House of Representatives

Explanatory Memorandum

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

MAIN FEATURES

Sales Tax (Exemptions and Classifications) Amendment Bill 1986

The present wholesale sales tax (WST) operates, as was explained earlier in these notes, to tax all goods at the general rate of 20% unless they are specified to be taxed at that rate, at a different rate or are exempt - there are presently six Schedules of goods contained in the Sales Tax (Exemptions and Classifications) Act 1935 - the Exemptions and Classifications Act - for this purpose.

The WST's multiple rate structure (exempt, 10% 20% or 30%) and the various detailed descriptions of goods in the six Schedules to the Exemptions and Classifications Act are the source of significant problems in its application and administration. Difficulties can and do arise in the assignment of particular commodities to an appropriate rate class with consequent administrative burdens and costs. In some relatively isolated instances unfair competition between like commodities or close substitutes can arise in the market place due to WST discriminations. In yet other cases, persons enjoy the benefit of exemption from tax in circumstances which are beyond the original intention of the law.

This Bill is designed to remove certain classification anomalies and inconsistencies that presently exist in the law, broaden the sales tax base in conjunction with the Sales Tax Laws Amendment Bill 1986 and make certain technical changes to several exemption items.

Alcoholic wine, cider and other similar beverages (Clause 5)

Australian and imported alcoholic wine, cider, mead, perry, sake and other similar fermented alcoholic beverages are presently subject to tax under item 1 in the Sixth Schedule to the Exemptions and Classifications Act - the rate of tax applicable in respect of those goods is 10%. The other item in that Schedule, item 2, covers containers for goods described in item 1, which are also taxed at 10%. The expression "other similar fermented alcoholic beverages" includes alcoholic fruit wines and alcoholic beverages fermented from plants such as vegetables, flowers and herbs and marketed as vegetable wine, etc. The expression does not include beer, spirits, liqueurs or spirituous liquors or beverages containing beer, spirits (other than spirits for fortifying wine or other beverages) liqueurs or spirituous liquors. Alcoholic beer is presently exempt from sales tax and will remain so under the measures proposed by this Bill. The other excluded alcoholic beverages are presently taxable at 20% and will continue to be so taxed - the expression "alcoholic" beverages refers to beverages which contain more than 1.15% by volume of alcohol determined in accordance with sub-section 3(7) of the Exemptions and Classifications Act.

The alcoholic beverages (and containers therefor) to which the Sixth Schedule applies are, as was mentioned earlier, taxable at the 10% rate. By this Bill, the Sixth Schedule is to be repealed. As these alcoholic beverages will no longer be specified in any Schedule to the Exemptions and Classifications Act, they will therefore fall to be taxed at the general rate - 20%.

High rate goods (Schedule clauses 21, 28 and 30)

The Second Schedule to the Exemptions and Classifications Act specifies categories of goods that are presently taxable at the highest rate, i.e., 30%. Goods presently covered by that Schedule include furs and fur garments, jewellery, cosmetics, photographic equipment, tape recorders, tape players, record and audio disc players, video tape recorders, video disc and cassette recorders and television receivers.

Consistent with the broad objective of rationalising the WST system, it is proposed to include in this Schedule "luxury" motor vehicles. Briefly stated, a luxury motor vehicle will be any motor car or station wagon (including cars or station wagons that are four wheel drive vehicles) the wholesale price of which exceeds $19,892. This amount is calculated by reference to the upper depreciation limit for motor vehicles for income tax purposes. As such, the figure will change generally each 1 July in accordance with indexation changes in the income tax depreciation limit.

Exempt goods to become taxable

Household goods (Schedule clauses 15 and 27)

Items 1, 2, 8 and 12 in the Third Schedule to the Exemptions and Classifications Act specify goods of a kind that are ordinarily used for household purposes. Goods covered by these items include, furniture, crockery, cutlery, refrigerators, washing machines, vacuum cleaners, household drapery and soft furnishings, water heating and hot water storage equipment and appliances or equipment for softening, filtering, de-salting or sterilising water.

There is, however, a number of other similar goods that are specifically exempt from sales tax by reason of their inclusion in the First Schedule to the Exemption and Classifications Act. Examples of these goods are household fittings and sanitary ware, household septic tanks and chemical sanitary units, movable toilet pans and chemicals or other materials or preparations for use in such goods.

This Bill will bring the sales tax treatment of all these goods into line by including household fittings and sanitary ware, etc., in the Third Schedule to the Exemptions and Classifications Act. The effect of this change will be to generally tax household goods at the one rate - 10%.

Non-alcoholic beverages (Schedule clause 7, 8 and 24)

Item 36 in the First Schedule to the Exemptions and Classifications Act exempts from sales tax goods that may broadly be described as beverages. There are three main categories of beverages covered by this item, namely -

•

alcoholic beer;

•

Australian fruit juice products; and

•

low-alcohol wine, cider and other similar beverages.

Alcoholic beer, that is beer that contains more than 1.15% by volume of alcohol, will remain exempt from sales tax. This Bill does, however, propose that the remaining categories of beverages described in item 36 become subject to tax at the 10% rate.

