Tax Law Notes
Tax Law Notes Sections Tests/Requirements Cases
Goods and Services Tax Background • Tax on consumption (Not a tax on income, e.g. income tax) • Main reason for introduction of GST to reduce government reliance on income tax as a source of government funding • GST is administered federally through the ATO • GST rate is 10% • Imposed upon the consumption of goods and services, including imports in Australia • Although all consumers pay GST upon consumption, GST is effectively borne by the final private consumer due to the ability of certain entities to obtain a refund of GST paid on acquisitions (AKA input tax credits) • Provisions regarding GST are contained in a separate legislation: A New Tax System (Goods and Services Tax) Act 1999 Enterprise • Defined in s 9-20 of the GST Act and includes an activity or series of activity conducted: ➢ In the form of a business: s 9-20(1)(a); ▪ Stone ▪ Ferguson ▪ TR 97/11 ▪ TR 2005/1 ➢ In the form of an adventure or concern in the nature of trades: 9-20(1)(b); OR ▪ FCT v Whitfords Beach Pty Ltd ▪ Westfield ▪ Myer ➢ In the form of leasing, licensing or other grant of an interest in property on a regular or continuous basis: s 9-20(1)(c); OR ➢ Activities carried out by trustees, charities, religious institutions and government bodies: s 9-20(1)(d) – (g) • BUT NOT the provision of labour as an employee; OR private, recreational pursuits or hobbies: s 9 – 20(2)
Taxable Supplies: s 9-5 • •
Vital to operation of GST as they create the obligation to pay (and therefore charge) GST An entity makes a taxable supply under s 9 – 5 of the GST Act if: ➢ It makes a supply; AND ➢ The supply is for consideration; AND ➢ The supply is made in the course or furtherance of the entity’s enterprise; AND ➢ The supply is connected with the indirect tax zone; AND ➢ The entity is registered or required to be registered for GST; AND ➢ Is NOT input-taxed or GST-free
1. Supply: s 9-10 • s 9-10 of the GST Act defines “supply” as “any form of supply whatsoever” and specifically includes (but is not limited to) the following s 9-10(2): (a) a supply of goods (b) a supply of services (c) a provision for advice or information (d) a grant, assignment or surrender of real property (e) a creation, grant, transfer, assignment or surrender of any right (f) a financial supply (g) an entry into, or release from, an obligation to do anything • The definition of “supply” is very broad and many activities of an entity may constitute the making of a supply ▪ FCT v Reliance Carpet Co Pty Ltd (2008) 68 ATR 158 - Taxpayer granted a purchaser an option to buy commercial property - Purchaser defaulted, deposit was forfeited to the taxpayer - Taxpayer argued that GST not applicable on deposit as there was no supply - HCA found that the deposit was consideration for a supply, being the obligations undertaken by the vendor on entry into the contract. Hence, the full amount of the deposit was forfeited ▪ FCT v Qantas Airways Ltd [2012] HCA 41 - Taxpayer was the supplier of domestic and international air travel - GST is imposed on domestic and international air travel - Question arose as to whether GST was payable where a passenger books and pays for a domestic flight but subsequently cancels the booking - Taxpayers argued that there was no supply, i.e. the provision of a flight - HCA found that the taxpayer was liable for GST in respect of the bookings made by customers where the relevant supply was “the promise to use the best endeavours to carry the passenger and baggage, having regard to the circumstance of the business operations of the airline”. ▪ FCT v MBI Properties Pty Ltd [2014] HCA 49 • Illegality of supply is irrelevant: s 9-10(3) • Does not include a supply of money unless consideration for a supply that is the supply of money: s 9-10(4)
2. Consideration: s 9-15 • Defined in s 9-15(1) of the GST Act as including any payment or any act or forbearance in connection with the supply • Consideration includes anything of value, such as the provision of services or goods • Does not matter whether the payment was voluntary or whether it was by the recipient of the supply: s 9-15(2) 3. In the course or furtherance of an enterprise. Enterprise: s 9-20 • Expression “in the course or furtherance of” is not defined in the legislation • A wide approach is to be adopted and any supply that is connected to the enterprise will be made “in the course or furtherance of” that enterprise ▪ FCT v Reliance Carpet Co Pty Ltd (2008) 68 ATR 158 4. Connection to the indirect tax zone: s 9-25 • The “indirect tax zone” is defined in s 195-1 of the GST Act and refers to Australia • The term “Australia” was replaced in the GST Act with “indirect tax zone” from 1 July 2015 to ensure consistency of terminology across the tax legislation. • Examples of supplies connect to Australia include where s 9-25: (1) The goods are delivered or made available to the recipient in Australia; (2) The supply involves goods being removed from Australia (exemption for exports); (3) Goods are imported into Australia or installation/assembly of goods is in Australia; (4) The supply is of Australian land (5) If not goods/real property, the thing is done in Australia or the supply is made through an enterprise carried on in Australia 5. Registration Turnover Threshold • Entities that are carrying on an enterprise must register for GST where their annual turnover exceeds the registration turnover threshold: s 23 – 5 of the GST Act • From 1 July 2007, the