House of Representatives

Explanatory Memorandum

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

Containers

A. Introduction

20.1 This chapter describes how the new law will apply to containers. There is no single part of the Sales Tax Assessment Bill 1992 that deals exclusively with containers. Instead, the rules for containers have been incorporated into the general scheme of the new law.

B. Explanation and Commentary

Overview

20.2 The general approach of the new law will be to apply the same treatment to containers as applies to their contents. This is also the approach of the existing law, but its implementation is complicated and numerous exceptions have obscured its effect. The new law will be designed to 'tax' containers at the same time and at the same rate (if any) as their contents. This will be achieved by the device of making containers liable to tax at the time that their contents are put in them, but exempting the dealing from tax if the contents are assessable goods. When the contents subsequently become liable to tax, the value of the container will be included in the taxable value of the contents.

20.3 The details of this scheme are set out below.

How will containers be 'taxed'?

20.4 The proposed tax treatment of containers is outlined below:

1.

Assessable dealing: A container will be taken to be applied to own use at the time that contents are put in it (or anything else is done which causes goods to become a container). This will be known as a packing AOU. A packing AOU will be an assessable dealing if it satisfies the requirements of one of the AOU dealings (ADs 3a, 3b, 3c, 13a, and 13c).

2.

Exemption: A packing AOU that is an assessable dealing will be exempted from tax:

(a)

if all the contents are assessable goods that are intended to be the subject of a later assessable dealing; or

(b)

if all the contents are assessable goods, and the container with contents is to be exported.

3.

Taxable value of the container: If the packing AOU is not exempt, then the container will be taxed and will attract the ordinary taxable value rules applicable to AOUs of assessable goods.

4.

Taxable value of the contents: If the packing AOU is exempted from tax then:

(a)

the taxable value of the contents will be increased by the value of the container; or

(b)

if the contents are exempted from tax, then the value of the container will remain tax-free.

5.

Quotation: The general quoting rules will apply, though there will also be some special quotation rules for containers.

6.

Credits: The general credit rules will apply, though there will also be some special credit rules for containers.

This chapter will also discuss leased containers and contract packing.

1. Assessable dealing

20.5 Assessable goods will be treated as becoming a container, and being applied to own use, at the same time. In broad terms, this means that goods will become a container at the time their contents are put in them. The container will also be applied to own use at that time (this will be referred to as a packing AOU). [clause 5, definitions of 'application to own use', paragraph (e), 'packing AOU']

20.6 A packing AOU will comprise more than just the act of putting contents into goods. Rather, it will be any act that causes goods to become a container. These will be :

(i)

packing or securing any property in packaging, (in the course of carrying on any business), for the purpose of marketing or delivery of the goods;

Note:

This will include labelling if the labelling forms part of the packaging.

(ii)

packing or securing any ancillary items with the contents that are intended and reasonably necessary to allow or facilitate their use.

Note:

'Ancillary items' will not be defined but will include items such as can keys, glass droppers, drinking straws and batteries. The 'reasonably necessary' condition will exclude items such as 'gifts' packed with goods. [clause 5, definition of 'container']

20.7 In order for the packing AOU be an assessable dealing, it will also have to satisfy the other requirements applicable to AOU assessable dealings e.g. if the container has been manufactured by the applier, then the container will have to have been manufactured in the course of a business in order for the AOU to be an assessable dealing.

20.8 Imported containers: Containers imported with contents ready in them can never themselves be the subject of an assessable dealing in Australia. This is because they will be treated as Australian-used goods at the time of their importation (see paragraph 6.5).

Reason: Without this rule, there would be doubt as to when the container could be said to have been applied to own use in Australia. Nevertheless, the treatment of these containers after importation will also follow the treatment of their contents. [clause 5, definition of 'Australian-used goods']

20.9

Examples: Example 1:

X is a registered person who purchases 100 cardboard boxes under quote. X packs contents into the boxes. The contents comprise 50% assessable goods and 50% Australian-used goods. X intends to sell the container and contents by wholesale.

Result: The packing of the cardboard boxes is a packing AOU those boxes.

Example 2:

Z is aregistered person who purchases packaging, consisting of foam trays and shrink wrap, under quote. Z places contents onto the tray, and wraps the goods and tray in shrink wrap. The contents are exclusively assessable goods. Z intends to sell the container and the contents by wholesale.

Result: The packaging of the contents is a packing AOU..

