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Cooper, Graeme; Vann, Richard --- "Implementing the Goods and Services Tax" [1999] SydLawRw 16; (1999) 21(3) Sydney Law Review 337



[*] Professor of Taxation Law, The University of Melbourne, Consultant to Freehill, Hollingdale & Page, Melbourne and Director, Consortium of Australian Tax Schools.

[#] Professor of Law, University of Sydney, Consultant to Greenwoods & Freehills, Sydney, External Advisor, Review of Business Taxation and Director, Consortium of Australian Tax Schools.

[1] The core Bills originally released on 2 December 1998 were A New Tax System (Goods andServices Tax) Bill 1998; A New Tax System (Goods and Services Tax Transition) Bill 1998; A New Tax System (Goods and Services Tax Administration) Bill 1998; A New Tax System (End of Sales Tax) Bill 1998; A New Tax System (Goods and Services Tax Imposition – General) Bill 1998; A New Tax System (Goods and Services Tax Imposition – Customs) Bill 1998; A New Tax System (Goods and Services Tax Imposition – Excise) Bill 1998; and A New Tax System (Trade Practices Amendment) Bill 1998. On 24 March 1999, a number of further bills were introduced to implement the luxury car tax, the wine equalisation tax and the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, which are all part of the GST package. On 23 April 1999, the government moved a number of mainly technical amendments to its GST legislative package, and on 23 June 1999, following agreement with the Australian Democrats, further amendments were made particularly to remove the tax on food. All of the bills, except two, cleared all Parliamentary stages by 29 June 1999 and became law on 8 July 1999. The two remaining bills relating to federal financial relations are on hold pending enactment of complementary legislation by all the states. The GST legislative package will be much amended before it comes into operation. On 30 June, the Treasurer introduced A New Tax System (Taxation Laws Amendment) Bill (No 1) 1999 to give effect to reforms of tax administration which include modifications of the earlier GST Bills. Generally this article deals with events up to 30 June 1999.

[2] The terms VAT and GST can be used interchangeably. New Zealand, Singapore, South Africa, Australia and Canada use the term ‘GST’ while France, Germany, the United Kingdom and other European Union (‘EU’) Member Countries use the term ‘VAT.’ There is no important difference between the two tax systems in design. If one were to seek differences, perhaps the principal one lies in the number of exemptions – EU VAT systems typically have many more exemptions from GST than are allowed in New Zealand, or as originally proposed for the Australian system. The government’s original indirect tax proposal was for ‘a broad-based indirect tax to replace the wholesale sales tax and a number of state taxes. In line with the terminology in use in New Zealand and Canada, the tax will be known as a goods and services tax or GST.’: Treasurer, Tax Reform: Not a New Tax, A New Tax System (Canberra: AGPS, 1998) at 80 (hereinafter ANTS Statement). We shall (reluctantly) follow the example henceforward of calling this species the GST. After the June amendments to the GST Bills however, the Australian variant is between the European and the New Zealand form – see section 1 below.

[3] Commonwealth Taxation Review Committee, Full Report (Canberra: AGPS, 1975) at para 27.2 (Asprey Report). A decade earlier the Social Science Research Council had appointed a group to look at the Australian tax system but it did not look at this issue. Downing RI, Taxation in Australia, Agenda for Reform (1964). This provoked Bensusan-Butt DM, ‘Taxation in Australia: Agenda for More Reform’ (1964) 40 Economic Record 226 to propose consumption tax reform.

[4] Groenewegen P, Australian Wholesale Sales Taxation in Perspective (1983) at 18–19.

[5] Australia, Reform of the Australian Tax System: Draft White Paper (Canberra: AGPS, 1985) at 116–126 (hereinafter Draft White Paper).

[6] Treasurer, Reform of the Australian Taxation System – Statement by the Treasurer (Canberra: AGPS, 1985). As indicated there on page 11, a suggestion from Prime Minister Hawke to retain the wholesale sales tax and to add a retail tax on services was short-lived, see National Taxation Summit, Record of Proceedings (Canberra: AGPS, 1985) at 227.