registration turnover threshold is $100,000 for non—profit organisations and $50,000 for all other entities: s 23 – 15 ➢ EXCEPTION: Taxi drivers required to register for GST regardless of annual turnover • Annual turnover: Div 188 ➢ Value of all supplies during the relevant 12-month period related to its enterprise, excluding any input-taxed supplies/ supplies not made for consideration: s 188-15 ➢ The relevant 12-month period includes the current-year annual turnover (annual turnover for current month and the preceding 11 months) and the projected annual turnover (annual turnover for current month and the following 11 months) • Entities with an annual turnover below the registration turnover may choose to register for GST provided that they are carrying on an enterprise ➢ Benefits: Entities can obtain a refund of GST paid on acquisitions ➢ Consequences: Incur additional compliance costs in satisfying its administrative responsibilities and required to impose GST on its supplies, potentially increasing the cost of its supplies to customers (and potentially affecting sales)
6. GST-free supply: Div 38 • Certain goods and services are exempt from being a taxable supply if they are listed in Div 38 of the GST Act as “GST-free supplies” • Also so aid low-income earners, but effect of this controversial and subject to much heated debate, e.g. convenience food are taxed (but are bought most by low-income earners whilst expensive fresh products, e.g. Kobe beef are GST-free) • The following items are listed in Div 38 as GST-free supplies: ➢ Food: Subdiv 38-A ▪ Lansell House Pty Ltd v FCT (2011) 79 ATR 22 – ciabette bread or cracker case? ➢ Health: Subdiv 38-B ➢ Education: Subdiv 38-C ➢ Child care: Subdiv 38-D ➢ Exports: Subdiv 38-E ➢ Religious services: Subdiv 38-F ➢ Non-commercial activities of charitable institutions: Subdiv 38-G ➢ Raffles and bingo conducted by charitable institutions: Subdiv 38-H ➢ Water, sewerage and drainage: Subdiv 38-I ➢ Supplies of going concerns: Subsiv 38-J ➢ Transport and related matters: Subdiv 38-K ➢ Precious metals: Subdiv 38-L ➢ Supplies through inward duty free shops: Subdiv 38-M ➢ Grants of land by governments: Subdiv 38-N ➢ Farm land: Subdiv 38-O ➢ Cars for use by disable people: Subdiv 38-P ➢ International mail: Subdiv 38-Q Consequences of making a GST-free supply • An entity that supplies GST-free supplies is not required to pay GST on the making of the supply: s 38-1 of the GST Act because GST-free supplies are excluded from the definition of “taxable supply” in s 9-5 • The making of a GST-free supply does not impact upon the entity’s entitlement to a refund of GST paid on any creditable acquisitions related to making the GST-free supply
6. Input-taxed supply: Div 40 • Exempt from being taxable supplies ➢ Financial supplies (GSTR 2002/2): Subdiv 40-A ❖ Includes: provision, disposal or acquisition of an interest in or under a bank account, a loan arrangement, a superannuation fund, insurance agreements, etc ❖ Excludes: profession advice (accounting, legal, insurance), bitcoin ➢ Residential rent: Subdiv 40-B ❖ Includes: Residential premises (defined in s 195-1 as land or buildings that are occupied or intended to be occupied or capable of being occupied as a residence or for residential accommodation) that are not commercial residential premises ❖ Excludes: hotels, ships for let or entertainment purposes, caravan park, campsite ➢ Sale of existing residential premises: Subdiv 40-C ❖ Includes: Sales or long-term leases (lease, hire or licence for a period of at least 50 years of used residential premises ❖ Excludes: New residential permises or commercial residential premises ➢ Precious metals: Subdiv 40-D ➢ School tuckshops/canteens: Subdiv 40-E ➢ Fund-raising events conducted by charitable institutions: Subdiv 40-F • Where a supply is both an input-taxed supply and a GST-free supply (eg financial supplies to an overseas customer), the GST-free characterisation prevails: s 9-30(3) Consequences of making an input-taxed supply • An entity that makes input-taxes supplies is not required to pay GST on the making of the supply: s 40-1 of the GST Act as input taxed supplies are excluded from the definition of “taxable supply” in s 9-5 • The entity is not entitled to refunds of GST paid on any acquisitions relating to making of that supply as the acquisition would not satisfy requirements of “credible acquisition”
Consequences of making a taxable supply • • • •
An entity that makes a taxable supply is liable to pay GST on the taxable supply: s 9-40 Although in practice it is often the recipient of a taxable supply who pays GST, the imposition of the liability to pay GST under the law is actually on the supplier. The amount of GST payable on the taxable supply is 10% of the value of the taxable supply: s 9-70 The value of a taxable supply is equal to 10/11ths of the price of the supply
Supply summary GST payable on supply? Taxable supply
YES
Entitled to input tax credits on acquisitions YES (if creditable acquisition)
GST-free supply
NO
YES (if creditable acquisition)
Input-taxed supply
NO
NO
Creditable Acquisition: s 11-5 •
Under s 11-5, an entity makes a creditable acquisition if: ➢ The entity makes an acquisition; ➢ The acquisition was solely or partly for a creditable purpose; ➢ The supply to the entity was a taxable supply; ➢ The entity provided or was liable to provide consideration for the supply; AND ➢ The entity is registered or required to be registered for GST purposes.
