Taxation Ruling

SST D4

Sales Tax: retention of title or Romalpa clauses

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FOI status:

draft only - for comment

Chapter 1: What this ruling is about

Introduction

1.1 Sales tax is a self-assessing tax. Essentially, this means that the responsibility for determining the extent of any liability for sales tax and for remitting any tax to the ATO rests with the taxpayer, rather than being dependent on any assessment issued by the Commissioner. To assist taxpayers self-assessing and to provide guidelines for Taxation Officers in giving private rulings, this ruling sets out the Taxation Office's views on how the sales tax law applies where a retention of title clause is included in a contract for the sale of goods.

Date of effect

1.2 This ruling confirms previous ATO advice and will be effective immediately upon its release in final form.

When does a liability to tax arise?

1.3 The general rules for liability for sales tax are set out in Division 1 of Part 3 of the Sales Tax Assessment Act 1992 (referred to in this Ruling as the Act). Section 16 of the Act outlines the general rules for taxing assessable dealings^[F1].

1.4 The time of dealing, as outlined in Table 1, will either be, depending upon the particular assessable dealing (also outlined in Table 1), the time of sale, time of 'AOU'^[F2], time of delivery, time of removal or time of local entry.

1.5 A retention of title clause (also called a reservation of title clause, and hereafter referred to as a Romalpa^[F3] clause) is a term of a contract of sale of goods^[F4]. In its simplest form, it is designed to ensure that ownership of the goods is retained by the seller until the buyer has paid the contract price in full^[F5]. A Romalpa clause that affects the time of the sale of goods may need to be taken into account in determining sales tax liability.

Chapter 2: When does a sale take place?

Sales tax legislation

2.1 A 'sale' is defined in section 5 of the Act as including barter or exchange. This definition is inclusive in nature, and as such, assumes that a sale is not limited to barter or exchange transactions. In order to promote the purpose of the Act^[F6], a legal meaning of the word 'sale' is appropriate^[F7], in addition to the above definition.

Sale of goods legislation

2.2 To a large extent the law relating to contracts of sale of goods has been codified in basically identical form throughout the States and Territories of the Commonwealth. For instance, a contract of sale is dealt with in section 6 of the Goods Act 1958 (Vic) (the Goods Act)^[F8]. A contract of sale includes an agreement to sell as well as a sale. Subsection 6(3) states that where, under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called a sale. Where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

Transfer of property as between seller and buyer

2.3 As the transfer of property^[F9] is the cornerstone of a sale, it is necessary to determine when property passes. Section 21 of the Goods Act deals with the sale of unascertained goods^[F10] and states that property in such goods is not transferred to the buyer unless and until the goods are ascertained. Section 22 states that where there is a contract for the sale of specific^[F11] or ascertained goods^[F12] the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the purpose of ascertaining the intention of the parties, subsection 22(2) of the Goods Act requires that regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

2.4 Where no intention can be determined from the above factors, section 23 of the Goods Act sets out five rules for ascertaining the intention of the parties as to the time when the property in the goods is to pass to the buyer^[F13]. The first four rules apply to contracts for the sale of specific or ascertained goods and the fifth rule applies to contracts for the sale of unascertained or future goods by description. Many of the contracts of sale of goods, in the absence of a contractual stipulation (such as a Romalpa clause), will come within the ambit of Rule 1, which states:

Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery or both be postponed.

Distinction between property and title

2.5 While it has been suggested that title and property are distinguishable^[F14], for the purpose of this ruling, the words title and property will be treated as being interchangeable^[F15]. Consequently, all Romalpa clauses that purport to retain the title, ownership or property in goods with the seller until the seller has been paid will be treated the same for the purposes of applying their effect to the sales tax law.

Chapter 3: Sales tax implications of Romalpa clauses

Purpose of Romalpa clauses

3.1 The purpose of a Romalpa clause is to protect the seller in the event of the buyer becoming insolvent where the contract price has not been fully paid. In order to achieve this, a Romalpa clause relies on two basic mechanisms^[F16]. First, the seller seeks to reserve property^[F17] in the goods until payment is received. An attempt to create a fiduciary relationship between the seller and the buyer in relation to the goods is also often made. The purpose of reserving property and creating a fiduciary relationship is to enable the seller to rely on the equitable doctrine of tracing in the event of the buyer becoming insolvent. Secondly, Romalpa clauses often seek to create for the seller proprietary rights over assets into which the goods might be transformed or with which they might be mixed.

