(25 September 1999)
Goods and Services Tax: Implications for the Commonwealth
Under the Commonwealth Constitution, the Commonwealth cannot tax itself. However, the goods and services tax ('GST') legislation provides that the Commonwealth will be notionally liable for the GST.1 This means that, in effect, the Commonwealth will be subject to the tax in much the same way as other entities, and that Commonwealth departments, agencies and authorities will participate in the GST collection system.
The GST is designed to be a broad-based indirect tax on private consumption in Australia. It will be charged on the importation or supply of most goods and services. The tax will commence on 1 July 2000 and will be levied at a single rate of 10% of the value of the taxable supply.
GST is payable by the registered supplier, not the purchaser. However, it is expected that suppliers will take the GST into account when setting prices for goods and services, and so it will be the final consumer who will ultimately pay the tax. Where a supplier fails to pass on the GST through pricing, unless the contract between the supplier and purchaser provides otherwise, it will be the supplier who bears the cost of the GST.
How Does it Work?
Registered entities2 will charge GST when they supply goods and services, except to the extent that the supply is GST-free or input taxed. Generally, registered entities may claim credits for GST they have paid on goods and services purchased for use in their business ('input tax credits'). In this way, each entity will only pay tax on the value which that entity has added. The Commonwealth will be a registered entity, although it is likely that each department and agency will administer its own GST affairs.
GST is payable on taxable supplies.3 A taxable supply is:
- one made for consideration,
- in the course or furtherance of an enterprise,
- connected with Australia,
- by a registered entity.
Supply is defined very broadly to include, among other things:4
- a supply of goods
- a supply of services
- a provision of advice or information
- a grant, assignment or surrender of real property
- a creation, grant, transfer, assignment or surrender of any right.
The definition of 'enterprise'5 includes an activity done by the Commonwealth and other bodies established by Government for a public purpose.6 Thus a government department is carrying on an enterprise. Activities carried on by the Commonwealth or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth are defined to be an 'enterprise' for the purposes of the legislation. The legislation does not draw any distinction between the 'commercial' activities of the Commonwealth and its more traditional 'administrative' activities, and all of these activities form part of the enterprise of the Commonwealth.
Amounts of GST collected on supplies of goods or services by an entity will be offset against the input tax credits claimable for tax paid on inputs. Where the GST collected is more than the total input tax credits, then the net amount will be remitted to the Australian Taxation Office ('ATO'). If the input tax credits are more than the GST collected, the entity can claim a refund.
If a supply is GST-free, a registered supplier:
- does not remit GST on the supply
- has an entitlement to input tax credits which is unaffected by the status of the supply.
Examples of GST-free supplies include:
- grants of freehold and similar interests by governments
- water and sewerage
- child care.
Input taxed supplies
If a supply is input taxed, the supplier:
- does not remit GST on the supply
- is not entitled to an input tax credit for anything acquired or imported to make the supply.
Input taxed supplies include:
- financial supplies
- residential rent
- residential premises
- precious metals.
Any entity carrying on an enterprise may register for GST. Many entities will be required to register for GST purposes. The legislation sets turnover limits to determine who must register. A registered entity may claim input tax credits on the purchase of goods and services for any business purpose or the purpose of carrying on its enterprise. A registered entity must lodge a GST return for each tax period, which is either quarterly or monthly, depending on turnover.
The Commonwealth, carrying on an enterprise as defined, will be registered for GST purposes, will be liable to remit GST on any taxable supplies it makes and will be entitled to input tax credits on GST paid for creditable purchases.
It is anticipated that registration for Commonwealth entities will be at the 'departmental' level, although it is possible that some agencies will be registered as a branch of a department. A registered entity will return to the ATO a periodic 'Business Activity Statement' (BAS), which will return all the entity's tax related details, including GST, fringe benefits tax and employee tax instalment deductions.
The entity will either forward the net amount of their liability to the ATO, or will receive a credit. The GST element of the BAS will return the GST an entity has collected on its taxable supplies, net of any input tax credits.
