Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 6 - Other amendments

Outline of Chapter

6.1 This Chapter explains the amendments contained in Schedule 6 to this Bill. Schedule 6 contains a number of GST related minor policy and technical amendments to the GST Act, GST Transition Act, LCT Act, WET and LCT Transition Act and the ITAA 1997. These amendments will:

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treat returnable containers as second-hand goods;

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allow an entity to attribute input tax credits to a tax period later than one in which it holds a tax invoice;

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ensure that an entity is able to claim its correct entitlement to input tax credits where it leases or hires a car, acquires a GST-free or partly GST-free car or acquires a car only partly for a creditable purpose;

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ensure the definitions of representative and incapacitated entity are aligned with the Bankruptcy Act 1966 and Corporations Law ;

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ensure that a car manufacturer is subject to the correct amount of LCT where they supply a luxury car by way of lease or hire;

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align the time to claim special credits provided for under the WET and LCT Transition Act with other special credits in the GST Transition Act;

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treat the special credits provided for under the WET and LCT Transition Act as assessable income;

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ensure that an entity that has a GST branch or branches cannot become a member of a GST group;

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allow partnerships, trusts and individuals to apply to be approved as additional members of existing GST groups;

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ensure that all partnerships, trusts and individuals that satisfy the membership criteria in relation to a particular GST group are not required to apply to be members of that GST group;

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stipulate that all partnerships, trusts and individuals that are GST group members must have the same tax periods and accounting basis as all other members of the GST group;

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ensure that companies cannot form GST groups with unrelated entities;

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ensure that the associates provisions operate in relation to non-profit sub-entities;

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ensure that an input tax credit is available to a GST group where the reverse charge rules have applied to make supplies within the group taxable;

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provide that an entity will not be required to provide a tax invoice to a recipient, where the supply is a taxable supply of real property under the margin scheme;

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clarify the treatment of acquisitions and importations made directly for settling claims under GST-free policies;

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clarify the treatment of settlements to injured third parties;

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correct the notification requirement for GST groups;

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provide an increasing adjustment for excesses in certain circumstances;

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remove the GST reverse charge from payments in relation to the provision of employee share scheme by a non-resident entity;

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remove the GST registration requirement for a non-resident entity that is only making supplies of employee services to a wholly-owned subsidiary in Australia;

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extend the concessional treatment of long-term accommodation to accommodation provided at marinas; and

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ensure that the correct amount of GST is calculated on the supply of a construction project in progress at 1 July 2000.

Detailed explanation of new law

Returnable containers as second-hand goods

6.2 Division 93 provides special rules for the GST treatment of supplies of returnable containers from unregistered entities who are not making taxable supplies. Returnable containers are those containers for which a statutory refund scheme exists to encourage recycling. South Australia is the only state which has a statutory refund scheme for certain beverage containers.

6.3 Division 66 provides special rules for the GST treatment of second-hand goods. A registered entity, which acquires second-hand goods from unregistered entities that are not making taxable supplies, is entitled to input tax credits. These rules currently apply to all containers which are not returnable containers.

6.4 In order to simplify the rules for all recyclable containers, item 31 will repeal Division 93. This reduces the compliance costs for those entities in South Australia which would have had to deal with 2 sets of rules depending on whether the recyclable containers were returnable or not.

6.5 Items 1, 3, 5, 15 and 40 make consequential amendments to sections 11-99, 29-39, 37-1, 66-20 and 195-1 (the definition of returnable container) to remove all references to returnable containers from the GST Act.

6.6 The effect of these amendments is that all recyclable containers are second-hand goods under Division 66. The acquisition of containers throughout Australia, including those previously treated as returnable containers, will entitle a registered recipient to input tax credits provided the other provisions of Division 66 are met.

Delaying a claim for an input tax credit

6.7 As the law currently stands, an entity is required to attribute an input tax credit to the first tax period in which it holds a tax invoice (subsection 29-10(3)). There may be situations where an entity does not become aware that it holds a tax invoice in respect of a creditable acquisition until after it has lodged its GST return for the tax period. For example, in the case of a larger entity, when the accounting section lodges a GST return it may not be aware that another part of the entity holds a tax invoice for a creditable acquisition, and does therefore not claim its input tax credits for that acquisition in the GST return.

6.8 In these situations the entity is unable to claim their entitlement to the input tax credit in the next tax period but must instead lodge an amended GST return for the tax period in which it should have claimed the input tax credit.

6.9 Item 2 inserts new subsection 29-10(4) in the GST Act to allow an entity to postpone the attribution of an input tax credit to any tax period after it holds a tax invoice. Where the GST return for the tax period states a net amount that does not take account of an input tax credit that was attributable to that tax period, then the input tax credit is:

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not attributable to that tax period; and

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attributable to the first tax period for which the entity takes it into account in its GST return.

[Subsection 29-10(4)]

6.10 Where an entity has attributed its input tax credits to a tax period later than the one in which it first held the tax invoice, that entity must keep records that record and explain the acquisition to which the claim relates for at least 5 years from the time it claimed its entitlement to the input tax credit. [Item 14 in Schedule 5, subsection 70(1AAB) of the TAA 1953]

6.11 New subsection 29-10(4) does not affect the operation of subsection 29-10(3). An entity can still claim input tax credits in the first tax period in which it holds a tax invoice. Where an entity attributes its input tax credits to the first tax period in which it held a tax invoice, the entity is still only required to keep records that record and explain the creditable acquisition for 5 years after the completion of the transaction or act relating to the acquisition. New subsection 70(1AAB) of the TAA 1953 does not in any way vary or amend this requirement.

