Australian master GST guide 2020 [21st edition.] 9781922347008, 1922347000

Table of contents :
Product Information
List of Abbreviations
HIGHLIGHTS OF RECENT GST CHANGES
OVERVIEW • BASIC CONCEPTS
INTRODUCTION
HOW GST OPERATES
SMALL BUSINESS ENTITIES
LEGISLATIVE BACKGROUND
GETTING STARTED WITH GST
REGISTRATION
LIABILITY FOR GST • TAXABLE SUPPLIES
TAXABLE SUPPLIES
CALCULATING GST ON SUPPLIES
CLAIMING INPUT TAX CREDITS • TAX INVOICES
INPUT TAX CREDITS
TAX INVOICES
GST ADJUSTMENTS
ADJUSTMENT EVENTS
ADJUSTMENTS FOR BAD DEBTS
“PLANNED USE” AND ASSOCIATED ADJUSTMENTS
STARTING, TRANSFERRING OR CEASING BUSINESS
OTHER ADJUSTMENT RULES
ACCOUNTING BASIS • TAX PERIODS
TAX PERIODS
ACCRUALS AND CASH BASIS
SPECIAL ATTRIBUTION RULES
GST RETURNS • THE BAS • PAYMENT • ASSESSMENT • REFUNDS
INTRODUCTION
STANDARD METHOD
OTHER REPORTING OPTIONS
OTHER PROCEDURAL ISSUES
ASSESSMENT, PAYMENT AND REFUNDS
IMPORTS AND EXPORTS
GOODS IMPORTED INTO AUSTRALIA
SPECIAL RULES RELATING TO OFFSHORE SUPPLIES
EXPORTS
FINANCIAL SUPPLIES AND INSURANCE
FINANCIAL SUPPLIES
INSURANCE
REAL ESTATE • ACCOMMODATION • SALE OF BUSINESS
SALE OF REAL PROPERTY
SPECIAL “MARGIN” RULES
BODIES CORPORATE
RENTED OR LEASED PREMISES
CROWN AND FARM LAND
BUYING AND SELLING A BUSINESS
TRANSPORT, TRAVEL AND VEHICLES
TRANSPORT AND TRAVEL
MOTOR VEHICLES
FOOD, HEALTH AND MEDICAL
FOOD
HEALTH AND MEDICAL
EDUCATION AND CHILD CARE
EDUCATION
CHILD CARE
CHARITIES, RELIGIOUS AND NON-PROFIT BODIES
GAMBLING, SECOND-HAND GOODS AND OTHER MEASURES
GAMBLING
SECOND-HAND GOODS
OTHER MEASURES
GST GROUPS, BRANCHES, AGENTS AND ASSOCIATES
GST GROUPS
AMALGAMATED COMPANIES
JOINT VENTURES
BRANCHES
AGENTS
ASSOCIATES
ADMINISTRATION • AUDIT • REVIEW
GENERAL ADMINISTRATION OF THE GST LAW
INFORMATION-GATHERING AND ACCESS POWERS
AUDITS AND COMPLIANCE
SPECIAL LIABILITIES AND OBLIGATIONS
OTHER GST-RELATED PENALTIES
OBJECTIONS AND APPEALS
CONTRACTS • TRANSITIONAL RULES
TIMING RULES
OTHER SPECIAL TRANSITIONAL RULES FOR CONTRACTS
GST CLAUSES: RECOVERING GST
ANTI-AVOIDANCE RULES
GENERAL ANTI-AVOIDANCE PROVISION
SCHEME PROMOTERS
PLANNING • PRICING • CASHFLOW
PRICING
CASHFLOW
OTHER PLANNING ISSUES
WINE EQUALISATION TAX
OUTLINE OF WINE EQUALISATION TAX
ASSESSABLE DEALINGS
CALCULATING AND PAYING WET
EXEMPTIONS FROM WET
WET CREDITS
LUXURY CAR TAX
INCOME TAX AND FBT
RELATIONSHIP BETWEEN GST AND INCOME TAX
RELATIONSHIP BETWEEN GST AND FBT
GST CHECKLISTS
GST TRANSACTION CHECKLISTS
GST RATES, DATES AND THRESHOLDS
INDUSTRY CHECKLISTS
ATO FORMS • FACT SHEETS • CONTACTS
GST TERMS
CASE TABLE
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Y
Numbered Decisions of Boards of Review, AAT and other Authorities
LEGISLATION FINDING LISTS
RULINGS FINDING LISTS
INDEX
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W

Citation preview

Product Information Disclaimer: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that: (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

About Wolters Kluwer Wolters Kluwer is a leading provider of accurate, authoritative and timely information services for professionals across the globe. We create value by combining information, deep expertise, and technology to provide our customer with solutions that contribute to the quality and effectiveness of their services. Professionals turn to us when they need actionable information to better serve their clients. With the integrity and accuracy of over 45 years’ experience in Australia and New Zealand, and over 175 years internationally, Wolters Kluwer is lifting the standard in software, knowledge, tools and education. Wolters Kluwer ― When you have to be right Enquiries are welcome on 1300 300 224. © 2020 CCH Australia Limited First published....................................March 2000

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All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher. ISBN 978-1-922347-00-8

FOREWORD This 2020 edition of the Australian Master GST Guide, the 21st in the series, is designed as a practical and up-to-date explanation of how the GST operates in Australia. This book aims to: • help businesses and their advisers to manage and comply with the tax • equip them to take advantage of some of the opportunities that GST offers, and • help them to avoid some of the many traps that GST presents. Plan of this book Part 1 provides a brief overview of how GST operates and covers the crucial issues in understanding the tax (Chapters 1 and 2). The nuts and bolts rules on how GST operates are contained in Part 2. This covers the standard rules on registration, tax periods, accounting basis, GST liability, claiming credits for GST, adjustments, returns and payments (Chapters 3 to 8). Part 3 contains the special rules that apply in areas such as imports and exports, finance, insurance, real property, transport, food, health, education, charities, gambling, second-hand goods, groups and branches (Chapters 9 to 17). Vital planning issues — including pricing and cashflow implications — are covered in Part 4. This part also contains the transitional rules governing pre-GST contracts, and the anti-avoidance rules. Administration, audits, compliance, penalties and review are also covered here (Chapters 18 to 21). Part 5 includes related tax measures — the wine equalisation tax and the luxury car tax. It also explains how GST is treated for income tax purposes and explains various other GST-related tax rules (Chapters 22 to 24). Useful checklists covering the GST status of transactions are contained in Part 6. This part also includes special checklists designed to alert you to GST issues that are relevant to particular industries. A minidictionary of GST terms is also included, as well as a checklist of key GST thresholds (Chapters 25 and 26). Throughout the text, there are convenient cross-references to commentary in CCH’s flagship Australian GST Guide (abbreviated as “GSTG”). A comprehensive index and other information locators appear at the end of the book. Changes since last edition This 2020 edition brings the book fully up to date for all developments since the publication of the previous edition in January 2019. A listing of the main changes introduced since the last edition of the book is provided at page xi. Online editions of this book Reflecting the dynamic GST environment, this book is also available in a continuously updated online version — the Online Master GST Guide. This version completely updates the commentary at least each quarter. It also features electronic links so that you can access the text of specific rulings, legislation or cases referred to in the online commentary. Sophisticated search facilities also enable you to easily search the online commentary for references to specific paragraphs, rulings, legislation or cases. For details, visit Wolters Kluwer’s website at www.wolterskluwer.cch.com.au or contact Wolters Kluwer Customer Support on 1 300 300 224.

Citations Unless otherwise stated, section references are to sections in the A New Tax System (Goods and Services Tax) Act 1999. References to other legislation are prefixed as follows: Administration Act....................................Taxation Administration Act 1953 ITAA 1997....................................Income Tax Assessment Act 1997 ITAA 1936....................................Income Tax Assessment Act 1936 LCT Act....................................A New Tax System (Luxury Car Tax) Act 1999 Reg....................................A New Tax System (Goods and Services Tax) Regulations 1999 CCA....................................Competition and Consumer Act 2010 Transition Act....................................A New Tax System (Goods and Services Tax Transition) Act 1999 WET Act....................................A New Tax System (Wine Equalisation Tax) Act 1999 This edition is up to date for changes notified up to 1 January 2020. Philip McCouat

Wolters Kluwer Acknowledgments Wolters Kluwer wishes to thank the following who contributed to and supported this publication: Director, General Manger, Research & Learning: Lauren Ma Associate Director, Regional Head of Content: Diana Winfield Author | Editor: Philip McCouat Cover Designer: Anjali Kakkad Books Coordinator: Jackie White

ABOUT THE AUTHOR Philip McCouat MA, LLB (Hons), LLM (Hons), MEnvL, has many years’ experience in business, publishing and the law. In the area of tax, he is the author of the GST Survival Guide and the Australian Motor Vehicle Tax Guide. Philip was the Founding Editor for Tax Navigator for Business Activities and has been a specialist contributor to many other major publications, most recently the Small Business Tax Concessions Guide, the Australian Master Tax Guide, Australian GST Legislation and the Australian Federal Income Tax Reporter.

Highlights of GST developments This sets out significant GST developments — legislative, administrative or judicial — that have occurred since the preparation of the previous edition. It also provides cross-references to the paragraph in this book where the development has been incorporated.

GENERALLY

The GST regulations originally issued in 1999 were reissued with minor procedural and numbering changes (A New Tax System (Goods and Services Tax) Regulations) 2019.

CHAPTER 3: REGISTRATION • Retired police officer was not carrying on an enterprise of private investigations or share trading where there was no business plan or evidence of systematic activities (NKCX v FC of T).................................... ¶3-020 • The government proposes that the ABN system will be strengthened to disrupt black economy behaviour by making the ABN conditional on holders (1) fulfilling any obligation to lodge income tax returns (from 1 July 2021); and (2) annually confirming the accuracy of their details on the ABN register (from 1 July 2022).................................... ¶3-050 • Legislation was passed to require offshore supplies of hotel accommodation in Australia to be included in GST turnover.................................... ¶3-030; ¶11-320

CHAPTER 4: LIABILITY FOR TAX / TAXABLE SUPPLIES • Where a customer purchased sexual services in a brothel, the relevant supply could not be split up into a supply of the room hire (by the brothel owner) and a separate supply of the sexual services (by the sex worker), where the owner supplied the customer with the total service, for a single inclusive price (Case 5/20).................................... ¶4-010 • The Tax Office issued a class ruling on the GST treatment of local government activities (Class Ruling CR 2019/61).................................... ¶4-080 • Van couriers engaged by a labour hire firm were held to be independent contractors, where they had a significant financial interest in the van (which had special value as a commercial transport vehicle), and had some influence in the manner in which they performed the work (Qian v FC of T). However, the Tax Office does not accept that the fact that a worker supplies his or her own vehicle is a decisive or dominant factor in determining whether the worker is an independent contractor (Decision Impact Statement on Qian).................................... ¶4-090 • Draft guidelines were released on where grants of rights are taken to have occurred.................................... ¶4-102 • The Tax Office finalised its guidelines on when supplies of intangibles are treated as being connected with Australia, attracting GST liability (GST Ruling GSTR 2019/1).................................... ¶4-102 • Guidelines were finalised on the method of converting digital currency to Australian currency for GST purposes, effective from 13 April 2019.................................... ¶4-200

CHAPTER 5: CLAIMING INPUT TAX CREDITS / TAX INVOICES • The Commissioner has the power to direct a liquidator of a company to give GST returns on behalf of the company within a further specified period. In such a case, the AAT has held that the four-year period for claiming input tax credits would start to run from that later date (Rosebridge Nominees Pty Ltd (in Liq) v FCT).................................... ¶5-010 • Where an input tax credit is claimed, the onus is on the claimant to show that an “acquisition” actually took place (Byron Pty Ltd v FC of T; Stallion (NSW) Pty Ltd v FC of T).................................... ¶5-010 • The ATO withdrew an earlier draft ruling on time limits for claiming input tax credits and is expecting to finalise its new ruling in 2020.................................... ¶5-010 • A bill proposes that input tax credits should not be available for losses or outgoings incurred by parties to a Deferred Prosecution Agreement that are not tax-deductible (Crimes Legislation Amendment (Combatting Corporate Crime Bill) 2019).................................... ¶5-010 • The Commissioner considers that the discretion to waive or modify the tax invoice requirements will be exercised on a case-by-case basis. The automatic waiver that applied in certain cases where a court or tribunal had conclusively found that the acquisition was creditable, and that a credit should be allowed, no longer applies (Notice of Withdrawal of former GST Determination GSTD 2004/1).................................... ¶5-130

CHAPTER 8: GST RETURNS / BAS/ PAYMENT/ ASSESSMENT / REFUNDS • People affected by the 2019 floods in North Queensland, or the November/December bushfires, may be eligible for concessional extensions of time in lodging returns or paying GST, and accelerated refunds where they are in necessitous circumstances.................................... ¶8-005 • For 2019/20, the GDP adjustment factor used in calculating GST instalments is 5%.................................... ¶8-037

CHAPTER 9: IMPORTS AND EXPORTS • Legislation was passed to remove luxury car tax on cars re-imported into Australia, following a refurbishment overseas.................................... ¶9-050; ¶23-050 • The Tax Office reported that, in the first year of their operation, the new rules regulating GST on offshore supplies of low value goods rules yielded over $250m and enjoyed a “very strong overall level of compliance”.................................... ¶9-130

CHAPTER 10: FINANCIAL SUPPLIES AND INSURANCE • The Tax Office issued detailed guidelines for financial suppliers in relation to the GST governance and record-keeping procedures necessary to mitigate GST risks.................................... ¶10-000 • The Tax Office finalised its guidelines on determining entitlements to input tax credits for acquisitions made in the business of issuing credit cards (GST Ruling GSTR 2019/2; Practical Compliance Guideline PCG 2019/8).................................... ¶10-100; ¶10-030

CHAPTER 11: REAL ESTATE / ACCOMMODATION / SALE OF BUSINESS • The Tax Office provisionally considers that certain schemes, affecting the GST treatment of arrangements between government agencies and private developers affecting land in the Australian Capital Territory, are not effective (GST Determination GSTD 2019/D1).................................... ¶11-062 • Legislation was passed to require offshore suppliers of commercial accommodation in Australia to include those supplies in working out their GST turnover.................................... ¶11-320 • The Tax Office considers that in determining whether Crown land is vacant, “improvements” are not limited to visible structural improvements, and include clearing, draining and any other operation by humans on the land that enhances its value and/or usefulness.................................... ¶11-400

CHAPTER 12: TRANSPORT, TRAVEL AND VEHICLES • The car limit for 2019/20 is $57,581, unchanged from the previous year.................................... ¶12-110

CHAPTER 16: GAMBLING, SECOND-HAND GOODS AND OTHER MEASURES • In a test case, a gold bullion tax scheme of the type which prompted anti-avoidance measures in 2017 has been ruled to be ineffective.................................... ¶16-210

CHAPTER 18: ADMINISTRATION / AUDIT/ REVIEW • From the 2019/20 financial year, third-party reporting of GST-affected transactions is extended to the road freight, IT and security investigation or surveillance businesses.................................... ¶18-110 • The High Court ruled that legal professional privilege is an immunity for the client that enables them to resist the compulsory disclosure of privileged information. It cannot be used to enforce the return of privileged documents that are already in the public domain (Glencore International AG v FC of T.................................... ¶18-140 • The rates of general interest charge were updated.................................... ¶18-300 • Person who purchased, developed and sold 10 properties at considerable profit, claiming that they were for personal use, and did not lodge GST returns, was found to be carrying on a business of property dealing and sentenced to 34 months’ jail for avoiding $1.7m in GST.................................... ¶18-300 • Company director was sentenced to four and half years imprisonment for tax fraud, where he fraudulently reported export sales, resulting in the company receiving substantial GST refunds, and failed to disclose significant personal taxable income (ATO Media Release).................................... ¶18-300 • Effective from 1 March 2019, the AAT has a separate Small Business Taxation Division to deal with disputes between small business entities and the Tax Office. Some additional simplified or assistance measures also apply.................................... ¶18-650

CHAPTER 20: ANTI-AVOIDANCE RULES • A bill was introduced to make directors personally liable for their company’s GST liabilities in certain situations, and to empower the Commissioner to collect estimates of anticipated GST liabilities in the same way as anticipated income tax collections. Draft guidelines on estimating liabilities were also released (Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019; Draft Practical Compliance Guideline PCG 2019/D4).................................... ¶20-000

CHAPTER 21: PLANNING / PRICING / CASHFLOW • In 2019/20, as part of its crackdown on black economy activity, the Tax Office expects to visit around 10,000 small businesses in order to check compliance, with particular attention being paid to Northern Territory, Queensland and Victoria (ATO Media Releases).................................... ¶21-045

CHAPTER 23: WINE EQUALISATION TAX • Guidelines for the attribution of WET where a contract for sale includes a retention of title clause, and the purchaser sells or uses the wine before title passes, are in Practical Compliance Guideline PCG 2019/3.................................... ¶22-300

CHAPTER 24: LUXURY CAR TAX • Legislation was passed to remove luxury car tax on cars re-imported into Australia, following a refurbishment overseas.................................... ¶23-050; ¶9-050 • The general luxury car tax threshold was increased to $67,525 for 2019/20. The ”fuel efficient” threshold remains at $75,526.................................... ¶23-150 • Exposure draft legislation was released to implement a Federal Budget proposal that would enable eligible primary producers and tourism operators to apply for a refund of any luxury car tax paid for vehicles acquired on or after 1 July 2019, up to a maximum of $10,000.................................... ¶23-210

List of Abbreviations Unless otherwise stated, section references are to sections in the A New Tax System (Goods and Services Tax) Act 1999. Other references or abbreviations are: Administration Act: Taxation Administration Act 1953 CCA

Competition and Consumer Act 2010

GST

Goods and services tax

GSTG

The GST Guide (CCH)

GST Regulations

A New Tax System (Goods and Services Tax) Regulations 2019

ITAA 1997

Income Tax Assessment Act 1997

ITAA 1936

Income Tax Assessment Act 1936

LCT Act

A New Tax System (Luxury Car Tax) Act 1999

LCT Regulations

A New Tax System (Luxury Car Tax) Regulations 2019

s

section

Transition Act

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

WET

Wine equalisation tax

WET Act

A New Tax System (Wine Equalisation Tax) Act 1999

WET Regulations

A New Tax System (Wine Equalisation Tax) Regulations 2019

HIGHLIGHTS OF RECENT GST CHANGES ¶1 Highlights of recent GST changes

A checklist of recent developments included in this update is given below. CHAPTER 3: REGISTRATION Legislation was passed to require offshore supplies of hotel accommodation in Australia to be included in GST turnover. ¶3-030; ¶11-320 CHAPTER 4: LIABILITY FOR GST/TAXABLE SUPPLIES Draft guidelines were released on where grants of rights are taken to have occurred. ¶4-102 CHAPTER 5: CLAIMING INPUT TAX CREDITS/TAX INVOICES Where an input tax credit is claimed, the onus is on the claimant to show that an “acquisition” actually took place (Byron Pty Ltd v FC of T; Stallion (NSW) Pty Ltd v FC of T). ¶5-010 CHAPTER 9: IMPORTS AND EXPORTS Legislation was passed to remove luxury car tax on cars re-imported into Australia, following a refurbishment overseas. ¶9-050; ¶23-050 The Tax Office reported that, in the first year of their operation, the new rules regulating GST on offshore supplies of low value goods rules yielded over $250m and enjoyed a “very strong overall level of compliance”. ¶9-130 CHAPTER 10: FINANCIAL SUPPLIES AND INSURANCE The Tax Office issued detailed guidelines for financial suppliers in relation to the GST governance and record-keeping procedures necessary to mitigate GST risks. ¶10-000 The Tax Office issued draft apportionment guidelines for acquisitions by banks, credit unions or building societies in relation to the supply of transaction accounts, such as everyday savings, cheque, deposit, online savings and term deposit accounts. ¶10-030 CHAPTER 11: REAL ESTATE/ACCOMMODATION/SALE OF BUSINESS Legislation was passed to require offshore suppliers of commercial accommodation in Australia to include those supplies in working out their GST turnover. ¶11-320 The Tax Office considers that in determining whether Crown land is vacant, “improvements” are not limited to visible structural improvements, and include clearing, draining and any other operation by humans on the land that enhances its value and/or usefulness. ¶11-400 CHAPTER 12: TRANSPORT, TRAVEL AND VEHICLES The car limit for 2019/20 is $57,581, unchanged from the previous year. ¶12-110 CHAPTER 18: ADMINISTRATION/AUDIT/REVIEW The High Court ruled that legal professional privilege is an immunity for the client that enables them to resist the compulsory disclosure of privileged information. It cannot be used to enforce the return of privileged documents that are already in the public domain (Glencore International AG v FC of T). ¶18-140 The rates of general interest charge were updated. ¶18-300 CHAPTER 20: ANTI-AVOIDANCE RULES A bill was introduced to make directors personally liable for their company’s GST liabilities in certain situations, and to empower the Commissioner to collect estimates of anticipated GST liabilities in the

same way as anticipated income tax collections. Draft guidelines on estimating liabilities were also released (Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019; Draft Practical Compliance Guideline PCG 2019/D4). ¶20-000 CHAPTER 24: LUXURY CAR TAX Legislation was passed to remove luxury car tax on cars re-imported into Australia, following a refurbishment overseas. ¶23-050; ¶9-050 The general luxury car tax threshold was increased to $67,525 for 2019/20. The “fuel efficient” threshold remains at $75,526. ¶23-150 Exposure draft legislation was released to implement a Federal Budget proposal that would enable eligible primary producers and tourism operators to apply for a refund of any luxury car tax paid for vehicles acquired on or after 1 July 2019, up to a maximum of $10,000. ¶23-210

OVERVIEW • BASIC CONCEPTS INTRODUCTION What is GST?

¶1-000

A 10-point guide to GST

¶1-010

HOW GST OPERATES GST liability and input tax credits

¶1-100

Registration

¶1-110

Tax periods

¶1-120

Basis of accounting

¶1-130

GST returns, payments and refunds ¶1-140 Tax invoices and adjustments

¶1-150

Non-taxable and GST-free supplies ¶1-160 Input taxed supplies

¶1-170

Special rules and concessions

¶1-180

Transitional rules

¶1-200

SMALL BUSINESS ENTITIES Overview: small businesses

¶1-250

Carrying on a business

¶1-255

Aggregated turnover test

¶1-260

Calculating aggregated turnover

¶1-265

Affiliates

¶1-275

Connected entities

¶1-280

LEGISLATIVE BACKGROUND Sources of GST legislation

¶1-300

Complexity of GST

¶1-310

Interpretation of GST legislation

¶1-315

Commissioner’s rulings

¶1-540

Editorial information

Summary This chapter explains the main concepts involved with GST and briefly describes how the GST works. It also identifies the main exemptions, special rules and transitional provisions. Although presented in simplified form, this chapter is fully cross-referenced so you can use it as a starting point and then go on to further details of the topics you are interested in.

INTRODUCTION ¶1-000 What is GST? A 10% goods and services tax (GST) started full operation in Australia on 1 July 2000. The GST is an indirect, broad-based consumption tax. Indirect means that it is levied on the supply of goods, services or activities, rather than directly on income. Other indirect taxes include sales tax and stamp duty. Consumption tax means, in economic terms, that the tax is ultimately borne by consumers, not by producers or suppliers. A broad-based tax means that it applies generally to all transactions made by all types of taxpayers, with only limited exceptions. It can be contrasted with taxes such as sales tax, which was generally limited to transactions involving sales, and transactions involving certain types of goods. GST is similar to taxes known in other countries as value-added taxes (VATs). The “value-added” refers to the feature that the net tax payable at any one stage is based on the increase in the price. Despite its name, GST is not limited to “goods and services” in the normally understood sense. For example, it also applies to real estate and the creation of rights. GST is therefore a convenient but not an entirely accurate shorthand term. GST replaced sales tax (more formally known as the wholesale sales tax or WST). The introduction of GST was also accompanied by the introduction of Wine Equalisation Tax (¶22-000) and Luxury Car Tax (¶23-000), and by a series of other tax measures, collectively forming part of the so-called New Tax System. In 2017/18, total annual net GST collections were about $63b, representing about 16% of total taxation revenue for all levels of government (ATO Annual Report 2017/18). An additional $3b in GST liabilities was raised through the ATO’s direct compliance activities. The main GST collections are from property and business services, and the wholesale and manufacturing sectors. There are over two million actively trading businesses registered for GST. Although the formal commencement date was 1 July 2000, GST could apply to certain contracts entered into before that date, under special transitional rules (¶19-000). No increase proposed in GST As at 31 December 2018, the government has indicated that it does not intend to propose any increase in the GST to take effect during its current term. As a matter of information, the Parliamentary Budget Office has released a summary of the revenue impacts of various options for changing the GST, including increasing the GST rate and/or removing some or all of the major exemptions (“Goods and Services Tax: Distributional analysis and indicative reform scenarios”, Report No 5/2015, 9 December 2015).

¶1-010 A 10-point guide to GST Here is a 10-point simplified snapshot of how GST works. Each of these steps is explained later in this chapter. (1) GST liability. Liability for GST arises where a registered entity — typically a business — makes supplies to its customers. The GST is imposed at the rate of 10%. Typically, it is included in the price paid by the recipient of the goods or services. The supplier must account for the amount of GST to the Tax Office (¶1-100). (2) Getting credits for GST. If the recipient of goods or services is a registered entity, it will normally be

able to claim a credit for the amount of GST in the price, provided it holds a tax invoice. This credit — called an input tax credit — is offset against any GST which the business itself is liable to account for on goods and services it has supplied to its own customers (¶1-100). (3) Burden on end-consumer. The net effect is that registered entities receive an amount representing GST but do not keep it, and pay an amount representing GST but get a credit for it. This means that they act essentially as collecting agents for the tax. The ultimate burden of the tax falls on the private consumer of the goods and services, as this person gets no credit for the GST component of the price (¶1-100). (4) Registration. Most entities will have to register for GST, although there are some exceptions. If an entity is not registered, GST normally cannot apply to the supply, and the supplier cannot claim credits for the GST component of its acquisitions (¶1-110). (5) Accounting basis and tax periods. GST and input tax credits are allocated to particular tax periods either on a cash basis (based on when amounts are received or paid out) or on an accruals basis (based on when invoices are sent or received). There are restrictions on who can use the cash basis (¶1-130). Tax periods may be monthly, quarterly or, in some limited situations, annually. Monthly tax periods are compulsory in some situations, such as where GST turnover is $20m or more (¶1-120). (6) Returns. Entities account to the Tax Office for their GST liabilities and credit entitlements by making a GST return in their Business Activity Statement (¶1-140). A separate GST return is made for each tax period, though some exemptions apply to quarterly taxpayers on the “instalments” system. (7) Tax or refund? If the GST allocated to a tax period is more than the credits for that period, the entity pays the balance to the Tax Office. If the credits exceed the GST, the entity gets a refund (¶1-140). Adjustments may need to be made later if there is a change of circumstances (¶6-000). (8) GST exemptions. Some transactions are outside the scope of GST altogether because, for example, they are gifts, or made by unregistrable entities, or have no connection with Australia. Others are “GST-free” which means that GST does not apply to the supply, but the supplier can claim credits for the GST on its own related acquisitions. The main GST-free items are exports, healthcare, food, education, international travel and certain charitable activities (¶1-160). (9) Input taxed supplies. A small range of supplies are “input taxed”. This means that GST does not apply to the supply, and the supplier cannot claim credits for the GST on its own acquisitions. The main input taxed items are financial services and the supply of residential rental premises (¶1-170). (10) Special rules apply to a wide range of items including imports, land development, insurance, motor vehicles, second-hand goods, small businesses, charities and gambling (¶1-180).

HOW GST OPERATES ¶1-100 GST liability and input tax credits GST applies where you supply goods or services — including real property and rights — in the course of carrying on an enterprise such as a business. These are called taxable supplies. For there to be a taxable supply, you must normally be registered, the supply must be made for consideration and it must be connected to Australia (¶4-000). The typical example of a “supply” is a sale, but anything else that could be described as supply in the normal sense of the word is also covered. A supply includes creating or surrendering a right (¶4-010). The rate of GST is 10%. This is typically included in the price paid to you by your customer. You must account for the amount of GST to the Tax Office. If you acquire goods or services as part of your business, you can claim a credit for the GST component of the price. This is called an input tax credit because it is a credit on your business inputs. For this to

apply, you must normally be registered, the acquisition must be for consideration and the supply must be connected to Australia (¶5-010). The combined effect of these rules is that the ultimate burden of the GST will fall on the end user, or private consumer. The businesses that form part of the chain of supply act as progressive collectors of the tax, but do not ultimately bear the burden of it. The following example gives you an idea of how GST is accounted for at the various stages of production. Example A customer buys a leather briefcase from a retailer. The retailer had acquired the briefcase from a leathergoods manufacturer that had acquired the leather to make the briefcase from a tannery. The tannery had bought cowhide from an abattoir to make the leather. Assume that all parties are registered, except for the customer. The GST rules apply as follows: (1) The abattoir sells the cowhide to the tannery for $22 (including $2 GST). When the abattoir fills in its GST return, it takes the GST it collected on its sale to the tannery ($2), subtracts any GST it paid for input (its input tax credit, in this case assume nil) and sends the net amount ($2) to the Tax Office. (2) The tannery processes the cowhide into leather and sells it to the leathergoods manufacturer for $44 (including $4 GST). When the tannery fills in its GST return, it takes the GST it collected on its sale to the manufacturer ($4), subtracts the GST it paid on its inputs ($2 paid to the abattoir on purchase of the cowhide) and sends the net amount ($2) to the Tax Office. The Tax Office has therefore collected $4 in total so far. (3) The leathergoods manufacturer makes the leather into a briefcase that it sells to a retailer for $88 (including $8 GST). When the manufacturer fills in its GST return, it takes the GST it collected from the retailer ($8), subtracts the GST it paid on its inputs ($4 paid to the tannery) and sends the net amount ($4) to the Tax Office. The Tax Office has therefore collected $8 in total so far. (4) The retailer sells the briefcase to the final consumer for $110 (including $10 GST). When the retailer fills in its GST return, it takes the GST it collected on the sale to the consumer ($10), subtracts the GST it paid on its inputs ($8 paid to the manufacturer), and sends the difference ($2) to the Tax Office. The Tax Office has therefore collected $10 in total. This means that the total GST payable on the briefcase was $10, which was the total amount sent to the Tax Office. It is also clear that the businesses did not ultimately bear the GST — this was totally borne by the final customer as part of the price paid.

GST is also payable if you import goods. However, in this case you, as importer, account for the GST instead of the supplier. You also claim an input tax credit for the amount of GST payable (¶9-000).

¶1-110 Registration To attract GST or claim input tax credits, you must normally be registered (¶3-000). You register with the Tax Office, which is the body responsible for administering the GST. Registration is compulsory if your GST turnover is $75,000 or more ($150,000 if you are a non-profit body). To be registered, you have to show that you are carrying on an enterprise — this is similar to showing that you are in business, but it is not limited to that (¶3-020). To be registered you must be an “entity”, for example an individual, company, trust, partnership or unincorporated association (¶3-015).

¶1-120 Tax periods Your liability is worked out at the end of each of your tax periods. These periods are normally monthly or quarterly. Monthly tax periods must be used if: • your GST turnover is $20m or more, or • you have a bad tax history. If you use quarterly tax periods they will normally end on 31 March, 30 June, 30 September and 31 December (¶7-100). Annual tax periods may apply where GST is being paid by instalments (¶8-037), or where voluntarilyregistered taxpayers so elect (¶8-040).

¶1-130 Basis of accounting The GST and the input tax credits that belong to each period are worked out according to attribution rules, which vary according to whether you are on a cash basis or an accruals basis of accounting. If you are on the cash basis, you work out your GST and input tax credits for each tax period on the basis of amounts actually received and paid out. You can use the cash basis if: • you satisfy a small business test • you account on a cash basis for income tax purposes • you are a charity, or • you can convince the Tax Office that it is appropriate (¶7-300). If you use the accruals basis, you work out your GST and input tax credits for each tax period on the basis of your entitlement to be paid and your obligation to pay. This will often be when you give or receive an invoice (¶7-205).

¶1-140 GST returns, payments and refunds If you are registered or required to be registered, you need to make a GST return in your Business Activity Statement, and account for the GST. This must be done for each tax period. This may be: • monthly (¶8-002) • quarterly (¶8-002), subject to some concessions (¶8-036), or • annually, in certain situations (¶8-037; ¶8-040). If your GST turnover is $20m or more, you must normally lodge electronically (¶8-043). The amount you are liable to pay for each tax period is the GST for that period less the input tax credits for that period. If the credits exceed the GST, you are eligible for a refund. You pay at the same time you lodge your return. If your GST turnover is $20m or more, you must pay electronically (¶8-100).

¶1-150 Tax invoices and adjustments Generally, you must hold a “tax invoice” at the time you lodge your GST return for the period in which the claim for an input tax credit is made. A tax invoice is a special type of document that contains prescribed items of information, including the supplier’s Australian Business Number (¶5-100). In certain situations, the tax invoice may need to be prepared by the recipient, rather than the supplier (¶5-140). Adjustments to previously declared GST or input tax credits may be needed if supplies are later cancelled, goods are returned, there is a part-refund, or a change of GST status. These “adjustment events” are taken into account in the later tax period (¶6-100). If they have the effect of reducing your liability, you must hold an “adjustment note” at the time of lodging the GST return for the period in which they are claimed. Adjustment notes contain information similar to tax invoices (¶6-110). Other adjustments may be required if there is a bad debt, a change in the intended business use, or where a business is started, transferred or closed down (¶6-000). Tax invoices are not essential if the supply is for $75 or less, excluding GST (¶5-170). Adjustment notes are not essential if the amount of the adjustment is $75 or less (¶6-135).

¶1-160 Non-taxable and GST-free supplies There are three types of exemption from GST. These are: • supplies outside the GST system

• GST-free supplies • input taxed supplies. Supplies outside the GST system The GST rules generally did not apply to supplies made before 1 July 2000. Nor, in general, do they apply to gifts (¶4-030), supplies made by unregistrable entities, supplies made by business entities that are not registered and are not required to be registered (¶4-090), or transactions that have no connection with Australia (¶4-100). For example, sales made at a private garage sale are not caught by the GST. The Commonwealth Government itself is not liable for GST, but has a notional liability for the purpose of its dealings with others (¶5-010). Appropriations made between government agencies are also not subject to GST (¶4-040). GST-free supplies If a supply is GST-free, this means that no GST is payable on it, but that the supplier is entitled to claim credits for the GST payable on its business inputs that relate to that supply (s 9-5; 11-15). For this reason, it is quite different from a supply which is outside the GST system altogether. Example A registered greengrocer’s business consists wholly of selling fresh food. The sale of that food is GST-free. GST therefore does not apply to the sale of the food, but the greengrocer can claim credits for the GST component of the goods and services it acquires in carrying on its business, for example, rent and equipment. Note: If the greengrocer used some of those goods for private, non-business purposes, only a proportion of the input tax credit for GST on those goods would be allowed (¶5-010).

GST-free supplies include: • exports (¶9-200) • health and medical care (¶13-300) • education (¶14-000) • food (¶13-100) • child care (¶14-100) • certain activities of charities and gift-deductible bodies (¶15-000) • religious services (¶15-050) • sales of businesses (¶11-500) • water, sewerage and drainage (¶16-200) • certain transactions involving precious metals (¶16-210) • international travel and transportation of goods (¶12-000; ¶12-010) • international mail (¶12-050) • supplies through inwards duty-free shops (¶12-020) • Crown land (¶11-400) • farm land (¶11-410)

• subdivisions of farm land for family residential purposes (¶11-420) • cars for disabled people (¶12-150) • certain prepaid funerals (¶13-380) • eligible emissions units (¶16-220). If a supply is GST-free, the supply of a right to that supply is also GST-free (s 9-30). Supplies of items such as retail books, public transport or domestic tourism are not GST-free. The greatest impact of GST-free status will normally be felt where the customer is a private consumer. It will not matter so much where the customer is a business that can get an input tax credit for GST in any event, though there may be some cashflow implications (¶21-060).

¶1-170 Input taxed supplies If a supply is “input taxed”, no GST is payable on it, but the supplier normally cannot claim input tax credits for the GST payable on its business inputs that relate to that supply (s 9-5; 11-15). Example A registered landlord’s business consists wholly of letting private residential premises. These are input taxed supplies. GST therefore does not apply to the rental, and the landlord cannot claim input tax credits for the GST component of the goods and services it acquires to run the business. Note: If the landlord also used some of the goods and services in other business activities that were taxable (or GST-free), it could claim a proportion of the GST as an input tax credit (¶5-010).

Input taxed supplies are set out in Div 40 (s 9-5). They include: • financial supplies such as loans, dealings in money and issuing securities (¶10-000) (note that in this particular case, limited input tax credits may be available) • the supply of residential rental premises (¶11-300; ¶11-320) • sales of residential premises (but not new homes or commercial premises) (¶11-010) • food at school tuckshops (optional) (¶14-010) • certain transactions involving precious metals (¶16-210) • certain fundraising activities of charities (¶15-055). If a supply is input taxed, the supply of a right to that supply is also input taxed (s 9-30). It is possible that a supply can be categorised as both a GST-free supply and an input taxed supply. In these cases, the GST-free status prevails (s 9-30(3)). Of course, this rule does not apply if a taxpayer has specifically chosen to be input taxed, for example, where a school tuckshop elects to treat its food sales as input taxed. A supply will also be input taxed if it is a supply of anything that you have used solely in connection with other input taxed supplies that you make (s 9-30(4)). This does not apply to a supply of new residential premises (¶11-020), or where the other input taxed supplies are financial supplies.

¶1-180 Special rules and concessions Some special rules and concessions that have not already been covered are set out below in alphabetical order.

Agents. A principal and an agent (or intermediary) can agree that the agent should be treated as a principal for GST purposes. If a non-resident acts through an agent resident in Australia, the agent is responsible for the GST consequences (¶17-400). Associates. Special rules apply if you supply something to an associate at a price below market value, or as a gift. The supply will be treated as if it had been for market value, unless the associate would have been entitled to a full input tax credit. An associate includes a relative, business partner, entities in trustee/beneficiary relationships, and companies and their controllers (¶17-500). Avoidance. The Commissioner has wide powers to cancel GST benefits that arise from contrived schemes and may also impose substantial penalties (¶20-000). Branches. Special rules allow you to register your business branches separately. This procedure is intended to avoid the administrative and accounting costs of having to amalgamate branch accounts every tax period (¶17300). Charities. Charities and non-profit bodies are generally subject to GST on their commercial activities, but their noncommercial activities are GST-free. They are also entitled to concessions on registration and choice of accounting basis. They may also arrange for their operations to be split into separate independent units for GST purposes, may claim the benefit of simplified accounting methods, and may choose to have their fundraising activities input taxed (¶15-000; ¶25-110). Commercial residential premises. Special rules apply where commercial residential premises, such as caravan parks, are rented out on a long-term basis (ie for more than 28 days) (¶11-320). Deposits taken as security for performance of an obligation are not subject to GST if the obligation is performed (¶4-070). Financial suppliers who would normally be input taxed may be able to claim partial input tax credits for certain outsourced services (¶10-040). Input tax credits may also be claimed where the financial supplier does not exceed the specified threshold or in certain borrowing transactions. Gambling. Special rules for calculating GST apply if you provide gambling services. These include selling tickets in lotteries or raffles, or accepting bets on races, games, sporting events or any other events (¶16-000). Groups. Certain groups of companies, trusts, individuals or partnerships can be treated as a single taxpayer for GST purposes. This means that purely internal transactions within the group do not have any GST consequences. One member of the group — the representative member — is responsible for lodging returns (¶17-000). Importations. The GST is payable by the importer rather than the overseas supplier (¶9-000). Insurance. Detailed rules apply to premiums and payouts. The GST treatment varies according to the type of insurance involved (¶10-100).

Joint ventures. Bodies engaged in specified types of joint ventures can have it approved for GST purposes. This will mean that the operator of the venture is responsible for the GST liabilities and entitlements arising from the operator’s dealings on behalf of the venture participants (¶17-200). Pre-establishment costs. A company may be entitled to input tax credits for acquisitions and importations made before it was incorporated (¶5-030). Property dealers and developers. These can use a “margin scheme” that allows them to calculate their GST liabilities as 1/11th of the difference between the tax-inclusive sale price and the original purchase price. Special rules apply to real estate held at 1 July 2000 (¶11-100). Redeemable vouchers are subject to GST on redemption rather than on the original acquisition (¶4-060). Reimbursements. In certain circumstances, input tax credits can be claimed where employees and others are reimbursed for expenses they incur in the course of their duties (¶5-040). Resident agents. If a non-resident acts through an agent resident in Australia, the agent is responsible for the GST consequences (¶17-400). Reverse charge. Certain services or rights provided from outside Australia may be caught by GST even though they are not made through an Australian business of the supplier. In these cases, the GST is payable by the recipient, not by the provider. This “reverse charging” overcomes the fact that the supplier will often not be within the Australian GST system. Reverse charging can also apply where general taxable supplies are made by non-residents, if both parties agree (¶9-095). Second-hand goods. In certain cases, dealers will be able to claim input tax credits on second-hand goods even though the person who supplied them with the goods was not registered for GST purposes (¶16-100). A “global” method of accounting for GST and input tax credits on second-hand goods may be available in certain circumstances (¶16-120). Small business entities. Taxpayers that qualify as small business entities (¶1-250) can claim various concessions such as cash accounting, annual apportionment of input tax credits and payment of GST by instalments. Small business entities are those whose income, when aggregated with the income of other related bodies, is less than $10m. Tourist refunds. Departing tourists may be entitled to refunds of GST paid on purchases that they take home with them (¶12-030).

¶1-200 Transitional rules The general rule is that GST is payable only on supplies and importations made on or after 1 July 2000, and that sales tax does not apply to those transactions. Similarly, input tax credits can only be claimed on acquisitions and importations made on or after 1 July 2000 (¶19-100). However, there were qualifications to this rule. For example, supplies made on or after 1 July 2000 could be GST-free in certain situations, where the contract was entered into before the GST officially became law (8 July 1999).

Other transitional rules affected: • redeemable vouchers (¶4-060) • progressive or periodic supplies (¶19-210) • rights exercisable after 30 June 2000 (¶19-200) • construction contracts (¶19-230) • life memberships (¶19-220) • prepaid funerals (¶13-380) • luxury vehicles (¶12-110) • stocks of second-hand goods on hand at 1 July 2000 (¶16-130).

SMALL BUSINESS ENTITIES ¶1-250 Overview: small businesses An entity’s eligibility to claim the following GST concessions normally depends on it qualifying as a “small business entity”: • cash accounting (¶7-300) • annual apportionment of input tax credits (¶5-020) • payment of GST by instalments (¶8-037). To be a small business entity, the entity must satisfy two requirements: (1) it must be carrying on a business (¶1-255), and (2) it must satisfy the $10m aggregated turnover test (¶1-260). Broadly, this means that the income of the entity and associated entities must be less than $10m (ITAA 1997 Subdiv 328-C). For tax periods starting before 1 July 2007, eligibility for these concessions instead depended on the entity satisfying various tests based on “annual turnover” (¶3-030). For tax periods starting on or after that date, those tests — renamed as “GST turnover” tests — still apply in determining the eligibility of the limited range of entities that are carrying on an enterprise that does not constitute a business, eg some charities, trustees of superannuation funds and government bodies. The GST turnover tests also still apply in determining certain GST liabilities, ie for compulsory registration (¶3-000), compulsory monthly tax periods (¶7-100) and electronic lodgment (¶8-043). They also apply in determining eligibility for annual payment of GST (¶8-040). There are substantial differences between GST turnover and the aggregated turnover used for the small business entity test. For example: (1) the aggregated turnover test applies to the total ordinary income, whereas GST turnover excludes the value of input taxed and certain other supplies; (2) the aggregated turnover takes into account the turnovers of affiliates and connected entities, as well as the turnover of the entity itself; and (3) GST turnover is determined as at the end of each month, whereas an entity’s status as a small business entity is determined for each income year. Lower turnover limit pre-2016/17 For an entity to qualify as a small business entity in income years prior to 2016/17, its aggregated turnover threshold was required to be below $2m, instead of $10m.

¶1-255 Carrying on a business

The first requirement for a small business entity is that it is carrying on a business (ITAA 1997 s 328-110). A “business” includes any trade or profession, but does not include occupation as an employee. For details, see ¶3-020. An entity is also treated as carrying on a business in an income year if it is winding up a business it formerly carried on, and it was a small business entity in the income year in which it stopped carrying on that business (ITAA 1997 s 328-110). To determine this, it will need to make a reasonable estimate of what its annual turnover would have been if the entity had carried on the business for the whole of that year (¶1-265).

¶1-260 Aggregated turnover test The second requirement for a small business entity is that it satisfies the “aggregated turnover” test. The method of calculating the aggregated turnover is explained at ¶1-265. Once this has been determined, there are three alternative ways of satisfying the test (ITAA 1997 s 328-110). The first depends on the aggregated turnover of the previous income year, and the second and third tests depend on the estimated or actual aggregated turnover of the current income year. First test: An entity satisfies the first test if its aggregated turnover for the previous income year was less than $10m. This is so irrespective of the entity’s likely or actual aggregated turnover for the current income year. It is expected that this will be the test most used in practice. Example A company that is carrying on a business in 2018/19 had an aggregated turnover for 2017/18 of $9.9m. It qualifies as a small business entity in 2018/19 even though it expects its aggregated turnover for that year will rise to $10.5m.

Second test: An entity satisfies the second test if its aggregated turnover for the current income year, worked out as at the first day of that year, is likely to be less than $10m. However, an entity cannot use this test if its aggregated turnover in each of the previous two income years was $10m or more (this qualification is designed to prevent abuse and to simplify administration for the Tax Office). Whether the current year aggregated turnover is likely to be less than $10m is a matter of objective judgment. It is based on the balance of probabilities as at the start of the income year. Relevant factors would include: • the aggregated turnover in previous income years • the prospect of changes in sales patterns, reductions in staff numbers or operating hours • plans to cease or wind down the business, and • the prospect of other factors such as drought, declining industry prices or increased competition. Example A company’s aggregated turnover is $9.5m in 2017/18 and $10.1m in 2018/19. A severe industry downturn commences in June 2019. As at 1 July 2019, the company expects to shortly retrench half of its staff. Although it cannot satisfy test 1 in 2019/20 (because of the previous year’s aggregated turnover of $10.1m), it may be able to satisfy test 2, because: (1) it is likely, as at 1 July 2019, that its 2019/20 aggregated turnover will be less than $10m; and (2) at least one of the two previous income years’ aggregated turnovers was less than $10m. Assume instead that the 2017/18 aggregated turnover had been $10.5m. This would mean that test 2 could not be satisfied in 2019/20, as the aggregated turnover in each of the two previous years exceeded $10m. In such a case, the company will need to rely on its actual 2019/20 aggregated turnover satisfying test 3 (see below).

An entity that starts carrying on business part-way through an income year will need to satisfy either this test or the third test, as there will be no previous year’s aggregated turnover. To satisfy the second test, this entity will need to make a reasonable estimate of its likely aggregated turnover for the whole year,

based on the situation as at the date it started to carry on the business. Third test: An entity will satisfy the third test if its aggregated turnover for the current year, worked out as at the end of that year, is actually less than $10m. This is so irrespective of the aggregated turnovers in previous income years. Example A company’s aggregated turnover for 2018/19 was $10.5m (with the result that test 1 cannot be satisfied for 2019/20). As at 1 July 2019, it is likely that there will be a similar turnover in 2019/20 (with the result that test 2 is not satisfied). However, in August 2019 a severe fire destroys the business premises and severely disrupts business operations, with the result that the actual aggregated turnover for 2019/20 is $9.3m. The company will satisfy test 3 in 2019/20.

As this test requires eligibility to be worked out at the end of the income year, an entity that satisfies only this test, and not the others, will not be able to access GST concessions that are used throughout the year, ie for accounting for GST on a cash basis (¶7-300), making an annual apportionment of input tax credits (¶5-020) or paying GST by quarterly instalments (¶8-037). Where entity has more than one business The aggregated turnover test relates to the business income of the entity, not to each business conducted by the entity. Example A sole trader carries on two separate businesses. The aggregated turnover test will be applied to the turnover of both businesses, considered together.

Lower turnover ceiling pre-2016/17 For an entity to qualify as a small business entity in income years prior to 2016/17, its aggregated turnover threshold was required to be below $2m, instead of $10m.

¶1-265 Calculating aggregated turnover An entity’s aggregated turnover for an income year is the sum of its own “annual turnover” (see below) and the annual turnovers of other “relevant entities”, ie: • its affiliated entities (¶1-275), and • its connected entities (¶1-280). However, the aggregated turnover does not include income that is: • derived by the entity from a dealing with a relevant entity, or • derived by a relevant entity from a dealing with another relevant entity (ITAA 1997 s 328-115). The reason for this exception is that relevant entities are regarded as a single entity, rather than multiple entities. Example Stefano is an affiliate of Iggie, who is therefore a related entity. Ordinary income from Stefano’s dealings with Iggie is not included in Stefano’s aggregated turnover. Assume that Stefano is also connected to X Corp, who is therefore also a relevant entity. Ordinary income from Stefano’s dealings with Iggie or with X Corp is not included in Stefano’s aggregated turnover. Nor is ordinary income from dealings between Iggie and X Corp.

An entity’s aggregated turnover includes the annual turnover of an entity that is a relevant entity at any time during the income year. However, the aggregated turnover does not include ordinary income derived by that entity during the period while it was not a relevant entity. Example From 1 July 2018 to 31 December 2018, Barbara’s controlling shareholding in a company means that the company is a connected entity (and therefore a relevant entity). On 1 January 2019, Barbara sells her shares. She and the company are no longer connected. Ordinary income derived by the company from 1 January 2019 onwards is therefore not included in Barbara’s aggregated turnover for 2018/19.

Annual turnover An entity’s annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business (ITAA 1997 s 328-120). Ordinary income simply means income according to ordinary tax concepts. Income is derived in the ordinary course of carrying on a business if: (1) it is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business; or (2) it is a direct result of the normal activities of the business. Wages and salary are not business income and are therefore not included. The following special rules affect the calculation of annual turnover: • annual turnover does not include GST on taxable supplies made by the entity or any upwards GST adjustments • if the entity carries on a business for only part of the income year, its annual turnover is calculated using a reasonable estimate of what it would have been if the business had been carried on for the full year. This applies even if the entity also carried on some other business for the whole of the income year (Interpretative Decision ID 2009/49). Examples (1) If the turnover is $2.2m for the three months of the year that the entity is carrying on business, a reasonable estimate may be that the full year’s turnover would be $8.8m. This of course may be affected by other factors, such as seasonal demand. (2) An entity carries on two businesses. During year 1, one business has an annual turnover of $10.8m, and the other has an annual turnover of $500,000. Halfway through year 2, the entity ceases the larger business, whose turnover for that half-year was $5.4m. Assuming that all other factors have remained the same, the entity’s annual turnover for year 2 would be reasonably estimated as $10.8m + $500,000 = $11.3m. This applies even though its actual turnover for that year was $5.4m + $500,000 = $5.9m.

• income derived from the sale of retail fuel is disregarded, as the low profit/volume ratios in this industry would mean that turnover would not be a reliable indicator of size. Dealings with associates If the entity has a non-arm’s length dealing with an associate (¶17-500), the ordinary income is taken to include the amount that would have resulted if the dealing had been at arm’s length. So, for example, if the income from the dealing was below market value, the market value would normally be substituted for the amount actually received. In determining the market value, however, normal discounts (eg for bulk purchases) may be taken into account. It is important to note that this arm’s length rule does not apply if the associate is an “affiliate” or a “connected” entity. As explained above, dealings with these entities are excluded from aggregated turnover altogether.

¶1-275 Affiliates An affiliate must be a company or individual. Trusts, partnerships and superannuation funds are not capable of being affiliates. A company or individual is an affiliate of an entity if it acts, or could reasonably be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity, in relation to the affairs of

the individual or the company’s business (ITAA 1997 s 328-130). Factors that may indicate that parties are acting in concert may include: family or close personal relationships; financial relationships or dependencies; relationships created through links such as common partners, directors or shareholders; degree of consultation; and whether there is an obligation to conduct business with the other. However, none of these is decisive in itself. The Tax Office considers that generally another business would not be acting in concert with you if they have different employees, different business premises, separate bank accounts, do not consult you on business matters and conduct their business affairs independently. A person’s spouse or child is not automatically an affiliate of the person. For example, if spouses run their own separate businesses, with no mixing of management, business premises or finances, they would be unlikely to be treated as affiliates. Similarly, co-directors or partners are not necessarily affiliates. Whether a franchisee is an affiliate of the franchisor may depend on the nature of the franchise agreement.

¶1-280 Connected entities Any two entities are connected with each other if one controls the other, or both are controlled by the same third entity. Control may be direct or indirect (ITAA 1997 s 328-125). Direct control There are various tests of direct control. Direct control of entities (not discretionary trusts) An entity (X) controls another entity (Y) if it owns interests in that entity that between them carry the right to receive at least 40% of: • any distributions of income or capital by entity Y, or • the net income of Y (if Y is a partnership). Example X is a partner in a partnership and is entitled to 40% of the net partnership income. X therefore controls the partnership.

In applying this 40% test, you also take into account any right that X may have to acquire ownership, and any ownerships or rights of X’s affiliates. Example X owns interests in another entity carrying the right to 30% of distributions of entity Y’s capital and income. An affiliate of X has an interest in entity Y carrying the right to 15%. Although X’s holding alone does not satisfy the 40% test, X will be taken to control entity Y because the combined interests of X and its affiliate are 45%.

Direct control of company An entity X also controls a company if it owns equity interests in the company that carry between them the right to exercise, or control the exercise of, at least 40% of the voting power in the company. Example X owns shares in a company that gives him 25% of the voting rights in the company. This alone is not sufficient to make X a controller. Assume that X also has an affiliate who owns shares giving her 20% of the voting rights in the company. This will mean that X controls the company, as his own ownership, added to the ownership of his affiliate, carry rights to a total of 45% of the voting rights. In determining X’s aggregated turnover, the annual turnover of both the affiliate and the company would therefore need to be taken into account.

In applying this 40% test, you also take into account any right that X may have to acquire ownership, and any ownerships or rights of X’s affiliates. Direct control of discretionary trust There are two alternative tests for direct control of a discretionary trust. The first test is that an entity X controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of X, or of affiliates of X, or of X together with affiliates of X. Factors that would be taken into account in determining this could include: • the past behaviour of the trustee • the relationship between the parties • the amount of any property or services transferred to the trust by the entities • any arrangement or understanding between the entities and persons who have benefited under the trust in the past. The wording of the trust deed will not be conclusive if the facts indicate otherwise. The second test is that an entity X also controls a discretionary trust for a particular income year if the following conditions were satisfied for any of the four preceding income years: • the trustee paid any of the income or capital of the trust to X and/or any of X’s affiliates (or applied it for their benefit), and • the amount paid or applied was at least 40% of the total amount paid or applied by the trustee for that year. Example During the income year, X received a distribution from a discretionary trust representing 55% of the total amount of income distributed by the trust for that year. This will mean that X will be taken to control the trust in each of the succeeding four income years. The same would apply if the 50% distribution had been paid to any of X’s affiliates, or to X in combination with its affiliates.

In applying this test, you ignore amounts paid or applied to deductible gift recipients or entities that are tax-exempt. Nominee owners Special provisions apply to enable certain nominee holders to be “looked through” to establish the real underlying owners. This applies, for example, where there are absolutely entitled beneficiaries, bankrupt individuals, security providers or companies in liquidation. Commissioner’s discretion to ignore direct control Where the 40% test applies, it is possible that there may be multiple controllers of the same entity. Accordingly, if a taxpayer has an interest that is at least 40% but less than 50%, the Commissioner has the discretion to determine that it is not a controller, if the Commissioner thinks that another entity is actually the controller. Depending on the circumstances, this may apply, for example, if one party has 40% and the other 60%. However, the discretion is not limited to situations where the other party has at least 40%. Indirect control of all entities An entity can control another even though one or more other entities are interposed between the two. This is called indirect control. This exists where one entity directly controls a second entity, and that second entity controls a third entity,

whether directly or indirectly. In such a case, the first entity is taken to indirectly control the third entity. Examples (1) Company A has a 40% direct interest in Company B which in turn has a 40% interest in Company C. Company A is taken to directly control Company B and to indirectly control Company C. (2) Company A has a 40% direct interest in Company B which in turn has a 30% interest in Company C. Company A is taken to directly control Company B. Neither Company A nor Company B control Company C.

Indirect control does not exist where the second entity is: • a public company, ie one whose shares are listed for quotation in the official list of an approved stock exchange, unless the shares are of a type that carries the right to a fixed rate of dividend • a publicly traded unit trust, a mutual insurance company, or a mutual affiliate company, or • a company which is a 100% subsidiary of any of the above.

LEGISLATIVE BACKGROUND ¶1-300 Sources of GST legislation The main GST legislation is the A New Tax System (Goods and Services Tax) Act 1999. For obvious reasons, this is universally shortened to the “GST Act”. In this book, all section references are to this Act, unless otherwise stated. The GST Act contains six chapters. Chapter 1 “Introduction” includes an overview of the Act. Chapter 2 “The basic rules” covers methods of calculation, supplies and acquisitions, tax periods, registration and returns. Chapter 3 “The exemptions” covers GST-free supplies (such as food) and input taxed supplies (such as financial supplies). Chapter 4 “The special rules” includes the GST grouping rules and other special provisions ranging from second-hand goods to insurance. This chapter also includes the anti-avoidance rules (Div 165). Chapter 5 “Miscellaneous” is just that. Chapter 6 “Interpreting this Act” contains a dictionary of definitions. The Schedules include checklists of the GST status of items such as food and medical aids. Features of the GST Act The format of the GST Act is similar to that of the redrafted Income Tax Assessment Act 1997. For example: (1) gaps have been left in the numbering to allow for future growth (2) “explanatory sections” appear at the start of Chapters, Divisions and some Subdivisions. These are intended to provide a quick, simply worded overview of what follows. Although they actually form part of the Act, they have no operative effect. They can only be used for the following purposes: (a) to determine the purpose or effect of provisions (b) to confirm that a provision has its ordinary meaning (c) to determine a provision’s meaning if it is ambiguous or obscure, or (d) to determine a provision’s meaning if its ordinary meaning would lead to a manifestly absurd or

unreasonable result (s 182-10) (3) footnotes to sections provide useful comments or cross-references. Some sections also have examples of how they are intended to apply. Transitional rules Rules governing the transition to GST are set out in the A New Tax System (Goods and Services Tax Transition) Act 1999 (hereinafter “Transition Act”). It includes the timing rules for supplies and acquisitions, special transitional rules for particular types of supply (such as periodical supplies) and the concessions for pre-GST contracts. Current transitional rules are explained in Chapter 19, and in various other parts of this book where they are particularly relevant. “Locking in” the GST rate Measures intended to lock in the GST rate at 10% are contained in the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999. This Act provides that no alteration can be made to the rate unless each state and territory agrees, as well as both Houses of Federal Parliament. It would appear, however, that this Act itself has no particular constitutional protection and may be amended in the same way as any other Commonwealth law. As at 31 December 2018, the government has indicated that it does not intend to propose any increase to the GST to take effect during its current term. Government bodies The Commonwealth Government is not liable to pay GST, but has a notional liability for the purpose of its dealings with others (s 177-1; Finance Minister’s (A New Tax System) Directions 2005; A New Tax System (GST, Luxury Car Tax and Wine Tax) Direction 2015). A Commonwealth body is not liable for GST penalties or for the general interest charge (Miscellaneous Taxation Ruling MT 2011/1). State bodies are liable for GST (s 1-4), but their liability is notional to the extent that the tax is a “tax on property” under s 114 of the Constitution. Penalties and GIC apply to the extent that the liability is not notional (Miscellaneous Taxation Ruling MT 2011/1; Practice Statement Law Administration PS LA 2011/26). Territory bodies are subject to GST, penalties and GIC (s 1-4). Distribution of GST revenue GST revenue is distributed among the states and territories in accordance with a process called “horizontal equalisation”, which is intended to ensure that all jurisdictions are funded so that they can provide broadly equivalent basic services. The government periodically reviews the distribution rules. Price exploitation Making false or misleading claims in connection with GST may contravene various provisions of the competition and consumer legislation. For details, see Chapter 21. Wine equalisation tax and luxury car tax The wine equalisation tax (WET) and luxury car tax (LCT) are both designed to modify the effect that the abolition of sales tax would otherwise have had. The operative provisions for these taxes are contained in the A New Tax System (Wine Equalisation Tax) Act 1999 and the A New Tax System (Luxury Car Tax) Act 1999. Subsidiary matters are covered in A New Tax System (Wine Equalisation Tax) Regulations 2019 and A New Tax System (Luxury Car Tax) Regulations 2019. The WET and LCT are explained in Chapters 22 and 23. Administration Machinery provisions for the administration of GST are contained in the Taxation Administration Act 1953. In this book, this is referred to as the “Administration Act”. It covers matters such as assessments, audit, recovery, penalties and evidence. This is explained in Chapter 18. GST Regulations Some important GST rules are contained in the A New Tax System (Goods and Services Tax)

Regulations — for example, the detailed requirements for tax invoices and the definition of input taxed financial supplies. These regulations, originally issued in 1999, were reissued in amended form, effective from 1 April 2019. They are generally referred to simply as the “GST Regulations”. Australian Business Numbers In general, an entity’s GST registration number will be its Australian Business Number (ABN). Rules governing the use of ABNs are contained in the A New Tax System (Australian Business Number) Act 1999 (¶3-050). Imposition of taxes The main provisions that formally impose GST are contained in the A New Tax System (Goods and Services Tax Imposition — General) Act 1999, the A New Tax System (Goods and Services Tax Imposition — Customs) Act 1999 and the A New Tax System (Goods and Services Tax Imposition — Excise) Act 1999. Correspondingly titled Acts apply to impose wine equalisation tax and luxury car tax. Constitutional validity A challenge to the constitutional validity of the GST Act and associated legislation was rejected in Halliday v The Commonwealth of Australia [2000] FCA 950. The grounds of the challenge included the claims that the legislation imposed civil conscription, interfered with free trade and commerce and imposed differential taxation between the states. The Federal Court said that none of the grounds had any prospect of success. A further challenge, based on the argument that the GST Act contravened s 55 of the Constitution by dealing with more than one subject of taxation, was rejected in O’Meara v FC of T 2003 ATC 4406.

¶1-310 Complexity of GST One of the advantages claimed for GST over other taxes — such as the sales tax it replaced — is that the GST is much more straightforward, easier to understand and easier to comply with. This is true up to a point. The general rules are relatively simple, once you become familiar with them. And the standard rate of 10% simplifies actual calculations and reduces classification problems. However, there are also some significant complications. These arise in the following ways: • The concept of the tax is different from the taxes that most Australians and their advisers have previously been used to. • There are a number of technical expressions and jargon. While the original intention was to write the legislation in plain English, this has proven hard to achieve. With drafting expressions such as “Subdivision 38-P period”, “intended or former application of a thing” and “total Subdivision 66-B credit amount”, the legislation does not make light reading. • The legislation is very long — the GST Act itself covers over 800 pages (and is still growing). • Even before the legislation had come into effect, over 1,000 amendments had been made to the original text. In some cases, these completely altered the effect of the tax. Since then, hundreds of further amendments have been made. • There are various “grey” areas where the detail has been left to Tax Office rulings. • Complex transitional rules covered the transition from sales tax and the impact of GST on contracts that spanned 1 July 2000. This complexity was unfortunate as these transitional rules were among the first things that businesses and advisers had to assimilate. • There are many exceptions to the general rules. These have proliferated as the government sought to counter industry objections (as with charities), deal with inadequacies in the original legislation (as with insurance) or overcome political opposition (as with the exemption for food). At a more general level, the GST is a complex issue because it has significant effects on business

procedures. Many businesses have had to re-evaluate their business practices. In particular, the impact of GST on pricing and cashflow has had impacts on many areas of business organisation.

¶1-315 Interpretation of GST legislation The traditional approach to tax legislation is that it should be interpreted strictly or literally, unless this leads to an objectively absurd result. This means that the intention to impose tax should be expressed in clear, unambiguous language. This is often associated with a view that ambiguities should be resolved in favour of the taxpayer. An alternative approach, which has gained support in recent years, is that courts should look more at the “purpose” or intent of the legislation, considered in its overall context (eg Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; HP Mercantile Pty Ltd v FC of T 2005 ATC 4571). This approach supposedly gives more discretion to the courts in deciding how to apply the law. To some extent, the “purpose” approach has been given some legislative backing. The Acts Interpretation Act 1901 provides that: • courts are required to interpret tax legislation in a way that would promote the purpose of the legislation in preference to a way that would not promote the purpose (s 15AA) • courts are authorised to refer to “extrinsic” material in confirming that the meaning of a particular provision is its ordinary meaning, or to determine the meaning of an ambiguous or obscure provision (s 15AB). Extrinsic material would include explanatory memoranda and second reading speeches. However, it would not include rulings by the Commissioner — though these may be relied on to some extent by the taxpayer (¶18-030). “Explanatory sections” in the GST Act are treated in a similar way to extrinsic materials (¶1-300). It is possible that the particular nature of GST — a largely self-assessed “administrative” tax imposed on an extremely wide range of business transactions — may mean that courts will tend to concentrate on the substance of a transaction, rather than simply make an overly technical analysis of its form. The late Graham Hill J, in a 2003 address, suggested that “unless the legislation otherwise requires, in interpreting the GST and characterising a transaction entered into for the purposes of the GST, that interpretation or that characterisation of the transaction will be adopted which produces a practical or common sense business result that accords with business reality and is not unduly technical”. This approach may require looking at the entirety and substance of a transaction, without “artificial dissection” (Saga Holidays Limited v FC of T [2006] FCAFC 191); see also Sterling Guardian Pty Ltd v FC of T 2005 ATC 4796. This may lead to the GST analysis of a transaction being different to that under income tax law. For example, the ATO considers that if a trustee of a bare trust transfers legal title to property to a third party at the direction of the beneficiaries, it is the beneficiaries that make the supply, even though the legal title was held by the trustee (¶4-010). On the other hand, there is a limit to how far the courts can go. In a 2005 address, High Court Justice Michael Kirby said: “There is a need for the legislature to cure defects from time to time. Yet there seems to be a refusal on the part of the government to admit there are defects and to make amendments other than amendments which may be thought necessary to overcome avoidance. In some cases, the courts may be able to resolve difficulties by applying a purposive construction, but in the Australian constitutional context where there is a sharp separation of the legislative and judicial powers, there is a limit to what one can expect of the courts. Ultimately, the courts can not act as legislators. Parliament cannot stand by and then blame the courts if a decision is one that does not favour the revenue when the problem lies not in how the legislation is to be interpreted in a common sense way, but in how it is written.” Ultimately, it is the text of the law that is important. The High Court has said that, “the statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of a statutory text. Nor is their

examination an end in itself” (FC of T v Consolidated Media Holdings [2012] HCA 55). The ATO says that it takes an approach that strikes a balance between the syntax, the legislative policy and the context. In developing its interpretations, it considers that, to the extent that the law is able to properly reflect the underlying policy of the government, it should interpret the law in that way. Where there are alternative interpretations and one is more practical than the other, the ATO will prefer the more practical approach or the one that minimises compliance costs, provided that it does not lead to anomalies or unintended consequences. Where the law is not reasonably capable of reflecting the underlying government policy, the law must prevail. In instances where the law is ambiguous, the appropriate avenue for resolution may be to test the interpretation of the law through the courts (Speech by Bruce Quigley, ATO Deputy Chief Tax Counsel, November 2006). As the GST law is based partly on overseas legislation, overseas cases may have some value in interpretation. However, this is limited, particularly where there are significant differences in wording, context or policy.

¶1-540 Commissioner’s rulings The Commissioner issues public rulings and determinations setting out the official views on aspects of the GST law. These rulings and determinations are generally binding on the Commissioner, though not on courts or tribunals. A separate system of Interpretative Decisions gives non-binding guidance on how particular issues have been dealt with by Tax Office officers. For details, see ¶18-030.

GETTING STARTED WITH GST Dealing with GST

¶2-000

A 20-point plan for managing GST

¶2-010

Checklist for management of GST administration

¶2-020

Assistance from ATO and other government departments ¶2-110

Editorial information

Summary Managing GST is an ongoing project for businesses and their advisers. This chapter provides a general plan that businesses may follow in meeting this task.

¶2-000 Dealing with GST Although the GST has been in full operation since 1 July 2000, many businesses will still be facing it for the first time — either because they are newly established or because recent changes in their turnover have forced them to register. In addition, some businesses will, even now, still be grappling with the challenges of managing the tax. To be in a position to manage GST, businesses will normally have to make a significant investment in ensuring that they are “GST-ready”. At a minimum, this means that they must: • understand how the GST applies to them • ensure that the business is able to handle the necessary changes. Because of the way GST works, businesses may also need to ensure that their suppliers and customers are sufficiently informed. GST is different from most other taxes that people are familiar with. Most of those taxes, such as income tax, are “private” taxes that are not anyone else’s direct business. With GST, however, many people who deal with you have an interest in knowing whether GST applies to the transaction and, if so, how much. For the system to work properly, you therefore need to ensure that the people you buy from and the people you sell to are aware of their GST obligations. The costs of preparing for GST, and for ongoing compliance, vary widely. However, in practically all cases, they are significant and, in many cases, they are substantial. In general, the costs are higher for businesses that have not had experience of dealing with sales tax. You also need to keep in mind that: • start-up and compliance costs are likely to have a significant effect on cashflow, particularly in the early stages of implementation (¶21-070) • in setting prices, businesses are entitled to recoup compliance costs that have been reasonably incurred as a result of changes in the tax system • a tax deduction may apply for some start-up costs (¶24-100).

¶2-010 A 20-point plan for managing GST

This is a 20-point plan to help businesses and their advisers to manage GST, together with crossreferences to further explanations and planning considerations. Many of these points will, of course, also need to be considered where you are reviewing the tax position of a company that you are planning to purchase. ▸ 1 Have a coordinator You should have a qualified person (or team) to identify, and ensure compliance with, the GST requirements that apply to the business. ▸ 2 Be aware of GST impacts You need to be aware of how GST affects your business. This includes: • how GST applies to the various types of supply the business makes — taxable, non-taxable, GST-free or input taxed (¶1-160) • what types of input tax credits the business will be able to claim on its acquisitions (¶5-000) • what effect this may have on selling or purchasing decisions (¶21-010) • how the business may be affected by any exemptions and special rules (¶1-180) • how customer and supplier relationships may be affected (¶21-010) • which areas may require professional advice. ▸ 3 Appreciate that GST is not just another tax GST is not just another tax that can be added onto your existing business practices. As many of the following points make clear, businesses need to be prepared to make significant changes in business practices in order to comply with the new tax and take advantage of some of the opportunities it offers. While compliance will be a burden, it may also act as a spur to updating procedures, improved recordkeeping and better credit control. ▸ 4 Take advantage of assistance The business should ensure that it is taking advantage of government assistance, including access to information (¶2-110). Where appropriate, it should also take advantage of any tax concessions available (¶24-100). Assistance from outside advisers may also be necessary or desirable. ▸ 5 Train management, staff and agents Management, staff and agents must understand how the GST affects business strategies, business practices and relationships with customers and suppliers. Some of the areas requiring particular attention are: • invoicing (point 13) • credit control (point 11) • cashflow requirements (point 11) • timing of sales and purchases (point 11) • pricing (point 10) • marketing (point 10) • return preparation (point 15) • contracts and legal matters (point 18)

• relationships with suppliers (point 17) • relationships with customers (point 17). ▸ 6 Attend to registration requirements Most businesses do not have any option about registration as they have turnovers above $75,000. Even for those who are not obliged to register, there are often good reasons to do so — for example, the ability to claim input tax credits. For the pros and cons of registration, see ¶3-010. You also need to consider whether special registration rules — such as grouping or GST branches — are appropriate for your business. ▸ 7 Choose your tax periods You need to decide whether your tax period is quarterly, monthly or annual (¶7-100). Normally, tax periods are quarterly, but monthly tax periods must be used in certain situations and may be adopted in all cases. There will be some situations where monthly tax periods will be desirable — for example, if you are an exporter (¶21-070). There are also various options for aligning tax periods with balance dates. ▸ 8 Choose your accounting method You must identify and, where relevant, choose the accounting method appropriate to your business (¶7200). Most businesses use the accruals (or invoice) method, but there are some advantages in choosing to use the cash basis where this is available. The choice of accounting method can have important implications for cashflow (¶21-050). ▸ 9 Differentiate stock and services You need to differentiate stock and services that are taxable from those which are input taxed or GSTfree. This is necessary for pricing and processing. ▸ 10 Examine implications for pricing and marketing For a full discussion of pricing and marketing issues, see ¶21-010 and following. ▸ 11 Examine implications for cashflow GST typically has a significant effect — positive or negative — on cashflow. This is affected by factors such as: • whether the business’ supplies are taxable, GST-free or input taxed • the timing of purchases and sales • whether there are any large capital purchases planned • the method of accounting for GST • whether the business has monthly or quarterly tax periods • whether the business is a net GST payer or is entitled to GST refunds • whether a business that is input taxed uses outsourced services • possible changes in customers’ purchasing patterns • the business’ credit control, bad debt procedures and time-to-pay rules • whether there are long-term instalment contracts • whether contracts are drafted to ensure recovery of GST and entitlement to input tax credits • the impact of GST compliance costs.

These factors are considered in detail at ¶21-050 and following. Particular care also needs to be taken to ensure that an amount representing the GST collected is still available at the time when it has to be accounted for to the ATO. ▸ 12 Check labelling and stationery GST must be incorporated into price tags, price lists and advertising material. ▸ 13 Have procedures for tax invoices For all supplies the business makes involving GST, you should have a system which ensures that tax invoices are produced. In practice, most businesses issue tax invoices with all sales, to avoid the effort of having to discriminate between different types of customer. The system should also ensure that tax invoices accompany all purchases of inputs and that they are correctly filled out (¶5-100). For all business acquisitions, it is normally essential to hold a tax invoice in order to claim input tax credits (¶5-100). It is therefore crucial that you have a system to ensure that all tax invoices for your acquisitions are collected and retained. ▸ 14 Track adjustments You need procedures to track changes in the use of items which were purchased for business purposes so that GST adjustments can be made and, where necessary, adjustment notes issued (¶6-000). ▸ 15 Attend to GST returns You need to have procedures and record-keeping to ensure that GST returns are prepared and lodged on time (¶8-005). Timing will depend on whether you have monthly, quarterly or annual tax periods. You should be prepared to lodge early if you are entitled to a refund. ▸ 16 Accounting systems Accounting software and systems need to be able to include GST on sales and to capture input tax credits on purchases. Smaller businesses can buy off-the-shelf packages which contain GST capabilities. Upgrades will be more difficult for larger businesses due to their increased size and complexity. Upgraded systems must be able to: • identify whether GST is chargeable on the sale of goods and services • identify whether an input tax credit arises on purchase of an input • detect any changes to sales and purchases (such as returns and discounts) • ensure that credit terms with customers and trade terms with suppliers do not jeopardise your cashflow position • provide the necessary documentation • provide information to flow into the GST return for the correct tax period. Be aware that even very small systemic errors can lead to major discrepancies where they recur in a large number of transactions over a period. You should also be aware that your method of accounting for GST may affect your accounting systems, notably where it differs from the method your system previously used. If you use the cash method for GST purposes, but your accounting system is set up on the accruals method, you may need to make adjustments to many transactions. You may find that it is simply easier to adopt the invoice method of accounting for GST so that it matches your accruals-based accounting system. Point-of-sale hardware — terminals, cash registers, etc — also needs reviewing. It is also important to ensure that your systems and processes keep up with changes in your business, especially in times of rapid growth. Be aware that the adequacy and integrity of your business systems in

accounting for GST may play a vital role in the event that the ATO is considering audit action (¶18-180). ▸ 17 Liaise with customers and suppliers You should ensure that pricing and invoicing requirements are understood by your customers — and can be explained by your staff, including call centres. The requirement for complying tax invoices should be understood by all parties. Your credit control requirements may need tightening (¶21-060) and this should be explained to customers. If the business provides or uses contractors, the GST implications must be clearly understood by both parties (¶4-090). ▸ 18 Check status of contracts All continuing contracts which commenced before 1 July 2000 should have been reviewed to check whether, and how, GST may apply. Particular attention should be paid to transactions such as leases and subscriptions (Chapter 19). All new supply contracts should take GST into account, where appropriate (¶19-400). You may also need to check on the cashflow implications of standard provisions allowing time for payment (¶21-060) and contracts such as instalment sales (¶21-070). This is an area where professional advice should be sought. ▸ 19 Carry out a business practice review In the light of GST, you need to analyse the way you conduct your business to determine whether changes to business practice are desirable. Some typical areas that may be affected are cashflow (¶21050), groups (¶17-000) and outsourcing (¶4-090). Existing company structures may also need to be reviewed if they had been set up with superseded sales tax considerations in mind; for example, if companies have been interposed to defer the payment of sales tax at the wholesale level. Refer to Chapter 21 for general planning considerations. ▸ 20 Prepare for the future The planning process is continuous. The ramifications of GST for all future key strategic decisions and transactions should be considered. Procedures to ensure that this is done should be put in place.

¶2-020 Checklist for management of GST administration The ATO and the Australian National Audit Office have published A Better Practice Guide for the Management of GST Administration. Although that Guide is intended primarily for government departments, the ATO says it would be relevant to any large public or private organisation. The Guide identifies and explains the following “indicators of better practice”: (1) apply a risk management approach to GST administration (2) establish an internal control environment that effectively supports GST processing (3) identify and document all GST-impacted transactions in the organisation’s operations and the technical positions that related to them (4) process and report GST transactions in an accurate, complete and timely manner (5) manage changes that impact on GST administration (6) monitor and review the effectiveness of GST administration.

¶2-110 Assistance from ATO and other government departments GST assistance “visits”

The ATO conducts a program of tax assistance (including GST) visits to businesses. These visits are intended to give practical on-the-spot advice. The Commissioner has stressed that the visits are not audits and are totally voluntary. It is the taxpayer’s choice as to whether they want a visit, how long the visit lasts, what level of advice they want, and what level of information, if any, they are prepared to provide. The visit is not an opportunity for the ATO to raise issues in relation to compliance or outstanding payments and returns. No information gained during the visit can be used against the taxpayer. Information and contacts The ATO publishes a wide range of industry booklets and fact sheets on the GST, and operates various “infolines” and an extensive website. Contact details are as follows: Website: www.ato.gov.au Tax agents: 13 72 86 GST enquiries: 13 28 66 Email: [email protected] Post: PO Box 9935 in your capital city The Australian Competition and Consumer Commission (ACCC) provides information on pricing issues. ACCC: 1300 302 502 ACCC website: www.accc.gov.au Industry partnerships The ATO has established “Industry Partnerships” to clarify GST issues relevant to specific industries and to help keep members of these industries informed. Industry Partnerships have included bookkeepers, charities and non-profit organisations, education, electronic commerce, financial services, health, insurance, mining and energy, motor vehicles, primary production, property and construction, racing and gambling, retail, retirement villages, tax practitioners, telecommunications, tourism and hospitality, and transport. Minutes of the meetings of the Industry Partnerships are at www.ato.gov.au.

REGISTRATION Importance of registration

¶3-000

Pros and cons of registration

¶3-010

Only “entities” can be registered

¶3-015

Carrying on an enterprise

¶3-020

The GST turnover test

¶3-030

Procedure for registration

¶3-040

Australian Business Number

¶3-050

Cancellation of registration

¶3-070

Simplified registration for certain non-residents ¶3-075 Special rules about registration

¶3-080

Editorial information

Summary Registration is the key to the operation of the GST system. Without registration, GST normally will not apply and input tax credits cannot be claimed. Registration is compulsory for most businesses, but there are some important exemptions if you have a low turnover. In this chapter, we look at the requirements for registration, how you go about it and the procedures for cancellation.

¶3-000 Importance of registration Registration is important for a number of reasons. The main ones are: • GST is normally only payable on a sale or supply if you are registered, except in the case of imports (¶4-105) • input tax credits can only be claimed if you are registered (¶5-010) • GST returns must be lodged if you are registered (¶8-000). All of these also apply if you are simply required to be registered. As far as registration is concerned, there are: (1) those who cannot be registered (2) those who can be registered, but are not required to be (3) those who are required to be registered. You cannot be registered unless you are carrying on an enterprise (¶3-020), or are intending to do so from a particular date (s 23-10).

You can be registered if you are carrying on an enterprise, or are intending to do so from a particular date (s 23-10). Non-residents as well as residents are eligible. You are required to be registered if you are carrying on an enterprise, and your GST turnover is $75,000 or more (s 23-5). This is called the registration turnover threshold (s 23-15). For non-profit bodies, the corresponding threshold is generally $150,000 (¶3-030). If you are required to register, but fail to do so, you become liable for penalties and even prosecution (¶18-300; ¶18-305). A taxpayer normally cannot be retrospectively required to register beyond a period of four years (¶3-040). You can only be registered if you are an “entity” (¶3-015). Limited registration entities For simplified rules designed to reduce the impact of the registration rules for certain non-residents, see ¶3-075. [GSTG ¶5-000]

¶3-010 Pros and cons of registration Most businesses do not have any choice about whether to register, as they are carrying on an enterprise and exceed the registration threshold. However, even where it is not compulsory, there are strong incentives to register. Here are some of the factors you may consider. • Unless you are registered, you cannot normally claim input tax credits for the GST you pay on your business inputs, nor pass on entitlement to claim credits to your customers. This may not be so important for businesses that primarily make input taxed supplies (eg superannuation funds), as their ability to claim input tax credits is restricted in any event. • Business suppliers and customers may prefer, or even insist on, dealing only with other registered businesses. • Some small businesses may decide to register simply to avoid the administrative chore of continually checking whether their current or projected turnover is approaching the relevant threshold. • Small businesses such as contractors may decide to register to avoid the embarrassment of “advertising” that their turnover is below the threshold. Although business customers normally will pay GST-inclusive prices, they will typically be able to recover that GST component by claiming input tax credits. The imposition of GST may therefore not have a significant net effect, except to the extent that there may be some cashflow disadvantage for the customer. However, this will not apply if the customer is an end-user, or is an input taxed business such as a financial institution. For those customers, the GST will represent an increased cost. A supplier whose customer base falls into this category may therefore find it advantageous not to register, provided the supplier: • is not concerned with claiming input tax credits itself • has a GST turnover less than the prescribed threshold. Apart from pricing issues, the main advantage of not registering is that paperwork will be reduced — records need not be kept of GST or input tax credits, the use of items need not be tracked, returns need not be lodged and so on. These compliance costs can be significant. Businesses, particularly sole traders and smaller businesses, also need to be aware that if they register, then all the enterprises they carry on — not just their main one — are subject to the GST system. Where a deceased person was registered, registration will also normally be advisable for trustees of the deceased estate in order to avoid automatic GST adjustments arising on death (¶6-415).

Currently, over two million businesses are registered for GST. Registration and PAYG Some people claim to operate as independent contractors, outside the PAYG system, when arguably they could be classed as employees. This issue may come to a head if those people apply for registration, as employees are not carrying on enterprises and therefore cannot be registered as such (¶3-020). Taxpayers that are registered, or that are required to be registered, are not eligible to pay their PAYG instalments annually. Registration and ABNs It is normally necessary to quote an Australian Business Number (ABN) on invoices to business customers to avoid tax being withheld (¶3-050). However, it is not necessary to register for GST in order to obtain an ABN. A business may apply for an ABN even though it does not register for GST. Conversely, a business may register for GST even though it is not entitled to an ABN, for example because it is not carrying on business in Australia. [GSTG ¶5-000]

¶3-015 Only “entities” can be registered To be registered, you must be an “entity” (s 23-5; 23-10). An entity means: • an individual or natural person • a “body corporate”. This includes a company, building society, credit union, trade union, statutory body, strata title body corporate (¶11-200), municipal council, incorporated association, and certain governing bodies of various religious institutions (Miscellaneous Taxation Ruling MT 2006/1) • a “corporation sole”. This is a corporation consisting of one person and that person’s successors to a particular position, for example, a bishopric • a “body politic”, ie a government. Government departments are technically not entities but can be separately registered (¶3-080) • a partnership (see below) • any other unincorporated association or body, for example, charities, clubs or certain syndicates. To qualify, something more than a common aim or purpose is necessary. Typical characteristics would include: members of the association; a contract binding the members among themselves; a constitutional arrangement for meetings of members and for appointing officers; freedom to join or leave the association; continuity of existence; and a moment in time when a number of persons combined to form the association. However, not all these characteristics are essential (Conservative and Unionist Central Office v Burrell (Inspector of Taxes) [1982] 2 All ER 1; Miscellaneous Taxation Ruling MT 2006/1) • a trust, or the trustee of the trust at any given time (see below) • a superannuation fund, or the trustee of the fund at any given time (¶10-080) (s 184-1). Non-charitable public ancillary and prescribed private funds (¶15-000) may also register and operate as enterprises for GST purposes. Types of partnership A partnership means an association of persons carrying on business as partners (a “general law” partnership) and also an association of persons who simply are in receipt of income jointly (a “tax law” partnership). Both are registrable “entities” for GST purposes. The ATO accepts that, for GST purposes, a mere change of membership of a general law partnership does not mean that the old partnership is terminated and a new partnership entity is created, provided there is a continuity clause and no

substantial change in the partnership business (GST Ruling GSTR 2003/13). In contrast, any change in the membership of a tax law partnership terminates the partnership (GST Ruling GSTR 2004/6; see also Russell v FC of T 2009 ATC ¶20-143). The ATO considers that a tax law partnership commences when the persons associate and carry on the activity from which the income will be received — this means, for example, that it can claim input tax credits on the acquisition of the property from which income may be derived jointly (GST Ruling GSTR 2004/6). As to whether an enterprise is being carried on by the partnership or by the partners themselves, see ¶3020. For the ATO’s views on supplies by partners and partnerships, see ¶4-010. A mere joint venture which does not involve a partnership or the creation of a separate entity is not itself an “entity”. These ventures are called non-entity joint ventures. They typically involve a contractual arrangement to jointly control an economic activity in order to obtain individual benefits, as distinct from joint or collective profitability. For ATO views on racing syndicates and groups, see the ATO Fact Sheet GST for the Racing Industry. For example, a property development arrangement was held to be carried on by a partnership, not simply as a non-entity joint venture, where there was: • a mutual interest in the carrying on of the business for the purpose of profit or gain • mutual confidence that the parties would engage in the venture for joint advantage only • sharing of profits and losses from the venture, as distinct from sharing of product (as in some mining ventures) • mutual agency in the sense that each party was a principal of the business and may bind the other (Yacoub v FC of T 2012 ATC ¶20-328). Trusts Both the trust and the trustee may be treated as entities (s 184-1(1), (2)). The reason for this is apparently that a trust is not a legal person in its own right and cannot have legal rights or obligations. The ATO interprets this as meaning that the relevant entity is the trust, with the trustee standing as that entity when a legal person is required, eg for transferring property or signing documentation (GST Ruling GSTR 2006/1). Accordingly, it considers that the registration should be in the name of the trustee. A public company acting as the “responsible entity” of a managed investment scheme was held to be entitled to register on this basis (Interpretative Decision ID 2007/7). For the ATO’s views on supplies by trustees, see ¶4-010. For the liability of trustees, see ¶18-270. For the treatment of Investor Directed Portfolio Services (IDPSs), see ATO GST Industry Issues — Financial Services: Issues 13.3 and 13.4. Other aspects A body that acts in various capacities can be treated as constituting different entities for GST purposes. This means, for example, that a person acting as a trustee can make a taxable supply to itself acting in an individual capacity. However, where a new trustee of a trust is appointed to replace the original trustee, without any change in the underlying trust, the transfer of assets to the new trustee is not treated as a supply to a new entity (s 184-1(2)). Entities can also include sub-entities of non-profit bodies (¶15-080). [GSTG ¶5-045]

¶3-020 Carrying on an enterprise An entity cannot be registered unless it is carrying on an “enterprise” (s 23-5; 23-10). Enterprise is defined very widely (s 9-20). The most common example of an enterprise is a business. More specifically, an enterprise means:

(1) an activity or series of activities done in the form of a business, trade, profession, vocation or calling. The Commissioner interprets this as including business-like activities that are not carried out for profit, for example, by bodies corporate of apartment blocks (Body Corporate, Villa Edgewater Courts 23092 v FC of T 2004 ATC 2056), or non-profit clubs or associations (Miscellaneous Taxation Ruling MT 2006/1; GST Determination GSTD 2006/6). In determining whether a part of an enterprise is itself an enterprise, the Commissioner will take into account factors such as the degree of autonomy, and whether there is a separate management structure, a system of internal user charging, a separate budget and agreements with internal service providers or external customers (Miscellaneous Taxation Ruling MT 2006/1; GST Ruling GSTR 2002/5). Trustees who were appointed and remunerated to carry out the sale of a development site were held to be carrying on an enterprise where they retained agents, solicitors and valuers, gave instructions for the marketing, liaised with the parties, prepared the contract, and arranged and implemented the sale (Toyama Pty Ltd v Landmark Building Developments Pty Ltd 2006 ATC 4160; see also Touram Pty Ltd v FC of T 2008 ATC ¶10-070). In a case involving rather exceptional facts, a company controlled by an art collector/investor, which over a period of eight years spent $4.8m on artworks but sold only a very small number of lesser works, was held to be carrying on an enterprise where: (1) its activities were apparently systematic and organised on a business-like basis; and (2) there was an intention to sell, where appropriate, when the circumstances were right (FC of T v Swansea Services Pty Ltd 2009 ATC ¶20-100). Similarly, in what the tribunal considered was a “finely balanced” case, a luxury car collector/dealer was held to be carrying on an enterprise even though only one car was sold and that was at a loss (Davsa Forty-Ninth Pty Ltd v FC of T [2014] AATA 337). However, there was no such enterprise in a similar “one car” case where there was an absence of records and little independent evidence that the car had been taken for test drives (Criterion Prestige Pty Ltd v FC of T [2015] AATA 468). Similarly, a building project manager who spent a few hours a week researching horse breeding matters and had a minority interest in up to eight horses, but made no profit from these activities, was not carrying on an enterprise of horse breeding (D’Arcy v FC of T 2008 ATC ¶10-041; see also Trnka v FC of T 2012 ATC ¶10-262 and Taxpayer v FCT [2015] AATA 737 (equine hospital and medical supplies)). A company whose “project management” activities consisted of little more than receiving invoices was held not to be carrying on an enterprise in Dotrac Pty Ltd & Anor v FC of T [2014] AATA 336. Similarly, a retired police officer was not carrying on an enterprise of private investigations or share trading where there was no business plan or evidence of systematic activities (NKCX v FC of T 2019 ATC ¶10-488). (2) an activity or series of activities done in the form of one-off ventures in the nature of trade. This is intended to catch a commercial activity that does not amount to a business. For example, the ATO considers that acquiring and refurbishing a suburban shop for resale at a profit could amount to an enterprise (GST Ruling GSTR 2001/7). Example A taxpayer’s enterprise consists solely of the acquisition and refurbishment of a suburban shop for resale at a profit. That activity, though isolated, is treated as an enterprise. In addition, as noted at ¶3-030, the disposal of the shop is not treated as transfer of a capital asset, with the result that the proceeds of the sale are not excluded from the taxpayer’s projected GST turnover.

However, the fact that a profit is made does not necessarily mean that the activity is commercial. So, for example, the sale of the family home, car and other private assets would not normally be caught (Miscellaneous Taxation Ruling MT 2006/1; GST Determination GSTD 2006/6). Nor would the private sale by a car dealer of his/her own car. The “mere realisation” of an investment asset is also not, in itself, an enterprise. For the position where land is subdivided and sold, see ¶11-063. The ATO considers that if you provide ride-sourcing services to the public (¶12-130), you are likely to be carrying on an enterprise. This is particularly the case if you operate in a business-like manner where, for example, invoices are provided to your customers. However, if you operate infrequently or your activities are otherwise non-commercial, you may not be carrying on an enterprise

(3) leasing, licensing or granting interests in property, if this is done on a regular or continuous basis. The Commissioner considers that an activity is “regular” if it is repeated at reasonably proximate intervals, and “continuous” if there is no significant cessation or interruption to the activity (Miscellaneous Taxation Ruling MT 2006/1; GST Determination GSTD 2006/6). On this basis, the occasional letting out of a holiday home for a few weeks a year would not be regarded as regular or continuous. However, if the holiday home was actively advertised for lease all year round, and was actually leased for 20 weeks a year, the Commissioner considers that this may constitute leasing on a regular and continuous basis. Similarly, where there is already an enterprise of leasing a building, that enterprise continues during the period of temporary vacancy where a new tenant is being actively sought. However, where the building has not previously been leased to a tenant, but is being actively marketed, an enterprise of leasing is not operating until the activity of leasing actually commences, ie when at least one tenant enters into an agreement to lease, or occupies the building (GST Ruling GSTR 2002/5; see also Cyonara Snowfox Pty Ltd v FC of T 2012 ATC ¶20-362) Example The Commissioner considers that an enterprise of leasing would be carried on in a situation where: (1) a commercial building had been leased for a number of years; (2) various floors were vacant but were being actively marketed; and (3) the remaining floors were being refurbished (GST Ruling GSTR 2002/5).

• activities of bodies that are eligible recipients of tax-deductible gifts • activities of a trustee or manager of a complying superannuation fund (¶10-080) • activities of charities (but these are also entitled to some exemptions: see Chapter 15) • activities of the Commonwealth, a state or a territory (including government departments and certain local governments: GST Ruling GSTR 2006/5), or corporations established for public purposes. It is not necessary that there be a series of activities. A single activity can be an enterprise. It may also happen that a single entity carries on more than one enterprise, or carries on some activities that are an enterprise and some that are not. Examples (1) A self-employed doctor also runs a profitable farm. The doctor is carrying on two enterprises. If the doctor registers, that will cover both enterprises. (2) A doctor employed by a hospital exercises her rights to private practice. The employment is not an enterprise (see below), but the private practice activities normally would be an enterprise. If the doctor registers, the registration will only apply to the enterprise activities.

Commencing or terminating an enterprise You are treated as carrying on an enterprise if you are doing anything in the course of commencing or terminating the enterprise (s 195-1). The ATO considers that this would include conducting a feasibility study involving genuine business activities where there has been serious contemplation of developing an enterprise. However, this would not apply where, for example, a person merely undertakes a tour of a wine region to enhance their knowledge of the wine industry with the aim of possibly establishing some future business activity. Similarly, it has been held that there was no commencement of an enterprise where a company had simply undertaken preliminary promotional activities before any activities were actually carried on. These activities were considered to be merely steps taken in preparation for the commencement (Guru 4 U Pty Ltd v FC of T [2014] AATA 740; Russell v FC of T [2011] FCAFC 10). Activities undertaken to establish an entity, for example drawing up of a trust deed and the settlement of trust property, would also not be included (Miscellaneous Taxation Ruling MT 2006/1). The AAT has said that, “[E]very business has to start somewhere. Where the business progresses from

its foundations to operation within a reasonable time frame, it is easier to see how initial expenditures can be seen as part of a course of conduct that amounts to carrying on an enterprise. But where there is delay — where the momentum of the activities is lost — it becomes harder to make a connection between initial expenditure and the operations which result. That connection is even more difficult to establish where the business has not, or does not, commence trading in due course” (Clayton v FC of T [2013] AATA 428). Similarly, acts done in the course of selling the business will be treated as carrying on the enterprise, for example, finalising accounts, paying creditors, repaying loans, cancelling licences and business registrations (Miscellaneous Taxation Ruling MT 2006/1); or the realisation of business assets as part of winding up a partnership (GST Ruling GSTR 2003/13). The ATO’s view is that an enterprise would normally be taken to have terminated when all assets are disposed of or converted to another purpose, and all obligations have been satisfied (Miscellaneous Taxation Ruling MT 2006/1). As to the treatment of pre-establishment acquisitions for agricultural managed investment schemes, see Interpretative Decisions ID 2010/198; ID 2010/199. Example A taxpayer decides to purchase a commercial property with the intention of leasing the property to prospective tenants. It acquires services and incurs various costs, such as legal and building inspection fees, in relation to the purchase of the property. It is likely that these acquisitions would be treated as part of the carrying on of the enterprise of leasing by the taxpayer.