2. Exemptions

20.10 A packing AOU will not be taxable if an exemption applies. There will be 2 exemptions that apply specifically to containers:

(i)

General exemption: Exemption Item 27 will apply to exempt the containers if the contents are exclusively assessable goods;

(ii)

Export: exemption for containers for export if the contents are exclusively assessable goods.

20.11 (i) General exemption: There will be an exemption Item for packing AOUs. [Item 27, Schedule 1, Exemptions and Classifications Bill]

20.12 Exemption Item 27 will apply only if all the contents of a container are assessable goods, or assessable goods and their containers, and the following 2 conditions are satisfied:

Condition 1: The contents are intended (or expected) by the applier to be the subject of a later assessable dealing while still in the container. That later assessable dealing must be a sale, a delivery of customer's materials goods, or a lease AOU.

Condition 2: Possession and/or control of the container must pass to the person who is the purchaser, deliveree or lessee under that assessable dealing.

20.13 The exemption Item will not over goods that are for use in marketing:

(i)

ice-cream goods, or biscuits manufactured on the same premises from which they are sold by retail;

(ii)

take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere).

Note 1:

This will continue the existing policy of taxing the inputs of retail food outlets.

Note 2:

In the existing law, these containers are listed in the Third Schedule of the Sales Tax (Exemptions and Classifications) Act 1935, and so are taxed at the rate of 10%. In the new law, these containers will not be listed in any of the Schedules to the Sales Tax (Exemptions and Classifications) Bill 1992, and consequently they will be taxed at the general rate of 20%.

20.14 Normally, exemption Items will be subject to the requirement that the applier must, at the dealing time, intend to satisfy the exemption Item for the duration of the statutory period see Chapter 8 - paragraphs 8.10 and 8.11 However, this requirement will be subject to any contrary intention that appears in the particular exemption Item concerned. Exemption Item 27 will not be subject to the statutory period. [clause 5 of the Exemptions and Classifications Bill]

20.15 Examples: (Refer examples at 20.9)

Example 1 :

The packing of the cardboard boxes by X is a packing AOU. The contents of the boxes comprise 50% assessable goods and 50% non-assessable goods.

Result: This packing AOU is taxable. The exemption Item will not apply because the contents of each box are not exclusively assessable goods.

Example 2:

The packaging of the goods by Z is a packing AOU. The contents are exclusively assessable goods which Z intends to sell by wholesale.

Result: The packaging of the goods is not taxable. The exemption Item applies because the contents are exclusively assessable goods, and Z intends to sell the contents, with their containers, by wholesale - which will be an assessable dealing.

20.16 (ii) Exemption for containers for export: There will be an exemption if, at the time of the packing AOU, the containers are intended for export. Two conditions must be satisfied for this exemption to apply:

Condition 1: the contents must consist wholly of assessable goods;

Condition 2: the packer must intend to export the container with the contents (or, if the packer packed the contents on behalf of another person - the packer expects that the other person will export the container with the contents). [clause 31]

3. Taxable value of the container

20.17 If no exemption applies at the time of the packing AOU, then the container will be taxable at that time. The container will attract the ordinary taxable value rules applicable to AOUs of assessable goods. These are set out in the table below:

20.18

Example: (Refer examples at 20.9)

Example: The packing AOU by X was taxable because the exemption Item did not apply.

Result: The container will attract the normal taxable value rules applicable to AOUs of assessable goods.

4. Taxable value of the contents

20.19 If an exemption has applied to the packing AOU, then there are special rules which will add to the taxable value of the contents, an amount that reflects the container component recouped in a taxable dealing with the contents. Generally, it will not be necessary to specifically add a container component to the taxable value of the contents because the contents are usually sold for a single price that includes a component for the container. However, if the sale price of the contents does not include a component for the container, then the taxable value must be increased by the amount of the container component. The amount of the container component will vary depending upon the assessable dealing with the contents:

20.20

Example: (Refer examples at 20.9)

Example: The packaging of the goods by Z was not a taxable dealing because the exemption Item applied at that time. Z then sells the contents and their containers by wholesale.

Result: When the contents are sold by wholesale their taxable value will include a component representing so much of the value of the container as is recouped by Z in connection with the sale of the contents.

20.21 Situations where no container component will be added: Acontainer component will not included in the taxable value of the contents if:

(i)

the container has itself been the subject of a taxable dealing at, or before, the time when it became a container in relation to the contents;

Note:

A container will be taxed at the time of the packing AOU if not all the contents are assessable. The contents that are assessable may at some later stage be the subject of a taxable assessable dealing. If so, then the taxable value of the assessable contents will not be increased to reflect the value of the container because the container will already have been taxed. This may require a reduction in the taxable value of the contents to exclude the container component.