GST groups and branches

6.12 Subsection 54-5(3) of the GST Act stipulates that a branch of an entity (the parent entity) cannot be registered as a GST branch if the parent entity is a member of a GST group. Clearly, this provision was intended to prevent an entity using both the GST grouping provisions in Division 48 of the GST Act and the GST branching provisions in Division 54.

6.13 However, there is no parallel provision in Division 48 that prevents an entity that has GST branches from using the GST grouping provisions. This means that an entity that is a member of a GST group cannot use the GST branching provisions by virtue of subsection 54-5(3), but an entity that first chooses to register a GST branch can subsequently become a member of a GST group.

6.14 Item 9 inserts a new condition that an entity must fulfil in order to satisfy the membership requirements of a GST group. New paragraph 48-10(1)(g) stipulates that in order to satisfy the membership requirements of a GST group or proposed GST group, an entity must not have any registered GST branches.

6.15 The amendment made by item 9 commences on the day the Bill receives Royal Assent. On commencement of this Act, if an entity that is a member of a GST group has any registered GST branches, that entity will no longer meet the membership requirements of a GST group. The representative entity of the GST group would therefore be required to notify the Commissioner within 21 days of Royal Assent of this Act that a member of the group no longer satisfies the membership requirements for the GST group (see section 48-80). The Commissioner will then revoke the approval of that group member (see subsection 48-70(2)) and will decide the date of effect of that revocation (see section 48-85).

GST groups - references that only apply to companies

6.16 The GST grouping provisions in Division 48 of the GST Act make several references that only apply to companies. This does not take into account that other entities (partnerships, trusts and individuals) can be members of a GST group.

Approval of additional members

6.17 Paragraph 48-70(1)(a) provides for approval of an additional member of a GST group only if that additional member is another company that satisfies the membership requirements for the GST group. This means that a partnership, trust or individual cannot apply to become a new member of an existing GST group.

6.18 Item 14 amends paragraph 48-70(1)(a) to remove the reference to company and to replace it with entity. This will ensure that partnerships, trusts and individuals can apply to be approved as additional members of existing GST groups.

Entities not required to apply to be a member

6.19 Subsection 48-5(2) specifies that an application for approval of a GST group need not include all the companies of the 90% owned group to which the 2 or more companies belong. It may be inferred by the inclusion of this provision that an application for approval of a GST group must include all partnerships, trusts and individuals that meet the membership requirements in relation to that GST group.

6.20 Item 7 repeals subsection 48-5(2), but not the note at the end of that subsection. The subsection is replaced by new subsection 48-5(2) , which states that an application for approval as a GST group need not include all entities that satisfy the membership requirements of that GST group. This will ensure that all partnerships, trusts and individuals that satisfy the membership criteria in relation to a particular GST group are not required to apply to be members of that GST group.

Membership requirements

6.21 Paragraph 48-10(1)(d) specifies that an entity will meet one of the membership requirements for a GST group if the entity has the same tax periods applying to it as the tax periods applying to all those other members . Paragraph 48-10(1)(e) specifies that another membership requirement will be met by an entity if that entity accounts on the same basis as all those other members .

6.22 The only previous circumstance in subsection 48-10(1) that refers to other members is in paragraph 48-10(1)(b). In this paragraph, it refers to all the other members of the GST group or proposed GST group that are also companies . Thus, it may be inferred that when paragraphs 48-10(1)(d) and (e) refer to all those other members, this term refers to all those other members that are companies . As a result, partnerships, trusts or individuals with differing tax periods or accounting basis may argue that they can form a GST group if they meet the other criteria specified in Subdivision 48-A.

6.23 Item 8 amends paragraphs 48-10(1)(d) and (e) to change the wording those other members to the other members of the GST group or proposed GST group. This will ensure that all partnerships, trusts and individuals must have the same tax periods and accounting basis as all other members of the GST group in order to satisfy the membership criteria in relation to that GST group.

Companies forming GST groups with unrelated entities

6.24 Division 48 of the GST Act was designed to enable related entities to form GST groups if they meet certain eligibility criteria. When a GST group is formed, the group is effectively treated as a single entity for GST purposes and transactions between group members are not subject to GST.

6.25 The specific membership criteria for companies in a GST group stipulates that the company must be a company of the same 90% owned group as all the other members of the GST group or proposed GST group that are also companies - paragraph 48-10(1)(b). Thus, group members that are companies are not required to satisfy any relationship with partnerships, trusts or individuals that are members of the GST group. Unrelated entities may therefore exist within one GST group, in conflict with the original policy intention of the legislation.

6.26 Item 11 inserts new subsection 48-10(3) , which stipulates that a company will not satisfy the membership requirements of a GST group or proposed GST group when certain circumstances apply. These circumstances will occur when one or more members of the GST group are not companies [paragraph 48-10(3)(a)] and none of the companies that are members of the GST group satisfy any of the criteria laid out in new section 48-15 [paragraph 48-10(3)(b)] . Item 10 makes a change to subsection 48-10(2) to reflect that another subsection has been added.

