House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 1 - GST and representatives of incapacitated entities

Outline of chapter

1.1 Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that a representative of an incapacitated entity is responsible for the goods and services tax (GST) consequences that arise during its appointment. This is the stated policy intention of the current law however, a recent Federal Court decision held that the current law does not achieve this intention. The proposed amendments will restore the policy intention of the GST Act relating to the GST consequences for a representative of an incapacitated entity.

1.2 The proposed amendments will also ensure that the GST consequences that arise from an action performed by the representative are the same as those that would have arisen had the action been performed by the incapacitated entity.

1.3 The main operative provisions will take effect from 1 July 2000, the introduction date of the GST. The consequential amendment to the Fuel Tax Act 2006 will take effect from 1 July 2006 which is the commencement date for that Act. The remaining consequential and minor amendments will commence from the date of Royal Assent.

Context of amendments

1.4 Division 147 of the GST Act contains provisions relating to representatives of incapacitated entities. The explanatory memorandum to the A New Tax System (Goods and Services Tax) Bill 1999, at paragraphs 6.272 and 6.273, states that the intention of Division 147 is to ensure that:

'The representative is personally liable for the GST payable and for the other requirements (of the GST legislation). The representative is liable from the date on which he or she becomes entitled to act for you (the principal) until he or she ceases to be entitled. The representative is liable for GST, entitled to input tax credits and has any adjustments attributable to that period.

During that period the effect of Division 147 is that the representative rather than the principal is carrying on the enterprise. The representative is not personally liable for GST attributable before he or she becomes entitled to act for the principal.'

1.5 However, Division 147 does not expressly deem the representative to be liable for the GST consequences that arise during its appointment. Rather, it:

•

requires the representative to register for GST in its capacity as a representative, if the entity it represents is registered or required to be registered (current section 147-5);

•

specifies when the Commissioner of Taxation (Commissioner) is required to cancel the representative's GST registration (current section 147-10);

•

requires the representative to notify the Commissioner if and when it ceases to represent the incapacitated entity (current section 147-15);

•

specifies that increasing adjustments that arise in relation to pre-appointment transactions undertaken by the incapacitated entity are, if the representative provides written notice to the Commissioner, to be treated as adjustments that the incapacitated entity has (instead of the representative) (current section 147-20); and

•

specifies that the tax periods applying to the representative, in that capacity, are the same as those applying to the incapacitated entity (current section 147-25).

1.6 The Federal Court decision Deputy Commissioner of Taxation v PM Developments Ltd [2008] FCA 1886 (PM Developments) handed down on 12 December 2008 held that a liquidator is not liable for the GST arising from a transaction occurring during the period of the liquidator's appointment. Instead the Court held that the GST liability is a liability of the company in liquidation.

1.7 The PM Developments decision is contrary to the stated policy intention (contained in the explanatory memorandum) that the representative of an incapacitated entity (for the purposes of Division 147 of the GST Act) is liable for GST on transactions within the scope of its appointment. It is also contrary to the Commissioner's administration of Division 147.

1.8 Following the Federal Court decision the Government decided to amend the GST law with effect from 1 July 2000 to ensure the law achieves the stated policy objective.

1.9 Retrospective amendment of the GST law is considered appropriate as the proposed amendments will give effect to the stated policy intention as at the commencement of the GST law on 1 July 2000. The proposed amendments are also generally consistent with the way the law has been administered by the Commissioner.

1.10 Consequently, retrospective application of the law is not expected to adversely impact taxpayers with one exception. Supplies by representatives to associates of incapacitated entities for no consideration or inadequate consideration may have a different GST outcome as a result of the retrospective amendments. A transitional provision will apply to ensure that the amendments will not adversely impact those taxpayers affected.

1.11 In addition, a transitional provision provides protection for representatives from retrospective GST liabilities in certain circumstances. Protection is provided from liability under the GST law for acts or omissions by a representative up until the date of the then Assistant Treasurer and Minister for Competition Policy and Consumer Affairs' announcement to amend the law in Media Release No. 005 of 6 February 2009.

Summary of new law

1.12 Schedule 1 inserts new Division 58 into the GST Act to provide that any supply, acquisition or importation by a representative of an incapacitated entity in his or her representative capacity will be treated as a supply, acquisition or importation of the incapacitated entity. This ensures that the GST consequences that arise from a supply, acquisition or importation of the representative are the same as the consequences that would have arisen as if they were a supply, acquisition or importation of the incapacitated entity.

1.13 New Division 58 also ensures that the representative is responsible for certain GST consequences which arise from a supply, acquisition or importation that falls within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

1.14 The main operative provisions relating to a supply, acquisition or importation of a representative and the provisions ensuring the representative is responsible for certain GST consequences will take effect from the date of the introduction of the GST on 1 July 2000. The consequential amendment to the Fuel Tax Act 2006 will take effect from 1 July 2006 which is the commencement date for that Act. The remaining consequential and minor amendments will commence from the date of Royal Assent of this Bill.

