Tax Law.Study Guide Ch 8.Goods Services Tax PDF

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30 June 2019 Tax Law

Chapter 8 – Goods and services tax Objectives The aim of this chapter is to introduce students to the fundamental concepts of the goods and services tax (‘GST’) and how it operates in Australia.

CHAPTER 8 – Goods and services tax - OVERVIEW: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Introduction Relevant legislation Format of the Acts Policy reasons behind GST Comparison to PAYG reforms Terminology Taxable supplies GST-free supplies Input taxed supplies Creditable acquisitions Tax invoices Imports treatment Derivation and net amounts Conclusion Suggested solutions to the Review Activities

1.

INTRODUCTION

1.1

Overview of the operation of GST



Reading:  Text at paragraph 27-000 to 27-047 Basic features of the GST are that GST: n

Applies from 1 July 2000;

n

Applies at a flat rate of 10%;

n

Payable on taxable supplies and taxable importations;

n

Covers most goods, services or anything else supplied;

n

Is charged by GST registered entities carrying on an enterprise;

n

Designed to be ultimately paid by the private consumer rather than by GST registered enterprises (this is achieved via a credit system – known as ‘input tax credits’); 8–1

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Is a multi-stage tax charged at each stage of the supply chain;

n

Is effectively applied to the value added at each stage of the supply chain; and

n

Has a credit mechanism that eliminates tax cascading (tax on tax).

1.2

The effect of GST on sales transactions

Example 1: Business transactions: To illustrate how the GST can apply to business transactions, below is a standard transaction both before and after the start of GST. It displays how the GST generally does not ‘stick’ for business via the credit system. (a)

Prior to 1 July 2000 (Pre GST): A blanket manufacturer purchases wool from a sheep farmer for $100. After processing, the blanket manufacturer sells blankets for $200. Journal entries Wool expense (DR) Cash (CR) Cash

100 100

(DR) Blanket revenue (CR)

Profit and Loss Sales Less wool purchases Profit (value added) (b)

200 200 $200 ($100) $100

From 1 July 2000 (Post GST): A blanket manufacturer purchases wool from a GST registered sheep farmer for $110 (including GST). After processing, the blanket manufacturer sells blankets for $220 (including GST). Journal entries Purchases: Wool expense (DR) Input tax credit a/c (DR) Cash (CR)

100 10 110

Sales: Cash (DR) Blanket revenue (CR) GST liability a/c (CR) Profit and Loss Sales Less wool purchases

220 200 20 200 (100)

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Profit (value added)

100

Business activity statement (GST return) GST liability (on sales) Less input tax credits (on purchases) Net GST payable to ATO

20 (10) 10

Example 2: Final private (non-business) consumers To illustrate how GST ‘sticks’ in a private consumption situation, illustrated below is the situation when a private consumer buys a private item. (a) Prior to 1 July 2000 (Pre GST):  

Kerry purchases a blanket from the blanket manufacturer for $200 for home. It cost Kerry $200 to purchase the blanket.

(b) From 1 July 2000 (Post GST):  

Kerry purchases a blanket from the blanket manufacturer for $220 (including GST) for home. It cost Kerry the full $220, as she is not able to claim the GST back as an input tax credit (compared to the business taxpayer in Example 1(b)). The GST ‘sticks’, as it is ultimately designed to be borne by the private consumer.

2. RELEVANT LEGISLATION The GST formed a key part of tax reforms announced by the Federal Government in ‘Tax reform: Not a new tax, a new tax system’ (Peter Costello, Canberra 1998). A number of different Acts were required to implement the GST. This course will mainly be concerned with the following administrative Act: n

A New Tax System (Goods and Services Tax) Act 1999 – (the ‘GST Act’)

3. FORMAT OF THE ACTS Similar to the Income Tax Assessment Act 1997, the GST Act is drafted in a way that reflects the principle of moving from the general case to the particular. By understanding this drafting technique getting around the GST Act and the GST Transitional Act will be more logical.

