: X. May not be liable to tax on the sale (as an external costs sale) because that assessable dealing specifically excludes external costs incurred before the date of introduction of the Bill in the House of Representatives. However, if the cost is incurred between the commencement date and the first taxing day, then tax will be imposed on any sale that occurs after the first taxing day, even though the royalty was paid before the first taxing day.

7.50 Dealings with goods taxed under the existing law: There is no general restriction on imposing tax on an assessable dealing with goods under the new law if those goods have already been taxed under the existing law. This is consistent with the existing law, which does not restrict the subsequent taxing of goods that have already borne tax. An example of a situation in which the existing law imposes tax on goods more than once is if goods are the subject of successive wholesale sales and the purchasers do not quote. If the new law imposes tax on goods that have already borne tax under the existing law then, with one exception, the new law will give the taxpayer a credit for any tax paid on the goods under the existing law.

7.51 Some assessable dealings will not apply to goods taxed under the existing law: The new law will impose tax on an 'untaxed goods sale or AOU'. Broadly, these are goods that either have not previously been taxed or would have been taxed except for the operation of an exemption Item in the proposed Sales Tax (Exemptions and Classifications) Act 1992. In the absence of a special provision, it is possible that some goods taxed under the existing law might fall inadvertently into the definition of 'untaxed goods'. There will be a special provision that prevents these dealings from applying to goods which have been taxed under the existing law or which would have been taxed under the existing law except for the operation of an item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. [clause 5 of the Sales Tax Amendment (Transitional) Bill 1992]

Application of the existing law

7.52 Leases: The existing law will not Impose sales tax on any act, transaction or operation with goods that happens on or after the first taxing day The single exception to the general principle will apply to goods that have been leased before the first taxing day. For goods in this category, the existing law will continue to apply for a period of 2 years after the first taxing day. In broad terms, this means that the existing law will continue to impose tax on the grant of subsequent leases of those goods if the grant occurs within 2 years after the first taxing day. [clause 2 of the Sales Tax Amendment (Transitional Bill 1992]

7.53 Reason for exception: The sale value of the grant of a lease of goods to which the existing law applies is the amount that the Commissioner determines to be fair and reasonable. The Commissioner has, as a general rule, determined that amount to be the amount of the lease payments, rather than the fair wholesale value of goods (as applies for other dealings with goods). However, tax on a fair wholesale value will ultimately be paid because subsequent leases of the goods are also subject to tax. At the first taxing day there will be many leased goods which will not yet have borne tax on the equivalent of a fair wholesale sale value. However, subsequent leases of these goods would not otherwise be subject to sales tax under the new law because the general approach of the new law is to impose tax only on the first lease of assessable goods. The extension is necessary, therefore, to prevent a windfall gain to some lessors.

Chapter 8

Exemptions

A. Introduction

8.1 This chapter describes the general situations in which assessable goods which are the subject of an assessable dealing will not be taxable. These situations are referred to as exemptions and are dealt with in Part 3 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

8.2 The basic structure of the new law is that assessable goods which are the subject of an assessable dealing will be taxable unless one of the exemptions applies.

What are the general categories of exemption?

8.3 There will be six general categories of exemption:

1.

An exemption Item applies to the assessable dealing, and quotation is not required.

2.

There is an eligible long-term lease.

3.

There is a quotation in respect of the dealing.

4.

The small business exemption applies to the dealing.

5.

The dealing is with goods that are intended for export.

6.

A miscellaneous exemption applies.

Exemption 1: An exemption Item applies and quoting is not required

8.4 There will be two specific exemptions in this category:

Exemption 1(a): An exemption Item is unconditionally satisfied;

Exemption 1(b): The dealing is a non-lease application to own use (AOU) and the applier intends to satisfy an exemption Item; and

8.5 Exemption 1(a): An exemption Item is unconditionally satisfied: An exemption Item is an exemption from sales tax for goods which are described in an item in Schedule 1 to the Exemptions and Classifications Bill 1992. [clause 5, definition of 'exemption Item']

8.6 There are two ways in which an exemption Item can be satisfied: unconditionally at the time of the assessable dealing or conditionally at the time of the assessable dealing. There are significantly different consequences under the sales tax law depending on which situation applies.

8.7 An exemption Item will be unconditionally satisfied if, at the time an assessable dealing occurs, all the requirements of an exemption Item are met. If this happens, there will be an exemption for that dealing. This exemption is available for every kind of dealing. Goods referred to in an exemption Item that will be unconditionally satisfied at the dealing time, no matter what the dealing, will be known as always exempt goods. [clause 24 of the Assessment Bill, and clauses 4 and 5 of the Exemptions and Classifications Bill]

Example 1:

An exemption for 'newspapers' will always be unconditionally satisfied at the dealing time.

Further examples of always exempt goods: Coal, firewood, tea, coffee, postage stamps, and manuscripts.

8.8 Exemption 1(b) : An exemption Item is conditionally satisfied (and the dealing is a non-lease AOU): An exemption Item is conditionally satisfied if, at the time of the assessable dealing, the goods are intended to be dealt with by a particular person so as to satisfy an exemption Item that is in force at the time of the assessable dealing.

8.9 Only in the case of an application to own use is there an exemption based solely on an intention to satisfy an exemption Item at the dealing time. In any other case, the exemption is available only if the intention is also evidenced by a quote by the person dealing with the goods. [clause 25 of the Assessment Bill, and clauses 4 and 5 of the Exemptions and Classifications Bill]

8.10 Statutory period: In all cases, exemption 1(b) is subject to the requirement that the applier must intend to satisfy the exemption Item for a minimum period, referred to in the new law as the statutory period. The applier must, at the time of the AOU, intend to use the goods so as to satisfy the requirements of the exemption Item throughout the whole of the statutory period. If that intention is satisfied at the time of the dealing, then the exemption will apply. This will be so, even though the applier might later change that intention and not satisfy the item throughout the whole of the statutory period. [clause 5 of the Exemptions and Classifications Bill]

8.11 Definition of 'statutory period': The statutory period commences at the time that goods are applied to own use and ends at the earliest of the following times:

(i)

after 2 years;

(ii)

when the goods are no longer reasonably capable of being used for the purpose for which goods of that kind are ordinarily used; or

Note:

The purpose of (ii) is to cover situations where the working life of the goods is less than 2 years.

(iii)

at a time that the Commissioner considers to be appropriate in special circumstances. [clause 5, definition of 'statutory period']

8.12 Extent of the changes: This exemption is a major part of the changes proposed by the new law to the operation of the conditional exemption system for goods. Under the existing law, there are no rules about giving effect to exemption for goods apart from a general statement that goods covered by an item in the first Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 are exempt from sales tax. An administrative system has developed based on the giving of exemption certificates in dealings where the dealer wants to rely on an exemption item. There are a number of shortcomings in that system, not the least of which is the absence of any liability to tax on persons who falsely give exemption certificates. The changes proposed to the existing law are:

(i)

statutory recognition of an exemption declaration system (see paragraph 8.18 and Chapters 14 and 15);

(ii)

imposition of liability on a person who falsely gives an exemption declaration (see Chapter 7);

(iii)

a requirement that the dealer must intend to use the goods so as to satisfy an exemption Item for the duration of the statutory period (see paragraph 8.10).

8.13 Examples of the exemption for a non-lease AOU:

Example 1: AVW Pty Ltd applies goods to own use. The goods have an effective working life of 10 years. At the time of the first AOU, AVW intends to use the goods in accordance with an exemption Item for 3 years and then to sell them. After 6 months of such use, AVW's business experiences a downturn and it is forced to sell the goods.

Result: AVW's AOU of the goods is exempt from tax because, at the time of the AOU, it had the intention to use the goods for the statutory period in accordance with an exemption Item. A change of intention after the dealing time does not affect liability.

Example 2: X applies goods to own use. The goods have an effective working life of 10 years. An exemption Item applies to the goods if they are used mainly (i.e. more than 50%) for an exempt purpose. X intends to use the goods exclusively for the exempt purpose for 18 months and then to use them for another 18 months exclusively in taxable circumstances.

Result: X is not entitled to the exemption and the AOU is taxable. The requirement is that the goods must be used mainly for the exempt purpose over the entire statutory period. This does not entitle X to argue that exclusive use over 18 months exceeds 50% use over 2 years and, hence, satisfies the exemption Item. It does not.

Exemption 2: The dealing is a lease AOU and the lease is an eligible long-term lease:

8.14 The granting of a lease of assessable goods will be treated as an application to own use under the new law. If the lease AOU is an assessable dealing, there will be an exemption if the lease is an eligible long-term lease. This is part of the new approach to the taxation of leases. This will be one of only 2 situations where an exemption will apply to the grant of a lease, (the other is where the lessee intends to export the goods - see paragraph 8.44). The new approach can be summarised as:

(i)

the first lease, and only the first lease, of assessable goods will be an assessable dealing (known as a lease AOU); [clause 5, definitions of 'application to own use' and 'lease AOU']

(ii)

the lease will be taxable unless it is an eligible long-term lease. [clause 26]

(iii)

the person who grants the lease the lessor will be the taxpayer; [clause 16 and Table 1]

(iv)

if the lease is taxable, then its taxable value will be the full wholesale value of the goods. The length of the lease and the amount of the lease payments will not be relevant for determining taxable value. [clause 34 and Table 1]

Leases are discussed in more detail in Chapter 19.

8.15 Definition of 'eligible long-term lease': An eligible long-term lease must satisfy 3 conditions:

(i)

the term of the lease must be for at least as long as the statutory period;

(ii)

the lessee must give to the lessor, at or before the grant of the lease, a statement that the lessee intends to use the goods so as to satisfy an exemption Item, at least until the end of the statutory period;

(iii)

if the lessor has previously borne tax on the goods, no part of that tax must have been passed on to any person.

Note:

Condition (iii) is relevant only to the credit rules and not to exemption.

If all these conditions are satisfied, and the lease is of assessable goods, then the lease AOU will not be taxable. [clause 5, definition of 'eligible long-term lease']

8.16 Examples of the exemption for eligible long-term leases

Example 1: X holds tax-free stock. X leases to EMG goods with an effective working life of 10 years. The term of the lease is 2 years. EMG gives a statement to X that EMG intends to use the goods to satisfy an exemption Item for the full period of the lease.

Result: X will not be taxable on the lease AOU.

Example 2: Leasing company X leases an item of goods to Y The goods have an effective working life of 10 years. The lease is for a period of 18 months with an option to renew for a further 12 months. Y gives a statement to X that Y intends to use the goods throughout the 18 month term of the lease to satisfy an exemption Item. Y also intends, at the time the lease is entered into, to take up the option and to continue to use the goods for an exempt purpose for the additional 12 months. This is also included in the statement.

Result: X is taxable on the lease. The lease is only entered into for a period of 18 months, which is less than the statutory period. While Y intends to take up the option for the additional 12 months, there is no guarantee that this will happen and so the exemption does not apply.

Exemption 3: There is a quotation in respect of the dealing

8.17 There will be an exemption whenever a quotation is made in respect of an assessable dealing, at or before the dealing time. This exemption is available for every kind of assessable dealing except an application to own use. [clauses 27 and 28]

8.18 What is quotation? Quotation is a mechanism that will prevent tax being payable on an assessable dealing (other than an application to own use). Quotation is discussed in greater detail in Chapters 14 and 15. The two purposes of quotation are to defer taxability to a later assessable dealing or to give effect to a full exemption from tax for particular goods. Broadly, there will be two types of quotation:

(i)

quotation by a registered person of their registration number; or

(ii)

quotation by an unregistered person of an exemption declaration. [clause 5, definition of 'quote']

A person will be entitled to quote in respect of an assessable dealing if they intend to satisfy one of the grounds for quotation (these are discussed in Chapter 15). If the quotation is made on the basis that the quoter intends to satisfy an exemption Item in respect of the goods, the intention must be that the exemption will be satisfied throughout the whole of the statutory period (see paragraphs 8.10-8.11 ). This requirement does not apply in the case of a registered person quoting on the basis of a non Exemption Item quoting ground e.g. acquiring goods for sale by wholesale. [subclause 5(1) of the Exemptions and Classifications Bill]

8.19 Who can quote? The following persons can quote:

(i)

in the case of a sale - the purchaser.

(ii)

in the case of a delivery of customer's materials goods - the customer.

(iii)

in the case of a local entry - the taxpayer. i.e. broadly, the person making the entry);

(iv)

in the case of a removal of airport shop goods from a customs clearance area - the taxpayer. i.e. the person removing the goods).

8.20 Consequences of quotation: If the quoter does not intend to satisfy a quotation ground at the time of quoting, but still quotes, then the quoter will be guilty of an offence. This will not, of itself, impose a liability to tax on either the quoter or the person receiving the quote. However, anything that the quoter does with the goods after acquiring them will constitute an assessable dealing. If, at the time of that later assessable dealing, an exemption does not apply then the dealing will be taxable. This closes a major gap in the law which is discussed in greater detail in Chapter 7.

8.21 Examples of the exemption where there is quotation:

Example 1: X is an unregistered person who purchases goods under quote of an exemption declaration. At the time of giving that declaration, X does not intend to satisfy any exemption Item in respect of the goods. X immediately sells the goods by retail to Y. Y does not quote in respect of the purchase.

Result: X is guilty of an offence of making a false quotation. X is also taxable on the subsequent sale to Y , which is an assessable dealing (AD2b or 12b - retail sale of goods obtained under quote).

Example 2: Y is a registered person who purchases goods under quote of a registration number. At the time of purchasing the goods, Y does not intend to satisfy any of the quotation grounds for a registered person. Y subsequently applies the goods to own use. At the time of AOU, Y does intend that the goods will be used to satisfy an exemption Item throughout the whole of the statutory period.

Result: Y is guilty of an offence of making a false quotation. However, Y is not liable to tax on the subsequent AOU because at the time of AOU Y had the intention of satisfying an exemption Item.

Example 3: Z is an unregistered company. It is part of a company group comprising companies X, Y and Z. There is an exemption Item for machinery for use mainly (i.e. more than 50%) for the bulk handling of grain. Z quotes on a purchase of goods to be used exclusively by X, Y and Z in equal proportions for bulk handling of grain throughout the statutory period.

Result: Z is not entitled to quote and will be liable to tax on the first AOU of the goods. The exemption requires that more than 50% of the use be by the quoter Z .

Exemption 4: The small business exemption applies to the dealing

8.22 What is the small business exemption? In broad terms, the small business exemption will be available to persons whose sales tax liability, over a 12 month period, is $10,000 or less.

8.23 Why have a small business exemption? The small business exemption is designed to provide an exemption for persons who have only a small annual sales tax liability. The purpose of the exemption is partly concessionary and partly to avoid the administrative costs of processing large numbers of small tax payments. Notwithstanding its name, the exemption is not limited to taxpayers who carry on a business. Rather, it is linked to assessable dealings (not all of which have a business test).

8.24 The intention is that persons who come within the exemption should not pay tax on their outputs but they should pay tax on their inputs The exemption will therefore not be available to dealings with goods obtained under quote, or output goods that are 'linked' to input goods that have not borne tax.

8.25 When will the exemption apply? The small business exemption will apply only if all of the following conditions are met:

Condition 1: The current dealing is one of the kinds of assessable dealing that is covered by the exemption (not all kinds are covered);

Condition 2: The goods for which exemption is sought (the 'current goods') were not obtained under quote by the taxpayer;

Condition 3: The current goods were not manufactured by the taxpayer on another manufacturer's premises;

Condition 4: The total tax liability for the current dealing, and all other countable dealings in the previous 2 months, is $10,000 or less;

Condition 5: The taxpayer has a reasonable expectation that the total tax liability for the next months will continue to be $10,000 or less; and

Condition 6: The inputs for the current goods have previously borne tax. [clause 29]

8.26 Condition 1: What dealings will the exemption apply to? The exemption will apply to a wider range of taxpayers and their dealings than does the small manufacturer's exemption in the existing law. The new exemption will be 'dealings' based, and the exemption will apply to all assessable dealings except the following:

(i) local entry of imported goods (AD10);

Reason: In the absence of the exception, every person in Australia would receive a $10,000 tax concession for goods which they import themselves or purchase in bond from importers.

(ii) removal of Australian or imported airport shop goods from a customs clearance area - (AD4b and AD14b);

Reason: This will avoid giving a $10,000 tax concession to international travellers arriving in, or returning to, Australia.

(iii) an AOU of Australian goods or imported goods by a person, other than the manufacturer, where the goods have not been obtained under quote, but they have not previously passed a taxing point - (AD3a and AD13a);

Reason: Under the existing law, it is possible for goods to fall through the sales tax net where they were acquired tax-free by some method other than purchase under quote. These dealings are designed to close that gap. It is appropriate that these dealings be treated similarly to dealings with goods obtained under quote. Therefore, the exemption will not apply to these dealings. [paragraph 29(4)(c)]

The fact that the exemption is not available if the current goods have been obtained under quote (see Condition 2), means that the exemption will not be available for any of the following dealings:

(iv) a retail sale of Australian goods or imported goods obtained under quote (AD2b and AD12b);

Reason: Dealings of this kind would often contravene the particular ground quoted to acquire the goods tax-free. Dealings AD2b and 12b will ensure that tax is collected when the goods are dealt with subsequently. To apply the concession to these dealings would allow the exemption to persons who abuse the quotation system. While there will be some situations where such a sale would not be in contravention of a quoting ground (e.g. where the goods are acquired under quote as part of the common stock of a person who is 'mainly a wholesaler'), these sales will also not attract the concession.

(v) an AOU of Australian goods or imported goods obtained under quote - (AD3c and AD13c).

Reason: Same as for (iv). [paragraph 29(4)(a)]

Example 1: GB imports goods which GB then sells by retail. GB is not entitled to quote on the importation of the goods. Does the small business exemption apply to exempt the local entry of the goods from tax?

Result: The small business exemption will not apply because the local entry of imported goods is one of the dealings to which the small business exemption will not apply.

Example 2: JH is a registered farmer. JH quotes and purchases a motor vehicle tax-free. JH was entitled to quote because at the time of purchase JH intended to satisfy a business inputs exemption Item. However, JH in fact uses the motor vehicle otherwise than in accordance with the exemption Item.

Result: The application to own use of the vehicle will be an assessable dealing. The small business exemption will not apply because the dealing is an AOU of goods obtained under quote. Therefore, JH must pay tax on the vehicle at the dealing time.

8.27 Condition 2: The current goods must not have been obtained under quote.

Reason: To ensure that the output dealing with stock will be exempt only if tax was paid at the time of acquisition of that stock. This condition will ensure that, in addition to the dealings listed in (iv) and (v) above, AD1b, AD2d, AD11b and AD12d dealings with goods obtained under quote will not be covered by the small business exemption. [paragraph 29(4)(a)]

Example: An unregistered retailer purchases trading stock tax-paid. The taxpayer sells the stock by wholesale (to a purchaser who doesn't quote). The taxpayer's current and countable dealings are below the $10,000 tax threshold.

Result: The sale of the stock will be an assessable dealing. The small business exemption will apply. Therefore, the output dealing will be exempt. There will be no credit available for the tax paid on the purchase of the stock.

8.28 Condition 3: The current goods must not have been manufactured by the taxpayer in circumstances covered by clause 8.

Reason: Clause 8 will ensure that tax is collected where goods are manufactured under arrangements whereby the customer in effect becomes the manufacturer of the goods. This situation is explained in greater detail in Chapter 7. The tax is collected from the customer who is taken to have manufactured the goods in the course of a business. The customers are usually individuals who do not engage in other assessable dealings. If the small business exemption were to apply to the customer in these circumstances, the purpose for which clause 8 was inserted would be defeated. [paragraph 29(4)(d)]

8.29 Condition 4: Prescribed limits must not be exceeded in previous 12 months

This condition will be satisfied if the total tax liability for the current (assessable) dealing, and all countable dealings in the past 12 months, is $10,000 or less. [subclause 29(2)]

8.30 What are countable dealings? Countable dealings will not correspond exactly to the class of dealings to which the exemption applies. Countable dealings will be any assessable dealings except:

(i) a local entry of imported goods or a removal of Australian or imported goods from a customs clearance area - AD4b, AD10 or AD14b;

Reason: The exemption will not apply to these dealings. Therefore, they will not be counted for the purposes of determining whether the $10,000 threshold has been exceeded.

(ii) an assessable dealing that would have been exempted from tax because of a business inputs exemption Item, if the taxpayer had been registered at the time of that assessable dealing. [subclause 29(7)]

Reason: These dealings will be with goods which are applied to own use as business inputs but are taxable because an exemption Item does not apply (e.g. because the relevant exemption Item is marked [R] but the taxpayer is not registered). As their value will be counted eventually in the value of any dealing with the output goods, to count both the input and the output dealings would not give a true reflection of the taxpayer's sales tax liability - it would amount to a double count which would more quickly push some taxpayers above the $10,000 limit, and so outside the benefit of the exemption.

8.31 How do you calculate the 'tax' for the $10,000 limit? Tax on the current dealing is to be calculated on the assumption that the dealing is taxable. With one exception, tax on countable dealings will only be capable of calculation if the dealing was in fact taxable. The exception will be where the dealing was not taxable because the small business exemption applied. In that case, tax will be calculated on the countable dealing on the assumption that the dealing was taxable. [subclause 29(6)]

Example: X purchases goods tax-paid which X then sells by wholesale. The sale is an assessable dealing and no exemption applies. X is liable to pay $2,000 tax on the sale. All of X 's sales in the preceding 12 months were covered by the small business exemption. If the small business exemption had not applied X would have been liable to pay a total of $7,000 tax on those previous dealings.

Result: The small business exemption applies to exempt the current assessable dealing from tax because:

•

tax had been paid on the purchase of the goods; and

•

X's Tax liability on its total current and countable dealings for the previous 12 months is only $9,000 i.e. $2,000 tax on the current dealing (to be calculated on the assumption that it will be taxable) plus $7,000 tax on the countable dealings (which because they were exempt only by virtue of the small business exemption, are treated as though they were taxable).

8.32 Condition 5: Prescribed limits not to be exceeded in next 12 months

This condition will be satisfied if, at the time of the current assessable dealing, the taxpayer has a reasonable expectation that the total tax liability for the current dealing, and all countable dealings for the next 12 months will also be $10,000 or less. [subclause 29(3)]

8.33 Condition 6: All inputs must have previously borne tax: The small business exemption will not apply if the current goods are in any way 'linked' to taxable inputs that have not previously borne tax. This condition will not be relevant where the inputs are always exempt goods. The purpose of this condition is to prevent persons from obtaining their business inputs tax-free and then also attempting to take advantage of the exemption on their outputs. The exemption will therefore not apply if any Of the input goods have not borne tax. It is therefore necessary to determine:

(i)

whether the appropriate link exists between the current goods and the input goods; and

(ii)

if so, whether the input goods have borne tax. [paragraph 29(4)(b)]

8.34 The link: There will be a 'link' if the input goods are linked with the current goods in any of the following ways:

(i)

the input goods, or some essential element of the input goods, has become an integral part of the output goods; [subparagraph 29(5)(a)(i), and clauses 5 and 7, definition of 'raw materials']

Note:

This is intended to cover input goods that are applied to own use as raw materials in the manufacture of the current goods. The wording closely follows that of the definition of 'raw materials'.

(ii)

the input goods have been used in connection with the output goods in the carrying out of an activity covered by an exemption Item marked [R] ; [subparagraph 29(5)(a)(ii)]

Note:

This category most frequently covers machinery used in the manufacture of goods. For this category of input goods, the goods will only be linked if the input goods were first applied to own use less than 2 years before the current dealing, If the input goods are used in this way, they will be business inputs for the purposes of the new law.

(iii)

something that formed part of the input goods at the time of an assessable dealing with the input goods has become an integral part of the output goods. [subparagraph 29(5)(a)(iii)]

Note:

This is intended to cover, for example, a part of defective input goods that have been returned by a purchaser and have been re-used in manufacturing the output goods.

8.35 The linked goods have not previously borne tax: There will be no exemption on the dealing if the linked goods have not previously borne tax - that is, if:

(i)

the taxpayer has not borne tax on the goods because they have been exempted from tax by virtue of one of the business input exemption Items marked [R] ;

(ii)

the taxpayer has borne tax on the input goods, but has become entitled to a credit for any of that tax. [paragraph 29(5)(b)]

Note:

A person will have borne tax on goods if, and only if:

•

the person has become liable to tax on an assessable dealing with the goods; or

•

the person purchased the goods for a price that included tax; or

•

the person was the customer for an AD4a delivery of the goods and did not quote in respect of the delivery. [clauses 5 and 11, definition of 'borne tax']

Example: M is a registered manufacturer of taxable goods. M purchases the raw materials used in the manufacture of those goods tax- paid i.e. M refrains from quoting on their purchase). The machinery used in the manufacture of the goods was acquired by M tax- free but was first used by M more than 2 years ago. M makes retail sales of the manufactured goods. Tax on M. current and countable dealings is within the $10,000 threshold.

Result: The small business exemption will apply to exempt the retail sales from tax because:

•

the dealing is a type to which the small business exemption is capable of applying;

•

the raw materials used in the manufacture of the goods have borne tax;

•

although the machinery used in the manufacture was originally acquired tax-free, it was first used applied to M's own use more than 2 years ago;

•

M's dealings come within the $10,000 threshold.

8.36 Credits: If a taxpayer is for any reason not entitled to access the small business concession, and they have paid tax on their inputs (i.e. they are liable to tax on both input and output goods), they will be entitled to a credit for tax borne on the input goods. However, the small business exemption will not then be available for goods produced from those input goods.

Exemption 5: The assessable dealing is with goods that are intended for export

8.37 One of the basic rules of both the existing law and the new law is that there is an exemption for an assessable dealing with goods that are to be exported. There are several reasons for this rule: to assist Australia's exports; to avoid the goods being taxed twice (the second time in the country to which they are exported); and to encourage tourism in Australia.

8.38 There will be 5 exemptions based on export:

Export exemption 4(a): If the goods are sold and the seller is required to export them. [clause 30]

Export exemption 4(b): If the goods are sold or delivered to a person who intends to export them, otherwise than as accompanied baggage. [clause 30]

Export exemption 4(c): If the goods are sold or delivered to an eligible foreign traveller in accordance with the prescribed rules for export. [clause 30]

Export exemption 4(d): If the dealing is a packing AOU and the applier intends to export the container with their contents. [clause 31]

Export exemption 4(e): If the dealing is a lease AOU and the lessee intends (or the lessor is required) to export the goods. [clause 32]

8.39 Export exemption 4(a): Export by seller: This exemption applies only to goods that are the subject of a sale. The contract of sale must require the seller to export the goods while the goods are still assessable goods. [paragraph 30(1)(c)]

8.40 Export exemption 4(b): Export by purchaser/customer: This exemption applies to goods that are the subject of a sale or a delivery of customer's materials goods. The purchaser or customer must intend, at the time of the sale or delivery, to export the goods while they are still assessable goods. The intended method of export cannot be as accompanied baggage if it is, exemption 4(c) may apply). [paragraphs 30(1)(b) and 30(2)(b)]

8.41 Export exemption 4(c): Export by eligible foreign traveller: There will be an exemption for goods to be exported by certain foreign travellers. This exemption will apply to sales and to delivery of customer's materials goods, made in accordance with the prescribed rules for export sales to eligible foreign travellers. These rules will be set out in the proposed new Sales Tax Regulations. [paragraphs 30(1)(a) and 30(1)(b), and clause 5, definitions of 'eligible foreign traveller' and 'prescribed rules for export sales']

8.42 Export exemption 4(d): Containers for export: The general exemptions for goods for export (Export exemptions 4(a) and 4(b)) require that the goods be assessable goods at the time of export. Any application to own use of the goods in Australia before export will be an assessable dealing and the export exemption will not be available. There will be, however, 2 situations where the export exemption will be available to goods that have been applied to own use in Australia before export. The first situation is an AOU of a container (known as a packing AOU) where both the container and the contents are intended to be exported. The second situation, which involves a lease AOU, is discussed in Export exemption 4(e) (paragraph 8.44).

8.43 Under the proposed new approach to the treatment of containers, goods broadly will be taken to be applied to own use when any contents are placed in them. This is defined as a packing AOU. In the case of a packed container, the general exemptions for goods for export (Export exemptions 4(a) and 4(b)) will not be available because the container is no longer assessable goods. Export exemption 4(d) will provide an additional ground for exempting the packing AOU when the container and its contents are intended for export by the applier, or if the applier packed the contents on behalf of another person - the applier expects that the other person will export the container with those contents. Containers are discussed in more detail in Chapter 20. [clause 31]

8.44 Export exemption 4(e): Leased goods for export: The general exemptions for goods for export require that they still be assessable goods at the time of export. The grant of a lease of goods to a lessee is an application to own use and the leased goods cease to be assessable goods at that time. This would mean that leased goods, which have not been physically used in Australia, could not be covered by the export exemption. That result is not intended. In order to avoid it, there will be a special exemption for goods which are leased. The exemption will apply to the lease AOU if at the time of the lease AOU:

(i)

the lessor is required, by the terms of the lease, to export the goods; or

(ii)

the lessee intends to export the goods without using them in Australia and has given evidence of intention to export to the lessor. [clause 32]

Exemption 6: Miscellaneous Exemptions

8.45 There will be two other exemptions:

(i)

if the goods have previously been taxed while in bond. This exemption applies only to a dealing that is a local entry.

