House of Representatives

Explanatory Memorandum

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

Chapter 7

Assessable Dealings

A. Introduction

7.1 This chapter describes those acts, operations and transactions with goods which will be taxable under the new law. They are referred to as assessable dealings . Assessable dealings are dealt with in Part 3 of the Sales Tax Assessment Bill 1992 and in Table 1 to that Bill.

B. Explanation and Commentary

7.2 Under the new law, assessable dealings with assessable goods will be taxable unless an exemption applies. Only acts, operations or transactions with goods which are assessable dealings will be taxable. [clause 5, definition of 'assessable dealing']

Structure of assessable dealings

7.3 There will be five broad kinds of dealing which, in certain circumstances, will be an assessable dealing. These dealings are:

(i)

sale

(ii)

application to own use

(iii)

delivery

(iv)

local entry

(v)

removal from customs clearance area

To be an assessable dealing, the dealing must occur at a time when the goods are in Australia, although the dealing itself can occur anywhere in the world. [clause 16 and Table 1]

Sale

7.4 There are two kinds of sale: wholesale and retail. Generally, most wholesale sales will be assessable dealings but only certain types of retail sales will be assessable dealings. The definition of 'wholesale sale' is discussed in Chapter 5 (paragraphs 5.21-5.22). In general terms, it will be any sale to a person who purchases goods for the purposes of resale. A 'retail sale' will be defined as any sale that is not a wholesale sale. 'Sale' will be defined essentially to have its ordinary meaning, but will specifically include both barter and exchange. In this context, exchange could include an exchange of goods for other goods or for the provision of services. Apart from barter and exchange, there will be no deemed sales under the new law. [clause 5, definitions of 'wholesale sale', 'retail sale' and 'sale']

Sale: wholesale sale [ADs 1a, 1b, 11b]

7.5 The general design of both the existing and new sales tax law is that the tax should fall on the last wholesale sale.

7.6 There will be three situations in which a wholesale sale will be an assessable dealing:

(i)

if the sale is of Australian goods manufactured by the seller in the course of any business carried on by the seller; [Table 1: AD1a]

Note:

The manufacture does not have to occur in the course of carrying on a manufacturing business. The carrying on of any business will be sufficient to satisfy the test. Moreover, there will be no requirement that the sale must be made in the course of any business. The definition of 'manufacture' is discussed in Chapter 5 (paragraphs 5.13-5.16).

(ii)

if the sale is of Australian goods and the seller did not manufacture them. [AD1b]

Note:

There will be no business test.

(iii)

if the sale is of imported goods. [AD11b]

Note 1:

There will be no business test.

Note 2:

Small business exemption: This will be a special exemption, which will exempt from tax persons whose total tax liability over the previous 12 months is $10,000 or less. It will apply to all of the assessable wholesale sales (except for those discused in the note to paragraph 7.7), including those which occur otherwise than in the course of a business. The exemption is discussed in greater detail in Chapter 8.

The net effect is that the only wholesale sale of assessable goods that will not be an assessable dealing will be a sale of Australian goods manufactured by the seller otherwise than in the course of any business.

Example:

A person who manufactures goods at home as a hobby and may, from time to time, sell some of those goods to a retailer.

7.7 There will be no requirement that any of the sales must occur in the course of a business. However, there will be a requirement, if the seller is the manufacturer of Australian goods that the goods must have been manufactured in the course of a business carried on by the seller (although it does not have to be a manufacturing business). This test will also apply in the case of retail sales and applications to own use by the person who manufactured the goods.

Sale: retail sale

7.8 A retail sale is any sale that is not a wholesale sale. While the majority of retail sales will not be assessable dealings (mainly because the goods would already have been the subject of a wholesale sale that was an assessable dealing), there will be five situations in which a retail sale will be an assessable dealing. These will be:

(i)

a retail sale of Australian goods manufactured by the seller in the course of carrying on any business

(ii)

a retail sale of goods obtained under quote

(iii)

an external costs sale

(iv)

an indirect marketing sale

(v)

a sale of goods which have not previously passed a taxing point, provided that, in the case of Australian goods the seller did not manufacture them

Retail sale: 'Australian goods' manufactured by the seller [AD2a]

7.9 The conditions attaching to this sale are identical to the conditions attaching to the wholesale sale of goods manufactured by the seller. The reason for making this sale an assessable dealing is that there would not have been an earlier wholesale sale that would have been the subject of an assessable dealing. Without this dealing, the goods would not be taxable. [Table 1: AD2a]