Types of Romalpa clauses

3.2 There are five types of Romalpa clauses^[F18]

The simple Romalpa clause

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here the clause merely provides that the buyer shall not become the owner of the goods until the seller has been paid.

The current account Romalpa clause

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this clause stipulates that property is not to pass until all other goods sold by the seller to the buyer have been paid for in full.

The continuing Romalpa clause

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the intention of this clause is to extend the Romalpa clause from the buyer to any purchaser from him and provide that such purchasers shall not get ownership until the purchase price has been paid.

The proceeds of sale Romalpa clause

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this clause authorises the buyer to resell the goods but provides that the proceeds of sale shall be held by him as an agent or trustee for the seller until the price owed by the buyer has been paid in full. It is supplemented frequently by the provision that the buyers' rights against his sub-purchaser shall be held in trust for the seller and/or shall be assigned by the buyer to the seller on demand.

The aggregation Romalpa clause

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the purpose of this clause is to permit the buyer to use the goods to fabricate other products from them or to incorporate the goods into composite products. It purports to vest the ownership of the resulting composite products in the seller to the exclusion of all other suppliers, or as an owner of the products in common with the buyer and all other parties who have reserved similar rights in proportion to the value of the goods supplied by them respectively.

Effect of a Romalpa clause on the time of sale

3.3 As the simple Romalpa clause is the most commonly used, this ruling is limited to an analysis of the implications of such clauses. In the absence of any contrary circumstances or conduct on the part of the parties to the contract, the time of sale will be governed by the Romalpa clause as it is a contractual stipulation indicating when property is to pass. Consequently, as the Romalpa clause initially reserves property in the goods to the seller, it is recognised as a legitimate device for delaying the sale of goods. In order to determine exactly when property passes, reference must be made to the Romalpa clause in question as well as to the conduct of the parties and the circumstances of the case.

3.4 Irrespective of the existence of a Romalpa clause, there are potentially four situations where the ability of the owner of a good to retain title to that good will be lost. Those four situations are^[F19]:

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where the goods become fixtures;

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where the goods are commingled with other goods so as to lose their identity;

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where the goods are irretrievably affixed to other goods; and

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where the goods are sold to third party purchasers^[F20].

3.5 Therefore, where the goods are the subject of a simple Romalpa clause, property in the goods will pass to the purchaser upon final payment of purchase monies where those goods are:

•

not on-sold;

•

not commingled with other goods, for example, as a raw material;

•

do not become irretrievably affixed to other goods; or

•

do not become fixtures in their own right;

prior to the receipt by the seller of final sale monies. Where, for example, goods are the subject of a Romalpa clause and are commingled with other goods before the purchaser pays the full purchase price, title to the goods may disappear when commingled and the sellers may be restricted to the recovery of the value of the goods and have no interest in the end-product^[F21].

The effect of section 17 of the Sales Tax Assessment Act

3.6 Section 17 of the Act ensures that the time of sale cannot be deferred for sales tax purposes beyond the time of first use. The purpose of section 17 is explained in the Explanatory Memorandum to the Sales Tax Assessment Bill 1992 at G78:

If the purchaser of goods is allowed to use the goods before the time that title passes, then the time of first use by the purchaser is to be treated as the time of sale. This provision is designed to ensure that the time of sale cannot be deferred, for sales tax purposes, beyond the time of first use.

3.7 The effect of section 17 is to bring the time of sale forward to when the purchaser first uses the goods, which will be a time after the contract is made but before the time when title is to pass under the contract. If title passes to the purchaser under the contract before the purchaser first uses the goods, that will be the time of sale and section 17 will have no application.

3.8 An example of the effect of section 17 is as follows:

A manufacturer of refrigerated display cabinets sells a cabinet to a milk bar proprietor on credit under a contract of sale that contains a Romalpa clause. The milk bar proprietor installs the cabinet and stocks it with soft drink. In accordance with section 17, the manufacturer would be required to account for tax on the cabinet at the time the cabinet was installed and stocked, i.e., the time it was first used by the milk bar proprietor is taken to be the time of sale.

