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Department of Treasury and FinanceGST UPDATE
Darren Baxter Manager Indirect Tax
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Introduction

• Session Two - 13 July 2001
• 2.00pm 2.55pm GST Rulings, Bulletins,
  Determinations and Legislation
• 2.55pm 3.05am Afternoon tea
• 3.05pm 4.00pm ACCC and CPI issues
• 4.00pm 4.15pm Questions

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GST Session Content

• Since 1 January 2001
• 5 GST Rulings
• 5 GST Draft Rulings
• 3 GST Determinations
• 2 GST Bulletins
• Royal Assent to an 1 Amendment Bill
• Commencement of ATO Compliance Activity

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GST Rulings
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GSTR 2001/1 - Supplies that are GST-free for
tertiary education courses

• Key changes made to GSTR 2000/D21
• A course provided under contract which is not
  available to resident students is not an
  approved tertiary course
• supply of a single unit of a tertiary course
  GST-free with no requirement for formal
  assessment but the student must be enrolled
• Where the course has a combination of accredited
  and non-accredited units - apportion for GST on a
  reasonable basis e.g. time

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GSTR 2001/1 - Supplies that are GST-free for
tertiary education courses

• Key changes (continued)
• supply of accommodation to a student undertaking
  a tertiary course is not GST-free
• supply of accommodation to students in connection
  with an education institution that is not a
  school is a supply of non-commercial residential
  accommodation
• establishing market value of supplies to which
  Subdivision 38-G applies in relation to tertiary
  student accommodation and food

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GSTR 2001/2 - Foreign exchange conversions

• Major changes to GSTR 2000/D15
• Establishes the method for foreign currencies to
  be converted into Australian currency for GST
  purposes.
• Does not apply to taxable importations
• Conversion calculation rate
• Foreign currency x 1/the exchange rate on
  conversion day

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GSTR 2001/2 - Foreign exchange conversions

• Exchange Rate Consistent application
• RBA Rate
• foreign exchange organisation rate
• agreed rate
• (No nominated rate - requirements adjusted
  since draft Ruling)
• Conversion date accruals, cash,
  periodic/progressive

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GSTR 2001/2 - Foreign exchange conversions

• Additional requirement for tax invoices and
  adjustment notes
• GST payable in Australian currency or
• A method of working out the conversion rate
• Input tax credit claim - Australian currency or
  method which is consistent
• Adjustments - original conversion day

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GSTR 2001/3 - GST and how it applies to supplies
of fringe benefits

• Previously released as GSTR 2000/D17
• GST implications on supplies made to employees or
  their associates as fringe benefits or exempt
  benefits
• Taxable supplies - GST liability
• GST-free and input taxed supplies - no GST
  liability
• Salary sacrifice - no consideration for the
  supply of a benefit

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TR 2001/2 Operation of the new FBT gross-up
formula

• Previously released as TR 2000/D8
• Classifies fringe benefits into Type 1 and Type 2
• What is a GST creditable benefit?
• Sets out a variety of sample FBT calculations

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GSTR 2001/3 - GST and how it applies to supplies
of fringe benefits

• Input taxed suppliers need to classify the
  benefits
• Operation of Division 71
• Remuneration benefits - provided in return for
  employee services - creditable
• Work benefits - provided to benefit employers
  enterprise and non-creditable

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GSTR 2001/3 - GST and how it applies to supplies
of fringe benefits

• Division 111 - determines an employers
  entitlement to an input tax credit for
  reimbursements made to employees.
• Division 69 - limits input tax credits for
  certain acquisitions and importations to the
  extent that they would be denied under certain
  provisions in ITAA 97.

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GSTR 2001/4 - GST consequences of settlements

• Replaces GSTR 2000/D23
• GST consequences arising from court orders and
  out-of-court settlements
• Depending on the type of supply and a direct
  linking of consideration for that supply, a GST
  liability may arise

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GSTR 2001/4 - GST consequences of settlements

• Supplies relating to out-of-court settlements
• earlier supply - dispute relating to earlier
  transaction
• current supply - new supply created by the terms
  of the settlement
• discontinuance of action - surrendering or
  refraining from further legal action, releasing a
  party from obligations

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GSTR 2001/4 - GST consequences of settlements

