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Tutorial Solutions – Chapter 7

Foundations of Taxation Law 2019

CHAPTER 7 GOODS AND SERVICES TAX SOLUTIONS TO STUDY QUESTIONS

QUESTION 1* GST and Sales Tax While GST and sales tax are both indirect taxes, they differ in many crucial respects. Sales tax was a narrow-based tax that was payable in respect of the sale and importation of certain goods. It was a ‘single level tax’ that was levied at the point of wholesale sale or importation of the goods. The rates of sales tax varied depending on the nature of the goods. Most goods were taxed at the general rate of 22%. Other goods were taxed at special rates (eg 12% or 32%). The sales tax regime also contained a large number of exemptions. Unlike sales tax, GST is a ‘multi-level tax’ that is generally payable at each stage of the supply chain. To prevent GST having a ‘cascading effect’ and to ensure that GST operates as a ‘neutral’ tax in relation to dealings between registered entities (ie most ‘business to business’ transactions), registered entities are generally entitled to recoup the cost of the GST that they have been charged. This recoupment is achieved by virtue of the ‘input tax credit’ mechanism, which allows registered entities to claim input tax credits for GST charged on things they acquire or import for the purposes of their ‘enterprise’. No input tax credits are available to unregistered entities, such as final consumers, who therefore bear the ultimate economic cost of GST. Political Background GST was introduced on 1 July 2000. The introduction of GST in Australia was an extremely controversial issue that involved many political ‘twists and turns’ along the way. The concept of a GST was first seriously proposed during the 1985 Tax Summit by the then Labor Treasurer, Paul Keating. However, the idea was ultimately rejected by the Prime Minister, Bob Hawke, who caved-in to pressure from a number of lobby groups, including the trade union movement, who opposed GST. In the 1993 Federal election, John Hewson, who had become the Liberal-National Coalition leader, resurrected the GST issue by making it the cornerstone of his highly publicised ‘Fightback’ election package. Paul Keating, who had succeeded Bob Hawke as Labor leader, however, ended up winning this election in what many considered to be a surprising outcome. Ironically, Keating’s campaign victory was 1|Page

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largely attributable to his vigorous opposition against the GST, which he had himself proposed in 1985. The Coalition’s 1993 election defeat led John Howard, who became Coalition leader in 1995, to vow that the Coalition would not introduce GST if it won the 1996 election. As it turned out, the Coalition ended up winning this election and kept its promise in relation to GST. However, by the time of the next election in 1998, the Coalition again proposed to introduce GST. Although the Coalition narrowly won this election, it did not have a majority in the Senate, and it was, therefore, always going to be difficult for it to enact GST legislation. Nevertheless, after significant political maneuvering, it eventually succeeded in passing a package of GST Bills through Parliament after gaining the support of the Democrats in the Upper House. The Coalition had always intended to implement a broad-based GST with very few exceptions. However, to obtain the Democrats’ support, the Coalition was forced to make a number of political compromises, including making certain food ‘GST-free’. As a result of these compromises, Australia’s GST system is not as broad-based as, for example, New Zealand’s GST system. International Background It is not surprising that Australia decided to replace its sales tax regime with a GST regime given that all OECD countries (other than the United States) already imposed GST or VAT (or similar tax). The rate of GST/VAT in other countries is generally higher than the rate of GST in Australia. Foundations of Taxation Law 2019 ¶7.2

QUESTION 2 A number of different Acts make up the GST legislative scheme. The main GST statute is A New Tax System (Goods and Services Tax) Act 1999 (GSTA). This Act determines an entity’s liability to GST and its entitlement to input tax credits. The GSTA operates in conjunction with regulations contained in the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regs). GST is imposed under the following Acts:  A New Tax System (Goods and Services Tax Imposition — General) Act 1999 — this Act is the main imposition Act and imposes GST in so far as it is neither a customs or excise duty  A New Tax System (Goods and Services Tax Imposition — Customs) Act 1999 — this Act imposes GST in so far as it is a customs duty, and  A New Tax System (Goods and Services Tax Imposition — Excise) Act 1999 — this 2|Page

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Act imposes GST in so far as it is an excise duty. Foundations of Taxation Law 2019 ¶7.3