Comparison of key features of new law and current law

Detailed explanation of new law

1.15 Schedule 1 replaces Division 147 of the GST Act with new Division 58 to ensure that a representative of an incapacitated entity is responsible for certain GST consequences that arise during the representative's appointment. It is intended that a supply, acquisition or importation of the representative will be treated as a supply, acquisition or importation of the incapacitated entity for the purposes of determining the GST consequences for the representative.

Supplies, acquisitions or importations by representatives of incapacitated entities

1.16 New subsection 58-5(1) provides that a supply, acquisition or importation by a representative, in its capacity as representative, is taken, for GST purposes, to be a supply, acquisition or importation by the incapacitated entity and not the representative . [Schedule 1, item 8]

1.17 Under new subsection 58-5(2), any act or omission of a representative is taken, for GST purposes, to be an act or omission of the incapacitated entity for the purposes of applying any provision in the GST law which determines whether:

•

a supply or importation is a taxable supply or a taxable importation or the amount of GST payable on the supply or importation;

•

an acquisition or importation is a creditable acquisition or a creditable importation, or the amount of the input tax credit for the acquisition or importation; or

•

an adjustment arises in relation to a supply, acquisition or importation made by an incapacitated entity or the amount of any such adjustment.

[Schedule 1, item 8]

1.18 The intention of subsections 58-5(1) and (2) is to ensure that the GST consequences that arise for the representative are the same as the consequences that would have arisen if they were supplies, acquisitions or importations or related acts or omissions of the incapacitated entity. For example, these provisions will ensure that:

•

any method that the incapacitated entity would have been eligible to use to work out the amount of GST payable on a supply (such as the margin scheme under Division 75) can be used;

•

a supply the representative makes for no consideration to an associate of the incapacitated entity is subject to GST if it would have been subject to GST had it been made by the incapacitated entity; and

•

supplies made by the representative in that capacity are taken into account in determining whether the incapacitated entity is required to be registered (which, in turn, will determine whether the representative is required to be registered).

1.19 Any acts or omissions of a representative will be taken to be acts or omissions of the incapacitated entity for the purposes of determining whether a supply is GST-free or input taxed. This is on the basis that such acts or omissions of the representative will be relevant in determining whether a supply is a taxable supply or the amount of GST payable on a supply. For example, the entry into a written agreement by a representative that a supply is a supply of a GST-free going concern will be taken to be an act of the incapacitated entity.

1.20 Paragraph 58-5(2)(c) ascribes acts and omissions that give rise to an adjustment to the incapacitated entity. New section 58-10 is the relevant provision that allocates the relevant liability or entitlement arising from the adjustment to the representative in specified circumstances . [Schedule 1, item 8]

1.21 New subsection 58-5(3) ensures that a seamless transition occurs in cases where the incapacitated entity continues to operate after the representative's appointment has ended. For example, an entity that was previously incapacitated will not be prevented from claiming an input tax credit in relation to a supply of second-hand goods it makes on the technicality that the goods were acquired by the representative while the entity was an incapacitated entity. This subsection is limited to supplies, acquisitions or importations or acts or omissions that were undertaken during the period that the entity was an incapacitated entity . [Schedule 1, item 8]

1.22 The accounting basis of a representative need not be the same as the accounting basis of the incapacitated entity and under subsection 58-5(2) the decision of a representative to account on a cash basis would not be an act of the representative that would be taken to be an act of the incapacitated entity. However for the avoidance of doubt, subsection 58-5(4) will ensure that for the purposes of the provisions relating to bad debts in Division 21 of the GST Act, the act of a representative to account on a cash basis will not be taken to be an act of the incapacitated entity. In particular, subsection 58-5(4) ensures that the action by a representative to account for GST on a cash basis does not prevent an adjustment that would otherwise have arisen under Division 21 from arising due to subsections 21-5(2) and 21-15(2) . [Schedule 1, item 8]

1.23 The overall effect of section 58-5 will be to ensure that all supplies, acquisitions and importations, and certain acts or omissions made during the period of a representative's appointment will be taken to be those of the incapacitated entity, regardless of whether it was the incapacitated entity or the representative that undertook the transactions or undertook the relevant acts or omissions.

1.24 It is recognised that in light of the decision in PM Developments, where the Federal Court held that the liquidator does not ordinarily makes supplies, acquisitions or importations, rather such supplies are made by the incapacitated entity, section 58-5 may only have limited application. However, section 58-5 will apply in circumstances where the representative, as a matter of law, makes the supply, for example, in the case of bankruptcy or where a vesting order is obtained.

1.25 Section 58-5 places all types of representation on common footing and provides a consistent base from which the representative becomes liable for relevant liabilities and becomes entitled to relevant entitlements.

