GST and Cross Border Issues August 2000 Menzies Hotel, Sydney Professor Bob Deutsch ATAX Paper Written & Presented By: Professor Bob Deutsch and John Ranieri, ATAX © Taxation Institute of Australia 2000 Disclaimer: The material published in this paper is published on the basis that the opinions expressed are not to be registered as the official opinions of the Taxation Institute of Australia. The material should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

GOODS AND SERVICES TAX: OVERVIEW AND INTERNATIONAL BY PROFESSOR R. DEUTSCH (ATAX) AND JOHN RANERI (ATAX)

TIA_Paper_31/08/00_Deutsch_Raneri

Page 1

GOODS AND SERVICES TAX – Overview and International Aspects

A. OVERVIEW

Australia introduced a comprehensive goods and services tax (GST) as from 1 July 2000.

Legislative Scheme

The initial legislative package for the Australian Goods and Services Tax (“GST”) consisted of six main Acts. These are the:

•

A New Tax System (Goods and Services Tax) Bill 1999 (The “GST Act”)

•

A New Tax System (Goods and Services Tax Imposition - Customs) Act 1999

•

A New Tax System (Goods and Services Tax Imposition - Excise) Act 1999

•

A New Tax System (Goods and Services Tax Imposition - General) Act 1999

•

A New Tax System (Goods and Services Tax Transition) Act 1999 (the “Transition Act”)

•

A New Tax System (Goods and Services Tax Administration) Act 1999.

The most substantive piece of the legislative regime is the first Act, which contains the administrative and operative provisions. The next three Acts will actually impose the tax. These 3 separate rating Acts are necessary for Constitutional reasons. As its name suggests, the Transition Act deals with transitional matters arising predominantly out of the transition from sales tax to GST. The final Act deals with the administration and collection of the GST.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 2

Commencement Date

The relevant Bills were first introduced into Parliament on 2 December 1998. After having been subject to a report by a Senate Select Committee and extensive debate in the Senate, the Bills finally received Royal Assent on 8 July 1999.

The GST Acts commenced to apply on 1 July 2000 (i.e. the ‘implementation date’). Thus, as a general proposition, GST is payable on a supply (or importation) only to the extent it is made on or after 1 July 2000- - and not on any part of a supply (or importation) made before 1 July 2000. This is irrespective of whether or not consideration passed or an invoice was issued before 1 July 2000. However, note that special transitional rules may apply to some agreements entered into before the date of Royal Assent, which involve supplies to be made after or before that date or both.

Tax base

GST applies to all taxable supplies or taxable importation's of goods, services or anything else except to the extent to which the supply or importation may be exempt from GST.

Thus, unlike sales tax, the tax base not only applies to goods but also to services and to “anything else” with only limited types of exemptions being available.

There are two entry points for a supply to be subject to GST it must either be a taxable supply or a taxable importation. The analysis that follows deals with taxable supplies. Taxable importations will be examined separately later in the paper under the heading 'B. International Aspects of GST'.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 3

Taxable Supplies

For there to be a taxable supply: •

there must be a supply

•

there must be a supply for consideration;

•

the supply must be made in the course or furtherance of an enterprise;

•

the supply must have the necessary connection with Australia; and

•

the supplier must be registered or required to be registered for GST purposes.

Supply

‘Supply’ is defined very broadly and includes a supply of goods or services; the provision of advice or information; a grant, assignment or surrender of real property; the creation, grant, transfer, assignment or surrender of any right; a financial supply and a release.

Enterprise

Subject to certain exceptions, an ‘enterprise’ is defined to include an activity (or series of activities) done the form of a business or of an adventure or concern in the nature of trade; or on a regular or continuous basis in the form of a lease, licence or other grant or an interest in property or other activities by charities, religious institutions and the like.

However an enterprise does not include an activity (or series of activities) done: a) as an employee or other PAYE earner (except certain activities performed as the holder of an office); b) as a private recreational pursuit or hobby;

TIA_Paper_31/08/00_Deutsch_Raneri

Page 4

c) by an individual or partnership without a reasonable expectation of profit or gain; or d) as a member of a local governing body established by or under a State Law or Territory Law.

Thus, private activities such as garage sales, sales of the family car or home, gifts at Christmas or on birthdays are not subject to GST. Whilst not specifically excluded, these activities clearly do not fall within any of the criteria for an enterprise.

Registration

Taxpayers are required to register if they carry on an enterprise and their annual turnover meets the registration turnover threshold (s23-5). The threshold is $50,000 per annum or $100,000 for a non-profit body. Taxpayers with annual turnovers below the threshold may nevertheless opt to register (s23-10). Note however that special registration rules apply to resident agents for non-residents (Division 57), representatives of incapacitated entities (Division 147) and for taxis (Division 144).

Connected to Australia

Supplies of goods are relevantly connected if the goods are: a) delivered or made available in Australia to the recipient of the supply; b) being removed from Australia; or c) imported into or assembled or installed in Australia - ss9-25(1)-(3) GST Act.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 5

Real property is relevantly connected if the real property is in Australia. Note the wide definition of ‘real property’ in s195-1, which includes certain personal and other rights which at law do not confer an interest in land - s9-25(4) GST Act.

Supplies of anything else are connected with Australia if either the thing is done in Australia or the supply is made through an enterprise in Australia (i.e. generally a permanent establishment for income tax purposes) - s9-25(5) GST Act

Note that special apportionment rules in Division 96 apply when supplies are partly connected with Australia and partly not. In such circumstances, this partly connected supply is treated as a separate supply subject to GST.

Calculation of GST Payable

The amount of GST on a taxable supply is calculated in accordance with the following formula:

10% x Price x 10/11

Note that the term “price” is defined in s9-75 to include not only monetary consideration payable for the supply (without any discount for the GST), but also the GST inclusive market value of any consideration in-kind. It is interesting to note that the legislation assumes the ‘price’ paid for a taxable supply will always include the GST. However, for commercial or other reasons, this may not always be the case in circumstances where a business may decide to fully absorb the additional GST impost and not to pass it on to the consumer.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 6

In any event, assuming that the price is GST inclusive, then the following formula can be used to calculate GST included in the price paid for a taxable supply:

GST = price x 1/11

Input tax credits

Input tax credits are available for creditable acquisitions and creditable importations (s7-1). Section 11-20 provides that a taxpayer is entitled to the input tax credit for any creditable acquisition made. The amount of the credit for a creditable acquisition is equal to the GST payable on the supply of the thing acquired (reduced if the acquisition is only partly creditable) [ss 11-25 and 11-30].