• Disputes resolved by a court order - not a supply
  by the court for GST purposes and confirmed by
  case law
• There is no discontinuance supply under a court
  order
• Where an earlier supply has been made and the
  order alters the consideration received there may
  be an adjustment event

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GSTR 2001/4 - GST consequences of settlements

• Damages not a taxable supply
• Apportionment between supplies
• GST attribution to the period of payment
• Transitional Issues when was the earlier supply
  made

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GSTR 2001/5 Going Concerns GST-free

• Has the supplier supplied everything necessary
• Critical factors
• Premises
• Employees
• Goodwill
• Forward contracts
• Licences and permits

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GSTR 2001/5 - When is a supply of a going
concern GST-free

• Considered from the perspective of the supplier
• Supply of going concern - s 38-325(1) and (2)(a)
  and (b)
• An arrangement between a supplier and a
  recipient is characterised by considering all of
  the transactions entered into and the
  circumstances surrounding the transactions rather
  than merely the description which the parties
  give the arrangement.
• Are you supplying to an entity that is not
  entitled to an input tax credit?

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GSTR 2001/5 - When is a supply of a going
concern GST-free

• Review the nature of the supply and whether or
  not it is an enterprise
• fully tenanted building
• enterprise within an enterprise
• an asset which is not an enterprise in its own
  right

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GSTR 2001/5 - When is a supply of a going
concern GST-free

• The supplier must supply all the things necessary
  for the continued operation of an enterprise
• the assets necessary for the continued operation
  of the enterprise and
• the operating structure and process of the
  enterprise
• The enterprise supplied needs to be operating,
  not merely being carried on.

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GST Draft Rulings
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GSTR 2001/D1 - Projected annual turnover

• The application of the GST Act and the
  requirement to Register will depend on an
  entities
• current annual turnover and
• projected annual turnover
• In order to determine whether your annual
  turnover meets or exceeds the turnover threshold,
  it is necessary to calculate both your current
  annual turnover and your projected annual
  turnover

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GSTR 2001/D1 - Projected annual turnover

• Key terms analysed such as likely to make,
  likely to be made, in connection with,
  capital asset, solely as a consequence of and
  connected with Australia

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GSTR 2001/D1 - Projected annual turnover

• Under s188-25 supplies should be disregarded
  when
• The supplies made transfer of the ownership of
  the entitys capital assets and
• The supplies made are solely as a consequence of
  ceasing to carry on an enterprise or
  substantially and permanently reducing the size
  or scale of an enterprise
• Isolated transactions will not be included where
  they are not an adventure in the nature of trade.

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GSTR 2001/D3 - New residential property

• Vacant land cannot be characterised as
  residential premises
• Residential premises are new residential
  premises if they
• have not previously been sold as residential
  property 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 2001/D3 - New residential property

• Exclusions from new residential property
• new residential property that were used for
  residential accommodation before 2 December 1998
• sales of rented houses
• Important that will apply from 1 July 2000

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GSTR 2001/D4 - Apportioning the consideration for
a supply

• When a supply is made that includes both taxable
  and non-taxable parts, you need to determine
  whether the supply is a mixed or a composite
  supply.
• Mixed supply - separately identifiable taxable
  and non-taxable parts
• Composite supply - only one identifiable part and
  includes something which is integral, ancillary
  or incidental to that part.

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GSTR 2001/D4 - Apportioning the consideration for
a supply

• If the parts of the supply are separately
  identifiable - mixed supply and an apportionment
  of GST is required on a reasonable basis
• If the parts merely form part of the supply,
  because they are integral, ancillary or
  incidental - composite supply
• Determine whether insignificant in value or
  function?

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GSTR 2001/D5 - Non-monetary consideration

• Issued 29 June 2001
• Very important ruling which explains the ATO
  treatment of barter, part exchange and payment
  in-kind transaction
• The ruling does not cover trade exchange
  transactions (query ability of government to
  enter anyway)

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GSTR 2001/D5 - Background

• Consideration includes
• Any payment, or any act or forbearance, in
  connection with a supply of anything and
• Any payment, or any act or forbearance, in
  response to or for the inducement of a supply of
  anything.
• payment is not restricted to payments of money

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Value of a Taxable Supply

• If you receive non-monetary consideration for a
  supply, the price includes the GST inclusive
  market value of that consideration
• Price amount of monetary consideration PLUS GST
  inclusive market value of non-monetary
  consideration

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Identifying non-monetary consideration

• What is consideration?
• A payment will be consideration for a supply if
  the payment is made in connection with, in
  response to or for the inducement of a supply
  

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Identifying non-monetary consideration (cont.)

