B2C National Newsletter Indirect Taxes

Welcome to the PwC Business to Consumer (B2C) National newsletter, which brings you the most up to date commentary on indirect taxes relevant to the B2C sector.

August 2010

Gift cards to Employees – ATO interpretation highlights FBT and GST risk The Australian Taxation Office (ATO) recently issued an Interpretative Decision (ID) outlining its view on the application of the $1,000 Fringe Benefits Tax (FBT) In-house Property Benefit Concession to arrangements where an employer uses gift cards to administer the allocation of goods to employees under the concession. The ATO view expressed in the ID is as follows: • the In-house Property Benefit Concession applies only to the provision of tangible property to employees or their associates • the gift card issued to the employee is the relevant fringe benefit under the arrangement and the goods provided to the employee on redemption of the gift card are not a fringe benefit • a gift card is not tangible property, rather it is intangible property in the form of rights, and

Inside this issue... Gift card to Employees - ATO interpretation highlights FBT and GST risk

1

Upcoming events

1

Tax Agent Services Act - Effective as of 1 March 2010 - Does it apply to you?

2

GST and POS

3

Reforms to the GST financial supply and margin scheme provisions

3

GST case update

4

Research and Development

4

Stamp Duty

4

• goods provided to an employee or an associate via a gift card redemption are not eligible for the In-house Property Benefit Concession. We understand that most employers treat the provision of goods by way of gift card as being eligible for the In-house Property Benefit Concession. Therefore, this ATO view highlights a potentially significant risk for those employers. The risk is that the ATO may seek to recover FBT at an effective rate of approximately 87 per cent of the face value of gift cards issued during the past three (or potentially six) FBT years. General interest charge and penalties may also apply.

The ATO view will apply to generic gift cards that are, amongst other things, transferable, not reloadable and expire after a certain period of time. Where an employer utilises an arrangement where the gift cards issued do not have these terms and conditions, it is possible that this ATO view will not apply to preclude the In-house Property Benefit Concession applying.

Upcoming events Melbourne Indirect Taxes (ITX) Forum When: Where:

October 2010, exact date and time tbc Melbourne PwC Offices (2 Southbank Boulevard, Southbank, 3006)

Sydney Indirect Taxes (ITX) Forum When: Where:

October 2010, exact date and time tbc Sydney PwC offices (Darling Park Tower 2, 201 Sussex Street, Sydney, 2000)

Indirect Taxes – B2C National Newsletter

Gift cards to Employees – ATO interpretation highlights FBT and GST risk (continued)

Tax Agent Services Act - Effective as of 1 March 2010 - Does it apply to you? The Federal Government has enacted legislation, the Tax Agent Services Act 2009 (TAS Act), which commenced on 1 March 2010 regulating the services provided by Tax and BAS agents. The new Act establishes, among other things:

GST It should be noted that goods supplied to employees (or their associate) by way of a gift card also attract GST (assuming they are taxable goods). This GST outcome does not arise where the goods are provided directly to the employee without use of a gift card, under which case no GST is payable.

What can you do? The release of this ID clearly signals a shift in focus on these types of arrangements by the ATO. Therefore, a prudent approach to managing any risk in respect of this issue may be to assess the value of any employee gift card program that you conduct and the extent to which the minor and infrequent FBT concession may be applied to reduce any financial risk. In addition, we consider there to be alternative arrangements/methods that employers may enter into using gift card variations that:

• new registration requirements for Tax and BAS Agents, • allow the FBT In-house Property Benefit Concession to apply, and • ensure that no GST is payable on the provision of goods to employees using the card. Successful implementation of an alternative approach/method can therefore potentially give rise to a tax saving of up to 96 per cent of the value of the card/goods. Given the potential risk is significant, any business offering gift cards to employees should review their arrangements and consider opportunities for alternative arrangements in light of this development.

• a wider and more flexible range of civil penalties for breaches of the Code, and • ‘safe Harbour’ relief to taxpayers from certain administrative penalties where they have taken reasonable care in providing timely information to a tax or BAS agent. The TAS Act categorises the services caught by the legislation as either tax services or BAS services, with BAS services including GST law, wine equalisation tax law, luxury car tax law, fuel tax law, fringe benefits tax law (relating to the collection and recovery only), and PAYG withholding and instalments.

