Overview
As noted in Chapter 1, the Committee’s role is to identify desirable boundaries for the GST-free activities, as well as the appropriateness of the proposed transitional arrangements for motor vehicles. This role has to be exercised in the context of a completely new indirect tax system, rather than looking at alterations to the existing indirect tax system.
Therefore, integral to understanding not only the Committee’s recommendations, but also the process of reasoning that led the Committee to those recommendations, is an adequate understanding of both the proposed GST and the wholesale sales tax system (WST) it replaces. The Committee considers this to be important given the number of submissions that appear to have had difficulty in grasping aspects of the proposed GST that are crucial in understanding its impact on GST-free activities.
Many submissions were confused about what being ‘GST-free’ entails. They approached it from a WST mindset, where purchases by an exempt body (such as a non-profit school, university, public hospital or a public benevolent institution) are exempt from WST, rather than from a GST perspective where all purchases are GST-inclusive and then creditable to the registered purchaser.
To enhance understanding of the Committee’s recommendations, the Committee considers it necessary to briefly outline the structure of the GST and, in particular, how the GST-free treatment of supplies of goods and services actually works.
A number of submissions focussed on whether a multi-stage value added tax system was appropriate, or whether a single stage system would be better. That is, a number of submissions, particularly within the education sector, considered the use of an exemption certificate or declaration, similar to that used in the current WST system would be appropriate. In the current tax reform context this would equate to advocating the use of a retail sales tax (RST), where goods and services are taxed only when they enter private final consumption. In such a tax system, where an entity purchases goods or services for its own use, such as a school purchasing desks or pens, there is no tax paid, with tax only being paid if the goods or services are on-sold into private consumption.
This is an area obviously outside the Committee’s terms of reference, as it is clearly a matter of Government policy. The Government’s preference for a multi-stage value added system rather than a RST is based on its view that there are are significant weaknesses with a retail sales tax. It is the Government’s view that the RST would be more complex for businesses and administrators and would not be as reliable a source of revenue.
The mechanics of the GST
Tax Reform: not a new tax, a new tax system outlined a number of key features of the GST. The features the Committee considers most relevant to its deliberations are noted below.
The GST is a key element of the Government's indirect tax reform strategy. The Government proposes that the GST is to replace the wholesale sales tax and a number of State taxes. The Government has argued that the GST has the advantages of:
- applying to a broad base;
- applying only one rate to taxable goods and services;
- being paid on the final selling price; and
- not taxing business inputs.
The value-added concept
The GST will be based on the ‘value added tax’ model adopted by many other countries. It will be a tax of 10 per cent on the consumption of most goods and services in Australia, including those that are imported, but it will not apply to exports of goods, or services consumed outside Australia.
The GST is a multi-stage tax.
Registered entities, which the Committee was advised will include hospitals, schools, universities, gift-deductible charities and religious institutions, as well as normal businesses, will charge GST when they sell or otherwise supply goods or services to another registered entity or a consumer. When calculating their GST liability, the entities will offset the tax paid on their inputs (such as purchases of raw materials and machinery). This offset is referred to as an input tax credit. In this way, tax will be collected only on the value added by each business in the production and distribution chain, with the tax being ultimately paid by the final consumer. However, sales by one registered entity to another will be effectively GST-free.
If the tax collected on sales exceeds total input tax credits in a particular tax period, then the net difference will be paid to the Australian Tax Office. If input tax credits exceed the tax collected on sales, a refund can be claimed. For example, if a hospital buys computers and stationery for administration work and then only supplies GST-free health services, so that no tax collected in a given period but tax has been paid on the computers and stationery, the hospital will be entitled to a GST credit or refund.
Registration
Individuals, partnerships, companies, trusts and other bodies that engage in taxable activity will be required to register if their total sales will exceed $50,000 per annum. Non-profit societies, clubs and associations will only need to register if their total sales (including membership fees, but not donations) will exceed $100,000 per annum.
Although individuals, businesses and clubs with smaller annual sales will not have to register, they will have the option of registering if they wish. In particular, the Committee is advised that gift-deductible charities and religious institutions will be eligible for registration. If they do not register, they will not charge tax on their sales (outputs) or claim back tax paid on their purchases (inputs).
Input tax credits depend upon the entity being registered
An important element to the Government’s proposed GST is that eligibility to receive credit for GST paid on inputs is dependent upon an entity being registered.