1. Acquisition: s 11-10 Similar to the definition of “supply”, acquisition is defined very broadly in s 11-10 of the GST Act as “any form of acquisition whatsoever” and includes s 11-10: (a) An acquisition of goods; (b) An acquisition of services; (c) A receipt of advice of information; (d) An acceptance of grant, assignment or surrender of real party; (e) An acceptance of grant, transfer, assignment or surrender of any right; (f) An acquisition of something the supply of which is a financial supply; AND (g) An acquisition of a right to require another person to do anything or to refrain from an act or to tolerate an act or situation. 2. Creditable purpose: s 11-15 • Generally the key issue in satisfying the requirements of “creditable acquisition” • An acquisition would be for a creditable purpose where the acquisition relates to the carrying on of the entity’s enterprise (Generally a business purpose) • s 11-15(2)(b) expressly states that an acquisition will not be for a creditable purpose if it is for private or domestic in nature (except for those relating to fringe benefits) • The “solely or partly” expression in s 11-5 of the GST Act ensures that an acquisition will still be treated as being for a creditable purpose even though the entity may have had a non-business purpose as well as a business purpose in making the acquisition. • Although the acquisition is still a creditable acquisition, the consequences will differ where it is partly for a creditable purpose. 3. Supply to the entity was for a taxable supply • Ensures that input tax credits are only available where GST was in fact paid on the acquisition • Where the information provided states clearly that the amount paid for an acquisition includes GST, this is clearly the acquisition of a taxable supply by the entity • However, where it is not clear the amount paid includes GST, it will be necessary to go through the analysis from the supplier’s perspective to determine whether the supplier has or should have charged GST on the supply (eg. Is the supplier registered for GST purposes, is the supply a GST-free or input-taxed supply, etc)
Consequences of making a creditable acquisition •
An entity that makes a creditable acquisition is entitled to input tax credits on the acquisition: s 11-20 of GST Act • The amount of input tax credits on a creditable acquisition is the amount equal to the GST payable on the supply of the thing acquired: s 11-25 • Where the acquisition was only partly for a creditable purpose, the amount of input tax credits on the acquisition is limited to the extent that the acquisition was for a creditable purpose. Acquisitions related to input-taxed supplies • Acquisitions relating to the making of input-taxed supplies are not creditable acquisitions: s 11-15(2) • Where the input taxed supplies are financial supplies, the supplier may nonetheless be entitled to input tax credits on acquisitions related to the making of those supplies in certain circumstances, e.g. cheque-clearing services, loan services, debt collection, etc. Input tax credit threshold on financial acquisitions cannot exceed $150,000. Special Rules These rules include: • Div 69: Non-deductible expenses ➢ No entitlement to input tax credits for non-deductible expenses ➢ Even where all of the elements of “creditable acquisition” are satisfied, an acquisition will not be a credible acquisition if it is a non-deductible expense: s 69-5 ➢ For GST purposes, these include: • Penalties: s 26-5 of ITAA 1997 • Relative’s travel expense: s 26-30 of ITAA 1997 • Family’s maintenance expenses: s 26-40 of ITAA 1997 • Recreational club expenses: s 26-45 of ITAA 1997 • Expenses for a leisure facility or boat: s 26-50 of ITAA 1997 • Entertainment expenses: Div 32 of ITAA 1997 • Non-compulsory uniforms: Div 34 of ITAA 1997 • Agreements for the provision of non-deductible non-cash business benefits: s 51AK of ITAA 1937
Importation • Covered in Div 13 of the GST Act and are slightly different from the general rules regarding GST as: ➢ Apply regardless of whether an entity is registered for GST purposes; ➢ Only apply to the importation of goods, not other types of importations; AND ➢ Impose the liability to pay GST on the importer of goods, not the supplier. • These rules are needed to ensure that goods consumed in Australia are subject to GST whether they are acquired in or out of Australia, thereby maintaining the competitiveness of Australian businesses.
