GST issues registers
Primary production industry partnership3 Dairy
3.1.1 - Dairy Industry Restructuring Compensation Package
This issue is no longer relevant as the Dairy Exit Program (DEP) ceased in 2003 and the Dairy Structural Adjustment Program (DSAP) ceased in 2008. The issue previously stated:
Question
Will dairy farmers be liable for GST on payments made under the Dairy Structural Adjustment Program and the Dairy Exit Program?
For the source of the ATO view, refer to paragraph 33 of - Goods and services tax: grants of financial assistance
Answer
No.
Explanation
Payments made to dairy farmers under either the Dairy Structural Adjustment Program (DSAP) or Dairy Exit Program (DEP) are considered to be grants of financial assistance. The GST treatment of grants is discussed in Goods and Services Tax Ruling GSTR 2000/11 Goods and Services Tax: Grants of Financial Assistance.
Paragraph 10 of the ruling states:
'GST is payable in respect of taxable supplies. Supplies made in connection with the receipt of a grant will be subject to GST where the grant represents consideration for a supply which is a taxable supply'
It is, therefore, necessary to determine whether dairy farmers make a supply in relation to the payments under both DSAP and DEP.
Section 9-10 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines the meaning of supply. It says that a supply is any form of supply whatsoever and includes the creation, grant, transfer, assignment or surrender of any right.
However, paragraph 33 of GSTR 2000/11, states:
For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish a supply. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties.
Dairy Structural Adjustment Program
The DSAP consists of payments from the Dairy Adjustment Authority (DAA) to dairy farmers. This is to assist them to adjust to a deregulated environment. DSAP payments are paid to dairy farmers who operate as various entities including sole traders, partnerships, companies and trusts. There are three types of payment under the scheme:
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- standard payments
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- exceptional events supplementary payments, and
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- anomalous circumstance payments.
In order to be eligible for standard payments, dairy farmers must hold an eligible interest in the enterprise at 6:30pm on 28 September 1999 and the enterprise must have delivered milk during the financial year beginning on 1 July 1998. Similar provisions apply in the case of exceptional events supplementary payments and anomalous circumstance payments. The main requirement placed on the recipients of these payments is that written claims contain enough information to enable the Dairy Adjustment Authority to determine eligibility for payment.
In the case of payments made under the Dairy Structural Adjustment Program (DSAP) no obligation is placed on the recipient.
Therefore, there is no supply.
Dairy Exit Program
The DEP payments are made to assist farmers who exit the dairy industry and are paid by Centrelink. In order to be eligible for payment the recipient must first be granted a DSAP payment right. They are also required to sell their farm and exit the dairy industry. It is understood that there is a requirement that the farmer is to remain outside the agricultural industry for five (5) years but this is not binding on the recipient of the payment.
The requirement to be excluded from an industry for a period of time is a restrictive covenant. If a restrictive covenant is enforced it will be a supply. However, in circumstances where the obligation is not binding, there is no supply.
In addition, under the DEP program the dairy farmers have already exited the industry and consequently the supply will not be made in the course or furtherance of an enterprise that they are carrying on. Therefore, it is considered that on this basis any obligation entered into in relation to the DEP program will not constitute a taxable supply.
Questions
Are the intermediate entities making taxable supplies in relation to the Dairy Adjustment Levy (DAL) collected for Commonwealth Department of Agriculture, Fisheries, and Forestry - Australia (AFFA)?
This issue is no longer relevant as the DAL ceased to be payable in February 2009
Are the intermediate entities required to show the DAL collected at G1 and G11 of their Business activity statement (BAS)?
This issue is no longer relevant as the DAL ceased to be payable in February 2009
Is the levy amount considered to be ordinary income of the intermediaries and need to be included at T1 on their BAS?
This issue is no longer relevant as the DAL ceased to be payable in February 2009
Background
The DAL is administered by AFFA and is levied on all retail sales of liquid dairy products. The levy rate is 11 cents per litre. This levy is not subject to GST as it is included in the A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2007 (No.1) (Treasurer's Determination) pursuant to Division 81 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
The retailer is responsible for payment of the levy and they are required to pay it to the wholesaler/distributor at the same time the product is paid for or 90 days after the sale, whichever is the earliest. In turn, the wholesaler/distributor must include the levy collected from the retailer in the price that they pay the processor. The processor then pays the money to the Commonwealth. It is shown as a separate line item on each invoice that passes between the parties. The wholesaler/processor holds the money in trust for AFFA.
