Senate

SUPPLEMENTARY Explanatory Memorandum

Amendments to be moved on behalf of the Government (Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Requests for amendments to the A New Tax System (Goods and Services Tax Transition) Bill 1998

Overview

2.1 This Chapter explains the requests for amendments to the A New Tax System (Goods and Services Tax Transition) Bill 1998 (Transition Bill). In particular, it deals with:

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supplies of rights paid for periodically on or after 1 July 2000;

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review opportunities;

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imported second hand goods;

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insurance;

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diesel fuel credits before 1 October 2000; and

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the reduction of wholesale sales tax (WST) rates from 32% to 22%.

Supplies of rights paid for periodically after 1 July 2000

2.2 Section 11 of the Transition Bill provides the transitional rules that apply to periodic or progressive supplies spanning the 1 July 2000 implementation date. Generally speaking, if you enter into an agreement before 1 July 2000 for a periodic or progressive supply of things (other than goods or real property) that extends after 1 July 2000, those supplies are taken to be made continuously and uniformly throughout that period. The proportion of the supply made before 1 July 2000 will not be subject to goods and services tax (GST) while the proportion of the supply made on or after 1 July 2000 will be.

2.3 Under the Transition Bill, as currently drafted, where a right is created or transferred before 1 July 2000, but the effective service delivery and consideration occurs on or after 1 July 2000, the supply may not be subject to GST (since the supply of the right is made before 1 July 2000). This is not the intention of the transitional measures.

2.4 Request 3 inserts new section 11A into the Transition Bill which will apply to you if:

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you make a supply under an agreement that provides that amounts of consideration for the supply are to be provided progressively over a period or otherwise on a periodic basis (whether or not at regular intervals);

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the period of the agreement begins before 1 July 2000 and ends on or after 1 July 2000;

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section 11 does not apply; and

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the supply does not consist of the provision of a funeral.

[Subsection 11A(1)]

2.5 If new section 11A does apply, each amount of consideration provided on or after 1 July 2000 is treated as if it is consideration for a separate supply:

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made by the entity to which the consideration is provided; and

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made at the time at which the consideration is provided

and will be subject to GST.

[Subsection 11A(2)]

2.6 Requests 1 and 2 will update references to section 11 in the Transitional Bill to also include references to section 11A.

Review opportunities

2.7 Section 12 of the Transition Bill provides that certain supplies under agreements that span the implementation date are GST-free until there is an opportunity under the agreement to review the consideration because of the imposition of the GST or to conduct a general review, renegotiation or alteration of the consideration (see paragraphs 2.32 to 2.52 of the explanatory memorandum to the Transition Bill for more information). However, the definition of a review opportunity in subsection 12(5) does not make it clear that it is the supplier that must have this review opportunity an opportunity under the agreement for the recipient to review the consideration is not intended to be a review opportunity under section 12.

2.8 Request 4 amends subsection 12(5) of the Transition Bill to provide that a review opportunity is an opportunity that arises under the agreement for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to:

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change the consideration because of the imposition of the GST; or

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conduct a general review, renegotiation or alteration of the consideration.

Imported second hand goods

WST paid on stock held for resale

2.9 If you hold inventories of new goods for sale or exchange at the start of 1 July 2000 on which WST has been paid, you may be entitled to a special GST credit under Part 4 of the Transition Bill. The reason for this special GST credit is to avoid applying GST on top of WST already paid in respect of these goods. The special GST credit is equal to the amount of sales tax that you have borne in respect of the goods.

2.10 Second hand goods held for sale or exchange at the start of 1 July 2000 are excluded from the special GST credit, because you have not borne any WST in respect of them. [Paragraph 15(2)(a)] However, if you import goods for sale or exchange, you generally pay WST at the time of importation, regardless of whether they are second hand or not.

2.11 Therefore, the Transition Bill will be amended to extend the special GST credit for second hand goods that you import and hold for sale or exchange at the start of 1 July 2000. However, you will not be entitled to claim the special GST credit in respect of goods if you did not pay WST when you imported them because you were entitled to quote under the Sales Tax Assessment Act 1992 . [Request 5]

Transitional rules

LNTE Generally, if you buy second hand goods for the purposes of sale or exchange in the ordinary course of your business, you are entitled to claim an input tax credit under Division 66 of the A New Tax System (Goods and Services Tax) Bill 1998 (GST Bill), subject to some limitations. Section 17 of the Transition Bill extends the application of Division 66 of the GST Bill to goods that you hold for sale or exchange at the start of 1 July 2000, which would otherwise be excluded by subsection 665(2) of the GST Bill.