• For a payment to be consideration for a supply,
  it must have economic value or be a benefit
  provided as compensation for the making of the
  supply
• Non-monetary consideration must have a clearly
  independent identity
• Exchange of rights and obligations are not
  separate consideration

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Identifying non-monetary consideration (cont.)

• Terms under which a transaction is conducted must
  go beyond merely defining and describing the
  supply, or specifying rights that are to be
  retained by the entity making the supply, before
  there is a separate supply or separate
  consideration
• The recipient of a supply may provide or make a
  thing available for the supplier however this
  does not necessarily form consideration
• Example 8 page 19

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Identifying non-monetary consideration (cont.)

• Goods traded-in for new goods will generally be
  part of the consideration for the new goods
• Example 9 page 20
• Traded-in goods
• Example 10 page 20
• No economic value to either party

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Identifying non-monetary consideration (cont.)

• Must examine character of transaction
• The existence of an obligation will not always be
  consideration
• Example 11 page 21
• Dependent services
• Example 12 page 21-22
• Dependent goods

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Identifying non-monetary consideration (cont.)

• The form of arrangement is not determinative of
  what is consideration for a supply
• The presence of a binding contractual obligation
  is not necessary to establish that a payment is
  non-monetary consideration for a supply. However,
  its existence is important in establishing nexus
  between the payment and the supply

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Is non-monetary consideration itself a supply for
consideration

• A thing that forms non-monetary consideration is
  itself a supply made for consideration
• Example 18 page 26
• Consideration is itself a supply for
  consideration

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Apportionment of non-monetary consideration

• Transactions involving money
• Supply made for consideration consisting of an
  in-kind payment and an amount of money
• Provision of the in-kind payment is itself a
  supply for consideration
• Need to apportion
• Transactions involving no money
• Apportionment may be required where single
  in-kind payment is provided as consideration for
  a supply consisting of more than one identifiable
  part which is GST-free, input taxed or non-taxable

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Valuation of non-monetary consideration

• GST inclusive market value of that consideration
  is used to work out the price and value of the
  supply
• Determined objectively
• Apply method that produces a reasonable
  reflection of the market value of the
  consideration
• Whether reference should be made to a general
  market or a particular market will depend on the
  context or circumstances of each transaction?

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Valuation of non-monetary consideration (cont.)

• Arms length transactions
• Goods, services or things exchanged in a
  transaction can reasonably be treated as equal in
  value in most cases
• Reasonable methods
• The market value of an identical good, service or
  thing
• The market value of a similar good, service or
  thing
• The market value of the supply
• A professional appraisal
• Other reasonable methods

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Time when GST inclusive market value is determined

• Time must be reasonable in the circumstances of
  the particular transaction
• For example
• Time when parties enter into binding agreement
• Time when economic risk is transferred
• Time when recipient assumes effective control

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Attribution Rules

• What amounts to an invoice i.e. an agreement
  providing for consideration to be paid in kind
  may be an invoice which may in turn trigger
  attribution?
• When is consideration received or provided?
• Goods earlier of passing of title or physical
  possession
• Services when provision of services has
  commenced (even where it results in a product)
• Periodic and progressive supplies

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GST Bulletins
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GSTB 2001/1 - Pulses supplied as food for human
consumption

• Pulses - hard, dried, edible seeds of leguminous
  plants such as field peas, lentils, chickpeas,
  soy beans, mung beans and faba peas.
• Machine dressed pulses - process or treated to
  alter their form - GST
• Farm dressed pulses - not processed or treated to
  alter their form - no GST

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GSTB 2001/2 - Accommodation in caravan parks and
camping grounds

• Commercial residential premises
• Short term stays
• lt27 days and 10 GST
• Long term stays - 28 days or more
• choice of how GST is applied if gt70 of activity
• Input taxed or GST on 50 of the GST inclusive
  price

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GST Determinations
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GSTD 2001/1 - Child care benefits and Family Day
Care Scheme levies