QUESTION 3* GST is a multi-level transaction-based tax imposed at a flat rate of 10% on ‘taxable supplies’ made by registered entities and on ‘taxable importations’. Registered entities are entitled to input tax credits for ‘creditable acquisitions’ and ‘creditable importations’. Input tax credits are not available for GST charged on things acquired or imported by entities that are not registered for GST. As a result, the ultimate incidence of the tax is borne by the consumer or end-user. Displayed prices (and quotes) for taxable items should include any GST payable. Taxpayers whose annual turnover exceeds the threshold ($75,000 for business; $150,000 for a non-profit body) are required to be registered for GST. For those under the threshold, registration is optional. Registered taxpayers need to maintain supporting documentation in the form of a prescribed tax invoice for each individual taxable supply and they must also submit GST returns (activity statements) to the ATO with their GST payment or GST refund claim. Registered entities (and entities required to be registered) only charge GST on their ‘taxable supplies’. They do not charge GST on their ‘GST-free supplies’ or their ‘input taxed supplies’. A supply is ‘GST-free’ if it falls within Div 38 GSTA. A supply is ‘input taxed’ if it falls within Div 40 GSTA. The specific kinds of supplies that fall within Div 38 and 40 are outlined at [¶7.7]. Examples of GST-free supplies include supplies of medical services, supplies of certain food, and exports of goods. Examples of input taxed supplies include financial supplies and supplies of residential rental premises. Importers only charge GST on ‘taxable importations’. They do not charge GST on ‘non-taxable importations’ [¶7.9]. Up to 30 June 2018, most goods valued under $1,000 and imported by post were non-taxable importations. However, from 1 July 2018, GST is imposed on the importation of goods valued under $1,000 [¶7.20]. Registered entities (and entities required to be registered) are entitled to input tax credits for GST charged on their ‘creditable acquisitions’ [¶7.8] and ‘creditable importations’ [¶7.9]. An entity makes a creditable acquisition where the entity acquires an item for a ‘creditable purpose’. An item is acquired for a creditable purpose to the extent that it is acquired for the purpose of carrying on the entity’s ‘enterprise’, but not to the extent that it is used to make ‘input taxed supplies’. This essentially means that input tax credits are only available to the extent that an acquisition is for an entity’s enterprise and is used by the entity to make taxable supplies or GST-free supplies. Foundations of Taxation Law 2019 ¶7.3, ¶7.4

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QUESTION 4 The ‘net amount’ of GST payable by an entity is calculated by setting off the input tax credits claimed against the GST payable, and taking adjustments into consideration, s 17-5 GSTA. This may be expressed as follows: Net amount = (GST liability on supplies + increasing adjustments) – (input tax credits + decreasing adjustments) The concept of net amount is important because it is this amount that an entity registered for GST is liable to pay to the ATO or an amount that it is entitled to claim from the ATO in the form of a refund for a particular tax period. Foundations of Taxation Law 2019 ¶7.4

QUESTION 5* In general, an entity’s ‘tax period’ is a period of three months (ending on 31 March, 30 June, 30 September and 31 December) (s 27-5 GSTA). However, entities with ‘GST turnovers’ that meet the ‘tax period turnover threshold’ of $20m must use monthly tax periods (s 27-15 GSTA). Entities with GST turnovers below $20m can elect to use monthly tax periods instead of quarterly tax periods (s 27-10 GSTA). The way in which an entity calculates its ‘GST turnover’ is discussed at [¶7.14]. Foundations of Taxation Law 2019 ¶7.4

QUESTION 6 As a general rule, GST is only payable by, and input tax credits are only available to, ‘entities’ that are ‘registered’ or ‘required to be registered’ for GST. An entity may be registered for GST if it is carrying on an enterprise (s 23-10 GSTA). It must be registered for GST if it is carrying on an ‘enterprise’ and its ‘GST turnover’ meets the ‘registration turnover threshold’ of $75,000 ($150,000 for a non-profit body) (s 23-5, s 23-15 GSTA, reg 23-15.01, reg 23-15.02 GST Regs). The way in which an entity calculates its ‘GST turnover’ is discussed at [¶7.14]. Special rules apply to the following entities, which must register irrespective of their GST turnover: 

taxi drivers (s 144-5 GSTA)



representatives (eg liquidators) of incapacitated entities that are registered or required to be registered (s 147-5 GSTA), and resident agents acting for non-residents that are registered or required to be registered (s 57-20 GSTA).