The acquisition of a capital asset for the purpose of carrying on a future enterprise may constitute an act performed in the carrying on of the enterprise. In establishing whether this purpose existed, evidence of the taxpayer’s intentions may be relevant (Russell v FC of T [2011] FCAFC 10). However, there was no enterprise being carried on where a taxpayer acquired a property for the purpose of converting it into an education and accommodation centre, but no educational supplies had been made, only minuscule income had been derived and the venture lacked commercial character (Educational Pty Ltd v FC of T [2011] AATA 445). There was also no enterprise of land subdivision being carried on where there was no objective evidence that the land had ever been acquired (Bryxl Pty Ltd v FC of T [2015] AATA 89). Other examples of enterprises Where a head company of a group obtains a valuation as part of the process of forming a “consolidated” group for tax purposes, this is treated as being an acquisition made in carrying on the company’s enterprise. The same applies to a valuation obtained by a subsidiary company as part of the process of joining such a group. This applies even if the consolidation does not go ahead (GST Determination GSTD 2003/3). It would follow that input tax credits could be claimed, provided the other requirements for a creditable acquisition (¶5-010) have been met. Where a parent company holds shares in a subsidiary, the parent may be treated as carrying on an enterprise if it is actively engaged in managing the subsidiary, or provides management services, equipment or loans to the subsidiary, but not if the holding is merely passive (Miscellaneous Taxation Ruling MT 2006/1). However, each case will depend on its own facts. The mere fact that the taxpayer is part of an economic group which overall is carrying on an enterprise does not mean that the taxpayer itself is carrying on an enterprise (Case 5/2010, 2010 ATC ¶1-024). A person serving a lengthy prison term would not normally be capable of carrying on an enterprise (Maksimovic v Registrar of Australian Business Register [2008] AATA 108). A participant in an agricultural managed investment scheme was considered to be carrying on an enterprise, where it retained ownership of the produce of the scheme (Interpretative Decision ID 2010/197). Previously, the ATO had taken the provisional view that normally an investor in an agricultural managed investment scheme is not carrying on an enterprise (former Draft GST Ruling GSTR 2008/D1), but that was withdrawn following an adverse income tax decision in Hance v FC of T 2008 ATC ¶20-085. What is not an enterprise An enterprise does not include the following activities: • activities carried out as an employee, or other person subject to specified PAYG withholding rules (company directors, officeholders, labour hire). This means that — subject to the special rule noted

below — these people are not treated as carrying on an enterprise themselves. However, their activities are still treated as part of the enterprise of their employer or work provider. For further details, including the position of independent contractors, see ¶4-090 • private recreational pursuits or hobbies. These are normally characterised by their small scale, irregularity and lack of profit motive (Taxation Ruling TR 97/11; Miscellaneous Taxation Ruling MT 2006/1) • activities by an individual, or partnership consisting wholly or mostly of individuals, where there is no “reasonable expectation” of profit or gain. A reasonable expectation requires more than just a possibility (Miscellaneous Taxation Ruling MT 2006/1; GST Determination GSTD 2006/6). However, the fact that no profit was in fact made over a significant period does not necessarily mean that there was no reasonable expectation that a profit would eventually be made (Case 2/2007, 2007 ATC 103). This issue often arises, with mixed results, in situations where a taxpayer who is already engaged in another business buys a yacht for unrelated “demonstration purposes”. One factor that can be taken into account in considering the likely profitability is the fact that the boat is declining in value (see discussion in Drysdale v FC of T 2008 ATC ¶10-027). A taxpayer who had been involved in the childcare industry and property development was unsuccessful in showing that his game fishing charter activities amounted to an enterprise, where they were conducted in a haphazard and unbusiness-like way (Rendyl Properties Pty Ltd v FC of T 2009 ATC ¶10-082) • activities by certain members of local governing bodies, for example, councillors (s 9-20(2), (4)). In a European case, the activity of installing and generating electricity through a photovoltaic installation on a private residence constituted an “economic activity” rather than a private activity, even though the home owner’s end object may have been to reduce his domestic electricity bills. As a result, the taxpayer was entitled to a VAT deduction for input VAT costs relating to the installation: Finanzamt Freistadt Rohrbach Urfahr v Unabhängiger Finanzsenat Außenstelle Linz (Case C-219/12). However, it is not clear that a similar decision would be reached in Australia. For an article discussing this case, see CCH Tax Week ¶1035 (2013). Religious practitioners carrying out pastoral and related duties are not treated as carrying on an enterprise (¶15-053). For the treatment of marriage breakdown settlements, see ¶4-090. Directors and other officeholders A special rule applies where a person accepts a position as an officeholder in connection with other business activities. An example of this is where a partner of a legal or accounting firm becomes a director of one of the firm’s client companies. Directors are generally treated as employees, so the services they provide are not normally subject to GST. However, in this particular case, the partner/director will be treated as an enterprise, not an employee, and the supply of the partner/director’s services to the company is therefore potentially subject to GST (s 9-20(2)(a)). A partnership was not carrying on an enterprise where the relevant activities were conducted by a partner in his capacity as a director and employee of another company (Naidoo & Anor v FC of T 2013 ATC ¶10323). Meaning of “business” As already noted, the most common form of enterprise is a business. Normally, there is little dispute about whether a business is being carried on. However, borderline situations arise in areas such as primary production, writing, sport or gambling. Some of the indicators used by the Commissioner are as follows. Their importance will vary in any particular situation: • significant commercial activity • a purpose of acting in a commercial way • an intention to make a profit • a reasonable prospect of profitability

• repetition or regularity of activity • reasonable size and scale • conformity with normal business practice • existence of a business plan • keeping of detailed business records • commercial sales of product • exercise of knowledge or skill (Taxation Ruling TR 97/11). Activities may constitute a business even though they are only carried on in a small way. However, it would normally need to be shown that there was a real expectation of profit emerging. The ATO considers that where activities are of a very small size and scale, they would normally not be treated as a business if they are carried on in an ad hoc manner and there is little repetition or regularity. For example, the ATO would not consider there to be a business where a person occasionally provides translation services on an ad hoc basis and receives payments totalling only $300 over the year (Miscellaneous Taxation Ruling MT 2006/1). On the other hand, it considers that if you provide taxi “ride-sourcing” services to the public, you are likely to be carrying on an enterprise: see ¶12-130. A private tutor was ruled to be carrying on an enterprise, even though his activities were small-scale and consistently unprofitable, where he could show that his activities were recurrent and systematic, reliable records were kept, and the intention was to make a profit (Case 3/2013, 2013 ATC ¶1-052). Consistent loss-making from horse-breeding activities was held not to be fatal to a claim that a business was being carried on where the losses were attributable to the capital costs of setting up the business, the subsequent restructuring of the business and a series of unforeseeable setbacks (Block & Ors v FC of T 2007 ATC 2735). For the position of participants in the racing industry generally, see the ATO Fact Sheet GST for the Racing Industry and Taxation Ruling TR 2008/2. Bodies that only supply members An entity is still treated as carrying on an enterprise even though it only makes supplies to its own members (s 9-20(3)). This will include, for example, non-profit clubs. Partnerships It will normally be the partnership, not the individual partners, that carries on the partnership enterprise. However, a partner may be carrying on an enterprise if it carries on a separate business on its own account. The supply of an interest in a partnership is a financial supply (¶10-010) made by the partnership in the course of its enterprise. For the GST treatment of the transfer of a partnership interest, see ¶11500. The ATO considers that an enterprise can be carried on, not only by a general law partnership, but also by a tax law partnership (¶3-015). However, the fact that property is held by the owners as tenants in common, rather than joint tenants, would tend to indicate that the enterprise is being carried on by each co-owner, rather than the tax law partnership. However, this will not always be the case — in the case of certain managed property leasing syndicates, the ATO considers that the enterprise is being carried on by a tax law partnership even though the property is held as tenants in common (GST Ruling GSTR 2004/6). A partnership was held liable for GST on the sale of assets where the evidence of the partners that the partnership had transferred the assets to another entity prior to the sale was vague and inconsistent (TG & A Martinazzo v FC of T 2009 ATC ¶10-074). Trustees For the position of trustees carrying on an enterprise, see ¶4-010. [GSTG ¶5-050]

¶3-030 The GST turnover test As we have seen, an entity is normally required to register if its “GST turnover” is $75,000 or more (s 2315; reg 23-15). This means that it must register if either of the following applies: • its current GST turnover is $75,000 or more, except if the ATO is satisfied that the projected GST turnover is below $75,000, or • its projected GST turnover is $75,000 or more (s 188-10). Special threshold for non-profit bodies If you are a non-profit body, the registration threshold is $150,000. “Non-profit” is not defined in the GST Act, but the ATO considers that a body will qualify if it is prevented by law or its constituent documents from distributing its profits or assets among its members, either while it is functional, or on winding up, and acts consistently with those restrictions (GST Ruling GSTR 2012/2; Taxation Ruling TR 97/22). The ATO also says it will accept that the non-profit test is satisfied if it is clear from the body’s objects, policies, history, activities and proposed future directions that there will be no distributions to members. For the position of strata title bodies corporate, see ¶11-200. For other rules relating to not-for-profits, see ¶15-000. The turnover periods At any particular time, your current GST turnover is measured over the 12-month period ending at the end of the current month (s 188-15). Your projected GST turnover is measured over the 12-month period starting at the beginning of the current month (s 188-20). Example If the current month is December 2019, the current GST turnover is measured from the start of January 2019 to the end of December 2019. The projected GST turnover is measured from the start of December 2019 to the end of November 2020.

This rule means that both your current and projected GST turnover may change every month. It follows that you may need to monitor them closely to work out if an obligation to register has arisen, or is likely to arise as a result of projected growth. Regular monitoring of turnover probably makes sense from a general business point of view in any event. Example As at March 2019, your current annual turnover (ie the turnover for the period from 1 April 2018 to 31 March 2019) is $40,000. Your projected GST turnover (ie the turnover for the period from 1 March 2019 to 29 February 2020) is $80,000. Assuming that you are not a non-profit body, you are therefore required to register.

Measuring turnover Current turnover is calculated by adding up the value of all the supplies you have made, or are likely to make, during the 12-month period ending at the end of the current month. Projected turnover is calculated by adding up the value of all the supplies you have made, or are likely to make, during the 12-month period starting at the beginning of the current month. In determining what supplies are likely to be made, the Commissioner accepts a calculation based on a bona fide business plan, accounting budget or some other reasonable estimate (GST Ruling GSTR 2001/7). In each case, the value does not include the GST component of the supplies. In working out the value, you also exclude the following: • supplies that are input taxed, for example, financial supplies or supplies of residential accommodation (¶1-170)

• supplies where there is no consideration paid, unless they are made to associates (¶17-500) • supplies that are not made in connection with your enterprise (¶3-020) • supplies that are not connected with Australia. You also disregard an offshore supply of rights or options that is deemed to be connected with Australia, unless (from 1 July 2017) it is made to an “Australian consumer” (¶9-120), the underlying supply is not a supply of goods or real property and the supply is not GST-free. • GST-free supplies made by a non-resident that are not made through an enterprise carried on by the non-resident in Australia. The exclusion applies in working out net amounts for tax periods starting on or after 1 October 2016. Example Lloyd lets out a private house for rent of $110,000 a year. This is an input taxed supply. He makes no other taxable or GST-free supplies. He is not required to register because he has no turnover for GST purposes. If 80% of the property was used by the tenant for business, there will be a potentially taxable supply of commercial accommodation (80% of $110,000 = $88,000) plus an input taxed supply of residential accommodation ($22,000). As the turnover from taxable supplies exceeds $75,000, Lloyd is required to register. (See generally GST Determination GSTD 2000/9.)

Insurance payouts are also disregarded when working out turnover (s 188-22). If the supply is a loan of money, the value for turnover purposes is normally the amount of the loan (s 188-35). If you are a member of a GST group (¶17-000), you also exclude supplies made between members. In addition, when working out projected turnover, you should not take into account: • transfers of capital assets, for example business premises, plant or goodwill. Capital assets do not include trading stock or assets acquired for resale at a profit (GST Ruling GSTR 2001/7: ¶3-020), or • supplies made solely as a consequence of closing down an enterprise, or substantially and permanently reducing its size or scale (s 188-25). The Commissioner accepts that a 10% reduction in size or scale is “substantial” for most enterprises, though a smaller reduction may also qualify. Changes that could foreseeably affect only one or two years would not be regarded as “permanent” (GST Ruling GSTR 2001/7). Supplies made through you as a mere agent are not counted in determining your turnover, as they are not treated as supplies you have made (¶17-400). What is measured is the turnover of the entity, rather than the turnover of each enterprise or business. If the one entity runs two businesses, the turnover of the entity will include both businesses. Example Mrs Woolly provides farmstay holidays at her operating farm. The turnovers from the holiday business and the farm business are taken into account in calculating Mrs Woolly’s turnover. However, if the farm and farmstay businesses are operated by separate entities, the turnover would be calculated separately for each.

If an overseas body supplies employee services in Australia to its 100% subsidiary, those supplies are disregarded in working out the non-resident’s turnover for registration purposes (s 188-40). This is subject to the proviso that the payments the non-resident makes to the employees would have been subject to Pay As You Go (PAYG) withholding if they had been paid by the Australian subsidiary. Offshore supplies of hotel accommodation in Australia are now included in turnover: see ¶11-320. GST turnover relevant for other purposes Your GST turnover is also relevant in determining: (1) your obligation to use monthly tax periods (¶7-110) or lodge returns electronically (¶8-043)

(2) if you do not carry on a business, your eligibility to use the cash basis (¶7-300), make annual apportionments of input tax credits (¶5-020), or pay GST by instalments (¶8-037) (3) your eligibility to report and pay annually (¶8-040). Special rules Special rules for measuring turnover apply to: • supplies covered by specified “reverse charge” agreements (¶9-095; ¶16-210) • agents who agree to act as principals (¶17-420) • gambling (¶16-030). [GSTG ¶5-070]

¶3-040 Procedure for registration You have to apply for registration within 21 days of becoming required to do so (s 25-1). Normally, this means that you have to apply within 21 days after the time when the enterprise you are carrying on first meets the relevant turnover threshold test (¶3-030). Remember, you are treated as carrying on an enterprise if you are doing anything in the course of commencing the enterprise (¶3-020). If you are entitled to be registered, but not required to do so, you may apply for registration at any time. Applications may be made online at the Australian Business Register (www.abr.gov.au) or by using the appropriate ABN registration form (¶3-050). Separate forms apply to sole traders, superannuation funds, companies and other organisations, and government bodies. The ABN will generally act as your GST registration number. Processing of application The ATO must grant your application if satisfied that you are carrying on an enterprise, or intending to do so from a specified date. If the ATO is satisfied that you are required to be registered, it must register you even if you have not applied. On registration, the ATO will notify you of the date of effect, your GST registration number and the tax periods that apply to you (s 25-5). Generally, the registration takes effect from the day specified in the application. This cannot be earlier than the date on which you commenced to carry on an enterprise. Registration may be backdated beyond the date specified in the application if the ATO is satisfied that you were required to be registered earlier. If so, you will be treated as being subject to the GST system from that date (s 25-10; 25-15). However, the Commissioner cannot backdate the registration beyond four years, unless there has been fraud or evasion (s 23-20; 25-10). Example Due to an honest misunderstanding of its GST obligations, a taxpayer does not register and therefore does not lodge Business Activity Statements (BASs). Subsequently, on 20 September 2018, the Commissioner determines that the taxpayer should have been registered from 1 July 2013. However, due to the four-year limit, the requirement to register can only be backdated to 21 September 2014. The taxpayer therefore is liable to lodge BASs for its transactions from that day onwards.

Backdating of the registration means, for example, that you have to account for GST on taxable supplies you made since that earlier time, even though you may not have allowed for it in your prices. Penalties and interest may also apply (¶18-300 and following). The date on which your registration becomes effective will be entered in the Australian Business Register (s 25-10(2)). A branch of a registered supplier can be separately registered (¶17-300).

Simplified rules for some non-residents For simplified registration rules applying to certain non-residents, see ¶9-120. [GSTG ¶5-080]

¶3-050 Australian Business Number The Australian Business Number (ABN) is a business identifier which can be used for the GST and various other tax-related purposes. For the GST system, your ABN is important because: • the ABN also acts as your GST registration number (unless you are a GST branch: ¶17-300) • the supplier’s ABN must normally appear on a tax invoice (¶5-110), otherwise the recipient will not be able to claim input tax credits. In the wider context, the ABN is crucial for identification under the PAYG system. Under PAYG, if you do not quote your ABN on invoices to other businesses, they may be required to withhold tax at the top marginal rate, plus Medicare levy, from their payment to you. For 2018/19, this normally requires a deduction of 47%. Example Enterprises Ltd hires Fizzer Electricians to do wiring work at its business premises. Fizzer does not have an ABN. It charges Enterprises Ltd $5,000 for the work. Enterprises should withhold 47% of $5,000 = $2,350 and pay the balance ($2,650) to Fizzer. Enterprises Ltd should account to the ATO for the $2,350 in its next BAS. Fizzer should claim a credit for that amount in its next tax return.

This withholding rule does not apply where the supply is wholly input taxed (Administration Act, Sch 1, s 12-190). For example, it will not apply where the supply consists of financial services or residential rent. Residential tenants will therefore not have to withhold tax from rent payments if the landlord does not quote an ABN. You must also have an ABN to apply for endorsement as a deductible-gift recipient or as an income tax exempt charity. You also need an ABN to apply for registration with the Australian Charities and Not-forprofits Commission in order to claim specified GST concessions (¶15-000). A limited registration entity (¶9-120) is not entitled to an ABN. Applying for an ABN As the ABN is used for a number of purposes, it is possible to apply for an ABN without applying for GST registration. This will normally be the advisable option for businesses that decide not to register for GST. The ABN applies to the individual entity (company, sole trader, trust, partnership, etc), not to the individual business. If you are carrying on more than one business, you will only have one ABN. Conversely, where a number of entities contribute to the running of a business, each will have to have a separate ABN. ABNs and tax avoidance • The ATO targets “unexpected” registrations as a way of identifying businesses that have previously been operating outside the tax system. • In the 2019/20 Federal Budget, the Treasurer said that the ABN system will be strengthened to disrupt black economy behaviour by making the ABN conditional on holders (1) fulfilling any obligation to lodge income tax returns (from 1 July 2021) and (2) annually confirming the accuracy of their details on the ABN register (from 1 July 2022) (2019 Budget Papers No 2, p 13, 2 April 2019). [GSTG ¶5-300]

¶3-070 Cancellation of registration If you stop carrying on an enterprise, you are no longer entitled to be registered, and must apply for cancellation of your registration within 21 days (s 25-50). Remember, you are treated as carrying on a business or enterprise as long as you are doing anything in the course of terminating it. Even though you are still carrying on an enterprise, you may apply for cancellation if registration becomes optional, for example, where the GST turnover drops below $75,000. In either case, the ATO is obliged to comply with the application for cancellation, provided that you have been registered for at least 12 months, and provided that the ATO is satisfied that you are not required to be registered (s 25-55). These compulsory cancellation rules are also activated if there is a change in the entity carrying on the enterprise, for example, if an enterprise formerly run by an individual as a sole trader is transferred to a company, even if the company is controlled by the individual. For the position of bicycle couriers who mistakenly registered in the belief that they were contractors, not employees, see ¶4-090. Cancellation of voluntary registration within 12 months If you apply for cancellation of voluntary GST registration before the 12 months have expired, the ATO has a discretion to cancel the registration (s 25-57). Applications are considered on the basis of: • how long you have been registered • whether you have previously been registered • any other relevant matters (s 25-57). These may include your net GST in previous tax periods and your likely GST in future tax periods if you remain registered. It is up to the Commissioner to determine the date of effect of the cancellation. It may be prospective or retrospective (s 25-60). If you nominate a prospective cancellation date — ie a date after the application is determined — this date will normally be accepted. If you request a retrospective cancellation date, the Commissioner will only accept a date that falls at the start of a tax period. In addition, the ATO must be satisfied that you stopped operating on a GST-registered basis from that date. So, for example, for a cancellation to be backdated all the way back to 1 July 2000, you would need to show that: • you have not held yourself out to other businesses as being registered for GST • you have not issued tax invoices or adjustment notes • you have not claimed input tax credits, special transitional credits or GST transitional credits (or if those credits have been claimed, a net GST amount has been paid to the ATO for each tax period where a Business Activity Statement has been lodged), and • you have made a signed statement to the ATO that you satisfy all these requirements. If your registration is cancelled retrospectively to 1 July 2000, the effect is that you will be treated as never having been in the GST system and can claim back any GST paid to the ATO. The retrospective cancellation will not affect any claim you may have made in the past for an immediate deduction for the cost of acquiring or upgrading GST-related plant and software. Discontinued businesses The Commissioner must cancel your registration if satisfied that you are not carrying on an enterprise, and that you are not likely to do so for at least 12 months. This applies whether or not you have applied for cancellation (s 25-55). General effects of cancellation

The general effects of cancellation of registration are: • the current tax period will cease at the end of the day on which the cancellation takes effect (¶7-120). This will be the business’s final tax period • future supplies you make are not subject to GST • you cannot claim input tax credits on future acquisitions that you make • you will not have to lodge normal GST returns for periods after your final tax period • if you are on a cash basis, any GST, input tax credits or adjustments that have not been attributed to any previous tax period will be attributed to the final tax period (s 138-15) • the business may be liable for an upwards adjustment to its net GST in its final tax period if it retains assets for which input tax credits have been claimed (¶6-410). The ATO says that if, after you cease to be registered, you receive a tax invoice for a creditable acquisition made while you were registered, you cannot claim an input tax credit for that acquisition (GST Advice GSTA TPP 089). [GSTG ¶5-200]

¶3-075 Simplified registration for certain non-residents Simplified GST registration arrangements are available for non-residents who make or intend to make: • supplies of inbound intangible consumer supplies (¶9-120), or • for tax periods starting on or after 1 July 2018, offshore supplies of low value goods (this also applies to redeliverers of these supplies) (¶9-130). For this to apply, the non-resident must elect to become a “limited registration” entity (Div 146). This means that the non-resident will only need to provide minimal information when they register and provide GST returns. Limited registration entities will not be entitled to input tax credits, are not entitled to an ABN (¶3-050), are not recorded in the Australian Business Register, must have quarterly tax periods, do not issue tax invoices, and cannot elect to pay GST by instalments (¶8-037) (s 146-5 to 146-25). These rules were formerly contained in former Subdiv 84-D. Elections made under those provisions continue in effect.

¶3-080 Special rules about registration Taxi operators are required to be registered, regardless of turnover (s 144-5). A taxi operator is someone who carries on an enterprise that includes transporting fare-paying passengers by taxi or limousine (s 195-1). For further details, see ¶12-130. Bankruptcy, receivership, liquidation. If a person who is registered (or required to be registered) goes into bankruptcy, the trustee in bankruptcy must be registered as such for GST purposes in relation to any enterprise carried on by that person. A corresponding rule applies where receivers, liquidators, administrators, controllers or interim managers are appointed (s 58-20). For these purposes, the representative will have the same tax period as the body it represents (s 58-35). A representative that ceases to act as a representative must notify the Commissioner within 21 days (s 58-30). Its registration must be cancelled if the Commissioner is satisfied that the representative is not required, or no longer required, to be registered (s 58-25; Interpretative Decision ID 2013/9). For GST adjustments arising after the appointment of the representative, see ¶6417. For more on tax periods, see ¶7-100. For the general liability of representatives, see ¶18-250.

Importations. Even if you are not registered, GST may still apply to taxable importations in the usual way (¶9-000). Resident agents for non-residents must be registered if the non-resident is registered or required to be registered (¶17-410). Charities and non-profit bodies. The registration turnover threshold for charities and non-profit bodies is $150,000, not $75,000. In addition, independent sub-units of charities and non-profit bodies can be registered separately from the parent body (¶15-080). Non-residents making taxable supplies may be exempt from registration where the supplies are covered by a reverse charge agreement (¶9-095). See also ¶17-410. From 1 July 2017, simplified GST registration arrangements are available for non-resident suppliers of inbound intangible consumer supplies (¶9-120). Groups and branches. Special rules apply to registration of GST groups (¶17-000) and GST branches (¶17-300). Government departments can register separately, even if they are technically not “entities” (¶3-015) and even if they are not carrying on an enterprise or intending to do so (s 149-5). Other government bodies can also register, even though they are not entities, if they are established to carry on an enterprise or for a public purpose, and can be separately identified by activity or location. However, government departments and bodies are not required to register even if they are carrying on an enterprise and exceed the relevant turnover threshold (s 149-10). Appropriations applied to an agency’s business operations are not treated as GST turnover. For ATO guidelines on the implications of “machinery of government” changes, such as mergers or abolitions of departments, see the ATO Fact Sheet GST and machinery of government changes at www.ato.gov.au. Partnerships can register, but individual partners cannot unless they are carrying on a separate enterprise in their own right (or are intending to do so). [GSTG ¶5-150]

LIABILITY FOR GST • TAXABLE SUPPLIES TAXABLE SUPPLIES What are taxable supplies?

¶4-000

Requirement 1: there must be a “supply”

¶4-010

Multi-party transactions

¶4-015

Requirement 2: supply must be “for consideration”

¶4-020

Gifts, tips, promotions and stolen property

¶4-030

Competitions and prizes

¶4-035

Grants, appropriations, subsidies and sponsorships

¶4-040

Redeemable vouchers

¶4-060

Frequent flyer, shopper and loyalty programs

¶4-062

Cancellation fees

¶4-065

Security deposits

¶4-070

Fines, penalties, taxes and charges

¶4-080

Court orders and out-of-court settlements

¶4-085

Requirement 3: in course of “enterprise”

¶4-090

Requirement 4: connection with Australia

¶4-100

Non-resident’s supplies that are not connected with Australia ¶4-101 Key concepts in connection test

¶4-102

Telecommunication supplies

¶4-103

Supplies partly connected with Australia

¶4-104

Requirement 5: registration

¶4-105

Requirement 6: supplies not GST-free or input taxed

¶4-110

CALCULATING GST ON SUPPLIES How GST is worked out

¶4-200

Rounding off rules for GST

¶4-205

Buying and selling at auction

¶4-210

Editorial information

Summary GST is normally payable if you make a taxable supply or importation. This chapter sets out the requirements for a taxable supply and explains how the GST is calculated. The main requirements for a taxable supply are that the supplier must be registered and must make the supply in connection with its business. There are also various special rules dealing with

particular transactions such as deposits, redeemable vouchers, sponsorships and payments of taxes and government fees. Taxable importations are dealt with in Chapter 9.

TAXABLE SUPPLIES ¶4-000 What are taxable supplies? You are liable to pay GST if you make a “taxable supply” (s 9-40). The rate is generally 10%. A “taxable supply” is not limited to a sale, and covers a very wide range of transactions. For there to be a taxable supply, the following requirements must be satisfied (s 9-5): (1) there must be a supply (¶4-010) (2) the supply must be for consideration (¶4-020) (3) the supply must be made in connection with an enterprise carried on by the supplier (¶4-090) (4) the supply must be connected with Australia (the “indirect tax zone”) (¶4-100) (5) the supplier must be registered, or be required to be registered (¶4-105) (6) the supply must not be “GST-free” or “input taxed” (¶4-110). The ATO considers that the time for determining whether a supply meets these requirements is the time when the supply is made, or the time of any event that triggers attribution (¶7-200), whichever is earlier (GST Advice GSTA TPP 070). GST is also payable where you make a taxable importation (¶9-000). Simplified rules for non-residents For special rules designed to reduce and simplify the application of the GST system to non-residents, see ¶4-101. [GSTG ¶10-000]

¶4-010 Requirement 1: there must be a “supply” The first requirement for a taxable supply is that a “supply” must be made by the taxpayer. A supply includes: • supplying goods (this means any form of tangible personal property) • supplying services • providing advice or information • granting, assigning or surrendering real property • creating, granting, transferring, assigning or surrendering any right • making financial supplies (¶10-000) • entering into an obligation to do anything, refrain from doing something, or tolerate an act or situation (or releasing someone from such an obligation)

• any combination of these (s 9-10). Anything else that could be described as a supply, in the normal sense of the word, is also covered. It does not matter whether the supply is legal or illegal — GST may be payable either way. Nor does it make any difference whether the thing being supplied is a revenue asset or a capital asset (though some exemptions may apply, for example, on the sale of a going concern: ¶11-500). The concept of a supply is very wide, and can apply whenever one entity provides something of value to another entity. The “something” can be anything and can be provided by any means. It can be provided by the supplier refraining from acting, or by the supplier tolerating some act or situation, just as it can be provided by means of the supplier doing some act (FC of T v MBI Properties Pty Ltd [2014] HCA 49). Thus, agreeing to refrain from producing goods could still be a supply, even if there is no element of consumption (GST Ruling GSTR 2001/4). A transaction which involves a supplier entering into and performing an executory contract (such as a lease) will in general involve the supplier making at least two supplies: (1) a supply which occurs at the time of entering into the contract, in the form of both the creation of a contractual right to performance and the corresponding entering into of a contractual obligation to perform; and (2) a supply which occurs at the time of contractual performance. This is so even if contractual performance involves nothing more than the supplier observing a contractual obligation to refrain from taking some action or to tolerate some situation during a contractually defined period (FC of T v MBI Properties Pty Ltd [2014] HCA 49). However, it has been previously suggested that there cannot be a supply constituted by a release of an obligation that occurs independently of the act of the releasor (Shaw v Director of Housing and State of Tasmania (No 2) 2001 ATC 4054: see ¶4-085). The ATO considers that a supply is normally something that passes from one entity to another (GST Rulings GSTR 2001/4; GSTR 2006/9). A company branch is not regarded as a separate entity from the company, unless it is registered as a GST branch (¶17-300). Therefore, if an unregistered branch carries out services for the company, there would not be a supply involved. The ATO considers, on the basis of the Department of Transport case (¶5-010), that even if there is no binding obligation between a payer and a supplier for services or goods to be provided to a third party, there may nevertheless be a supply made by the supplier to the payer in certain circumstances (¶4-015). One transaction can constitute two or more supplies. For example, where a government department subsidised a taxi company for discounted fares provided for disabled customers, it was held that this constituted a supply by the company of services to the department and a separate supply to the customers (FC of T v Department of Transport (Vic), ¶5-010). For the ATO’s views on subsidies, see ¶4040. Examples (1) In the sale of a business, the ATO accepts that the assumption of an obligation by the purchaser (eg in relation to the continuation of long service leave entitlements) does not constitute a supply by the purchaser if the liability on the purchaser is imposed, required and effected by the words of a statute. The same applies if the statutory liability is merely confirmed by way of contractual agreement between the parties (GST Rulings GSTR 2004/9; GSTR 2006/9). (2) Where an employee changes jobs from one government employer to another, and the new employer is legally required to assume liability for the employee’s accrued long service leave entitlements, the new employer does not make a supply when it simply accepts the statutorily-required payment from the previous employer to cover those entitlements (GST Ruling GSTR 2004/9). For further discussion of the position where liabilities are assumed by the purchaser on the sale of a business, see ¶11-515. (3) There was no supply where an entity that did not exercise a right to acquire shares under an entitlement offer later received a premium as a result of the shares being subsequently sold, at a higher price, to other investors (Interpretative Decision ID 2009/11). (4) An entity would not make a supply simply because a government licence it held was unilaterally cancelled.

The ATO considers that for an “entry into an obligation” to constitute a supply, the obligation must have economic value and an independent identity that is separate from the underlying transaction (GST Ruling GSTR 2001/6). For the possible application of this rule to the purchase of a property subject to an existing lease, see ¶11-335. Compulsory acquisitions

On a similar basis, the ATO also considers that the compulsory resumption of land from a taxpayer does not involve a “surrender” or other supply unless the taxpayer has taken some action to cause its interest to be transferred or surrendered to the relevant authority. Accordingly, there is no supply by the taxpayer where its legal interest is divested by operation of the resumption statute, for example, upon gazettal of the acquisition notice, and the authority initiated the resumption process pursuant to a statutory right (GST Ruling GSTR 2006/9; see also CSR Ltd v Hornsby Shire Council 2004 ATC 4966). This may apply even though the owner agreed to the price to be paid for the resumption. However, where the owner, following a rezoning of land, exercised its right to request a council to acquire the land, the subsequent transfer of the land to the council constituted a taxable supply by the owner (Hornsby Shire Council v FC of T 2008 ATC ¶10-061; GST Ruling GSTR 2006/9). This would also have the consequence that the council may have been entitled to an input tax credit on the acquisition. Similarly, there was held to be a supply where the taxpayer executed a contract of sale under which it agreed to convey the land to the State of Queensland at a time when the statutory process of resumption was in prospect but had not come to fruition (SXGX v FC of T [2011] AATA 110). For the position where co-owned land is partitioned, see ¶11-064. Supplies of money A payment of money for the supply of something else is not a “supply” — otherwise there would be a doubling up of GST (s 9-10(4)). Example (1) Lee buys office equipment from a retailer. The supply in this transaction is the supply of the equipment by the retailer to Lee. There is not also a supply of money by Lee to the retailer. (2) A liquidator makes a cash distribution to a shareholder as part of winding up a company. GST would not apply to the payment as it is not a supply (see also ¶4-020). (3) A capital contribution of money made by a partner on entering into a general law partnership is not a supply (GST Ruling GSTR 2003/13). For “in kind” contributions, see below.

However, if money is provided as consideration for the supply of other money, that will be treated as a supply. This may apply, for example, where there is a foreign exchange transaction or a cheque is cashed for a fee. This is treated as a financial supply (¶10-010). Example Company A contributes an amount to company B’s business in return for a right to a share of the net profit from that business. This contribution is not treated as providing consideration for a supply of money, and therefore is not treated as a supply by A under s 910(4). Nor is it treated as an input taxed supply of an interest in a credit arrangement under s 40-5(1) (¶10-005; Interpretative Decisions ID 2007/15; ID 2007/17). Note: Entity B would be treated as making a taxable supply of the right to profits under s 9-10(2) (e). The supply would not be treated as an input taxed supply of an interest in a debt (Interpretative Decisions ID 2007/16; ID 2007/18).

“Money” includes currency, promissory notes, bills of exchange, negotiable instruments intended to be used as currency, postal notes, money orders and payments by way of credit or debit card, credit or debit to an account or creation or transfer of a debt (s 195-1). It does not include collectors’ pieces, investment articles, items of numismatic interest or currency with a market value above its face value. Bitcoin and digital currency transactions For supplies or payments made on or after 1 July 2017, the GST treatment of digital currency such as bitcoin is aligned with that of money (s 9-10(4); 9-85(2)). The effect is that a supply of digital currency is not treated as a supply unless it is provided as consideration for another supply of money or digital currency — for example, in debt trading or foreign currency speculation. If there is such a supply, it will be treated as a financial supply. This treatment overturns the previous practice of treating digital currency as intangible property. That practice had the effect that users could effectively have to bear GST twice — once on the purchase of the currency and again on its use in exchange for other goods and services subject to GST. This was seen as

an obstacle for the financial technology sector to grow in Australia. “Digital currency” refers to digital units of value that: • are designed to be “fungible”, or fully interchangeable for the purpose of their use as consideration for a supply. Digital assets that are valuable because of their specific features, such as photographs, do not qualify • are generally available to members of the public, without any substantial restriction on their use as consideration • are not denominated in any country’s currency • do not have a value that depends on the value of anything else, and • do not give an entitlement to receive or to direct the supply of a particular thing, unless that entitlement is merely incidental (s 195-1). For an article on the income tax rules on bitcoin, see CCH Tax Week ¶888 (2017). Transactions by partners and partnerships A partnership is treated as an entity in itself for GST purposes (¶3-015). If a partner supplies something in their capacity as a partner, this is treated as a supply by the partnership, not by the partner (s 184-5). Factors that may indicate that the supply has been made in the capacity as a partner include: • the consideration for the supply is paid to a common fund or to all the partners • the supply is of a kind that is typically made in the type of enterprise carried on by the partnership, and • the invoice shows the firm or business name, or the names of all the partners, as supplier (GST Ruling GSTR 2003/13). A corresponding rule applies to supplies made by members of the committee of management of any other unincorporated association. An “in kind” capital contribution made by a partner on entering into a general law partnership (¶3-015) is a supply by the partner, and may be taxable if made as part of carrying on or closing down a separate business run by the partner. The ATO also considers that an in-kind distribution made to the partner during the operation of a general law partnership, or as a final distribution on its winding up, is a supply by the partnership for consideration. This consideration is the reduction in the value of the partner’s interest in the partnership (GST Ruling GSTR 2003/13). The ATO considers that where a partner takes goods held as trading stock from the partnership for private or domestic use, this will be a supply by the partnership in the course of its business (GST Determination GSTD 2009/2). If the partner provides inadequate consideration for the supply, GST may be based on the market value (¶17-500). The special adjustment applicable under Div 130 (¶6-320) does not apply in these circumstances. Transactions by trustees Although a trust is an entity (¶3-015), it is not a legal person able to have legal obligations or duties. As the NSW Supreme Court has commented, it is therefore “difficult to conceive how a trust, which has no legal personality, as distinct from a trustee, or a trustee’s agent, can make a supply” (Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83). Supplies are therefore made by trustees, not trusts. The ATO says that an entity acting in its capacity as trustee does not normally contract as agent for the beneficiary of the trust (¶17-400), but as principal (GST Ruling GSTR 2008/3). A taxpayer who was a trustee of a trust and traded under a company name, and who signed a contract as the director/secretary of the company, could not claim that he was a party to the contract in his capacity

as trustee for the trust (Harland v FC of T 2013 ATC ¶10-348). In the case of a bare trust, where the trustee has no or minimal active duties, the ATO considers that: • the trustee does not carry on an enterprise (¶4-090) and therefore cannot make a taxable supply, and cannot be registered (¶3-000); see also Wynnum Holdings No 1 Pty Ltd v FC of T 2012 ATC ¶10-274 • if the trustee transfers legal title to property to a third party at the direction of the beneficiaries, it is the beneficiaries that make the supply, even though the legal title was held by the trustee • a change of bare trustees does not give rise to GST, but a change of beneficiaries may involve a taxable supply • relevant tax invoices may be made in the name of the trustee, rather than the beneficiaries (¶5-010). The Commissioner has also waived the requirement to hold a tax invoice in certain bare trust situations (WTI 2013/2: see ¶5-130), and • the trustee may sign an agreement to apply the margin scheme (¶11-100) or an agreement that a supply be a supply of a going concern (¶11-500) (GST Ruling GSTR 2008/3). For the liability of trustees, see ¶18-270. Examples (1) A taxpayer carrying on business as a developer acquires land from V in the name of a shelf company which agrees to act solely as a bare trustee in accordance with the developer’s instructions. V calculates the GST on the sale under the margin scheme. The developer carries out a strata unit development on the land and arranges for the subsequent sale of the units. All moneys relevant to the original purchase, the development and the ultimate realisation are provided by the developer, and all legal documentation is signed by the trustee as owner of the land. The GST implications are: (a) the creation of the trust does not give rise to GST (b) the acquisition of the land is an acquisition by the developer, but no input tax credit can be claimed as V calculated GST under the margin scheme (c) other acquisitions relating to development and sale of the units are made by the developer, who could claim input tax credits (d) the ultimate sale of the units is a taxable supply by the developer, who may make use of the margin scheme in accordance with the normal rules. (2) Assume that the developer retains one unit and directs the trustee to transfer title to it. The developer later sells the unit in its own name. The transfer of the unit to the developer is not a taxable supply because the trustee is not carrying on an enterprise. The subsequent sale by the developer will be a taxable supply. (Despite the earlier transfer by the trustee, the sale will nevertheless be treated as a sale of new residential premises: ¶11-020.) (3) Assume instead that the developer originally acquired the land in its own name and then transferred title to the trustee to hold on a bare trust. This would not be treated as a taxable supply as there is no consideration. The associate rules (¶17-500) would not apply, as the market value of the supply is nil. (Based on GST Ruling GSTR 2008/3.)

Motor vehicle holdback and incentive payments Certain third party rebates or “holdback” payments made by manufacturers, for example in the car industry, are not treated as consideration for a supply, as there is no supply involved (GST Ruling GSTR 2000/19; GST Determination GSTD 2005/4; see also KAP Motors Pty Ltd & Anor v FC of T 2008 ATC ¶20-007). For the treatment of refunds where a taxpayer has incorrectly overpaid GST in this situation, see ¶8-110. This does not apply to specified fleet rebates and run-out model support payments, which have been held to be consideration for the supply of the vehicles to customers, though target incentives were not (AP Group Ltd v FC of T [2013] FCAFC 105). As a result of this decision, the ATO has issued guidelines in GST Ruling GSTR 2014/1. These include: • where the dealer does something specific for the manufacturer for the incentive payment, there is a supply by the dealer to the manufacturer for consideration. This does not apply to conduct by the

dealer that is for its own benefit and something the dealer would be likely to do anyway without an incentive payment, even if the manufacturer perceives an advantage in encouraging the conduct • where the supply of particular vehicles to a customer is the reason for the incentive payment, and there is nothing specific the dealer does for the manufacturer for the payment, there is a supply for consideration of the vehicle by the dealer to the customer • where the dealer does not make any supply for consideration, the dealer is not liable for GST and the manufacturer is not entitled to an input tax credit. However, in these circumstances, an incentive payment may give rise to a GST adjustment (¶6-100). Modified rules apply in attributing GST where an incentive payment is received by a dealer (¶7-440). For modified tax invoice requirements, see ¶5-130. For the general treatment of multi-party transactions, see ¶4-015. Small-scale renewable technology rights Under the small-scale renewable energy scheme, the owner of an installed eligible solar water heater or small generation unit may acquire assignable rights to create small-scale technology certificates (STCs) in return for financial benefits. In these circumstances, the ATO’s practice is: (1) the sale of the heater would be subject to GST in the normal way (2) the assignment of the right by the customer would only attract GST where the customer was GSTregistered (or required to be) (3) GST would not apply to the creation of the STC by the assignee, as there is no “supply” involved (4) sale of the created STC would be a supply which would be subject to GST, unless the vendor is not registered for GST, or required to be. The ATO considers that steps (1) and (2) must be accounted for separately, and cannot be “netted” for GST purposes. Example A retailer of a solar water heater sells an eligible system to a customer for a GST-inclusive price of $4,400. The customer, who is not GST-registered (or required to be), assigns their right to create STCs in relation to the heater to the retailer. In return, the retailer discounts the price by $600, and the customer pays a net $3,800. The GST consequences are as follows: • the retailer is liable for GST of $400 on the supply of the water heater to the customer • the assignment by the customer of the right to create STCs, in return for $600, is not subject to GST. The retailer therefore cannot claim input tax credits on the assignment. If instead the customer had been GST-registered (or required to be), the assignment would be a taxable supply. The customer would therefore be liable to remit GST of 1/11th of $600, and to provide a tax invoice to the retailer so they can claim the relevant input tax credit (based on ATO Fact Sheet: GST and the small-scale renewable energy scheme).

As to whether the activity of installing and generating electricity through a photovoltaic installation on a private residence constitutes an “economic activity”, see ¶3-020. Supplies in a brothel Where a customer purchases sexual services in a brothel, there can be a question as to whether the relevant supply can be split up into a supply of the room hire (by the brothel owner) and a separate supply of the sexual services (by the sex worker). It appears that the ATO may accept that there are separate supplies if the facts demonstrate that the fees for these are properly segregated physically and by proper accounting (Harrison v FC of T [2010] AATA 155). In such a case, the owner would be liable to GST only on the room hire. However, this would not apply if the facts were that the owner supplied the customer with the total service, for a single inclusive price, and used the sex worker as a sub-contractor for the sexual component (Case 5/2018 ATC ¶1-097).

ATO’s summary of “supply” rules The ATO considers that the following propositions generally apply in identifying and characterising typical two-party supplies: (1) for every supply there is a supplier (2) generally, for every supply there is a recipient and an acquisition (3) a supply may be mixed, composite or neither (4) a transaction may involve two or more supplies (5) to “make a supply”, an entity must do something (though refraining from an act, or tolerating some act or situation, may also be sufficient: MBI Properties, above) (6) “supply” usually, but not necessarily, requires something to be passed from one entity to another (7) an entity cannot make a supply to itself (8) a supply cannot be made by more than one entity (9) creation of expectations alone does not establish a supply (10) it is necessary to analyse the transaction that occurs, not a transaction that might have occurred (GST Ruling GSTR 2006/9). [GSTG ¶10-070]

¶4-015 Multi-party transactions Transactions may of course involve more than two parties. According to the circumstances, these transactions may comprise: • a supply made to one entity but provided to another entity • the making of two or more supplies, or • a supply made and provided to one entity and consideration paid by a third party. The ATO uses the following propositions when analysing these arrangements (the numbering follows on from the 10 propositions used in analysing two-party arrangements (¶4-010)): (11) the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply (see Example 1) (12) transactions that are neither based in an agreement that binds the parties in some way, nor involve a supply of goods, services or some other thing, do not establish a supply (see Example 3) (13) when A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow) (Examples 1 and 2) (14) a third party may pay for a supply but not be the recipient of the supply (see for example the TT-Line case: ¶4-020) (15) one set of activities may constitute the making of two or more supplies (see for example the Department of Transport case: ¶5-010) (16) the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply (GST Ruling GSTR 2006/9). Examples The following examples of the ATO’s approach are adapted from GST Ruling GSTR 2006/9: (1) A enters into a contract with B, a florist, for B to provide flowers to C. There is no contractual relationship between A and C. Also, there is no contractual relationship between B and C, as B simply provides flowers to C on A’s behalf. The only contractual relationship is between A and B. Under this contract, B makes a supply of flowers to A and consideration is paid by A to B. The flowers are provided (not supplied) by B to C.

(2) An airline had an arrangement where third party food outlets provided food to passengers on delayed flights. When there was a flight delay, vouchers of a specified amount were made available for passengers’ use at the outlets. The ATO would treat this in the same way as the supply of flowers in Example (1), ie the food outlets make a supply of the meals to the airline, but provide the meals to the passengers. Note that in comparable circumstances in the UK, the supply has been treated not as a supply of meals but the supply of a right to have the passengers fed (British Airways plc [2000] BVC 2207; following Customs and Excise Commissioners v Redrow Group plc [1999] BVC 96). (3) M, a manufacturer, supplies goods to authorised dealers who on-supply those goods to end-users. M makes a standing offer to end users that if their purchases from an authorised dealer reach a certain level, M will pay the end user a “loyalty payment”. Under this arrangement, M supplies goods to a dealer (D), and D supplies goods to an end-user (E). E receives a loyalty payment from M. However, there is no supply from E to M in relation to the loyalty payment. (However, M may be entitled to a decreasing adjustment of 1/11th of the third party payment: ¶6-100.)

The ATO considers, on the basis of the Department of Transport case (¶5-010), that even if there is not a binding obligation between a payer and a supplier for services or goods to be provided to a third party, there may nevertheless be a supply made by the supplier to the payer. This may occur in certain cases where it is in accordance with a pre-existing framework which contemplates that the services or goods will be provided in that way (2011 Addenda to GST Rulings GSTR 2006/9; GSTR 2006/10).

¶4-020 Requirement 2: supply must be “for consideration” The second requirement for a taxable supply is that the supply is made “for consideration”. Consideration means, in effect, just about anything of value (s 9-15). In the straightforward example of a sale of goods for money, the consideration is simply the payment. As well as payment, consideration also covers situations where someone does something or refrains from doing something. Any of these things are treated as consideration for a supply if they are: • “in connection with” the supply (this is interpreted widely) • made in response to the supply, or • made to induce the supply. It is not necessary that the consideration is provided by the recipient of the goods or services — it may be provided by a third party. Nor is it necessary that there was any legal obligation to make the payment, or that it was made to the supplier (TT-Line Company Pty Ltd v FC of T 2009 ATC ¶20-157; GST Ruling GSTR 2006/9). However, in such cases, it would be necessary to establish that there is a sufficient connection between the supply and the third party payment. Examples (1) Kool Kars sells a car that was financed under a hire-purchase agreement. It directs the purchaser to pay the purchase price directly to the financiers to cover the amount still owing to them by Kool Kars. This payment will be treated as consideration for the supply of the car by Kool Kars. (2) A service trust associated with a law firm provided tax minimisation schemes to clients. A fee was payable by the clients, but this was not paid to the trust — instead it benefited other individuals or entities associated with the trust. The AAT ruled that this was a taxable supply for consideration. (Based on Keenhilt Pty Ltd v FC of T [2007] AATA 2095.) (3) The government reimbursed a transport company for discounts the company allowed to its passengers. The reimbursement precisely matched the amount of fare reduction offered to passengers. The court considered that the reimbursement formed part of the consideration received by the company for providing transport services. (Based on TT-Line case.) Note: (1) the reimbursement was not covered by the exemption for government appropriations (¶4-040); (2) for the separate issue of whether an input tax credit can be claimed, see the Department of Transport case at ¶5-010. For the general position on subsidies, see ¶4-040.

It is not necessary that the consideration be adequate or at a commercial rate. The requirement that the consideration be “for” the supply means that there must be a connection or relationship — not necessarily a contractual one — between the supply and the consideration (FC of T v Qantas Airways Ltd [2012] HCA 41).

Payments by members Payments made by members to their associations can be consideration. Example The registered body corporate of a block of home units imposes a levy on each owner. This is treated as consideration for the services that the body corporate provides. As the body corporate is regarded as carrying on an enterprise (¶11-200), GST will be payable if it meets the relevant turnover threshold (Body Corporate, Villa Edgewater Courts 23092 v FC of T 2004 ATC 2056). However, the body corporate can claim input tax credits for the GST it pays outside contractors for providing those services.

Similarly, club membership subscriptions are treated as consideration for the supply of membership services. Example To obtain membership of a club, Hector must pay a membership fee and also provide an interest-free loan to the club. This will be treated as a supply of membership services for a consideration equal to the membership fee plus the benefit to the club of having the interest-free use of the loan moneys for the period of the loan. (Based on Interpretative Decision ID 2003/4; see also Exeter Golf and Country Club Ltd v Customs and Excise Commissioners (1981) 1 BVC 385.)

For the treatment of fines imposed on members, see ¶4-080. Non-monetary consideration and bartering The consideration for a supply may be monetary or non-monetary, or a combination of both. If there is a barter transaction, where property or services are traded for other property or services, this is treated as a supply for consideration by each party. For example, where web pages are designed in exchange for web server space, this is treated as a supply of design services for consideration and a separate supply of server space for consideration. The GST is based on the GST-inclusive market value of the property or services bartered (s 9-75). Tax invoices will need to be issued to enable input tax credits to be claimed by either party. Example Enterprises sells an item of equipment to Business in return for specified services. The GST-inclusive market value of the equipment and the services is assumed to be the same, ie $11,000. Enterprises is liable for GST of $1,000 on the sale of the equipment and can claim a $1,000 input tax credit on the acquisition of the services. Business is liable for GST of $1,000 on the supply of the services and can claim a $1,000 input tax credit on the acquisition of the equipment.

The market value is the price that would be negotiated between a knowledgeable and willing (but not anxious) buyer and a knowledgeable and willing (but not anxious) seller, acting at arm’s length in an appropriate market. This will often be determined on the basis of the value of identical or closely similar items, but in some cases a professional appraisal may be needed. In the case of new or unique items, a cost plus profit margin method may be appropriate. Where the market value is difficult to determine, for example where intangibles are involved, the market value may be assumed to be equal to the consideration provided. The Commissioner does not accept “historical cost” or “residual value” methods (GST Ruling GSTR 2001/6). For further guidelines on market valuations, see the ATO’s Market Valuation for Tax Purposes (www.ato.gov.au/General/Capital-gains-tax/In-detail/Market-valuations/Marketvaluation-for-tax-purposes). The Commissioner considers that the market value should be determined at a time that is reasonable in the circumstances. This may be when the agreement is entered into, when economic risk is transferred, or when the recipient assumes effective control (GST Ruling GSTR 2001/6). If a supplier is on a cash basis and receives consideration in the form of services over more than one tax period, the services will need to be apportioned. This may be done on the basis described in GST Determination GSTD 2000/3 (¶19-100). In determining when services begin to be provided, purely

preliminary activities may be disregarded in appropriate circumstances (GST Ruling GSTR 2001/6). For the treatment of bitcoin transactions, see ¶4-010. For the Commissioner’s guidelines on barter transactions carried out under a formalised system involving points or credits, see ¶7-435. Simplified compliance rules From 18 November 2016, simplified compliance rules apply to barter (or “countertrade”) transactions in the following situation: • countertrade transactions do not exceed approximately 10% of the taxpayer’s total number of supplies • both parties to the transaction are GST-registered and are acting at arm’s length • both supplies are fully taxable/creditable • no monetary consideration is involved, and • appropriate records of the transaction are kept (Practical Compliance Guideline PCG 2016/18). The general effect is that the two parties do not need to agree on the value of the transaction, or exchange tax invoices, where the transaction is GST-neutral. Instead, each party can report the supply and the corresponding acquisition at the amount that they consider the goods or services they have supplied to be worth. Mining “farm out” arrangements For the ATO’s views on the application of the GST rules to farm-out arrangements that are commonly used in the mining and petroleum industries, see Miscellaneous Taxation Ruling MT 2012/1 (immediate transfers) and Miscellaneous Ruling MT 2012/2; A New Tax System (Goods and Services Tax) (Particular Attribution Rules Where Supply or Acquisition Made Under a Contract Subject to Preconditions) Determination 2012 (deferred transfers). Adjustments and set-offs on sale of business For the calculation of consideration where the sale price of a business is affected by adjustments and setoffs, see ¶11-515. Trade-ins For the GST treatment of motor vehicle trade-ins, see ¶12-125. Government charges Government “fee for service” charges, such as park entry charges or visa fees, are treated as consideration for the services to which they relate, and GST may therefore apply. However, there are various exceptions to this (¶4-080). Appropriations made between government bodies are not subject to GST, even if they are separately registered (¶4-040). Rights and options If someone is granted a right or option to acquire something, that is a supply. If the option is later exercised, that is a further supply. The amount paid, if any, for each supply is treated separately. This would apply even if the contract states that the purchase price is inclusive of the option fee (The Trustee for the Whitby Trust v FC of T 2017 ATC ¶10-450). One effect of this rule is that the second supply is not subject to GST unless there is an extra amount payable on the exercise of the option (s 9-17). Separate rules apply to certain redeemable vouchers (¶4-060). Example In February 2019, Enterprises, a registered business with quarterly tax periods, grants an option to Trader to buy land for business purposes for $220,000. Trader pays Enterprises $22,000 on the grant of the option. Enterprises must account for 1/11 × $22,000 = $2,000 in its GST return for the March 2019 quarter. In July 2019, Trader exercises the option and pays Enterprises the balance of $198,000. Enterprises must account for GST of 1/11 × $198,000 = $18,000 in its GST return for the September 2019 quarter.

If Trader is also registered with quarterly tax periods, it can claim input tax credits for $2,000 in the March 2019 quarter and $18,000 in the September 2019 quarter.

GST will also potentially apply where an option is assigned or renewed for consideration, but apparently not where the option simply expires. For transitional provisions relating to options granted before 1 July 2000, see ¶19-200. Note that if a supply is GST-free, the supply of a right to that supply is itself GST-free. Similarly, if a supply is input taxed, the supply of a right to that supply is itself input taxed (s 9-30). Early termination of lease of goods The Commissioner’s views on the GST treatment of payments received on early termination of a lease of goods are as follows (GST Ruling GSTR 2003/11): • where the lessee exercises a contractual right to terminate early, the termination payment is treated as altering the consideration for the original supply of the leased goods, giving rise to a GST adjustment. The same applies if the lessee terminates early pursuant to a right under consumer credit legislation • where there is an early termination by mutual agreement, outside the terms of the original lease, the termination payment is treated as consideration for a separate supply by the lessor. The same applies where the lease allows for early termination at the lessor’s discretion • if the early termination payment arises automatically from the lessee’s default, and it is made to genuinely compensate the lessor for any damage suffered, it will not be treated as consideration for a supply, so GST will not apply. The same would normally apply to early termination payments that become due because of some external event, such as where the leased goods are stolen, destroyed or compulsorily acquired. However, specific components of the termination payment may be treated separately. For example, if part of the payment is made in satisfaction of arrears of lease instalments, that part is always treated as consideration for the earlier supply of the leased goods. If part of the payment is made for transferring title to the goods to the lessee, the ATO considers that this should be treated as consideration for a separate supply (the supply of title). For the GST treatment of lease incentives and payouts in relation to commercial leases of real estate, see ¶11-330. Early termination of hire-purchase agreement Where the supplier terminates a hire-purchase agreement (¶7-438) due to the hirer’s default, the termination amount payable to the supplier is treated as damages and therefore does not form part of the consideration for the supply, except for any component representing a payment of pre-termination arrears (Interpretative Decision ID 2013/52). For GST adjustments that may apply, see ¶6-100 (Interpretative Decision ID 2013/51). Termination of water access rights For the treatment of termination fees paid by irrigators to water infrastructure operators, see ¶16-200. Distributions by liquidators, trustees It appears that a cash distribution by a liquidator on the extinguishment of shares is not a supply (¶4-010). Nor, it seems, is it consideration for a supply by the shareholders. There are accordingly no GST consequences of such a distribution. An “in specie” distribution of the company’s assets is also not normally made for consideration. However, it may nevertheless be subject to GST in certain situations where it is made to an associate (¶17-500): see ATO GST Industry Issues — Representative of Incapacitated Entities: Issue 5.1. There may be consideration where a trustee transfers an asset to a beneficiary who has an indefeasible interest in the trust property. However, a distribution of an asset by a trustee to a beneficiary under a

discretionary trust would not be for consideration, as the beneficiary has no rights to surrender (see also ¶17-500). Dividends paid to parent company Where a parent company provides management services to a subsidiary, the mere receipt of dividends from the subsidiary would probably not be treated as consideration for those services (Floridienne SA & Berginvest SA v Belgian State [2001] BVC 76). Pro bono services A business may provide free goods or services to deserving clients, for example the poor, charities and local non-profit groups. These “pro bono” supplies are not subject to GST as there is no consideration. If they are provided at a discount, GST will only be payable on the discounted price. In either case, the supplier could presumably claim input tax credits for its costs, provided that pro bono work can be regarded as being done in the normal course of a business. Supplies to associates In certain cases, if something is supplied free or at a discount to an associate, GST may be payable as if the associate had paid market value (¶17-500). [GSTG ¶11-000]

¶4-030 Gifts, tips, promotions and stolen property Most gifts do not attract GST as no consideration is involved and, in any event, they will usually be made in non-business situations. A gift is something that is transferred voluntarily for no material advantage (FC of T v McPhail (1968) 17 CLR 111; Taxation Ruling TR 2005/13). On this basis, the ATO considers that membership fees paid to a charity organisation are not gifts because they confer membership rights, even though these may not be tangible. However, a school scholarship is evidently regarded as a gift (¶14-004). A restaurant proprietor is liable for GST on service charges and pre-set extras, but not on genuine tips made personally to restaurant staff. If a tip is paid with a credit card, GST will not apply if the amount of the tip is actually given to the person for whom it was intended. This must be recorded by the business (ATO GST Industry Issues — Tourism and Hospitality: Issue 26). The Commissioner considers that tips paid to registered taxi operators are subject to GST. No GST applies to free services such as shuttle bus services for club patrons. The fact that goods or services are provided as a gift does not prevent the donor from claiming an input tax credit for the cost if the gift is made in the course of carrying on the donor’s enterprise. Gifts made to associates can be subject to GST in certain situations (¶17-500). Fundraising dinners, auctions and functions At a typical $1,000-a-plate fundraising dinner, none of the $1,000 can be treated as a gift, even though the actual value of the dinner may only be $100. This applies even if the admission price is notionally split into $100 for the dinner and $900 as a “gift”, unless the gift component is truly optional. Similarly, if a person at a charity auction pays $100 for an item worth $40, no part of the $100 is treated as a gift. Accordingly GST, if applicable, will be calculated on the full amount. On the other hand, GST will not apply on separate genuinely voluntary payments. For example, if a person pays $22 to attend a fundraising trivia night, and later makes a voluntary contribution of $10, the GST will be limited to 1/11 × $22 = $2. In certain circumstances, charities and non-profit bodies may elect to treat fundraising activities as input taxed (¶15-055). “Crowdfunding” arrangements Crowdfunding involves using the internet and social media to raise funds for specific projects or particular business ventures. Typically, the promoter of the project or venture engages an intermediary to operate

an online platform that allows the promoter to connect to potential funders. The ATO’s views on the GST impacts are as follows: (1) if the funder makes a payment without receiving anything significant in return, apart from public acknowledgement, there is no supply by the promoter, so GST would not apply to that transaction. However, GST may apply to the supply of services by the intermediary to the promoter, who may claim an input tax credit for those (2) if the funder receives something significant in return, such as free or concessional goods or services, the promoter will be liable for GST on those supplies, provided that it satisfies the usual GST requirements (registration, carrying on an enterprise, connection with Australia, etc: ¶4-000). The funder would be entitled to an input tax credit if it satisfies the general requirements for creditable acquisitions (¶5-010). The intermediary makes a taxable supply of services to the promoter, who is entitled to an input tax credit for those (3) if the funder makes a payment in return for an interest in the equity of the promoter (such as shares in the company), the supply of the shares is input taxed (¶10-000), and no input tax credit is available to the funder. The intermediary makes a taxable supply of services to the promoter, who is not entitled to an input tax credit for those unless it satisfies a concessional rule such as the financial acquisitions threshold test (¶10-032) (4) if the funder’s payment is to be repaid with interest, both the funder and the promoter have made input taxed financial supplies. The intermediary/promoter’s position is the same as in (3) above. Clients’ meals Under the income tax rules, a taxpayer wishing to claim a tax deduction for meals provided to its clients at an in-house dining facility must include a specified amount in assessable income. This is not treated as a supply for consideration (Interpretative Decision ID 2005/121). Collect-a-Cap and similar programs Under promotional programs such as Collect-a-Cap, a manufacturer makes a payment to a participating organisation for every specially marked bottle cap from the manufacturer’s product collected by the organisation. The ATO considers that if the organisation is registered, the provision of the caps may be a taxable supply by the organisation for a consideration equal to the payment made by the manufacturer. GST of 1/11th of that payment would therefore be payable. However, if the organisation is a charity, giftdeductible entity or government school (¶15-000), the supply will be GST-free because it is the sale of donated second-hand goods (¶15-030). If the organisation is a specified non-profit body, it has the option to treat its Collect-a-Cap activities as a non-profit sub-entity (¶15-080), which will not have to register and pay GST unless the turnover is $150,000 or more. In that case, however, the organisation could not claim input tax credits on its purchases made in carrying out those activities. Marketing incentives Payments received by a retailer as an incentive to sell a particular manufacturer’s or wholesaler’s products are treated as consideration for a supply by the retailer. Example Under an incentive agreement between a greeting card wholesaler and a GST-registered newsagency, the agency receives $1,000 plus a month’s supply of free stock in return for agreeing to sell the wholesaler’s cards for 12 months. This is treated as a taxable supply by the agency, which must account for GST based on a consideration equal to $1,000 plus the market value of the free stock.

“Free” software If “free” software is downloaded over the internet, there would normally be no consideration, so GST would not apply. However, it is possible that there will be consideration if the software is accompanied by a “cookie” that provides benefits to the supplier. It would, however, be difficult to value the consideration involved. Acknowledgments

The Commissioner considers that if something is supplied voluntarily, it may still be a gift even though the supplier receives an in-kind “payment” purely in recognition of the supplier’s benevolence (GST Ruling GSTR 2001/6). Example A company supplies equipment to a school free of charge to use on its annual speech night. The fact that the school acknowledges the company in its program does not prevent the supply from being a gift. However, if the school provided advertising or naming rights to the company, that would be treated as a paid sponsorship and GST may apply (¶4-040).

Tokens of appreciation If a conference organiser presents a speaker with a mere token of appreciation, this will generally not be treated as consideration for the speaker’s services (GST Determination GSTD 2002/5). The Commissioner says that a typical token of appreciation could include a book, a bottle of wine or a bunch of flowers. It will not be a token of appreciation if the speaker has requested it, or expects or is entitled to it. Example A speaker who is registered for GST charges $550 for her speaking services. In addition, she is presented with a bottle of wine as an unsolicited token of appreciation. Only the $550 is treated as consideration. The GST is therefore 1/11 × $550 = $50. If the speaker had not charged any fee, and received only the bottle of wine, there would be no consideration for the speaking services and no GST liability.

As an exception to this general rule, a token of appreciation may be treated as consideration where there are special circumstances. Factors that may point to the token being consideration include: • the fact that it is significantly different from gifts given to other speakers • the fact that it complements another non-monetary fee provided to the speaker, for example, where the non-monetary fee is a laptop computer and the token is complementary software, the token may be considered as additional consideration • the motive of the organiser • whether the value of the token exceeds what is reasonable, taking into account the fee paid to the speaker or comparable speakers for this type of engagement. For example, where a speaker waives a significant fee and instead receives a comparably-valued item of equipment related to the speaker’s business, the token may be treated as consideration (GST Determination GSTD 2002/5). The Commissioner considers that accommodation, transport and meals are not consideration if they are provided merely to enable the speaker to supply the speaking services. However, they would be consideration to the extent that they go beyond that, for example, where they cover a period outside the conference, or the speaker’s family members (GST Determination GSTD 2002/5). A “gift” of free product presented by a direct marketer to the host of a product party held at the host’s home was a taxable supply, as it was conditional on the services provided by the host (Interpretative Decision ID 2004/673). An honorarium given to persons for voluntary services (eg by a football club to a strapper) may constitute consideration if there is sufficient connection between the services and the payment (GST Advice GSTA TPP 015). Promotions “Happy hour” alcohol promotions are subject to GST on the discounted price. A free drink which is given away as part of a promotion would normally not be subject to GST as there is no amount paid. The same applies if a restaurant offers an additional main course (or bottle of wine) for

diners who pay for a meal, or similar “buy one, get one free” type offers. In this case, GST applies to the amount charged. There is no GST on the notional value of the additional main course or wine. For the situation where promotional items are supplied “free” with GST-free food, see ¶13-200. Stolen property Where property is stolen from a business, that is not a taxable supply as no consideration has been provided. No adjustment is made to any input tax credit that the business may have claimed when it originally acquired the property (¶6-100). If the thief is later forced to make some payment for the goods, there would be a taxable supply to that extent. If a business is robbed of its takings, representing the proceeds of earlier taxable supplies, that does not alter the fact that GST is payable on those supplies. If the business is reimbursed under an insurance policy, the settlement will not be subject to GST (¶10-120). No GST applies if a taxi passenger “does a runner” and does not pay the fare. The supply of the taxi service to the passenger is not a taxable supply as there is no consideration. [GSTG ¶11-730]

¶4-035 Competitions and prizes There are three different sets of rules that may apply to competitions: • charitable raffles and bingo may be GST-free (¶15-020) • commercial gambling — including lotteries, raffles, and betting on games, races or sporting events — is covered by special rules (¶16-000) • other competitions are covered by the general GST rules, as discussed below. In a competition covered by the general rules, there are various types of supply that may be subject to GST, if the supplier is registered and makes the supply as part of an enterprise: • the supply by the organiser to entrants of rights to participate • the supply by the entrants of their participation • the supply by the organiser of (non-monetary) prizes. (1) Organiser’s supply of right to participate If an entry fee or some other consideration is paid by the entrant, and the organiser is registered, the organiser’s supply of the right to participate is subject to GST (GST Ruling GSTR 2002/3). So, for example, if the entry fee is $110, the GST will be $10. The entrant can claim an input tax credit for this amount if the entrant is registered and entered the competition as part of an enterprise. (2) Entrant’s supply of participation The entrant’s supply of participation will be taxable if the entrant receives consideration (eg a prize), is registered and entered the competition as part of its enterprise (GST Ruling GSTR 2002/3). If there is a non-monetary prize, this may be treated as part of the consideration. For valuation procedures, see ¶4020. Example 1 A registered racehorse owner enters a horse in a race. The horse wins $11,000 and a trophy with a GST-inclusive market value of $5,500. The owner is liable for GST of 1/11 × $16,500 = $1,500. The organiser can claim this amount as an input tax credit.

If the prizewinner is not registered (or required to be), or does not enter the competition as part of its enterprise, the supply of its participation cannot be taxable, so there is no GST on it.

The Commissioner says that if the prize is a symbolic medal, ribbon or trophy awarded as a recognition of achievement, with only personal or sentimental value, it is treated as having a market value of nil. It will therefore not attract GST. The same applies to perpetual trophies awarded on a custodial basis. However, this does not apply if the medal, etc, has intrinsic value because of its craftsmanship or precious metal content. Nor does it apply if the prize has a practical use, for example, a crystal decanter. Such prizes have a market value and will be treated as consideration for the winner’s supply of participation (GST Ruling GSTR 2002/3; ATO Fact Sheet GST for the Racing Industry). Winners of medals won in the Olympics or Commonwealth Games are not subject to GST. Exhibitors at agricultural shows and fetes are not subject to GST on the medals, ribbons or trophies typically awarded at these types of events (ATO Media Release Nat 02/87). (3) Organiser’s supply of non-monetary prizes The organiser’s supply of a (non-monetary) prize may be a taxable supply for a consideration consisting of the winner’s winning effort (GST Ruling GSTR 2002/3). This does not apply to money prizes, as money cannot normally be treated as a supply (¶4-010). Example 2 The supply of the trophy to the racehorse owner in the previous example is a taxable supply. The consideration is the GST-inclusive market value of the horse’s winning participation attributable to the trophy, which is valued by reference to its market value, ie $5,500 (see further below). The organiser accounts for $500 GST on the supply and the owner claims an input tax credit of the same amount. If the owner was not registered, it could not claim the input tax credit.

This applies even if the winner has not formally entered the competition, for example, a sportsperson’s best player award. However, it does not apply: • if the winner does not have to provide anything more than participation, for example, lotteries or raffles where success is governed purely by chance • to product promotion competitions, for example, where winning symbols are found on product packaging, or • if the prize is awarded as a gesture of thanks, for example, where it is given in recognition of volunteer community involvement (GST Ruling GSTR 2002/3). If the winner is registered, and competed in the course of an enterprise, the winner’s participation is normally valued as the value of the prize (GST Ruling GSTR 2001/6: ¶4-020). However, this may not apply where the winner is not registered, or not competing in the course of an enterprise, and the participation is trivial, for example: • entering a free prize draw • being a nominated caller to a radio program and answering a trivial question • participating in “social” competitions, for example, as the person who can hop on the spot the longest, or • being among the first to arrive at a promotional vehicle parked at an advertised location (GST Ruling GSTR 2002/3). In these cases, the winner’s participation is treated as having no additional market value, so no GST applies. The same would apply, for example, to participation in children’s underage sporting events or school quiz events for students. However, an unregistered winner’s participation may have market value in certain cases, depending on the commerciality of the event and the media profile of the event and the winner. This would apply, for example, where: • a contestant wins prizes in a national television quiz show

• an amateur sportsperson wins a prize in a major professional tournament, or • a winner is required to endorse the organiser’s products (GST Ruling GSTR 2002/3). In these cases, the winner is taken to have provided valuable consideration for the prize, so GST may apply. Grossing up of prizes It is understood that racing clubs are able to advertise prize money exclusive of GST. If the winning owner is registered, GST will be added. (This is called “grossing up” the prize money.) This will require that the owner’s registration status be notified to the club. Examples (1) A horse race carries prize money of $10,000 (plus $1,000 allowance for GST) and a trophy worth $1,320. As the winning owner is registered, the supply of the horse by the owner is a taxable supply. The consideration for this supply is $12,320 (ie $10,000 + $1,000 + $1,320). The owner accounts for GST of $1,120 (ie 1/11 × $12,320) and the racing body claims an input tax credit of $1,120. The trophy also constitutes a taxable supply by the racing body to the horse owner for a consideration equal to its value (ie $1,320). The racing body accounts for GST of $120 and the owner claims an input tax credit of $120. The overall result is that the owner receives $11,000 plus the trophy, accounts for $1,120 as GST and claims an input tax credit of $120. Its net gain is therefore $10,000 plus the trophy. The racing body pays $11,000 plus the trophy, claims a $1,120 input tax credit and accounts for $120 as GST. Its net outlay is therefore $10,000 plus the trophy. (2) Assume instead that the owner is not registered. The supply of the horse by the owner is therefore not a taxable supply and has no GST implications. The owner therefore receives prize money of $10,000 plus the trophy. However, the supply of the trophy is a taxable supply by the racing body. The body accounts for GST of $120. The owner is not entitled to any input tax credit for this.

A racing syndicate may take the form of a company, a partnership, or an incorporated association or body of persons. If it fits none of these descriptions, it may be the individual members who are supplying the horse to race — in other words, each of those members will be a supplier. If only some of these are registered, the consideration should be apportioned according to the proportion of those registered. The racing body should gross up the prize money according to this percentage. Attribution of GST and credits For the purpose of attributing GST and input tax credits to tax periods (¶7-200), consideration that consists of participation is first given when the participation commences and continues to be given until participation stops. Consideration that consists of a prize is given and received in the tax period in which the prize is awarded (GST Ruling GSTR 2002/3). Tax invoices In certain circumstances, an event or competition holder may issue a recipient created tax invoice (RCTI), showing the prize as consideration for the supply of participation by the entrant (¶5-140). An RCTI can also include supplies by the recipient, so it could also show the supply of any non-monetary prize to the entrant. Supplies by sponsors Where prizes are provided by sponsors, the supply by the sponsor to the organiser is treated separately from the supply by the organiser to the winner (¶4-040). Data matching program for horse racing industry The ATO has set up a data matching program (¶18-175) to check GST compliance by racehorse owners and lessors, trainers, jockeys and farriers, with particular emphasis on correct treatment of GST registration, income and prizes. [GSTG ¶10-110]

¶4-040 Grants, appropriations, subsidies and sponsorships

Normally, a payment of money is not itself a “supply” (¶4-010). However, if there is a supply by the payee/recipient in return for the payment, the money may be treated as consideration for that supply. If so: • the payee will be liable for GST on that supply if it is registered and carrying on an enterprise • in accordance with the usual rules, the GST will be 1/11th of the payment, and • the payer may be entitled to an input tax credit. This issue commonly arises with payments such as grants, subsidies, sponsorships, financial assistance, co-payments and rebates. In general, for these to be treated as payments for a supply by the payee, there must be a sufficient nexus or connection between the payment and the supply. This is an objective test, to be determined on the basis of the true character of the arrangement between the parties. Not every connection will be sufficient. In the ATO’s view, set out in GST Ruling GSTR 2012/2, there may be a sufficient nexus where, in return for the payment: • the payer is provided with the right to commercially exploit the results of the payee’s work • the payer is provided with advice or information in return for the payment, eg where a government funds medical research in return for the right to use the results of that research in developing its health policy. However, this would not apply where the information is required merely to substantiate how the funds were spent • the payee enters into an obligation with the payer to do something or refrain from doing something, as desired by the payer, eg where an arts group accepts a grant conditionally on the group having to present performances in remote areas • the payee promotes the payer’s business through promotional material, programs or uniforms, or advertises the business at events and in the media. However, this would not apply where the payee merely acknowledges the source of the assistance, eg on a plaque (see further “Sponsorships” below). The fact that the payee has to repay the assistance if it fails to comply with the payer’s requirements does not necessarily mean that the payment is made for a supply. However, this factor will form part of the overall circumstances that should be taken into account. For example, the ATO would consider that there was a payment for a supply where, as part of a governmental industry restructuring scheme, a company receives a government payment as an incentive for exiting the industry, but must return the money if it resumes that business within a certain period. However, this apparently would not apply where a scout group that received a council grant to help in the purchase of gymnasium equipment simply had to repay it if it elected not to proceed with the purchase. The financial assistance cannot be treated as consideration for a supply where nothing is to be supplied by the payee in return for the payer or in relation to it. For example, this would apply where a government settles a charitable trust for the relief of the needy. The trust provides nothing to the government/payer, so there is no relevant supply and GST does not arise. The same applies if: • there is simply an expectation that the payee may make a supply, as distinct from an obligation, and nothing else passes from the payee to the payer or a third party, or • a business simply receives a government rebate for buying energy efficient equipment. Grants made to employees will not attract GST because employees are not carrying on an enterprise. Similarly, the payment of unemployment benefits is not subject to GST, even though it is subject to conditions to look for work. GST does not apply where payments are made to creators and publishers under the Public Lending Right scheme or the Educational Lending Right scheme. Nor did it apply to payments to cane growers under

the Sugar Industry Assistance Package. According to the ATO Fact Sheet GST and the Great Barrier Reef Marine Park Structural Adjustment Package 2004, GST may apply to “licence buy out” assistance and social or community assistance provided under that package, but not to the full fishery-related business exit assistance, business restructuring, employee or business advice assistance components. For the general treatment of multi-party transactions, see ¶4-015. For the treatment of subsidised supplies of travel, see Example (3) at ¶4-020. Gifts to non-profit bodies Gifts to non-profit bodies cannot be treated as consideration in any circumstances (s 9-17; former s 915(3)(b)). This means that GST cannot apply unless the grantor gets some “material advantage” in connection with the grant (¶4-030). For the meaning of “non-profit”, see ¶3-030. Examples The ATO interprets this rule as follows. (1) A grant is made to a non-profit body which looks after the needy. The grantor states a non-binding preference that the funds be spent on food rather than shelter. The ability to make such a preference is not regarded as a material advantage to the grantor, so the grant is a gift and GST does not apply. (2) A philanthropist makes a grant to a non-profit hospital to build a new wing, which the hospital decides to name after the grantor. This is not treated as a material advantage and will be accepted as a gift, so GST does not apply. (Based on GST Ruling GSTR 2012/2.)

For the treatment of subsidies received by a charity for supplying low-cost accommodation, see ¶15-010. Sponsorships As noted above, sponsorships would normally be subject to GST, as they are provided in return for advertising services. This means that if the beneficiary is registered, it will have to account for GST on the amount received as it has made a supply of services for consideration. Correspondingly, the sponsor can claim an input tax credit if it is registered. Example A sporting group that is registered for GST receives $5,500 in sponsorship from a leagues club, and in return shows the sponsor’s name on its uniforms. The sporting group will account to the ATO for GST calculated as 1/11th of $5,500, ie $500. The sponsor will be entitled to an input tax credit of $500.

If the sponsor provides goods or services instead of cash (contra sponsorship), both parties will be making supplies to each other and, if registered, must pay GST on that supply. Example Assume instead in the previous example that the leagues club directly provided the group with uniforms worth $5,500 (including $500 GST) in return for advertising worth the same amount. The club is liable to account for $500 GST on its supply of uniforms, and the group is liable to account for $500 GST on its supply of advertising. Both the club and the group can claim input tax credits of $500. The net amount of GST paid is therefore nil.

GST may not apply where the “sponsorship” involves a mere acknowledgment (¶4-030). Government appropriations In accordance with the normal rules noted above, a payment between government bodies is not treated as consideration for a supply if it is made without strings or conditions. GST will therefore not apply to the transaction. A payment between government bodies is also not treated as consideration if it qualifies under the rule governing appropriations made under Commonwealth, state or territory law, or specified agreements. The purpose of this rule is to exclude funding payments, which are non-commercial in nature, from the

operation of GST, while not excluding payments that represent fees for goods, services and similar things. The relevant government bodies are Commonwealth, state and territory departments, agencies, statutory bodies and local governing bodies. This would include government schools. Once the appropriation is used to acquire goods or services, or is provided as a grant to a nongovernment organisation, that transaction will be subject to the GST rules in the normal way. Example A local council receives an appropriation from a state government to purchase earthmoving equipment. The appropriation itself is not subject to GST. However, GST may apply to the purchase, as the expenditure will be treated as consideration.

For the appropriations rule to apply, there must be a connection between the payment and the appropriation. Provided that the payment is made for a non-commercial supply, it is sufficient that it simply be “covered” by an appropriation, as distinct from being specifically covered (s 9-17). For the supply to be non-commercial, the payment and any associated benefits must not exceed the supplier’s anticipated or actual costs of making the relevant supplies. On this basis, for example, GST will not apply where the payment is made in return for a hospital committing to achieve certain health outcomes (non-commercial), but would apply where the supply was the provision of legal services on a fee-for-service basis (commercial). The exemption for appropriations may apply where a government agency receives payment for the secondment of its employee to another government entity, in accordance with reciprocal arrangements (Interpretative Decision ID 2013/54). It is specifically provided that payments covered by the appropriations rules are not affected by the rules applying to associates (¶17-500). Appropriations applied to an agency’s business operations do not form part of its GST turnover for registration purposes (¶3-030). Services provided outside Australia GST will not apply if the grant is made to a body outside Australia, and the services to be supplied by the grantee in return for the grant are also to be performed outside Australia (s 9-25(5)). Example Help Foundation makes a grant of humanitarian aid to an overseas aid organisation to assist refugees in a civil war. The grant is not subject to GST.

Position of grantor If the grantor is registered, it will normally be able to claim an input tax credit for any GST component of the grant, as it will be paid as part of its business. The grantor will of course need to obtain a tax invoice from the grantee. It may be that the parties can apply for approval for the tax invoice to be created by the grantor (a recipient created tax invoice) (¶5-140). Grossing up payments to allow for GST Where pre-GST grants or sponsorships are renewed, allowance should be made for the GST’s impact. For example, to maintain the level of support, the grant or sponsorship may need to be increased by 1/10th to cover the GST. This amount can be claimed back as an input tax credit by a registered grantor or sponsor, so the result is revenue neutral. Grantors in this situation would normally need to be assured that the grantee is registered and that it will provide a tax invoice. Example Assume it is proposed to make a grant of a net $10,000 to a registered charity for specified purposes. If the grant is grossed up to

$11,000, the position is as follows: • the registered grantor pays $11,000 including GST and recovers $1,000 as an input tax credit. The net cost is $10,000 • the registered charity receives $11,000. As $1,000 of it has to be accounted for as GST, the net receipt is $10,000.

“Grants” that are financial supplies If a “grant” is actually a financial supply, such as a loan involving repayment with interest, it will be input taxed (¶10-010). [GSTG ¶11-730]

¶4-060 Redeemable vouchers Special rules apply to vouchers, tokens, stamps, coupons or similar articles that can be redeemed for other supplies up to a monetary value stated on the voucher (s 100-5; 100-25). These are commonly called “face value” vouchers. A typical example is a retail store voucher that entitles the holder to any goods from that store up to a stated value. These vouchers may be distinguished from vouchers that entitle the holder to a specific item, for example, goods to replace stolen goods. Under these special rules, the initial supply of the voucher is not a taxable supply, so no GST applies and no input tax credit can be claimed (s 100-5(1)). However, GST potentially applies if and when the voucher is redeemed and the relevant goods or services are supplied (s 100-10; see also ¶7-325). This GST liability on the supplier will vary according to the GST status of those particular goods or services, in the normal way. These special rules apply because, at the time of issue, it is possible that the voucher may be redeemed for different types of supplies that have a different GST status that will not be known until redemption. GST on redemption On redemption of the voucher for taxable goods or services, the GST will normally be based on a consideration equal to the face value of the voucher, plus any additional consideration provided for the supply on redemption. If the voucher is partly redeemed for goods and services and partly for a cash refund, the GST on redemption will be based on the face value less the amount refunded (s 100-12; GST Ruling GSTR 2003/5). If the voucher is not redeemed, the supplier will become liable for an upwards GST adjustment at the time that it writes back its reserve for the redemption into current income (s 100-15). This may also apply to the extent that the voucher is only partly redeemed. In such a case, the adjustment is based on the amount unredeemed. The adjustment applies even though it is possible that the voucher could have been redeemed for GST-free goods (Interpretative Decision ID 2013/24). Inclusions and exclusions The special rules do not apply to postage stamps (s 100-25). Nor are they intended to apply to tickets or entitlements for specified goods or services, such as ordinary bus tickets, movie tickets or airline tickets. On this basis, for example, a music voucher entitling the recipient to buy CDs or DVDs of his/her choice up to a value of $50 is covered by the special rules, but not a movie pass specifically entitling the recipient to 10 visits to the cinema over a 12-month period, or a monthly bus pass. The movie or bus pass would be subject to GST on sale in the normal way and no GST would apply on redemption unless an additional amount was payable at that time (s 9-17; former s 9-15(3)). For the treatment of bitcoin transactions, see ¶4-010. The special rules also do not apply where the supply would not have been taxable in any event, for example, supplies of traveller’s cheques that are treated as input taxed financial supplies (¶10-010). The ATO considers that an article does not become a voucher until it is issued by the entity that has commissioned its production. For example, if a business places an order with a printing company to produce 1,000 vouchers, these are not treated as vouchers for GST purposes until the business supplies them to a retailer (GST Ruling GSTR 2003/5).

The special rules apply to a wide range of prepaid phone cards or facilities. To qualify, the card or facility must be issued for the primary purpose of using telephone or similar services or making acquisitions facilitated by those services. The similar services include mobile phone or multimedia messaging services, text, graphics, images, sound, video, information, software content and data transmission services — including email — and internet access services. If the voucher is supplied as part of a bundled kit (for example, a mobile handset, a SIM card and an entitlement to telephone services that are facilitated by the voucher), this will be a mixed supply that must be apportioned between its taxable and non-taxable components. Phone cards that have a credit facility are input taxed financial supplies and are not vouchers. Nor are stored value cards linked to bank accounts, or mobile phone accounts where the user pays a monthly access fee or rental fee in advance and call costs under a plan. Examples (1) A department store issues a $100 gift certificate entitling the holder to purchase goods to the value of $100 (GST-inclusive). No GST applies on the issue of the certificate. The recipient later redeems the certificate by buying clothes for $55 and food for $45. As the food is GST-free, the store must account for the GST of 1/11th of $55, ie $5 which has been paid by the certificate holder on the clothes. If the holder had purchased $100 worth of clothes, the GST on redemption would have been 1/11th of $100, ie $9.09. (2) For their first wedding anniversary, Charles buys a gift certificate for Morticia which entitles her to $110 worth (GST-inclusive) of beauty products of her choice from Miracle Cures. This certificate is covered by the special voucher rules. The purchase by Charles would therefore not be subject to GST. However, when Morticia redeems the voucher, this will be treated as a purchase of those goods for the value stated. Assuming that all the beauty goods are taxable, Miracle Cures will then have to account for GST of 1/11th of $110, ie $10. (3) Assume instead in Example 2 that Morticia is outraged by what she sees as the deeply offensive and sexist nature of the gift from Charles. She disposes of the certificate into a nearby receptacle and never redeems it. Miracle Cures has, however, made a reserve in its accounts for the unredeemed certificate. When it ultimately writes back that reserve to current income, there will be a GST adjustment of 1/11th of the amount written back. (4) For their second anniversary, Charles buys Morticia a gift certificate which entitles her to a three-hour total foot massage at Pleasure Spot. The certificate costs $110. As the service is specified, the special rules do not apply. This is treated as a normal purchase, and Pleasure Spot must account for GST of 1/11th of $110, ie $10 in the normal way. What Morticia actually does with the certificate is irrelevant for GST purposes. There is no further GST on redemption. (5) A book voucher with a face value of $100 is redeemed for taxable books worth $90 and change of $10. GST on the redemption is 1/11th of $90, ie $8.18. If no change had been given, GST on the redemption would have been 1/11th of $100, ie $9.09.

Supply chains The ATO considers that the amount received on the supply of the voucher is not relevant in determining the consideration on its redemption (GST Ruling GSTR 2003/5). It considers that contrary views expressed in the European case (Argos Distributors Ltd v Commissioners of Customs and Excise [1997] BVC 64) are based on differently structured legislative provisions. Example A wholesaler distributes its vouchers through a retailer. The vouchers have a face value of $33, but are sold for $22 to the retailer, who in turn sells them to customers at face value. On redemption, the wholesaler supplies goods with a face value of $33 to the customer. The ATO takes the view that the wholesaler is liable for GST on the face value of the voucher ($33), even though the consideration actually received by the wholesaler was only $22.

Voucher suppliers and their distributors may voluntarily enter into arrangements to simplify their GST accounting procedures (s 100-18). Under these arrangements, the supply of commission or similar services is not treated as a taxable supply. This means that it will not be necessary for the distributor or retailer in a distribution chain to remit GST on the commission services, and the supplier of the voucher will not claim the corresponding input tax credit. So, in the example above, if the $11 difference represents commission, the retailer would not be required to remit GST on the commission services, and the wholesaler would not be able to claim an input tax credit on the amount paid for them. For an associated rule allowing the Commissioner to apply special attribution rules to supply chain transactions, see ¶7-440. Purchase price more than face value If the purchase price of a voucher is more than its face value, GST will apply to the additional

consideration at the time of purchase, then to the balance on redemption (s 100-5(2)). Example Nick buys a collector’s limited edition phone card with a face value of $50 for $110. GST will apply to the additional consideration of $60, so the GST payable on the sale will be 1/11th of $60, ie $5.45. Nick later loses interest in collecting, and redeems the phone card by making phone calls to his Swiss investment adviser. On this redemption, GST will apply to the face value consideration of $50, so the GST payable will be 1/11th of $50, ie $4.55. The total GST which has been paid is $5.45 + $4.55 = $10, ie 1/11th of the original consideration of $110.

Sale to non-resident If the voucher is sold to a non-resident who is overseas, but the voucher is to be redeemed in Australia, the normal GST rules apply and GST would apply on the sale (s 100-20). Complimentary or promotional vouchers If a supplier gives away a redeemable voucher (eg as part of a sales promotion), GST will not apply in any event as any supply will be a gift (¶4-030). However, if the voucher is a separately identifiable component of a supply of something else, the consideration should be apportioned even if the voucher was described as being “free” (GST Ruling GSTR 2003/5). “Two-for-one” offers would not normally be treated as vouchers, but simply as a discount (¶4-030). Vouchers as consideration If you receive a redeemable voucher in return for supplying services, the voucher may be treated as consideration for those services (Interpretative Decision ID 2003/957). [GSTG ¶11-870]

¶4-062 Frequent flyer, shopper and loyalty programs Under “frequent shopper” programs, a customer typically receives points for purchases made at a shop. When these points reach a certain amount they can be redeemed for other goods or services from the shop. The Commissioner considers that GST does not apply to the award of these points, or to the supply of the goods or services obtained on the redemption of the points, as there is no consideration. However, GST will apply to any additional amount the customer is required to pay to obtain those goods or services (sometimes known as “points plus pay”) (GST Ruling GSTR 2012/1). GST will also apply to any fees paid for membership of the program. Similar rules would apply to frequent flyer programs (¶12-020) or equivalent consumer loyalty programs. Additional factors apply where a “points fee” is charged by a loyalty program operator to partners in the program. The Commissioner considers that this fee would be consideration for the supply of the points by the operator to the partner. The GST consequences depend on the GST status of the supply made when the points are redeemed. For example, if the points are redeemed for supplies of goods that are taxable, the supply of the points by the operator will also be taxable. On the other hand, if the points are redeemed for GST-free international travel, the supply of points by the operator would also be GST-free (GST Ruling GSTR 2012/1). If the points are redeemed for vouchers, this would be a taxable supply to the extent that the vouchers would, in turn, be redeemed for taxable supplies; this is so even though the supply of the voucher itself may be non-taxable under the rules in ¶4-060 (Interpretative Decision ID 2013/1).

¶4-065 Cancellation fees A fee imposed where a customer cancels an intended supply, or fails to take advantage of an intended supply, will commonly be treated as consideration, and may therefore attract GST. The reason, according to the ATO, is that even if the intended supply is not made, there will normally be other supplies for which the cancellation fee can be treated as consideration. On this view, which is based on an interpretation of Reliance Carpet (¶4-070), these other supplies may, for example, include actions taken by the supplier in preparing to make the supply (“facilitation supplies”), in processing the cancellation, or in performing work

in progress at the time of the cancellation. If the cancellation fee is consideration for any of these other supplies, the question then arises whether those supplies are exempted from GST on other grounds. For example, facilitation supplies may be GSTfree in various situations, for example, where the booking gives the customer a right to receive a GSTfree service, or involves the supply of certain administrative services relating to GST-free education courses (¶14-004) or certain travel agent services in relation to overseas travel (¶12-020). The ATO’s guidelines on the GST treatment of various types of cancellation are set out in GST Ruling GSTR 2009/3 and are summarised below. Appointments If a cancellation fee is charged where a customer fails to turn up for an appointment or reservation, or turns up late, the fee will normally be treated as consideration for a supply. That supply consists of the actions taken by the supplier in making the booking, committing to carry out the service, setting aside the time for the customer to the exclusion of others, and allocating personnel or resources. This facilitation supply is distinct from the actual supply of the service itself. Example A customer has to pay a $25 cancellation fee for failing to show up for a beauty treatment in accordance with an appointment. This will be treated as payment for a taxable supply, and GST will apply.

However, if the terms of the appointment give the customer a contractual right to receive a GST-free supply (eg to receive medical services), GST will not apply on the cancellation, as the supply of a right to receive a GST-free supply is itself a GST-free supply (s 9-30). Hotel reservations, ticketing and no-shows If a customer cancels or fails to show up for a hotel reservation, the cancellation fee is treated as consideration for the supply of a right in relation to land (¶11-000), and GST would therefore apply. If a customer buys a non-refundable ticket for a concert, but fails to show, GST will still apply as the original supply has gone ahead. If the ticket was partly refundable on a customer no-show, GST applies to the extent that the ticket was not refundable — this may therefore give rise to a decreasing GST adjustment for the supplier (¶6-100). If the supplier cancels the concert, and refunds the price in full, the supplier will be entitled to a decreasing adjustment for the full amount of GST. For the GST effects of cancelled travel arrangements or passenger no-shows, see ¶12-020. Early termination fees For the GST treatment of early termination fees on leases or hire-purchase agreements, see ¶4-020.

¶4-070 Security deposits Special rules apply to deposits made as security for the performance of an obligation (Div 99). These are called security deposits. Typical transactions to which these rules will apply are: (1) a contract for the hire of goods, where the supplier holds a security deposit to secure the return of the goods; or (2) a contract for the purchase of real property, goods or services, where the purchaser pays a deposit to secure the obligation to complete the purchase. If the security deposit is refunded on performance of the obligation, no GST is payable because the deposit is not treated as consideration for a supply (s 99-5). Example Heidi, a home handyperson, hires a piece of equipment. She pays $110 for the hire and a separate $132 security deposit. She returns the equipment the next day and gets the deposit back. The GST component of the hire cost was $10 but no GST applies to the deposit.