• Child care services provided by a registered
  carer or approved child care service - GST-free
• Administration levies charged by a family day
  care scheme which are directly in relation to a
  supply of GST-free child care - GST-free
• Apportion where not related to GST-free child
  care services

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GSTD 2001/2 - Sale of goods by a lessor on expiry
of lease agreement

• The sale of the goods is a separate supply to the
  supply of the lease of the goods per GSTD 200/D6
• Transitional Rules - lease may be GST-free and
  may need to apportion
• Sales proceeds on taxable supply
• less than the residual value - increasing
  adjustment
• exceed the residual value - decreasing adjustment

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GST Determination Taxes, Fees and Charges

• The A New Tax System (Goods and Services
  Tax)(Exempt Taxes, Fees and Charges)
  Determination 2001
• Gazetted on 20 June 2001
• Updated regarding new Victorian Legislation
• Our advice is that there are very few changes
  from (No.3)
• Check that any new fees are included

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Legislative Amendments
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Taxation Laws Amendment Act (No.3) 2001 (TLAA)

• Royal Assent granted on 30 June 2001
• Amendments to GST Legislation include
• allowance of full input tax credits after 23 May
  2001 on new motor vehicles
• benchmark interest rate - has fallen from 8 to 7
  percentage points.

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TLAA

• Those using substituted account periods now have
  a choice of quarterly or monthly
• Able to defer quarterly GST lodgment dates and
  payments to 28th of proceeding month (I.e. 28
  October, 28 February, 28 April and 28 July)
• Where BAS due on a weekend or public holiday may
  lodge the day after

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The Future
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ATOs approach

• To date
• visited approximately 20,000 taxpayers
• average visits 2-3 hours
• underpayments 500m
• overpayments (ie unclaimed ITCs) 350m
• Source Barrie Russell - ATO Head of GST
  compliance A-TAX Conference 22-24 April 2001

PricewaterhouseCoopers
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ATOs approach (contd)

• Cooperative Compliance Model (CCM)

Active enforcement
Assisted self-regulation
Self-regulation and cooperation
PricewaterhouseCoopers
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GST audit issues

• BAS integrity
• BAS preparation methodology
• GST procedures manual
• adequately trained staff
• reviews undertaken
• transaction analysis

PricewaterhouseCoopers
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Audit Triggers

• errors, variances and comparisons in BAS
  information
•     information from stakeholders, suppliers and
  customers
•    investigation of industry sectors by the ATO
  and other government departments
•     audits of suppliers and customers
•     tax compliance history
•     routine compliance profiling, including
  substantial refunds.

PricewaterhouseCoopers
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GST review issues

• Poor audit trails
• source documentation, GL entries, systems
  generated reports, BAS entries

PricewaterhouseCoopers
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GST review issues

• BAS often completed incorrectly
• gt Interest income not included in G1 and G4
• gt Interest expense not included in G11 and G14
• gt Contra/barter arrangements ignored
• gt Non-deductible expenses not included in G11
  and G15

PricewaterhouseCoopers
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GST review issues

• Contracts with GST
• GST not considered or a last minute thought
• CPI changes
• issues with contracts - rent, services etc
• grandfathered supplies

PricewaterhouseCoopers
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GST review issues

• GST and FBT
• confusion over interaction
• incorrect treatment of non-deductible expenses
• reimbursement of staff expenses

PricewaterhouseCoopers
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GST review issues

• Cross Border Transactions
• Reverse Charge rules
• PE issues
• Exported services
• Adjustment events

PricewaterhouseCoopers
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GST review issues

• Agency arrangements
• Controls issues
• controls absent/lacking over production/reconcilia
  tion of BAS

PricewaterhouseCoopers
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Further Rulings and Legislation

• Hundreds of amendments to the Acts are expected
  to be released post-election
• Possible change in Federal Government and roll
  back in particular areas
• Rulings finalised or draft e.g. Vouchers, Exports
• Need to allocate resources to deal with
  these issues in the next twelve months

PricewaterhouseCoopers
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Questions
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ACCC and CPI Issues

• Andrew Bryant
• Senior Manager
• Indirect Tax

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CPI RELATED INCREASES ATTRIBUTABLE TO GST -
OUTLINE

• Background
• Contract review clauses
• GST spike in the September 2000 CPI
• ACCC view Guidelines on Price Exploitation
• Options for Departments as Purchaser/Supplier
• Remove the GST spike in reviewing contracts
• Keep the spike and adjust using the full CPI
  figure
• Employ the Victorian Government Purchasing Board
  capped CPI figure of 2.75 as a negotiating tool