[7] Liberal Party of Australia, Fightback!: Taxation and Expenditure Reform for Jobs and Growth (21 November, 1991) at 47–93; Liberal Party of Australia, Fightback! Supplementary Papers (21 November, 1991) Paper No 5 ‘Operation of the GST: Technical Manual’; Liberal Party of Australia, Fightback!: Fairness and Jobs (December 1992).

[8] The Committee consisted of a Board and a Technical Sub-Committee with the support of a Secretariat. Richard Vann was a member of the Sub-Committee for a short time.

[9] See ‘Tax Reform: It’s On – Government Announces Its Plan’ [1997] Weekly Tax Bull at 888– 889 (Australian Tax Practice).

[10] Above n2 at 69–103.

[11] Treasurer, Press Release No 103: Tax Consultative Committee (27 October 1998).

[12] Tax Consultative Committee, Report of the Tax Consultative Committee (Canberra: AGPS, 1998). See also Treasurer, Press Release No 112 (13 November 1998).

[13] Senate Select Committee on a New Tax System, First Report (1999).

[14] Senate Environment, Communications, Information Technology and the Arts References Committee, Inquiry into the GST and a New Tax System (http://www.aph.gov.au/senate/ committee/erca_ctte/gst/index.htm).

[15] Senate Community Affairs Reference Committee, The Lucky Country Goes Begging, Report on the GST and a New Tax System (http://www.aph.gov.au/senate/committee/clac_ctte/gst/ index.htm).

[16] Senate Employment, Workplace Relations, Small Business and Education References Committee, Inquiry into the GST and A New Tax System (http://www.aph.gov.au/senate/ committee/eet_ctte/gst/index.htm).

[17] Senate Select Committee on a New Tax System, Main Report (1999). The Committee’s report on the ancillary Bills introduced in March 1999 was tabled on 30 April 1999, Report on Commonwealth-State Financial Arrangements Bills, Luxury Car Tax Bills and Wine Equalisation Tax Bills (http://www.aph.gov.au/senate/committee/gst/Third/index.htm).

[18] Cominos D & Dwyer T, ‘Constitutional Problems in the Goods & Services Tax’ (1999) 28 Australian Tax Review 69.

[19] The literature discussing the design of a VAT is large. The following discussion draws in part on these sources – Aaron H (ed), VAT – Experiences of Some European Countries (1982); Aaron H (ed), The VAT – Lessons from Europe (1981); American Bar Association, VAT – A Model Statute and Commentary (1989); Bickley JL, ‘The VAT: Concepts, Experience and Issues’ (1990) 47 Tax Notes 447; Brooks N, The Canadian GST: History, Policy & Politics (1992); Cnossen S, ‘The Value Added Tax: Key to a Better Tax Mix’ (1989) 6 Aust Tax Forum 265; Cnossen S, ‘Broad-Based Consumption Taxes: VAT, RST or BTT?’ (1989) 6 Aust Tax Forum 391; Cnossen S, ‘Misunderstanding VAT: A Comment on ‘On the Presumed Technical Superiority of VAT’’ (1992) 9 Aust Tax Forum 271; Cnossen S, ‘Key Issues in Considering a VAT for Central and Eastern European Countries’ (1992) 39 IMF Staff Papers 211; Gillis M, Shoup C & Sicat G (eds), Value Added Taxation in Developing Countries (1990); Groenewegen P, ‘The Australian Indirect Taxation Regime: Targeting the Defects’ (1989) 6 Aust Tax Forum 283; McLure CE, The Value-Added Tax: Key to Deficit Reduction? (1987); Scott C & Davis H, The Gist of GST: A Briefing on the Goods and Services Tax (1985); Sullivan CK, The Tax on Value Added (1965); Tait AA, Value Added Tax: International Practice and Problems (1988); Tait Alan A, Value Added Tax: Administrative and Policy Issues (1991); Terra BJM & Kajus J, A Guide to the European VAT Directives (1993); Thirsk W, ‘Intellectual Foundations of the VAT in North America and Japan’ in Eden L (ed), Retrospectives on Public Finance (1991) 133; Turnier WJ, ‘Designing an Efficient VAT’ (1984) 39 Tax Law Review 435; The Treasury Department Report to the President, Tax Reform for Fairness, Simplicity, and Economic Growth, Volume 3, Value Added Tax (Washington: Office of the Secretary, Department of the Treasury, 1984) and Williams D, ‘Value Added Tax’ in Thuronyi V (ed), Tax Law Design and Drafting, vol 1 (1996) 164.

