GST Update May 2004

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GST Update May 2004

• Sponsored by the Department of Treasury Finance

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Todays Presenter Suzi Russell Senior Manager

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Agenda

• Appropriations and grants
• GST-free overview
• Health
• Education
• Input taxed overview of financial supplies
• Finalised GST rulings
• Draft GST rulings
• Other interesting ATO resources
• GST risk management (including ATO audit activity)

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Appropriations

• Why should recipient be concerned as to GST
  status?
• Payment made by a government related entity to
  another government related entity is not the
  provision of consideration if the payment is
  specifically covered by an appropriation under an
  Australian law.
• No consideration no supply by recipient
• In practice, purpose may not always be explicitly
  specified by the appropriation

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Appropriations cont

• GSTR 2000/4 provides general rule of thumb
• the payment is made by a government related
  entity to another government related entity and
• the authority to make the payment is found in an
  Act or other instrument of a legislative
  character which appropriates moneys and
• the payment is either
• covered by an appropriation that specifically
  deals with transactions between one government
  related entity and another, or
• not part of a commercial transaction

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Grants

• Payment which is not covered by an appropriation
  may be grant
• Grants which do not create obligations for
  recipient generally not consideration for a
  supply
• Guidance from GSTR 2000/11 and ATO Fact Sheet
  (Grants and GST questions and answers)
• Recipients obligations
• Identifiable consumers not world at large

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Grants cont

• Provision of grant to deliver specified services
  to community in furtherance of a specific
  objective may establish supply (recipient is
  obligated)
• Direct benefit to grantor (e.g. research grant)
• Supply of information is peripheral to reason for
  grant (e.g. report as to how money used)
• Co-payments (such as Abstudy) are GST-free if
  related to GST-free supply

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Grants cont

• GST-free examples from GSTR 2000/11
• Education department grants subsidy to school for
  cost of GST-free education courses (amount is not
  tied to provision of particular courses)
• School is obliged to provide courses at a reduced
  rate in exchange for the funding not
  consideration for GST-free supplies
• Potentially taxable

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Grants cont

• Per capita funding from education department to
  schools based on number of pupils at school
  during the year
• Funding does not represent consideration for
  GST-free supplies of education to individual
  students
• Potentially taxable

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Gifts to Non-Profit Bodies

• Gift to a non-profit body is not the provision
  of consideration
• Disclosure of donor and direction as to where
  funds should be spent not normally sufficient
  benefit assuming non-profit recipient

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GST-Free Overview of Health

• GST-free in GST Act (Subdivision 38-B Health)
• Medical services and other health services
• Hospital treatment
• Residential, community and flexible care
• Medical aids and appliances and other GST-free
  health goods
• Drugs and medicinal preparations
• Private health insurance

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Medical Services

• a service for which medicare benefit is payable
  under Part II of the Health Insurance Act or
• any other service supplied by or on behalf of a
  medical practitioner or approved pathology
  practitioner that is generally accepted in the
  medical profession as being necessary for the
  appropriate treatment of the recipient of the
  supply

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Medical Services cont

• Not GST-free if rendered for cosmetic reasons
  (and no medicare benefit payable)
• Common pitfall assessing the recipient of the
  supply and establishing what is necessary for
  the appropriate treatment of the recipient
• Tripartite arrangements with other hospitals,
  charities or overseas governments

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Other Health Services

• Service must be specified in the table at
  subsection 38-10(1) including acupuncture,
  dental, optometry, psychology and social work
  services
• Supplier must be recognised professional
• Supply must generally be accepted as being
  necessary for the appropriate treatment of the
  recipient of the supply
• Again, common pitfall is assessing the recipient
  of the supply
• Also, what is necessary for the appropriate
  treatment?