6.27 The criteria in new section 48-15 outline certain relationships that a company may satisfy in relation to the non-company group members. In most respects, these criteria mirror the requirements in Division 48 of the GST Regulations, which sets out the GST group membership requirements for partnerships, trusts and individuals. [Item 12]

6.28 A company will meet the requirements of new section 48-15 if it satisfies any of the following criteria:

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A partnership, trust or individual that is a member of the GST group or proposed GST group has at least a 90% stake in the company. Whether or not any of these entities has at least a 90% stake in a company will be determined in accordance with section 190-5 of the GST Act, as though the non-company entity was the holding company referred to in that section [paragraph 48-15(1)(a)] ;

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If the company is a single-shareholder company, that shareholder is either:

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a partner in a partnership that is a member of the GST group;

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an individual that is a member of the GST group; or

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a family member of that partner or individual [paragraph 48-15(1)(b)] ;

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If the company has more than one shareholder, all of those shareholders are either a partner of the same partnership, where that partnership is a member of the GST group or a family member of any of those partners [subparagraphs 48-15(1)(c)(i) and (ii)] . Further, the shareholding of the company must be such that ensures at least 2 partners of the partnership are represented as shareholders either personally or by a family member [subparagraphs 48-15(1)(c)(iii), (iv) and (v)] ;

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If the company has more than one shareholder, each of those shareholders are either an individual that is a member of a GST group or a family member of that individual [paragraph 48-15(1)(d)] ;

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A trust that is a member of the GST group only makes distributions of income or capital to either companies that are members of the GST group [subparagraphs 48-15(1)(e)(i) and (ii)] or a charity [subparagraph 48-15(1)(e)(iii)] . New subparagraph 48-15(1)(e)(iia) enables a company to satisfy the criterion outlined in paragraph 48-15(1)(e) if the trust referred to in that paragraph makes distributions to shareholders, or family members of shareholders, of a company that is a member of the GST group [item 12] . New subsection 48-15(1A) stipulates that if the company has more than one shareholder, at least 2 shareholders of the company must be represented as beneficiaries of the trust in question either personally or by a family member [item 12] .

6.29 It should be noted that the requirement in paragraph 48-10(1)(b) will continue to apply in addition to the requirement in new subsection 48-10(3) . That is, all of the companies that are members of the GST group must be members of the same 90% owned group, as described in Division 190 of the GST Act.

6.30 Item 36 inserts a definition of a family member in the Dictionary in section 195-1. This term has the meaning given by new subsection 48-15(2) . In new subsection 48-15(2) , a family member of an individual is defined by reference to section 272-95 of Schedule 2F to the ITAA 1936. This is the same as the definition of family as used in the GST Regulations. It will include any parent, grandparent, brother, sister, nephew, niece, child, or child of a child of either the individual or the individuals spouse. It will also include the individuals spouse and the spouses of any person mentioned in the previous sentence. [Item 12]

6.31 The amendments made by items 6 to 12 and item 36 commence on the day the Bill receives Royal Assent . On commencement of this Act, if a company or companies that are members of a GST group do not meet the requirements of new section 48-10 , they will no longer satisfy the membership requirements of that GST group. As a result, the representative member of the GST group must notify the Commissioner within 21 days of Royal Assent of this Act that a member or members of the group no longer satisfy the membership requirements for the GST group (see section 48-80). The Commissioner will then revoke the approval of that group member or members (see subsection 48-70(2)) and will decide the date of effect of that revocation (see section 48-85).

Input tax credits for motor vehicles

6.32The ITAA 1997 limits the costs of a car for working out the amount an entity can claim as an income tax deduction for depreciation. The car depreciation limit also applies for working out the amount of input tax credits an entity can claim for a creditable acquisition of a car (section 69-10). Vehicles above this limit are generally subject to LCT.

6.33 Section 69-10 provides a special rule which limits the amount of input tax credits available on some creditable acquisitions or creditable importations of cars. Items 16 and 17 amend section 69-10 to ensure that this section operates as intended and calculates the correct amount of input tax credit for a creditable acquisition of a car.

6.34 Item 16 ensures that the amount of input tax credit for a creditable acquisition or importation of a car is equal to the amount of GST included in the price of the car, but must not exceed 1/11 of the car depreciation limit. [Item 16, subsection 69-10(1)]

Luxury cars acquired by way of lease or hire

Section 69-10 does not apply to a car that was acquired by way of lease or hire [paragraph 69-10(4)(b)] . If an entity acquires a car by way of lease or hire, the amount of input tax credit to which the entity is entitled to will be calculated under the normal rules in Division 11 of the GST Act.

Example 6.1

Mohammed leases a luxury car wholly for his enterprise and makes monthly payments of $13,200. The input tax credit to which Mohammed is entitled to is $1,200.

Partly creditable

6.36 If an entity's acquisition of a car is partly creditable, the entitys input tax credit entitlement for the car is proportionately reduced to the extent of its creditable purpose. [Subsection 69-10(3)]

Example 6.2

In August 2000, Emily acquires a motor vehicle for which she is not entitled to quote an ABN for the purposes of LCT. In the financial year in which she first used the car for any purpose, the car had a GST inclusive market value of $66,000. She uses the car but only 25% is for a creditable purpose.