(ii)

if the taxpayer is an exempt person at the dealing time. This exemption applies to all dealings.

8.46 Goods taxed in bond: There will be an exemption at the time of a local entry (AD10) of goods if the goods entered have previously been the subject of a taxable dealing while in bond, or still under the control of the Customs. [clause 33]

8.47 Taxpayer is an exempt person: A person may be exempt for a reason outside the sales tax law. For example, an authority may be exempt from sales tax by virtue of the legislation that established it.

C. Summary of Main Changes

8.48 The main changes to the existing law discussed in this chapter are:

D. Structure of Exemptions

8.49 The following table shows the general structure of the exemptions, and their relationship to the assessable dealings.

E. Transitional Arrangements

8.50 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be special transitional provisions in the Bill that apply to the small business exemption.

8.51 Broadly, the special transitional provisions:

•

will preserve the benefit of existing items 100 and 103 (the small manufacturers exemptions) of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 for any manufacturer who will be taxable on a dealing under the new law, but would have been exempt if items 100 and 103 continued to apply. This is discussed in greater detail in paragraph 23.20; [clause 12(1) of the Sales Tax Amendment (Transitional) Bill 1992]

•

will extend the concept of countable dealings to include acts, transactions or operations taxed under the old law (or exempted by items 100 or 103). This is discussed in paragraph 23.21;

•

will ensure that dealings with goods manufactured before the first taxing day from tax-paid raw materials will not be entitled to exemption. This is discussed in paragraph 23.22. [clause 13 of the Sales Tax Amendment (Transitional) Bill 1992]

Chapter 9 Taxable Values

A. Introduction

9.1 This chapter describes the value to be assigned to goods that are the subject of a taxable assessable dealing. These values will be known as taxable values. Under the existing law they are known as sale values. The amount of tax payable on assessable goods will be calculated by multiplying the taxable value by the tax rate applicable to the goods.

9.2 Taxable values are dealt with in Part 3 and Table 1 of the Sales Tax Assessment Bill 1992. [clause 5, definition of 'taxable value']

B. Explanation and Commentary

9.3 The approach of the new law will be to:

•

give to each assessable dealing a general taxable value;

•

add to that taxable value, where applicable, certain additional amounts; and

•

in certain situations, replace the general taxable value with a substitute taxable value.

The final taxable value calculated after following these steps will be the value on which tax is payable.

9.4 Additionally, the amount of the taxable value will be capable of adjustment by two general provisions which will be included in the new law. These will be a general anti-avoidance provision [clauses 92 and 93] and the general non-arm's length dealings provision [clause 94] .

Normal taxable values

9.5 Each assessable dealing will attract a normal taxable value. In most cases, this will be the value on which tax will be calculated. The normal taxable values are set out in the table below, together with the assessable dealing to which they apply. [subclause 34(1) and Table 1]

Changes to normal taxable values

9.6 The following changes will be made to the sale value provisions of the existing law:

(a)

Application to own use (AOU) by the manufacturer : The existing law provides an alternative sale value if all the materials used in the manufacture of goods have borne tax and the manufacturer does not sell similar goods by wholesale. The value is 120% of the wages paid by the manufacturer. The alternative value will not be included in the new law.

Reason For Change : The alternative value is inconsistent with the general approach of taxing actual or notional wholesale values. It has little current application. [Table 1, AD3b]

(b)

AOU or a retail sale of untaxed goods not obtained under quote : The taxable value will be the notional wholesale selling price.

Reason For Change : These will be new assessable dealings. There are ways in which goods can be acquired tax-free other than by a person manufacturing them or purchasing them under quote, eg. transfers of goods by court order under a company group restructuring. These dealings will close a gap in the existing law (see paragraphs 7.21 and 7.22). In many cases there is no value attributable to the goods at the time when they were obtained.

Note:

The notional wholesale selling price is the price for which the goods could reasonably have been expected to have been sold by wholesale under an arm's length transaction. [Table 1, AD2e, AD12e, AD3a and AD13a]

(c)

Lease AOU: The taxable value of a lease AOU will be the same taxable value that would apply to the goods if the assessable dealing was a non-lease AOU. This will replace the existing requirement that the Commissioner form an opinion in each case of what is a fair and reasonable value.

Reason For Change : This will bring leases into line with all other assessable dealings in the sales tax law, in that tax in full will be payable when the goods are AOU in Australia. It will also enable the taxpayer to self assess the amount of tax payable. [Table 1, ADs 3a, 3b, 3c , 13a or 13c]

(d)

Delivery of customer's materials goods: Under the existing law, if a customer supplies materials to be made up into goods, the manufacturer's sale value is the price charged by the manufacturer plus the wholesale value of any exempt materials supplied by the customer.

However, if a customer supplying materials intends to re-sell the made up goods by retail, the customer is deemed to be the manufacturer and is liable for the tax. The sale value for the goods sold by the customer is the amount for which the customer could have sold the goods by wholesale.

Under the new law, the physical manufacturer will be treated as the manufacturer in all cases and will be liable to pay sales tax on the delivery of the customer's materials goods. The taxable value of the goods that are the subject of that dealing will be the amount charged by the manufacturer to the customer for manufacturing the goods, plus the notional wholesale purchase price of any always exempt materials supplied by the customer.

Reason For Change : The existing rules are inconsistent with the general approach of taxing manufacturers and wholesalers rather than retailers and end users. The rules are also complicated by a number of deeming provisions that have been used to give effect to the existing law.

Note 1:

The cost of any 'always exempt' materials that are supplied by a customer are included in the taxable value of the goods to reflect the true value of the made up goods. Taxable materials that are supplied by a customer would have already borne tax either:

(i)

because the customer purchased the goods for a tax-inclusive price; or

(ii)

if they have been purchased for a tax-free price, the supply of the materials to the manufacturer would amount to an AOU by the customer and tax would be payable at that time.

Note 2:

The notional wholesale purchase price is the price (excluding sales tax) for which the taxpayer could reasonably have been expected to buy the goods by wholesale under an arm's length transaction. [Table 1, AD4a]

Additions to taxable value

9.7 The normal taxable value of assessable dealings will be increased in certain circumstances. Additional amounts will be added to the taxable value of assessable dealings with goods which:

•

are in a container which has not been the subject of a taxable dealing;

•

are subject to an associated royalty payment;

•

occur while the goods are in bond under Customs control.

9.8 These additions to taxable value are set out in table 9B, together with a comparison to the existing law. [clause 38]

Addition 1 : The container component

9.9 If assessable goods are the subject of an assessable dealing while they are in a container, then the value of the container will be included in the taxable value of the assessable dealing with the contents. The value to be attributed to the container (the container component) will vary depending on the nature of the assessable dealing with the contents. If the container is used more than once then the value may be included more than once. For a more detailed discussion on containers see Chapter 20.

9.10 The taxable values that will apply to containers are discussed below:

(i)

if the assessable dealing is a wholesale sale: the container component will be so much of the value of the container as is recouped in the sale of the contents;

Note:

Generally, there will be no need to add a container component to the taxable value of the contents, as the contents would usually be sold for a single price that includes a recoupment component for the container. [subclause 35(2)]

(ii)

if the assessable dealing is not a wholesale sale: the container component will be so much of the value of the container as might reasonably be expected to be recouped if the assessable dealing with the contents was a wholesale sale. [subclause 35(3)]

9.11 Exceptions to the addition of a container component: A container component will not be included in the taxable value of goods if:

(i)

the container has been the subject of a taxable dealing at, or before, the time when it becomes a container in relation to its contents; or

Reason : The general position is that the value of the container will form part of the taxable value of the contents. If tax has already been paid on the container as a separate assessable dealing before it becomes a container, then tax should not be paid again on the value of the container.

(ii)

the container is a shipping container covered by exemption Item 60.

Reason: These containers will always be exempt where they are for repeated use on ships for transporting cargo by sea, are designed to be loaded from one mode of transport to another without the contents being re-packed and have a minimum capacity of 14 cubic metres. The containers are used principally with the exporting and importing of goods and it is proposed that tax should not be imposed on this form of transportation of goods. [subclause 35(4)]

Addition 2 : Associated royalty component

9.12 In certain circumstances, the value of any royalty that is paid or payable in connection with goods will be included in the taxable value of those goods. If a royalty is paid or payable in connection with a triggering event for particular goods, such as:

(a)

the manufacture of goods;

(b)

the importation or local entry of goods;

(c)

a sale of goods;

(d)

the granting of a lease of goods; or

(e)

an AD4a delivery of the goods

then that part of the royalty that is paid in relation to the goods will form part of the taxable value for any assessable dealing with the goods. [clause 36]

9.13 Some royalties relate to other matters such as the use of a trade name. Where a royalty is paid for something other than goods it does not form part of the taxable value.

9.14 A royalty may be paid as a lump sum or as a fixed or variable amount per article. A lump sum is generally apportioned over the number of goods produced and sold under the royalty agreement. In calculating the taxable value it is only the part of the lump sum royalty that is apportioned to each article that will be included. Eventually all the lump sum royalty will be recouped and included in the taxable value of goods. In the event that the full lump sum of the royalty is not recouped, eg. insufficient sales, then the unrecouped portion is not taxable. It simply remains as an unrecouped expense of selling the goods. [subclause 36(1)]

9.15 It has been suggested that the existing definition of 'royalty' in certain situations, may not cover a lump sum payment as being a royalty. The new law will put beyond doubt that royalty means any amount which is paid or payable (whether or not periodically) as consideration to a person, for a right to use a product belonging to that person, without a reference to quantity or value of the product. [subclause 36(2)]

Example:

KN Videos pays Film Productions Ltd $100,000 for the right to produce one of its films as a video. KN Videos then produce 20,000 videos, each of which it sells by wholesale for $20.

Result: The taxable value of each video sold will include $5 per video as the cost of the royalty.

Addition 3 : Assessable dealings with goods in bond

9.16 The inclusion in the taxable value of the amount of customs duty or excise applicable to the goods represents no change to the existing law. These amounts would be included in the taxable value of goods when they are entered for home consumption. Therefore, it is necessary to include these amounts in the taxable value when an assessable dealing occurs while the goods are in bond which is before the goods are entered for home consumption. [clause 5, definition of 'customs duty' and 'excise duty', and clause 37 ]

Substitute Taxable Values

9.17 There are some situations under the new law where it is difficult to determine a clear value for certain goods and a substitute taxable value may be used. These substitute taxable values are set out in Table 9C, together with a comparison to existing substitute values.

9.18 Pre-fabricated buildings: While building materials are generally exempt from sales tax and buildings themselves are not taxable because they are not goods, there is no exemption for pre-fabricated buildings that have an identity as goods. To place pre-fabricated buildings on the same tax footing as buildings erected on site, the law operates to apply tax only to the taxable value of any taxable goods used in producing the pre-fabricated building. For example, if a pre-fabricated building or pre-fabricated building section includes any taxable materials such as ductwork, fittings, accessories or attachments for air conditioning systems, then these goods are included in the taxable value of the building or section.

9.19 The taxable value of a pre-fabricated building or a building sections will, therefore, be limited to the value of any taxable goods incorporated in the building or building section. The value will be calculated by adding together the taxable value of each taxable good as if that taxable good had been sold separately. The effect of this provision will be the same as under the existing law. [clause 39]

9.20 Sale of Newspaper and magazine inserts: The existing law deems newspaper and magazine inserts to be separate goods from the newspaper or magazine in which they are inserted. The sale value of the insert is calculated by reference to the provisions relating to application to own use under each Assessment Act. If the goods are printed and inserted by the manufacturer, then the sale value is the notional wholesale selling price. If the inserts are sold to a printer for inclusion in the newspaper/magazine, then the sale value is the amount for which the goods are purchased.

9.21 Under the new law, there will be no change to the treatment of the inserts as separate goods, nor will there be any change to the taxable value rules. [clause 40]

9.22 AD2a sale of photographs exposed in the camera by seller: If a photographer produces photographs (i.e. exposes, develops and prints the photographs) to the order of a particular customer then the taxable value of the goods will be 40% of the amount (excluding tax) payable by the customer to the photographer. This is a change to the existing law where tax is calculated on a tax inclusive retail price. This taxable value does not apply to film exposed by a person who then sends it to a laboratory for processing. Photography is discussed in more detail in Chapter 21. [clause 41]

Reason For Change: It is easier to calculate the tax payable on the basis of the price being exclusive of tax rather than on a retail price which is inclusive of tax.

9.23 Goods imported after being exported for alteration: Under the existing law, imported goods that are re-imported after being exported for repair have a sale value equal to the value of the repair plus any customs duty, if applicable. There is, however, no tax liability imposed on goods produced in Australia that are sent overseas for repair and returned to Australia.

9.24 The new law will not distinguish between imported goods and Australian goods sent overseas for repair. It will impose tax on both Australian goods and imported goods that are exported for repair and re-imported. The taxable value rules will also apply to goods that have been sent overseas for alteration, additions or renovations. The taxable value will be:

(i)

the value of the repair, alteration, addition or renovation; plus

(ii)

if any customs duty is payable, the value of the duty. [clause 42]

Reason For Change : The new law will treat both Australian manufactured goods and imported goods on the same basis. This will bring imported goods and Australian manufactured goods sent overseas for repair broadly into line with goods repaired, restored or altered in Australia. Sales tax will be payable on the value of any repairs, alterations, additions or renovations to the goods when they are re-imported.

9.25 Agreement with the Commissioner: The Commissioner may enter into an agreement with a taxpayer to determine a method of calculating a taxable value or values for certain goods. The manner of calculating the taxable value or values for the goods that are specified in the agreement will apply to all assessable dealings with those goods and will override all the taxable value provisions. This represents no change to the existing law. [clause 43]

Miscellaneous Rules Affecting Taxable Value

9.26 There are also three miscellaneous rules that will affect the taxable value of assessable goods.

Taxable value excludes tax

9.27 The taxable value of an assessable dealing will not include any amount of sales tax that has been paid on that assessable dealing. This represents no change from the existing law. [Table 1, AD1a and 1b and definition of 'notional wholesale selling price]

The arm's length rule

9.28 Under the existing law, each sale value provision in each Assessment Act has its own complicated arm's length rule. Each of these arm's length rules provides that the Commissioner may alter the sale value of goods if the Commissioner is satisfied that the seller and the purchaser have entered into an agreement to reduce the sale value of the goods, or they are not dealing with each other at arm's length. The Commissioner may alter the sale value to be either:

(i)

an arm's length price;

(ii)

a price for which identical goods could have been purchased (the alternative price); or

(iii)

the lesser of the arm's length price and the alternative price.

9.29 Under the new law there will be an automatic rule that will apply to all taxable values. If a taxpayer, or an associate, is a party to a non-arm's length transaction then the taxable value of the goods will be recalculated to reflect a price for which the goods could reasonably have been expected to be sold, or purchased, under an arm's length transaction. This rule also extends to transactions that are not directly involved in the calculation of liability.

9.30 For example, if a taxpayer is able to sell goods under an arm's length transaction at a low price because of having bought the goods under a non-arm's length transaction at a reduced price then the taxable value of the goods must be increased to an arm's length price.

9.31 Under the new law the onus is on the taxpayer or the person making the sale to ensure that tax is paid on an arm's length taxable value. This is a major change from the existing law where the arm's length provisions rely on the Commissioner being satisfied that the sale value is less than a true arm's length value, and if not, then determining what the sale value will be.

9.32 If a taxpayer lodges a return and pays tax on a basis that fails to apply the arm's length rule, there will be a 200% penalty under the untrue and misleading statement provision and a late payment penalty for the underpaid tax.

Reason For The Change : There will be less reliance on the Commissioner having to determine the arm's length value for goods that are the subject of a taxable dealing. The onus will be on the person making the sale to ensure that tax is paid on an arm's length price. [clause 94]

Apportionment of amounts

9.33 If taxable and exempt goods, or goods that are taxed at different rates are packaged and sold together for one inclusive price, then the goods will be treated separately for the purpose of calculating the taxable value. The value for each item will be the value for which that item could reasonably have been expected to have sold for separately. This represents no change to the existing law. [subclause 95(1)]

Example 1:

A gift pack containing a watch and a fountain pen sold by wholesale for one inclusive price of $125.

Result: The pen has a taxable value of $50 and is taxed at 20% and the watch has a taxable value of $75 and is taxed at 30%. The goods would be treated separately to calculate the taxable value of the gift pack and the total amount of tax payable would be $32.50.

Example 2:

A gift pack containing clothing and perfume sold by wholesale for one inclusive price of $50.

Result: The clothing has a taxable value of $40 and is exempt from tax, and the perfume is valued at $10 and is taxed at 20%. The goods would be treated separately and the total amount of tax that will be payable is $2.

9.34 If goods are sold as part of a package which involves payment for something that is not goods, e.g. goodwill, installation charges or a maintenance agreement, then the elements that are not goods will be treated separately for the purpose of calculating the taxable value of the goods. The value of each element will be the amount that could reasonably have been expected to be allocated to the element if it had been the only transaction. This represents no change to the existing law. [subclause 95(2)]

Example 1:

A wholesale business is sold for a single price that includes all stock on hand and goodwill.

Result: The goodwill and any other non-taxable elements are separately valued and tax is not payable on them. Tax is payable only on the stock and other goods that are liable to sales tax.

Example 2:

A bag of golf clubs and free golf lessons are packaged together for one inclusive price.

Result: The taxable value attributable to the golf clubs will be taxable at 20% and the value attributable to the lessons will not be taxable as it represents an element that is not taxable.

C. Summary of Main Changes

9.35 The main changes to the existing law discussed in this chapter are:

D. Transitional Arrangements

9.36 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision in the Bill for the taxable value of containers. Additionally, the general principle that the new law will apply to acts, transactions or operations that occur before the first taxing day has particular relevance to taxable values.

Example:

Before the first taxing day, JL Ltd pays a royalty in connection with the proposed manufacture of goods. JL manufactures and sells those goods by retail after the first taxing day.

Result: The royalty will be included in the taxable value of the sale of those goods, even though the royalty was paid before the first taxing day.

9.37 Containers: The taxable value of any assessable dealing with assessable goods will include the value of any associated container, except if the container has been the subject of a previous taxable dealing in its own right [clause 35] . 'Taxable dealing' does not, in its ordinary meaning, include a dealing on which tax was imposed under the existing law. There will be a special provision that will alter the meaning of taxable dealing, for the purpose of clause 35 only, to include a dealing that attracted tax under the existing law. [clause 8, Sales Tax Amendment (Transitional) Bill 1992]

Chapter 10 Exempt Parts of Taxable Value

A. Introduction

10.1 This chapter describes amounts that must be deducted from the taxable value of certain goods before tax is calculated on the goods. These amounts are known as exempt parts of the taxable value.

10.2 Exempt parts of taxable value are dealt with in Part 3 of the Sales Tax Assessment Bill 1992. [clause 44]

B. Explanation and Commentary

10.3 Goods that incorporate the following goods will have a reduced taxable value when they are the subject of an assessable dealing:

(i)

tax-advantaged computer programs;

(ii)

videotex equipment;

(iii)

solar panels;

(iv)

milk tanks;

(v)

luxury motor vehicles for certain disabled persons; or

(vi)

goods partly exempt from customs duty.

Goods incorporating tax-advantaged computer equipment

10.4 A tax-advantaged computer program is:

•

any program that is not embodied in a microchip; or

•

a program for entertainment or educational use, that is embodied in a microchip and enclosed by a cartridge, to use in a personal computer or home electronic device.

10.5 These computer programs will have a tax advantage because their taxable value is reduced by the value of the intelligence contained on that disc or cartridge, which is to be treated as an exempt part. Computer programs are discussed in more detail in Chapter 22. This measure will be the same as under the existing law. [clause 45]

Goods incorporating videotex equipment

10.6 There will be an exemption from sales tax for videotex equipment for a person who is certified as being profoundly deaf (exemption Item 95). If that videotex equipment is incorporated in a television set and the television is then purchased by a person who is profoundly deaf, then the taxable value of the television set will be reduced by the value of the videotex equipment.

10.7 Under the existing law, an eligible person is only entitled to claim an exemption every three years. This restriction will not apply under the new law. [clause 46]

Goods incorporating solar panels

10.8 There will be an exemption from sales tax for solar panels for collecting, absorbing or concentrating solar rays in order to produce heat (exemption Item 171). If these solar panels are incorporated in other goods then the taxable value of those goods will be reduced by the value of the solar panels.

10.9 The treatment of these goods will be the same as under the existing law. [clause 47]

Goods incorporating milk tanks

10.10 There will be a sales tax exemption for tanks for bulk milk tankers that are used to collect milk from farms (exemption Item 5). If these tanks are attached to a road vehicle and the complete vehicle is regarded as taxable, then the value of the vehicle will be reduced by the value of the tank when calculating a taxable value for the vehicle.

10.11 These goods will be treated in the same way as they are under the existing law. [clause 48]

Luxury motor vehicle for a disabled person

10.12 There is a sales tax exemption that allows certain disabled persons to purchase motor vehicles free of tax if the vehicle is for use for a particular purpose (exemption Items 96 or 97). The tax exemption is only available for vehicles with a taxable value at or below the luxury motor vehicle threshold. This threshold is the wholesale value, on which tax is calculated, that is equivalent to the retail price motor vehicle depreciation limit determined under section 57AF of the Income Tax Assessment Act 1936. For the 1992-93 year the wholesale value is $31,725 and the depreciation limit is a retail price of $47,280.

10.13 A person who qualifies for an exemption under the above items and wishes to purchase a vehicle that has a taxable value above the threshold amount may do so at a reduced taxable value. The taxable value of the motor vehicle will be reduced by 44.733% of the motor vehicle depreciation limit that applies for the financial year in which the dealing occurs. [clause 49]

10.14 This treatment does not vary from that of the existing law.

Example:

The luxury vehicle depreciation limit for 1992-93 is $47,280 which results in a taxable value threshold of $31,725.

If a motor vehicle has a retail purchase price of $58,000, then the equivalent wholesale value on which the tax is calculated is $36,471

Result: The taxable value of the $36,471 is reduced by the exempt part which is 44.733% of $47,280 or $21,150.

Note:

The exempt part is the same amount for all motor vehicles that are subject to tax at 30%

The taxable value on which tax is payable is $15,321 ($36,471 - 21,150). Tax is payable on this amount at the rate of 30% = $4,596.

Goods partly exempt from Customs duty

10.15 An eligible Australian traveller who, as a passenger on a plane or ship, imports personal goods into Australia is entitled to bring in $400 worth of new taxable goods tax free. Therefore, taxable value for any new goods imported into Australia by an eligible Australian traveller will be reduced by $400. These goods may have been purchased either overseas or tax-free in Australia prior to departure. If that traveller's new goods exceed the $400 limit, then both customs duty (if applicable) and sales tax are payable on the balance of the value of the goods. This represents no change from the existing law. [clause 50]

C. Summary of Main Change

Credits

A. Introduction

11.1 This chapter describes the general situations in which a credit will be available for tax that has been borne on goods. The term credit will embrace both refunds obtained directly from the Commissioner and rebates deducted from the gross tax payable in a sales tax return. Credits are dealt with in Part 4 of the Sales Tax Assessment Bill 1992. The credit entitlement grounds are set out in Table 3 of the Bill.

B. Explanation and Commentary

What is a credit?

11.2 The new law will provide an entitlement to a credit if sales tax is overpaid on a transaction, if more tax is payable on the goods than the law intends, and in some other circumstances.

11.3 There will be two methods of obtaining credits:

(i)

Direct refunds: This will be a direct payment to the person claiming the refund. These payments will be obtained by applying directly to the Commissioner;

(ii)

Rebates on returns: This will be an amount that a taxpayer will be entitled to deduct from the total amount of tax payable by them on their assessable dealings during a payment period. Only the net tax (i.e. the tax payable less the amount of the credit) will be required to be remitted with the sales tax return to the Commissioner.

Categories of credits

11.4 There will be 6 broad categories of credit grounds under the new law:

1.

Credits for overpaid tax

2.

Credits to avoid goods being taxed twice

3.

Export-related credits

4.

Import-related credits

5.

Credits where goods are leased

6.

Miscellaneous credits

How does the passing on condition apply?

11.5 A number of credit grounds will require that the amount of the credit available will be limited to the amount that the claimant has not passed on to some other person. As with the existing law, the new law will not include a comprehensive definition of what is meant by tax passed on. Tax will be considered to be not passed on if a person has passed tax on to another person, but has refunded the tax to that other person before making a claim for the credit.

Example:

A taxpayer sells certain goods by wholesale and has calculated tax on the goods at the rate of 30%. The amount of tax of $100 is included in the selling price and is identified on the sales invoice. The $100 has clearly been passed on to the purchaser of the goods at this stage. A court subsequently decides, within 3 years of the sale, that the specific class of goods concerned is always exempt. The taxpayer issues a credit note to the purchaser for $100, and then makes a credit claim within 3 years of the sale.

Result: The taxpayer will be entitled to a credit of $100 under credit ground 1, as the amount concerned will no longer be considered as having been passed on.

What does borne tax mean?

11.6 A number of credit grounds will require that the claimant must have previously borne tax on either the goods which are the subject of the dealing, or on goods (such as business inputs or raw materials) which are linked in some way to the production of other goods by the claimant. The concept of sufficient link as discussed below. A person will have borne tax on goods where the person:

(a)

has become liable to tax on an assessable dealing with the goods;

(b)

has purchased the goods for a price that included tax; or

(c)

was the customer for an assessable dealing known as a delivery of customer's materials goods (see paragraph 7.29) and did not quote in respect of the delivery.

Example:

A person purchases goods by wholesale for a total price of $120 of which $20 is the amount of tax included in the price of the goods and shown on the sales invoice. The person has not received a refund or credit for any part of the $20.

Result: The amount of tax borne on the goods by the purchaser will be $20.

What does sufficient link mean?

11.7 A number of credit grounds will require that tax has been borne on input goods which have a sufficient link with the output goods which are the subject of a subsequent assessable dealing. Inputs will satisfy the requirements necessary to characterise them as having a sufficient link with the output goods concerned in three situations, as follows:

(a)

where the inputs are raw materials, that is, goods to be so used that all, or some essential element, of the goods will form an integral part of the outputs concerned; [paragraph 52(1)(a)]

(b)

where the inputs are goods, such as machines or equipment, which are used in connection with the production of the outputs concerned, and which would be covered by an exemption [R] Item if the taxpayer was registered; or [paragraph 52(1)(b)]

(c)

where something that formed part of the inputs has become an integral part of the output goods. [paragraph 52(1)(c)]

Example:

A piece of equipment has been sold by a manufacturer to a purchaser, who has subsequently returned the goods as being faulty. The sale was an assessable dealing and the manufacturer was liable to tax on the sale. The manufacturer has recovered a part from the faulty goods and has incorporated that part in separate goods which are now subject to an assessable dealing.

Result: The manufacturer is entitled to a credit, as a consequence of the sale of the manufactured goods, to the extent of the tax borne on the goods incorporated into the manufactured goods.

1. Credits for tax overpaid

Credit Ground 1: Tax overpaid

11.8 General Description: The claimant has paid an amount as tax that was not legally payable.

Coverage:

Overpayments may occur in a number of different circumstances, including:

(i)

the amount was not legally payable because:

.

the particular dealing was not an assessable dealing;

.

an exemption applied to the dealing;

.

the taxpayer was an exempt person;

.

the goods were wrongly classified by the taxpayer, resulting in tax being calculated at a higher rate than was applicable to the goods;

.

the taxpayer made an incorrect calculation;

(ii)

liability is reduced retrospectively;

Example:

A person pays tax that was legally payable, but the law is subsequently amended to alter retrospectively the rate of tax payable on the dealing.

Result: The taxpayer will be entitled to a credit for the amount of the tax overpaid, to the extent that it was not passed on.

(iii)

liability had not fully crystallised at the time of the payment;

Example: A taxpayer pays tax on a wholesale sale under AD1a. The taxable value of the assessable dealing is the price (excluding sales tax) for which the goods were sold. The price is subsequently reduced because of a prompt payment discount which the taxpayer gives to the purchaser.