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BACKGROUND

• One-off effect of the GST during FY 2000/01
• General price increases reflected in CPI have
  been greater due to the introduction of GST
• Summary of Current Position re discounted CPI
• 1. ABS figures 2.0 or (considerable
  reservation)
• 1.4 (implausible)
• 2. Econtech/BCTR figure of 3.0 underlying CPI
• 3. Third Party calculation
• ACCC view reference to GST-inflated CPI may
  increase net dollar margins

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CONTRACT REVIEW CLAUSES

• Regular aspect of departmental dealings
• Provision for price reviews, indexed to CPI
• Unified approach across government departments
  required
• If in doubt, contract managers should be
  consulted for the details of arrangements

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GST SPIKE IN SEPTEMBER 2000 CPI

• Full figure released by the ABS 3.7 - Sept
  qtr.
• ABS never committed to a definite figure for the
  NTS impact on the full figure
• BCTR commissioned Econtech series of price
  adjusters
• Average NTS impact on the September 2000 CPI, was
  3.0, resulting in underlying inflation rate of
  0.7

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Adjustment of the CPI for the effects of indirect
tax reform
these figures will be released shortly after
the ABS release of official CPI data for each
quarter.

•  

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ACCC View Guidelines

• Never wished to commit to an underlying inflation
  figure
• No reference to Econtech/BCTR figures in
  bulletins or other ACCC publications
• Indirect endorsement was obtained in early 2001
• Onus is on business to justify their figures and
  whether they use the underlying CPI, or the full
  CPI in negotiations
• Guidelines require a constant net dollar
  margin.
• Does using the full CPI amount to double
  dipping?

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IMPLICATIONS FOR DEPARTMENTS AS PURCHASER /
SUPPLIER

• Remove the estimated GST impact on CPI and apply
  the underlying rate of inflation in adjusting
  prices to account for CPI increases
• Ensure Departments are not unnecessarily subject
  to increased costs from the introduction of the
  GST
• Price exploitation may occur - if the indexed
  contract price is not correctly adjusted to
  remove the GST impact (spike).
• Refer to VGPB cap on any CPI increase 2.75
• Departments should document their methodology

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PASSING THROUGH A DISCOUNTED CPI FIGURE

• e.g. Rent Review for a commercial lease (full CPI
  5.9, 2.6 spike)

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IMPLICATIONS FOR DEPARTMENTS AS PURCHASER /
SUPPLIER

• 2. Include the estimated GST impact on CPI and
  apply the full rate of inflation in adjusting
  prices to account for CPI increases
• Approach adopted by Commonwealth Departments
  immune from ACCC scrutiny application of the
  Trade Practices Act (e.g. Treasurys position on
  Excise increases)
• Contracts entered into with knowledge of GST
  (last couple of years)
• Justification and supporting documentation will
  be critical

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IMPLICATIONS FOR DEPARTMENTS AS PURCHASER /
SUPPLIER

• 3. Employ the Victorian Government Purchasing
  Board capped CPI figure of 2.75 as a negotiating
  tool
• Recommended clauses place a cap on any CPI
  increase
• Increase in the contract price should be the CPI
  figure or, if the CPI is greater than 2.75, the
  increase shall be limited to 2.75
• VGPB clauses provide guidance to contract
  managers in dealing with suppliers on this issue
• Each department to document its methodology to
  respond to any ACCC queries regarding the means
  by which the contracts were adjusted for CPI.

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CONCLUSIONS

• For every CPI-related price adjustment,
  Departments must determine a consistent approach
  to negotiations
• Monitoring required only for an adjustment which
  includes a September 2000 figure
• This applies to Departments agencies as both
  suppliers and purchasers

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FURTHER ACCC ISSUES

• 1 July 2001 NTS changes
• Removal of Financial Institutions Duty (FID)
• Abolition of Stamp Duty on Transferable
  Securities
• FULL GST input tax credits on motor vehicles
• Petrol pricing inquiry fuel price variability
• GST inclusive pricing displays
• GST free status of goods in grocery sector

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Questions
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