In most types of transactions, however, if the transaction proceeds to completion, the deposit simply becomes incorporated into the consideration for the supply. For example, if land is sold for $100,000, and a deposit of $10,000 was paid on exchange of contracts, the sale will be completed by the vendor transferring the land, retaining the deposit and receiving the balance of $90,000 from the purchaser. If the supply of the land was taxable, the GST will be based on a total consideration of $100,000, including the deposit. Forfeited deposits The situation is different if a taxable supply does not proceed to completion because the supplier has rescinded the contract on the grounds of the purchaser’s default, and the purchaser has accordingly become liable to forfeit the deposit to the supplier. In such a case, the forfeited deposit is treated as the consideration for a separate taxable supply (s 99-5). The effect is that the supplier becomes liable for GST on the forfeited amount in the tax period in which the forfeiture took place, and that the purchaser may claim an input tax credit if the transaction meets the usual requirements (¶5-010) (s 99-10) (FC of T v Reliance Carpet Co Pty Ltd 2008 ATC ¶20-028; [2008] HCA 22; GST Rulings GSTR 2000/28; GSTR 2006/2). The rules on forfeited deposits, as stated above, apply only where the original contemplated supply would have been taxable. The ATO has indicated that where the original contemplated supply would have been GST-free or input taxed, the separate supply on forfeiture will also be GST-free or input taxed, as the case may be (ATO Decision Impact Statement on Reliance Carpet; s 9-30): This represents a change from the earlier ATO view, so taxpayers who incorrectly paid GST on forfeited security deposits on the basis of that earlier ATO view may seek a refund, subject to the usual restrictions (¶8-110). Examples (1) Assume in the previous example that Heidi failed to return the equipment and forfeits the deposit. Additional GST of $12 (= 1/11th of $132) would become payable. (2) Ron, a business owner, orders business equipment for $10,000, payable on delivery. The supplier requires a $990 deposit before filling the order. That deposit will be refunded to Ron if the supplier is unable to fulfil the order, and Ron will forfeit it if he cancels the order. Four months later, Ron cancels the order and forfeits the deposit. The supplier accounts for GST of $90 for the tax period in which the cancellation was made. As Ron is registered, he can claim an input tax credit of $90. (3) A registered purchaser pays a $55,000 deposit on signing a contract to buy commercial real estate. The purchaser later defaults on the contract and forfeits the deposit to the registered vendor. On forfeiture, the vendor should account for $5,000 as GST, and the purchaser should claim an input tax credit for the same amount. (For further details of GST on land sales, see ¶11-065.)

Where the forfeiture of a security deposit may attract GST, the supplier should ensure that the deposit is calculated on a GST-inclusive basis. If the party forfeiting the deposit is eligible for an input tax credit, it should obtain a tax invoice from the supplier. These rules do not apply in any event where the deposit was never forfeitable or “at risk” and was always treated as simply a part-payment. In this case, the contract is the same as an instalment contract (¶21070). Example An established customer is allowed to pay 20% on delivery and the balance in four monthly instalments. The first payment is clearly understood by both parties to be the first instalment of the purchase price, and not to be a forfeitable deposit. This is treated as an instalment contract, and is subject to the normal attribution rules (¶21-070). The rules for security deposits do not apply.

The ATO considers that pre-contract deposits, paid simply to indicate the purchaser’s keen interest, are not normally deposits at all, and that Div 99 would therefore normally not apply to them. The ATO considers that these payments are simply consideration for a separate transaction (GST Ruling GSTR 2006/2). Deposits vs penalties The ATO considers that an amount is not a “deposit” if it is so unreasonably high as to constitute an unenforceable penalty. In standard commercial sale contracts, the ATO would consider that amounts

higher than 10% should normally be treated as penalties, unless there is a higher-than-normal risk of significant losses in the event of default. Relevant factors in determining this would include: • unusual designs or sizes that make a completed product very difficult to sell in the event of default • the use of special materials that could not be used on other jobs • the purchase of highly specialised equipment which could only be used in the performance of the contract at risk • the length of time of the contract and the risk of loss or devaluation of the asset by neglect, illegal act, mismanagement or adverse conditions during that period • vulnerability of the goods to loss in value • industry practices or norms, or • other extraordinary conditions of the contract (GST Ruling GSTR 2006/2). In the case of a hiring contract, the ATO considers that a higher deposit may be reasonable, as the supplier is taking a calculated risk that the goods may not be returned, or may be returned damaged. The deposit could then be considerably higher than the actual hire fee (GST Ruling GSTR 2006/2). If the payment is unreasonable, it is not a security deposit and is subject to the normal attribution rules for part payments. If it is refunded, a GST adjustment may be appropriate (GST Ruling GSTR 2006/2). Core deposits for reconditioned vehicle parts The ATO says a “core deposit” paid as part of the supply of reconditioned motor vehicle parts cannot be treated as a security deposit, and is simply part of the consideration for the part (ATO Fact Sheet GST and the Sale of Reconditioned Parts; GST Ruling GSTR 2006/2). GST should therefore be calculated on the full price including the core deposit. If the deposit is returned to the customer, in return for the customer providing a worn part to the supplier, this is treated as a separate sale of the worn part by the customer. If the customer is registered, it will be liable for GST on that sale and the parts supplier can claim an input tax credit. Recipient created tax invoices (¶5-140) may be issued in such cases (A New Tax System (Goods and Services Tax) Recipient Created Tax Invoice Determination RCTI 2005/1). If the customer is not registered, the parts supplier may claim an input tax credit in accordance with the secondhand goods rules (¶16-110). [GSTG ¶11-910]

¶4-080 Fines, penalties, taxes and charges Fines and penalties imposed for punishment or deterrence are normally not treated as consideration for any supply, and therefore do not attract GST (Case S65 (1996) 17 NZTC 7408). The ATO considers that this would apply, for example, to fines or penalties imposed by a club on a member for breach of its rules (GST Determination GSTD 2005/6). However, the position may be different where the penalty is imposed under a commercial contract (eg a late fee for video hire), or the defaulter obtains extra rights in return for paying the penalty. Exempt taxes and charges Although GST potentially applies to goods and services supplied by governmental bodies, government taxes, regulatory charges and information-related fees are not treated as consideration for the supplies to which they relate, and those supplies therefore do not attract GST (s 81-5; 81-10). In more detail, this exemption applies to: (1) Australian taxes, eg income tax, stamp duty, fringe benefits tax, payroll tax, Medicare levy, local government general rates (Interpretative Decision ID 2012/87) and various industry levies. Certain local government special rates were also considered to be exempt in Class Ruling CR 2013/1.

(2) Australian fees and charges payable to Australian government agencies that relate to: • providing, retaining or amending a permission, exemption, authority or licence. For example, this would apply to items such as occupational practising certificates; pilots’ licences; heavy vehicle drivers’ licences; compulsory testing or inspection fees for regulatory purposes; permits for restaurants to occupy the footpath; or a licence for an event to close roads • recording, copying, modifying, accessing, receiving, processing or searching for information. For example, this would apply to Freedom of Information requests; searches and extracts from government registers; copies of official documents; or registration and lodgement fees for property transfers deeds, plans and instruments. However, exemption would not apply to commercial sales of information by government agencies, eg bookshops. The following fees or charges are also not treated as consideration: • for kerbside collection of waste. In Class Ruling CR 2013/19, the Commissioner said that this may not apply to certain fees levied by NSW Councils for garbage tips or refuse transfer stations, or for waste management services provided in a competitive market • as royalties charged in relation to natural resources • imposed on an industry to finance regulatory or other government activities connected with the industry • to compensate an Australian government agency for costs incurred by the agency in undertaking regulatory activities • imposed in relation to a court, tribunal, commission of inquiry or Sheriff’s office, including hearing fees • for a supply of a regulatory nature made by an Australian government agency (eg an annual charge for emergency services levied by a local council: Class Ruling CR 2013/1) • for entry to a national park (GST Regulations, Div 81). Most fees and charges imposed by councils in relation to property development and building applications, and other related approvals and permissions, would be exempt: for detailed guidelines, see Class Ruling CR 2013/32. Water, sewerage and drainage supplies are normally GST-free (¶16-200) and associated services would normally be exempt: see table in Class Ruling CR 2013/39. For the treatment of council enforcement activities, essential services, provision of information, professional time, staff time and works, see Class Ruling CR 2013/41. Certain community services such as Meals on Wheels are GST-free under separate rules (¶13-340). Where GST may apply GST may apply to: • parking fees, road tolls, car ferry fees • fees for hiring, using or entering a facility (but not national park entry fees) • fees imposed by a waste disposal facility. Governmental environmental levies paid by the facility are exempt but, if passed on in the fee charged to customers, the fees will form part of the taxable consideration (Interpretative Decision ID 2013/38) • non-compulsory pre-lodgment advice relating to applications relating to providing, retaining or amending a permission, exemption, authority or licence. For example, this would include fees for the pre-examination of a community plan, deposited plan or strata plan (Interpretative Decision ID 2012/55) • fees for the sale of maps and related products

• database access subscription fees (GST Regulations, Div 81). The various exemptions were formerly set out in detail in the Treasurer’s A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination, www.comlaw.gov.au/Details/F2010L03352. The ATO has said that government agencies that selfassessed the GST treatment of their supplies as exempt in accordance with the Treasurer’s determination will be protected from any retrospective amendment of that treatment (Practice Statement PS LA 2013/2 (GA)). Inclusion of charge in price If a business which has incurred a non-taxable charge (such as stamp duty) passes that amount on as part of the price charged to a purchaser, the amount normally forms part of the consideration — it does not retain its exempt status (GST Ruling GSTR 2000/37; Interpretative Decision ID 2001/133). The position is different if the business does not pay the amount on their own account, but purely as an agent for their customer, as may sometimes happen in the case of a solicitor (¶17-425). In such a case, the payment by the purchaser is effectively a reimbursement, so no GST would apply on that component of the price. Example A new motor vehicle is modified by Racy Wheels before delivery to the purchaser. On behalf of the purchaser, Racy Wheels also arranges and pays for the issue of a vehicle modification permit from the relevant authority. This permit is a non-taxable charge. Racy Wheels should include a GST component in charging the purchaser for the cost of the repairs and for arranging the issue of the permit. However, GST should not be applied to the permit fee itself, as the purchaser is merely reimbursing Racy Wheels for that (non-taxable) amount. (Based on Interpretative Decision ID 2002/877.)

The Environmental Management Charge on Great Barrier Reef tours is levied directly on customers, and tour operators are responsible only for collecting it on behalf of the Great Barrier Reef Marine Park Authority. This means that GST does not apply to the Management Charge component of the tour price. Previously, the charge was imposed on the operators, and therefore formed part of the taxable consideration for the tour where it was passed on to the customers (ATO Fact Sheet NAT 11230; Great Barrier Reef Marine Park Act 1975, Sch 1). Example An operator charges $59.50 for a barrier reef tour, including a $4.50 environmental management charge. The operator accounts for GST calculated as 1/11th of the price excluding the charge, ie $55, so the GST is $5. Note also that no input credit is allowed for the charge.

Where a farmer is liable for Commonwealth grain levy, this is paid direct by the purchaser to the levying agency, but is included in the price on which GST is imposed. Example The price of grain is $110, including $10 GST. The levy is $1. The purchaser pays $109 to the grower and $1 to the levying agency, and claims an input tax credit of $10. The grower accounts for $10 GST to the ATO. (Based on Primary Production Issues Register 2.3.1.)

Land developer contributions As part of a planning approval granted to a developer by a local authority, the developer may legally be required to provide additional capital works or services, either to the authority or to third parties. These are often called “in kind” developer contributions. The supply of the contribution and the supply of the approval are not treated as consideration for each other (s 82-5; 82-10). Therefore, neither supply is taxable on that ground. This also applies if the developer contribution takes the form of a tax, fee or charge. For the treatment of

certain developer contributions to NSW councils, see Class Ruling CR 2013/13. For the GST treatment of development leases, see ¶11-062. Other surcharges and levies • Credit card surcharge. A surcharge imposed by a supplier on a purchaser who uses a credit card to pay is treated as part of the consideration for the underlying transaction (GST Ruling GSTR 2014/2). If a credit card is used to pay a GST-exempt fee or charge (such as a council residential parking permit), the surcharge is similarly exempt (Waverley Council v FC of T [2009] AATA 442). Similar rules apply to debit cards • Dishonour fees. A fee imposed by a financial institution on a supplier for presentation of a dishonoured cheque or dishonoured direct debit is treated as part of the consideration for a financial supply (¶10-010, item 1; GST Ruling GSTR 2002/2). If the supplier on-charges its customer with a failed payment fee, under a contractual arrangement, this will not normally be treated as consideration for a supply (GST Determination GSTD 2013/1). This may be contrasted with credit card surcharges or late payment fees (see above), which are a contingent part of the agreed price and are therefore part of the consideration • Industry levy. Dairy Adjustment Levy paid on sales of flavoured milk was not part of the consideration for the sale (former Interpretative Decision ID 2005/25). [GSTG ¶11-930]

¶4-085 Court orders and out-of-court settlements An out-of-court settlement or court-ordered compensation may be treated as consideration for a supply (s 9-15(2A)). In accordance with the normal rules, that supply may therefore be taxable if: • the plaintiff is registered (or required to be registered) • the supply is made in the course of carrying on the plaintiff’s enterprise • the supply is connected with Australia, and • the supply is not GST-free or input taxed (s 9-5). To work out the GST consequences in any particular case, you must therefore identify: • the relevant supply, if any • whether that supply is taxable. Where the payment is consideration for a taxable supply, the payee is liable for GST and the payer is entitled to an input tax credit provided that it satisfies the usual conditions (¶5-010). Damages awards It seems that an award of damages in itself does not constitute a taxable supply by the court (Interchase Corporation Ltd v ACN 010 087 573 Pty Ltd & Ors 2000 ATC 4552; Gagner Pty Ltd v Canturi Corporation Pty Ltd [2009] NSWCA 413; Taxation Ruling TR 2001/4). It follows that GST would not apply to it. However, as explained below, the ATO considers that certain settlements may involve consideration for supplies by the parties and therefore potentially attract GST. According to the ATO’s view, as set out in GST Ruling GSTR 2001/4, the relevant supply between the parties may include: • a supply made as part of the transaction from which the dispute arose (this is called an “earlier” supply), and/or • a supply made as part of the settlement itself, for example, where the settlement requires one party to provide the other with something of substance (this is called a “current” supply).

Examples (1) Under an out-of-court settlement, Dodger agrees to pay an amount for supplies previously made to it by Retailer. The settlement amount is treated as consideration for that “earlier” supply. If the other requirements for a taxable supply are met, GST will apply. (2) As a result of a dispute over the use of a trade name, Magnum agrees to allow Minim the right to use the name in the future. This would be a “current” supply. If the other requirements for a taxable supply are met, GST will apply.

However, the ATO accepts that there is no supply where the order or settlement is wholly concerned with finalising a claim for damages or compensation for previous property damage, negligence causing loss of profits, breach of copyright, personal injury, termination or breach of contract. In such cases, there is therefore no GST liability. This would also apply to a settlement for wrongful use of a trade name, though if the payment is made for the right to use a trade name in the future, that may amount to a “current” supply to which GST may apply. Examples (1) Damages for negligent misstatement were held not to be subject to GST in Shaw v Director of Housing and State of Tasmania (No 2) 2001 ATC 4054. The Tasmanian Supreme Court ruled that for there to be a supply, there had to be some voluntary action by the plaintiff. Here, although a “supply” includes a release of obligations, and although the award of damages was technically a “release” of the defendants’ liability, that release occurred without any voluntary act by the plaintiff. GST therefore did not apply. (2) Similarly, GST was held not to apply where a court ordered payment of a judgment debt arising out of a dispute over a construction contract (Walter Construction Group Ltd v Walker Corporation Ltd & Ors [2001] NSWSC 283). The NSW Supreme Court said that there was neither a “supply” by the plaintiff as a result of the court order, nor consideration paid by the defendant. (3) The taxpayer successfully sued another party for conversion of its assets. Under the judgment, payment of the damages extinguished the taxpayer’s ownership of the assets, which then vested in the other party. The court rejected the Commissioner’s argument that this constituted a taxable supply of the assets by the taxpayer (Reglon Pty Ltd v FC of T 2011 ATC ¶20-267; [2011] FCA 805). (4) A company sued a former employee for damages for losses arising from the breach of a contractual obligation restraining the person from competing for the services of the company’s clients. The person made a payment in settlement of the claim but was not entitled to claim an input tax credit for it as the payment did not qualify as consideration for a taxable supply by the company (Lighthouse Financial Advisers (Townsville) Pty Ltd [2014] AATA 301).

A practical problem can arise in determining whether the amount of damages should reflect the fact that the plaintiff is likely to be liable for GST on that amount. Example A person received damages for non-payment for work done. It argued that as it was likely that the damages would be subject to GST, the court should “gross up” the damages by 10%, or that alternatively the defendant should indemnify the plaintiff for the amount of any GST the plaintiff would have to pay. The court ruled that the “fairest and most efficient” approach would be as follows: (1) the plaintiff would provide a tax invoice to the defendant on request, thus enabling the defendant to obtain an input tax credit; (2) the defendant would pay the plaintiff 10% of the damages amount; and (3) the plaintiff would remit the GST to the ATO and provide the defendant with written proof of the payment (Peet Ltd v Richmond [2009] VSC 585).

Where the award is compensation for outgoings for which the plaintiff would be eligible to claim input tax credits, the compensation should reflect that fact. Examples (1) A plaintiff received compensation for damage caused by flooding from a neighbour’s property. The plaintiff would have been entitled to input tax credits for the costs of rectifying that damage. The amount of the compensation should therefore be reduced to reflect that fact. (Based on Gagner Pty Ltd v Canturi Corporation Pty Ltd [2009] NSWCA 413.) (2) The owner of a business vehicle claimed compensation for the cost of damage caused to the vehicle in an accident. The owner would have been entitled to claim input tax credits for the cost of the repairs. The court ruled that the owner was under a duty to mitigate its damage, and that the compensation should therefore be reduced to the extent that the owner had not acted reasonably in claiming the input tax credits to which it was entitled (Millington v Waste Wise Environment Pty Ltd [2015] VSC 167).

Other ATO guidelines The ATO’s views on other specific aspects of court orders and settlement awards are as follows.

Awards of legal costs. There is no supply where legal costs are awarded to one party by the court, or are payable under a negotiated “out of court” settlement (Practice Statement PS LA 2009/9). However, although the award of costs itself does not give rise to GST liability, there is a separate question as to whether the amount recovered as costs should be reduced to reflect the fact that the party would have been entitled to claim the GST component of those costs as an input tax credit. This will be affected by the relevant court rules in each jurisdiction, to which reference must be made in each case. For example, in assessing costs on a party/party basis, most jurisdictions provide a fixed scale of professional fees that cannot be adjusted to reflect input tax entitlements. Adjustment of these costs may, however, be appropriate in the State Courts of New South Wales (for most purposes) and in the Supreme and District Court of South Australia. Adjustment may also be appropriate in all jurisdictions for the following: • the assessment of professional fees on a “solicitor and client” or indemnity basis, and • disbursements (except where these are fixed). For worked examples, and jurisdictional details, see Practice Statement PS LA 2009/9, Annexure I. For additional discussion on the situation in NSW, see the useful articles by Mark Brabazon SC in the NSW Law Society Journal, December 2009 at p 66, and March 2010 at p 54. Discontinuance undertakings. Most settlements involve a formal, incidental undertaking by the plaintiff to discontinue the claim. Although this is technically a supply (a “discontinuance” supply), the settlement will not normally be treated as consideration for this supply, unless the undertaking gives rise to additional payment in its own right, for example (see Lighthouse Financial Advisers). This could occur where payment is made for settlement of a claim which is obviously lacking in substance. For GST indemnities in relation to offers of compromise, see ¶19-400. Judgment interest. The ATO considers that the award of pre- or post-judgment interest is not consideration for any relevant supply and that, to this extent, GST would not apply (GST Determination GSTD 2003/1). This does not apply to judgment interest awarded in insurance claims covered by s 78-110 (¶10-150). GST adjustments. Where the relevant supply is an “earlier” supply, GST and input tax credits on that supply may have already been attributed to an earlier tax period. In such a case, the subsequent settlement of the dispute may be an adjustment event (¶6-100). Example Enterprises invoices business goods to Trader for $22,000. Both parties are on the accruals basis. Enterprises accounts for GST of $2,000 and Trader claims an input tax credit for the same amount. Trader subsequently defaults on payment, alleging that the goods were defective. The dispute is ultimately settled by Trader agreeing to pay $16,500, instead of $22,000. The reduction in the consideration resulting from the settlement is an adjustment event. Enterprises is entitled to a decreasing adjustment of 1/11th of ($22,000 − $16,500) = $500 and Trader is liable for an increasing adjustment of the same amount.

Where there is more than one supply. A settlement may involve consideration for more than one supply. If those supplies have different GST consequences — for example, one is taxable and the other is not — there will need to be an apportionment. If the court itself apportions the settlement amount, that will be accepted by the ATO. In the case of an out-of-court settlement, an apportionment made by the parties will be accepted if it is made on a “reasonable” basis. Example Colossus sues Minor, claiming $50,000 damages for breach of contract plus an undisclosed amount for unauthorised use of copyright material. The matter is settled for $200,000 before it reaches the court. The ATO considers that it would be reasonable to

apportion the payment on the basis that $50,000 relates to the (non-taxable) damages claim and $150,000 to the (taxable) copyright usage claim. Alternatively, industry standards may be used to calculate the copyright usage fees.

For the separate rules applying to insurance payouts, see ¶10-120. [GSTG ¶10-105]

¶4-090 Requirement 3: in course of “enterprise” The third requirement for a taxable supply (¶4-000) is that the supply is made “in the course or furtherance of an enterprise” that the supplier is carrying on (s 9-5). According to the ATO, this covers any supplies that are made in connection with the enterprise. The ATO considers that the necessary relationship is established if the asset is applied, or intended to be applied, in the enterprise. This is so even if the application or intended application is minor or secondary. It is irrelevant what the recipient intends to use the asset for. It is also irrelevant, for example, whether the asset is sold or whether it is distributed “in specie” (eg where a discretionary trust makes a distribution to a beneficiary by directly transferring an asset to them). However, it would not cover the supply of private commodities, such as when a car dealer privately sells his/her own car that is not used to any extent in the business (GST Determination GSTD 2009/1). For an article discussing the width of the ATO’s views, see CCH Tax Week ¶670 (2008). The meaning of “enterprise” is explained at ¶3-020. As is noted there, the most common example of an enterprise is a business, but it is not limited to that. Employees vs independent contractors GST does not apply to services provided by an employee to his/her employer (¶3-020). Therefore, wages and salaries paid to employees and superannuation contributions paid on behalf of employees are not subject to GST. However, GST does apply to services provided by a registered independent contractor. The reason for this distinction is that GST is only payable if services are provided by a registered person, and only enterprises can be registered. The activities of an employee are not classed as an enterprise, but the activities of an independent contractor are. This has important implications in situations where businesses have “outsourced” any part of their workforce. From the independent contractors’ point of view, they will normally become liable to account for GST to the ATO, just like any other business, provided that they are registered. Registration is compulsory if GST turnover is $75,000 or more, so many contractors will be caught. From the businesses’ point of view, GST will not apply to the services provided by their employees, but normally will apply to the services provided to them by contractors. Normally, this will not ultimately affect the business’ bottom line because it will be able to claim back the GST component of the prices it pays by getting an input tax credit. However, if the business cannot claim input tax credits, this will increase the effective cost of the services provided by the contractor. This could apply, for example, where the services are provided to a private individual who is not in business, or a business that is not registered, or to an input taxed business such as a bank. For provisions that are designed to reduce this bias towards in-house services for financial service providers, see ¶10-040. In some cases, the borderline between employee and independent contractor is difficult to draw. In general, the greater the control and direction which is exercised over the way in which the person’s work is done, the more likely it is that the person is an employee. Factors pointing towards the person being more likely to be an independent contractor include (1) they have independence in the conduct of their work, and work on their own account (2) the substance of the contract is to achieve a specific result and requires special skills (3) they have power to delegate or subcontract the work (4) they bear the risk of remedying defects in the work, and (5) they provide their own clothing, tools and equipment and incur business expenses. However, the application of these factors in particular cases, and the relative weight to be given to them, leads to some fine distinctions. See also the ATO guidelines in Taxation Ruling TR 2005/16. The consideration for the contractor’s services (on which GST is calculated) includes reimbursements of

travel and incidental costs (¶17-425), but not statutory superannuation support contributions made on behalf of contractors who are engaged principally for their labour (Interpretative Decision ID 2002/22). Where on-charged expenses form part of the consideration, the amount on-charged should be reduced to reflect any input tax credit entitlement of the contractor. Labour hire arrangements As noted at ¶3-020, GST typically does not apply to payments made by a labour hire firm to workers whose services it provides to other businesses. The reason for this is that the workers are either employees of the firm or subject to PAYG withholding. Their activities therefore do not constitute an enterprise, so there is no taxable supply (s 9-20(2)). However, the labour hire firm itself will be carrying on an enterprise, so the fees it charges to the contracting business will be subject to GST. Where the labour hire firm only provides a placement service, it charges a fee for introducing the worker to the contracting business, and that business then contracts directly with the worker for their services. In this situation, the labour hire firm charges GST on the placement fee to the business. If the worker is engaged as an employee by the business, the salary paid by the business to the employee will be subject to PAYG withholding, and will not be subject to GST. If the worker is engaged as an independent contractor by the business, fees charged by the independent contractor will be subject to GST, assuming that the contractor is registered or required to be registered. Examples These examples are based on the ATO’s views in GST Determination GSTD 2000/12. It is assumed that all entities other than employees are registered. (1) Handypersons, a labour hire firm, contracts to provide the services of an accountant to a business. Handypersons pays the accountant and charges the business a fee. The payments to the accountant by Handypersons are subject to PAYG withholding (not GST) and the fee charged by Handypersons to the business is subject to GST. (2) Assume that Handypersons only provides a placement service. In this case, the accountant is employed by the business. The payments to the accountant by the business are subject to PAYG withholding (not GST) and the placement fee charged to the business by Handypersons is subject to GST. If the business instead engages the accountant as an independent contractor, fees charged by the accountant will be subject to GST (not PAYG).

People such as certain bicycle couriers engaged by labour hire firms may have registered for GST on the basis that they were independent contractors, but have subsequently been ruled to employees (see Hollis v Vabu Pty Ltd 2001 ATC 4508). Couriers in that position would need to apply for cancellation of their registration (¶3-070) (ATO Fact Sheet, 9 May 2002). However, van couriers engaged by a labour hire firm were held to be independent contractors, where they had a significant financial interest in the van (which had special value as a commercial transport vehicle), and had some influence in the manner in which they performed the work (Qian v FC of T 2019 ATC ¶10-487). However, the Tax Office does not accept that this decision establishes that the fact that a worker supplies his or her own vehicle is a decisive or dominant factor (Decision Impact Statement on Qian, 12 April 2019). Where there is a voluntary withholding agreement Under the PAYG system, businesses and contract workers can enter into voluntary agreements for tax to be withheld from payments for work or services, even though the workers are not employees and would not normally be covered by the PAYG rules. In this situation, the provision of that work or services is not treated as a taxable supply, so no GST is applicable. However, there is an exception to this rule if the business uses the work or services in making input taxed supplies (eg financial supplies). In this case, the provision of the work or services will be a taxable supply and GST will apply (s 113-5). This is intended to prevent voluntary agreements being used to avoid GST in input taxed industries. Example A computer contractor contracts with a bank to provide various services associated with the bank’s loans business. The contractor and the bank enter into a voluntary agreement that the bank will withhold tax from the payments for those services. If the contractor is registered for GST, the provision of those services will be a taxable supply and GST should be included in the price the contractor charges.

Group training schemes and secondments Where a Group Training Company charges a host employer for the supply of services of apprentices or trainees, that supply will be subject to GST. However, in accordance with the normal rules, the wages paid to the apprentice or trainee by the Group Training Company will not be subject to GST (GST Determination GSTD 2000/7). Similarly, GST may apply if a taxpayer charges another for supplying the services of employees under a secondment arrangement. Disposal of capital assets A common error made by registered enterprises — one which the ATO takes a particular interest in under its compliance program — is the failure to recognise that disposal of capital business assets (ie assets that are not trading stock) will often be a taxable supply. The disposal of capital assets such as motor vehicles, manufacturing machinery, office equipment or land and buildings are considered to be a supply in the course or furtherance of the enterprise. Disposals cover sales, trade-ins and the transfer of ownerships, and include the sale of obsolete assets as scrap. The sale of a capital asset that was acquired by a business and then sold before it was used in the business will still be regarded as a taxable supply, as the sale is still connected with the entity’s enterprise and so regarded as being made in the course or furtherance of the entity’s enterprise (Interpretative Decision ID 2003/701). The disposal of capital assets will not be a taxable supply if the asset is not a business asset (eg a family car), or if sold as part of a business sold as a going concern (¶11-500), or if it is residential premises (¶11000) or if the asset is farm land in some cases (¶11-410). The ATO has set up a data matching project (¶18-175) directed at identifying incorrect treatment of business asset disposals. This will involve collection of data from sources such as motor vehicle registries, finance companies and land titles offices. Transfers on marriage breakdown Normally, no question of GST arises with transfers of non-business assets (eg the family home) on marriage breakdown, as the transferor will normally not be registered and there will be no “enterprise”. In the case of business assets or interests (eg a commercial rental property or partnership interest), the ATO considers that GST would not normally apply, as a disposal as a result of marriage breakdown is not “in the course or furtherance” of carrying on the enterprise, and in any case there is no consideration for the transfer (GST Ruling GSTR 2003/6). However, the disposal may give rise to a GST adjustment in cases where input tax credits were claimed on the original acquisition of the asset; for an example, see ¶6-300. Fringe benefits for employees For the GST effects where fringe benefits are provided to employees, see ¶24-200. [GSTG ¶12-510]

¶4-100 Requirement 4: connection with Australia The fourth requirement for a taxable supply is that the supply is connected with Australia (the “indirect tax zone”) (s 9-25). This test varies according to whether the supply is of goods, real property or other things such as services. Special rules also apply to telecommunications (¶4-103), and there are important exemptions for certain supplies by non-residents (¶4-101). (1) Goods A supply of goods has the relevant connection with Australia in the following circumstances: (a) in the case of goods supplied wholly within Australia, the supply has the relevant connection if the goods are delivered or made available in Australia. The ATO considers that this means physically delivered or made available (GST Ruling GSTR 2018/2) (b) in the case of goods supplied from Australia, the supply has the relevant connection if the goods are

removed from Australia (but for the exemption for exports, see ¶9-200), or (c) in the case of goods supplied to Australia, the supply has the relevant connection if either: • the supplier imports the goods into Australia. The ATO considers that, in this context, “import” includes completing the customs formalities, for example, by entering the goods for home consumption, warehousing or transhipment (GST Ruling GSTR 2003/15). For the special rules applying to imports, see ¶9-000, or • the supply is an offshore supply of low value goods to a consumer, and the supplier does not reasonably believe that the supply will be a taxable importation (¶9-130). This particular measure applies for tax periods starting on or after 1 July 2018. “Goods” include any form of tangible personal property (s 195-1). Goods therefore include trading stock, plant, equipment, food, vehicles and raw materials. Goods do not include real property, interests in real property, or intangible property such as contractual rights, goodwill, copyright or trademarks. A human body awaiting burial is not goods, but a preserved body and cremated ashes are goods (Doodeward v Spence (1908) 6 CLR 406; Interpretative Decision ID 2008/124), as is a dead animal. A ticket for an event is not goods, where it is merely evidence of prepayment (Interpretative Decision ID 2004/153). A supply of money, whether Australian or foreign currency, is not normally a supply of goods (Travelex Ltd v FC of T [2010] HCA 33). An acquisition of currency at face value was not considered to be an acquisition of goods even though the acquisition had been made with a view to possible resale of the currency as collectibles (Interpretative Decision ID 2006/202). However, goods include banknotes or coins acquired or sold as collectibles. Software, in itself, is not goods. However, where computer software is sold packaged with hardware, it will normally be treated as goods (GST Ruling GSTR 2003/8; see also Toby Constructions Products Pty Ltd v Computa Bar (Sales) Pty Ltd [1983] 2 NSWLR 48). The Commissioner also considers that if “off the shelf” software is supplied on a tangible medium — such as a CD-ROM — this should be treated as a supply of goods, even though specified rights to use are inherent in the product (Taxation Ruling TR 93/12; GST Ruling GSTR 2003/8). However, software that is downloaded or transmitted by email is not goods (ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (1990) 97 ALR 513; GST Ruling GSTR 2003/8). The Commissioner also considers that it will not constitute the supply of rights simply on the ground that it is accompanied by a licence to use (GST Ruling GSTR 2003/8). The Commissioner considers that a one-off software solution that is developed for a client will be a supply of services, not goods, if copyright in the program vests on its creation in the client — this is so whether it is delivered on-line or on a disk. However, where a programmer contracts to develop a solution and make it available for the client, so that copyright in the program, once developed and accepted by the client, will be assigned to the client, the supply will be a mixed supply — it will comprise the development and a supply of the program and assignment of copyright in the program. Assignment of the copyright is the supply of a right, but supply of the program is not. The supply of the program is not a supply of goods even if it is delivered in tangible form on a disk (GST Ruling GSTR 2003/8). If goods are supplied by way of a lease, the ATO treats this as a supply of the goods, rather than the supply of the right to use the goods. (2) Real property A supply of real property has the relevant connection if the real property is situated in Australia, or if the land to which the real property relates is in Australia. “Real property” includes rights, interests, options and licences over land (¶11-000). So, for example, if you have a licence to occupy land situated in Australia, that licence is treated as real property which is connected with Australia. This would also apply to the grant of contractual rights to occupy or stay at accommodation in Australia, and would include a stay at a hotel or motel on presentation of a voucher or travel document (GST Ruling GSTR 2018/1; ¶12020). (3) Other things such as services and intangibles A supply of anything else (eg services, digital products, rights, advice or obligations) has the relevant

connection if: (a) it is done in Australia, or (b) the supplier makes the supply through an enterprise that the supplier carries on in Australia (¶4102), or (c) there is a supply of a right or option to acquire some other thing, and the supply of that thing would be connected with Australia. This particular measure is primarily intended to ensure that GST can apply to non-resident tour operators who acquire Australian package holidays from resident tour wholesalers and then on-sell them to tourists. However, it is not specifically restricted to that situation. It appears that the accommodation component of such packages would in any event be caught under the pre-existing rules (¶12-020). The Commissioner considers that, in general, the rule in (c) may be satisfied irrespective of whether the supply of that other thing is actually made. However, in the case of a surrender of a right or option to acquire something, the Commissioner considers that the rule in (c) will not apply. This would mean that the surrender would only be connected with Australia if (a) or (b) is satisfied (GST Ruling GSTR 2003/8), or (d) for tax periods starting on or after 1 July 2017, where the recipient of the supply is an “Australian consumer”. An Australian consumer means a resident of Australia that either: (1) is not registered, or (2) is registered, but does not acquire the supply solely or partly for the purpose of an enterprise that it is carrying on. For full details of this measure, see ¶9-120. Exceptions • Some services or rights supplied from overseas to Australian businesses are subject to special rules that affect whether they are treated as having a connection with Australia (¶4-101; ¶9-100). • If the consideration for a supply is an Australian tax, fee or charge, the supply may be treated as taxable even though it is not connected with Australia (s 81-10).

¶4-101 Non-resident’s supplies that are not connected with Australia For tax periods starting on or after 1 October 2016, the following types of supply are not connected with Australia if they are made by a non-resident and the supply is not made through an enterprise carried on in Australia: (1) supply of an intangible (anything other than goods or real property) made to an “Australian-based business recipient”, where the thing is done in Australia. An entity is an Australian-based business recipient of a supply if it is registered and carries on an enterprise in Australia, and its acquisition of the supply is not solely private or domestic (2) supply of an intangible to another non-resident that acquires it solely for the purpose of carrying on its enterprise outside Australia, and the thing is done in Australia (3) transfer of ownership of leased goods to another non-resident that does not acquire them solely or partly for an enterprise that it carries on in Australia. The lessee must have made a taxable importation of the goods before the supply was made and must continue to lease them on substantially similar terms and conditions, or (4) supply of the lease if the recipient in (3) is the lessee (s 9-26). These exclusions override the special rules applying to telecommunication supplies (¶4-103). For ATO guidelines, see GST Ruling GSTR 2018/2. Although these supplies are not connected with Australia, the supply may be “reverse charged”, so that GST is instead paid by the recipient (¶9-100), if the acquisition would not have not been fully creditable to the recipient (¶5-010).

Examples (1) Non-resident makes supply from overseas of digital service to Australian-based business recipient that uses it wholly for creditable business purposes. This supply is not connected with Australia (s 9-26), no GST is payable by supplier or recipient, and no input tax credit is claimable by the recipient. (2) Assume the same facts, except that recipient uses the digital service only partly for creditable business purposes. The supply is connected to Australia and is taxable, but the reverse charge rules apply. The recipient is liable for the GST, and can claim an input tax credit to the extent of the creditable purpose. (3) Non-resident leases equipment to an Australian company that imports and uses it in Australia. The non-resident later sells the equipment to another non-resident, subject to the lease. That sale is not connected with Australia.

For transitional rules, see ¶19-250.

¶4-102 Key concepts in connection test Some of the key concepts in determining whether there is a connection with Australia are explained further below. “Done” in Australia. The ATO considers that if the supply consists of the creation, grant, transfer, assignment or surrender of a right, the supply is “done” where that creation, etc, occurs. For example, if a right is granted under an agreement to use intellectual property, the grant is done where the agreement is made — not where the right is exercised (Draft GST Ruling GSTR 2019/D2; former GST Ruling GSTR 2000/31). The agreement will be made where the last act necessary to create a binding contract is performed (WA Dewhurst and Co Pty Ltd v Cawrse [1960] VR 278). Services are normally “done” in the place where they are performed, even if they are performed by a nonresident or for the benefit of a recipient who is somewhere else. For example, the ATO considers that if, an architect prepares a plan, or a lawyer prepares a legal opinion, in Australia, and then provides it to an offshore recipient, the service is done in Australia, even though the delivery of the end product may be offshore (Draft GST Ruling GSTR 2019/D2; former GST Ruling GSTR 2000/31). However, even though that service is therefore connected with Australia, it could be specifically made GST-free under s 38-190 (¶9-240). Where a non-resident contracted to supply an installation service for goods in Australia, and subcontracted that obligation, that would normally be considered to be a service done by the non-resident in Australia (GST Ruling GSTR 2005/6). Many digital supplies are governed by specific rules which affect whether they have a connection with Australia, depending on whether they are made to Australian consumers (¶9-120) or Australian businesses (¶4-101; ¶9-100). To the limited extent that it is necessary to determine whether they are done in Australia, it is the subject of the supply or its component parts which must be characterised, rather than the activities, actions, means, processes or systems involved (Draft GST Ruling GSTR 2019/D2). A computer program, which is normally treated as a service, not goods (see ¶4-100) is “done” where the work is done to develop it (ATO Fact Sheet Trading Over the Internet). The reservation or registration of an internet domain name is a supply of a service, not goods or real property. It is therefore not connected with Australia if the service is done in a place overseas where the supplier carries on its enterprise (Interpretative Decision ID 2005/354). However, if the Australian resident customer is registered for GST and the acquisition of the services is not solely for a creditable purpose, Div 84 (¶9-100) may apply to reverse-charge the customer for GST on the supply. “Enterprise carried on in Australia” For tax periods starting on or after 1 October 2016, an enterprise is carried on in Australia if it is carried on by one or more individuals who are in Australia, and either: • the enterprise is carried on through a “fixed place” in Australia, or • it has been carried on through one or more places in Australia — not necessarily fixed places — for

more than 183 days in a 12-month period, or • the entity intends to carry on the enterprise through one or more places in Australia for more than 183 days in a 12-month period (s 9-27). The individual(s) concerned may be either the entity itself, or an employee or officer of the entity, or an agent (or agent’s employee) that habitually exercise its authority to conclude contracts on the entity’s behalf. This does not extend to brokers, general commission agents or other independent agents. In accordance with accepted international practice, a “fixed place” means that there is a stable or continual connection between the enterprise and the place. It need not be everlasting or forever, but must be more than a merely temporary or transitory connection. In determining whether an enterprise is carried on through a particular place (fixed or not), the place does not need to be exclusively used by the entity for carrying on its enterprise. Nor does the entity need to own, lease or have any other claim or interest in the place. The 183 days need not be continuous. This test, which replaces the “permanent establishment” test (see below), applies for tax periods starting on or after 1 October 2016. The ATO has provided useful guidelines on how it will apply (Law Companion Ruling LCR 2016/1). According to the ATO, the types of supply that are affected by the change will generally be things other than goods or real property, for example, legal or accounting services, or supplies of digital products. It is intended to have two main outcomes: • where the non-resident entity has the relevant connection, the entity will be treated in the same way as a domestic entity, and • where the non-resident entity does not have the relevant connection, the non-resident will generally only be subject to GST on supplies to unregistered entities in Australia. Former “permanent establishment” test For tax periods starting before 1 October 2016, the test was instead dependent on whether the enterprise was being carried on through a “permanent establishment” in Australia. A permanent establishment means “a place at or through which a person carries on any business” and includes a factory, office, farm, mine or market. It also includes: • a place where the supplier is carrying on business through an agent • a place where the supplier has or is using or installing substantial equipment or machinery (see generally Taxation Ruling TR 2007/11). For the application of this to reverse charging on crossborder leases, see ¶9-095 • a place where the supplier is engaged in a construction project, or • where goods sold by the supplier are manufactured, assembled, processed, packed or distributed by a related party. For there to be “a place at or through which a person carries on any business”, the Commissioner considers that there must be a degree of permanence in both place and time. As a rule of thumb, the Commissioner considers that this test is satisfied where the business operates at or through a particular place continuously for six months or more, though shorter periods of less than six months may suffice if the connection with Australia is very strong (Taxation Ruling TR 2002/5). This may apply, for example, where the business returns to a particular location in Australia on an ongoing and regular basis but for short periods each time; or where the intention is to set up a permanent business in Australia but the owner unexpectedly dies or the business fails. Due to its intangible and mobile nature, a website is normally not a permanent establishment. However, if the business operates a server, that could constitute a permanent establishment (Taxation Determination TD 2005/2).

Whether a supply is made “through” the permanent establishment will depend on the facts. The Commissioner considers that if the supplier carries on an enterprise through a permanent establishment in Australia, any supply made in the course of that enterprise will be a supply made through the permanent establishment, even if the supply can also be said to be connected with a place of business in another country. The requirement would presumably be satisfied if the permanent establishment signs the contract or accepts purchase orders for the supply, provides the service or has authority to make important decisions in relation to the supply (GST Ruling GSTR 2000/31). Where software is sold and transmitted directly from an overseas supplier to an Australian customer, the ATO considers that there is a sufficient connection if the sale was negotiated and promoted by an employee of the permanent establishment in Australia (Interpretative Decision ID 2001/577). “Australia”, for GST purposes, does not include external territories, for example Christmas Island, Cocos (Keeling) Islands or Norfolk Island (s 195-1). Norfolk Island previously had its own 12% GST, but this was abolished as part of changes to end its self-governing status, with effect from 1 July 2016. The Australian GST will not be introduced to replace it. “Australia” may include offshore oil rigs, but not oil rigs in the Australia/East Timor Joint Petroleum Development Area (Interpretative Decision ID 2007/169). It also includes coastal seas for up to 12 nautical miles (Acts Interpretation Act 1901, s 15B). Note that with effect for tax periods starting on or after 1 July 2015, the term “Australia” is replaced by the expression “the indirect tax zone” (ITZ), without significant alteration in meaning. This is considered necessary to differentiate the territorial scope of GST from the uniform definition of Australia that applies generally for other tax purposes from that date (s 195-1 definition).

¶4-103 Telecommunication supplies Telecommunication supplies are connected with Australia if the recipient will “effectively use or enjoy” them in Australia (s 85-5). This potentially applies to telephone calls, call back services, email and internet access, satellite transmissions, the provision of leased lines, circuits and global networks, and the transmission element of international data exchange (s 85-10). However, it is not intended to apply to licences to use intellectual property such as computer software, or consultancy services provided via the internet. Example A New Zealand telecommunication provider supplies internet access to a customer in Australia. This supply will be treated as connected to Australia under s 85-5, so GST may apply. If the supply was made through an Australian business, it could be treated as being connected with Australia under the general rules in s 9-25.

This rule applies whether the supplier is in Australia or offshore. However, the Commissioner has a discretion not to apply it if the supply is made through an offshore enterprise and enforcement would not be administratively feasible (s 85-5(2)). Collection of GST is not administratively feasible where the recipient is not registered, or where the recipient itself makes telecommunication supplies to the public for a fee (A New Tax System (Good and Services Tax) Act 1999 Telecommunication Supplies Determination (No 38) 2015). For tax periods starting on or after 1 October 2016, this rule is subject to the exclusions in ¶4-101.

¶4-104 Supplies partly connected with Australia As different rules apply to goods, real property, services and telecommunication supplies, a supply that involves a mixture of these may be partly connected with Australia and partly not connected. In this situation, the supply is split up into separate supplies. The GST and input tax credits are calculated only on the part of the supply that is connected with Australia (s 96-5).

Example Under a contract, goods are delivered in Australia to an overseas resident and services are provided to that person overseas through an overseas enterprise. Although the supply of the goods is associated with Australia, the supply of the services is not. Only the supply of the goods is a taxable supply. The value of this supply is calculated as a proportionate part of the whole supply, based on value (s 96-10). If the supply of the goods was only partly subject to GST (because part was input taxed or GST-free), the taxable value is reduced further.

However, if one of the supplies is incidental to the other, and its value does not exceed $50,000, it will be treated as part of that other supply (s 96-5(4)). Example Assume in the previous example that the value of the services was $25,000 and that they were incidental to the provision of the goods. The supply of the services will be treated as part of the supply of the goods. The whole supply may therefore be a taxable supply.

In this context, hotel accommodation provided as part of a tour package would not normally be regarded as “incidental” to the transportation and sightseeing components of the package (Saga Holidays Limited v FC of T [2006] FCAFC 191). [GSTG ¶13-200]

¶4-105 Requirement 5: registration The fifth requirement for a taxable supply is that the supplier is either registered or required to be registered (s 9-5). This means that a supplier who is required to register — for example, because its GST turnover is $75,000 or more (¶3-000) — cannot avoid GST obligations simply by not registering. Examples (1) A business supplier with a GST turnover of $20,000 elects not to register, in accordance with the rules at ¶3-000. GST does not apply to the supplies it makes. GST can only apply if it elects to register. (2) A business supplier with a GST turnover of $100,000 fails to register. The supplies it makes will nevertheless be subject to GST in the normal way, because it was required to register (¶3-000). This is so even though the supplier did not formally include GST in its prices. The supplier will still have to account for GST equal to 1/11th of the price. In addition, the supplier may be liable to a penalty for failing to register when required.

[GSTG ¶5-000]

¶4-110 Requirement 6: supplies not GST-free or input taxed Taxable supplies do not include supplies that are GST-free or input taxed (s 9-5; 9-30). If a supply is GST-free, this means that no GST is payable on it and that the supplier is entitled to claim credits for the GST payable on its related business inputs. If a supply is input taxed, no GST is payable on the supply, but the supplier generally cannot claim input tax credits on its related business inputs. For lists of GSTfree and input taxed supplies, see ¶25-000. A supply of a right to receive a supply that would be input taxed is itself input taxed, and the supply of a right to receive a supply that would be GST-free is itself GST-free. [GSTG ¶13-530]

CALCULATING GST ON SUPPLIES ¶4-200 How GST is worked out

To calculate the GST, you must know the “value” of the taxable supply. GST is calculated as 10% of that value (s 9-70). The “value” of the supply is 10/11th of the price, ie the consideration for the supply (s 9-75(1)). This means, in effect, that the GST is calculated as 1/11th of that price. The supplier must account for that amount to the ATO. This is so, irrespective of whether the supplier actually included any GST component in the price. Example Enrico buys a car from a registered dealer for $33,000, including GST. The amount of GST is 1/11th of $33,000, ie $3,000.

If the payment for the supply includes something other than money, the price will include the market value of that thing, including GST (ie the GST-inclusive market value) (¶4-020). For this purpose, notes or coins which are collector’s pieces or have a value above face value are not treated as money and will be valued at their GST-inclusive market value. If the supply is made to an associate below market value, or as a gift, the GST may be worked out as if market value had been paid (¶17-500). Luxury cars Luxury car tax is not taken into account in calculating the value of a taxable supply of a luxury car (s 975(2)). Mixed and composite supplies If the supply is partly taxable and partly GST-free, the value of the taxable supply is worked out on a proportional value basis (s 9-80). The same applies if the supply is partly taxable and partly input taxed, for example, where the lease of a building includes both residential premises (input taxed) and distinct commercial premises, such as a doctor’s surgery (taxable). For convenience, all these types of supplies are called “mixed” supplies. The actual apportionment formula in s 9-80 has elements of circularity, and accordingly apportionment should instead be carried out in a practical, commonsense manner (FC of T v Luxottica Retail Australia Pty Ltd 2011 ATC ¶20-243; [2011] FCAFC 20; GST Ruling GSTR 2001/8). Example A business makes a supply for $210. The taxable proportion is 50% of the total value. The value of the total supply for GST purposes is: (10 × $210) / (10 + 0.5) = $200 The value of the taxable supply is therefore 50% of $200 = $100. The GST is 10% of $100 = $10.

However, in some cases, the parts of the supply may not be separately identifiable in this way. For example, there may be a supply which is essentially of one thing, but which contains other parts which are simply “integral, ancillary or incidental” to that supply. This would be treated as a “composite” supply, rather than as a mixed supply, and apportionment would not be appropriate. Whether a supply is a mixed supply or a composite supply will often be a matter of fact and degree, and should be determined in a practical, realistic way (Luxottica), after having regard to any specific provisions of the GST Act. Identifying the essential character of what is supplied may help to determine whether a particular transaction is covered by such a provision. For example, an air ticket may include the supply of an in-flight meal, but that meal would normally be treated as merely incidental to the supply of the transport (British Airways plc v Customs and Excise Commrs [1990] 5 BVC 97). Such a supply is therefore a composite supply and it is not necessary to apportion it into its taxable and non-taxable components. This may be contrasted with a situation where a rail company offers special gourmet excursions at premium prices, where the provision of the food is

heavily promoted as a vital part of what is being supplied. In such a case, there may be a mixed supply of food and transport, which requires apportionment (Sea Containers Ltd v Customs and Excise Commrs [2000] BVC 60). It has also been held in the UK that all the rights conferred under a credit card protection plan, including registration of cards and emergency cash advances, were incidental to the main objective of the plan, which was insurance (Card Protection Plan Ltd v Commrs of Customs and Excise [2001] UKHL 4). The Commissioner considers that a component will be integral, ancillary or incidental if it is insignificant in value or function, or merely complements the dominant part of the supply. For example, as a rule of thumb, this will apply if the consideration that would otherwise be apportioned to the component does not exceed the lesser of $3 or 20% of the total consideration. However, this test is not exhaustive (GST Ruling GSTR 2001/8). Examples of incidental parts of a composite supply that the Commissioner considers would normally not require apportionment include: • a cleaning brush supplied as part of a hearing aid • periodic journals provided as part of the GST-free supply of membership of a professional organisation to a non-resident (GST Ruling GSTR 2003/8) • the fitted tyres supplied as part of a motor vehicle • newspapers provided without additional charge to hospital patients • cleaning and porterage services provided with room accommodation, and • stickers provided with a packet of cereal. Examples of separately identifiable parts of a mixed supply that the Commissioner considers would require apportionment include: • food supplied to a full boarder at university college • a coffee plunger (taxable) and a jar of coffee (GST-free) that are sold together at a discount price. Non-food promotional items, such as clocks, cricket balls and cups, which were supplied “free” with GST-free food were considered to be separate taxable supplies in the Food Supplier case: see further ¶13-200 • membership of gym provided with purchase of premium health cover. The delivery of sold goods is normally treated as a separately-identifiable part of a mixed supply. For example, if goods are ordered from a department store, and the customer opts to have them delivered for a fee, the delivery service will be taxable irrespective of the GST treatment of the goods themselves. The position is different where delivery is an incidental part of a composite supply. For example, the Commissioner accepts that if goods are ordered from an internet, mail order or other supplier, and the supplier provides no premises where they can be picked up, delivery is an essential part of the supply. The GST treatment of the delivery service will therefore be determined by the GST treatment of the goods. If those goods are GST-free, so will be the delivery; if the goods are partly taxable and partly GSTfree, so will be the delivery (GST Determination GSTD 2002/3; Customs & Excise Commissioners v British Telecommunications plc [1999] 3 All ER 961). Similar rules would apply to packing. Example Tamsyn orders fresh fruit ($44, GST-free) and flowers ($22, including $2 GST) from an internet grocer. There are no facilities for pick-up. The delivery fee is $11. The GST component of the delivery fee is 1/11 × $11 × 22/66 = $0.33. The grocer’s total GST liability is therefore $2.33. If delivery had been optional, the delivery would have been fully taxable, and the GST component would have been 1/11 × $11 = $1. The grocer’s total GST liability would therefore be $3.

A part of a supply cannot be treated as incidental where there is specific legislation to the contrary. For example, where food is provided on an educational field trip, its GST status must be determined separately (¶14-004). Separate rules also apply to incidental financial supplies (¶10-010). For the application of these rules to an international online sale of goods to Australia, see Interpretative Decision ID 2013/20 at ¶12-010. For composite services supplied by inbound tour operators, see ¶12020. Methods of apportionment The Commissioner considers that you may use any reasonable method to apportion the consideration for the separate parts of a mixed supply (GST Ruling GSTR 2001/8). Apportionment may be done on a direct basis, for example the relative value of goods or property, relative time spent in providing services, or relative floor value basis in a supply of property. There are also indirect methods, for example, cost plus usual profit margin. However, the Commissioner does not accept “historical cost” or “residual value” methods unless they reflect an appropriate apportionment. An apportionment based on relative cost was considered reasonable in Case 6/2007 (¶13-200). The fact that an item is advertised as a “free” component of a package of goods does not necessarily mean that it must be given a nil value in an apportionment. All the relevant circumstances, including the terms of the offer, must be considered (Food Supplier case, ¶13-200; Luxottica). Records supporting the apportionment should be kept (¶18-040). Discounted mixed supplies It may happen that a supplier allows a discount on one component of a mixed supply, but not on the other. For example, a discount may apply to the taxable component of the supply, but not the GST-free component. Provided that this pricing is commercially justifiable and is not a contrived arrangement, it seems that the GST on the taxable component should be based on the fully discounted price of that component. It is not appropriate to spread the discount over the whole of the supply. Example A spectacle retailer sold (taxable) frames at a discount on the condition that the customer also purchased (GST-free) prescription lenses at the normal price. The ATO argued that in calculating GST on the supply, the discount should be apportioned, so that only part of it should be attributed to the cost of the taxable frame. However, the court ruled that the discount should be wholly offset against the cost of the frame, even though that discount would not have applied if the frame had been sold separately without the lenses. (Based on Luxottica, above.) Note: for the availability of refunds to suppliers as result of this decision, see ¶8-110.

Foreign currency conversion If the price is expressed in foreign currency, it has to be converted to Australian currency in the manner determined by the Commissioner (s 9-85). Guidelines for conversion are given in GST Ruling GSTR 2001/2; Goods and Services Tax: Foreign Currency Conversion Determination 2018. In general, the Commissioner says that the conversion rate you use may come from: • the Reserve Bank of Australia • a commercial bank or other foreign exchange organisation, or • the agreement between the parties. The Commissioner says that whichever rate is chosen, it should be used consistently, although rates may be changed if there are “sound commercial reasons” for doing so. If you alternate between exchange rates with a view to reducing your GST liability, the Commissioner considers that the anti-avoidance provisions may apply (¶20-000). A separate rule applies for low-value imports to consumers (¶9-130). The “functional currency” conversion rules that apply for income tax purposes do not apply to GST (Taxation Determination TD 2006/5). Digital currency conversion

Prices expressed in digital currency, such as bitcoin, must be converted to Australian currency. Guidelines are in GST Digital Currency Conversion Determination 2019 (DCC 2019/1), effective from 13 April 2019. These state that the exchange rate should be obtained from a digital currency exchange or website, or be agreed between the parties. If that rate is only quoted in a foreign currency, it will also need to be converted to Australian currency according to the normal guidelines. These guidelines replace similar provisional guidelines that had effect from 1 July 2017. [GSTG ¶13-800]

¶4-205 Rounding off rules for GST Special “rounding off” rules apply where the amount of GST involves a fraction of a cent (s 9-90). Single unitemised supply If there is only one taxable supply on an invoice, and this supply is not broken down into a number of items, the GST is rounded to the nearest cent, with half cents being rounded upwards. Example Enterprises invoices a purchaser $10.84 (GST-inclusive) for a single supply. The unrounded amount of GST is 1/11 × $10.84 = $0.9854545. This is rounded to 99 cents.

Multiple supplies or items If there is more than one taxable supply on an invoice, or a single supply is broken down into separate items, the ATO says that you have a choice of approaches. Under the “total invoice approach”, if the GST for each supply or item is 1/11th of the price, you may simply divide the total price by 11 to arrive at the total GST. Where necessary, the total should be rounded to the nearest cent, with half cents being rounded upwards. Alternatively, you can adopt a “line item approach”. This requires you to add up the separate unrounded amounts of GST and round the total to the nearest cent, with half cents being rounded upwards. Example Enterprises charges a purchaser GST-inclusive amounts of $10.84 and $14.08 for two separate supplies on the one invoice. The unrounded amounts of GST are $0.9854545 + $1.28 = $2.2654545. This is rounded to $2.27.

It may happen that the unrounded amount of GST for an individual supply or item has more decimal places than your accounting system can record. In this case, you can round the amount to the maximum number of places that you can record. If the last number in the unrounded GST is five or more, you round up, otherwise you round down. You then add up the amounts, rounded as necessary, to reach a total. This total is in turn rounded to the nearest cent, with half cents being rounded upwards. Example Assume in the previous example that Enterprise’s accounting system only records to four decimal places. The GST on the $10.84 item will be rounded to $0.9855. The total will therefore be $2.2655, which is rounded to $2.27.

It is a matter for the supplier to choose the rounding rule for working out its GST liability, and for the recipient to choose the rounding rule for working out its input tax credit entitlement. It is not necessary that they use the same rule. These rules also apply where the document on which the GST is recorded is not an invoice, for example where it is a receipt, a cash register total, a recipient’s record of small expenses, or electronic data. [GSTG ¶13-930]

¶4-210 Buying and selling at auction The ATO considers that where taxable goods are being sold at auction, it should be made clear whether the items are being sold on a GST-inclusive or GST-exclusive basis, and whether the seller is registered. Auctioneers and vendors who fail to ensure disclosure may attract the attention of the Australian Competition and Consumer Commission (ACCC) and incur legislative penalties (¶21-010). Example A real estate agent auctioned three allotments of residential land. The land was promoted in newspapers without showing whether the prices were inclusive or exclusive of the GST. There was also no clear disclosure to potential bidders before the auctions whether GST applied to the land sales. In one auction, the auctioneer made a representation that he did not believe GST was applicable when in fact there was GST liability on the hammer price. Following intervention, the agent gave court-enforceable undertakings to the ACCC, and the successful bidders became entitled to refunds totalling $48,350 of the GST paid. (Based on ACCC Media Release 177/05, 13 July 2005.)

A number of cases have arisen in which there is a dispute over what exactly was said by the auctioneer or agent. Simply saying that the sale is subject to GST leaves the question open as to whether any GST that is payable is included in the price or should be added to it. The following examples illustrate the difficulties that may arise. Examples (1) A contract for the sale of vacant business premises stated that the price was GST-inclusive. After the sale was made, the vendors sought to have the contract rectified on the basis that both parties had clearly understood that GST was to be added to the price. Disputed evidence was led as to what the auctioneer had said at the auction, and what the vendors and purchasers respectively understood was the position. The court ruled that the vendors had failed to establish that there had been a mistake common to both parties or that the contract should be rectified (based on Tam v Mannall & Anor [2010] NSWC 250). (2) A different result was reached in another case, again involving a dispute over what was said at an auction. In this case, the court found, on the balance of probabilities, that both parties understood that the sale price of $1,060,000 was GST-exclusive, even though the contract said it was GST-inclusive. The vendors were therefore entitled to have the contract rectified to say that the price was “$1,060,000 + GST”. However, as there was a further dispute over whether the sale was subject to GST in any event, the court ruled that the vendor should apply to the Commissioner for a private ruling as to whether the sale was taxable and if so, to what extent, so that the amount of GST (if any) could be determined (based on Ashton v Monteleone [2010] NSWC 258). (3) Although a contract for sale specified that the price was inclusive of GST, the vendor claimed that it was clearly understood between the parties that it was GST-exclusive. This was supported by evidence given by the auctioneer as what was said at the auction, and by the existence of contemporaneous written evidence that the price did not include GST. The court ordered that, given the weight of evidence, the contract should be rectified (based on SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2016] NSWSC 362).

If the sale is GST-inclusive, GST will be included in the final auction price and a registered purchaser may claim an input tax credit of 1/11th of that price. If the sale is GST-exclusive, 10% GST will have to be added in order to calculate the input tax credit claimable by the purchaser. Example Under the conditions of sale at an auction, the sale is GST-exclusive. The vendor, the auctioneer and the purchaser are all registered. The knockdown price is $4,000. GST of $400 is added, so that the purchaser pays the seller $4,400. The seller accounts for $400 of that as GST. The seller can also claim an input tax credit of $10 for the $110 auctioneer’s fee, so the net GST for the seller is $390. The purchaser can claim an input tax credit of $400 for the GST on its purchase.

If the vendor is not registered, the sale must necessarily be on a GST-exclusive basis. GST will not apply on the sale, so no input tax credit can be claimed by the purchaser. Nor can the vendor claim an input tax credit on the auctioneer’s fee. The same principles apply to computer aided livestock marketing (CALM) sales. The assessor’s fee and CALM levies would be subject to GST, but a registered vendor could claim input tax credits for these. If the goods are GST-free, no GST applies in any event. For example, livestock sold at auction are taxable, but slaughtered and processed stock that are for human consumption are GST-free food (¶13-

110).

CLAIMING INPUT TAX CREDITS • TAX INVOICES INPUT TAX CREDITS What is an input tax credit?

¶5-000

Creditable acquisitions

¶5-010

Calculation of input tax credit

¶5-020

If company is not yet set up

¶5-030

Reimbursement of employees, agents, officers or partners ¶5-040 TAX INVOICES Role of tax invoices

¶5-100

Contents of tax invoices

¶5-110

Sample tax invoices

¶5-120

Postponing credit claim to later BAS

¶5-125

Modifications to tax invoice requirements

¶5-130

Recipient created tax invoices

¶5-140

Contents of recipient created tax invoices

¶5-150

Low-value acquisitions

¶5-170

Acting through an agent or broker

¶5-190

Editorial information

Summary Although you are liable for GST on goods or services that you supply through your business, you can also claim credits for the GST on your business inputs or acquisitions. These “input tax credits” are designed to ensure that the ultimate burden of GST falls on the end consumer, not the businesses that form the chain of supply. In this chapter, we explain how you identify the business acquisitions that qualify for input tax credits and how the credits are calculated. We also explain the requirement to hold a “tax invoice” to support your credit claim.

INPUT TAX CREDITS ¶5-000 What is an input tax credit? The general scheme of the GST legislation is that you account for GST on the supplies you make, but get a credit for the GST component of supplies made by others to you. This credit is called an input tax credit, because it is a credit for tax paid on your business inputs. Input tax credits are designed to ensure that the ultimate burden of the GST will fall on the end user, or

private consumer. The businesses that form part of the chain of supply act as progressive collectors of the tax, but do not ultimately bear the burden of it. For an example of how this operates, see ¶1-100. [GSTG ¶15-000]

¶5-010 Creditable acquisitions You are entitled to an input tax credit equal to the GST component of your “creditable acquisitions” (s 115; 11-20). A creditable acquisition is simply the purchase or acquisition of something to be used in carrying on your enterprise. More specifically, you make a creditable acquisition if all the following conditions are satisfied: (1) you must “acquire” something (2) you must acquire the thing for a “creditable purpose” (3) the supply of the thing to you must be a “taxable supply”, ie it must be subject to GST (¶4-000) (4) you must provide consideration, or be liable to do so. Consideration is explained at ¶4-020, and (5) you must be registered or required to be registered (¶3-000). For the position where registration is cancelled, see ¶3-070. You will normally also need to hold a tax invoice for the transaction at the time you lodge your GST return for the tax period in which the input tax credit on the transaction is claimed (s 29-10). For details of tax invoices, see ¶5-100. The question of whether a taxpayer has made a creditable acquisition is determined from the point of view of the taxpayer, not of the supplier. Example A government department subsidised a taxi company for discounted fares provided for disabled customers. The department was held to have made a creditable acquisition of transport services. This was so, notwithstanding that from the company’s point of view it was simply making a supply of travel to the customer (FC of T v Department of Transport (Vic) 2010 ATC ¶20-196: see ¶4-040). Similarly, where an employer provides a Cabcharge facility for its employees who work late, it seems that it could claim an input tax credit for the GST component of the taxi fare.

“Acquisition” An acquisition is a mirror image of a supply (¶4-010). It includes: • acquiring goods • acquiring services • receiving advice or information • accepting the grant, assignment or surrender of real property • accepting the grant, transfer, assignment or surrender of any right • receiving financial supplies (¶10-000) • acquiring the right to require someone to do something, refrain from doing something, or tolerate something, and • any combination of these (s 11-10). Anything else that could be described as an acquisition, in the normal sense of the word, is also covered. However, receiving a payment of money for the supply of something else is not treated as an acquisition

— otherwise, there would be a doubling up of input tax credits. It does not matter whether the acquisition is legal or illegal — input tax credits may be claimed either way. The onus is always on the taxpayer to show that the acquisition actually took place. For recent examples involving unsuccessful claims for credits for the claimed acquisition of motor vehicles, see Byron Pty Ltd v FC of T [2019] AATA 2042; Stallion (NSW) Pty Ltd v FC of T 2019 ATC ¶20-707; [2019] FCA 1306. “Creditable purpose” To acquire something for a “creditable purpose” (s 11-15) means that: (a) you must have acquired it in carrying on your “enterprise” (¶3-020). This requires that the particular nature of the enterprise be identified. The ATO considers that this is determined on the basis of matters such as the business’ income-earning activities, its formation documents, contracts, business records, business plans and minutes. The ATO also considers, on the basis of analogous income tax cases, that whether a thing is acquired in carrying on your enterprise depends on the purpose for which you acquired the thing (GST Ruling GSTR 2008/1). This is determined objectively (AXA Asia Pacific Holdings Ltd v FC of T 2008 ATC ¶20-074), though your subjective purpose might also have some limited relevance (Macquarie Finance Ltd v FC of T 2005 ATC 4829; GST Ruling GSTR 2008/1) According to the ATO, some of the factors that would suggest that an acquisition is made in carrying on an enterprise are that: • it is incidental or relevant to the commencement, continuance or termination of the enterprise • the thing acquired is used by the enterprise in making supplies • the acquisition secures a real benefit or advantage • it is one which an ordinary business person would be likely to make • it does not meet the personal needs of individuals such as partners or directors • it helps to protect or preserve the enterprise entity, structure or organisation, and • it is made by the entity in accordance with statutory requirements (GST Ruling GSTR 2008/1) (b) the acquisition must not be of a private or domestic nature. The ATO considers, on the basis of analogous income tax cases, that this would normally cover matters such as living expenses, childminding expenses and most home/work travel (GST Ruling GSTR 2008/1), and (c) the acquisition must not relate to making supplies that would be input taxed, unless specified exceptions apply (¶5-020). Typical input taxed supplies include financial supplies (¶10-000) and residential accommodation (¶11-310). The relationship must be real and substantial, not just trivial. However, it is not necessary that there be a direct link between the acquisition and an actual supply that is input taxed (HP Mercantile Pty Limited v FC of T 2005 ATC 4571; [2005] FCAFC 126; GST Ruling GSTR 2008/1). Nor is the relationship subject to some overriding “purpose” test. For example, where a mining company acquired residential accommodation to lease to its employees in remote areas, it was denied input tax credits on associated acquisitions, as they related to the (input taxed) supply of the premises. This was so notwithstanding that this supply was not a commercial objective of the company in itself, but was made as a purely incidental part of running its (taxable) mining operations (Rio Tinto Services Ltd v FC of T 2015 ATC ¶20-525). Examples (1) Bank acquires a computer that it uses in making its input taxed financial supplies. The acquisition is not creditable. (2) Retailer that also offers loan finance to customers acquires special loans software to be used exclusively by its loans staff. The acquisition is not creditable.

It is apparently irrelevant whether the acquisition precedes or follows the input taxed supply (HP Mercantile Pty Limited v FC of T 2005 ATC 4571; [2005] FCAFC 126). Apportionment is appropriate where the acquisition is partly private or domestic, or partly related to making input taxed supplies (¶5-020). Examples (1) Where a bookshop owner buys stock to sell in the business, this will be a creditable acquisition for which input tax credits can be claimed. So will a new broom that the shopowner buys to sweep the shop. But the bus ticket that the shopowner buys to travel to the shop each day is not a creditable acquisition for which input tax credits can be claimed because it is a private or domestic expense. The same applies to other expenses such as food, clothing, shelter and child care that are treated as private or domestic under the income tax law (based on GST Ruling GSTR 2006/4). (2) Keith, an employee, is dismissed and goes into business carrying on an enterprise as a sole trader. Keith brings unfair dismissal proceedings against his former employer. Although Keith is now operating as a sole trader, he cannot claim an input tax credit for the legal expenses, because they were incurred as a result of his employment, not his enterprise. (3) A public company that is subject to a takeover offer obtains an independent report on the merits of the takeover, and obtains legal advice on the preparation of a formal shareholder statement required by law. The ATO would accept these as being acquired in carrying on the company’s enterprise (GST Ruling GSTR 2008/1). (4) A businessperson was disallowed claims for input tax credits on life insurance premiums, home contents insurance, home electricity and gas charges, airfares for guests, cable TV subscriptions and dental and grooming costs. A proportion of his claims was allowed for items such as newspaper costs and travel expenses; and a full claim was allowed for certain airfares, and for legal and accounting fees (Ryan v FC of T [2014] AATA 818).

In determining whether goods or services have been acquired for business or private purposes, you look at it from the business’s point of view. Example Lavish Pty Ltd provides cars to its sales representatives as part of their salary packages. The cars can be used for personal purposes when not being used on company business. However, from the company’s point of view, it acquired the cars purely because of the requirements of its business. They are therefore treated as being acquired wholly for business purposes. (Based on GST Ruling GSTR 2006/4.)

It follows that items such as food, clothing, shelter and child care will be treated as private if they are acquired for the benefit of the business owner, but not if they are required to be provided to others as part of that business. Examples (1) A religious order provides food and accommodation to monks who live and work at its monastery. Although the food and accommodation are private to the monks, it is treated as being acquired by the order wholly for business purposes (based on GST Ruling GSTR 2006/4.) (2) A taxpayer had a swimming pool constructed as part of the intended establishment of a naturist retreat. This was considered to be an acquisition made in the course of carrying on the taxpayer’s enterprise. This applied even though the pool would also have been capable of private or domestic use (Russell v FC of T [2011] FCAFC 10).

Some of the expenses for which a business could not claim input tax credits for one reason or another would be employees’ wages (not taxable: ¶4-090), life insurance premiums (no GST is payable: ¶10-100), interest on loans (no GST is payable: ¶10-000), most entertainment, or water or sewerage supplies (GSTfree: ¶16-200). Where no tax deduction available Generally, it is not necessary that you are able to claim an income tax deduction for the cost of something you have acquired before you can claim an input tax credit for it. For example, the purchase of a capital item will not normally be tax deductible, but there is no reason why it cannot qualify as a creditable acquisition for the purpose of claiming input tax credits. This applies equally to acquisitions of a capital nature which are made to provide an enduring benefit to the enterprise, or to restrict competition (GST Ruling GSTR 2008/1). Similarly, where goods or services are acquired in order to carry out a feasibility

study, that acquisition may qualify for input tax credits irrespective of whether the cost would be tax deductible (¶3-020). However, acquisitions will not qualify as creditable acquisitions to the extent that they involve certain expenses that are specifically made non-deductible under the income tax law (s 69-5). These include expenses that are not deductible under the following provisions: • recreational club expenses (ITAA 1997 s 26-45) • leisure facility expenses (ITAA 1997 s 26-50) • non-compulsory uniforms (ITAA 1997 Div 34) • family maintenance (ITAA 1997 s 26-40) • relatives’ travel (ITAA 1997 s 26-30) • entertainment (ITAA 1997 Div 32; ITAA 1936 s 51AEA; 51AEB; 51AEC). However, input tax credits may apply for acquisitions in the limited situations where the entertainment is deductible, for example, where morning and afternoon teas or light lunches are provided to employees during the working day (Taxation Ruling IT 2675); food, accommodation and travel is provided as part of a qualifying seminar (Taxation Determination TD 93/195); entertainment is provided to employees as a taxable fringe benefit; or food and drink is provided at a non-social occasion at an in-house dining facility to employees or, subject to conditions, to clients (Interpretative Decision ID 2005/122). For fringe benefits tax (FBT) rules, see ¶24-210 • penalties (ITAA 1997 s 26-5) • car parking for certain self-employed persons, partnerships and trusts (ITAA 1936 Div 4A of Pt III) • certain non-cash business benefits used for private purposes (ITAA 1936 s 51AK). Currently, there is no prohibition on the maker of an unlawful supply claiming input tax credits for creditable acquisitions related to that supply. Note, however, that the government has changed the income tax law to deny deductions for outgoings that are related to activities for which the taxpayer has been convicted of an indictable offence. Example Colossus Enterprises buys $110,000 worth of sporting and theatre tickets which it distributes free to its major clients. These would be classed as entertainment expenses. Colossus Enterprises cannot claim an input tax credit for the $10,000 GST on the tickets.

Conversely, of course, the fact that an expense is tax deductible does not necessarily mean that the acquisition will qualify for input tax credits. For example, a bank may claim a tax deduction for outgoings even though, as a financial supplier, it cannot claim input tax credits. These restrictions apply equally to bodies that are exempt from tax, such as charities. Purchasing from the government The Commonwealth Government is not liable to pay GST, but has a notional liability for the purposes of its dealings with others (¶1-300). If you purchase goods or services for your business from the government, you can claim input tax credits as if this notional GST had applied. Similarly, you can claim input tax credits if you make a business purchase from a state government, and a notional GST liability is included in the payment (s 177-3). Corresponding rules apply to untaxable Commonwealth entities. For GST exemptions that apply to certain government services, see ¶4-080. Acquisitions by partners and partnerships If a partner acquires something in their capacity as a partner, this is treated as an acquisition by the

partnership, not the partner (s 184-5). Factors that may indicate that the acquisition has been made in the capacity as a partner include: • the acquisition is used in the partnership enterprise • it is made with the consent of all the partners • it is paid for out of the partnership profits or from a partnership account • the invoice shows the firm or business name, or the names of all the partners, as recipient (GST Ruling GSTR 2003/13). The Commissioner has waived the requirement to hold a tax invoice in certain situations where a taxpayer holds a document that contains a partner’s identity and certain other requirements (WTI 2013/6: see ¶5-130). Corresponding rules apply to acquisitions made by members of the committee of management of any other unincorporated association. A general law partnership can claim an input tax credit on the acquisition of an “in kind” contribution by a partner on formation of the partnership. However, the partner cannot claim an input tax credit on the acquisition of an interest in the partnership, as its supply to the partner is not a taxable supply (¶10-010; GST Ruling GSTR 2003/13). If a partner resigns and later incurs legal expenses in recovering its equity in the partnership, the partner cannot claim an input tax credit for those expenses, as they are not incurred in carrying on an enterprise (Interpretative Decision ID 2002/11). For the definition of partnership, see ¶3-015. When input tax credit can be claimed The tax period for which the input tax credit can be claimed will depend on whether you are on the cash basis or the accruals basis of accounting. For details, see ¶7-200 and ¶7-320. In certain situations, it is open to a taxpayer to defer a claim for an input tax credit from the tax period for which it would normally be attributable, to a later tax period (¶5-125). However, any deferment is subject to a time limit, as follows: • if the period to which the input tax credit would normally be attributable commences on or after 1 July 2012, a taxpayer will generally lose the entitlement to the credit unless it has been taken into account in an assessment within four years after the taxpayer was required to lodge a return for that tax period (s 93-5; Draft Miscellaneous Taxation Ruling MT 2018/D1) • if the period to which the credit would normally be attributable commenced before 1 July 2012, the taxpayer generally lost the entitlement to the credit unless it claimed it in a return lodged within four years after the taxpayer was required to lodge a return for that tax period (Administration Act, Sch 1, former s 105-55; Trustee for SBM Trust v FC of T 2015 ATC ¶10-389; ATO Decision Impact Statement, 25 August 2015). Example A taxpayer on a cash basis made a creditable acquisition in August 2015 but neglected to take it into account in its September 2015 quarterly return, which was required to be lodged by 28 October 2015. The taxpayer has until 28 October 2019 to claim the input tax credit in a return, thereby giving rise to an assessment (¶8-080).

Exceptions to this limit apply in the following situations: (1) where the supply to which the acquisition relates is incorrectly assessed as input taxed, and is subsequently assessed as taxable or GST-free, or (2) where the taxpayer has requested the Commissioner to treat a document as a tax invoice before the end of the four-year period, and the Commissioner agrees after the four-year period has passed (s 93-10).

The Commissioner has the power to direct a liquidator of a company to give GST returns on behalf of the company within a further specified period (s 58-50; ¶8-050). In such a case, the AAT has held that the four-year period would start to run from that later date (Rosebridge Nominees Pty Ltd (in liq) v FC of T [2019] AATA 426). Artificial claims The ATO considers that certain arrangements where an entity uses an associate to secure input tax credits on the construction of residential premises for lease, and to defer the corresponding GST liability, are not tax-effective (GST Ruling GSTR 2010/1 (¶20-000); Taxpayer Alerts TA 2009/4; TA 2009/5). It has also raised questions about the effectiveness of certain arrangements where an entity claims an input tax credit on a purported acquisition of an intangible right (on non-commercial terms), with the provision of vendor finance under which payments are contingent on a future event (Taxpayer Alert TA 2012/5). [GSTG ¶15-050]

¶5-020 Calculation of input tax credit Normally, the input tax credit is simply the amount of GST payable on the supply to you (s 11-25). Example You buy equipment that you use wholly in carrying on your business. The GST-inclusive cost is $22,000. You can claim an input tax credit of $2,000.

However, some transactions involve acquisitions that are only partly eligible for credit (s 11-30). Typically, these involve acquisitions that relate partly to making private or input taxed supplies. In these cases, it is necessary to work out the creditable amount by a process of apportionment. The general rule is that the method for doing this must be fair and reasonable, must reflect the intended use of the acquisition, and must be appropriately documented. Apportionment guidelines have been issued by the Commissioner (GST Ruling GSTR 2006/4) and are explained below. Part business, part private The first category of partial credits is where the acquisition is made partly in carrying on your business and partly for private or non-business purposes. In this situation, you are only entitled to a credit for the part related to business use. There are various methods for working out the extent to which you acquired something for a business use. These vary according to the nature of the item acquired and the nature of the business. The ATO prefers that you use “direct” methods for determining intended or actual use. These methods are based on factors such as: • distance, for example, kilometres travelled by a motor vehicle as evidenced by a logbook • time, for example, computer processing time spent on various input taxed and other activities, as evidenced by a time sheet • volume, for example, numbers of transactions of particular types • space, for example, floor area where the space is used for different activities, and • staff numbers, for example, where the use of particular acquisitions is directly related to the number of staff. These factors may be measured on the basis of: • records you already have available from a previous period

• records kept since you made the acquisition, but before you lodge your BAS for the tax period in which you made the acquisition, including your actual use of it • records kept for some other purpose, for example, income tax (see below), management accounting, profitability analysis, intra-entity transfer charging or cost accounting • your previous experience concerning the usage of similar acquisitions • your business plan, or • any other fair and reasonable basis. If you have already established the business use of an acquisition for income tax purposes in a particular tax year, this may be used as a reasonable estimate for GST purposes for tax periods ending during the next tax year. However, this will not apply if you are aware of significant changes to the extent of business use (GST Ruling GSTR 2006/4). You may also need to make adjustments to reflect the differences between the income tax and GST rules (¶5-010). The ATO accepts that it is not always necessary to consider each individual acquisition separately. In the case of acquisitions of a particular class, or made by a business area of the enterprise which undertakes a single type of supply or activity, it may be sufficient simply to determine the intended use of acquisitions of that class or business area. Specific types of expenses In the case of car expenses, you can adapt the four methods used for tax purposes, ie cents per kilometre, percentage of original value, one-third of actual expenses or log book method. For details and useful examples, see GST Bulletin GSTB 2006/1. In other cases, the ATO accepts the following methods: • computer and internet expenses — a reasonable estimate may be based on a diary or log of computer use over one representative month • home offices — for insurance and other occupancy expenses, a reasonable estimate may be based on a floor area basis. If the insurance relates to contents, a valuation basis may also be used. For electricity and other running expenses, a reasonable estimate may be based on a diary or log of home office use over one representative month • telephone — a reasonable estimate may be based on a diary or log for one representative month, covering incoming and outgoing calls (GST Ruling GSTR 2006/4). Examples (1) Ronald, a builder, acquires a load of bricks for $11,000, including $1,000 GST. He uses 70% of the bricks in his business and 30% for building extensions to his home. Ronald will be entitled to an input tax credit of 70% of $1,000, ie $700. (2) Megan lives in a flat above the shop where she runs a business. She incurs the following expenses: Electricity: If only one electricity bill covers the entire premises, this could be apportioned according to the business usage established by diary records for a typical month. Telephone: If there is only one telephone line for the entire premises, the bill could be apportioned on the percentage of business calls. This could be based on a log of incoming and outgoing calls over a representative month. Building insurance: This could be apportioned on a floor area basis. For example, if the shop comprises 60% of the total floor area, and the bill is $1,100, then the insurance relating to the shop is $660. The amount for which an input tax credit could be claimed is therefore 1/11th of $660, ie $60. (3) Kerry buys a replacement car for her business. The business use of the replaced car, as established by log books, was 60%. If the pattern of usage is expected to be the same, Kerry can use the same percentage in calculating business usage for the new car. However, the ATO would expect her to keep a log book for a representative period to substantiate actual business use. (4) Robyn leases a farm for $60,000 pa, including GST. The lease includes a private house where Robyn lives. The rental value of the house is $10,000. The Tax Off would probably accept an apportionment so that Robyn can claim an input tax credit of 1/11th × 5/6 × $60,000, ie $4,545 and the lessor accounts for GST of the same amount.

In Interpretative Decision ID 2002/296, it was suggested that if you construct a house as your home, you cannot claim any input tax credit on the construction costs, even though you intend to use part of the home for business purposes, unless that part is clearly differentiated as commercial premises (eg a doctor’s surgery). That Decision has now been withdrawn as it does not accurately reflect the ATO view. Optional annual apportionments for small business Certain types of small businesses can elect to make their apportionments of input tax credits annually (s 131-5). This applies to entities that qualify as small business entities (¶1-250) for the income year in which the election is made, and to non-business entities with a GST turnover that does not exceed $2m. For calculation of GST turnover, see ¶3-030. This option does not apply to taxpayers who are on the instalments system (¶8-037) or who have elected for annual tax periods (¶8-040). The election takes effect from the start of the first tax period for which a GST return (BAS) is not yet due at the time of the election (s 131-10). For example, if a quarterly taxpayer makes an election on 20 April — before the 28 April deadline for lodging a return for the March quarter — the election takes effect from the beginning of that March quarter. Extensions may be approved by the Commissioner. The election ceases to have effect if: • the taxpayer revokes it, or • the taxpayer ceases to be a small business entity, or • the taxpayer is a non-business entity that exceeds the turnover threshold as at 31 July in the financial year. The Commissioner may also disallow the election on the ground of a bad compliance history (s 131-20). A record should be kept of the election, for example in a file note, but it does not need to be notified to the ATO. The general effect of the election is that where an acquisition was made during a tax period, a full input tax credit can be claimed in the BAS for that tax period, even though the acquisition was not fully creditable (s 131-40). Any necessary apportionment is instead made by way of an increasing adjustment for the tax period in which the next annual income tax return is due to be lodged with the ATO (s 131-55; 131-60). The increasing adjustment is calculated by subtracting the input tax credit based on the actual creditable use from the input tax credit originally claimed. Any other adjustments that would normally apply are also taken into account. If no income tax return is required to be lodged, the adjustment is made in the BAS for the tax period ending 31 December after the end of the financial year in which the tax period occurred. Taxpayers can in any case elect to attribute the adjustment to an earlier tax period if they wish. The election cannot apply to acquisitions that are not creditable at all, eg where they are applied or intended to be applied solely for a private purpose. Nor can it apply to reduced credit acquisitions. The input tax credit will also be reduced pro rata where the acquisition relates partly to making supplies that would be input taxed, or where the taxpayer has provided only part of the consideration (s 131-40). The input tax credit allowed on the acquisition of a “luxury” car generally cannot exceed the limit normally allowed (¶12-110; s 131-50). Corresponding rules apply to importations (s 131-45; 131-50; 131-55). In the case of GST groups, an election can only be made if each group member satisfies the eligibility criteria (s 131-15). Example In March 2019, Gary, a quarterly GST payer, pays $550 for telephone services, including $50 GST. He uses the services partly for his business and partly for private purposes. He has made a valid election to make an annual apportionment, so he claims the full $50 as an input tax credit in his BAS for the March 2019 quarter. It later turns out that Gary has applied the telephone services 80% for business purposes during 2018/19. Gary is therefore liable for an increasing adjustment of $10, calculated as follows:

Input tax credit originally claimed.................................... Less: credit allowable on basis of actual business use (80% ×

$50

$50)....................................

$40

Increasing adjustment ....................................

$10

Assuming that Gary’s income tax return is due by 31 October 2019, the adjustment must be made in the BAS for the tax period ending 31 December 2019, which itself is required to be lodged by 28 February 2020.

Business involving input taxed supplies The second category of partial credits arises where the acquisition is made partly for making input taxed supplies. To that extent, you will generally not be entitled to an input tax credit (¶10-000). This does not apply where the input taxed supply is made through an enterprise, or part of an enterprise, that you carry on outside Australia. In such a case, input tax credits may still be available. Typical supplies that would be input taxed are renting out residential premises (¶11-310) and financial supplies (¶10-000). Guidelines on apportionment of credits to the extent that they relate to financial supplies are given at ¶10-030. In the case of financial supplies, there are also some exceptions to the general rule. The first exception is that certain outsourced services may entitle you to a reduced 75% input tax credit (¶10-040). The second is the “de minimis” exception, which applies to businesses that provide financial services as only an incidental part of their operations (s 11-15). The general effect of this exception is that you will not be prevented from claiming input tax credits relating to financial supplies if those credits do not exceed $50,000 and are also less than 10% of the total input tax credits of the business (¶10-032). The third exception is that if an entity borrows money and uses it in making taxable or GST-free supplies, it will be entitled to input tax credits for its borrowing-related expenses (¶10-035). Indirect apportionment All the examples discussed above involve fairly straightforward situations where business (or taxable) usage can be calculated directly. Sometimes, however, the usage has to be calculated indirectly. This may be appropriate, for example, where a direct method is not practicable or where the cost of measuring directly is disproportionate to the cost of the acquisition itself. For example, the ATO accepts that an indirect method may be appropriate where there are overhead expenses or a large number of small acquisitions and it is not cost effective to treat each one separately (GST Ruling GSTR 2006/4). There are two types of indirect methods — input based and output based. The ATO prefers the inputbased method, where possible. Under this method, the way in which some inputs are used is applied to measure the way other inputs are used. It can only be used if the use of the first set of inputs can be worked out directly. Example Amir owns a building. He rents out the ground floor to a business (a taxable supply) and the first floor to a private residential tenant (an input taxed supply). Some of his costs are overheads that cannot be directly allocated to either the taxable or the input taxed supplies. However, various other costs can be allocated directly on the basis of 60%/40%. Using the input-based method would enable Amir to allocate the overheads on the same basis.

Output- based methods use outputs to measure the business use of inputs. Example Shane makes both taxable and input taxed supplies as part of her business. Some of her costs are overheads that cannot be directly allocated to either the taxable or the input taxed supplies. However, the outputs from taxable supplies are 60% of total outputs. Using the output-based method, Shane can allocate the overheads on the same basis.

The ATO can approve other ways of apportioning input tax credits in particular cases. For an example involving the disposal of goods on a marriage breakdown, see ¶6-300. The apportionment of general management expenses incurred by a financial supplier was considered in AXA Asia Pacific Holdings Ltd v FC of T [2008] FCA 1834.

Feasibility studies A business may conduct a feasibility study into whether to embark on a particular course of action. If the study is directed wholly at the feasibility of making supplies that would be input taxed, no input tax credit would normally be available (HP Mercantile Pty Limited v FC of T 2005 ATC 4571; [2005] FCAFC 126). However, if the study relates to two options — one involving supplies that would be taxable and the other involving supplies that would be input taxed — the ATO suggests that an input tax credit may be available for services rendered up to the time the business forms the intention to proceed with the input taxed option: see Example 41 in GST Ruling GSTR 2002/2. Correcting mistakes in credit claims There are procedures for correcting mistakes in claims for input tax credits: see ¶8-045. However, a fouryear limit applies to claims (¶5-010). No input tax credit can be claimed where GST was mistakenly not included by the supplier and the GST has since ceased to be payable because the four-year collection limit (¶8-100) has expired (Interpretative Decision ID 2008/16). Use of industry benchmarks The ATO may use its industry benchmarks (¶18-175) to identify claims which are above the norm and which may require further investigation or substantiation: see, for example, Baini (¶12-130) and Carter v FC of T [2013] AATA 141, where a florist claimed a “cost of goods sold” equalling 83% of total business income, whereas the benchmark rate was in the range of 44%–54%. Taxpayers with claims significantly above benchmark levels need to be prepared to provide satisfactory records as substantiation. For example, an eBay trader was unsuccessful in challenging a benchmarkbased GST assessment where they had carried on their enterprise without proper consideration of GST requirements and lacked any adequate records (Cronan v FC of T [2014] AATA 745). However, the AAT has commented that benchmarks may not be appropriate in certain cases, such as where a taxpayer who is operating a low turnover business has suffered prolonged serious illness (Mold v FC of T [2011] AATA 823). Payment partly by third party Input tax credits also need to be apportioned where you only pay part of the purchase price and someone else pays the balance. You will only be entitled to an input tax credit in accordance with the proportion of the amount you paid (s 11-30). Examples (1) As part of her business, Alana gives a talk at a business motivation seminar. The cost of her interstate travel and accommodation associated with the seminar is $2,200, including $200 GST. Alana pays half this amount and the company organising the seminar pays the other half. Alana is entitled to half the input tax credit ($100) and the company is entitled to the other half ($100). (2) Assume the same facts, except that $550 of the costs (including $50 GST) relate to accommodation for a private holiday stopover after the seminar. Alana would be entitled to an input tax credit of:

($2,200 − $550) × 1/2 × 1/11 × $2,200 = $75  $2,200 

Adjustment on subsequent supply A GST adjustment may be available where you dispose of something that you originally acquired wholly or partly to make financial supplies or for private or domestic purposes (¶6-310). Special rules • The input tax credit may be limited if you acquire a car for more than the car limit (¶12-110). • Details of how the ATO calculates the input tax credit where a representative of an incapacitated entity (¶18-250) on a cash basis pays creditors a dividend of less than 100 cents in the dollar are contained in Practice Statement PS LA 2012/1 (GA).

[GSTG ¶15-500]

¶5-030 If company is not yet set up It may happen that you incur business costs relating to a company that has not been formally established. If you are not registered, you cannot claim an input tax credit. Even if you are registered, the credit is not available unless setting up the company is part of your own business. To cover these situations, a special rule enables the credit to be claimed by the company after it has been set up (s 60-5). For this “pre-establishment” rule to apply, all these conditions must be satisfied: • you must have made an acquisition before the company exists • you must use the acquisition for the purpose of bringing the company into existence, or for the purpose of the company carrying on an enterprise • the company must come into existence and be registered within six months after the purchase • you become a member, officer or employee of the company • the company fully reimburses you for the amount you paid for the purchase (s 60-15). Where all these conditions are satisfied, the input tax credit is claimable by the company, not by you. The input tax credit is attributed to the tax period in which you are fully reimbursed for the costs you incurred on the acquisition (s 60-25). At the time that the company lodges its GST return for that period, it should hold a copy of the tax invoice that you hold for the purchase (¶5-100). If it does not, the input tax credit will be deferred until the copy of the tax invoice is held. Where pre-establishment rule does not apply The pre-establishment rule does not apply if you yourself are entitled to an input tax credit on the acquired goods or services, for example, if you use the purchased goods or services as part of your own business. Nor does it apply if the company takes over the ownership of the goods or services and can claim an input tax credit in the normal way (s 60-15). Examples (1) An accountant who sells shelf companies as a business would be entitled to input tax credits for the incorporation costs, so the pre-establishment rule does not apply. The credit is simply claimed by the accountant, not the companies. (2) An equipment wholesaler purchases stock to be used by a future retail company. After the company is set up, it buys the stock. This purchase entitles the company to an input tax credit for the GST component of the purchase price. The original purchase by the wholesaler is therefore not treated under the pre-establishment rule.

The pre-establishment rule also does not apply if the purchase is of a private or domestic nature, or if it relates to the company providing financial services or other input taxed supplies (s 60-20). The pre-establishment rule applies only to companies. Other business entities cannot claim input tax credits for acquisitions made in these circumstances. However, they may be able to claim adjustments for stock held at the time they register (¶6-400). The supply of services through your overseas branch is not treated as an input taxed supply, so the preestablishment rule may apply (¶10-050). Taxable importations Corresponding rules apply if you make importations before the company has been set up. [GSTG ¶15-720]

¶5-040 Reimbursement of employees, agents, officers or partners

An employer that is making taxable supplies can claim input tax credits where it purchases uniforms, tools and equipment needed by its employees to do their job. If the employee makes the purchase on his/her own account, the employee cannot claim input tax credits for the GST on the purchase because they are not themselves carrying on an enterprise. Nor could the employer, unless the employee was acting purely as its agent in making the purchase (¶17-400). However, in certain circumstances, you can claim input tax credits if you reimburse employees or agents for expenses they incur that are directly related to the performance of their duties (s 111-5). For the purpose of this rule, employees include people subject to withholding under the PAYG rules relating to company directors, officeholders, labour hire arrangements or voluntary agreements (s 111-20). A corresponding rule applies when a partnership reimburses a partner, or a company reimburses a company officer. In addition, where there is no direct relationship to work duties, input tax credits can nevertheless be claimed if: (1) you reimburse an employee, or an associate of the employee, for expenses incurred by the employee or the associate; and (2) the reimbursement is a fringe benefit (or an exempt fringe benefit) under the FBT legislation. In this case, it is not necessary for you to be the employer of the employee. Your entitlement to the credit will be determined as if you had incurred the expense yourself. However, you cannot claim the credit if the employees, etc, are themselves entitled to claim one. Nor can you claim if you are a partnership that is already entitled to an input tax credit for the expense in any case under s 184-5 (¶5-010). The credit will also be reduced to the extent that the reimbursement is for an acquisition that relates to the making of input taxed supplies, eg financial supplies (Interpretative Decision ID 2013/13). The amount of the input tax credit is 1/11th of the amount of the reimbursement (s 111-10). Example An employee incurs $110 for petrol that she uses entirely in work-related travel. If the employer fully reimburses the employee, the employer can claim an input tax credit of $10.