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Hospital Treatment

• Hospital treatment has meaning given by
  subsection 67(4) of the National Health Act 1953
• Generally GST-free unless related to a medical
  service which is not GST-free
• Supply of goods is also GST-free if it is
  directly related to a supply of GST-free hospital
  treatment and it is supplied by, or on behalf of,
  the supplier of the hospital treatment

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Medical Aids and Appliances and Other GST-Free
Health Goods

• GST-free if specifically listed in legislation or
  regulations (e.g. pacemakers, bedpans, medical
  alert devices and diabetes needles and
  syringes) and
• The thing is specifically designed for people
  with an illness or disability, and is not widely
  used by people without an illness or disability
• Includes spare parts, including any integral,
  ancillary or incidental labour
• Other GST-free health goods by Health Minister
  determination
• Not GST-free if supplier and recipient agree
  specifically not to treat as GST-free

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GST-Free Overview of Education

• GST-free in GST Act (Subdivision 38-C Education)
• Education courses
• Excursions, field trips and course materials
• Curriculum related goods
• Student accommodation
• Recognition of prior learning

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Education Course

• Pre-school, primary, secondary or tertiary course
• Masters or Doctoral course
• Special education course
• Adult and community education course
• English language course for overseas students
• First aid or life saving course
• Professional or trade course
• Tertiary residential college course
• Includes directly related administrative services

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Relevant ATO Rulings

• GST-free education supplies GSTR 2000/30
  (pre-school, primary and secondary education
  courses)
• GST-free tertiary education supplies GSTR
  2001/1
• Adult and community education courses GSTR
  2000/27 (assessment of whether course is likely
  to add to the employment related skills of people
  undertaking the course)
• GST-free professional or trade courses GSTR
  2003/1 (more detail later)
• Commercial pilot training GSTD 2000/11
  (includes analysis of essential prerequisites for
  entry to employment in a trade, profession or
  occupation)

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Excursions, Field Trips and Course Materials

• Excursions or field trips GST-free if directly
  related to curriculum of a GST-free education
  course and not predominantly recreational
• In some situations, accommodation supplied as
  part of excursion or field trip is not GST-free
• Supply of course materials (necessarily
  consumed or transformed by the students
  undertaking the GST-free education course) will
  also be GST-free

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Additional Student Fees

• Student organisation (e.g. union) fees not
  GST-free
• Amenities Fee if used to help fund
  infrastructure of university and make facilities
  available for general student population (e.g.
  access to libraries and computers), GST-free
• Amenities Fee if relates to facilities
  provided to particular students (e.g. 20
  photocopying card or car parking), taxable
• Private tuition not part of a supply of an
  education course

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Curriculum Related Goods

• Lease or hire of goods is GST-free if goods are
  for use principally by a student undertaking a
  pre-school, primary or secondary education
  course and
• The entity supplying the course leases or hires
  the goods and
• At all times, the entity supplying the course has
  the right to decide who uses the goods and the
  use to which the goods are put

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Input Taxed Overview of Financial Supplies

• Meaning of financial supplies
• Input taxed treatment of financial supplies
• Inability to claim input tax credits
• De minimus rule (financial acquisitions
  threshold)
• Apportionment implications if de minimus level
  breached
• Reduced credit acquisitions
• Financial supply provider vs financial supply
  facilitator

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Meaning of Financial Supplies

• Provision, acquisition or disposal of an interest
  mentioned in the table in Regulation 40.
  Examples include
• A debt, credit arrangement or right to credit
  (e.g. borrowing, lending and supply of credit
  cards)
• An annuity or allocated pension
• A guarantee, including an indemnity (except
  warranty for goods or a contract of insurance or
  reinsurance)
• Securities (e.g. bonds, stocks or debentures)
• Acquisition-supply concept
• Refer GSTR 2002/2

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Financial Acquisitions Threshold (FAT)

• Breached in any current or projected year if the
  input tax credits relating to the making of
  financial supplies (other than borrowings) exceed
  either 50,000 or 10 of the total input tax
  credits for that year (including those relating
  to the making of financial supplies)
• Need to apportion costs (direct and indirect) to
  monitor whether breached
• Should be calculated each month
• If not breached, no apportionment required
  (except for other input taxed supplies)
• Refer GSTR 2003/9 (more detail later)

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Reduced Credit Acquisitions

• 75 input tax credit on eligible costs
• Regulation 70 contains table of costs. Examples
  include
• Processing services in relation to account
  information (including archives storage,
  retrieval and destruction services and statement
  processing and bulk mailing)
• Arrangement by a financial supply facilitator,
  of the provision, acquisition or disposal of an
  interest in a security
• Loan protection insurance
• Debt collection services
• Refer GSTR 2004/1 (more detail later)