A creditable acquisition is made by a taxpayer if:

a) the taxpayer acquired anything solely or partly for a creditable purpose; b) the supply of the thing to the taxpayer is a taxable supply; c) the taxpayer provides (or is liable to provide) consideration for the supply; and d) the taxpayer is registered or required to be registered.

Creditable purpose

Essentially, a taxpayer acquires a thing for a creditable purpose to the extent that it is acquired in carrying on an enterprise. However, an acquisition is not for a creditable purpose to the extent that: a) it relates to making supplies that would be input taxed; or

TIA_Paper_31/08/00_Deutsch_Raneri

Page 7

b) the acquisition is of a private or domestic nature.

It is important to note that the creditable purpose test is substantially wider than the general deductibility test contained in s8-1 of the 1997 ITAA. For example, input tax credits would be available for the purchase of capital items (such as large machinery items or freehold factory premises), which would not be deductible for income tax purposes . However, like the income tax treatment, no input tax credits are available for acquisitions of a private or domestic nature. Note however that special rules in Division 69 may apply to deny an input tax credit for certain creditable acquisitions which are not-deductible for income tax purposes. Note also, that the input tax credit available on the acquisition of a “luxury car”, where the GST inclusive price exceeds the car depreciation limit, is limited to 1/11th of the car depreciation limit.

Acquisitions for partly creditable purposes

Under s11-30, an acquisition is partly creditable if it is a creditable acquisition which: a) is made only partly for a creditable purpose; or b) only part of the consideration is provided or liable to be provided.

The formula for calculating input tax credits on partly creditable acquisitions is set out in s1130(3) as follows:

Full input tax credit

x

Extent of creditable purpose

TIA_Paper_31/08/00_Deutsch_Raneri

x

Extent of consideration

Page 8

However, if an acquisition is only partly creditable, because it relates to the making of financial supplies (which are input taxed), then the acquisition will still be treated as fully creditable if the annual value of the financial supplies is less than $50,000-00 or less than 5% total annual turnover.

Payment of GST

If taxpayers are registered or required to be registered, they are required to lodge a GST return for each ‘tax period’ within 21 days of the month following the end of the relevant tax period. (ss 31-5 & 31-10). The return must be in approved form and set out the “net amount for the tax period” (s31-15).

Taxpayers are required to pay to the Commissioner any amounts of GST remaining after netting off all available input tax credits.

If the net amount is greater than zero, then the net amount must be paid before the 21st day of the month following the end of the tax period to which the payment relates. Where the net amount for a tax period is less than zero, then the Commissioner is obliged to pay a refund for the excess input tax credits - see s35-1.

The net amount for a tax period is worked out according to the following formula:

TIA_Paper_31/08/00_Deutsch_Raneri

Page 9

Net Amount = GST - Input Tax Credits

Where:

GST is the sum of all of the GST payable on taxable supplies that are attributable to the tax period. Input tax credits is the sum of all input tax credits on creditable acquisitions or importations attributable to the relevant tax period.

Adjustments

Note that the net amount can be altered by adjustments (see s17-10) which can arise because of ‘adjustment events’. Increasing adjustments increasing the net amount whereas decreasing adjustments decrease that amount. Such events include the cancellation of a supply or acquisition, a change in the consideration say, because of a volume discount.

There are several other adjustments which can arise under the GST legislation such as (to name a few), for writing off bad debts or for recovery of amounts previously written off (Division 21); for changes in the extent of the creditable purpose (Division 129) and for the supply of things (for over $50,000) originally acquired or imported to make supplies (Div 132).

Tax Periods

Tax periods are the periods for which taxpayers calculate the amount of input tax credits or of GST payable in order to arrive at their net amount. Generally, for most taxpayers, their tax

TIA_Paper_31/08/00_Deutsch_Raneri

Page 10

periods are for three months ending each quarter on 31 March, 30 June, 30 September and 31 December in each year (s27-5). However, in certain cases, taxpayers must use calendar months as tax periods, such as where the taxpayer has a poor tax compliance history or where annual turnover exceeds $20 million.

Furthermore, the ATO may determine tax periods

other than monthly periods, for example, where commercial accounting periods do not accord with the calendar months.

Attribution Rules

Special attribution rules apply to attribute the GST payable or the input tax credits to particular tax periods, depending upon whether a taxpayer accounts for GST on a cash basis.

Generally speaking, the non-cash basis of accounting applies unless: •

the taxpayer chooses to account on a cash basis and the annual turnover is less $500,000 per annum or the taxpayer is a charitable institution, trustee of a charitable fund or a giftdeductible entity; or

•

the taxpayer requests and Commissioner approves the use of the cash basis method if it is appropriate having regard to the nature and size of the enterprise, the nature of the accounting system used and how income tax is accounted for (s 29-45).

Whilst many taxpayers may seek to minimise compliance costs by accounting for GST on the same basis as they do for income tax purposes, it is important to realise that there is no necessary correlation in the accounting methodology between the two regimes. Thus, an accruals based taxpayer for income tax purposes may elect to account for GST on a cash basis provided the annual turnover is below the relevant threshold.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 11

Non-cash method

Unless a taxpayer uses the cash basis of accounting, the general rule is that all of the GST payable on a taxable supply is attributable to the tax period in which the earliest of the following occurs: •

consideration in connection with the supply is received; or

•

an invoice is issued in relation to the supply (s29-5).

Likewise, input tax credits on creditable acquisitions are attributed on other than the cash basis to a tax period in which the earliest of the following occurs: •

consideration is provided; or

•

an invoice is received (s29-10)

Cash Basis

If a taxpayer accounts on a cash basis, then the GST on a taxable supply is attributable to the tax period in which payment is received (and only to the extent that payment is received) s29-5. Likewise, input tax credits for creditable acquisitions are attributed on a cash basis to the tax period in which (and to the extent that) consideration is provided - s29-10. Adjustment events are attributed to the tax periods in which the consideration is received or paid s29-20.