Taxable Importation: s 13-5 •
• • •
Under s 13-5 of the GST Act, an entity makes a taxable importation where: ➢ Goods are imported; and ➢ The goods are entered for home consumption: “Entered for home consumption” is an expression used in customs law and essentially means that goods are brought into Australia for consumption or use in Australia. ➢ Value must exceed $1,000; AND ➢ NOT be a good that is GST-free or an input-taxed supply An entity does NOT have to be carrying an enterprise or be registered for GST purposes to make a taxable importation. A taxable importation will exist regardless of whether the goods are being imported for business or private purposes. Some goods are listed as non-taxable importations. Exceptions: ➢ Goods that would have been GST-free or input taxed supplies if they were supplies supplied in Australia ➢ Money ➢ Goods exported from Australia and returned to Australia unchanged ➢ Goods that are duty free under the customs law • A wide range of goods are duty free under customs law and therefore would be non-taxable importations, e.g. low-value goods (less than $1,000)
Consequences of making a taxable importation • GST is payable on the making of a taxable importation by the person making the taxable importation: ss 13-1 and 13-15 of the GST Act • The amount of GST payable on the making of a taxable importation is 10% of the value of the taxable importation: s 13-20(1) • The value of a taxable importation is the customs value of the goods plus any costs incurred in transporting and insuring the goods to bring them into Australia: s 13-20(2)
Creditable importation: s 15-5 •
An entitlement to input tax credits. Under s 15-5, creditable importation exists where: ➢ An entity imports goods solely or partly for a creditable purpose, ➢ The importation is a taxable importation, and ➢ The entity is registered or required to be registered for GST purposes
Consequences of making a creditable importation • An entity to makes a creditable importation is entitled to input tax credits on the importation: ss 15-1 and ss 15-15 of the GST Act.
GST Administration • Administered by the ATO • Entities that are registered or required to be registered for GST are required to complete and lodge a GST return (AKA Business Activity Statement or BAS) on a quarterly basis: ss 27-5, 31-5 and 31-8 ➢ On the BAS, among the items which must be included are entitlement to input tax credits and GST payable for the period • Entities must report the amount of any GST payable (GST on taxable supplies or taxable importations) and GST refundable (Input tax credits on creditable acquisitions or creditable importations) for the period on the BAS. The two amounts are netted off and the entity is either in a net GST payable or refundable position for the period: s 17-5(1). GST Adjustments • The net amount calculated under s 17-5 of the GST Act is increased or decreased for any adjustments: s 17-5(2) • An entity can make an adjustment to its GST obligations on supplies or acquisitions under Div 19 • These adjustments may arise due to the supply or acquisition being cancelled, changes to the consideration for a supply or acquisition, or the supply or acquisition stops being a taxable supply or credible acquisition: s 19-10 • Where an adjustment is necessary, the entity must compare its obligations following the adjustment with its previously reported GST obligations and include an adjustment to increase or decrease its GST liability on its BAS. The adjustment is attributable to the tax period when the entity becomes aware of the adjustment: s 29-20(1) (unless the entity accounts for GST on a cash basis) Interaction with other taxes • Income tax ➢ Entities include the GST-exclusive amount of their supplies in their assessable income: s 17-5 of ITAA 1997 ➢ The amount to be included as a deduction will depend on the entity’s entitlement to input tax credits on the acquisition. Where the entity is entitled to input tax credits, the deduction amount will be the GST-exclusive amount (since the GST is refundable): s 27-5 of the GST Act. On the other hand, if the entity is not entitled to input tax credits, the deduction amount will be the GST-inclusive amount •
Fringe benefits tax ➢ Where an entity’s acquisition relates to the provision of a fringe benefit, the entity’s FBT liability in relation to the provision of the fringe benefit will depend on the entity’s entitlement to input tax credits as the gross-up factor to be used in calculating the FB taxable amount depends on whether the entity is entitled to input tax credits on the acquisition.
