Taxation Ruling

SST 9

Sales tax: retention of title or Romalpa clauses

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FOI status:

may be releasedFOI number: I 1017457

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 Australian Taxation Office (ATO) rests with the taxpayer, rather than being dependent on any assessment made by the Commissioner. To assist taxpayers to determine their sales tax liability, this Ruling sets out how the sales tax law applies where a retention of title clause (also known as a reservation of title clause and in this Ruling referred to as a Romalpa clause) is included in a contract of sale of goods. The Ruling also provides a lower cost alternative method for accounting for sales tax in returns where goods are sold under contracts which include a Romalpa clause. ^[F1]

Date of effect

1.2 This Ruling confirms previous ATO advice and is effective immediately. It replaces any previous public or private Rulings to the extent that they are inconsistent with it.

When does a liability for sales tax arise?

1.3 The general rules covering liability for sales tax are set out in Division 1 of Part 3 of the Sales Tax Assessment Act 1992 (STAA). Section 16 of the STAA outlines the general rules for taxing assessable dealings. ^[F2]

1.4 Liability for sales tax arises at the time when an assessable dealing occurs as set out in Table 1 in Schedule 1 to the STAA. The time of dealing, as specified in column 4 of Table 1, depends upon the nature of the particular transaction and may be the time of sale, time of 'AOU', ^[F3] time of delivery, time of removal or time of local entry. In the case of an assessable dealing involving the sale of goods, the liability arises at the time of sale. However, the time of sale may be affected by the existence of an effective Romalpa clause in the contract of sale.

1.5 A Romalpa clause is a term or condition found in certain contracts of sale of goods. ^[F4] In their simplest form, such clauses ^[F5] are designed to ensure that ownership of the goods is retained by the seller until the buyer has paid the contract price in full. As Romalpa clauses may affect the time of a sale of goods, it follows that they may also affect the timing of liability for payment of sales tax.

1.6 A mere statement in a sales invoice that 'property in the goods is retained until payment is received in full' may not, of itself, be sufficient to incorporate that condition into the contract for sale ^[F6] and may not, therefore, be effective in deferring the time of sale and liability for payment of sales tax.

Chapter 2: When does a sale take place?

Sales tax legislation

2.1 The term 'sale' is defined in section 5 of the STAA as including barter or exchange. Because the definition is inclusive in nature, a sale is not limited to barter or exchange transactions. To ensure that the purposes of the STAA are promoted, ^[F7] the word 'sale' also assumes its legal meaning. ^[F8]

Sale of goods legislation

2.2 The law relating to contracts for sale of goods has been codified in basically identical form throughout the various States and Territories of the Commonwealth. ^[F9] A contract of sale is dealt with in section 6 of the Goods Act 1958 (Vic) (the Goods Act). ^[F10] 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 being fulfilled, the contract is called an agreement to sell.

Transfer of property between seller and buyer

2.3 As the transfer of property ^[F11] is the cornerstone of a sale, it is necessary to determine when property passes in order to determine the time of a sale. Section 21 of the Goods Act deals with the sale of unascertained goods ^[F12] 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 ^[F13] or ascertained goods, ^[F14] 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 determining 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 determining the intention of the parties as to the time when the property in the goods is to pass to the buyer. ^[F15] 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. In the absence of a contractual stipulation (such as a Romalpa clause), most ordinary contracts for sale of goods 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.'

2.5 Subsection 24(1) of the Goods Act allows a seller of specific goods to reserve the right of the disposal of the goods until certain conditions are fulfilled. In such a case, property in the goods does not pass to the buyer until the conditions are fulfilled, notwithstanding the delivery of the goods to the buyer. A Romalpa clause is an example of the conditions referred to in subsection 24(1).

Distinction between property and title

2.6 While it has been suggested that the terms title and property are distinguishable, ^[F16] for the purpose of this Ruling, the words title and property are treated as being interchangeable. ^[F17] Consequently, all Romalpa clauses that purport to reserve title, ownership or property in goods until the seller has been paid are treated the same for sales tax purposes.

Chapter 3: Sales tax implications of a Romalpa clause

Purpose of a Romalpa clause

3.1 The purpose of a Romalpa clause is to protect the seller in the event that the buyer fails to pay for the goods at the agreed time or is unable to pay the contract price in full due to insolvency. In order to achieve this, a Romalpa clause relies on two basic mechanisms. ^[F18] Firstly, the seller seeks to reserve property ^[F19] in the goods until payment is received. Often, an attempt is also made to create a fiduciary relationship between the seller and the buyer in relation to the goods. 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, a Romalpa clause often seeks to create proprietary rights for the seller over assets into which the goods might be transformed or with which they might be mixed.

Types of Romalpa clause

3.2 There are several types of Romalpa clause. All have a common theme - to protect the interests of the vendor where goods are sold on credit. The more common variations can be categorised ^[F20] as:

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The simple Romalpa clause

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

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The current account Romalpa clause

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.