Tax Invoices and Adjustment Notes

Suppliers are required to issue tax invoices if so requested by the recipient of a supply and the taxable supply has a GST exclusive value of $50 or more. If the value of the supply is less

TIA_Paper_31/08/00_Deutsch_Raneri

Page 12

than $50, then suppliers are not required to issue tax invoices - but may do so. If the supply is GST-free or input taxed, then there is no requirement to issue a tax invoice.

Tax invoices must be in approved form and (amongst other things) set out the ABN (i.e. Australian Business Number) of the issuing entity and the GST inclusive price for the supply. There is no requirement to specify the GST component of the price.

Likewise, adjustment notes relating to a taxable supply must be issued by suppliers if so requested or within 28 days of becoming aware of a decreasing adjustment. However, there is no requirement to supply an adjustment note where the decreasing adjustment relates to a taxable supply of less than $50.

Note that no input tax credits or adjustments can be claimed unless the relevant tax invoices or adjustment notes are actually obtained.

Non-Taxable Supplies

A supply is not a taxable supply to the extent that it is GST-free (often referred to in other countries as ‘zero rated’) or input taxed (often referred to in other countries as ‘exempt’).

If a supply is both GST-free and input taxed (for example,. export of financial supplies), then the supply is taken to be GST-free and not input taxed [s9-30(3)]. Also, note that a supply of something used solely in connection with supplies which are input taxed, is also taken to be input taxed [s9-30(4)]. Thus, the sale of a building used solely to carry on an enterprise that made only input taxed supplies would also be input taxed.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 13

If the supply is input taxed (such as the provision of financial services), then the supplier cannot claim an input tax credit for the things that are acquired or imported for or relating to the input taxed supply - ss11-15 and 15-10. On the other hand, if supplies are GST-free, such as medical services, then the suppliers would still be entitled to input tax credits on acquisitions relating to the GST-free supplies.

GST-free Supplies

Very broadly, the type of supplies which are GST-free include the following:

•

Food for human consumption, except for savoury snacks, confectionery, ice cream food, biscuits, flavoured milk, fruit and vegetable juice, cordials and certain beverages, bakery products (other than bread) and prepared food, takeaway food and food supplied by restaurants - see Subdivision 38-A.

•

Health and medical care - such as medical services by a medical practitioner or an approved pathology practitioner which are necessary for the treatment of the patient (other than for purely cosmetic purposes). Other health services include acupuncture, herbal medicine, naturopathy, dental, dietary, nursing, optical, pharmacy, physiotherapy, podiatry, social work - see list at s 38-10. Also exempt are generally, hospital treatment, residential care, community care, specialist disability services, certain aids and appliances and health insurance and ambulance subscriptions - see Subdivision 38-B.

•

Education - such as preschool, primary school, secondary school, tertiary courses, such as TAFE and higher education courses, including excursions or field trips, course materials,

TIA_Paper_31/08/00_Deutsch_Raneri

Page 14

accommodation at boarding schools and certain adult and community education courses and a first aid or life saving course - see Subdivision 38-C

•

Child care - such as provided at facilities that receive government funding or if the provider is a registered carer - see Subdivision 38-D

•

Exports and other supplies for consumption outside of Australia - see tables at ss38-185 and 38-190 for list of goods and services which are GST

•

Religious services by a religious institution if they are essential to the practice of the religion - see Subdivision 38-F

•

Non-commercial activities of and raffles and bingo conducted by charitable institutions, trustees of charitable funds and gift deductible entities - see Subdivisions 38-G and H

•

Water (unless supplied or transferred into a container of less than 100 litres capacity) & sewerage - see Subdivision 38-I

•

Sale of an enterprise as a going concern - if the purchaser is registered or required to be registered, both parties agree in writing that the supply is of a going concern and all of the things for the continued operation of the enterprise must be supplied. Note, purchasers may have a GST liability if the going concern is later used to make input taxed supplies as to which see later - see Subdivision 38-J

•

International transport and related matters - for passengers and goods into and out of Australia and domestic travel connected with overseas travel - see Subdivision 38-K

TIA_Paper_31/08/00_Deutsch_Raneri

Page 15

•

First supplies of precious metals after refining, such as gold, silver and platinum - see Subdivision 38-L

•

Supplies of airport shop goods through inwards duty free shop to relevant travellers - see Subdivision 38-M

•

Grants of freehold and long-terms leases (at least 50 years) by Governments - see Subdivision 38-N

•

Supply of potential residential land if the land is subdivided farm land and is made to an associate for nil or inadequate consideration - see Subdivision 38-O

•

Cars for use by disabled veterans and other people for their own personal transportation for at least 2 years - but subject to the income tax car depreciation limit - see Subdivision 38-P

Input Taxed Supplies

The types of supply which are input taxed include:

•

Financial supplies - see full list in table at s40-5(2), which includes the lending money, mortgages, dealings with certain bank accounts, dealing with securities for a debt, allotment, issue, transfer etc. of shares and units, dealings with futures, options and warrants, superannuation funds, life insurance, hire purchase and the underwriting and arranging of certain supplies. Note that the table at s40-5(3) excludes a range of services often association with financial transactions from being input taxed and includes advisory

TIA_Paper_31/08/00_Deutsch_Raneri

Page 16

services, general insurance (i.e. not life or health), legal services, accounting services, tax agents services, safe custody for documents and cash and payroll services - see Subdivision 40-A

•

residential leases, hires or licences (for less than 50 years), excluding hotel, motel, inns and other commercial residential premises - see Subdivision 40-B

•

sales of residential premises or a residential lease for not less than 50 years if used for residential accommodation, except to the extent that the premises are new or commercial residential premises - see Subdivision 40-B and C

•

certain precious metals - see Subdivision 40-D

•

supplies of food by school tuckshops and canteens - see Subdivision 40-E.