Retail sale: goods obtained under quote [ADs 2b, 12b]

7.10 Any retail sale of goods obtained under quote will be an assessable dealing. Under the existing law, a person may acquire goods tax-free by providing a certificate to the effect that the person intends to satisfy an exemption item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 in relation to those goods. If the person subsequently sells those goods without satisfying that item, there is no sanction in the law apart from prosecution for giving a false or misleading statement. Under the new law, if a person obtains goods under quote (either by quote of a registration number or an exemption declaration) then any subsequent retail sale of those goods by that person will be an assessable dealing. If no exemption applies at the time of that sale, then the person will be liable to pay tax.

Retail sale: External costs sale [ADs 2c, 12c]

7.11 There will be a new approach to the taxation of dealings with goods by persons who have either:

•

incurred certain costs in connection with the design, formulation or development of the goods, but who do not manufacture the goods; or

•

paid a royalty in connection with the goods.

A general principle of the new law is that expenditure of this kind should be included in the taxable value of those goods. There is, however, a problem with the existing law. Broadly, there is no liability to tax on a retail sale of goods that have already borne tax. They are regarded as having passed the last taxing point. As a general rule, that would be the correct result. However, if the retailer has also incurred costs in connection with manufacture, those costs will be excluded from the tax base. That would not be the correct result.

7.12 The new dealing will be directed, in particular, towards arrangements (regardless of their purpose) that have the effect of only taxing goods on the basis of the costs incurred in connection with the physical manufacture of the goods, rather than other costs that are necessarily incurred in connection with the design, formulation or development of the goods and which are reflected in the price of the goods to the consumer. These arrangements can be easily achieved by contracting out the physical manufacture of the goods to a person who has not incurred those other costs. Without this new assessable dealing, the person who incurred those other costs would have no liability on any subsequent retail sale because the goods would already have borne tax.

7.13 The following examples will illustrate the anomaly that the new dealing is designed to address. They are based on the operation of the existing law.

Example 1: Company X incurs costs in designing new goods, which it also manufactures and sells (both by wholesale and retail

Result: X is liable to tax on the sale. Tax will be payable on a value that reflects both the manufacturing and the design costs, regardless of whether the sale is by wholesale or retail. This is the correct result.

Example 2: X contracts with company Y for Y to design new goods. X pays Y for the design. X manufactures the goods and sells them (both by wholesale and retail).

Result: The same result as for example 1 - X will be liable on a sale value that includes both the manufacturing and the design costs (regardless of whether the sale is by wholesale or retail). Y is not liable to tax. This is the correct result.

Example 3: X designs a new product. X engages Y to manufacture the product, which Y sells to X . X sells the goods (both by wholesale and retail). X does not quote and Y charges X tax on the sale.

Result:

(a)

Y is liable to tax on the sale of the goods that it has manufactured. The sale value will reflect only Y's manufacturing costs, and not X's design costs.

(b)

If X , in turn, sells the goods by wholesale. X will be liable to tax on the sale. The sale value will include both the design costs and the manufacturing costs. There will be a credit for the tax paid by Y This is the correct result.

(c)

If X sells the goods by retail, X will not be liable to tax on the sale. As a result, there will be no tax payable on the design costs. This is not the correct result.

7.14 Royalties: The external costs dealing will be one of the measures under the new law which are designed to replace the present taxation treatment of royalties under the Sales Tax Assessment Act (No. 10) 1985. Under that Act, it is the person who makes the royalty payment, and not necessarily the person who deals with the goods, who is liable to tax. Under the new law, royalties paid before the last assessable dealing with goods will be covered by the special taxable value rules for royalty payments. If that payment is made after that time, then the payment of the royalty will be included in the value of any retail sale or AOU of those goods.

7.15 An 'external costs sale' will occur if the following conditions are met:

(i)

the sale must occur in the course of a business carried on by the seller;

Note 1:

The reason for including a business test is to broadly match the dealing with dealings by the physical manufacturer of goods. In those cases, the manufacturer will not be liable unless the manufacture occurs in the course of a business.

Note 2:

The dealing will apply to both Australian goods and imported goods.