Processors are required to notify AFFA of any late or non-payments and penalties apply.
Question 1
Are the intermediate entities making taxable supplies in relation to the DAL collected for AFFA?
Answer
No.
Explanation
AFFA is making a supply to the retailers in that they are obligated to spend the money collected to assist the Dairy Industry. The levy payment by the retailers represents consideration for that supply.
This arrangement would normally constitute a taxable supply, except for the fact that the DAL is specifically excluded from GST by virtue of the Treasurer's Determination.
The wholesaler/distributor is required to advise the retailer that they are liable for the levy of 11c per litre on liquid milk products delivered. They are, in turn, required to pay that amount to the processor. The documentation provided to the processor must show the amount of levy included in the payment.
The processor is then required to forward the levy amount to AFFA and must provide supporting documentation.
It is not considered that these intermediaries make any supplies in relation to the transfer of the levy between themselves. The intermediaries merely act as collection agents for AFFA.
Consequently the payment of the levy remains outside the GST regime throughout the entire supply chain. Therefore GST cannot be charged on this component anywhere within the supply chain.
Question 2
Are the intermediate entities required to show the DAL collected in their BAS?
Answer
No.
Explanation
These intermediate entities are not considered to be making any supplies or acquisitions in relation to the transfer of the levy, as they are merely collection agents for AFFA. Therefore no entries are required on these entities' BAS for this levy.
Question 3
Is the levy amount considered to be ordinary income of the intermediaries and need to be included at T1 on their BAS?
Answer
No.
Explanation
The collection of the Dairy Adjustment Levy is performed as a collection agent of the Commonwealth, (section 97 of the Dairy Industry Adjustment Act 2000 (DIAA)). Similarly, the collection may be undertaken by sub-agents of the Commonwealth (sections 98 and 99 of the DIAA).
Dairy adjustment levy amounts do not represent ordinary income of the collection agent or sub-agent, as these amounts are not derived, they are merely collected on behalf of the Commonwealth. The amounts are not instalment income and not included at label T1 of the Activity Statement.
3.3.1 - Unprocessed cow's milk -GST-free status
Question
Is unprocessed cow's milk subject to GST?
Non-interpretative - straight application of the law
Answer
Yes. Unprocessed cow's milk is subject to GST pursuant to paragraph 38-4(1)(ga) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
Explanation
A supply of food is GST-free pursuant to section 38-2 of the GST Act. 'Food' is defined in section 38-4 of the Act to include:
but does not include:
- (ga)
- unprocessed cow's milk; ...'
Therefore, cow's milk will be GST-free once it has been subjected to any process (other than filtration). Processes that the milk is subjected to may include several, but not all, of the following:
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- Separation;
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- Evaporation;
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- Pasteurisation;
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- Re-hydration;
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- Homogenisation; and
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- Reconstitution.
Filtration is not considered to be a 'process', on the basis that all milk leaving the farm has been subjected to some form of filtration and if this were considered a process for the purposes of the GST Act, the provision would become inoperative. For more details please refer to Issue 2 of the Food Industry Partnership - issues register.
3.3.2 - Supplies of excess unprocessed milk
Question
Are the supplies of excess unprocessed milk between dairy manufacturers taxable?
Non-interpretative - straight application of the law
Background
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- Dairy manufacturers have contracts with dairy producers to receive all the milk produced by them.
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- Excess milk supplies occur at times during the year.
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- These excess supplies may be given to other dairy manufacturers who process the milk as their own.
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- The payment by one dairy manufacturer to another for the milk received is usually by way of milk (which would be of equivalent protein and milk fat content). Sometimes the payment is in cash at the end of the financial year.
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- Often, there are no formal contracts drawn for these arrangements.
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- Most dairy manufacturers account on a non-cash basis.
Answer
Yes.
Explanation
The supplies of unprocessed milk would be taxable if section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is satisfied.
Section 9-5 of the GST Act provides:
You make a taxable supply:
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- you make the supply for consideration; and
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- the supply is made in the course or furtherance of an enterprise that you carry on; and
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- the supply is connected with Australia; and
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- you are registered, or required to be registered.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
Supply
The definition of supply as provided for in section 9-10 of the GST Act is very broad and includes the supply of goods.