The Bill will specifically include the following beverages in the Third Schedule to the Exemptions and Classifications Act thus bringing them within the 10% rate category -

•

concentrates that consist of not less than 25% by volume of juices of Australian fruits for making non-alcoholic beverages;

•

cordials for making non-alcoholic beverages, and preparations for use in the flavouring of foods, being cordials or preparations which consist of not less than 25% by volume of juices of Australian fruits, a mixture of concentrates of juices of Australian fruits and water (not less than the natural strength of the juices) or a mixture of ]juices and their concentrates;

•

non-alcoholic non-carbonated beverages consisting of not less than 25% by volume of Australian fruit juices; and

•

non-alcoholic beverages consisting wholly of juices of Australian fruits.

This Bill will also bring into the WST base at the 10% rate Australian non-alcoholic wine and cider, together with Australian and imported non-alcoholic mead, perry, sake and other similar fermented beverages and beverages similar to cider and wine. Imported non-alcoholic wine and cider are taxable at the 20% general rate and will continue to be so taxable - in this context, "non-alcoholic" beverages refers to beverages which contain less than 1.15% by volume of alcohol.

Packaged flavoured milk (Schedule clauses 5, 6 and 23)

Item 26 in the First Schedule to the Exemptions and Classifications Act exempts milk, milk products and any food containing not less than 95% milk (including skim milk) or milk powder (including skim milk powder). A range of packaged flavoured milk drinks satisfies this item and is therefore exempt.

The Bill will specifically include these packaged flavoured milk drinks in the Third Schedule with the result that they will, subject to the overriding 95% test, be subject to tax at the 10% rate. Unflavoured milk will, however, continue to be exempt, as will, for example, certain dry powder products (which are presently exempt) that may be added to water or milk to produce flavoured beverages. Flavoured beverages containing less than 95% milk products will continue to be taxable at the 20% rate.

Certain scientific instruments and apparatus used in schools (Schedule clause 9)

Items 63 and 63A in the First Schedule to the Exemptions and Classifications Act together exempt a range of goods when purchased by individuals, universities and schools for use in those institutions.

The Bill proposes the repeal of item 63. This will not affect the position of universities and schools that purchase goods for their use, as item 63A will continue to provide that exemption. However, goods such as computers and calculators that have, in the past, been purchased by individuals such as teachers and students "tax-free" under item 63 will no longer be exempt when purchased by those persons.

Negatives, transparencies and film strips (Schedule clauses 20 and 29)

At present the developing of exposed film is not regarded as "manufacture" for WST purposes. Clause 4 of the Sales Tax Laws Amendment Bill 1986 proposes to include this process in the definition of "manufacture" for WST purposes. Under measures proposed by this Bill, negatives, transparencies and film strips manufactured from exposed film supplied by the customer will be included in the Fourth Schedule to the Principal Act. At the same time the Bill will exclude these goods from existing Item 39 in the Second Schedule to that Act - that item describes similar goods which are taxable at 30%. The result of these amendments will be that negatives, transparencies and film strips manufactured from exposed film supplied by the persons for whom they are manufactured will become taxable at the lower rate of 20% applicable to the Fourth Schedule.

Other anomalies and inconsistencies

Some anomalies that have been identified involve particular goods being taxed at lower rates than broadly comparable products or close substitutes. Changes to be made by this Bill for the purposes of eliminating these inequities are -

•

to increase from 10% to 20% the rate of tax on -

• .

swimming pools and equipment and accessories for use in swimming pools (Schedule clauses 16, 22, 25 and 26);

• .

certain film and video recordings (Schedule clause 24);

• .

industrial hand tools, gardening tools, and machinery, implements, etc., for use for business or industrial purposes in certain servicing, repairing, reconditioning, constructing and maintaining operations (Schedule clause 24); and

•

to tax at the 20% rate, goods that are presently exempt from sales tax -

• .

salt marketed for non-culinary purposes, principally as a swimming pool chemical (Schedule clauses 3 and 4); and

• .

spa baths (Schedule clauses 10, 11, 12, 13, 14, 15 and 27).

Other anomalies arise in the classification of particular goods at higher rates than similar goods. In this regard, the Bill will ensure that all aircraft used for business or industrial purposes qualify for exemption from sales tax irrespective of their design or method of uplift or propulsion - the present exemption item is restricted to certain aeroplanes (Schedule clause 17).

Technical changes (Schedule clauses 1, 2, 18 and 19)

There are many bases for exemption in the WST law. The wording of particular items in the First Schedule to the Exemptions and Classifications Act is in some cases, so specific that on a strict reading it could be argued that some goods, which were clearly intended to be exempt on policy grounds, are technically not exempt. This Bill will remedy a number of these deficiencies in several items in the First Schedule.

Sales Tax Laws Amendment Bill 1986

Sounds, visual images and computer software (Clauses 4, 5, 7, 10, 12, 14, 16, 18, 20, 22, 23, 24, 25, 27, 29, 31, 33, 35, 37, 39, 40 and 42)

While the demands of technological change have brought about significant growth in the development and marketing of goods containing computer software, this growth has generally not been reflected in sales tax payable in respect of those goods.