(ii)

the sale is not covered by another category of assessable dealing;

Note:

If the sale is covered by another assessable dealing, then the taxable value of that dealing would include all the costs incurred in connection with the manufacture of the goods.

(iii)

the seller must incur either:

•

expenditure, directly or indirectly, in connection with the design, formulation or development of the goods; or

Note:

Examples of expenditure of this kind include design and research and development costs.

•

a royalty, that is paid or payable, in connection with the goods;

Note:

Any royalty payable in connection with goods will be covered. It does not have to be incurred in connection with the design, formulation or development of the goods, as do other external costs.

(iv)

the seller must incur expenditure or pay a royalty at or before the time of the sale, or might reasonably be expected to incur such expenditure or royalty after that time. Alternatively, the expenditure or royalty must be incurred by an associate of the seller or by any person (except the manufacturer) under an arrangement with either the seller or the associate of the seller;

(v)

if the taxpayer had manufactured the goods, it would be reasonable to expect that the expenditure would be included in the taxable value of the retail sale of the goods by the taxpayer.

Note 1:

This condition will not apply if the external cost is a royalty.

Note 2:

Small business exemption will apply to this dealing.

Note 3:

'external costs' do not include costs incurred in the manufacture or purchase of materials that are supplied to a manufacturer to be made up into goods that will be the subject of an assessable dealing under AD4a (i.e. a delivery of customer's materials goods). The reason is that the law will adequately deal with the costs of these goods in other places. [clause 19]

7.16 It will not be necessary for all external costs to be identified before the dealing can apply. The identification of at least one external cost will cause the sale to become an assessable dealing. The taxable value for the dealing (the notional wholesale selling price of the goods) will automatically include all of those costs.

7.17 The extent of the new dealing will be modified by the requirement that the expenditure must be of a kind which, if the taxpayer had manufactured the goods and then sold them by retail, it would be reasonable to expect that the expenditure would be reflected in the taxpayer's taxable value (which would be the notional wholesale selling price of the goods). This is intended to exclude expenditure that is of its nature quite clearly connected only with things that normally occur after the point of last wholesale sale. With external costs being restricted to costs that are directly or indirectly incurred in connection with the design, formulation or development of the goods, it is unlikely that expenditure of this kind would be incurred after the last wholesale sale. However, some expenditure may be of a retail nature, and where this is the case it will not form part of the taxable value. The modification will not apply to royalties because any royalty payable in connection with goods will be an external cost.

7.18 The dealing is intended to include expenditure (including a royalty) by an associate of the seller or by a person who incurs the expenditure pursuant to an agreement with the seller.

Example:

* Company A (a retailer) contracts with company B (a manufacturer) for B to manufacture recorded compact discs for A;

* Company C (an associate of A ) has paid a royalty to Company D (the copyright holder) for the right to manufacture compact discs of the copyrighted material;

* C supplies the mastercopy of the copyrighted material to B ;

* A pays C a management fee, which includes a component for re-imbursement of the royalty payment;

* A sells the compact discs by retail.

Result: A will be liable on the retail sale or AOU of the compact discs on a taxable value equal to the notional wholesale selling price of the discs (which will reflect the royalty paid).

Note: The payment of the royalty is not itself an assessable dealing - it merely means that the later dealing with the goods by A will be an assessable dealing (by which time the royalty costs will be reflected in the taxable value).

Retail sale: Indirect marketing sale

7.19 These are sales pursuant to certain arrangements that have the technical, but generally artificial, effect of converting what would have been a wholesale sale into a retail sale. As a consequence, the taxing point in the marketing chain is pushed back so that it applies to the sale to the person who is 'really' the wholesaler, rather than the sale by that person. This arrangement eliminates the 'real' wholesaler's profit margin from the sale value of the goods and the sales tax payable is, accordingly, that much lower. As that tax saving can be transferred, in whole or in part, to the consumer, those who engage in these arrangements can achieve an unfair competitive position in the market place. Indirect marketing sales have been taxable under the existing law since 1985. The new law will treat these sales according to their true nature as retail sales. (Under the existing law, they are deemed to be wholesale sales). The retail sale will be a separate assessable dealing and its taxable value will be the notional wholesale selling price of the goods. [AD2d and 12d]

7.20 There will be an indirect marketing sale if the sale occurs in either of the following circumstances:

(i)

the sale must be made by the seller through another person, other than an employee of the seller, who is acting for the seller under an arrangement to that effect; or

(ii)

the sale must be made from premises that are:

•

used by a person, other than the seller, mainly for making retail sales of goods; and

•

are held out to be the premises of, or premises used by, that other person.