[20] In fact, the GST also operates on imports of goods (and in some cases services) into the jurisdiction, thus giving two heads of tax – supplies and imports. The discussion here will focus primarily on domestic suppliers and supplies, leaving the international issues until later.

[21] Shoup C, Public Finance (1969) at 251.

[22] Stories exist during the commencement of the GST in Canada of firms seeking special treatment under a GST-type tax who made the mistake of seeking an ‘exemption’ from GST. An exemption (or input taxation) will turn out to work to the detriment of a firm which deals primarily with other firms. Businesses nowadays are fully conversant with the difference.

[23] ANTS Statement, above n2 at 96.

[24] The argument that export competitiveness is thereby increased is often overstated, as it overlooks adjustments to the exchange rate, but some transitional competitive advantage probably accrues, perhaps for as long as five years: Juttner DJ, ‘International Trade: Implications of VAT’ (1997) 1 Tax Specialist 90.

[25] An example of this tendency can be seen in CIR (NZ) v Databank Systems Ltd (1990) 12 NZTC at 7227. In that case, a company was formed by a group of banks to provide common accounting, record keeping and systems services to the members of the consortium as a means of costpooling. It shared the costs with the members by charging a fee for the services it provided. The company argued that its services too were input taxed on the basis that it was supplying financial services to its members. The Privy Council held that the services were taxable.

[26] The effect of the GST-free treatment of a sale of a business as a going concern is that the seller of the business is refunded the input credits allowed on its acquisitions still on hand at the point of sale, whilst the buyer of the business will start without any tax credits.

[27] The nearest example of this alternative in Australia is input taxing of school tuckshops under Division 40–E which was included as part of the deal between the Australian Democrats and the government.

[28] There is a large jurisprudence on the treatment of composite supplies and the circumstances in which a single supply may be disassembled. See eg, C&E Comrs v United Biscuits (UK) Ltd [1992] STC 325 (dealing with biscuits and their tin containers); British Airways plc v C&E Comrs [1990] STC 643 (dealing with meals supplied on aeroplanes); Domestic Service Care Ltd [1994] BVC 745 (dealing with the warranty provided by a mechanical engineering firm after it had undertaken its annual inspection).

[29] An example of this in the legislation is the indifference to transfer pricing – that is, whether transactions between related companies must occur at market price. Division 72 allows transactions to occur for less than full market value consideration between associates provided that the acquirer would be entitled to a full input tax credit on the acquisition.

[30] See eg, Fightback! which states that a GST would make ‘the tax system fairer by reducing avoidance and evasion.’ Fightback!, above n7 at 67. It also notes that under a GST, ‘there is less scope for avoidance and evasion as the tax is collected at each step of the production/distribution chain’: Id at 68. By way of variation, in the ANTS Statement, the Treasurer asserts, ‘tax will be collected only on the value-added by each business in the production and distribution chain, with the tax ultimately paid by the final consumer. However, sales by one business to another will be effectively tax free’ ANTS Statement, above n2 at 80.

[31] Indeed, it is sometimes said in Europe that, ‘a tax invoice is a blank cheque drawn on the government’ because a tax invoice entitles the holder to the refund in cash of the tax implicit in the purchase.