Result: The taxpayer is entitled to a credit for the amount of tax overpaid, to the extent that it was not passed on to the purchaser.

(iv)

liability is later reduced by an amendment of an assessment or by an appeal decision.

Example:

A taxpayer pays tax on an assessable dealing in accordance with a private ruling of the Commissioner. Subsequently, the taxpayer receives a favourable appeal decision that the assessable dealing concerned was non-taxable. The tax will be considered as having been overpaid at the time the amount was paid and not at the time of the appeal decision.

Result: The taxpayer will be entitled to a credit for the amount of tax paid on the assessable dealing, to the extent that it was not passed on.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

2. Credits to avoid goods being taxed twice

11.9 There will be circumstances where goods are either directly or indirectly subjected to sales tax more than once. This can happen when goods are taxed, but all of their inputs have also been taxed. The second broad category of credit grounds will be those designed to avoid the same goods being taxed twice, or to avoid unintended taxing where the final assessable dealing is exempt. There will be eight credit grounds to deal with the following situations:

.

failure to quote a registration number - CR2;

.

where a fully effective quotation is made ineffective - CR3;

.

avoiding the same goods being taxed twice - CR4;

.

ensuring exemption where the latest assessable dealing of the taxpayer is exempt - CR5;

.

avoiding unintended taxing where outputs are taxable - CR6;

.

avoiding unintended taxing where outputs are exempt - CR7;

.

where tax excluded from the sale price of tax-paid goods sold to quoting purchasers - CR8.

.

return of faulty goods - CR9

Credit Ground 2: Failure to quote a registration number

11.10 General Description: Tax has been borne by a registered person who was entitled to quote a registration number.

Coverage: There are two situations covered by this credit ground. The first is where the claimant was entitled to quote on a dealing, but did not quote. The second is where the claimant was entitled to quote but the quote was not accepted by the person to whom it was given. The claimant will be entitled to a credit if they have borne tax on that dealing, to the extent that they have not passed on that tax.

However, if the goods have been applied to own use by the time that the credit is claimed, then the claimant must also have been entitled to quote at the time of application to own use. This is a notional test, as the application to own use would usually not be an assessable dealing (as the goods would be tax-paid). What is intended is that the actual use of the goods at the time of the AOU would also be covered by an exemption item if the AOU had been an assessable dealing.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

Change from existing law: The credit will apply to all dealings, not just assessable dealings. The existing law also contains a number of other ad hoc restrictions.

Reason for changes: These extensions to the coverage of the existing law will remove unnecessary restrictions upon the circumstances in which these credits will be available.

Credit Ground 3: Providing credits where a fully effective quotation is made ineffective

11.11 General Description: The claimant has become liable to tax on an assessable dealing (or has lost an entitlement to a credit under CR 8) because a fully effective quotation which that person had accepted was rendered ineffective by virtue of clause 89. The supplier in these circumstances will now have a retrospective liability to pay tax on the dealing concerned.

Coverage 1: This ground will apply in the following situation:

(a)

where a supplier of goods has accepted a quotation of a registration number or an exemption declaration in respect of an assessable dealing with certain goods;

(b)

the quotation is made ineffective because of clause 89. This could include, for example, where there were reasonable grounds to believe that the purchaser was not authorised to quote, or did not quote in the form and manner approved by the Commissioner; and

(c)

nevertheless, the quote is and was a bona fide quote.

Coverage 2: A credit will also be available in these circumstances where the supplier has lost a credit entitlement under CR8 as a result of the quote being ineffective because of clause 89.

Example: A retailer makes a tax-free sale of goods for $100 out of tax-paid stock to a registered person who quotes a registration number. The retailer is entitled to claim a credit from the Commissioner under CR8 for the amount of the tax excluded from the price for which the goods were sold to the registered person (i.e. $20). The retailer has not passed the $20 on to any person.

An objective assessment of the dealing suggests that the quote is rendered ineffective under clause 89 because there were reasonable grounds for the quote being refused. Thus the retailer loses his entitlement to a credit under CR8, as the dealing can no longer be treated as having been a sale to a quoting purchaser.

Subsequently, the facts reveal that the quote was a bona fide quote.

Result: The retailer is entitled to a credit for an amount of $20, because the quote can be treated as valid and the retailer has not passed that amount of tax on.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

Change from existing law: The existing law contains a number of restrictions.

Reason for change: These extensions to the coverage of the existing law will remove unnecessary restrictions upon the circumstances in which these credits will be available.

Credit Ground 4: Avoiding the same goods being taxed twice

11.12 General description: The claimant has become liable to tax on an assessable dealing in respect of certain goods, but has borne tax on the same goods before the time of that dealing.

Coverage: The new law will impose a tax liability each time there is an assessable dealing with assessable goods, provided no exemption applies. The system of quotation is intended to ensure that, by the time goods cease to be assessable goods, tax will only have been paid on one assessable dealing. However, there will be cases in which liability to tax may be incurred twice on the same goods. This credit ground is necessary to prevent those goods being taxed twice in these circumstances.

Exclusion: Goods altered or repaired overseas: The credit ground will not apply if the later assessable dealing is with goods that were exported from Australia for repair or alteration and which are subsequently imported back into Australia. The importation causes the goods to again become assessable goods. The reimportation, while a taxable dealing, will have a taxable value that is limited to the value of the repairs or alterations. It is not intended, in these cases, that the taxpayer should be entitled to a credit for the tax previously borne on the goods.

Example: Certain goods have been manufactured, sold and used in Australia. The purchaser of the goods has borne $300 tax on the goods. The used goods have been sent overseas by the purchaser for repair. The goods are subsequently reimported by the purchaser. The taxable value rules will apply so that the taxable value for the purposes of the importation will only be the value of the repair, plus the value of any customs duty payable on the importation of the goods - see paragraph 9.23. Tax of $100 is payable on the importation of the repaired goods.

Result: The purchaser will not. e entitled to a credit under CR4 for any part of the $300 tax borne on the original purchase of the goods before the goods were sent overseas for the repair.

Requirement that the tax not be passed on: No.

Change from existing law: The existing law does not have the same exclusion for repair of re-imported goods.

Reason for change: To be consistent with new approach to re-imported goods sent overseas for repair.

Credit Ground 5: Ensuring exemption where the latest assessable dealing is exempt

11.13 General description: The claimant is the taxpayer for an assessable dealing with goods that is exempt, and the claimant has borne tax on the same goods before the time of the assessable dealing.

Coverage: The purpose of this credit ground is to ensure that, if a taxpayer has borne tax on goods (for example, purchasing them for a tax-inclusive price), then that amount of tax can be credited to the taxpayer when the taxpayer has an assessable dealing with those goods that is exempt. An example of a subsequent assessable dealing with tax-paid goods would be a wholesale sale. There will be three exclusions from this credit ground.

Exclusion 1: Small business exemption: The credit ground will not apply if the subsequent assessable dealing with the goods was exempt by reason only that the small business exemption applied. A central element of the small business exemption is that it will not apply to goods that have been acquired tax-free under quote by the taxpayer. To provide a credit in these cases would mean that the exemption would be applied in cases where, ultimately, the goods were acquired tax-free.

Exclusion 2: Goods taxed in bond: The credit ground will not apply if the goods have been taxed while in bond, and the later assessable dealing is a local entry. That local entry will not be taxable because there will be an exemption for goods that previously have been taxed in bond.

Exclusion 3: Goods altered or repaired overseas: The credit ground will not apply if the later assessable dealing is with goods that were exported from Australia for repair or alteration and which are subsequently imported back into Australia. The importation causes the goods to again become assessable goods. The reimportation, while a taxable dealing, will have a taxable value that is limited to the value of the repairs or alterations plus any customs duty payable. It is not intended, in these cases, that the taxpayer should be entitled to a credit for the tax previously borne on the goods.

Requirement that the tax has not been passed on: No.

Change from existing law: The new law will be wider than the existing law in at least 2 respects. First there is no passing on requirement. Second the new law will apply to all assessable dealings, whereas a credit is available under the existing law only if the second transaction is a wholesale sale.

Reasons for change: These extensions to the coverage of the existing law will remove unnecessary restrictions upon the circumstances in which these credits will be available.

Credit Ground 6: Avoiding taxing inputs where outputs are taxable

11.14 General description: The claimant is liable to tax on an assessable dealing with goods and has borne tax on other goods (such as raw materials or business inputs) which have a sufficient link (as discussed in paragraph 11.7) with the goods which are the subject of the dealing.

Coverage: This credit ground will operate to avoid goods being inappropriately taxed indirectly. It will prevent inputs being taxed where outputs are taxable. Otherwise tax could be collected indirectly on taxable outputs where tax was imposed on that component of the selling price which represented some or all of the tax included in the price for which the goods producer purchased the inputs concerned. An entitlement under this credit ground will arise if the following two conditions are present:

(a)

the claimant is liable to tax on an assessable dealing with goods (e.g. where manufactured goods are taxable and

(b)

the claimant has borne tax on other goods, such as business inputs or raw materials, which have a sufficient link with the production of the first-mentioned goods (or outputs) for which the claimant is liable to tax.

Requirement that the tax not be passed on: No.

Change from the existing law: This credit ground will cover the same subject matter as seven separate refund provisions in the existing law. Some of the equivalent refund provisions of the existing law contain restrictions that will not be present in the new law. Unlike the existing law, the new law will:

(a)

apply to all assessable dealings;

(b)

entitle the claimant to either a rebate or a refund and

(c)

not be limited to the amount of tax payable on the assessable dealing with the output goods.

Reason for changes: These changes will remove unnecessary restrictions on both the circumstances in which an entitlement to a credit will arise, and the means of obtaining the credit.

Credit Ground 7: Avoiding taxing inputs where outputs are exempt

11.15 General description: The claimant is the taxpayer for an exempt assessable dealing in respect of goods, and has borne tax on other goods (such as business inputs or raw materials) which have a sufficient link (as discussed in paragraph 11.7) with the goods which are the subject of the dealing.

Coverage: This credit ground will prevent inputs being taxable where outputs are exempt. If a credit were not available in these circumstances, the law would not be fully giving effect to the exemption concerned, because some tax would have been paid indirectly on the goods which are the subject of the exemption. A credit entitlement will arise where the following two conditions are present:

(a)

the claimant is the taxpayer for an assessable dealing with certain goods where that dealing is exempt and

(b)

the claimant has borne tax on other goods, such as business inputs or raw materials, that have a sufficient link with the first-mentioned output goods.

Exclusion: Small business exemption: The credit ground will not apply if the subsequent assessable dealing with the goods was exempt by reason only that the small business exemption applied. A central element of the small business exemption is that it will not apply to goods that have been acquired tax-free under quote by the taxpayer. To provide a credit in these cases would mean that the exemption would be applied in cases where, ultimately, the input goods were acquired tax-free. Otherwise, for example, a manufacturer whose total sales are below the small business threshold would be able to obtain the benefit of the small business exemption on the outputs of its production process, and would also be entitled to obtain a credit for the tax included in the price for which the manufacturer purchased the raw materials or business inputs used in connection with the production of those outputs. This would not be the correct result.

Requirement that the tax has not been passed on: Yes (see paragraph 11.5).

Changes from existing law: This credit ground covers the same subject matter as 2 separate refund provisions in the existing law. However, the new law will be wider than the existing law in at least one respect. The new law will apply to all assessable dealings, whereas a refund is available under the existing law only in limited situations, e.g. where tax has been borne in respect of raw materials for goods manufactured in Australia, sold by the manufacturer or treated by the manufacturer as stock for sale by retail or applied to the manufacturer's own use.

Reasons for change: This change will remove unnecessary restrictions on the circumstances in which an entitlement to a credit will arise.

Credit Ground 8: Tax excluded from sale price to quoting purchasers

11.16 General description: Tax has been excluded from the sale price of tax-paid goods sold to a purchaser who quotes either a registration number or an exemption declaration.

Coverage: This ground will provide a mechanism for allowing persons to quote or to obtain goods for a tax-exclusive price from a seller, such as a retailer, who holds tax-paid stock. It will enable unregistered persons to obtain a refund from the Commissioner if they sell tax-paid goods at a tax-free price to a quoting purchaser.

Requirement that the tax has not been passed on: No specific requirement. However, the amount of the credit will only be the amount of the tax excluded from the sale price to the quoting purchaser.

Change from existing law: First this ground is much wider than the scope of the existing law, which limits refund entitlements to situations where tax was paid on goods that are sold free of tax to a person (who is not a manufacturer of exempt goods) who quotes a certificate of registration. The existing law does not generally apply where the sale is to a person who provides a conditional exemption certificate. Second administrative practices under the existing law referred to above will no longer apply.

Reasons for change: First this change will significantly increase the opportunities for exemption users to obtain goods at tax free prices from retail outlets. Under the existing law, retailers holding tax-paid stocks are often reluctant to sell goods at tax-free prices to purchasers who provide conditional exemption certificates, as there is currently no statutory basis for retailers selling in these circumstances to obtain refunds of the amounts of tax included in the price for which they purchased the goods. Second the new range of credit grounds will be more comprehensive than apply at present, and past administrative practices will no longer be required.

Credit Ground 9: Return of faulty goods

11.17 General description: The claimant has borne tax on replacement parts used to replace (free of charge and under warranty) the whole, or any part, of faulty goods on which the claimant has already been liable for tax.

Coverage: This credit ground will operate to avoid the taxing of replacement parts used to repair goods under warranty. It will be a requirement that the repair must be free of charge and under warranty.

Example:

Certain goods have been sold by a manufacturer to a purchaser, who has subsequently returned the goods as being faulty. The sale was an assessable dealing, and the manufacturer was liable to tax on the sale. The manufacturer has borne tax on the replacement parts which are used to repair the faulty goods. The goods are repaired free of charge and under warranty.

Result: The manufacturer will be entitled to a credit for the amount of tax borne on the replacement parts.

A credit under this ground will be subject to the condition that if the claimant later sells the faulty goods which were replaced under warranty, then the claimant will be liable to pay an amount in accordance with the formula set out in clause 58. This formula will operate to clawback the amount of the original credit to the extent that the claimant has recouped some or all of the tax borne on the replacement parts by later selling the faulty goods which were replaced. [clause 58]

Requirement that the tax has not been passed on: No specific requirement. However, the credit entitlement will only arise where the repairs are carried out free of charge.

Changes from existing law: The new law removes the existing requirement that a refund is only available if the claimant can satisfy the Commissioner that the faulty goods replaced will not be used for a purpose, or similar purpose, for which they were manufactured. The new law will also only operate if the goods are replaced under warranty.

Reasons for change: First to simplify the operation of the provision by removing the need for claimants to satisfy the Commissioner about possible future uses of the faulty goods. Second to prevent possible abuse e.g. where the labour costs of the repair are inflated to allow for the parts to be provided 'free of charge'. Such arrangements could potentially result in a credit being payable for the tax borne on all parts used in repair situations.

3. Export-related credits

11.18 There is a general principle that goods should not be subject to tax where they are exported as assessable goods. This is to ensure that goods which have not been applied to own use in Australia are able to be sold on the international market at prices which do not directly include sales tax. This is consistent with the international convention that goods sold between countries will be subject to the taxes that apply in the country of the destination (this principle is known as the "destination principle").

The third broad category of credit grounds are export-related credits. The six credit grounds which deal with the relief of sales tax on exported goods are as follows:

•

tax excluded from the sale price of tax-paid goods sold to a purchaser for export otherwise than as accompanied baggage - CR10;

•

tax borne directly on assessable goods that are exported - CR11;

.

tax borne on inputs which have a sufficient link with exported goods - CR12;

.

tax borne on containers for exported goods - CR13;

.

tax excluded from the sale price of goods exported by eligible Australian travellers as accompanied baggage - CR14;

.

tax excluded from the sale price of goods to be exported by eligible foreign travellers - CR15.

Credit Ground 10: Tax excluded from the sale price of tax-paid goods sold to a purchaser for export

11.19 General description: The claimant has excluded tax from the sale price of tax-paid goods sold to a purchaser who, at the time of the sale, had the intention of exporting the goods (otherwise than as accompanied baggage).

Coverage: This ground will allow exemption users (whether registered or unregistered) to obtain goods for export for a tax-exclusive price from a seller, such as a retailer, who holds tax-paid stock.

Change from existing law: There is no equivalent refund provision in the existing law.

Reason for change: To provide a simpler, more effective mechanism for enabling the benefit of the exemptions to be obtained by all exporters. This will also minimise the circumstances in which purchasers of goods for export will have to obtain the goods at tax-inclusive prices and then apply for refunds directly from the Commissioner under CR11 (discussed below).

Credit Ground 11: Tax borne directly on assessable goods that are exported

11.20 General description: The claimant has borne tax on goods which the claimant has exported while those goods are still assessable goods.

Coverage: This credit ground will relieve exports from any direct sales tax burden. Under this ground a credit is available for a person in the following circumstances:

(a)

the claimant has borne tax on goods;

(b)

the claimant has personally exported those goods; and

(c)

the goods were assessable goods at the time of export.

Requirement that the tax has not been passed on: No.

Change from existing law: The existing law requires that the tax borne on the goods by the claimant must not have been passed on by the claimant to another person. This restriction will be omitted in the new law.

Reason for change: This extension to the coverage of the existing law will remove an unnecessary restriction.

Credit Ground 12: Tax borne on inputs which have a sufficient link with exported goods

11.21 General description: The claimant has borne tax on raw materials or business inputs that have a sufficient link as discussed in paragraph 11.7) with assessable goods which are exported.

Coverage: This credit ground will operate to prevent tax being paid indirectly. on assessable goods which are exported. If a credit was not available in these circumstances, the law would not be fully giving effect to the principle of freeing exports from sales tax, because some tax would have been paid on inputs used in the production of the exported goods. No tax will be payable on the assessable goods exported (because of the exemption for exported goods). However, the price for which the goods were sold would include a component to recover the cost of the tax included in the price for which the exporter purchased the raw materials or equipment used to manufacture the exported goods. This credit ground will enable that tax to be refunded.

Requirement that the tax has not been passed on: No.

Changes from existing law: First the equivalent refund provisions of the existing law have a requirement that the tax borne on the goods by the claimant must not have been passed on by the claimant to another person. Second the new credit ground will apply to all assessable dealings, whereas the existing refund provisions only apply to a limited range of taxable transactions.

Reasons for change: This extension to the coverage of the existing law will remove unnecessary restrictions.

Credit Ground 13: Tax borne on containers for exported goods

11.22 General description: The claimant has borne tax on a container which is exported containing wholly assessable goods, and the first AOU in Australia of the container was a packing AOU involving those assessable goods.

Coverage: A special credit ground is necessary for the export of containers for assessable goods because, at the time of export, the container will be Australian-used goods.

The conditions to be satisfied before a credit entitlement will arise under this credit ground are as follows:

(a)

the first AOU in Australia of the container must have been a packing AOU by the claimant;

(b)

the contents of the container must have consisted wholly of assessable goods;

(c)

the container must have been exported while still a container for those assessable goods; and

(d)

the claimant must have borne tax on the container before the time of export.

These conditions are necessary to ensure that credits will only be available for amounts of tax borne on containers which have not been used for any purpose other than the packing of assessable goods for export.

Requirement that the tax has not been passed on: No.

Changes from existing law: There is no equivalent refund provision in the existing law.

Reasons for changes: This ground is part of the changed treatment of containers under the new law.

Credit Ground 14: Tax excluded from the purchase price of goods exported by eligible Australian travellers

11.23 General description: The claimant has sold goods for a tax-exclusive price to an eligible Australian traveller in accordance with the prescribed rules for export sales and the traveller has subsequently exported the goods.

Coverage: This credit ground will operate where vendors sell tax-paid goods for a tax-inclusive price in the following situation:

(a)

the claimant has sold goods to an eligible Australian traveller;

(b)

the sale was in accordance with the prescribed rules for export sales;

(c)

the selling price excluded some or all of the tax previously borne by the claimant on the goods; and

(d)

the goods have been exported by the purchaser within the time, and in the manner, prescribed by the regulations.

Requirement that the tax has not been passed on: No.

Change from existing law: There is no equivalent refund ground under the existing law.

Reason for change: To ensure that tax-free sales of goods to Australian residents departing on international voyages may only be made where there is adequate proof of the export of the goods while the goods are still assessable goods. The regulations will ensure that a credit entitlement will only arise where the goods have been exported from Australia, and where the goods have not been used prior to export.

Credit Ground 15: Tax excluded from the purchase price of goods to be exported by eligible foreign travellers

11.24 General description: The claimant has sold goods for a tax-exclusive price to an eligible foreign traveller in accordance with the prescribed rules for export sales.

Coverage: This credit ground will operate where vendors sell tax-paid goods for a tax-exclusive price in the following situation:

(a)

the claimant sold goods to an eligible foreign traveller;

(b)

the sale was in accordance with the prescribed rules for export sales; and

(c)

the selling price excluded some or all of the tax previously borne by the claimant on the goods.

This ground will effectively apply where the goods are intended to be exported as accompanied baggage by an eligible foreign traveller who is departing Australia on an international air or sea voyage. The prescribed rules for export sales will ensure that a credit entitlement will only arise where the correct procedures have been followed at the point of sale to ensure that the purchaser is a bona fide overseas visitor.

Requirement that the tax has not been passed on: No.

Change from existing law: There is no equivalent refund ground under the existing law.

Reasons for change: The introduction of this new credit ground will allow a wider range of unregistered retailers to make tax-free sales to foreign travellers who are visiting Australia and are departing on international voyages.

4. Import-related credits

11.25 There will be two credit grounds relating to imported goods as follows:

•

destruction of imported goods - CR16; and

•

drawback of sales tax where imported goods are exported while still assessable goods - CR17.

Credit Ground 16: Destruction of imported goods

11.26 General description: The claimant has become liable to tax on a local entry, but the claimant has rejected the goods for non-compliance with the sale contract and the goods have been destroyed under Customs' supervision.

Coverage: This credit ground will operate in those rare cases where the following four conditions are satisfied:

(a)

the claimant has become liable to tax on a local entry of goods that were imported under a contract of sale;

(b)

the claimant rejected the goods for non-compliance with the contract;

(c)

the goods were destroyed under Customs' supervision; and

(d)

the Commissioner is satisfied that the destruction is or would be grounds for remission of customs duty on the goods.

It will be a requirement that the Commissioner is satisfied that the customs duty paid on the importation of the goods will be remitted because of the destruction. In the case of non-dutiable goods, the Commissioner must be satisfied that if customs duty had been paid on the goods, then that duty would have been remitted by Customs as a result of the destruction of the goods.

Requirement that the tax has not been passed on: No.

Change from existing law: There will be no passing on requirement, whereas the equivalent refund provision of the existing law has a requirement that the tax borne on the goods by the claimant must not have been passed on by the claimant to another person.

Reason for change: To remove an unnecessary restriction upon the circumstances in which these credits will be available.

Credit Ground 17: Drawback of customs duty on imported goods

11.27 General description: The claimant is an importer who is entitled to a drawback of customs duty on the goods on which tax was paid.

Coverage: This ground will operate to provide a credit in those cases where:

(a)

drawback of customs duty has been allowed in respect of certain goods under section 168 of the Customs Act; or

(b)

if the goods are non-dutiable, the Commissioner is satisfied that a drawback of duty would have been allowed if the goods had been liable to duty.

Drawback: A drawback of customs duty will be allowed where imported goods are exported without being used in Australia. In this context, goods which have only been used for the purpose of being inspected or exhibited will not be treated as having been used in Australia (see Customs Regulation 129).

Requirement that the tax not be passed on: No.

Changes from existing law: The existing provision that refund claims may be made at any time will be replaced with the general requirement that a claim must be made within 3 years from the time when the drawback was allowed (or would have been allowed).

Reasons for changes: To provide consistency for all credit claimants. Potential claimants will not be disadvantaged by this change.

5. Credits where goods are leased

11.28 There will be two credit grounds dealing with leases of goods:

.

eligible long-term lease - CR18;

.

export of leased goods - CR19.

Credit Ground 18: Eligible long-term lease

11.29 General description: The claimant has borne tax on goods before the granting of an eligible long-term lease, and the first AOU in Australia of the goods consisted of the granting of that lease.

Coverage: This credit ground will ensure that, if the claimant has borne tax on goods (e.g. purchasing the goods for a tax-inclusive price), then the claimant will be entitled to a credit for the amount of tax borne on the goods where there is a subsequent eligible long-term lease of the goods. The credit ground will only be satisfied where the following conditions are met:

(a)

the first AOU of the goods in Australia is the granting of a lease by the claimant;

(b)

that lease is an eligible long-term lease; and

(c)

the claimant has borne tax on the goods before the time of the granting of the lease.

(i)

the term of the lease is at least for as long as the statutory period (e.g. it is for a period exceeding two years, or exceeding the effective working life of the goods, whichever is the less);

(b)

the lessee intends to use the goods so as to satisfy an exemption Item during that period (e.g. the leasing of equipment by a manufacturer for use in the processing of raw materials); and

(c)

if the lessor has previously borne tax on the goods, no part of that tax must have been passed on to any person. [clause 5, definition of 'eligible long-term lease']

Requirement that the tax has not been passed on: No. However, a lease of goods will not be an eligible long-term lease if any part of the tax borne by the lessor on the goods before the grant of the lease has been passed on to any person.

Change from existing law: There is no equivalent refund provision in the existing law.

Reasons for change: This ground is part of the changed treatment of leases under the new law.

Credit Ground 19: Tax borne on goods exported to an overseas lessee

11.30 General description: The claimant has borne tax on leased goods which are exported before being used by the lessee, and the first AOU in Australia of the goods consisted of the granting of that lease.

Coverage: This credit ground will operate to ensure that leased goods exported will be treated on the same basis as goods exported for sale - i.e. the goods will be relieved of any direct sales tax burden where they have not been used before export. If a credit was not available in these circumstances, then the law would not be fully giving effect to the general exemption for exported goods. This would be because the leasing charges would most likely include a component to recover the cost of the tax previously borne by the lessor on the goods.

The credit ground will only be satisfied where the following 3 conditions are met:

(a)

the first AOU of the goods in Australia is the granting of the lease by the claimant;

(b)

the leased goods were exported before being used by the lessee; and

(c)

the claimant has borne tax on the goods prior to export.

Requirement that the tax has not been passed on: No.

Changes from the existing law: There is no equivalent refund ground under the existing law.

Reasons for change: To allow lessors to lease equipment at internationally competitive rates to persons outside of Australia.

6. Miscellaneous credits

11.31 There will be two credit grounds of a miscellaneous nature as follows:

.

retrospective credits for approved R&D bodies - CR20; and

.

credits for bad debts - CR21.

Credit Ground 20: Retrospective R & D registration or approval

11.32 General description: The claimant has borne tax on a tax-bearing dealing for which the claimant would have been entitled to quote an exemption declaration if the claimant had been registered with the Industry, Research and Development Board or had entered into an agreement under the Industry Research and Development Act 1986 (IR&D Act) at the time of the dealing.

Coverage: This credit ground recognises that many persons who will qualify as an approved R&D body as described in business inputs exemption Item 34) will not have obtained their registration with the Industry Research and Development Board, or entered into the relevant agreements with the Board, until after the time at which they will have acquired the equipment and materials necessary to undertake their research and development activities.

These persons will not be entitled to quote an exemption declaration under Item 34 at the time of acquisition of the goods. This credit ground will enable these persons to obtain a credit for the tax borne on these goods where the following conditions are satisfied:

(a)

the claimant has borne tax on a tax-bearing dealing;

(b)

after the dealing, the claimant either obtained registration under section 39F, 39J or 39P of the IR&D Act, or entered into an agreement under section 28 or 31 of that Act; and

(c)

the claimant would have been entitled to quote an exemption declaration on the dealing if that registration had been obtained, or that agreement had been entered into and had been in force at the time of the dealing.

Requirement that the tax has not been passed on: No.

Changes from existing law: None.

Credit Ground 21: Bad debts

11.33 General description: The claimant has paid tax on a taxable dealing with goods and some or all of the amount owed to the claimant in respect of that dealing is subsequently written off as a bad debt.

Coverage: This credit entitlement will apply where a claimant has paid tax on an assessable dealing such as a sale and the claimant has subsequently written off some or all of the price for which the goods were sold.

Requirement that the tax has not been passed on: No.

Changes from existing law: There is no time limit under the existing law for claiming refunds where bad debts have been written off. Under the new law there will still be no time limit as to when a debt can be classified a bad debt. However, the general three year time limit for claiming credits under the new law will apply. In this case, it will be 3 years from the time of the writing off of the debt.

Reason for change: To provide consistency for all credit claimants.

7. General rules for obtaining a credit

11.34 The general rules for obtaining a credit will be broadly similar to the provisions of the existing law. Any significant changes from the existing law are discussed below.

What are the general entitlements to credits?