Representative liable for GST, entitled to input tax credits or has adjustments in some circumstances

1.26 New section 58-10 sets out the circumstances in which a representative of an incapacitated entity will be liable for GST on a taxable supply or a taxable importation, entitled to an input tax credit for a creditable acquisition or creditable importation and have any adjustments . [Schedule 1, item 8]

1.27 New subsection 58-10(1) provides that a representative of an incapacitated entity is liable for any amount of GST, is entitled to any input tax credit, and has any adjustment that would, in the absence of this subsection, be an amount that the incapacitated entity is liable for, or entitled to. However, this only applies to the extent that the making of the supply, acquisition or importation to which the amount of GST, input tax credit, or adjustment relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs . [Schedule 1, item 8]

Example 1.1 : Representative continues an existing lease under a new agreement

In August LeaseCo Pty Ltd enters into a two-year agreement to lease commercial premises to a tenant. Prior to December, when a receiver is appointed with respect to the premises subject to a lease, LeaseCo Pty Ltd invoices and receives payment from the tenant for the previous four months rent at $1,100 per month.

The receiver notifies the tenant of their appointment and negotiates the continuation of the lease under a new agreement. Pursuant to subsection 58-10(1) the receiver is liable for the GST applicable to the supply of the premises under the new lease agreement.

The incapacitated entity remains liable for $400 GST, being the GST applicable to the supply of the premises for the four months prior to the representative's appointment. The supply of the premises for the period prior to the representative's appointment is not within the scope of the representative's responsibility or authority for managing LeaseCo Pty Ltd's affairs.

Example 1.2 : Concurrent representatives

A receiver is appointed with respect to a commercial property from which JimCo Pty Ltd operates a printing business. The receiver is appointed with respect to the property to protect the interests of a secured creditor. At the same time a liquidator is separately appointed to wind up JimCo Pty Ltd.

With the acquiescence of the liquidator, the receiver enters into a contract of sale and sells the property with respect to which they were appointed. The receiver will be liable for the GST liability arising on the sale of the property, as the sale is within the scope of responsibility or authority of the receiver's appointment.

The liquidator will not be liable for any GST pertaining to the sale of the property, as the sale of the property is not within the scope of the liquidator's responsibility or authority.

1.28 The references to sections 48-40, 40-45 and 48-50 in paragraphs 58-10(1)(a), (b) and (c) respectively, provide for circumstances where the liability or entitlement would not be with the incapacitated entity because the incapacitated entity is a member of a GST group, and pursuant to Subdivision 48-B it is the representative member of the GST group that otherwise would have the relevant liability or entitlement. In these circumstances, the representative of the incapacitated entity will be liable for or entitled to the GST amount and not the representative member of the group . [Schedule 1, item 8]

1.29 Subsections 58-10(2) and (3) provide a number of exceptions from the general rule in subsection 58-10(1). In particular, the representative of an incapacitated entity is not liable for or entitled to any GST related amounts to the extent that consideration for a taxable supply or creditable acquisition was received or provided before the representative became a representative of the incapacitated entity. In these circumstances, the incapacitated entity would remain liable or entitled in respect of such amounts . [Schedule 1, item 8]

Example 1.3 : Lay-by sales

RetailCo Pty Ltd offers a lay-by service to its customers. In August, prior to the appointment of a liquidator, RetailCo Pty Ltd had entered into a number of lay-by arrangements with customers, for which some instalment payments had been received, that were yet to be finalised.

Upon appointment, the liquidator agrees to continue with the lay-by arrangements with customers and continues to collect lay-by payments from customers. Upon finalisation of a lay-by arrangement when the relevant goods are made available to the customer, the liquidator will be liable for GST applicable to the supply of the goods, as the supply of those goods is within the scope of the liquidator's responsibility or authority for managing the incapacitated entity's affairs.

However the liquidator will not be liable for GST to the extent of payments received from the customer prior to their appointment. The incapacitated entity will remain liable for the amount of GST applicable to the payments received prior to the liquidator's appointment under new paragraph 58-10(2)(a).

Example 1.4 : Deposit received prior to representative's appointment

ShedCo Pty Ltd enters into a contract to construct and supply a shed. The contract price is $22,000, and upon entry into the contract ShedCo Pty Ltd receives a deposit of $2,200. Prior to the commencement of the construction of the shed an administrator is appointed to manage the affairs of ShedCo Pty Ltd.

The administrator agrees with the customer that the construction of the shed will continue. It is agreed that the $2,200 deposit paid to ShedCo Pty Ltd will be applied as part of the consideration for the shed.

The administrator will be liable for the GST applicable to the supply of the shed, but will not be liable to the extent of the $2,200 deposit paid to ShedCo Pty Ltd, prior to the administrator's appointment.