[32] This point was made by Kesselman JR, ‘Role of the Tax Mix in Tax Reform’ in Head JG (ed), Changing the Tax Mix (1986) at 70–71 during the previous tax reform but is consistently ignored in public debate on the GST.

[33] ANTS Statement, above n2 at 80; Explanatory Memorandum accompanying A New Tax System (Goods and Services Tax) Bill 1998 at 5 says ‘GST is effectively borne by consumers when they acquire anything to consume ... GST is remitted by suppliers who make supplies in carrying on their enterprise. Suppliers do not bear the GST because the tax is included in the price of what they supply.’ Fightback! too took the position that, ‘the Goods and Services tax is not a tax on business or on its profits’: Fightback! above n7 at 69.

[34] This can be seen explicitly in (say) the real estate margin scheme in Division 75 where the taxpayer pays GST on its ‘margin’ from its transactions – ie, its cash flow profit.

[35] The $30 GST-inclusive price is a GST-exclusive price of $27.27. With a cost of $8.00, the firm now makes a profit of only $19.27 per CD.

[36] The classic text in English is Simons HC, Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy (1938).

[37] Among a large literature, see the early manifestations in the Asprey Report, above n3; US Treasury, Blueprints for Basic Tax Reform (1977); Meade Committee, The Structure and Reform of Direct Taxation (1978). Slemrod J, ‘Deconstructing the Income Tax’ (1997) 87 American Economic Rev 151, demonstrates how with a flat rate of tax, conversion among the various methods of levying income and consumption taxes on individuals and firms can be achieved. These discussions generally ignore the problems of incidence.

[38] The income tax reforms of the Australian Government (ANTS Statement, above n2 at 105–127) are currently being considered by the Review of Business Taxation headed by John Ralph. In its discussion papers, the Review on the one hand has considered the virtues of moving to a more comprehensive income tax base, and on the other, contemplated specific measures (such as allowing income from capital to be taxed at a low rate in entities and reductions in taxes on capital gains) that move the income tax base further towards an income consumption hybrid, A Strong Foundation (Canberra: AGPS, 1998); A Platform for Consultation (Canberra: AGPS, 1999).

[39] The discussion which follows is based on A New Tax System (Goods and Services Tax) Act 1999 (Cth). All legislative references that follow will be to this Act, unless otherwise indicated.

[40] And, as we shall see, there is even a parallel to the income tax debate between receipts and outgoings accounting and profit emerging computations. See Parsons RW, Income Taxation in Australia (1985) at 607–759. The parallel is seen in provisions such as Division 75 (real estate developments) and Division 126 (gambling) which establish profit-based output tax computations. That is, they do not offer an input tax credit for the actual (or even a deemed) input tax implicit on individual acquisitions, but rather bring into account only a net amount of output tax – the output tax reduced by an assumed level of input tax on a transaction, being the acquisition of certain types of real estate or the payment of prizes.

[41] Section 7–1 states that, ‘GST is payable on taxable supplies and taxable importations.’ We take it that this section is intended to identify the tax base for output tax. Section 9–40 provides that ‘you must pay the GST payable on any taxable supply that you make.’ This section appears intended to identify the taxpayer, the ubiquitous ‘you,’ who, we take it, is the supplier.

[42] There are other provisions in the Act such as Division 105 (supplies in satisfaction of debts), which ignore these requirements and simply deem the elements needed to create taxable supplies.

[43] Section 9–10(1). Courts in other jurisdictions faced with this same word have fashioned definitions of ‘supply’ as ‘to furnish with or to provide’: Databank Systems, above n25; ‘to furnish or to serve’: Carlton Lodge Club v C&E Comrs [1975] 1 WLR 66 and ‘the passing of possession in goods’: C&E v Oliver [1980] 1 All ER 353.

[44] C&E v City Council of Norwich [1995] BVC 712.

[45] Oliver, above n43.

[46] Carlton, above n43.

[47] C&E v Automobile Association [1974] 1 WLR 1447.