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Finalised GST Rulings of Note

• GSTR 2003/1 supplies that are GST-free as
  professional or trade courses
• GSTR 2003/3 when is a sale of real property a
  sale of new residential premises?
• GSTR 2003/9 financial acquisitions threshold
• GSTR 2003/11 payment on early termination of a
  lease of goods
• GSTR 2003/16 inducements to enter into a lease
  of commercial premises
• GSTR 2004/1 reduced credit acquisitions

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Draft GST Rulings of Note

• GSTR 2003/D6 Assignment of income streams
  including under a securitisation arrangement
• GSTR 2004/D1 the GST implications of the
  purchase of fuel using a fuel card
• Various revised drafts on GST-free exported
  services

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GSTR 2003/1 GST-Free Professional or Trade
Courses

• Professional or trade course is defined as a
  course leading to a qualification that is an
  essential prerequisite
• For entry to a particular profession or trade in
  Australia or
• To commence the practice of (but not to maintain
  the practice of) a profession or trade in
  Australia.
• Ascertaining whether you are supplying a course
  and then deciding whether the course leads to a
  qualification
• Qualification must result from, and will follow
  successful completion of the course
  (qualification may be issued by a third party)

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GSTR 2003/1 GST-Free Professional or Trade
Courses cont

• Qualification must be an essential prerequisite
• Must be mandatory for a person to have the
  qualification before he/she can enter into, or
  commence the practice of, a particular profession
  or trade
• What is a profession or trade (more than just a
  skill)?
• Qualification imposed by or under an industrial
  instrument
• Qualification imposed by a professional or trade
  association that operates on a national level or,
  if so applicable, at a State or Territory level

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GSTR 2003/1 GST-Free Professional or Trade
Courses cont

• Ability of professional or trade association to
  impose a qualification
• What is a professional or trade association?
• If doing specialist course is really just gaining
  additional skills but is not an essential
  prerequisite and/or not related to entering a
  profession or trade will not qualify
• Maintaining the practice of a profession or trade
  (e.g. refresher courses) will not qualify

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GSTR 2003/3 Sale of New Residential Premises

• Sale of residential premises not input taxed to
  extent that they are commercial residential
  premises or new residential premises (other than
  those used for residential accommodation before 2
  December 1998)
• Generally, new residential premises
• Have not previously been sold as residential
  premises and have not previously been the subject
  of a long-term lease or
• Have been created through substantial renovations
  of a building or
• Have been built, or contain a building that has
  been built, to replace demolished premises on the
  same land

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GSTR 2003/3 Sale of New Residential Premises
cont

• Residential premises constitutes the land and the
  residential building on the land as a package
• Where retail premises with separate residential
  premises may require apportionment
• Sale refers to transfer of full and complete
  ownership of the maximum interest in the land
  (may be freehold or leasehold)

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GSTR 2003/3 Sale of New Residential Premises
cont

• Subdivision of land, in itself, does not create
  new residential premises
• Where land with a residential building has
  previously been sold as residential premises, or
  been the subject of a long-term lease, and the
  area of land is reduced in size, subsequent sale
  is not sale of new residential premises
• Where area of land is subsequently increased, ATO
  considers that there is a different package
  which needs to be apportioned (between input
  taxed and taxable) on disposal

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GSTR 2003/3 Sale of New Residential Premises
cont

• New residential premises previously sold as
  commercial property
• New residential premises may be created through
  substantial renovations of a building
• Where, however, substantial renovations occurred
  before 2 December 1998 and the premises have been
  used for residential accommodation before that
  date sale will not be taxable supply

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GSTR 2003/3 Sale of New Residential Premises
cont

• Criteria for substantial renovations
• renovations need to affect the building as a
  whole and
• renovations need to result in the removal or
  replacement of all or substantially all of the
  building
• Demolition of premises, apart from the façade,
  and construction of residential premises behind
  the façade, would create new residential premises

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GSTR 2003/3 Sale of New Residential Premises
cont