If Emily used it 100% for a creditable purpose, then Emily is entitled to input tax credits of $5,012, which is 1/11 of the car depreciation limit. However, since she uses the car for a partly creditable purpose, her entitlement is reduced to 25% of $5,012 (i.e. $1,253).

Vehicles that are non-taxable under Subdivision 38-P

6.37 New subsection 69-10(2) denies input tax credits for vehicles which are GST-free under Subdivision 38-P or non-taxable importation by virtue of Subdivision 38-P. This is necessary because under Subdivision 38-P, a vehicle is GST-free (and non-taxable) to the extent that it is below the car depreciation limit. Since any GST included in the price of a Subdivision 38-P car relates to its luxury component, the entity should not be able to claim input tax credits in respect of this component. This will ensure that the treatment of these cars is the same as other luxury cars under section 69-10.

Vehicles excluded from LCT

6.38 Certain motor vehicles are excluded from both LCT and section 69-10. These vehicles are non-passenger commercial vehicles and motor homes or campervans. However, as the law currently stands, emergency vehicles and non-GST-free vehicles for transporting disabled people are included in the operation of section 69-10 even though they are not subject to LCT.

6.39 New subsection 69-10(4)(a) will align section 69-10 with the rules for LCT. The provision will ensure that all vehicles that are not luxury cars because of subsection 25-1(2) of the LCT Act are also excluded from the operation of section 69-10. Therefore, the amount of input tax credits that an entity may claim for these vehicles is not reduced to 1/11 of the car depreciation limit but will be equal to the amount of GST included in the price of the vehicle.

Associates of non-profit sub-entities

6.40 Division 72 of the GST Act provides special rules that apply to certain supplies between associates. Essentially, these rules ensure that supplies to an entitys associates without consideration are brought within the GST system and that supplies to an entitys associates for inadequate consideration are properly valued for GST purposes.

6.41 Division 63 of the GST Act provides that certain types of non-profit entities may treat separately identifiable units of their organisation as though they are separate entities for GST purposes. These separately identifiable units are called non-profit sub-entities. As a result of being treated as an entity, a non-profit sub-entity is not required to register for GST (although it may choose to register) where its annual turnover is below the registration turnover threshold.

6.42 The term associate , as used in the GST Act, is defined in section 195-1 by reference to section 318 of the ITAA 1936. The term is defined widely to include entities with specified relationships to natural persons, companies, certain trusts and partnerships. For example, relatives and partners of a natural person are associates of that person.

6.43 However, because the current definition of associate in section 195-1 of the GST Act adopts the definition in section 318 of the ITAA 1936, the term associate does not acknowledge the separate existence of non-profit sub-entities as they are not recognised entities in the income tax regime.

6.44 Item 18 inserts new section 72-92 into the GST Act to alter the operation of Division 72 so that the Division will apply to non-profit sub-entities. New section 72-92 treats non-profit sub-entities as associates of:

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the parent entity [paragraph 72-92(a)] ;

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every other non-profit sub-entity of the parent entity [paragraph 72-92(b)] ; and

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any other associate of the parent entity [paragraph 72-92(c)] .

6.45 Consequently, supplies between non-profit sub-entities or between a non-profit sub-entity and the parent entity or associates of the parent entity for nil or inadequate consideration will attract GST.

Example 6.3

A registered non-profit organisation acquired books for $3,300 (including $300 GST, which it is entitled to claim as an input tax credit). The organisation then supplied the books for no consideration to one of its unregistered non-profit sub-entities. If there was consideration for the supply, the supply would be a taxable supply.

Subdivision 72-A operates to treat the supply for no consideration by the registered non-profit organisation to its unregistered non-profit sub-entity as a taxable supply. Section 72-10 makes the value of that taxable supply its GST exclusive market value of $3,000, rather than nil.

Tax invoices and Division 75 margin scheme

6.46 Subsection 29-70(2) provides that an entity is required to provide a tax invoice to a recipient of a taxable supply where it is requested to do so by the recipient. A tax invoice must be held by a recipient of a taxable supply before the recipient is entitled to claim any input tax credits on the acquisition (subsection 29-10(3)). The recipient is only entitled to claim input tax credits on the acquisition where the acquisition is a creditable acquisition.

6.47 Under section 75-20 of the GST Act, the supply of real property by an entity cannot give rise to a creditable acquisition where the GST liability is calculated using the margin scheme in Division 75 of the GST Act. Therefore, the recipient of the supply does not need to hold a tax invoice in relation to the acquisition because the recipient is not entitled to claim any input tax credits for the acquisition.

6.48 Item 19 inserts new section 75-30 to ensure that a supplier of real property will not be required to issue a tax invoice to the recipient of the supply, where the GST liability has been calculated using the margin scheme within Division 75. Item 4 inserts a reference to the new provision in section 29-99. Section 29-99 contains a list of special rules relating to tax invoices and adjustment notes.

Excesses

6.49 Section 78-55 currently provides that an excess paid to an insurer is not consideration for a taxable supply. It is not subject to GST. This provides the correct treatment where the insurer makes a payment, a supply or both in settlement of the claim. That is, where the insurer is entitled to a decreasing adjustment under Division 78 of the GST Act (or would have been so entitled if not for the fact that the insured had been entitled to a full input tax credit on the premium). This is because the excess is taken into account when calculating the decreasing adjustment in step 2 of the method statement in subsection 78-15(4).