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Foundations of Taxation Law 2019 ¶7.5

QUESTION 7* The concepts of ‘taxable supply’ and ‘taxable importation’ are important because GST liability is triggered with the making of a taxable supply or a taxable importation (s 7-1 GSTA). It is the entity making the taxable supply or taxable importation that is liable for GST (s 9-40 and s 13-15 GSTA). For an entity to make a taxable supply, certain conditions must be met (s 9-5 GSTA). An entity makes a taxable supply if: • • • • •

the supply is for consideration the supply is made in the course or furtherance of an enterprise that it carries on the supply is connected with Australia the entity is either registered or required to be registered, and the supply is not GST-free or input taxed.

In respect of taxable importations, an entity makes a taxable importation if (s 13-5 GSTA): • • •

goods are imported the entity enters the goods for home consumption (within the meaning of the Customs Act 1901 (Cth)), and the importation is not a ‘non-taxable importation’.

GST is payable on the importation of goods irrespective of whether the entity making the importation is registered (or required to be), or whether the entity is carrying on a business. Where an entity satisfies the elements of the terms (taxable supply and taxable importation), the provisions apply, and a GST liability will arise; whereas, an entity not satisfying the requirements of the terms, will not be liable to GST. Foundations of Taxation Law 2019 ¶7.6, ¶7.9

QUESTION 8 The amount of GST payable on a taxable supply is 10% of the ‘value of the taxable supply’ (s 9-70 GSTA). The value of the taxable supply is defined as ‘price’ × 10/11 (s 9-75 GSTA). Price is defined as the GST inclusive monetary consideration for the supply, or where the consideration is non-monetary, the GST inclusive market value of the non-monetary consideration.

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The amount of GST payable on a taxable importation is 10% of the ‘value of the taxable importation’ (s 13-20(1) GSTA). The value of the taxable importation is defined as the sum of the customs value of the imported goods, international transport and insurance costs, and any customs duty payable on the importation (s 13-20(2) GSTA). Foundations of Taxation Law 2019 ¶7.6, ¶7.9 QUESTION 9* It is important to distinguish between supplies that are ‘taxable supplies’ as distinct from supplies that are ‘GST-free’ or ‘input taxed’ because only taxable supplies attract GST liability. Entities that supply GST-free supplies and input taxed supplies do not have a GST liability for making these supplies. Suppliers of GST-free supplies (like suppliers of taxable supplies) can claim credits for the GST on acquisitions relating to these supplies, whereas suppliers of input taxed supplies cannot, as a general rule, claim credits for the GST on acquisitions that relate to the making of input taxed supplies. The features of the three different supplies are evident in the following table: Type of Supply Taxable Supply GST-free Supply Input Taxed Supply

Liability to GST Liable to GST Not Liable to GST Not Liable to GST

Entitlement to Input Tax Credits Entitled to Input Tax Credits Entitled to Input Tax Credits Not Entitled to Input Tax Credits

A supply is ‘GST-free’ if it falls within Division 38 GSTA. Examples of GST-free supplies are, broadly, supplies of health services, food, education and exports (there are specific exceptions within the categories). A supply is ‘input taxed’ if it falls within Division 40 GSTA. Examples of input taxed supplies are supplies of residential rental premises and supplies of financial services. There are other kinds of supplies that do not fall within the above three categories. These are non-taxable supplies and they include supplies made before 1 July 2000: gifts, supplies made by un-registrable entities, supplies made by business entities that are not registered and are not required to be registered, and transactions that have no connection with Australia. Foundations of Taxation Law 2019 ¶7.6, ¶7.7 QUESTION 10 An ‘input taxed supply’ is a supply that falls within Division 40 GSTA. The supplier of an input taxed supply is not liable for GST on such a supply and is also generally not able to claim input tax credits for GST paid on the inputs that relate to the making of the input taxed supply. For example, the supply of residential premises (other than commercial residential premises) by way of lease is an input taxed supply. The landlord making such a supply does not have a GST liability in respect of the supply of the premises but is 6|Page