• Reference to used for residential accommodation
  before 2 December 1998 applies to the new
  residential premises, not the premises prior to
  renovation/building
• Residential premises are not new residential
  premises if they have only been used for making
  input taxed supplies of residential rent for
  continuous five years since first became
  residential premises, last substantially
  renovated or last built
• Ruling has a number of examples, in particular,
  concerning renovations and helpful flowchart at
  Appendix 1

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GSTR 2003/9 Financial Acquisitions Threshold
(FAT)

• Current and future acquisitions threshold tests
• First limb of test exceeding 50,000
• Second limb of test exceeding 10
• Financial acquisition is an acquisition that
  relates to the making of a financial supply
  (other than a financial supply consisting of a
  borrowing)
• The nexus between an acquisition and the making
  of a financial supply (direct and indirect costs)

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GSTR 2003/9 Financial Acquisitions Threshold
(FAT) cont

• Timing of acquisition in relation to making the
  financial supply difficult issue!
• Looking at the entitys intention
• Intention may be evidenced through business plan,
  accounting budget, previous experience,
  correspondence with third parties or board
  resolution
• If entity subsequently changes intended or actual
  use of acquisition, it ceases/starts to be a
  financial acquisition for FAT purposes from that
  date no retrospective recalculations required

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GSTR 2003/9 Financial Acquisitions Threshold
(FAT) cont

• No consideration of reduced input tax credit
  entitlement when calculating FAT
• Acquisitions related to making GST-free input
  taxed supplies to be included in FAT calculations
• Consider GST group as one single entity (timing
  issues when new member leaves/joins group)
• Need to test the FAT every time BAS is completed

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GSTR 2003/11 Payment on Early Termination of a
Lease of Goods

• Although examines lease of goods termination
  payments, principles may have broad application
  to payments made on early termination of other
  types of agreements
• Main thrust of ruling is that there will be GST
  consequences of payments (unlike out-of-court
  settlements or damages payments) adjustment to
  earlier supply or new supply
• Early termination by agreement in accordance with
  original terms of lease

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GSTR 2003/11 Payment on Early Termination of a
Lease of Goods cont

• Early termination under a separate agreement
• Early termination pursuant to State or Territory
  consumer credit legislation
• Early termination following default by lessee
  only genuine damages (arising out of genuine
  default and dispute) considered not to be
  consideration for a supply
• Early termination following a casualty occurrence
• Detailed alternative views and examples

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GSTR 2003/16 Commercial Lease Incentives

• Monetary (e.g. fitout costs) and non-monetary
  (e.g. rent holiday) inducements provided by
  either landlord or tenant
• Inducements may be provided to or paid by an
  associate
• Where tenant agrees to carry out work on premises
  in addition to normal obligations of tenant,
  could be consideration for additional supply from
  landlord
• Where landlord provides lease incentive,
  consideration for supply of premises by landlord
  is not reduced by the incentive

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GSTR 2003/16 Commercial Lease Incentives cont

• Cash incentive from landlord tenant makes
  supply for consideration
• Fitout/plant incentives from landlord GST
  treatment largely dependant on who has ownership
  of fitout/plant
• Income guarantees unless lease agreement is
  specifically for this purpose, no separate supply
  by tenant to landlord

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GSTR 2003/16 Commercial Lease Incentives cont

• Landlord pays tenants rent under existing lease
  akin to cash incentive in that tenant is making
  supply to new landlord for consideration
• Landlord accepts the assignment of tenants
  existing lease contra supplies by landlord and
  tenant for assignment
• Rent-free or discounted period on new lease no
  separate supply by tenant

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GSTR 2003/16 Commercial Lease Incentives cont

• Rent-free or discounted period on existing lease
  separate supply by tenant as not condition of
  the existing lease
• Rent-free or discounted period in exchange for
  service (e.g. repairs) which benefits the
  landlord separate supply by tenant (unless
  part and parcel of the terms of the lease)
• Lease premiums part of consideration for
  premises or separate inducement for lease GST
  treatment same as underlying lease (landlord
  liable for GST)

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GSTR 2004/1 Reduced Credit Acquisitions