11.35 Methods of claiming credits: There will be two methods of obtaining a credit:

(a)

Direct refunds: This will be a direct payment to the person claiming the credit. These payments will be obtained by applying directly to the Commissioner;

(b)

Rebates on returns: This will be an amount that a taxpayer will be entitled to deduct from the total amount of tax payable by them on their assessable dealings during a payment period. Only the net tax (i.e. the tax payable less the amount of the credit) will be required to be remitted with the sales tax return to the Commissioner.

11.36 Refund procedures: With the exception of the new minimum monetary limit discussed below, the requirements and procedures affecting the claiming of refunds will be substantially the same as under the existing law:

(a)

Offset against other liabilities: The Commissioner will be able to apply the credit against any outstanding tax liabilities of the claimant before paying as a refund the remaining amount of the credit. [paragraph 55(a)]

(b)

Minimum monetary claims: Refunds will not be available for amounts totalling less than $200. Individual claims may be aggregated to reach the minimum amount. This new requirement is necessary to reduce the likely administrative costs of processing large numbers of small refund claims from a much larger group of potential claimants than exists under the existing law. [subclause 54(1)]

Note:

There will be no minimum monetary limit for credits claimed as rebates on returns.

(c)

A taxpayer will be able to obtain a direct refund from the time a credit arises, independently from the return process.

Example: A credit entitlement arises 2 months before the next quarterly return is due, and the taxpayer wishes to apply for a cash refund rather than wait to deduct the credit from the next return.

Result: The taxpayer is entitled to lodge a credit claim immediately the credit entitlement arises.

11.37 Rebate procedures: There will be no changes to the procedures by which taxpayers will be able to deduct credits to which they are entitled from the tax payable in their (monthly or quarterly) sales tax returns. [clause 53]

11.38 Additional requirements: Additional requirements regarding the operation of the credit provisions will be as follows:

(a)

Approved form: Claims for credits will be required to be made in a form approved by the Commissioner, and will be required to be accompanied by such supporting evidence as the Commissioner requires. [subclause 51(4)]

(b)

Avoiding 'doubling up of credits': There will be a non-discretionary rule that an entitlement to a credit will not arise to the extent that it would result in a double credit in respect of the same tax (whether for the claimant or another person). [subclause 51(2)]

(c)

Recovery of excess credits: There will be a provision to ensure repayment by the claimant of excess or overpaid credits. This will cover cases not only where refunds have been incorrectly overpaid by the Commissioner, but also where credits have been improperly deducted from the tax payable in respect of a return. The amount of the excess will be treated as if it were tax due and payable, and due for payment at the time when it was overpaid or deducted. [clause 56]

(d)

Agreements relating to calculation of credits: The Commissioner will be allowed to enter into agreements with any person regarding substitute methods of calculating credit entitlements. Such agreements will override the legislation. [clause 59]

Who cannot apply for credits?

11.39 Unregistered exemption users: There may be situations in which an unregistered person who is entitled to quote an exemption declaration fails to do so, and consequently makes a tax-inclusive purchase. Such a person will generally not be entitled to obtain a refund directly from the Commissioner under the new law.

11.40 There will be a number of exceptions to the general rule. Unregistered exemption users will be entitled to claim credits directly from the Commissioner for tax borne on certain business inputs (see discussion of CR6 or CR7) or for tax borne on goods exported (see discussion of CR11). Subject to these two credit grounds, the availability of direct access credits under CR8 to retailers (and other persons holding tax-paid stock) as discussed in paragraph 11.16, will remove the need for unregistered exemption users to be entitled to apply directly to the Commissioner for credits in any other circumstances.

11.41 Removal of existing refund provisions: The existing law allows direct refunds for only a very limited number of exemption users. There will not be any equivalent credit grounds in the new law. The existing refund provisions concerned are:

(a)

Public hospitals and public benevolent institutions etc: Direct access refunds are available under the existing law to public hospitals, public benevolent institutions or other organisations covered by Item 81 in the First Schedule to the E&C Act for amounts of tax included in the price for which those organisations purchased goods;

(b)

Persons with impaired hearing: Direct access refunds are available to profoundly deaf persons for amounts of tax included in the price for which those persons purchased broadcast teletext or closed caption decoding devices or other goods covered by Item 123A in the First Schedule to the E&C Act.

Reasons for change: These refund provisions are very rarely used. The purchases concerned are almost always made at tax-exclusive prices from retailers who either write-off the small amounts involved, or who obtain credits from their suppliers for the amount of the tax excluded from the sale price. Under the new law, retailers who make sales in these circumstances will be able to make refund claims directly to the Commissioner under CR8 for the amounts of tax excluded from the sale price. This change will ensure consistent treatment for all exemption users.

(c)

Bakers and pastrycooks donating to charity: The existing law provides for a rebate of tax payable on the sale value of goods manufactured by a baker or a pastrycook and donated to charitable institutions and certain public organisations. There will be no equivalent credit ground in the new law.

Reason for change: Under the new law there will be no assessable dealing for the placing of manufactured goods into stock for retail sale. The donation of such goods would be an AOU which would be an assessable dealing. However these goods are always exempt goods, and no tax is payable.

11.42 Removal of credit ground for tax paid under protest: The existing law provides refund grounds under which tax may be paid under protest. There is no time limit applicable to these refund claims, and the Commissioner is not required to be satisfied that the claimant has not passed on the tax. There will not be a specific credit ground in the new law for tax paid in these circumstances, as such amounts will be recoverable as tax overpaid under CR1.

Reason for change: The existing refund grounds for tax paid under protest are rarely used. The provision only applies where the items in respect of which tax was paid were not 'goods manufactured in Australia' (e.g. because the operation concerned did not constitute manufacture), or because the end result of the operation did not bring 'goods' into existence. The removal of the specific provision will ensure greater consistency between the credit provisions.

Within what time limits must credit claims be made?

11.43 All claims for credits will be required to be made within 3 years of the time when the credit entitlement arises. [subclause 51(3)]

Change from existing law: This will alter the current situation under which there is unlimited time within which to apply for refunds in relation to a number of situations, including:

(i)

bad debts;

(ii)

the quotation of bona fide registration certificates which have been deemed not quoted;

(iii)

sales to Commonwealth and State Governments; and

(iv)

drawback of customs duty.

Reasons for change: The change to a uniform three year period within which all credits must be claimed will ensure greater consistency between different credit grounds. Three years is regarded as sufficient time within which to make credit claims.

Objections against credit decisions

11.44 The provisions of the Taxation Administration Act concerning rights to object against refund decisions will apply to the new law.

C. Summary of main changes

11.45 The main changes proposed to the existing law which are discussed in this chapter are:

D. Transitional Arrangements

11.46 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be special transitional provisions applicable to credits. These will:

(a)

ensure that tax that is paid or payable under the existing law, or that is borne under the existing law, will be treated as if it is tax paid, payable or borne under the new law for the purposes of the credit rules. Consequently, if a taxpayer pays tax on a dealing with goods under the existing law and then becomes liable to tax under the new law on a subsequent dealing with the same goods, then the taxpayer will be entitled to a credit under the new law for the tax paid under the existing law. This is discussed in paragraph 23.15;

(b)

exclude from the credit grounds under the new law situations that more appropriately relate to acts, transactions or operations under the existing law. These are discussed in paragraphs 23.16 and 23.17.

Collection and Recovery

A. Introduction

12.1 This chapter describes the obligations of people who engage in taxable dealings, in relation to the lodgment of returns and payment of tax . It also deals with the Commissioner's right to recover unpaid tax and the penalties that apply to non-payment. The new law will be changed very little in this area, but the relevant provisions will be expressed in a simpler form. These matters are dealt with in Part 5 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

Lodgment of returns

12.2 Taxpayers who engage in taxable dealings will be required to calculate the tax payable on those dealings and send a return, in the approved form, to the Commissioner. The return will be required to be received by the Commissioner within 21 days after the end of the month or quarter in which the dealing took place, depending upon whether the person is a monthly remitter or a quarterly remitter. The relevant quarters for a quarterly remitter will be the three months ending on 31 July, 31 October, 31 January and 30 April. [clause 5, definition of 'sales tax quarter', 'taxpayer' and clause 61 ]

12.3 Quarterly remitters: A quarterly remitter will be a person whose annual sales tax liability for the previous financial year did not exceed the quarterly remitter threshold, and who has no sales tax payments outstanding. The threshold for 1991-92 is $50,000. The threshold for 1992-93 will be $51,200. [clause 5, definition of 'quarterly remitter' and clause 62 ]

12.4 Monthly remitter: A person who is not a quarterly remitter is a monthly remitter. [clause 5, definition of 'monthly remitter' and clause 62]

12.5 In some very limited circumstances, certain people such as airport shop proprietors and auctioneers are, under existing law, required to lodge returns at the time of the taxable dealing or within 7 days of that dealing. Under the new law, these people will become either monthly or quarterly remitters, depending on their liability.

Due date for payment

12.6 Monthly remitters: Tax will be required to be paid by the 21st day after the end of the month in which the taxable dealing occurred. [subclause 63(1)]

12.7 Quarterly remitters: Tax will be required to be paid by the 21st day after the end of the quarter in which the taxable dealing took place. For example, for the quarter ending 31 July the date for payment is 21 August. [subclause 63(2)]

12.8 If tax is payable on a local entry of goods, or a removal of goods from a customs clearance area, then the tax will be payable at the time of the customs dealing. This means that the taxpayer will not have the option of paying that tax at a later time. [clause 64]

Other times for payment

12.9 If the Commissioner believes that a person is about to leave Australia before an amount of tax becomes due and payable, the Commissioner will be able to bring forward the due date for the payment of the tax. [clause 65]

Extension of time

12.10 The Commissioner will be able, in a particular case, to extend the time for payment of tax, or allow tax to be paid by instalments. This provision will be of the same effect as the existing provision that allows the Commissioner to extend the time for payment. [clause 66]

Way in which tax will be required to be paid

12.11 Tax payable on goods removed from a customs clearance area or on a local entry of goods will be required to be paid at the same place and in the same way as Customs duties are payable. [subclause 67(1)]

12.12 Any other tax will be required to be paid at the place, and in the way determined by the Commissioner. [subclause 67(2)]

Penalty for late payment

12.13 If tax payable by a person has not been paid by the due date for payment, the person will be liable to pay a penalty. The penalty will be 20% per year, calculated on the unpaid amount from the due date for payment, or from a later date determined by the Commissioner if the Commissioner has granted an extension of time to pay or has allowed payments by instalments. [clause 5, definition of 'late payment penalty' and subclause 68(1)]

12.14 Where a judgement has been entered or given in a court for the payment of tax, this will not alter the fact that the tax has remained unpaid from the original due date. [subclause 68(2)]

12.15 If the judgement debt includes interest, the penalty (discussed in 12.16 above) will be reduced by a proportion of the interest as follows:

(Tax component of judgement debt / judgement debt) * Interest on Judgement debt
[subclause 68(3)]

12.16 The Commissioner will be able to remit some, or all, of the penalty for unpaid tax if he is satisfied that the circumstances warrant it. Some of those circumstances will be described in the law. In other situations the Commissioner will be able to remit some or all of the tax if the Commissioner is satisfied that there are special circumstances that justify a remission. [subclause 68(4)]

12.17 These provisions have been simplified but the effect of the law remains unchanged.

Recovery of unpaid tax

12.18 Unpaid tax (including penalty) will be a debt which can be sued for by the Commissioner or a Deputy Commissioner in the appropriate court. [clause 69]

Recovery of tax paid on another person's behalf

12.19 A person who pays tax for, or on behalf of, another person will be able to recover the amount from the other person (including the cost of recovery) as a debt through court action. Alternatively, the amount will be able to be deducted from moneys held by the person that belong to the other person. For this purpose, tax will include any penalties payable on the unpaid tax. [clause 70]

Recovery of tax from joint taxpayers

12.20 When 2 or more people become jointly liable to pay tax, each one will be liable for the whole of the tax. If any of them pays the whole tax, that person will be able to recover tax from the others in the same proportion as their interest in the goods.

Example:

If 4 people are jointly liable to pay tax and they each have an equal interest in the goods, the person who has paid the tax will be able to recover 25% of the tax from the other 3 people.

12.21 The person who has paid the tax will be able to either recover it as a debt through court action or deduct it from any money held by the person which belongs to the other people. For this purpose, tax will include any penalties payable on the unpaid tax. [clause 71]

Recovery of tax from trustee of deceased taxpayer

12.22 If at the time of a taxpayer's death, tax that is due has not been assessed or paid, the Commissioner will have the same powers and remedies for assessment and recovery from the trustee of the estate as he would have had against the taxpayer.

12.23 The trustee will be required to lodge any returns and provide any information that the taxpayer would have been liable to provide. The trustee will also be required to lodge any further returns or provide any further information required by the Commissioner.

12.24 If the trustee does not lodge any return or further information, the Commissioner will be able to make an assessment of tax in relation to the deceased taxpayer.

12.25 The trustee will be liable to the same penalty under Part 9 and the same late payment penalty for which the taxpayer would have been liable had the taxpayer still been alive.

12.26 Any tax due by the trustee will be a first charge on all of the taxpayer's estate in the hands of the trustee.

12.27 A trustee who is dissatisfied with an assessment made under this section will be able to object as set out in Part IVC of the Taxation Administration Act 1953.

12.28 In this part trustee will include an executor, administrator or other personal representative of a deceased person. [clause 5, definition of 'trustee' and clause 72 ]

Recovery of tax from unadministered deceased estate

12.29 If probate has not been granted or letters of administration taken out within 6 months of a taxpayer's death, the Commissioner will be able to make an assessment of tax. Notice of the assessment will be required to be published twice in a daily newspaper in the State or Territory where the taxpayer resided at the time of death.

12.30 Subject to any amendment, the assessment will be conclusive evidence of the liability of the deceased taxpayer.

12.31 A person who claims an interest in the deceased taxpayer's estate, or has been granted probate of the taxpayer's will, or letters of administration of the taxpayer's estate, and who is dissatisfied with the assessment, will be able to object in the same way as that set out in Part IVC of the Taxation Administration Act 1953 if the person were the deceased taxpayer. [clause 73]

Collection from a person who owes money to a taxpayer

12.32 The Commissioner will be able to collect money from a person who owes money to a taxpayer who has a sales tax debt. This power will extend to the following situations:

•

a person who owes, or may owe money to a taxpayer;

•

a person who holds, or may hold money for a taxpayer;

•

a person who holds, or may hold money for a person who will pay it to the taxpayer; or

•

a person who has authority from someone else to pay money to a taxpayer.

The Commissioner will be able, by written direction, to require people in the situations outlined above to pay the money (or an amount equal to the tax due) to the Commissioner, in accordance with the direction. If several payments are to be made to the taxpayer, the Commissioner will be able to require a specified amount out of each payment. The Commissioner will not be able to require money to be paid to the Commissioner before it is due to the taxpayer. Money will be taken to be due to the taxpayer regardless of whether there is a condition to be fulfilled before the taxpayer is entitled to the money.

12.33 Any person who refuses to comply or does not comply will be guilty of an offence carrying a penalty of $2,000. Where such a person is convicted of not complying by a court, the court will be able to order the convicted person to pay the amount refused in addition to any penalty determined by the court.

12.34 Any person making payments to the Commissioner under these provisions will be deemed to be acting on the authority of the taxpayer and will be indemnified against any action that may be taken by the taxpayer in relation to the payments.

12.35 If the whole debt has been paid before the Commissioner has received payments of the debt from a third party, the Commissioner will be required to inform the third person that the debt has been paid.

12.36 Where a person owns withdrawable shares in the capital of a building society which have not been repaid, the money represented by the shares and held by the building society will be taken to be due to the person if it is repayable on demand, or if it is not repayable on demand, it will be taken to be money which may become due by the building society to the person. [clause 74]

Service of notices

12.37 If, in any proceedings for recovery of sales tax against a taxpayer, the taxpayer is absent from Australia and after reasonable enquiries the Commissioner is satisfied that:

(a)

the taxpayer does not have any attorney or agent on whom documents can be served in Australia, and

(b)

the taxpayer cannot be found,

the Commissioner will be required to post the documents (or a sealed copy) in a letter addressed to the taxpayer at the last known place of business or residence in Australia. [clause 75]

Tax unpaid for 3 years

12.38 The Commissioner will be required to remit any tax not paid 3 years after it became due, unless the Commissioner has, during that 3 year period, required payment of the tax in writing or is satisfied that payment of the tax has been avoided by fraud or evasion.

12.39 Where a taxpayer makes a part payment towards several due amounts, the due amounts will be cleared by the payment in the order in which they became due. The Commissioner will be able, however, to determine a different order. [clause 76]

Commissioner's rulings

12.40 Clause 77 will apply to a taxpayer who has been given a ruling by the Commissioner which has subsequently been changed and, relying on the first ruling, has either paid no tax or underpaid the tax that has become due under the new ruling.

12.41 The Commissioner will be required to remit the underpaid tax unless he is satisfied that the taxpayer had made a mis-statement of fact or suppressed an important fact causing the first ruling to be given or continued.

12.42 If a ruling is given to a particular person, it will apply only to that person and when a subsequent public ruling is issued which conflicts with a ruling previously given to a particular person, the public ruling will prevail. Similarly, if a private ruling is issued which conflicts with an earlier public ruling, the private ruling will be the correct ruling.

12.43 The general position with private and public rulings will be that the later issued ruling will prevail. With public rulings, it will be the responsibility of the taxpayer to ensure that any public ruling does not conflict with an earlier ruling the taxpayer has received.

12.44 If the Commissioner issues a ruling subsequent to an amendment to the law, that ruling will not alter a previous ruling which was issued prior to the commencement of the amendment, except to the extent that it deals with issues other than the amendment.

Example:

Ruling issued	1 June 1992
Law amended	1 July 1992.
Ruling issued giving advice of the amendment and altering the June ruling	1 August 1992

Because the law had been amended, the ruling issued on 1 June 1992 applies only until 1 July 1992 and cannot be relied on the after that date. The ruling issued on 1 August 1992 will not act to remit tax underpaid from 1 July 1992 to 1 August 1992 if the taxpayer had continued to rely on the 1 June 1992 ruling and had ignored the amendment made to the law on 1 July 1992. [clause 77]

Registration

A. Introduction

13.1 This chapter discusses the circumstances in which a person may apply to the Commissioner of Taxation for registration under the Sales Tax law. Registration is a necessary pre-condition to the quotation of a registration number (which is discussed in Chapters 14 and 15).

Registration is dealt with in Part 6 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

What is registration?

13.2 Taxpayers who engage (or intend to engage) in certain activities with goods will be entitled to be registered by the Commissioner of Taxation for sales tax purposes. The Commissioner will allocate a separate registration number to each registered person. [clause 5, definition of 'registered person' and 'registration number']

13.3 The purpose of registration is to entitle a person to quote their registration number to acquire their business inputs or trading stock tax-free. Registered persons will also be entitled to quote their registration number to acquire goods tax-free on the basis that they intend to satisfy any exemption Item in respect of the goods.

13.4 There will be two types of quotation authorised under the sales tax law:

(i)

quotation of a registration number by a registered person; and

(ii)

quotation of an exemption declaration by an unregistered person.

Only a registered person will be entitled to quote a registration number. Quotation of a registration number will be a simpler and faster method of quoting than quotation of an exemption declaration. On the other hand, quoting an exemption declaration will require the quoter to give certain details, including the circumstances in which the goods will be used to satisfy an exemption Item, to be specified. In the case of a registered person, these details do not need to be specified when quoting.

13.5 Registration will not be compulsory: Under the new legislation, registration will be optional. Persons entitled to be registered may choose not to be. This represents a major change from the existing law, under which registration is compulsory for manufacturers and wholesale merchants. The reason for the change is that there is insufficient reason to continue to impose an offence of failure to register. While the Government would prefer that persons entitled to register do so, the approach of the new legislation will be to encourage registration rather than to require it.

Grounds for registration

13.6 There will be 6 grounds for registration:

Registration Ground 1: The person manufactures assessable goods.

Registration Ground 2: The person sells assessable goods by wholesale.

Registration Ground 3: The person makes indirect marketing sales of assessable goods.

Registration Ground 4: The person sells goods that are for use by the purchaser as raw materials in the manufacture of assessable goods.

Registration Ground 5: The person sells assessable goods to eligible Australian or foreign travellers.

Registration Ground 6: The person does something which, if done by a registered person, would have satisfied an exemption Item that is limited to registered persons (referred to as a business input exemption Item). [clause 78]

13.7 Intention test: While each of the registration grounds will relate to the carrying on of a particular activity (e.g. manufacture, wholesale sale, retail sale to eligible travellers), that activity will not actually have to be carried on before the person can be registered. Rather, any of the registration grounds can be satisfied if the person intends to carry out the prescribed activity in the immediate or foreseeable future. This will allow persons starting up in business to acquire their business inputs and trading stock tax-free before they actually start trading.

13.8 Business test: A registration ground will only be satisfied if the registrable activity is carried on (or intended to be carried on) by a person in the course of carrying on a business. The business does not have to be one that is primarily oriented towards the nature of the registrable activity - it can be any kind of business. Once registered for one business activity it will not be necessary to become registered for each subsequent business activity. It will be possible to carry on business activities that are not related to the one for which registration may have been granted without the requirement for separate registrations. The overriding consideration is that the activity must be carried on in the course of carrying on a business.

13.9 Registration Ground 1: Manufacture: This is one of the 2 grounds for registration under the existing law. The major change to the existing law will be that registration will not be limited to a person who carries on business as manufacturer. Further, the registration entitlement will be closely linked to the assessable dealings by manufacturers, as there is the same business test in both places, i.e. a manufacturer's liability to tax and entitlement to register both require that the manufacture of the goods must occur in the course of a business. Given the broad definition of 'manufacture', this ground will be available to a wide class of persons. [paragraph 78(1)(a)]

13.10 Registration Ground 2: Wholesale sales: This is the second of the two grounds for registration under the existing law. As with Registration Ground 1, the major change to the existing law is that registration will not be limited to a person who carries on business as a wholesaler. Registration will be available to a person who makes wholesale sales in the course of carrying on any business. However, unlike Registration Ground 1, there will not be the same close link with the corresponding assessable dealings, as liability on a wholesale sale will generally arise regardless of whether or not the sale is made in the course of a business. [subparagraph 78(1)(b)(i)]

13.11 Registration Ground 3: Indirect marketing sales: These are, broadly, retail sales of goods through an agent or from premises used by a person, other than the principal, mainly for making retail sales. These dealings are discussed in greater detail in Chapter 7. Under the existing law, indirect marketing sales are deemed to be wholesale sales even though they are retail sales and indirect marketers are covered by the 'wholesale merchant' registration ground. Under the new law, indirect marketing sales will be treated as what they are: a class of retail sale that will be a separate assessable dealing and which will give rise to a separate registration entitlement. As with Registration Ground 2, there will be no business test for the corresponding assessable dealing. [subparagraph 78(1)(b)(ii)]

13.12 Registration Ground 4: Sales of goods for use by the purchaser as raw materials: Under the existing law, a sale of goods to a manufacturer for use as raw materials is treated as a wholesale sale of goods. Consequently, a person making sales of this kind has a registration entitlement under the existing law. Under the new law such a sale will not be a wholesale sale (see paragraph 5.22). To ensure that such persons have a registration entitlement, a separate ground for registration for them will be created. [subparagraph 78(1)(b)(iii)]

13.13 Registration Ground 5: Retail sales to eligible Australian or foreign travellers: This is a new class of assessable dealing. It is part of the new arrangements proposed for exempting retail sales of assessable goods to eligible Australian or foreign travellers in accordance with the prescribed rules for export sales. This registration ground will enable retailers who satisfy the conditions set out in the prescribed rules for export sales to become registered. There will also be a new quotation ground which will enable them to quote their registration number for acquisitions of goods to be sold to eligible travellers in accordance with the prescribed rules. As a general rule, retailers will not be entitled to hold tax free stock (although there will be exceptions, e.g. indirect marketers). [paragraph 78(1)(c)]

13.14 Registration Ground 6: Selected business inputs exemption Items: In order to satisfy this registration ground the applicant must do things, in the course of carrying on a business, that would have satisfied an exemption [R] Item i.e. an exemption Item that is limited to registered persons. [clause 5, definition of 'exemption [R] Item']

13.15 This ground will be wide enough to cover 2 classes of person:

(i)

persons who in any event will be entitled to registration under Registration Ground 1 (manufacture);

(ii)

persons who carry out activities on behalf of manufacturers but the activity they carry out is part only of the production process.

It is the second class of persons who will take advantage of this registration ground.

13.16 The applicant must be able to satisfy all of the requirements of an exemption Item marked [R], except for the requirement that they be registered.

Example:

Exemption Item 18 is marked [R] and allows an exemption for goods for use in applying a process or treatment to raw materials to be used in manufacturing assessable goods. Carrying out such an activity does not of itself amount to manufacture and would not entitle a person to registration under Registration Ground 1. However, this ground will allow a person who carries out these activities to be registered.

13.17 Registration not limited: The new legislation is not drafted on the basis that registration is confined to a particular activity or business. Once registered, a person has the status of a registered person for all purposes, activities and businesses including those unrelated to the basis for registration.

13.18 Grounds for refusal to register and cancellation of registration: The following table summarises the circumstances in which the Commissioner may refuse to register a person or may cancel a person's registration:

13.19 Objections: A person who has been refused registration or who has had their registration cancelled by the Commissioner will be able to object against the decision of the Commissioner in the manner set out in Part IVC of the Taxation Administration Act 1953. [subclauses 79(2) and 80(3)]

13.20 Notification requirements: A registered person must notify the Commissioner within 21 days of a change of address, or their failure to satisfy a registration ground. [clause 81]

C. Summary of Main Changes

13.21 The main changes to the existing law proposed by the measures discussed in this chapter are summarised below.

D. Transitional Arrangements

13.22 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be special transitional rules for people who are registered immediately before the first taxing day.

13.23 Registrations: The new law will maintain the registration of persons who are registered under the existing law immediately before the first taxing day. However, it will not provide any special entitlement to registration if, on the first taxing day, the registered person does not satisfy any of the grounds for registration under the new law. Consequently, the Commissioner may cancel any person's registration if that is the case. To enable the Commissioner to de-register persons who are not entitled to registration under the new law, persons registered under the existing law who have no entitlement to registration on the first taxing day will be required to notify the Commissioner of that fact within 21 days after that day. [clause 10 Sales Tax Amendment (Transitional) Bill 1992]

Quoting - General

A. Introduction

14.1 This chapter describes the general rules relating to quoting. The matters discussed in this chapter are dealt with in Part 7 of the Sales Tax Assessment Bill 1992. The grounds upon which a quote can be made are set out in Chapter 15.

14.2 Chapter 8, Exemptions, should be read before commencing this chapter.

B. Explanation and Commentary

What is quoting?

14.3 Quoting is a mechanism to relieve or defer tax on goods to a later assessable dealing, or to give effect to a complete exemption from tax for those goods. Quoting can have different effects, depending upon the circumstances:

(i)

a quote will allow an exemption on an assessable dealing;

(ii)

a quote will allow a vendor of goods who has already borne tax on those goods to sell them for a tax-exclusive price - the vendor would then be entitled to a refund from the Commissioner of the tax excluded from the sale price;

(iii)

a quote, or an entitlement to quote, will be a key pre-condition to several of the grounds for credits under the new law;

(iv)

a quote will impose a liability to tax on the quoter for any retail sale or application to own use of those goods (as assessable dealings with goods obtained under quote - ADs 2b, 3c, 12b and 13c), unless an exemption applies to that later dealing.

When will quoting be allowed?

14.4 Broadly, there will be four conditions governing when, and if, a person can quote, all of which must be satisfied:

Condition 1: A person can only quote for a sale or delivery of customer's materials goods, or a customs dealing (i.e. local entry or removal from a customs clearance area);

Note:

Quoting will not be available for an application to own use (because there would be no-one to quote to).

Condition 2: The quoter must be:

(i)

in the case of a sale - the purchaser;

(ii)

in the case of a delivery of customer's materials goods - the customer and not the deliveree, if a different person);

(iii)

in the case of a customs dealing - the person who makes the local entry or removes the goods from the customs clearance area

Condition 3: The quote must be made at or before the time of the dealing, and in the form and manner approved by the Commissioner;

Condition 4: The quoter must intend to satisfy one of the specified grounds for exemption applicable to the quoter's type of quote. Alternatively, the quoter makes the quote in special circumstances authorised by the Commissioner.