Goods and Services Tax Background • Tax on consumption (Not a tax on income, e.g. income tax) • Main reason for introduction of GST to reduce government reliance on income tax as a source of government funding • GST is administered federally through the ATO • GST rate is 10% • Imposed upon the consumption of goods and services, including imports in Australia • Although all consumers pay GST upon consumption, GST is effectively borne by the final private consumer due to the ability of certain entities to obtain a refund of GST paid on acquisitions (AKA input tax credits) • Provisions regarding GST are contained in a separate legislation: A New Tax System (Goods and Services Tax) Act 1999 Enterprise • Defined in s 9-20 of the GST Act and includes an activity or series of activity conducted: ➢ In the form of a business: s 9-20(1)(a); ▪ Stone ▪ Ferguson ▪ TR 97/11 ▪ TR 2005/1 ➢ In the form of an adventure or concern in the nature of trades: 9-20(1)(b); OR ▪ FCT v Whitfords Beach Pty Ltd ▪ Westfield ▪ Myer ➢ In the form of leasing, licensing or other grant of an interest in property on a regular or continuous basis: s 9-20(1)(c); OR ➢ Activities carried out by trustees, charities, religious institutions and government bodies: s 9-20(1)(d) – (g) • BUT NOT the provision of labour as an employee; OR private, recreational pursuits or hobbies: s 9 – 20(2)
Taxable Supplies: s 9-5 • •
Vital to operation of GST as they create the obligation to pay (and therefore charge) GST An entity makes a taxable supply under s 9 – 5 of the GST Act if: ➢ It makes a supply; AND ➢ The supply is for consideration; AND ➢ The supply is made in the course or furtherance of the entity’s enterprise; AND ➢ The supply is connected with the indirect tax zone; AND ➢ The entity is registered or required to be registered for GST; AND ➢ Is NOT input-taxed or GST-free
1. Supply: s 9-10 • s 9-10 of the GST Act defines “supply” as “any form of supply whatsoever” and specifically includes (but is not limited to) the following s 9-10(2): (a) a supply of goods (b) a supply of services (c) a provision for advice or information (d) a grant, assignment or surrender of real property (e) a creation, grant, transfer, assignment or surrender of any right (f) a financial supply (g) an entry into, or release from, an obligation to do anything • The definition of “supply” is very broad and many activities of an entity may constitute the making of a supply ▪ FCT v Reliance Carpet Co Pty Ltd (2008) 68 ATR 158 - Taxpayer granted a purchaser an option to buy commercial property - Purchaser defaulted, deposit was forfeited to the taxpayer - Taxpayer argued that GST not applicable on deposit as there was no supply - HCA found that the deposit was consideration for a supply, being the obligations undertaken by the vendor on entry into the contract. Hence, the full amount of the deposit was forfeited ▪ FCT v Qantas Airways Ltd [2012] HCA 41 - Taxpayer was the supplier of domestic and international air travel - GST is imposed on domestic and international air travel - Question arose as to whether GST was payable where a passenger books and pays for a domestic flight but subsequently cancels the booking - Taxpayers argued that there was no supply, i.e. the provision of a flight - HCA found that the taxpayer was liable for GST in respect of the bookings made by customers where the relevant supply was “the promise to use the best endeavours to carry the passenger and baggage, having regard to the circumstance of the business operations of the airline”. ▪ FCT v MBI Properties Pty Ltd [2014] HCA 49 • Illegality of supply is irrelevant: s 9-10(3) • Does not include a supply of money unless consideration for a supply that is the supply of money: s 9-10(4)
2. Consideration: s 9-15 • Defined in s 9-15(1) of the GST Act as including any payment or any act or forbearance in connection with the supply • Consideration includes anything of value, such as the provision of services or goods • Does not matter whether the payment was voluntary or whether it was by the recipient of the supply: s 9-15(2) 3. In the course or furtherance of an enterprise. Enterprise: s 9-20 • Expression “in the course or furtherance of” is not defined in the legislation • A wide approach is to be adopted and any supply that is connected to the enterprise will be made “in the course or furtherance of” that enterprise ▪ FCT v Reliance Carpet Co Pty Ltd (2008) 68 ATR 158 4. Connection to the indirect tax zone: s 9-25 • The “indirect tax zone” is defined in s 195-1 of the GST Act and refers to Australia • The term “Australia” was replaced in the GST Act with “indirect tax zone” from 1 July 2015 to ensure consistency of terminology across the tax legislation. • Examples of supplies connect to Australia include where s 9-25: (1) The goods are delivered or made available to the recipient in Australia; (2) The supply involves goods being removed from Australia (exemption for exports); (3) Goods are imported into Australia or installation/assembly of goods is in Australia; (4) The supply is of Australian land (5) If not goods/real property, the thing is done in Australia or the supply is made through an enterprise carried on in Australia 5. Registration Turnover Threshold • Entities that are carrying on an enterprise must register for GST where their annual turnover exceeds the registration turnover threshold: s 23 – 5 of the GST Act • From 1 July 2007, the registration turnover threshold