[48] C&E v First National Bank of Chicago [1998] 3 CMLR 353.

[49] Apple & Pear Development Council v C&E [1988] 2 All ER 922. It may be, however, that a better reading of this case sees it as more concerned with whether there was a sufficient connection between the supply and the consideration for it to be said that the consideration was provided for the supply.

[50] For example, the inclusion as a supply of ‘(e) a creation, grant, transfer, assignment or surrender of any right and ... (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation’ mirrors similar provisions in Income Tax Assessment Act 1997 (Cth) s104–35 (hereinafter ITAA 97), and its predecessor in Income Tax Assessment Act 1936 (Cth) s160M(6) (hereinafter ITAA 36).

[51] Above n49.

[52] Section 9–5.

[53] Section 9–20(1)(b).

[54] Section 9–20(1)(d)–(g).

[55] Section 9–20(2).

[56] Section 195–1 provides that business ‘includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.’ This is identical to the definition of ‘business’ used in s995–1 of the ITAA 97.

[57] Much of this case law is not concerned with the statutory definition of ‘business’ as such, but with the judicial principle that income from business is ordinary income within s6–5 of the ITAA 97. The approach in both situations is, however, the same. In the United Kingdom it has been held that a statutory licensing body which issued licences to auditors, insolvency practitioners and persons carrying on investment business, for consideration is not carrying on of business. See Institute of Chartered Accountants in England and Wales v C&E [1999] STC 398.

[58] Section 9–20(2)(b), (c).

[59] This has important consequences for second hand goods that are acquired by dealers – that is, when goods that have already entered consumption return into the distribution chain to be sold to consumers again.

[60] See eg, Ferguson v FCT [1979] FCA 29; (1979) 9 ATR 873 (lease of four cattle by navy officer); FCT v JR Walker (1985) 16 ATR 331 (purchase of one breeding goat by real estate employee).

[61] Section 9–5(a) requires that a supply be made ‘for consideration.’ More obviously, Division 38– G treats as GST–free supplies made by charitable institutions for ‘less than 50 per cent of the GST–inclusive market value of the supply’. Division 38–F makes GST-free the supply of services by a religious institution where the service is ‘integral to the practice of that religion.’ The decision in C&E v Church of Scientology [1981] 1 All ER 1035, dealt with procedural issues but in doing so confirmed the judge at first instance, [1979] STC 297, who in turn found no basis for disturbing the finding of fact of the tribunal [1977] VATTR 278, that for VAT purposes, Scientology was making supplies while engaged in a trade or business. It provided ‘auditing’ and ‘training’ courses, and sold books and E-meters in return for fees. It argued that it provided education courses which were not taxable and in any event, it was not carrying on a taxable activity – the equivalent notion in the European VAT. It was held, however, that the Church was carrying on a taxable activity and value-added was taxed.

[62] In the United Kingdom a charity which raised funds in a ‘business-like’ manner was held not to be running a business, except for certain supplies made for a more than nominal consideration as part of its fund raising activities. See C&E v Royal Exchange Theatre Trust [1979] 3 All ER 797.

[63] This phrase originally stems from UK income tax jurisprudence in Jones v Leeming [1930] AC 415, and the definition of ‘trade’ inserted to overcome that case in s526 Income Tax Act 1952 (UK). The idea was interpolated into Australian income tax law by the Privy Council in cases such as McClelland v FCT [1970] HCA 39; (1970) 120 CLR 487, and adopted by the High Court in cases such as FCT v NF Williams [1972] HCA 31; (1972) 127 CLR 226. And according to Windeyer J in White v FCT [1968] HCA 41; (1968) 120 CLR 191 at 208, s26(a) ITAA 36 was introduced for the purpose of overcoming any issue that the decision in Jones v Leeming might have applied to Australia. Section 26(a) enacted the opposite of the ratio decidendi in Jones v Leeming, and insisted that the profit arising from an isolated instance of purchase and sale would be assessable as income. A long discussion of this history can be found in McClelland v FCT [1970] HCA 39; (1970) 120 CLR 487.