6.50 However, insurers will not always settle claims by making payments or supplies. Insurers can also make acquisitions in order to settle claims. For example, an insurer may acquire from a supplier the undertaking to make supplies to the insured. Such acquisitions can be creditable acquisitions by the insurer for which it will be entitled to input tax credits.

Example 6.4

An insured not registered for GST has a motor vehicle accident and acquires the services of a tow truck operator to tow the vehicle to a repairer. The insurer reimburses the insured for the costs of the tow. The insurer will have a decreasing adjustment on this cash reimbursement. If the insurer then makes a creditable acquisition from the repairer it will be entitled to an input tax credit.

6.51 If the insurer is entitled to input tax credits on such acquisitions made in order to settle the claim, a payment of an excess to it is not taken into account when calculating the input tax credit, unlike when the insurer has a decreasing adjustment under Division 78.

6.52 Items 20 and 21 make amendments to allow a payment of excess to the insurer to be taken into account regardless of whether the insurer settles the claim in a way that entitles it to a decreasing adjustment under Division 78 or an input tax credit under the general rules in Division 11 of the GST Act.

6.53 The effect of the amendments is to provide that if the insurer has made payments or supplies in settlement of a claim and has made creditable acquisitions or creditable importations directly for the purpose of settling the claim, and an excess is paid to the insurer, the excess is apportioned. The excess is apportioned between the payments and supplies made in settlement of the claim and the creditable acquisitions or creditable importations made directly for settling the claim.

6.54 That portion that relates to the payments or supplies made by the insurer in settling the claim is taken into account in calculating the decreasing adjustment. This is done by amending step 2 of the method statement in subsection 78-15(4) to provide that the payment of excess to the insurer is only taken into account to this extent. [Item 20]

6.55 That portion that relates to the acquisition or importations made directly for the purpose of settling the claim is taken into account by providing that the insurer has an increasing adjustment on that portion. Item 21 makes amendments to provide for the increasing adjustment. Item 38 adds this new increasing adjustment to the list of increasing adjustments in section 195-1. The increasing adjustment occurs where the insurer only makes acquisitions or importations directly for the purpose of settling the claim. In this case the amount of the increasing adjustment is 1/11 of the excess paid to the insurer.

6.56 The increasing adjustment also occurs where the insurer makes both payments or supplies in settlement of a claim and acquisitions or importations directly for the purpose of settling the claim. In this case the amount of the increasing adjustment is calculated using the method statement in new subsection 78-18(2) .

Example 6.5

An insurer settles a claim by paying $1,100 cash settlement to the party damaged by the insured. The insurer also arranges with a supplier to make supplies to that party. The insurers arrangement with the supplier is such that it constitutes an acquisition by the insurer. It is a creditable acquisition by the insurer. It cost the insurer $2,200 (including GST). The insured paid an excess of $660 to the insurer. As the insurer has made both a payment in settlement of the claim and an acquisition directly for the purpose of the claim, it has an increasing adjustment on the payment of excess to it. The amount of the increasing adjustment is calculated as follows: 1,000 + 2,000 = 3,000. The excess, $660 is multiplied by 2,000 and divided by 3,000, which equals 440. This 440 is then multiplied by 1/11 to give the amount of the increasing adjustment, $40.

GST-free policies

6.57 Section 78-30 currently provides that insurers are not entitled to input tax credits for acquisitions of goods made for the purpose of supplying those goods in settlement of the claim where the supply of the insurance policy was not subject to GST. Insurers can acquire things other than goods directly for the purpose of settling claims. For example, a private health insurer could acquire an undertaking from a doctor to provide services to the insurers client. The amendments extend the operation of section 78-30 to include things other than goods. [Items 22 to 24]

6.58 Section 78-30 currently applies where the supply of the policy was not a taxable supply. This could therefore include policies that were supplied before 1 July 2000, or, for policies that span 1 July 2000, that part of the policy that occurs before 1 July 2000. This is not the intended application of the provision. Item 25 makes amendments to provide that the section only applies where the supply of the policy was GST-free.

Notification of extent of input tax credit on insurance premiums for GST groups

6.59 Section 78-50 currently provides that a settlement of an insurance claim is subject to GST if the entity that paid the premium did not inform the insurer of the extent to which it is entitled to an input tax credit on the premium, or in so informing the insurer understated that extent. In relation to GST groups the representative member of the group is the entity entitled to input tax credits. Hence, it is not necessarily the entity paying the premium that will be entitled to the input tax credits on the premium. Items 26 and 27 make amendments to section 78-50 so that for GST groups the GST liability on a settlement will arise if the entity that paid the premium does not inform the insurer of, or understates, the extent of input tax credit entitlement of the representative member on the premium.

Settlements to injured third parties

6.60 Items 28 and 29 amend section 78-65 to clarify that it applies, as for section 78-70, to the situation where the insured has a liability to a third party. This could be because of damage caused by the insured to the third party, and the settlement from the insurer is made to enable that liability to be discharged.

Interaction of Division 48 and Division 84

6.61 Under Division 48 of the GST Act, transactions within GST groups are generally not treated as taxable supplies. An exception to this general rule arises under subsection 48-40(2) where the reverse charge rules under Division 84 apply because an offshore supply of services is made from one group member to another. Supplies falling within this exception are treated as taxable supplies between GST group members.