Input tax credits for reimbursements of expenses incurred by agents, officers and partners will be proportionately reduced if the expenses were only partly directly related to the performance of the person’s duties (s 111-10). This does not apply to reimbursements of an employee’s expenses because, as noted above, these qualify for input tax credits in additional situations where there is no direct relationship to work duties. To enable you to claim the credit, the employee, etc, will need to obtain and provide you with a tax invoice for the acquisition that they made (s 111-15). However, in accordance with the normal rules, this will not be necessary if the acquisition was for $75 or less, excluding GST (¶5-170). The tax invoice will be effective even if the employee, not the employer, is shown as the recipient (GST Ruling GSTR 2013/1). A corresponding rule applies to adjustment notes for later adjustments (¶6-140). For the situation where the purchase is made on a corporate credit or charge card, see ¶5-130. Reimbursement of non-deductible expenses You cannot claim input tax credits for a reimbursement of “non-deductible” expenses (¶5-010) such as client entertainment or penalties. Example Kindly Ltd reimburses an employee for fines and penalties that she incurs. No input tax credit can be claimed for fines and penalties, so no input tax credit can be claimed for their reimbursement.

Direct payment of employee’s expenses These rules also apply where an employer directly pays the work-related expenses of an employee (s 111-25). This is treated in the same way as a reimbursement.

Example Trusty Enterprises pays the professional association fees of its senior staff. Trusty can claim an input tax credit in relation to these payments.

This also applies where anyone — not necessarily the employer — pays on behalf of an employee, or an associate of the employee, for expenses incurred by the employee or the associate. In this case, the payment must be a fringe benefit (or an exempt fringe benefit) under the FBT legislation. Former or future employees Input tax credits can also be claimed for reimbursements of, and direct payments to, former and future employees or their associates. In this case, the payment must be a fringe benefit (or an exempt fringe benefit) under the FBT legislation (s 111-30). Allowances The reimbursement rules do not apply where an employee is paid an allowance, for example, where: • the employee is paid for an estimated expense and does not have to repay any amount not spent, or • the employee is paid on a notional basis, such as a cents-per-kilometre payment for work-related use of a private car, or a “per diem” travel allowance. In such cases, the Commissioner considers that the employer cannot claim an input tax credit. Charitable volunteers’ expenses Volunteers for endorsed charities are treated in the same way as employees for the purposes of these rules. This means, for example, that charities will be able to claim input tax credits if they reimburse volunteers for expenses that are directly related to their activities as volunteers (s 111-18). This also applies to volunteers for gift-deductible organisations or for government schools (¶15-000). However, it does not apply to other non-profit organisations. [GSTG ¶15-740]

TAX INVOICES ¶5-100 Role of tax invoices A tax invoice is a special type of invoice which contains specified items of information needed for the effective operation of the GST system. Tax invoices are important because they record creditable acquisitions for which an input tax credit can be claimed. You will normally have to hold a tax invoice for the acquisition at the time you lodge your GST return for the tax period in which the credit is claimed (s 29-10(3)). For exceptions to this rule, see ¶5-130. Tax invoices are only relevant for taxable supplies. For the position where a supplier has both taxable and non-taxable supplies, see ¶5-110. The mere existence of a document purporting to be a tax invoice is not, by itself, sufficient to establish that a taxable supply or creditable acquisition has occurred (GH1 Pty Ltd (in liquidation) v FC of T 2017 ATC ¶10-461). Issue of tax invoice The tax invoice for a taxable supply must be issued by the supplier, except in the case of “recipient created” tax invoices (¶5-140). If the recipient requests a tax invoice, the supplier must issue it within 28 days after the request (s 29-70). If the supplier refuses to issue a tax invoice in accordance with the recipient’s request, the recipient may apply to the ATO to investigate the matter, giving full details of the transaction. The recipient may also apply for a determination either: (1) that a tax invoice is not required in the circumstances (s 29-10); or (2) that such documentation as the recipient holds can be treated as a tax

invoice (s 29-70) (¶5-130). Penalties apply for failing to issue a tax invoice (¶18-300). It has been held that a tax invoice is not “issued” until some act is done to convey it to the intended recipient, though it is not clear whether it is necessary to show actual receipt (Tavco Group Pty Ltd v FC of T 2008 ATC ¶10-049). Tax invoices may also be issued in electronic form (¶5-110). For ATO guidelines on when an “invoice” is issued, see ¶7205. For penalty remission guidelines, see ¶18-305. Failure to hold a tax invoice at the time of making a claim for an input tax credit may also constitute a penalisable false or misleading statement (¶18-300). In cases of dispute, the recipient may also apply to the court for a declaration that a tax invoice should be supplied. However, in a situation where the supplier’s refusal to issue the tax invoice was backed by a private ruling from the Commissioner, the court may refuse to determine the matter unless the Commissioner is also joined as a party to the proceedings (CSR Ltd v Hornsby Shire Council 2004 ATC 4966). The obligation on a supplier to issue a tax invoice, or on a recipient to obtain one, does not apply where the value of the supply (excluding GST) does not exceed $75 (¶5-170). The tax invoice rules also do not apply to importations (¶9-010). For other modifications to the tax invoice rules, see ¶5-130. Tax invoice is different from ordinary invoice An ordinary invoice is simply a notice of an obligation to pay (¶7-205). It does not have to contain the information that a tax invoice must. However, if it does not, it cannot normally be used to support the recipient’s claim for input tax credits (for exceptions, see ¶5-130). On the other hand, the issue of an ordinary invoice by a non-cash basis supplier is sufficient to ensure that all the GST on that supply should be attributed to the tax period in which the invoice is issued (s 29-5). Purchasers will need to be alert that invoices purporting to be tax invoices in fact comply with all the requirements. If a purchaser claims an input tax credit on the basis of an incorrect belief that the invoice complies, and no exemption applies, the purchaser might even be exposed to penalties as well as not getting the credit. Suppliers can choose to issue a tax invoice as well as their ordinary invoices, though most simply adapt their ordinary invoices to serve both purposes. [GSTG ¶16-000]

¶5-110 Contents of tax invoices The required contents for a tax invoice are as follows: (1) it must be issued by the supplier (for recipient created tax invoices, see ¶5-140) (2) it must be in the approved form (3) it must contain enough information to enable the following to be “clearly ascertained”: • the supplier’s identity (eg its legal name, business name or trading name) and ABN. A builder’s registration or licence number would not normally be sufficient (GST Ruling GSTR 2013/1) • if the total price of the supply/ies is $1,000 or higher, the recipient’s identity or ABN • what is supplied, including quantity and price • the extent to which each supply to which the document relates is taxable. This requirement is satisfied if the document includes the amount of GST payable for each taxable supply, or a statement of the extent to which the supply is taxable, or each taxable supply is asterisked with a corresponding statement of the extent to which the supply is taxable (GST Ruling GSTR 2013/1) • date of issue

• the amount of GST payable in relation to each supply to which the document relates • such other matters as may be specified in the regulations, and (4) it must be clearly ascertainable from the document itself that it was intended to be a tax invoice. The most obvious way would be to include the words “Tax Invoice”, though alternatives such as “GST Invoice” may suffice in appropriate circumstances (s 29-70). The tax invoice may cover more than one supply, provided that it meets the requirements for each of those supplies. If it meets the requirements for some but not all of the supplies, it qualifies as a tax invoice in relation to the former supplies, but not the latter. So far as price is concerned, GST Ruling GSTR 2013/1 says that it is not necessary to specify the actual price of each item, provided that the price can be determined from the invoice. The $1,000 threshold for requiring the recipient’s identity or ABN is designed to accommodate smaller business transactions, such as from a cash register, where that information may not be readily available. Of course, a supplier retains the option of including this information if it wishes, even if the transaction is for less than $1,000. “Clearly ascertainable” information It appears that the required information must be ascertainable from the document itself. It is not sufficient that it could be ascertained from some other external source. Example A document purporting to be a tax invoice contains all the required information except for the supplier’s ABN. The fact that the ABN may be ascertainable from the Australian Business Register is not sufficient, because it cannot be said that the ABN is ascertainable from the document. The document therefore does not qualify as a tax invoice. (However, it may qualify if the ABN can be ascertained from some other document provided by the supplier: see further below.)

One piece of information may often be sufficient to satisfy more than one condition. For example, the description of the supply may also make clear the identity of the supplier, such as in certain cases where a new membership in a club is issued (GST Ruling GSTR 2013/1). In satisfying requirement (4), evidence as to the subjective intention of the supplier is not relevant. The intention must be clearly ascertainable from the document itself. The most obvious way of satisfying this is simply to include the words “Tax invoice” or “GST invoice” on the document. It may also be sufficient to specifically state in the document that it provides all the information needed for the recipient to claim an input tax credit. However, merely providing that information without such a statement would not be sufficient. Information in two or more documents Two or more documents can be considered together when a recipient is determining whether all of the required information has been provided (s 29-70(1A)). For this to apply, all the required information must be clearly ascertainable from the documents, and those documents must have been given by the supplier to the recipient. It is not sufficient that the information can be ascertained from some other outside source. Examples (1) A document purporting to be a tax invoice contains all the required information except for the supplier’s ABN. However, the ABN can be ascertained from an earlier invoice or business card provided by the supplier. The recipient can treat the documents, considered together, as comprising a valid tax invoice. (2) The same applies if the purported tax invoice shows an incorrect ABN, but the correct ABN can be determined from the other document (GST Ruling GSTR 2013/1).

Although the document(s) may be treated as a tax invoice for the purposes of the recipient, this does not mean that the supplier has satisfied its own obligation to supply a tax invoice. The recipient may still require the supplier to provide a formally valid tax invoice, and this must be provided within 28 days (¶5-

100). Tax invoices and GST groups A special rule applies where the recipient of the supply is a member of a GST group, and the group’s representative member is entitled to an input tax credit for that member’s acquisition (¶17-020). In practice, the supplier may not always know which member of the group has actually made the acquisition. To avoid practical difficulties arising, there is a relaxation of the normal requirement that a tax invoice must enable the recipient’s identity or ABN to be clearly established. In such a case, it is sufficient if the document contains enough information to enable the clear ascertainment of the identity of: • the group itself • the group’s representative member, or • another member of that group, provided that the representative member would have been able to claim the input tax credit if that member had actually been the recipient (s 48-57). This concession can operate in conjunction with the concession allowing more than one document to be taken into account in determining whether the document can be treated as a tax invoice. The actual recipient retains the right (s 29-70) to require the supplier to provide a tax invoice which identifies the recipient rather than just the relevant group, representative member or other group member (s 48-57). This may be appropriate, for example, in some situations where it is necessary to account for GST adjustments arising after the actual recipient has left the group. This particular concession does not apply to recipient created tax invoices. Overlooking non-compliance Even if the document does not qualify under the above rules, the Commissioner still has the discretion to treat it as a tax invoice (¶5-130; s 29-70(1B)). Alternatively, the recipient may request the Commissioner to exercise the discretion to allow an input tax credit to be claimed despite the absence of a tax invoice (¶5-130). These are additional to the other options open to a recipient on receiving a document that does not formally comply with the tax invoice requirements, namely: • if the defect can be rectified by reference to another document provided by the supplier, to treat the documents together as a tax invoice • to require the supplier to issue a formally compliant tax invoice. Other aspects Tax invoices issued by trusts. In GST Ruling GSTR 2013/1, the Commissioner says that information sufficient to identify the trust includes the registered business name, or the trustee’s name, and the ABN of the trust. Property contracts. The Commissioner considers that a property settlement statement or a contract for the sale of real property would not normally qualify as a tax invoice (¶19-400). Tax invoice issued under arrangement. In certain circumstances, another entity can issue a tax invoice on behalf of a supplier where there is an agreement between them (Interpretative Decision ID 2010/146). Joint recipients. A single tax invoice may be issued to cover a single supply to joint recipients, eg where an item is supplied jointly to two family members who operate separate businesses. However, the identities or ABNs of both recipients must appear (Interpretative Decision ID 2010/144). Foreign currency. Although the consideration may be expressed in a foreign currency, the amount of GST payable must be expressed in Australian currency, or there must be sufficient information to enable the recipient to work it out (GST Ruling GSTR 2001/2: ¶4-200). For the requirements for recipient created tax invoices, see ¶5-140. Rounding. For the “rounding” rules that apply where the amount of GST involves a fraction of a cent, see

¶4-205. Electronic tax invoices. A tax invoice may be in electronic form, provided that it contains the required information. For record-keeping requirements, see ¶18-040. For the application of this to mobile phone invoices, see Class Ruling CR 2014/15. Identification of supply. The items supplied may be identified by a code or part number if both the supplier and the recipient hold another document that describes the item covered by that number. Lost invoices. If the original tax invoice is lost, the Commissioner suggests that any replacement issued to the recipient should be marked “copy” or “duplicate”. Amount of GST. The ATO considers that a document that shows only the “WEG” amount (ie the combined amount of GST plus wine equalisation tax) does not meet the requirements, as it does not show the amount of GST. [GSTG ¶16-050]

¶5-120 Sample tax invoices The following are sample tax invoices that comply with these rules. For further guidance, see the ATO’s How to set out tax invoices and invoices at www.ato.gov.au. Fully taxable supply for less than $1,000 TAX INVOICE No 2019/67 Pete’s Office Supplies Pty Ltd ABN: 32 123 456 789

15 Byron Road Shelley NSW

Date: 1 August 2019

Description of supply

Total

Filing cabinets

$750

GST

$75

TOTAL

$825

The total price includes GST for this supply Fully taxable supply for $1,000 or more TAX INVOICE Dinkum Auto Parts Pty Ltd ABN: 32 123 456 787 Date:

15 August 2019

To:

Auto Assemblers Ltd 99 Elliott Drive Lehmann QLD

302 Keats Street Coleridge QLD

Qty

500

Description of supply

Unit price

Total

Carb flanges

$15.00

$7,500

GST

$1.50

$750

TOTAL including GST

$8,250

Mixed supply TAX INVOICE Owl Student Resources ABN: 32 123 455 271

75A Donne Street Milton SA

Date:

12 August 2019

To:

St Brian’s Secondary School 116 Larkin Parade Ginsberg SA Qty

Description of supply

30

75

Unit price

Total

Tax Studies Primer

$24.00

$720

GST

$2.40

$72

Bottled water

$1.00

$75

TOTAL including GST

$867 [GSTG ¶16-100]

¶5-125 Postponing credit claim to later BAS A business may sometimes fail to claim an input tax credit because, for example, it is not aware that it holds a tax invoice for a particular acquisition until after it has lodged its GST return for the relevant tax period. This may particularly apply to larger businesses that have a number of departments. In such situations, the input tax credit for the acquisition will be postponed to any subsequent tax period in which it is claimed (s 29-10(4)). This removes the need to lodge an amended GST return for the earlier tax period, though it does not prevent the taxpayer from adopting that option (Interpretative Decision ID 2011/76). Note, however, that an overall four-year limit generally applies to input tax credit claims (¶5010). Example During a tax period, a business orders and buys a piece of equipment. Although it has received a tax invoice, no claim for an input tax credit is claimed in the GST return for that tax period. The credit may instead be claimed in any subsequent GST return and will be attributable to the tax period covered by that return.

Where this occurs, the normal five-year period for keeping records starts from the time you make the claim, rather than from when the acquisition was made (Administration Act, Sch 1, s 382-5). For general rules on correction of BAS mistakes, see ¶8-045. [GSTG ¶16-350]

¶5-130 Modifications to tax invoice requirements The Commissioner can waive or modify the requirement that a tax invoice must be held before an input tax credit can be claimed (s 29-10). For example, this has been done, subject to various conditions, in relation to: • corporate credit or charge card statements (see below) • importations of services under the “reverse charge” rules (¶9-100) • direct entry services (WTI 2015/30) • reimbursement by government law enforcement agencies of work expenses incurred by undercover officers under assumed names (WTI 2006/1) • acquisitions under an agency relationship (¶5-190) • acquisitions from or by a beneficiary of a bare trust (¶4-010; WTI 2013/2) • acquisitions through electronic purchasing systems (WTI 2013/3) • acquisitions where total consideration not known (¶7-440) • offer documents and renewal notices (WTI 2013/5) • acquisitions from or by a partnership (¶5-010; WTI 2013/6) • acquisitions from property managers (WTI 2013/7) • taxi travel (WTI 2013/8) • creditable acquisitions by a lessee or sub-lessee following a sale of a reversion in commercial premises (¶11-335; WTI 2013/9) • acquisition of a motor vehicle under a novated lease (WTI 2013/10; see ¶7-420) • acquisition of a motor vehicle from a dealer who is entitled to a motor vehicle incentive payment (WTI 2014/1; see ¶4-010). For further details, see Appendix 2 to GST Ruling GSTR 2013/1. The Commissioner has previously said that this discretion may be exercised where there are special circumstances, such as a natural disaster or where the supplier is uncontactable or uncooperative (former GST Ruling GSTR 2000/17). The Commissioner considers that the discretion to waive or modify the requirements will be exercised on a case-by-case basis. The automatic waiver that applied in certain cases where a court or tribunal had conclusively found that the acquisition was creditable and that a credit should be allowed, no longer applies (Notice of Withdrawal of former GST Determination GSTD 2004/1; ATO Decision Impact Statement on Davsa case (¶3-020)). Corporate credit or charge card statements Many businesses allow employees to use corporate credit or charge cards, with purchases being recorded on periodical statements. In GST Ruling GSTR 2000/26, the Commissioner sets out the

circumstances in which businesses can claim input tax credits on the basis of these statements, even though no formal tax invoice has been issued. This ruling has been supplemented by various Legislative Determinations which may be accessed via the Legal Database on the ATO website (¶2-110). The exemption applies, subject to varying conditions, to certain statements issued by providers such as VISA, American Express, Diners Club, MasterCard, Motorcharge, Fleet Systems, Cabcharge, Custom Service Leasing, Qantas and Wex Australia. Documents that do not strictly comply The Commissioner also has a discretion to treat a document as a tax invoice even though it does not strictly comply (s 29-70(1B)). The ATO says that this discretion is exercised in a practical way. According to Practice Statement PS LA 2004/11, the preconditions are: • if the taxpayer has not yet claimed the credit, it must have made a genuine and reasonable attempt — preferably in writing — to obtain a valid tax invoice from the supplier, although it is not necessary that they go to extraordinary lengths or great expense • if the claim for a credit has already been made in a BAS, the taxpayer must show that it has made a genuine attempt to meet the invoice requirements, bearing in mind the practical and commercial realities of record-keeping. The ATO will take into account factors such as: (1) whether the error is minor in legal or money terms; (2) whether any missing information is provided in other documentation; (3) the taxpayer’s compliance record; (4) the adequacy of their record-keeping systems; and (5) their GST “experience” level. Further details are given in the Practice Statement and in GST Ruling GSTR 2013/1. The AAT has commented that these situations should not necessarily be limited to special circumstances, but that it would normally be necessary for the taxpayer to show that it had acted with reasonable care and in good faith (Queensland Harvesters Pty Ltd v FC of T 2009 ATC ¶10-088). Note also that taxpayers may disregard minor errors and treat other documents as tax invoices in certain situations (¶5-110). Where the discretion is not exercised in the taxpayer’s favour, the input tax credit will of course be disallowed. However, it is possible that additional penalties and general interest charge may be waived if the acquisition was otherwise creditable. The taxpayer may seek a review of the decision under the Administrative Decisions (Judicial Review) Act 1977. They may also object against an assessment that excludes an input tax credit as a result of the decision not to exercise the discretion (¶18-600). Whether the discretion is exercised or not, the supplier remains liable to issue the tax invoice within 28 days of the recipient’s request (Practice Statement PS LA 2007/3). For penalties, see ¶18-300. A single tax invoice may be issued for a series of supplies under a progressive or periodic contract, such as a lease. For further details, including the position of novated leases, see ¶7-420. Other modified requirements Various other modifications to the normal tax invoice rules apply in the following situations: • in certain situations, invoices may be issued by the recipient, not the supplier (¶5-140) • an employer can claim an input tax credit for a reimbursement made to an employee even if the tax invoice shows the employee as the recipient (¶5-040) • casinos and other gambling operators do not need to issue tax invoices (¶16-000) • tax invoices are not required to be issued for supplies of real property under the margin scheme (¶11100) • tax invoices are not required for supplies made by non-residents that are covered by reverse charge rules (¶9-095) • tax invoices are not required where liability for GST under a long-term contract has passed to the recipient under special transitional rules

• the tax invoice rules apply to sales made to satisfy a debt, whether or not you are required to be registered (¶10-070) • special rules apply where supplies are made by members of a GST group (¶17-020) or GST branch (¶17-300) • tax invoices may be held by either you or your agent (¶5-190) • modified requirements apply where supplies are made before the total consideration is known or where there is a retention clause (¶7-440) • a formal tax invoice is not required where a second-hand dealer buys goods from an unregistered seller (¶16-110). [GSTG ¶16-300]

¶5-140 Recipient created tax invoices A tax invoice is normally issued by the supplier. However, sometimes this will not be practicable, for example, where the recipient determines the value of the goods or services, rather than the supplier. In these cases, it may be more appropriate for the tax invoice to be issued by the recipient. The situations in which these “recipient created tax invoices” (RCTIs) can be issued are determined by the Commissioner (s 29-70(3)). The Commissioner has authorised the use of recipient created tax invoices for some general situations and for a variety of more specific industry transactions. The general situations are specified in GST Ruling GSTR 2000/10. They are as follows: (1) Supplies of agricultural products made to registered recipients who determine the value of the products after a qualitative or quantitative analysis. This applies to products derived from viticulture, horticulture, pasturage, apiculture (bees), poultry farming and dairy farming, and other operations connected with cultivation, crop gathering or livestock rearing. Example A tax invoice could be issued by a sugar mill that tests crushed sugar cane it receives to establish the sugar content or by an abattoir that weighs, slaughters, grades and prices the animals that are supplied to it.

(2) Supplies made to registered government entities such as a department, branch or other approved body. (3) Supplies made to registered recipients that have a turnover of at least $20m. If the recipient is a member of a group that meets the requirements for a GST group (¶17-010) — even though the group is not actually registered as such — it will be sufficient that one of the members of the group has GST turnover of at least $20m. If the recipient is the operator of a GST joint venture (¶17-200), it will be sufficient that one of the participants has turnover of at least $20m, or is a member of a qualifying group as described above. The turnover is measured in the same way as explained at ¶3-030, including the value of input taxed supplies. Examples (1) Company X has turnover of $25m. It satisfies the turnover test even if $10m of that turnover is for financial supplies that are input taxed. (2) Company Y has turnover of $5m. It is 100% owned by Company Z that has a turnover of $21m. As Company Z’s turnover exceeds $20m, and Companies Y and Z can be treated as a group, Company Y satisfies the turnover test. Company Z satisfies the turnover test in any event by virtue of its own turnover.

For a recipient created tax invoice to be effective in any of these situations, various additional conditions

must be satisfied, for example, there must be a written agreement (which may alternatively be embedded in the invoice) and both parties must be registered. RCTIs for specific industry transactions The Commissioner has also determined that recipient created tax invoices may be used in specific industry situations. These determinations, which are subject to various qualifications, are contained in a series of Recipient Created Tax Invoice (RCTI) Determinations. They may be accessed under “Legislative Determinations” at www.ato.gov.au. Registered recipients or industry associations whose members are registered recipients can request the Commissioner to make a determination approving other classes of recipient created tax invoices. The request should include the following: • name of the recipient or industry association • type of industry • details of the supply and related transactions, including current invoicing and payment practices • a statement acknowledging that the recipient(s) will enter into written agreements (or have such an agreement embedded in the invoice) • an explanation of why the determination is requested (GST Ruling GSTR 2000/10). Applications will be decided on the basis of the particular circumstances of the industry. The ATO considers that a document that shows only the “WEG” amount (the combined amount of GST plus WET) does not meet the requirements, as it does not show the total amount of GST. Dual purpose invoices A tax invoice issued by the recipient can also cover any supplies which the recipient makes back to the supplier. However, the Commissioner considers that the two supplies must be accounted for separately in the GST return of each party (GST Ruling GSTR 2013/1). Example A cane grower supplies cane to a sugar mill, which in turn supplies testing services to the grower. Although the supplies are related they must still be treated as separate supplies, which must be accounted for separately in the parties’ GST returns. The recipient created tax invoice issued by the mill can, however, act as a tax invoice covering both supplies provided it treats them as separate.

The ATO considers that a recipient created tax invoice can qualify as an “invoice”, for the purpose of determining when liability arises under the accruals basis (¶7-205; GST Determination GSTD 2005/1). Foreign currency conversions If the consideration for the supply is expressed in foreign currency, the recipient issuing the invoice should hold a written advice from the supplier stating the supplier’s particular exchange rate and the conversion day. However, if the recipient’s computer system is set up in a way that does not enable the recipient to use the supplier’s conversion information, the recipient can make a reasonable estimation (GST Ruling GSTR 2002/4; ¶4-200). [GSTG ¶16-400]

¶5-150 Contents of recipient created tax invoices For determining net amounts for tax periods, the requirements for a recipient created tax invoice are as follows: (1) it must be issued by the recipient

(2) it must be in the approved form (3) it must contain enough information to enable the following to be clearly ascertained: • the supplier’s identity and ABN • the recipient’s identity or ABN • what is supplied, including quantity and price • the extent to which each supply to which the document relates is taxable • date of issue • the amount of GST payable in relation to each supply to which it relates • that any GST payable is payable by the supplier • such other matters as may be specified in the regulations, and (4) it must be clearly ascertainable from the document that it was intended to be a recipient created tax invoice (s 29-70). Reflecting the special status of recipient created tax invoices, these requirements differ from ordinary tax invoices (¶5-110) by requiring that the recipient’s identity or ABN must be ascertainable, even if the total price of the supplies is less than $1,000. Further differences are that it must be ascertainable from the document that the GST is payable by the supplier and that the document is intended to be a recipient created tax invoice. The ATO has prepared a template that may be followed in preparing an RCTI: see “recipient created tax invoice form” at www.ato.gov.au. [GSTG ¶16-450]

¶5-170 Low-value acquisitions There is no obligation to issue or hold a tax invoice if the value of the supply (excluding GST) is $75 or less (s 29-80; A New Tax System (Goods and Services Tax) Regulations 2019 s 29-80.01). In the typical case, where the GST is 10% of the GST-exclusive price, this means that there is no obligation to issue or hold a tax invoice if the GST-inclusive value of the supply is $82.50 or less. Example A registered supplier sells an item for $77, including $7 GST. The GST-exclusive value is $70. The supplier is therefore not obliged to issue a tax invoice. Correspondingly, there is no requirement for the recipient to hold a tax invoice in order to support its claim for an input tax credit.

The Commissioner applies this threshold on the basis of the value of the whole of the taxable supply. For example, if the sale comprises two items, each with a GST-exclusive value of $45, you will still need a tax invoice because the total GST-exclusive value of the supply exceeds $75 (GST Ruling GSTR 2013/1). Where a tax invoice is not issued for a low-value transaction, the recipient will need to support a claim for an input tax credit in other ways. This would normally require that the recipient be able to produce sufficient records to substantiate what was purchased, the supplier, the time of purchase and the consideration. Even where the supplier is not obliged to issue a tax invoice, the supplier may of course choose to do so. [GSTG ¶16-550]

¶5-190 Acting through an agent or broker If you are acting through an agent, the general agency rules apply (¶17-400). However, some specific rules apply to tax invoices and adjustment notes for transactions made through an agent. The effect is as follows: • you can claim an input tax credit on an acquisition made through an agent if either you or the agent holds a tax invoice at the time the return is lodged (s 153-5) • if you have made a supply or acquisition through an agent, you can claim an adjustment reducing your tax if either you or the agent holds an adjustment note at the time the return is lodged (s 153-10) • either you or the agent may issue a tax invoice for a supply made through the agent, but not both (s 153-15). Corresponding rules apply to adjustment notes relating to supplies or acquisitions made through an agent (s 153-20; GST Ruling GSTR 2013/1) • in the case of insurance premiums, it is sufficient if the tax invoice or adjustment note is held by an insurance broker on your behalf. Brokers can also issue tax invoices or adjustment notes on behalf of insurance companies (s 153-25). The Commissioner says that these may show the name and ABN of the insurance broker instead of the insurer (GST Ruling GSTR 2000/37). In certain cases, an agent/intermediary and a principal may agree that the agent/intermediary will act as if it were a principal (¶17-420). In these cases, the tax invoice and any relevant adjustment note for a supply to third parties will be issued by the agent/intermediary, not the principal (s 153-50). The Commissioner has waived the requirement for a tax invoice to be held in certain agency situations (WTI 2013/1: see ¶5-130). [GSTG ¶16-375]

GST ADJUSTMENTS Types of GST adjustment

¶6-000

ADJUSTMENT EVENTS What are adjustment events?

¶6-100

Adjustment notes

¶6-110

Contents of adjustment notes

¶6-115

Modifications to adjustment note requirements

¶6-130

Adjustment note exemption for minor adjustments ¶6-135 Special rules about adjustment notes

¶6-140

ADJUSTMENTS FOR BAD DEBTS Bad or overdue debts

¶6-200

Attributing bad debt adjustments to tax periods

¶6-205

What is a bad debt?

¶6-210

Other rules affecting bad debts

¶6-220

“PLANNED USE” AND ASSOCIATED ADJUSTMENTS Changes to planned use

¶6-300

Adjustment periods

¶6-304

Interaction with other adjustment rules

¶6-306

Sales of things acquired without full credits

¶6-310

Goods applied solely to private or domestic use

¶6-320

STARTING, TRANSFERRING OR CEASING BUSINESS Adjustments for newly-registered businesses

¶6-400

Adjustments on cessation of registration

¶6-410

Where business owner dies

¶6-415

Adjustments after bankruptcy, liquidation, etc

¶6-417

Adjustments on acquisition of business

¶6-420

OTHER ADJUSTMENT RULES Other rules about adjustments

¶6-510

Editorial information

Summary Adjustments to previously declared GST or input tax credits may be needed if supplies are later cancelled, goods are returned, there is a part-refund, or there is a change in the GST status of a supply. These “adjustment events” are taken into account in the later tax period, provided that an

adjustment note is held at the time of lodging the GST return for that period. Other adjustments may be required if there is a bad or overdue debt, a change in the intended business use, a business is started up, transferred or closed down, or a business owner dies.

¶6-000 Types of GST adjustment Sometimes subsequent changes to transactions or business operations may make it necessary to adjust the amount of GST that has been imposed, or the amount of input tax credit that has been claimed. These changes fall into the following categories: • changes in price or GST status. These are called adjustment events (¶6-100) • debts becoming bad or overdue (¶6-200) • changes in intended use (¶6-300) • changes associated with starting, transferring or ceasing business, or altering your registration status (¶6-400) • other miscellaneous adjustments (¶6-510). Increasing and decreasing adjustments An adjustment may either increase or decrease your net GST. It is called an increasing adjustment (IA) if the adjustment has the effect of increasing the net GST, ie by increasing the GST on your supplies or reducing the input tax credit on your acquisitions (s 19-50; 19-75; 19-80). It is called a decreasing adjustment (DA) if the adjustment has the effect of reducing the net GST, ie reducing the GST on your supplies or increasing the input tax credit on your acquisitions (s 19-55; 19-75; 19-85). Attribution to tax periods Adjustments are generally attributed to the tax period in which you become aware of them (s 29-20). Apparently, this means when you become aware of the relevant facts that give rise to the liability, whether you realise the GST implications or not (Interpretative Decision ID 2007/72). For examples of how this rule operates in the case of bad or overdue debts, see ¶6-200. Special attribution rules apply for adjustment events (¶6-100) and on cessation of registration (¶6-410). [GSTG ¶17-000]

ADJUSTMENT EVENTS ¶6-100 What are adjustment events? “Adjustment events” occur where: (1) a supply of goods or services is cancelled, for example, where an order is returned. However, simply returning something for repair or maintenance is not an adjustment event (for travel reservations, see ¶12-020) (2) the consideration is changed, or (3) a supply changes its GST status, for example, where goods supplied for export are not exported within 60 days, and thereby become subject to GST instead of being GST-free (s 19-10).

If this happens, a compensating adjustment generally must be made by both parties to reflect the true GST position (s 19-40; 19-70). In determining that true GST position, you may also need to take into account any other adjustments that have already been made. If a supplier does not fully reimburse a customer, or only reimburses part of the GST paid for a cancelled supply, any adjustment as a result of the cancelled supply is correspondingly reduced (¶8-115; GST Ruling GSTR 2009/3). This ensures that the supplier does not get a windfall gain. The adjustments are attributed to the tax period(s) in which you become aware of them. However, if you account on a cash basis and the adjustment event results in your paying consideration, the adjustment is attributable to the period(s) in which the consideration is paid (s 29-20). In the case of decreasing adjustments, you must also hold an adjustment note (¶6-110). For the treatment of cancellation fees, see ¶4-065. Product recalls Where there is a product recall, and the goods returned for refund cannot be reused or resold, the supplier is entitled to a decreasing adjustment for the GST component of the original sale. The purchaser will have to make an increasing adjustment if they have already claimed an input tax credit on the purchase. If substitute goods are supplied, instead of allowing a refund, this is treated as a new supply coupled with a cancellation of the original supply. Change of consideration Examples of where there is an adjustment resulting from change in the consideration (see (2) above) are: • where there is a discount, for example, for early repayment or volume purchases. However, this does not apply to a discount made to induce the purchase in the first place, because that type of discount would be reflected in the actual consideration charged. The ATO also considers that if the purchaser is paid interest for early payment, this is not an adjustment event — instead, it is a separate input taxed financial supply by the purchaser (GST Ruling GSTR 2000/19) • where the supplier under a hire-purchase agreement exercises its right to terminate the agreement due to default, and the future outstanding instalments are no longer payable (GST Ruling GSTR 2000/29; Interpretative Decision ID 2013/51). The same applies where the supplier equitably assigns the payment stream relating to the hire-purchase agreement to a special purpose trust under a securitisation arrangement, and later terminates the agreement due to a default by the purchaser (Interpretative Decision ID 2010/6). For other aspects of termination, see ¶4-020 • where the invoice is incorrect and is later changed • where the quantity of goods supplied for a particular price varies from that originally agreed and the parties agree to accept that change • where there is a change in the extent to which the purchaser is liable to pay the consideration, for example, where a purchaser originally obliged to contribute 50% has to pay 60% (GST Ruling GSTR 2000/19) • in certain cases where the vendor of premises is required under a rental guarantee agreement to pay the purchaser an amount to make up for a shortfall in rent received from the premises (GST Determination GSTD 2014/3), or • where a payment is made under a court order or out-of-court settlement relating to an earlier disputed supply (¶4-085), or a company in liquidation receives a payment in settlement of a voidable preference claim (¶6-417). The ATO considers that there is not a change in consideration — and therefore not an adjustment event — where: • additional charges are made for an extension of a hire period

• late payment charges are imposed. These charges, whether in the form of interest or as “accountkeeping fees”, are treated as consideration for a separate input taxed financial supply by the seller (Addendum to GST Ruling GSTR 2000/19) • a promotional, cooperative or advertising allowance is paid by a supplier to a retailer in return for promotional and marketing activities to boost sales of the supplier’s products. These allowances are treated as consideration for the separate supply of those activities by the retailer, rather than changes to the original price (see “Marketing incentives” at ¶4-030). The same applies where a retailer receives a commission in the form of a rebate for recommending a supplier’s product to customers (Interpretative Decision ID 2004/232) • a foreign currency gain or loss is made on a set price contract • there is a credit card “chargeback” (reversal of credit) by a financial institution against a merchant, unless the chargeback is due to fraudulent use of the card (GST Advice GSTA TPP 017) • a payment cheque is dishonoured. However, in such a case, a bad debt adjustment may become appropriate if the debt actually becomes bad (¶6-210). For the treatment of dishonour fees, see ¶4080, or • you correct an error in an earlier Business Activity Statement. Examples (1) Dodgy Deals provides spare parts to Ernest Enterprise for $11,000, including $1,000 GST. Six months later, Ernest Enterprise discovers that 25% of the spare parts are defective and receives a refund of $2,750, including $250 GST. Dodgy Deals is eligible for a decreasing adjustment that reduces its net amount of GST for the later period by $250. Correspondingly, Ernest Enterprise is liable for an increasing adjustment that reduces its input tax credit for the later period by $250. (2) A manufacturer buys raw materials from a supplier worth $110,000 during a tax period. The supplier accounts for $10,000 GST and the manufacturer claims an input tax credit of $10,000. In a later tax period, the manufacturer’s level of purchases from the supplier entitles it to a retrospective volume discount of $2,200 (including $200 GST) for its original purchase. The supplier is eligible for a decreasing adjustment that reduces its net GST by $200 and the manufacturer is liable for an increasing adjustment that reduces its input tax credit for that later tax period by $200.

The nature of a rebate does not change even though it is bundled into another type of rebate. For example, if a 3% volume rebate and a 2% promotional rebate are bundled up into a 5% rebate, they retain their own characters, no matter what that composite rebate is called. Only the original 3% would be treated as changing the consideration. If the adjustment event occurs in the same tax period as the earlier transaction, there is no “adjustment” — the change is simply reflected in the relevant amount for that period (GST Ruling GSTR 2000/19). Example On 1 April goods are supplied for $115, with a $5 discount if payment is made within 14 days. Within that time, the purchaser pays the discounted amount of $110. As the supply and the change of consideration occur in the same tax period, both parties will simply account for GST on the basis that the price was $110.

For the position where business property is stolen, see ¶4-030. Adjustments for third party payments A special rule applies where there is a rebate to a third party. The effect is that GST adjustments will be made in all situations in which consideration is paid by an entity in the supply chain to a payee where that payment effectively alters the consideration paid (Div 134). This could have particular application, for example, to manufacturers’ rebates. The effect is: • the payer of the amount becomes entitled to a decreasing adjustment (s 134-5). Unless this

adjustment is below the threshold amount (¶6-135), it cannot be claimed until the payer creates and holds a “third party adjustment note” (s 134-15) • the payee, if it acquires the goods as part of its business, becomes liable for an increasing adjustment (s 134-10). The third party adjustment note must be in an approved form, which requires it to contain enough information to enable the following to be clearly ascertained: • payer’s identity and ABN • payee’s identity or ABN • description and quantity of what is being supplied • amount of the third party payment • amount of payer’s decreasing adjustment, and • date of issue (A New Tax System (Goods And Services Tax) Third Party Adjustment Note Information Requirements Determination (No 1) 2010). The payer must give a copy of it to the payee within 28 days after becoming aware of the adjustment, or within 28 days of receiving a request, if this is earlier (s 134-20). Example A manufacturer sells goods to a retailer for $660. The retailer sells the goods to a business customer for $880. Under the manufacturer’s cash back scheme, the customer obtains a cash back payment of $110 from the manufacturer. The GST consequences of this payment are: The manufacturer is entitled to a decreasing adjustment calculated as: (1/11 × $660) − (1/11 × $550) = $10 Its net GST liability is therefore ($60 − $10) = $50 The retailer’s position is not affected. Its net liability is calculated in the normal way, ie GST of (1/11 × $880) less input tax credit of (1/11 × $660) = $20. The business customer has an increasing adjustment calculated as: (1/11 × $880) − (1/11 × $770) = $10 Its net entitlement is therefore an input tax credit of ($80 − $10) = $70. Note: (1) As the manufacturer’s adjustment is less than the relevant threshold (¶6-135), it need not issue a third party adjustment note; (2) if the customer was not a business customer, no question of an increasing adjustment for that customer arises, as they would not have been entitled to an input tax credit in any event.

These adjustment rules apply even though the relevant supplies may not have been taxable for the reason that the parties in the supply chain were members of the same GST group, GST religious group or GST joint venture. There are also provisions to ensure that: (1) there is no decreasing adjustment for the payer of a third party rebate if the supply to the payee of the rebate is GST-free (eg exports or pharmaceuticals), not connected with Australia (eg sales by overseas retailers to overseas customers), or is subject to a refund of GST under the Tourist Refund Scheme, provided that the payer knows or has reasonable grounds to suspect that this is the case, and (2) the payee of a third party payment is not required to make an increasing adjustment if the supply by the payer was not a taxable supply. Detailed guidelines on the application of these rules to incentive payments made under typical motor vehicle “floorplan” arrangements are in GST Ruling GSTR 2014/1. For the general treatment of motor vehicle fleet sales support payments, margin support payments and

related incentives, see ¶4-010. [GSTG ¶17-040]

¶6-110 Adjustment notes If an adjustment event results in a decreasing adjustment — ie a reduction of GST or an increase in input tax credits — you will need to hold an adjustment note at the time you lodge your return for the tax period in which the adjustment is claimed (s 29-20). There is an exception for minor adjustments (¶6-135). An adjustment note must be issued by the supplier within 28 days after the recipient requests. Even if a request is not made, the supplier must issue an adjustment note within 28 days of becoming aware of the adjustment, provided that a tax invoice was issued (or requested) in relation to the original supply (s 2975). Penalties for failing to issue an adjustment note are explained at ¶18-300 and penalty remission guidelines at ¶18-305. The Commissioner has a discretion to vary the 28-day rule in those cases where a request has not been made. This may be appropriate, for example, in the case of a utilities supplier that issues bills on the basis of three-monthly meter checks (see Goods and Services Tax Extension of Time to Issue an Adjustment Note Determinations (Nos 35, 36 and 37) 2015). However, if the recipient makes a request for an adjustment note, it must be issued within the normal 28-day period. [GSTG ¶17-080]

¶6-115 Contents of adjustment notes The required contents for an adjustment note which is issued by a supplier are as follows: (1) it must be in the approved form. No particular format has been prescribed, as long as it complies with (2) and (3) (2) it must set out the ABN of the supplier (3) it must contain enough information to enable the following to be “clearly ascertained”: • that it is intended as an adjustment note, and the effect of the adjustment, eg whether it is for an increasing or decreasing adjustment • the identity and ABN of the supplier or supplier’s agent • the identity or ABN of the recipient or the recipient’s agent. This, however, is only essential where the note relates to a tax invoice showing the total price for the supply was at least $1,000; or relates to a supply that was not taxable but becomes taxable and its price is at least $1,000 • the issue date • a brief explanation of the reason for the adjustment • the amount of the adjustment to the GST payable. Where the amount of GST is 1/11th of the price (as is usual), it will be sufficient to make it clear that the difference in the price of the supply includes GST • the difference (if any) between the price of the supply before the adjustment event and the price after the adjustment event. If the supply is not wholly taxable, the price is apportioned accordingly (s 29-75; A New Tax System (Goods and Services Tax) Adjustment Note Information Requirements Determination 2012, 2013; GST Ruling GSTR 2013/2). Guidelines on corresponding requirements for tax invoices, including the meaning of “clearly ascertained”, are set out at ¶5-110. Recipient created adjustment notes

Recipient created adjustment notes — ie those issued by the recipient of the supply (¶5-140) — must contain the same information as those issued by suppliers, except that they must make it clear that they are intended to be recipient created adjustment notes, and must in all cases show the recipient’s identity and ABN. ATO guidelines for special situations The following additional guidelines were given in GST Ruling GSTR 2013/2: Combined adjustment note and tax invoice. In situations such as where there is a prompt payment discount, it may be convenient to combine the adjustment note with the original tax invoice. This is permissible, provided that the content requirements of both are satisfied. Adjustments may also be shown on a later tax invoice. For example, a monthly statement may be issued at the end of the month that shows the supplies made during the month, as well as any adjustments such as returns or discounts made during that month. A separate amount should be shown for each type of adjustment (discounts, refunds, etc). In these situations, however, care must be taken to comply with the rule that the adjustment note is issued within the required period of 28 days. Adjustment note in two documents. Two or more documents may be considered together in determining whether the required information has been provided, provided that they have been given by the issuer to the other party. For example, it may happen that a supplier cancels the original tax invoice with a credit note and then issues a new tax invoice showing the new price. The credit note and the new tax invoice may together be accepted as an adjustment note, provided that the required information is clearly ascertainable. Electronic notes. An adjustment note may be issued in electronic form, for example, by Electronic Data Interchange (EDI), provided it is readily accessible and convertible to English. Foreign currency. Although the consideration may be expressed in a foreign currency, it should also contain enough information to enable the recipient to work out the change in GST payable in Australian currency. [GSTG ¶17-080]

¶6-130 Modifications to adjustment note requirements The Commissioner has the discretion to modify the adjustment note requirements in various ways. (1) Removal of requirement for adjustment note You do not need to have an adjustment note to claim an adjustment if the Commissioner has given a written determination that it is not required (s 29-20). This will apply, for example, where you import services and are liable for GST under the “reverse charge” rules (¶9-100) or in particular cases where a court or tribunal has conclusively found that there is an entitlement to a decreasing adjustment (GST Determination GSTD 2004/1). Other specific exemptions have been granted by Legislative Determination; these are summarised in Appendix 2 to GST Ruling GSTR 2013/2 and may be accessed via the Legal Database on the ATO website at www.ato.gov.au. (2) Documents that do not strictly comply The Commissioner may also treat a document as an adjustment note even though it does not strictly comply (s 29-75). This discretion is exercised on a case-by-case basis, as explained in Practice Statement PS LA 2004/11 (discussed in the context of tax invoices at ¶5-130). It was not appropriate to treat non-complying documents as adjustment notes where they did not relate to the original invoices by description or identification, and did not show the actual adjustment in relation to the original invoiced amount (Vadasz v FC of T [2006] AATA 682). [GSTG ¶17-080]

¶6-135 Adjustment note exemption for minor adjustments There is no requirement to issue an adjustment note if the amount of the adjustment is $75 or less (s 2980; GST Regulations s 29-80.02). It is irrelevant what the value of the original supply may have been. Example The value of a taxable supply is $1,000. As a result of an adjustment event, there is a decreasing adjustment of $60. As this does not exceed the applicable $75 threshold, no adjustment note is required.

[GSTG ¶17-100]

¶6-140 Special rules about adjustment notes ▸ Groups. The representative member of a GST group is responsible for adjustments relating to a group member (¶17-020), but that group member must issue the relevant adjustment note. ▸ Branches. If you make a taxable supply through a GST branch, you must show the branch registration number on any related adjustment note (s 54-50). ▸ Agents and insurance brokers. For the special rules that apply, see ¶5-190.

ADJUSTMENTS FOR BAD DEBTS ¶6-200 Bad or overdue debts If you pay GST on an accruals basis (¶7-200), you may be required to account for GST on goods or services you have supplied before you actually receive the payment for them. If the payment is in fact not paid, or not paid in full, you will have overpaid the GST on the transaction. In such a case, you are entitled to a decreasing adjustment that reduces the GST for the period in which the debt is written off as a bad debt. The amount of the reduction will be 1/11th of the amount written off (s 21-5). This also applies if any part of the debt has been overdue for 12 months or more, whether or not you have actually written it off. In this case, the reduction will be 1/11th of the amount unpaid. “Overdue” means that the debtor has breached its obligation to discharge the debt (s 195-1). For the rules for determining whether or when consideration has been received, see ¶7-325. If some or all of the debt is later recovered, there will have to be an appropriate increasing adjustment to the GST for that later period. Again, the amount of the increase will be 1/11th of the amount recovered (s 21-10). However, the Commissioner accepts that where an entity receives a payment under an insurance policy that covers the non-payment of customer debts, an increasing adjustment under s 21-10 is not required. This is because the payment from the insurer is not paid on behalf of the non-paying customer as a payment of that debt, but in accordance with the insurance policy, the supply of which is a separate supply. The insurance payment does not cancel the customer’s debt (Interpretative Decision ID 2003/698). This interpretation is possibly inconsistent with remarks in Apple Computer Australia Pty Ltd v Mekrizis & Ors [2003] NSWSC 126. Note too that the sale of bad debts to a debt factor is treated as a separate transaction (normally an input taxed financial supply: ¶10-010) and does not give rise to an increasing adjustment (Interpretative Decision ID 2005/201). Corresponding rules apply to the other party to the transaction. If they account for GST on an accruals basis, they may have claimed an input tax credit before they have actually paid for the goods or services.

If they fail to pay within 12 months after the due date, or the supplier writes the debt off as a bad debt, they are liable for an increasing adjustment that increases their GST for the period in which they become aware of that. If they later pay some or all of the consideration, there will be a corresponding reduction in the GST (s 21-15; 21-20). Details of how the ATO calculates these adjustments where a representative of an incapacitated entity (¶18-250) pays creditors a dividend of less than 100 cents in the dollar are contained in Practice Statement PS LA 2012/1 (GA). The Commissioner considers that “debt” is not limited to monetary debts and includes non-monetary consideration that has not been received (GST Ruling GSTR 2001/6). Partial adjustments If the supply giving rise to the adjustment was only partly taxable, the adjustment will be reduced accordingly (s 136-5). A similar rule applies where an acquisition giving rise to an adjustment is only partly creditable (s 136-10). Of course, there can be no adjustment for the supplier if the supply was never taxable at all, and no adjustment to the recipient if there was never any entitlement to an input tax credit. It may also happen that, technically, a supply is fully taxable, or an acquisition is fully creditable, but not to the normal extent of 1/11th of the price. For example, this may apply where cars are sold for a price above the car limit (¶12-110), or the GST on the supply of long-term commercial accommodation is calculated at a concessional rate (¶11-320). In these situations, special rules apply for working out bad debt adjustments (Subdiv 136-B). The general effect is as follows: • the supplier’s decreasing adjustment for the bad debt is calculated as the difference between the GST on the original transaction and the GST that would have been payable if the price had been reduced by the amount of the bad debt (s 136-30) • the supplier’s increasing adjustment on recovery of a bad debt is calculated as the difference between the GST adjusted for the bad debt and the GST that would have been payable if the original price had been reduced by the amount still owing (s 136-35) • corresponding rules apply in calculating the adjustments for the recipient (s 136-40; 136-45). Adjustment notes Adjustment notes are not required to substantiate bad or overdue debt adjustments. There is also no obligation on a supplier to tell the customer that the debt has been written off. [GSTG ¶17-200; ¶17-220; ¶17-240]

¶6-205 Attributing bad debt adjustments to tax periods The normal rule is that an adjustment is attributed to the tax period in which you became aware of it (¶6000). The Commissioner interprets this as meaning that: • an adjustment for a bad debt is attributed to the tax period of the supplier in which it is written off, and to the tax period of the recipient in which the recipient becomes aware that the debt has been written off • an adjustment for an overdue debt that has not been written off is attributed to the tax period of the supplier in which the supplier becomes aware that the debt has been overdue for 12 months, and to the tax period of the recipient in which the recipient becomes so aware (GST Ruling GSTR 2000/2; Addendum GSTR 2000/2A). Examples (1) Bad debt. In January 2019, Enterprises supplies goods to a business customer for $110. Both parties are on an accruals basis and have quarterly tax periods. Enterprises accounts for GST of $10 in its return for the tax period ending 31 March 2019 and the customer claims an input tax credit of the same amount in its return for the same period. The customer goes into liquidation without paying any of the debt, and Enterprises writes the debt off as bad in May 2019. Enterprises will be entitled to an adjustment reducing its GST by $10 in its return for the tax period ending 30 June 2019. Conversely, if the customer is aware that the debt has been written off, there will be an adjustment for the customer increasing its GST by $10 in its corresponding tax period.

If the customer had in fact paid $44 of the debt, only $66 would be bad, so Enterprises’ decreasing adjustment and the customer’s increasing adjustment would both be $6. (2) 12-month overdue debt. In January 2019, Enterprises supplies goods to a business customer for $110. Both parties are on an accruals basis and have quarterly tax periods. Enterprises accounts for GST of $10 in its return for the tax period ending 31 March 2019 and the customer claims an input tax credit of the same amount in its return for the same period. Although the debt is due to be paid by 15 March 2019, the customer defaults and refuses to pay. The debt becomes 12 months overdue on 15 March 2020. Enterprises will be entitled to an adjustment decreasing its GST by $10 in its return for the tax period ending 31 March 2020. Conversely, there will be an adjustment to the customer increasing its GST by $10 in its tax return for the same period. (3) Supply only partly taxable. Assume in Example 2 that half the value of the supply was for GST-free goods. Enterprises’ GST and subsequent decreasing adjustment will be $5. The customer’s input tax credit and subsequent increasing adjustment will also be $5. (4) Partial credit. Assume in Example 2 that the supply was fully taxable, but that the customer only plans to use the goods 50% for business purposes and is therefore only entitled to a 50% input tax credit. Enterprises’ GST position is the same as in Example 2. The customer’s input tax credit and subsequent increasing adjustment will both be reduced to $5.

It may happen that a debt arises and is written off as bad in the same tax period. Where this occurs, the Commissioner considers that you must separately account in your return for the GST on the supply and for the amount of the adjustment. You cannot ignore them on the basis that they cancel each other out (GST Ruling GSTR 2000/2). [GSTG ¶17-260]

¶6-210 What is a bad debt? Whether a debt is bad is a question of fact. The Commissioner accepts that if you make a bona fide commercial decision that a debt is unlikely to be recovered, the debt can be treated as bad (GST Ruling GSTR 2000/2). However, a debt normally cannot be considered as a bad debt simply because it is overdue or if there is still a genuine dispute over it (Case 45/93, 93 ATC 486). In the Commissioner’s view, a debt can be considered bad in any of these situations: (1) the debtor has died, leaving insufficient assets to pay the debt (2) the debtor or the debtor’s assets cannot be traced (3) the debt has become statute barred and it is reasonable to expect the debtor will rely on this defence (4) the debtor company is in liquidation or receivership with insufficient funds to pay the debt (5) an objective examination of all the facts indicates that there is little or no likelihood of recovering the debt. This will normally require that appropriate steps have been taken to attempt to recover the debt. These steps vary according to the size of the debt and the resources available to pursue it. Depending on the circumstances, the steps could include: • issuing reminder notices and attempting telephone/mail contact • allowing a reasonable time for payment • serving a formal notice of demand • issuing and serving a summons • entering judgment • execution proceedings to enforce judgment • ceasing the calculation of interest and closing the account • valuing any security held against the debt • selling any seized or repossessed assets (Taxation Ruling TR 92/18; GST Ruling GSTR 2000/2).

The fact that a cheque is dishonoured (¶6-100) does not, by itself, mean that the debt has become bad, though it will be a relevant circumstance. Writing off the debt A bad debt is normally written off by a journal entry in the books of account, though less formal written records may also suffice. A bad debt cannot be written off if it has already ceased to exist, for example, where it has been released, settled or compromised (Point v FC of T 70 ATC 4021; GE Crane Sales Pty Ltd v FC of T 71 ATC 4268). However, where this involves a change in the price payable, there may be an adjustment under the “adjustment event” rules (¶6-100). The Commissioner also considers that a bad debt adjustment cannot be claimed if a debt has been factored or assigned to someone else, because the adjustment can only be claimed by the original supplier (GST Ruling GSTR 2000/2). [GSTG ¶17-220]

¶6-220 Other rules affecting bad debts ▸ For the treatment of bad debts arising from gambling, see ¶16-010. ▸ If real estate is sold under the margin scheme, the amount of any GST bad debt adjustment for the supplier is limited to 1/11th of the margin (¶11-130). ▸ Special rules apply to bad debt adjustments where there is a change of accounting basis (¶7-400).

“PLANNED USE” AND ASSOCIATED ADJUSTMENTS ¶6-300 Changes to planned use You can only claim an input tax credit for something you acquire in carrying on your enterprise, and you cannot normally get a credit if the purchase relates to the sale of input taxed goods and services or for private or domestic purposes (¶5-010). However, it might be that your actual use turns out to be different from the use you intended. This may mean that your input tax credit entitlement will need to be adjusted (s 129-5). This type of adjustment is made annually, subject to important limitations (¶6-304). In determining the amount of each subsequent adjustment, you take into account the actual total use since purchase, not just the actual use since the last adjustment (s 129-40). If you buy something and later donate it to a charity, that is not treated as a change of use, so no question of an adjustment arises (s 129-45): see further ¶15-040. However, this does not apply if the “donation” is in fact payment for something else. Adjustment thresholds You should ignore any change of use where the thing you acquired was used in making financial supplies (¶10-010) unless you exceed the financial acquisitions threshold (¶10-032). You also do not make GST adjustments where the original acquisition related solely or partly to providing financial supplies and its GST-exclusive value was $10,000 or less. In any other case, the rule is that no adjustment is required if the GST-exclusive value of the acquisition was $1,000 or less (s 129-10). The GST-exclusive value is simply the price of the thing less GST — looking at it another way, it is 10/11th of the GST-inclusive price. The ATO considers that where several things are acquired together, they should nevertheless be considered separately in working out whether the threshold has been exceeded (GST Ruling GSTR 2000/24). Similarly, each component of a progressive or periodic acquisition is treated separately — for example, if you lease a building, each progressive component of the lease is a separate acquisition.

Example An engineering business buys a computer for $4,400 and a desk for $660. The GST-exclusive value of the computer is $4,000 and of the desk is $600. Although they were bought on the same invoice and delivered together, they are treated separately. The computer is over the $1,000 threshold, but the desk is under it. Accordingly, an adjustment can only arise in relation to the computer, not the desk.

Planned and actual use The amount of the adjustment depends on the difference between the planned and the actual use of the thing for a “creditable purpose” (¶5-010). The legislation uses the terms “intended application” and “actual application” to describe these (s 129-40). An increasing GST adjustment can arise where the intended application exceeds the actual application. A decreasing GST adjustment can arise where the actual application exceeds the intended application. The “intended application” is the extent to which you acquired the thing for a creditable purpose, ie for carrying on your business, other than for making supplies that are input taxed or are of a private or domestic nature (s 129-50). The “actual application” is the extent to which the thing has been applied for those purposes since its acquisition. You “apply” something if you supply, consume, dispose of or destroy it, or allow another entity to do those things (s 129-55). The ATO says that, where possible, you should use a “direct” method for working out the extent to which the item is used for a creditable purpose. For example, for a car, you could use the proportion of business kilometres. Where a direct method is not practicable, you can use an indirect method, for example, an input- or output-based method (GST Ruling GSTR 2000/24). For an explanation of both direct and indirect methods, see ¶5-020. It may happen that the item is idle or not in use for part of a period. In these cases, the ATO says that you can apportion the non-use period according to the actual usage pattern, or simply disregard it (GST Ruling GSTR 2000/24). Example A sole trader uses a vehicle 80% for business and 20% for private purposes. The vehicle breaks down and is out of action for a month. The business use can still be treated as 80%.

In certain situations, the ATO will accept that a business can “pool” individual assets in order to compare their actual and intended applications (GST Ruling GSTR 2000/24). This may possibly be appropriate, for example, where there is a large number of assets which can be pooled on the basis of location, type of acquisition, business unit or profit/cost centre. The ATO considers that if a taxpayer acquires advice about the feasibility of a proposed input taxed transaction (such as a takeover), but does not proceed with that transaction, there is no adjustment event, and the acquisition of the advice remains wholly non-creditable. However, if the same advice is also later re-used for a different purpose in connection with a different transaction which is not input taxed, there may be a change of creditable purpose and an adjustment event may therefore arise (GST Determination GSTD 2012/3). Disposals on marriage breakdown As explained at ¶4-090, a disposal of business assets as a result of a marriage breakdown is not normally a taxable supply. However, it may give rise to a GST adjustment if input tax credits were claimable on the original acquisition of the asset. The reason is that the disposal is treated as an application for private use. As there is no ongoing use of the asset by the transferor after the disposal, an indirect method of calculating the extent of creditable use must be adopted. In GST Ruling GSTR 2003/6, the Commissioner suggests the use of an “effective life” method for depreciating assets and a “rental value” method for nonwasting assets, such as land. Example Back on 1 July 2016, two spouses in a business partnership bought a second-hand car for $55,000. They intended to use it 80% for

business (which they in fact did), and therefore claimed an input tax credit of 80% × 1/11 × $55,000 = $4,000. On 31 December 2018, as a result of their marriage breakdown, the car is transferred to one of the spouses. On the basis that the effective life of the car was eight years, the actual application may be calculated as:

Period of time held × extent of creditable purpose pre-disposal  Effective life    = 2.5/8 × 80% = 25% The increasing GST adjustment is calculated as: Full input tax credit × % difference between actual and intended application = $5,000 × (80% − 25%) = $2,750. In effect, therefore, the partnership has received a net input tax credit of ($4,000 − $2,750 = $1,250). (Based on GST Ruling GSTR 2003/6.)

There would be no adjustment if the asset had originally been acquired GST-free, as in this case no input tax credit would have been claimable. This could happen, for example, where the asset had been part of GST-free acquisition of a going concern (GST Advice GSTA TPP 067). Residential property developments It may happen that a taxpayer carries out a property development with the sole intention of selling the individual units, but due to a depressed market is forced to rent them out pending sale to assist with meeting the holding costs. In this situation, there is a difference between the extent to which premises were intended to be used for a creditable purpose and the extent to which they are actually used. The reason is that although the original intended application was entirely for a creditable purpose (ie sale), the actual application is for the mixed purpose of renting out (input taxed and therefore not creditable) and marketing for sale (creditable). There would therefore have to be an increasing GST adjustment. In GST Ruling GSTR 2009/4, the ATO suggests that if the premises are sold before the end of the relevant adjustment period, one acceptable method of calculating the extent of creditable purpose in the actual application could be as follows: Consideration for the taxable supply of the new residential premises Consideration for the taxable supply of the new residential premises plus consideration for the input taxed supplies of residential premises by way of lease Where the sale does not occur before the end of the adjustment period, but the premises are held for the purpose of sale for the whole of the period, the estimated consideration for the sale may be substituted for the actual consideration in this formula. However, if the premises were held for sale for only part of the time before sale, an additional reduction based on time would need to be made. Relevant factors in showing that the premises are being held for sale would include the fact that they are being actively marketed for sale, and that an ultimate sale is consistent with the taxpayer’s business plan and past activities. Special considerations apply where the premises are partially completed, or are being undertaken in multiple stages. It has been held that the relevant intention did not exist where there were no overt acts demonstrating that the apartments were available for sale and the intention was not to sell in the short term (Case 8/2009, 2009 ATC ¶1-012). It appears that an apportionment based on an assumed effective life of the premises is not appropriate (GST Ruling GSTR 2009/4, para 128–129; Taxpayer v FC of T [2011] AATA 160). Instead of revising the BAS (¶8-045) to reflect the increasing adjustment, the taxpayer may send a Voluntary Disclosure Statement — Property (NAT 72625) to the ATO at PO Box 1127, Albury, NSW, 2640. If there is a voluntary disclosure, and the mistake was honest, no shortfall penalties will be imposed and the general interest charge (¶18-300) will be reduced by seven percentage points. This concession will not apply if the ATO has already advised you that they are conducting an audit (ATO Fact Sheet Reporting mistakes on GST and property transactions). Financial suppliers’ reduced credits

If a financial supplier is entitled to a reduced (75%) input tax credit (¶10-040), any adjustment for a change of use is calculated on the basis that the item was acquired 75% for a creditable purpose (s 12940(3)). Example A credit union acquires eligible services for $22,000, including $2,000 GST, which it intends to use entirely for making financial supplies. This entitles it to a reduced (75%) input tax credit of $1,500. The “intended application” is therefore 75%. At the end of the adjustment period, the services have in fact been used 60% for making financial supplies and 40% for taxable supplies. The “actual application”, ie the extent to which the services have been used for creditable purposes, is therefore 40% + (75% × 60%) = 85%. The credit union is therefore entitled to a decreasing GST adjustment calculated as: Full input tax credit × % difference between actual and intended application = $2,000 × (85% − 75%) = $200 In effect, therefore, the credit union has received a net input tax credit of ($1,500 + $200) = $1,700.

[GSTG ¶17-280]

¶6-304 Adjustment periods An adjustment for changes in planned use is made annually, usually in the tax period that ends on 30 June or the closest to 30 June — this is designed to fit in as closely as possible with the income tax year (s 129-20). This period is called the adjustment period. The first adjustment period must start at least 12 months after the end of the tax period in which the acquisition was made — this is designed to provide an adequate time for you to assess the use. Example (1) A business bought equipment on 1 December 2016, and was allowed an input tax credit for its quarterly tax period ending 31 December 2016. The first adjustment period for the equipment is the tax period from 1 April 2018 to 30 June 2018. (2) Assume instead that the business bought the equipment in January 2018. The first adjustment period is the tax period from 1 April 2019 to 30 June 2019.

The obligation to make these annual adjustments does not continue forever. There are limits, ranging from one to 10 adjustments, according to the type of acquisition and its GST-exclusive value. If the acquisition related solely or partly to making financial supplies, and was not in any way of a private or domestic nature, the limits are as follows: • if the GST-exclusive value is $10,000 or less, there is no requirement to make an adjustment in any event • if the GST-exclusive value is more than $10,000 but less than $50,000, you only have to make one adjustment for a change of use. This adjustment is made in the first adjustment period that occurs at least 12 months after the tax period in which you make the acquisition. You do not make any subsequent adjustments • if the GST-exclusive value is more than $50,000 but less than $500,000, you may have to make adjustments for changes of use in any of the first five adjustment periods after acquisition • if the GST-exclusive value is $500,000 or more, you may have to make adjustments for changes of use in any of the first 10 adjustment periods after acquisition. In other more typical cases — for example, where the acquisition does not relate to making financial supplies — the limits are as follows: • if the GST-exclusive value is $1,000 or less, there is no requirement to make an adjustment in any event

• if the GST-exclusive value is more than $1,000 but less than $5,000, you may have to make adjustments for changes of use in any of the first two adjustment periods after acquisition • if the GST-exclusive value is more than $5,000 but less than $500,000, you may have to make adjustments for changes of use in any of the first five adjustment periods after acquisition • if the GST-exclusive value is $500,000 or more, you may have to make adjustments for changes of use in any of the first 10 adjustment periods after acquisition. Example In December 2018, Alexander buys a commercial van to use in his courier business, with the intention that 25% of the van’s use will be private. The van costs $88,000, including $8,000 GST. Alexander is therefore entitled to an input tax credit of 75% × $8,000, ie $6,000. At the end of the first annual adjustment period (30 June 2020), Alexander has in fact used the van 40% privately since purchase. The input tax credit therefore should have been 60% × $8,000, ie $4,800 instead of $6,000. Alexander is liable for an increasing GST adjustment of $1,200. At the end of the second annual adjustment period (30 June 2021), Alexander has in fact used the van 30% privately since acquisition. The input tax credit therefore should have been 70% × $8,000, ie $5,600 instead of $4,800. Alexander is entitled to a decreasing GST adjustment of $800. As the GST-exclusive value of the van ($80,000) is between $5,000 and $500,000, adjustments may continue, if appropriate, for the next three adjustment periods.

It might happen that the thing you acquire is disposed of, lost, destroyed or stolen, or expires before the end of its last adjustment period. If so, the last adjustment period for that acquisition will be the next tax period ending on 30 June or closest to it (s 129-25). However, this does not apply if the disposal is covered by the rules at ¶6-310. For special rules applying where a business owner dies, see ¶6-415. A taxpayer cannot claim an adjustment in relation to events occurring after its registration is cancelled (GOL-HUT Pty Ltd v FC of T 2013 ATC ¶10-306). [GSTG ¶17-380]

¶6-306 Interaction with other adjustment rules If there has already been an adjustment — for example, because of a change in consideration or a bad debt — this must be taken into account in working out any subsequent planned use adjustment (s 12980). Example A business purchases items for $22,000 wholly for business purposes and becomes entitled to an input tax credit of $2,000. At the end of the first adjustment period, the actual application for business purposes is only 60%, so the business becomes liable for an increasing adjustment to reflect the change in planned use. In the meantime, there have been other adjustments resulting from a $1,100 quantity discount (¶6-100) and from a $3,300 bad debt write-off by the supplier (¶6-200). The planned use adjustment is calculated as:

Full input tax credit

× 

% difference between actual and intended application

  = (1/11 × ($22,000 − $1,100 − $3,300)) × (100% − 60%)   = $640

[GSTG ¶17-460]

¶6-310 Sales of things acquired without full credits GST will be adjusted downwards in certain situations where you sell something that you originally

acquired wholly or partly to make financial supplies or for private or domestic purposes (Div 132). (1) Financial suppliers If you acquire (or import) something for the purpose of providing financial supplies, or subsequently use it for those purposes, you will either not be entitled to an input tax credit or be entitled to a reduced credit. If you subsequently sell that thing as part of a taxable supply, or as part of a GST-free disposal of a going concern, your GST will be adjusted downwards (s 132-5). This decreasing adjustment compensates for your not being allowed the input tax credit on the acquisition. Pro rata rules apply if you were only entitled to a partial input tax credit on the acquisition because you only intended to use it partly for providing financial services. The adjustment is attributed to the same tax period as the sale (s 132-10). These rules apply only where the thing is “sold”. Other types of supply, such as leases or gifts, are not covered. However, the ATO considers that a sale includes a transfer by way of barter or exchange (GST Ruling GSTR 2004/8). The adjustment is calculated as:

However, it cannot exceed the difference between the potential input tax credit on the acquisition and the input tax credit (if any) to which the financial supplier was actually entitled. Examples (1) A bank acquires a building to use in its banking activities for $110m. As these activities are input taxed, the bank cannot claim any of the potential $10m input tax credit. It later sells the building for $165m. It is entitled to a decreasing adjustment of $10m, calculated as the lesser of: • the difference between the potential input tax credit and the actual input tax credit, ie $10m • 1/11th × $165m × (1 − zero/$10m) = $15m. (2) A finance company acquires a building for $110m to use 60% in its loan activities and 40% in taxable business activities. The finance company can claim an input tax credit of 1/11th × 40% × $110m = $4m. It later sells the building for $99m. It is entitled to a decreasing adjustment of $5.4m, calculated as the lesser of: • the difference between the potential input tax credit and the actual input tax credit, ie $6m, and • 1/11th × $99m × (1 − $4m/$10m) = $5.4m.

In calculating the actual input tax credit, any adjustments are taken into account. In these circumstances, the last adjustment period will be the last period ending before the sale (s 129-25). In calculating the potential input tax credit, the ATO considers that you normally ignore credits on associated goods or services such as conveyancing or valuations. Similarly, you ignore credits on work made after the acquisition, unless it represents clearly identifiable differences between the thing sold and the thing originally acquired. For example, in the case of a building, you would take into account input tax credits on work relating to a new wing, but not work relating to repairs of the original building (GST Ruling GSTR 2004/8). (2) Private or domestic use A similar GST adjustment applies where you sell something that you originally acquired or later used wholly or partly for private or domestic purposes. Example Priya, a registered sole trader, buys a computer for $4,400 (including $400 GST) which she uses 75% for business and 25% for private purposes. She claims an input tax credit of $300 (ie 75% of $400). Some years later she sells the computer for $660 (including $60 GST). Priya can claim an adjustment reducing her GST by $15. This is calculated as the lesser of: • the difference between the potential input tax credit and the actual input tax credit, ie $100

• 1/11 × $660 × (1 − 300/400) = $15.

If the thing was being used wholly for private or domestic purposes at the time of the sale, there will be no decreasing adjustment under Div 132. The reason is that the sale would presumably not be made in the course of an enterprise, and would therefore not be a taxable supply. [GSTG ¶17-600]

¶6-320 Goods applied solely to private or domestic use We have already seen that if you acquire something for business purposes and later decide to use it partly for private or domestic purposes, there will be an increasing adjustment, in accordance with the planned use rules (¶6-300). A separate rule applies to goods that were acquired solely for business purposes, but are applied solely to private or domestic use. In this situation, the benefit of the input tax credit is effectively withdrawn by an increasing adjustment (s 130-5). The $1,000 threshold applicable under the planned use rules does not apply. The ATO considers that: • this rule is not limited to trading stock, and extends to plant, building materials and office equipment • this rule may apply even though the goods were applied for business use before they were applied solely to private or domestic use • when trading stock is set aside and removed for private consumption, this is an application solely to private and domestic use (GST Ruling GSTR 2003/6). Example In November, a shopowner purchases 20 × $55 items as business stock for a GST-inclusive total of $1,100 and puts them on the shelf for sale. In his November monthly return, the owner claims an input tax credit of 1/11th of $1,100, ie $100. In the next February, the owner takes one of the items off the shelf to keep solely for personal use at home. In his February return, the owner’s net GST will be increased by an adjustment of 1/11th of $55, ie $5.

If there is an adjustment under this rule, there cannot later be an adjustment under the planned use rules. Conversely, if there has already been an adjustment under the planned use rules, there cannot be an adjustment under this rule (s 129-15; 130-5(3)). The Commissioner considers that the Div 130 adjustment only applies where the entity that acquired the goods is the same as the entity that applies them for private or domestic purposes (GST Determination GSTD 2009/2). It therefore does not apply where a partner takes goods held as partnership trading stock for the private or domestic use of the partner in his/her individual capacity. [GSTG ¶17-580]

STARTING, TRANSFERRING OR CEASING BUSINESS ¶6-400 Adjustments for newly-registered businesses It may happen that at the time a business registers for GST, it has already paid GST on stock for resale or for use as raw materials. However, it would not have been able to claim input tax credits for this GST, because it was not registered at the time. On the other hand, if it sells or uses the stock after registration, GST will apply. To cover this situation, a special GST adjustment is allowed. This has the effect of reducing your net GST by the amount of input tax credit you could have claimed if you had been registered (s 137-5). This adjustment applies if:

• at the time you become registered, or required to be registered, you hold stock for the purpose of sale or exchange, or for use as raw materials, in the course of your business • you acquired the stock solely or partly for a creditable purpose (¶5-010) • you were not entitled to an input tax credit on the acquisition. The adjustment applies only to stock, not plant or equipment. Example Roberta runs a business with a GST turnover of $40,000 (ie below the compulsory registration threshold). She chooses not to register for GST. In August, she acquires some trading stock for $1,100 including $100 GST. Roberta cannot claim an input tax credit for this $100 because she is not registered or required to be registered. In the following month, she registers and starts becoming liable for GST on her supplies. At this time the stock is still on hand. Roberta is entitled to an adjustment reducing her net GST by $100 in her first GST return.

The adjustment would not apply if Roberta had purchased a computer because it would not be stock. Nor would it apply if the stock had been sold before Roberta was registered. Re-registrations It may happen that a business is registered after previously having its registration cancelled. The adjustment on registration will not apply unless the business has had its GST increased to cover input tax credits claimed on stock held at the time of cancellation, under the rules described at ¶6-410. [GSTG ¶17-640]

¶6-410 Adjustments on cessation of registration When a business’ registration is cancelled, it may still hold assets on which it has claimed input tax credits. In this situation, the business’ net GST will be adjusted upwards, to the extent that the asset still has value (s 138-5). The amount of this adjustment is calculated as: 1/11th × actual application × applicable value The “actual application” means the extent to which the asset was applied for purposes of the business, other than for making supplies that are input taxed, private or domestic (s 129-40). The “applicable value” is the GST-inclusive market value of the asset (¶4-020) immediately before the cancellation. If you acquired or imported it for less than that amount (eg where the asset has appreciated over time), the applicable value is the amount you paid (s 138-5(2)). The adjustment is made in the business’ concluding tax period (¶7-120) (s 138-10). Example Norbert winds up his business and cancels his registration. The only business asset remaining is a truck which Norbert acquired for $55,000 (including $5,000 GST). Norbert used the truck exclusively in the business and claimed an input tax credit of $5,000. At the time of the cancellation of the registration, the GST-inclusive value of the truck has dropped to $22,000. The amount of the adjustment is: 1/11th × 100% (actual business use) × $22,000 = $2,000 This is added to Norbert’s net GST for his concluding tax period. The net effect is that Norbert’s original input tax credit of $5,000 is reduced to $3,000.

These rules normally apply irrespective of the reason for the cancellation of registration, for example, where the business is wound up, or sold as a going concern, or the business opts to cancel because its turnover falls below $75,000. However, special rules apply where the taxpayer had an annual tax period (¶8-040). For the position where a business continues to be carried on after the death of the owner, see ¶6-415.

It may have happened that adjustments have already been made because of a change in the planned use of the asset (¶6-300). If the relevant adjustment period(s) have ended before the cancellation of registration takes effect, there will be no further adjustment on cessation of registration (s 138-5(3)). The adjustment could apply where the item for which input tax credits were claimed is an identifiable part of another asset, for example, where there are improvements made or spare parts installed (GST Advice GSTA TPP 094). However, no adjustment is necessary where the item for which input tax credits were claimed does not exist as a discrete asset in its own right (for example, repairs or painting), or where the asset has zero value (for example, scrapped machinery) (GST Advice GSTA TPP 095). Other unattributed adjustments If you were on the cash basis, any adjustments which have not yet been attributed to a tax period are attributed to the tax period in which your registration is cancelled (s 138-15). [GSTG ¶17-660]

¶6-415 Where business owner dies When a GST registered individual dies, his/her registration must be cancelled. This potentially gives rise to an increasing adjustment under the rules described at ¶6-410. However, those rules will not apply if the deceased’s business continues to be carried on by a GST registered estate trustee (s 138-17). Nor will they apply when a GST registered estate beneficiary takes over the running of the business from the trustee. In these situations, however, there may be a need for an adjustment under the “planned use” rules (¶6300). In working out how these apply, you treat the business as if it were still being carried on by the individual who died. Example In December 2018, Harley buys a computer for $4,000. In his GST return for the December 2018 quarter, he claims an input tax credit on the basis that the computer is used 75% for business and 25% for private purposes. Harley dies in January 2019. David, the estate executor, uses the computer in continuing to carry on the business. David increases the business usage of the computer and at the end of the adjustment period the business use is 90%. David, as executor, is entitled to a decreasing adjustment based on the change of business use from 75% to 90%.

A separate adjustment applies in the different situation where the estate trustee distributes a deceased’s business assets to a beneficiary who does not intend to continue carrying on the business (Div 139). In such a case, the trustee becomes liable for an increasing adjustment, to reflect the fact that the asset is no longer used for purposes of the business. This adjustment is calculated in a similar way to adjustments on cessation of registration (¶6-410). Example Assume the same facts as in the previous Example. David, the executor, also distributes another asset of Harley’s business to Rebecca who intends to use it for private purposes. Harley had purchased this asset for $5,500 and claimed an input tax credit for this asset on the basis that it was used 100% for business purposes. When the asset is distributed to Rebecca, its GST-inclusive value is $3,300. The increasing adjustment is calculated as: 1/11 × 100% (Harley’s actual business use) × $3,300 = $300

Special rules apply where a taxpayer with an annual tax period dies (¶8-040). [GSTG ¶17-680]

¶6-417 Adjustments after bankruptcy, liquidation, etc It may happen that an adjustment that arises after a trustee in bankruptcy has been appointed may relate to a transaction that occurred before the appointment. The same may apply where other representatives

— receivers, liquidators or interim managers — are appointed. In this situation, the adjustment will be attributable to the business entity, not the representative (¶18-250).

¶6-420 Adjustments on acquisition of business An increasing adjustment will apply if you acquire a business GST-free as a going concern but intend to use it wholly or partly in making private or input taxed supplies (eg providing credit facilities). This type of adjustment is explained at ¶11-520. [GSTG ¶17-620]

OTHER ADJUSTMENT RULES ¶6-510 Other rules about adjustments ▸ Adjustments relating to members of a GST group are attributed to the representative member (¶17020 and following). ▸ Adjustments relating to participants in a GST joint venture are attributed to the venture operator (¶17220 and following). ▸ There may be an adjustment where property is amalgamated (¶11-140). ▸ Special rules about adjustment notes apply where you make a supply through an agent (¶5-190). ▸ Insurance companies may be entitled to decreasing adjustments when they settle a claim with an insured who was not entitled to full input tax credits for the premiums it paid. They may also be liable for increasing adjustments where they make acquisitions directly for the purpose of settling the claim (¶10-120). ▸ Adjustments may need to be made where there is a change in the method of determining the proportion of creditable entertainment expenses (¶24-210). ▸ An increasing adjustment may apply where a taxpayer elects to make annual apportionments of input tax credits (¶5-020). ▸ A decreasing adjustment may be available where a claim for an input tax credit for an additional payment required under a “gross-up” clause falls outside the four-year limit (¶19-400).

ACCOUNTING BASIS • TAX PERIODS Offsetting credits against GST

¶7-000

TAX PERIODS Determining the tax period

¶7-100

Non-standard tax periods

¶7-105

The $20m turnover test

¶7-110

Concluding tax periods

¶7-120

ACCRUALS AND CASH BASIS Working out the GST and credits attributable to a tax period ¶7-200 Accruals basis

¶7-205

Cash basis

¶7-300

How the cash basis operates

¶7-320

When consideration is received or provided

¶7-325

Where GST or credits are adjusted

¶7-330

SPECIAL ATTRIBUTION RULES Changing your accounting basis

¶7-400

Progressive or periodic supplies

¶7-420

Lay-by sales

¶7-430

Barter transactions and trade exchanges

¶7-435

Hire-purchase transactions

¶7-438

Tax Office guidelines on particular attribution situations

¶7-440

Other special attribution rules

¶7-450

Editorial information

Summary Your GST liability is worked out at the end of each of your tax periods. These may be monthly or quarterly (or annually in certain cases), but monthly tax periods are normally compulsory if your GST turnover is $20m or more. To work out your GST liability, you offset the input tax credits for the tax period against the GST on your supplies for the period, and make allowance for any GST adjustments. The way you attribute credits and GST to each period depends on whether you operate on a cash basis or — more commonly — an accruals (invoice) basis. Special rules also apply, for example, where there are lay-bys or periodic supplies. The Commissioner also has power to override the normal rules where they would produce an inappropriate result.

¶7-000 Offsetting credits against GST Your GST liabilities are worked out at the end of each tax period. As explained at ¶7-100, this period may be either monthly, quarterly or annual. For each tax period, you work out the amount of input tax credits you can claim and offset it against the amount of GST that applies to supplies you have made. The balance, after allowing for any adjustments, is called the “net amount” (s 7-5). If the GST exceeds the input tax credits, you must pay the balance to the ATO with your GST return for the period. If the credits exceed the GST, you are entitled to a refund (s 7-15). The Tax Office may, however, offset that refund against any other tax debts you might have (¶8110). It is not necessary to work out the GST and input tax credits separately for each transaction attributable to the period. Assuming that the standard 10% GST and input tax credit rates apply, you can calculate the net amount from your total taxable supplies and creditable acquisitions for each period. Example The total creditable acquisitions attributed to a particular tax period are $110,000, entitling you to input tax credits of $10,000. The total taxable supplies attributed to that period are $121,000 including $11,000 GST. The net amount is ($11,000 − $10,000) = $1,000. This is the net amount of GST payable to the Tax Office for that period. If instead the total taxable supplies were $44,000 including $4,000 GST, the net amount would be $6,000 and this could be claimed as a refund. If instead the total taxable supplies were $110,000 (ie the same as the creditable acquisitions), the net amount would be zero. There would be no amount on account of GST payable to the Tax Office, and equally no amount payable by the Tax Office to you.

This then raises two questions: • How do you work out your tax periods? This is explained at ¶7-100. • How do you know which transactions are attributable to which period? This is explained at ¶7-200. Simplified accounting methods for some industries Simplified accounting methods apply to food retailers (¶13-215) and for certain sales by charities (¶15060). The Commissioner also has the power to specify simplified accounting methods for small enterprise entities that make both taxable and GST-free supplies, or that make acquisitions from such supplies. A “small enterprise entity” is: • a small business entity (¶1-250), or • an entity that does not carry on a business but has a GST turnover (¶3-030) that does not exceed $2m (s 123-5; 123-7). [GSTG ¶20-000]

TAX PERIODS ¶7-100 Determining the tax period Tax periods are either one month or quarterly, depending on the circumstances. In certain situations, annual tax periods may also apply. All these options are discussed below. Quarterly tax periods The general rule is that tax periods are quarterly, ie for three months. These periods end on 31 March, 30 June, 30 September and 31 December (s 27-5). However, as explained below, monthly tax periods will be compulsory in certain situations. In other cases, optional monthly tax periods may be adopted.

Compulsory monthly tax periods You must use monthly tax periods if any of the following apply: • your GST turnover is $20m or more • you will be carrying on your enterprise in Australia for less than three months • you have a history of failing to comply with your tax obligations (s 27-15). If these circumstances change — say, your GST turnover falls below $20m — you can elect to change to quarterly tax periods, provided that you have been using one-month periods for at least 12 months (s 2725). Unlike the position with optional monthly tax periods — see below — the Tax Office does not have a discretion to reduce this 12-month period. If you are a resident agent for a non-resident, monthly tax periods will apply if the non-resident’s GST turnover is $20m or more (s 57-35). Optional monthly tax periods Even if monthly tax periods are not compulsory, you may elect to use them (s 27-10). This election can take effect from 1 January, 1 April, 1 July or 1 October. Once you have been using optional monthly tax periods for at least 12 months, you can change to quarterly tax periods, provided that your GST turnover is less than $20m (s 27-20). This simply requires the relevant notification to the Tax Office. The Tax Office has a discretion to reduce this 12-month period if you make a request in the approved form (s 27-22). In exercising this discretion, the Tax Office may take all relevant matters into account, including how long you have been using monthly tax periods and whether monthly tax periods applied to you under an earlier registration. Annual tax periods for small business For small business entities (¶1-250) that elect to pay GST by instalments, the tax period will normally be the same as the financial year (¶8-037). Taxpayers that are voluntarily registered also have the option of reporting and paying GST on an annual basis (¶8-040). Planning considerations If you legitimately elect to have monthly tax periods so as to bring forward your entitlement to input tax credits, it seems that this would not be caught by the anti-avoidance rules (¶20-000). Having monthly returns will increase your paperwork because you will have to lodge returns more frequently. However, in some cases there can be cashflow benefits. Some of the cashflow implications of monthly and quarterly returns are discussed at ¶21-050 and following. Liquidators, receivers and trustees Liquidators, receivers, interim managers, controllers and trustees in bankruptcy have the same tax period as the entity they represent (s 58-35). The entity’s tax period at the time that it becomes incapacitated is taken to have ended on the day prior to that time. The next tax period starts on the day after the tax period ends, and ends when the first tax period would have ended (s 27-39). For the effect on entities that are group members, see ¶17-030. [GSTG ¶20-500]

¶7-105 Non-standard tax periods There may be modifications to normal tax periods to fit individual circumstances. (1) “Non-calendar” monthly tax periods The compulsory monthly tax periods may be modified for businesses that do not use calendar months as

the basis of their commercial accounting. Entities that are in this position, and that have GST turnovers of $20m or more, can apply to the Tax Office to have tax periods that reflect their normal accounting practice (s 27-37). For example, this may be appropriate if the entity uses 13 four-weekly accounting periods, or 12 accounting periods, with some of four weeks and others of five weeks. Approval will be withdrawn if the entity subsequently fails to satisfy any of these preconditions (s 27-38). (2) Seven-day leeway for aligning tax periods You can also change the day in each year on which a tax period would normally end, so as to be consistent with your normal accounting practice. However, the changed period must end no more than seven days before or after the end of the original period. You do not need to get the Tax Office’s consent for this (s 27-35). If the day is changed in this way, the next period commences on the day after the changed period ends. Example A supermarket owner normally balances her accounts on Fridays. She uses quarterly GST tax periods. Assume the first period in the year (ending 31 March) ends on a Tuesday. She opts to end her tax period on Friday, 27 March, so that she does not have to make a special balance on the Tuesday. Her next three-month tax period starts on Saturday, 28 March, instead of 1 April. She must account for the tax period ending on 27 March by 28 April.

(3) Transitional tax periods If you have changed tax periods, the Tax Office can nominate a particular period as a tax period to ensure a continuous transition. The nominated period cannot be less than three months, and cannot overlap with any other tax period for which a GST return has already been lodged (s 27-30). This also applies at the time you register. Example In August, a business on three-month periods realises that its GST turnover will for the first time exceed $20m. It must therefore change to one-month periods from 1 September. Its previous tax period ended on 30 June. It may therefore be appropriate for the Tax Office to nominate a two-month interim tax period from 1 July to 31 August.

[GSTG ¶20-550]

¶7-110 The $20m turnover test As already explained, you are required to use monthly tax periods if your GST turnover is $20m or more (s 27-15). This means that you must use monthly periods if either of the following applies: • your current GST turnover is $20m or more, except if the Tax Office is satisfied that the projected GST turnover is below $20m, or • your projected GST turnover is $20m or more (s 188-10). Example As at March 2019, your current GST turnover (ie the turnover for the period from 1 April 2018 to 31 March 2019) is $18.6m. Your projected GST turnover (ie the turnover for the period from 1 March 2019 to 29 February 2020) is $21.3m. You will therefore be required to adopt monthly tax periods.

The way you work out your current and projected GST turnover is explained at ¶3-030. For special rules relating to clubs and hotels, see ¶16-030. [GSTG ¶20-500]

¶7-120 Concluding tax periods

Your final (or “concluding”) tax period ends at the following time: • at the end of the day before you die, or the entity ceases to exist • at the end of the day on which you cease to carry on any enterprise • at the end of the day on which your cancellation of registration takes effect (s 27-40). If you are on a cash basis and your registration is cancelled (¶3-070), any GST, input tax credits or adjustments that have not been attributed to any previous tax period will be attributed to your concluding tax period (s 138-15). For GST adjustments that may apply where registration is cancelled, see ¶6-410. For special rules that apply where the taxpayer is paying GST by instalments, see ¶8-037. For taxpayers with annual tax periods, see ¶8-040. For the separate rules that apply to bankruptcy, liquidation and receivership, see ¶7-100. [GSTG ¶20-600]

ACCRUALS AND CASH BASIS ¶7-200 Working out the GST and credits attributable to a tax period You need to work out the GST and input tax credits attributable to each tax period because you have to lodge a GST return for every period. There are two alternative ways of doing this: • the accruals (or invoice) basis • the cash basis. These two attribution methods are explained below. Note that they do not apply to attributing GST on taxable importations, which are covered by separate rules (¶9-005).

¶7-205 Accruals basis Unless you qualify to operate on a cash basis (¶7-300), you must use the accruals basis. Under the accruals basis, the GST payable on a supply that you make is attributed to the tax period in which: • you received any consideration for the supply (¶7-325), or • an invoice for the supply is issued, whichever comes first (s 29-5). The input tax credit which you are eligible to claim on an acquisition that you make is attributed to the tax period in which: • you provided any consideration for the goods or services, or • an invoice for the acquisition is issued, whichever comes first (s 29-10). However, you normally cannot claim an input tax credit unless you also have a tax invoice for the purchase at the time of lodging the return (¶5-100). You may also be able to defer an input tax credit to a tax period after the period in which you first held the tax invoice. This, however, is subject to the general four-year limit on making input tax credit claims (¶5-010). Some of these terms need more explanation: Invoice. An invoice is a document notifying an obligation to make a payment (s 195-1). It may be in written or

electronic form. The ATO considers that the obligation must be a legal obligation (GST Ruling GSTR 2000/34). However, it seems that a document may be an invoice even though it does not specify a time for payment (Shell NZ Holding Company Ltd v CIR (1994) 16 NZTC 11,163 at p 11,168). An invoice may include a delivery docket, but not a mere job quote or an insurance or membership renewal notice. The Tax Office also considers that a notification of a conditional obligation is not an invoice. On this basis, a standard contract for the sale of land would normally not be an invoice because the sale is conditional on both parties completing their side of the agreement (GST Ruling GSTR 2000/28). Similarly, a document issued by an exporter would not be an invoice where it related to a debt that would only become payable at a later stage, once the goods were loaded onto a ship (Interpretative Decision ID 2002/531). Suppliers may need to take care that documents such as reports on work in progress do not unintentionally amount to invoices. Where it is not intended that the document create an obligation to pay, it may be advisable to make this explicit in the document. It has been held that a tax invoice is not “issued” until some act is done to convey it to the intended recipient, though it is not clear whether it is necessary to show actual receipt (Tavco Group Pty Ltd v FC of T 2008 ATC ¶10-049). The Tax Office considers that an invoice is issued when it is electronically transmitted, posted, couriered, hand delivered or similar. The recipient is entitled to rely on the date of issue noted in the invoice in the absence of any evidence to the contrary (GST Ruling GSTR 2000/34). The Tax Office also considers that an invoice posted on a website is “issued”, provided: (1) it is posted in an area that is readily accessible; (2) it can be downloaded or printed in a readable format; and (3) the receiver has been informed that the invoice has been placed on the website (eg by email), or is aware by prior arrangement that invoices will be placed on the website (GST Determination GSTD 2005/2). Invoices would normally be issued by the supplier, but the Tax Office considers that a recipient created tax invoice (¶5-140) would also qualify (GST Determination GSTD 2005/1). Tax invoice. This is a special type of document which must include certain details about the supplier, the supply and the GST. It is not necessarily the same as an ordinary invoice, though they will commonly be the same document (¶5-100). Consideration. This is normally the payment for the supply, but also covers almost anything of value (¶4-020). For the rules on when various forms of consideration are treated as being received by the supplier, or provided by the recipient, see ¶7-325. Examples (1) Assume that the seller and the buyer operate on an accruals basis and that both have the same tax periods. The seller sells goods and issues an invoice in the first tax period of the year. The invoice does not comply with the requirements for a tax invoice. The buyer pays for the goods in the second tax period of the year. The seller becomes entitled to be paid when it issues the invoice and should therefore attribute all the GST on the sale to the first tax period. The buyer becomes liable to pay when it receives the invoice in the second tax period, but cannot attribute the input tax credit to that period because it does not have a tax invoice. Until it receives this, it cannot claim the credit. (2) Assume that the seller and the buyer operate on an accruals basis and that both have the same tax periods. The buyer makes a deposit on goods in the first tax period, receives the goods in the second period (together with a tax invoice) and pays the balance owing in the third period. As the seller receives some of the consideration (ie the deposit) in the first tax period, all the GST on the sale should be attributed to that period. As the buyer does not receive a tax invoice until the second tax period, all the input tax credit for the purchase should be attributed to that period. (3) Assume that the seller and the buyer operate on an accruals basis and that both have the same tax periods. The seller requires payment in advance in the first tax period, and delivers the goods in the second tax period, together with a tax invoice. The seller should attribute all of the GST on the sale to the first period. As the buyer does not receive a tax invoice until the second tax period, all the input tax credit for the purchase should be attributed

to that period.

For cashflow implications of using the accruals basis, see ¶21-050 and following. [GSTG ¶21-050]

¶7-300 Cash basis Under the cash basis, GST is attributed to the tax periods in which consideration is received (¶7-325), and input tax credits are attributed to the tax periods in which you provide consideration (¶7-320). The cash basis is never compulsory, but you may choose to adopt it in any of the following situations: (1) where you satisfy the relevant turnover test. The test is that: (a) you are a “small business entity” for the income year in which you make your choice. Broadly, this requires that your income, aggregated with that of affiliates and connected bodies, is less than $10m (¶1-250), or (b) you are not carrying on a business, and your GST turnover (¶3-030) is less than $2m. The requirement that there not be a “business” — as distinct from an enterprise (¶3-020) — means that this category would normally be restricted to taxpayers such as certain charities, trustees of superannuation funds or government bodies. (2) where you are an endorsed charity, a gift-deductible entity or a government school (¶15-000; s 1575). (3) where you account for your income tax on a receipts basis (eg this method is commonly used by individual professional practitioners: see Taxation Ruling TR 98/1). (4) where each of the enterprises that you carry on is of a type that has been approved by the Commissioner as being able to adopt a cash basis (s 29-40). Under such an approval, liquidators, receivers, interim managers and trustees in bankruptcy may adopt a cash basis for the enterprises that they carry on as representatives (Goods and Services Tax Choosing to Account on a Cash Basis Determination (No 39) 2015). Approvals under this head may be appropriate for industry groups or bodies representing their members, such as industrial trade unions (Goods and Services Tax: Accounting on a cash basis Determination 2017 — Industrial Trade Unions). In considering these applications, the Commissioner is likely to take into account the same considerations as when considering applications for permission by individual entities (see below). In each of these situations, the choice to adopt the cash basis will take effect from the first day of the tax period that you choose. Approval of cash basis in individual cases Even if you do not qualify on any of these grounds, you can still adopt the cash basis where you can satisfy the Commissioner that it is appropriate in your particular case. The Commissioner will take into account: • the nature and size of your enterprise • the nature of your accounting system (s 29-45). To get this permission, you have to apply. The Commissioner has provided the following guidelines (GST Ruling GSTR 2000/13). Whether supplies are on cash or credit basis. Where the vast majority of sales are made for cash, then the cash basis may apply, for example a men’s hairdresser, convenience store or hot bread shop.