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More specifically the GST Act is organised as follows: n

Chapters are divided into Parts; Parts are divided into Divisions;

n

n

Divisions are divided into Subdivisions; n

Subdivisions are divided into sections; n

Sections are divided into subsections; and n

Subsections are divided into paragraphs. Subsections Sections Subdivisions Divisions

Parts Chapters

Subsections Sections

Subdivisions Divisions

Parts

Defined terms in the Acts are identified by an * asterisk appearing at the start of the term (for example, s 7-1 uses the term *taxable supplies). The dictionary at the end of the Act either details the precise definition, or it refers the reader to the relevant provision. The dictionary is located in s 195-1.

! Note s 3-5(3) of the GST Act details a list of common basic terms used throughout the GST Act that are actually defined in the GST Act though not identified with asterisk. These common terms include the terms ‘entity’, ‘acquisition’, ‘supply’ and ‘goods’.

4. POLICY REASONS BEHIND GST The GST is similar to various ‘value added taxes’ implemented in numerous countries around the world. The GST is seen as a ‘good tax design’ as: n

It applies to a broad base of transactions;

n

It only has a limited number of exemptions; and

n

It is economically efficient as it has one flat rate.

This is compared to wholesale sales tax (which ended with the introduction of GST), which was seen as problematic as: n n

It only raised a limited amount of revenue; The arbitrary range of levels of wholesales tax levels was seen to create potential distortions in production and consumption decisions in favour of low or untaxed goods; 8–4

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n

n

It was seen as penalising exports, as it could be embedded into the price of the exported goods (in that, if an export company purchased a computer that was subject to wholesales tax – that extra cost of the computer would be factored into the costing of the exported good); It was seen as a tax on business, as more than half of the sales tax revenue was raised on goods used as inputs to one type of business or another; and The base that the wholesale sales tax applied to was seen as limited, and actually shrinking, since wholesale tax only applied to goods, whereas services account for approximately two-thirds of Australia’s gross domestic product (‘GDP’).

However, the GST is seen as regressive, as the GST applies at the same rate regardless of a consumer’s ability to pay it. The government has attempted to lock in the rate at 10%, as no alteration to the rate can be made without approval by each State and Territory as well as both Houses of Federal Parliament.

5. COMPARISON TO OTHER CONTEMPORARY REFORMS 5.1

Pay As You Go (PAYG) collections

Another part of tax reform that began on 1 July 2000 is the Pay As You Go (‘PAYG’) system. This is not part of the GST, instead PAYG relates to collection of income tax. This section is included as background. Previously, there were several systems for income tax collection, including:



Employees had Pay As You Earn (‘PAYE’) tax withheld from their wages, and their employers paid it to the ATO on a regular basis.



Self-employed people and investors paid Provisional Tax, which was paid either quarterly or annually.



Sub-contractors in certain ‘prescribed’ industries (e.g. cleaners, carpenters, and electricians) had (usually) 20% tax withheld by their payers, in the system called Prescribed Payments System (‘PPS’).



Companies paid their taxes by instalments in the year following the year of income.



People in the clothing industry had their own system for income tax collection called the Reportable Payments System (‘RPS’).

The PAYG system replaced all of the above income tax collection systems. In fact, it replaced 11 systems. A significant change was that under PAYG, income tax instalments are based on an entity’s current income conditions and are paid after the income is earned. Under the prior systems, this was true mainly for PAYE earners only.

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Companies pay a regular amount based on their ‘instalment rate’ multiplied by the instalment income. Regular payments of income tax are paid by either 

Payers withholding at time of payment; or



The taxpayer paying tax during the year in PAYG instalments.

Nothing changed for employees. Their employers continued to withhold tax for them on a regular basis. As for contractors, if they do not quote their ABN to their payer, then the payer is obliged to withhold tax at highest marginal tax rate plus medicare. If a subcontractor wishes to, they can enter into a Voluntary Agreement with a payer as long as they have an ABN. The payer will treat them in a similar way to an employee, by making regular withholdings of income tax on behalf of the subcontractor. The payment would not be subject to GST.