1.30 Paragraphs 58-10(2)(b) and (c) provide two further exceptions to the requirement that the representative is liable for GST on taxable supplies or importations within the scope of its authority. These relate to reverse-charged GST and vouchers. The representative is not liable for GST if under Divisions 83 or 84 the GST is payable by the recipient of the supply and the incapacitated entity provided any of the consideration for this supply before the representative became a representative . [Schedule 1, item 8]

1.31 The representative is also not liable for any GST payable on a supply a representative makes to honour a voucher issued by the incapacitated entity, to which Division 100 applies. This applies to the extent that the consideration provided for the representative's supply does not exceed the consideration provided for the incapacitated entity's supply of the voucher . [Schedule 1, item 8]

1.32 The intention of paragraph 58-10(2)(c) is to ensure that a representative who honours a voucher issued by the incapacitated entity is not liable to remit GST on their supply as, effectively, the payment for the supply was provided to the incapacitated entity. The representative will only be liable to pay GST on the supply made on redemption of the voucher to the extent that it is entitled to receive additional consideration (that is, consideration in addition to the voucher itself). In these circumstances the representative's GST liability will be limited to the extent of GST applicable to the additional consideration received . [Schedule 1, item 8]

Example 1.5 : Voucher redeemed and additional consideration provided

In August a customer purchased a voucher for $1,500 from ResortCo Pty Ltd. The customer was entitled to redeem the voucher for $1,500 worth of accommodation at any of ResortCo Pty Ltd's holiday resort complexes.

In December a representative was appointed to manage ResortCo Pty Ltd's affairs.

In January the customer redeemed their voucher for accommodation at one of ResortCo Pty Ltd's resorts, and also paid an additional $770 to upgrade their accommodation to a luxury suite. The representative will only be liable for the GST applicable to the supply of the accommodation to the extent of the additional $770 consideration. The incapacitated entity will be liable for the GST applicable to the extent of $1,500, being the monetary value of the voucher that was redeemed.

1.33 New subsection 58-10(4) provides that the representative does not have adjustments in certain circumstances. Paragraphs 58-10(4)(a) and (b) provide that the representative does not have an adjustment to the extent that the incapacitated entity received consideration for the supply or provided consideration for the acquisition to which the adjustment related before the representative's appointment . [Schedule 1, item 8]

1.34 Paragraph 58-10(4)(c) provides that the representative does not have an adjustment to the extent that the adjustment would not be attributable to a tax period applying to the representative. For example, this provision ensures that a representative whose appointment has ceased will not have adjustments arising for a change in extent of creditable purpose, under Division 129, after the cessation of their appointment even though the relevant acquisition may have been made during the period of their appointment . [Schedule 1, item 8]

1.35 Finally, new subsection 58-10(5) provides that an incapacitated entity, (or a representative member of an incapacitated entity if the incapacitated entity is a member of a GST group), is not liable for GST, entitled to input tax credits or has any adjustment if a representative is liable or entitled to such amounts. This provision makes it clear that there cannot be more than one entity liable or entitled to GST related amounts . [Schedule 1, item 8]

Adjustments for bad debts

1.36 Division 21 of the GST Act provides for adjustments to arise where debts of an entity are written off. The adjustments are intended to ensure that any GST paid or input tax credits claimed where consideration is not received or provided is refunded or repaid. This is only necessary in circumstances where an entity accounts on a non-cash basis and consequently liability and entitlement can be attributed before consideration is received or provided.

1.37 Where a representative is appointed to an incapacitated entity, depending on the accounting basis of the representative and the incapacitated entity, Division 21 may not operate effectively.

1.38 New section 58-15 ensures that the bad debt provisions in Division 21 operate to ensure that bad debt adjustments cannot arise where GST has not been paid or an input tax credit has not been claimed . [Schedule 1, item 8]

1.39 For example, without this provision, if a representative that accounts for GST on a cash basis 'makes' a taxable supply but does not receive the consideration for the supply within 12 months of the due date for payment, a bad debt adjustment may arise if the incapacitated entity accounts on a non-cash basis. This is because under new section 58-5 it is the incapacitated entity and not the representative that would be taken to have made the supply for the purposes of subsection 21-5(1) as the incapacitated entity accounts on a non-cash basis, subsection 21-5(2) will not prevent the incapacitated entity from claiming a decreasing adjustment.

Attribution rules

1.40 The interaction of the attribution rules in Division 29 with new Division 58 should not result in entitlements or liabilities not being attributable to a tax period that applies to the entity for which the relevant entitlement or liability arises (under section 58-10). In the absence of new section 58-40 circumstances may arise where an amount of GST or input tax credit that a representative is liable for or entitled to may be attributable to a period that ends prior to the representative's appointment and prior to the representative's registration in that capacity. In such cases, the relevant amount of GST or input tax credit would not be included in the net amount of any entity.