Types of quoting

14.5 There will be two types of quoting:

(i)

quote of a registration number by a registered person; and

(ii)

quote of an exemption declaration by an unregistered person. [clause 5, definition of 'quote']

14.6 Different rules and different quoting grounds will apply for each type of quote.

Quoting a registration number

14.7 As described in Chapter 13, each registered person will be allocated, on registration, their own separate registration number by the Commissioner of Taxation. The quote of a registration number will be essentially no more than that: the quoter will notify the other party to a dealing that the quoter is the holder of a particular registration number (which they will cite), and that the number is being quoted in respect of the particular dealing. [subclause 86(1)]

The grounds for quoting a registration number are set out in Chapter 15.

14.8 Quoting a registration number not compulsory: Under the new law, quoting a registration number will be optional. Registered persons entitled to quote their registration number may choose not to quote. This represents a change from the existing law, under which quoting is compulsory for registered persons. The reason for the change is that there is insufficient reason to continue to impose an offence of failure to quote. Optional quoting is linked to optional registration (see Chapter 13).

Quoting an exemption declaration

14.9 An exemption declaration will be a written statement given by a party to a dealing declaring that the giver (i.e. the quoter) intends to satisfy one of the quoting grounds set out in the law for exemption declarations. [clause 5, definition of 'exemption declaration' and subclause 86(1)]

The grounds for quoting an exemption declaration are set out in Chapter 15.

Restrictions on quoting

14.10 A registered person will not be entitled to quote an exemption declaration. An unregistered person will not be entitled to quote a registration number. [clause 87]

Effects of incorrect quoting

14.11 There are a number of situations in which a person may incorrectly quote. These are:

(i)

a registered person quotes an exemption declaration;

(ii)

an unregistered person purports to quote a registration number;

(iii)

a person quotes, but there is no entitlement to quote;

(iv)

a person quotes other than in accordance with the form and manner approved by the Commissioner (or the quote occurs after the dealing time);

(v)

a person makes a quote that is false or misleading.

14.12 The effects of a quote in any of these circumstances are:

(i)

the person will be treated as having acquired the goods under quote. Consequently, any sale or AOU by the quoter with the goods will be an assessable dealing; [paragraph 88(a)]

(ii)

if the supply of goods is an assessable dealing, the person receiving the quote (the supplier) will not be liable to tax. However, the supplier will not be exempted from liability if the supplier had reasonable grounds for believing that the quote was ineffective; [paragraph 88(b) and clause 89]

Note:

If the quote was made to a supplier of tax-paid goods, the supplier will be entitled to a credit for any tax excluded from the sale price as a result of the quote, unless the supplier had reasonable grounds for believing that the quote was ineffective. [CR8 and clause 89]

(iii)

if the supplier had reasonable grounds. or believing that the quote has been incorrectly made the quote will not exempt the supplier from liability on the dealing. Alternatively, if the supply of goods is from tax-paid stock (and is not an assessable dealing), the supplier will not be entitled to a credit on the supply; [clause 89]

Note:

In this case, a supplier may still be entitled to a credit if the supplier can establish that the quote was in fact a fully effective quote (i.e. a quote that is effective without the assistance of clause 88). [CR3]

(iv)

in any case where a person incorrectly quotes, they will also be guilty of an offence of improper quoting. [clause 91]

14.13 Reasonable grounds: A quote will not be effective if the person receiving the quote has reasonable grounds for believing any of the things set out in paragraph 4.11. This is an objective test. The only relevant consideration is whether or not there are reasonable grounds for the quotee to believe that the quote is improperly made. This means that the provision may apply even where the quote has in fact been made correctly. If that happens the person receiving the quote will be entitled to a credit for any tax paid, but excluded from the sale price on the strength of the quote. [CR3]

Example:

Reasonable grounds exist for believing that a quote is improperly made. Despite being fully aware of these grounds and believing the quote to be made improperly, a person accepts the quote. However, contrary to the person's belief, the quote was properly made. The quote will nevertheless be ineffective (although the quotee will be entitled to a credit under Credit Ground 3). [clause 89]

C. Summary of Main Changes

14.14 The main changes proposed to the existing law which are discussed in this chapter are:

D. Transitional Arrangements

14.15 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision for references in the new law to goods obtained under quote.

14.16 Goods obtained under quote: A key concept of the new law is 'obtaining goods under quote'. It is an element of several assessable dealings and of several credit grounds. The term is defined in the new law to mean a quote of:

•

an exemption number by a registered person; or

•

an exemption declaration by an unregistered person.

'Exemption number' and 'exemption declaration' are new concepts. In the existing law, the equivalent concept to quoting an exemption number is the quoting of a certificate of registration. There is no equivalent, in the existing law, to the quotation of an exemption declaration, although there are administrative arrangements in place which are broadly similar.

14.17 In the absence of a special provision, a person who obtained goods before the first taxing day by quoting a certificate of registration would not be taken to have obtained the goods under quote for the purposes of the new law. As a consequence, a sale or application to own use of those goods after the first taxing day would not be taxable under either the new or the existing law. In order to prevent this from happening, there will be a special provision in the new law which will treat goods obtained under quote of a certificate of registration under the existing law as obtained under quote for all purposes of the new law.

Example:

Company X purchases goods before the first taxing day and quotes its certificate of registration. After the first taxing day, X sells the goods by retail.

Result: The retail sale of the goods will be an assessable dealing by X (a retail sale of goods obtained under quote - AD2b).

Quoting - Grounds

A. Introduction

15.1 This chapter describes the general grounds on which a person may quote in respect of an assessable dealing. The grounds for quoting are dealt with in Part 7 of the Sales Tax Assessment Bill 1992. This chapter includes the grounds for quoting a registration number , and the grounds for quoting an exemption declaration .

B. Explanation and Commentary

Different types of quotation

15.2 There will be 2 types of quoting under the new law:

(i)

quote of a registration number by a registered person;

(ii)

quote of an exemption declaration by an unregistered person.

There will be different grounds for each type of quoting.

Grounds for quoting a registration number

15.3 There will be 8 general grounds for quoting a registration number. The grounds will apply if the quoter intends to:

Ground 1: sell the goods by wholesale or indirect marketing sale

Ground 2: sell the goods by any kind of sale, and the quoter is mainly a wholesaler

Ground 3: sell the goods to any registered person who quotes

Ground 4: sell the goods to a particular unregistered person who quotes an exemption declaration

Ground 5: sell the goods, and the goods will be exported

Ground 6: lease the goods in exempt circumstances

Ground 7: use the goods so as to satisfy an exemption Item

Ground 8: use the goods as a container for goods to be exported [clause 82]

15.4 Quotation Ground 1: The quoter intends to sell the goods by wholesale or indirect marketing sale. [paragraph 82(1)(a)]

Coverage: This ground will apply to any person who wishes to acquire goods for wholesale sale or indirect marketing sale, regardless of whether they sell goods mainly by wholesale or retail. As the wholesale sale will be an assessable dealing the purpose of the ground is to defer sales tax to that point.

Change: No substantive change. Under the existing law indirect marketing sales are deemed to be wholesale sales, and indirect marketers are deemed to have quoted their certificate in certain circumstances. This ensures that the taxing point is not pushed back to a point prior to the indirect marketing sale. This quoting ground merely reflects the fact that, under the new law indirect marketing sales will be a separate registrable activity and a separate assessable dealing. This is discussed further at paragraphs 7.19-7.20 and paragraph 13.11.

15.5 Quotation Ground 2: The quoter intends to sell the goods by wholesale or retail, and the quoter is mainly a wholesaler. [paragraph 82(1)(b)]

Coverage: A person will be 'mainly a wholesaler' if they make wholesale sales or indirect marketing sales (or both) and those sales account for more than 50% in value of all the persons sales. The person will have the option of determining whether this test is met over the 12 months before the time of the quotation, or is reasonably likely to be met over the next 12 months. The value of the goods will be the amount for which they are sold. [subclause 82(2)]

Change: No change.

15.6 Quotation Ground 3: The quoter intends to sell the goods to any registered person who quotes. [paragraph 82(1)(c)]

Change: No direct change. This ground will not extend the circumstances in which a registered person can quote for goods for retail sale to another registered person. However, under the existing law, the second registered person can only quote for goods for use as aids to manufacture, auxiliaries to aids to manufacture and eligible business goods. Proposed Quoting Ground 6 will extend the second registered person's quoting ground to include any situation where the quoter intends to satisfy an exemption Item in respect of the goods.

15.7 Quoting Ground 4: The quoter intends to sell the goods to a particular unregistered person who quotes an exemption declaration. [paragraph 82(1)(d)]

Coverage: The purpose of this quotation ground is to allow (registered) persons to acquire goods tax-free for sale to persons who will use them in circumstances which will satisfy an exemption Item. But for this ground, a person would not be entitled to quote in respect of specific goods for retail sale to an unregistered exempt end-user, such as a Government department.

Change: This is a new quoting ground in that the existing law does not allow for the quoting of exemption declarations (i.e. quoting by unregistered persons).

15.8 Quoting Ground 5: The quoter intends to sell the goods, and the goods will be exported. [paragraph 82(1)(e)]

Coverage: This ground will allow a person to quote for goods, if those goods are intended for sale in circumstances that will qualify the goods for exemption under the export exemptions in clause 30. That is if the goods are intended for sale and:

(i)

the contract of sale requires the seller to export them;

(ii)

the purchaser intends to export the goods; or

(iii)

the sale is in accordance with the prescribed rules for export sales.

15.9 Quoting Ground 6: The quoter intends to lease the goods in exempt circumstances. [paragraph 82(1)(g)]

Coverage: This quoting ground will ensure that a lessor who will be leasing goods in circumstances that would qualify the lease AOU for exemption, will be able to quote on those goods (see paragraphs 8.14-8.16, 8.44 and Chapter 19). The quoter must intend that the goods will be leased under an eligible long-term lease, or that they will be exported by the lessor or the lessee before they are used.

15.10 Quoting Ground 7: The quoter intends to use the goods so as to satisfy an exemption Item that is in force at the time of quoting. [paragraph 82(1)(f)]

Coverage: The quoter must intend that the goods will be dealt with by the quoter so as to satisfy an exemption Item in force at the time of the dealing. As explained in Chapter 8 (Exemptions), quotation on the basis of this ground will only be allowed if:

(i)

the quoter has the intention to satisfy the exemption Item throughout the statutory period (see paragraphs 8.10-8.11); and

(ii)

it will be the quoter's use, and not the use of some other person, which will satisfy the exemption.

Example:

Z is part of a company group that comprises companies X, Y and Z . There is an exemption Item for machinery for use for the bulk handling of grain. Z quotes on goods that will be used exclusively by X, Y and Z in equal proportions for the bulk handling of grain throughout the statutory period.

Result: Z is not entitled to quote and will be liable to tax on the first AOU of the goods. The exemption requires that more than 50% of the use is by the quoter, Z.

15.11 Quoting Ground 8: The quoter intends to use the goods as a container for goods to be exported. [paragraph 82(3)(b)]

Coverage: The quoter must have the intention to use the goods as a container for assessable goods that will be exported in the container. In situations where the contents are owned by another person, the packer must have an expectation (rather than an intention) that the goods will be exported. A typical example would be a contract packer.

Comparison of new and existing quoting grounds for registered persons

15.12 The new grounds for quoting a registration number will cover the existing quoting grounds contained in Sales Tax Regulations 12(1)(a)-(ea), 12(3)-(5) and 14(1). The remaining existing quoting grounds that are not covered by the new registration quoting grounds are noted below. The reasons they are not covered by the new quoting grounds are also given.

15.13 Regulation 12(1)(f): This regulation was introduced to operate with previous exemption item 132 which has since been omitted. It has no significant application in the existing law.

Reason: This quoting ground is obsolete.

15.14 Regulation 12(1)(g): This regulation applies to goods for use as raw materials by persons who are manufacturers but who, because they manufactured goods from materials supplied by a customer who requires them for resale, are deemed not to be manufacturers.

Reason: Under the new law, those persons will be treated as manufacturers and will be able to quote under the several rules for manufacturers.

15.15 Regulation 12(1)(h): This regulation covers goods for sale by persons who are 'deemed manufacturers' under the existing law.

Reason: As a consequence of the change to the deemed manufacturers provisions in the existing law, this ground is no longer necessary.

15.16 Regulation 12(2): Regulation 12(2) covers containers for goods for which a person has quoted.

Reason: There will be a different mechanism under the new law for taxing containers. Consequently, there will be new quotation and exemption grounds. [subclauses 82(3), 83(2) and clauses 30, 31]

15.17 Regulation 14(2): Under Regulation 14(2) the Commissioner of Taxation has a discretion to permit a person to quote in certain circumstances.

Reason: Under the new law, the Commissioner will be given a wider discretion to permit a person to quote in special circumstances in which the person would not otherwise be entitled to quote [clause 84]

Grounds for quoting an exemption declaration

15.18 There will be 5 general grounds for quoting an exemption declaration. The grounds will apply if the quoter intends to:

Ground 1: use the goods so as to satisfy an exemption Item

Ground 2: sell the goods to a purchaser who will quote on the purchase

Ground 3: sell the goods, and the goods will be exported

Ground 4: lease the goods in exempt circumstances

Ground 5: use the goods as a container for assessable goods which will be exported [clause 83]

15.19 Quoting Ground 1: The quoter must intend that the goods will be dealt with by the quoter so as to satisfy an exemption Item in force at the time of the dealing. This is the same as Quoting Ground 7 for registered persons (paragraph 15.10). However, unregistered persons will not be permitted to quote for business input exemption Items marked [R]. [paragraph 83(1)(a)]

15.20 Quoting Ground 2: The quoter must have the intention of selling the goods to a particular person who will quote in respect of the sale. It will not be sufficient for the quoter merely to intend to hold the stock tax-free for sale only to quoting purchasers. The quoter must, at the quoting time, intend to sell only to a particular purchaser who is identified at that time. The purchaser can either be a registered person quoting a registration number or an unregistered person giving an exemption declaration. [paragraph 83(1)(b)]

15.21 Quoting ground 3: The quoter intends to sell the goods, and the goods will be exported. This ground will also require that it be a term of the contract of sale that the seller export the goods while they are still assessable goods. [paragraph 83(1)(d)]

15.22 Quoting Ground 4: The quoter intends to lease the goods in exempt circumstances. This quoting ground will ensure that a lessor who will be leasing goods in circumstances that would qualify the lease AOU for exemption, will be able to quote on those goods (see paragraphs 8.14-8.16, 8.44 and Chapter 19). The quoter must intend that the goods will be leased under an eligible long-term lease, or that they will be exported by the lessor or the lessee before they are used. [clause 83(1)(c)]

15.23 Quoting Ground 5: The quoter must have the intention to use the goods as a container for assessable goods that will be exported in the container. [subclause 83(2)]

Containers

15.24 Once goods have been applied to own use (AOU) as a container they are no longer assessable goods. However, there is an exception to this. The packing of goods in bond does not result in the container being applied to own use. After packing the container is still assessable goods. If this occurs a quote made for the contents will also apply to the container. Containers are discussed in more detail in Chapter 20. [clause 5, definition of 'application to own use' paragraph (h) and clause 90]

Additional quoting ground

15.25 A person may also quote in circumstances that fall outside the quoting grounds discussed above if the person has received special authorisation from the Commissioner.

15.26 The Commissioner will have a discretion to allow quoting in 'special circumstances'. The discretion allows the Commissioner to authorise a registered person to quote a registration number, or an unregistered person to quote an exemption declaration, in special circumstances in which the person would not otherwise be entitled to quote. [clause 84]

Monthly quoting

15.27 The Commissioner will have a discretion to allow a registered person to quote monthly for purchases that the registered person proposes to make from another registered person. The Commissioner's approval must be obtained in writing. The approval allows a person to quote once, on or before the first day of the month, and they will thereafter be taken to have quoted in respect of all purchases from the supplier during that month, unless they notify the supplier otherwise. [clause 85]

C. Summary of Main Changes

15.28 The main changes proposed to the existing law which are discussed in this chapter are:

Avoidance Schemes and Penalties

A. Introduction

16.1 This chapter discusses the special provision that will apply to deal with schemes designed to avoid tax. It will be known as the general anti-avoidance provision. This chapter will also discuss the special provision designed to deal with situations where a person's liability to tax (or exemption from tax) is affected by arrangements that the person has entered into with other persons otherwise than at arms length. These matters are dealt with in Parts 8 and 9 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

The general anti-avoidance provision

16.2 The existing law contains a number of specific anti-avoidance provisions. They suffer from two drawbacks. First they do not cover the field of avoidance schemes. Instead, they are limited by the policy maker's knowledge of the schemes being developed and are a re-active and untimely response to the problem of avoidance. Second the provisions are complex. The new law will replace the specific anti-avoidance provisions with a single general provision.

16.3 The general anti-avoidance provision (the 'GAAP' ) is based, broadly, on Part IVA of the Income Tax Assessment Act 1936. As with Part IVA, the GAAP is designed to apply in situations where, on an objective view of the particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of obtaining a tax benefit. In the sales tax context, a tax benefit will be defined to mean either a reduction in a tax liability or an increase in an entitlement to a credit.

16.4 Obtaining a tax benefit under a scheme: This will be the central element of the GAAP. The provision will not apply unless a taxpayer has obtained a tax benefit under a scheme.

16.5 Definition of tax benefit: 'Tax benefit' will mean either of the following:

(i)

a reduction in liability to tax; [clause 5, definition of 'reduce']

Note:

This will include obtaining an entitlement to an exemption which would not have been available but for the scheme.

(ii)

any increase in entitlement to a credit. [clause 5, definition of ' increase']

Note:

This will include obtaining an entitlement to a credit which would not have been available but for the scheme.

16.6 Definition of scheme: 'Scheme' has been defined broadly, so as to cover the widest variety of conduct or omission in which tax avoidance arrangements may be found. It includes arrangements that are not legally enforceable as well as unilateral courses of conduct.

16.7 Limitations on the operation of the GAAP: There are two conditions that must be satisfied before a taxpayer will be taken to obtain a tax benefit under a scheme. These are:

(i)

It must be established that the taxpayer would not have obtained the benefit if the scheme had not been entered into;

Note:

This test will be satisfied if it could reasonably be expected that the benefit would not have been obtained if the scheme had not been entered into. In determining whether that reasonable expectation exists, the new law will allow consideration to be given to all relevant matters including things that did not happen, but which could reasonably be expected to have happened if the scheme had not been entered into.

(ii)

It must be reasonable to conclude that the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit for a taxpayer.

Note 1:

This is an objective test. It must be based on an objective consideration of relevant circumstances. The actual purpose for which a person may have entered into the scheme is not relevant.

Note 2:

'Dominant purpose' has been defined to clarify that, if there is more than one purpose, then the tax avoidance purpose must be the dominant purpose when measured against each of the other purposes. However, it does not have to be greater than the aggregate of all the non-tax avoidance purposes in order for the GAAP to apply.

Note 3:

The actual purpose for which a person enters into a scheme will not be relevant to determining whether the GAAP will apply. This will re-inforce the objective nature of the test. [clause 93]

16.8 While the conditions that establish whether or not a person has obtained a tax benefit will be objective, the GAAP will be a discretionary provision. There will be no compulsion on the Commissioner to apply the test in particular cases.

Effect of applying the GAAP

16.9 Determinations by the Commissioner: In applying the GAAP to cancel a tax benefit, the Commissioner will be authorised to make a number of determinations. These will be:

•

a determination that particular things are to be treated as not having happened;

•

a determination that particular things are to be treated as having been done by different persons or at different times;

•

a determination that particular things which did not happen are to be treated as having happened and to have been done by a particular person or at a particular time.

16.10 If the GAAP is applied and an entitlement to a credit is cancelled, then the amount that becomes payable is to be treated as an amount of tax. This will ensure that the provisions of the Assessment Bill dealing with recovery of unpaid tax will apply to these amounts.

16.11 Any amount that becomes payable because of an assessment made under the GAAP will be due for payment by the date specified in the assessment. That date must be no less than 14 days after the issue of the assessment.

16.12 Application of the GAAP: The GAAP will only apply to schemes that were entered into, or commenced to be carried out, after the date on which the new law is introduced into the House of Representatives. This will ensure that the provision is not retrospective in its application.

16.13 The GAAP will replace the specific provision in the existing law which is directed towards schemes involving the sale of goods under option arrangements and service company arrangements where an associated company of the taxpayer supplied services in relation to the goods with the object of reducing the taxable value of the goods. With these kinds of schemes the dominant purpose was to reduce the taxable value of goods. The GAAP will therefore catch these schemes. [clause 92]

Penalty

16.14 If the Commissioner applies the GAAP to cancel a tax benefit, the new law will apply an automatic penalty of double the amount of the tax benefit i.e. 200%. The Commissioner may, however, remit all or any of the penalty. The remission may be made either before or after the penalty is imposed. [clauses 98 and 100]

Special provision for non-arm's length transactions

16.15 There will be a special provision in the new law to prevent a tax benefit from being obtained by being a party to a non-arm's length transaction. Two conditions that must be established in order for the provision to apply are:

(i)

a taxpayer (or an associate of the taxpayer) must have been a party to the non-arm's length transaction; and

Note:

Non-arm's length transaction will not be defined.

(ii)

if the transaction had been at arm's length, then either the taxpayer's liability to tax would have been increased or an entitlement to a credit would have been reduced.

Note:

The second condition will be satisfied if it would be reasonable to expect that the liability or entitlement would have been different had the transaction been at arm's length. Moreover, the liability or credit entitlement can relate to any transaction, not just the non-arm's length transaction.

16.16 If both these conditions are satisfied, then the taxpayer's liability to tax, or entitlement to a credit, will be assessed on the basis of the liability or credit that would have applied if the transaction had been an arm's length transaction. [clause 94]

16.17 The non-arm's length provision will replace the provisions in the existing law relating to non-arm's length transactions. These cover:-

(a)

sales between parties where the sale is not made at arm's length.

Note:

The parties may be at arm's length but if the sale is not - that is the sale is made at deflated value - then the sale transaction is caught.

(b)

where a person has a liability on the application of goods to own use - because the goods have been acquired under quote - and has purchased the goods at a non-arm's length price.

(c)

where a person manufactures goods for another person and that person has supplied materials at a depressed price to the manufacturer. The manufacturer then in turn sells the made-up goods either direct to the person who supplied the materials or through another person to the supplier of the materials.

16.18 In all of these situations the relevant provisions do not come into operation until the Commissioner makes a finding that the Commissioner is satisfied that the goods have not been sold at arm's length.

16.19 The new law will cover all of these situations. It is expressed in terms that will cover any transaction that results in goods being sold for a non-arm's length price.

Example:

A person purchases goods at a non-arm's length price under quote. The goods are then sold to an arm's length party at a deflated value because of the low purchase price. The later sale is caught because it is linked to a non-arm's length transaction.

16.20 The new arm's length provision will also operate automatically without the need for the Commissioner to exercise any discretion. The parties to a transaction will be required at all times to ensure that goods are sold at an arm's length price. Where the goods are not sold at an arm's length price the law will operate to apply an arm's length price to the sale or other taxable dealing.

Liability for a non-arm's length dealing

16.21 A taxpayer who has dealt with goods at a non-arm's length price will be liable to pay the tax underpaid from the time payment for tax is due on the dealing, i.e. 21 days after the end of the month or quarter in which the dealing was made.

Penalty

16.22 A taxpayer who does not correctly account for tax on a non-arm's length dealing will be liable to a penalty on the basis of having lodged a false or misleading statement. The taxpayer will also be liable to a late payment penalty on the underpaid tax from the time of lodgment of the return containing details of the non-arm's length dealing.

Penalties in general

Failure to provide return or other information

16.23 A taxpayer who fails to provide a return or other information that is required to be provided under the sales tax law will be liable to a penalty. The penalty will be 200% of the tax payable on any assessable dealings involved with the failure to lodge returns or the relevant information. [clause 96]

False statements

16.24 A penalty will apply to a person who makes a false statement to a taxation officer or another person for a purpose relevant to the sales tax law and as a result of that statement, tax is underpaid. The penalty is 200% of the underpayment. It will not matter if the person making the false statement does not know it is false. The penalty applies if it is simply a false statement.

16.25 A false statement is one that is false or misleading in a material particular or omits a material particular.

16.26 A reference to a taxation officer means a person who is exercising powers or performing functions in connection with the sales tax law. [clause 97]

Remission of penalty

16.27 If the law imposes a penalty on a person for failure to provide a return or other information or for making a false statement, the Commissioner will be authorised to remit all or any of the penalty imposed. The remission may be made before or after the penalty is assessed. [clause 100]

C. Summary of Main Changes

16.28 The main changes to the existing law discussed in this chapter are:

Administration

A. Introduction

17.1 This chapter covers a number of matters relevant to the administration of sales tax and protection of taxpayers' rights. It deals with the following topics:

•

Assessments

•

Objections

•

Collection of Information

•

General Administration

These matters are dealt with in Part 10 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

Assessments

17.2 In the new law it will be specified that both a taxpayer's liability to sales tax, and the due date for payment of the tax, will arise independently of the making of an assessment. [subclause 103(1)]

Exception: This principle will not apply to an amount payable under the general anti-avoidance provisions. These amounts will not be due for payment until the date stated in a notice of assessment. [subclause 103(2)]

Note:

This is the practical effect of the existing law.

17.3 General power to issue assessments: Sales tax will be a self-assessing tax and taxpayers will be obliged to pay tax without the issue of an assessment. However, in certain situations it will be necessary for the Commissioner to issue assessments. The Commissioner will be able to make assessments at any time in respect of tax payable in relation to any assessable dealing or dealings. [clause 5, definition of 'sales tax' and clause 101]

17.4 Second Assessments: The Commissioner will also be able to make second assessments, as opposed to amended assessments, in respect of dealings which have already been the subject of an assessment. If the Commissioner does make a second assessment, the later assessment will prevail. [clauses 101 and 106]

Exception: The Commissioner will not be able to make second assessments for amounts payable in respect of the cancellation of a tax benefit under the anti-avoidance provisions.

Note:

This is a change from the existing law, to will give the Commissioner flexibility. A sales tax assessment might only deal with one assessable dealing out of all the taxpayer's assessable dealings in a month or quarter and the Commissioner may later wish to issue an assessment for a taxpayer's total liability for that month or quarter, which would cover the dealing for which an assessment has already issued. This will not result in double tax on that dealing because the first assessment will be subsumed by the second and will no longer be of any effect.

17.5 Deceased taxpayer - trustees: The Commissioner will also have power to issue assessments after a taxpayer has died. If tax is unpaid at the time of a taxpayer's death, or has not been assessed, and a trustee of an estate fails to lodge a return or other information, the Commissioner will be able to make an assessment in relation to the deceased taxpayer. 'Trustee' in this context will include an executor, administrator or other personal representative of a deceased person. [clause 5, definition of 'trustee' and subclause 72(4)]

17.6 Deceased taxpayer - unadministered estates: Where probate of a taxpayer's will or letters of administration of the taxpayer's estate have not been granted within 6 months after a taxpayer's death, the Commissioner will be able to make an assessment in relation to the deceased taxpayer. The Commissioner will have to publish notice of the assessment twice in a daily newspaper circulating in the State or Territory in which the taxpayer lived. [clause 73(2)]

17.7 When assessments must be issued: In addition, there will be circumstances in which the Commissioner will be required to issue an assessment. These will be:

•

when a taxpayer makes a written request for an assessment in respect of a particular dealing on which tax may be payable by the taxpayer;

•

when a penalty for non-compliance under Part 9 of the Bill is payable; and

•

when the Commissioner cancels a tax benefit that a taxpayer would have obtained under an avoidance scheme.

These circumstances are discussed in greater detail in the following paragraphs.

17.8 Written request for assessment: With regard to a taxpayer's written request for an assessment in respect of a specific dealing, the Commissioner will be required to issue the assessment to a quarterly remitter if the quarterly remitter lodges the request within 21 days after the close of the quarter (or such further time as the Commissioner allows) in which the dealing occurred. If the taxpayer is not a quarterly remitter, the Commissioner will be required to issue the assessment if the taxpayer has lodged the request for the assessment within 21 days after the end of the month (or such further time as the Commissioner allows), in which the dealing occurred. [clause102]

17.9 Assessment of penalties for non-compliance: The Commissioner will be required to issue assessments for penalties which are payable for non-compliance under Part 9 of the Bill. The penalty will become due for payment on the date stated in the notice of assessment, which date must be at least 14 days after the day on which the assessment was issued. Part 9 is further discussed in Chapter 16, 'Avoidance Schemes and Penalties'. [clause 99]

17.10 Anti-avoidance provisions: The cancellation of a tax benefit under the anti-avoidance provisions in Part 8 of the Bill will be done by means of the making of an assessment. The making of the assessment will play an essential part in the process of applying those provisions. In these cases, the amount payable will become due for payment on the date specified in the assessment. That date will also be required to be also be at least 14 days after the day on which the assessment was issued. Part 8 is discussed in more detail in Chapter 16, 'Avoidance Schemes and Penalties'. [clause 92]

17.11 Notices of assessment: The Commissioner will be required to give a taxpayer written notice of an assessment as soon as possible after it is made. Failure to give the notice will not invalidate assessments, however, with regard to assessments of penalty for non-compliance and amounts payable under the anti-avoidance provisions, the penalty or amount payable will not become due and payable unless a notice is issued. Notices of assessment for amounts payable under the anti-avoidance provisions or penalties for non-compliance will be able to be included in other notices of assessment for the same person. [clauses 92, 99 and 105]

17.12 Amended Assessments: The new law will specify that the Commissioner has the power to amend assessments. This power is implied under the existing law. [clause 104]

17.13 Assessment defined: 'Assessment' will be an assessment made under clauses 92, and 99, and Division 1 of Part 10. The definition will be included in the new law as a convenient means of applying objection and evidentiary provisions to all assessments. [clause 5, definition of 'assessment']

Objections

17.14 The new law will contain provisions which will allow taxpayers or in some cases, other persons, to contest assessments and certain other decisions of the Commissioner by way of objection. An objection is a written request to the Commissioner for him to review assessments or certain specified decisions.