Computer programs embodied onto discs, tapes or other media and sold, whether alone or as part of computer equipment, bear sales tax in the same way as other goods, that is, on a taxable sale value of the goods equal to their wholesale selling price or its equivalent. However, the practice has developed where the value of the intellectual property in software is being separated from the medium when supplied to consumers and is therefore freed from sales tax. Under one arrangement, the software is supplied to the user under licence and, at the same time, the carrying medium is simply given to the consumer. As there is no sale of goods (so far as the software licence is concerned), the transaction does not attract sales tax and the liability is then limited to payment of sales tax on the value only of the relatively inexpensive carrying medium as an application of goods to the manufacturer's own use.

Licensing agreements have, as a means of reducing sales tax, been adopted widely by marketers of packaged "off-the-shelf" software, including word processing and accounting packages as well as the mass produced computer games. Persons who adopt this marketing technique have a distinct and significant advantage over competitors who have continued to include the value of the software in the taxable sale value of the goods containing it.

The provisions being put in place by this Bill will ensure that the sale value of goods containing computer software will always include the value of any consideration paid for a licence or other right to use the software.

Specialist producers who market software tailored to consumers' individual requirements often use the licensing system but in some cases for genuine commercial reasons. Nevertheless, the net revenue result is the same. The measures contained in the Bill treat specialist software producers the same for sales tax purposes as producers of packaged "off-the-shelf" software.

The changes proposed by the Bill do not disturb cases where persons produce their own computer programs for internal use in their businesses. These situations will continue to be free of any liability for sales tax on software so produced and used.

Although no evidence yet exists of such arrangements, licensing could readily be adapted to the marketing of films, videos or sound recordings. Accordingly, the Bill proposes measures to prevent revenue loss from similar arrangements with marketing of goods such as records, videos, cassettes, etc.

Swimming pools (Clauses 4 and 6)

The WST classification of swimming pool liners and components designed to form part of the walls or floors of swimming pools is determined on criteria related to whether the pool is a fixture, its mode of construction and its volumetric capacity. However, these criteria, taken together, produce discriminatory results, e.g., two swimming pools of similar size are taxed differently where one is constructed in situ from ordinary building materials (e.g., poured reinforced concrete and tiles) and the other is constructed using a pre-fabricated fibreglass shell.

In-ground swimming pools, however constructed, are fixtures. Vinyl and fibreglass liners and goods designed to form the walls or floors of such swimming pools are presently taxable at 10% (20% proposed under measures in the Sales Tax (Exemptions and Classifications) Amendment Bill 1986 : see notes on that Bill). On the other hand, swimming pools that are constructed in situ from, for example, concrete are not subject to tax because such structures built up and incorporated in the land are not presently regarded as "goods" for WST purposes.

Under measures contained in the Bill, the construction of the container or shell of a swimming pool in situ will be taken to be the manufacture of goods, and the person who constructs the container or shell, either personally (other than for own non-business use) or by using sub-contract labour, will be treated as a manufacturer for WST purposes. The result will be that sales tax will be payable at the 20% rate on the value of the container or shell of any swimming pool, however constructed. These measures will also apply in relation to the construction of spa pools and hot tubs.

Developing exposed film (Clause 4)

At present the developing of exposed film is not regarded as "manufacture" for WST purposes. However, the production of prints from the developed negatives is so treated. Because the charge for carrying out developing is not subject to sales tax, avoidance arrangements arise whereby the non-taxable developing charge is inflated to reduce the sales tax liability in respect of the production of prints.

This Bill seeks to remedy this situation by including the process of developing exposed film as manufacture in the definition of "manufacture" for WST purposes. As such, all the costs associated with the photographic process will be included in the sales tax base.

Temporary imports of goods (Clause 47)

Complementary provisions in the sales tax and customs laws allow the temporary importation of prescribed classes of goods, or goods to be used in prescribed circumstances, without payment of sales tax or customs duty. Examples include goods, brought into Australia by tourists or temporary residents, that are to be exported within 12 months.

Goods imported under these provisions are freed from tax or duty, subject to the giving of a security or an undertaking to the satisfaction of the Comptroller-General of Customs for the payment of tax or duty in the event the goods are not exported within 12 months.

The customs law was amended recently to extend its application, in relation to the temporary importation provisions, to goods to be used for purposes related to an America's Cup yacht race held in Australia or the Australian bicentennial celebrations.

This Bill will also bring the sales tax law into line with the customs law in this area, subject to existing safeguards concerning securities or undertakings in relation to the goods.

Sales Tax Acts Amendment Bill 1986

This Bill will make a number of consequential amendments of the Sales Tax Acts (Nos.1 to 9) 1930 and the Sales Tax Acts (Nos.11A and 11B) 1985 to exclude references to the Sixth Schedule to the Exemptions and Classifications Act that is proposed to be repealed by the Sales Tax (Exemptions and Classifications) Amendment Bill 1986 : see earlier notes in this memorandum.

More detailed explanations of the clauses of each of the Bills are contained in the notes that follow.