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The continuing Romalpa clause

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

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The proceeds of sale Romalpa clause

This clause authorises the buyer to resell the goods but provides that the proceeds of sale shall be held by the original buyer 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 the sub-purchaser shall be held in trust for the seller and/or shall be assigned by the buyer to the seller on demand.

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The aggregation Romalpa clause

The purpose of this clause is to permit the buyer to use the goods to make 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 The ability of a seller to retain title beyond delivery to the buyer is governed by the intention of the parties. ^[F21] The intention of the parties is determined not only from the terms of the contract, but also by the conduct of the parties and the circumstances of the case. ^[F22] While subsection 24(1) of the Goods Act recognises that sellers can reserve the right of disposal of goods after delivery to the buyer, the effectiveness of a Romalpa clause in reserving ownership depends on its consistency with the rest of the contract of sale, read as a whole.

3.4 In support of a substance over form approach, Lord Herschell in Alexander Knox McEntire and John Arthur Maconchy v. Crossley Brothers Limited [1895] AC 457 stated at 462-463:

'... the agreement must be regarded as a whole - its substance must be looked at. The parties cannot, by the insertion of any mere words, defeat the effect of the transaction as appearing from the whole of the agreement into which they have entered. If the words in one part of it point in one direction and the words in another part in another direction, you must look at the agreement as a whole and see what its substantial effect is.'

3.5 An example of a Romalpa clause that was held to run contrary to the substance and reality of the agreement is found in The South Australian Insurance Company v. William Beavis Randell and Samuel Randell [1869] 3 LR 101. In this case, the Privy Council held that corn which was delivered to a miller for the general purpose of his trade became his property on the basis that, at 112:

'... having the power to use property as his own for his own purposes is wholly irreconcilable with the notion of his being a Trustee of the property ...'

3.6 See also the judgment of Vinelott J In re Peachdart Ltd [1984] 1 Ch 131 at 142:

'To my mind it is impossible to suppose that ... the parties intended that until a parcel of leather had been fully paid for the company would remain a bailee of each piece of leather comprised in the parcel throughout the whole process of manufacture, that [the sellers] should have the right until the parcel had been fully paid for, to enter the company's premises and identify and take away any partly or completely manufactured handbag derived from it, and that on the sale of a completed handbag the company would be under an obligation to pay the proceeds of sale into a separate interest bearing account and to keep them apart from their other moneys and not employ them in the trade.'

3.7 As the complexity of a Romalpa clause increases, its effectiveness in reserving ownership may decrease and establishing the time of sale becomes more difficult. Normally, it might be assumed that the time of sale under a contract of sale of goods with a Romalpa clause is as stipulated in the clause. However, contrary indications in the rest of the contract or in the conduct of the parties may suggest a different result.

3.8 There are potentially four situations where the ability of the owner of goods to retain title to those goods will be lost. Those four situations are: ^[F23]

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where the goods become fixtures;

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where the goods are commingled ^[F24] 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. ^[F25]

3.9 In the ordinary course, where goods are not on-sold, not commingled with other goods so as to lose their identity, ^[F26] do not become irretrievably affixed to other goods or do not become fixtures in their own right, property in the goods passes to the buyer according to the terms of the Romalpa clause. A liability to sales tax which depends on the time of sale (see paragraphs 1.3 to 1.5) arises at that time.

The effect of section 17 of the Sales Tax Assessment Act

3.10 Section 17 of the STAA 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 page 72:

'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.'

3.11 The effect of section 17 is to bring the time of sale forward to when the purchaser first uses the goods, which is 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 is the time of sale and section 17 has no application.

3.12 An example of the effect of section 17 is where 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, stocks it with soft drink and switches it on. Under section 17, the time when the cabinet is installed and stocked by the milk bar proprietor, i.e., the time when it is first used, ^[F27] is taken to be the time of sale and therefore the time when the manufacturer would be required to account for sales tax.

3.13 The STAA does not define the term use and it therefore takes its usual or ordinary meaning. The mere placing of trading stock on a shelf does not constitute a use of the stock that will trigger the effect of section 17. However, a commingling of the stock with other goods may affect the reservation of title unless the seller is able to trace his or her ownership of that stock. ^[F28]

Chapter 4: Accounting for sales tax in returns

General responsibilities

4.1 Section 61 of the STAA 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 an effective Romalpa clause are not liable for sales tax at that stage ^[F29] as the contract formed is a contract of sale that has not, as yet, ripened into a sale. ^[F30]

4.2 To comply with the requirements of section 61, the taxpayer needs to determine the fate of every item delivered, including whether any item has either been used by the purchaser (section 17) or has been on-sold ^[F31] prior to payment. In order to achieve this, the taxpayer would have to be able to establish which of the following events occurs 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 the goods; or

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the time when the purchaser on-sells the goods.

Even with regular monitoring this is difficult to accomplish in most situations, unless the goods are clearly identifiable, for example, by serial number.