A common misunderstanding was that eligibility for credits was dependent upon the input being used in a GST-free activity. The Committee has been advised that entitlement to input credits under the proposed GST arises from the fact that a registered entity has purchased goods or services for use in their activities irrespective of whether they are linked to any sales. For example, the GST included in the price of goods and services purchased by a university for the purposes of research where no goods or services end up being sold, will be creditable to the university. That is, the Committee has been advised there is no requirement that inputs be traced through to outputs and credits claimed accordingly. A registered entity will simply be entitled to a credit for the GST paid on all their inputs within a particular tax period and be liable for GST on all their taxable sales in that period. This will mean that entities carrying on largely GST-free sales within a particular period will be in a refund position.
Taxable activity
A taxable activity is any supply of goods or services for a payment, whether in cash or kind. However, certain supplies will be excluded from the definition of taxable activity. For example, wages received by employees will not be taxable under the GST in practice employees will not be caught up in the GST system. Private activities and some other supplies that will be input taxed (see below) will also not be taxable activities.
The GST base very few exceptions
The Government has decided that the GST will apply to a very broad base, but some supplies of goods and services will not be taxable.
This will apply in some circumstances because imposing GST would be technically difficult (as in the case of financial services) or it would create inequities between private and public sector providers (as in the case of health and education).
GST will also not be impo
sed where the supply is not of a commercial nature. The most common example of this is in the charitable sector where goods and services are often given away (for example, a charity providing food and blankets for no charge). In such a case, no sale has occurred and so there will be no GST paid. There will also be occasions, most notably in religious services, where the particular supply has no commercial equivalent and so it would seem inappropriate to levy GST on the sale.
There will be two types of non-taxable supplies under the GST:
- supplies that are not taxed and where credit is allowed for tax paid on purchases (known as GST-free); and
- supplies that are not taxed and no credit is allowed for tax paid on purchases (known as input-taxed).
The main focus for the Committee is GST-free supplies.
Activities that are GST-free
Where activities are GST-free, a registered person will not charge tax on the sale of those goods and services, but will nevertheless claim back the tax paid on inputs. Other countries use the term ‘zero-rated’ to describe this type of activity.
An important point with respect to GST-free activities is that purchases of goods and services by an entity making GST-free supplies will not be GST-free unless the goods and services they are purchasing are themselves GST-free. An example is where a school purchases chairs and desks for use in the classroom. Even though they are for use in a GST-free activity, the school will purchase them GST-inclusive, and then be entitled to a credit for the GST paid on the purchase.
This position needs to be contrasted with the situation that currently exists under the WST. Schools are exempt from WST and they can purchase goods exempt from WST by means of quoting an exemption declaration (previously referred to as an exemption certificate) to the supplier who then is relieved from the requirement to charge the school WST.
Activities that are input-taxed
Some activities will be input taxed. These activities will not be taxable, but anyone selling them will not be able to claim credits for the tax paid on their inputs.
This approach has been chosen where it is technically difficult to impose GST on the sale of particular services, but it is not appropriate to allow the sale to be GST-free. Other countries use the term ‘exempt’ to describe input-taxed.
Certain classes of financial services will be input-taxed, as will rental of residential accommodation. The rationale for input-taxing residential accommodation is to ensure there is comparable treatment for renters with owner occupiers.
Facilitating implementation
The Government intends that the GST will start on 1 July 2000. This date has been selected to allow time for entities in the GST system to learn about the new tax and establish appropriate administrative systems.
The Government will provide financial support of up to $500 million for small and medium businesses to upgrade their record keeping capacity through software and hardware, so that the start-up costs of a GST are minimised. Business will be consulted through a Small Business Consultative Committee to ensure that this support is targeted and delivered in the most effective way.
The Committee recommends that the Government ensures that entities dealing with largely GST-free activities be entitled to participate in this GST implementation funding. The Committee believes this would be appropriate given that the extra compliance costs due to the start-up phase of the GST will apply to all those in the GST system and not just those who will be net remitters of tax.
Areas of special concern
There were a range of issues raised in submissions that the Committee considers arose mainly due to a misunderstanding of how the GST actually operates. The Committee considers these can easily be dealt with via an explanation of that particular part of the operation of the GST. The Committee considers it would be useful to deal with these in a general manner, so the principles can be understood and applied in a number of cases.