The services caught by this legislation are very broad and, as a result it is possible that it will apply to Tax and BAS services provided by a wide range of entities that under the previous regime, were not required to register as tax agents. The types of services the TAS Act covers range from preparation, lodging or advising on an entity’s tax liabilities, obligations or entitlements under a taxation law to providing a computerised accounting system which has default tax coding incorporated. For example, under the new regime entities such as franchise administration functions and multibrand ownership structures that run a shared services finance and tax function could potentially be required to register. Therefore, any entity providing such services for a fee will need to consider whether they are covered by this legislation, and register if required.

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Indirect Taxes – B2C National Newsletter

GST and POS

recognise purchases made with different types of tender that are not subject to GST (e.g. loyalty gift cards), and be able to deal with these appropriately.

1 July 2010 marks the 10th anniversary of GST and given the ATO’s recent heightened interest in systems and processes risks, now is an optimal time to review point of sale (POS) systems for GST, especially where no major reviews have been carried out since 1 July 2000.

• Return and exchange of goods introduces further complexity where the original supply of goods was subject to a promotional offer and only some of the goods are returned, especially where different GST rates applied to the supply. It should be ensured that the GST accounting upon a return of the goods mirrors the original GST treatment of the supply.

POS systems may have difficulty dealing with transactions with complex GST outcomes. This can cause issues from a GST accounting perspective. It is recommended that the GST treatment of the following typical transactions is reviewed at POS and tax code level to ensure that GST is applied correctly to the transaction and any risk areas are identified. Typical problem transactions for POS systems include: • Scenarios where conditional offer promotional discounts are given and different GST rates apply, or where transaction discounts only apply to some of the items, e.g. “Buy 1 get 1 free” or “Buy item X and get discount on item Y”. The POS system needs to have the flexibility to correctly apportion the GST across the items or apply the discounts to specific items only, depending on the discount type.

• Finally, where transactions are treated differently for GST and accounting purposes, such as lay-by sales, it should also be ensured that the GST amounts in the POS and Finance systems reconcile. • Achieving the correct GST outcome may also be problematic where bonus gift cards are issued to customers who meet certain buying conditions, e.g. where the bonus gift card is awarded on the basis of buying item X, and other items are purchased as part of the same transaction. • Similarly, where retailers either run a loyalty program (or participate in one) the POS system needs to

Having considered the above areas to ensure that the current POS system correctly reflects the intended GST outcomes, POS impact should be re-assessed whenever undertaking any new promotional activities. In our experience, a review of a POS system will invariably highlight GST under or over payments and a cyclical review of the POS will therefore be of value, both from a compliance/ controls risk and a financial risk perspective.

Reforms to the GST financial supply and margin scheme provisions Following submissions on Treasury’s reviews of the financial supply and margin scheme provisions, the Government will not undertake significant reform of either of these aspects of the GST law. However, it will make a number of amendments intended to clarify the operation of the provisions and reduce compliance costs. These include, for example: • Increasing the threshold for the Financial Acquisitions Threshold test from $50,000 to $150,000; • Amending the reduced input tax credit (RITC) provisions and • Making minor changes to the current margin scheme provisions intended to clarify the law and simplify compliance. Unfortunately, changes will not apply until 1 July 2012.

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Indirect Taxes – B2C National Newsletter

GST case update Lansell House Pty Ltd v Commissioner of Taxation. The Federal Court handed down its decision on 9 April 2010 in Lansell House Pty Ltd v Commissioner of Taxation. The Court dismissed the taxpayers’ applications, finding that the product sold within Australia known as “Mini Ciabatte”, described on its packaging as “Italian flat bread” imported from Italy, was not GST-free food. In order to succeed, the applicants had to establish that Mini Ciabatte is not food of a kind listed as “food that is, or consists principally of biscuits, cookies, crackers ....” within the GST Act. In reaching its conclusion, the Court observed that a supplier cannot, by a label, govern the classification of product for GST purposes. Sundberg J found that, based on the product’s appearance, ingredients, process of manufacture, use and marketing, the product had the characteristics of and was indeed a cracker, and therefore not GST-free. This case highlights the holistic approach adopted by the Federal court in determining the GST classification of food items. Therefore, due care will need to be paid to marketing and

product appearance etc. The prize in achieving GST-free status over taxable status is an additional 9% margin on the sale of the product to the consumer. Note that the taxpayers in this case have lodged an appeal to the Full Federal Court.

option to “revive” the current Bills by moving that they are reinstated to the position they were in prior to lapsing (in this case, before the Senate). However, this still means that it will be late in 2011 before there can be progress on the passage of the legislation.