6.62 Under subsection 48-45(3) of the GST Act an acquisition an entity makes from another member of the same GST group is treated as if it were not a creditable acquisition. This does not recognise that supplies between group members are taxable because of subsection 48-40(2) and Division 84. For an entity that is not a member of a GST group, input tax credits are generally available for acquisitions that relate to a supply that is a taxable supply because of section 84-5 to the extent that the acquisition is acquired for a creditable purpose.

6.63 Item 13 replaces subsection 48-45(3). New subsection 48-45(3) provides that an acquisition one member of the GST group makes from another member of the same GST group is not a creditable acquisition unless the thing acquired was a taxable supply as a result of the reverse charge rule under Division 84. However, the extent to which the acquisition is acquired for a creditable purpose will still be determined with regard to sections 11-15 and 11-30.

Supply of employees by offshore entity to an onshore subsidiary

6.64 Paragraph 9-20(2)(a) of the GST Act provides that employee services are generally not subject to GST. Similarly, subsection 84-15(2) of the GST Act provides that where a non-resident entity makes a transfer of the services of an employee to its Australian enterprise, the transfer is not subject to GST under the reverse charge rules. However, this exclusion from the reverse charge rules only applies where the payments from the Australian enterprise to the overseas enterprise would be withholding payments if they were payments made from the Australian enterprise to the employee. Where the services of an employee are provided by a registered entity to another entity, it will generally be a taxable supply under section 9-5 of the GST Act.

6.65 Where a non-resident entity makes a supply of employee services, in Australia, to its 100% owned subsidiary that supply will be a supply that is connected with Australia and be included in the calculation of the non-residents annual turnover. Where an entity is carrying on an enterprise and its annual turnover exceeds $50,000, the entity is required to be registered for GST. If the non-resident entity is required to register, the supply of employee services performed in Australia will be a taxable supply and subject to GST.

6.66 Item 32 inserts new section 188-40 to remove, in limited circumstances, the requirement for a non-resident entity making supplies of employee services in Australia to its 100% owned subsidiary, to register for GST.

6.67 New section 188-40 provides that when determining whether a non residents current annual turnover or projected annual turnover meets the registration turnover threshold, the entity can disregard a supply, to the extent that:

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the supply consists of employee services performed in Australia and provided to a 100% subsidiary of the non-resident entity; and

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the payments that the non-resident entity makes to the employee for its services would be withholding payments, if they were made by the Australian entity.

[Section 188-40]

6.68 However, when determining your annual turnover in relation to other turnover thresholds, these supplies are still included in your annual turnover. [Subsection 188-40(2)]

6.69 Item 33 inserts a definition of 100% subsidiary into section 195-1 of the GST Act. 100% subsidiary is defined as having the meaning given to that term by section 975-505 of the ITAA 1997.

Example 6.6

GlobalBank Corp (GBC) is a global bank with its headquarters in New York. It carries out its Australian operations through AustBank Corp (ABC) which is a wholly-owned subsidiary of GBC. GBC seconds to ABC an information technology (IT) manager to oversee the development and introduction of ABCs new computer system for 4 years on a salary of $200,000 per year. GBC pays the IT managers salary and recovers this cost from ABC.

The supply of the manager by GBC is a supply that is connected with Australia because the manager performs their duties in Australia. This is the only supply that GBC makes to ABC. Even though GBCs annual turnover of supplies connected with Australia exceeds the registration threshold of $50,000, GBC is not required to register for GST.

In the second year, GBC also supplies specialised personnel services to other financial institutions in Australia. The services are performed on site at the financial institution for a period of 2 weeks. The fee charged for this supply is $40,000. GBC does not need to take into account the continuing supply of the IT manager to ABC in determining whether it needs to register for GST. Therefore, GBC has not exceeded the registration threshold and is not required to be registered.

In the third year, GBCs supplies of specialised personnel services performed within Australia will increase and the fee received will be $110,000 over the next 12 months. Again, GBC does not need to take into account the continuing supply of the IT manager to ABC in determining whether it needs to register for GST. However, GBC will make other supplies connected with Australia over the next 12 months, the value of which will exceed the registration threshold. GBC is required to register for GST. Therefore, where all the conditions of section 9-5 are satisfied, both the supply of the specialised personnel services and the IT manager, by GBC will be taxable supplies.

Employee share ownership schemes

6.70 Imported services used to make input taxed supplies are subject to a GST reverse charge under Division 84. That is, the Australian recipient of the supply, rather than the overseas supplier, is liable for the GST on the imported service.

6.71 The supply of an employee share scheme by an overseas enterprise to an Australian branch, or by an overseas entity to a subsidiary of the entity, is currently subject to a GST reverse charge. For a variety of reasons, employee share schemes provided by international financial institutions to employees engaged at the Australian enterprise or subsidiary, involve the share scheme being provided outside of Australia. The cost of providing the employee share scheme is charged to the Australian branch or subsidiary.

6.72 A GST reverse charge, in these circumstances, places non-resident entities making input taxed supplies though their Australian operations at a potential competitive disadvantage compared to domestic suppliers. This is because domestic employee share schemes are usually provided directly by the employing entity to the employee and therefore, will not be subject to GST.

