Senate

Explanatory Memorandum

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

Chapter 5 - Input tax credits for motor vehicles

Outline of chapter

5.1 Part 5 of Schedule 1 amends section 20 of the GST Transition Act to remove the phasing-in rules for input tax credits that apply in relation to the acquisition or importation of motor vehicles, trailers and vehicle bodies.

Context of reform

5.2 Under the New Tax System, the availability of input tax credits for the GST on new motor vehicles, certain trailers and vehicle bodies was subject to a phasing-in arrangement. Input tax credits were denied in full for the first year of the GST and a 50% denial was to be applied for the year commencing 1 July 2005. Full input tax credits were to be available from 1 July 2002. These phasing-in rules were designed to minimise the disruption to the market that could have occurred if businesses were to defer their purchases of motor vehicles in the months preceding the GST.

Detailed explanation of new law

5.3 Section 20 of the GST Transition Act applies to:

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motor vehicles (including cars, trucks and motor cycles);

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detachable trailers for heavy prime movers such as semi-trailers; and

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bodies for motor vehicles (e.g. refrigerated bodies).

5.4 Amendment 2 amends section 20 to effectively end the input tax credit phasing-in rules on and from 23 May 2005. The effect of these changes is that entities entitled to claim input tax credits will be able to claim full input tax credits for new motor vehicles, trailers and vehicle bodies acquired or imported on or after 23 May 2005. For the purposes of these amendments, a motor vehicle, trailer or body will be taken to be acquired when it is physically removed by the entity acquiring the motor vehicle, trailer or body. Where the entity claiming the input tax credit has imported the motor vehicle, trailer or body, the time of importation is taken to be the time the taxable importation occurs. The changes to achieve these outcomes are discussed in paragraphs 5.5 to 5.10.

5.5 Subsection 20(2) is amended to change the date on which the denial of input tax credits ends. Currently, the denial of input tax credits relates to acquisitions or importations made before 1 July 2005. This date is amended to 23 May 2001 [Schedule 1, item 70] . Subsection 20(4C), which is about eligible short-term lease agreements, is also amended to reflect this change [Schedule 1, item 75] .

5.6 Subsection 20(3) provided a 50% denial of input tax credits for acquisitions or importations made on or after 1 July 2001 but before 1 July 2002. As full input tax credits will be available on and from 23 May 2001, this subsection is no longer relevant and is repealed [Schedule 1, item 71] . Subsections 20(3A) and 20(4B) are amended to remove redundant references to subsection 20(3) [Schedule 1, items 72 to 74] . Subsection 20(6) is also repealed as it referred only to the 50% reduction in input tax credits in subsection 20(3) [Schedule 1, item 76] .

5.7 Section 6 of the GST Transition Act provides rules for determining when an acquisition occurs and refers to when the goods are removed. To clarify the time of supply, section 20 is amended to provide rules for determining when motor vehicles, trailers and bodies are removed. Subsection 6(2) is amended by adding a note referring to the rules in new subsection 20(8) for when goods are taken to be removed. [Schedule 1, item 69]

5.8 New subsection 20(8) provides that the time motor vehicles, trailers and bodies are taken to be removed is when they are physically removed:

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by the entity acquiring the motor vehicle, trailer or body; or

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by the lessee where the motor vehicle, trailer or body is leased if this occurs before the lessor removes them.

[Schedule 1, item 77]

Example 5.1

Ray orders and pays for a vehicle on 21 May 2001 but does not take delivery of the vehicle until 23 May 2005. The vehicle is delivered on or after 23 May 2001 and therefore section 20 will not prevent Ray from claiming an input tax credit for the acquisition of the vehicle. Ray will still need to satisfy the normal rules for claiming input tax credits in Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 .

Example 5.2

Bruno orders and pays for a new refrigerated body for his delivery truck on 10 May 2005. The manufacturer phones Bruno on 21 May 2001 to say that the refrigerated body is complete and ready to be fitted. Bruno does not take his truck to have the new body fitted until 24 May 2005. The refrigerated body is physically removed on or after 23 May 2005. As Bruno has not acquired the refrigerated body before 23 May 2001, section 20 will not prevent Bruno from claiming an input tax credit in relation to the acquisition of the refrigerated body.

Example 5.3

AGP Finance enters into an agreement with MG Company for the lease of a motor vehicle. AGP Finance orders the vehicle on 21 May 2005. The vehicle is available on 22 May 2001 but AGP Finance does not take delivery of the vehicle. The vehicle is taken from the motor vehicle dealer by MG Company on 24 May 2005. The vehicle is physically removed by the lessee on or after 23 May 2001 and therefore section 20 will not prevent AGP Finance from claiming an input tax credit in relation to the acquisition of the vehicle.

5.9 The rule in new subsection 20(8) only applies in relation to acquisitions covered by section 20. [Schedule 1, item 77, subsection 20(9)]

5.10 New subsection 20(10) provides a rule for determining the time an importation takes place. A motor vehicle, trailer or vehicle body will be taken to be imported when it becomes a taxable importation. In the majority of cases the importation of a motor vehicle will become a taxable importation when it is entered for home consumption. [Schedule 1, item 77]

Application and transitional provisions

5.11 The amendments apply in relation to motor vehicles, trailers and vehicle bodies acquired or imported on or after 23 May 2001 [Schedule 1, item 78] . The amendments in Part 5 of Schedule 1 are taken to have commenced on 23 May 2005.