The dealing will not apply if the seller is the manufacturer of the goods. This is because there is no one in the marketing chain behind the manufacturer to push the taxing point back to. Regardless of whether the sale is by retail or wholesale, the law will bring the wholesaler's profit margin into the taxable value of the goods.

Retail sale: goods that have not previously passed a taxing point

7.21 The existing law assumes that a person will be liable to tax on goods not previously taxed, either because the person has manufactured them or has purchased them under quote. Tax is, therefore, only imposed on persons who have acquired goods in this way. There are other ways in which goods may be acquired tax-free by a person. For example, transfers of goods by court order (no sale, lease or application to own use is involved), which can be common in company mergers and group restructurings.

7.22 The new law will close that gap, in the case of a retail sale, by making all retail sales of goods assessable dealings, (known as an untaxed goods sale unless any of the following conditions is satisfied:

(i)

the goods have previously passed through a taxing point;

Note:

Goods will be taken to have previously passed a taxing point if:

•

tax became payable on an earlier assessable dealing (i.e. there was no exemption to liability); or

•

the goods were the subject of an earlier assessable dealing but tax did not become payable on them because:

•

they unconditionally satisfied an exemption Item (see paragraphs 8.5-8.7);

•

the taxpayer concerned could not be taxed or was entitled to an exemption arising outside the sales tax law. For example, the taxpayer could have been a Commonwealth Department or a Commonwealth authority which is made exempt from sales tax by the legislation which established it.

(ii)

the goods were obtained under quote. There is a separate assessable dealing for those cases;

(iii)

the sale is an indirect marketing sale. There is a separate assessable dealing for those sales;

(iv)

the goods are Australian goods manufactured by the seller. There is a separate assessable dealing for those goods if they were manufactured by the seller in the course of carrying on a business. If they were manufactured by the seller outside any business, then the sale is not an assessable dealing. [AD2e and AD12e and clause 21]

Application to own use

7.23 Application to own use (AOU) in Australia will be the last point at which goods can be the subject of an assessable dealing, as is the case under the existing law. Once goods have been applied to own use in Australia they will, with two exceptions, no longer be assessable goods and no longer taxable.

7.24 The definition of 'application to own use' is discussed in detail in Chapters 5. In broad terms it includes:

(i)

consumption;

(ii)

gifts;

(iii)

transferring property in goods under a contract that is not a contract of sale;

(iv)

the grant of a lease of goods or the giving of permission to another person to use the goods;

(v)

packing goods into a container (AOU of the container);

(vi)

using goods as raw materials (in the manufacture, construction, repair etc of goods and other property).

The definition will exclude sale and anything done with imported goods before they are locally entered. [clause 5, definition of 'application to own use']

7.25 An AOU will only be an assessable dealing if it happens at a time when the goods are in Australia. Therefore, even though goods may have been applied to own use outside Australia they will still be liable to tax at the time of importation and local entry. [clause 5, definition of 'AOU in Australia']

7.26 Leases: An important change to the existing law will be the treatment of leases. Under the existing law, a lease of goods by a registered person is a separate taxable dealing. The dealing is not self-assessing, as the sale value is the amount that the Commissioner considers to be fair and reasonable. Subsequent leases of the goods are also taxable. The time for payment of the tax is determined by the Commissioner. Under the new law, a grant of a lease of goods will be treated as an AOU of the goods by the lessor. The lessor will be liable to tax on the goods (unless an exemption applies). The taxable value will be the same as for other AOUs in similar circumstances. Subsequent leases will not be an assessable dealing with the goods.

7.27 There will be four situations in which an application to own use will be an assessable dealing:

(i)

an AOU of Australian goods Manufactured by the applier in the course of carrying on any business; [Table 1: AD3b]

(ii)

an AOU of any goods obtained under quote; [AD3c and AD13c]

(iii)

an external costs AOU of any goods; [AD3d and AD13d]

(iv)

an AOU of goods which have not previously passed a taxing point and which are not covered by any other assessable dealing. [AD3a and AD13a]

7.28 Each of these situations is identical to the corresponding situation for retail sales. The only difference is that there will not be an AOU that corresponds to an indirect marketing sale. Dealing (ii), however, will be a major change to the existing law. It is this dealing which will impose tax on persons who obtain goods under quote (either of an exemption declaration or a registration number) but who deal with the goods in a taxable manner (i.e. they do not intend to satisfy an exemption Item).