2.13 Request 6 will exclude imported second hand goods from the second hand goods transitional arrangements available under section 17 of the Transition Bill, if you are also entitled to a special GST credit as outlined in paragraph 2.11 above.

Insurance

Claims notified before 1 July 2000

2.14 Section 20 of the Transition Bill deals with insurance arrangements where the insured event and the settlement of a claim under an insurance policy fall either side of the implementation date. If an insurance company settles an insurance claim on or after 1 July 2000 in relation to an event that occurs before that date, the:

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acceptance of the payment by the insured is not a taxable supply by him or her [Subsection 20(1)]; and

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acquisition by the insurance company of the insured persons right to pursue the claim any further is not a creditable acquisition. [Subsection 20(2)]

2.15 However, in some cases it may be difficult to determine when the insured event actually takes place. Therefore, Requests 7 and 8 insert new subsections 20(1A) and 20(3) respectively , that will apply if it cannot be ascertained whether the event giving rise to the claim happened before 1 July 2000. If this is the case:

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subsections 20(1) and/or 20(2) do not apply; and

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the settlement is not a taxable supply and/or you are not entitled to an input tax credit for the claim you pay, if the claim was made before 1 July 2000.

2.16 What this means is that if the event is uncertain, and the claim is lodged by the insured with the insurer under a policy that spans 1 July 2000, then the event is considered to have occurred after 1 July 2000 and the usual GST insurance provisions apply. For example, if the policy is a taxable supply, the insurer will be entitled to an input tax credit of 1/11th of a monetary settlement. In addition, if the insured is entitled to an input tax credit for the GST on the premium, the insured will be liable to remit 1/11th of any monetary settlement. In the case of a policy that spans 1 July 2000 and the part of the policy after 1 July 2000 is GST-free, the usual treatment for settlements under a GST-free insurance policy applies.

Insurers input tax credits before 1 July 2003

2.17 You may choose whether or not to be liable for GST on the settlement of your insurance policy for a period of three years. This provides an opportunity for insurance contracts to be rewritten to take into account the GST on premiums and the GST you would be liable for on the settlement. This is done by inserting new section 20A in the Transition Bill to provide that you are not entitled to an input tax credit for a premium paid on an insurance policy before 1 July 2003 unless you notify the Commissioner of Taxation (the Commissioner) that you are claiming an input tax credit for GST on the payment of the premium . [Request 9] You must notify the Commissioner in the approved form.

2.18 If you are not entitled to an input tax credit for the payment of the premium under new section 20A , you are not liable for GST on any related settlement. If you notify the Commissioner that you are claiming an input tax credit for the payment of the premium, you will be liable for GST on a related settlement (see paragraphs 1.67 to 1.89 for more information).

Diesel fuel credits

2.19 Under section 12340 of the GST Bill, diesel fuel credits are based on the excise or customs duty rate applicable on the 1 April or 1 October last occurring before the end of the tax period to which the acquisition or importation is attributable. However, this means that for the first 3 months of the GST, the diesel fuel credit is based on the pre-GST 1 April diesel excise or customs duty rate. This is inappropriate because the diesel fuel excise or customs duty rate is expected to fall from 1 July 2000.

2.20 Request 10 inserts new section 21A into the Transition Bill, so that if you acquire or import diesel or like fuel for creditable diesel fuel consumption before 1 October 2000, your diesel fuel credits will be calculated using the excise or customs duty rate as at 1 July 2000. The amount of diesel fuel credits on acquisitions or importations of diesel fuel made on or after 1 October 2000, will be calculated using the normal rules under the GST Bill.

Reduction of sales tax rates

2.21 Under the Transition Bill, the reduction in the WST rate from 32% to 22% will apply from the date of the Royal Assent of the GST Act (see Chapter 5 of the explanatory memorandum to the Transition Bill for further information). However, to allow businesses adequate time to plan for this change, it is necessary to give some notice of a specific date from which the measure will apply.

2.22 Requests 11 and 12 amend Schedule 1 to the Transition Bill to ensure that the reduction in the sales tax rate from 32% to 22% will apply from the 21st day following the date of Royal Assent of the GST Act.