17.15 The actions of the Commissioner which will be able to be challenged by way of objection are:-

•

assessments; [clause 107]

•

Commissioner's decisions on claims for credits; [subclause 60(2)]

•

Commissioner's decision to refuse to register an applicant; and [subclause 79(2)]

•

Commissioner's decision to cancel a person's sales tax registration. [subclause 80(3)]

Note 1:

There will be no right to object against decisions concerning security for registration because the Commissioner will no longer have the power to ask for security. Similarly, there will be no right to object against decisions about prohibition of quotation because there will be no equivalent provision in the new law.

Note 2:

It will no longer be necessary to have applied for a credit within 60 days or 120 days (if the applicant is a quarterly remitter) of the claim for the credit arising in order to lodge an objection against a credit decision. Since the Commissioner frequently grants extensions of time for lodging the applications under the existing law, the 60 day and 120 day time-limits will be removed.

17.16 The procedures which a taxpayer or other person will have to follow to lodge an objection (and the Commissioner's duties in relation to objections) are set out in Part IVC of the Taxation Administration Act 1953.

17.17 Who can object? With regard to assessments, the taxpayer will be the person who is entitled to object. If the taxpayer has died and an assessment has been issued under clause 72 (see paragraph 17.5), a trustee of the estate will be able to object against the assessment. A person who claims an interest in a deceased taxpayer's estate or a person who has been granted probate of a will or letters of administration of an estate will be able to object against an assessment made under clause 73 (see paragraph 17.6). With regard to decisions to refuse to register an applicant or to cancel a person's sales tax registration, persons affected by the decisions can object against them. The right to object to these decisions will not be restricted to applicants or persons wanting to be registered.

Collection of Information

17.18 The Commissioner will have powers to compel a person to provide information and to obtain access to premises and documents. These powers will be very similar to powers in the existing law. However, the confidentiality of the information obtained by the Commissioner or his officers will be protected.

17.19 Power to collect Information: The Commissioner will have the power to require a person, by written notice-

•

to provide such information as the Commissioner requires;

•

to attend and give evidence; and

•

to produce documents in the custody or control of the person.

The Commissioner will only be able to use these powers for the purpose of applying the sales tax laws in relation to that person or another person. [subclause 108(1)]

17.20 The Commissioner will be able to require information or answers to questions to be given orally or in writing. The Commissioner will also be able to insist that information or answers to questions be verified or be given under oath or affirmation. Either the Commissioner or an authorised officer will be able to administer the oath or affirmation. The new law will allow for regulations to set out scales of re-imbursement for persons required to attend under these provisions. [subclauses 108(2), (3)&(4)]

17.21 Non-compliance with these provisions will be an offence under the Taxation Administration Act 1953.

17.22 Access: Authorised officers will be able to gain access to premises for the purposes of the sales tax laws. Officers exercising powers under this section will need an authority in writing signed by the Commissioner. 'Authorised officers' will be able to:

•

gain access to any land or premises at all reasonable times;

•

gain full access to documents, goods or other property at all reasonable times;

•

inspect, examine, copy or take extracts from any documents; and

•

inspect, examine, count, measure, weigh, gauge, test or analyse any goods or other property and take samples from them. [subclause 109(1)]

Note:

The access provisions will refer to "other property", that is, property which may not be goods. This will allow inspection of property to determine, for example, whether it is goods.

17.23 'Authorised officer', when the term is used in a particular provision, will be defined to mean a person authorised in writing by the Commissioner to exercise powers or perform functions under that provision. [clause 5, definition of 'authorised officer']

17.24 The occupier of the land or premises will be obliged to provide the officer seeking access with reasonable facilities and assistance. If the occupier does not do so, the occupier will be liable to a penalty of $1,000. On the other hand, an officer will not be entitled to remain on land or premises if they fail to produce their written authorisation when requested to do so. [subclauses 109(2) and (3)]

17.25 Confidentiality: The dissemination of information obtained under the sales laws will be restricted. A person who holds protected information or documents obtained in the course of official employment will be prohibited from making a record of the information or disclosing it to anyone else, except in specified circumstances. There will be a penalty of 2 years imprisonment for a breach of this prohibition.

17.26 Protected information will be information obtained under the sales tax laws by a person acting in the course of official employment and relating to the affairs of another person. Protected documents will be documents made or given under, or for the purposes of, the sales tax laws. Official employment will mean, as well as appointment or employment by the Commonwealth, performance of services for the Commonwealth or the exercise of powers or functions under a delegation by the Commissioner. [subclauses 110(1), (2) and (6)]

17.27 The circumstances in which a person will be able to record or disclose protected information or documents are as follows:-

(a)

the recording or disclosure is for the purposes of the sales tax laws;

(b)

it happens in the course of official employment;

(c)

the person is the Commissioner or a Deputy Commissioner, or a person authorised by the Commissioner or a Deputy Commissioner to disclose the information, and the disclosure is to the Comptroller-General of Customs or to another person carrying out functions under a taxation law;

(d)

the person is the Commissioner or a Deputy Commissioner and the disclosure is to the Administrative Appeals Tribunal in proceedings under a taxation law;

(e)

the disclosure or production of a document is to a court and is necessary to give effect to the sales tax laws. A person acting in the course of official employment will not otherwise be required to produce protected information or documents to a court.

There will be no circumstances in which a disclosure of protected information or documents can be made to a Minister. [subclauses 110(3), (4) and(5)]

17.28 The duties of officers with regard to confidentiality will not be changed by the new law. However, the Commissioner will no longer be specifically empowered to require officers to take oaths of secrecy. The power to administer an oath of secrecy will be unnecessary because officers will have to observe the secrecy provisions described above in any event.

General Administration

17.29 Responsibility for administration: The Commissioner of Taxation, referred to as the Commissioner, will have the general administration of the sales tax laws . [clause 111]

17.30 Annual report: Each year the Commissioner will have to prepare an annual report for the Minister on the working of the sales tax laws. The Minister will have to lay a copy of the report before each House of Parliament within 15 sitting days of that House after the Minister has received the report. The report will have to include information about any breaches or evasions of the sales tax law that the Commissioner knows about. [clause 112]

17.31 Returns and other forms: The Commissioner will have the power to prescribe the format of any return, application, notification or other document to be lodged with the Commissioner. The document will have to contain the information requested in the form, and such further information as is required. The form will have to be lodged in the place and manner that the Commissioner requires. [clause 113]

17.32 Any notice, approval, direction or authority which the Commissioner will be required to give to a person under the new law will have to be in writing. [clause 114]

C. Summary of main changes

17.33 The main changes to the existing law discussed in this chapter are:

Miscellaneous

A. Introduction

18.1 This chapter describes several miscellaneous provisions which will be necessary to enable the new sales tax legislation to operate effectively. The new provisions will have broadly the same effect as those in the existing legislation. These matters are dealt with in Part 11 of the Sales Tax Assessment Bill 1992.

B. Explanation and Commentary

Judicial notice of Commissioner's signature

18.2 The new law will provide that the court must take judicial notice of signatures of the Commissioner, Second Commissioner or a Deputy Commissioner, if that signature appears on any official document in connection with the sales tax law. For the purposes of this clause, "court" will include a tribunal and any judge or person acting judicially and authorised by law to hear evidence. [clause 5, definitions of 'Commissioner', 'Second Commissioner' and 'Deputy Commissioner' and clause 115]

Evidentiary effect of notices of assessment etc.

18.3 Under the new law, the production of a notice of assessment or the making of a credit decision that is signed by the Commissioner, a Second Commissioner or a Deputy Commissioner shall be conclusive evidence that the notice of assessment or credit decision is correct. The clause will also cover associated matters of evidence dealing with production of documents, extracts of documents, certificates and issue of notices in the Gazette. [clause 116]

18.4 There will be no changes to the effect of the existing law under this provision.

Partnerships and Unincorporated Companies

18.5 The existing law enables recovery of sales tax from businesses operated by partnerships or unincorporated companies but is silent on the general application of the sales tax legislation to these kinds of entities. The new law will state that the sales tax law applies to partnerships and unincorporated companies and will include the obligations of partners and, in the case of unincorporated companies, members of the committee of management. It will also provide that if a person is prosecuted for an offence under these provisions, certain defences will be available . [clauses 117 and 118]

Each capacity of trustee treated separately

18.6 The existing law does not deal expressly with persons who act as trustees in more than one capacity. The new law will make it clear that a person who is a trustee in more than one capacity is to be treated as a separate person in relation to each of those capacities. One effect of this rule will be that the same person could be registered several times in respect of different trustee capacities. [clause 119]

Public Officers

18.7 The existing law requires that every company which is a manufacturer or a wholesale merchant must appoint a public officer for sales tax purposes and must also notify the Commissioner of Taxation of that appointment and any subsequent appointments. The public officer is responsible for ensuring that the company meets all its obligations under the sales tax law and is liable if the company defaults on those obligations.

18.8 Under the new law the person appointed as public officer for purposes of the Income Tax Assessment Act 1936, will also be the public officer for sales tax purposes. This will enable the existing provisions to be simplified. Companies will no longer be required to separately appoint public officers for sales tax and income tax purposes.

18.9 The responsibilities of a public officer under the new law will remain the same. The public officer will be responsible for doing everything required to be done by the company under the sales tax law. A proceeding may be brought against the public officer and notices or other documents relevant to the sales tax law may be served on the public officer. [clause 120]

18.10 Under the new law "company" will be defined to include any body or association whether or not it is incorporated. Any unincorporated bodies or associations which are subject to sales tax legislation will satisfy the public officer requirement if they have appointed a public officer for purposes of the Income Tax Assessment Act 1936. [clause 5, definition of 'company' and clause 120]

Directors and Other Officers

18.11 Directors and other company officers will retain the same potential liabilities under the new law as they have under the existing law. If the Commissioner thinks fit, documents may be served upon them and they will have the same liability as the company or its public officer. [clause 121]

Agents and trustees

18.12 The existing law contains provisions dealing specifically with the sales tax obligations of trustees and agents including auctioneers. All agents and trustees are required to comply with the sales tax legislation generally and are personally liable for sales tax payable in their representative capacities. The new law will contain similar provisions. With the exception of auctioneers, the obligations of agents and trustees under the new law will be the same as under the existing law.

18.13 Broadly the obligations of an agent or trustees will be:

(a)

to provide returns and information in relation to assessable dealings;

(b)

to pay tax on the dealings (but be liable only in their representative capacity);

(c)

to retain sufficient money held in a representative capacity to pay any tax due; and

(d)

to be answerable generally for all things required to be done under the sales tax law.

In the new law "agent" will include a person in Australia who manages or controls any business or property for another person who is outside Australia. These agents will have the same obligations under the sales tax law as agents for principals who are in Australia.

18.14 To ensure payment, the Commissioner will have the same remedies against the attachable property under the control of the agent or trustee as he will have against the property of the taxpayer. [clause 5, definition of 'trustee' and clause 122]

18.15 Under the existing law, auctioneers who sell goods on behalf of persons who are registered for sales tax are required to send any tax charged (and a sales tax return) to the Commissioner within 7 days of the sale. Under the new law auctioneers will not be subject to this rule but will have the same obligations as any other taxpayer who is liable to pay tax. Any returns required to be lodged will come within the provisions dealing with general lodgement of returns. Broadly, this means that auctioneers will lodge returns on either a monthly or quarterly basis. (Refer to Chapter 12)

Liquidators and Receivers

18.16 The new law will contain a reorganisation of the provisions dealing with trustees of various kinds including receivers and liquidators. A wider definition of 'trustee' will be included. It will be a slightly modified version of the definition of "trustee" found in the Fringe Benefits Tax Assessment Act 1986. [clause 5, definitions of 'liquidator' and 'trustee']

18.17 The liabilities of receivers and liquidators will be the same under the new law as under the existing law. That is, a liquidator or receiver who takes control of the assets of a company will be required to notify the Commissioner of that fact within 14 days. As soon as practicable the Commissioner will be required to notify the liquidator etc of the amount necessary to set aside to cover sales tax that is payable by the company or may become payable. The liquidator will not be able to part with any assets of the company without the Commissioner's permission but this obligation will not apply to the payment of a debt that is not an ordinary debt. An ordinary debt is an unsecured one that is not required by any law to be paid in priority to the other debts of the company.

18.18 A significant feature of the new legislation will be the inclusion of a simplified formula for use by liquidators in calculating the amount to be set aside out of a company's ordinary debts for the payment of sales tax. The amount to be set aside will be the same as under the existing law.

18.19 The simplified formula will include the expression 'notified other taxes' which means the total of any amounts, other than sales tax, which the Commissioner has notified as being outstanding. These other outstanding taxes and charges are referred to as "prescribed tax" in the existing law. The use of "Notified other taxes" will remove the need for the list of "prescribed taxes" found in the existing law and will save having to continually amend the law because of changes to that list. [clause 123]

Agent winding up business for absentee principal

18.20 The new law will contain a more detailed statement of the sales tax obligations of agents winding up businesses for absentee principals. In the new law the expression 'non-resident' principal will replace 'absentee' principal. The obligations of agents for non-resident principals will basically remain the same as those in the existing law but will be stated in more detail.

18.21 An agent for a non-resident principal will be required to advise the Commissioner within 14 days of being instructed by the principal to wind-up the business. The Commissioner will then be required to advise the agent of any sales tax payable by the principal and the agent will be required to set aside sufficient assets to pay the sales tax. The agent will be liable as trustee to pay sales tax owing by the principal to the extent of the assets that the agent is required to put aside. If the agent, without reasonable excuse, fails to do this, the agent will be personally liable to pay the sales tax and will be guilty of an offence punishable on conviction by a fine of up to $1,000. [clause 124]

Wholesale sales invoices

18.22 The existing law requires that where a taxable wholesale sale is made and an invoice is issued, the taxpayer must show the amount of sales tax on that invoice. The new law will restate this principle. [clause 125]

Records

18.23 The new law will impose record keeping requirements on a person who is the taxpayer for an assessable dealing, or the claimant of a credit. Two significant changes will be made to the provisions concerning the obligations to keep records of sales tax matters. The first will require that there be sufficient records to explain all relevant sales tax transactions and other relevant acts for the purposes of the sales tax legislation. The second will be that the records be in writing in the English language, or be accessible and easily converted into writing in the English language, so that where necessary, a person's sales tax liability can be determined.

The changes will make the record keeping requirements of the sales tax law more consistent with similar requirements in other revenue laws e.g. the Income Tax Assessment Act 1936 and the Fringe Benefits Tax Assessment Act 1986. Records will be required to be kept for 5 years. [clause 127]

Effect of change to sales tax law on contract prices

18.24 The existing law provides that if a change to the sales tax law affects the cost of goods under a contract for the sale of goods or a contract for the construction of a building or other work, the contract price is automatically altered by the difference in the tax payable on the goods as a result of the change unless the contract provides otherwise.

18.25 The new law will be expressed in simpler terms but will have the same effect. The existing requirement for certain contractors to provide written notice of price alterations caused by changes to the sales tax law will be removed. It is an unnecessary requirement. [clause 128]

Example:

Parties make a contract for the construction of a building and agree upon a price for the goods and services required. There are no express or implied terms in the contract concerning the effects on the contract price if the sales tax law is changed. A change is made to the sale tax law which causes an additional amount of tax to be payable on materials to be incorporated in the building.

Result: The contract price will be automatically increased by the additional amount of sales tax which becomes payable as a result of the change to the sales tax law. The vendor will not be required to provide a written notification containing details of the price increase. Note that if the contract contains a clause which states that there will be no alteration to the price because of changes to the sales tax law, the contract price will not be increased.

Amending Acts and Penalties

18.26 The existing law (section 12F of the Sales Tax Procedure Act) operates to remove liability for a sales tax penalty which would otherwise be incurred in the 28 day period after a sales tax amendment Act receives Royal Assent, where that penalty applies as a result of the amending law. The effect of the provision is that until the 28th day after Royal Assent is reached for the amending law, a person cannot be guilty of an offence or be liable to a penalty that arises from an infringement of the amending law. The new law will contain provisions which achieve the same effect. [clause 129]

Commonwealth-controlled authorities and cancellation of certain exemptions

18.27 Under the new law, provisions in another Act which provide for a Commonwealth-controlled authority to be exempt from sales tax will be of no effect unless the provision is enacted after 13 May 1987 and specifically refers to sales tax. A Commonwealth-controlled authority will be defined as a body established before 14 May 1987 and specified in the regulations or a body of the following kind established on or after 14 May 1987:

(a)

a corporation established for a public purpose by a law of the Commonwealth;

(b)

a company in which the Commonwealth has a controlling interest;

(c)

a company in which a controlling interest is held by:

(i)

a corporation established for a public purpose by a Commonwealth law

(ii)

a company in which the Commonwealth has a controlling interest.

The regulations will list Commonwealth-controlled authorities that were established before 14 May 1987 and which will not be entitled to exemption from sales tax. [clause 130]

18.28 This provision will not change the effect of the existing law.

Sales Tax Regulations

18.29 The Governor-General has power under the existing law to make regulations for carrying out or giving effect to the sales tax legislation. This broad regulation making power will be restated in the new law. The new law will also give the Governor-General specific regulation making power in relation to the payment of sales tax on goods temporarily imported and in relation to the service of documents. The regulations will be able to prescribe penalties by way of fines not exceeding $1000 for offences against them. [clause 131]

C. Summary of Main Changes

18.30 The main changes to the existing law discussed in this chapter are:

Leases

A. Introduction

19.1 This chapter describes how the new law will apply to a lease goods. There is no single part of the Sales Tax Assessment Bill 1992 that deals exclusively with leases. Instead, the rules for leases have been incorporated into the general scheme of the new law.

B. Explanation and Commentary

Overview

19.2 The new law will apply a different treatment to the taxation of leases than the existing law. The purpose of the change is to make leases of assessable goods the subject of a single, self-assessing assessable dealing. Under the new law, a lease of goods will be treated as an application to own use (AOU) of the goods by the lessor. This means, broadly that the first lease of assessable goods will be an assessable dealing (and also the point at which the goods become Australian-used goods, and no longer taxable). The lessor will be liable to tax on the lease unless an exemption applies at the time that the lease is granted. The taxable value of the lease will be the same value that applies to other AOUs. For example, if the lessor is the manufacturer of the goods leased, the taxable value would be the notional wholesale selling price of the goods. If the lessor purchased the goods under quote, the taxable value would be the purchase price of the goods. A subsequent lease of goods will not be an assessable dealing.

How will leases be 'taxed'?

19.3 The proposed tax treatment of leases is outlined below:

1.

Assessable dealing: A grant of a lease of goods by the lessor will be treated as an application to own use by the lessor. This will be known as a lease AOU. A lease AOU will be an assessable dealing if it satisfies the requirements of one of the AOU assessable dealings, e.g. a lease from tax-free stock.

2.

Exemption: There are 2 exemptions which will apply only to lease AOUs. These are:

(a)

the lease is an eligible long-term lease; or

(b)

the leased goods are intended for export (before use).

3.

Taxable value: The taxable value of a lease AOU will depend upon the circumstances in which the goods were obtained by the lessor.

4.

Registration: There will be no registration ground specifically for lessors. However, a lessor may be registered if the lessor satisfies one of the other registration grounds.

5.

Quotation: Lessors who obtain goods that will be the subject of an eligible long-term lease for a lease where the goods will be exported before they are used , will be entitled to obtain those goods under quote. In all other cases, lessors will be obliged to obtain the goods tax paid and to claim credits in respect of the first eligible long-term lease or lease of goods that are exported.

6.

Credits: There will be a credit for eligible long-term leases for leased goods that are exported before they are used.

1. Assessable dealing

19.4 The grant of a lease of goods is one of the dealings with goods that will be treated as an application to own use under the new law. It will be known as a lease AOU The goods will be taken to be applied to own use by the person who grants the lease (i.e. the lessor). [clause 5, definitions of 'application to own use' and 'lease AOU']

19.5 Definition of 'lease': Lease will be defined to mean a lease of goods by their owner, and will include letting or hiring goods under a hire-purchase agreement. [clause 5 definition of 'lease']

19.6 A lease AOU will be an assessable dealing only if it satisfies the requirements of one of the AOU assessable dealings (ADs 3a, 3b, 3c, 13a, and 13c). Broadly, the requirements will be that the lessor either manufactured the goods or obtained the goods under quote. In order for there to be an assessable dealing the leased goods must be assessable goods. Once assessable goods have been leased they will become Australian-used goods and, with 2 exceptions, will no longer be taxable. Therefore, only the first lease of goods is capable of being an assessable dealing.

2. Exemption

19.7 An assessable dealing will be taxable unless one of the exemptions applies. The following exemptions are capable of applying to a lease AOU:

(a)

the lease is an eligible long-term lease;

(b)

the leased goods are intended for export prior to use;

(c)

an exemption Item is unconditionally satisfied at the time of the lease i.e. the leased goods are always exempt goods (see Chapter 8);

(d)

the small business exemption applies to the lessor (see Chapter 8).

Note:

The small business exemption will apply to a manufacturer who leases goods of own manufacture. The exemption will not apply to goods obtained under quote. [paragraph 29(4)(a)]

Exemptions (a) and (b) are special exemptions applicable only to leases.

19.8 Eligible long-term lease: An eligible long-term lease must satisfy 3 conditions:

(i)

the term of the lease must be for at least as long as the statutory period.

Note:

The statutory period is also the period of time for which an exemption Item must be satisfied. It is, broadly, the period that ends 2 years after the first AOU (see Chapter 8).

(ii)

the lessee must give to the lessor, at or before the grant of the lease, a statement, in a form approved by the Commissioner, that the lessee intends to use the goods so as to satisfy an exemption Item, at least until the end of the statutory period;

(iii)

if the lessor has previously borne tax on the goods, no part of that tax must have been passed on to any person. [clause 5, definition of 'eligible long-term lease' and clause 26]

19.9 Examples of the exemption for eligible long-term leases:

Example 1:

BTR Ltd is a leasing company holding tax-free stock. It leases to CW goods with an effective working life of 10 years. The term of the lease is 2 years. CW gives a statement to BTR Ltd , in a form approved by the Commissioner, that CW intends to use the goods so as to satisfy an exemption Item for the full period of the lease.

Result: BTR Ltd will not be taxable on the lease AOU.

Example 2:

Leasing company BTR leases an item of goods to CW . The goods have an effective working life of 10 years. The lease is for a period of 18 months with an option to renew for a further 12 months. CW gives a statement to BTR , in a form approved by the Commissioner, that CW intends to use the goods throughout the 18 month term of the lease to satisfy an exemption Item. CW also intends, at the time the lease is entered into, to take up the option and to continue to use the goods for an exempt purpose for the additional 12 months. This is also included in the statement.

Result: BTR is taxable on the lease. The lease is only entered into for a period of 18 months, which is less than the statutory period. While CW intends to take up the option for the additional 12 months, there is no guarantee that this will happen and so the exemption does not apply.

19.10 The leased goods are intended for export: The general export exemptions only apply if the goods intended for export are assessable goods. In the case of a lease AOU, the leased goods cease to be assessable goods at the time of the grant of the lease. This will be before the goods have been physically used by the lessee. Therefore, there will be a special exemption for leased goods intended for export. The exemption will apply if:

(i)

the lease agreement requires the lessor to export the goods before they are used; or

(ii)

at the time of the lease AOU, the lessee intends to export the goods before using them.

Note:

The lessee will be required to provide the lessor with evidence, (in a form approved by the Commissioner), of the lessee's intention to export the goods. [clause 32]

19.11 If goods are exported in accordance with the export exemption, and are subsequently brought back into Australia, they will be treated again as assessable goods (and tax may be payable on them). This is one of the two exceptions to the general rule that once goods have been applied to own use in Australia they will never again be assessable goods.

Reason: When goods are exported in this manner they have never been physically used and they have never borne tax (or if they have borne tax a credit has been obtained). It is therefore appropriate that if the goods are brought back into Australia, they be capable of being the subject of an assessable dealing. [clauses 5 and 10, definition of 'Australian-used goods']

19.12 Evidence of lessee's intention: In order to satisfy an exemption or become entitled to a credit in respect of a lease AOU, the lessor must hold evidence of the lessee's intention to deal with the goods in qualifying circumstances. The evidence must be in a form approved by the Commissioner. Unlike a normal 'quote', the lessee does not become potentially liable to sales tax on the goods leased if the evidence given to the lessor is false. This is because the goods cease to be 'assessable goods' at the time of the first lease AOU. However, lessees who make false statements in connection with lease AOUs will be subject to the normal penalty provisions applicable to false statements made for a purpose in connection with the operation of the sales tax law. [clause 97, penalty for making false statements] .

3. Taxable value

19.13 If a lease AOU is an assessable dealing and no exemption applies, it will be necessary to calculate the taxable value of the lease AOU. Unlike the existing law, it will be calculated once only and will not be linked to the term of the lease or the amount of the lease payments. The lease AOU will attract the ordinary taxable value rules applicable to AOUs of assessable goods, and the taxable value applicable to a particular lease will therefore vary, depending on the exact nature of the dealing. The possible taxable values are set out in the table below:

4. Registration

19.14 The leasing of goods will not of itself be a ground for registration. A lessor will only be entitled to be registered if one of the other grounds for registration is satisfied e.g. the manufacture of assessable goods in the course of carrying on a business. [clause 78]

5. Quoting rules

19.15 Whether a lessor is registered or unregistered, the only quoting grounds for goods intended for lease will be where the lessor is obtaining the goods for lease to a person under an eligible long term lease, or for lease where the goods will be exported before use. The practical consequence of this is that a lease AOU will only be an assessable dealing where:

(i)

the leased goods have been obtained under quote by the lessor on the above grounds;

(ii)

the leased goods have been manufactured by the lessor;

(iii)

the leased goods have been acquired under quote by the lessor under one of the general quoting grounds (e.g. for sale by wholesale), and the lessor has a change of intention and decides to lease the goods;

(iv)

the leased goods have been obtained tax-free (otherwise than by quoting) but they have not previously passed a taxing point.

Therefore, a significant number of leases will be freed from tax via the credit rules rather than the exemption rules. [subclauses 82(1)(g) and 83(1)(c)]

6. Credits

19.16 The credit rules will ensure that the first eligible long-term lease, and leased goods exported before being used, will be tax-free. A credit will be available where:

(i)

the first AOU of the goods consisted of the granting of an eligible long-term lease, and the lessor has borne tax on the goods before the time of the grant of the lease. In this case, the credit will be available to the lessor. [CR18]

Note:

This credit will only be available if the lessor has not passed the tax on to another person.

(ii)

the first AOU of the goods consisted of the granting of a lease, and the goods were exported before being used by the lessee of that lease. Again, the credit will be available to the lessor if the lessor has previously borne tax on the leased goods before export. [CR19]

C. Summary of Main Changes

19.17 The main changes to the existing law discussed in this chapter are:

D. Transitional Arrangements

19.18 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision applicable to leases

19.20 The existing law will not. mpose sales tax on any act, transaction or operation with goods that happens on or after the first taxing day. The single exception to the general principle will apply to goods that have been leased before the first taxing day. For goods in this category, the existing law will continue to apply for a period of 2 years after the first taxing day. In broad terms, this means that the existing law will continue to impose tax on the grant of subsequent leases of those goods if the grant occurs within 2 years after the first taxing day. [subclause 4(2) of the Sales Tax Amendment (Transitional) Bill 1992]

19.21 Reason for exception: The sale value of the grant of a lease of goods to which the existing law applies is the amount that the Commissioner determines to be fair and reasonable. The Commissioner has, as a general rule, determined that amount to be the amount of the lease payments, rather than the fair wholesale value of goods (as applies for other dealings with goods). However, tax on a fair wholesale value will ultimately be paid because subsequent leases of the goods are also subject to tax. At the first taxing day there will be many leased goods which will not yet have borne tax on the equivalent of a fair wholesale sale value. However, subsequent leases of these goods would not otherwise be subject to sales tax under the new law because the general approach of the new law is to impose tax only on the first lease of assessable goods. The extension is necessary, therefore, to prevent a windfall gain to some lessors.