Delivery of customer's materials goods

7.29 It is common practice for a person to manufacture goods for a customer from materials supplied by the customer. If most, or all, of the materials used in the manufacture of goods are supplied by the customer, then the manufacturer may not legally be the owner of the goods. Consequently, the delivery of the manufactured goods to the customer may not be a sale of the goods to the customer and, therefore, not covered by any assessable dealing. The existing law overcomes this problem by deeming the delivery to be a sale by the manufacturer to the customer. Under the new law, delivery of the goods in this situation will be treated as a separate assessable dealing (known as a delivery of customer's materials goods. This is consistent with a general approach of removing deeming provisions from the law and treating concepts according to their true identity. [Table 1: AD4a]

7.30 A 'delivery of customer's materials goods' will occur if the following conditions are satisfied:

(i)

the goods are manufactured in Australia for a customer;

(ii)

some or all of the materials used in the manufacture of the goods were:

•

supplied by the customer;

•

supplied by a third person at the request of the customer;

•

were purchased from the manufacturer by the customer; or

•

were purchased from the manufacturer by a third person at the request of the customer; and

(iii)

the goods were delivered to:

•

the customer; or

•

to a third person at the request of the customer.

Note 1:

The dealing will be restricted to Australian goods the case of materials supplied to an overseas manufacturer, their value would automatically be included in the taxable value of the imported goods, either at the time of local entry or at the time of a later dealing with the goods.

Note 2:

There will be no business test.

Note 3:

Small business exemption: The exemption will apply to this dealing. [clause 5, definition of 'delivery of customer's materials goods' and clause 22]

7.31 This dealing will make a major change to the existing treatment of goods manufactured from materials supplied by a customer. Under the existing law, the manufacturer in these situations is often deemed not to be the manufacturer while another person is deemed to be the manufacturer. The result of all the existing deeming provisions is that the 'real' manufacturer is not liable in the following situations:

(i)

if the customer wants the goods for resale. In this case, the customer is deemed to be the manufacturer and is liable to tax on the subsequent sale; and

(ii)

if a third person has arranged the manufacture of the goods from the customers materials. In this case, the third person is deemed to be the manufacturer and is liable to tax on the delivery of the goods to the customer.

This is an artificial and confusing set of rules. The policy intention of the deeming provisions, however, is clear: to postpone the taxing point if some of the costs of production are incurred by a person who is not the physical manufacturer of the goods, so that those costs are brought within the tax base.

7.32 Under the new law, every delivery of goods by the manufacturer will be an assessable dealing. There will be a special taxable value for this dealing which will include both the manufacturer's charge plus the value of any always exempt materials supplied by the customer (see paragraphs 9.5-9.6).

Local entry

7.33 Local entry is a dealing that applies only to imported goods and is the new name for the dealing referred to under the existing law as an 'entry for home consumption'. In general terms, 'local entry' can be described as an act or activity that takes imported goods out of the control of the Collector of Customs. The most common local entry will be an entry for home consumption under the Customs Act 1901. Under the new law, these will be known as 'formal local entries'. There are other acts or activities under the Customs Act which are also treated under the existing law as 'entries for home consumption' even though they are not technically entries. These will also be treated as local entries under the new law and will be known as 'deemed local entries'. Formal and deemed local entries are distinguished because there can be more than one entry for goods. If this happens, there will be rules governing which entry will take priority (see paragraphs 7.34-7.36). [Table 1: AD10, clause 5, definition of 'local entry' and clause 23]

7.34 Formal local entries: The following will be treated as formal local entries under the new law:

(i)

an entry for home consumption given to a Collector of Customs under section 36 of the Customs Act; and

(ii)

an advance entry for home consumption under section 37 of that Act. [clause 23 and clause 5, definition of 'Customs Act']

7.35 Deemed local entries: These are listed in the new law in table form. [Table 2]

7.36 Priority of multiple local entries:Goods can often be the subject of more than one entry. In particular, an entry can be withdrawn and a second entry made. The existing law sets out rules as to which of the multiple entries takes priority. The new law will maintain the existing rules, which are set out in Table 7A (below).