5.2

Activity statements

A form called the Business Activity Statement (‘ BAS’) is used to report an entity’s GST, their PAYG (income tax payments) and any fringe benefits tax (‘FBT’). If applicable, wine equalisation tax (‘WET’) and luxury car tax (‘LCT) are also reported on a BAS. Since the introduction of fuel tax credits (‘FTC’) on 1 July 2006, a FTC is also reported and claimed through a BAS. Note that business taxpayers must be registered for GST in order to claim a FTC, and that the reporting period is aligned with their GST reporting period. Note that taxpayers who are not required to register for GST, but still have PAYG and/or FBT obligations use an Instalment Activity Statement (‘ IAS’) instead. Typically these taxpayers would be individuals or trustees with investment income from rent, dividends and/or interest.

5.3

Australian business number

A number which is crucial to both the GST and PAYG regimes is the Australian Business Number (‘ABN’). To get an ABN an entity needs to be carrying on an enterprise. Therefore, employees cannot get an ABN, nor can people who have mere hobbies. For companies, their ABN is their Australian Company Number (‘ ACN’) with two extra digits at the start. A company’s ACN is issued by the Australian Securities and Investments Commission (‘ASIC’). It is planned the ABN will eventually supersede the ACN and companies will only need one number, the ABN. However, currently companies can use their ABN with 8–6

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their company's name in place of the ACN on company documents and negotiable instruments if certain conditions are met.

6. TERMINOLOGY Term Taxable supply Division 9 (s 9-5 for elements)

Taxable importation Division 13

Creditable acquisition

Explanation Where goods and services are taxable supplies:

 

The supplier is liable to pay GST: s 9-40 However, the supplier is able to claim credits for the GST included in the price of things acquired to make the taxable supplies if they have made a creditable acquisition: s 11-20

An importer has a GST liability when it does a taxable importation, which occurs when goods are imported and they are entered for home custom (within the meaning of the Customs Act 1901), unless it is non-taxable importation. Entitlement to a GST input tax credit arises when a creditable acquisition (‘acquisition’ defined in s 11-10) occurs. A creditable acquisition arises under s 11-5 when: you acquire anything (solely or partly) for a *creditable purpose (s 11-15);  the supply of the thing to you is a *taxable supply (s 9-5);  you provide (or liable) consideration for the supply (s 9-15),  you are GST registered (Div 23).

 Division 11

Input tax credit Section 11-20

GST-free supply Division 38

Input taxed supply Division 40

This is the credit an enterprise gets for the GST included in its acquisitions. (‘enterprise’ is defined in s 9-20)

Where goods and services are GST-free supplies s 38-1:

 

The supplier is not liable to pay GST; and The supplier is able to claim credits for the GST included in the price of things acquired to make the supplies.

Where goods and services are input taxed supplies under s 40-1:



The supplier is not liable to pay GST.



The supplier is not able to claim credits for the GST included in the price of things acquired to make the supplies.

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Term

Explanation

Tax periods

The concept ‘tax periods’ is outlined in Division 27 of the GST Act. Tax periods are generally the time periods that GST registered entities have to look at to determine their net amount of GST. Division 27 of the GST Act provides that generally tax periods may be either:  monthly (if you elect under s 27-10); or  quarterly (i.e. July to September, October to December, January to March, & April to June) – general rule: s 27-5 If an entity’s GST turnover exceeds $20 million, the entity must lodge monthly GST returns: s 27-15

Cash method Section 29-5(2)

Non-cash method Section 29-5(1)

If an entity uses the cash method to attribute its GST liability, then the GST payable on a taxable supply that the entity has made is attributed to the *tax period where:



all of the consideration is received for the taxable supply; OR



part of the consideration is received for a taxable supply, BUT only to the extent that the consideration is received in that tax period.