(ii)

the container is a shipping container covered by exemption Item 60.

Note:

It is intended that these containers, which will be exempt under their own special exemption Item, will never have their value included in the taxable value of their contents. [subclause 35(4)]

20.22 Second-hand containers: Goods may be used as a container for assessable goods more than once. If an exemption applies to the packing AOU then the container component is to be included every time assessable contents are the subject of a taxable dealing in that container. This will be the case, even if a component for that container has previously been included in the taxable value of other assessable goods. Thus, the value of a re-usable container can be included several times in the taxable value of assessable goods.

20.23 Second-hand containers -

Example:

S is a soft drink manufacturer who purchases new soft drink bottles under quote. S bottles the soft drink and sells it by wholesale to a purchaser who doesn't quote. After the soft drink has been consumed, the bottles are retrieved by S, washed, filled with soft drink and sold again. This occurs a number of times.

Result:

(i)

S is entitled to quote on the purchase of the bottles on the basis that S intends to satisfy the exemption Item (see paragraph 20.25);

(ii)

when S fills the bottles with soft drink for the first time, this will amount to an application to own use of the bottles by S (a packing AOU). This packing AOU will be an assessable dealing;

(iii)

the packing AOU will be exempt because the exemption Item applies;

(iv)

the sale of the soft drink by wholesale is an assessable dealing and no exemption applies. An amount is added to the taxable value of the contents, being the value of the container recouped by S in connection with the sale of the soft drink;

(v)

when the bottle is again filled with soft drink there can be no assessable dealing because the bottle is now Australian-used goods;

(vi)

however, when the bottle is sold again the value of the bottle recouped will again be included in the taxable value of the contents. This will be the result every time the bottle is used for assessable goods that are the subject of an assessable dealing.

20.24 Multiple goods and mixed goods: If the contents of the container comprise more than one item of assessable goods, then the value of the container component will be pro-rated across all of those goods. Consequently, if the contents are mixed goods that attract different rates of tax (or some are exempt) the container component will be automatically apportioned across those goods. The pro-rated container component will then attract the same tax treatment as the contents.

5. Quoting rules

20.25 The general quoting rules will apply to containers in the same way as they apply to other goods. However, there will also be special quoting rules that apply only to goods that are intended to be used as containers for export.

(i)

General exemption for container: the quoter intends to use the goods as a container in a way that will satisfy the exemption Item (see paragraphs 20.11-20.15). [paragraphs 82(1)(f) and 83(1)(a)]

(ii)

Containers for export: is quoting ground applies in the same circumstances in which the export exemption applies (see paragraphs 20.16). [subclauses 82(3) and 83(2)]

20.26 Quoting after the goods have become a container: A quote made on an assessable dealing with goods ('contents') will be taken to apply to any other assessable goods that are a container for those contents. This provision will only apply if the container is assessable goods at the time of the dealing in respect of which the quote is made. Normally a packing AOU will result in the container becoming Australian-used goods and so no longer assessable goods. However, because the definition of application to own use excludes an AOU in bond containers packed in bond will continue to be assessable goods at the time of local entry and so will be entered in their own right. Therefore, without this provision, a local entry of containers and goods packed in bond would require a separate quote for the container and the contents.

6. Credits

20.27 The credit rules will apply in relation to containers in the same way as they apply to other goods. However, there will be special credit rules for containers intended for export.

20.28 There will be a credit available where a registered person was entitled to quote their registration number, but failed to do so. Therefore, if a registered person was entitled to quote for goods to be used in accordance with the exemption Item, but failed to do so, a credit will be available.

20.29 Credits for containers that are exported: There will be a credit for containers that are exported if all of the following conditions are satisfied:

(i)

the first AOU of the container in Australia is a packing AOU by the claimant;

(ii)

the contents are all assessable goods;

(iii)

at the time the container is exported, it is still a container for those goods, and they are still assessable goods;

(iv)

the claimant has borne tax on the container before it was exported. [Table 3: CR13]

Example 1:

R purchases goods for a tax-inclusive price. The goods comprise packaging material which R tends to use as containers for assessable goods for sale by retail. The retail sale will not be an assessable dealing. However, R unable to find a domestic market for the goods and chooses to export the goods in the containers.