is $100,000 for non—profit organisations and $50,000 for all other entities: s 23 – 15 ➢ EXCEPTION: Taxi drivers required to register for GST regardless of annual turnover • Annual turnover: Div 188 ➢ Value of all supplies during the relevant 12-month period related to its enterprise, excluding any input-taxed supplies/ supplies not made for consideration: s 188-15 ➢ The relevant 12-month period includes the current-year annual turnover (annual turnover for current month and the preceding 11 months) and the projected annual turnover (annual turnover for current month and the following 11 months) • Entities with an annual turnover below the registration turnover may choose to register for GST provided that they are carrying on an enterprise ➢ Benefits: Entities can obtain a refund of GST paid on acquisitions ➢ Consequences: Incur additional compliance costs in satisfying its administrative responsibilities and required to impose GST on its supplies, potentially increasing the cost of its supplies to customers (and potentially affecting sales)
6. GST-free supply: Div 38 • Certain goods and services are exempt from being a taxable supply if they are listed in Div 38 of the GST Act as “GST-free supplies” • Also so aid low-income earners, but effect of this controversial and subject to much heated debate, e.g. convenience food are taxed (but are bought most by low-income earners whilst expensive fresh products, e.g. Kobe beef are GST-free) • The following items are listed in Div 38 as GST-free supplies: ➢ Food: Subdiv 38-A ▪ Lansell House Pty Ltd v FCT (2011) 79 ATR 22 – ciabette bread or cracker case? ➢ Health: Subdiv 38-B ➢ Education: Subdiv 38-C ➢ Child care: Subdiv 38-D ➢ Exports: Subdiv 38-E ➢ Religious services: Subdiv 38-F ➢ Non-commercial activities of charitable institutions: Subdiv 38-G ➢ Raffles and bingo conducted by charitable institutions: Subdiv 38-H ➢ Water, sewerage and drainage: Subdiv 38-I ➢ Supplies of going concerns: Subsiv 38-J ➢ Transport and related matters: Subdiv 38-K ➢ Precious metals: Subdiv 38-L ➢ Supplies through inward duty free shops: Subdiv 38-M ➢ Grants of land by governments: Subdiv 38-N ➢ Farm land: Subdiv 38-O ➢ Cars for use by disable people: Subdiv 38-P ➢ International mail: Subdiv 38-Q Consequences of making a GST-free supply • An entity that supplies GST-free supplies is not required to pay GST on the making of the supply: s 38-1 of the GST Act because GST-free supplies are excluded from the definition of “taxable supply” in s 9-5 • The making of a GST-free supply does not impact upon the entity’s entitlement to a refund of GST paid on any creditable acquisitions related to making the GST-free supply
6. Input-taxed supply: Div 40 • Exempt from being taxable supplies ➢ Financial supplies (GSTR 2002/2): Subdiv 40-A ❖ Includes: provision, disposal or acquisition of an interest in or under a bank account, a loan arrangement, a superannuation fund, insurance agreements, etc ❖ Excludes: profession advice (accounting, legal, insurance), bitcoin ➢ Residential rent: Subdiv 40-B ❖ Includes: Residential premises (defined in s 195-1 as land or buildings that are occupied or intended to be occupied or capable of being occupied as a residence or for residential accommodation) that are not commercial residential premises ❖ Excludes: hotels, ships for let or entertainment purposes, caravan park, campsite ➢ Sale of existing residential premises: Subdiv 40-C ❖ Includes: Sales or long-term leases (lease, hire or licence for a period of at least 50 years of used residential premises ❖ Excludes: New residential permises or commercial residential premises ➢ Precious metals: Subdiv 40-D ➢ School tuckshops/canteens: Subdiv 40-E ➢ Fund-raising events conducted by charitable institutions: Subdiv 40-F • Where a supply is both an input-taxed supply and a GST-free supply (eg financial supplies to an overseas customer), the GST-free characterisation prevails: s 9-30(3) Consequences of making an input-taxed supply • An entity that makes input-taxes supplies is not required to pay GST on the making of the supply: s 40-1 of the GST Act as input taxed supplies are excluded from the definition of “taxable supply” in s 9-5 • The entity is not entitled to refunds of GST paid on any acquisitions relating to making of that supply as the acquisition would not satisfy requirements of “credible acquisition”
Consequences of making a taxable supply • • • •
An entity that makes a taxable supply is liable to pay GST on the taxable supply: s 9-40 Although in practice it is often the recipient of a taxable supply who pays GST, the imposition of the liability to pay GST under the law is actually on the supplier. The amount of GST payable on the taxable supply is 10% of the value of the taxable supply: s 9-70 The value of a taxable supply is equal to 10/11ths of the price of the supply
Supply summary GST payable on supply? Taxable supply
YES
Entitled to input tax credits on acquisitions YES (if creditable acquisition)
GST-free supply
NO
YES (if creditable acquisition)
Input-taxed supply
NO
NO
Creditable Acquisition: s 11-5 •
Under s 11-5, an entity makes a creditable acquisition if: ➢ The entity makes an acquisition; ➢ The acquisition was solely or partly for a creditable purpose; ➢ The supply to the entity was a taxable supply; ➢ The entity provided or was liable to provide consideration for the supply; AND ➢ The entity is registered or required to be registered for GST purposes.