1.41 New section 58-40 ensures that any amount of GST or input tax credit that a representative is liable for or entitled to (under section 58-10) is, to the extent the amount would have been attributable to a tax period that ended prior to the time the representative became a representative of the incapacitated entity, instead attributable to the first tax period applying to the representative that begins on or after this time. This will only apply to a representative that does not account for GST on a cash basis . [Schedule 1, item 8]

Registration

1.42 New sections 58-20, 58-25 and 58-30 are consistent with sections 147-5, 147-10 and 147-15 of the current law. These provisions ensure that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered. When the appointment of a representative ends, the representative must notify the Commissioner within 21 days of the end of the appointment. The Commissioner must cancel a representative's registration if the Commissioner is satisfied that the representative is not required to be registered in that capacity . [Schedule 1, item 24]

GST returns and notifications

1.43 New section 58-45 allows a representative that is appointed to two or more incapacitated entities that are members of a GST group to give the Commissioner one return for a tax period in respect of the entities . [Schedule 1, item 24]

1.44 New section 58-50 provides that a representative of an incapacitated entity must give to the Commissioner a GST return for a tax period applying to the incapacitated entity if the incapacitated entity has failed to give such a return and the Commissioner directs the representative to give the Commissioner the return. Any direction by the Commissioner to a representative of an incapacitated entity to provide a GST return is a reviewable decision . [Schedule 1, item 25]

1.45 A direction by the Commissioner in relation to a tax period may be in relation to any tax period applying to the incapacitated entity including a tax period that ends before the representative became a representative and a tax period that starts after the representative became a representative. It would not, however, include a tax period that occurs after a representative's appointment has ended.

1.46 Subsection 58-50(4) provides, without limiting the matters that the Commissioner may take into account in deciding whether to give a direction to a representative to give a return, the Commissioner must take into account the following four factors:

•

the prospect for, and likely size of a dividend being paid to unsecured creditors;

•

the likelihood that the return would, if lodged, reveal a liability to pay an amount to the Commissioner;

•

the availability of books and records which would make it possible to prepare the return; and

•

the likelihood that the representative's cost of preparing the return would be covered by the assets of the incapacitated entity without resulting in an unreasonable impact on other creditors.

[Schedule 1, item 25]

1.47 While the Commissioner must take into account these four factors, the Commissioner is not limited to these factors. For example, another relevant factor would be the scope of the representative's responsibility or authority for managing the affairs of the incapacitated entity.

1.48 Subsection 58-50(6) is included to assist readers as the direction of the Commissioner is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003.

1.49 New section 58-55 recognises that in some circumstances the requirement under Division 31 for an incapacitated entity to lodge GST returns while a representative is appointed will not be necessary. This section provides that an incapacitated entity is not required to lodge a GST return where the entity's net amount for the tax period is zero, the entity does not have an increasing adjustment that is attributable to the tax period and the entity is not liable for GST that is attributable to the tax period . [Schedule 1, item 25]

1.50 New section 58-60 provides that a representative must notify the Commissioner of certain liabilities of the incapacitated entity that it could reasonably be expected to become aware of for which a GST return has not been given to the Commissioner. The representative is required to notify the Commissioner of such amounts prior to declaring a dividend to unsecured creditors . [Schedule 1, item 25]

1.51 In cases where there is more than one dividend to be paid to creditors, for example an interim dividend followed by a final dividend, notification will be required prior to the declaration of each dividend. Each successive notification will only need to notify relevant liabilities that have not been included in prior notifications.

1.52 Where a representative does not comply with section 58-60 a penalty may arise under section 286-75 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) for failing to lodge documents on time.

Tax periods

1.53 New section 27-39 specifies what happens in relation to an entity's tax periods if it becomes incapacitated. In particular, the tax period applying to an incapacitated entity at the time it becomes incapacitated ends at the end of the day before the entity became incapacitated. The next tax period starts on the day after the tax period ends and ends when the first tax period would have ended. This amendment ensures that all incapacitated entities have a tax period that ends on the day before they become incapacitated. Currently, an incapacitated entity may or may not have a tax period that concludes the day before they become incapacitated, depending on the type of representation to which it is subject . [Schedule 1, item 15]

1.54 A consequential amendment is made to subsection 27-40(1) which currently provides for an entity's concluding tax period in certain circumstances. As a result of new section 27-39, which specifically applies to incapacitated entities, references to liquidation, receivership and bankruptcy have been removed from subsection 27-40(1) . [Schedule 1, item 16]

1.55 Consistent with existing section 147-25, new section 58-35 provides that if a representative of an incapacitated entity is required to be registered, the tax periods applying to the representative are the same tax periods that apply to the incapacitated entity . [Schedule 1, item 24]

1.56 These amendments relating to tax periods will assist in separating pre-appointment and post-appointment liabilities. It will also ensure that all incapacitated entities will be required to pay any net GST liability for their concluding tax period on or before the 21st day of the month following the end of the concluding tax period under section 33-5.