7.37 Small Business exemption: The exemption will not apply. If it did, it would give every person in Australia a $10,000 tax exemption on goods that they import into Australia each year. The present exemption (for international travellers) is $400 value. On the other hand, these dealings are not included among the dealings that are taken into account under the small dealings exemption in determining whether the $10,000 threshold has been met.

Removal from a customs clearance area

7.38 This is a dealing which will be limited in its application to goods ( airport shop goods which are the trading stock of an inwards duty-free shop at an Australian international airport. It applies to both Australian goods and imported goods as both kinds of goods are sold from airport shops. These goods are taxable under the existing law and the new law will make no change to their treatment. [clause 5, definitions of 'airport shop goods' and 'inwards duty-free shop', and Table 1: AD4b and AD14b]

7.39 Background: In 1986 the sales tax law was changed to allow international passengers arriving in Australia (relevant travellers) to have access to inwards duty-free shopping facilities at Australian international airports. This change enabled both foreign and returning Australian tourists to make duty-free and sales tax-free purchases from these facilities in Australia. The airport shops are all bonded warehouses under the Customs Act 1901 and are located in the international terminals between the point of disembarkation and the customs barrier. They are permitted to sell only tobacco products, spirituous liquors and perfume. The sales tax treatment of goods in these shops under the existing law is as follows:

(i)

There is a sales tax exemption which enables the proprietor of the airport shop to acquire airport shop goods tax-free for sale to international travellers arriving at the airport (item 114(3) in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935).

(ii)

There is a sales concession for certain goods brought into Australia by international travellers that was extended in 1986 to include goods purchased from airport shops (item 114(1)).

(iii)

The sales tax law was amended to impose sales tax on Australian manufactured airport shop goods that were:

•

sold to a relevant traveller (in this case the traveller, and not the proprietor, is the taxpayer. Liability arises if the traveller exceeds the exemption limit under item 114(1));

•

sold to a person who was not a relevant traveller (in which case the proprietor is liable); and

•

applied by the proprietor to own use (in which case the proprietor is liable).

7.40 The 1986 amendments applied only to Australian manufactured goods in airport shops. Imported airport shop goods will always be taxable at the point of entry for home consumption, which is not reached until after the time of the dealings at the airport shop.

7.41 Definition of 'relevant traveller': A 'relevant traveller' will be defined as a person who has arrived in Australia on an international flight as a passenger, or member of the crew of an aircraft. The person must also not have been questioned by a Customs officer about goods carried on that flight. [clause 5, definition of 'relevant traveller']

7.42 Liability of a relevant traveller: The purpose of this dealing is to impose a liability on a relevant traveller for any goods purchased from an airport shop. This will ensure that the goods will be taxable if, when added to the goods in the traveller's personal baggage, they exceed the traveller's exemption limit. This will be achieved by creating a new assessable dealing: removal of goods from a customs clearance area. A relevant traveller who purchases goods from an airport shop must pass through a customs clearance area before exiting the terminal. This is the same point at which goods imported by the traveller as personal baggage will be deemed to be entered for home consumption, so the exemption can be applied against all the value of all the travellers goods.

7.43 Customs clearance area: This will be any place set aside for the performance of functions under the Customs Act. For example:

(i)

questioning passengers disembarking from an aircraft;

(ii)

examining the baggage of those passengers; or

(iii)

as a holding place for passengers. [clause 5, definition of 'customs clearance area']

7.44 Proprietor's liability: Under the new law, the dealings listed in paragraph 7.39 will be dealt with as follows:

(i)

the sale by the proprietor to the relevant traveller will be an assessable dealing by the proprietor. In the case of Australian goods it will be a retail sale of goods acquired under quote (AD 2b). In the case of imported goods it will be a retail sale of goods not previously taxed (AD 12e). However, because the goods will be exempt if they are sold to relevant travellers, the dealing will not be taxable (exemption Item 190);

(ii)

the sale by the proprietor to a person who is not a relevant traveller will also be an assessable dealing (identical to (i) except that the sale will be taxable because the goods will not be always exempt goods).

(iii)

the AOU by the proprietor will be a taxable assessable dealing - either of Australian goods acquired under quote (AD3c) or imported goods which have never been taxed (AD13a).

The proprietor's liability will not be part of the assessable dealing of removing goods from a customs clearance area.