If instead an entity uses the non-cash method to attribute its GST liability, then the GST payable on a taxable supply that the entity has made is attributed to the *tax period in which the earlier of either of the following occurs:

 

any of the consideration is received for the supply; OR an invoice is issued relating to the supply.

Value

Is the GST exclusive amount that you receive for making a taxable supply (e.g. $10).

Section 9-75

The ‘value’ is equivalent to 10/11th of the GST inclusive ‘price’ paid for the taxable supply.

Price Section 9-75

Is the GST inclusive amount you make a taxable supply for (e.g. $11) Price = Value + (Value * 10%)

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 Review Activity 8-1: Go to section 195-1 of the GST Act, and go through some of the key defined terms.

6.1

Price

‘Price’ - - is the GST inclusive amount you make a taxable supply for (i.e. $11) 1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

1

GST ‘Value’ – is the GST exclusive amount (i.e. $10) Price = Value + (Value * 10%)

10% of value (i.e.- $1)

A GST registered enterprise that makes a taxable supply is liable to pay GST in respect of that taxable supply. The GST liability is 1/11th of the GST inclusive ‘price’ paid for the taxable supply (that is, 1/11th of $11). Example 3: Bertha purchased a farm tractor for the ‘price’ of $330,000 on 8 February. n

The GST component of the purchase price is: 1/11 x $330,000 = $30,000.

n

The price of the supply is $330,000

n

The value of the supply is $300,000

! Note The GST Act is drafted on the assumption that the supplier has taken into account the supplier’s liability for GST (if any) in agreeing to a sale price. It is important for businesses to realise that the GST Act does not give them a statutory right to recover GST from their customers. There is no provision under the GST Act providing the power to increase the price to take into account the GST liability of a taxable supply. Instead any right for recovery must be included in the agreement reached between the relevant parties. Also, it is important to realise it is the supplier (NOT the purchaser) who has the liability for GST on any taxable supplies

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7. TAXABLE SUPPLIES



Reading:  Text at paragraphs 27-055 and 27-075  Division 9 of the GST Act. Where goods and services are taxable supplies: n n

The supplier is liable to pay GST (under s 9-40). However, the supplier is able to claim credits for the GST included in the price of things acquired to make the taxable supplies if they have made a creditable acquisition.

The principle above will remain the same no matter how many links there are in the supply chain. The example below demonstrates the ‘value added’ nature of the GST.

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Example 4: Normal taxable supply GST registered Sheep Farmer



GST registered Wool Manufacturer



GST registered Blanket Manufacturer



Private Consumer

Sells raw wool to Wool Manufacture r for $110

Sells processed wool to Blanket Manufacturer for $220

Sells blanket to private consumer for $330

Paid $330 including $30 GST

owes $10 GST

$10 credit of GST for acquisition

$20 credit of GST for acquisition

No amount claimable

$10

+

owes $20 GST for supply

$10

+

owes $30 GST for supply

$10

=

$30 total GST collected by AT0

Australian Taxation Office (‘ATO’) – Net GST collected As per section 9-5, for a ‘taxable supply’ to exist (and therefore a liability for GST) the following elements must exist: n n n n

n n

there must be a supply; the supply must be for consideration; the supplier must be registered for GST the supply must be made in connection with an enterprise carried on by the supplier; the supply must be connected with indirect tax zone; and the supply must not be GST Free or Input taxed.

SCREAN is a memory tool to help you remember the elements of taxable supply. s 9-10 Supply, s 9-15 for Consideration, s 23-5 by a Registered entity or an entity required to be registered, s 9-20 carrying on an Enterprise, s 9-25 in connection with Australia (ie with indirect tax zone), s 9-30 that is Not a GST-free or input taxed supply

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7.1 Supply



Reading:  Text at paragraphs 27-056 to 27-057  Section 9-10 of the GST Act.  F...