Issues for Commonwealth Entities
If a supplier of goods or services is a very small concern and not registered for GST purposes, the price charged for services to a purchaser, such as a Commonwealth department, will not include GST. Therefore the department would not be entitled to claim an input tax credit in relation to these services.
Dealing with unregistered suppliers, then, may impact on a department's accounting for GST purposes, in that the department will need to identify those service charges paid to registered service providers which include an amount of GST, and those that do not include GST.
Accounting and Record Keeping
All Commonwealth entities, including those departments and agencies conducting commercial activities such as selling publications and other goods to the public, will need to examine their accounting and record keeping systems to ensure that they will be in a position to claim their input tax credits on the relevant monthly or quarterly basis. Departments and agencies will also need to examine their sales tax position as there are transitional provisions governing the end of sales tax and the beginning of the GST.
Commonwealth Charges, Fees and Taxes
Some departments and agencies will need to consider the GST implications of taxes and other fees that they charge. Every tax payment, apart from GST, is to be treated as consideration for a supply to the taxpayer, and so is subject to GST.7 However the Act gives the Federal Treasurer power to make a determination that the payment of the tax is not consideration.8
Therefore departments and agencies may need to examine the taxes and other fees they charge in order to determine which ones could be included in a determination by the Treasurer.
The general rule is that GST is only payable on a supply of goods or services to the extent that it is made after 1 July 2000. Sales tax continues to apply for assessable dealings up until that date. Whether or not GST is payable on a contract will depend on the time of supply and that will be determined by applying the legislative provisions to the facts of the particular situation.9
The GST legislation provides for transitional rules in relation to contracts for the supply of goods and services which span 1 July 2000. The GST treatment of such supplies depends on the date of the contract, whether the agreement is 'reviewable' or 'non-reviewable' for the purposes of the legislation, and the nature and time of supply
A contract is reviewable if it provides a 'review opportunity'. This is where a contract allows for a change in the consideration, directly or indirectly, because of the imposition of the GST, or an opportunity to conduct a general review, renegotiation or alteration of the consideration. If
- the purchaser of the supply under a reviewable contract is entitled to full input tax credits for that supply, and
- the contract was entered into prior to 8 July 1999
- then supplies under the contract will be GST-free until the earlier of the first review date or 1 July 2005. If
- the purchaser is not entitled to full input tax credits for that supply, and
- the reviewable contract was entered into prior to 2 December 1998
then the supply will be GST-free until the earlier of the first review date or 1 July 2005.
Where a non-reviewable contract was entered into, and all consideration paid, before 2 December 1998, then all supplies will be GST-free for the life of the contract.
Where a non-reviewable agreement was made before 8 July 1999 and the purchaser is entitled to full input tax credits on the supply, then the supply made before 1 July 2005 is GST-free.
Contracts Entered into after 8/7/99s
Whether a contract entered into after 8 July 1999 contains a review opportunity or not, GST will apply to the supplies after 1 July 2000 under the contract. In such a situation, the supplier will be liable to return the GST and the purchaser will be able to claim the input tax credit for GST included in the purchase price. Departments and agencies should make provision for GST in contracts entered into after 8 July 1999 for those supplies which will be made on or after 1 July 2000.
Preliminary GST Advice Received by Departments and Agencies
Advice that departments and agencies have received relating to GST issues prior to the passing of the final legislation by Parliament should be treated with caution. It would be desirable for departments and agencies to review such advice in order to ensure that it is still correct in light of amendments to the legislation since it was first released in the form of Bills.
1 Section 177-1 A New Tax System
(Goods and Services Tax) Act 1999
2 See page 2
3 Section 7-1
4 Section 9-10
5 Subsection 9-20(1)
6 Paragraph (g)
7 Division 81
8 Section 81-5(2)
9 A New Tax System (Goods and Services Tax Transition) Act 1999
For further information please contact:
(02) 6253 7074
(02) 9581 7481
(03) 9242 1249
(07) 3360 5700
(08) 9268 1102
(08) 8205 4231
(08) 8943 1408
(03) 6220 5474
ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)
The material in this briefing is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this briefing.