1. Acquisition: s 11-10 Similar to the definition of “supply”, acquisition is defined very broadly in s 11-10 of the GST Act as “any form of acquisition whatsoever” and includes s 11-10: (a) An acquisition of goods; (b) An acquisition of services; (c) A receipt of advice of information; (d) An acceptance of grant, assignment or surrender of real party; (e) An acceptance of grant, transfer, assignment or surrender of any right; (f) An acquisition of something the supply of which is a financial supply; AND (g) An acquisition of a right to require another person to do anything or to refrain from an act or to tolerate an act or situation. 2. Creditable purpose: s 11-15 • Generally the key issue in satisfying the requirements of “creditable acquisition” • An acquisition would be for a creditable purpose where the acquisition relates to the carrying on of the entity’s enterprise (Generally a business purpose) • s 11-15(2)(b) expressly states that an acquisition will not be for a creditable purpose if it is for private or domestic in nature (except for those relating to fringe benefits) • The “solely or partly” expression in s 11-5 of the GST Act ensures that an acquisition will still be treated as being for a creditable purpose even though the entity may have had a non-business purpose as well as a business purpose in making the acquisition. • Although the acquisition is still a creditable acquisition, the consequences will differ where it is partly for a creditable purpose. 3. Supply to the entity was for a taxable supply • Ensures that input tax credits are only available where GST was in fact paid on the acquisition • Where the information provided states clearly that the amount paid for an acquisition includes GST, this is clearly the acquisition of a taxable supply by the entity • However, where it is not clear the amount paid includes GST, it will be necessary to go through the analysis from the supplier’s perspective to determine whether the supplier has or should have charged GST on the supply (eg. Is the supplier registered for GST purposes, is the supply a GST-free or input-taxed supply, etc)
Consequences of making a creditable acquisition •
An entity that makes a creditable acquisition is entitled to input tax credits on the acquisition: s 11-20 of GST Act • The amount of input tax credits on a creditable acquisition is the amount equal to the GST payable on the supply of the thing acquired: s 11-25 • Where the acquisition was only partly for a creditable purpose, the amount of input tax credits on the acquisition is limited to the extent that the acquisition was for a creditable purpose. Acquisitions related to input-taxed supplies • Acquisitions relating to the making of input-taxed supplies are not creditable acquisitions: s 11-15(2) • Where the input taxed supplies are financial supplies, the supplier may nonetheless be entitled to input tax credits on acquisitions related to the making of those supplies in certain circumstances, e.g. cheque-clearing services, loan services, debt collection, etc. Input tax credit threshold on financial acquisitions cannot exceed $150,000. Special Rules These rules include: • Div 69: Non-deductible expenses ➢ No entitlement to input tax credits for non-deductible expenses ➢ Even where all of the elements of “creditable acquisition” are satisfied, an acquisition will not be a credible acquisition if it is a non-deductible expense: s 69-5 ➢ For GST purposes, these include: • Penalties: s 26-5 of ITAA 1997 • Relative’s travel expense: s 26-30 of ITAA 1997 • Family’s maintenance expenses: s 26-40 of ITAA 1997 • Recreational club expenses: s 26-45 of ITAA 1997 • Expenses for a leisure facility or boat: s 26-50 of ITAA 1997 • Entertainment expenses: Div 32 of ITAA 1997 • Non-compulsory uniforms: Div 34 of ITAA 1997 • Agreements for the provision of non-deductible non-cash business benefits: s 51AK of ITAA 1937
Importation • Covered in Div 13 of the GST Act and are slightly different from the general rules regarding GST as: ➢ Apply regardless of whether an entity is registered for GST purposes; ➢ Only apply to the importation of goods, not other types of importations; AND ➢ Impose the liability to pay GST on the importer of goods, not the supplier. • These rules are needed to ensure that goods consumed in Australia are subject to GST whether they are acquired in or out of Australia, thereby maintaining the competitiveness of Australian businesses.