Special Rules

The GST legislation contains a number of special rules contained in Chapter 4, which apply in particular circumstances and are generally quite limited in their scope. Some of these rules have a general application whilst others are more relevant (but not exhaustively) to nonresidents or to cross border transactions. The more general rules will be dealt with first followed by a segment entitled “International Aspects of GST” on those rules which have a more international flavour.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 17

GST Branches

A branch of a registered entity, which has an independent system of accounting, can be separately registered as a GST branch. As such, a separate GST return must be lodged and separate payments and refunds of GST made in respect of the GST branch. In other words, the GST branch is treated as a distinct entity for GST purposes – see Division 54.

GST Groups

Australian resident companies, which are registered, and which form part of a 90% owned group may form a GST Group. Intra-group transactions are generally not treated as taxable supplies or creditable acquisitions [s48-40(2)) and 48-45(2)]. One company of the GST group (the ‘representative member’) is responsible for paying all GST for supplies and claiming all input credits for acquisitions made outside the group. Effectively, the GST Group is treated as a single entity for GST purposes. In fact, in deciding the extent to which an acquisition by a group member gives rise to input tax credits, it is necessary to look at the creditable purpose of the group as a whole rather than only the purpose of the group member making the acquisition – see s48-45(2).

GST Joint Ventures

Australian resident and registered companies that are engaged in joint ventures for the exploration or exploitation of mineral deposits (or other prescribed purposes) can seek approval as participants in a GST joint venture. One participant, the “joint venture operator”, assumes the GST liabilities for supplies and entitlements to input tax credits for acquisitions and importations which are made for the purposes of the joint venture on behalf of other

TIA_Paper_31/08/00_Deutsch_Raneri

Page 18

participants in the joint venture. The effect is similar to a GST Group in that supplies by the joint venture operator to other members of the GST joint venture are ignored for GST purposes. The GST return is made by the operator on behalf of the other participants.

Pre-Establishment Costs

Companies are allowed to claim input tax credits for certain pre-establishment acquisitions and importations made before incorporation, if generally speaking: a) the company comes into existence within 6 months of the acquisition or importation; b) the company reimburses the taxpayer for the acquisition or importation cost; and c) the taxpayer becomes a member, officer or employee of the company.

This concession may well be of advantage to foreign companies seeking to establish subsidiaries in Australia.

General Anti - Avoidance Provision

The GST legislation includes a general anti-avoidance provision. This provision, contained in Division 165 of Part 4-7 of the GST Bill, largely resembles (but is much wider than) Part IVA of the ITAA 1936. Division 165 applies where a scheme was entered into or carried out for the sole or dominant purpose of an entity obtaining a "GST benefit" or if the principal effect of the scheme is to give the entity a GST benefit, directly or indirectly.

The following is a brief summary of how the general anti-avoidance provision will operate:

TIA_Paper_31/08/00_Deutsch_Raneri

Page 19

1. Section 165-5 outlines the purpose and sets out the circumstances in which Division 165 will apply. Note that the provisions can apply to schemes entered into or carried out before 1 July 2000 but after 2 December 1998. Also note that the provisions do not apply where the GST benefit is attributable to the exercise of an option expressly provided for under the GST law, for example the election to adopt the cash basis of accounting;

2. Section 165-10 defines a GST benefit to cover the reduction of the GST payable, increasing a refund, delaying payment of GST and accelerating a refund of GST. Subsection (3) provides that an entity can get the benefit from a scheme , even if there was no alternate economic way of structuring the activities. A ‘scheme’ is defined widely in subsection (2);

3. Section 165-15 sets out the 12 circumstances which should be taken into account by the Commissioner in determining whether the scheme was entered into with the relevant purpose and the effect of the scheme. This test is objective and not subjective in nature;

4. Section 165-40 allows the Commissioner to negate the GST benefit obtained under a scheme that is caught by Division 165 by making a relevant ‘declaration’. Section 165-45 allows the Commissioner to make compensating adjustments by negating or reducing a GST disadvantage;

5. Under s165-80, the entity must pay a penalty equal to 200% of the increased GST liability.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 20

Second hand goods

Supplies of second hand goods by unregistered persons are not taxable. Likewise, supplies of second hand goods by registered persons may not be taxable if say, the supply is not made in connection with the enterprise. In such circumstances, the recipient is under the general rules unable to claim any input tax credits, even if acquired for a creditable purpose. Nevertheless, under Division 66, a recipient of second hand goods may in certain circumstances, be entitled to an input tax credit on the acquisition of second hand goods if the goods are subsequently subject to a taxable supply.

Sale of Freehold Interests

GST may apply to the supply of real property (as defined in s195-1), unless the supply is by an unregistered person or is not in connection with an enterprise or is GST-free (e.g. a residential lease - Subdiv. 40-B or sales of residential premises except new or commercial residential premises - Subdiv 40-C).

If the supply of real property is taxable, then the GST payable may be calculated under the usual rules or by the margin method. Under the latter method, the amount of the GST is 1/11th of the margin for the supply – see Division 75. The margin is the “profit” on the supply, that is, the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property. However, if the real property was held as at 1 July 2000, then valuations of land and improvements are required to establish the relevant cost base.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 21

Note that the margin method is not available if the taxpayer acquired the freehold interest through a taxable supply on which GST was paid without applying the margin method.

Insurance

The supply of an insurance policy by a registered insurer is generally a taxable supply, but not if it is a life insurance policy (which is a financial supply and is input taxed) or a private health insurance policy (which is GST-free under s38-55). An insured would be entitled to claim input tax credits for premiums paid under the policy provided the acquisition of the policy was a creditable acquisition.

Pay-outs by insurance companies are treated as consideration for an acquisition made by the insurer – see Subdivision 78-A. Thus, the insurance company will be entitled to an input tax credit if the issue of the policy was a taxable supply and the insurer was registered or required to be registered.

The registration status of the insured is not a relevant consideration.

Generally speaking, the amount of the input tax credit is 1/11th of the settlement monies.

On the other hand, the receipt of settlement proceeds from an insurance company is treated as consideration for a supply made by the insured – see Subdivision 78-B. The supply by the insured is treated as a taxable supply if the insured was entitled to claim input tax credits for the premiums.