Value and volume of supplies. Generally, a cash basis business will have high volume supplies of low value, for example, ice-cream vendors, milk or paper runs. Circulating capital and consumables. The cash basis will be more appropriate where the business does not rely on its circulating capital or consumables to produce supplies. For example, it may not be appropriate for a motor vehicle spare parts and repairs business. Capital items. The greater the reliance on the use of capital items, the greater the likelihood that it would not be appropriate to use the cash basis. Cash basis is more appropriate where labour is the major component of the business. For example, the accruals basis may be more appropriate for a car rental company, but the cash basis may be more appropriate for a driving school where the use of the vehicles is only for the purpose of providing lessons. Credit policy and debt recovery. If the business has formal procedures for extending credit and collecting debts, the cash basis is less likely to be appropriate. Size. The cash basis is less likely to be appropriate where the business has a large number of employees, large overheads, a large amount of trading stock or a complex business structure. Nature of the accounting system. This requires consideration of the books of account and the way they are kept for day-to-day business operations; the appropriateness of the accounting method used; its ability to readily provide lists of creditors and debtors; ordinary accounting principles and commercial practice; and Accounting Standard AAS 6, which requires companies to use the accruals basis. For example, a cash basis would not be appropriate for a business that is totally operated on invoice sales and has an accounting system with the capacity to readily obtain invoice information. Timing advantages. The cash basis will not be warranted on the sole basis that it avoids timing disadvantages that may apply under the accruals basis. If permission is granted, the cash basis will take effect from the date notified by the ATO. Ceasing to account on the cash basis You may, at your own option, notify the Tax Office that you are ceasing to use the cash basis for future tax periods. If you cease to satisfy the eligibility requirements, you must stop using the cash basis for future tax periods, unless you have the Tax Office’s permission (s 29-50; 157-10). [GSTG ¶21-100]

¶7-320 How the cash basis operates If you are using the cash basis of accounting for GST, you attribute the GST to the tax period in which you received payment (consideration) for supplies you make. If you only received part of the payment for supplies during the tax period, you attribute a corresponding part of the GST to that period. The GST which is attributed to the tax period is the amount that is included in your return for the period (s 29-5). The time of invoicing or supply is irrelevant. If you are making acquisitions and are using the cash basis, you attribute the input tax credit for the purchase to the tax period in which you provided the payment. If you only provided part of the payment during the tax period, you attribute a corresponding part of the credit to that period. The credit which is attributed to the period is the amount that is claimed in the return for the period. However, you normally cannot claim any credit unless you also held a tax invoice (¶5-100) for the acquisition at the time of

lodging the return (s 29-10). You may also be able to defer an input tax credit to a tax period after the period in which you first held the tax invoice. This, however, is subject to the general four-year limit on making input tax credit claims (¶5010). Examples (1) Assume that a seller and buyer both operate on a cash basis and both have the same tax periods. The seller sells goods and issues a tax invoice in the first tax period of the year. The buyer pays for the goods in the second tax period of the year. The seller should attribute the GST on the sale to the second tax period because that is when payment is received. The buyer should attribute the input tax credit to the second period because it paid for the goods in that period and had a tax invoice. (2) Assume that a seller and buyer both operate on a cash basis and both have the same tax periods. The buyer makes a partpayment for goods in the first tax period, receives the goods in the second period, together with a tax invoice, and pays the balance owing in the third period. The seller should attribute the GST on the part-payment to the first tax period, and the GST on the balance to the third tax period. As the buyer does not receive a tax invoice until the second tax period, the input tax credit for the part-payment should be attributed to that period. The input tax credit for the balance should be attributed to the third period.

Cashflow and instalment transactions Where there is a sale by instalments to a cash basis taxpayer, the parties cannot accelerate the claiming of input tax credits by agreeing that an amount representing the GST component of the whole consideration is payable at the time of the first instalment. The input tax credits for each tax period must be based on the instalments paid in that period (Lancut (Aust) Pty Ltd v FC of T 2003 ATC 2204). For other cashflow implications of using the cash basis, see ¶21-050 and following. [GSTG ¶21-200]

¶7-325 When consideration is received or provided For the purposes of the attribution rules, the ATO has given its views on when consideration is received by the supplier, or provided by the recipient, under various types of transactions (GST Ruling GSTR 2003/12). These are as follows. Cash. Consideration is normally both provided and received when cash is tendered. Cheque. Consideration is provided when the cheque is either handed or posted to the supplier. Consideration is received when the cheque is actually received, not when it is banked or cleared. If the cheque is postdated, consideration is normally both provided and received on the date stated. However, if the cheque is received later to that date, the consideration is received when the cheque is received. If a cheque you receive is dishonoured in a later tax period, and you are on the cash basis, the Tax Office considers that you should lodge a revised BAS to reflect the reduced GST (GST Ruling GSTR 2000/19). If you are on the accruals basis, the Tax Office says that this will not be an “adjustment event” (¶6-100), but that a bad debt adjustment (¶6-200) may be appropriate if it is established that the debt has actually become bad. Traveller’s cheque. Consideration is both provided and received when the cheque is countersigned. Credit card. If payment is made in person, consideration is both provided and received when the cardholder signs the docket to authorise the transaction. If payment is made by telephone or through the internet, the consideration is provided and received when the cardholder gives the card number and other required details.

Debit card (EFTPOS). Consideration is both provided and received when the transaction is accepted by the system. Direct credit (eg BPAY). Consideration is provided when the payment is authorised by the recipient, and is received when credited to the supplier’s account. Consideration is not received under a conditional letter of credit until it can be drawn on (Interpretative Decision ID 2002/530). Direct debit. Consideration is both provided and received at the time of transfer. Interbank transfer. Consideration is provided on a date authorised by the recipient and is received when the payment is credited to the supplier. Digital cash. Consideration is both provided and received when the cash transfer is made. Vouchers. If payment is made using a voucher that entitles the holder to receive supplies up to a stated monetary value (¶4-060), consideration is both paid and received on redemption of the voucher. To the extent that other consideration is paid in connection with vouchers, the manner of payment (eg cash, cheque) determines when the consideration is provided and received. Stored value card. If the card is supplied with no credit on it, and is not linked to a bank or similar account, the manner of payment determines when the consideration is provided and received. Loading value onto the card may not be treated as consideration. When the card, loaded with value, is used to purchase goods or services, consideration is both provided and received at the time the card is used in payment. If the card is supplied with credit already stored, and the card gives an entitlement to certain specific goods or services (eg a transit card), the issue of the card is treated as the supply of a right (s 9-17; former s 9-15(3)). The manner of payment for it will determine when the consideration is provided and received. If the card is able to be recharged by the supplier for further consideration provided by you, the recharging of the card will be a further supply of rights to you, and will be treated in the same way as the initial purchase of the card. The supply of goods or services for which the card is used will not be a supply for consideration unless consideration in addition to the value on the card is provided. In that case, the payment instrument used will determine when consideration is provided and received. If the card is linked to a bank or similar account, its issue will be an input taxed financial supply (¶10-000). The transfer of funds to the card from its linked account is not treated as consideration. The consideration for a supply of goods or services obtained by the use of the card will be the full amount of the consideration given, including the amount by which the value of the card is depleted. The consideration is both provided and received at the time the transaction takes place. Line of credit/overdraft. If the supplier provides an interest bearing line of credit or overdraft, and payment is reflected by an increase in the amount owing in relation to the debt facility, consideration is both provided and received at the time that increase is recorded in the supplier’s accounts. Book entries. The Tax Office considers that, in the absence of actual payment, book entries can amount to the provision or receipt of consideration for a taxable supply where there is a discharge of mutual liabilities by way of set-off. The consideration is provided or received on the date that the set-off legally occurs. This is typically when the set-off is recorded in the books of the parties (GST Determination GSTD 2004/4). However, it needs to be established that there is a real transaction between the parties, and that

something real was acquired and supplied (Sunlea Enterprises Pty Ltd as trustee for Drummond Cove Unit Trust v FC of T; 2018 ATC ¶10-480). Sale on credit. Where a supply is made on credit (eg 30 days to pay), consideration is provided and received when actual payment is made in accordance with the manner of payment used. This would also apply where the agreement is for the purchaser to pay by instalments, with interest accruing on the outstanding balance (Interpretative Decision ID 2008/49). Where a cash property sale was settled partly with a secured loan from the vendor, the AAT considered that the taxable consideration received on settlement included the full amount of the loan, even though it was ultimately not fully repaid. This was not affected by the fact that the vendor was on the cash basis (Rod Mathiesen Truck Hire Pty Ltd v FC of T [2013] AATA 496). Bill of exchange. Where a bill of exchange with a future maturity date was honoured on maturity, the ATO considered that consideration was given and received on the maturity date. If it is not honoured, there is no receipt of consideration and, if the holder is on an accruals basis, a bad debt adjustment (¶6-200) may be available (Interpretative Decisions ID 2010/10; ID 2010/11). Barter transactions. See ¶7-435. Money held on trust pending disbursement Where a retirement village operator held moneys deposited by residents in a maintenance reserve fund on trust, the moneys were not “received” by the operator until they were withdrawn from the fund for the purpose of providing the maintenance services. Accordingly, for a cash basis operator, the GST on the supply of the maintenance services would be attributable to the tax period in which the withdrawal took place, not the period in which the amounts were originally deposited by residents (Interpretative Decision ID 2003/422). The same applies to an accruals-based operator that does not issue an invoice for the services (Interpretative Decision ID 2003/423). [GSTG ¶11-100]

¶7-330 Where GST or credits are adjusted There may need to be an adjustment to the GST or input tax credits because of a change in circumstances, for example, a transaction is cancelled, goods are returned, the price is changed, a debt becomes bad or overdue, or there is a change in planned use. For the attribution rules for adjustments, see ¶6-000.

SPECIAL ATTRIBUTION RULES ¶7-400 Changing your accounting basis If you change your basis of accounting, there have to be some transitional rules that prevent some of your transactions being taxed twice or falling through the net altogether. For example, if you change from the cash basis to the accruals basis, GST and input tax credits may not arise at all on transactions that were invoiced before the change but not paid until after. Conversely, GST and input tax credits may arise twice if the change was from the accruals basis to the cash basis. To overcome these anomalies, the following transitional rules apply. Change from cash to accruals basis If the GST on a supply was not attributable to a tax period before the change, but would have been if the change had been made earlier than it was, the GST is attributed to the first tax period in which the change applies (s 159-5).

If the GST on a supply was partly attributable to a tax period before the change, but would have been fully attributable if the change had been made earlier than it was, the balance of the GST is attributed to the first tax period in which the change applies (s 159-10). Corresponding rules apply to input tax credits and adjustments. Examples (1) Assume you operate on a cash basis. In tax period 1, you issue an invoice for a supply. For tax period 3, you stop accounting on a cash basis. In tax period 4, you receive payment for the supply. The GST on the supply is not attributable to tax period 1, because at that time you are on a cash basis and have not received payment. However, it would have been attributable to that period if you had been on an accruals basis, because you had issued an invoice. It is therefore attributed to the first tax period in which you are on an accruals basis, ie tax period 3. (2) Assume you operate on a cash basis. In tax period 1, you issue an invoice for a supply and receive 25% of the payment. For tax period 3, you stop accounting on a cash basis. In tax period 4, you receive the balance of the payment for the supply. The GST on the supply is 25% attributable to tax period 1, because at that time you are on a cash basis and have received 25% payment. However, it would have been fully attributable to that period if you had been on an accruals basis, because you had issued an invoice. It is therefore attributed 25% to tax period 1, and 75% to the first tax period in which you are on an accruals basis, ie tax period 3.

Where GST or credits are attributed under these rules, but the relevant debt was written off as bad before the change, there will be a GST adjustment in the same way as if you were always on the accruals basis, except that it is attributed to the first period in which you are actually on the accruals basis (s 159-15). Example A company operates on the cash basis. In tax period 1, it issues an invoice for a supply. In tax period 2, it writes off the whole of the debt because the customer has gone out of business. In tax period 3, it changes to the accruals basis. Under the normal transitional rule on a change of accounting basis, the GST on the supply will be attributed to tax period 3. However, because the debt is bad, there will also be a decreasing GST adjustment (¶6-200) in that same period, which will have the effect of reducing the net GST on the supply to nil.

Change from accruals to cash basis If the GST was attributable to a tax period before the change, it remains attributable to that period and no other (s 159-20). Corresponding rules apply to input tax credits and adjustments. Example Assume you operate on an accruals basis. In tax period 1, you issue an invoice for a supply. In tax period 3, you start accounting on a cash basis. In tax period 4, you receive payment for the supply. The GST on the supply is attributable to tax period 1, because at that time you are on an accruals basis and had issued an invoice. In the absence of the transitional rule, it would also have been attributable to tax period 4, because you were on a cash basis and had received payment. The effect of the transitional rule is that the GST remains wholly attributable to tax period 1, and not to tax period 4.

If you change from an accruals to a cash basis, and a debt is written off as bad after the change, there will be a GST adjustment in the same way as if you were still on the accruals basis (s 159-25). Example A company operates on the accruals basis. In tax period 1 it issues an invoice for a supply. In tax period 2 it changes to the cash basis. In tax period 3 it writes off the whole of the debt because the customer has gone out of business. Under the normal transitional rule on a change of accounting basis, the GST on the supply remains attributable to tax period 1. However, because the debt is bad, there will be a decreasing GST adjustment (¶6-200) as if the company were still on the accruals basis. This will apply in tax period 3 and will have the effect of reducing the net GST on the supply to nil.

[GSTG ¶22-000]

¶7-420 Progressive or periodic supplies If you are not operating on a cash basis, a special rule applies to agreements where a single supply or acquisition is made for a period or on a progressive basis, and the payment is made on a progressive or periodic basis (Div 156). This specifically applies to leases and hiring arrangements (s 156-22), but other examples would include annual subscriptions paid on a monthly basis, building and construction contracts, real estate property management contracts, pay-by-the-month insurance cover or an office equipment maintenance contract payable monthly. In this situation, the contract is treated as a series of contracts for supplies that are paid for separately (s 156-5; 156-10; 156-17; 156-20). From the supplier’s point of view, this means that each progressive or periodic component of the supply is treated as a separate supply, so that the GST is attributed to the tax period in which the payment for that component is made or earlier invoiced. Correspondingly, from the recipient’s point of view, it means that the input tax credit for each progressive or periodic payment is attributed to the tax period in which the payment is made or earlier invoiced. Without this special rule, you would have been required to attribute all the GST and input tax credits to the tax period in which the first payment was made or earlier invoiced. It may happen that the progressive or periodic components are not readily identifiable. In this case, the components will correspond to the separate amounts of consideration (s 156-5; 156-10). Examples (1) Under a 12-month lease, payments are made monthly. In this case, the components are readily identifiable as being monthly. The lessee’s input tax credit for each lease payment will be attributed to the earlier of the invoice or payment for the month. (2) Under a 12-month lease to a farmer, the payments are to be staggered according to when crops are harvested. In this case, the components may not be readily identifiable. If the payments are actually made in April ($10,000), May ($5,000) and June ($5,000), the lease will be treated as comprising three separate supplies of $10,000, $5,000 and $5,000 occurring in those months. The farmer’s input tax credits will be calculated accordingly.

Although Div 156 applies to rent payments, it does not apply to lease premiums or lease incentives (GST Ruling GSTR 2000/35). Hire-purchase transactions entered into from 1 July 2012 onwards are specifically excluded (s 156-23); this confirms the Commissioner’s previous practice (GST Ruling GSTR 2000/29). For the separate rules applying to these transactions, see ¶7-438. Where a deposit is paid, this is not treated as a part payment unless the deposit is forfeited (¶4-070) or unless it was never forfeitable in any event. It is not necessary that both the supplier and the recipient account on the accruals basis. If only one party is operating on the accruals basis, the rule will apply only to that party. Example A consultant agrees to provide consultancy services to a company for a period of six months, with payments made monthly. The consultant is on the cash basis and the company is on the accruals basis. The special rule in Div 156 will therefore apply to the company but not the consultant. In accordance with the normal cash basis rules, the consultant must attribute the GST on each payment to the tax period in which it is received. In accordance with Div 156, the company must attribute the input tax credit for each payment to the tax period in which the payment is made or earlier invoiced.

Part not connected with Australia A further adjustment must be made if any part of these supplies is not connected with Australia, for example, if services under the contract are provided outside Australia through an overseas branch (¶4100). In this situation, the part that is not connected with Australia is itself treated as a separate supply that is not subject to GST (s 156-15). This particular rule applies whether you are on a cash basis or an accruals basis (s 156-25). Tax invoice requirements Although the various components are treated as separate supplies, it is not necessary to issue a separate

tax invoice (¶5-100) for each of those supplies. The Commissioner accepts that a single tax invoice can be issued covering all the supplies, provided that it identifies the price of each of them, either within the document or in an attached schedule. For example, a lease agreement that showed the rent as $1,000 a month would be treated as a tax invoice covering all the monthly supplies, provided that it otherwise complied with the tax invoice rules (GST Ruling GSTR 2013/1). The Commissioner has waived the requirement for an employer making an acquisition of a motor vehicle by way of a lease through a full or split full novation arrangement to hold a tax invoice for an input tax credit to be attributable to a tax period (s 29-10; ¶5-130). The employer must hold documents other than a tax invoice that meet certain requirements (WTI 2013/10). Formerly, it was the practice for the novated lease agreement to be treated as a tax invoice provided that it otherwise satisfied the information requirements (former GST Advice GSTA TPP 056). Contract spanning 1 July 2000 A special transitional rule applied where goods or services were provided progressively under a contract that spanned 1 July 2000 (¶19-210). [GSTG ¶22-050]

¶7-430 Lay-by sales Lay-by sales made in the course of business would normally be subject to GST. If the retailer is on the cash basis (¶7-300), it will account for GST on each instalment as it is received. Correspondingly, if the customer is a cash basis business customer it will claim input tax credits as the instalments are made. Of course, if the customer is a private consumer, no question of claiming input tax credits will arise. If the retailer is on the accruals basis, the normal attribution rules would mean that it should account for the whole of the GST in the tax period in which the first instalment is made, or tax invoice is issued (¶7205). This result can be seen as inappropriate, as a lay-by customer is not under any obligation to complete the sale. Accordingly, under the powers noted at ¶7-440, the Tax Office has varied the normal rules by determining that retailers in this position can instead account for the GST in the tax period in which the final instalment is made (GST Ruling GSTR 2000/12; Goods and Services Tax: Particular Attribution Rules for Lay-By Sales Determination 2017). Correspondingly, a business customer on the accruals basis cannot claim an input tax credit for any of its payments until the tax period in which the final instalment is made. A business customer should ensure that it receives a complying tax invoice to support its claim for input tax credits. This may be comprised in the lay-by agreement. Example A registered retailer operates on a cash basis, with quarterly tax periods. Under a lay-by sale, the total price is $1,650. The purchaser makes payments of $550 in October 2018, December 2018 and February 2019. The retailer should account for 1/11th of $1,100, ie $100 in its return for the December 2018 quarter and 1/11th of $550, ie $50 in its return for the March 2019 quarter. Note: If the retailer had been on an accruals basis, it should account for GST of 1/11th of $1,650, ie $150 in its return for the March 2019 tax period. Assume that the purchaser is registered, enters into the transaction as part of its business and operates on a cash basis with quarterly tax periods. It will be entitled to input tax credits of $100 in its return for the December 2018 tax period and $50 in its return for the March 2019 quarter. If instead the registered purchaser was on the accruals basis, it would be entitled to an input tax credit of $150 in its return for the March 2019 quarter.

Cancellation of lay-by If a lay-by is cancelled, and payments are refunded, the supplier will be entitled to a GST adjustment to the extent that it has already accounted for GST on those payments (s 19-40). The adjustment is allowed in the tax period in which the supplier finds out about the cancellation (s 29-20). This adjustment will, however, apply only to cash basis suppliers. Accruals basis suppliers would not have accounted for any

GST in any event because of the special attribution rules noted above. If any payments are retained by the supplier, they will be treated as consideration for the supply of the lay-by service (s 102-5). This also applies to any additional payments recovered from the customer as a result of the cancellation (but not uncollected moneys required to be forwarded to the government under unclaimed moneys legislation (Interpretative Decision ID 2005/306)). The GST is attributed to the tax period in which the amount is retained or recovered (s 102-10). This applies whether the supplier is on the cash or the accruals basis. Correspondingly, if the purchaser took out the lay-by for business purposes and later cancels, the purchaser will have an adjustment increasing its GST to the extent that it has already claimed input tax credits. This will only apply to cash basis purchasers. Accruals basis purchasers would not have claimed any input tax credits because of the special attribution rules noted above. The business purchaser can, however, claim an input tax credit for the GST component of the amount retained by the supplier. This credit is attributed to the tax period in which the payment was retained or recovered. This applies whether the purchaser is on the cash or the accruals basis. Example A registered retailer operates on a cash basis, with quarterly tax periods. Under a lay-by sale, the total price is $1,650. The cash basis purchaser makes payments of $550 in October 2018 and December 2018. It then cancels and makes no further payment. The retailer refunds the payments made but retains $55 as a service fee. The retailer is entitled to a GST adjustment reducing its previously declared GST by $100, and is liable for GST of 1/11th of $55, ie $5. The adjustment is allowed in the return for the period in which the retailer finds out about the cancellation (March 2019 quarter). The GST is attributed to the tax period in which the $55 is retained (March 2019 quarter). Note: If the retailer had been on an accruals basis, it would not be entitled to any adjustment because it would not yet have accounted for any of the payments. However, it will be liable for GST of $5 in its return for the March 2019 quarter. The purchaser will be subject to a GST adjustment increasing its GST by $100 in its return for the March 2019 tax period. It will also be entitled to an input tax credit for 1/11th of $55, ie $5 in the same return. Note: If the purchaser had been on an accruals basis, it would not be liable for any adjustment because it would not yet have claimed input tax credits for any of the payments. However, it will be entitled to an input tax credit for 1/11th of $55, ie $5 in its return for the March 2019 quarter.

[GSTG ¶22-100]

¶7-435 Barter transactions and trade exchanges Barter transactions may be formal or informal. The application of the GST rules to informal barter transactions is discussed at ¶4-020. Formalised barter transactions are typically carried out under a system involving points or credits with standard values (eg “trade exchanges”). In these cases, the consideration normally consists of the amount of credit to the supplier’s account (GST Ruling GSTR 2003/14). Example Under a formalised barter system, Chris provides secretarial services to Tim, and is credited with 110 credits. Each credit is worth $1. The price of the supply is therefore $110. If Chris is registered and made the supply as part of his business, he is liable to account for GST of $10.

The ATO considers that, for purposes of attribution of GST and input tax credits, the consideration is both received and provided when the recipient of the supply signs the docket or transaction slip to authorise the exchange to credit the supplier’s account and debit the recipient’s account. When a payment is made remotely (eg by telephone or through the internet) using a membership card, consideration is provided and received when the member cardholder gives the card number and other required details (GST Ruling GSTR 2003/12; Taxology Pty Ltd v FC of T [2016] AATA 565).

Example Under a formalised barter system, Merryn provides business services to other participants and is credited with barter points. She uses those barter points to purchase business equipment from Angus, another participant. Merryn is treated as having paid when she signs the docket authorising the scheme organiser to credit Angus’ account and debit her account.

Direct barter Where there is a direct barter of goods or services, but there is a time lapse between the two transactions, the Tax Office will treat the first transaction as a prepayment for the second (GST Ruling GSTR 2003/12). Example A painter and a plumber agree that the painter will provide specified painting services to the plumber and in return the plumber will later provide specified plumbing services for the painter. The provision of the painting services will be treated as a prepayment for the provision of the plumbing services. The painter therefore claims an input tax credit, and the plumber accounts for GST, based on a consideration equal to the GST-inclusive market value of the painting. When the plumbing is done, this is consideration for the painting. The plumber claims an input tax credit, and the painter accounts for GST, based on a consideration equal to the GSTinclusive market value of the plumbing. Note: This example assumes that invoices triggering GST liabilities are not issued before the supplies are made.

The Tax Office considers that: (1) where a current exchange member sells any of its credit for a sum of money, this may be a taxable supply, not an input taxed financial supply; and (2) the tax invoice for a trade exchange transaction should show the GST-inclusive price or GST payable in Australian currency (GST Ruling GSTR 2003/14; Interpretative Decision ID 2007/31). For further Tax Office guidelines, see Bartering and barter exchanges (NAT 9748) and the ATO Fact Sheet Record keeping for barter transactions. The supply of an interest in a barter trade exchange is taxable in accordance with the normal rules (GST Regulations s 40-5.09; GST Determination GSTD 2005/5). This means that GST is required to be remitted on the supply of the interest, and input tax credits are available for the acquisition of the interest. Further, barter scheme suppliers will be entitled to claim input tax credits for acquisitions that relate to making the supply of the interest in the scheme. The Tax Office has set up a data matching project (¶18-175) using data collected from barter exchanges to identify incorrect treatment of barter transactions by participants. It also considers that certain artificial barter exchange agreements involving grossly inflated payments are not effective for GST purposes (GST Determination GSTD 2006/5; Taxpayer Alert TA 2005/4). Simplified compliance rules From 18 November 2016, simplified compliance rules apply to barter (or “countertrade”) transactions in certain situations where the transaction is GST-neutral (Practical Compliance Guideline PCG 2016/18; ¶4-020). [GSTG ¶11-770]

¶7-438 Hire-purchase transactions A hire-purchase agreement is normally treated in the same way as a purchase of goods by instalments. In accordance with the usual rules (¶7-205), taxpayers on an accruals basis account for their GST liabilities upfront in the tax period when the first payment is received or an invoice is issued, whichever is the earlier. Correspondingly, they claim input tax credits in the tax period when they make the first payment, or an invoice is issued, whichever is the earlier. In contrast, cash basis taxpayers would normally attribute their GST liabilities and input tax credits progressively, in the tax periods in which they make or receive each instalment. To overcome the distortion that this rule creates between hire-purchase and other forms of financing, a special rule now

enables these cash basis taxpayers to instead account for hire-purchase transactions as if they were accruals basis taxpayers. This special treatment only applies to agreements entered into on or after 1 July 2012 (s 158-5): ¶12-110. Examples (1) A taxpayer who accounts on a cash basis entered into a hire-purchase agreement in July 2018. The purchase price was $5,500. The taxpayer paid the first of 10 instalments of $550. Although the taxpayer is on a cash basis, it can claim the full input tax credit of $500 (ie 1/11 × $5,500) in the tax period in which the invoice was originally issued, in the same way as if it had been on an accruals basis.

For the position where a hire-purchase agreement is terminated early, see ¶4-020.

¶7-440 Tax Office guidelines on particular attribution situations The Commissioner has the power to determine that special attribution rules for GST, input tax credits and adjustments should apply in situations where the normal attribution rules would have an inappropriate effect (s 29-25). This power can only be exercised in situations such as: • a deferral of the passing of title • a deferral of the use or enjoyment • a cooling-off period • a conditional contract • a situation where aspects of the contract are not known by the parties at the relevant time. The power can also be exercised in the situation where the GST treatment of a supply or acquisition will not be known until a later supply is made, for example, where the supply is made through a distribution chain. The special attribution rule must relate to all instances of the specified kind of supply, acquisition, importation or adjustment. It cannot be limited, for example, to supplies of a specified kind made by a particular entity. Once a determination is made, it is mandatory. The Commissioner has determined that special attribution rules will apply in the following situations. Contracts subject to cooling off Certain contracts are subject to statutory cooling-off periods that enable a purchaser to cancel the contract, for example, in the case of used cars and door-to-door sales. In these situations, the GST on the sale and the input tax credit on the purchase will be deferred until the tax period in which the cooling-off period expires. This will apply irrespective of the accounting basis (GST Ruling GSTR 2000/29; Goods and Services Tax: (Particular Attribution Rules for Cooling off Periods) Determination 2017). Coin- or note-operated machines Where transactions are carried out through a coin- or note-operated vending or games machine, you may not know what sales you have made until you empty the machine. Under the normal attribution rules, you would therefore have to empty the machine at the end of every tax period. To overcome this compliance cost, the GST on the sales will be attributed to the tax period in which the machine is emptied, whenever that may be. This applies irrespective of your accounting basis (GST Ruling GSTR 2000/29; Goods and Services Tax: Particular Attribution Rules for Banknote and Coin-operated Machines and Similar Devices Determination 2017). This will typically apply to machines used for food and drink vending, games and amusements, access to parking or toll-ways, photocopying, internet kiosks, car washes, laundry services and automatic photo booths. Where GST applies, the purchaser’s entitlement to input tax credits will be determined in the usual way.

Typically, the entitlement, if any, will arise when payment is made. Transactions conducted through agents If you make supplies or acquisitions through your agent (¶17-400), information about those transactions may not become available to you until after the end of the tax period in which they occurred. Where this occurs as part of your normal business practice, the following rules will apply: • if you are a supplier on an accruals basis, you attribute the GST to the tax period in which you become aware that any consideration has been received or that an invoice has been issued, whichever is the earlier • if you are a supplier on a cash basis, you attribute the GST to the tax period in which you become aware that consideration has been received • if you are an accruals based purchaser, you attribute the input tax credit to the tax period in which you become aware that any consideration has been provided or that an invoice has been issued, whichever is the earlier • if you are a cash-based purchaser, you attribute the input tax credit to the tax period in which you become aware that consideration has been provided (GST Ruling GSTR 2000/29; Goods and Services Tax Particular Attribution Rules for Supplies and Acquisitions Relating to the Operation of a Collecting Society under the Copyright Act Determination (No 34) 2015; Goods and Services Tax: (Particular Attribution Rules for Supplies and Acquisitions made through Agents) Determination 2017). This, however, does not affect the requirements for issuing tax invoices and adjustment notes (¶5-190). Nor does it apply to transactions conducted by a non-resident through a resident agent (¶17-410), or situations where there is an agreement for the agent to act as a principal (¶17-420). Where there is retention of payment Under some contracts, such as building and construction contracts, a part of the payment may be retained until the end of the defects liability period, or pending final completion. In this situation, the GST on the retained amount may be deferred until the tax period in which it is actually received or an earlier invoice relating to it is issued. Similarly, the input tax credit on the retained amount is deferred until the tax period in which the amount is actually paid or an invoice issued (GST Ruling GSTR 2000/29; Goods and Services Tax: (Particular Attribution Rules for Retention Payments) Determination 2017). In these situations, the Commissioner suggests that the initial tax invoice should set out the total price, less the retention amount, with a net amount payable (GST Ruling GSTR 2013/1). This special rule only needs to apply if you account on an accruals basis. Estimated or contingent payments Under arrangements such as agricultural pooling contracts, payments may be received before the final amount is known. That final amount will typically be calculated after the goods are measured or graded, and may be affected by current market conditions. In this situation, the GST and input tax credit are attributed to a tax period to the extent that consideration has been received/paid or an invoice issued. The balance will be attributed to the tax period in which the final amount becomes known (GST Ruling GSTR 2000/29; Goods and Services Tax: Particular Attribution Rules Where Total Consideration Not Known Determination 2017). The Commissioner has waived the requirement to hold a tax invoice in certain such situations (WTI 2013/4: see ¶5-130). This special rule will not apply if you account on a cash basis. A similar rule applies where a dealer receives a third party motor vehicle incentive payment (¶4-010) or issues an invoice for the payment before receiving the payment. In this case, the GST and luxury car tax payable will be attributable to the tax period in which the total consideration for the supply of the vehicle is known. This is normally the tax period in which the dealer and customer enter into a contract for the sale of the vehicle (A New Tax System (Goods and Services Tax) (Particular Attribution Rules for Certain Motor Vehicle Incentive Payments Made to Motor Vehicle Dealers) Legislative Instrument 2015). Electricity and gas supplies

Some public utility providers have special payment plans allowing customers to spread their payments, which may involve part payment before the meter is read and an invoice issued. If the provider is on the accruals basis, the Commissioner considers that the GST payable on those supplies should be attributed to the tax period in which the invoice is issued or would normally have been issued (GST Ruling GSTR 2000/32; Goods and Services Tax: (Particular Attribution Rule for Supplies of Gas or Electricity made by Public Utility Providers) Determination 2017). Lay-bys For the special attribution rules that apply to accruals basis retailers and customers under a lay-by transaction, see ¶7-430. Transactions falling under more than one rule It may happen that a single transaction is covered by more than one of these special attribution rules. In this case, the Commissioner considers that the rule which results in later attribution should apply (GST Ruling GSTR 2000/29; Goods and Services Tax: Application of Particular Attribution Rules Determinations (Determination) 2017). Situations where normal rules will apply The Commissioner does not intend to vary the normal attribution rules in the case of goods sold “on approval” or on a “sale or return” basis, or floor plan arrangements (GST Ruling GSTR 2000/29). The effect is as follows: Goods sold on “approval” or on a “sale or return” basis: the seller is not normally charged or required to make payment until the ownership of the goods changes. If this is the case, GST or input tax credits will, under the normal rules, not be attributed before title to the goods passes (¶17-422). The Commissioner regards this as appropriate. Floor plan arrangements: these typically apply to motor vehicles, caravans, power boats, pianos and jewellery. Under the normal attribution rules, the manufacturer, distributor or financier attributes GST to the tax period in which it issues an invoice or receives any part of the consideration from the dealer. This will usually be when the dealer has secured a customer and acquired title to the goods (¶17-422). Similarly, the dealer attributes its input tax credit to the same tax period. (This assumes neither party is on the cash basis.) The Commissioner regards this as appropriate. [GSTG ¶22-250]

¶7-450 Other special attribution rules Other special attribution rules apply to: • importations (¶9-005; ¶9-010) • agents and insurance brokers (¶5-190) • company amalgamations (¶17-100) • associates (¶17-500) • security deposits (¶4-070) • pre-establishment costs (¶5-030) • representatives of incapacitated entities (¶18-250) • second-hand goods (¶16-110) • cessation of registration (¶6-410) • supplies of real estate (¶11-065)

• supplies of things acquired without full credits (¶6-310).

GST RETURNS • THE BAS • PAYMENT • ASSESSMENT • REFUNDS INTRODUCTION Various options for lodgment of GST returns

¶8-000

STANDARD METHOD GST return for each tax period

¶8-002

Standard method: time for lodgment

¶8-005

Standard method: completion of GST return

¶8-010

OTHER REPORTING OPTIONS Option to use streamlined quarterly remittance form ¶8-036 Small business option to pay GST instalments

¶8-037

Option to report and pay annually

¶8-040

OTHER PROCEDURAL ISSUES Authorised BAS preparers

¶8-042

How a GST return is lodged

¶8-043

Correcting and revising an earlier BAS

¶8-045

Other special rules for GST returns

¶8-050

ASSESSMENT, PAYMENT AND REFUNDS GST assessments

¶8-080

Amending an assessment

¶8-090

Payment of net GST

¶8-100

Payment of GST refunds

¶8-110

Restriction where refund would give rise to windfall ¶8-115 Review and other rules about refunds

¶8-120

Editorial information

Summary If you are registered or required to be registered, you need to make a GST return in your Business Activity Statement, and account for the GST. Normally, for monthly taxpayers, this must be done for each tax period. However, streamlined requirements for lodgment of returns apply to quarterly taxpayers. Returns may be made electronically — in fact, this is normally a requirement if your GST turnover is $20m or more. This chapter also explains the procedures for refunds, and directs you to various special rules that might apply.

INTRODUCTION ¶8-000 Various options for lodgment of GST returns All taxpayers who are registered — or are required to be registered — must provide a GST return to the ATO (s 31-5). The GST return must be in the approved form, ie in a Business Activity Statement (BAS) (¶8-010); however, the precise requirements for lodging returns vary according to the circumstances. The standard method requires a return to be lodged for each tax period (¶8-002). This may be used by either monthly or quarterly taxpayers. Two additional options apply specifically to quarterly taxpayers. These are: • the “quarterly remittance” method, which enables a substantially abbreviated form to be lodged each quarter, with a full information report lodged annually (¶8-036) • the “instalments” method, which is available only to small taxpayers. This requires quarterly instalments to be paid and an annual return to be lodged (¶8-037). Simplified BAS for newly registered businesses . . . From 19 January 2017, newly registered small businesses have the option of completing a simpler BAS. Under this option: • if a quarterly GST reporting cycle was selected when registering for GST, select “Option 2: Calculate GST quarterly and report annually” on the first BAS. The ATO will not seek the additional GST information or lodgment of the Annual GST Information Report • if a monthly GST reporting cycle was selected at registration, insert “0” at G2, G3, G10 and G11 on your BAS • if an annual GST reporting cycle was selected at registration, the business can leave G2, G3, G10 and G11 blank on its Annual GST Return. . . . and for small businesses From 1 July 2017, small businesses with GST turnover of less than $10m have simpler requirements for their annual BAS. The effect is that the annual BAS will only need the following information: • G1 Total sales • 1A GST on sales • 1B GST on purchases • 1H GST instalments. Information will no longer be required on labels (G2) export sales, (G3) GST-free sales, (G10) capital purchases and (G11) non-capital purchases. Quarterly GST instalments reporting will remain unchanged. Voluntary registrees For taxpayers that are voluntarily registered, there is an option to report on an annual basis (¶8-040). This may be used by either monthly or quarterly taxpayers. [GSTG ¶25-000]

STANDARD METHOD ¶8-002 GST return for each tax period

The “standard” method applies to: • taxpayers with monthly tax periods, and • quarterly taxpayers who choose to use it. Under the standard method, you must provide a GST return in your Business Activity Statement (BAS) for each tax period (s 31-5). The return must be made even if the net amount (¶8-100) is zero, and even if you are not liable for any GST on supplies made during the period (s 31-5). [GSTG ¶25-040]

¶8-005 Standard method: time for lodgment Under the standard method (¶8-002), if you have monthly tax periods, the return must normally be made on or before the 21st day of the month following the end of the tax period (s 31-10). For example, the monthly return for March 2018 is due by 21 April 2018. If you are a quarterly taxpayer using the standard method, the lodgment deadlines are: Quarter ending Deadline

30 September

28 October

31 December

28 February

31 March

28 April

30 June

28 July

Extensions The Commissioner has the power to extend the time for lodgment. Two-week extensions of the 28 October, 28 April and 28 July deadlines may be allowed for businesses lodging and paying their quarterly returns online via the ATO’s Business Portal (¶8-043). Extensions are also allowed where returns are prepared by tax agents. In individual cases, an extension may be appropriate where there are the usual delays in the settlement of affairs following a taxpayer’s death. Applications for such individual extensions should be made before the due date to avoid the possibility of penalty. For the position where the deadline date falls on a weekend or public holiday, see ¶25-055. People affected by major natural disasters may be eligible for concessional extensions of time in lodging returns or paying GST, and accelerated refunds where they are in necessitous circumstances, eg the 2019 floods in North Queensland. For details, see www.ato.gov.au/individuals/dealing-with-disasters/. Adjusted monthly tax periods A special rule applies if your monthly tax period ends during the first seven days of a month. This can happen where the period has been adjusted to fit in with your normal balancing date (¶7-105). In this situation, the time for lodgment is calculated at the beginning of that month, not the following month. Example Assume that as a result of the alignment of your GST and commercial accounting periods, your monthly GST tax period ends on 2 October 2019, not 30 September 2019. You must lodge your return for that tax period by 21 October 2019.

BAS and FBT returns The Commissioner suggests that if your BAS includes fringe benefits tax (FBT) instalments, you should

lodge your BAS for the period ending on 31 March before you lodge your FBT return for the FBT year ending on that date. This should ensure that your FBT details are up to date and may therefore avoid delays in processing the FBT return. Penalties For details of penalties for late lodgment or incorrect returns, see ¶18-300. [GSTG ¶25-040]

¶8-010 Standard method: completion of GST return Under the standard method (¶8-002), the GST return is incorporated in a two-page form called the Business Activity Statement, or BAS. The BAS is also used as a return for income tax withholding and instalments, deferred company tax instalments, FBT instalments, luxury car tax (¶23-000) and wine equalisation tax (¶22-000). Normally, the ATO will send you a personalised BAS before lodgment time. It will indicate when it needs to be lodged and the tax period it covers. Although the BAS itself is relatively short, considerable preparation may be needed in order to complete it. Businesses should not underestimate the time needed, particularly, in the case of their first few returns. In calculating the GST, taxpayers may use the “GST Calculation Worksheet” which is supplied by the ATO but which is not actually lodged with the BAS. Alternatively, they can use the more streamlined “derived from accounts” method, which enables them to identify their GST payable and input tax credits directly from their accounting records. This method may be used if you separately record your GST amounts for supplies and acquisitions. This requirement may be satisfied by the relatively simple procedure of having a GST column in your cash book or spreadsheet. Net GST or refund In general terms, you are liable to pay GST for a tax period if the GST payable on supplies is more than the input tax credits claimable on your acquisitions. You are entitled to a refund from the ATO for a tax period if the GST payable on your supplies is less than the input tax credits claimable on your acquisitions (¶8-100). The GST return therefore requires you to: • identify the GST payable on your supplies • identify the input tax credits you can claim • offset them against each other. Guidance on completing the return is given in the ATO’s Goods and Services Tax — How to Complete Your Activity Statement (NAT 7392). ATO tips on preparing a BAS The ATO has given the following tips and warnings: • if you have lost your BAS form, contact the ATO to get a new one sent • the actual BAS form must be posted in after payment is made at the Post Office or electronically • use numerics rather than symbols such as $ + − / • use only whole dollars • generally, leave boxes blank if they do not apply to your business. However, you should write a zero (0) at G1 and 1A if you are using GST Option 1 or 2 and have nothing to report due to a suspension of trading. If you are varying your GST instalment down to zero, you should write a zero at 1A

• use black pen only. If a mistake is made, use white-out (for corrections to earlier returns, see ¶8-045) • if you have not provided your correct bank account details, it may take longer to receive a refund — telephone 13 28 66 to update your details • do not add attachments or explanatory comments. Common errors in preparing BAS For common errors made in complying with GST requirements, see ¶18-170. For corrections to earlier returns, see ¶8-045. [GSTG ¶25-060]

OTHER REPORTING OPTIONS ¶8-036 Option to use streamlined quarterly remittance form Quarterly taxpayers have the option — referred to as Option 2 — of making their GST payments on the basis of a “simple remittance form” and lodging a more detailed annual information report. The quarterly remittance form only requires reports of sales, GST collected on sales, and GST paid on purchases. The annual information report requires details of exports, other GST sales, capital and other purchases for compliance reasons. This report must be lodged by the date the income tax return is due (or 28 February following the end of the financial year if no income tax return is due). This method is optional. Quarterly taxpayers that fully comply with the standard system (¶8-002) are not under any obligation to change from their previous arrangements. [GSTG ¶25-040]

¶8-037 Small business option to pay GST instalments A further option — referred to as Option 3 — applies to certain small businesses that are entitled to lodge quarterly. Under this “instalments” option, GST returns are lodged annually and instalments of estimated GST are paid quarterly, with an annual reconciliation being made. The instalments are generally based on the previous year’s GST. The amount of the instalments may be varied by the taxpayer, but penalties may apply if the varied instalments turn out to be too low. Who is eligible You may elect to use the instalments system if you satisfy all the following requirements: • you are a “small business entity” (¶1-250) in the income year in which you make your election, or you are a non-business taxpayer with a “GST turnover” (¶3-030) that does not exceed $2m • you are not required to lodge on a monthly basis and have not elected to do so (¶7-100) • you have a “current lodgment record” of at least four months • you have lodged all previous GST returns as required • you are not in a “net refund position” (s 162-5). Even if you are eligible, your election can still be disallowed if the Commissioner is satisfied that you have a history of failing to comply with your taxation obligations (s 162-15). Limited registration entities (¶9-120) are not eligible for the instalments system. GST turnover of non-business taxpayers A non-business taxpayer’s “GST turnover” is measured in the same way as for registration purposes (¶3030). This means that it will satisfy the turnover requirement if:

• its current GST turnover does not exceed $2m, and the Commissioner is not satisfied that its projected GST turnover will exceed $2m, or • its projected GST turnover does not exceed $2m (s 188-10). Current lodgment record To satisfy the current lodgment record requirement, you must have lodged GST returns covering at least a four-month period before the current tax period (s 162-10). This would be satisfied by: (1) four monthly returns; (2) two quarterly returns; or (3) one monthly and one quarterly return. This requirement provides the ATO with a payment history so that it can make reasonable instalment calculations. For this reason, if you are a member of a GST group, the period starts again whenever there is a change in membership. Similarly, if you were previously the representative member of a GST group, returns lodged for periods while you had that status are not taken into account in determining your lodgment record. Net refund position Whether you are in a net refund position is measured over a period that varies according to how long you have previously been lodging returns (s 162-5). If you have lodged returns for less than seven months, you work out whether you are in a net refund position by looking at the results for the three months preceding the current tax period. If you have lodged returns for eight or nine months, you look at the six months preceding the current tax period. If you have lodged returns for 10, 11 or 12 months, you look at the nine months preceding the current tax period. If you have lodged returns for at least 13 months, you look at the 12 months preceding the current tax period. Example A newly established quarterly payer has net GST of $16,000 for its first GST return (up to 30 September 2017) and a refund of $12,000 for its second GST return (up to 31 December 2017). It wishes to elect to adopt the instalment system with effect from its third quarter. As it has lodged returns for tax periods totalling six months (ie less than seven months), it must take into account the three months preceding the third quarter. On this basis, it is in a net refund position (ie for the $12,000), so it cannot elect to adopt the instalment system at this time. Assume that the payer subsequently has net GST of $15,000 for its third GST return (up to 31 March 2018). It wishes to elect to adopt the instalment system with effect from its fourth quarter. As it has now lodged returns for tax periods totalling nine months, it must take into account the six months preceding the fourth quarter (ie the second and third tax periods). The total tax amount over this period is $15,000 − $12,000 = $3,000. It is therefore not in a net refund position, and can elect to adopt the instalment system provided that all other requirements are fulfilled.

Making the election to pay instalments To make the election, you must notify the Commissioner in the approved form (s 162-15). In practice, you will be taken to have exercised the option if you complete the relevant box on the BAS. The election must normally be made by 28 October of the relevant financial year (s 162-25). However, in certain situations you can make part-year elections. This applies if you first become eligible to use the instalments system after 28 October, and your current lodgment record does not exceed six months — typically, this means that you have lodged no more than two quarterly GST returns. In these circumstances, your election must be made by the date you would otherwise have had to lodge a GST return for the tax period in which you became eligible. The election will then be valid for that tax period until the end of the year. An election continues in force indefinitely, unless you revoke it or lose your eligibility, or the Commissioner disallows it on the grounds of your bad compliance history (s 162-30). As an exception to this, an entity that is already paying GST by instalments can continue to do so, even if it has moved into a net refund position. In such a case, the instalment amount will be zero. The rules as to loss of eligibility are similar to those applying to annual input tax credit apportionments (¶5-020). The Commissioner also has power to extend the time for making an election in individual cases. Application for the extension must be made on the approved form. The Commissioner will take into account the taxpayer’s previous compliance history, whether the taxpayer has a valid reason for the late election, whether the failure to elect was isolated and any exceptional circumstances such as serious

illness (Interpretative Decisions ID 2004/447 to ID 2004/449). The representative member of a GST group cannot make an election unless each member of the group is eligible (s 162-20). Effect of making instalments election Making the election means that: • you are called a “GST instalment payer” (s 162-50) • you have an “instalment tax period” that corresponds to the period for which the election applies (s 162-55). For example, if your election applies to the whole financial year, that financial year will be your instalment tax period • you must pay the GST for that instalment tax period by quarterly instalments (see below) • you must lodge a BAS for that instalment tax period (see below). Taxpayers can opt not to lodge the BAS for an instalment period if they: (1) only report GST and Pay As You Go (PAYG); and (2) accept the instalment amount calculated by the Commissioner. Amount and timing of instalments The amount of each instalment will normally be notified to you by the Commissioner (s 162-135). This will typically be calculated as 25% of the previous year’s GST, adjusted by a factor that reflects changes in GDP (Gross Domestic Product) (Administration Act, Sch 1, Subdiv 45-L). This adjustment factor is: • 6% for the 2018/19 income year • 4% for the 2017/18 income year • 2% for the 2016/17 income year. Instalments are payable by 28 April, 28 July, 28 October and 28 February (s 162-70), ie the same dates as for lodgment of quarterly returns under the normal rules (¶8-005). If any instalments are paid late, the general interest charge (GIC) will be imposed (s 162-100). You can also elect to vary your notified instalments (see below). Annual return and reconciliation In the typical case, where your instalment tax period is the financial year, the ATO will normally send you an annual GST return sometime after 30 June. This return must be completed and lodged by the time your income tax return is due (s 162-60). However, if you are not liable to lodge an income tax return, the GST return must be lodged by the following 28 February. The Commissioner can extend the time for lodging GST returns (Administration Act, Sch 1, s 388-55). The annual GST amount is worked out on the annual return. Any shortfall (or “wash up” payment) between this and the amounts already paid must be paid by the time for lodgment of that return (s 162105; 162-110). If there has been an overpayment, the Commissioner must give a refund (s 35-5). If the taxpayer has died, ceased to carry on an enterprise or has its registration cancelled during the instalment tax period, there is still an obligation to lodge an annual return for that period as described above (s 162-85). However, there is no requirement to pay instalments for any quarter that starts after the death, etc. Example Jan is on the instalments system. She dies on 15 January 2019. An annual return must be lodged by the time her income tax return for 2018/19 is due. Her last quarterly instalment will be for the quarter ending 31 March 2019.

If the taxpayer becomes incapacitated (eg goes bankrupt, goes into liquidation or receivership) or goes

out of existence, the instalment tax period ends on the day before that happens, and the return must be lodged by the 21st day of the following month (s 162-90). Any outstanding GST must also be paid by that date. Example Assume the same facts except that Jan goes bankrupt instead of dying. An annual return must be lodged by 21 February 2019.

If the membership of a GST group changes, the instalment tax period ends at that time (s 162-95). The representative member must lodge the annual return by the 21st day of the following month, together with any outstanding GST. Example A, B and C are members of a GST group and commence paying by instalments from the start of 2018/19. In December 2018, C leaves the group. The GST group must lodge the annual return by 21 January 2019. All parties will revert to ordinary quarterly tax periods and, in accordance with the normal rules, cannot resume paying by instalments until they have current lodgment records of at least four months.

Variation of instalments Instead of accepting the instalments notified by the Commissioner, you have the option of varying the instalments by using your own estimates (s 162-140). The variation is made by notifying the Commissioner on or before the due date for the instalment. Variation may be appropriate in a variety of circumstances. The BAS form requires that you provide a numerical “reason code” for the variation. These codes are: current business structure not continuing (21); significant change in trading conditions (23); internal business restructure (24); change in legislation (25); financial market changes (26); entering the Simplified Tax System (28); or leaving that system (29). Example Enterprises is paying its GST by instalments. For the September 2019 quarter, the Commissioner notifies Enterprises that its GST instalment is $50,000 (consistent with an annual GST of $200,000). Due to a major downturn in business, Enterprises estimates that its annual GST will only be $160,000 and decides to vary its instalment to (1/4 × $160,000) = $40,000. For the (second) December 2019 quarter, Enterprises revises its annual GST estimate to $164,000. The varied second instalment will be (1/2 × $164,000) − $40,000 = $42,000. For the (third) March 2020 quarter, Enterprises does not change its estimate. The third instalment will be (3/4 × $164,000) − $82,000 = $41,000. For the (final) June 2020 quarter, Enterprises again revises its estimate, to $168,000. The revised fourth instalment will be $168,000 − $123,000 = $45,000. Enterprises’ actual GST liability for the year turns out to be $170,000. Enterprises will be required to pay the balance of $2,000 (ie $170,000 − $168,000) by the time it lodges its annual return.

However, there are a series of penalties that apply if your varied estimates turn out to be too low. These penalties apply if: • the sum of your instalments is less than 85% of your actual annual GST liability (s 162-175) • your estimated annual GST amount relating to any quarter is less than 85% of your actual annual GST liability (s 162-180), or • each varied instalment is not a correct proportion of your estimated annual GST amount (s 162-185). This is designed to ensure, for example, that an entity that correctly estimates its annual GST amount cannot vary its instalments to zero for the first three quarters and then pay 100% of the estimated annual liability in the final quarter. If the first of these penalties applies, the other two will not apply. The second can only apply if the first

does not apply. The third can only apply if the other two do not apply. In each case, the amount of penalty is imposed at the rate of the GIC (¶18-300), calculated up to the date when the net amount is due. If you make up an earlier underestimate by a top-up payment for a later quarter, the penalty is only calculated up to the date of the top-up (s 162-190; 162-200). These penalties are tax deductible (ITAA 1997 s 25-5). No penalties apply where an underestimate results simply from the adoption of the Commissioner’s notified instalments. This applies even if the taxpayer is aware that the notified instalments are not representative of its current position. This can provide some cashflow benefits (¶21-070). Primary producers and averaging professionals A special concession applies to primary producers and others who are entitled to average their income for tax purposes. The concession recognises that these bodies are susceptible to wide fluctuations in income. It means that they will only have to pay two instalments for any financial year. These are due on 28 April and 28 July (s 162-80). The concession applies if: • you carry on a primary production business in the year in which you elect to use the instalments system, and you had at least $1 of net primary production income in your last tax assessment • you are a “special professional” entitled to average your income (eg an author, inventor, performing artist or sportsperson), and you had at least $1 of net professional income in your last tax assessment. In effect, this means that the first two instalments are deferred until the net annual GST amount is paid. This may incidentally provide some cashflow benefits (¶21-070). [GSTG ¶25-230]

¶8-040 Option to report and pay annually A taxpayer that is voluntarily registered for GST may elect to adopt an annual tax period, so that it reports and pays GST on an annual basis, instead of monthly or quarterly (s 151-5). This applies to ordinary enterprises with a GST turnover of less than $75,000 and non-profit organisations with a GST turnover of less than $150,000 (¶3-030). The election is not available to taxpayers if the only reason that they are not required to be registered is because offshore supplies of rights or options have been disregarded in calculating their turnover (¶3030). Nor does it apply to taxi operators (¶12-130) or to taxpayers on the instalments system (¶8-037). Making the election The election is called an “annual tax period election”. Normally, it must be made on or before 28 October in the financial year to which it relates (for quarterly taxpayers) or on or before 21 August in that financial year (for monthly taxpayers). The election applies from the start of the financial year (s 151-10; 151-20). However, a special rule applies where a taxpayer first becomes eligible to make an election after 28 October in any financial year, and their current GST lodgment record is no more than six months. This taxpayer may make the election on or before the date their next GST return becomes due. The election takes effect from the start of the tax period to which that return relates. The Commissioner has the power to grant extensions of these deadlines. Effect of election Making a valid election means that the taxpayer has an annual tax period (s 151-40). This takes the place of the monthly or quarterly tax periods that would otherwise apply (¶7-100). If the election takes effect part-way through the year, the balance of that year is still called an annual tax period. An annual GST election also applies to WET (¶22-000) and LCT (¶23-000). However, it does not affect PAYG obligations.

Lodgment of return The taxpayer must lodge an annual GST return and pay its GST for the annual tax period. This must be done on or before the date the taxpayer is required to lodge its annual income tax return for that year (s 151-45; 151-50). The ATO has the power to extend this deadline. If the taxpayer is not required to lodge an income tax return, it must lodge its annual GST return and pay its GST by 28 February following the end of the financial year. Duration of election Once made, an election continues in force indefinitely unless: • the taxpayer revokes it. A revocation is effective for the whole of the financial year if made on or before 28 October in that year; otherwise, it does not apply until the start of the next financial year • the taxpayer’s circumstances (eg turnover) are such that it is required to be registered as at 31 July in the financial year. In this case, the election ceases to have effect from that start of that year. In effect, this means that a taxpayer must review its eligibility each 31 July, or • the Commissioner disallows the election on the ground of a bad compliance record. If the disallowance occurs during the financial year in which the election first took effect, the election will have no effect. For later financial years, a disallowance is effective for the whole of the financial year if made on or before 28 October in that year; otherwise, it applies from the start of the next financial year (s 151-25). If an individual taxpayer who has made an election dies during a financial year, the annual tax period continues until the end of that financial year (s 151-25; 151-55). The same applies if a taxpayer ceases to carry on its enterprise, or has its registration cancelled. However, a different rule applies if the taxpayer becomes incapacitated (eg goes bankrupt, goes into liquidation or receivership), or ceases to exist. In this case, the annual tax period ends at the end of the day before the bankruptcy, etc, occurs. Unless the Commissioner grants an extension, the GST return will become due and GST will become payable for that period on or before the 21st of the following month (s 151-25; 151-60). GST groups The representative member of a GST group (¶17-010) can only make an election if all members of the group are eligible (s 151-15). Alignment with PAYG instalments Voluntarily-registered taxpayers who choose to remit GST annually may also, in certain circumstances, be eligible to make their PAYG tax instalments annually (Administration Act, Sch 1, Div 45). [GSTG ¶25-045]

OTHER PROCEDURAL ISSUES ¶8-042 Authorised BAS preparers A national registration and regulation system governs those who are in the business of providing “BAS services” for a fee or other reward. Under the Tax Agent Services Act 2009 (TASA), these providers have to be registered with the Tax Practitioners Board (TPB) as tax agents, or as BAS agents. BAS agents have to meet minimum educational and experience tests, though at a lower level than that required of tax agents. There are penalties for failing to comply. From 2016, registered tax and BAS agents have to complete an annual declaration with the TPB, showing that they meet their registration requirements: see “Annual declaration” at www.tpb.gov.au. What are BAS services? BAS services which registered BAS agents or tax agents may provide include:

• preparing or lodging a return or other approved form about a taxpayer’s liabilities, obligations or entitlements under a “BAS provision” (this includes the GST, WET and LCT laws) • giving a taxpayer advice about a BAS provision that the taxpayer can reasonably be expected to rely on to satisfy their taxation obligations • dealing with the Commissioner on behalf of a taxpayer in relation to a BAS provision. They do not include: • installing computer accounting software without determining default codes tailored to the client • coding tax invoices and transferring data onto a computer program for clients under the instruction and supervision of a registered BAS agent, or • general training in relation to the use of computerised accounting software, preparing bank reconciliations or entering data. Under its power to declare that certain services are BAS services, the Tax Practitioners Board has indicated that it will not require BAS agents to register as tax agents for work such as: • superannuation guarantee and superannuation guarantee charge services • superannuation contribution payment and reporting services, and taxable payments reporting. This practice has now been formalised, effective from 2 June 2016 (Tax Agent Services (Specified BAS Services) Instrument 2016). Further details of what constitutes BAS services are at the TPB website: www.tpb.gov.au. Requirements for registration The requirements for registration as a BAS agent are as follows: (1) Individuals must be aged 18 years or more, be a fit and proper person and satisfy the following tests: • the individual must have been awarded at least a Certificate IV Financial Services (Accounting) or a Certificate IV Financial Services (Bookkeeping) from a registered training organisation or an equivalent institution. They must also have successfully completed a course in basic GST/BAS taxation principles, and • if the individual is a voting member of a recognised tax agent or BAS agent association, they must have undertaken at least 1,000 hours of relevant experience in the preceding three years. Otherwise they must have undertaken at least 1,400 hours of relevant experience in the preceding three years (TASA, s 20-5; Tax Agent Services Regulations 2009, reg 7, Sch 2). (2) For partnerships and companies, the partners and directors will need to pass fit and proper person requirements, the entity must not be under external administration, and there must not be any disqualifying taxation offences. In addition, the partnership or company will need to have a sufficient number of individuals who are registered tax agents or BAS agents, to provide BAS services to a competent standard, and to carry out supervisory arrangements (TASA, s 20-5). Licensed customs brokers may provide BAS services that relate to imports or exports affected by GST, WET or LCT without being registered. Employees of BAS agents are not necessarily required to be registered. The same applies to legal practitioners providing BAS services in the course of acting for a trust or deceased estate. The AAT does not have the jurisdiction to review a decision by the Board to grant registration for a period shorter than the standard three-year period (Kuan v Tax Practitioners Board [2013] AATA 254). Code of practice and “safe harbours”

BAS agents are also governed by a Code of Professional Conduct (TASA, s 30-10). The Code contains 14 principles dealing with honesty and integrity, independence, confidentiality, competence and other responsibilities. Sanctions for breach of the Code include cautions, compulsory re-education, imposition of restrictions (such as working under supervision or providing only limited services), suspension or termination of registration (TASA, s 30-15 to 30-30). For an Information Sheet on the Code, see the Tax Practitioners Board website (www.tpb.gov.au). Under “safe harbour” rules, a taxpayer who uses a registered agent may, in certain circumstances, not be liable for administrative penalties for making false or misleading statements, or failing to lodge documents, where the statement or failure to lodge is attributable to the agent. Details are at ¶18-300. ATO’s BAS Agent Portal The ATO has a portal especially for bookkeepers and other non-tax agents that provide BAS services for a fee. The BAS Agent Portal enables them to: • prepare, lodge, view and print activity statements • receive confirmation of lodgments • view and update client registration details • view client account information • view payment options and print payment slips, and • communicate with the ATO using secure portal mail. See “ BAS agents portal” at www.ato.gov.au.

¶8-043 How a GST return is lodged If your GST turnover is $20m or more (¶3-030), you must lodge your GST return electronically in a format approved by the ATO, unless the ATO approves some other method (s 31-25). In other cases, you can choose whether to lodge your return physically (by mail) or electronically. To lodge electronically, go to the ATO’s Business Portal (www.bp.ato.gov.au), which operates 24 hours, seven days a week. At this Portal, businesses can also view previously lodged BASs, view and update registration details and carry out certain other transactions. To use the portal, businesses must have a valid Australian Business Number (ABN), an ATO digital certificate (available from the ATO) and, of course, internet access. Businesses lodging quarterly returns via the Business Portal may be entitled to automatic extensions of time (¶8-005). If there is nothing to report for the tax period (nil amounts at all labels), the ATO may allow you to lodge by telephone (s 31-15). This may apply, for example, where your business is seasonal, intermittent or has no staff or turnover activity in the period. You will need to have your BAS on hand and be able to quote your ABN or tax file number, and the BAS document identification number. GST turnover test for electronic returns As already noted, you must normally lodge electronically if your GST turnover is $20m or more (s 31-25). This means that you must lodge electronically if either of the following applies: • your current GST turnover is $20m or more, except if the ATO is satisfied that the projected GST turnover is below $20m, or • your projected GST turnover is $20m or more (s 188-10). Example As at March 2019, your current GST turnover (ie the turnover for the period from 1 April 2018 to 31 March 2019) is $18.5m. Your projected GST turnover (ie the turnover for the period from 1 March 2019 to 29 February 2020) is $21.3m. You will therefore be required to lodge electronically.

The way you work out your current and projected GST turnover is explained at ¶3-030. [GSTG ¶25-080]

¶8-045 Correcting and revising an earlier BAS If you have made an error in your Activity Statement, you may lodge a revised Statement. You can ring the ATO on 13 28 66 and request a revised form to complete. In certain situations, however, the Commissioner can allow you to simply make the appropriate change in a subsequent BAS, rather than making a revision of the earlier form (s 17-20). This is beneficial for taxpayers, as it may enable them to avoid liability for general interest charge or administrative penalties (¶18-300). Note that in certain cases the ATO may allow penalty relief for inadvertent errors in Activity Statements made by small businesses (¶18-305). The ability to make a correction is not limited to errors in the immediately preceding BAS. For corrections of wine equalisation tax, see ¶22-300. Guidelines on corrections The Commissioner has issued the following guidelines on how this concession may be administered (Goods and Services Tax: Correcting GST Errors Determination 2013): • the concession applies to quantified overstatements (credit errors) or understatements (debit errors) of the net GST payable for an earlier tax period. These may arise, for example, from clerical or typographical errors, double counting, omissions or other mistakes. Although it would include overstating or understating an input tax credit, it would not include the situation where the taxpayer simply delays attributing the whole of an input tax credit and takes it into account in a later tax period, in accordance with the rules at ¶5-125. Nor does it include normal GST adjustments to reflect changed circumstances (¶6-000) • an error cannot be corrected in a return if at the time of lodging the return the taxpayer is subject to a GST audit or other compliance activity (¶18-160) • in the particular case of a debit error, the error must be corrected in the first return after it is identified. It must not have resulted from recklessness or intentional disregard for the GST law (¶18-300), and must comply with the limits set out in the following table: Current GST turnover

Debit error value limit

Debit error time limit

Less than $20m

Less than $10,000

The error must be corrected on an activity statement that is lodged within 18 months of the due date of the incorrect activity statement.

$20m to less than $100m

Less than $20,000

The error must be corrected on an activity statement that is lodged within 12 months of the due date of the incorrect activity statement.

$100m to less than $500m

Less than $40,000

The error must be corrected on an activity statement that is lodged within 12 months of the due date of the incorrect activity statement.

$500m to less than $1b

Less than $80,000

The error must be corrected on an activity statement that is lodged within 12 months of the due date of the incorrect activity statement.

$1b and over

Less than $450,000

The error must be corrected on an activity statement that is lodged within 12 months of the due date of the incorrect activity statement.

A taxpayer cannot correct an error from an earlier tax period by requesting an amendment of a GST return of a later tax period. Credit errors from an earlier tax period can only be corrected in a later tax period if the GST return for the later tax period is lodged within the period of review for the earlier assessment in which the error was made (Correcting GST Errors Amendment Determination 2017 (No 1): GSTE 2017/1). Property owners For special rules applying to corrections on certain supplies to non-resident property owners, see the ATO Fact Sheet GST Paid on Services to Non-resident Property Owners. For the procedure where a GST adjustment arises from a change in intended business use of a development property, see ¶6-300.

¶8-050 Other special rules for GST returns Here are some special rules about returns. ▸ The ATO has the power to require you to provide a GST return, or to make additional or more detailed GST returns (s 31-20). For example, this power may be exercised where you fail to furnish a return at all, or are acting as the agent or trustee of someone else. The information required in these returns may be modified so as to avoid unnecessary duplication of material that has already been provided. ▸ The Commissioner can treat a GST return as having been duly signed by a taxpayer, or with the taxpayer’s authority, unless the taxpayer is able to prove otherwise (Administration Act, Sch 1 s 35010; former s 31-30). This rule is intended to allow the Commissioner to be able to process assessments without needing to be involved in disputes about who was authorised to lodge a return on the taxpayer’s behalf. ▸ The GST return requirements also apply if you are required to be registered, even if you are not actually registered (s 31-5). ▸ GST returns must be made for all of an entity’s GST branches (¶17-300). ▸ Only the representative member is required to lodge a return for a GST group (¶17-020). ▸ A representative that is appointed to two or more incapacitated entities (¶18-250) that are members of a GST group may lodge one return for a tax period for all the entities (s 58-45). The Commissioner can direct a representative to provide a return for an incapacitated entity that has failed to do so (s 58-50). Incapacitated entities need not provide returns for tax periods for which there is no GST liability (s 58-55). The representative must notify the Commissioner of any undisclosed liabilities of the incapacitated entity of which the representative could reasonably be expected to have become aware (s 58-60). ▸ The joint venture operator must lodge a return for a GST joint venture (¶17-220). ▸ Special rules apply to non-residents and their resident agents (¶17-400). ▸ A special GST return may be required by an insured business that has ceased to be registered at the time an insurance settlement is made (¶10-120). ▸ GST returns are required for supplies made by creditors in satisfaction of debts in certain circumstances (¶10-070).

ASSESSMENT, PAYMENT AND REFUNDS

¶8-080 GST assessments GST is a “self-assessment” system (Administration Act, Sch 1, Div 155). This means that: • a taxpayer’s GST liability is determined by an assessment (Sch 1 s 155-5) • this assessment may be made at any time, but is normally deemed to have been made when the taxpayer lodges their return • the assessed liability is normally the amount stated in the taxpayer’s return (Sch 1 s 155-15), and • notice of the assessment must be given to the taxpayer as soon as practicable (Sch 1 s 155-10). However, the return itself is normally deemed to be an assessment notice which is notionally given to the taxpayer on the date of lodgment of the return (Sch 1 s 155-15). In limited cases, a taxpayer’s return will not contain sufficient information to allow a deemed assessment to occur. An actual assessment must therefore be made. If the taxpayer does not receive notice of the assessment within six months after the return was lodged, the taxpayer can request the Commissioner to issue the notice. If the Commissioner fails to do so within 30 days, the taxpayer can object under the normal objection and appeal provisions (Sch 1 s 155-30): see ¶18-600. If the taxpayer simply fails to lodge a return, the Commissioner can issue a default assessment at any time (Sch 1 s 155-5). In making an assessment, the Commissioner can treat part of a tax period as the whole tax period (Sch 1 s 155-25). A taxpayer may object to an assessment under the normal objection and appeal provisions (Sch 1 s 155-90): see ¶18-600. [GSTG ¶25-600]

¶8-090 Amending an assessment If a taxpayer lodges a return, then later lodges an amended return for the same tax period, the first return gives rise to a deemed assessment, and the second return is treated as an application for amendment of that assessment. Similarly, if the Commissioner makes a default assessment due to the taxpayer’s failure to lodge a return, and the taxpayer later lodges a return for that period, that return will be treated as an application to amend the default assessment. An assessment can be amended either on the Commissioner’s own initiative or at the request of the taxpayer. If the request is made in the approved form (such as where the taxpayer lodges a revised return), and the Commissioner makes the amendment in accordance with the revised return, that return is itself deemed to be a notice of the amended assessment. This is treated as being given to the taxpayer on the day when the Commissioner makes the appropriate change to the taxpayer’s running balance account (RBA) (Sch 1 s 155-40; 155-80). If the Commissioner makes an amendment that is not fully in accordance with the taxpayer’s request, or the request was not in the approved form (eg it was in a simple letter), an actual notice of amended assessment must be issued. Period of review Under the self-assessment system, once there has been an assessment of the taxpayer’s GST liabilities and entitlements, they remain payable without time limit. This means that they are able to be enforced at any time. However, there is generally a four-year period in which the assessment can be amended, either in favour of the Commissioner or the taxpayer (Sch 1 s 155-35). This “period of review” is measured from the date on which notice of the assessment is given (or deemed to be given) to the taxpayer. The four-year period can be extended if there is a partly completed examination of the taxpayer’s affairs — eg an audit, investigation or review — that is pending when the period expires. For this to apply, the Commissioner must obtain either the consent of the taxpayer or a Federal Court order. The request for consent, or the application to the court, must be made before the period expires. In deciding whether to

grant an extension order, the court must be satisfied that the Commissioner’s failure to complete the examination was attributable to actions taken by the taxpayer, or to the taxpayer’s failure to take reasonable steps (Sch 1 s 155-35). This could apply, for example, where the taxpayer has been unreasonably obstructive or non-cooperative. An extended period of review may itself be extended. As exceptions to the general rule, the Commissioner can amend an assessment at any time where: (1) it is made in response to a request for amendment in the approved form made by the taxpayer within the period of review (Sch 1 s 155-45) (2) the amendment is necessary to give effect to a decision on review or appeal (Sch 1 s 155-60) (3) it is made to give effect to a private ruling requested by the taxpayer during the period of review (Sch 1 s 155-50) (4) the Commissioner considers that there has been fraud or evasion (Sch 1 s 155-60) (5) the Commissioner has made a declaration under the anti-avoidance rules (¶20-070) (Sch 1 s 15555). In each of these cases, except for (1), the Commissioner must issue an actual notice of amendment to the taxpayer. Where an assessment is amended within the normal four-year review period, there is another four-year period in which that amendment may itself be reviewed (Sch 1 s 155-65; 155-70). This “refreshed” period runs from that date on which notice of the amended assessment was given to the taxpayer. This period cannot itself be extended. Example A taxpayer lodges a BAS for the September 2019 quarter on 28 October 2019. The Commissioner’s notice of assessment is deemed to be given on the same day, so the period of review is until 27 October 2023. On 1 December 2022, within the period of review, the taxpayer applies for an amendment. The Commissioner allows the amendment on 15 December 2022, so the refreshed four-year period of review for that amendment starts from that date.

If amendments were made in relation to different particulars at different times during the normal four-year period, a separate refreshed review period will apply to each. These rules about refreshed periods do not apply to those cases noted above where an amendment can be made at any time. An amended assessment is itself an assessment and the taxpayer can object to it under the normal objection and appeal provisions (Sch 1 s 155-80; 155-90): see ¶18-600. [GSTG ¶25-615]

¶8-100 Payment of net GST The standard rule is that you are liable to pay GST for a tax period if the GST payable on supplies you make is more than the input tax credits claimable on your acquisitions. Typically, this will be where the net amount shown in your GST return is more than zero (s 33-5). The net amount for a tax period is the amount of GST attributable to the period, less the input tax credits attributable to that period (s 17-5). The net amount may be increased or decreased if there are any GST adjustments for the period (s 17-10). It may also be increased by any amounts of wine tax or luxury car tax, or decreased by any wine tax credits or luxury car tax credits (¶22-300; ¶23-260). Your liability depends on an assessment being made. In the normal case, this is deemed to occur when you lodge your return (¶8-080). Example

According to your return, the GST on sales that you made which is attributable to a particular tax period is $50,000. The input tax credits on acquisitions which are attributed to that period are $35,000. There are no other relevant liabilities or credits. You must account for the net amount of $15,000 to the ATO.

The deadlines for paying GST are generally the same as the deadlines for lodging returns (¶8-005). For example, for taxpayers with monthly tax periods the net GST must normally be paid on or before the 21st day of the month following the end of the tax period (s 33-5). For quarterly taxpayers, the net GST must normally be paid on or before 28 July, 28 October, 28 February and 28 April (s 33-3). Extensions of time apply in certain situations (¶8-005). Special rules apply to taxpayers paying by instalments (¶8-037) and taxpayers with annual tax periods (¶8-040). For the position where the deadline falls on a weekend or public holiday, see ¶25-055. Examples (1) For the quarterly tax period ending on 31 December 2018, your due date for payment is 28 February 2019. (2) For the monthly tax period ending on 31 January 2019, your due date for payment is 21 February 2019.

If the return is late, interest will be payable (¶18-300). The ATO has the power to extend the time for payment in special circumstances, or to allow the amount to be paid by instalments (¶8-005): see “Help for small businesses experiencing short-term financial difficulties” and “Difficulty in paying your tax debt” at www.ato.gov.au. On the other hand, the ATO can bring forward the time for payment if there is reason to believe that you may be leaving Australia. The ATO can also issue a Departure Prohibition Order in certain circumstances (Administration Act, s 14U; Sch 1 s 255-20). For the requirement to lodge a security deposit, see below. If your GST turnover is $20m or more, you must pay electronically (s 33-10). This mirrors the requirement to lodge your return electronically (¶8-043). In other cases, you can choose whether or not to pay electronically — this applies whether or not you lodge your return electronically. The ATO says it will accept electronic payment through direct credit, direct debit or BPAY. If you do not pay electronically, payment may be made in cash or by cheque at any post office, or by mail. For special advance payment facilities available to the taxi industry, see ¶12-130. In making an assessment, the ATO may take into account third party information, audit results, statistical comparisons or extrapolations from previous years. The production of a notice of assessment is conclusive evidence that the assessment was properly made and — except on normal review or appeal proceedings (¶18-600) — that the amount of the assessment is correct (Administration Act, Sch 1, s 35010; former s 105-100). However, this may not apply if the assessment was tentative or not bona fide (DFC of T v Richard Walter Pty Ltd 95 ATC 4067; Platypus Leasing Inc & Ors v FC of T [2005] NSWCA 399). For ATO practice on issuing multiple assessments in relation to the same transaction, see Practice Statement PS LA 2006/7. BAS amounts and the RBA In practice, in determining the taxpayer’s net BAS tax or credit, the net GST/LCT/WET liability is aggregated with any liabilities or credits for other types of tax covered by the BAS, such as PAYG instalments, FBT instalments or deferred company tax instalments. These are collectively called “BAS amounts”. The net amount owing at any particular time is recorded in the taxpayer’s RBA (Administration Act, s 8AAZA to 8AAZLH). However, it is not mandatory for the Commissioner to offset a payment, credit or RBA surplus against a BAS tax debt until that debt is due and payable. This could have particular application to joint ventures, eg a credit in the RBA for a joint venture account will not automatically be offset against a debt on the operator’s own BAS account where that debt is due but not yet payable. GST on importations Payments of GST on importations are made by the importer, at the same time and in the same way as customs duty (s 33-15). However, the payment may be deferred in certain situations. For further details,

see ¶9-000. Time limit on recovery of GST Separate rules on recovery of unpaid GST apply according to the tax period to which the GST liability relates. Under the self-assessment system, there is no time limit on the Commissioner’s power to recover unpaid GST relating to tax periods commencing on or after 1 July 2012, once the taxpayer’s liability entitlement has been crystallised in an assessment (¶8-080). However, any amendment to an assessment can only be made during a refreshable four-year period, normally four years (¶8-090). An unpaid net amount of GST relating to a tax period commencing before 1 July 2012 ceased to be payable four years after it originally became payable by the taxpayer, unless the Commissioner had given notice to the taxpayer within those four years, or the payment was evaded, or avoided by fraud (Administration Act, Sch 1, former s 105-50; Practice Statement PS LA 2009/3; Interpretative Decision ID 2014/36). Effective from 1 July 2008, this restriction also applied where the liability resulted from a reduction in a taxpayer’s entitlement to a refund. The “notice” may take the form of a notice of assessment, even if the Commissioner subsequently concedes that the amount stated as owing in that notice was wrong (Cyonara Snowfox Pty Ltd v FC of T 2012 ATC ¶20-362). The four-year limit did not apply where the Commissioner was seeking to recover input tax credits incorrectly allowed to the taxpayer (Wynnum Holdings (No 1) Pty Ltd v FC of T [2011] AATA 296; Russell v FC of T 2009 ATC ¶20143). Security deposits The Commissioner may require a taxpayer to provide security for the payment of existing or future tax liabilities, including GST (Administration Act, Sch 1, s 255-100). This applies where the Commissioner has reason to believe that: • the taxpayer is establishing or carrying on an enterprise, and intends to carry on that enterprise for only a limited time, or • it is appropriate in the circumstances. Security may be required to be given in various situations, including where: • the enterprise is likely to be short-term • there is a history of non-compliance by the taxpayer or its directors • the Commissioner has granted the taxpayer the benefit of a payment arrangement, or • phoenix activity (¶20-000) is involved. The security may take various forms, including a bank guarantee, mortgage or an electronic funds transfer. The Commissioner has validly used this power to require a security deposit to be given by way of a mortgage over land owned by the taxpayer, where GST liabilities were expected to arise from the taxpayer’s proposed sale and subdivision of the land and the Commissioner believed that there was a significant risk that this liability would not be paid. This was so even though the taxpayer had not actually commenced carrying out the relevant enterprise: Keris Pty Ltd v FC of T [2017] FCAFC 164. Special rules about payments Special rules about payment apply to GST branches (¶17-300), joint ventures (¶17-220), insurance settlements (¶10-120), importations (¶9-000) and supplies in satisfaction of debts (¶10-070). Schemes designed to decrease payments or alter their timing may be caught by special anti-avoidance rules (¶20-030). Penalties For details of penalties for late payment, see ¶18-300.

[GSTG ¶25-220]

¶8-110 Payment of GST refunds You are entitled to a refund from the ATO for a tax period if the net amount shown in your GST return (¶8100) is less than zero (s 35-5). In a simple situation, this could occur, for example, if the GST payable on supplies you make is less than the input tax credits claimable on your acquisitions. The entitlement to a refund arises when the Commissioner issues an assessment of the relevant amount (s 35-10). Where a refund is involved, there is an incentive to lodge the return as soon as possible. Example According to your return, the GST on sales that you made which is attributable to a particular tax period is $50,000. The input tax credits on acquisitions which are attributable to that period are $80,000. There are no other relevant liabilities or credits. You are entitled to a refund of $30,000.

Refunds may also become due where there is an amendment of a taxpayer’s GST liability as a result of an amendment of an assessment (Administration Act, Sch 1, s 155-75). Time limit for paying refunds There is no set time limit within which the ATO must actually credit the refund, but it appears that it must generally be done within a “reasonable” period. However, the ATO has specific power to retain the refund in the following situations: (1) during any time that it is awaiting a return or information which may affect the amount of that refund and which the taxpayer is under a statutory obligation to provide (Administration Act, s 8AAZLG), or (2) pending verification of information that the taxpayer has provided (Administration Act, s 8AAZLGA; Practice Statement PS LA 2012/6). The power to retain pending verification ((2) above) applies only where it would be reasonable to require verification, or the taxpayer has requested that the power be exercised. In deciding whether to retain the refund, the Commissioner must take into account factors such as the likely accuracy of the information provided, the likelihood that it was affected by fraud, evasion or recklessness, the financial impact on the taxpayer, the impact on the revenue and the complexity of the verification process. The Commissioner can only retain the refund until: • it is no longer reasonable to require verification, or • there is a change to the amount of the refund as a result of an assessment or amended assessment. The taxpayer must be notified of the retention within 14 days, otherwise the refund becomes payable immediately. The taxpayer can object to a decision by the Commissioner to retain the refund, under the usual objection and appeal provisions (Administration Act, s 14ZW), but this does not apply once the retention period has expired by the subsequent issue of an assessment or amended assessment (Sanctuary Australasia Pty Ltd v FC of T [2013] AATA 371). Examples The following examples of the Commissioner’s practice are based on Practice Statement PS LA 2012/6: (1) Likely level of accuracy: A taxpayer registered as a commercial land developer lodges a BAS claiming an input tax credit on the acquisition of a block of land. A property search is conducted based on information given by the taxpayer and the search results indicate that the land may not have been purchased by the taxpayer. This would be a factor in favour of it being reasonable to retain the refund for verification. (2) Financial impact: A company lodges an income tax return that is identified for review. The company is expecting a large refund and claims that the refund is required to fund business reconstruction following a recent natural disaster. Bank statements and other documents show that the viability of the business will be compromised if the refund is retained. This would be a factor against it being reasonable to continue to retain the refund.

If the ATO does not pay the refund within 14 days of a complete return being lodged, “delayed refund” interest becomes payable (Taxation (Interest on Overpayments and Early Payments) Act 1983, s 12AA; 12AF). The interest is payable with effect from 14 days after the date on which the entitlement for the refund arose, irrespective of when the ATO becomes aware of the refund amount. There is no statutory requirement for the taxpayer to notify the ATO of the entitlement, though this would be advisable as a practical matter (Travelex Limited v FC of T [2018] FCA 1051; 2018 ATC ¶20-661; appeal pending). The interest rate is, in effect, seven percentage points less than the rate of GIC (¶18-300). For example, for the October–December 2019 quarter, when the GIC rate was 7.98%, the delayed refund interest rate was 0.98%. Offsetting of refunds Any GST refund will be offset against any liabilities for other types of tax covered by the BAS, ie “BAS amounts” (¶8-100). The ATO may also offset any refund against outstanding tax liabilities under other taxation legislation administered by the ATO, for example, income tax (Administration Act, s 8AAZL to 8AAZLB). The ATO has a discretion not to offset GST refunds against outstanding tax debts if those debts are “due” but not yet actually payable (Administration Act, s 8AAZL). However, this does not apply to outstanding tax debts covered by the BAS. This means that GST refunds may continue to be offset against these amounts provided that they are due, even if they are not yet payable. The ATO also has a discretion not to offset GST credits against another tax debt where: • the taxpayer is complying with an arrangement to pay that debt by instalments, or • the ATO has agreed to defer recovery of the debt (Administration Act, s 8AAZL). Example Lauren has a GST credit. She also has been assessed for an amount of income tax which she disputes. The ATO has agreed to defer recovery of the debt until the matter is determined by a tribunal. In these circumstances, the ATO may pay the GST credit as a refund, notwithstanding that the tax debt is still technically outstanding.

Manner of payment After any offsetting as described above, refunds will normally be made electronically to a bank, building society, credit union or other financial institution nominated by the taxpayer (Administration Act, s 8AAZLH). This account must be in the name of the taxpayer, or their tax agent, or of a legal practitioner acting as trustee or executor. The ATO also has a discretion to make payments in other ways, for example, by cheque. It may also pay the refund by crediting the accounts of certain nominated third parties who have “significant legal relationships” to the taxpayer, for example, a parent company, strata title manager, liquidator or receiver, provided this is in accordance with a legal obligation or common commercial practice (ATO Practice Statement PS LA 2004/7). Other methods may be approved in special cases, for example, where there are religious objections. Unless these requirements are fulfilled in one way or the other, the ATO is not obliged to make the refund. In such cases, however, it may offset the entitlement against liabilities arising in subsequent BASs. [GSTG ¶25-400]

¶8-115 Restriction where refund would give rise to windfall In general, excess GST is not refunded if this would give the taxpayer a windfall gain (Div 142). For the purposes of this rule, “excess GST” is the additional GST liability that can arise where: • a transaction has been wrongly categorised as a taxable supply, whereas in fact it is an input taxed or GST-free supply, or is not a “supply” at all

• there is a miscalculation of the GST payable (this can typically occur under the real estate margin scheme (¶11-100) or the gambling supply rules (¶16-000)), or • there is a mistake in the way that an amount of GST is reported in the taxpayer’s BAS. Excess GST does not arise where an amount has simply been attributed to an incorrect tax period; or where the correct amount was reported but is reduced in a later period due to an adjustment event, such as the cancellation of a supply or a change in consideration for the supply (s 142-5). However, the ATO considers that if a subsequent adjustment increasing the GST is incorrectly taken into account, this can give rise to excess GST, and is therefore covered by the restriction (GST Determination GSTD 2016/1). This could occur, for example, where the price paid for an earlier supply is adjusted upwards, but the supply later turns out to be have been GST-free. The taxpayer is entitled to a refund of excess GST provided that the excess has not already been “passed on” to another (for example, to a customer), or if it has been passed on but reimbursed (s 142-10). In the case of an amount that has not been passed on, the refund is made under the normal refund provisions (Administration Act, Sch 1, s 155-75). This also applies if there is a reimbursement following an incorrect characterisation of a transaction as a “supply” (s 142-15). In other cases of reimbursement, the refund normally takes the form of a decreasing adjustment for the taxpayer, and a corresponding increasing adjustment for the customer (¶6-000). As a practical business matter, it would normally be assumed that if GST has been paid, it will be passed on to recipients in some way. Whether it has been passed on would generally be clear from the tax invoice or other documentation, though this is not necessarily conclusive. However, the supplier may still remain entitled to the refund if they can show that the recipient has not yet paid the invoiced amount (s 142-25), or possibly, depending on the supplier’s pricing structure, where it makes a drastic reduction in the sale price of an item in order to sell it. In a sales tax context, the High Court has held that if the price charged for an item was calculated by reference to costs including sales tax, this means that the sales tax component had been passed on, and that a refund would therefore not be allowable (Avon Products Pty Limited v FC of T [2006] HCA 29). The Commissioner considers that the matters relevant to whether GST has been passed on include: • the manner in which the excess GST arose • the supplier’s pricing policy and practice • the documentary evidence surrounding the transaction, and • any other relevant circumstances (GST Ruling GSTR 2015/1). If only part of the GST was passed on, the refund entitlement applies to the part that is not passed on. Where the whole amount has been passed on, but the recipient was only partly reimbursed for it, the refund entitlement is reduced accordingly (s 142-10; GST Ruling GSTR 2015/1). The taxpayer’s refund entitlement applies whether the excess is discovered before or after the taxpayer has actually paid it to the Commissioner. The fact that a refund of excess GST is later made to the supplier does not affect the recipient’s original input tax credit, but a decreasing adjustment would arise to the recipient when the supplier reimburses the excess GST to it. As an anti-collusion measure, refunds would not be made where the recipient knows, or could reasonably be expected to know, that the supplier has not actually paid excess GST (s 142-15). Commissioner’s discretion to allow refund In certain limited circumstances, the Commissioner has a discretion to allow a refund of excess GST, even though it has been passed on and not reimbursed. This discretion may only be applied where the taxpayer specifically requests it and the Commissioner is satisfied that the refund would not result in a windfall gain for the taxpayer (s 142-15). This may apply, for example, where the windfall gain is technical rather than real. However, it seems that it would not apply simply because for practical reasons it would not be cost-effective to make a reimbursement, or that the benefit from the excess has been counteracted by the effect of market forces.

Example A supermarket mistakenly sells a product to a mass market as subject to GST. As its competitors are correctly selling the same product as GST-free they are selling at a lower price and thereby gaining market share. After discovering the error, and ceasing to include GST in the price, the supermarket applies to the Commissioner to exercise the discretion to allow a refund for the excess GST that it has previously incurred on the product and passed on to customers. It argues that it is not cost effective to try to locate customers to provide a reimbursement, and that its mistake has caused it to lose sales and profitability. The Commissioner would not exercise the discretion in this case.

Where the cancellation of a taxable supply results in a decreasing GST adjustment for the supplier (¶6000), the amount of that adjustment is reduced to the extent that GST has been passed on but not reimbursed. Correspondingly, there would be a reduction in the recipient’s increasing adjustment (s 14220). Former windfall rules Under the rules that applied in working out refunds for excess GST for tax periods commencing before 31 May 2014, a larger degree of discretion was given to the Commissioner to refuse payment of refunds (Administration Act, Sch 1, s 105-65). For details, see pre-2018 editions of the Australian Master GST Guide.

¶8-120 Review and other rules about refunds Taxpayers have the normal rights of objection and review in challenging assessments that include excess GST. A separate review right also applies where the Commissioner refuses to exercise the discretion under s 142-15 to allow a refund of excess GST that has been passed and not reimbursed (¶18-600). In contrast, under the refund rules applying to tax periods commencing before 31 May 2014, it was held that a taxpayer could not object to the AAT under the normal review provisions against the Commissioner’s decision on whether to allow a refund (Naidoo & Anor v FC of T 2013 ATC ¶10-323). That restriction has now been statutorily removed (Administration Act, Sch 1, s 105-65). The objection must be made within 60 days after the taxpayer is notified of the decision, or four years after the end of the tax period to which the decision relates (Administration Act, s 14ZW). As associated transitional measures, objections raised by taxpayers before the Naidoo decision (28 June 2013) have been validated, and taxpayers that decided not to object because of the finding in Naidoo have been given 60 days from 30 May 2014 in which to object. For most purposes, these provisions will terminate from 1 July 2018 (Tax Laws Amendment (2014 Measures No 1) Act 2014, s 17 to 24). Apart from the normal rights of objection, “judicial review” of the Commissioner’s decision by the Federal Court (¶18-600) may be available, though was refused in PFTF Stock Pty Ltd v FC of T [2010] FCA 557. The ATO accepts that a taxpayer can object to a private ruling that the Commissioner makes on the availability of a refund, provided that an assessment has not already been made (GST Determination GSTD 2014/1). Overpaid refunds It may turn out that a previously paid refund has been overpaid. For example, this may arise where the Commissioner makes or amends an assessment, or a taxpayer revises their BAS. With effect from the first quarterly tax period starting on or after 24 March 2010, the overpaid amount is liable for GIC from the date when the taxpayer received the benefit of the overpayment. The Commissioner has a discretion to remit the GIC in appropriate circumstances. It seems that the Commissioner cannot issue an assessment withdrawing a refund which has been paid in accordance with a binding private ruling (Swanbat Pty Ltd v FC of T 2013 ATC ¶10-344). The Commissioner accepts that where he seeks to recover a refund mistakenly paid outside the former fouryear limitation period (¶8-110), he should proceed under the normal rules for recovering administrative overpayments. Where registration was cancelled retrospectively A refund of any GST paid to the ATO can be claimed if your voluntary registration was cancelled

retrospectively to 1 July 2000 (¶3-070). Refunds under double taxation treaties Under various double taxation treaties and international agreements, certain bodies — such as the Australian–American Educational Foundation — are entitled to refunds of Australian indirect taxes paid on their acquisitions. Applications for refunds of GST, accompanied by the relevant tax invoices, must be made to the ATO (Taxation Administration Regulations 2017, reg 58 to 61; former Taxation Administration Regulations 1976, reg 21A to 21E). Refunds of GST will also apply for certain acquisitions by Papua New Guinea visiting forces, US visiting forces, US commissaries and the US Government in relation to defence facilities at Pine Gap and the North West Cape (Taxation Administration (Defence Related International Obligations — Indirect Tax Refunds) Determination 2000). Other special rules Special rules about refunds apply to GST branches (¶17-300), joint ventures (¶17-220) and tourists (¶12030). Schemes designed to increase refunds or alter their timing may be caught by special anti-avoidance rules (¶20-030). For general procedures on correcting mistakes in earlier BASs, see ¶8-045. For the practice relating to charities, see ¶15-010.

IMPORTS AND EXPORTS GOODS IMPORTED INTO AUSTRALIA Taxable importations of goods

¶9-000

GST is payable by importer

¶9-005

Input tax credits on imports

¶9-010

Installation or assembly of goods brought to Australia

¶9-020

Non-taxable importations of goods

¶9-030

Where importation is partly taxable

¶9-040

Where goods have previously been exported for repair

¶9-050

Re-importation of breeding livestock

¶9-055

Excisable goods held “in bond”

¶9-060

Imported second-hand goods

¶9-070

Importations through an agent

¶9-080

SPECIAL RULES RELATING TO OFFSHORE SUPPLIES Non-resident business supplies: optional reverse charge

¶9-095

Offshore business supplies of services and rights

¶9-100

Offshore supplies of digital products and other intangibles to consumers ¶9-120 Offshore supplies of “low-value” goods to consumers

¶9-130

EXPORTS Treatment of exports

¶9-200

Exports of goods

¶9-210

Export of aircraft or ship

¶9-215

Other GST-free exports of goods

¶9-220

Lease of goods used overseas

¶9-230

Tooling used by non-residents

¶9-235

Exports of services and other things

¶9-240

Repair or treatment of goods under warranty

¶9-250

Editorial information

Summary Imports of goods into Australia are generally subject to GST, which is payable by the importer rather than the supplier. Some services and rights supplied from overseas are also subject to GST under the “reverse charging” rules. Special rules apply to imports of digital products and low-value goods to consumers. Exports are generally GST-free.