Containers

A. Introduction

20.1 This chapter describes how the new law will apply to containers. There is no single part of the Sales Tax Assessment Bill 1992 that deals exclusively with containers. Instead, the rules for containers have been incorporated into the general scheme of the new law.

B. Explanation and Commentary

Overview

20.2 The general approach of the new law will be to apply the same treatment to containers as applies to their contents. This is also the approach of the existing law, but its implementation is complicated and numerous exceptions have obscured its effect. The new law will be designed to 'tax' containers at the same time and at the same rate (if any) as their contents. This will be achieved by the device of making containers liable to tax at the time that their contents are put in them, but exempting the dealing from tax if the contents are assessable goods. When the contents subsequently become liable to tax, the value of the container will be included in the taxable value of the contents.

20.3 The details of this scheme are set out below.

How will containers be 'taxed'?

20.4 The proposed tax treatment of containers is outlined below:

1.

Assessable dealing: A container will be taken to be applied to own use at the time that contents are put in it (or anything else is done which causes goods to become a container). This will be known as a packing AOU. A packing AOU will be an assessable dealing if it satisfies the requirements of one of the AOU dealings (ADs 3a, 3b, 3c, 13a, and 13c).

2.

Exemption: A packing AOU that is an assessable dealing will be exempted from tax:

(a)

if all the contents are assessable goods that are intended to be the subject of a later assessable dealing; or

(b)

if all the contents are assessable goods, and the container with contents is to be exported.

3.

Taxable value of the container: If the packing AOU is not exempt, then the container will be taxed and will attract the ordinary taxable value rules applicable to AOUs of assessable goods.

4.

Taxable value of the contents: If the packing AOU is exempted from tax then:

(a)

the taxable value of the contents will be increased by the value of the container; or

(b)

if the contents are exempted from tax, then the value of the container will remain tax-free.

5.

Quotation: The general quoting rules will apply, though there will also be some special quotation rules for containers.

6.

Credits: The general credit rules will apply, though there will also be some special credit rules for containers.

This chapter will also discuss leased containers and contract packing.

1. Assessable dealing

20.5 Assessable goods will be treated as becoming a container, and being applied to own use, at the same time. In broad terms, this means that goods will become a container at the time their contents are put in them. The container will also be applied to own use at that time (this will be referred to as a packing AOU). [clause 5, definitions of 'application to own use', paragraph (e), 'packing AOU']

20.6 A packing AOU will comprise more than just the act of putting contents into goods. Rather, it will be any act that causes goods to become a container. These will be :

(i)

packing or securing any property in packaging, (in the course of carrying on any business), for the purpose of marketing or delivery of the goods;

Note:

This will include labelling if the labelling forms part of the packaging.

(ii)

packing or securing any ancillary items with the contents that are intended and reasonably necessary to allow or facilitate their use.

Note:

'Ancillary items' will not be defined but will include items such as can keys, glass droppers, drinking straws and batteries. The 'reasonably necessary' condition will exclude items such as 'gifts' packed with goods. [clause 5, definition of 'container']

20.7 In order for the packing AOU be an assessable dealing, it will also have to satisfy the other requirements applicable to AOU assessable dealings e.g. if the container has been manufactured by the applier, then the container will have to have been manufactured in the course of a business in order for the AOU to be an assessable dealing.

20.8 Imported containers: Containers imported with contents ready in them can never themselves be the subject of an assessable dealing in Australia. This is because they will be treated as Australian-used goods at the time of their importation (see paragraph 6.5).

Reason: Without this rule, there would be doubt as to when the container could be said to have been applied to own use in Australia. Nevertheless, the treatment of these containers after importation will also follow the treatment of their contents. [clause 5, definition of 'Australian-used goods']

20.9

Examples: Example 1:

X is a registered person who purchases 100 cardboard boxes under quote. X packs contents into the boxes. The contents comprise 50% assessable goods and 50% Australian-used goods. X intends to sell the container and contents by wholesale.

Result: The packing of the cardboard boxes is a packing AOU those boxes.

Example 2:

Z is aregistered person who purchases packaging, consisting of foam trays and shrink wrap, under quote. Z places contents onto the tray, and wraps the goods and tray in shrink wrap. The contents are exclusively assessable goods. Z intends to sell the container and the contents by wholesale.

Result: The packaging of the contents is a packing AOU..

2. Exemptions

20.10 A packing AOU will not be taxable if an exemption applies. There will be 2 exemptions that apply specifically to containers:

(i)

General exemption: Exemption Item 27 will apply to exempt the containers if the contents are exclusively assessable goods;

(ii)

Export: exemption for containers for export if the contents are exclusively assessable goods.

20.11 (i) General exemption: There will be an exemption Item for packing AOUs. [Item 27, Schedule 1, Exemptions and Classifications Bill]

20.12 Exemption Item 27 will apply only if all the contents of a container are assessable goods, or assessable goods and their containers, and the following 2 conditions are satisfied:

Condition 1: The contents are intended (or expected) by the applier to be the subject of a later assessable dealing while still in the container. That later assessable dealing must be a sale, a delivery of customer's materials goods, or a lease AOU.

Condition 2: Possession and/or control of the container must pass to the person who is the purchaser, deliveree or lessee under that assessable dealing.

20.13 The exemption Item will not over goods that are for use in marketing:

(i)

ice-cream goods, or biscuits manufactured on the same premises from which they are sold by retail;

(ii)

take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere).

Note 1:

This will continue the existing policy of taxing the inputs of retail food outlets.

Note 2:

In the existing law, these containers are listed in the Third Schedule of the Sales Tax (Exemptions and Classifications) Act 1935, and so are taxed at the rate of 10%. In the new law, these containers will not be listed in any of the Schedules to the Sales Tax (Exemptions and Classifications) Bill 1992, and consequently they will be taxed at the general rate of 20%.

20.14 Normally, exemption Items will be subject to the requirement that the applier must, at the dealing time, intend to satisfy the exemption Item for the duration of the statutory period see Chapter 8 - paragraphs 8.10 and 8.11 However, this requirement will be subject to any contrary intention that appears in the particular exemption Item concerned. Exemption Item 27 will not be subject to the statutory period. [clause 5 of the Exemptions and Classifications Bill]

20.15 Examples: (Refer examples at 20.9)

Example 1 :

The packing of the cardboard boxes by X is a packing AOU. The contents of the boxes comprise 50% assessable goods and 50% non-assessable goods.

Result: This packing AOU is taxable. The exemption Item will not apply because the contents of each box are not exclusively assessable goods.

Example 2:

The packaging of the goods by Z is a packing AOU. The contents are exclusively assessable goods which Z intends to sell by wholesale.

Result: The packaging of the goods is not taxable. The exemption Item applies because the contents are exclusively assessable goods, and Z intends to sell the contents, with their containers, by wholesale - which will be an assessable dealing.

20.16 (ii) Exemption for containers for export: There will be an exemption if, at the time of the packing AOU, the containers are intended for export. Two conditions must be satisfied for this exemption to apply:

Condition 1: the contents must consist wholly of assessable goods;

Condition 2: the packer must intend to export the container with the contents (or, if the packer packed the contents on behalf of another person - the packer expects that the other person will export the container with the contents). [clause 31]

3. Taxable value of the container

20.17 If no exemption applies at the time of the packing AOU, then the container will be taxable at that time. The container will attract the ordinary taxable value rules applicable to AOUs of assessable goods. These are set out in the table below:

20.18

Example: (Refer examples at 20.9)

Example: The packing AOU by X was taxable because the exemption Item did not apply.

Result: The container will attract the normal taxable value rules applicable to AOUs of assessable goods.

4. Taxable value of the contents

20.19 If an exemption has applied to the packing AOU, then there are special rules which will add to the taxable value of the contents, an amount that reflects the container component recouped in a taxable dealing with the contents. Generally, it will not be necessary to specifically add a container component to the taxable value of the contents because the contents are usually sold for a single price that includes a component for the container. However, if the sale price of the contents does not include a component for the container, then the taxable value must be increased by the amount of the container component. The amount of the container component will vary depending upon the assessable dealing with the contents:

20.20

Example: (Refer examples at 20.9)

Example: The packaging of the goods by Z was not a taxable dealing because the exemption Item applied at that time. Z then sells the contents and their containers by wholesale.

Result: When the contents are sold by wholesale their taxable value will include a component representing so much of the value of the container as is recouped by Z in connection with the sale of the contents.

20.21 Situations where no container component will be added: Acontainer component will not included in the taxable value of the contents if:

(i)

the container has itself been the subject of a taxable dealing at, or before, the time when it became a container in relation to the contents;

Note:

A container will be taxed at the time of the packing AOU if not all the contents are assessable. The contents that are assessable may at some later stage be the subject of a taxable assessable dealing. If so, then the taxable value of the assessable contents will not be increased to reflect the value of the container because the container will already have been taxed. This may require a reduction in the taxable value of the contents to exclude the container component.

(ii)

the container is a shipping container covered by exemption Item 60.

Note:

It is intended that these containers, which will be exempt under their own special exemption Item, will never have their value included in the taxable value of their contents. [subclause 35(4)]

20.22 Second-hand containers: Goods may be used as a container for assessable goods more than once. If an exemption applies to the packing AOU then the container component is to be included every time assessable contents are the subject of a taxable dealing in that container. This will be the case, even if a component for that container has previously been included in the taxable value of other assessable goods. Thus, the value of a re-usable container can be included several times in the taxable value of assessable goods.

20.23 Second-hand containers -

Example:

S is a soft drink manufacturer who purchases new soft drink bottles under quote. S bottles the soft drink and sells it by wholesale to a purchaser who doesn't quote. After the soft drink has been consumed, the bottles are retrieved by S, washed, filled with soft drink and sold again. This occurs a number of times.

Result:

(i)

S is entitled to quote on the purchase of the bottles on the basis that S intends to satisfy the exemption Item (see paragraph 20.25);

(ii)

when S fills the bottles with soft drink for the first time, this will amount to an application to own use of the bottles by S (a packing AOU). This packing AOU will be an assessable dealing;

(iii)

the packing AOU will be exempt because the exemption Item applies;

(iv)

the sale of the soft drink by wholesale is an assessable dealing and no exemption applies. An amount is added to the taxable value of the contents, being the value of the container recouped by S in connection with the sale of the soft drink;

(v)

when the bottle is again filled with soft drink there can be no assessable dealing because the bottle is now Australian-used goods;

(vi)

however, when the bottle is sold again the value of the bottle recouped will again be included in the taxable value of the contents. This will be the result every time the bottle is used for assessable goods that are the subject of an assessable dealing.

20.24 Multiple goods and mixed goods: If the contents of the container comprise more than one item of assessable goods, then the value of the container component will be pro-rated across all of those goods. Consequently, if the contents are mixed goods that attract different rates of tax (or some are exempt) the container component will be automatically apportioned across those goods. The pro-rated container component will then attract the same tax treatment as the contents.

5. Quoting rules

20.25 The general quoting rules will apply to containers in the same way as they apply to other goods. However, there will also be special quoting rules that apply only to goods that are intended to be used as containers for export.

(i)

General exemption for container: the quoter intends to use the goods as a container in a way that will satisfy the exemption Item (see paragraphs 20.11-20.15). [paragraphs 82(1)(f) and 83(1)(a)]

(ii)

Containers for export: is quoting ground applies in the same circumstances in which the export exemption applies (see paragraphs 20.16). [subclauses 82(3) and 83(2)]

20.26 Quoting after the goods have become a container: A quote made on an assessable dealing with goods ('contents') will be taken to apply to any other assessable goods that are a container for those contents. This provision will only apply if the container is assessable goods at the time of the dealing in respect of which the quote is made. Normally a packing AOU will result in the container becoming Australian-used goods and so no longer assessable goods. However, because the definition of application to own use excludes an AOU in bond containers packed in bond will continue to be assessable goods at the time of local entry and so will be entered in their own right. Therefore, without this provision, a local entry of containers and goods packed in bond would require a separate quote for the container and the contents.

6. Credits

20.27 The credit rules will apply in relation to containers in the same way as they apply to other goods. However, there will be special credit rules for containers intended for export.

20.28 There will be a credit available where a registered person was entitled to quote their registration number, but failed to do so. Therefore, if a registered person was entitled to quote for goods to be used in accordance with the exemption Item, but failed to do so, a credit will be available.

20.29 Credits for containers that are exported: There will be a credit for containers that are exported if all of the following conditions are satisfied:

(i)

the first AOU of the container in Australia is a packing AOU by the claimant;

(ii)

the contents are all assessable goods;

(iii)

at the time the container is exported, it is still a container for those goods, and they are still assessable goods;

(iv)

the claimant has borne tax on the container before it was exported. [Table 3: CR13]

Example 1:

R purchases goods for a tax-inclusive price. The goods comprise packaging material which R tends to use as containers for assessable goods for sale by retail. The retail sale will not be an assessable dealing. However, R unable to find a domestic market for the goods and chooses to export the goods in the containers.

Result: R has borne tax on the containers because the intended use of the packaging at time of purchase did not satisfy the exemption Item. However, R will be entitled to a credit for the tax paid on the containers.[CR13]

Note:

Goods held in retail stock can be assessable goods even if tax-paid. Goods remain assessable goods until they are AOU in Australia.

Example 2:

Xis an unregistered exporter of goods. Xis entitled to quote an exemption declaration on goods that Xintends using as containers for assessable goods for export. However, Xfails to quote an exemption declaration on purchase of the goods for use as a container, and so purchases the goods for a tax-inclusive price.

Result: Xwill be entitled to a credit of the amount of tax included in the purchase price of the containers. The credit entitlement will arise at the time of export.[CR13]

Leased containers

20.30 Goods may be leased for use as a container. A lease will also be an application to own use and so by the time the leased goods are used as a container they will already be Australian-used goods. Therefore, the packing AOU cannot be an assessable dealing and the exemption Item will also not be relevant. The container taxable value rules will simply apply to determine whether or not a container component is to be added to the taxable value of the contents, (if those contents are the subject of a taxable dealing).

20.31 A container component will not be added if the container itself has previously been the subject of a taxable dealing. The container will have been the subject of a taxable dealing if it had been taxed prior to the lease, or if the lease AOU was taxable. If the container was taxed in either manner a container component will not be added to the taxable value of the contents.

20.32 Leased container example:

M company manufactures beer bottles. M leases those bottles to B, a brewing company, for a period of 1 month. B uses the bottles by filling them with beer, and then sells the bottled beer by wholesale. M retrieves the used bottles, washes them, and again leases them to B who again fills them and sells them. This process is repeated a number of times.

Result:

(i)

the first lease of the bottles by Mis a lease AOU that is an assessable dealing, being an AOU by the manufacturer of goods manufactured in the course of any business (AD3b). There is no exemption because the lease does not satisfy the conditions of an eligible long-term lease;

(ii)

the filling of the bottles by Bamounts to a packing AOU, however, by this stage the bottles are Australian-used goods, and so the packing AOU is not an assessable dealing;

(iii)

the sale of the bottled beer by Bis an assessable dealing - a wholesale sale by a person who manufactured to the goods in the course of any business (AD1a);

(iv)

there will never be a container component added to the taxable value of the beer when sold because the container was the subject of a taxable dealing at the time of the first lease.

Contract packing

20.33 Frequently a person who engages in assessable dealings with goods ('contents') will contract with another person to pack those goods. There are 2 possible situations:

(i)

both the contents and the containers are given to a contractor for packing; or

(ii)

only the contents are given to the contractor who then provides the containers.

In each case the result will be the same as if the owner of the contents had also packed them.

20.34 Contents and containers are given to the contractor: In this case the contractor will be the agent of the person requiring the packing. The person requiring the packing (the 'principal') will be able to purchase the containers under quote, and will be taken to have applied the containers to own use at the time of the packing by the contractor. The exemption Item will apply provided the contents are exclusively assessable goods, and the principal intends them to be the subject of a later sale, delivery or lease AOU. At the time of the later dealing the value of the container will be added to the taxable value of the contents. [paragraphs 82(1)(f) and 83(1)(a), and Item 27]

20.35 Contractor provides own containers: In this case the contractor (whether registered or unregistered) will be entitled to quote for goods to be used as containers, if the containers will be used to pack exclusively assessable goods, and the contractor expects that the contents will be the subject of a later sale, delivery or lease. Expectation, rather than intention, is the test because the packer does not own or control the goods. At the time of the packing AOU by the contractor the exemption Item will operate to exempt the dealing if the packer still expects that the conditions of the Item will be met. At the time of the later dealing, with the contents, the value of the container will be added to the taxable value of the contents. [paragraphs 82(1)(f) and 83(1)(a), and Item 27]

C. Summary of Main Changes

20.36 The main changes to the existing law which are discussed in this chapter are:

D. Transitional Arrangements

20.37 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision applying to the taxable value of goods that include a container component.

20.38 The taxable value of any assessable dealing with assessable goods will include the value of any associated container, except if the container has been the subject of a previous taxable dealing in its own right [clause 35]. 'Taxable dealing' does not, in its ordinary meaning, include a dealing on which tax was imposed under the existing law. There will be a special provision that will alter the meaning of taxable dealing, for the purpose of clause 35 only, to include a dealing that attracted tax under the existing law. [clause 8, Sales Tax Amendment (Transitional) Bill 1992]

Photography

A. Introduction

21.1 This chapter describes how the new law will apply to photography which is a manufacturing activity. There is no separate part of the new law that will deal with photography. Instead, it will be incorporated into the general scheme of the new law.

B. Explanation and Commentary

What is photography?

21.2 Photography comprises 3 key steps:

Step 1: A picture is taken i.e. photographic film is exposed;

Step 2: The exposed film is processed or treated so as to produce a negative, transparency or film strip;

Step 3: A print is made from the negative, transparency or film strip.

Tax consequences of photography

21.3 This chapter broadly describesthe tax consequences in 2 situations:

(i)

the 'classic case' of a customer having prints developed;

(ii)

professional photographers.

21.4 (i) The classic case: The classic case involves a person 'taking' pictures and delivering the exposed film to a commercial developer to be made up into negatives and prints. The elements of the classic case are:

Element 1: A person 'takes' a picture - i.e. the person exposes a film.

Consequence: This, by itself, does not amount to manufacture. It will be an application to own use (AOU) of the unexposed film. Generally, the film would have been acquired tax-paid by the person taking the picture, in which case the AOU will not an assessable dealing.[clause 5, definition of 'application to own use']

Element 2: The person who has exposed the film provides it to a commercial developer for prints to be made,

Consequence: Giving the film to the developer will be regarded as the supply of materials to a manufacturer by a customer to be made up into customer's materials goods. Subclause 22(3)]

Element 3: The developer produces a negative from the exposed film.

Consequence: The developer will be taken to have manufactured the negative from materials supplied by the customer. The exposed film and the negative will be treated as separate goods. The negative will be assessable goods. [clause 5, definition of 'manufacture' - paragraph (d)]

Element 4: The developer makes a print from the negative.

Consequence (a): The use of the negative to make the print will not an application to own use of the negative by either the developer or the customer. It is not an AOU by the developer because, as a general rule, only the owner of goods can apply them to their own use. Ordinarily, a use of goods in this manner would be treated under the new law as an AOU by the customer. However, there will be a specific exclusion from the definition of 'application to own use' of anything that is done with the negative by the developer before it is delivered to the customer.

Consequence (b): The developer will be taken to have manufactured the print. Unlike the manufacture of the negative, the print will not be treated as manufactured from materials supplied by the customer. The print is manufactured from the negative which was also manufactured by the developer.

[clause 5, definition of 'application to own use'-paragraph (i)]

Element 5: The developer delivers the negative and the print to the customer in return for a single charge of, for example, $20.

Consequence (a): The delivery of the negative will be a delivery of customer's materials goods - which will be an assessable dealing. [AD4a and clause 22]

Consequence (b): The delivery of the print will be a sale of the print - which will also be an assessable dealing. [AD1a or AD2a]

Consequence (c): The taxable value of the negative will be the amount charged for making it up (and the value of any always exempt materials supplied by the customer). If there is no separately identified charge for making up the negative, then there should be allocated to the taxable value the amount that would be charged for the negative if the manufacture of the negative had been the only activity undertaken by the developer. The Commissioner has a discretion to make this allocation. [Table 1 and clause 95]

Consequence (d): The taxable value of the print will be its notional wholesale selling price (if it is a retail sale to the customer), or its actual selling price (if it is a wholesale sale to the customer).[Table 1]

21.5 If the print is sold by wholesale, the making up charge on the negative will be included in the wholesale price. The taxable value is simply the amount for which the goods were sold. However, if as is the more common situation, the prints are sold by retail, then 2 taxable value calculations will have to be made - the making up charge for the negative, and a notional wholesale selling price for the print. That is also the situation under the existing law where the Commissioner has come to a special arrangement with the industry allowing them to calculate their taxable value simply as a set percentage of the total retail selling price.

21.6 (ii) Professional photographers: Some professional photographers do their own developing and processing - others simply expose the film in the camera and deliver it to a commercial developer to have negatives and prints produced. Photographers who do their own developing and processing will be regarded as manufacturers and as such will be entitled to be registered. Photographers who engage others to do their developing and processing will not regarded as manufacturers and so will not be entitled to be registered, unless they are able in some other way to satisfy the conditions of registration. If they are not registered they will be in exactly the same position as the customer described in the classic case. Unregistered persons cannot obtain their business inputs tax-free.

21.7 The elements involved if professional photographers do their own developing and processing are set out below:

Element 1: The professional photographer 'takes' a picture - i.e. the photographer exposes a film.

Consequence: This will be an application to own use of the unexposed film. The film would probably have been acquired tax-free by the photographer, who will be entitled to quote on the film as a business input. Therefore, the AOU is an assessable dealing. However, there will be an exemption Item for materials applied to own use in the manufacture of assessable goods which would exempt this AOU from tax. In this case, the manufactured goods would be the negative. [clause 5, definition of 'application to own use';ADs 3c & 13c and Exemptions and Classifications Bill, Schedule 1, Item 19]

Element 2: The photographer produces a negative from the exposed film.

Consequence: The photographer will be taken to have manufactured the negative. The exposed film and the negative will be treated as separate goods. The negative will be assessable goods.[clause 5, definition of 'manufacture' - paragraph (d)]

Element 3: The photographer produces a print from the negative.

Consequence (a): In manufacturing the print, the photographer will have applied the negative to their own use. This AOU does not fall within the paragraph (h) exclusion to the definition of 'application to own use' because the photographer has manufactured the negative on his own behalf (i.e. so that a print can be produced), and the negative will in most cases not be delivered to the customer but will be retained by the photographer. However, again the AOU of the negative will be exempted from tax by an exemption Item for materials applied to own use in the manufacture of assessable goods.

Consequence (b): The photographer will be taken to have manufactured the print. The print will be assessable goods. [clause 5, definition of 'application to own use']

Element 4: The photographer sells the print to a customer for $50.

Consequence (a): The sale is an assessable dealing. [AD1a; AD2a, or where the customer supplied any of the materials (such as the unexposed film), AD4a]

Consequence (b): If the print was manufactured by the photographer to the order of a particular customer for their own use, then a substitute taxable value will apply, being 40% of the tax-exclusive amount payable by the customer (exclusive of sales tax) to the photographer. That is, the amount payable by the customer will be discounted by 60% to reflect a wholesale value (and in recognition of the fact that part of the amount payable by the customer represents the photographer's fee for service). However, the taxable value is intended to include an amount for the manufacture of the negative.[clause 41]

Consequence (c): In any other case the taxable value of the print will be its notional wholesale selling price (if it is a retail sale to the customer) or its actual selling price (if it is a wholesale sale to the customer). Either value will include an amount for the manufacture of the negative. However, the taxable value will not include the fee charged by the photographer for taking the picture as this represents a fee for a service and not goods. [Table 1]

21.8 Sometimes a professional photographer produces proofs which are supplied to the customer for a fee. The customer selects those proofs that are to be developed into prints. The proofs will be assessable goods and their supply to the customer will be an assessable dealing upon which tax will be payable on a taxable value that will depend on whether they are produced to the order of a particular customer (see paragraph 21.7). If the proofs are retained by the photographer then they will be regarded as having been applied to the photographer's own use and tax will be payable on a taxable value equal to the notional wholesale selling price of the proofs.

Rate of tax

21.9 Having calculated the taxable value, tax is payable in all circumstances at the rate of 20%.

C. Summary of Main Changes

21.10 The main changes to the sales tax treatment of photography will be:

Computer Programs

A. Introduction

22.1 This chapter describes how the new law will apply to the writing and duplicating of computer programs.

B. Explanation and Commentary

What is a computer program?

22.2 A computer program hasthe same meaning as in the Copyright Act 1968. It is defined in that Act to mean:

"an expression, in any language, code or notation, of a set of instructions (whether with or without related information) intended, either directly or after either or both of the following:

(a)

conversion to another language, code or notation;

(b)

reproduction in a different material form

to cause a device having digital information processing capabilities to perform a particular function."

[clause 5, definition of 'computer program']

When is a computer program manufactured?

22.3 There are two steps to the production of a computer program. The first is the writing or developing of the program and the second is the duplication of the program when completed onto another or similar carrying medium.

22.4 The writing of a computer program will not be manufacture. It is considered to be the result of skilled services rather than bringing goods into existence for sale or application to own use and is caught by excluding paragraph (g) of the definition of manufacture. [clause 5, definition of 'manufacture' - paragraph (g)]

22.5 Consequently, a person who writes computer programs will not be liable to sales tax on the writing or developing of the programs. Nor will that person be entitled to obtain goods (e.g. computers, paper and writing instruments) for use in writing such programs tax-free. Any sales tax liability will be met by the program writer purchasing goods for use in writing the programs at a price that includes sales tax.

22.6 Duplicate, (in relation to a computer program), will be defined to mean to copy or reproduce the program so as to embody the program in goods or to covert the computer program to another language so as to embody the program in goods. 'Embodied' is defined to mean that a computer program is only embodied in goods where it can be reproduced from the goods either with or without the aid of some other device. The classic case of where a computer program is embodied in goods is where it is duplicated onto a disc. [clause 5, definition of 'duplicate', and clauses 5 and 13, meaning of 'embodied']

22.7 With one exception, the duplication of a computer program which involves the embodying of the program in goods, will be manufacture, whether the duplication is on a new or used disc or other carrying medium, or into the memory or hard disc of a computer. This is the same position as applies under the existing law. [clause 5, definitions of 'duplicate' (in relation to a computer program) and 'manufacture' - paragraph (e)]

22.8 The exception will be where the duplication is carried out by a person on a carrying medium (other than a microchip) that is held in tax-paid stock and the duplicated program is for retail sale. [clause 5, definition of 'manufacture' - paragraph (h)]

Example:

A retailer of computers and computer programs who, in the course of selling those goods, and as part of a service to customers, copies a program onto a disc or into the memory of the computer.

Result: Where a retailer performs this function there is no liability to sales tax.

Sales Tax Liability on Computer Programs

22.9 Computer programs will, for sales tax purposes, fall into two broad categories:

(i)

those that are tax-advantaged; and

(ii)

those that are not tax-advantaged.

22.10 Tax-advantaged computer programs: A tax-advantaged computer program will be one that is embodied on a carrying medium, other than a micro-chip, i.e. on a floppy or hard disc or in the memory of a computer. In addition, programs embodied on micro-chips will also be tax-advantaged where the program:

(i)

is for educational or entertainment use; and

(ii)

the micro-chip on which the program is embodied is contained in a cartridge that is marketed exclusively for use with a personal computer or home electronic device that is for use with a computer monitor or television screen.

Example:

Computer games that come in cartridge form and are designed to fit into a console that is linked to a television. [clause 5, definition of 'tax-advantaged computer program' and clause 14]

22.11 Where a computer program is tax-advantaged the taxable value of the computer program will be reduced by the value of the program embodied on the carrying or other medium onto which the program is duplicated. This reduction is described as an exempt part of the taxable value and has the effect that where a tax-advantaged computer program is the subject of an assessable dealing, tax will be payable only on the wholesale value of the carrying medium.[clause 45]

22.12 Although the duplication of a tax-advantaged computer program will be manufacture, a person involved in such activities will not be entitled to be registered. Consequently, such a person will be required to purchase goods for use in carrying out the duplicating at a price which includes sales tax. This will be contrary to the general rule that a manufacturer can obtain goods for use in manufacturing goods free of sales tax. However, the different treatment for duplicators of tax-advantaged computer programs is because of the special taxable value for such programs.[subclause 78(5)]

Computer programs embodied on microchips

22.13 The tax treatment of computer programs embodied on microchips will be different to other computer programs.

22.14 In the case of microchips, the ordinary rules relating to manufacturers will apply. The duplicator will be entitled to exemption from sales tax on computers and other equipment used to duplicate the programs onto the microchips. This is because with microchips, tax will be payable on the full wholesale value which includes the value of the computer program embodied on the microchip.