Generally speaking, the amount of the GST is 1/11th of the total settlement

received by the insured. The GST liability continue even after the insured has ceased to be registered. Any excess paid by the insured reduces the GST liability, that is, 10/11th of the excess is deducted from the value of the taxable supply.

A number of transitional measures apply to insurance, as to which see later.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 22

Payment of Taxes

The payment of Australian tax, other than GST, (imposed under a law of a State, Territory or Commonwealth) is taken to be the consideration for a supply that is made to you. Thus, GST applies to the payment or other charges, except if they are excluded from GST by a determination from the Treasury – see Division 81

Inadequate Or No Consideration

It will be recalled that both taxable supplies (s9-5) and creditable acquisitions (s11-5) require consideration.

Supplies and acquisitions between ‘associates’ (as that term is defined under s318 of the ITAA 1936) for no consideration, may in certain circumstances nevertheless be treated as taxable supplies or creditable acquisitions.

In particular, a supply to an associate without consideration can still be taxable supply if: a) the associate is not registered or required to be registered; or b) the associate acquired the thing supplied otherwise than solely for a creditable purpose (s72-5).

The value is taken to be the tax exclusive market value of the supply (s72-10). A supply for inadequate consideration to an associate in the same circumstances is taken to be for the GST exclusive market value of the supply (s72-70).

TIA_Paper_31/08/00_Deutsch_Raneri

Page 23

Likewise, the acquisition of a thing from an associate without consideration may still be a creditable acquisition if the recipient did not acquire the supply solely for a creditable purpose (ss72-40). The recipient would be entitled to the full input tax credit that would have been available if the consideration had been the tax inclusive market value (s72-45).

Like the transfer pricing provisions in Division 13 of ITAA 1936, these GST provisions need to be borne in mind when pricing inter-group transactions.

Supplies of Going Concerns

Supplies of going concerns to entities which are registered or required to be registered are GST-free - Subdivision 38-J. This concession may well be relevant if and when Australian business activities cease wholly or partly and say, the business and all relevant assets are sold.

However, Division 135 may apply to impose GST on the recipient of the going concern if and to the extent the concern is used for making input taxed supplies. In other words, a purchaser will only buy a going concern tax free to the extent that it is used for making supplies that are not input taxed.

Other Special Rules

There are a number of other special rules - but these will only be briefly mentioned below:

•

Long Term Commercial Accommodation - GST concessional treatment is available to long term stays (28 days or more) in commercial residential premises - Division 87.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 24

•

Returnable Containers - special rules apply to prevent the cascading of GST on returnable containers under certain State statutory refund schemes - Division 93.

•

Security Deposits - a security deposit is not treated as consideration for a supply (and hence not subject to GST) unless the deposit is forfeited or is applied towards the consideration for the supply - Division 99

•

Cancelled lay-by sales - suppliers will be subject to GST on amounts received pursuant to cancelled lay-by sales - Division 102

•

Supplies in satisfaction of a debt - A creditor may be liable for GST on supplies of a debtor’s property if the supply was made in satisfaction of a debt and the supply would have been taxable if it had been made by the debtor. Note that the creditor could be liable to GST even if not registered or required to be registered - Division 105

•

Valuation of supplies in bond - basically GST is calculated on the value of the supply plus any customs or excise duty which would have been paid if the goods were entered for home consumption - Division 108

•

Importations without entry for home consumption - GST is still payable on goods imported into Australia even if not entered for home consumption under the Customs Act 1901 - Division 114

•

Valuation of exports made for repair or renovation - to avoid double GST taxation, GST only applies to the value of the repair or renovation - Division 117

TIA_Paper_31/08/00_Deutsch_Raneri

Page 25

•

Diesel fuel credits - such credits will arise in relation to certain acquisitions and importation of diesel and like fuels - Division 123

•

Gambling - GST applies to gambling conducted by entities which are registered or required to be registered e.g. casinos. - Division 126

•

Cessation of registration - special rules apply to attribute any amounts of GST, input tax credits or adjustments in the concluding tax period - Division 138

•

Special rules for registration in relation to Taxis, representatives of incapacitated entities (i.e. a bankrupt or company in liquidation or receivership) - Division 144

TIA_Paper_31/08/00_Deutsch_Raneri

Page 26

B. INTERNATIONAL ASPECTS OF GST

Like resident taxpayers, non-residents are liable to GST if they make taxable supplies or importations and are entitled to claim input tax credits if they make creditable acquisitions or importations. The following special rules are more relevant to non-residents or cross border transactions.

I

Supplies "connected with Australia"

For a supply to be a taxable supply one of the many conditions is that the supply is connected with Australia.

As will be seen later in this paper there are circumstances where the requirement for a supply to be "connected with Australia" is waived (see for example Division 84) but these are unusual circumstances which have specific requirements. In all other cases in order for a supply to constitute a taxable supply the connected with Australia criteria is critical.

In order to give some clarity to the notion of connected with Australia s9-25 provides some important pointers. This most obvious case is dealt within s9-25(4) which deals with real property and provides quite logically that a supply of real property connected with Australia if the land to which the real property relates is in Australia.

Real property is defined to include (a) any interest in or right over land (b) a personal right to call for or to be granted any interest in or right over land or (c) a licence to occupy land or any other contractual right exerciseable over or in relation to land (see s195-1). Thus, the reference in subsection 9-25(4) to "land to which the real property relates" means that an

TIA_Paper_31/08/00_Deutsch_Raneri

Page 27

interest in, or right over the land is connected with Australia where the physical land to which the interest or right relates, is in Australia. This seems to be an appropriate result but one that is achieved by fairly awkward drafting.

The second perhaps most obvious case is covered by s9-25(2) which provides that a supply of goods that involves the goods being removed from Australia is connected with Australia. This would clearly deal with the case of the export of goods where the goods are shipped from Australia to a foreign location. Thus, exports are specifically covered by the GST legislation and, in a point that I make more emphatically under the exports heading, it is only by reference to specific (although numerous and broad) exemptions that certain exports are taken out from the GST net.