GOODS IMPORTED INTO AUSTRALIA ¶9-000 Taxable importations of goods With only limited exceptions, GST will be payable where goods are imported into Australia (s 7-1). In technical terms, you make a taxable importation of goods if: • the goods are imported, ie brought to Australia with the intention of unloading them here • you enter the goods for home consumption under customs law (s 13-5). For the meaning of “goods” and “Australia”, see ¶4-100. Comprehensive details of the Commissioner’s views on taxable importations are given in GST Ruling GSTR 2003/15. Taxable importations do not include offshore supplies of things other than goods, for use in Australia. These may attract GST under other rules (¶9-100). Entry for home consumption Entry for home consumption generally means that the goods have passed out of customs control. However, some goods may be treated as effectively imported even though they have not been entered in this way (s 114-5). Examples of this include: • personal and household goods of passengers or crew • certain low-value consignments • certain goods that are delivered into home consumption under authorisation • goods delivered after having been seized • goods purchased at an inwards duty-free airport shop • goods that should have been entered for home consumption but were not. Unless goods are exported after being imported, they cannot be taken to be imported twice (s 114-10). Warehoused goods imported by others If you purchase goods in bond from an importer, you will also be treated as an importer and can therefore claim an input tax credit for the amount of GST paid when the goods are taken out of bond (s 114-25). [GSTG ¶40-220; ¶40-240]

¶9-005 GST is payable by importer The GST is payable by the importer (s 13-15). This applies whether or not the importer is registered, and whether or not it was carrying on an enterprise. However, if the importer is registered, it may be able to claim input tax credits for the GST it has paid (¶9-010). The GST is calculated as 10% of the value of the taxable importation (“VOTI”). This is worked out by adding up: (1) the “customs value” of the goods. This is normally the value of the goods at the time they were exported, as determined by Australian Customs. It excludes GST and transport and insurance costs from the place of export (2) the amount paid or payable for the international transport of the goods (¶12-010) to their “place of

consignment” in Australia (see further below) (3) the amount paid or payable to insure the goods for that international transport (4) the amount paid or payable for loading or handling the goods, or for facilitation services (such as fumigation), during the course of GST-free international transport. This does not include taxes, fees and charges exempted under s 81-5 (¶4-080) (5) any “customs duty” payable in respect of the importation of the goods, and (6) any wine equalisation tax payable in respect of the local entry of the goods (s 13-20(2)). The VOTI does not include the value of any assembly or installation services (¶9-020). To avoid duplication, it is provided that each of the inclusions in items (2)–(4) applies only to the extent that they are not already covered by any earlier inclusion, such as the customs value. Examples (1) If the goods cost $20,000 to buy overseas, the freight, insurance and other relevant costs were $5,000 and customs duty was $2,000, the GST would be 10% of $27,000, ie $2,700. However, if the importer is registered, an input tax credit may be claimed (see Example 2). (2) A registered importer imports equipment for $5,000, including duty, freight, insurance and other relevant costs. It pays GST of $500 to Customs on the importation. The importer then sells the equipment to a wholesaler for $7,700, including $700 GST. The importer must account for this $700 GST in its GST return, but can claim an input tax credit for the $500. The net amount due to the ATO is therefore $200.

If the costs of transport and insurance are expressed in foreign currency, they should be converted at the ruling rate of exchange on the day the goods were exported. A special rule for calculation applies if the imported goods had previously been exported for repair or renovation (¶9-050). Where the overseas supplier is also the importer, it is liable for the GST on the importation and, if registered, may be entitled to an input tax credit for that GST, as outlined above. If registered, it will also be liable for GST on the actual supply to the customer (Clothing Importer v FC of T [2011] AATA 281). For taxable importations made on or after 1 October 2016, the importer may use a shortcut method of calculating the transport, insurance, loading and handling fees in items (2)–(4) above. This will simply be determined as 10% of the customs value. So, for example, if the customs value is $150,000, those fees may be treated as being $15,000. This option may be particularly useful where invoices for those costs have not yet been received. The percentage may be varied by regulation. This shortcut does not apply to taxable importations of luxury cars, or where the local entry is a taxable dealing in relation to wine. Place of consignment in Australia The “place of consignment” in Australia is defined in s 195-1 as: (1) for postal goods — the place in Australia to which the goods are addressed. Goods weighing less than 31.5 kg that are transported to Australia and delivered “door to door” by an international express courier service are treated as goods posted to Australia (GST Ruling GSTR 2003/15) (2) if the supplier of the goods is to deliver them in Australia — the place in Australia for delivery under the contract for the supply of the goods. This will typically be the case, for example, where the supply is on trading terms such as “delivered duty paid” (DDP), “delivered duty unpaid” (DDU) or “cost, insurance and freight” (CIF) (3) if the goods are not posted, the supplier is not to deliver the goods in Australia, and they are to be transported to Australia by a transport contractor for the importer — the place in Australia to which the goods are to be delivered under that transport contract. This will typically be the case, for example, where the supply is on “free on board” (FOB) trading terms

(4) in any other case — the port or airport of final destination of the goods in Australia as indicated in the relevant transportation document, eg consignment note, house bill of lading or master air waybill. The “port or airport of final destination” is the port or airport where the goods can be removed from Customs control after being dealt with in accordance with the Customs Act. If the goods are removed from Customs control at a place other than a port or airport, the last port or airport that the goods were located prior to being taken to that other place is the “port or airport of final destination” (GST Ruling GSTR 2003/15). Example 1 An overseas supplier agrees to sell and deliver goods to a purchaser in Windsor, NSW. The supplier subcontracts with Global to transport the goods. Global itself undertakes the transport to Sydney and subcontracts with Minnow for the transport from there to Windsor. Under item (2) above, the place of consignment is Windsor. The value of the importation will include the total cost of transport to there, not just to Sydney.

Example 2 Assume instead that the contract between the supplier and the purchaser did not include delivery. Instead, the goods are supplied on a FOB basis, and the supplier’s obligations cease once the goods are delivered on board a ship at the overseas port. The purchaser contracts separately for shipment of the goods to Sydney, and also engages a freight forwarder to transport the goods to Windsor. Under item (3) above, the place of consignment is Sydney, not Windsor. The value of the importation will include the total cost of transport to Sydney, but not from there to Windsor.

Time and manner of payment The rules for attributing GST to tax periods do not apply to importations. Instead, the following rules apply: • the GST should be paid to Customs, in the same way and at the same time as customs duty • the time for payment is when the goods are entered for home consumption or otherwise dealt with under the Customs Act • a Customs officer can refuse to deliver the goods if customs duty or GST has not been paid (s 33-15). Under the self-assessment system (¶8-080), an assessment of the GST is deemed to have been made when an import declaration or self-assessed clearance declaration has been communicated to Customs, and Customs issues an import declaration advice or a self-assessed clearance declaration advice (Administration Act, Sch 1, s 155-20). The assessable amount is worked out according to the declaration and the advice. In practice, a special Deferred GST Scheme enables approved importers to defer the GST until the first Business Activity Statement is submitted after the goods are entered for home consumption. In most cases, this deferral means that the GST is cancelled out, as a corresponding input tax credit will be claimed in the same return. To be eligible for the deferral, an importer must: • have an Australian Business Number (ABN) and be registered for GST • lodge its return monthly and electronically • pay its liability electronically • enter goods for home consumption electronically (although making a refund application manually would be permissible: Interpretative Decision ID 2013/55) • have a satisfactory compliance record

• have written approval from the Tax Office (GST Regulations, Div 33). Approved importers should quote their ABN to Customs when entering goods for home consumption. Customs will release the goods after payment of customs duty, but record the deferred GST of each shipment as it is cleared. This liability will appear on the Business Activity Statement issued to the importer by the Tax Office. Example An importing company successfully applies for approval under the deferral scheme. On 15 August, it imports goods from overseas and enters them for home consumption. The VOTI is $100,000, with a GST liability of $10,000. The company can defer payment of this $10,000 until 21 September, when its Business Activity Statement for the month of August is due. In that Business Activity Statement, it can also claim a corresponding input tax credit.

The deferral scheme is intended to overcome the cashflow disadvantage for importers of having to pay GST “up front”. The government estimates that it covers more than 95% in value of total business importations. According to the Tax Office, common GST errors with imported goods include: • importers failing to account for GST on their on-sale of the imported goods • taxpayers who assemble or install imported goods but fail to account for GST on those services (¶9020). “Free into store” transactions Under certain trading arrangements, the overseas supplier of goods undertakes to import them into Australia and deliver them to the premises of the Australian purchaser. In the case of a “free into store” (FIS) transaction where the overseas supplier is responsible for entering the goods for home consumption and paying duties and taxes, Customs treats the supplier as the importer (Australian Customs Notice ACN 2000/30). It follows that the supplier is liable for the GST and will need to register if it wishes to claim input tax credits. In the case of a “landed into store” (LIS) transaction where either party can enter the goods for home consumption, whichever party takes this responsibility will be treated as the importer for GST purposes. Other rules relating to payment If there is an importation without entry for home consumption, and security for payment of customs duty on goods is forfeited, the assessed GST payable on the importation is payable at that time (s 114-15). If information had to be provided as a condition of obtaining authorisation for the delivery of goods into home consumption, the assessed GST payable on the importation is payable when the information is provided (s 114-20). In the case of temporary importations, the importer may be required to give a security or undertaking to pay any customs duty, GST or luxury car tax relating to the importation. If the goods are subsequently exported within the required time and other relevant conditions are complied with, GST will not be payable (s 171-5). Example Horst, an overseas executive, is seconded to Australia for six months. He brings with him his Mercedes car, provides Customs with an undertaking to export the car on his return overseas and lodges a security to cover the customs duty, GST and luxury car tax that would have been payable if the car had been imported permanently. No duty or taxes will be imposed unless Horst fails to export the car within six months or otherwise breaches the terms of his agreement with Customs.

The Tax Office considers that in the racing industry, animals imported for racing may qualify under the temporary import provisions, but animals imported for breeding purposes generally will not (ATO Fact Sheet GST for the Racing Industry).

Similar rules apply in situations such as where the goods are accidentally destroyed before they can be exported. If goods are imported under bond directly into a licensed customs warehouse, duty and taxes only become payable when they are removed from the warehouse. Customs broker’s fees GST would apply to the fees charged by a customs broker for processing and clearing importations. The business can claim this GST as an input tax credit in accordance with the rules set out at ¶9-010. [GSTG ¶40-300; ¶40-360]

¶9-010 Input tax credits on imports If you import goods, you can claim an input tax credit if you are registered (or required to be registered) and the taxable importation was for a “creditable purpose”. This requires that the importation be made in carrying on your enterprise, that it is not of a private or domestic nature, and that it does not relate to making input taxed supplies (s 15-5; 15-10). The amount of the credit will be equal to the amount of the GST payable on the importation (s 15-20). This corresponds to the normal rules for claiming input tax credits, described at ¶5-010. The differences are that: • there is no requirement that payment has been made. The reason for this is that the GST on importations is based on market value, not price • unlike the normal situation, the person claiming the credit is the same person who was liable for the GST (s 15-15) • you do not need to hold a tax invoice to claim the credit. However, you should retain the customs documentation (eg the Entry for Home Consumption document) as evidence that GST has been paid. The credit is attributable to the tax period in which you pay the GST on the importation (s 29-15). This applies whether you are on a cash or accruals basis of accounting. However, if the Commissioner allows a deferment, the credit will be attributed to the tax period in which the liability arose. If the goods are to be used only partly for a creditable purpose, the credit will be correspondingly reduced (s 15-25). For example, if you use the imported goods partly in making input taxed supplies or for private purposes, you will not be entitled to a credit to that extent. Example A registered importer imports an item for $100,000 plus $10,000 GST. It intends to use the item 60% for business and 40% for private purposes. It can claim an input tax credit of 60% × $10,000 = $6,000. If the importer was not registered, the GST would still be payable, but no input tax credit at all could be claimed even if the item was used wholly for business purposes.

The Commissioner considers that the “importer” who can claim the credit is the person who: (1) causes the goods to be brought to Australia with the purpose of supplying, using or otherwise applying those goods after importation; and (2) completes the customs formalities for entry of the goods (GST Ruling GSTR 2003/15). If goods are purchased from overseas, and the person transporting the goods enters them for home consumption, this should be done as agent for the purchaser, not as owner in its own right. Otherwise, neither party may be able to claim the input tax credit. Although input tax credits cannot normally be claimed for importations that relate to financial supplies, there are various exceptions relating to reduced input tax credits, credits that do not exceed a “de minimis” threshold and borrowing expenses. These are explained at ¶10-030 and following. [GSTG ¶40-400]

¶9-020 Installation or assembly of goods brought to Australia For tax periods starting on or after 1 October 2016, special rules apply where the supply of goods involves them being brought into Australia, and being installed or assembled here (s 9-25(6)). In this situation: • the part of the supply that involves the installation or assembly in Australia is treated as if it were a separate supply. This will potentially be connected with Australia because it is a supply of services that is “done” here (¶4-100), but there are important exceptions to this, for example, if the recipient is an “Australian-based business recipient”: see ¶4-101 • the rest of the supply is treated as another separate supply, ie a supply of goods. This will be connected with Australia if the supplier was the importer (¶4-100). If the supplier was not the importer, the supplier does not have to pay GST, though the actual importer will be liable to GST on the taxable importation. The price of each supply is apportioned according to what reasonably represents the price for that component (s 9-75(4)). Example A non-resident agrees to supply equipment to a recipient in Australia on the basis that the recipient will import the goods and the non-resident will assemble them in Australia. Assume that the supply is not made through an enterprise that the non-resident carries on in Australia, and that the recipient qualifies as an Australian-based business recipient. The supply will be divided into a supply of goods (the equipment) and a supply of services (the assembly). The effect is: (1) the supply of goods is not taxable, as the non-resident did not import them, so GST does not apply (2) the supply of services, although done in Australia, is not connected to Australia because the recipient is an Australian-based business recipient, so GST will not apply (3) the recipient is liable for GST on the taxable importation, but is entitled to an input tax credit. To the extent that the acquisition of the assembly services was not wholly creditable (eg was not wholly for business purposes), the recipient is liable for GST on that supply under the reverse charge rules (¶9-100).

Previously, the installation or assembly of goods brought into Australia was connected with Australia as part of the supply of the goods (former s 9-25(3)). For transitional rules, see ¶19-250. [GSTG ¶40-600]

¶9-030 Non-taxable importations of goods The rules explained above do not apply if the importation of the goods is non-taxable (s 13-5). An importation is non-taxable if it involves GST-free or input taxed goods, or if it is eligible for certain customs duty concessions. (1) Imports of GST-free or input taxed goods An importation of goods does not attract GST if the sale of those goods within Australia would have been GST-free or input taxed anyway (s 13-10). Example Zoe imports a wheelchair into Australia. Sales of wheelchairs are GST-free (¶13-350). Therefore, the importation of the wheelchair does not attract GST.

(2) Goods returned unaltered An importation is not taxable if goods that were exported are returned to Australia in an unaltered

condition, for example, where a manufacturer sends its goods for sale overseas and they are returned unsold (s 42-10). For this to apply: (1) the importer must be the manufacturer of the goods; or (2) the importer must have previously acquired the goods for a GST-inclusive price; or (3) the importer must have previously imported the goods and paid GST on the importation. In either case, the importer must not have been entitled to a payment under the Tourist Refund Scheme when the goods were exported. The Tax Office considers that in the racing industry, any treatment or training of an animal while overseas means that it is unlikely that the animal will be returned in an unaltered condition. This includes a mare returning to Australia in foal. On this basis, it is unlikely that the re-importation of race animals or animals used for breeding would be a non-taxable import (ATO Fact Sheet GST for the Racing Industry). (3) Imports of other concessional goods An importation of goods is not subject to GST if the goods qualify for specified exemptions under customs law (s 13-10; 42-5). The exemptions include the following goods, subject to various restrictions. Item numbers in this list refer to the Customs Tariff Act 1995, Sch 4, effective from 1 March 2013; previous numbering where different is also shown: • calendars and catalogues (item 4, previously 33A) • goods of foreign governments (item 10, previously 4) • goods for foreign services (item 11, previously 8) • personal effects for passengers and ship or aircraft crew (item 15) • warranty and safety recall goods (item 18, previously 18A–18C) • goods for repair, alteration or industrial processing which are to be exported (item 21) • Tradex scheme goods (item 21A) (see below) • containers that are used to import goods that will be exported without any other use (item 22, previously 34) • donations or bequests (item 23, previously 23A–23B) • will or intestacy goods not for sale or trade (item 24) • trophies, medallions and prizes (item 25, previously 25A–25C) • “low-value” goods (item 26, previously 32A–32B). This exemption is to be replaced: see below • samples of negligible value (item 27, previously 33B). Official guidelines on the application of these concessions are given in the government’s Schedule 4 Guidelines, November 2015, accessible at www.customs.gov.au. If and when appropriate regulations are made, exemptions may also apply to goods of a scientific, educational or cultural kind (item 1), books, visual and auditory goods (item 3), works of art (item 7), Trade Commissioner goods (item 12), goods subject to the Torres Strait Treaty (item 13) and goods for persons with disabilities (item 29). Duty-free purchases at inwards duty-free shops by certain inbound passengers and crew are GST-free under s 38-415 (¶12-020). As noted above, goods imported under the Tradex scheme are non-taxable importations. The Tradex scheme is intended to assist importers who bring goods into Australia temporarily for activities such as processing, packaging or warehousing prior to export. If it happens that the goods are not exported, or

are dealt with contrary to Tradex requirements — for example, where goods manufactured from the imported goods are sold in Australia — GST will be imposed by way of an increasing adjustment (Div 141). The amount of that adjustment is the difference, if any, between: (1) the amount of GST that would have been payable if the importation had been taxable; and (2) any input tax credit to which the entity would have been entitled for the importation if it had been taxable. Transporting imported goods If goods are imported, the international transport of them from overseas to their place of consignment in Australia is GST-free (¶12-010). Former exemption for “low-value” goods A GST and customs duty exemption formerly applied to imported goods with a customs value of no more than $1,000 (Customs Tariff Act 1995, Sch 4 item 26). The exemption — referred to as the “low value threshold” (LVT) — was abolished, effective for tax periods commencing on or after 1 July 2018, and replaced by a new system imposing GST at the point of sale. For details, see ¶9-130. The exemption does not apply to alcoholic beverages, tobacco products or goods that are the accompanied or unaccompanied effects of passengers or crew of a ship or aircraft. If the goods arrived by sea or air, a self-assessed clearance declaration has to be made before customs clearance. This does not apply to goods arriving by post. [GSTG ¶40-260]

¶9-040 Where importation is partly taxable It may happen that the importation of the goods is partly taxable and partly non-taxable. For example, the importation may consist of some goods that are subject to GST and some that are GST-free. In this situation, only the taxable part is subject to GST, and the GST value is apportioned accordingly (s 13-25). If taxable and non-taxable goods are included in the one shipment, and the insurance and freight costs relate to the whole shipment, it is expected that Customs will apportion those costs to each item on a pro rata basis according to its customs value. [GSTG ¶40-340]

¶9-050 Where goods have previously been exported for repair Goods that are exported for repair or renovation would normally have already been subject to GST. If those goods are later imported back into Australia, there would be double taxation because GST would already be included in their taxable value. To overcome this, the GST on the import is, in effect, restricted to the value added by the repair or renovation (Div 117). This means that the taxable value is calculated as: • the cost of the repair or renovation (materials, labour and other charges), plus • the transport and insurance costs of importing the goods, plus • the amount paid or payable for loading, handling or facilitation services (excluding exempt taxes, fees and charges: ¶4-080) • customs duty (s 117-5). Example Company X sends an item of equipment worth $100,000 overseas for repairs. The cost of materials, labour and other charges is $20,000, transport, insurance and other relevant costs from overseas to Australia are $5,000 and customs duty is $1,000. On the importation back to Australia, the GST is 10% of ($20,000 + $5,000 + $1,000) = $2,600.

If the costs of transport, insurance and other relevant costs are expressed in foreign currency, they should

be converted at the ruling rate of exchange on the day the goods were exported. These rules also apply to goods that are part of a “batch repair” process. This covers goods that are imported as part of a process to replace similar-standard goods that have been exported from Australia for repair or renovation. However, it naturally does not apply if the imported goods are of a kind that does not attract GST, as no GST would be payable on those imports in any event. For details of non-taxable imports, see ¶9-030. Re-importation of luxury cars For the luxury car tax exemption for cars re-imported into Australia, following a refurbishment overseas, see ¶23-020. [GSTG ¶40-340]

¶9-055 Re-importation of breeding livestock Where a live animal is exported (eg for breeding) and then re-imported, the importation is only subject to GST on the increase in value of the animal (s 117-10). Furthermore, in certain circumstances — yet to be defined — the GST may be refunded if the value of the animal drops after re-importation (s 117-15). Example A horse owner sends a brood mare overseas for the purpose of having it serviced at stud. The horse is re-imported in a pregnant state. GST will apply only on the increased value of the horse — typically, this will be based on the value of the foal carried by the horse. If the horse subsequently does not produce a live foal, a refund of the GST paid on re-importation may possibly be made.

For these rules to apply, the ownership of the animal must be the same at the time of export and the time of re-importation. If there is a change of ownership, GST will apply to the full value of the importation. For further guidelines, see the ATO Fact Sheet GST for the Racing Industry. [GSTG ¶40-340]

¶9-060 Excisable goods held “in bond” Excisable goods held “in bond” have not, at that stage, been subjected to excise duty. To cover this situation, the GST value of those goods is increased to include the excise duty that would have been payable if they had been entered for home consumption (s 108-5). This rule does not apply to a supply of the goods to a person registered for GST purposes who acquires the goods solely for business purposes. If the rule applied to these persons, they would get inflated input tax credits. The rule will apply, however, if a registered person acquires the goods at least partly for private or domestic purposes, or for the purpose of providing input taxed goods or services. It is not necessary for a corresponding rule to apply to customable goods. When those goods are ultimately entered for home consumption, that entry will be a taxable importation and GST will be paid on the full value of the goods in accordance with the normal rules. [GSTG ¶40-610]

¶9-070 Imported second-hand goods Imported second-hand goods do not qualify for the special input tax credit which applies where goods are acquired from an unregistered supplier (¶16-110). However, if you had imported second-hand goods on hand at 1 July 2000, you could have claimed a separate input tax credit equal to the amount of sales tax you paid when you imported the goods (Transition Act, s 16).

¶9-080 Importations through an agent

In accordance with the normal agency rules, importations made by an agent on behalf of your business are treated as being made by the business. However, where a registered non-resident makes an importation into Australia through an agent resident here, the agent is responsible for the GST consequences of the importation. For full details, see ¶17-400. Example Agent acts as the agent for Enterprises, a resident company. Both are registered for GST. If Agent imports and sells equipment for Enterprises, GST and input tax credits on the importation and sale are claimed by Enterprises, not Agent. Agent also acts as the agent for Foreign, a non-resident company registered for GST. Foreign does not have a branch in Australia, but imports equipment into Australia and sells it through Agent. GST and input tax credits on the importation and sale are paid by Agent, not Foreign. Note: If Foreign has a turnover of $20m or more, Agent must use monthly tax periods.

SPECIAL RULES RELATING TO OFFSHORE SUPPLIES ¶9-095 Non-resident business supplies: optional reverse charge In accordance with the normal rules, supplies made by non-residents can be taxable supplies in certain situations, for example, where the supply is connected with Australia and the non-resident is registered, or is required to be registered because its GST turnover from supplies connected with Australia is $75,000 or more (¶9-020). In cases where the non-resident does not have a presence in Australia, this could cause practical difficulties. To help overcome this, the non-resident and the Australian recipient can agree that the GST on the supply should be paid by the recipient, not the non-resident supplier. This is called a “reverse charge”. An agreement to reverse charge can be made where: (1) the supply is not made through an enterprise carried on by the non-resident supplier in Australia (ie through a “permanent establishment” (¶4-100)), and (2) the recipient is registered, or required to be (s 83-5). Exclusions This rule does not apply to: • a supply made through a resident agent, who will be liable to pay the GST (¶17-410) • offshore supplies that are covered by separate rules relating to business supplies of services and rights (¶9-100) or, with effect from 1 July 2018, to supplies of low value goods to consumers (¶9130), or • offshore supplies of rights or options that are not treated as GST turnover (¶3-030). Agreements to reverse charge cannot retrospectively apply to taxable supplies that are attributable to earlier tax periods (Interpretative Decision ID 2004/117). Payment The amount of the GST is 10% of the price of the supply (s 83-20). The non-resident is not required to issue a tax invoice, and the recipient is not required to hold a tax invoice in order to claim an input tax credit for the GST paid (s 83-35). If the recipient is a member of a GST group, the GST is payable by the representative member (s 83-10). If the recipient is a participant in a GST joint venture, the GST is payable by the venture operator (s 8315). Registration and turnover

For registration purposes, supplies that are covered by these reverse charge agreements are not taken into account in calculating the non-resident’s GST turnover (s 83-25; 83-30). This means that the nonresident will not need to be registered unless the value of other supplies connected with Australia is at least $75,000. Supplies covered by a reverse charge agreement are also not taken into account in calculating the recipient’s GST turnover (s 188-23). [GSTG ¶40-710]

¶9-100 Offshore business supplies of services and rights A reverse charge rule applies where someone overseas provides something other than goods, for example, services or rights over intellectual property (s 84-5, items (1) to (3)). If that service or right is not provided through an Australian enterprise of the provider, the effect of the normal rules (¶4-100) could be that it is not connected with Australia, with the result that GST would not apply. To partly cover that situation, GST automatically applies to a supply that is not connected with Australia, or is an offshore supply of rights or options that is deemed to be connected with Australia (¶4-100), if the following requirements are satisfied: • the recipient is registered or required to be registered • the service or right is provided in return for consideration (¶4-020) • the recipient acquires the item at least partly for the purposes of an enterprise that it is carrying on in Australia (ie through a “permanent establishment” (¶4-100)), and • the recipient does not acquire the item wholly for a creditable purpose, for example, it uses it to provide input taxed financial services (s 84-5). In this situation, the services or rights provided to the recipient will be subject to GST and the GST will be payable by the recipient, not the provider (s 84-10). This “reverse charge” is intended to overcome the fact that the provider will often not be subject to the Australian GST system. For the situation where the recipient is a non-business consumer, see ¶9-120. Examples (1) Software is downloaded from an overseas third party by a financial institution that carries on business in Australia and is registered. It uses the software in providing financial supplies. If the normal rules applied, the overseas supplier would not be taxable because the supply of the software was not connected with Australia (¶4-100). However, GST will be payable by the financial institution under the reverse charge rules, because it uses the software to provide input taxed financial services. (2) A private consumer purchases software from an overseas supplier. GST does not apply as the supply is not connected with Australia, and the reverse charge rules do not apply as the consumer is not registered or required to be registered (ATO GST Industry Issues — Electronic Commerce Ch 4).

The amount of the GST is calculated as 10% of the price of the supply (s 84-12). The recipient will be entitled to an input tax credit to the extent that the item was used for creditable purposes. The input tax credit is 10% more than the credit that would have been allowable if the supply had been a taxable supply under the normal rules (s 84-13). The Commissioner accepts that the recipient does not need to hold a tax invoice (¶5-100) in order to claim the input tax credit (WTI 2000/2 — Goods and Services Tax: Waiver of Tax Invoice Requirement Determination 2017 for intangible supplies from offshore). Any GST adjustment relating to the acquisition (¶6-000) is worked out assuming that the supply was fully taxable and the acquisition fully creditable (s 84-30, effective for tax periods starting on or after 1 October 2016). Transfers between branches

For the purposes of the reverse charge rule, transfers made between an Australian branch and an overseas branch of the same entity are treated as not being connected with Australia. The same applies if the overseas branch does something for the Australian branch (s 84-15). Example A company acquires the right to use a copyright in Australia. The acquisition is made through an overseas branch and the right is then transferred to an Australian branch. The transfer is treated as not being connected to Australia and may therefore attract the reverse charge rule.

Supplies of employee services The reverse charge does not apply to amounts paid to an overseas enterprise by its Australian branch for the services of an expatriate employee (s 84-15). This is subject to the proviso that the payment would have been subject to PAYG withholding if it had been paid to the employee by an Australian employer. Example An employee of an overseas bank is transferred to Australia to work for a local branch. The overseas bank continues to pay the employee’s salary directly, but recoups that salary from the local branch and also charges an administrative fee. If the employee had been paid directly by the local branch, the salary would have been subject to PAYG withholding (and not subject to GST). The payment to the overseas bank to reimburse the salary is therefore not subject to the reverse charge rules. However, the reverse charge will apply to the administrative fee.

If a non-resident entity supplies employee services in Australia to its 100% subsidiary, that supply can be disregarded in working out the non-resident’s GST turnover, for the purpose of determining whether it is required to be registered: see ¶3-030. Financial management and support services Where the reverse charge rule applies to certain management and support services supplied to an Australian financial enterprise by a closely-related overseas entity, a reduced input tax credit may be available (¶10-042). Employee share ownership schemes The reverse charge rule does not apply to supplies relating to specified types of employee share schemes made by an overseas enterprise to an Australian branch or by an overseas entity to a 100% subsidiary in Australia (s 84-14). The exemption means that these schemes are treated on the same footing as share schemes offered directly by domestic employers, which are not subject to GST. Electronic distribution services to consumers Effective for supplies made on or after 1 July 2017, a separate procedure for shifting GST liability applies where supplies are made from offshore to Australian consumers through electronic distribution services (Subdiv 84-B). This is explained at ¶9-120. Other aspects • This reverse charge rule does not apply if the original supply was itself GST-free or input taxed. For example, imported financial services are input taxed (¶10-010), so are not subject to reverse charging. • As this reverse charge rule only applies if the recipient is registered or required to be registered, it will normally not apply to private consumers in Australia. For special rules applying to inbound supplies of intangibles to Australian consumers, see ¶9-120. • Where a supply may potentially be taxed under this reverse charge rule or under the normal rules, the reverse charge rule will prevail (s 84-10).

• In certain limited situations, a reverse charge may also apply to offshore supplies of goods to consumers (¶9-130). [GSTG ¶40-720]

¶9-120 Offshore supplies of digital products and other intangibles to consumers Traditionally, services and intangibles supplied to non-business consumers from overseas have generally not been subject to GST, as they were not “connected” with Australia (¶4-100). This treatment was justified on the ground that the number of those types of supply was very limited. However, this position has changed dramatically with the growth of the internet and e-commerce. Accordingly, for tax periods starting on or after 1 July 2017, supplies of things other than goods or real property — ie services or rights — are treated as having a connection with Australia if they are made to an “Australian consumer” (s 925(5)). Those supplies therefore may become subject to GST even though the supplier is overseas. This rule is largely directed at supplies of digital products, such as streaming or downloading of movies, music, apps, games and e-books, as well as consultancy and professional services. However, it is not restricted to those things. Australian consumers An “Australian consumer” is an entity (¶3-015) that: (1) is an Australian resident, and (2) is either not registered, or is registered but does not acquire the things supplied wholly or partly for the purpose of the entity’s enterprise (s 9-25(7)). Residents of Australia’s external territories (¶4-100) are not included. Interaction with other rules A business recipient of the supply that makes the acquisition only partly for business purposes will not be an Australian consumer (see (2) above). However, to the extent that it cannot claim an input tax credit on the acquisition, it will be subject to the reverse charging rules applying to supplies of services and rights. This generally means that the business is liable for GST on the portion of the acquisition for which a credit cannot be claimed (¶9-100): see Example 2. Of course, even where the supply is connected to Australia under these rules, it will not be subject to GST if it is entitled to a GST exemption under other provisions such as s 38-190. This will particularly apply to supplies that are connected with property outside Australia, or supplies where the effective use or enjoyment occurs outside Australia (¶9-240, items (1) and (3)). Such supplies continue to be GST-free. Examples (1) Foreign business provides video streaming services from overseas to non-registered Australian resident individual. This supply is connected to Australia and GST may therefore apply. (2) Foreign business provides accounting software from overseas to registered individual who acquires it partly for her business and partly for private purposes. The supply is not connected to Australia under these rules. However, it will be subject to the reverse charging rules (¶9-100).

For rules for converting amounts of consideration expressed in foreign currency, see Goods and Services Tax: Foreign Currency Conversion Determination (No 1) 2017. Determining consumer status In practice, it may be difficult for an overseas supplier to determine the residency and GST-registration status of its customers. Accordingly, a supplier is entitled to act on the basis that a customer is not an Australian consumer if it forms a reasonable belief that this is so, based on reasonable steps which it has taken to obtain information about that status (s 84-100). This is so, even if it later turns out that this belief was incorrect.

A belief may be “reasonable” even though it is based on a limited combination of information, such as the customer’s address, contact numbers, credit card details, phone country code and statements about location. In some cases, a wide range of such information will be available through the supplier’s normal business systems. In the particular case of a fully automated system, where there is no human interaction between supplier and customer, the Commissioner accepts that a reasonable belief can be formed where it is based on at least two of such pieces of non-contradictory evidence as to residency. Detailed guidelines on the Commissioner’s approach are in GST Ruling GSTR 2017/1. Alternatively, where the business systems do not provide sufficient information, the supplier may form a reasonable belief after taking reasonable steps to obtain the information. The Commissioner considers that relevant circumstances to be considered in determining what steps are reasonable for a supplier to take include: • the level of interaction the supplier has with the recipient in making the supply or in maintaining the commercial relationship • the type of personal information that a recipient will usually share, or usually be willing to share, with the supplier in the course of making a supply or in maintaining the commercial relationship, taking into account the type of supply, the value of the supply, and the nature of the commercial relationship • the difficulty and costs involved for the supplier in taking steps to obtain information about whether an entity is an Australian consumer of a supply (including both direct and indirect costs), and • the expected reliability of the information about whether an entity is an Australian consumer (GST Ruling GSTR 2017/1). The Commissioner also accepts that a supplier will normally be able to rely on a determination that the recipient is resident outside Australia where it has been made by a comparable overseas jurisdiction (European Union countries, Norway and New Zealand). A belief formed on the basis that the customer is not an Australian consumer, based on the fact that the customer is GST-registered, is not reasonable unless the supplier has obtained the customer’s ABN (¶3050) and a declaration from the customer that it is registered. If the supplier wrongly treats an entity as an Australian consumer, with the result that GST becomes payable, the normal rules as to repayment of excess GST apply (¶8-115). A customer that misrepresents its consumer status — for example, in an attempt to escape GST on the transaction — may be subject to penalties under the rules related to “false and misleading” statements (¶18-300). In serious cases, false statements about residency or ABNs may constitute criminal offences (Taxation Administration Act, s 8U; A New Tax System (Australian Business Number) Act 1999, s 23). It may happen that an Australian business has made a wholly private or domestic acquisition, but provides information misrepresenting that it is not an Australian consumer of that supply (and that GST therefore does not apply). In this case, the reverse charge rule (¶9-100) will apply and the recipient, not the supplier, is liable for the GST (s 84-5). Transactions through electronic distribution platforms Special rules apply in allocating GST liability where there is an offshore supply of intangibles — things other than goods or real property — to an Australian consumer. These are called “inbound intangible consumer supplies” (s 84-65). For these supplies: (1) no tax invoice or adjustment note is required (s 84-50) (2) non-resident suppliers may elect to be limited registration entities (see further below) (3) where they are made through an electronic distribution platform, such as an e-store, the operator of the platform, not the actual supplier, is liable for the GST (s 84-55). These rules do not apply where the thing is done wholly in Australia or is supplied through an enterprise that the supplier carries on in Australia.

An electronic distribution platform includes a website, internet portal, gateway, store or marketplace (s 8470). It enables entities to make supplies available to end-users electronically. Merely providing a payment system, or advertising does not qualify. Nor does a carriage service, such as those provided by internet service providers. Where a supply is made through the platform, the operator of the platform is treated as having made the supply as part of its enterprise (s 84-55). There is an exception if all the following conditions are satisfied: • the operator and the actual supplier have agreed in writing that the supplier is liable for the GST • the recipient is notified, and • the operator does not control any of the key elements of the supply, for example, in directly or indirectly setting any of the terms and conditions of the supply, or in authorising payment or delivery. Where a supply is made through multiple distribution platforms, the first operator to authorise a charge or receive consideration for the supply is normally treated as making the supply. Failing that, it is the first operator to authorise delivery. Alternatively, the operators can agree among themselves which operator is liable. An operator and a supplier may also agree to these distribution platform rules applying to other types of supply made by electronic communication — not just offshore supplies of intangibles to Australian consumers — made through the platform (s 84-60). For this to apply, the operator must be registered for GST, and the supply must not be input taxed or GST-free. For the Commissioner’s rulings on the operation of these rules, see Law Companion Ruling LCR 2018/2. These rules as to electronic distribution platforms will also apply under the provisions governing supplies of low value goods (¶9-130). The Treasurer has the power to declare inbound intangible consumer supplies made by non-residents to be GST-free where this is necessary to comply with Australia’s international obligations, and the supply would be GST-free if made within Australia (s 38-610). A corresponding rule applies for input taxed supplies (s 40-180). This has been applied to ensure that supplies of bank accounts and superannuation interests by foreign financial institutions remain input taxed (GST Regulations s 40-5.09(3); ¶10-010). “Limited registration” option for non-resident suppliers Non-resident suppliers of inbound intangible consumer supplies can elect to take advantage of simplified registration requirements (¶3-075). Transitional rules for transactions spanning 1 July 2017 These provisions about inbound intangible consumer supplies apply in working out net amounts for the tax periods starting on or after 1 July 2017. A transitional rule applies to ensure that entities cannot avoid GST on supplies by entering into long-term supply arrangements before that date. The effect is that where there is a periodic or progressive supply over a period that spans that date, the supply is treated as being made continuously and uniformly over that period. Any consideration for the part of the supply that is taken to be made on or after that date is treated as being received in the first tax period on or after that date. However, this transitional rule does not apply to: • warranties, if the value of the warranty was included in the price of the goods or services supplied, or • supplies that are taxable in any event. Example On 1 May 2017, a non-business Australian consumer takes out a one-year subscription to an online magazine and pays the full subscription fee. Under the transitional rule, 334/365 of the fee will be attributed to the first tax period on or after 1 July 2017.

¶9-130 Offshore supplies of “low-value” goods to consumers

Until 1 July 2018, a GST and customs duty exemption generally applied to goods imported in a consignment with a customs value of no more than $1,000. The exemption — referred to as the “low value threshold” (LVT) — did not apply to alcoholic beverages, tobacco products or goods that are the accompanied or unaccompanied effects of passengers or crew of a ship or aircraft. If the goods arrived by sea or air, a self-assessed clearance declaration had to be made before customs clearance. This did not apply to goods arriving by post. Imposition of GST from 1 July 2018 The $1,000 exemption is abolished, effective for tax periods commencing on or after 1 July 2018, and is replaced by new rules imposing GST at the point of sale (Subdiv 84-C). This is intended to provide competitive neutrality for domestic retailers that have historically been at a disadvantage against foreign retailers, who have been able to sell equivalent goods online to Australian customers exclusive of GST. The Tax Office has reported that in the first year of operation, the new rules yielded over $250m and enjoyed a “very strong overall level of compliance” (ATO media release, 1 July 2019). The effect of the new rules is that an offshore supplier will normally be required to register, collect and remit GST where the following conditions are satisfied: • there is an offshore supply of goods, ie goods are brought to Australia with the assistance of the supplier, for example, where the supplier delivers the goods to Australia, or procures, arranges or facilitates their delivery to Australia (s 84-77). For the meaning of “goods”, see ¶4-100 Example While on holidays overseas, Russell buys two items costing $400 each from a shop. He brings one item back home to Australia himself, and arranges with the shop to arrange for the second item to be transported and delivered to him in Australia. The supply of the first item is not an offshore supply, but the supply of the second item is.

• the goods are “low value” goods. This requires that their customs value (¶9-005) would have been $1,000 or less if they had been exported at the time when the consideration for the supply was first agreed. Tobacco or alcoholic beverages are excluded and continue to be treated as taxable importations, as under the former rules (s 84-79). For the method of converting foreign currency amounts, see Goods and Services Tax: Foreign Currency (Customs Value of Low Value Goods) Determination 2018 Example An order includes two goods with customs values of $600 each, totalling $1,200. This is a supply of low value goods.

• the supplier has a (Australian) GST turnover of $75,000 or more ($150,000 for non-profit bodies), including the GST turnover from the relevant supply, and • the supply is connected with Australia (¶4-100). Subject to the exception detailed below, this requirement is satisfied if the recipient is a “consumer” of the supply — for example, is not GSTregistered, or is GST-registered but does not acquire the thing for use in an enterprise that it carries on in Australia (s 84-75). There is a “safe harbour” for suppliers where the customer provides its ABN and a declaration that it is GST-registered (s 84-105). A reverse charge mechanism also applies where the recipient misrepresents that the supply is being made to a consumer. Where a purchaser arranges for the goods to be delivered to someone else, the purchaser is still the recipient. Where these conditions are fulfilled, they apply irrespective of the way the consumer purchases the goods, whether online, by telephone, in person in a store overseas or from a store in Australia if the goods were located outside Australia. Additional guidelines on the application of these rules are set out in Law Companion Ruling LCR 2018/1. Exception where there is a taxable importation

A supply is not connected with Australia, and therefore not caught by the low value rules, if the supplier has taken reasonable steps to obtain information about whether the supply will be a “taxable importation” (¶9-000) and reasonably believes that the supply will be a taxable importation (s 84-83). In such a case, the normal rules for taxable importations apply and GST will be paid at the border. Under customs law, a supply is a taxable importation if goods are included in a consignment with a customs value exceeding $1,000. Goods are considered to be in the same consignment if they are (1) sent by international mail from one person to another, or (2) sent by air or sea cargo, from one person to another, where the goods are all transported to Australia in the same ship or aircraft (see further Law Companion Ruling LCR 2018/1). This means that if the combined customs value of the goods in one consignment exceeds $1,000, the supply is a taxable importation, even if individual items in the consignment are low value items and they were ordered at the same time. However, it is up to the supplier to establish this. If the supplier knows that the goods will be consigned separately or is uncertain whether the goods will be sent together, then the low value rules may apply. Taking “reasonable steps” generally requires the supplier to seek to obtain information, whether directly or by setting up business systems and processes, about how the goods are to be consigned (Law Companion Ruling LCR 2018/1). Where a redeliverer is treated as the supplier, the reasonable belief must be held at the time it assists in bringing the goods into Australia. Where the operator of a distribution platform is the supplier, the belief must be held at the last time the consideration for the supply changes prior to export. Various other rules are designed to ensure that if there is a supply of low value goods that is subject to GST, the importation will be non-taxable (s 84-85; 42-15). Provisions also govern the payment of refunds where the supply has incorrectly been treated as a taxable supply (s 142-16). Suppliers may include operators and redeliverers An entity may also be treated as the supplier if the entity is the operator of an “electronic distribution platform” (¶9-120) through which the supply is made, and the operator delivers the goods into Australia, or “procures, arranges or facilitates” the delivery into Australia (s 84-77; 84-81). In this case, the operator is liable to pay the GST. An entity may also be treated as the supplier if it is a “redeliverer”. This covers an entity carrying on an enterprise who: • under an agreement with the recipient, delivers the goods into Australia, or “procures, arranges or facilitates” the delivery of the goods into Australia, and • either provides an address outside Australia to which the goods are delivered, or purchases the goods, or procures, arranges or facilitates either of those (s 84-77; 84-81). Typical examples would include providers of offshore mailbox or shopping services. If there are multiple redeliverers, generally, the first redeliverer to deal with the customer is liable for the GST. Example Penny, an Australian resident who is not registered for GST, has an account with a mail forwarding service based in the US. She purchases low value goods from a US store for a non-business use. The store does not ship to Australia, so she instructs it to send the goods to a US-based address provided to her by the forwarding service, which then forwards the goods to Penny. The forwarding service, not the store, will be treated as the supplier of the goods. This results in the supply having a connection with Australia, so the forwarding service will be subject to the low value goods rules and will be required to register and remit GST if its GST turnover (from other transactions connected to Australia) is $75,000 or more.

Where a redeliverer, rather than the supplier, is liable for GST, the pricing of the supply by the supplier will not reflect the application of GST. As a result, GST applies to the supply on the basis that the price is GST-exclusive. This means that the amount of GST on the supply in the hands of the redeliverer is 10% of the price set by the actual supplier rather than 1/11th of that price (s 84-91). Procuring, arranging or facilitating the delivery of the goods includes making arrangements with third parties for the transport of the goods or facilitating the individual making those arrangements, eg by

having arranged special terms for its customers for delivery. However, it does not include merely selling goods to a recipient, making the goods available for collection or providing contact information for otherwise unrelated transport companies. The Commissioner’s rulings on redeliverers are in Law Companion Ruling LCR 2018/3. These rules apply to the practice of “drop shipping”, for example, where a consumer purchases an item from an online Australian-based retailer, who arranges for the item to be sent directly to the customer by sea from the retailer’s offshore supplier. This would be treated as subject to GST in the same way as a domestic sale. However, these rules as to supplies made through electronic distribution platforms do not apply if the supply is connected with Australia under some other provision, eg the merchant is the importer, or the supply is sourced within Australia. In such cases, the merchant is responsible for the GST. Documentation requirements Tax invoices and adjustment notes are not required where the supply is taxed under these provisions (s 84-87). However, the supplier must notify the recipient of the amount of GST on the supply, and failing to do so is subject to a penalty (¶18-300) (s 84-89). The notice must be in the approved form and be given at the time the consideration for the supply is first agreed. It may be in electronic form.

The approved notice must contain: • the name of the supplier • the GST registration number of the supplier, which is either an ATO Reference Number (ARN) or Australian Business Number (ABN) • the name of the recipient (this is only required if the total price of the transaction is over $1,000) • the date of issue • a description of what goods were supplied, including the quantity (if applicable) and the GSTinclusive price of the goods • the amount of GST payable for each of the goods, and • information that identifies the extent to which each of the goods were supplied as a taxable supply (Law Companion Ruling LCR 2018/1).

Specified tax information must also be included in customs documents (s 84-93). For example, suppliers must ensure that their customs documentation has the supplier’s GST registration number, recipient’s ABN (if known) and extent to which the supply has been treated as a taxable supply. Non-disclosure of the recipient’s consumer status which results in non-payment or underpayment of the GST on the supply may, in certain circumstances, give rise to a “GST benefit” to the recipient that would attract the general tax avoidance rules (¶20-030). “Limited registration” option for non-resident suppliers Non-residents who make offshore supplies of low value goods — including operators of electronic distribution platforms — can elect to take advantage of simplified registration requirements (¶3-075). The same applies to non-residents who are, or intend to be, redeliverers of these supplies. Failure to register exposes the entity to penalties (s 84-5; ¶18-300). Supplies that are reverse charged Certain offshore supplies of low value goods may be treated as taxable supplies and be subject to a

“reverse charge” in the same way as offshore business supplies of services and rights (¶9-095). This means that the supply is taxed in the hands of the recipient, not the supplier (s 84-5, items (4), (5)). This rule applies where the low value goods are acquired for wholly private purposes but the consumer wrongly represents to the supplier that they were acquired for business purposes, with the result that the supplier did not impose GST on the supply. It also applies to the extent that they were acquired for private purposes even though they may also have been acquired partly for business purposes. This rule does not apply to GST-free or input taxed supplies. Sanctions for non-compliance The Tax Office has released the following summary of steps it will take in the event of mistakes or noncompliance with these rules (Making Compliance Happen at www.ato.gov.au): Compliance category Fully compliant — Willing to do the right thing

Mostly compliant — Try to comply but don't always succeed

Your behaviour

ATO action

You have: • registered for GST as   required • made necessary changes to   your business systems • collected GST as required • reported and paid GST   collected by the due date • made an honest mistake.

ATO will not contact you unless it believes you have made a mistake.

You have: • registered for GST as   required • made a genuine attempt to   collect, pay and report   GST as required, but   have difficulty with any   or all of these • contacted us about your   situation and worked with   us to resolve it.

ATO will not contact you unless it believes you have made a mistake.

From 1 July 2018 to 30 June 2019, where you have made a mistake, ATO will: • ask you to correct it • not impose any penalties. From 1 July 2019, where you have made a mistake, ATO will: • ask you to correct it • consider your circumstances   and level of co-operation   before applying penalties.

From 1 July 2018 to 30 June 2019, where you have made a mistake, ATO will: • ask you to correct it • not impose any penalties. From 1 July 2019, where you have made a mistake, ATO will: • ask you to correct it • consider your circumstances   and level of co-operation   before applying penalties.

Partly compliant — You have: Don't want to • registered for GST as comply   required • not collected GST as   required • not reported the GST you   collected • not paid us the GST   collected.

As of 1 July 2018 ATO will: • calculate your liability and   issue an assessment • impose an additional 75%   administrative penalty • take recovery action for the   debt.

Not compliant — Have decided not

As of 1 July 2018 ATO will: • register you for GST

You have taken no action to comply with your obligations.

to comply

• calculate your liability and   issue an assessment • impose an additional 75%   administrative penalty —   higher penalties can apply   if you are a significant global   entity • take recovery action for the   debt.

Transitional rules The low value goods rules apply in working out GST for tax periods starting on or after 1 July 2018 and to taxable importations made on or after that date. Typically, this means that they apply where the invoice is issued or payment received on or after 1 July 2018, irrespective of when the goods are actually delivered.

EXPORTS ¶9-200 Treatment of exports As GST is primarily a tax on consumption in Australia, it is not intended to apply to things that are not consumed in Australia, such as exports. Exports are therefore GST-free. This means that no GST applies, but that the exporter is entitled to input tax credits (¶1-160). The export exemptions are divided into: • exports of goods (¶9-210) • exports of services and things other than goods or real property (¶9-240). For the meaning of “Australia”, see ¶4-100. [GSTG ¶41-000]

¶9-210 Exports of goods A supply of goods is GST-free if the supplier exports them from Australia before, or within 60 days after, receiving any of the consideration for them. If the goods have been invoiced before any payment is made, they must be exported before, or within 60 days after, the invoice is given (s 38-185, item 1). For the meaning of “goods”, see ¶4-100. For what constitutes an invoice, see ¶7-205. As to when consideration is received, see ¶7-325, but note that a special rule applies to associates (see below). If the export contract provides for payment by instalments, the goods must be exported by the supplier before, or within 60 days after, receiving any of the final instalment. If that instalment has been invoiced before any amount is paid for it, the goods must be exported before, or within 60 days after, that invoice is given (s 38-185, item 2). Examples (1) An exporter exports goods before invoicing or receiving any payment for them. The export is GST-free. (2) An exporter invoices goods on 1 March, is paid on 30 March and exports the goods on 20 April. The export is GST-free. (3) An exporter invoices goods on 1 March, is paid on 30 March and exports the goods on 20 May. Although the export is within 60 days of payment, it is not within 60 days of the earlier invoice. The export is not GST-free. (4) A manufacturer has a contract to build and export a machine. Payments are to be made in two instalments. The first instalment is invoiced on 1 March and paid on 30 March. The second instalment is invoiced on 1 May and paid on 30 May. The machine is exported on 15 June. The export is GST-free because it occurs within 60 days of the invoicing of the final instalment. It is irrelevant that this is more than 60 days after the first instalment was invoiced.

For the supplier to be the exporter, the Commissioner considers that the supplier must be the effective “sender” of the goods overseas (Australian Trade Commission v Goodman Fielder Industries Ltd (1992) 36 FCR 517). This means that the supplier must either: (1) contract at its own expense with an international carrier for the overseas transportation of the goods; or (2) be responsible for delivering the goods to a ship or aircraft operator that has been engaged by another party to transport the goods overseas (GST Ruling GSTR 2002/6). This also covers the situation where the supplier arranges for a freight forwarder, consolidator or express courier to deliver the goods to the carrier on the supplier’s behalf. The supplier may therefore be the exporter, for example, where the relevant contract is CIF , DDP or FOB. It is not necessary that the supplier be the beneficial owner of the goods at the time they are exported (Inland Revenue Commr (NZ) v International Importing Ltd 72 ATC 6033; Companhia Votorantim de Cellulose e Papel v Anti-Dumping Authority & Ors (1996) 42 ALD 7). Technically, an export does not occur until the ship or aircraft departs from its final Australian port or airport and clears Australian territorial limits. However, this time may not be known to the supplier. Accordingly, the Commissioner considers that the 60-day requirement is met if the supplier: (1) hands over possession of the goods to a freight forwarder, etc, for delivery, before or within the 60-day period; or (2) delivers the goods to the ship or aircraft operator before or within the 60-day period. This is provided that the supplier has completed all other actions necessary to export the goods (GST Ruling GSTR 2002/6). A special rule applies where the supply is to an “associate” (¶17-500). In this case, the export of goods by the supplier from Australia to the associate can be GST-free even though the supply is without consideration (s 38-185, item 2A; 38-185(4)). The supply of coal that is included in an export load as part of a loan or borrow arrangement at the port may be accepted as a GST-free export where appropriate documentation requirements are satisfied (ATO GST Industry Issues — Mining and Energy: Ch 5). The Commissioner also has the power to extend the 60-day limit. This may occur, for example, where there are physical, practical or commercial circumstances that reasonably explain the delay. Detailed guidelines are in Practice Statement PS LA 2006/16. Example A supplier is exporting goods into a new market and encounters difficulties in organising for the delivery into the foreign country. The goods were exported outside the 60-day period. Where the difficulties encountered were outside the supplier’s and recipient’s control, an extension would be granted. (Based on Practice Statement PS LA 2006/16.)

If the export is not made within the allowable period, the export loses its GST-free status. This may mean that there will need to be an adjustment to increase the GST for a tax period that has been calculated on the basis that the export would be GST-free (¶6-100). The export is not GST-free if the supplier re-imports the goods back into Australia. Keeping records The general obligation is to keep records that are sufficient to explain all relevant transactions for GST purposes. As far as exports are concerned, this means that they must verify the export and when it happened. This could include air waybills, bills of lading, evidence from the Australian Customs Service that the goods were exported, and evidence from the foreign Customs authority that they were received. For the Commissioner’s detailed requirements, see GST Ruling GSTR 2002/6. Deemed export by supplier where goods delivered to purchaser It may happen that the overseas purchaser of the goods buys them and takes delivery in Australia and later exports the goods itself. This is treated as an export of the goods by the Australian supplier, if the following conditions are met: • the overseas purchaser is not GST-registered, or required to be registered • the goods must be “entered for export”

• the overseas purchaser must not alter the goods in any way, except to prepare them for export. For example, packaging, wrapping, cleaning, dismantling or testing would normally be permissible, but not taxidermy on hunting trophies. Breaking-in or barrier trialling a horse intended for export would prevent the exemption from applying (GST Ruling GSTR 2002/6) • the Australian supplier has documentary evidence that the purchaser actually exported the goods. The Commissioner considers that this particular requirement is satisfied if the documents held by the supplier provide a reasonable basis for an independent party to conclude that the goods were exported (GST Ruling GSTR 2002/6), and • if the overseas purchaser is a resident in an external territory they must not have claimed a refund of the GST under the Tourist Refund Scheme (¶12-030; s 38-185(3)). If these conditions are not met, GST may be payable, and the overseas purchaser would have to be registered in order to claim an input tax credit. Example A taxpayer ran a business of providing hunting expeditions in Australia to foreign clients. At the end of the expedition, he provided clients with trophies of animals that they had killed, which the clients took home with them. This was not a GST-free export, as the taxpayer himself was not the actual exporter, and his informally kept records were not sufficient to establish that he could be deemed to be the exporter under the rules stated above (based on McKay v FC of T 2011 ATC ¶10-201; [2011] AATA 593).

The supplier will be able to ensure that the purchaser is not registered by checking the Australian Business Register. To determine if the purchaser is not required to be registered, the Commissioner considers that it will be sufficient for the supplier to obtain a signed written statement from the purchaser, provided that the supplier has no reason to believe that the statement is wrong (GST Ruling GSTR 2002/6). [GSTG ¶41-100]

¶9-215 Export of aircraft or ship The export of an aircraft or ship by the supplier may be GST-free in accordance with the general rules stated at ¶9-210. In addition, the supply of the craft for export by the recipient is GST-free in the following situations: (1) the recipient exports the craft under its own power within 60 days after taking physical possession (s 38-185, item 3), or (2) if the export contract provides for payment by instalments, the recipient exports the craft before, or within 60 days after, the earliest of the following events: • the supplier receives any of the final instalment or gives an invoice for it • the supplier delivers the aircraft or ship to the recipient, or to someone else at the recipient’s request (s 38-185, item 4). The recipient would normally be the new owner or its agent. A ship means any vessel used in navigation, other than air navigation (s 195-1). New recreational boats As a separate measure, the supply of a “new recreational boat” is GST-free where: • the boat is exported by the supplier or the recipient within a 12-month period (in contrast to the usual 60-day period). The export does not have to be under the boat’s own power, though this would commonly be the case • the boat is not used in a disqualifying activity before it is exported within the 12-month period. This

means that it must generally not be used in commercial activities or for commercial gain. For example, if the recipient sells the boat, or uses it in carrying on an enterprise, this exemption would not apply. There are some minor exceptions, eg competing in a race or other sporting event for prizes would not be a disqualifying activity • the supply is made under a contract entered into on or after 1 July 2011, and is not pursuant to right or option granted before that date (s 38-185, item (4A)). To qualify as a “new recreational boat”, the boat must satisfy all of the following conditions: • it must be designed and fitted out principally for private recreational pursuits or hobbies • it must not be a commercial ship. For example, a boat suitable for large-scale commercial fishing would not qualify • it must be a new construction, not simply a substantial reconstruction of an existing boat. This would not prevent modifications of a newly constructed boat in order to meet the requirements of customers unless they amounted to a substantial reconstruction. For example, refitting the galley with a double sink and repainting the walls to a different colour would be permissible (GST Ruling GSTR 2002/6) • it must not have been previously sold, leased or used since its construction (s 38-385(5), (6)). The 12-month period in which the export must occur is measured from the earliest day on which: • the recipient takes physical possession of the boat, and • if the export contract provides for payment by instalments — the supplier receives any of the final instalment or gives an invoice for it. Having a 12-month instead of 60-day period enables a purchaser to experience operating the boat in Australian waters before having to remove it from Australia. However, there is no requirement for this or, for that matter, no requirement that the boat be sailed or motored at all before export. Measuring or extending the limit For the purposes of the 60-day (or 12-month) limit, the Commissioner considers that an aircraft or ship is exported when it departs from its final Australian port or airport and clears Australian territorial limits (GST Ruling GSTR 2002/6). The Commissioner also has power to extend the limit. Where the craft is exported by the recipient, the supplier will need to gather sufficient evidence of the export from the recipient to satisfy themselves that the export occurred within the relevant time period. [GSTG ¶41-100]

¶9-220 Other GST-free exports of goods There are various other less common exports of goods that qualify as GST-free (s 38-185). Again, these exemptions do not apply if the supplier re-imports the goods back into Australia. Goods consumed on international flights and voyages The supply of aircraft or ship stores or spare parts is GST-free if they are to be used or sold on a flight or voyage that has a foreign destination (s 38-185, item 5). This applies even if part of the trip involves travel between two places in Australia. However, the Commissioner considers that it must be intended that the craft must actually lay anchor, or land at a specific foreign location, not just pass through international waters or airspace (GST Ruling GSTR 2003/4). The stores or parts may be for the passengers or crew, or for the servicing of the aircraft or ship. “Stores” include: • food or beverages intended for consumption on board • fuel and lubricants

• goods intended for sale on board (such as souvenirs, film, batteries and confectionery) but not personal belongings brought on board by passengers or crew (GST Ruling GSTR 2003/4). It appears that durable goods would not qualify unless it can be established that they are specifically for the purchaser’s use on the cruise rather than use after the cruise. So, for example, the exemption would apply to a beach towel sold on a cruise ship that had a swimming pool, and medical products and clothing relevant to the cruise. However, it would not normally apply to fashion clothing, electronic goods or jewellery. Consumables such as alcohol and tobacco may qualify but not if they are required to be taken ashore when the passenger disembarks. Perfumes sold in quantities such that it would not be reasonable to expect that they would be substantially consumed on the cruise would not normally qualify (Interpretative Decision ID 2013/37). Repair of goods from outside Australia The supply of goods used in the repair of goods that are from outside Australia, and whose destination is outside Australia, is GST-free (s 38-185, item 6). To qualify, the goods must become attached to the imported goods, or become part of them, or become unusable or worthless as a direct result of being used in the repair. Corresponding rules apply where the imported goods are renovated, modified or treated. However, the Commissioner considers that the exemption does not apply where the imported goods are changed to the extent that they are no longer essentially the same goods by the time they are exported, for example, where the work amounts to the manufacture of new goods (GST Ruling GSTR 2005/2). For goods to qualify as “from outside Australia whose destination is outside Australia”, the Commissioner considers that: (1) the stay in Australia should normally be temporary; and (2) at the time the goods are being repaired, it must be intended that the goods will have a destination outside Australia. This requirement may be satisfied even if, due to a change of circumstances, they do not actually depart Australia (GST Ruling GSTR 2005/2). The exemption would apply to repairs done in Australia to a ship (or goods on board) that is from outside Australia and is in transit to a place outside Australia. It would apply even if the ship, with Customs’ permission, intends to visit various locations in Australia for sightseeing or fishing before it leaves. For the documentary evidence required to support a claim, see GST Ruling GSTR 2005/2. In certain situations, where the exemption does not apply because new goods have been created, another exemption may apply instead. For example, where a supplier is contracted to make new goods using components provided by a non-resident recipient, the export of the goods to the recipient may be GST-free under s 38-185, item 1 (¶9-210). The provision of services in connection with the repair, etc, is also GST-free (¶9-240). Export of accompanied baggage: sealed bag system A supply of goods to Australian and foreign national tourists is GST-free if the goods are exported as accompanied baggage under the sealed bag system (s 38-185, item 7; GST Regulations s 38-185.01; 196-1.01; Sch 1). For details, see ¶12-030. Australian transport, loading and handling Transport, loading and handling costs incurred in Australia as part of exporting goods may be GST-free (¶12-010). Tourist refund scheme For details of the refunds available to tourists for GST paid in Australia on goods taken overseas, see ¶12-030. [GSTG ¶41-100]

¶9-230 Lease of goods used overseas Leasing or hiring out goods used outside Australia is GST-free (s 38-187).

Example Equipco in Australia leases machinery to a New Zealand business to use in New Zealand. No GST is payable on the lease.

This exemption applies pro rata if the leased goods are used partly in Australia and partly overseas. [GSTG ¶41-100]

¶9-235 Tooling used by non-residents Supplies of tooling to non-residents are GST-free if the tooling is to be used in Australia solely to manufacture goods for export (s 38-188). This only applies if the non-resident is not registered and not required to be registered. “Tooling” means jigs, patterns, templates, dies, punches and similar machine tools. It may be difficult for the Australian supplier to verify whether the non-resident is not “required to be registered”. A statement from the non-resident that it does not make supplies connected with Australia will generally be sufficient for these purposes. [GSTG ¶41-100]

¶9-240 Exports of services and other things So far, the export exemptions we have covered only apply to goods. There are also export exemptions for other things — such as services, advice, financial supplies or alteration of rights — that are not goods or real property (s 38-190(1)). (For the meaning of “goods” and “Australia”, see ¶4-100; for “real property”, see ¶11-000.) These exemptions cover the following. (1) A supply that is “directly connected” with goods or real property outside Australia. The ATO considers that this means that there must be a very close link or association, and that there must be a direct effect on specific goods or real property (GST Ruling GSTR 2003/7; see also Malololailai Interval Holidays NZ Ltd v C of IR (1997) 18 NZTC 13,137). On this basis, there will typically be a direct connection where: • the supply changes or affects specific property in a physical way, for example, the construction, alteration, demolition, repair or maintenance of a building; the installation, alteration, repair, cleaning, restoration or modification of goods; or the removal of vegetation or revegetation or decontamination of land • there is a physical interaction with specific property, but without changing it, for example, transport or security • the supply establishes quantity, size, other physical attributes or the value of specific property, for example, testing, analysing, surveying, stocktaking or exploration services • the supply affects or protects the nature or value of specific property, for example, insurance, architecture, design engineering, town planning or property management • the supply affects the ownership of specific property, for example, land conveyancing, lease or mortgage, sale of goods, contract enforcement or supply of options to buy goods (but not, apparently, the preparation of a will or taxation advice: GST Ruling GSTR 2003/7). Examples (1) An Australian buyer of a New Zealand commercial property engages a solicitor in Australia to carry out the conveyance. The supply of the conveyancing services is GST-free under item (1) as it is directly connected with property outside Australia. (2) An Australian resident engages an accountant in Australia to provide advice on the capital gains tax implications of selling property owned and situated in the UK. The services are directly connected to the vendor’s tax position, rather than the property itself, and they are therefore not GST-free under item (1). Nor are they GST-free under any of the other items. The same result would apply where an adviser conducted a financial review of the feasibility of an overseas construction project for a resident client

(GST Ruling GSTR 2003/7). (3) An architect supplies plans prepared in Australia for the renovation of a building in Hong Kong. The supply of the services is GST-free under item (1) as it is directly connected with specific property outside Australia.

The mere fact that goods or real property are used in making a supply does not mean that the supply is directly connected with them. Eligible emissions units (¶16-220) are personal property rights and are not directly connected with real property. (2) A supply made to a non-resident who is not in Australia when the thing supplied is done. For this exemption to apply, the supply must not be a supply of work physically performed on goods in Australia at the time, or a supply directly connected with real property in Australia. Alternatively, the nonresident must acquire the thing in carrying on its enterprise but not be registered or required to be registered. Real property includes accommodation (¶11-000). A non-resident means a non-resident of Australia for tax purposes (for ATO guidelines, see Taxation Ruling TR 98/17). A supplier can check whether a recipient is not registered by checking the Australian Business Register. The supplier may assume that the recipient is not required to be registered if it obtains a statement to that effect from the recipient, and has no reason to disbelieve it (GST Ruling GSTR 2002/2). The Tax Office considers that: • a non-resident individual is in Australia if he/she is physically located here • a non-resident company or partnership is in Australia if: (1) it carries on business here through a place of business on its own or through an agent; (2) the place of business or agent has a fixed and definite place in Australia; and (3) the business has continued for a sufficiently substantial period of time. On this basis, a company may be in Australia even though it is incorporated elsewhere (Interpretative Decision ID 2008/69). However, the mere presence of directors representing a non-resident company in legal proceedings in Australia was held not sufficient to establish that the company was in Australia at the time (Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors 2004 ATC 4633; [2004] NSWSC 381). For further discussion of some of these requirements, in the context of permanent establishments, see ¶4-100 • registration of a company with the Australian Securities and Investments Commission is a strong indicator that the company is in Australia (GST Ruling GSTR 2004/7). The Tax Office also considers that the requirement that the non-resident must not be in Australia when the thing supplied is done means that they must not be in Australia in relation to the supply when the thing supplied is done (GST Ruling GSTR 2004/7). For example, if a non-resident individual merely happens to be in Australia on holidays at the time the supply is done, and has no contact with the supplier, the exemption may still apply. For an explanation of when a supply of services, rights, etc, is “done”, see ¶4100. The supply of banknotes to a wholesale customer in another country was considered to qualify for this exemption in Interpretative Decision ID 2006/203. The Tax Office considers that the physical performance of work on goods means that the goods are changed or affected in some physical way, for example, repairs, cleaning or upgrading, but not mere transport (GST Ruling GSTR 2003/7). On this basis, services such as market research, marketing, advertising or certification of goods do not amount to work physically performed on the goods and may therefore qualify for exemption. Example An Australian lawyer gives advice to a non-resident who is in New Zealand on the application of Australian trade practices law. This

would be GST-free under item (2).

This exemption does not apply if under an agreement directly or indirectly with the non-resident the services, etc, will be provided to another entity in Australia (s 38-190(3)). For example, the exemption does not apply if overseas parents are billed for services to be provided to their children in Australia. However, for tax periods starting on or after 1 October 2016, this restriction does not apply to the following business-to-business transactions where the entity to which the services are provided: • would be an Australian-based business recipient (¶4-101) if the supply had been made directly to them, or • is an individual employee or officer of such a business, or • is an individual employee or officer of the non-resident whose acquisition is solely for a creditable (business) purpose and not a non-deductible expense. Provided that such supplies are not input taxed, they would continue to be GST-free under item (2). For repairs carried out under a warranty with a non-resident manufacturer, see ¶9-250. (3) A supply that is made to a recipient who is not in Australia when the thing supplied is done, where the “effective use or enjoyment” takes place outside Australia. For this exemption to apply, the supply must not be of work physically performed on goods in Australia at the time, or a supply directly connected with real property in Australia. This exemption is also intended to apply if, under an agreement with an Australian resident, the supply is made to someone outside Australia (s 38-190(4)); this may apply, for example, to the supply of mobile telephone roaming to an Australian business with an employee overseas, or a supply to an Australian business of a training course to be conducted overseas (GST Ruling GSTR 2005/6). However, this extension of the exemption does not apply to the transport of goods on the Australian leg of an international transport, or to associated loading, handling, facilitation, insurance or arranging costs (s 38-190(5)). Instead, those supplies may be exempt under s 38-355 (¶12-010). Although the recipient must not be in Australia, it is not necessary that the recipient be a non-resident. The Tax Office considers that a company is in Australia if it is incorporated here or if it is a foreign company that satisfies the test applying to non-resident companies under item (2) above (GST Ruling GSTR 2004/7). The Tax Office also considers that the requirement that the recipient must not be in Australia when the thing supplied is done means that they must not be in Australia in relation to the supply when the thing supplied is done (GST Ruling GSTR 2004/7). A similar interpretation applies under item (2) above. Where supplies are made through the internet, it may be hard to know or establish whether the conditions of the exemption have been met. The Tax Office’s interim non-mandatory guidelines suggest that for supplies for less than $1,000, the supplier should obtain as a minimum an appropriate declaration from the recipient and their full address. The Tax Office also suggests that to meet National Privacy Principles the following clause should be displayed on the order page: “Information given in the course of this transaction may be used to determine your liability to Australian GST”. Although quoted prices must normally be GST-inclusive (¶21-010), the Commissioner accepts that if the business only makes supplies that are GST-free under this head, it can show GST-exclusive prices only on its website. However, it should be made clear that the price does not include GST so that any domestic enquirers are not misled. Detailed Tax Office guidelines on the requirement that the “effective use and enjoyment” must take place outside Australia are given in GST Ruling GSTR 2007/2. The Tax Office says that the steps in determining this are: • identify the exact nature of what is being supplied

• identify the entity to which the supply is provided (the “providee-entity”). This need not be the same as the entity to which the supply is made. For example, if a supplier contracts with a company to audit that company’s subsidiary, for the purpose of ensuring compliance by that subsidiary, the supply of that service is made to the company, but it is provided to the subsidiary. Similarly, if a supplier contracts with an employer to provide training for its employees, the supply is made to the employer but provided to the employees. If goods from one entity are addressed for delivery to another entity, the providee-entity is the addressee • determine the time when the supply that is provided to the providee-entity is “done”, in accordance with the rules at ¶4-100 • identify whether, at that time, there is a provision of the supply to the providee-entity outside Australia. This is largely determined by the presence of the entity, ignoring presences that are merely coincidental. For guidelines on determining presence, see the discussion under item (2) above • if the supply is provided partly to an entity in Australia and partly to an entity outside Australia, it can be apportioned on a reasonable basis, which should be documented. The Ruling also includes guidelines on more complex arrangements, such as subcontracts and global supplies. (4) A supply in relation to rights, where the rights are for use outside Australia, or the supply is to a non-resident entity that is not in Australia when the thing supplied is done. This exemption applies, for example, where an Australian copyright owner sells to a non-resident the rights to distribute a product outside Australia. It could also apply where insurance cover is provided against claims arising from overseas acts (GST Ruling GSTR 2003/8); where a trader of emission credits supplies them to non-resident entities for use outside Australia; where a credit card facility is provided to a cardholder to undertake transactions while they are physically overseas (GST Determination GSTD 2017/1); or where brokerage services are supplied to facilitate the sale or purchase of financial products, such as shares, on overseas securities/futures exchanges (GST Determination GSTD 2015/1). This exemption applies to the supply of foreign currency to a passenger who had passed through the departures side of the customs barrier (Travelex Ltd v FC of T [2010] HCA 33). The High Court considered that the exemption applied because the supply related to “rights” attached to the banknotes, rather than being simply a supply of banknotes. In GST Ruling GSTR 2003/8, the Commissioner says that: • the exemption does not apply to a supply of rights which is also a supply of real property, eg leases and licences (see also Saga Holidays; ¶12-020) • a supply made “in relation to” rights covers a supply that is the creation, grant, transfer, assignment, or surrender of a right, eg a supply of intellectual property rights. Following the decision in Travelex, the Commissioner considers that a supply in relation to rights also includes (1) supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights, eg shares or foreign currency; and (2) supplies of services that are directly connected with rights. Examples of these would be legal services for the preparation of a contract for the sale of copyright; enforcement of intellectual property rights or applying for the registration of a trademark; and brokerage services in relation to the sale of shares • it is not necessary that the rights must bind the parties in some way. The Commissioner considers that it is not necessary that the right be a proprietary right — for example, personal rights such as tavern licences may be covered (GST Ruling GSTR 2003/8). Supplies of insurance and capacity in an international telecommunications network may be treated as a supply of rights (see further below), but computer software generally is not (¶4-100). Membership subscriptions could qualify if they involved only a supply of rights, but commonly they would more appropriately be treated as a supply of services which may be GST-free under item (2) or (3) above (GST Ruling GSTR 2003/8).

Whether a right is “for use outside Australia” depends on the intended use (DFC of T v Stewart & Anor 84 ATC 4146). If the right is only partly for use outside Australia, a partial exemption may apply. To determine the appropriate proportion, the supplier may need to consult with the recipient (GST Ruling GSTR 2003/8). Where the supply was of rights to sell education packages, the exemption did not apply where those rights were exercised in Australia, even though the ultimate customers were outside Australia (Interpretative Decision ID 2006/101). Some of the requirements of this exemption are similar to those applying under exemption (2) and are explained in the commentary under that heading. (5) The repair, renovation, modification or treatment of goods that are from outside Australia, and whose destination is outside Australia. For the corresponding exemption for goods used in the repair, see ¶9-220. This exemption was applied where grey waste water was removed from the holding tank of a ship that had interrupted its overseas journey for victualling in Australia (Interpretative Decision ID 2004/491). Possibly, if a horse may be treated as goods, the exemption may apply where an Australian stallion services a foreign mare which has been imported for the purpose and is then exported to their home country. For repairs carried out under warranty, see ¶9-250. Partial exemptions In certain situations, a partial exemption may apply, for example, where services are provided over time and the conditions for exemption under item (2) or (3) are satisfied for only part of that time. The Tax Office considers that in these cases the exemption should be apportioned on any reasonable basis that is supportable (GST Ruling GSTR 2004/7). For methods of apportionment, see ¶4-200. Right or option to acquire something connected with Australia The GST exemption does not apply to the supply of a right or option to acquire something, if the supply of that thing would be connected with Australia (¶4-100) and would not be GST-free (s 38-190(2)). Example An Australian-based hotel chain provides rights to accommodation in Australian hotels to a New Zealand travel agency. The agency provides accommodation vouchers to NZ tourists to use in obtaining accommodation in Australia. In this situation: • there is a supply of a right or option to acquire accommodation • the provision of the accommodation is connected with Australia. The provision of the accommodation rights to the travel agency is therefore not GST-free. Note: For the GST position of the NZ agency, see ¶12-020.

It follows that the denial of GST-free status does not apply if the actual supply of the thing would itself be GST-free, for example, financial services provided to a non-resident. The Commissioner considers that a supplier cannot claim a decreasing adjustment (¶6-000) if the supply of goods under an option turns out to be GST-free, even though the original supply of an option to acquire the goods was taxable (Interpretative Decision ID 2007/185). This situation could arise, for example, if the parties originally envisaged that the goods acquired under the option would be used in Australia, but it turns out that they are exported GST-free. Offshore owners of Australian real estate Special rules apply to services supplied to offshore owners of real estate in Australia. In the absence of these rules, these services could be GST-free under item (2), (3) or (4) above. Under the special rules, supplies of services do not qualify for those exemptions if the services relate to a supply of the property that would be input taxed (s 38-190(2A)). This means, for example, that the

exemptions would not apply to services that relate to the renting out or proposed renting out of a property for residential purposes (¶11-310), or to the sale or proposed sale of a non-new residential property (¶11010). This applies even if the services only relate indirectly or partly to the input taxed supply. Services that would be typically affected include architectural services, property management or selling services, building insurance, repairs, legal services in connection with a mortgage, public liability insurance and advertising in connection with the property. Accounting services are considered to be caught where, for example, they relate to: (1) general management of the non-resident’s bank account to ensure adequate funds were available to meet mortgage repayments; (2) rent statements and accounting records; (3) occasional liaison with the property managers; and (4) preparing and lodging the nonresident’s tax returns. For further details of the treatment of tax return services, see GST Determination GSTD 2007/3 and the ATO Fact Sheet GST and Tax Return Services for Non-resident Property Owners. Examples (1) A non-resident who lives overseas owns a residential rental property in Australia. She hires a local gardener to maintain the garden, and a local real estate agent to advertise the property for rent. Both are registered for GST. As the supply of the rental property is input taxed, the supply of the gardening and advertising services would not qualify for GST-free status, and would therefore be taxable. The same would apply even if the property was partly residential (input taxed) and partly offices (taxable). The services supplied in relation to the whole property would be taxable, not just those relating to the residential part. However, in accordance with the normal rules, the owner would, if registered, be entitled to input tax credits only for the portion of the services that relates to the offices, not the residential part. (2) A non-resident owns investments consisting of a residential rental property in Australia and also some shares in Australian companies. It acquires written advice on the tax effectiveness of these investments from an Australian accountant. It is not in Australia when the services are performed. The acquisition of the advice is partly related to the input taxed supply of the Australian rental property and partly related to its other investments in shares. The supply of advice is not GST-free, as the acquisition of the supply relates in part to the making of a supply of residential premises that is input taxed. If the non-resident sought advice only about its investments in Australian shares (eg whether it should sell some shares and acquire other shares), the acquisition of the advice would not relate directly or indirectly to the making of a supply of real property in Australia, and may therefore be GST-free if it otherwise qualifies for exemption. (Based on GST Determination GSTD 2007/3.)

Supplies of telecommunication services Global roaming: a separate exemption applies for mobile telephone global roaming and mobile internet roaming services provided to subscribers of non-resident suppliers while in Australia (s 38-570; GST Determination GSTD 2012/10). For global roaming services outside Australia, the Commissioner accepts that an exemption under item (3) above may be available in certain circumstances (GST Determination GSTD 2012/8). Interconnection: the Commissioner accepts that supplies of interconnection services made by an Australian resident telecommunications supplier to a non-resident may be exempt under item (2) above in certain circumstances (GST Determination GSTD 2012/7). Capacity: for the Commissioner’s views on the application of the exemption in item (4) above to a supply of capacity in an international telecommunications network by a resident supplier, see GST Determination GSTD 2012/9. [GSTG ¶41-300]

¶9-250 Repair or treatment of goods under warranty For tax periods starting on or after 1 October 2016, repairs, renovations, modifications or treatments of goods carried out for a non-resident are GST-free where they are done to meet the non-resident’s obligations under a warranty (s 38-191). For this to apply, the non-resident must be outside Australia, must not be registered (or required to be), and the services must be acquired as part of its enterprise. In addition, the warranty must either have been sold as part of a package with the supply of goods, or been a separate taxable supply. The exemption also extends to goods, such as replacement parts, that are supplied as part of the warranty services. This exemption could apply, for example, where a non-registered non-resident is required to repair a

defect under warranty in goods it supplied to an Australian recipient, and engages an Australian repairer to carry out the services. It is designed to prevent the non-resident being unnecessarily drawn into the GST system. Before this change, the services would have been treated as taxable, as they would not have qualified for the exemption in item (2) at ¶9-240 (see former GST Determination GSTD 2006/2). However, a payment from a non-resident car manufacturer to and Australian distributor under an offshore warranty chargeback arrangement would not be subject to GST in any event, if the repairs were carried out by the distributor purely under its own warranty to the customer (GST Determination GSTD 2006/1).

FINANCIAL SUPPLIES AND INSURANCE FINANCIAL SUPPLIES Overview

¶10-000

Financial supplies: general requirements

¶10-005

Financial supplies: specific items

¶10-010

What are not financial supplies?

¶10-020

Apportioning input tax credits

¶10-030

“De minimis” test: where credits do not exceed threshold

¶10-032

Input tax credits for expenses of borrowing

¶10-035

75% “reduced” input tax credit for certain services

¶10-040

Reduced credit for offshore management and support services ¶10-042 Provision of fringe benefits by financial suppliers

¶10-045

Exported financial services

¶10-050

Sales of things acquired to make supplies

¶10-060

Sales to satisfy debts

¶10-070

Superannuation funds

¶10-080

Other practical impacts for financial service providers

¶10-090

INSURANCE Issue of life insurance policies

¶10-100

Issue of general insurance policies

¶10-110

Insurance settlements

¶10-120

Statutory compensation schemes

¶10-130

GST-free insurance

¶10-140

Other special insurance rules

¶10-150

Editorial information

Summary This chapter looks at the special rules that apply to the financial and insurance industries. Most financial supplies — such as loans — are input taxed, so GST does not apply and no input tax credits can be claimed by the supplier. However, this does not apply to advisory services, which are subject to GST. Limited credits may also be allowed for specified outsourced services and in certain other situations. Difficult problems of apportionment arise if financial institutions also provide non-financial supplies or make GST-free exports of their services. Life insurance is input taxed, general insurance is subject to GST, while health insurance and “exported” insurance are GST-free.

FINANCIAL SUPPLIES ¶10-000 Overview Supplies that are classed as “financial supplies” — including loans, share trading and life insurance — are input taxed (s 40-5). In general, this means that the supply is not taxable and that the supplier cannot claim input tax credits for the GST component of the things it acquires for the purpose of providing that supply. Example A bank acquires a computer to use in its loans business. Loans are financial supplies and are input taxed. GST therefore does not apply to the loan, and the bank cannot claim an input tax credit for the GST it paid on the computer.

As an exception to this general rule, certain acquisitions do entitle a financial supplier to claim input tax credits, but only at a reduced 75% rate. For example, if a bank obtains debt collection services from third parties, it can claim a 75% input tax credit, even though it uses those services in providing input taxed financial supplies (¶10-040). Further exceptions apply where the credits satisfy a “de minimis” test (¶10032), where credits are being claimed for borrowing expenses (¶10-035) or where supplies are made through overseas branches (¶10-050). Not every supply that a financial supplier makes is treated as a “financial supply”. Supplies such as general insurance, finance leases, professional advice or broking services are treated as taxable (¶10020). A financial supplier is also, of course, taxable on other taxable supplies that are not related to finance, and may make some supplies that are GST-free, for example, where it exports services (¶10050). Conversely, not every financial supply will be made by a financial institution. For example, retailers who provide credit to their customers are making financial supplies, which will potentially be input taxed. This range of possible GST treatments makes it essential for all suppliers to identify the various types of supply that they make, and to identify the inputs that relate to each type of supply. The question of apportionment is discussed at ¶10-030. Rationale for treatment of financial supplies Before explaining the rules in detail, it is useful to understand their rationale. According to the Treasurer, the general rule is that “where a financial supply provider is able to earn a return on a financial product, the supply of a financial product will be a financial supply and input taxed. A financial supply provider is generally able to earn a return by way of margin where they hold a legal interest in the financial product before it is supplied”. Making these supplies input taxed overcomes difficulties in identifying the valueadded margin on individual transactions, because input taxation does not require the service to be valued. The Treasurer added that “All other financial services, including agency services, are generally not capable of being charged for by way of a margin. This is because the facilitators of such financial services do not hold a legal interest in a financial product before it is supplied. All other financial services will therefore be taxable. For example, fees and commissions relating to agency services are easily identified and valued, and are taxable”. Tax Office guidelines on compliance, records and governance The Tax Office has issued detailed guidelines for financial suppliers in relation to the GST governance and record-keeping procedures necessary to mitigate GST risks. In general, when reviewing a supplier’s compliance, the Tax Office will be looking for evidence that: • the roles and responsibilities of different parts of the business are defined

• controls are in place at the board, managerial and operational levels, including oversight of non-tax functions that are critical to tax outcomes (eg offshore resources and information technology) • sign-off procedures are undertaken by someone other than the original decision maker – eg in apportionment methodology, requiring internal or external verification to assess the robustness of the supplier’s positions • the supplier has ensured the integrity of the tax positions it has adopted, such as by monitoring changes in tax law or administrative updates, and documenting the technical analysis it has undertaken to form its views • the supplier uses appropriate systems and processes to meet its GST obligations, including methods for determining the extent of creditable purpose for acquisitions — eg system account codes or allocation tables to classify transactions appropriately and identify reduced credit acquisitions • staff are adequately trained in these systems and processes, through regular refresher training and access to training manuals • processes are in place to review the supplier’s tax positions regularly or when there are significant changes to its circumstances, (eg review of apportionment methodology to ensure it remains fair and reasonable). The Tax Office considers specific priority issues include: • determining the extent of creditable purpose (¶10-030) • reduced credit acquisitions (¶10-040) • reverse charge for recipients of cross-border supplies (¶9-100) • rights for use offshore (¶9-240) • significant or unusual transactions (www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/GSTgovernance-and-record-keeping-for-financial-supplies/). [GSTG ¶30-000]

¶10-005 Financial supplies: general requirements What constitutes a financial supply is specified entirely in the Regulations (s 40-5). For there to be a financial supply, the following must apply. (1) There must be a provision, acquisition or disposal of an “interest” in specified items (GST Regulations s 40-5.09). An interest means any form of property (GST Regulations s 196-1.01: former reg 40-5.02). This is interpreted widely (FC of T v American Express International Inc [2010] FCAFC 122). For example, it includes: • a debt or right to credit • an interest conferred under a superannuation scheme • a mortgage over land or premises • a right under a contract of insurance or guarantee • a right to receive a payment under a derivative • a right to future property. A “provision” includes the allotment, creation, grant or issue of the interest (GST Regulations s 196-1.01;

former reg 40-5.03). An “acquisition” includes acceptance and receipt of the interest (GST Regulations s 40-5.05). A “disposal” includes assigning, cancelling, redeeming, transferring and surrendering (GST Regulations s 196-1.01; former reg 40-5.04). The reference to an “acquisition” means that a financial supply will include an acquisition and, apparently, that a supply made includes an acquisition received. This has been described as “perhaps counterintuitive” and a “rather strange use of the regulation making power” which could raise a question of validity (Hill J in HP Mercantile Pty Limited v FC of T 2005 ATC 4571; [2005] FCAFC 126). These financial supplies that take the form of an acquisition are referred to as “acquisition supplies”. (2) The provision, acquisition or disposal must be “for consideration” (¶4-020). In the case of an acquisition supply (see above), it appears that this requirement will be satisfied even though the consideration actually flows from, rather than to, the deemed supplier (AXA Asia Pacific Holdings Ltd v FC of T [2008] FCA 1834). For special rules applying to associates, see ¶17-500. (3) It must be in the course of an enterprise (¶3-020). So, for example, an occasional share trade by a private individual is not a financial supply, where that individual is not carrying on an enterprise. (4) It must be connected with Australia (¶4-100). For example, a mortgage over land or goods will be connected with Australia if the land or goods are situated here. However, a mortgage over a copyright or debt will be connected with Australia if the supply is made through a business situated in Australia, irrespective of where the mortgaged property is situated. (5) The entity that provides, acquires or disposes of the interest must be a “financial supply provider” (GST Regulations s 40-5.06). This covers the owner of the interest immediately before its supply, the creator of the interest, and the acquirer of the interest. For example, if you sell shares, both you and the purchaser are financial supply providers. If you sell the shares through an agent, you are a financial supply provider, but the agent is only a financial supply facilitator (GST Regulations s 40-5.07). It follows that if all other relevant conditions are fulfilled, your sale of the shares will be input taxed, but the provision of the agent’s services to you would be taxable. (6) The financial supply provider must be registered or required to be registered (¶3-000). Imported financial services are treated as financial supplies, even though they are not connected with Australia and the supplier is not registered. [GSTG ¶30-020]

¶10-010 Financial supplies: specific items Interests in the following numbered items may be the subject of a financial supply (GST Regulations s 405.09; Sch 2). More detailed lists are provided in GST Ruling GSTR 2002/2. Accounts (item 1) This covers services provided by banks to banking account holders and includes: • opening, keeping, operating, maintaining and closing of cheque, debit card, deposit and savings accounts for account holders (for debit card surcharges, see ¶4-080) • cash collection, handling and sorting for account holders by account providers • Automatic Teller Machines (ATMs), electronic and telephone operation of accounts, ATM withdrawals, deposits, electronic transfers and balance notifications supplied by any entity (not just an authorised deposit-taking institution) are input taxed, provided that the fee does not exceed $1,000 (GST Regulations s 40-5.09(4A); GST Ruling GSTR 2014/2). Foreign ATM transactions may, however, be GST-free (GST Ruling GSTR 2002/2) • supply of standard cheque and deposit books for account holders • supply of debit and smart cards • cashing cheques and payment orders

• preparation, reconciliation and replacement of account statements • notification of dishonoured transactions and unpaid fees. For the treatment of the actual fees, see ¶4080 • stopping payment of cheques • operation of authorised overdraft facilities • services related to unauthorised usage of overdraft facilities • retention and storage of vouchers • making information about accounts available • garnishee of accounts • recovery of Commonwealth, state and territory fees, duties and taxes • audit confirmation of accounts • electronic funds transfer • money transfer for account holders • making disbursements for account holders. An actual EFTPOS transaction between the bank and the customer is a financial supply. However, where a service provider allowed another business to use its EFTPOS facilities for a fee, that was a taxable supply, not an input taxed financial supply (Interpretative Decision ID 2004/820). The supply of transaction information to a client in relation to a transaction on the client’s account would be covered, but not information related to a transaction of the client’s customer (Interpretative Decision ID 2007/33). The provision of a prepaid card facility was considered to be a financial supply in Interpretative Decision ID 2010/225. The supply of access to internet banking services and the supply of internet transaction facilities would be financial supplies under this head (Interpretative Decisions ID 2006/32; ID 2006/33), although the supply of software access and maintenance would be taxable (GST Ruling GSTR 2002/2). Loans, debt and credit (item 2) This covers debts, credit arrangements or rights to credit and includes: • borrowing and lending, including establishing, maintaining and discharging loans • opening, keeping, operating, maintaining and closing charge and credit card facilities (provision of credit card facilities for use overseas may be GST-free: ¶9-240) • supply of credit cards (for credit card surcharges, see ¶4-080) • establishing, operating and terminating letters of credit • rights to an income stream under a securitisation arrangement (for details, see GST Ruling GSTR 2004/4 (subject to changes: see GSTR 2004/4DC)) • recovery of Commonwealth, state and territory fees, duties and taxes • recovery of lender’s mortgage insurance fees. The concept of “credit” bears its ordinary meaning and should not be construed narrowly (FC of T v

American Express International Inc [2010] FCAFC 122). The Commissioner considers that item (2) may also apply to assignments of rights to payment streams under loan agreements, finance and operating leases, residential or commercial property leases, royalty agreements, credit card receivables arrangements and debt factoring (GST Ruling GSTR 2004/4 (subject to changes: see GSTR 2004/4DC); Interpretative Decision ID 2007/158). Where the underlying supply is subject to GST (eg in the case of a commercial property lease), the supplier remains the entity liable to account for the GST. A “debt” may include a contingent debt (Interpretative Decision ID 2007/29). For the Tax Office’s provisional views on acquisitions made by a credit card or charge card issuing business with a four party (open loop) payment system, see Draft GST Determination GSTD 2018/D1. For its views on the circumstances in which fuel card transactions involve financial supplies of credit, taxable supplies of fuel, or both, see GST Ruling GSTR 2005/1. Mortgages and charges (item 3) This covers mortgages and charges over real and personal property and includes: • a mortgage over land or premises • a mortgage over a chattel • a charge over the assets of a company • documentation or valuation of the collateral or security for a credit or advance • a mortgage over a share or bond. Superannuation, annuities (items 4 and 5) • Interests in a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, public sector superannuation scheme or retirement savings account. This would also apply where the fund trustee supplies information to the member about that member’s interest in the fund (Interpretative Decision ID 2006/246). However, where that information is supplied, for a fee, to a non-member spouse under family law rules, this would be treated as a taxable supply (Interpretative Decision ID 2006/245). • Annuities or allocated pensions. Life insurance (item 6) • A contract of insurance that provides for the payment of money on the death of a person, or on the happening of a contingency dependent on the termination or continuance of human life. • A contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life. • A contract of insurance for a term dependent on the termination or continuance of human life that provides for the payment of an annuity. • A contract that provides for the payment of an annuity for a term not dependent on the continuance of a human life. • A continuous disability policy. • Investment account contracts and investment-linked contracts. Guarantees and indemnities (items 7 and 7A) This covers:

• a guarantee, ie an agreement under which the guarantor agrees to be liable for the obligations of another if the other entity defaults • an indemnity that protects a person from any loss as a result of a transaction the person enters into with a third party. This does not apply to warranties for goods, or non-life insurance or reinsurance. These are not financial supplies (¶10-020). The Tax Office considers that this category also does not cover the situation where a lessor guarantees a lessee’s income from the business operated from the leased premises (GST Ruling GSTR 2003/16). For detailed guidelines on guarantees and indemnities, see GST Ruling GSTR 2006/1. Pre-1 July 2012 hire-purchase agreements (item 8) Supplies made or credit provided under hire-purchase agreements entered into on or after 1 July 2012 are not financial supplies and are fully taxable (¶10-020). However, credit under a pre-1 July 2012 hirepurchase agreement in relation to goods is a financial supply if the credit is provided for a separate charge disclosed to the recipient. This means that the credit (interest) component and associated fees and charges is input taxed, but the principal payments are subject to GST in the normal way. If the credit component of a pre-1 July 2012 hire-purchase agreement is not shown separately and disclosed to the recipient, the entire agreement is subject to GST. Post-30 June 2012 changes made to pre-1 July 2012 hire-purchase agreements do not affect their GST treatment unless the changes amount to a new agreement. For special attribution rules applying to hire-purchase agreements, see ¶7-438. Finance leases are not treated as financial supplies and are wholly subject to GST (GST Regulations s 40-5.12, item 6; ¶10-020). Currency (item 9) This covers Australian currency, foreign currency and agreements to buy and sell currency, and includes: • digital currency (such as Bitcoin) from 1 July 2017 (¶4-010) • foreign currency in cash form • foreign currency drafts • traveller’s cheques • international cheques • collection, negotiation and endorsement of instruments (including cheques) for payment in foreign currency, including message services • forward contracts for transactions to buy or sell foreign currency • options to buy or sell foreign currency • conversion of Australian currency into foreign currency and conversion of foreign currency into Australian currency. Although the supply may be a financial supply, it will be treated as GST-free rather than input taxed if it qualifies for the export exemption. For example, the supply of foreign currency to a passenger travelling overseas who intended to use the currency overseas, and had passed the departure side of the Customs barrier was held to be a GST-free export in Travelex Ltd v FC of T [2010] HCA 33 (¶9-240). So was the supply of banknotes to a wholesale customer in another country (Interpretative Decision ID 2006/203). The supply of currency with a market value above its face value is not a financial supply (¶10-020). Where a non-bank entity cashed a cheque for a fee, this was considered to be a financial supply of

currency by the entity, and a financial supply of an interest in a security by the other party, provided that the general requirements (¶10-005) were satisfied (Interpretative Decision ID 2007/146). Conversely, where the entity provided a cheque to a client in exchange for an equivalent amount of cash, plus a fee, this was considered to be a financial supply of an interest in a security by the entity, and a financial supply of currency by the client (Interpretative Decision ID 2007/159). For the Commissioner’s views on the availability of input tax credits for acquisitions related to retail foreign currency exchange transactions with customers in Australia, see GST Determination GSTD 2012/5. For the treatment of bitcoin transactions, see ¶4-010. Securities (item 10) • Bonds, stocks or debentures issued, or proposed to be issued, by a government entity. • Shares, debentures or convertible notes. • Subordinated notes. • Structured notes. • Interests in the capital of a trust. This would cover units in a unit trust (see, for example, AXA Asia Pacific Holdings Ltd v FC of T [2008] FCA 1834), but is apparently not restricted to this. Possibly, it may extend to any transfer of a trust asset. However, it did not apply where a unit holder in a unit trust entered into a contract to appoint a proxy to vote at a meeting of unitholders (Interpretative Decision ID 2011/20), or where a trustee of a unit trust constituting a registered managed investment scheme executed a deed irrevocably appointing a proxy to vote against resolutions at a meeting of unitholders (Australian Style Investments Unit Ltd v FC of T 2013 ATC ¶10-341; [2013] AATA 847). Trustee services are also not treated as financial supplies. • Dealings in floating rate notes, commercial bills, commercial paper, extendable bill investments and other financial instruments. • Interests in the capital of a general law partnership, as distinct from a tax law partnership (¶3-015). This includes all the interests that a partner acquires from the partnership as a consequence of being a partner, and includes the partner’s interest in the partnership (GST Rulings GSTR 2003/13; GSTR 2004/6). • Promissory notes and bills of exchange. (For the implications of cashing or providing cheques for a fee, see under heading “Currency” above.) • Bank cheques. • Warrants. • Securities lending. Example GST does not apply where a share trader buys or sells shares, as this is an input taxed financial supply. However, brokerage on the transaction will normally be subject to GST (¶10-020). If the trader is registered for GST, it may claim a reduced input tax credit for 75% of the GST on the brokerage (¶10-040), with the balance of the GST on the brokerage being tax deductible (¶24-030). If the trader is not registered for GST (and not required to be), no input tax credit at all can be claimed for the GST on the brokerage, but it may be tax deductible (¶24-030).