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Foundations of Taxation Law 2019

unable to claim the GST paid (ie an input tax credit) on the legal fees incurred to prepare the lease agreement. An input tax credit, on the other hand, is a reference to the credit for the GST paid by an entity on certain acquisitions, namely, creditable acquisitions or creditable importations. When calculating the amount to pay to the ATO for GST collected, the taxpayer is entitled to offset input tax credits. A creditable acquisition is the acquisition of goods and services for any creditable purpose (s 11-5 and s 11-20 GSTA). An entity acquires goods or supplies for a ‘creditable purpose’ to the extent that it acquires them in carrying on its enterprise, s 11-15 GSTA. A creditable purpose does not include acquisitions for private or domestic purposes or inputs for making input taxed supplies (s 11-15(2) GSTA). Foundations of Taxation Law 2019 ¶7.7, ¶7.8 QUESTION 11* The GST status of the different types of supplies is listed below (all legislative references are to GSTA): •

the sale of fruit by a grocer – GST-free (Subdiv 38-A).

•

the loan of a video by a video store – Taxable (Subdiv 9-A).

•

the sale of books by a newsagent – Taxable (Subdiv 9-A).

•

the sale of shares in a company – Input taxed (Subdiv 40-A).

•

the supply of a meal at a restaurant – Taxable (s38-3(1)).

•

the provision of audit services by an accounting firm – Taxable (Subdiv 9-A).

•

the opening of a bank account – Input taxed (Subdiv 40-A).

•

the provision of advice by a bank regarding a loan – Taxable (Subdiv 9-A).

•

the export of raw minerals by a mining company – GST-free (Subdiv 38-E).

•

the sale of a new residential home by a builder – Taxable (Subdiv 40-C).

•

the sale of a holiday home – Input taxed (Subdiv 40-C).

•

the lease of city office premises – Taxable (Subdiv 9-A).

•

the lease of a residential home – Input taxed (Subdiv 40-B).

•

the provision of a medical consultation by a doctor – GST-free (Subdiv 38-B).

•

the sale of a business as a ‘going concern’ – GST-free (Subdiv 38-J).

•

the provision of an education course delivered by a school – GST-free (Subdiv 38C).

•

the supply of hospital care – GST-free (Subdiv 38-B).

•

the sale of ice-cream by a supermarket – Taxable (Subdiv 9-A). Foundations of Taxation Law 2019 ¶7.6 ¶7.7

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QUESTION 12 The concepts of ‘creditable acquisition’ and ‘creditable importation’ are important because entities that make these acquisitions or importations are entitled to a credit (input tax credit) for the GST payable on these acquisitions or importations (s 11-20 and s 15-15 GSTA). A creditable acquisition is an acquisition that satisfies the following requirements (s 11-5 GSTA): • • • •

there is an acquisition of a thing wholly or partly for a creditable purpose the supply of the thing is a taxable supply consideration is provided or liable to be provided by the acquirer for the supply, and the acquirer is registered or required to be registered.

A thing is acquired for a creditable purpose if it is acquired in the ‘carrying on’ of the acquirer’s enterprise (s 11-15 GSTA). A creditable importation is an importation that satisfies the following requirements (s 15-5 GSTA): • there is an importation of goods wholly or partly for a creditable purpose • the importation is a ‘taxable importation’, and • the importer is registered or required to be registered. A thing is imported for a creditable purpose to the extent that it is imported in the ‘carrying on’ of the entity’s enterprise (s 15-10 GSTA). To the extent that the acquisition or importation of a thing relates to the making of input taxed supplies or acquisitions of a private or domestic nature, the acquisition or importation is not acquired or imported for a creditable purpose (s 11-15(2) and s 15-10(2) GSTA). Foundations of Taxation Law 2019 ¶7.8, ¶7.9

QUESTION 13* The following list outlines whether input tax credits are available for the following acquisitions (assuming that there is, where relevant, a GST component in the purchase price and a tax invoice is held by the recipient of the supply): •

the purchase of books by a bookshop from a publisher – Yes (creditable acquisition)

•

the purchase of beef by a hamburger restaurant from a butcher – No (the supply of beef is GST-free)

•

the purchase of a computer by a doctor for use in preparing his surgery’s accounts – Yes (creditable acquisition) 8|Page

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the purchase of pipes by a plumber for use in repairing a sewer at a client’s home – Yes (creditable acquisition)

•

the purch...