GST groups and incapacitated entities

1.57 Division 48 of the GST Act provides that two or more closely-related entities may form a GST group if they satisfy certain requirements. In particular, all group members must have the same tax periods and the group must nominate one member as the representative member of the GST group. The representative member of a group is the only member of the group required to lodge a GST return. It is liable for the GST payable on supplies made by group members and is entitled to any input tax credits arising from acquisitions group members make. Intra-group transactions are effectively ignored.

1.58 A member of a GST group that becomes incapacitated will generally be required to exit the GST group. Under section 27-39, such an entity's current tax period would end on the day before the entity became incapacitated, and as this tax period would differ from those applying to other members, the entity would no longer satisfy the membership requirements of the group.

1.59 In these circumstances, the incapacitated entity would be required to exit the GST group from the start of a tax period applying to group members. Thus, the incapacitated entity will be required to exit the group 'retrospectively' (that is, from the start of the tax period that applied to group members at the time it became incapacitated). This creates difficulties for the group as a whole as, during the first part of that tax period, they would have accounted for GST as though they were a group.

1.60 New section 48-73 provides that if a member of a GST group becomes incapacitated, the representative member of that group may elect to have the tax periods that apply to group members cease at the same time as the incapacitated entity's tax period ceases . [Schedule 1, item 22]

1.61 If the representative member elects to have the group members' tax periods cease, it must lodge a GST return (for the group, including the incapacitated entity) on or before the 21st day of the month following the end of the tax period. The representative member of the GST group will also be required to pay any net GST liability for the tax period on or before this day. As a result of this election, the tax periods applying to all group members will be the same and the incapacitated entity will not be required to exit the group on the basis that it has different tax periods to other members of the GST group.

1.62 Alternatively if an incapacitated entity does exit the group, the representative member of the group can still elect to have the group members' tax period cease at the same time as the incapacitated entity's tax period ceases. This will eliminate the need for revision of GST group transactions that occurred prior to the relevant group member becoming incapacitated.

1.63 If the representative member does not make an election under section 48-73 when a member of the GST group becomes an incapacitated entity, it is likely that the incapacitated member will no longer satisfy the grouping eligibility requirements and will be required to exit the group.

1.64 New section 48-73 will provide the opportunity for an incapacitated entity to remain part of a GST group. This may reduce compliance costs especially where an incapacitated entity continues to trade in its own right during the period of the representative's appointment.

1.65 New section 48-72 provides that an incapacitated entity cannot be a representative member of a GST group unless all the members of the GST group are incapacitated . [Schedule 1, item 22]

1.66 Consequential amendments are made to section 48-70 to provide that the Commissioner must revoke the approval of a member of a GST group if the member becomes incapacitated and the representative of the incapacitated entity applies to the Commissioner for the member's approval to be revoked . [Schedule 1, item 21]

1.67 Consequential amendments are also made to section 48-75 to provide that the Commissioner must revoke the approval of a GST group if a member of the group has ceased to be the representative member of the group because the entity has become an incapacitated entity. However, the approval will not be revoked if within 21 days the Commissioner has approved another member of the group to replace that member as the representative member of the group . [Schedule 1, item 23]

1.68 A representative may be appointed as a representative of two or more incapacitated entities that are part of the same GST group. In accordance with subsection 184-1(3) of the GST Act, the representative is taken to be a different entity in relation to each incapacitated entity that it represents. Thus, it will be required to account for GST separately in relation to each of these entities.

1.69 However, new section 58-45 provides that where a representative is appointed as a representative of two or more incapacitated entities, the representative may elect to lodge one consolidated GST return per tax period (rather than a separate return for each incapacitated entity) if the incapacitated entities are members of the same GST group . [Schedule 1, item 25]

1.70 The intention of the amendments in relation to GST groups is to provide flexibility and reduce compliance costs in circumstances where one or more members of a GST group becomes incapacitated.

Indemnity

1.71 Under new section 58-65 a representative will be indemnified for any payment it makes to meet its GST obligations . [Schedule 1, item 25]

1.72 Even though a representative may be appointed to an incapacitated entity, in most but not all cases (such as where the assets are vested in the representative), the incapacitated entity retains both the legal and beneficial ownership of any property even though it can no longer deal with that property. As the funds received by the representative in such cases will still belong to the incapacitated entity, an indemnification provision is required to ensure that the legal representative can use the incapacitated entity's assets to make GST payments to meet its obligations.

1.73 Further, new section 58-70 provides protection against civil or criminal proceedings in relation to an act done or omitted to be done in good faith in the performance of the representative's duties under the GST law . [Schedule 1, item 25]

Application and transitional provisions

1.74 New provisions 58-1 to 58-15, 58-40 and minor related consequential amendments will commence from 1 July 2000. The consequential amendment to the Fuel Tax Act 2006 will take effect from 1 July 2006 which is the commencement date for this Act. The remainder of the amendments will take effect from the date of Royal Assent.