In determining whether a share trader exceeds the turnover threshold for compulsory registration (¶3000), the turnover from input taxed share trading activities is not taken into account (¶3-030). However, if the threshold is not exceeded and the trader does not register, it cannot claim the reduced input tax credit for GST on the brokerage.

If you are a share investor, not a trader, GST will typically not apply in any event because you are not carrying on an enterprise. No input tax credit or tax deduction can be claimed for GST on any brokerage, but GST will be included in the cost base of the shares for capital gains tax (CGT) purposes (¶24-060). Interests in managed investment schemes are generally included, as are time-sharing schemes. For an example involving a forestry managed investment scheme, see Interpretative Decision ID 2010/129. As to whether participants in agricultural managed investment schemes can be treated as carrying on an enterprise, see ¶3-020. For the treatment of barter trade exchange schemes, see ¶7-435. Share-for-share swaps involve financial supplies by both parties. Example The following is based on Tax Office decisions on the GST implications of various transactions associated with time-share schemes: (1) An accommodation time-sharing scheme issued timeshare points to a participant in the scheme. This was treated as a financial supply to that participant. In addition, to the extent that the developer’s interest in the scheme was proportionately reduced when the timeshare points were issued, there was a financial supply by the developer to the scheme. The requirement that there can only be a supply where the supplier “does something” (¶4-010) was met, because the developer had agreed to be bound by the scheme’s constitution which provided for the reduction in its interest whenever timeshare points were issued (Interpretative Decision ID 2010/18). It is possible that in certain circumstances such a supply might constitute a GST-free supply of a going concern (¶11-500). (2) Conversely, when the developer made a property contribution to the scheme, thus increasing its interest, this constituted a financial supply by the scheme to the developer (Interpretative Decision ID 2010/18). (3) The supply of short-term excess accommodation by the scheme was taxable. It was not input taxed, either as a financial supply or as a supply of “commercial residential premises” (¶11-030) (Interpretative Decision ID 2010/19). (4) The supply of an interest in the scheme to an overseas non-resident was not a GST-free export of services (s 38-190), because the interest constituted rights over real property (¶11-000; Interpretative Decision ID 2010/20). (5) The annual maintenance fee paid by a participant in the scheme is consideration for the input taxed supply of an interest in the scheme (Interpretation Decision ID 2010/23).

Securities included an interest acquired as a single member in a limited liability company formed under Delaware law. That interest was considered to be broadly equivalent to a “share” in the share capital of a company limited by shares (Interpretative Decision ID 2010/125). A company was treated as having made a financial supply when it redeemed redeemable preference shares from its shareholders (Interpretative Decision ID 2012/66). Derivatives (item 11) • Forward contracts, futures contracts, swap contracts and options contracts whose value is related to: (1) the price of debt securities or debts securities index values or interest rates; (2) foreign exchange or currency values or currency index values; (3) share or stock prices or equity index values; (4) credit spreads or credit events; (5) macroeconomic indicators or variables; or (6) climatic events or indexes. • Commodity derivatives that involve no option, right or obligation to delivery of the commodity (eg electricity derivatives). • Reciprocal repurchase agreements. • Options over input taxed supplies of precious metals. • Securities lending agreements. • Initial and variation margins in respect of exchange traded futures contracts. • Cash settlements of derivatives over the counter or on the exchange, rather than the physical delivery of the underlying tangible assets. A guaranteed fixed interest rate facility may be treated as a derivative (Interpretative Decision ID 2003/1061). So may financial spread betting contracts and “contracts for difference” (GST Determination

GSTD 2005/3), but not an arrangement where a taxpayer sold a commodity to a financial institution and agreed to subsequently repurchase it at a price reflecting the original sale price plus interest and holding charges (Interpretative Decision ID 2004/76). A commodity trader does not make a taxable supply when it makes a cash settlement payment in relation to a deliverable commodity forward contract where there is a formal default. The payment is simply treated in the same way as damages (¶4-085; Interpretative Decision ID 2004/359). The same would apply when a party is in default due to insolvency. The grant of an option may be the supply of a derivative, but it is not an input taxed financial supply if the option is to make or receive a taxable supply (¶10-020). For the treatment of bitcoin transactions, see ¶4-010. Foreign bank accounts, superannuation (items 12, 13) Supplies of bank accounts and superannuation interests by foreign financial institutions (tax periods starting on or after 1 July 2017). Services to non-account holders Services of these types that are provided by authorised deposit-taking institutions to a non-account holder are also treated as a financial supply if the fee charged is $1,000 or less. For example, this could apply where an application fee is charged for a loan that is not approved or taken up. The supply of transaction information to a client who was not an account holder would be covered where it relates to the client’s own transaction (Interpretative Decision ID 2007/32), but not information related to a transaction of the client’s customer (Interpretative Decision ID 2007/33). Incidental financial supplies Anything that is supplied directly in connection with a financial supply is itself a financial supply, provided: • it is incidental to the main financial supply • both supplies are made at about the same time, but not for separate consideration • the supplier and the recipient are the same in each case • making the supplies together is the usual practice of the supplier in the ordinary course of its business (GST Regulations s 40-5.08; 40-5.10). “Usual practice” is not limited to already-established practices — it can be a practice new to the supplier, or a usual practice established by other financial supply providers, that the supplier intends adopting (GST Ruling GSTR 2002/2). This rule is intended to avoid the need for financial suppliers to allocate a separate price to relatively small non-financial components of a larger financial supply. Examples (1) In accordance with its normal practice, a bank values a home as part of making a home loan. No separate charge is made. As the valuation is directly connected to the loan (which is a financial supply), the valuation would be treated as an incidental financial supply. Both the valuation and the loan would therefore be input taxed. However, if the valuation was supplied by a third party not acting for the bank, it would not be an incidental financial supply, as it is not provided by the same supplier as the loan. The valuation would therefore be subject to GST in the normal way. (2) In accordance with its normal practice, a bank provides “free” financial advice as part of making a home loan. The advice would be treated as an incidental financial supply and both the advice and the loan would be input taxed. However, if the bank later provides general financial advice for a fee to that same customer, this would not be an incidental financial supply as it is not “directly connected” to the loan. The advice would therefore be subject to GST in the normal way.

Incidental financial supplies are treated as financial supplies even if they are covered by an exclusion noted at ¶10-020 below. [GSTG ¶30-040]

¶10-020 What are not financial supplies? The supply of any of the following items, or interests in them, is not a financial supply and would therefore normally be subject to GST (s 40-5; GST Regulations s 40-5.12; Sch 3). (Detailed lists are given in GST Ruling GSTR 2002/2.) (1) Cheque and deposit forms and books supplied to a banking business. (2) Special forms, or overprinting of special forms, to the requirements of particular account holders. (3) Professional services, including information and advice, in relation to a financial supply. This includes: • advice by a legal practitioner or accountant in the course of professional practice • taxation advice, including tax return preparation • actuarial advice • rating services for securitisation vehicles. For broking services, see (11) below. (4) Payment systems, ie funds transfer systems that facilitate the circulation of money, including any procedures that relate to the system. This includes: • supplies of services covered by membership, processing, service, marketing, risk management and multi-currency fees • access to payment systems • supplies of services by one participant in a payment system to another in relation to charge, credit and debit card transactions • processing, settling, clearing and switching the following: direct credit and debit; other debit and credit transactions; charge credit and debit card transactions; cheques; electronic funds transfer; ATM; BPAY; internet banking; Bank@Post; SWIFT; approved RTGS systems; and Austraclear • supplies of services for processing of account data and electronic payment. A “payment system” does not include the arrangement for the provision of a credit card or charge card facility (FC of T v American Express International Inc 2010 ATC ¶20-212; [2010] FCAFC 122). Nor, with effect from 1 July 2017, does it include digital currency, such as Bitcoin (¶4-010). (5) Stored value facility cards and prepayments, other than those linked to accounts of the type specified at ¶10-010. Fees for prepaid travel cards denominated in a foreign currency are GST-free to the extent that the card is intended to be used when the cardholder is outside Australia (GST Ruling GSTR 2002/2). (6) Goods supplied in accordance with lease agreements where the lessors dispose of their rights in the goods to the lessees, or where the lessees have no obligation or option to acquire the rights of the lessors in the goods. This would include finance leases. As to hire-purchase agreements, see (20) below. (7) Options, rights or obligations to make or receive a taxable supply. This means that GST may apply to any premium on a deliverable commodity option, such as a deliverable wool option or wheat option. However, the provision of margin in respect of exchange traded futures is input taxed. Mortgages and charges over real and personal property are also input taxed (¶10-010). The grant of a call option to make or receive an input taxed supply would be input taxed, and the grant of a call option to make or receive a GST-free supply would be GST-free (¶11-068). (8) Supplies made as a result of the exercise of an option or right, or the performance of an option, to make or receive a taxable supply. This means that the supply of the taxable commodity when delivery takes place is not a financial supply, and GST is payable on the basis of the settlement price, ie GST is payable on the strike or exercise price when the commodity such as wool or wheat is delivered under the option. However, if the futures contract is cash settled without delivery of the commodity, no GST is

payable as the settlement is a financial supply (ATO GST Industry Issues — Primary Production: Issue 20.9.1). Item (8) includes supplies made as a result of an option, etc, under a mortgage or charge. (9) Facilities for trading securities or derivatives and the clearance and settlement of those trades. (10) Insurance and reinsurance business, except for life insurance. This includes insurance against loss, damage, injury or risk. Health insurance is not a financial supply but is GST-free (¶13-370). (11) Broking services, for example, services by stock brokers and insurance brokers. These are subject to GST. If the customer is a business, it can claim a 75% credit for this GST under the reduced input tax credit rules (¶10-040). If the broker transfers shares in its own right, that will be an input taxed financial supply. If the broker carries on both types of activity, an apportionment will be necessary. Example A broker rents office premises where it carries on brokerage trading (taxable) and share trading on its own account (input taxed). It will need to apportion the GST on the rent between the two activities and claim input tax credits only in relation to the brokerage component. As to the method of apportionment, see ¶10-030.

(12) Management of the assets or liabilities of others or acting as a trustee, including investment portfolio management and administration services for trusts or superannuation, pension or annuity funds. These services would include maintaining account holder records and associated accounting, processing of contributions and returns, storage and retrieval of archives, statement processing and bulk mailing. (13) Debt collection services. (14) Sales accounting services under a factoring or similar arrangement. (15) Trustee services. This would include management fees for acting as a trustee of a trust or other entity, or for acting as a trustee under a will or settlement. (16) Custodian services in relation to money, documents, digital currency (from 1 July 2017: ¶4-010) and other things. (17) Australian or foreign currency if the market value exceeds its stated value as legal tender, and agreements to buy or sell that currency. An acquisition of currency at face value involves a financial supply even though the acquisition was made with a view to possible re-sale of the currency as collectibles (Interpretative Decision ID 2006/202). (18) Providing goods to an entity for display or demonstration pending disposal to a third party, ie bailment and floor plan arrangements. (19) and (20) Supplies of goods or credit provided under a hire-purchase agreement entered into on or after 1 July 2012. The “credit” may relate to the cost of the goods or associated costs such as stamp duty, registration and insurance. It may also include an amount financed to discharge a debt incurred under a separate hire-purchase agreement entered into earlier with the same financier (Interpretative Decisions ID 2013/31; ID 2013/32). For pre-1 July 2012 agreements, credit could be a financial supply in certain circumstances (¶10-010). (21) Warranties for goods. National Guarantee Fund payments No GST consequences arise from National Guarantee Fund payments made to companies in order to fund the clearing and settlement system support provided for under s 891A of the Corporations Act 2001. This, however, does not apply to payments made from the Fund to compensate investors (Taxation Laws (Clearing and Settlement Facility Support) Act 2004). [GSTG ¶30-040]

¶10-030 Apportioning input tax credits It will often happen that an institution such as a bank provides input taxed financial supplies together with

other services that are taxable or GST-free. For example, a bank may provide a loan that is input taxed, advisory services that are subject to GST and exported services that are GST-free. In this situation, the bank can generally only claim full input tax credits for business inputs so far as they relate to the advisory services and the exported services. This means that an apportionment will have to be carried out (s 1130). Commissioner’s guidelines The general rule for apportionment is that the method for doing this must be fair and reasonable, must reflect the intended use of the acquisition, and must be appropriately documented. The Commissioner’s preferred methods of apportionment are set out in GST Ruling GSTR 2006/3. See also the ATO’s “GST Apportionment Decision Making Guide for Financial Supply Providers” at www.ato.gov.au. The Commissioner considers that you should use the “direct estimation” method to the greatest extent possible. This method involves matching the cost of certain “sole purpose” acquisitions to certain activities, and allocating mixed purpose costs to specific outputs in accordance with an internal cost allocation system. If the accounting system that you use satisfies Australian Accounting Standards, the Commissioner will generally accept it as being a reasonable basis for direct estimation. An entity-based “general formula” method may be used for unallocated costs, or to the extent that direct attribution is not possible. Under this general formula, the proportion of input tax credit which will be allowed is calculated as: revenue in relation to taxable and GST-free supplies  total revenue including input taxed supplies 

Example A business has GST-free financial services revenue of $50,000, revenue from taxable supplies of $100,000 and input taxed supplies of $150,000. It has overheads of $30,000 that cannot be directly attributed to any particular activity. Under the general formula, the percentage of input tax credit that it can claim on the overheads is:

  50,000 + 100,000    (50,000 + 100,000 + 150,000) 

= 50%

Therefore, the business can claim input tax credits in relation to expenses directly attributable to its GST-free and taxable supplies, and on $15,000 (ie 50% of $30,000) of the overheads.

Detailed examples of the use of the general formula are given in GST Ruling GSTR 2006/3. In applying the formula, it has been held that payments of late payment fees under a credit card facility should be treated as revenue from input taxed (financial) supplies (FC of T v American Express International Inc [2010] FCAFC 122). Special formulas may also be acceptable if they are better suited to the particular business. Example A business rents out commercial premises (taxable) and also makes financial supplies (input taxed). It can directly attribute $4,000 of its expenses to the taxable activity and $6,000 to the financial supplies. It has overheads of $200 that it cannot directly attribute to either activity. Using an input based method, the proportion of overheads that could be allocated to the taxable activity is:

  4,000   = 40%  (4,000 + 6,000)  Therefore, the business can claim input tax credits on $4,000 directly attributable expenses, and on (40% of $200) = $80 of the overheads.

Provided the apportionment method you choose is appropriate, reasonable, accurate, well documented and justifiable, you can choose the method that gives you the most advantageous result.

Example Corporate Treasury acquires a new photocopier. On a dollar turnover basis, Corporate Treasury produces 50% GST-free supplies (exports) and 50% input taxed supplies. On a number of transactions basis, the ratio is 65/35. On a headcount basis, the ratio is 40/60. As input tax credits can only be claimed to the extent that the supplies are GST-free, the most advantageous method is the transactions basis. Assuming that this conforms with Australian Accounting Standards, and adequate records are kept, this will be acceptable to the Commissioner, provided that the number of export transactions is not artificially inflated (eg by “churning”), in which case the anti-avoidance measures may be applied (¶20-000; based on GST Ruling GSTR 2006/3).

You can also retrospectively change an apportionment made for an earlier tax period by applying a different apportionment method which is more advantageous, provided that this method is also fair and reasonable (Interpretative Decisions ID 2008/75; ID 2008/76). For time restrictions, see ¶5-010. For the Commissioner’s views on the availability of input tax credits for acquisitions related to retail foreign currency exchange transactions with customers in Australia, see GST Determination GSTD 2012/5. Credit unions, building societies and member-owned banks A shortcut method applies to customer-owned banking institutions (COBIs) such as mutual banks, credit unions and building societies. For tax periods starting on or after 1 July 2017, the Commissioner accepts a rate of no more than 18% as the extent of the creditable purpose, subject to specified conditions (Practical Compliance Guideline PCG 2017/15). Acquisitions in relation to transaction accounts The Commissioner has issued draft apportionment guidelines for acquisitions by banks, credit unions or building societies in relation to the supply of transaction accounts, such as everyday savings, cheque, deposit, online savings and term deposit accounts (Draft GST Ruling GSTR 2019/D1). Reduced credit acquisitions The position is further complicated where the financial supplier makes a reduced credit acquisition (eg for debt collection services). In this case, a combination of approaches is necessary (¶10-040). [GSTG ¶30-300]

¶10-032 “De minimis” test: where credits do not exceed threshold The general rule is that you cannot claim input tax credits on acquisitions related to making financial supplies. However, there is an exception to this if you do not exceed the financial acquisitions threshold (FAT) (s 11-15(4)). This exception is sometimes called the “de minimis” test. It is designed to ensure that most entities are not denied input tax credits for making financial supplies that are not part of their principal commercial activities. Whether you satisfy this test is determined each month. The test has two separate components — a current year component and a projected year component. To satisfy the test, you must satisfy both components. The current year component requires you to calculate the financial acquisitions that you have made or are likely to make in the current month and the previous 11 months. You then work out the input tax credits that would apply to those acquisitions if they had been made for a creditable purpose. If these credits exceed either $150,000 or 10% of your total input tax credits for that year (including the potential credits for the financial acquisitions), you have exceeded the threshold and cannot satisfy the test (s 189-5). In a similar way, the projected year component requires you to calculate the financial acquisitions that you have made or are likely to make in the current month and the next 11 months. You then work out the input tax credits that would apply to those acquisitions if they had been made for a creditable purpose. If these credits exceed either $150,000 or 10% of your total input tax credits for that year (including the potential credits for the financial acquisitions), you have exceeded the threshold and cannot satisfy the test (s 18910). Financial acquisitions

The “financial acquisitions” referred to in these tests are acquisitions that relate to the making of a financial supply (s 189-15). This means that the acquisition must be used or intended to be used for the making of a financial supply (GST Ruling GSTR 2003/9). In cases of doubt, the ATO considers that the relevant intention may be evidenced by a business plan, accounting budget, previous experience concerning usage of similar acquisitions, correspondence with third parties or a board resolution. If there is a subsequent change of intention, this only operates prospectively, though a GST adjustment may be appropriate (¶6-300). Acquisitions that relate to borrowing are not treated as financial acquisitions, so you ignore the potential credits for borrowing expenses in working out whether you satisfy the test. However, if you do satisfy the test, you can claim input tax credits for borrowing expenses as well as for your financial acquisitions. If you do not satisfy the test, you may still be able to claim input tax credits for borrowing expenses in certain situations. Financial acquisitions from an associate for no consideration are treated as giving rise to input tax credits which may be taken into account in calculating the threshold (Interpretative Decision ID 2008/123). However, acquisitions of supplies that were GST-free, input taxed or outside the GST system when they were supplied to you (eg where the acquisition is from a non-registered supplier) are not included in calculating whether you exceed the threshold. Future financial acquisitions As noted above, the test requires you to determine the financial acquisitions that you are “likely” to make within the relevant time frame. In determining this, you should make a reasonable estimation in good faith. The Tax Office considers that the estimate may be based on your previous experience, transactions that are currently being negotiated, your business plan, accounting budget or some other reasonable basis (GST Ruling GSTR 2003/9). Examples (1) Current year threshold exceeded. In May 2019, Traders calculates that its total acquisitions for the current year from 1 June 2018 to 31 May 2019 are $330,000. Of that amount, Traders calculates that $44,000 was spent on financial acquisitions. Its input tax credits for its total acquisitions (including the financial acquisitions) would be $30,000. Its input tax credits for the financial acquisitions would be $4,000. Although this $4,000 does not exceed $150,000, it exceeds 10% of the total input tax credits (ie it exceeds 10% of $30,000). Traders therefore fails the test and will be denied input tax credits in relation to its financial supplies. It is not necessary to consider whether Traders will satisfy the threshold for the projected year. (2) Neither current nor projected year threshold exceeded. In May 2019, Enterprises calculates that its total acquisitions for the current year from 1 June 2018 to 31 May 2019 are $660,000. Of that amount, Enterprises calculates that $44,000 was spent on financial acquisitions. Its input tax credits for its total acquisitions (including the financial acquisitions) would be $60,000. Its input tax credits for the financial acquisitions would be $4,000. This $4,000 does not exceed $150,000 and does not exceed 10% of the total input tax credits for the current year (ie it does not exceed 10% of $60,000). Enterprises therefore satisfies the current year component of the test. In relation to the projected year component, Enterprises calculates the total acquisitions for the year from 1 May 2019 to 30 April 2020 are $770,000 and the likely financial acquisitions will be $55,000. The total input tax credits for that year would therefore be $70,000 and the input tax credits for the financial acquisitions would be $5,000. As the $5,000 will not exceed $150,000 and will also not exceed 10% of the total input tax credits for the projected year (ie it will not exceed $7,000), Enterprises satisfies the projected year component of the test. As it satisfies both components, it will be eligible to claim input tax credits for acquisitions related to its financial supplies.

GST groups For the purposes of the threshold, a GST group is treated as a single entity. This means that if the combined credits for financial acquisitions made by members of the group exceed the threshold, all members are treated as exceeding the threshold. This does not apply to GST religious groups (¶15-052). Company floats Guidelines on the application of these rules to company floats are given in the ATO Fact Sheet GST Issues on Flotation of a Company, available on the Tax Office website. [GSTG ¶30-350]

¶10-035 Input tax credits for expenses of borrowing

Borrowing is a financial supply and would normally be input taxed. However, as noted at ¶10-032, you can claim input tax credits for borrowing expenses if you satisfy the “de minimis” test. Even if you do not satisfy that test, your borrowing-related expenses may be eligible for input tax credits if the borrowing itself does not relate to making input taxed supplies (s 11-15(5)). This means that if you borrow money and use it to make taxable or GST-free supplies, you may claim input tax credits for the borrowing-related expenses. Examples (1) Mega borrows $20,000 to renovate one of its residential rental properties. It pays $1,100 for borrowing expenses. As the loan relates to making an input taxed supply (supply of the residential rental premises), the borrowing-related expenses do not qualify for input tax credits under this test. (2) Assume the same facts, except that Mega uses the $20,000 to renovate a commercial property. As the loan relates to making a taxable supply (supply of commercial premises), the borrowing-related expenses qualify for an input tax credit of $100. (3) Enterprises borrows $1m to buy a factory for its manufacturing business. Expenses related to the borrowing will qualify for input tax credits. (4) Handibank borrows $1m to use in making input taxed financial supplies. Its borrowing-related expenses will not qualify for input tax credits under this test.

The borrowing may be secured or unsecured, and includes the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness (s 195-1). The Tax Office considers that a debtor–creditor relationship must be involved (GST Ruling GSTR 2003/9). This may include the issue of convertible notes to raise capital (Interpretative Decision ID 2004/902), but not equity issues, for example, the issue of redeemable preference shares. The provision of deposit accounts does not qualify as a borrowing for these purposes. [GSTG ¶30-430]

¶10-040 75% “reduced” input tax credit for certain services As financial supplies are input taxed, the supplier normally cannot claim input tax credits for acquisitions it makes in making those supplies. However, there is provision for a special 75% input tax credit to be allowed for certain types of services acquired by financial supply providers. These are called “reduced credit acquisitions” (s 70-5). The 75% credit does not apply to the extent that the supplier would be entitled to an input tax credit in any event, for example, under the “de minimis” rule (¶10-032) or for borrowing expenses (¶10-035). Reduced credit acquisitions are set out in GST Regulations s 70-5.02. They largely represent services that financial institutions have outsourced in recent years. They include: • transaction banking and cash management services, such as operating accounts, processing account information and credit reference services • certain payment and funds transfer services • arranging the provision, acquisition or disposal of interests in securities • securities and unit registry services • loans services including providing loan facilities, broking, insurance; and loan application, processing and management services, such as loan origination, credit reference and mortgage valuation. Lenders mortgage reinsurance is included in this category • services supplied to a credit union by jointly owned subsidiaries. This also applies to credit unions who “rebrand” as banks without otherwise changing their corporate structure • debt collection. The Federal Court has rejected an argument that a full input tax credit for debt collection services can be claimed where the collection services are acquired after the debt is

acquired. It also rejected a claim that a full input tax credit was allowable for due diligence advice as to whether to acquire the debts for collection (HP Mercantile Pty Limited v FC of T 2005 ATC 4571; [2005] FCAFC 126) • arranging hire-purchase (pre-1 July 2012) • trade finance processing, recording and remittance • services in connection with (1) the supply of derivatives or foreign currency, or an agreement to buy or sell that currency, (2) sale of a forward contract or (3) effective from 1 July 2017, the supply of digital currency, or an agreement to buy or sell that currency • certain investment portfolio management services and administration services provided to superannuation funds (excluding taxation and auditing services). This includes processing and assessing claims under life insurance policies • insurance brokerage and certain administration services provided to life insurers • certain services remunerated by commission and franchise fees (for example, certain services provided to a credit card provider by a co-branding partner: GST Determination GSTD 2007/1) • trustee and custodial services (but not safe custody of money, documents or other things). For the treatment of cash transportation from ATMs, see Interpretative Decisions ID 2011/105; ID 2011/106, and • certain money-laundering monitoring and reporting services. As an anti-exploitation measure, the RITC rate is reduced to 55% for certain services acquired by recognised trust schemes (GST Regulations s 70-5.02(2), item 32; s 70-5.03). For the application of this rule to a managed investment trust, and a suggested method of calculation, see GST Determination GSTD 2013/3. Costs incurred for the preparation of tax returns or Business Activity Statements do not qualify for reduced credits. In certain circumstances, reduced credits will also apply to management and support services supplied from overseas by closely-related entities (¶10-042). Detailed guidelines on reduced credit acquisitions are given in GST Ruling GSTR 2004/1, which should be read in conjunction with GST Ruling GSTR 2002/2. The Tax Office has issued a warning about artificial arrangements designed to create or increase reduced input tax credits for an entity that makes a financial supply of acquiring shares in a company as part of a takeover (GST Determination GSTD 2011/3; Taxpayer Alert TA 2010/1). Calculation of reduced credit Where these eligible services are used for making financial supplies, this is regarded as a creditable purpose entitling the recipient to an input tax credit (s 70-10). This credit is normally calculated as 75% of the credit that would otherwise have been available (s 70-15). Example A credit union pays an agency $11,000 for a debt collection service which it uses wholly in its business of making financial supplies. It can claim an input tax credit of 75% × 1/11 × $11,000 = $750.

As with other input tax credits, the credit is further proportionately reduced if: • the recipient does not provide the whole of the consideration, or • the acquisition is partly for private purposes (s 11-30).

If the acquisition is partly for making financial supplies and partly for normal creditable purposes, the 75% credit applies only to the financial component and normal rules apply to the balance (s 70-20). Example A credit union acquires eligible services for $110,000. Using the direct attribution method (¶10-030), it works out that the services are used 40% in making financial supplies and 60% in making taxable supplies. It can claim an input tax credit of $9,000, calculated as follows: 1/11 × [60% + (75% × 40%)] × $110,000 = $9,000

For further guidelines, see GST Ruling GSTR 2006/3. Rationale for reduced credit The 75% rate of credit is designed to reduce the bias between insourcing and outsourcing the relevant services. This bias can arise because GST can apply to services rendered by independent contractors, but not by employees. In the situation where the contractor’s client cannot claim input tax credits, this increases the effective cost of the contractor’s services. This may provide an incentive to have the services provided in-house, rather than being outsourced. (This incidentally is not regarded as infringing the anti-avoidance rules if there are other economic justifications: ¶20-000.) It may also provide an advantage to larger service providers that can afford to maintain a large in-house staff. It is therefore expected that the credit will particularly benefit smaller finance organisations, such as credit unions which operate with a large range of outsourced activities. Company floats Guidelines on the application of these rules to company floats are given in the ATO Fact Sheet GST Issues on Flotation of a Company, available on the Tax Office website. [GSTG ¶30-200]

¶10-042 Reduced credit for offshore management and support services Under the reverse charge rules, certain supplies of services by overseas entities to Australian financial enterprises may be subject to GST (¶9-100). This could potentially disadvantage enterprises such as branches or subsidiaries that receive management and support services from related overseas entities, as compared to resident financial institutions that receive these services from internal sources within Australia. To offset this disadvantage, a reduced input tax credit is available where: (1) the following types of services are acquired: • senior executive management • human resources support • corporate marketing and communications • financial management • supply procurement and management • credit, operational and risk management • relationship management • in-house legal services, including company secretary functions and regulatory and legal compliance • technology systems

• business services, ie property management, transport, security and mail services (2) the supply of those services is taxable under the reverse charge rules in s 84-5. Essentially, this means that the services are acquired from overseas for the purpose of carrying on business in Australia and would not otherwise be taxable because they were not sufficiently connected with Australia (¶9-100) (3) the supplier and the recipient of the services are closely related (GST Regulations s 70-5.02A). Enterprises are “closely related” if: • they are both carried on by the same entity, or by 100% subsidiaries of the same entity, or • one enterprise is carried on by a 100% subsidiary of the entity that carries on the other enterprise (GST Regulations s 70-5.01A). Example Mega, an overseas-based international bank, has a branch in Sydney. It charges the Sydney branch for training assistance and legal advice provided by divisions of Mega. The Sydney branch can claim a reduced input tax credit on the acquisition of these services. It can also claim a reduced input tax credit for its share of the cost of payroll services provided by a 100% subsidiary of Mega.

Services supplied by third parties The reduced credit is not available where the services are supplied by a third party that is not closely related to the supplier, and the cost is passed on to the recipient. This is called an “unabsorbed contribution” (GST Regulations s 70-5.02A). Example Mega charges its Sydney branch for a share of the cost of acquiring telecommunications services from an overseas Telecom which are used by the branch. No reduced credit will be available.

[GSTG ¶30-200]

¶10-045 Provision of fringe benefits by financial suppliers No input tax credit can be claimed where a financial supplier who exceeds the financial acquisitions threshold acquires or imports things that: (1) are provided to its employees as taxable fringe benefits; and (2) relate to input taxed supplies (s 71-5). This will in turn affect the fringe benefits tax (FBT) gross-up rate (¶24-210).

¶10-050 Exported financial services Exported financial services are generally GST-free, not input taxed, under the general rules described at ¶9-240. GST-free treatment applies, for example, in the following situations: • a financial supply is directly connected with goods or real property outside Australia (s 38-190, item 1) • a financial supply is made to a non-resident who is overseas, and the service is not directly connected with goods or real property in Australia (s 38-190, item 2) • a financial supply is made to an overseas recipient, the “effective use or enjoyment” takes place outside Australia, and the service is not directly connected with goods or real property in Australia (s 38-190, item 3), or • a supply of rights (eg an overseas overdraft or credit facility) is made available to be used overseas or to a non-resident who is overseas (s 38-190, item 4: see, for example, GST Determination GSTD 2015/1 at ¶9-240).

Where the residence status of the counterparty in an on-market securities transaction cannot be determined, it may be assumed to be the location of the relevant securities exchange. If this is not known, it can be assumed to be where the security is listed or, failing that, where the counterparty’s broker is ordinarily resident (GST Ruling GSTR 2002/2). To the extent that the financial service is GST-free, input tax credits can be claimed, so there is an incentive to clearly identify these transactions. Supplies through an overseas branch Financial services that are provided through an overseas branch that is separately registered are treated as GST-free. A similar result applies even if the branch is not separately registered, as input tax credits may be allowed in this situation (s 11-15).

¶10-060 Sales of things acquired to make supplies If you acquire something for the purpose of making financial supplies, you will either not be entitled to an input tax credit or be entitled to a reduced credit. If you later sell that thing, you may be entitled to a decreasing adjustment. For details, see ¶6-310.

¶10-070 Sales to satisfy debts Say that you repossess goods under a hire-purchase agreement and sell them to recover the debt. In effect, you are making a sale on behalf of the debtor. In such a situation, you are liable for GST in the same way as if the debtor had made the sale. This means that the sale attracts GST if it would have attracted GST if the debtor had made it. It does not matter whether you yourself made it in the course of business, or whether you are registered (s 105-5). This rule applies whenever you supply the property of another person to satisfy a debt which that person owes to you. It is not limited to repossession situations, and it is not necessary that the property you supply was property you originally sold to the debtor. The rule applied where a sale of real estate was completed by the agent of the mortgagee in possession, even though the original owner had previously signed the contract for sale, as the supply did not occur until completion (Trustee for Naidu Family Trust v FC of T 2011 ATC ¶10-227; [2011] AATA 910). You are not treated as having made a taxable supply if: • the debtor has given you a written notice stating that the supply would not be subject to GST if made by the debtor, and giving full reasons, or • you cannot obtain such a notice, but you believe on the basis of reasonable information that the supply would not be subject to GST if made by the debtor (eg where the debtor is not registered or required to be registered). A mortgagee in possession who sells a business can use this rule to claim that the sale is a GST-free supply of a going concern (GST Ruling GSTR 2002/5). The sale of land by a sheriff, as a government employee, under an enforcement warrant falls outside these rules because the relevant debt is owed to the creditor, not the government/supplier (Interpretative Decision ID 2004/315). Similarly, the rules apparently may not apply to the sale of impounded livestock by a council, even though the costs of impounding and selling the livestock were withheld from the proceeds of the sale (Interpretative Decision ID 2004/485). In each case, however, the sale would be subject to GST under general principles, as a supply by the sheriff or council, though not by the debtor. Where the mortgagee sells the property of a corporation, these rules apply rather than the “incapacitated entity” rules (¶18-250). This may arise in circumstances where a representative of an incapacitated entity is a creditor of that incapacitated entity, and the representative makes a supply of the incapacitated entity’s property in satisfaction of a debt that the incapacitated entity owes to the representative. GST returns and payment

If you make a supply attracting GST under these rules, and you are not registered or required to be registered at the time, you must lodge a special GST return within 21 days after the end of the month (s 105-15). You must pay the GST within the same time, or at the time when any earlier assessment is notified by the Commissioner (s 105-20). [GSTG ¶48-420]

¶10-080 Superannuation funds Both superannuation funds and their trustees are “entities” (¶3-015), although only trustees (or managers) can be registered, as funds do not have the legal capacity to carry out GST obligations. Where the fund is a “complying” fund for income tax purposes, any activities of the trustee constitute the carrying on of an enterprise. If the fund is non-complying, the determination of whether the activities constitute the carrying on of an enterprise is made in accordance with the general rules described at ¶3020 (GST Determination GSTD 2006/6). Registration is compulsory where the GST turnover of the enterprise is $75,000 or more, in accordance with the normal rules (¶3-000). However, most of the supplies will typically be input taxed financial supplies, and will not be included in GST turnover. It follows that for some smaller funds, the turnover will be less than $75,000, so registration will be optional. In deciding whether to register, the trustee may need to compare the costs of compliance with the limited amounts of input tax credits it could claim. Those credits may include the 75% credits allowed for certain inputs (¶10-040) or credits allowed in relation to taxable non-financial supplies, for example, where the fund leases out commercial premises (¶11-330). For other pros and cons of registration, see ¶3-010. The provision of an interest in a superannuation fund to a member is an input taxed financial supply (¶10010), so no GST applies and input tax credits are normally not available. The same applies to the provision of life insurance, but the provision of salary continuity insurance would normally be subject to GST. Entry fees, exit fees and management fees charged to fund members do not attract GST. Where outsourced administration or management services are supplied to superannuation funds, a reduced input tax credit for any GST could normally be claimed (¶10-040). The same applies to debt collection services and certain custodial services, but not taxation, legal or audit fees. Example This example is adapted from the Tax Office’s GST and financial supplies for self managed super funds (NAT 71512). Hazel Super Fund is a SMSF and is registered for GST. It has made the following purchases (amounts include GST): • repairs to residential property: $7,000 • repairs to commercial property: $14,300 • management of investment portfolio: $1,100 • maintenance of member records and associated accounting (excluding auditing and tax services): $880 • brokerage on share sale: $440. Financial acquisitions the fund made are: • investment portfolio management • maintaining member records and associated accounting, and • brokerage on share sale. Total GST credits on financial acquisitions = $220 ($1,100 + $880 + $440) × 1/11. Total GST credits that the fund could claim = $1,520 ($14,300 + $1,100 + $880 + $440) × 1/11. The fund has exceeded the financial acquisitions threshold (¶10-032), as its total GST credits on financial acquisitions exceeds 10% of the total GST credits the fund could claim ($220 / $1,520 × 100 = 14.47%). Providing a residential property for lease is an input taxed supply (¶11-310), so Hazel Super Fund cannot claim GST credits for GST they paid on purchases that relate to making that supply. Providing a commercial property is a taxable supply (¶11-330). Hazel Super Fund can claim GST credits for GST they paid on purchases that relate to making taxable supplies. The GST credit is $1,300 ($14,300 × 1/11).

Fees paid to manage the fund’s investment portfolio, brokerage costs and maintaining its member records and associated accounting are all purchases that relate to making financial supplies. The fund can claim reduced GST credits for these purchases because they: • are listed as reduced credit acquisitions, and • relate to making financial supplies. Therefore, the fund can claim reduced GST credits for: • portfolio management: $75 ($1,100 × 1/11 × 75%) • records maintenance and associated accounting: $60 ($880 × 1/11 × 75%) • brokerage costs: $30 ($440 × 1/11 × 75%). Total reduced GST credit it can claim is $165 ($75 + $60 + $30). Total GST credit it can claim on purchases it uses to make taxable sales is $1,300 ($14,300 × 1/11). Total credit it can claim as GST credits and reduced GST credits is $1,465 ($1,300 + $165).

The trustee cannot claim an input tax credit for the annual superannuation supervisory levy (Interpretative Decision ID 2002/78). Where a member of a self managed superannuation fund made a contribution of a commercial property to the fund trustee, this was not a taxable supply as the trustee provided no consideration. The “associate” rules, which may deem consideration to have been provided (¶17-500), did not apply because the trustee was registered and intended to use the property for a creditable purpose (Interpretative Decision ID 2005/70). Payments by employer The ATO’s preferred approach is for all fund expenses to be paid directly out of the fund itself, and for superannuation contributions to be made directly to the fund. However, in certain situations, a sponsoring employer may, for administrative convenience, pay superannuation fund expenses on behalf of the fund, with the payment being reclassified as a superannuation contribution in the employer’s accounts. In such a case, the ATO considers that the employer is not entitled to an input tax credit if the superannuation fund makes an acquisition (eg it receives legal advice) and the employer pays the expense (eg solicitors’ fees) on the fund’s behalf. This is because the acquisition is made by the fund and not the employer. However, the ATO considers that the fund itself may be able to claim a reduced input tax credit under the financial supply rules (¶10-040; GST Determination GSTD 2016/1). [GSTG ¶31-200]

¶10-090 Other practical impacts for financial service providers Apart from the important issue of outsourcing (¶4-090), there are some practical implications for providers of input taxed financial services. These include: • as financial supplies are input taxed, financial service providers will probably either have to absorb the GST which they pay on their business inputs, or seek to effectively recover those costs indirectly through restructuring the fees they charge their customers • where input tax credit entitlements can be determined at branch level, it may be administratively simpler to separately register those branches • suppliers of exported financial services will have an advantage over suppliers to the domestic market, because exports are GST-free. Apportionment will be necessary when both domestic and overseas services are provided • in general, financial institutions that provide financial advice to customers as part of other services may need to bill this separately so that input tax credits may be claimed.

INSURANCE

¶10-100 Issue of life insurance policies Life insurance is treated as a financial supply and is input taxed (¶10-010). This means that there is no GST on life insurance cover, but the insurer will generally not be able to claim input tax credits on business inputs relating to its life business. [GSTG ¶32-200]

¶10-110 Issue of general insurance policies General insurance is not treated as a financial supply and is taxable (¶10-020). GST therefore applies to general insurance cover, but the insurer will be able to claim input tax credits on business inputs relating to its general insurance business. If an insurer provides life and general insurance, apportionment of the business inputs would be appropriate. If the person taking out general insurance is a private individual, there would normally not be any question of that person claiming input tax credits for premiums. However, if the insured is a registered business, input tax credits may be claimed by the insured. In GST Ruling GSTR 2006/1, the Tax Office summarises the distinguishing features of insurance as follows: • the insurer has primary liability under the contract • the insurer bears the risk of loss. It has no right to be indemnified by the insured under the contract • the contract is made in utmost good faith. The insured must disclose anything relevant to the insurer’s risk • the insured is not entitled to profit from the contract. If the insured salvages anything from the loss, the amount salvaged is reflected in the settlement by the insurer • the contract is usually made in a commercial context, and the insurer receives a premium • the contract of insurance is usually formed by the insurer issuing a policy in response to a proposal by the insured • a contract of insurance is void if the insured has no insurable interest in the subject matter, and • the insurer must be an entity authorised to carry on an insurance business. Contracts of insurance can be distinguished from guarantees and other forms of indemnity, which are normally treated as input taxed financial supplies (¶10-010; GST Ruling GSTR 2006/1). [GSTG ¶32-000]

¶10-120 Insurance settlements Special rules apply where there is a settlement of an insurance claim. On a settlement, the insured is technically making a supply to the insurance company by giving up its rights under the policy. However, the settlement it receives from the insurance company — whether in the form of money or goods and services — is generally not treated as consideration received or provided. GST will therefore not be payable (s 78-45) and the insurance company will not claim an input tax credit (s 78-20). Duty to notify entitlement There is an exception to the general rule where the insured — or other entity paying the premium — was entitled to an input tax credit for the premium but failed to notify the insurance company of its credit entitlement, or understated it (s 78-50). To this extent, a pro rata amount of GST will be payable on the

settlement. The insured will remain liable for this GST even if it has ceased to be registered by the time the settlement is made, but in this situation it may need to lodge a special GST return (s 78-80; 78-85; 7890). However, none of this applies if the insured was not registered or required to be registered at the time of the understatement or non-disclosure, for example, where it was a private consumer. The notification may be made when, or at any time before, a claim is first made under the policy. It is normally done as part of the renewal process. Example A registered business is partly taxable and partly input taxed. It takes out insurance for a purely taxable purpose, pays a $550 GSTinclusive premium and claims a 100% input tax credit of $50. However, it informs the insurance company that the credit entitlement was 70%. It later suffers a loss and claims under the policy. The insurance company would have had to account for $50 GST on the issue of the policy. Proceeding on the basis of what the business told it — ie that only a 70% credit was available — it claims a decreasing adjustment, as described below. To compensate for this, the business will be liable for GST calculated as (100% − 70%) × 1/11th × payout.

Decreasing adjustment where premiums not creditable As the insurance company normally pays GST on the provision of insurance, it is appropriate that its net GST liability should be reduced when it is called on to settle a claim. Given that it is not permitted to claim an input tax credit, this reduction is achieved by allowing the insurance company to claim a decreasing adjustment (s 78-10). This adjustment only applies if the issue of the policy was taxable — it does not apply to wholly GST-free or input taxed insurance (eg health insurance, overseas travel insurance, life insurance or exported insurance: ¶10-140). In addition, the insured must not have been entitled to an input tax credit on the premiums it paid under the policy, or alternatively, its input tax credit must have been less than the GST payable by the insurer on the issue of the policy (s 78-10). The decreasing adjustment is calculated as 1/11th of the settlement amount. In general terms, this settlement amount is calculated as: • the amount of money paid, plus • the market value of goods and services for which the insurer was not entitled to an input tax credit, for example, where the insurer provides the insured with a voucher up to a stated monetary value (¶4060) from a third party such as a retailer. Ex gratia payments made in response to a claim are included (GST Determination GSTD 2011/1). If the insured was entitled to a partial input tax credit for the premium, a proportion of the decreasing adjustment will be allowed, based on the extent to which there was no credit entitlement. In addition, the settlement amount is grossed up by a factor calculated as 11/(11 − proportion of credit allowed for premium) (s 78-15). For the treatment of excesses, see “Insurance excesses” below. In determining the insured’s entitlement to input tax credits, the rules allowing annual apportionment of credits (¶5-020) are ignored. Examples (1) A registered business takes out insurance 100% for business purposes and claims a full input tax credit for the premium. It later suffers loss and claims under the policy. The GST results of the settlement are: • the insurance settlement is not subject to GST • the insurance company is not eligible for a decreasing adjustment because the business was entitled to a full input tax credit for the premium. (2) An unregistered business takes out insurance. It cannot claim an input tax credit on the premium because it is not registered. It later suffers loss and claims under the policy. The GST results of the settlement are: • the insurance payout is not subject to GST • the insurance company is entitled to a decreasing adjustment calculated as 1/11th of the settlement. The same would apply if the insured was a private person.

(3) A registered business takes out insurance. The supply of the policy is 60% taxable and 40% GST-free. The business claims an input tax credit on the premium. It later suffers loss and claims under the policy. The loss relates to the GST-free part of the policy. The GST results of the settlement are: • the insurance payout is not subject to GST • the insurance company is not entitled to a decreasing adjustment as the settlement relates to the non-taxable part of the policy. (4) A registered business consists partly of providing financial services and is 60% taxable and 40% input taxed. It takes out insurance over the whole of its business. It claims a 60% input tax credit on the premium. It later suffers a loss of $5,200 and claims under the policy. The GST results of the settlement are: • the settlement is not subject to GST • the insurance company is entitled to a decreasing adjustment, calculated as follows: “Gross up” the payout: $5,200 × 11/(11 − 0.6) = $5,200 × 11/10.4 = $5,500 Decreasing adjustment: 40% × 1/11 × the grossed up payout of $5,500 = $200

Subrogation Under its rights of “subrogation”, an insurance company may be able to recover part of its payout from third parties who were liable for the loss. In this situation, any decreasing adjustment to which the insurance company was entitled will be reduced to reflect the amount recovered. The payment by the third party is not treated as a payment for a taxable supply, and the third party cannot claim an input tax credit for it (s 78-35; 78-75). Example An insurance company makes a payout of $11,000 to an unregistered business. The business was not entitled to any input tax credit on the premium, so the insurance company is eligible for a decreasing adjustment of 1/11th of $11,000 = $1,000. Later it recovers $6,600 of the payout from a third party. It will be liable for an increasing adjustment of 1/11th of $6,600 = $600. The result is a net decreasing adjustment of $1,000 − $600 = $400. This is the decreasing adjustment appropriate to its net payout of $4,400.

Goods or services supplied to insurer by insured Sometimes an insurance company acquires goods or services from the insured solely for the purpose of settling a claim. GST does not apply to this transaction (s 78-20; 78-60). Example A business vehicle is written off in an accident. The insurance company makes a payout under the insurance policy and takes possession of the vehicle. The giving of the vehicle to the insurance company does not attract GST. The business owner does not pay GST and the insurance company does not claim input tax credits for its acquisition (see also Interpretative Decision ID 2005/206).

Goods and services supplied by insurer A supply of goods or services that an insurer makes in settlement of a claim is not a taxable supply, so GST will not apply and the insured will not claim an input tax credit (s 78-25). An insurer can claim an input tax credit under the normal rules where it purchases new replacement items and acquires title in the goods before it supplies them to the insured. However, it cannot claim an input tax credit for goods or services it acquires to settle a claim if the policy was GST-free (s 78-30). An insurer may pay a supplier to provide goods or repair services in settling an insurance claim. The Tax Office considers that if an insurer enters into a binding obligation with a supplier to provide goods, perform services or do something else for the insured in settlement of an insurance claim, and is liable to pay for that supply, the supplier is making a supply to the insurer, even though the supply may be provided to the insured. In this case, the insurer can claim a normal input tax credit for the acquisition (GST Ruling GSTR 2006/10). The Tax Office also considers, on the basis of the Department of Transport case (¶5-010), that this may also apply in certain cases where there is a pre-existing framework which contemplates that insurer and supplier will act in a certain way in relation to goods or services that are to be provided by the supplier to the insured or a third party (2011 Addendum to GST Ruling GSTR 2006/10). As for GST-free

heath supplies, see ¶10-140. Vouchers If the insurer acquires a face value voucher from a third party, and provides it to the insured, the third party will be liable for GST when the voucher is redeemed (¶4-060). The insurer is not entitled to an input tax credit on the acquisition of the voucher from the third party (because that supply was not taxable), but may be entitled to a decreasing adjustment on settlement of the claim. The position is different if the voucher is not a face value voucher, but instead entitles the holder to specific items — for example, a voucher to replace stolen goods. In this case, the supply of the voucher to the insurer is taxable, and the insurer can claim an input tax credit. The supply of the voucher by the insurer to the insured is not taxable (s 78-25). GST does not apply on the redemption of the voucher, except to the extent that additional consideration is provided by the insured. Insurance excesses The payment of an excess by the insured to an insurance company is not consideration for a supply, so does not attract GST (s 78-55). This does not apply if the excess is paid to another entity such as a repairer. If the insurance company settles a claim by making a supply or payment, the excess is excluded from the settlement amount in the calculation of the insurance company’s decreasing adjustment (s 78-15). A corresponding rule applies if the insurance company makes acquisitions “directly” for the purpose of settling the claim. The effect of this rule is that there will be an increasing adjustment calculated as 1/11th of the excess paid (s 78-18). If the settlement is partly by supplies or payments, and partly by acquisitions, the excess is apportioned, with part being taken into account in calculating the decreasing adjustment and part giving rise to an increasing adjustment. An acquisition is not made “directly” for the purpose of settling the claim if it is made simply to enable the insurer to determine what its liability is, eg where it acquires the services of an assessor, or acquires a police or medical report (ATO GST Industry Issues — Insurance: Issue 31). Example An insurer settles a claim by paying $1,100 cash to the party damaged by the insured. The insurer also pays $2,200 under a contract with a chosen repairer to provide repairs to that party, making a total settlement of $3,300. In simplified terms, if the insured pays a $660 excess to the insurer, the effect is: • one-third of the excess ($220) will be excluded from the calculation of the insurer’s decreasing adjustment • 1/11th of the balance (ie 1/11 × $440 = $40) will be an increasing adjustment to the insurer. In the absence of this rule, the whole of the excess would simply be excluded from the calculation of the insurer’s decreasing adjustment.

ATO guidelines for apportionment of excesses, known as safe harbour arrangements, are set out in ATO GST Industry Issues — Insurance: Issue 34. Where there has been an increasing adjustment in relation to an excess that is later refunded, the insurance company will be entitled to a decreasing adjustment to reflect the amount refunded (s 78-42). For guidelines, see ATO GST Industry Issues — Insurance: Issue 33. Position of third parties Payments or supplies of goods and services that are made to third parties as part of an insurance settlement do not have any GST consequences for the third party. This applies whether the payment or supply is made by the insured or the insurance company (s 78-65; 78-70). Portfolio transfers Where an insurer transfers its insurance portfolio to another insurer, the GST rules apply as if the transferee insurer were the insurer in relation to the insurance policy (s 78-118). This will, for example, allow the transferee to claim decreasing adjustments on settlement as if it were the original insurer.

CTP settlements The GST insurance rules are modified to ensure that they operate as intended in relation to payments or supplies made in settlement of claims under a compulsory third party (CTP) motor vehicle insurance scheme (Div 79; 80). These rules also extend to various other insurance-related payments or supplies made by CTP insurers, for example, payments of hospital and ambulance charges for services provided directly to injured persons, that are paid by an insurer via CTP scheme bulk-billing arrangements. In addition, there are provisions ensuring that the GST insurance rules apply to payments and supplies made by CTP insurers under “settlement sharing” arrangements. [GSTG ¶32-020]

¶10-130 Statutory compensation schemes Settlements made under statutory compensation schemes are treated in the same way as ordinary insurance claims (s 78-100). These schemes cover specified Commonwealth, state and territory statutory schemes for workers compensation, sporting injuries insurance and military rehabilitation and compensation (GST Regulations s 78-105.01; former Sch 10). They do not include compulsory third party schemes, which are treated separately (¶10-120). Example Under a workers compensation policy, the insurer reimburses a worker for medical costs incurred from visits to the worker’s own physiotherapist. The insurer is not entitled to an input tax credit because it did not have a contractual relationship or binding agreement with the physiotherapist and there was therefore no supply to it. The insurer is also not entitled to a decreasing adjustment on the settlement because the employer was entitled to a full input tax credit on the premium (based on GST Ruling GSTR 2006/10). Note: If the GST-registered physiotherapist had been nominated by the insurer, and had agreed with the insurer to provide the services and invoice the insurer, the insurer would have been entitled to an input tax credit on the supply of the services. Those services would not have been GST-free because the supply was not for the treatment of the insurer, but the worker (¶13-330).

Sometimes a settlement may be made under a statutory compensation scheme even though the relevant contributions or premiums were not paid, for example, workers compensation may become payable to a worker even though the employer has defaulted in its payments. For GST purposes, the employer would be treated as having complied with its obligations (s 78-100(2)). Separate provisions may be made for certain government insurance or compensation schemes (s 78115). This could possibly apply, for example, to certain loss-making statutory schemes, though these have not yet been specified. [GSTG ¶32-080]

¶10-140 GST-free insurance The supply of private health insurance is GST-free (¶13-370), so no GST applies to contributions and the insurance company can claim input tax credits on its normal business inputs. The same applies to travel insurance for travel outside Australia (¶12-020) and insurance for the international transport of goods (¶12-010). There is a specific provision designed to ensure that supplies by health care providers paid for by a statutory compensation scheme operator are GST-free if the underlying supply from the health care provider to the individual is also GST-free (s 38-60). An insurance company cannot claim a decreasing adjustment on settlements made under GST-free insurance policies (s 78-10). If the policy is partly GST-free, a partial adjustment may apply as described at ¶10-120. Corresponding rules apply to insurance policies that constitute GST-free exported services (¶9-240), for example, where a life insurance company issues a life policy for a non-resident overseas, or a policy is issued to a non-resident covering a car to be used outside Australia. These are treated as GST-free, even

though life insurance is normally input taxed (s 9-30(3)). [GSTG ¶32-010]

¶10-150 Other special insurance rules Tax invoices. Normally, you cannot claim an input tax credit for a payment unless you hold a tax invoice from the seller. In the case of insurance premiums, it is sufficient if an insurance broker holds the tax invoice on your behalf. Brokers can also issue tax invoices on behalf of the insurance company (s 153-25). Insurance renewal notices may qualify as tax invoices in certain circumstances (¶5-130). Joint ventures. Business entities engaged in providing general insurance can form GST joint ventures (¶17-210). Stamp duty on premiums. GST on insurance premiums is worked out as if the state stamp duty had not been charged (s 78-5; 7895). Conversely, it appears that state governments charge stamp duty on the GST-inclusive amount of the premium. This issue is discussed further at ¶11-070. Example The premium on a policy is $240, including $20 stamp duty. GST is calculated as 1/11th of $220 = $20.

Compensation ordered by a court on an insurance claim is treated in the same way as compensation paid directly under the insurance policy (s 78-110).

REAL ESTATE • ACCOMMODATION • SALE OF BUSINESS SALE OF REAL PROPERTY Summary of GST position on sales

¶11-000

Sale of pre-existing non-commercial residential premises

¶11-010

Sale of “new” residential premises

¶11-020

Purchaser of new premises to remit GST from 1 July 2018

¶11-022

Sale of commercial residential premises

¶11-030

Sale of non-residential premises

¶11-050

Long-term leases

¶11-060

Development leases

¶11-062

Subdivision and sale

¶11-063

Partitions of co-owned land

¶11-064

Attribution of GST and credits on taxable sales

¶11-065

Easements, restrictive covenants and options

¶11-068

Other matters associated with property

¶11-070

SPECIAL “MARGIN” RULES How the margin scheme works

¶11-100

How to calculate the margin

¶11-110

Requirements for valuation

¶11-120

Bad debts under the margin scheme

¶11-130

Special situations

¶11-140

BODIES CORPORATE Bodies corporate

¶11-200

RENTED OR LEASED PREMISES Summary of GST position on leases

¶11-300

Accommodation in residential premises

¶11-310

Accommodation in commercial residential premises

¶11-320

Leased commercial premises

¶11-330

Sale of real property subject to lease

¶11-335

Leases entered into before 1 July 2000

¶11-340

CROWN AND FARM LAND Grants of Crown land

¶11-400

Certain sales of farms are GST-free

¶11-410

Where farm land is subdivided

¶11-420

BUYING AND SELLING A BUSINESS GST-free supplies of going concerns

¶11-500

Enterprise must be carried on until day of supply

¶11-503

Supply must be of all things necessary

¶11-506

If “going concern” exemption does not apply

¶11-510

Assumption of liabilities by purchaser of business

¶11-515

Subsequent GST adjustment if recipient makes input taxed or private supplies ¶11-520 Sale of business by selling shares

¶11-530

Sale of franchise

¶11-540

Option to purchase business

¶11-550

Editorial information

Summary The GST status of real estate sales depends on whether the premises are new, residential or commercial. Sales of existing homes are input taxed, but would not normally be subject to GST in any event because most owners would not be registered as dealers. The sale of new houses is subject to GST, as is the sale of commercial residential premises such as hotels. Special rules enable taxpayers such as dealers and developers to calculate their GST on a “margin” basis. GST does not normally apply to residential rent, but special rules apply to long-term commercial residential accommodation. Rent on commercial premises is subject to GST, but renters could normally claim offsetting input tax credits if they are in business. Certain grants of Crown land, farm land sales and farm subdivisions may be GST-free. The chapter concludes with an explanation of the GST-free status of sales of businesses.

SALE OF REAL PROPERTY ¶11-000 Summary of GST position on sales The general GST treatment where real property is sold is as follows: Type of premises

Example

GST treatment

New residential premises

New house

Generally taxable (¶11020)

Commercial residential premises

Hotel

Taxable (¶11-030)

Other residential premises

Existing home

Input taxed (¶11-010)

Non-residential premises

Office building

Taxable (¶11-050)

Part of going concern

Sale of business

GST-free (¶11-500)

Farm land

Sale to intending farmer

GST-free (¶11-410)

Vacant land

Development Private sale

Taxable (¶11-010) Not taxable (¶11-010)

In general, unless a specific exemption applies (eg for sales of going concerns), sales of “real property” are taxable, but are input taxed in the following situation: • the property is “residential premises” (¶11-010) • the premises are to be used predominantly for residential accommodation (¶11-010) • the premises are not “commercial residential premises” (¶11-010), and • the premises are not “new residential premises”, except for those used for residential accommodation before 2 December 1998 (¶11-020). Meaning of “real property” “Real property” includes: • an interest in land or a right over land. The ATO considers that this is limited to legal or equitable interests or rights, such as legal estates in fee simple, leaseholds, easements and profits à prendre (GST Ruling GSTR 2003/7) • a personal right to be granted such rights or interests, for example, options • a licence to occupy land (see below), or • any other contractual right exercisable in relation to land, for example, a restrictive covenant (s 195-1). In the UK, it has been held that there will not be a licence to occupy land if the right is merely ancillary to some other supply that does not involve land (Customs and Excise Commissioners v Sinclair Collis Ltd [1998] BVC 335). For example, a licence to occupy a particular car parking space is a supply of real property, but the supply of valet car parking services is not. Similarly, the supply of a particular secure storage space is the supply of real property, but storage services without rental of a specific site are not. The hire of a room for a function is a supply of real property, but not the sales of tickets to entertainment or sporting events. Similarly, it appears that the supply of hotel accommodation is a supply of real property on the basis that it provides a right exercisable in relation to land (Saga Holidays Limited v FC of T [2006] FCAFC 191; GST Ruling GSTR 2003/7; see also ¶12-020). Fixtures. Real property includes fixtures attached to the land. However, the ATO considers that a house that has been physically removed from the land and sold separately is not real property (Interpretative Decision ID 2002/523). For the ATO’s views on tenants fixtures, see ATO GST Industry Issues — Primary Production: Issue 6.5.2. Chattels included in sale. Unlike fixtures, chattels included in a sale of real property would normally be treated separately from the real property itself. For example, if a registered taxpayer purchased chattels used in furnishing/renovating a residential property which it then sells, the ATO would normally treat the sale of the chattels as taxable and the sale of the premises as input taxed. However, if the property was previously the subject of an input taxed lease, the sale of chattels that were used solely in connection with that lease would also be treated as input taxed under the special rules in s 9-30 (¶1-170; Interpretative Decisions ID 2004/401; ID 2004/402). Where new residential premises are sold with certain chattels included, the ATO says that the consideration should be apportioned to enable the real property element eligible for the margin scheme to be identified (GST Advice GSTA TPP 013). Foreign property.

The sale of foreign real property is not subject to GST (¶4-100). For the position where real property is compulsorily resumed, see ¶4-010. Time-sharing schemes. An interest in an accommodation time-sharing scheme may constitute real property: Interpretative Decision ID 2010/20 (¶10-010). Emissions units. Eligible emissions units (¶16-220) are treated as personal property rights, rather than real property rights. Time of supply. Technically, a supply by way of sale of land under the Torrens title system does not take place until registration of the transfer document. As a matter of practice, however, the ATO accepts that the supply (and acquisition) occurs on settlement — typically, this happens when a registrable transfer document is unconditionally provided to the purchaser (GST Ruling GSTR 2006/7; Central Equity Ltd v FC of T [2011] FCA 908; Trustee for Naidu Family Trust v FC of T [2011] AATA 910). For the transitional rules that apply where a sale straddled the commencement of GST on 1 July 2000, see ¶19-100. [GSTG ¶35-000; ¶35-020]

¶11-010 Sale of pre-existing non-commercial residential premises In general, the sale of non-commercial residential premises that are not new is input taxed, if the premises are real property to be used predominantly for residential accommodation (s 40-65). This means that no GST is payable and input tax credits for acquisitions relating to the sale are not available. For the meaning of “new”, see ¶11-020. For commercial residential premises, see ¶11-030. Example A home owner sells the home. The sale will be input taxed. No GST is payable and no input tax credits can be claimed.

In many cases, the sale of an existing residence is not subject to GST in any event, as the owner will normally not be selling in the course of business, and will not be required to be registered. A “sale” would normally require consideration. For special rules applying to transactions involving associates, see ¶17-500. What are “residential premises” “Residential premises” means land or a building that is: (a) actually occupied as a residence or for residential accommodation, or (b) intended to be occupied as a residence or for residential accommodation, provided that it is capable of being used in that way (s 195-1). This test must be satisfied at the time of the relevant supply (Marana Holdings Pty Ltd & Anor v FC of T 2004 ATC 5068). The term of the occupation or intended occupation is irrelevant. This overcomes the Federal Court’s earlier view that the premises must have a “significant degree of permanence of occupation”. It means that the premises do not have to be a home or permanent place of abode. On this basis, for example, serviced apartments let on a short-term basis may be residential premises (South Steyne Hotel Pty Ltd v FC of T 2009 ATC ¶20-145; [2009] FCAFC 155). Lodging, sleeping or overnight accommodation is included (GST Ruling GSTR 2012/5). It is primarily the physical characteristics of a building that mark it out as residential premises. The crucial requirement is that it must provide the occupants with shelter and basic living facilities, such as are provided by a bedroom and bathroom (Marana Holdings; Vidler v FC of T 2010 ATC ¶20-186; [2010] FCAFC 59; GST Ruling GSTR 2012/5). The premises must also be fit for human habitation; this test may

be satisfied even though they are in a minor state of disrepair, or there is temporary disruption to occupation pending repairs. Where it is clear that the physical facilities are simply ancillary to the function of some other type of premises (such as a private hospital or office building), they are not treated as residential premises (GST Ruling GSTR 2012/5). There is no specific restriction on the area of land that can be included with a building and be treated as part of the residential premises. The ATO says that a relevant factor is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises (GST Ruling GSTR 2012/5). Vacant land is not residential premises, even if it is intended to erect residential accommodation on the land in the future (Vidler v FC of T 2010 ATC ¶20-186; [2010] FCAFC 59; GST Ruling GSTR 2012/5). Paragraph (b) of the definition (above) is not satisfied in such a case, as it is directed at situations where the premises already exist at the time of the supply but are not actually occupied as such. Whether the supply of vacant land is taxable will therefore depend on the usual conditions (¶4-000). For example, if the vacant land was sold as part of a developer’s business, it would be taxable, but a non-business private sale would not be taxable. A floating home is residential premises, provided that it is permanently affixed to a floating platform and is not capable of being adapted for self-propulsion (s 195-1). Leasing a floating home is therefore input taxed (s 40-35). However, the sale of a floating home is subject to GST — it is not input taxed under s 4065 because it is not “real property”. Most ships and houseboats would not qualify as floating homes because they are capable of self-propulsion, or of being adapted for self-propulsion by the fitting of an outboard motor. However, they may qualify as commercial residential premises (¶11-030). The ATO considers that where an investor buys premises from the builder then leases them back to the builder as a display home, the lease is a supply of premises to be used predominantly for residential purposes and is therefore input taxed (GST Ruling GSTR 2012/5). A transportable or demountable house with the usual facilities is residential premises once it is placed on land and installed ready for occupation (GST Ruling GSTR 2012/5). The ATO has previously expressed the view that “home parks” in which sites for demountable homes are rented are commercial residential premises (¶11-030). In GST Ruling GSTR 2012/6, the ATO says that this issue is being reconsidered, but that in the meantime taxpayers may continue to rely on the previous view. An “over-55s” retirement village would normally be residential premises, but a care hostel or nursing home would not (GST Ruling GSTR 2012/5). The ATO considers that road vehicles — including motor homes, caravans and campervans — are not residential premises (GST Ruling GSTR 2012/5). This applies even if they are left on site for permanent occupation. However, caravan parks and camp sites can qualify as commercial residential premises (¶11030). Most employee accommodation provided by employers would be accommodation in residential premises. The ATO considers that camp-style accommodation in a remote area, or accommodation on an offshore oil rig, may be commercial residential premises if operated in a business-like manner, even though not available to the public generally (GST Ruling GSTR 2012/6): see ¶11-310. Individual units in a strata title block are residential premises. When aggregated with other units under the control of one management, the premises as a whole may be commercial residential premises (¶11-030). As indicated above, residential premises also include premises that are intended to be occupied as a residence, provided that they are capable of being occupied as such. This is apparently determined on an objective basis, without reference to the subjective intention of the parties. The objective intention is indicated by the suitability of the premises to be occupied as a residence (Marana Holdings). There can be a supply of residential premises even though, under the contract, the purchaser enters possession and destroys the premises before settlement (GST Advice GSTA TPP 072). “To be used predominantly for residential accommodation”

For their sale to be input taxed under s 40-65, premises must not only be residential as described above, but must also satisfy the further condition that they are “to be used predominantly for residential accommodation”. It appears that this should be determined objectively, by reference to the physical characteristics of the property at the date of acquisition. The subjective intention of the purchaser is therefore not determinative; for example, it does not matter whether the purchaser intends to use the property for residential accommodation or not. Conversely, premises that lack the requisite physical characteristics do not satisfy the condition even if they are actually occupied as a residence, for example by a squatter in a disused factory (Sunchen Pty Ltd v FC of T 2010 ATC ¶20-229; [2010] FCAFC 138; GST Ruling GSTR 2012/5). The term of the accommodation is irrelevant. The residential accommodation may be long-term or shortterm. For the application of these rules to “White Popi Option” Agreements, see Product Ruling PR 2013/13. Partial residences If only part of the premises is residential, or to be used predominantly for residential purposes, the transaction must be apportioned. Example A building consists of a ground floor shop and a first floor where the owner lives. The owner sells the building. The sale will be input taxed to the extent that it relates to the residential area and will attract GST to the extent that it relates to the shop.

This apportionment would presumably be on a value basis (¶4-200). If so, the value allocated in the contract will be important. Attention should also be given to the special anti-avoidance rules (¶20-000). Similarly, if a dealer sells a house with an adjoining unused paddock that has no significant connection to the house, the sale may be input taxed to the extent that it relates to the house, but taxable to the extent that it relates to the paddock. If the premises are only partly constructed, and not yet fit for habitation, they are not residential premises (GST Ruling GSTR 2012/5). Separately-titled garages Residential apartments may be sold together with garages, car parking spaces or storage areas located within the building complex. The ATO considers that this may be treated as a composite supply of residential premises to be used predominantly for residential purposes. This applies whether or not the garage, etc, is on a separate title, provided that it is physically located within the building complex (GST Ruling GSTR 2012/5). However, the sale of a separately-titled garage by itself, without the residential unit, would be treated as taxable. Sale with development consent The assignment of a development consent as part of the input-taxed sale of residential premises may be a separate taxable supply if it provides substantive rights to the purchaser in addition to those naturally attached to the premises. This would not apply if the consent automatically flows with ownership of the premises and the assignment is merely formal (Interpretative Decision ID 2004/303). [GSTG ¶35-200]

¶11-020 Sale of “new” residential premises The sale of new residential premises is normally taxable (s 40-65). This means that GST may be payable if the vendor is registered. This will typically apply to builders and developers. However, there is an exception to this rule if the premises were used for residential accommodation before 2 December 1998. In that case, the sale will be input taxed. For this to apply, the premises must also have been within the definition of residential premises (¶11-010) at that time (Marana Holdings Pty Ltd & Anor v FC of T 2004 ATC 5068; [2004] FCAFC 307). Use of premises as commercial residential

premises (¶11-030) is not treated as use for residential accommodation (GST Determination GSTD 2012/11). Example A developer sells a strata-titled unit in a block that had been operated in 1997 as a hotel. The use of the unit for providing accommodation in commercial residential premises before 2 December 1998 does not prevent the sale of the unit from being taxable.

For special withholding rules for remitting GST on certain sales of newly constructed residential premises or new subdivisions of potential residential land, see ¶11-022. “New” residential premises New residential premises fall into the following three categories: (1) those that have not previously been sold as residential premises (¶11-010), or have not previously been subject to a long-term lease, or (2) those that have been created by “substantial” renovations, or (3) those that have been built to replace demolished premises (s 40-75). “New” residential premises do not include residential premises that have been used solely for rental purposes for the period of at least five years since they were built, substantially renovated or replaced. The Commissioner considers that this five-year period may include short periods between tenancies, but not periods when the premises are used for a private purpose or left vacant with no attempt to rent (GST Ruling GSTR 2003/3). It is also specifically provided that residential premises that qualify as new under categories (2) or (3) cease to qualify as new once they fail to satisfy category (1), ie when they are sold or supplied under a long-term lease as residential premises. Example As a result of substantial renovations to premises that had been previously sold as residential premises, the renovated premises will qualify as “new” under category (2). However, once the renovated premises themselves are subsequently sold as residential premises, they cannot be treated as “new” as they fail to satisfy category (1).

The categories of new residential premises are more fully explained below. (1) Residential premises that have not previously been sold as residential premises (other than commercial residential premises), or have not been subject to a long-term lease (¶11-060). The Commissioner’s views on this requirement are set out in GST Ruling GSTR 2003/3, as follows: • if land with a building that has previously been sold as residential premises is subdivided, so that those premises now occupy a smaller block, that does not make those premises “new”. If the new vacant block created by the subdivision is sold, that may be taxable, as vacant land is not residential premises in any event (¶11-010). If instead a house is built on the new vacant block, that house would be treated as new • if the land on which a building that has previously been sold is increased in size, and then sold, the original house and land package would not be new residential premises and may therefore be input taxed. To the extent that the sale relates to the additional land, it may be taxable • where a residential building is relocated from one block of land to a different vacant block, the building and new block of land become new residential premises. However, if a previously sold residential building is relocated to a different part of its original allotment, which is reduced in size, the house and land package is not treated as new

• where a block of flats is under company title, and the company that built the block strata titles the flats and sells them, that is treated as a sale of new premises. The sale of a new strata-titled accommodation suite in a newly constructed hotel to a purchaser who licensed it back to the vendor under a registered managed investment scheme was considered to be a taxable supply of new residential premises (Interpretative Decision ID 2008/37). The granting of a 99-year lease over newly constructed premises would mean that they are no longer new (Interpretative Decision ID 2014/19), but note that special provisions may apply in certain circumstances: see “Subdivisions, strata titles and development leases” below. (2) Residential premises that have been created by “substantial” renovations, ie involving the removal or replacement of all of a building, or substantially all of a building. This can apply even though the renovations do not involve removal or replacement of foundations, external or internal supporting walls, floors, roof or staircases (s 195-1). The Commissioner’s views on this requirement are set out in GST Ruling GSTR 2003/3, as follows: • the renovations need to affect the building as a whole. (An individual strata unit or apartment is treated as a building in itself.) For example, a building is not treated as being substantially renovated if there are radical changes to only one or two rooms and only minor work done on the remainder. However, there would be a substantial renovation where, for example, the fibro exterior of a house was replaced by brick; some interior walls were removed; flooring throughout the house was completely replaced by polished hardwood floors; the existing kitchen was removed and a new extended kitchen was installed; and the existing bathroom was removed and a new bathroom including a spa bath was installed • additions, landscaping or cosmetic improvements such as painting are not treated as renovations • the renovations must have been carried out by the current owner. The mere addition of a second storey or additional rooms to a building that otherwise remained substantially unchanged was not a “substantial renovation” (GST Ruling GSTR 2003/3). (3) Residential premises that have been built to replace demolished premises on the same land, or which contain a building that has been built for that purpose (s 40-75). The Commissioner considers that premises may be “demolished” even though some of the foundations are retained (GST Ruling GSTR 2003/3). Examples (1) A developer builds and sells new homes. These sales will be subject to GST (but see ¶11-100). (2) A developer knocks down some existing residences and replaces them with a new one. This will be treated as new residential premises, even though there were previously residences on the land, and GST will apply on its sale. The same would apply if the developer substantially rebuilt the existing premises. (3) Residential premises in a CBD are converted for commercial use. A developer later buys the building, knocks it down and builds an apartment block. This will be treated as new residential premises, even though there was previously a residence on the land, and GST will apply on its sale. (4) A Housing Authority sells a house that it has held for use as public housing since 1997 but which had not previously been sold. As the premises were used for residential accommodation before 2 December 1998, the sale is input taxed. (5) A developer constructs a block of apartments, which it uses for short-term rentals for a period of six years. It then sells them. This sale is input taxed and is not subject to GST. (6) A taxpayer constructed a motel in 1997. In 2018, it strata titles one of the units and sells it as residential premises. This will be treated as the sale of new residential premises and will be subject to GST. The use of the unit as part of commercial residential premises before 2 December 1998 is not treated as use for residential accommodation before 2 December 1998. (Based on Interpretative Decision ID 2008/136.)

New residential premises are excluded from the rule that a supply will be treated as input taxed if it is a supply of anything that you have used solely in connection with other input taxed supplies that you make (¶1-170).

Examples (1) A property developer constructs and sells a new dwelling. The developer let the dwelling during the period between exchange of contracts and settlement. As the letting of the dwelling was an input taxed supply (¶11-310), s 9-30(4) may normally have the effect that the sale would also be input taxed. However, this will not apply as new residential premises are excluded from that rule. The sale will therefore be subject to GST. (2) As part of its development business, a property developer demolishes and removes a house that it had used previously for leasing purposes. It then sells the vacant land. This sale would be taxable. The input taxing rule in s 9-30(4) does not apply — although the land was not exempted as new residential premises, the demolition was connected with the property development business, not the previous input taxed leasing. The position may be different if the destruction of the house had been as a result of a fire, unconnected with the property development business (based on Interpretative Decisions ID 2009/18; ID 2009/19; ID 2009/40).

Subdivisions, strata titles and development leases Special provisions apply to subdivisions and development leases in determining whether premises are new. (1) Where premises are created under a property subdivision plan of existing residential premises that are not new, this does not by itself result in the subdivided premises becoming new premises (s 40-75(2AA)). “Property subdivision plans” include strata title plans or plans to subdivide land (s 195-1). This provision, which applies from 27 January 2011, confirms the Commissioner’s previous practice and was inserted to overcome doubts arising as a result of the Federal Court decision in FC of T v Gloxinia Investments Ltd 2010 ATC ¶20-182. It does not prevent the subdivided premises from being treated as new if they themselves are then substantially renovated, or are demolished and rebuilt. (2) Where there is a grant of strata-lot leases in relation to newly constructed residential premises on the registration of a property subdivision plan, this does not by itself mean that those premises cease to be new (s 40-75(2C)). In effect, the grant is disregarded. This provision particularly relates to jurisdictions where land tenure is by way of long-term leasehold, eg the ACT. It applies to grants made on or after 27 January 2011. However, as a transitional measure, it does not apply if the grant related to a property subdivision plan that was lodged for registration before 27 January 2011. (3) There is also a specific provision designed to ensure that certain sales of newly constructed residential premises by a developer to home buyers and investors will be taxable supplies of new residential premises, even though there may have been an earlier “wholesale supply” of the premises (s 40-75(2B)). The effect is that the earlier supply is disregarded if the residential premises have been constructed pursuant to an arrangement between a developer or builder and a land holder, under which the developer or builder (or an associate) becomes entitled to the freehold or long-term leasehold title in the premises conditional on specified building or renovation work being undertaken. It may happen that a supply potentially falls within both rules (2) and (3). In such a case, it seems that neither rule will apply if the supply falls within the transitional provision for rule (3) even though it does not fall within the transitional provision for rule (2) (Interpretative Decision ID 2014/19). For the general treatment of development leases, see ¶11-062. Supplies within groups New residential premises do not lose that status simply by being supplied within a GST group or between joint venture partners (s 40-75(2A)). This measure was primarily directed against artificial arrangements designed to exploit the group or joint venture rules, though it was likely that these arrangements could have been struck down in any event under the anti-avoidance rules, or been ineffective on other grounds. Previous sale as commercial residential premises Premises can still be treated as new residential premises even though they have previously been sold as commercial residential premises (¶11-030). For example, if a motel is sold, then strata titled, the subsequent sale of the individual units could be treated as a sale of new residential premises. Time of supply Under most standard forms of sale contract, it seems that the supply would not take place until settlement (¶11-000). If so, there can be no taxable supply if the settlement occurred before 1 July 2000. However,

GST may potentially apply if the settlement occurs on or after that date, even though the contract was signed and a deposit paid before that date. For the attribution rules applying to taxable sales, see ¶11065. Adjustment where sale deferred A GST adjustment may be necessary where there is a delay in selling the units in a property development, and they are rented out pending sale (¶6-300). [GSTG ¶35-200]

¶11-022 Purchaser of new premises to remit GST from 1 July 2018 With effect from 1 July 2018, purchasers of newly-constructed residential premises or new subdivisions of potential residential land have an obligation to withhold an amount on account of GST and remit it directly to the Tax Office (Administration Act, Sch 1, s 14-250). This measure is intended to avoid the practice of some developer/vendors who fail to remit the GST despite having claimed input tax credits on their construction costs (“Improving the Integrity of GST on Property Transactions”, treasury.gov.au/consultation/c2017-t220266). A major example of this, known as “phoenixing” (¶20-000), is where the developer simply dissolves the business before their next BAS lodgment. Application date In general, the withholding obligation applies to any supplies for which any of the consideration (other than a deposit) is first provided on or after 1 July 2018. However, if the contract was entered into before 1 July 2018, the obligation does not apply if the consideration is first provided before 1 July 2020. This provides a two-year transitional period for pre-existing contracts. Special transitional rules also apply to pre-existing property development arrangements under which there are agreed distribution or “waterfall” payments (Treasury Laws Amendment (2018 Measures No 1) Act 2018, Sch 5, s 26, 27 and 28). Inclusions The obligation arises where there is a supply by way of sale or long-term lease (¶11-060) of: • new residential premises (¶11-020), other than those created through a substantial renovation of a building • subdivisions of potential residential land that is included in a property subdivision plan and does not contain any building that is in use for a commercial purpose. This will typically apply, for example, to house and land packages in areas zoned for residential premises (s 195-1; Administration Act, Sch 1, s 14-250). Exclusions The obligation does not apply to: • non-taxable supplies • transactions between members of a GST group or participants in a joint venture • commercial residential premises (¶11-030), or • supplies of potential residential land if the purchaser is GST-registered and acquires it for a creditable purpose. This ensures that the obligation does not apply to certain business-to-business transactions. Timing and amount The obligation to withhold falls on the recipient of the supply, typically the purchaser. In the case of joint purchasers, each is liable for the payment, and either may discharge it. Tenants in common are each liable for a share of the payment, proportionate to their interest in the property. The amount required to be remitted to the ATO is based on the (GST-inclusive) price for the supply,

which will normally be ascertainable from the contract. If the sale is subject to the margin scheme (¶11100), 7% of the price needs to be remitted, with any subsequent adjustment needed to cover the actual margin scheme liability being made through the developer’s BAS. Otherwise, 1/11th of the price should be remitted. In the special case where the supply is made between associates for less than the GSTinclusive market value (¶17-500), the purchaser must remit 10% of that market value, and this must be done on the day on which the supply is made. The amount must generally be paid to the ATO on or before the day that any consideration for the supply, other than the deposit, is first provided. Typically, this will occur on settlement of the sale. It appears that the full amount must be paid even if the purchase price is paid in instalments, though the Commissioner has power to provide by legislative instrument that the amount be paid progressively as each instalment is paid. The purchaser also has the option of providing the supplier with a bank cheque for the relevant amount made out to the Commissioner. In this case, the purchaser is protected from any penalties if the supplier does not pass this on to the Commissioner. The position is summarised in the following table (based on Law Companion Ruling LCR 2018/4): Type of supply:

Amount to be paid by purchaser:

General rule, that is where none of the other circumstances in this table apply

1/11th of the “contract price” or “price”

The margin scheme applies to the supply

7% of the “contract price” or “price”

The supply is between associates and is without 10% of the GST-exclusive market value of the consideration or is for consideration that is less supply than the GST-inclusive market value of the supply: (a) The supply is only partly a supply of new residential premises or potential residential land to which the withholding rule applies, and (b) it is practicable to ascertain the portion of the consideration that relates to the supply of new residential premises or potential residential land to which the withholding rule applies when consideration is first provided

A “reduced amount” that is the proportion that relates to the supply to which the withholding rule applies of the amount otherwise determined in the relevant circumstance of this table

There are multiple recipients (not joint tenants)

For each recipient, the proportion of the supply that is deemed to be made to them of the amount otherwise determined in the relevant circumstance of this table

Guidelines for purchasers for notifying the Tax Office of the purchase and making payment are in its GST property settlement online forms and instructions www.ato.gov.au/Business/GST/In-detail/Yourindustry/Property/GST-property-settlement-online-forms-and-instructions/). Where the purchaser has fulfilled this requirement, the amount remitted reduces the price it is liable to pay to the supplier, and when the supplier lodges its BAS it will get a corresponding credit from the Commissioner for the amount paid (Administration Act Sch 1, s 18-60). Refunds or partial refunds may be available to the vendor where the purchaser has withheld in error (Administration Act Sch 1, s 18-85). Example Purchaser buys a new apartment for $880,000. As the margin scheme does not apply, the purchaser remits $80,000 (1/11 × $880,000) to the Commissioner. On settlement, the purchaser gets a credit for the $80,000 from the supplier. In its BAS, the supplier will receive a credit for the same amount.

Vendor’s notice requirements Before making the supply (normally settlement), the vendor must provide the purchaser with a written

notice, stating whether the purchaser must remit the GST and if so, specifying how much, and when, plus other details such as the vendor’s ABN (Administration Act Sch 1, s 14-255). This applies to supplies of any residential premises or potential residential land, except (1) commercial residential premises or (2) where a GST-registered purchaser acquires potential residential land for a creditable purpose. Failure to provide the notice, where required, attracts a penalty, as does failure by the purchaser to pay any required GST (Administration Act, Sch 1, s 16-30). There may be a defence in cases of reasonable mistake.

¶11-030 Sale of commercial residential premises Input taxation does not apply to the sale of commercial residential premises (s 40-65(2)). This means that GST may apply if the vendor is registered. What are “commercial residential premises” There are various types of commercial residential premises (s 195-1). They are as follows: (1) Hotels, motels, inns, hostels, boarding houses or “similar” premises. None of these terms are defined, so they bear their ordinary meanings. The ATO says that in determining what premises are “similar” to hotels, etc, the following characteristics should be considered: • Commercial intention. The establishment must be run in a business-like manner. However, this does not exclude non-profit operators. • Multiple occupancy. The establishment must provide sleeping accommodation on a multiple occupancy basis. This therefore excludes premises that only offer accommodation to one person or a small group living or travelling together. It also excludes premises limited to a single occupancy, even if regularly let for short-term stays (eg cottages let as weekenders). • “Held out” to the public. The establishment must be held out as premises that will receive travellers who are willing and able to pay. The “public” can include a particular segment or a niche market. • Accommodation is the main purpose. Compliance with the necessary zoning, building code and health regulations necessary to operate premises as a hotel, motel, inn, hostel or boarding house would indicate that the main purpose of the premises is to provide accommodation. Incidental accommodation provided in a high level medical centre or nursing home would not qualify. • Central management. The establishment must be centrally managed. The management ordinarily accepts reservations, allocates rooms, receives payment and arranges services. • Management not agents. The management must have control of the premises as a whole, whether or not it owns the property. It must let the premises in its own right, rather than as an agent. • Services offered. An absence of services, such as cleaning, indicates that the premises may not be commercial, though to a large extent this varies according to the tariff. • Status of guests. Guests and lodgers can expect a reasonable amount of privacy from management and other guests, but do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant. For an exception to this general rule, see Example (4) below (GST Ruling GSTR 2012/6). Other factors, such as zoning and overall physical character may also be relevant. The fact that the premises are not actually operating as such at the time of sale does not prevent them from being commercial residential premises.

Checklist Factors that may indicate that premises are not a hotel, motel, inn, hostel, boarding house or similar premises include: • the operator and occupant agree for accommodation to be supplied for a periodic term (which may be for a period of months or years at a time), such as in a residential lease • the operator and occupant document the condition of the premises under a written contract before the accommodation is initially supplied and when the occupant ceases to occupy premises • the operator has the right to impose a cleaning fee on the occupant when the occupant ceases to occupy the premises • the occupant is permitted, subject to the terms of the lease or licence, to alter the part of the premises occupied by the occupant, such as by attaching hanging devices on a wall • the occupant is permitted, subject to the terms of the lease or licence, to keep pets in the premises • the occupant must separately arrange and pay for the connection of a telephone, electricity or gas service • the occupant is responsible for the cleaning and minor maintenance of the premises, such as changing light bulbs in their room • the premises are unfurnished, and • the right to occupy the residential premises is supplied to the occupant in exchange for the occupant loaning an amount to the operator together with other fees (GST Ruling GSTR 2012/6).

Examples (1) A retirement village was not commercial residential premises as it was not sufficiently “similar” to a hotel, motel, etc. Relevant factors included the fact that residents agreed to occupy the accommodation for months or years at a time, had a right to make certain alternations and keep pets, and had to arrange their own telephone, electricity and gas services (Wynnum Holdings No 1 Pty Ltd v FC of T 2012 ATC ¶10-274). (2) A dual occupancy rental dwelling did not qualify as a boarding house, or as similar to a boarding house, because it did not provide food with the lodging. The dwelling also was not similar to a hotel or motel as it had none of their characteristics, ie there was no signage, no proprietor on the premises, no offer of short-term or overnight accommodation and no meals provided (Karmel & Co Pty Ltd (as trustee for Urbanski Property Trust) v FC of T 2004 ATC 2075; 2004 AATA 481).

Because of the requirement for multiple occupancy, a single strata titled unit or suite cannot, by itself, be commercial residential premises. It will retain its character as residential premises if sold individually, and the sale will therefore generally be input taxed (¶11-010) unless the unit is new (¶11-020; South Steyne Hotel Pty Ltd v FC of T 2009 ATC ¶20-145; [2009] FCAFC 155). See also Example (3) below. Examples The following are examples of the ATO’s approach (GST Ruling GSTR 2012/6). (1) Farm stay: guests at a farm-stay business are invited to participate in farm activities and stay in renovated buildings that sleep up to 12 in four separate suites. Accommodation is offered on a bed and breakfast basis, the suites are cleaned daily, there is an onsite manager and the business is advertised nationally. This would be treated as commercial residential premises. (2) Room in house: a single room in a house is advertised as being available for short-term accommodation, with linen provided. This would not be treated as commercial residential premises, and the supply would be input taxed.

(3) Single strata unit: an individually-owned apartment in a block of strata-titled holiday apartments is let out for short-term stays during the year through on-site managers acting as the owner’s agent. The on-site managers provide keys to guests, clean the rooms between stays, and refresh linen, towels and the tea and coffee making facilities. The body corporate maintains common areas but does not otherwise involve itself with occupants. The supply of the apartment would not be treated as accommodation provided in commercial residential premises, and the supply would be input taxed. This would apply even if the managers also act as agents for other owners in the block. However, the position may be different if the managers supply the accommodation in their own right. (4) Boarding house: certain premises that have the capacity to provide board and lodging to 25 occupants are marketed as a boarding house. The average stay of a resident is six months. Under state law, the landlord is required to enter into a rooming agreement, requiring that residents are given “quiet enjoyment” of their rooms. Each resident is provided with daily meals. Despite these additional rights, the premises would still be treated as a boarding house, and therefore as commercial residential premises. Note, however, that the supply of meals to the residents would be a taxable supply.

The result in Example (4) represents a change — based on the Southbank case — in the ATO’s previous practice. Under that practice, situations where the occupants had tenant-like rights additional to normal guests were treated as involving an input taxed supply of residential accommodation. In recognition of the fact that this changed treatment may require operators to change their systems to correctly account for GST, a special rule may enable them to continue to treat such a supply as input taxed for a transitional period. For details, see GST Ruling GSTR 2012/6, paras 127 and 128. Commercial residential premises such as motels may include a unit or apartment occupied by a manager or caretaker. Where this is a physical part of the motel building, it is treated as part of the premises (GST Ruling GSTR 2012/6). Accommodation provided to that person in the unit would therefore be taxable (¶11-320). (2) School accommodation or similar premises. School accommodation means premises used to provide accommodation in connection with a pre-, primary or secondary school. This would potentially apply to school boarding house accommodation provided to teachers, staff and students. Student accommodation which falls outside this category — for example, because it does not have any connection with a school — may be treated as commercial residential premises in certain situations. This was held to be the case where an establishment for student accommodation was run by a controller with a commercial purpose, had multiple occupancy, was held out to a section of the public, had a central management, and was used for the main purpose of accommodation. Even though meals were not provided, the premises were considered to be “similar” to a hostel and were therefore commercial residential accommodation premises. The Commissioner’s argument that the accommodation should be treated as input taxed residential accommodation, as the occupants were equivalent to tenants, was rejected (ECC Southbank Pty Ltd & Anor v FC of T 2012 ATC ¶20-336). Note that certain non-tertiary student accommodation is specifically made GST-free, eg where it is provided by the school or is for rural or remote students (¶14-004). Accommodation provided to students at tertiary institutions — such as residential colleges — is non-commercial and therefore input taxed (¶14004). (3) Charter vessels and cruise ships. This covers ships that are mainly let out on hire, or used mainly for entertainment and transport, in the ordinary course of business. (4) Marinas. This covers marinas where one or more of the berths are for occupation by ships used as residences in the sense of being occupied on a permanent or long-term basis. The requirements of any government or statutory authorities may be relevant, but not necessarily conclusive, in working out whether a berth at a marina may be occupied by a ship used as a residence. (5) Caravan parks, camping grounds or similar premises. Guests at these facilities may stay in a caravan, a moveable home, a permanent cabin or villa, or a tent provided by the operator on the site. Alternatively, they may park their own caravan, motor home, camper trailer or the like on a site, or pitch their own tent on a site (GST Ruling GSTR 2012/6).

“Home parks” in which sites for moveable homes are rented and the homes themselves either rented or occupied by their owners fall into this category. Excess accommodation provided in a resort under a time-sharing scheme was in “commercial residential premises” (Interpretative Decision ID 2010/19). Although commercial residential premises may be “residential premises” (¶11-010), this will not always be the case. For example, a ship may be commercial residential premises, as defined above, but could not be residential premises because it is not land or a building. [GSTG ¶35-320]

¶11-050 Sale of non-residential premises Sales of non-residential premises are subject to GST, as are sales of new residential premises and commercial residential premises (s 40-65). Example The registered owner of an office block sells it. The sale will be subject to GST.

If a tenanted commercial building is sold, it may be that this can be treated as the GST-free sale of a going concern (¶11-500). For the meaning of residential premises, see ¶11-010. [GSTG ¶35-320]

¶11-060 Long-term leases A “long-term lease” of premises is treated in the same way as the sale of premises (s 40-70). So, for example, a long-term lease of new residential premises, commercial residential premises or nonresidential premises is generally taxable, but a long-term lease of an established home is input taxed. A long-term lease of vacant land may be taxable, irrespective of whether it is subject to a condition that the lessee constructs residential premises on the land (Interpretative Decision ID 2010/22). A long-term lease means a lease for at least 50 years, where it is reasonable to expect that it will continue for at least that period (s 195-1). Examples (1) The owner of a hotel leases it for 99 years. The lease may be subject to GST in the same way as if the hotel building had been sold. (2) A lease of a retirement village unit for more than 50 years would not be a long-term lease because it would not be reasonable to expect that it would continue for that period. The lease would therefore remain input taxed (Interpretative Decision ID 2001/635).

Unless the lessor is an Australian government agency, the terms of the lease must be “substantially the same” as those under which the lessor held the premises. This requirement may be relevant, for example, where a lessee under a head lease grants a sublease. Example S held land under a head lease in perpetuity. S granted a number of subleases over parts of the land for a period of 99 years with an option for a further 99 years. The ATO accepted that the period of the subleases and the head lease were substantially the same. However, the amount of rent, the way in which it was worked out, the area leased and the restrictions on usage in each sublease were all significantly different from under the head lease. The subleases were therefore not long-term leases (based on Interpretative Decision ID 2006/340).

Renewals or extensions may, in themselves, qualify as long-term leases. They are treated as supplies separate from the original grant. Example A grant of a lease for less than 50 years did not qualify as a long-term lease even though it contained an option to renew for a period of more than 50 years. The lease created by the exercise of that option could, however, qualify (based on Interpretative Decision ID 2006/113).