Nonetheless, the word "removed" may raise some interesting issues in certain circumstances but importantly in GST R2000/31 (paragraph 51) the Commissioner states that goods removed from Australia are physically taken out of Australia. This would seem to imply that anything other than physical removal of the goods could not amount to a removal in the sense required.

Thirdly, s9-25(1) provides the supply of goods is connected with Australia if the goods are delivered, or made available in Australia to the recipient of the supply.

Subsection 9-25(3) also provides that a supply of goods that involves the goods being bought to Australia is connected with Australia if the supplier either imports the goods into Australia or installs or assembles the goods in Australia.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 28

They are perhaps the obvious cases in which three subsections deal with suppliers of goods and one deals with supplies of real property. Subsection9-25(5) has a heading "supplies of anything else" looking at the heading alone one might be tempted to say that we are looking at supplies other than the supplies covered by subsections 1-4. However, upon closer analysis it becomes evident that we are dealing here with supplies of anything other than goods and real property. This is an important point since the emphasis is not on the supply but on the things supplied being goods or real property. Thus, subsection 9-25(5) can only apply to things that are clearly not goods or real property as defined. Supplies of these types of things will be connected with Australia if either the thing is done in Australia or the supplier makes the supply through an enterprise that the supplier carries on in Australia.

The use of the word "thing" may mean something quite different to fans of the Adams family but in the GST context "thing" is defined in s195-1 to mean "anything that can be supplied or imported". Since this subsection does not cover goods or real property it clearly means anything that can be supplied or imported that is not a good or real property. So, for example, the supply of advice or information would not ordinarily be a supply of a good or real property. In order to be covered though the thing must be "done" in Australia. According to GST 2000/31 paragraph 64 the meaning of done depends on the nature of the thing being supplied. Done can mean for example performed, executed, completed, finished etc depending on what it is that is supplied.

I look forward with interest to the detailed High Court interpretations of the meaning of such interesting English words such as "thing" and "done" (see also paragraph 67 to 77 of that Ruling dealing with this issue).

TIA_Paper_31/08/00_Deutsch_Raneri

Page 29

Finally, one needs to examine whether the supplier makes the supply through an enterprise that the supplier carries on in Australia. Under subsection 6 an enterprise is carried on in Australia if the enterprise is carried on through a permanent establishment (see section 6(1)) or a place that would be such a permanent establishment if paragraphs e, f or g of that definition did not apply.

Because of the truncated nature of the definition of permanent establishment created by s925(6) the scope for the application of s9-25(5)(b) is significantly expanded. Significantly paragraphs e, f and g of the section 6 definition of permanent establishment are all excluding provisions. Thus, since the exclusions from the definition of permanent establishment are themselves excluded the definition of what is a permanent establishment is significantly expanded thereby leaving broader scope for s9-25(5) to apply. For the sake of completeness a point made forcefully in paragraph 89 of GST R2000/31 deals with the situation where you might have an Australian resident taxpayer who is making a supply just outside Australia. The supply could be treated if it is a supply of something other than goods or real property as being connected with Australia if the supplier being the Australian resident makes the supply through an enterprise that the supplier carries on in Australia. That would be the case if the resident carries on the enterprise through a permanent establishment in Australia using the truncated definition of permanent establishment.

The important point being made is that the definition of permanent establishment in this context can be relevant to both residents and non-residents.

II

Exports

It is commonly said that under the Australian GST exports will be GST-free.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 30

This is a vast simplification of some detailed provisions that are to be found in Subdivision 38-E which deals broadly with exports and other supplies for consumption outside Australia that are GST-free.

Ordinarily, the export of goods from Australia is a removal of these goods from Australia and as such is treated as a supply that is connected with Australia under section 9-25(2). This fulfills the requirement in section 9-5(c) for the supply to be a taxable supply in accordance with the relevant legislation.

In other words even though exports of goods can be GST-free as a result of the application of Subdivision 38-E, prima facie export supplies are within the GST net on the basis that they are connected with Australia. This is not merely being pedantic  rather it highlights the critical structure of the GST legislation which is to the effect that exports are taxable supplies unless specifically exempted under section 38-E. This conflicts with the more lay understanding that exports generally are free from GST and puts a heavy onus on advisors to ensure that taxpayers generally understand the need to fit squarely within one of the twelve GST-free export categories outlined in Subdivision 38-E.

Specifically, the following supplies are GST-free:-

1.

A supply of goods but only if the supplier exports them from Australia within sixty days (or such further period as the Commissioner allows) after either the day on which the supplier receives any of the consideration for the supply or the day on which the supplier gives an invoice if that is an earlier day;

TIA_Paper_31/08/00_Deutsch_Raneri

Page 31

Without limiting this and the next head, for the purposes of both heads a supplier exports the goods from Australia if:-

(a)

before the goods are exported the supplier supplies them to an entity that is not registered or required to be registered;

(b)

the entity exports the goods from Australia;

(c)

the goods have been entered for export within the meaning of s. 113 Customs Act 1901;

(d)

since their supply to that entity the goods have not been altered or used in any way except to the extent (if any) necessary to prepare them for export; and

(e)

the supplier has sufficient documentary evidence to show the goods were exported.

However, under both heads if such goods are reimported into Australia (query by whom and when) the supply is not GST-free unless the importation is a taxable importation.

2.

A supply of goods for which the consideration is provided in instalments under a contract that requires the goods to be exported but only if the supplier exports them from Australia within sixty days (or such further period as the Commissioner allows) after the day on which the supplier receives any of the final instalment of the

TIA_Paper_31/08/00_Deutsch_Raneri

Page 32

consideration for the supply or the day on which the supplier gives the invoice if that is an earlier date;

3.

A supply of an aircraft or ship but only if the recipient of the aircraft or ship exports it from Australia under its own power within sixty days (or such further period as the Commissioner allows) of taking physical possession of it;

4.

A supply of an aircraft or ship for which the consideration is provided in instalments under a contract that requires the aircraft or ship to be exported but only if the recipient exports it from Australia within sixty days (or such further period as the Commissioner allows) after the earliest of the day on which the supplier receives any of the final installment of the consideration for the supply, the supplier gives an invoice for that final installment or the supplier delivers the aircraft or ship to the recipient or at the recipient's request to another person;

5.