6.73 Item 30 inserts new section 84-14 which removes the GST reverse charge from a supply that relates to an employee share scheme:

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by an overseas enterprise to its Australian branch; or

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by an entity to its wholly-owned subsidiary.

6.74 New section 84-14 only excludes from the reverse charge those supplies relating to employee share schemes that are subject to Division 13A of Part III of the ITAA 1936. [Paragraph 84-14(b)]

6.75 Item 33 inserts a definition of 100% subsidiary into section 195-1 of the GST Act. 100% subsidiary is defined as having the meaning given to that term by section 975-505 of the ITAA 1997.

6.76 Item 35 inserts a definition of employee share scheme into section 195-1 of the GST Act. Employee share scheme is defined as having the meaning given to that term by section 139C of the ITAA 1936.

Example 6.7

DallasUSA is a non-resident of Australia and carries on an enterprise both in the United States of America and in Australia through a branch located in Sydney. The employees engaged through the Sydney branch are eligible to participate in an employee share scheme which is a scheme within Division 13A of Part III of the ITAA 1936. The shares are supplied to the employees by DallasUSA and provided in the United States. The cost of providing the scheme to the Australian employees is recovered by DallasUSA from the Sydney branch. The provision of the scheme is not subject to GST under the reverse charge rules.

Long-term commercial accommodation provided at a marina

6.77 Operators of commercial residential premises providing long-term commercial accommodation have the option to treat their supplies of long-term accommodation as either input taxed or to include GST in the price at a concessional rate under Division 87 of the GST Act.

6.78 Currently, the supply of a berth at a marina that is to be occupied by a ship that is used as a residence is not covered by the definition of commercial residential premises and the supply is fully taxable. Therefore, there is a disparity between the treatment of a supply of long-term commercial accommodation by way of the use of a berth at a marina and the supply of long-term commercial accommodation at other commercial residential premises, including caravan parks.

6.79 Item 34 inserts new paragraph (da) into the definition of commercial residential accommodation contained within section 195-1 of the GST Act. New paragraph (da) provides that a marina at which one or more of the berths is occupied, or are to be occupied, by ships used as residences, is a commercial residential premise . Division 87 then provides that supplies of long-term accommodation through these marinas are eligible to calculate the GST payable on the supply at the concessional rate.

6.80 Division 87 also allows the supplier of long-term commercial accommodation to choose that the Division doesnt apply to the supply. Where this choice is made, supplies of long-term commercial accommodation become input taxed under Subdivision 40-B. Item 8 of Schedule 1 inserts new subsection 40-35(1A) to ensure that the supply of a berth at a marina will be input taxed where the berth is, or is to be occupied by a ship that is used as a residence. The supply is only input taxed if the supply would have been subject to Division 87 if the supplier had not made the choice. That is, the supply must be a supply of long-term commercial accommodation.

6.81 The term marina has its ordinary meaning and will include a single berth. For example, where individual marina sites are provided by a supplier and the sites are not co-located, these marina sites will be commercial residential premises under the definition in section 195-1.

Definition of incapacitated entity and representative

6.82 An incapacitated entity is defined in section 195-1 of the GST Act to mean an individual who is bankrupt or an entity that is in liquidation or receivership. A representative is also defined in section 195-1 to mean a trustee in bankruptcy, a liquidator or a receiver.

6.83 These definitions do not include interim managers, like controlling trusteeships, arrangements under Part X of the Bankruptcy Act 1966 , voluntary administrations or administrations of a deed of company arrangement, even though the Bankruptcy Act 1966 and the Corporations Law regard entities with interim management as insolvent.

6.84 The Bankruptcy Act 1966 and the Corporations Law broadly consider an entity to be insolvent when it is unable to pay all its debts as and when they become due and payable.

6.85 Items 37 and 39 amend the definition of incapacitated entity and representative in section 195-1 to ensure that the GST law is consistent with the Bankruptcy Act 1966 and the Corporations Law .

6.86 Item 39 extends the definition of representative to:

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all persons appointed or authorised under Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable;

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an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Law ; or

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an administrator of a deed of company arrangement executed by the entity.

6.87 While new paragraph (e) of the definition of representative in section 195-1 will cover most of the interim arrangements (since most entities will be unable to pay their debts thereby meeting this paragraph) it does not cover all administrators. As an administrator may be appointed to an entity that is still solvent under a deed of company arrangement or Division 2 of Part 5.3A of the Corporations Law , these circumstances have also been included in the definition of representative. This ensures that all interim managers are covered by the definitions and therefore subject to Division 147 of the GST Act.

6.88 Item 37 amends the definition of incapacitated entity in section 195-1 so that when a representative is appointed to manage the affairs of the entity, then the entity becomes an incapacitated entity at the same time. This ensures that the appointment of an interim manager to an entity will bring the entity under the application of Division 147 of the GST Act.

GST Transition Act

Construction agreements made before 1 July 2000

6.89 Under subsection 19(3) of the GST Transition Act, GST is payable to the extent that the value of the supply exceeds the value of the construction project as at 1 July 2000. The definition of value of the supply could, in certain circumstances, link back to section 9-75 of the GST Act and provide that the value is calculated as 10/11 of the entire GST inclusive consideration received. However, because GST is only payable on the proportion of the total consideration that relates to construction from 1 July 2000, the formula does not correctly calculate the value of the supply.