Protection for representatives from liabilities arising from retrospective application

1.75 A transitional provision provides protection for representatives from GST liabilities in limited circumstances. This provision provides protection from liability under the GST Act for acts or omissions by a representative up until the date of announcement to amend the law by the then Assistant Treasurer and Minister for Competition Policy and Consumer Affairs in Media Release No. 005 of 6 February 2009 . [Schedule 1, item 55]

1.76 The relevant GST liability must also be within the scope of the representative's authority and obligations as a representative of the incapacitated entity.

1.77 Protection from liability under the GST Act is limited. Protection will be available in circumstances where GST obligations arising during the period of appointment of a representative have been reported and paid in full by the incapacitated entity (and not the representative).

1.78 Protection will also be available in circumstances where, due to insufficient funds, the relevant GST obligations arising during the period of appointment of a representative have only been paid in part by the incapacitated entity or not at all. In such cases the protection will be limited to cases where the representative no longer had access to company assets or an indemnity by which the outstanding liability may be satisfied at the time of the announcement of the proposed retrospective amendments on 6 February 2009.

1.79 The limited protection afforded by this provision is not intended to apply in cases where, after 6 February 2009, a representative has retrospectively revised a net amount or GST liability in accordance with the Federal Court's decision in PM Developments.

Supplies to associates of incapacitated entities

1.80 The proposed retrospective amendments may give rise to an inconsistent outcome in relation to supplies by a representative of an incapacitated entity to an associate of the incapacitated entity for no consideration or inadequate consideration.

1.81 Division 72 of the GST Act provides that a supply between 'associates' may be a taxable supply even though there is no consideration. In most cases an associate of an incapacitated entity will not be an 'associate' of the representative. Consequently under the existing GST Act a supply made by a representative to an associate of the incapacitated entity would not be treated as a taxable supply if there was no consideration provided by the associate.

1.82 In contrast, under new section 58-5, a supply by a representative to an associate of the incapacitated entity for no consideration will be covered by Division 72 as the supply will be taken to be a supply of the incapacitated entity.

1.83 A transitional provision will prevent Division 72 from applying to past supplies by representatives to associates of incapacitated entities for no consideration or inadequate consideration. The new provisions will apply in respect of any such supplies made after the date of Royal Assent . [Schedule 1, item 50]

1.84 Further, in the case of members' voluntary liquidations Division 72 will not apply to any supplies by representatives to associates of incapacitated entities where the members' voluntary liquidation commenced before the day on which this Bill is introduced into the House of Representatives. This provides transitional protection against GST liability on distributions of assets by the liquidator to an associate of the company on the basis that such liquidations commenced prior to the introduction of this Bill into Parliament . [Schedule 1, item 50]

Repeal of Division 147

1.85 The repeal of Division 147 will take effect from the date of Royal Assent. The provisions in new Division 58 requiring notifications and returns by representatives will also take effect from the date of Royal Assent. In light of this a number of transitional provisions are required.

1.86 Section 147-20 is amended to ensure it only applies to increasing adjustments for the period between 1 July 2000 and the date of Royal Assent. Currently section 147-20 applies to both increasing and decreasing adjustments. In addition, current section 147-20 is predicated on the basis that the relevant adjustments are adjustments of the representative. However due to the operation of new section 58-5 the adjustments to which this section relates will always be adjustments that the incapacitated entity has. Therefore this section, as currently worded, would have no application . [Schedule 1, item 10]

1.87 Transitional provisions will also ensure that cancellations of registration under section 147-10 and notices under section 147-15 still have effect under the new relevant provisions in Division 58 that is, sections 58-25 and 58-30 respectively . [Schedule 1, items 51 and 52]

Time limit on recovery by the Commissioner

1.88 Section 105-50 of Schedule 1 to the TAA 1953 provides for a four-year time limit on the Commissioner's ability to recover unpaid indirect tax. That is, an unpaid amount ceases to be payable if four years have passed after the date it was due for payment.

1.89 If a refund of GST previously paid is made in accordance with the law between the date of the Federal Court decision (12 December 2008) and the commencement of Schedule 1, the proposed amendments will have the effect of reimposing that liability upon the representative unless the liability falls outside the four-year limit.

1.90 A transitional provision provides the Commissioner with an extension to the four-year time limit to ensure that the Commissioner has the ability to recover the liability imposed by the retrospective amendments in circumstances where refunds may have been paid between the Federal Court decision and commencement of the proposed amendments.