GST applies to the price paid
A basic principle of the GST is that it is only imposed on the price paid for goods or services. Where goods or services are given away, then aside from any tax avoidance issues, there will be no GST implications.
For example, where a public benevolent institution raises money through donations and then purchases food to give away, it will be entitled to receive an input credit for the tax paid on the food, and it will not be subject to any GST on the gift.
Transactions between registered entities result in no net GST
The GST will only have a net impact when there is a sale to an unregistered entity, which will include private individuals. Where a transaction takes place between registered entities, then even though GST is paid, it will simply be a credit for the entity paying the GST-inclusive amount.
For example, a hospital might contract with a company to provide cleaning services. The cleaning company will need to include GST in the bill they charge the hospital. The cleaning company will need to remit to the Tax Office the GST payable by the hospital. However, the hospital will be entitled to a credit for the GST paid for the cleaning services as that is simply another input to its activities. So if there were $1,000 worth of cleaning services, the company would charge $1,100, the hospital would pay $1,100 and the company would remit $100, leaving it with $1,000. The hospital would get a credit of $100 leaving it with net outgoings of $1,000. Therefore, the net position of both the hospital and the company is the same as if there were no GST.
Sponsorships are subject to GST
The Government has determined that sponsorships, in the usual sense, are payments for services. That is, sponsorships are regarded as payments in return for the service of advertising or other related benefits. However, because a sponsorship transaction will typically take place between two registered entities, the impact of the GST will net out, as in the example given above. That is, if an entity sponsors another entity then the entity providing the service of sponsorship will need to remit GST on the amount of sponsorship provided. But, leaving aside the special treatment of input-taxed financial services, the sponsor will get a credit for that amount. If two organisations decided they wanted to enter into an arrangement whereby one would effectively provide for $10,000 worth of sponsorship, the sponsor would pay $11,000, the recipient of the sponsorship would pay $1,000 tax, and be left with $10,000. The sponsor would be entitled to a credit of $1,000 and so be in the same position as if they had provided sponsorship of $10,000 pre-GST.
A number of submissions, particularly from charitable organisations, wanted sponsorships in the charitable sector to be GST-free. The concern of the charitable entities seemed to rest on a belief that if GST was payable on sponsorship, then the attraction of using the entity as an advertising vehicle would be reduced. However, all sponsorships will be subject to GST, and so the attractiveness of using a charitable entity as compared with another entity will not be affected by the GST. Moreover, the net financial position of the sponsor will not be affected because the transactions will normally be taking place between two GST-registered entities.
Donations are not subject to GST…
The Government has determined that donations, unlike sponsorships, are not payments in return for goods or services. Therefore they do not come into the GST system and no GST is payable upon the receipt of genuine donations.
Nor are government grants
The Government has also determined that government grants are not payments in return for goods or services and so should remain outside the GST. However, some payments by governments are called g
rants but are in fact payments for providing specified services. In these cases, they will be subject to GST, but where the recipient is a registered entity, the transaction will be between two registered entities and so will have no net GST implications.
Fundraising activities will be subject to GST
Fundraising activities by all registered entities will be subject to the GST. A general tenet of the GST is that the supplier should not need to know the status of the recipient and should not need to know the purpose of the supply. All that matters is that the supply is for consideration and then, generally, GST is paid on the consideration.
Memberships will be subject to GST
A number of submissions, particularly in the charitable sector, considered that subscriptions paid as memberships of organisations should not be subject to GST. The Government has made it clear that it regards membership fees as payments in return for services and therefore will be taxable.
GST-free status extends to activities and not institutions
A number of submissions argued that GST-free status should apply on an institutional basis rather than on the basis of the activity performed. The Committee notes that this is contrary to Government policy and the design of the GST. The GST will apply equally to all entities where they make sales of similar goods or services. For example, if a school sells textbooks to students, the school will need to pay GST to the same degree as commercial bookshops.
Cash flow impact
Several submissions noted that the GST will have an adverse cash-flow effect on entities supplying largely GST-free supplies. That is, entities that will usually be in a position of claiming GST refunds, will first of all have to make the GST-inclusive purchase and therefore required cash up front. The Committee considers that cash flow problems will be minimal, providing the Government ensures refunds are paid promptly.