• Only relevant if FAT breached
• Explains each of the 31 items in Regulation 70 in
  detail and whether they are inclusive or
  exclusive
• Reduced input tax credit (75) available from
  time the intention to make a financial supply is
  formed
• Discussion regarding meaning of financial supply
  provider and financial supply facilitator

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GSTR 2003/D6 Assignment of Income Streams

• Ruling deals with supply of a right to an income
  stream from
• Loan portfolios
• Finance and operating leases
• Hire purchase agreements
• Residential/commercial property leases
• Royalty agreements and
• Credit card receivables
• Also deals with issues related to debt factoring
  and securitisation arrangements

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GSTR 2003/D6 Assignment of Income Streams cont

• Assignment of income stream (including all rights
  in the underlying asset which may be the subject
  of the receivables agreement) is a financial
  supply
• Assignor retains liability to remit GST on
  underlying supply
• Issuing invoices and tax invoices
• No bad debt adjustment available

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GSTR 2003/D6 Assignment of Income Streams cont

• Redirection of payments no provision,
  acquisition or disposal of an interest in a debt
• Novation creation or substitution of a new
  agreement between the original parties and a
  third party
• Securitisation arrangements (using a special
  purpose vehicle) are examined in detail

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GSTR 2004/D1 GST Implications of Using a Fuel
Card

• Where terms of contract are such, fuel card
  provider makes supply of fuel to card customer
  and makes acquisition of fuel from fuel merchant
  (tax invoices must flow accordingly)
• Monthly or annual fees, interest or late payment
  charges payable by the fuel card customer are
  financial supplies

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Sample of ATO Interpretive Decisions

• GST and supplies of meals funded under the Home
  and Community Care Act 1985 (ATO ID 2003/1038)
• GST and medical services supplied to a health
  service provider (ATO ID 2003/1157)
• GST and goods supplied after conclusion of
  GST-free other health service (ATO ID 2003/10)
• GST and transfer of annual leave, annual leave
  loading, flextime and sick leave entitlements
  (ATO ID 2004/362)

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Sample of ATO Interpretive Decisions cont

• GST and registration of a government body (ATO ID
  2003/1169) note DTF Proof of Identity
  requirement
• GST and government GST group members in different
  government portfolios (ATO ID 2004/227)
• GST and sale of land by the sheriff of a court
  (ATO ID 2004/315)
• GST and cancellation of a licence as a result of
  a government direction (ATO ID 2004/316)

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ATOs Register of Private Binding Rulings

• Can be useful ATO resource. Examples
• GST and removal of sewage because of leakage of
  sewer pipes (18069)
• GST and acceptance of waste at the transfer
  station (8567)
• GST and tipping of sewage sludge (11893)

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GST Risk Management Considerations

• DTFs Tax Compliance Framework
• Monitoring guidelines and staying abreast of
  technical changes
• How do you know what is happening in your
  organisation?
• Identifying/escalating risks
• Annual independent assurance review of taxation
  compliance and certification of compliance
• Systems and processing - periodic reasonableness
  testing

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GST Risk Management Considerations cont

• Maximising input tax credits and correctly
  classifying supplies
• ATOs cooperative compliance model tax risk
  forms large part and ATO looks at
• Business and transactions
• Globalisation
• Attitude
• Systems of compliance
• Perceptions of stakeholders
• Materiality
• Application of the law

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GST Risk Management Considerations cont

• Risk identification, classification and
  assignment core accountabilities, processes and
  existence of documentation and specialist advice
• Current impact and mitigation of assessment
  analysis of existing business processes, people
  and technology systems in place for GST
  accounting purposes
• Assessment of probability and impact
  cost/benefit analysis of various go-forward
  strategies/controls for addressing key tax risk
  areas
• Tax risk register blueprint to address all
  key risks identified, monitor risks and achieve a
  best practice

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ATO Audit Activity

• Current environment
• Computer assisted techniques
• Government departments and agencies are currently
  under ATO audit
• Key focus inputs, outputs, processes, coding,
  controls and preparation of the BAS

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GST Hotspots for Government Entities

• Appropriations and grants
• Division 81 fees
• Tripartite arrangements vs third party
  arrangements
• Property margin scheme
• Transitional GST-free contracts
• In-kind contributions
• Machinery of Government changes

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Questions