3.9 The Act does not define the term use and it would therefore take its usual or ordinary meaning. However, the mere placing of trading stock on a shelf or in a cabinet does not constitute a use of the stock as it does not amount to a commingling with other goods so as to completely lose its identity. In this situation the owner would be able to trace their ownership^[F22].

Chapter 4: Accounting for sales tax in returns

General responsibilities

4.1 Section 61 of the Act requires a person who has a liability to sales tax to lodge a return within 21 days after the end of the month or quarter in which the liability arose, that is, when the sale took place. As previously mentioned, taxpayers supplying goods on credit subject to a Romalpa clause are not liable for sales tax at that stage as the contract formed is a contract of sale that has not as yet ripened into a sale^[F23]. In order for a taxpayer to comply with section 61, the taxpayer would need to monitor the fate of each good involved, and pay tax on each good in accordance with section 17. If, however, title passes to the purchaser under the contract before the purchaser uses the goods, that will be the time of sale and section 17 has no application.

4.2 Where goods are sold on credit subject to a Romalpa clause, in order for a taxpayer to meet the requirements of section 61, the taxpayer would be required to determine the fate of every item delivered, and whether any item had been either used by the purchaser (section 17) or sold prior to payment. In order to achieve this, the taxpayer would have to be able to determine which of the following events occur first and account for tax accordingly:

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the time when title passes to the purchaser under the contract;

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the time when the purchaser first uses or sells the goods.

This could only be done where the goods are clearly identifiable, for example, by serial number. The rate of tax would be the rate of tax applicable at the earlier of the two alternatives above.

The Commissioner's alternative method

4.3 An alternative approach, endorsed by the Taxation Office, is for the taxpayer to account for tax as if the sale occurred at either the time of invoicing or delivery. The attraction with this method is that the taxpayer is not required to trace the fate of each agreement to sell in order to determine when it is deemed to be a sale by virtue of section 17. This method will obviously lead to a significant reduction in compliance costs in comparison to the approach set out in paragraph 4.2.

4.4 The Taxation Office is able to offer this alternative arrangement under section 111 of the Act, which states that the Commissioner has the general administration of the sales tax law. The courts have interpreted this power to include the ability to enter into any agreement that is necessary for fair and reasonable administration, but not to extend to the ability to remit or relieve from taxation, or to collect more taxation than the Act imposes^[F24].

4.5 The Taxation Office considers that fair and reasonable administration is achieved by giving taxpayers the choice of either enjoying the timing benefits derived from the inclusion of a Romalpa clause in the terms of trade, or significantly reducing compliance costs by paying tax on the alternative basis that the sale occurred at the time of invoicing or delivery at the rate of tax applicable at that date, and foregoing the delayed sale time. The Taxation Office will not therefore enter into agreements to account for tax on the basis of the calculation of average periods in regard to payment patterns or deemed sales under section 17.

The inclusion of delivery charges in the taxable value

4.6 The taxable value of an assessable dealing will include charges for freight, postage or insurance where goods are sold under a contract that provides that the sale price includes delivery^[F25]. Where delivery is the subject of a separate contract, delivery charges will not form part of the taxable value if the parties genuinely intend property in the goods to pass without delivery at the prices stated and the amount for delivery is a competitive commercial charge. However, if the delivery charges need to be paid for the purchaser to get good title to the goods, those charges form part of the price of those goods and should be included in their taxable value. A fuller description of the treatment of delivery charges is provided in Taxation Ruling SST 6 at paragraphs 2.5 - 2.8.

Chapter 5: Previous advice affected by this ruling

5.1 This ruling replaces any other advice that you may have been given to the extent that the previous advice is inconsistent with this ruling. All private rulings previously issued are therefore amended to the extent they are inconsistent with this ruling.

Appendix A - Reference details

Comparative Table of Sale of Goods Legislation

Commissioner of Taxation
7 August 1996

This Draft Ruling has been finalised by SST 9

References

ATO references:
NO T2000/3647
BO (BO Number [optional])