Taxable Importation: s 13-5 •
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Under s 13-5 of the GST Act, an entity makes a taxable importation where: ➢ Goods are imported; and ➢ The goods are entered for home consumption: “Entered for home consumption” is an expression used in customs law and essentially means that goods are brought into Australia for consumption or use in Australia. ➢ Value must exceed $1,000; AND ➢ NOT be a good that is GST-free or an input-taxed supply An entity does NOT have to be carrying an enterprise or be registered for GST purposes to make a taxable importation. A taxable importation will exist regardless of whether the goods are being imported for business or private purposes. Some goods are listed as non-taxable importations. Exceptions: ➢ Goods that would have been GST-free or input taxed supplies if they were supplies supplied in Australia ➢ Money ➢ Goods exported from Australia and returned to Australia unchanged ➢ Goods that are duty free under the customs law • A wide range of goods are duty free under customs law and therefore would be non-taxable importations, e.g. low-value goods (less than $1,000)
Consequences of making a taxable importation • GST is payable on the making of a taxable importation by the person making the taxable importation: ss 13-1 and 13-15 of the GST Act • The amount of GST payable on the making of a taxable importation is 10% of the value of the taxable importation: s 13-20(1) • The value of a taxable importation is the customs value of the goods plus any costs incurred in transporting and insuring the goods to bring them into Australia: s 13-20(2)
Creditable importation: s 15-5 •
An entitlement to input tax credits. Under s 15-5, creditable importation exists where: ➢ An entity imports goods solely or partly for a creditable purpose, ➢ The importation is a taxable importation, and ➢ The entity is registered or required to be registered for GST purposes
Consequences of making a creditable importation • An entity to makes a creditable importation is entitled to input tax credits on the importation: ss 15-1 and ss 15-15 of the GST Act.
GST Administration • Administered by the ATO • Entities that are registered or required to be registered for GST are required to complete and lodge a GST return (AKA Business Activity Statement or BAS) on a quarterly basis: ss 27-5, 31-5 and 31-8 ➢ On the BAS, among the items which must be included are entitlement to input tax credits and GST payable for the period • Entities must report the amount of any GST payable (GST on taxable supplies or taxable importations) and GST refundable (Input tax credits on creditable acquisitions or creditable importations) for the period on the BAS. The two amounts are netted off and the entity is either in a net GST payable or refundable position for the period: s 17-5(1). GST Adjustments • The net amount calculated under s 17-5 of the GST Act is increased or decreased for any adjustments: s 17-5(2) • An entity can make an adjustment to its GST obligations on supplies or acquisitions under Div 19 • These adjustments may arise due to the supply or acquisition being cancelled, changes to the consideration for a supply or acquisition, or the supply or acquisition stops being a taxable supply or credible acquisition: s 19-10 • Where an adjustment is necessary, the entity must compare its obligations following the adjustment with its previously reported GST obligations and include an adjustment to increase or decrease its GST liability on its BAS. The adjustment is attributable to the tax period when the entity becomes aware of the adjustment: s 29-20(1) (unless the entity accounts for GST on a cash basis) Interaction with other taxes • Income tax ➢ Entities include the GST-exclusive amount of their supplies in their assessable income: s 17-5 of ITAA 1997 ➢ The amount to be included as a deduction will depend on the entity’s entitlement to input tax credits on the acquisition. Where the entity is entitled to input tax credits, the deduction amount will be the GST-exclusive amount (since the GST is refundable): s 27-5 of the GST Act. On the other hand, if the entity is not entitled to input tax credits, the deduction amount will be the GST-inclusive amount •
Fringe benefits tax ➢ Where an entity’s acquisition relates to the provision of a fringe benefit, the entity’s FBT liability in relation to the provision of the fringe benefit will depend on the entity’s entitlement to input tax credits as the gross-up factor to be used in calculating the FB taxable amount depends on whether the entity is entitled to input tax credits on the acquisition.