The provision of milk would fall within this definition.
Consideration
A taxable supply must be for consideration, which includes everything that the supplier has received for the goods. Section 9-15 of the GST Act states that it includes any payment, act or forbearance done in connection with the supply of the thing.
The return of the milk or any payment in cash would be consideration for the supply of milk.
Provided that paragraphs 9-5 (b) - (d) of the GST Act are also satisfied, the supplies of the unprocessed milk between dairy manufacturers will be taxable.
3.3.3 - Milk and creditable acquisitions?
Question
Are the acquisitions of milk creditable acquisitions?
Non-interpretative - straight application of the law
Background
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- Dairy manufacturers have contracts with dairy producers to receive all the milk produced by them.
- •
- Excess milk supplies occur at times during the year.
- •
- These excess supplies may be given to other dairy manufacturers who process the milk as their own.
- •
- The payment by one dairy manufacturer to another for the milk received is usually by way of milk (which would be of equivalent protein and milk fat content). Sometimes the payment is in cash at the end of the financial year.
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- Often, there are no formal contracts drawn for these arrangements.
- •
- Most dairy manufacturers account on a non-cash basis.
Answer
Yes
Explanation
The acquisition of milk by the dairy manufacturers would be creditable acquisitions if section 11-5 of the GST Act is satisfied.
Section 11-5 of the GST Act provides:
You make a creditable acquisition if:
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- you acquire anything solely or partly for a creditable purpose; and
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- the supply of the thing to you is a taxable supply; and
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- you provide, or are liable to provide, consideration for the supply; and
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- you are registered, or required to be registered.
Acquisition
Acquisition is defined in section 11-10 of the GST Act to include an acquisition of goods. The acquisition of milk would satisfy this section.
Creditable purpose
Subsection 11-15(1) of the GST Act provides that a thing is acquired for a creditable purpose to the extent that it is acquired in the carrying on of an enterprise. As the milk is acquired by dairy manufacturers to be processed into dairy products, the milk would be acquired for a creditable purpose.
Therefore, provided the other requirements of section 11-5 of the GST Act are met, the acquisitions of milk will be creditable acquisitions.
3.3.4 - Valuing supplies of milk
Question
What would the value of the milk be?
Non-interpretative - straight application of the law
Background
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- Dairy manufacturers have contracts with dairy producers to receive all the milk produced by them.
- •
- Excess milk supplies occur at times during the year.
- •
- These excess supplies may be given to other dairy manufacturers who process the milk as their own.
- •
- The payment by one dairy manufacturer to another for the milk received is usually by way of milk (which would be of equivalent protein and milk fat content). Sometimes the payment is in cash at the end of the financial year.
- •
- Often, there are no formal contracts drawn for these arrangements.
- •
- Most dairy manufacturers account on a non-cash basis.
Answer
The value of milk would be based on the market value at the time of supply.
3.3.5 - Milk manufacturer accounting on non cash basis
Question
When does the GST liability and input tax credits entitlement occur when a manufacturer accounts on a non-cash basis?
Non-interpretative - straight application of the law
Background
- •
- Dairy manufacturers have contracts with dairy producers to receive all the milk produced by them.
- •
- Excess milk supplies occur at times during the year.
- •
- These excess supplies may be given to other dairy manufacturers who process the milk as their own.
- •
- The payment by one dairy manufacturer to another for the milk received is usually by way of milk (which would be of equivalent protein and milk fat content). Sometimes the payment is in cash at the end of the financial year.
- •
- Often, there are no formal contracts drawn for these arrangements.
- •
- Most dairy manufacturers account on a non-cash basis.
Answer
Please refer to explanation below
Explanation
Where the supplies are taxable supplies, each party will be liable for GST on the supply of milk that they make.
When a manufacturer accounts on a non-cash (accruals) basis, the following rules apply with regard to GST liability and input tax credit entitlement.
Subsection 29-5(1) of the GST Act states that GST payable on a supply is attributed to the tax period in which:
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- any consideration is received for the supply; or
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- an invoice is issued for the supply;
whichever is the earlier.
Subsection 29-10(1) of the GST Act states that eligibility for an input tax credit arises in the tax period in which:
- •
- payment is made for the supply; or
- •
- an invoice was issued for the acquisition;
whichever is the earliest.
In order to claim input tax credits, a tax invoice is required from the entity making the taxable supply.
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