These rules apply equally to hiring or licensing arrangements. A supply by way of sale of a long-term lease takes place on settlement. Typically, this is when the registrable transfer is unconditionally provided to the recipient. The recipient acquires the lease at the same time (GST Ruling GSTR 2006/7). For the separate rules that apply where commercial residential premises are rented out for “long-term” accommodation (more than 28 days), see ¶11-320. For GST implications of development lease arrangements, see ¶11-062. [GSTG ¶35-360]

¶11-062 Development leases Under various types of development lease arrangements, a private developer undertakes a development on land owned by a government agency, on the contractual basis that the land will be supplied to the developer on a short-term lease (or licence) during the development phase, and will then be transferred to the developer by way of the freehold or a long-term lease once the development is completed. According to ATO guidelines, the main GST implications are as follows: • the grant of the short-term development lease is treated as a taxable supply of the vacant land to the developer by way of lease or licence. Any rent, or lump sum payable by the developer on the grant, would be consideration for that supply • in completing the development works, the developer is supplying services to the government agency. The ultimate supply of the land by way of freehold or long-term lease by the agency would be consideration for that supply. Both of those supplies are taxable (GST Ruling GSTR 2015/2). Specific rules apply in situations where “in kind” developer contributions are made in return for the grant of subdivision or rezoning approvals (Div 82); see ¶4-080. For the situation where the developer subsequently sells residential premises on the developed land, see ¶11-020. The ATO has warned that it is reviewing certain arrangements where there is an inconsistency between the ways the developer and government entity are reporting the value of the supplies under these arrangements (Taxpayer Alert TA 2018/3).

¶11-063 Subdivision and sale The subdivision and sale of land by a registered developer would form part of the developer’s business enterprise and would be potentially subject to GST. The transaction is not input taxed because if the land is sold vacant, it would be treated as non-residential (¶11-050) and if it is sold with newly erected houses, it would be treated as new residential premises (¶11-020). Even if the subdivision and sale is an isolated transaction, it would generally be treated as “an adventure in the nature of trade” and therefore part of the registered seller’s enterprise (¶3-020). GST would therefore potentially apply. This may not apply, however, where there is a mere advantageous realisation, for example, where land which is inherited or held for some purpose is subsequently subdivided and sold off to the best advantage (FC of T v NF Williams 72 ATC 4188; Casimaty v FC of T 97 ATC 5135). As to when an enterprise of land development can be said to have commenced, see ¶3-020.

In the case of isolated transactions, the ATO considers that if several of the following factors are present it may be an indication that there is an enterprise being carried on, rather than a mere realisation: (1) there is a change of purpose for which the land is held (2) additional land is acquired to be added to the original parcel of land (3) the parcel of land is brought into account as a business asset (4) there is a coherent plan for the subdivision of the land (5) there is a business organisation, for example a manager, office and letterhead (6) borrowed funds financed the acquisition or subdivision (7) interest on money borrowed to defray subdivisional costs was claimed as a business expense (8) there is a level of development of the land beyond that necessary to secure council approval for the subdivision, and (9) buildings have been erected on the land (Miscellaneous Taxation Ruling MT 2006/1). For details of GST withholding rules applicable from 1 July 2018 in relation to subdivisions of potential residential land, see ¶11-022. Requirement to register If the seller is not registered and not required to be, GST will not apply. The requirement to register is determined according to GST turnover. This does not include transactions that substantially and permanently reduce the size of the enterprise (¶3-030). It may be that some cases of subdivision and sale may fall into this category. If so, this may make a difference to whether the seller is required to register. However, it must be remembered that if the seller is not registered and not required to be, the seller cannot itself claim input tax credits on its own acquisitions and cannot take advantage of the margin scheme (¶11-100). Farm land In certain cases where farm land is subdivided, the supply may be GST-free, either under specific concessions or under the general exemption for the sale of going concerns (¶11-420). Application of margin scheme For changes affecting the application of the margin scheme to sales of subdivided land, see ¶11-100. [GSTG ¶35-390]

¶11-064 Partitions of co-owned land There is a partition of land where it is divided up and redistributed among the former co-owners. This may occur, for example, as a result of a dispute between the co-owners, or the conclusion of a business venture. The ATO considers that a partition has the following GST implications: • if the partition is by agreement between the parties, each transfer by a co-owner to the others is a supply. However, the mere fact that land held by co-owners is subdivided does not amount to a supply • this also applies even if the partition is made by the parties pursuant to a court direction. Although there cannot be a supply unless the supplier “does something” (¶4-010), that does not mean that the act must be voluntary • the supply by each co-owner will normally be made as part of carrying on an enterprise, if the land was applied or intended to be applied as part of an enterprise carried on by that co-owner. This is so

even if the partition results in the termination of the enterprise (¶3-020) • the consideration for the supply is that each co-owner gives up their interests in part of the land in return for the same from the other co-owners • the margin scheme can be applied to work out the amount of GST payable on the supply: see further ¶11-140 • a partnership makes a supply to the partners in the course of its enterprise when it makes an in specie distribution of partnership land to them, or when it supplies an interest in the land by way of a partition (GST Ruling GSTR 2009/2).

¶11-065 Attribution of GST and credits on taxable sales Where the sale of real estate is a taxable supply — for example, where it is non-residential, new residential or commercial residential — it is necessary to attribute the GST and input tax credit to the appropriate tax periods. The ATO’s views on how this applies in the case of a standard contract for the sale of land (GST Ruling GSTR 2000/28) are as follows: • the supplier should attribute the GST on the sale to the tax period in which the supply occurs, ie when settlement of the sale takes place (¶11-000). This applies whether the supplier is on the cash basis or the accruals basis • similarly, the purchaser should claim the input tax credit for the tax period in which settlement of the sale occurs. Again, this applies whether the purchaser is on the cash basis or the accruals basis. However, the purchaser must be registered and hold a tax invoice in accordance with the normal rules • these rules apply irrespective of whether the contract is subject to conditions such as a “subject to finance” clause. The mere fact that contracts have earlier been exchanged and a deposit paid is not relevant, even if there is an early release of the deposit to the vendor pending settlement. Example A registered, accruals basis vendor with monthly tax periods contracts to sell a commercial property to a registered, cash basis purchaser with quarterly tax periods. The sale price is $550,000 and a deposit of $50,000 is paid to the agent on exchange of contracts. Settlement occurs in January 2019, when the vendor provides a transfer and the title documents to the purchaser in return for the purchaser paying the balance of the sale price ($500,000) and the agent releasing the deposit. The vendor attributes the whole of the GST (1/11 × $550,000 = $50,000) to the monthly tax period ending 31 January 2019. Assuming that it holds a tax invoice, the purchaser claims an input tax credit of $50,000 for the quarterly tax period ending 31 March 2019.

If the deposit is refunded as a result of a default by the vendor, there are no GST consequences. For the position where the deposit is forfeited as a result of a default by the purchaser, see ¶4-070. [GSTG ¶35-120]

¶11-068 Easements, restrictive covenants and options For GST purposes, the granting of an easement or restrictive covenant affecting land is a “supply” of a real property interest or right. Provided that the land is in Australia, GST may therefore apply if the grantor is registered (or required to be registered), there is consideration, and the grant is made as part of an enterprise carried on by the grantor (¶4-000). If GST applies, the grantee can claim an input tax credit if the grantee is registered (or required to be

registered), pays consideration, and acquires the interest as part of its enterprise (¶5-010). Examples (1) Jackie grants her neighbour a right of way over part of Jackie’s backyard, to enable the neighbour to widen the driveway access to her house. In return Jackie receives $10,000. There are no GST implications as the transaction is not part of an enterprise carried on by either party. (2) As part of its business, a registered property developer pays $100,000 to acquire an easement over land which will assist it to carry out its development plans. The land is owned by a registered land trader. Assuming that the grant is part of the trader’s enterprise, GST will apply. Assuming that the acquisition is part of the developer’s enterprise, it will be able to claim an input tax credit. (3) Assume the same facts as in Example 2 except that the land was owned by an unregistered private individual. GST would not apply and no input tax credit could be claimed. (4) Assume the same facts as in Example 2 except that the easement was acquired by an individual for private purposes. GST would apply to the grant, but no input tax credit could be claimed.

Options The grant of an option to acquire land is a “supply” of a right over real property. Whether the supply is taxable will depend on the circumstances. The supply of a right to receive a taxable supply (eg of commercial property) is itself taxable if it meets the usual requirements as to consideration, connection with Australia, etc, (¶4-000). The supply of a right to receive an input taxed supply (eg of residential premises) is itself input taxed, and the supply of a right to receive a GST-free supply (eg of farm land) is itself GST-free (s 9-30; Interpretative Decisions ID 2005/182 to ID 2005/184). As to whether consideration is received, see ¶4-020. [GSTG ¶35-030]

¶11-070 Other matters associated with property ▸ Home loans are input taxed as financial supplies (¶10-010), so no GST is payable on them. Similarly, where a purchaser is given time to pay under an instalment contract, this is a credit arrangement (¶10-010) that may be treated as an input taxed financial supply. This is separate from the supply of the property itself (Interpretative Decision ID 2005/194). ▸ There will be a GST adjustment if a property development originally carried out for the purpose of sale is actually used for rental purposes (¶6-300). ▸ Water, sewerage and stormwater drainage supplies are GST-free (¶16-200). ▸ GST does not apply to local government services for which rates are payable (¶4-080). ▸ Electricity and gas supplies are taxable. ▸ GST does not apply to development or building applications (¶4-080), but building inspections are taxable. ▸ Stamp duty is not treated as part of the consideration (¶4-080), and therefore do not attract GST. However, it appears that stamp duty will be imposed on the GST-inclusive price (Ambiance (Arncliffe) Pty Ltd v Chief Commr of State Revenue (NSW) 2002 ATC 2257; Commr of State Revenue (Vic) v Royal & Sun Alliance Insurance Australia Ltd 2003 ATC 4998; [2003] VSCA 177). Some state governments have also passed legislation designed to confirm this. ▸ The former NSW vendor duty was not treated as part of the consideration (¶4-080), and therefore did not attract GST. ▸ Adjustments for rates, land taxes and other outgoings on the settlement of a taxable sale of real property are taken into account in calculating the consideration on which GST is based (GST

Determination GSTD 2006/3; see also ¶11-110). ▸ For the treatment of rental guarantee payments, see ¶6-100. ▸ Home insurance is taxable (¶10-110). ▸ Estate agents’ and solicitors’ fees and advertising costs on property transfers are subject to GST. This applies irrespective of whether the property is residential, non-residential, newly constructed or existing. However, input tax credits for the GST cannot be claimed where the property is an existing dwelling. ▸ Special rules apply to services provided to offshore owners of Australian real estate (¶9-240). ▸ New house construction costs are subject to GST. ▸ House alterations are subject to GST. ▸ If an amount under a building contract is retained pending satisfactory completion, the GST is deferred until it is actually paid over (¶7-440).

SPECIAL “MARGIN” RULES ¶11-100 How the margin scheme works The margin scheme enables the GST on certain sales of real estate to be calculated on a concessional basis (Div 75). It is typically applicable to new residential property developments. Normally, GST on a supply is calculated as 1/11th of the GST-inclusive price, and a purchaser can claim an input tax credit for the GST component. Under the margin scheme, however, the GST on the sale is instead calculated as 1/11th of the “margin”, and no input tax credit is allowed to the purchaser. In broad terms, the margin is calculated as follows: • if you acquired the property before 1 July 2000, the margin is the increase in value since that date • if you acquired the property after 30 June 2000, the margin is the difference between your sale price and the price you paid. Eligibility rules The margin scheme applies in working out the GST where: • you make a taxable supply of real property. For there to be a taxable supply, it must be made for consideration, in the course of a registered supplier’s enterprise, and it must be connected with Australia and be neither GST-free or input taxed (¶4-000). The supply of real property must be the sale of a freehold interest, a strata unit, or the grant or sale of a long-term lease (¶11-060). Freehold interests include the fractional interest of a co-owner (Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635; GST Ruling GSTR 2006/8), and • both parties agree that the margin scheme will apply (see “Documentation” below) (s 75-5). The margin scheme cannot be applied to a supply that you make if you had acquired the property in any of the following circumstances: (1) you acquired it under a taxable supply on which the GST was worked out without using the margin scheme. The rationale for this exclusion is that in such a case, you would have been entitled to an input tax credit on the purchase, and should therefore not be entitled to any further relief by way of the margin scheme (2) you acquired it by inheritance, if the deceased person had acquired it through a supply that was not

eligible for the margin scheme (see also ¶11-140) (3) you acquired it from another GST group member, and the last supply of the property from a nongroup member had been ineligible for the margin scheme (¶11-140) (4) you acquired it from the operator of a joint venture in which you were a participant, and the operator had acquired it through a supply that was ineligible for the margin scheme (¶11-140) (5) you acquired it as a GST-free supply of a going concern (¶11-500), a farm (¶11-410) or subdivided farm land (¶11-420), from an entity that was registered or required to be, and that entity had acquired it through a taxable supply on which GST was worked out without applying the margin scheme. For other rules applying where there are GST-free supplies, see ¶11-140 (6) you acquired it for no consideration from an associate (¶17-500) that was registered or required to be, where the supply by that associate was not a taxable supply in the course of an enterprise (¶4090), and the associate had acquired the property through a taxable supply on which the GST was worked out without using the margin scheme. This exclusion can also apply where, for example, a government entity acquires the property for no consideration from an associate without the associate technically making a “supply”. For other rules applying to associates, see ¶11-140. The ineligibility rules in (5) and (6) are intended to prevent arrangements under which taxpayers “refreshed” their eligibility to use the margin scheme by interposing a GST-free or non-taxable supply before selling the property. These rules apply to supplies of things that you acquired through a supply that was: (1) made on or after 9 December 2008; and (2) not made under a written contract made before that date, or pursuant to an option granted before that date that specified the consideration or a way of working it out. Example In this example, it is assumed that all parties are registered. X sells a property to Y. X accounts for GST in the normal way and Y claims an input tax credit. Y sells the property to Z as a GSTfree going concern. Z develops the property for residential use and sells it to Purchaser. Ineligibility rule (1) does not prevent Z from using the margin scheme on the sale to Purchaser, because Z itself did not acquire the property under a taxable sale on which GST was calculated in the normal way. However, ineligibility rule (5) prevents Z from using the margin scheme because Z acquired the property from Y, who in turn acquired it under a taxable sale on which GST was calculated in the normal way.

The ineligibility rules in (5) and (6) do not apply if more than one GST-free or non-taxable sale is interposed. This recognises the complexity that would arise if it were necessary to look back through multiple transactions. However, it is likely that the general anti-avoidance rules in Div 165 may apply in any event where there is a contrived arrangement designed to exploit this rule (¶20-040). Pros and cons of margin scheme The upside of the margin scheme is, of course, that the GST is reduced. The downside is that the purchaser cannot claim an input tax credit (s 75-20). This means that the margin scheme will be particularly relevant where the purchaser may not have been entitled to an input tax credit in any event, for example, where a developer sells new residential units, a project builder sells house and land packages, or land is sold to an unregistered purchaser. It also means that a developer could consider using the margin scheme on sales to purchasers who cannot claim input tax credits in any event — for example, unregistered purchasers — and using the normal method of calculating GST on sales to registered purchasers who can claim the GST back as an input tax credit. Documentation As mentioned above, the decision to apply the margin scheme must be agreed, in writing, by both parties (s 75-5). This agreement must be made on or before the supply is made — this will normally be when settlement occurs (¶11-000). The Commissioner has the discretion to extend this date. This discretion may be exercised where the Commissioner is satisfied that all the other requirements for application of

the margin scheme have been met and there is no arrangement that produces an outcome contrary to the policy of the legislation. An example of this is where the failure to make the agreement arose because of a mistaken belief that the supply was GST-free (Practice Statement PS LA 2005/15). It would appear that once a supply has been made on the basis of an agreement to apply the margin scheme, the GST consequences cannot be changed by the parties subsequently agreeing to revoke the agreement (Interpretative Decision ID 2010/83). The ATO considers that where the transaction is in the name of a bare trustee, the trustee can sign the agreement (GST Ruling GSTR 2008/3). As use of the margin scheme prevents input tax credits being claimed, there is no obligation on the vendor to issue a tax invoice (s 75-30). A developer who purchased property under the margin scheme and incorrectly claimed substantial input tax credits on the basis of a tax invoice supplied by the vendor was held to be penalisable for a reckless false statement (Barcia Pty Ltd v FC of T [2008] AATA 1073). Selling land as part of selling a business It appears that the margin scheme can apply where land is being sold as part of closing down a business, as such a sale is treated as being made in the course of carrying on an enterprise (¶3-020). However, this would not apply if the sale was a GST-free supply of a going concern (¶11-500). Subdivisions Taxpayers may use the consideration method, the valuation method or the GST-inclusive method, whichever is appropriate, when calculating the margin on a taxable supply of subdivided land (s 75-15). [GSTG ¶35-210]

¶11-110 How to calculate the margin The margin is generally calculated as the difference between your cost (ie the consideration for your acquisition of the real property) and the amount you charge on disposing of it (ie the consideration for your supply of the real property). The GST is calculated as 1/11th of that margin (s 75-10). Property held at 1 July 2000 Special rules apply to real property held on 1 July 2000. These rules reflect the fact that GST applies only from that date. Their effect is: • if you acquired the property before 1 July 2000, the cost is calculated as the value as at 1 July 2000. In effect, you will be liable for GST only on the value added since that date • if you were not registered or required to be registered at 1 July 2000, the cost is calculated as the value as at the date you become registered. In effect, you will be liable for GST only on the value added by you after registration. Example A developer buys land in 1999 for $75,000. At 1 July 2000, the developer is registered and the land is valued at $100,000. The developer subsequently sells the land for $144,000. The margin is therefore $44,000 and GST is $4,000.

In this example, note that after allowing for GST, the developer clears $140,000. If the developer had not adopted the margin scheme, it would have had to sell at $154,000 to achieve this result. Using the margin scheme therefore enables it to make the price more attractive to those purchasers who cannot claim input tax credits (eg private purchasers). This may also lead to savings on stamp duty. If the Commonwealth, a state or territory (¶11-400) held unimproved land as at 1 July 2000 and subsequently sells it in an improved state, the cost of the land is calculated as the value of that unimproved land on the date the sale is made. (For the meaning of improvement, see GST Ruling GSTR 2006/6; ¶11-400.) The effect is that GST will only be charged on the difference between the sale price and the value of the unimproved land at that time. This applies even though, in the meantime, there has

been a change, for no consideration, in the government agency that held the land (GST Determination GSTD 2006/4). This is consistent with the rule that the sale of government land is GST-free (¶11-400). Where a grant of the government land results from the post-30 June 2000 conversion of a short-term lease issued before 1 July 2000, the valuation date is 1 July 2000. Where a taxpayer granted a long-term lease over improved freehold land acquired before 1 July 2000, the relevant valuation was that of the freehold as at 1 July 2000 (Interpretative Decision ID 2006/255). Where the cost is based on a valuation, it will of course be the case that a lower valuation will increase the margin, and therefore the GST. The possibility of dispute over the valuation should therefore be considered in drafting the contract. For a case involving an unsuccessful attempt to sue a valuer over a valuation for margin purposes, see Derring Lane Pty Ltd v Fitzgibbon (Civil Claims) 2006 ATC 4182; [2006] VSC 46. It appears that there does not have to be strict identity between what the taxpayer acquired before the valuation date and what it subsequently supplied. For example, a developer was able to use the margin scheme in relation to the sale of strata units, even though as at 1 July 2000 it had only held an equitable interest under a contract to buy the building and no strata titles had been issued (Brady King Pty Ltd v FC of T 2008 ATC ¶20-034). This decision reverses an earlier restrictive court ruling that had cast doubts as to the circumstances in which the margin scheme could be used by unit developers. There is continuing litigation in this case over valuation issues. Calculating the cost In calculating the margin, your cost does not include any consideration for improvements, construction or development costs of building work, additional costs such as solicitors’ fees and stamp duty, or any expenses in bringing the property into legal or physical existence (s 75-14; Sterling Guardian Pty Limited v FC of T 2006 ATC 4227; [2006] FCAFC 12). Example The cost of eligible land is $250,000. Improvements of $50,000 are carried out, on which input tax credits are claimed. The land is then sold for $360,000. In calculating the margin, the improvements are ignored. The margin is therefore $110,000 and the GST is $10,000.

The cost would include any additional amount you paid as an adjustment for council rates and land tax paid in advance by the vendor of the property prior to settlement (GST Determination GSTD 2006/3), but not legal fees, stamp duty or registration fees on the purchase. If the sale is part of a subdivision, your cost is calculated on a pro rata basis (s 75-15). You may use any reasonable method of apportionment, for example, on the basis of area, or expected resale price. Note that certain subdivisions by farmers are GST-free in any event (¶11-420). Example (1) A developer acquires land for $500,000 which it subdivides into five blocks. The land has a uniform value per square metre and each block is of equal size. It is therefore reasonable to allocate a cost of $100,000 to each block. The developer sells one block for $155,000 and later sells the remaining four blocks for $166,000 each. Using the margin scheme, the GST on the first block is $5,000 (ie 1/11th of $55,000). The GST on each of the other four blocks would be $6,000 (ie 1/11th of $66,000). (2) Assume instead that one of the blocks is 1,200 square metres and the others are 600 square metres. It would be reasonable to allocate a cost of $166,667 (ie 1,200/3,600 × 500,000) to the first block and $83,333 (ie 600/3,600 × 500,000) to each of the other four blocks. If the first block is sold for $300,000, the margin would therefore be $133,333 and the GST would be $12,121.18. If the other blocks are each sold for $150,000, the margin on each would be $66,667 and the GST on each would be $6,060.63. (3) A developer buys land for $400,000 and builds four strata units on it. The expected sale prices of the units are $540,000, $480,000, $600,000 and $780,000, a total of $2,400,000. It is reasonable to allocate the cost of those units as follows:   Unit 1:  540,000/2,400,000  ×  400,000  =  $90,000   Unit 2:  480,000/2,400,000  ×  400,000  =  $80,000   Unit 3:  600,000/2,400,000  ×  400,000  =  $100,000   Unit 4:  780,000/2,400,000  ×  400,000  =  $130,000 If, say, Unit 3 is sold for $610,000, the margin would be $510,000 and the GST would be $46,363.63.

Where the full price under the contract has not been paid, the margin will reflect only the amount paid (s 75-12). If there is a subsequent additional payment, the supplier will be entitled to a decreasing adjustment (s 75-27). In calculating the margin where land was sold on the exercise of a call (purchase) option, the consideration for the supply did not include the amount paid for the call option, even though it was applied to the purchase price (GST Determination GSTD 2014/2). The option fee is instead treated as consideration for the supply of the call option, not for the separate supply of the land (¶4-020). This applies even if the contract specifically states that the purchase price is inclusive of the option fee (The Trustee for the Whitby Trust v FC of T 2017 ATC ¶10-450). For special rules for calculating the margin in particular situations, see ¶11-140. The ATO has also warned that it is investigating the efficacy of certain schemes designed to minimise the GST payable under the margin scheme through the use of associates (Taxpayer Alert TA 2009/4). For the ATO’s practice on time limits for refund claims made where GST liability was miscalculated using the margin scheme, see ¶8-110. [GSTG ¶35-210]

¶11-120 Requirements for valuation Valuations may be needed for real property acquired by the supplier before 1 July 2000 (¶11-110) or in other special situations (¶11-140). The methods of valuation must be approved by the ATO (s 75-35). Broadly, the approved valuation methods are: (1) a written valuation by a professional valuer. If unimproved government land held at 1 July 2000 has subsequently been improved, the valuation must be on an unimproved basis (2) adoption of the amount of consideration received by the supplier in a contract signed or exchanged before the valuation date by parties dealing at arm’s length. This method does not apply where unimproved government land held at 1 July 2000 has subsequently been improved, or (3) adoption of the value determined by the government as the most recent valuation of the land for rating or land tax purposes before the valuation date. Valuations under these methods must be made by the due date for lodgment of the BAS for the tax period to which the GST on the supply is attributable. However, if the Commissioner has allowed an extension of the period for the parties to agree that the margin scheme is to be applied (¶11-100), the valuation must be made by the later of: • eight weeks from the end of that extended period, or from the date of the Commissioner’s decision to grant the parties the extended period. • an additional period that the Commissioner may allow. This may apply, for example, where: (a) the valuation obtained by a supplier was invalid; (b) the parties contracted on the incorrect basis that the supply was GST-free, input taxed or otherwise non-taxable; (c) the supplier mistakenly believed that a valuation was not required or that a valuation had already been obtained; (d) the supplier and recipient agreed to use the margin scheme but the supplier forgot to instruct the valuer or failed to notice that the valuer had not valued all the lots in a subdivision; or (e) the valuation was not undertaken for reasons outside the control of the parties, for example, if a settlement is close to the end of a tax period and the supplier has taken reasonable steps to obtain a valuation on time but there is insufficient time to obtain one (Practice Statement PS LA 2005/16). A valuation may also be approved if it is obtained by the Commissioner in specified circumstances where this is appropriate to ensure that GST is payable only on the value added after the commencement of the GST system or the taxpayer’s entry into it (Margin Scheme Valuation Requirements Determinations MSV 2009/1, MSV 2005/3 and MSV (No 53) 2015). In determining whether a method of valuation is approved, it is relevant and appropriate to consider

whether it has been made in accordance with relevant professional standards (Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust and FC of T 2018 ATC ¶20-656). Additional guidelines are in GST Rulings GSTR 2006/7 and GSTR 2006/8. Different valuation required for builder It is important to distinguish the valuation required under the margin scheme from the valuation required for construction contracts. The valuation under the margin scheme is for the purpose of determining the developer’s GST liability on the eventual sale of the property, and includes the land. The valuation for constructions in progress is for the purpose of determining the builder’s liability for GST on work and materials supplied, and does not include the land (¶19-230). [GSTG ¶35-210]

¶11-130 Bad debts under the margin scheme If the buyer defaults, there may be a GST bad debt adjustment for the supplier (¶6-200). This adjustment is limited to 1/11th of the margin (s 75-25). There is no adjustment for the purchaser because a purchaser under the margin scheme is not eligible for input tax credits. Example A developer buys land in 1999 and sells it after 2000 under an instalment contract for $200,000. The value of the land at 1 July 2000 was $156,000. Adopting the margin basis, the margin is therefore $44,000. The developer subsequently writes off $77,000 of the debt. The amount of the adjustment reducing the developer’s GST is the lesser of: • 1/11th of the bad debt ($77,000) = $7,000 • 1/11th of the margin ($44,000) = $4,000. The supplier’s adjustment is therefore $4,000. There is no adjustment for the purchaser.

[GSTG ¶35-210]

¶11-140 Special situations The following rules govern how the margin scheme applies in particular situations. Property acquired from or supplied to associate • Where real property was acquired on or after 9 December 2008, the taxable supply of that property to an associate may be deemed to be a “sale” — and may therefore fall within the margin scheme — even though no consideration is provided (s 75-5(1B)): see ¶11-100. Note that under a separate rule, a supply to an associate for less than market value may be treated as a sale: see ¶17-500. • The margin scheme may not apply in certain situations where there has been an interposed nontaxable supply to an associate prior to the sale of the property by the supplying entity (¶11-100). • Generally, if you acquired the property from an associate (¶17-500), the margin on your subsequent supply of the property will be the amount by which the consideration for that supply exceeds an approved valuation of the property as at 1 July 2000 (if you acquired the property before 1 July 2000), or its GST-inclusive market value as at the time you acquired it (if this is on or after 1 July 2000). However, a special rule applies if you originally acquired the property on or after 9 December 2008 for no consideration from a registered associate under a non-taxable supply made in the course of the associate’s enterprise. In such a case, the margin on your subsequent sale of the property is calculated as the difference between: (1) the price you sell the property for, and (2) the price for which the associate acquired the property, or its market value at the date of that acquisition. If the acquisition by the associate was pre-1 July 2000, a valuation is made as at that date (s 75-11). • If you supply the property to an associate, the margin is calculated as if the consideration for the

supply was the GST-inclusive market value of the property (s 75-13). For property that you acquired on or after 9 December 2008 (¶11-100), this applies whether or not the supply was for consideration. The ATO considers that if a general law partnership (¶4-010) supplies real property that was acquired from its partners by way of capital contribution, the margin is calculated under s 75-11 in the same way as stated above. The ATO also considers that the margin scheme can apply where: (1) a partner supplies real property as a capital contribution to a partnership, in exchange for an interest in the partnership, provided that the interest becomes partnership property; or (2) the partnership distributes real property to a partner as a result of a general dissolution, provided that the real property becomes the property of the partner and is no longer partnership property. However, the margin scheme does not apply where there is merely a reconstitution of a partnership that holds real property (GST Ruling GSTR 2009/1). Inherited property If you inherited the property, you and the deceased are treated, in effect, as one entity for the purposes of the margin rules (s 75-11). This rule is beneficial to taxpayers, as it overcomes a previous anomaly that the full price was subject to GST because the beneficiary had not paid any consideration. In calculating the margin on your subsequent supply of the property, you can treat the cost as the consideration for the acquisition of the property by the deceased. Alternatively, you may determine the cost on the basis of a valuation, in accordance with the following rules: (1) if the deceased acquired the property on or after 1 July 2000, the margin on your subsequent supply of the property is the amount by which the consideration for that supply exceeds an approved valuation of the property as at the date the deceased acquired it (2) if the deceased acquired the property before 1 July 2000, and was registered (or required to be), the date of the valuation is the later of 1 July 2000 or the first day on which the deceased registered or was required to register (3) if the deceased acquired the property before 1 July 2000, and was not registered (or required to be), the date of the valuation is the later of 1 July 2000, the date of inheritance, or the first day on which you registered or were required to register. “Inherit” includes acquiring property from a deceased estate by way of court order or deed of arrangement. These rules do not apply if the special rules covering acquisitions from fellow GST group members apply. The margin scheme will not apply in any event if the deceased would not have been eligible to apply it on a subsequent supply (see ineligibility rule (2) in ¶11-100). Multiple acquisitions and amalgamated property The general rule is that real property is not eligible for the margin scheme if it was acquired by the supplier through a taxable supply to which the margin scheme was not applied (see ineligibility rule (1) in ¶11-100). The margin scheme may also apply even though part of the property was not eligible. However, in this case, there will be an increasing adjustment to recover any input tax credits that have been claimed in relation to the ineligible property (s 75-22). Corresponding adjustments must be made if the real property is partly ineligible under other ineligibility rules in ¶11-100. For property acquired on or after 9 December 2008 (¶11-100), there is also provision for apportionment of the margin in cases where the property was acquired though several acquisitions which involve different ways of calculating the margin (s 75-16). Partitions For the ATO’s guidelines on the application of the margin scheme where co-owned land is partitioned, see GST Ruling GSTR 2009/2. GST groups and joint ventures The intention is that GST group transactions cannot be used to “re-open” eligibility to the margin scheme. This means that if you acquire real property from a fellow GST group member, the margin scheme cannot

apply to your subsequent supply of the property unless the group member who first acquired the property from outside the group could have applied the margin scheme to a supply outside the group (s 75-5). The government regards this specific statutory rule simply clarifies the law, and does not change it. The margin on a supply to outside the group is generally the difference between the consideration for the supply and the consideration paid by that first acquiring member. However, if the acquisition by that member was before 1 July 2000, the margin is the difference between the consideration for the supply and an approved valuation of the property as at 1 July 2000 (s 75-11). For sales made before 16 March 2005, when s 75-11 was introduced, it has been held that the margin could be calculated on the basis of the consideration paid by the member making the supply (FC of T v Unit Trend Services Pty Ltd 2013 ATC ¶20-389). Corresponding measures apply to supplies made by joint venture operators to venture participants. GST-free acquisition of farm land or going concern Under the margin scheme, the general rule is that GST is only paid on the value added by the supplier of a taxable supply of real property. This has meant that it did not apply to value added where the supply was GST-free. To overcome this deficiency, a special rule applies where the supplying entity acquired the property on or after 9 December 2008 under a GST-free supply of a going concern (¶11-500), a farm (¶11-410) or subdivided farm land (¶11-420). In such cases, the margin on the subsequent supply is calculated as the difference between: • the price for which the entity sells the property, and • the price for which the prior owner acquired the property, or its market value at the date of that acquisition. If its acquisition by that owner was pre-1 July 2000, a valuation is made as at that date (s 75-11). A corresponding rule applies if the supplying entity acquired the property for no consideration from an associate. Subdivisions For a special rule governing the application of the margin scheme to certain real property subdivisions, see ¶11-100. Additional guidelines Additional guidelines on the operation of some of these provisions are contained in GST Ruling GSTR 2006/8. [GSTG ¶35-218]

BODIES CORPORATE ¶11-200 Bodies corporate A body corporate is an “entity” for GST purposes (¶3-020), and is considered to carry on an “enterprise” by providing services to members, contracting with contractors, acting in a business-like way and undertaking to discharge its responsibility to manage and maintain the building (Miscellaneous Taxation Ruling MT 2006/1; Body Corporate, Villa Edgewater Courts 23092 v FC of T 2004 ATC 2056). However, where a body corporate is a non-profit body (¶3-030), it is not required to register unless its GST turnover is $150,000 or more. For the pros and cons of opting to register where the turnover is less than $150,000, see ¶3-010. The ATO says that a body will be a non-profit body where: • it is prevented from distributing its profits or assets among its members (both while the body is functional and on its winding up) by its constituent documents or by operation of law (for example, a statute governing the body’s activities), or

• if the law or the constituent documents do not prohibit such distributions, but it is clear from the objects, policy statements, history, intention, activities and proposed future directions of the body corporate that there will be no such distributions to its members (Interpretative Decision ID 2016/1). A return of the members’ own funds is a return of capital, not a distribution of profits. However, the ATO will treat a body corporate as not qualifying as a non-profit body in the exceptional case where it has the intention to distribute interest or other income to members (whether the body is in operation or is considering winding up). In this case, the compulsory registration threshold is the usual $75,000, not $150,000. If the body corporate is registered, or required to be registered, it is liable for GST when it levies contributions to its sinking and administrative funds (Body Corporate, Villa Edgewater Courts 23092). The registered owner of commercial residential premises can claim that GST as an input tax credit. Levies (but not the GST component) form part of the body corporate’s turnover for the purpose of determining whether it is obliged to register (¶3-030). A registered body corporate can claim input tax credits for the GST included in costs such as maintenance, cleaning, repairs, management and electricity. For the position where a property management company carries out services, see ¶17-400. The creation of a new residential lot out of the subdivision of the common property would have the effect of terminating the lot’s status as common property, so its subsequent sale to a third party could be a taxable supply by the body corporate (Interpretative Decision ID 2008/81). In such a case, the creation of the new lot would not constitute a supply by the existing lot proprietors to the body corporate (Interpretative Decision ID 2008/82). Services provided to the body corporate by an office holder will not normally be subject to GST even though an honorarium is paid. [GSTG ¶35-410]

RENTED OR LEASED PREMISES ¶11-300 Summary of GST position on leases The general GST treatment where real property is leased or hired is as follows: Type of premises

Example

GST treatment

Private residential

Flat

Input taxed (¶11-310)

Commercial residential

Motel

Generally taxable (¶11-320)

Long-term commercial residential

On-site van

Input taxed or concessional (¶11320)

Commercial

Shop

Taxable (¶11-330)

Leases for at least 50 years

99-year lease

Treated as sale (¶11-000)

The lease of overseas real property would not be subject to GST. Leases of goods used outside Australia are GST-free (¶9-230). The assignment of the right to rental income under a real property lease may be an input taxed financial supply (¶10-010). Development leases For the GST implications of development lease arrangements, see ¶11-062. Schemes involving associates The ATO considers that certain arrangements where an entity uses an associate to secure input tax

credits on the construction of residential premises for lease, and to defer the corresponding GST liability, are not tax-effective (GST Ruling GSTR 2010/1 (¶20-000); Taxpayer Alert TA 2009/5).

¶11-310 Accommodation in residential premises The provision of private rented residential premises is input taxed to the extent that the premises are to be used predominantly for residential accommodation, regardless of the term of occupation (s 40-35). This means that GST does not apply and the landlord is not entitled to claim input tax credits. This applies whether the premises are leased, hired or licensed, and to accommodation provided through online rental sites such as Airbnb. However, “long-term leases” are treated in the same way as a sale (¶11-060). Accommodation provided to employees is treated in the same way as accommodation provided to others. Renting out a car parking space is not in itself a supply of residential accommodation. Although no GST may be payable on private rented accommodation, it may happen in practice that landlords pass on some or all of the GST-inflated costs they incur in maintaining the premises. For example, maintenance and repair costs on the premises that are incurred by the landlord are subject to GST, which the landlord cannot recover by claiming input tax credits. The same applies to the cost of replacing appliances, body corporate levies and management, advertising, legal and accounting services. (For special rules applying where the owner is offshore, see ¶9-240.) For the meaning of residential premises, and the treatment of display homes, see ¶11-010. If a lease relates partly to residential accommodation and partly to other (taxable) purposes, the rent will need to be apportioned. For example, if a rural property including a residence is leased to a farmer, the supply will be input taxed to the extent that the value of the lease relates to the residence and taxable to the extent it relates to the farm land. For the method of apportionment, see ¶4-200. Rental bonds would presumably be treated as security deposits (¶4-070). The rent from input taxed supplies of residential accommodation is not taken into account in determining the landlord’s turnover for GST purposes (¶3-030). Employee accommodation The ATO considers that, depending on the circumstances of the case, a supply of accommodation made to an employee or contractor may be either: • an input taxed supply by way of lease, hire or licence of residential premises to be used predominantly for residential accommodation, or • a taxable supply of accommodation in commercial residential premises (GST Ruling GSTR 2012/6). Examples The following examples are based on GST Ruling GSTR 2012/6. (1) Mining Co owns houses which it either leases or provides under licence to employees. The employees are responsible for the costs of utilities and grounds maintenance, while Mining Co is responsible for repairs and other maintenance. The houses do not have the features of a hotel, motel, inn, hostel or boarding house and are, therefore, not commercial residential premises. The supplies of the houses by way of lease or licence are input taxed supplies of residential premises. (2) Exploration Co establishes camp-style accommodation consisting of single person quarters at a mine site to accommodate its mine employees and contractors. The quarters consist of a separately keyed room with a bed, small wardrobe and separate bathroom. Exploration Co has a central office at the site for the management, maintenance and servicing. Cleaners service the rooms regularly. Meals are provided in a communal canteen. Communal laundry facilities are provided. Televisions and bar facilities are provided at the site. Authorised mining company personnel are able to enter and inspect rooms without providing notice. Employees and contractors are subject to restrictions on fixtures and fittings being added to the single person quarters, and are prohibited from smoking and the keeping of pets. On balance, despite not being available to the public generally, this would be regarded as a taxable supply of accommodation in commercial residential premises (¶11-320).

A mining company which acquired apartment-style residential accommodation to lease to its employees in remote areas was denied input tax credits, notwithstanding its argument that this supply was not a commercial objective in itself, but was made as a purely incidental part of running its (taxable) mining operations (Rio Tinto Services, ¶5-010).

Accommodation in retirement villages Supplies of accommodation at retirement villages are GST-free in specified care situations (¶13-340; ¶15015). Where these exemptions do not apply, and the resident is not receiving care, the ATO’s views are as follows: • supplies of residential accommodation are input taxed (so input tax credits are not available) • to the extent that the supplies cannot reasonably be expected to be provided as part of rent — for example, where it covers personal laundry, cleaning, meals, diversional activities or bus services — they are subject to GST (so input tax credits may be available) • maintenance fees paid by residents who have strata or freehold title are subject to GST (see also ATO GST Industry Partnership examples). The AAT has said that input tax treatment should apply to facilities or services that are integral, ancillary or incidental to the lease (Living Choice Australia Ltd and FC of T [2014] AATA 168). This would apply to the provision of, say, an indoor heated pool, but only to the extent that it is used by residents or for noncommercial purposes. The ATO is investigating arrangements under which village operators seek to claim input tax credits for electricity and other services which they on-supply to residents of independent living units (Taxpayer Alert TA 2010/7). These claims are based on an argument that the supply of electricity is a (taxable) supply which is separate from the (input taxed) supply of accommodation. For the GST treatment of deferred management fees, see ¶15-015. [GSTG ¶35-300]

¶11-320 Accommodation in commercial residential premises A supply of residential premises by way of lease, hire or licence is generally taxable if the supply is of: • commercial residential premises (¶11-030) • accommodation in commercial residential premises provided to an individual by the owner or controller of the premises. It appears that “control” should be interpreted in a practical way (South Steyne Hotel Pty Ltd v FC of T 2009 ATC ¶20-145; [2009] FCAFC 155), or • commercial accommodation to which the long-term accommodation rules (see below) may apply. Examples (1) Cosy Stays runs a bed and breakfast business and is registered for GST. The supply of the accommodation is subject to GST and it can claim input tax credits on its business outgoings. (2) Under a management agreement, a hotel owner appointed another party as the operator of the hotel, as agent of the owner. The owner was taxable on the supply of accommodation as it was provided by it through its agent (Paul J Castan & Son Pty Ltd ATF Castan Investments Unit Trust v FC of T [2015] AATA 298): see also Crown Estates at ¶17-400. (3) A hotel in Australia sells rights to accommodation in its premises to a (non-agent) tour provider, which subsequently supplies the rights to tourists as part of a holiday package in Australia. The Tax Office considers that both the supply by the hotel to the tour provider and the supply by the tour provider to the tourists are taxable supplies of a right to accommodation in commercial residential premises, as in each case the accommodation is provided by the owner of the hotel (based on GST Ruling GSTR 2012/6).

However, where an owner of an individual strata-titled unit in the commercial premises sublets the unit, this is input taxed. The lease, hire or licence of a berth at a marina is input taxed if the berth is occupied, or intended to be occupied by a ship used as a residence, and the supply is of commercial accommodation (s 40-35(1A)). For the treatment of “home parks” for demountable houses, see ¶11-010. For accommodation provided to on-site motel managers or caretakers, see ¶11-030.

Concessions for long-term commercial residential accommodation Special rules apply if there is a taxable supply of “commercial accommodation” which is provided to individuals in commercial residential premises (¶11-030) that are used for long-term accommodation, ie accommodation in the same premises for a continuous period of 28 days or more (Div 87). “Commercial accommodation” means the right to occupy the whole or part of any commercial residential premises, such as hotels, motels or caravan parks. Incidental supplies of cleaning, maintenance, power, air conditioning, heating, telephone, television, radios or similar things are also covered (s 87-15). The “right to occupy” implies a right to stay rather than necessarily requiring permanent or long-term residence (Meridien Marinas Horizon Shores Pty Ltd v FC of T 2009 ATC ¶20-138). The Commissioner also considers that the right to occupy must extend to the full duration of the supply (GST Ruling GSTR 2012/7). If you provide long-term accommodation to an individual, you have the following choice: • you may treat the transaction as subject to the concessional form of GST described below, and claim input tax credits in the normal way (s 87-25), or • you may treat the supply as input taxed (s 40-35). Whatever choice you make, the same treatment must apply to all provisions of long-term accommodation. Choices cannot be revoked for at least 12 months. The ATO says that accommodation may be provided “to an individual” even though it is booked and paid for by the company that employs that person (GST Ruling GSTR 2012/7). It also considers, on the basis of Meridien Marinas, that it is only necessary to establish that the supply of commercial accommodation is available under the terms of the agreement to be taken up by an individual, even if it not actually taken up by an individual. Where a caravan park operator moves a caravan from one site to another within the park for convenience, but maintains the booking, this is regarded as a continuous site rental (GST Ruling GSTR 2012/7). Option 1: concessional GST treatment If you opt for the concessional GST treatment for long-term accommodation, rather than input taxation, the effect is as follows: • the GST value will only be 50% of what would otherwise be the GST-inclusive price, provided that the premises are predominantly for long-term accommodation (s 87-5), or • if the premises are not predominantly for long-term accommodation, GST is paid at the full rate for the first 27 days. For the balance of the stay, the 50% rule applies (s 87-10). In either case, full input tax credits are available for creditable acquisitions that relate solely to the supply (States and Territories Industry Partnership minutes, 24 February 2010). “Predominantly” for long-term accommodation Premises are “predominantly” for long-term accommodation if at least 70% of the individuals staying in the premises are provided with long-term accommodation (s 87-20). According to the ATO, the 70% is calculated on the basis of the number of supplies of accommodation (eg rooms), or the number of bookings, rather than the number of occupants of those rooms (GST Ruling GSTR 2012/7). Where a school provides staff accommodation in premises that also include GST-free accommodation for students (¶14-004), both staff and students are taken into account in calculating whether the 70% test is satisfied (Interpretative Decision ID 2003/976). This does not apply to tertiary institutions, as the supply of accommodation to students in this case is treated as non-commercial (¶14-004) (Interpretative Decision ID 2003/977). If premises such as a caravan park or camping ground have separate zones or areas for “permanent” and “holiday” stays, these may be treated as separate premises. This means that you determine whether the 70% threshold is met by calculating what proportion of the stays in the permanent zone are for a period of

28 days or more (GST Bulletin GSTB 2001/2). In determining whether the 70% test is satisfied, you can rely on any “fair and reasonable” method. The ATO accepts calculations based on actual occupancy for the preceding 12 months, projected occupancy for the next 12 months, a combination of both, or some other “reasonable alternative” (GST Ruling GSTR 2012/7). Calculation of 50% reduction The 50% reduction applies to the provision of the right to occupy the premises, and any of the following if they are provided as part of that right: • cleaning and maintenance • electricity, gas, air conditioning or heating • telephone, television, radio or any similar appliances (s 87-15). The 50% reduction does not apply to the provision of other incidental goods and services, such as meals, drinks, laundry or service charges. These are subject to GST at the full rate. Examples (1) Ernest stays for 14 days at a resort hotel. This is not long-term accommodation and the concessions do not apply. GST is payable at the full rate. (2) Rhonda lives in a caravan at a camping ground that is used predominantly for long-term accommodation. The normal accommodation charge would be $220 per week including $20 GST. The camping ground operator opts to apply the concessional GST method. For Rhonda’s accommodation, the GST is therefore calculated as 10% of 50% of $220, ie $11. Her GST-inclusive accommodation charge is therefore $200 + $11, ie $211. (This represents an effective GST rate of 5.5%.) The camping ground operator can claim input tax credits in the normal way. (3) Enrico stays for 30 days at a hotel which, like most hotels, is used predominantly for short-term stays. Under the concessional GST method, the GST on Enrico’s accommodation will be charged in the normal way for the first 27 days, but for the remaining three days it will be calculated on the 50% value basis. Assuming the accommodation charge was $100 per day plus GST, Enrico would therefore be charged as follows:

$    27 days @ ($100 + $10) .................................... 3 days @ ($100 + $5.50*) ....................................

2,970.00    316.50 $3,286.50

* Calculated as 10% of 50% of $110. The full amount of Enrico’s meal, mini bar and dry cleaning purchases would all be subject to GST, no matter when purchased. The hotel operator would continue to claim input tax credits in the normal way. (4) Assume instead that the hotel opted to treat Enrico’s long-term accommodation as input taxed. This would mean that no GST applies, and no input tax credits can be claimed for relevant business inputs (ie inputs that are directly related to the long-term accommodation, plus a proportion of other expenses such as overheads).

The 50% reduction rule is designed as a matter of convenience for accommodation providers. It is intended to avoid the need to apportion input tax credits between the charges that relate to accommodation and those that relate to services. Option 2: treating the supply as input taxed Instead of opting for the concessional GST treatment, the supplier may treat supplies of long-term accommodation as input taxed (s 40-35). This means that GST does not apply to the supply, and the supplier cannot claim input tax credits for acquisitions relating to it. If you also provide short-term accommodation, which is taxable, you will need to apportion input tax credits for overheads that cannot directly be related to either type of accommodation. The various methods of apportioning input tax credits for overheads are explained at ¶5-020. As a further alternative, a simpler “formula” method may be used by caravan park operators (GST Bulletin GSTB 2001/3; Goods

and Services Tax: Simplified Method to Apportion Input Tax Credits Determination (No 32) 2016 for Caravan Park Operators). Under the formula method, the input tax credit for overheads may be calculated as: (GST paid on general overheads) LESS (1.75% of total income from long-term accommodation)

Example (1) Standard apportionment method This example, taken from GST Bulletin GSTB 2001/2, shows how the Commissioner applies the output method of apportioning input tax credits (¶5-020).

Inputs

$  

Electricity and cleaning overheads ....................................

4,400

Outputs Taxable supplies of short-term accommodation ....................................

3,000

Input taxed supplies of long-term accommodation ....................................

1,000

Taxable non-accommodation supplies (eg kiosk) ....................................

   500

Total ....................................

$4,500

 Input tax credit for overheads: 1/11 ×

$3,000 + $500 × $4,400 = $311.11  $4,500 

(2) Formula method For a particular tax period, a caravan park operator’s overheads that cannot directly be related to either long-term or short-term accommodation are $27,500, including $2,500 GST. The total income from long-term accommodation is $100,000. The input tax credit for the overheads is therefore $2,500 − $1,750 = $750. Note: (1) the formula method does not apply to input tax credits for capital expenditure (eg on roads). These are apportioned in the normal way, with only the proportion attributable to short-term accommodation qualifying for credit; (2) where there are nonaccommodation supplies, for example sales from a shop, input tax credits are available on stock purchases other than for GST-free goods.

Offshore suppliers of hotel accommodation Offshore suppliers of rights to use commercial accommodation (such as hotels) in Australia must include those supplies in working out their GST turnover (¶3-030), in the same way as local sellers, with effect from 1 July 2019. Removing the exemption that previously applied in this situation is designed to level the playing field by ensuring the same tax treatment of Australian hotel accommodation, whether booked through a domestic or offshore company. The new rule applies to supplies for which consideration is first received on or after 1 July 2019; or if before any consideration is received, an invoice is issued on or after 1 July 2019. Accommodation supplied by charities Accommodation supplied by charities for less than 75% of the market value or cost is GST-free (¶15-010). [GSTG ¶35-320]

¶11-330 Leased commercial premises Leases of commercial premises such as shops and offices are subject to GST. However, the lessees would normally be able to claim input tax credits for the GST if they are in business. For the rules on allocating rent to tax periods and the issue of tax invoices, see ¶7-420.

As explained earlier, long-term leases (for at least 50 years) are treated like outright sales (¶11-060). Outgoings payable by tenant Where outgoings of the lessor in relation to the premises are paid or reimbursed by the tenant, this cost would normally be treated as part of the rent on which GST is calculated. The Commissioner considers that this applies irrespective of whether the outgoings are for services that would have been GST-free, or not subject to GST, if paid direct by the lessor, for example, rates or land tax (GST Determination GSTD 2000/10). Example The consideration under a commercial lease is $1,000 plus the rates on the property, which are $220. The GST will be 10% of ($1,000 + $220) = $122.

If the outgoing is one for which the lessor is entitled to an input tax credit (eg cleaning or maintenance), the lessee should ensure that this is reflected in the amount that it is required to reimburse. Otherwise, this will inflate the amount of rent and produce a windfall gain for the lessor. Lease incentives, premiums and payouts If the lessor provides a money incentive to the lessee to enter the lease, that is treated as a taxable supply by the lessee, because it has received consideration for agreeing to do something as part of its enterprise (¶4-000). The lessee is therefore liable to account for GST on that amount. Conversely, if the lessee pays a lease premium in addition to the normal rent so as to secure a lease, that is a supply by the lessor, who will be liable to account for GST on the premium. Details of the ATO’s views on various specific types of inducements are as follows (GST Ruling GSTR 2003/16): • Non-monetary. If an inducement is non-monetary, there may be two supplies. For example, if a lessor induces a lessee by providing a car, there will be a supply by the lessee in agreeing to enter into the lease, and a supply by the lessor in providing the car. Both supplies could be taken to be made for a consideration equal to the GST-inclusive market value of the car. • Fit-outs. If the lessor provides a free fit-out, and retains ownership of it, GST will not apply. However, if the lessor contributes an amount equal to the amount spent by the lessee on a fit-out owned by the lessee, this is treated in the same way as a cash incentive, so GST may apply. The same applies if the lessor provides plant whose ownership passes to the lessee. • Income guarantees. Where a lessor guarantees a lessee’s income from a business operated from the leased premises, that is normally treated simply as a taxable supply of the premises and of the income guarantee for a consideration equal to the rent. The position is different if it is clear that the lessee’s entry into the lease is specifically in consideration of the income guarantee. In this case, the lessee is making a taxable supply of its agreement to enter the lease and is liable for GST of 1/11th of the GST-inclusive value of the guarantee. The lessor also makes a taxable supply of the guarantee, for which the consideration is the lessee’s agreement to enter the lease. • Rent-free periods. GST does not apply where there is simply a rent-free period. However, if that inducement is specifically provided in exchange for the lessee agreeing to do something extra (eg carry out repairs that benefit the lessor), the value of those services forms part of the consideration for the lessor’s supply of the premises. The lessee’s supply of the services is taken to be made for a consideration equal to the GST-inclusive value of the supply of the premises for the rent-free period. Lessors and lessees may also pay to get out of a lease. If the payment is made by the lessor, the lessee must account for GST and the lessor claims an input tax credit. If the payment is made by the lessee, the lessor must account for GST and the lessee claims an input tax credit. GST may apply even though the incentive or payout is related to the commencement or cessation of the business (¶3-020).

Solicitors’ costs The lease will normally require the lessee to reimburse the lessor for its solicitors’ costs of preparing the lease. If the solicitor sends the bill direct to the lessee, that cannot qualify as a tax invoice because the solicitor has not supplied anything to the lessee. The lessee therefore cannot claim an input tax credit. The correct procedure would appear to be for the solicitor to issue a tax invoice to the lessor (to whom it has supplied services), and for the lessor to then issue its own tax invoice to the lessee (to whom it has supplied the premises). [GSTG ¶35-250]

¶11-335 Sale of real property subject to lease Where real property is sold subject to a continuing lease (ie there is a sale of the “reversion” in the property), the assumption and continued observance of the vendor/lessor’s obligations by the purchaser constitutes a supply by the purchaser to the tenant (FC of T v MBI Properties Pty Ltd [2014] HCA 49). That supply may be: • taxable if the lease is of commercial property (GST Determination GSTD 2012/2). In this case, the purchaser is liable for the GST relating to the continuing lease and would be entitled to input tax credits on the purchase (if the margin scheme is not used) and for acquisitions related to the ongoing lease. The ATO also considers that the vendor of commercial premises that are subject to a lease is liable for GST on all of the prepaid rent it receives and retains for a particular month when the supply of the reversionary interest occurs part-way through that month. • input taxed if the lease is of non-new residential property. In this case, the purchaser would therefore not be liable for the GST on the rent it receives under the continued lease, nor would it be entitled to claim input tax credits for the acquisition of the reversion or acquisitions related to the ongoing lease, for example, legal, management, insurance or maintenance costs (GST Determination GSTD 2012/1). For the possible application of the GST adjustment provisions in this situation, see ¶11-520. For an article discussing some of the implications of this ruling, see CCH Tax Week ¶1085 (19 December 2014). For the ATO’s transitional administrative arrangements, see its Decision Impact Statement on the MBI Properties case (ato.gov.au). Modified tax invoice requirements may apply where there is a creditable acquisition by a lessee or sublessee following a sale of a reversion in commercial premises (WTI 2013/9: see ¶5-130). [GSTG ¶35-320]

¶11-340 Leases entered into before 1 July 2000 If a commercial lease spanned 1 July 2000, only the part from 1 July 2000 is subject to GST (¶19-210). A lease may set the rent according to the amount of the turnover of the lessee. Where the contract extends beyond 1 July 2000, it will need to be made clear whether that turnover amount includes GST. Turnover clauses are not treated as constituting opportunities to review. [GSTG ¶75-600]

CROWN AND FARM LAND ¶11-400 Grants of Crown land The initial grant of unimproved Crown land is GST-free (s 38-445). The grant must be of the freehold or be a long-term lease, ie a lease that is for a term of at least 50 years and that is reasonably expected will not be terminated before that time (¶11-060). Governments may grant short-term leases over unimproved land subject to conditions that enable the recipient to have the grant converted to freehold or long-term lease. Both the initial short-term lease and

the subsequent conversion are GST-free. A similar rule applies where the short-term conditional lease is surrendered in return for a grant of freehold or a long-term lease (s 38-445(1A); 38-450). These exemptions apply only where the land was supplied by the Commonwealth, a state or a territory. This may include government departments and agencies, and certain local governments (GST Ruling GSTR 2006/5). A supply by a government-related body could qualify if the body was wholly owned and controlled by the government and acted solely in the interests of the government (SGH Ltd v FC of T 2002 ATC 4366; [2002] HCA 18; GST Ruling GSTR 2006/5). Meaning of improved land The ATO considers that “improvements” are not limited to visible structural improvements, and include clearing, draining and any other operation by humans on the land that enhances its value and/or usefulness (GST Ruling GSTR 2006/6). [GSTG ¶35-385]

¶11-410 Certain sales of farms are GST-free If a farm is sold as a going concern, that transaction may be GST-free in accordance with the rules explained at ¶11-500. The supply of farm land, even if it does not qualify for the going concern exemption, is GST-free if: (1) there has been a farming business carried on, on the land, for at least the period of five years before the sale, and (2) the buyer intends that a farming business be carried on, on the land (s 38-480). This concession applies to the supply of: • the freehold interest in the land • the lease of the land from the government or a government authority, or • the long-term lease of the land (¶11-060). Although the concession extends to fixtures and fittings on the land, it does not apply to livestock, plant or equipment. Natural growth such as grass, trees and fruit on trees would normally be considered part of the land. However, depending on the circumstances, unharvested annual crops such as potatoes may be subject to GST as a separate supply of goods (ATO GST Industry Issues — Primary Production: Issue 2.9.1). The supply of a government lease apparently includes not only the initial grant of the lease, but also a supply by way of assignment or transfer of the lease (Interpretative Decision ID 2004/674). Example After 20 years on the land, Farmer Jenks decides to sell the farm and move to the Gold Coast. The stock and machinery are sold separately in clearing sales, and the land and buildings are sold to Mr Slicker who intends to use the land for commercial gladioli production. As the land itself does not constitute a going concern, the going concern exemption does not apply. However, the sale of the land and improvements (but not the stock and machinery) will be GST-free.

Farming business A “farming” business means a business of cultivating or propagating plants, fungi or their products or parts; maintaining animals for the purpose of selling them or their bodily produce (including natural increase); manufacturing dairy produce from raw material produced by the taxpayer; or planting or tending trees for felling (s 38-475(2)). What constitutes a “business” is discussed at ¶3-020. Providing agistment for animals, by itself, would not normally be considered to be a farming business. See generally ATO GST Industry Issues — Primary Production: Issue 6.2.

Five years requirement The requirement that a farming business must have been carried on for the period of five years refers to the five years immediately before the supply. The Commissioner accepts that the requirement can be met even though there has been a temporary break in the business because of holidays, bad weather or land lying fallow. The same applies if there is a temporary cessation of the activities of the farm due to the sale process itself (ATO GST Industries Issues — Primary Production: Issue 6.2; GST Determination GSTD 2011/2) or, it seems, where there is a break in the farming activities due to the administration of the estate of a deceased taxpayer (Interpretative Decision ID 2001/779). However, the Commissioner considers that the requirement may not be met if there has been a conscious decision to cease farming altogether, even if this only takes effect for a relatively short period prior to the sale (Interpretative Decision ID 2004/632). In determining the use of land, it is necessary to look at the land being sold in its entirety. If farming activities represent the predominant activity carried out on the land in its entirety, then it can be accepted that a farming business has been carried out on the land. On this basis, the sale of farm land qualified for the exemption even though it included certain rights over some land dedicated for use as a future road on which no farming had been carried out (Interpretative Decision ID 2004/674); or where it included land on which there were two residential cottages (Interpretative Decision ID 2005/92). The same applied where a minority portion of the land was affected by a restrictive covenant that prohibited farming activities from being carried on (Interpretative Decision ID 2004/730). It is suggested in that Decision that this may also apply where: (1) the value of the covenanted area is less than the value of the land used directly for farming; (2) regardless of the area or value of the covenanted land, the covenant is essentially restrictive in nature and does not place substantial positive obligations on the landowner in relation to the covenanted area; or (3) regardless of the area or value of the covenanted land, the only activities other than farming relate to obligations under the covenant which are merely to do with maintaining the natural state of the land not directly used for farming. It is not necessary that the seller of the land be the entity that was carrying on the farming business. Intent to carry on farming business Although the legislation requires that the buyer must intend that a farming business be carried on, it does not specify any time period within which the business must actually commence. However, the Commissioner considers that it is not sufficient that there is simply a long-term goal or hope, and that the intention must be backed up by some activity which should commence in the “immediate or foreseeable future” (ATO GST Industry Issues — Primary Production: Issue 6.2.6). It is not necessary that the buyer itself be the entity that it is intended will carry on that business, or that the business be the same type of farming as the seller’s business. The exemption has also been held to apply where the buyer’s intention was to simultaneously on-sell the land to a third party who intended that a farming business would be carried out on the land (Interpretative Decision ID 2005/103); but not where there was a time gap between the acquisition and the resale to the third party during which there was no intention to carry on a farming business (Interpretative Decision ID 2004/631). As the seller’s exemption depends on the intended future usage of the land, it would be wise to have this covered by a specific clause in the contract, or by a written warranty. Interaction with other rules Normally, if the exemption does not apply, the GST on the sale would ultimately be recoverable by the purchaser as an input tax credit, in the same way as under the going concern rules (¶11-510). However, in accordance with the normal rules, this would not apply if the purchaser did not acquire the property in the course of carrying on its enterprise (¶5-010). Even if the exemption does not apply, GST would not apply to that part of the sale that related to a specified part of the property which had been used as a private residence and had not been used as part of the profit-making activity (Property and Construction Industries Partnership Issues Register 6.1). Where the farm business is being sold, it may happen that the supply of the land is also GST-free under the going concern rules (¶11-500). However, the “predominant use” rule means that the category of land that qualifies for the farm land exemption may be wider than the category of land that qualifies for exemption under the going concern rules (see Interpretative Decision ID 2005/92).

GST adjustments may be necessary in certain cases where the purchaser intends to make supplies that are neither taxable nor GST-free (¶11-520). The sale of water rights would normally be GST-free (¶16-200). Margin scheme Special rules apply to counter schemes designed to exploit the interaction of this concession and the margin scheme (¶11-100; ¶11-140). [GSTG ¶49-000]

¶11-420 Where farm land is subdivided If a farm is subdivided and sold as a number of going concerns, the sales may be GST-free in accordance with the rules explained at ¶11-500. If the subdivided lots are not going concerns, the sale of the land to an intending farmer may nevertheless be GST-free under the rules explained at ¶11-410. A further, more limited, concession applies where farm land is subdivided and sold to associates for residential purposes (s 38-475). Such a sale will be GST-free if the following conditions are satisfied: • the land must be subdivided from land where there has been a farming business (¶11-410) being carried on for at least five years. It is suggested in Interpretative Decision ID 2009/131 that this business must be carried on up to the commencement of the subdivision. It is, however, not necessary that the seller of the land be the entity that was carrying on that business • it must be permissible to use the land for residential purposes. However, the land must not actually contain any buildings occupied as a residence or buildings that are intended for residential use and are capable of being used in that way • the land must be sold to an associate of the seller (widely defined to include relatives, partners, related companies and trusts, and other entities associated with the seller in various ways) • the sale must be for no payment, or for less than the GST-inclusive market value. Example A farmer who has run a large farm for 20 years subdivides part of it and sells vacant lots to his children at a nominal cost to enable them to build their homes. The sales would be GST-free.

If the sale is made at market value, GST will be payable in accordance with the general rules. In this case, the seller may choose to use the margin rules explained at ¶11-100. This concession applies only to the supply of the freehold interest in the land, or the lease of the land from the government or the government authority, or the long-term lease of the land (¶11-060). It is not clear, however, how it applies where there is a transfer of a long-term lease, as distinct from its grant. Margin scheme Special rules apply to counter schemes designed to exploit the interaction of this concession and the margin scheme (¶11-100; ¶11-140). [GSTG ¶49-200]

BUYING AND SELLING A BUSINESS ¶11-500 GST-free supplies of going concerns The supply of a going concern is GST-free in certain circumstances (s 38-325). The purpose of this exemption is to remove the need for the recipient to obtain additional funds to cover the GST that would otherwise apply (¶11-510). It also may enable a reduction in stamp duty on the amount otherwise

payable. A “going concern” means, in effect, a continuing “enterprise” (¶3-020). The most typical example of a supply of a going concern is the sale of a business. In this commentary, it will generally be assumed that this is the type of transaction involved, but it must be remembered that this is a simplification. To obtain the exemption, the following conditions must be satisfied: • the sale must be for consideration (¶4-020) • the buyer must be registered or required to be registered for GST purposes. The Commissioner considers that this requirement must be satisfied on and from the date of the sale (GST Ruling GSTR 2002/5) • the seller and buyer must have agreed in writing that the sale is of a going concern • under the arrangement between the parties, the seller carries on the enterprise until the date of sale (¶11-503) • under the arrangement, the seller supplies the buyer with all the things necessary for the enterprise’s continued operation (¶11-506). Agreement re going concern The requirement for the parties to agree in writing that the sale is of a going concern is designed to avoid one source of dispute where the purchaser claims an input tax credit on a sale that the vendor believes is GST-free. However, as explained below, it does not by itself guarantee that the sale is in fact GST-free. The agreement that the supply is of a going concern must be explicit — it is not sufficient that it is implicit in the nature of the sale or documentation (Midford v DFC of T 2005 ATC 2189; Case 12/2009, 2009 ATC ¶1-016). Furthermore, it should be expressed in clear and unequivocal terms. In a New Zealand case, for example, it was held that there was no such agreement as it was conditional on the property sold being tenanted, whereas in fact there was only a licence in existence (Fatac Ltd (in liq) v Commr of IR [2002] NZCA 269). A specific statement in a contract that the supply was of a going concern was held to be overridden by a later statement in the contract that, in the event that the supply was ultimately held to be taxable, the margin scheme should apply (MSAUS Pty Ltd atf the Melissa Trust & Anor v FC of T 2017 ATC ¶10-463). The Tribunal rejected earlier decisions to the contrary on the ground that they had been based on an interpretation of the legal nature of the supply which had been superseded by the MBI Case (¶11-335). Although it is not explicit in the GST legislation, it appears that the agreement that the supply is of a going concern must be made on or before the date on which the supply is made (GST Ruling GSTR 2002/5; Midford’s case; Brookdale Investments Pty Ltd v FC of T 2013 ATC ¶10-301). Accordingly, if the parties are in doubt as to whether this requirement has been satisfied, and a private binding ruling is sought to determine the matter, it seems that this should be obtained before the supply occurs. Example The following sample agreement is contained in the ATO’s Sale of a Business as a Going Concern — Checklist: “The vendor and the purchaser agree that the supply of [enterprise being supplied] pursuant to this Agreement is the supply of a going concern for the purposes of s 38-325 of the GST Act and that the supply is GST-free for the purposes of the GST law. The Vendor will supply to the purchaser all of the things necessary for the continued operation of the enterprise for the purposes of that subdivision and the Vendor will carry on the enterprise until the day of the supply. The supply is for consideration, and the purchaser warrants that it is registered or required to be registered for GST. For the purpose of this clause the following words have the following meaning or meanings: ‘GST’ means the tax that is payable under the GST law and imposed as goods and services tax as set out in the GST Act. ‘GST Act’ means the A New Tax System (Goods and Services Tax) Act 1999, as amended, or if that Act does not exist for any reason, any other Act imposing or relating to the imposition or administration of a goods and services tax in Australia. ‘consideration’; ‘enterprise’; ‘GST-free’; ‘GST law’; ‘registered’; ‘required to be registered’; ‘supplier’; ‘supply’; and ‘supply of a going concern’ have the respective meanings given to each of those terms in the GST Act.”

The “going concern” agreement does not have to be part of the contract for sale (GST Ruling GSTR 2002/5). However, where different essential components of the sale itself are covered in separate contracts, care must be taken to ensure that that going concern agreement applies to all of them. In one case, the requirement for the agreement to be in writing was held to be satisfied by a combination of the contract of sale, the tax invoice and a goods statutory declaration exchanged at settlement indicating that the sale was of a going concern (SDI Group Pty Ltd v FC of T 2012 ATC 10-282; [2012] AATA 763). The following example illustrates the type of dispute that may arise. Example The parties entered into a sale of the goodwill and business assets of a hotel business, and agreed in the contract that the supply was of a going concern. They also entered into a separate contract for the sale of the land on which the hotel stood. Both contracts provided for simultaneous settlement. However, the purchaser subsequently claimed that the sale of the land should be treated separately, and that it was taxable, thereby entitling the purchaser to claim 1/11th of the land sale price as an input tax credit. The AAT rejected this. It was obvious that the parties intended the sale of the business to be GST-free and that the sale of the land was an essential part of that sale. The GST-free status therefore applied to both contracts (Debonne Holdings Pty Ltd v FC of T [2006] AATA 886).

The ATO considers that where a supply or acquisition is made in the name of a bare trustee, the trustee can sign the agreement even though it is not itself carrying on an enterprise (GST Ruling GSTR 2008/3). Enterprise part of larger enterprise It is possible to sell a going concern that consists of an enterprise which is part of a larger enterprise. However, this does not apply if what is sold does not comprise an enterprise in itself. Example A single bakery forming part of a chain of bakeries is sold. This may be a GST-free supply of a going concern as the bakery is an enterprise in its own right as well as being part of a larger enterprise (GST Ruling GSTR 2002/5).

For further guidelines see ¶3-020. A corresponding issue arises in connection with the capital gains tax treatment of business goodwill. For the Commissioner’s views on the issue in that context, see Taxation Ruling TR 1999/16. If seller is not registered If the seller is not registered, and is not required to be registered, the sale will not be subject to GST in any event. Partnerships and joint ventures The going concern exemption can apply where a general law partnership sells its partnership business, or where a single entity sells an interest in its enterprise to form a partnership (GST Ruling GSTR 2003/13). In the case of a tax law partnership (¶3-015) which is carrying on an enterprise, there may be an eligible sale of a going concern where, for example, a jointly owned leased property is sold. This also applies in certain circumstances where a co-owner’s interest in the property is sold (GST Ruling GSTR 2004/6). However, merely admitting new partners cannot be the supply of a going concern (GST Ruling GSTR 2002/5). In the Commissioner’s view, the disposal of a partner’s interest by the partner is not a taxable supply in any event, as the supply is not in the course of an enterprise carried on by the partner (GST Rulings GSTR 2002/5; GSTR 2003/13). However, if the partner is carrying on a business of dealing in partnership interests, the supply of a partnership interest may be input taxed as a financial supply (¶10-010). This also applies where a partnership issues a new interest in the partnership (GST Ruling GSTR 2003/13). If a business is run as a joint venture, as distinct from a partnership, the Commissioner accepts that each joint venturer is capable of conducting an enterprise (GST Ruling GSTR 2002/5). It is therefore possible for each joint venturer to make a supply of a going concern if it supplies all the things necessary for the continued operation of the business (¶11-506).

Future conduct of business It is apparently not necessary that the purchaser carries on the same type of business as that carried on by the seller, or even that it carry on the business at all (Pine v CIR (1998) 18 NZTC 13,570; GST Ruling GSTR 2002/5). Schemes involving the margin scheme Special rules apply to counter schemes designed to exploit the interaction of these concessions (¶11-100; ¶11-140). [GSTG ¶48-100]

¶11-503 Enterprise must be carried on until day of supply Under the arrangement, the seller must carry on the enterprise until the day of supply to the purchaser (s 38-325(2)(b)). The Commissioner accepts that this requirement may be satisfied even though the seller temporarily ceases some activities of the enterprise for a short period to facilitate the sale (GST Ruling GSTR 2002/5). The effect of this requirement is complicated by the fact that “carrying on” an enterprise is also defined to mean doing things in the course of terminating the enterprise (¶3-020). The Commissioner concedes that where an enterpriseceases to carry on activity and is in the course of selling off the assets, the enterprise is still being carried on. However, that enterprise could not satisfy the separate requirement (¶11-506) that all things be provided for the continued operation of the enterprise (GST Ruling GSTR 2002/5). In the case of a commercial building, the Commissioner considers that an enterprise of leasing would still be carried on in a situation where: (1) the building had been leased for a number of years; (2) various floors were vacant but were being actively marketed; and (3) the remaining floors were being refurbished (GST Ruling GSTR 2002/5). For further details of leasing enterprises, see ¶3-020. The sale of a motel would not satisfy this requirement where the motel business had been closed down, and the buildings were sold with vacant possession and without forward bookings (Belton v Commr of IR (NZ) (1997) 18 NZTC 13,403). Similarly, the sale of a purported residential development enterprise was held not to qualify where the vendor had already abandoned the development, and the only work being carried on was certain earthworks required by the purchaser for its intended use of the land (Aurora Developments Pty Ltd v FC of T [2011] FCA 232). The same would apply if the business had become non-operational as a result of circumstances such as fire. However, if the damage was minor and the business could still be operated, it may qualify even though it is only running at a reduced capacity. Date of supply The “day of the supply” is the date on which the recipient assumes effective control and possession of the enterprise. This applies even though the economic risk and benefit may be deemed under the contract to have passed at an earlier date (GST Ruling GSTR 2002/5). Subject to the terms of the contract, the day of supply would therefore typically be the date of settlement, rather than the date of the contract (Aurora Developments). Considerable care may need to be taken to ensure that this requirement is satisfied. [GSTG ¶48-320]

¶11-506 Supply must be of all things necessary To obtain the exemption, the seller must supply the purchaser with all things necessary for the continued operation of the business (s 38-325(2)(a)). It is not necessary that all those things must be provided in the same single supply. There may be more than one supply, provided that they are all made under the one arrangement. In some cases, it is not technically possible for the seller to supply all things necessary for the continued operation of the business. For example, there may be an essential non-assignable licence or quota that can only be reissued to the purchaser by a government authority. The Commissioner considers that such a reissue will be treated as a supply of the licence by the seller if the seller makes all reasonable efforts to facilitate the reissue (GST Ruling GSTR 2002/5). Alternatively, if assignment is possible, but normal

commercial practice is for the right to be surrendered and reissued, such a reissue may be treated as a supply if it is facilitated by the seller. Care must be taken if a business such as a farm and the land on which it is conducted are owned by separate entities (eg a family trust and a family company). The reason is that neither may be able to supply all the things necessary, even though together they could. If each of them is carrying on a separate enterprise, each enterprise must be capable of continued operation by the purchaser (GST Ruling GSTR 2002/5). Corresponding difficulties may arise if the sale is to two entities. What is “necessary” for the continued operation of the business will vary according to the circumstances. For example, a fitted-out vehicle may be necessary for the continued operation of a mobile mechanic business, but a car may not be necessary for a broking business that operates from fixed premises. On the other hand, where a business is necessarily conducted from premises, for example, a hotel, either premises or the right to occupy them must be supplied (see also Debonne Holdings Pty Ltd v FC of T [2006] AATA 886). If the premises are leased, the lease should be assigned; alternatively, the lease could be surrendered and the lessor should facilitate the entry of a new lease to the recipient. This also applies where a lease has already expired and the supplier continues to occupy under a short-term periodic tenancy — in this case, the benefit of that tenancy should be supplied to the recipient. However, the Commissioner considers that where the supplier occupies premises under a tenancy which is terminable “at will”, this cannot be assigned and the conditions for exemption therefore cannot technically be satisfied (GST Ruling GSTR 2002/5). If there is significant goodwill attached to a key site, or a site has special features essential to the operation of the business, that particular site or the right to occupy it would normally need to be supplied. Where the enterprise has goodwill that is capable of being transferred, that goodwill would be treated as necessary for the continued operation of the business. For example, the sale of the assets of a business without a transfer of goodwill or of forward bookings was held not to be the supply of a going concern in Allen Yacht Charters Ltd v CIR (1994) 16 NZTC 11,270. Providing introductions to existing clients and facilitating continuity of marketing arrangements would also be a typical part of a supply of a going concern. So would an assignment of trade debts (GST Advice GSTA TPP 014). Where there are key personnel whose skills are essential to the running of the business, the seller must take all reasonable steps to facilitate the transfer of those skills and knowledge, for example by training sessions or provision of training manuals (GST Ruling GSTR 2002/5). Similarly, the Commissioner accepts that where non-transferable personal qualifications of a sole proprietor are essential to the business, it will be sufficient that everything else necessary is transferred. In the case of a trading name, it is sufficient if this is licensed to the purchaser, rather than sold (Interpretative Decision ID 2002/237). It may happen that only part of the things necessary for the continued operation of the business needs to be supplied because the purchaser already has some of them already available. In this situation, the Commissioner considers that the requirements for exemption have not been met (GST Ruling GSTR 2002/5). The arrangement may also include things that are not essential to the continued operation of the business, even though they are actually used in it (GST Ruling GSTR 2002/5). However, the exemption will not apply to the supply of such things if they are supplied independently of the arrangement (Interpretative Decision ID 2012/54). If surplus non-essential assets are retained by the seller, the exemption may still apply, but the supplier may be liable for an increasing GST adjustment (¶6-410). The supply of property that would have been taxable if sold by itself may become GST-free if sold as part of a going concern. For example, a milk quota sold by a dairy business is normally taxable, but if sold as part of the business, the whole sale may be GST-free under the going concern exemption. The same would apply to the sale of a commercial fishing licence. The Commissioner considers that if the enterprise consists solely of the leasing of property, even if carried on as part of a broader enterprise, the supply of associated management and service contracts is not necessary for the continued operation of that enterprise. However, the benefit of the covenants in the lease must be supplied and there could therefore not be a supply of a going concern to the lessee where

the property is simply transferred to it (GST Ruling GSTR 2002/5). For the position where the property is held by a tax law partnership, see ¶3-020. The Commissioner considers that where a property development enterprise involves the supply of residential houses or strata units under construction, the necessary things may include: title to the land; council or local authority applications and approvals; construction schedules; intellectual property such as names, project plans, construction plans and drawings, and details of covenants; marketing plans and contracts, and “off the plan” sales contracts; quality assurance plans; assignment of subcontracts and lists of subcontractors; and a site sales and marketing office. In the case of an enterprise involving the supply of lots or development land, necessary things may include: rezoning applications, approvals or deeds; intellectual property such as engineering plans for headworks construction and utilities infrastructure, and environmental impact studies; and rights of access (former GST Ruling GSTR 2005/5). For the sale of a business by a mortgagee, see ¶10-070. For the position where liabilities for long service leave are transferred to the purchaser, see ¶4-010. [GSTG ¶48-260]

¶11-510 If “going concern” exemption does not apply If the exemption does not apply, any GST payable could normally be claimed back by a registered purchaser as an input tax credit when the next GST return is lodged. To this extent, the only disadvantage to the purchaser is a cashflow disadvantage. The exemption basically only relieves the purchaser of having to fund the tax on settlement (and may possibly result in savings on stamp duty). For the position where the business involves input taxed supplies, see ¶11-520. It is important to realise that the agreement between the parties that the sale is of a going concern cannot guarantee that it is GST-free. The existence of that agreement is just one of the conditions that must be fulfilled. This has important implications for a seller who does not include GST on the basis of an incorrect belief that the conditions for the exemption have been satisfied. In this situation, the burden of paying the GST will effectively fall on the seller if there has not been any allowance made for it in the contract price. Example (1) The registered vendor of a business sells it to “X or its nominee”. Although X is not registered (or required to be), the vendor understands that the sale will be to the nominee, which is registered. In fact, X makes no nomination. The sale is therefore to the unregistered X, so the going concern exemption will not apply. The vendor will be required to account for GST on the sale (based on CIR v Capital Enterprises Ltd (2002) 20 NZTC 17,511). (2) The registered vendor of a business with a small turnover sells it as a going concern for a price that is “inclusive of GST (if any)”. The contract says that the supply is a GST-free supply of a going concern. The vendor subsequently finds out that the purchaser was not registered, and was not required to be registered because its GST turnover, including the new business, was less than $75,000. This condition for exemption is therefore not satisfied. The vendor will therefore be liable to account for GST on the sale. On the other hand, the buyer could not claim input tax credits because it was not registered.

Actually, the facts of example (2) are not typical. A buyer will normally be registered or be required to be registered because its GST turnover is $75,000 or more — particularly when it is remembered that the turnover of the new business must be taken into account (¶3-030). If the buyer is registered (or required to be registered) it may enjoy the windfall of being able to claim input tax credits for the GST payable, even though the GST was not reflected in the purchase price. Example The vendor of a business sells it as a going concern for a price that is “inclusive of GST (if any)”. The contract says that the supply is a GST-free supply of a going concern. However, the vendor fails to comply with the condition that it carries on the business until the date of the sale. The vendor will therefore be liable for GST based on the sale price, and the (registered) buyer will be able to claim an input tax credit. Effectively this is a windfall for the buyer.

As you can see, the burden of this error falls on the seller. Sellers should therefore ensure that these eventualities are covered in the contract. For example, it could be specified in the contract that the

purchase price is “plus GST (if any)”, and that any GST payable could be recovered from the buyer if it turns out that the supply is not GST-free. Conversely, difficulties can arise for the purchaser if there is an incorrect assumption that the sale is taxable. Example The vendor of a defunct farm sells it for a price that is “inclusive of GST (if any)”. The purchaser assumes that the sale will be taxable, and budgets on the basis that it will get back 1/11th of the purchase price as an input tax credit. In fact, as it happens, the sale is GST-free because the vendor is not registered (or required to be). The vendor will not be liable to account for any GST on the sale and the purchaser will not be entitled to any input tax credit.

If sale includes a residence If the exemption does not apply and GST is payable, the GST will not apply to the component of the sale price that relates to residential premises (¶11-010). To that extent the sale is input taxed (s 40-65). Example Irma sells her farm for $500,000 including GST. Assume that a farming business had only been carried on for two years (so that the exemption at ¶11-410 does not apply) and that the sale does not comply with the going concern exemption rules. The farm includes a homestead valued at $60,000. The GST is 1/11th of $440,000 = $40,000. Irma can claim an input tax credit of 440/500 of general expenses of the sale, such as agents’ and legal fees.

¶11-515 Assumption of liabilities by purchaser of business Where an enterprise is sold, the purchaser commonly takes on various liabilities, both contractual and statutory, previously borne by the vendor. The question arises as to whether the value of those liabilities should be taken into account in determining the consideration paid for the business for GST purposes. The ATO’s views, as set out in GST Ruling GSTR 2004/9, are as follows: • rates, land tax, rent: where there is the usual adjustment in the contract price to reflect the apportionment of rates for the period in which the sale occurs, that adjusted price is taken as the consideration. However, if the adjustment reflects the purchaser’s assumption of a liability to pay rates already overdue by the vendor for a period ending before the time of sale, the consideration would be taken as the contract price without any adjustment. Similar rules apply to land tax and rent. • long service leave, annual leave: where there is an adjustment to reflect the purchaser’s assumption of liability for long service leave of continuing employees, the adjusted price is taken as the consideration for the business. This does not apply where there is an adjustment in the purchaser’s favour for accrued annual leave liabilities. The difference in treatment is because, under statute, liability for accrued long service leave normally passes to the purchaser, but liability for accrued annual leave stays with the vendor (Example (2) below). • non-statutory liabilities to third parties: the contractual assumption of liabilities to third parties would normally be taken to be part of the consideration, for example, where the purchaser agrees to discharge the vendor’s existing obligation to a trade debtor, or to assume product warranty obligations for defective products already sold (Example (1) below). Examples (1) Under a contract for sale of a business for $90,000, the purchaser agrees to assume an existing $10,000 liability to a trade creditor. The ATO would consider the consideration for the sale to be $100,000. The same would apply if the contract price was $100,000 but the vendor allowed a $10,000 adjustment on sale to cover the liability. (2) Under a contract for sale of a business for $100,000, the purchaser agrees to retain existing employees and honour their accrued entitlements to long service ($8,000) and annual leave ($2,000). The amount allowed in the contract, after taking into account the tax effect of this settlement adjustment, is $5,600 for long service leave and $1,400 for annual leave. The purchaser therefore pays an adjusted price of $93,000 on settlement. The consideration is taken to be $95,000, ie $93,000 plus the $2,000 for annual leave

(based on GST Ruling GSTR 2004/9).

These principles apply whether or not the going concern exemption applies. Retirement village arrangements Under certain arrangements for developing and selling retirement villages, the developer receives interest-free loans from incoming residents to secure their accommodation entitlements, and these loans are repayable (less deferred management fees) when the accommodation ends. Under the sale agreement, the liability to repay the outstanding loans falls on the purchaser. In GST Ruling GSTR 2011/1, the Commissioner states that: (1) the amount of that liability imposed on the purchaser should be treated as forming part of the consideration for the sale, thus increasing the amount of GST on the sale; and (2) the developer’s entitlement to input tax credits for its acquisitions depends on the extent to which the supplies it makes are taxable. This may require apportionment on a fair and reasonable basis where those supplies are a mixture of (say) input taxed leasing of residential premises and a taxable (or GSTfree) supply of the village. The Commissioner will accept as fair and reasonable a method which determines the extent of non-creditable purpose for development acquisitions based on the following formula: Total value of economic benefits reasonably expected to be obtained from making input taxed supplies Total value of economic benefits reasonably expected to be obtained in respect of the arrangement For an example of impermissible use of this formula where the taxpayer had made an unreasonable estimate of the “economic benefits” component, see Case 4/2016, 2016 ATC ¶1-082.

¶11-520 Subsequent GST adjustment if recipient makes input taxed or private supplies You will be liable for an increasing GST adjustment if you purchase an enterprise GST-free as a going concern and you intend that some or all of the supplies made through that enterprise will be input taxed (eg providing credit facilities or residential leases) (s 135-5). The adjustment is calculated as: 1/10 × supply price × proportion of input taxed supplies In the case of a residential lease, the “supply price” in this formula is the rent to be paid by the tenant (FC of T v MBI Properties Pty Ltd [2014] HCA 49). The “proportion of input taxed supplies” in the formula is the proportion of all the supplies made through the enterprise that you intend will be input taxed goods and services. The proportion is worked out on the basis of the prices of those supplies. If this proportion changes over time, appropriate additional adjustments will need to be made. The proportion may be 100% where all the supplies made through the enterprise are input taxed. The ATO considers that your subsequent sale of the enterprise is itself a supply made through the enterprise (Interpretative Decision ID 2007/180). It also apparently considers that the adjustment is attributable to the tax period in which you acquired the business (Interpretative Decision ID 2007/72). In the same way, there will be an increasing GST adjustment if you intend to make private or domestic supplies. If a change in business purposes means that your actual input taxed or private supplies are different from those intended, an adjustment should instead be made under the corresponding rules noted at ¶6-300 (s 135-10). The same rules apply to purchasers of farm land that is GST-free under the rules described at ¶11-410. Where sale includes residence

If the going concern is on land that also contains a private residence unrelated to the business, the ATO considers that the going concern concession would not apply to that residence, so no question of an adjustment would arise. However, if the residence is used in the business, for example it is leased to the manager of the business, the going concern concession could extend to the residence. Even here, though, an adjustment may not be necessary. Example A supplier sells farm land in circumstances such that the sale does not qualify for the specific exemption under s 38-480 (¶11-410), but qualifies for the going concern concession. The land includes a residence that is leased to a farm manager. The ATO says that the residence could qualify as part of the going concern, and that an adjustment would not be necessary, provided that: (1) the manager’s residence forms part of land that has the essential characteristics of farm land, and (2) the recipient continues to use the farm land as a whole for operating a farming business (GST Advice GSTA TPP 092).

[GSTG ¶48-440]

¶11-530 Sale of business by selling shares A business operated by a company may also be sold by disposing of the shares in the company. In this situation, the “going concern” exemption is normally not relevant, as the supplier (the shareholder) is not the same as the entity carrying on the business (the company). Instead, the sale of the shares is treated as a financial supply and is therefore input taxed, ie GST will not be payable, but the seller will not be able to claim input tax credits (unless it is below the financial acquisitions threshold: ¶10-032). This means, for example, that GST on lawyers’ or accountants’ advice in relation to the sale would not be recoverable by the vendor. On the other hand, any GST on their services will be recoverable to the extent that it relates to activities of the vendor which are subject to GST. Where the shares in the operating company are acquired, the purchaser will inherit the company’s tax and financial history. The normal due diligence enquiry in such cases will need to include the company’s GST status and liabilities. It will be important to check that the company has complied with its GST obligations, that it has correctly categorised its supplies, monitored thresholds, maintained an effective accounting system and so on, and express warranties sought where appropriate. In fact, many of the points you needed to consider in preparing your own business for GST (¶2-010) will also need to be explored in relation to the vendor company. Where the company being acquired is a member of a GST group, the purchaser should normally ensure that an Indirect Tax Sharing Agreement is in place (¶17-025). In some cases, shares may form part of the assets of the business being sold, for example, where there is a shareholding in a subsidiary company that holds assets used in the business, or shares are held as trading stock of the business. In these cases, the transfer of the shares can be treated as part of the supply of a going concern. [GSTG ¶48-600]

¶11-540 Sale of franchise The sale of an existing franchise by a franchisee may qualify as the sale of a going concern. To obtain the exemption, the franchisee must transfer the benefit of the franchising agreement to the purchaser. However, if this is not allowable under the franchise agreement, or the franchisor withholds permission, or the purchaser wishes to extend the term, the Commissioner accepts that the requirement will be satisfied if: (1) the franchisee surrenders its rights in favour of the purchaser; and (2) a new agreement is entered into by the franchisor and the purchaser (GST Ruling GSTR 2002/5). If a franchisor sells a new franchise to a franchisee, that would not be the sale of a going concern, because there was no business being carried on before the sale. If a franchisee terminates the franchise, there will be an adjustment event (¶6-100) if the GST on unpaid instalments has already been accounted for.

[GSTG ¶48-280]

¶11-550 Option to purchase business The grant of an option to buy a going concern will itself be GST-free if the supply of the concern would be GST-free (s 9-30). The Commissioner considers that this requires that the parties to the option must agree that, on the exercise of the option, the supply will be GST-free, and must specify that all the conditions for the exemption will be satisfied (GST Ruling GSTR 2002/5). For other rules relating to options, see ¶4-020. [GSTG ¶48-400]

TRANSPORT, TRAVEL AND VEHICLES TRANSPORT AND TRAVEL Overseas and domestic travel

¶12-000

Transporting, handling and insuring goods

¶12-010

Travel insurance, agents and related matters ¶12-020 Tourist Refund Scheme

¶12-030

International mail

¶12-050

MOTOR VEHICLES GST on supply of cars

¶12-080

Input tax credits on cars above car limit

¶12-110

Second-hand vehicles

¶12-120

Trade-ins

¶12-125

Evaluation and product launches

¶12-128

Taxis, limousines and ride-sourcing

¶12-130

Sale of car on termination of lease

¶12-145

Cars and other vehicles for the disabled

¶12-150

Refunds for diplomats

¶12-160

Associated transport costs

¶12-170

Editorial information

Summary International travel is GST-free, but domestic travel is generally subject to GST except where it forms part of an overseas trip. Visiting tourists may be entitled to refunds of GST on items purchased in Australia, provided they take them home with them. Exemptions apply to export and import transport costs. Special rules apply to taxis and “luxury” cars. Certain sales or leases of cars to disabled people are GST-free. Petrol and diesel are subject to GST.

TRANSPORT AND TRAVEL ¶12-000 Overseas and domestic travel Supplies of transport that are effectively consumed outside Australia are generally GST-free (s 38-355). This means that no GST is payable, but that the supplier can claim input tax credits for the GST

component of anything acquired to make the supply. Overseas travel Transport of passengers from Australia to a destination outside Australia is GST-free. So is transport between destinations outside Australia, or to Australia from a place outside Australia (s 38-355, item 1). This applies whether the transport is by air or sea. Example Mr Page flies from Sydney to New York, then to Chicago, then back to Sydney. All this transport is GST-free. This, however, does not apply to meals and accommodation consumed in Australia.

The ATO says that a destination outside Australia must be a specific physical location outside Australia to which the passenger is going, and that this location is objectively significant to the passenger (GST Determination GSTD 2015/2). Examples (1) Ms Finn leaves from Cairns on a booked diving trip to a particular coral reef in international waters, returning to Australia. This transport is GST-free. (2) Mr Ahab leaves from Sydney on a booked whale-spotting cruise which travels around following whales according to where they happen to be. The trip may involve occasional stops in international waters for viewing. It then returns to Sydney. This transport would be considered to be domestic, as there was no specific physical destination outside Australia (based on GST Determination GSTD 2015/2).

Domestic travel Normally, domestic travel is subject to GST. However, there are some exceptions. (1) If the passenger is a non-resident, domestic air travel within Australia is GST-free, provided that the ticket was purchased while the passenger was outside Australia (s 38-355, item 3). In practice, it may be difficult to determine whether a passenger is a “non-resident”, particularly, if they book over the internet and pay by credit card. The ATO considers that “domestic air travel” involves movement from one place to another. Accordingly, this exemption will not apply to a scenic flight or hot air ballooning trip within Australia that returns to the same place without landing elsewhere. Similarly, a non-stop round trip sightseeing flight to Antarctica that starts and ends in Australia may not qualify for this exemption, nor for the international flight exemption as there is no “destination” outside Australia. However, to the extent that the flight occurs outside Australia, it may qualify as partially GST-free under the export of services rule (see category (3) at ¶9-240). The ATO says that the GST-free component could be calculated on a time basis or, preferably, on a distance basis (ATO GST Industry Issues — Tourism and Hospitality: Issues 11, 12). (2) The Australian domestic flight leg of any passenger’s international flight is GST-free if it forms part of the international ticket, or was cross-referenced to such a ticket (s 38-355, item 2). This applies even though there may be a stopover of any length between the international and domestic legs. Examples Ms Bates, a non-resident, is staying in Australia on a three-month working holiday. She flies from Adelaide to Cairns on a ticket that she bought before coming to Australia. The flight to Cairns is GST-free. If she had bought the ticket in Australia, GST would have applied. Ms Crowley flies from the UK to Dubbo on the one ticket. The domestic leg from Sydney to Dubbo is GST-free. However, the flight to Dubbo would not be GST-free if Ms Crowley had travelled from London to Sydney by ship, unless she was a non-resident and the ticket was purchased while she was overseas.

(3) The Australian domestic leg of any passenger’s international sea voyage is GST-free if it is provided by the same transport supplier (s 38-355, item 4).

Example Mr Capstan sails from the UK to Melbourne. The ship docks first at Sydney. The voyage from Sydney to Melbourne is GST-free. However, the voyage to Melbourne on the ship would not be GST-free if Mr Capstan had travelled from the UK to Sydney by air.

Rail, bus or car transport within Australia is subject to GST. This applies irrespective of whether the traveller is a non-resident, or whether the travel was purchased outside Australia. Example As part of a package holiday to Australia, Gina buys a 30-day bus pass entitling her to travel anywhere in Australia. This will be subject to GST.

For cancellations or passenger “no shows”, see ¶12-020. [GSTG ¶41-810]

¶12-010 Transporting, handling and insuring goods If goods are exported from Australia, the international transport of them to their destination overseas from their place of export is GST-free (s 38-355, item 5). The “place of export” is the place from which they are posted, depart Australia, or are placed on board a ship or aircraft (s 195-1). If non-postal goods were packed in a freight container, the place of export is the last place from which they were collected, or to which they were delivered, before being packed. However, if this did not occur, it means the place where they were packed in the container. To the extent that the transport is within Australia, the exemption only applies if: • the transport was supplied by the same transport supplier that transported the goods from Australia, or • the transport is supplied to a recipient that is a non-resident and is not in Australia at the time (s 38355(2)). Transporting goods from one overseas place to another, and insuring that transport, is GST-free (s 38355, item 5). Transporting goods to Australia If goods are transported to Australia, the international transport of them from overseas to their place of consignment in Australia is GST-free (s 38-355, item 5). The place of consignment is explained at ¶9-005. Essentially, for postal goods, it means the place in Australia to which the goods are addressed. For non-postal goods, it generally means the place in Australia to which the goods are delivered under the main contract between the supplier and the recipient. To the extent that the transport is within Australia