Result: R has borne tax on the containers because the intended use of the packaging at time of purchase did not satisfy the exemption Item. However, R will be entitled to a credit for the tax paid on the containers.[CR13]

Note:

Goods held in retail stock can be assessable goods even if tax-paid. Goods remain assessable goods until they are AOU in Australia.

Example 2:

Xis an unregistered exporter of goods. Xis entitled to quote an exemption declaration on goods that Xintends using as containers for assessable goods for export. However, Xfails to quote an exemption declaration on purchase of the goods for use as a container, and so purchases the goods for a tax-inclusive price.

Result: Xwill be entitled to a credit of the amount of tax included in the purchase price of the containers. The credit entitlement will arise at the time of export.[CR13]

Leased containers

20.30 Goods may be leased for use as a container. A lease will also be an application to own use and so by the time the leased goods are used as a container they will already be Australian-used goods. Therefore, the packing AOU cannot be an assessable dealing and the exemption Item will also not be relevant. The container taxable value rules will simply apply to determine whether or not a container component is to be added to the taxable value of the contents, (if those contents are the subject of a taxable dealing).

20.31 A container component will not be added if the container itself has previously been the subject of a taxable dealing. The container will have been the subject of a taxable dealing if it had been taxed prior to the lease, or if the lease AOU was taxable. If the container was taxed in either manner a container component will not be added to the taxable value of the contents.

20.32 Leased container example:

M company manufactures beer bottles. M leases those bottles to B, a brewing company, for a period of 1 month. B uses the bottles by filling them with beer, and then sells the bottled beer by wholesale. M retrieves the used bottles, washes them, and again leases them to B who again fills them and sells them. This process is repeated a number of times.

Result:

(i)

the first lease of the bottles by Mis a lease AOU that is an assessable dealing, being an AOU by the manufacturer of goods manufactured in the course of any business (AD3b). There is no exemption because the lease does not satisfy the conditions of an eligible long-term lease;

(ii)

the filling of the bottles by Bamounts to a packing AOU, however, by this stage the bottles are Australian-used goods, and so the packing AOU is not an assessable dealing;

(iii)

the sale of the bottled beer by Bis an assessable dealing - a wholesale sale by a person who manufactured to the goods in the course of any business (AD1a);

(iv)

there will never be a container component added to the taxable value of the beer when sold because the container was the subject of a taxable dealing at the time of the first lease.

Contract packing

20.33 Frequently a person who engages in assessable dealings with goods ('contents') will contract with another person to pack those goods. There are 2 possible situations:

(i)

both the contents and the containers are given to a contractor for packing; or

(ii)

only the contents are given to the contractor who then provides the containers.

In each case the result will be the same as if the owner of the contents had also packed them.

20.34 Contents and containers are given to the contractor: In this case the contractor will be the agent of the person requiring the packing. The person requiring the packing (the 'principal') will be able to purchase the containers under quote, and will be taken to have applied the containers to own use at the time of the packing by the contractor. The exemption Item will apply provided the contents are exclusively assessable goods, and the principal intends them to be the subject of a later sale, delivery or lease AOU. At the time of the later dealing the value of the container will be added to the taxable value of the contents. [paragraphs 82(1)(f) and 83(1)(a), and Item 27]

20.35 Contractor provides own containers: In this case the contractor (whether registered or unregistered) will be entitled to quote for goods to be used as containers, if the containers will be used to pack exclusively assessable goods, and the contractor expects that the contents will be the subject of a later sale, delivery or lease. Expectation, rather than intention, is the test because the packer does not own or control the goods. At the time of the packing AOU by the contractor the exemption Item will operate to exempt the dealing if the packer still expects that the conditions of the Item will be met. At the time of the later dealing, with the contents, the value of the container will be added to the taxable value of the contents. [paragraphs 82(1)(f) and 83(1)(a), and Item 27]

C. Summary of Main Changes

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

D. Transitional Arrangements

20.37 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 applying to the taxable value of goods that include a container component.

20.38 The taxable value of any assessable dealing with assessable goods will include the value of any associated container, except if the container has been the subject of a previous taxable dealing in its own right [clause 35]. 'Taxable dealing' does not, in its ordinary meaning, include a dealing on which tax was imposed under the existing law. There will be a special provision that will alter the meaning of taxable dealing, for the purpose of clause 35 only, to include a dealing that attracted tax under the existing law. [clause 8, Sales Tax Amendment (Transitional) Bill 1992]