[64] Some well known examples are FCT v Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355 (company which originally purchased land for access to beach but was later taken over by other companies involved in property development); FCT v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199 (retailer which sold a stream of interest income); and Westfield v FCT [1991] FCA 97; (1991) 21 ATR 1398 (shopping centre manager which sold land originally acquired for a shopping centre). This area of Australian income tax law is littered with hundreds of cases involving the purchase of land by individuals for recreation which is later developed and sold; these cases involve a variant on the hobby/business border line.

[65] See eg, London Australia Investments Company Ltd v FCT [1977] HCA 50; (1977) 138 CLR 106.

[66] See Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen Arnhem [1991] 1 ECR 3111; [1993] STC 222 (dealing with the activities of a holding company).

[67] Section 9–20(2)(a).

[68] ANTS Statement, above n2 at 134–46. A New Tax System (Taxation Laws Amendment) Bill (No 1) 1999, introduced into Parliament on 30 June 1999 is designed to give effect to these proposals.

[69] Division 144.

[70] FCT v DeLuxe Red and Yellow Cabs Co-operative (Trading Society) Ltd [1998] FCA 361; (1998) 38 ATR 609. The issue remains a problem in New Zealand’s GST, Case U9 (1999) 19 NZTC 9077.

[71] A New Tax System (Taxation Laws Amendment) Bill (No 1) 1999 complicates the issues further. Schedule 1 Part 2 item 50 proposes to amend s9–20(2)(a) of the GST Act to extend the exclusion from an enterprise by adding a payment to an individual under a labour hire arrangement ‘the performance of which, in whole or in part, involves the performance of work or services by the individual for a client’ of the enterprise which is making the payment to the individual, proposed s12–60 of Schedule 1 to the Taxation Administration Act 1953. Such payments will be subject to Pay As You Go withholding in a similar way to employees’ wages. This provision has potentially a very wide scope, eg, it could apply to payments by a solicitor to a barrister for an opinion obtained for a client of the solicitor. The general assumption, however, is that barristers will be within the GST, not excluded from it. On the input tax credit side, Division 111 was added to the GST legislation as it proceeded through Parliament. This allows employers to obtain input tax credits for purchases made by employees which are reimbursed by the employer. A New Tax System (Taxation Laws Amendment) Bill (No 1) 1999 proposes to extend this treatment to similar reimbursements under labour hire arrangements.

[72] The phrase typically quoted is the words of the Lord Justice Clerk in Californian Copper Syndicate v Harris (1904) 5 TC 159 at 166. He said, ‘it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.’

[73] Above n33 at 26, 27.

[74] In C&E v Lord Fisher [1981] 2 All ER 147 the Court held that the recovery from the taxpayer’s friends of a contribution toward the costs of a shooting trip was not consideration for supplies made by the taxpayer through his other business activities of farming and running a stately home.

[75] See Newman v CIR (NZ) (1995) 17 NZTC 12097 (where the division and sale by a builder of the front allotment of his dwelling was treated as not being within the scope of his business, nor as constituting its own business).

[76] See, eg, FCT v Cooling [1990] FCA 297; (1990) 21 ATR 13; Selleck v FCT (1997) 36 ATR 558; and Montgomery v FCT (1998) 38 ATR 186 for the issues surrounding transactions with leased premises, and see FCT v Cyclone Scaffolding Pty Ltd (1987) 19 ATR 674; Memorex v FCT (1987) 19 ATR 553; FCT v GKN Kwikform Services Pty Ltd (1991) 21 ATR 1532; and FCT v Hyteco Hiring [1992] FCA 515; (1992) 24 ATR 218, for issues surrounding transactions with depreciable plant.

[77] See Division 129.