R & D

Stamp Duty

The Research and Development Tax Bills that were before Parliament earlier this year, have lapsed with the calling of the Federal Election. This has left industry and business uncertain as to what incentives will be available for expenditure incurred from 1 July 2010.

“Tenant’s fixtures” - An interest in land for Australian stamp duty purposes?

The Innovation Minister, Senator Carr, has announced that, under a Labor government, he is confident the policy will pass and wants “...the bill to apply from the first of July”. However, the Opposition believes applying retrospective legislation is “foolish and unfair”. Parliament was due to convene for the Spring session on 24 August 2010 but cannot be reformed until after the return by the Australian Electoral Commission of the writs endorsing successful candidates (the latest date for the return of the writs is 27 October 2010). When Parliament resumes, if the current Government is re-elected, it has the

The High Court of Australia has granted the taxpayer special leave to appeal from the decision of the Western Australian Court of Appeal in Commissioner of State Revenue (WA) v TEC Desert Pty Ltd [2009] WASCA 128.

Draft Revenue Ruling DA 02-10 – Victorian Lease Provisions A Draft Revenue Ruling regarding the application of the lease provisions contained in the Duties Act 2000 (VIC) is currently under development by the Victorian State Revenue Office (SRO).

The Western Australian Court of Appeal held that a sale agreement to transfer fixtures including power generation assets situated on both freehold land and land subject to mining tenements in Western Australia was an agreement for a sale of an interest in land and therefore subject to stamp duty.

The provisions seek to apply duty to leases over real property based on the market value of the leased property in certain cases, including, where any consideration other than rent reserved is provided for the grant of a lease or any consideration is provided for the assignment of a lease.

This case could result in increased stamp duty in relation to dealings in fixtures when selling retail and other commercial premises including the sale of tenant’s fixtures.

The Ruling provides examples to illustrate the application of the provisions to certain common situations involving leases. The Draft Ruling is available on the SRO website, although consultation closed on 9 July 2010.

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Indirect Taxes – B2C National Newsletter

Further information For further information, please contact your usual PricewaterhouseCoopers adviser or: Melbourne

Sydney

Peter Konidaris Partner – GST Phone: +61 (3) 8603 1167 [email protected]

Suzi Russell Partner – GST Phone: +61 (2) 8266 1057 [email protected]

Barry Diamond Partner – Stamp Duty Phone: +61 (3) 8603 1118 [email protected]

Angela Melick Partner – Stamp Duty Phone: +61 (2) 8266 7234 [email protected]

Jamie Clarke Director – GST Phone: +61 (3) 8603 6340 [email protected]

Sandra Mason Partner – R&D Phone: +61 (2) 8266 0470 [email protected]

Bill Cole Director – Customs and Excise Duty Phone: +61 (3) 8603 6043 [email protected]

Adrian Abbott Partner – GST & Customs and Excise Duty Phone: +61 (2) 8266 5140 [email protected]

Greg Kent Director – Employment Taxes Phone: +61 (3) 8603 3149 [email protected] Marcus Tierney Director – R&D Tax Phone: +61 (3) 8603 4358 [email protected]

Russell Wilkinson Director – Customs and Excise Duty Phone: +61 (2) 8266 2168 [email protected]

Brisbane Tony Windle Director – GST Phone: +61 (7) 3257 8854 [email protected]

Perth Michelle Tremain Partner – GST Phone: +61 (8) 9238 3403 [email protected] Editor Catherine Pasula PricewaterhouseCoopers Tax Phone: +61 3 8603 4987 [email protected] Technical Editor Helen Cosby, Director Tax Technical Knowledge Centre PricewaterhouseCoopers Tax Phone: +61 2 8266 3025 [email protected] Media enquiries Meghan Chalmers Phone: +61 2 8266 2174 Mobile: 0412 716 186 [email protected]

© 2010 PricewaterhouseCoopers. PricewaterhouseCoopers refers to the individual member firms of the worldwide PricewaterhouseCoopers organisation. All rights reserved. The information in this publication is provided for general guidance on matters of interest only. It should not be used as a substitute for consultation with professional accounting, tax, legal or other advisers. This document is not intended or written by PwC to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the tax payer. Before making any decision or taking any action, you should consult with your regular PricewaterhouseCoopers’ professional.No warranty is given to the correctness of the information contained in this publication and no liability is accepted by the firm for any statement or opinion, or for any error or omission. Print Post Approved PP255003/01192.

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