C. Summary of Main Changes

7.45 The main changes proposed to the existing law which are discussed in this chapter are:

D. Transitional Arrangements

7.46 The Sales Tax Amendment (Transitional) Bill 1992 sets out the transitional arrangements that will apply to the new law. These arrangements are discussed in full in Chapter 23. They include provisions of general application as well as special provisions applicable to particular elements. There will be a special transitional provision in the Bill for assessable dealings .

Application of the new law

7.47 General principle: The new law will apply only to assessable dealings that occur on or after the first taxing day. [subclause 16(2)]

7.48 The new law can apply before the first starting day: Although the new law cannot impose tax on a dealing with goods that occurs before the first taxing day, it is capable of applying (for other purposes) to acts and omissions that occur before that day. This provision is essential to ensure that tax is imposed on dealings with goods either under the new law or the existing law. In the absence of this provision, there would be a number of acts, transactions or operations with goods which might fall outside either law. The broader purpose of this provision is to ensure that when the new law refers to a course of conduct or series of events, and some (but not all) elements of that conduct or those events occur before the first taxing day, then the conduct or events will be covered by the new law. However, there are exceptions to that general purpose in a number of areas [subclause 3(2)]

7.49 Examples of the application of the new law:

Example 1: Company X. Manufactures goods before the first taxing day and sells them by wholesale after the first taxing day.

Result: The new law will impose tax on this dealing, even though one of its essential elements (the manufacture of the goods) occurs before the first taxing day.

Example 2: Company X. Purchases goods, for a tax-inclusive price, and makes a payment of royalty in connection with the goods before the first taxing day. X then sells the goods by retail after the first taxing day.

Result: X. May not be liable to tax on the sale (as an external costs sale) because that assessable dealing specifically excludes external costs incurred before the date of introduction of the Bill in the House of Representatives. However, if the cost is incurred between the commencement date and the first taxing day, then tax will be imposed on any sale that occurs after the first taxing day, even though the royalty was paid before the first taxing day.

7.50 Dealings with goods taxed under the existing law: There is no general restriction on imposing tax on an assessable dealing with goods under the new law if those goods have already been taxed under the existing law. This is consistent with the existing law, which does not restrict the subsequent taxing of goods that have already borne tax. An example of a situation in which the existing law imposes tax on goods more than once is if goods are the subject of successive wholesale sales and the purchasers do not quote. If the new law imposes tax on goods that have already borne tax under the existing law then, with one exception, the new law will give the taxpayer a credit for any tax paid on the goods under the existing law.

7.51 Some assessable dealings will not apply to goods taxed under the existing law: The new law will impose tax on an 'untaxed goods sale or AOU'. Broadly, these are goods that either have not previously been taxed or would have been taxed except for the operation of an exemption Item in the proposed Sales Tax (Exemptions and Classifications) Act 1992. In the absence of a special provision, it is possible that some goods taxed under the existing law might fall inadvertently into the definition of 'untaxed goods'. There will be a special provision that prevents these dealings from applying to goods which have been taxed under the existing law or which would have been taxed under the existing law except for the operation of an item in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. [clause 5 of the Sales Tax Amendment (Transitional) Bill 1992]

Application of the existing law

7.52 Leases: The existing law will not Impose sales tax on any act, transaction or operation with goods that happens on or after the first taxing day The single exception to the general principle will apply to goods that have been leased before the first taxing day. For goods in this category, the existing law will continue to apply for a period of 2 years after the first taxing day. In broad terms, this means that the existing law will continue to impose tax on the grant of subsequent leases of those goods if the grant occurs within 2 years after the first taxing day. [clause 2 of the Sales Tax Amendment (Transitional Bill 1992]

7.53 Reason for exception: The sale value of the grant of a lease of goods to which the existing law applies is the amount that the Commissioner determines to be fair and reasonable. The Commissioner has, as a general rule, determined that amount to be the amount of the lease payments, rather than the fair wholesale value of goods (as applies for other dealings with goods). However, tax on a fair wholesale value will ultimately be paid because subsequent leases of the goods are also subject to tax. At the first taxing day there will be many leased goods which will not yet have borne tax on the equivalent of a fair wholesale sale value. However, subsequent leases of these goods would not otherwise be subject to sales tax under the new law because the general approach of the new law is to impose tax only on the first lease of assessable goods. The extension is necessary, therefore, to prevent a windfall gain to some lessors.