Legal Briefing No. 50

Number 50

(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.

Taxable Supplies

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.

Non-Taxable Supplies

GST-free supplies

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:

  • health
  • education
  • 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.

Registration

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

Unregistered Suppliers

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.

Transitional Arrangements

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

Reviewable Contracts

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.

Non-Reviewable Contracts

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.

Notes

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:

Canberra

Leo Hardiman

(02) 6253 7074

Sydney

Catherine
Leslie

(02) 9581 7481

Melbourne

Jolanta
Kowalewska

(03) 9242 1249

Brisbane

David Durack

(07) 3360 5700

Perth

Graeme
Windsor

(08) 9268 1102

Adelaide

Sarah Court

(08) 8205 4231

Darwin

Ashley Heath

(08) 8943 1408

Hobart

Peter Bowen

(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.

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