4.3 The rate of sales tax applicable to goods sold subject to a Romalpa clause is the rate of tax that is in force under the STAA at the time a sale occurs. This may be different (higher or lower) than the rate of sales tax in force at the time goods are invoiced or delivered.

The Commissioner's alternative method

4.4 It is recognised that taxpayers who sell goods under contracts containing a Romalpa clause may face practical difficulties and significant costs in maintaining systems to enable them to trace the fate of those goods so as to determine the time of sale. The compliance costs associated with this requirement may lessen the commercial benefits that the taxpayers seek to achieve by the use of Romalpa clauses.

4.5 As an alternative, a taxpayer selling goods under contracts containing a Romalpa clause is permitted to account for sales tax on those goods as if the relevant time of sale was at the time of invoicing or at the time of delivery of the goods, whichever occurs first. The rate of sales tax applicable to those goods is the rate in force at the time of invoicing or delivery as the case may be. Any subsequent change in the rate of sales tax does not lead to any change in liability for sales tax.

4.6 This alternative method retains for the taxpayer the commercial benefits associated with the use of Romalpa clauses while avoiding the difficulties and compliance costs associated with tracing the fate of every item sold subject to a Romalpa clause. It is also consistent with the recommended accounting treatment of goods sold subject to a Romalpa clause. ^[F32]

4.7 This alternative method of accounting for sales tax liability is an exercise of the general powers of administration of the sales tax law conferred on the Commissioner by section 111 of the STAA. 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 STAA imposes. ^[F33]

4.8 Some taxpayers who sell goods under contracts that include a Romalpa clause have sought agreement to lodge returns and to account for sales tax either on a cash received basis or, more generally, according to the payment patterns of their customers, for example, on the basis of average debtor turnover. Neither of these bases is acceptable. They are unlikely to be a true reflection of 'the time of sale' of the goods because they do not take into account any use of goods by the purchaser or any sales of goods to third parties prior to payment. Furthermore, determining sales tax liability on such bases is not likely to result in equity between competitors in business because of the variations in credit terms and other factors affecting payment. However, the ATO will consider submissions for alternative methods, on a case by case basis, from taxpayers who can demonstrate that they employ effective Romalpa clauses and can trace the fate of the goods, but are incurring unreasonable administrative costs in meeting their obligations under the law.

The inclusion of delivery charges in the taxable value

4.9 As a general rule, all amounts charged by the seller in relation to the supply of goods up to the point when property in the goods passes to the buyer, form part of the price and therefore the taxable value of goods sold by wholesale. The mere presence of a Romalpa clause does not automatically mean that charges for delivery form part of the taxable value of the goods. If delivery charges ^[F34] need to be paid for the purchaser to get good title in the goods, those charges form part of the price of the goods and should be included in their taxable value. Where delivery is the subject of a separate contract, delivery charges do not form part of the taxable value, provided that 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. A fuller explanation of the treatment of delivery charges is provided in Taxation Ruling SST 6 at paragraphs 2.5 to 2.8.

Commissioner of Taxation
29 April 1998

Appendix A

Comparative table of sale of goods legislation

Previously released to the public in (unnumbered) draft form on 7 August 1996

References

ATO references:
NO NAT 96/7601-5

Subject References:
retention of title
Romalpa clauses

Legislative References:
AIA 15AA
ITAA 1
Goods Act 1958 (Vic) 3(1)
Goods Act 1958 (Vic) 4(2)
Goods Act 1958 (Vic) 6
Goods Act 1958 (Vic) 6(3)
Goods Act 1958 (Vic) 21
Goods Act 1958 (Vic) 22
Goods Act 1958 (Vic) 22(2)
Goods Act 1958 (Vic) 23
Goods Act 1958 (Vic) 24(1)
Goods Act 1958 (Vic) 31
Goods Act 1958 (Vic) 41
Goods Act 1958 (Vic) 42
STAA 5 Table 1 Schedule 1
STAA 16 Table 1 Schedule 1
STAA 17 Table 1 Schedule 1
STAA 61 Table 1 Schedule 1

Case References:
Alexander Knox McEntire and John Arthur Maconchy v. Crossley Brothers Limited
[1895] AC 457

Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd
[1976] 2 All ER 552
Borden (UK) Ltd v. Scottish Timber Products Ltd and Anor
[1981] 1 Ch 25
Commonwealth Quarries (Footscray) Pty Ltd v. FCT
(1938) 59 CLR 111
Four Point Garage Ltd v. Carter
[1985] 3 All ER 12
In re Peachdart Ltd
[1984] 1 Ch 131
Queensland Trustees Limited v. Fowles
(1910) 12 CLR 111
Scott v. Surman
(1742) Willes 400
125 ER 1235
The Attorney-General for the State of New South Wales v. The Brewery Employees' Union of New South Wales
(1908) 6 CLR 469
The South Australian Insurance Company v. William Beavis Randell and Samuel Randell
[1869] 3RPC 101