A supply of either aircrafts stores for use, consumption or sale or an aircraft on a flight that has a destination outside Australia or ships stores for use, consumption or sale or a ship that is on a voyage that has a destination outside Australia whether or not part of the flight or voyage involves a journey between places in Australia;

6.

A supply of goods in the course of repairing, renovating, modifying or treating other goods from outside Australia whose destination is outside Australia but only if the goods are attached to or become part of the other goods or the goods become unusable or worthless as a direct result of being used to repair, renovate, modify or treat the other goods;

TIA_Paper_31/08/00_Deutsch_Raneri

Page 33

7.

A supply of goods to a relevant traveller but only if the supply is made in accordance with the rules specified in the regulations and the goods are exported as accompanied baggage of the relevant traveller;

8.

A supply of goods is GST-free if the supply is by way of lease or hire and the goods are used outside Australia;

9.

A supply of goods if the recipient is a non-resident not registered or required to be registered and the goods are jigs, patterns, templates, dies, punches and similar machine tools to be used in Australia solely to manufacture goods that will be for export from Australia;

10.

A supply of something other than goods or real property that is directly connected with goods or real property situated outside Australia;

11.

A supply of something other than goods or real property that is made to a recipient who is not in Australia when the thing supplied is done; and (a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or

(b) the non-resident acquires the thing in carrying on the non-residents enterprise but is not registered or required to be registered.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 34

However, a supply under an agreement entered into, whether directly or indirectly, with a non-resident where the supply is provided, or the agreement requires it to be provided, to another entity in Australia is not GST-free under this head.

12.

A supply of something other than goods or real property that is made to a recipient who is not in Australia when the thing supplied is done and the effective use or enjoyment of which takes place outside Australia other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

For these purposes a supply is taken to be a supply made to a recipient who is not in Australia if it is in supply under an agreement entered into, whether directly or indirectly with an Australian resident and the supply is provided or the agreement requires it to be provided to another entity outside Australia.

13.

A supply of something other than goods or real property that is made in relation to rights if the rights are for use outside Australia or the supply is to an entity that is nonresident and is outside Australia when the thing supplied is done;

14.

A supply of something other than goods or real property that is constituted by the repair, renovation, modification or treatment of goods from outside Australia whose destination is outside Australia.

It should be noted that:-

(a)

1-9 apply to supplies of goods only but 10-14 apply to supplies generally;

TIA_Paper_31/08/00_Deutsch_Raneri

Page 35

(b)

the supplies referred to in 1-6 above are not GST-free if the supplier re-imports the goods into Australia (s. 38-185(2)).

(c)

the supplies referred to in 10-14 above are not GST-free if they are supplies of a right or option to acquire something the supply of which would be connected with Australia or would not be FST-free (s. 38-190(2)).

Specific comments on the categories

Category 8 specifically refers to a supply that is "directly connected" with goods or real property situated outside Australia. It should be noted that if thing supplied is itself goods or real property, which is directly connected with goods or real property situated outside Australia, the supply in question, would not itself be GST-free.

Further, the phrase 'directly connected' is likely to embrace litigation fairly quickly and no doubt we will have some statutory interpretation by the courts of the meaning of this phrase. Significantly, it is wholly owned undefined in the legislation but the New Zealand GST law contains a similar provision with the phrase 'directly connected' being similarly used.

A key New Zealand case is that of Malololailai Interval Holidays NZ Limited v CIR (1997) 18 NZTC13, 137 in which the New Zealand High Court held that a marketing company selling time share interests for the owner of foreign real property was not making a supply that was directly connected with the real property. Thus, the supply itself was not, to use the Australian language "GST-free". Accordingly, the supply of the service constituted by the marketing company selling the time share interests would in the Australian equivalent legislation be fully subject to GST on the basis that it is an export which is not specifically covered by any of the twelve exemptions referred to earlier.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 36

III

Imports (could be referred to as Reverse Charge No. 1)

Section 7-1(1) of the Goods and Services Tax Act 1999 declares in clear and unequivocal terms that "GST is payable on taxable supplies and taxable importations."

In other words the two events which any taxpayer must look for to determine if they have a GST liability is whether they have made a 'taxable supply' or a 'taxable importation'.

Much has been said about the notion of a taxable supply  comparatively little has been said about the notion of a taxable importation. The phrase is defined in section 13-5(1) of the Act to be "an importation of goods into Australia, but only to the extent that it is not a non-taxable importation." For this purpose an importation of goods into Australia, occurs if a person enters the goods for home consumption within the meaning of the (Customs Act 1901) and that of the time they are so entered, that person is the owner of the goods within the meaning of that Act.

This does not however apply to an importation of money. (s. 13-5(3))

Further, an importation is a non-taxable importation if it is either a non-taxable importation as described in Part 3-2 or it would have been a supply that was GST-free or input tax if it had been a supply.

Thus, for example if the imported good is food which would be GST-free if provided on the local market, its importation will be a non taxable importation and thereby fall outside the GST net.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 37

In relation to non-taxable importations on Part 3-2 these extend to include:

1.

Goods specifically covered under various items in Schedule 4 to the Customs Tariff Act (s. 42-5);

2.

Goods which are ship stores, or aircraft stores(s. 42-10);

3.

Goods which are imported by a passenger or member of the crew of a ship or aircraft and are covered by Item 15, Schedule 4 to the Customs Tariff Act 1995 (s. 42-15(1)); and

4.

Goods which are purchased from inwards duty free shop by a relevant traveller and are covered by Item 15 in Schedule 4 of the Customs Tariff Act 1995 (s. 42-15-(2)).

Having concluded that one is dealing with a taxable importation it is necessary to determine who is liable for GST and for what amount. Curiously, the person who is liable for GST on the taxable importation is the person who has imported the goods (s. 13-15). I say curiously because normally it is the supplier not the receiver of the goods that is liable to the GST. However, in the context of imports, the supplier would usually not be resident in Australia. Accordingly as a practical matter it is easier to impose and collect the actual liability for the GST upon the resident receiver of the goods. For this practical reason the tax is the responsibility of the receiver not the payer in this one case.