C. Summary of Main Changes

22.15 The main changes to the existing law discussed in this chapter are:

Transitional Arrangements

A. Introduction

23.1 This chapter discusses the transitional arrangements that will apply to determine whether a taxpayer's rights and obligations in connection with dealings with goods will be determined under the existing law or under the new law. The transitional arrangements are set out in the Sales Tax Amendment (Transitional) Bill 1992, although there are some related provisions in the Sales Tax Assessment Bill 1992.

Unless otherwise stated, all clause references are to the Sales Tax Amendment (Transitional) Bill 1992.

B. Explanation and Commentary

Termination of the existing sales tax law

23.2 General principle: A general principle of the transitional arrangements will be that, with one exception, the existing law will not impose sales tax on any act, transaction or operation with goods that happens on or after the first taxing day. [subclause 4(1)]

The effect of this principle will be that any sale, entry for home consumption or application to own use of goods that occurs before the first starting day will be subject to the existing law and not to the new law.

23.3 Exception for leases: The single exception to the general principle will apply to goods that have been leased before the first taxing day. For these goods, the existing law will continue to apply for a period of 2 years after the first taxing day. In broad terms, this means that the existing law will continue to impose tax on subsequent leases of those goods if the grant occurs within 2 years after the first taxing day.[subclause 4(2)]

23.4 Reason for exception: The sale value of the grant of a lease of goods to which the existing law applies is the amount that the Commissioner determines to be fair and reasonable. The Commissioner has, as a general rule, determined that amount to be the amount of the lease payments, rather than the fair wholesale value of goods (as applies for other dealings with goods). However, tax on a fair wholesale value will ultimately be paid because subsequent leases of the goods are also subject to tax. At the first taxing day there will be many leased goods which will not yet have borne tax on the equivalent of a fair wholesale sale value. However, subsequent leases of these goods would not otherwise be subject to sales tax under the new law because the general approach of the new law is to impose tax only on the first lease of assessable goods. The extension is necessary, therefore, to prevent a windfall gain to some lessors.

23.5 Examples of the application of the exception:

Example 1: Company X is a registered person who first leases-out goods 6 months before the first taxing day. The term of the lease is 8 months. At the end of the lease (which is 2 months after the start of the new law), X grants another lease of the goods, for a period of 6 months. At the end of the second lease, X sells the goods to Y who leases the goods to Z for a further period of 6 months.

Result: X is liable to tax under the existing law for both the first and second leases. Y is not liable on the third lease of the goods.

Note:

If the sale of the goods by X is to a related company and the purpose of the sale is to avoid paying any further tax on the goods under the existing law, then the general anti-avoidance provision of the new law could apply.[clauses 92 and 93 of the Sales Tax Assessment Bill 1992]

Example 2: X first leases goods 6 months before the first taxing day. The term of the lease is 4 months. The lease is exempt from tax because it is covered by an item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. The goods are not leased at the first taxing date, but X grants another lease of the goods 2 months after the first taxing day. The term of the lease is 3 years.

Result: X will be liable on both leases. The sale value of the second lease will be the lease payments of the full term of the lease, even though it ends more than 2 years after the first taxing day.

Transitional operation of the new law

23.6 General principle: The new law will apply only to tax dealings with goods that occur on or after the first taxing day. [subclause 16(2) of the Sales Tax Assessment Bill 1992]

23.7 The new law can apply before the first taxing day: Although the new law cannot impose tax on a dealing with goods that occurs before the first taxing day, it is capable of applying (for other purposes) to acts and omissions that occur before that day. This provision is essential to ensure that tax is imposed on dealings with goods either under the new law or the existing law. In the absence of this provision, there would be a number of acts, transactions or operations with goods which might fall outside either law. The broader purpose of this provision is to ensure that when the new law refers to a course of conduct or series of events, and some (but not all) elements of that conduct or those events occur before the first taxing day, then the conduct or events will be covered by the new law. However, there are exceptions to that general purpose in a number of areas. [subclause 3(2) of the Sales Tax Assessment Bill 1992]

23.8 Examples of the application of the new law:

Example 1:

Company X manufactures goods before the first taxing day and sells them by wholesale after the first taxing day.

Result: The new law will impose tax on this dealing, even though one of its essential elements (the manufacture of the goods) occurs before the first taxing day.

Example 2: Company X purchases goods, for a tax-inclusive price, and makes a payment of royalty in connection with the goods before the first taxing day. X then sells the goods by retail after the first taxing day.

Result: X may not be liable to tax on the sale (as an external costs sale) because that assessable dealing specifically excludes external costs incurred before the date of introduction of the Bill in the House of Representatives. However, if the cost is incurred between the commencement date and the first taxing day, then tax will be imposed on any sale that occurs after the first taxing day, even though the royalty was paid before the first taxing day.

Example 3: Company X enters into an avoidance arrangement before the first taxing day which affects the amount of tax payable on an assessable dealing that occurs after the first taxing day.

Result: Under the general principles, the general anti-avoidance provision ( 'the GAAP' ) would be expected to apply to this scheme. However, a specific element of the GAAP is that it will not apply to schemes entered into on or before 26 May (the day that the Bill was introduced into the House of Representatives).[subclause 92(1) of the Sales Tax Assessment Bill 1992]

23.9 Dealings with goods taxed under the old law: There is no general restriction on imposing tax on an assessable dealing with goods under the new law if those goods have already been taxed under the existing law. This is consistent with the existing law, which does not restrict the subsequent taxing of goods that have already borne tax. An example of a situation in which the existing law imposes tax on goods more than once is if goods are the subject of successive wholesale sales and the purchasers do not quote. If the new law imposes tax on goods that have already borne tax under the existing law then, with one exception, the new law will give the taxpayer a credit for any tax paid on the goods under the existing law.

23.10 Some assessable dealings will not apply to goods taxed under the old law: The new law will impose tax on an 'untaxed goods sale or AOU'. Broadly, these are goods that either have not previously been taxed or would have been taxed except for the operation of an exemption Item in the proposed Sales Tax (Exemptions and Classifications) Act 1992. In the absence of a special provision, it is possible that some goods taxed under the existing law might fall inadvertently into the definition of 'untaxed goods'. There will be a special provision that prevents these dealings from applying to goods which have been taxed under the existing law or which would have been taxed under the existing law except for the operation of an item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. [clause 5]

23.11 Australian-used goods: The new law will not impose tax on Australian-used goods. which, broadly, are goods that have been applied to own use in Australia). Australian-used goods are not assessable goods. As mentioned in paragraph 23.7, the new law will be capable of applying to acts and omissions that occur before the first taxing day. A consequence of this is that, at the first taxing day, goods can be regarded as Australian-used goods because of an application to own use ( as defined in the new law. that occurred before the first taxing day. However, if those goods have not been regarded as applied to own use (or have not gone into use or consumption) as defined in the existing law, then they will not be taxable under either the new law or the existing law.

23.12 To overcome this problem, there will be a special transitional provision which will apply to treat, as assessable goods, goods which were applied to own use (as defined in the new law) before the first taxing day. This rule will apply unless:

•

tax was imposed on the AOU under the existing law; or

•

tax would have been imposed on the AOU except that it was exempted under the Sales Tax (Exemptions and Classifications) Act 1935 because the applier could not be taxed for any reason.

There will be one exception to this rule. Any packing AOU that occurred before the first taxing day will result in the container being Australian-used goods on the first taxing day. There will be no tax payable on that packing AOU. However, the normal taxable value rules will apply if any of the contents are assessable goods that are the subject of a later assessable dealing. In that case, the taxable value of the contents will include the value of the container.

Example:

Goods (as defined in the existing law) are packed into a container before the first taxing day and the goods, and their container, are sold by wholesale after the first taxing day. At the time of the sale the contents are assessable goods.

Result: The container will be treated as Australian-used goods on the first taxing day. When the contents are sold by wholesale, the taxable value of the contents will include the value of the container.[clause 6]

23.13 Goods obtained under quote: A key concept of the new law is 'obtaining goods under quote'. It is an element of several assessable dealings and of several credit grounds. The term is defined in the new law to mean a quote of:

•

an exemption number by a registered person; or

•

an exemption declaration by an unregistered person.

'Exemption number' and 'exemption declaration' are new concepts. In the existing law, the equivalent concept to quoting an exemption number is the quoting of a certificate of registration. There is no equivalent, in the existing law, to the quotation of an exemption declaration, although there are administrative arrangements in place which are broadly similar.

23.14 In the absence of a special provision, a person who obtained goods before the first taxing day by quoting a certificate of registration would not be taken to have obtained the goods under quote for the purposes of the new law. As a consequence, a sale or application to own use of those goods after the first taxing day would not be taxable under either the new or the existing law. In order to prevent this from happening, there will be a special provision in the new law which will treat goods obtained under quote of a certificate of registration under the existing law as obtained under quote for all purposes of the new law.[clause 7]

Example:

Company X purchases goods before the first taxing day and quotes its certificate of registration. After the first taxing day, X sells the goods by retail.

Result: The retail sale of the goods will be an assessable dealing by X (a retail sale of goods obtained under quote - AD2b).

23.15 Credits will be available for goods taxed under existing law: Tax that is paid or payable under the existing law, or which is borne under the existing law, will be treated as if it is tax paid, payable or borne under the new law for the purposes of the credit rules. Consequently, if a taxpayer pays tax on a dealing with goods under the existing law and then becomes liable to tax under the new law on a subsequent dealing with the same goods, then the taxpayer will be entitled to a credit under the new law for the tax paid under the existing law.[clause 9]

Example:

Company X purchases goods for an amount that includes tax paid by the vendor. The purchase occurs before the first taxing day. Company X sells the goods by wholesale after the first taxing day (and the goods are still assessable goods at the time of the sale).

Result: The sale of the goods after the first taxing day will be an assessable dealing. Company X will be liable to tax on the dealing but will be entitled to a credit for the tax paid under the existing law to the extent that it has been included in the purchase price for the goods.

23.16 The credit grounds are set out in Table 3 in Schedule 1 to the Sales Tax Assessment Bill 1992. Column 5 of that table specifies the time at which each of the credit grounds arises. This is usually the time at which occurs the last of the elements of each ground. As a general rule, if that last element occurs on or after the first taxing day, then the credit will arise under the new law and not under the existing law.

Example:

EB Ltd sells goods by wholesale under the existing law to AD Ltd. who does not quote on the purchase). EB pays tax under the existing law on the sale. After the first taxing day, AD sells the goods by wholesale to MP Ltd (who does not quote on the purchase). That sale is an assessable dealing (AD1b) and AD pays tax under the new law.

Result: AD is entitled to a credit under the new law (Credit ground 4) for the tax paid under the existing law.

23.17 There will be some cases where, if the last element only of the credit entitlement occurs after the first taxing day, then the new law will not apply. This is because the credit entitlement essentially relates to acts, transactions or operations which are fully covered by the existing law. These will be:

CR1 (tax overpaid): If the overpayment is in connection with an act, operation or transaction that occurred before the first taxing day, then CR1 will not apply.

CR11 (goods exported): If the claimant has borne tax on goods before the first taxing day but exports the goods on or after that day, then CR11 will not apply.

CR12 (output goods exported): If the claimant has borne tax on the output goods before the first taxing day but exports the goods on or after that day, then CR12 will not apply.

CR13 (container exported): If the claimant has borne tax on the container before the first taxing day, CR13 will not apply.

CR19 (leased goods exported): If the claimant has borne tax on the goods before the first taxing day, then CR19 will not apply.

CR20 (R&D approval obtained): If the claimant has borne tax on the goods before the first taxing day, then CR20 will not apply.

CR21 (bad debt): If the claimant has paid tax on a dealing that occurs before the first taxing day, then CR21 will not apply. [clause 9]

23.18 Registrations: The new law will maintain the registration of persons who are registered under the existing law immediately before the first taxing day. However, it will not provide any special entitlement to registration if, on the first taxing day, the registered person does not satisfy any of the grounds for registration under the new law. Consequently, the Commissioner may cancel any person's registration if that is the case. To enable the Commissioner to de-register persons who are not entitled to registration under the new law, persons registered under the existing law who have no entitlement to registration on the first taxing day will be required to notify the Commissioner of that fact within 21 days after that day.[clause 10]

23.19 Continued operation of some exemption items under existing law: Some of the exemption items in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 will continue to apply after first taxing day, but they have not been included in Schedule 1 to the Sales Tax (Exemption and Classifications) Bill 1992. The items to which this special transitional provision will apply are:

(i)

items 14 and 14A: Goods for use in the mining industry;

Reason: The structure of the items is not consistent with the structure of the exemption Items in the new law.

(ii)

item 105: Certain UHF television transmitters.

Reason: Item 105 will have no application after 1 January 1993, so it has not been thought necessary to reproduce it in the new law.

23.20 Continued operation of the small manufacturers exemption: The existing law provides 2 exemptions for the dealings of manufacturers whose total liability to tax is below certain threshold levels. These exemptions are provided in items 100 and 103 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. It is possible that there may be some taxpayers who can obtain a greater exemption under the existing concession than under the new small business exemption. This would only occur in isolated situations, usually with manufacturers whose turnover consisted almost exclusively of goods taxable at the highest rate of tax (30%). In these cases, if the dealing is taxable under the new law, but would have been exempt under item 100 or 103 if the existing law still applied, then the dealing will not be taxable under the new law. [clause 12]

23.21 Modification of the small business exemption - 'countable dealings': An essential element of the small business exemption is that it will apply only if the tax liability on countable dealings over the preceding 12 months does not exceed $10,000. This term is defined by reference to dealings under the new law and not to dealings under the existing law. It will be necessary to ensure that, on the first taxing day, the concession will not apply to taxpayers whose dealings under the existing law exceeded $10,000. Therefore, there will be a special provision that will modify the meaning of the total tax liability on countable dealings to include:

•

tax payable under the old law on the sale value of any 'dealing'; or

•

tax that would have been payable under the old law on the sale value of any dealing except that the small manufacturer's exemption applied.

However, this will not include any tax imposed on an entry for home consumption of imported goods under the Sales Tax Act (No. 5) 1930. [clause 13]

Example:

PAL is a wholesaler/retailer of goods which it does not manufacture. During the period commencing 2 years before the first taxing day PAL has paid tax of $5000 per month. None of this tax is paid on goods entered for home consumption under the old law.

Result: On the first taxing day, the small business exemption will not apply to PAL because the tax liability on countable dealings in the previous 12 months under the existing law exceeded $10,000.

23.22 Modification of the small business exemption - tax-free inputs: One of the exclusions from the application of the small business exemption will be an assessable dealing with output goods that have a sufficient link with input goods, and the taxpayer has not borne tax on the input goods. The purpose of this exclusion is to ensure that the small business exemption applies only to exempt output goods if their input goods have borne tax. In the case of most inputs goods (except for raw materials used in the manufacture of the output goods), the exemption will not apply if the linked input goods were purchased tax-free less than 2 years before the assessable dealing with the output goods. However, if this restriction were to apply from the first taxing day it would severely limit the application of the small business exemption. It would particularly disadvantage taxpayers who cannot access the existing small manufacturer's exemption, but who will be able to access the small business exemption. However, most of them would have purchased their inputs tax-free under the existing law. In order that these taxpayers will not have to wait for 2 years before accessing the concession, the exclusion in the small business exemption will not apply to inputs that were purchased or applied to own use before the first taxing day.[clause 12]

23.23 Containers: The taxable value of any assessable dealing will include the value of any associated container, except if the container has been the subject of a previous taxable dealing in its own right [clause 35 of the Sales Tax Assessment Bill 1992]. 'Taxable dealing' does not, in its ordinary meaning, include a dealing on which tax was imposed under the existing law. There will be a special provision that will alter the meaning of 'taxable dealing', for the purpose of clause 35 only, to include a dealing that attracted tax under the existing law.[clause 8]

23.24 Monthly and quarterly remitters: Under both the existing and the new law, a person whose liability to sales tax is below a certain amount has the option to pay tax on a quarterly basis. The remainder of taxpayers pay on a monthly basis. Under the new law, the first taxing day may occur during sales tax quarter, rather than at the start of it. Therefore, some of a quarterly remitter's total tax liability for that quarter will arise under the existing law and the rest under the new law. The approach of the new law, with one exception, will be to let the new and existing laws operate in tandem for the tax payable during this quarter. So, for example, references to tax payable throughout Part 5 of the new law (Collection and recovery provisions) will mean tax payable under the new law in respect of the quarter in which the first taxing day occurs. Tax payable under the existing law in respect of that quarter will be dealt with under the existing law.[clause 14]

23.25 The one exception to this approach will apply to the provision which will identify the circumstances in which a person can be a quarterly remitter [clause 62 of the Sales Tax Assessment Bill 1992]. In determining whether the conditions set out in that clause are satisfied, references to tax payable and obligations to pay tax and lodge returns will be interpreted as including references to tax payable, and obligations, under the existing law.

Regulations

23.26 There will be power to make regulations concerning transitional matters [clause 15] . The purpose of this regulation-making power is to deal with specific issues, not covered by the general transitional provisions, which may only be identified after the new law was introduced in the House of Representatives. The power will be a general one. However, there will also be specific powers to make regulations providing for:

(i)

approvals given under the old Exemptions and Classifications Act to continue to have effect for the purposes of corresponding provisions in the new Exemptions and Classifications Act;

Example:

Item 135A of the existing law exempts motor vehicles for use by persons who have been certified by the Secretary of the Department of Community Services as sufficiently disabled to meet the tests set out in the item. The regulations will ensure that these certificates continue to apply in the same way as if the new law was not enacted.

(ii)

regulations under the existing Exemptions and Classifications Act (with appropriate modifications) to continue to have effect for the purposes of the new Exemptions and Classifications Act.

Consequential Amendments To Other Commonwealth Acts

A. Introduction

24.1 This chapter explains the consequential amendments to other Commonwealth Acts that will be necessary because of the re-write of the sales tax law.

B. Explanation and Commentary

24.2 The following Acts will be amended as a result of the new sales tax law:

•

Australian National Maritime Museum Act 1990.

•

Australian National Railways Commission Act 1983.

•

Australian Sports Commission Act 1989.

•

Australian Sports Drug Agency Act 1990.

•

Consular Privileges and Immunities Act 1972.

•

Crimes (Taxation Offences) Act 1980.

•

Diplomatic Privileges and Immunities Act 1967.

•

Freedom of Information Act 1982.

•

Fringe Benefits Tax Assessment Act 1986.

•

Hearing Services Act 1991.

•

Income Tax Assessment Act 1936.

•

Pay-roll Tax (Territories) Assessment Act 1971

•

Petroleum (Australia-Indonesia Zone of Cooperation) Act 1990

•

Petroleum Resource Rent Tax Assessment Act 1987.

•

Sales Tax Assessment Act (No. 1) 1930.

•

Social Security Act 1991.

•

Special Broadcasting Service Act 1991.

•

Taxation Administration Act 1953.

•

Taxation (Interest on Overpayments) Act 1983.

•

Telecommunications Act 1991.

•

Tobacco Charges Assessment Act 1955.

•

Training Guarantee (Administration) Act 1990.

•

University of Canberra Act 1989.

•

Wool Tax (Administration) Act 1964 [clause 16 and the Schedule]

Australian National Maritime Museum Act 1990

24.3 Existing Law: The Act currently provides that the transactions of the Museum in respect of goods for use and not for sale by them are not subject to sales tax.

24.4 Change: The Act will be amended to ensure that the Museum retains its exemption from sales tax under the new law for goods purchased for use by the Museum.

Australian National Railways Commission Act 1983

24.5 Existing Law: This Act provides that the Australian National Railways Commission can make a regulation to deem them not to be a public authority for the purposes of item 77 of the First Schedule of the Sales Tax (Exemptions and Classifications) Act 1935. The Commission would then be liable to pay sales tax on their dealings.

24.6 Change: The Act will be amended to allow the provision to apply to the equivalent item under the new law.

Australian Sports Commission Act 1989

24.7 Existing Law: The Act currently provides that the transactions of the Sports Commission and the Australian Sports Foundation in respect of goods for use and not for sale by them are not subject to sales tax.

24.8 Change: The Act will be amended to ensure that both bodies retain their exemption from sales tax under the new law for goods purchased for use by both the Sports Commission and the Sports Foundation.

Australian Sports Drug Agency Act 1990

24.9 Existing Law: The Act currently provides that the transactions of the Australian Sports Drug Agency in respect of goods for use and not for sale by them are not subject to sales tax.

24.10 Change: The Act will be amended to ensure that the Drug Agency retains its exemption from sales tax under the new law for goods purchased for use by the Drug Agency.

Consular Privileges and Immunities Act 1972

24.11 Existing Law: Under this Act, Consular officials are allowed to bring certain goods into Australia free of sales tax.

24.12 Change: The Act will be amended to ensure that this concession will be available under the new sales tax legislation.

Crimes (Taxation Offences) Act 1980

24.13 Existing Law: This Act provides for penal sanctions to counter sales tax evasion practices where tax that is lawfully payable cannot be collected because the taxpayer has deliberately set up a business so that there are insufficient funds to meet any sales tax liability. It is an offence for a person to enter into an arrangement so that a company or trustee is unable to pay sales tax or future sales tax, or to aid or abet another person to enter into such an arrangement.

24.14 Change: The Act will be amended to insert a new Part IIA which will apply the existing provisions relating to sales tax evasion to offences committed under the new law.

Diplomatic Privileges and Immunities Act 1967

24.15 Existing Law: Under this Act, Diplomats are allowed to bring certain goods into Australia free of sales tax.

24.16 Change: The Act will be amended to ensure that this concession will be available under the new sales tax legislation.

Freedom of Information Act 1982

24.17 Existing Law: A person may obtain access to documents under the control of the Commissioner containing any personal information about their sales tax dealings.

24.18 Change: This Act will be amended to exempt from an FOI request information that is not allowed to be disclosed under the Sales Tax Assessment Bill 1992, unless the information contains personal information about the person requesting it.

Fringe Benefits Tax Assessment Act 1986

Income Tax Assessment Act 1936

Pay-roll Tax (Territories) Assessment Act 1971

Petroleum Resource Rent Tax Assessment Act 1987

Sales Tax Assessment Act (No. 1) 1930

Tobacco Charges Assessment Act 1955

Training Guarantee (Administration) Act 1990

Wool Tax (Administration) Act 1964

24.19 Existing Law: Under these Acts a liquidator of a company is required to set aside, out of the assets available to the company to pay ordinary debts, an amount to cover any 'prescribed tax' that is owing by the company. The Commissioner is required to notify the liquidator as soon as practicable of the amount of tax that is or may become payable under any tax Act listed In that law.

24.20 Change: The liquidator provisions of these Acts will be amended to remove the list of Commonwealth Tax Acts that have corresponding liquidator provisions. A simpler definition of 'prescribed tax' will require the Commissioner to notify the liquidator or asset holder of any amounts of tax owing under any Act administered by the Commissioner that has equivalent rules for a liquidator. The words 'any amount that the Commissioner is required to notify under a section of another Act that corresponds to this section' will replace the specific listing so that an amendment will not be required every time a new Tax Act is enacted.

Hearing Services Act 1991

24.21 Existing Law: The Act currently provides that the transactions of the Hearing Services Authority in respect of goods for use and not for sale by them are not subject to sales tax.

24.22 Change: The Act will be amended to ensure that the Authority retains its exemption from sales tax under the new law for goods purchased for use by the Authority.

Petroleum (Australia - Indonesia Zone of Cooperation) Act 1990

24.23 Existing Law: This Act provides the conditions for a treaty between Australia and Indonesia over an area between Indonesian East Timor and Northern Australia. Goods imported into the area by either party are not subject to sales tax by the other party. If the goods are permanently transferred to another part of Australia they will then be subject to sales tax.

24.24 Change: The Act will be amended to allow this concession to continue under the new legislation.

Social Security Act 1991

24.25 Existing Law: Section 1037 of this Act provides that a mobility allowance is not payable to a person who is eligible to purchase a motor vehicle free of sales tax under items 135 or 135A of the First schedule to the Sales Tax (Exemptions and Classifications) Act 1935.

24.26 Change: The Act will be amended to provide a reference to the equivalent Items of the new law. A person who purchases a tax-free motor vehicle under Items 96 or 97 of Schedule 1 of the new Sales Tax Exemptions and Classifications law will not be entitled to a mobility allowance.

Special Broadcasting Service Act 1991

24.27 Existing Law: The Act currently provides that the Broadcasting Service is not liable to pay tax under any law of the Commonwealth relating to sales tax.

24.28 Change: The Act will be amended to ensure that the Broadcasting Service retains its exemption from sales tax under the new law for goods purchased for use by the Broadcasting Service.

Taxation Administration Act 1953

24.29 Offences relating to statements made to a taxation officer:

Existing Law: It is an offence to make a false or misleading statement to a taxation officer. Subsection 8J(2) of this Act specifically excludes any statement made in a document in response to a request for information made by the Commissioner under subsection 23(1) of the Sales Tax Assessment Act (No. 1) 1930.

Change: Subsection 8J(2) will be amended to ensure that this exclusion continues to apply in relation to statements made in response to the equivalent provision in the new law (clause 108).

24.30 Penalty taxes to be alternative to prosecution for certain offences:

Existing Law: Section 8ZE provides for penalty taxes to be an alternative to prosecution for certain offences such as failing to lodge returns or making untrue statements under section 45 of the Sales Tax Assessment Act (No. 1) 1930.

Change: Subsection 8ZE(3) will be amended to ensure that prosecution will continue to be an alternative to administrative penalties imposed under the new law (clauses 96 and 97) .

24.31 Definition of delayed administration (beneficiary) objection:

Existing Law: A person who has an interest in the estate of a deceased person may lodge an objection against any assessment of tax made by the Commissioner.

Change: This Act will be amended to include a reference to subclause 73(4) of the new law to allow interested persons to lodge objections against assessments made under the new law.

24.32 Definition of delayed administration (trustee) objection:

Existing Law: A trustee of an estate of a deceased person may lodge an objection against any assessment of tax made by the Commissioner.

Change: This Act will be amended to include a reference to subclause 72(7) of the new law to allow trustees to lodge objections against assessments made under the new law.

24.33 Registration-type sales tax decision:

Existing Law: A person may lodge an objection against a decision by the Commissioner to refuse to register them for sales tax purposes or for cancelling their registration as set out in the sales tax law.

Change: This Act will be amended to include references to the relevant sections of the new law that cover registration and cancellation of registration.

24.34 Ineligible sales tax remission decisions:

Existing Law: If a person fails to provide a return or other information in respect of goods or makes an untrue statement pursuant to s45 of Sales Tax Assessment Act (No. 1) 1930. When a penalty of up to double the excess of tax avoided will apply. A person may object against this penalty decision only if the amount is more than $20 and more than 20% per year of the tax avoided.

Change: This definition will be amended to cover the equivalent provision in the new sales tax law. Under the new law this penalty provision will also apply to a person who obtains a tax benefit under an avoidance scheme.

Taxation (Interest on Overpayments) Act 1983

24.35 The definition of 'relevant tax' will be amended to include a reference to the new Sales Tax Assessment Bill 1992. This will ensure that a taxpayer who has paid tax under the new law and has a successful objection against the amount of tax paid will receive interest on any tax overpaid.

Telecommunications Act 1991

24.36 Existing Law: The Act currently provides that the AUSTEL is not liable to pay tax under any law of the Commonwealth relating to sales tax.

24.37 Change: The Act will be amended to ensure that the AUSTEL retains its exemption from sales tax under the new law for goods purchased for use by the AUSTEL.

University of Canberra Act 1964

24.38 Existing Law: The Act currently provides that the University is not liable to pay tax under any law of the Commonwealth relating to sales tax.

24.39 Change: The Act will be amended to ensure that the University retains its exemption from sales tax under the new law for goods purchased for use by the University.

Government Authorities exempt from sales tax

24.40 Existing Law: Certain Commonwealth Government Authorities have an exemption from paying sales tax if they were set up before 14 May 1987. If a Government authority was set up after that date their enabling legislation must specifically provide for an exemption from sales tax.

24.41 Change: There will be no change to the effect of these provisions under the new law. Those authorities that were exempt under the existing law will retain their exemptions under the new law. [clause 130 of the Sales Tax Assessment Bill 1992]