6.90 Item 41 amends subsection 19(3) to ensure that GST is only payable on the supply to the extent that the price of the supply (less the amount of any GST payable on the supply) exceeds the value of the construction project as at 1 July 2000.

6.91 The amendment in item 41 is taken to have commenced on 1 July 2000.

Amendments to the LCT Act

Lease or hire of luxury cars

6.92 As a general rule, the LCT value is the price of the car. Under this rule, where there is a lease or hire of a luxury car, then the LCT value is the total of all lease or hire payments under the arrangement. This may make the LCT value too high (since lease or hire payments include other indirect charges like administration, finance and fuel consumption charges) or too low (if the residual value of the lease is a large component of the agreement).

6.93 Item 42 amends the LCT Act to ensure that the LCT value is the GST inclusive market value of the car excluding any LCT payable, any other Australian taxes, fees or charges (other than GST and customs duty) and the price of certain modifications. [Subsection 5-20(6) of the LCT Act]

Example 6.8

In October 2000, Wendy acquires a luxury car. The LCT value (which includes GST) is $60,634. The LCT threshold is $55,134.

Using subsection 5-15(1), the amount of LCT payable is:

25/100 * 10/11 * [$60,634 - $55,134] = $1,250


The price of the luxury car is $61,884 (i.e. $60,634 + $1,250).

In November 2000, she leases the same luxury car to Justin. The GST inclusive market value is $61,884. As calculated above, this value comprises LCT value of $60,634 and LCT payable of $1,250 on the supply of the car to Justin.

Since LCT has already been paid, then the amount of LCT payable is calculated using subsection 5-15(2).

The amount of LCT payable ($1,250) is reduced by the amount of LCT payable in respect of the previous supply of the car ($1,250). Therefore, there is no amount of LCT payable on the lease of the luxury car.

Example 6.9

In October 2000, Motors Pty Ltd finishes making a luxury car in Australia. There is no LCT payable because as yet there is no taxable supply of a luxury car.

In November 2000, Motors Pty Ltd leases its luxury car to Usha. The GST inclusive market value is $61,884. Using subsection 5-15(1), the amount of LCT payable is $1,250. There is no reduction under subsection 5-15(2) because there has been no previous taxable supply or taxable importation.

Attributing LCT payable

6.94 At present, the attribution of LCT on taxable supplies and taxable importations follows the basic rules for attribution of supplies and importations under the GST Act. As the law currently stands, a manufacturer which leases a luxury car that it makes in Australia would have to attribute LCT on a periodic or progressive basis. Consequently, these manufacturers would be given an unintended advantage over lease companies which are subject to the full amount of LCT when they purchase the car.

6.95 Item 43 ensures that where there are supplies of a car by way of lease or hire, the LCT is attributable to the first tax period to which the supply of the car is attributable. This has effect despite the fact that the GST on supplies of cars under lease arrangements are attributable on a periodic or progressive basis under GST law. [Subsection 13-15(1A)]

Example 6.10

Following on from Example 6.9, when Motors Pty Ltd leases the luxury car to Usha, the LCT payable of $1,250 is attributable to the first tax period in which the supply of the car is attributable.

Amendments to the WET and LCT Transition Act

Special GST credit for sales tax paid on wine stock

6.96 Under subsection 3(4) of the WET and LCT Transition Act, an entity can only claim the special GST credit on wine stock by identifying the stock in one (and only one) GST return that it lodges before 22 January 2001. The Commissioner has granted a concession which provides small businesses with an extension of time for lodging their GST return under section 31-10 of the GST Act. Item 45 amends subsection 3(4) to ensure this concession also applies to special GST credits on wine tax by aligning the date of lodgment of an entitys special GST credit claim for wine tax with the concession granted by the Commissioner.

6.97 It is anticipated that many retailers will claim the special GST credit as soon as possible. However, later events such as discounts and returns may alter the amount the entity is entitled to claim. If, after making the claim, the entity receives any discounts or rebates, or accepts any return or returns goods to their supplier which leads to the entitlement to the special credit changing, the entity must lodge an amended GST return. The entity must do this on or before the 21st day of the month following the end of the tax period in which the change happens. [Items 44 and 46, subsections 3(3B) and 3(4A)]

6.98 The amendments made to the WET and LCT Transition Act are taken to have commenced on 1 July 2000.

Amendments to the ITAA 1997

Special credits under the WET and LCT Transition Act 1999

6.99 Item 48 amends the ITAA 1997 to include an amount equal to a special GST credit for sales tax paid on wine stock in assessable income. It will be treated as assessable income in the income year in which the end of the tax period the special credit is attributed to occurs. For example, if a special credit is attributed to a tax period ending 30 November 2000, and the entity has a calendar year substituted accounting period for income tax purposes, an amount equal to the special credit will be included in assessable income for the 2000 calendar year. [Item 48, subsection 17-30(2)]

6.100 Item 47 makes a change to the heading of section 17-30.

6.101 These amendments to the ITAA 1997 apply to assessments from the 2000-2001 income year. [Item 49]

Application and transitional provisions

6.102 Unless otherwise mentioned, the amendments made in Schedule 6 generally apply in relation to net amounts for tax periods starting on or after 1 July 2000. The amendments in items 20, 21 and 38 apply in relation to net amounts for tax periods starting on or after 17 August 2000. This is the date of Treasurers Press Release No. 85. [Item 49]