The amount of GST to be paid by the receiver is 10% of the value of the taxable importation.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 38

The value is the total of:

•

the customs value of the goods imported.

•

the amount paid or payable to transport the goods to Australia and to insure the goods for their transport (to the extent that it is not already reflected in the customs value);

•

and the customs duty payable in respect of the importation of the goods (s. 13-20(2)).

The next step in the analysis of the import situation arises under section 7-1(2) of the Act. This section ensures that the receiver is entitled to an input tax credit on creditable importations. A credit for a taxable importation is defined in Division 15 and essentially means an importation where you import goods solely or partly for a creditable purpose and you are registered or are required to be registered.

Section 15-10 requires that in order for imported goods to have been imported for a creditable purpose it is necessary that you import the goods in carrying on your enterprise. This however does not extend to situations where the importation relates to making supplies that would be input taxed or where the importations are of a private or domestic nature.

The importer has been granted an input tax credit for any creditable importation that the importer makes and the amount of the input tax credit for a creditable importation is the amount equal to the GST payable on the importation. The net effect is that whilst the importer has a liability to GST, importations wholly for creditable purposes will suffer no GST as the amount of the input tax credits will equal the amount of the output tax. This makes sense in as much as GST is not intended to be a tax other than on private consumption and if the importation is wholly for creditable purposes then usually private consumption is not involved.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 39

If however, the importation is partially for a creditable purpose, then some percentage of the use is for private consumption and accordingly GST will be payable on a net basis by the importer.

It should be noted that to be a taxable importation you do not need to register or be required to but you cannot claim an input tax credit unless you register.

IV

Supplies that are incidental to imports and exports

In relation to both imports and exports of goods to and from Australia a number of incidental supplies will arise apart from the supply of the goods themselves. In particular, the supply of transport, the supply of insurance relating to that transport and the supply of the service of arranging transport. All these items are sequentially covered in Subdivision 38-K ("Transport and related matters") by items 5, 6 & 7 of s.38-355. [RLD preparing fuller analysis].

V

Offshore supplies of things other than goods or real property (could be referred to as Reverse Charge No. 2)

Ordinarily, only supplies that have the necessary connection with Australia ( in terms of s925) are subject to GST.

However, Division 84 considerably extends the territorial nexus

rules in relation to intangible supplies from off-shore.

In particular, a supply of things (other than goods or real property) that is not connected with Australia, is nevertheless treated as a taxable supply (unless input taxed or GST-free)

TIA_Paper_31/08/00_Deutsch_Raneri

Page 40

provided the three pre-conditions set out below are satisfied. Note that a transfer of anything by an overseas branch to an Australian enterprise or the doing of anything for the Australian enterprise by the overseas branch is taken to be a supply not connected with Australia and therefore potentially within this Division – see s84-15.

The three relevant pre-conditions are that: a) the thing is acquired for the purpose of an enterprise carried on in Australia (but not solely for a creditable purpose); b) the supply is for consideration; and c) the recipient is registered or required to be registered.

If the off-shore intangible supplies are taxable under s84-5, then the GST on such supplies is payable by the recipient of the supply rather than the supplier (s84-10). In other GST/VAT jurisdictions, this is known as a “reverse charge”. This charge would, for example, apply to the exercise of an intellectual property right supplied from outside Australia but to be exercised in Australia, such as a licence to use a foreign manufacturing patent granted by an overseas owner. Such provisions should be taken into account when drawing distribution or licence agreements.

VI

Resident agents acting for non-residents (Division 57)

A non-resident carrying on an enterprise (whether or not located in Australia) may register for GST purposes - s23-10.

However, if an Australian resident agent acts for a non-resident, then:

TIA_Paper_31/08/00_Deutsch_Raneri

Page 41

(a)

the agent must be registered if the non-resident is registered or required to be registered. (s57-20).

(b)

the agent is liable for any GST payable on a taxable supply or taxable importation made on behalf of the non-resident (s57-5).

(c)

the agent is entitled to input tax credits on creditable acquisitions and importations made on behalf of the non-resident (s57-10)

(d)

the resident agent must prepare and lodge GST returns on behalf of the non-resident (s31-5). A non-resident is not required to lodge a GST return if:

a) the non-resident’s net amount for tax relevant period is zero; or

b) the non-resident only makes taxable supplies or taxable importations through a resident agent. (s.57-40)

The Division does not apply to a non-resident that is a member of a GST group.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 42

VII

Non-residents making supplies connected with Australia (could be referred to as Reverse Charge No. 3)

As a result of recent amendments new Division 83 dealing with non-residents making supplies connected with Australia has been introduced. In essence under s83-5 if a supply is made by a non-resident in circumstances where the supply is not made through an enterprise that the supplier carries on in Australia and the recipient of the supply is registered or required to be registered, the GST payable on the supply can, at the joint election of the supplier and recipient, be reverse charged such that the GST on the supply is payable by the recipient rather than the supplier.

The section does not apply to a supply that is a taxable supply only because of division 84 nor to a taxable supply made by a non-resident through a resident agent to which Division 57 will apply.

In such a circumstance the amount of the GST payable on the supply is 10% of the price of the supply.

A non-resident does not need to apply to be registered under this Act if the non-residents annual turnover would not meet the registration turnover threshold excluding s83-5 type supplies. Similarly, the Commissioner need not register such a non-resident if the Commissioner is satisfied that the non- resident's annual turnover would not meet the registration turnover threshold excluding the s83-5 supplies.

TIA_Paper_31/08/00_Deutsch_Raneri

Page 43

Sub-sections 83-25(2) and 83-30(2) provide rather awkwardly that "it does not matter whether the non-resident is required to be registered". One is negatively lead to the question "what does not matter"?

Where a s83-5 type supply is made, a non-resident is not required to issue a tax invoice.

Importantly, if s83-5 applies to a taxable supply but the recipient of the supply is a member of a GST group the GST on the supply is payable by the representative member and is not payable by the member. (Unless, the member is a representative member).

TIA_Paper_31/08/00_Deutsch_Raneri

Page 44