1.91 In particular, the four-year period within which the Commissioner may recover unpaid tax will be extended to four years from the date on which the refund was claimed . [Schedule 1, item 53]

Refunds of amounts wrongly paid by incapacitated entities

1.92 A transitional provision is inserted to ensure that if an amount is payable by a representative of an incapacitated entity to the Commissioner, but was paid by the incapacitated entity after the appointment of the representative, the incapacitated entity is not entitled to a refund of the amount unless the representative has paid the amount to the Commissioner . [Schedule 1, item 54]

Consequential amendments

1.93 The proposed amendments insert a new Division 58 dealing with representatives of incapacitated entities. As a result existing Division 147 is repealed. A number of consequential provisions ensure there are no anomalous outcomes as a result of the retrospective commencement of new Division 58 and repeal of Division 147.

1.94 Section 444-70 of the TAA 1953 is amended to clarify its interaction with new Division 58 . [Schedule 1, item 49]

1.95 Section 444-70 provides that two or more representatives of an incapacitated entity are jointly and severally liable to pay any amount that is payable under an indirect tax law. Section 58-10 provides that a representative is liable for GST to the extent that a supply is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

1.96 The amendment to section 444-70 ensures that in the case of successive appointments a representative is not liable in relation to actions of an earlier representative where the appointment of that representative has ceased prior to its appointment. It is further provided that a representative is not liable in relation to concurrent appointments where the representatives are appointed to act in different capacities as representatives. Section 444-70 will still apply in the case of concurrent appointments where the representatives are appointed to act in similar capacities . [Schedule 1, item 49]

1.97 A number of minor consequential amendments will also be made to subsection 110-50(2) of the TAA 1953. These amendments insert or remove references to decisions under subsection 58-25(1), paragraph 58-50(1)(b) and subsection 147-10(1) as reviewable decisions . [Schedule 1, items 47 and 48]

1.98 A consequential amendment will be made to the definition of 'representative' in Division 195 to include a reference to a 'controller'. A controller is a form of external administrator relating to corporations and should therefore be included as a representative for the purposes of the GST Act . [Schedule 1, item 42]

1.99 Division 156 is amended to clarify the treatment of periodic and progressive supplies and acquisitions under Division 58. Division 156 provides that in relation to attributing GST or an input tax credit on progressive or periodic supplies, the GST payable or input tax credit is attributable as if each progressive or periodic component of the supply were a separate supply.

1.100 New section 156-17 is inserted to provide that each periodic or progressive component of a supply or acquisition is to be treated as a separate supply or acquisition for the purposes of Division 58. This should assist representatives in determining whether a periodic or progressive supply is within the scope of their authority . [Schedule 1, item 35]

Example 1.6 : Representative continues with an existing lease agreement

In August CrashCo Pty Ltd enters into a one-year agreement for the lease of premises from which it operates a car repair business. The lessor invoices CrashCo Pty Ltd on a monthly basis for monthly rent of $2,200; with the rent being payable one month in advance.

On 15 December an administrator is appointed to manage CrashCo Pty Ltd's affairs. At the time of appointment of the administrator CrashCo Pty Ltd had paid five monthly instalments of rent of $2,200. The amounts paid by CrashCo Pty Ltd include payment in advance for the lease of the premises for the month of December.

The acquisitions of the premises by way of lease for the period subsequent to the administrator's appointment on 15 December, and up until the cessation of the administrator's appointment will be made within the scope of the administrator's responsibility or authority for managing CrashCo Pty Ltd's affairs. The administrator will be entitled to any input tax credits arising with respect to the acquisitions of the premises for that period.

However, although the administrator was appointed part way through the month of December, the administrator will not be entitled to any input tax credits with respect to the acquisition of the premises during the month of December because CrashCo Pty Ltd has provided the consideration for the lease of the premises for entire month of December, see paragraph 58-10(3)(a).

1.101 There are also a number of amendments reorganising headings and notes and amending other provisions that need to be removed or changed because of the introduction of the new provisions . [Schedule 1, items 1 to 7, 9, 12 to 14, 17 to 20, 26 to 34, 36 to 41, 43 to 45]

1.102 Consequential amendments will be made to section 70-25 of the Fuel Tax Act 2006 to replace the reference to 'Division 147' with a reference to 'Divisions 58 and 147' from 1 July 2006 until the date of Royal Assent of this Bill. From the date of Royal Assent the reference in section 70-25 will be to 'Division 58' only . [Schedule 1, items 11 and 45]

1.103 The amendments to the Fuel Tax Act 2006 will ensure that the fuel tax law continues to apply to an incapacitated entity and its representative in the same way as the GST Act would apply to them under proposed Division 58.

1.104 Primarily, this would mean that a representative would be entitled to any fuel tax credit for an acquisition or importation of fuel to the extent that:

•

the making of the acquisition or importation is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs; and

•

in the case of an acquisition - the incapacitated entity did not provide consideration for the acquisition prior to the representative's appointment.

1.105 Similarly, the representative would have any fuel tax adjustment that arises in relation to an acquisition or importation of fuel if the making of the acquisition or importation was within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs. In the case of an acquisition, the representative would not have the adjustment to the extent that the consideration for the acquisition was provided by the incapacitated entity before its appointment commenced.