[78] This is the contemporaneity issue that has dogged the income tax in relation both to the derivation of income and the incurring of deductions. This is matched in the VAT cases in decisions of English and European courts such as Intercommunale voor Zeewaterontzilting (Inzo) in liquidation v Belgian State [1996] ECR I–859 (input tax credits allowed to company set up to desalinate salt water which went into liquidation when study of profitability caused investors to withdraw); Merseyside Cablevision v C&E [1987] 3 CMLR 290 (input tax credits allowed to cable television company during feasibility studies and preparatory stage even though it had not obtained a licence at time of hearing); and Rompelman v Minister van Financien [1985] 1 ECR 655 (input tax credits allowed to investors who had bought showrooms ‘off the plan’ in relation to instalment payments of purchase price, even though building not completed nor showrooms rented).

[79] Section 195–1 defines ‘carrying on’ to include ‘doing anything in the course of the commencement or termination of the enterprise’.

[80] Division 60.

[81] The Review of Business Taxation which was set up by the government to consider its proposals in the ANTS Statement to reform the income tax and taxation of entities has flagged this issue in its discussion paper, A Platform for Consultation above n38 at 42. The proposals there do not, however, go as far as the GST.

[82] Section 9–5(d).

[83] Section 23–15(1).

[84] Sections 23–5, 23–15, 25–1.

[85] Division 99.

[86] Until the Treasurer issues a list eliminating various taxes from this section, it raises some interesting questions – does a taxpayer enjoy an input tax credit for the payment of income tax, for example? The question will survive for foreign corporate and withholding taxes even after such a list is published, as the Treasurer can exclude only an ‘Australian tax.’

[87] On the income tax side this issue comes up most frequently in relation to capital gains where there may be several possible analyses of the transaction which may or may not trigger a CGT Event. In recent times, compensation receipts have been the subject of much discussion in this regard, eg, in Ruling TR 95/35. Compensation payments give rise to similar GST issues, Daron Motors Ltd [1995] BVC 651.

[88] Apple and Pear Development Council v Customs & Excise Commissioners [1988] 2 All ER 922.

[89] Parsons, above n40, at 55–60 discusses the income tax position as it stood in 1985; recent cases, especially GP International Pipecoaters v FCT (1990) 170 CLR 124 and First Provincial Building Society Ltd v FCT (1995) 30 ATR 207 have clarified that government subsidies will be income of a business in virtually all cases.

[90] Section 38–250.

[91] See eg, Federal Coke Pty Ltd v FCT [1977] FCA 3; (1977) 7 ATR 519 (supplier under a long term coke supply contract agreed to reduce quantity to be supplied in return for payment to its subsidiary which closed down its plant for converting coal into coke as a result of the reduction; the payment was held to be a non-taxable capital payment in the hands of the subsidiary; as the court made clear, the amount should have been treated as income of the parent company for tax purposes).

[92] Professional Footballers Association [1993] 1 WLR 153.

[93] Equivalent to ss6–5(4), 6–10(3) and 103–10(1) of ITAA 97. See Daron Motors, above n87 (where it was held under the UK VAT that amounts paid to a finance company by a car dealer constituted part of the consideration paid for the cars it had acquired from a bankrupt firm). It thus is possible that the courts will solve this issue in the absence of a statutory provision as arguably they would under the income tax, Vann RJ, ‘General Principles of the Taxation of Fringe Benefits’’ [1983] SydLawRw 7; (1983) 10 Syd LR 90 at 97.

[94] See Parsons, above n40 at 60–67.

[95] The Squatting Investments Co Ltd v FCT [1953] HCA 13; (1953) 86 CLR 570 raises the question neatly. The taxpayer received a payment from a fund after World War II based on wool compulsorily acquired during the war. The payment was held to be business income as in effect a voluntary addition by the government to the price of the wool. Are tips added to a credit card payment in a restaurant consideration for the supply of the meal?

[96] ANTS Statement, above n2 at 91.

[97] See eg, The Boots Company plc v C&E [1990] 2 CMLR 731 where it was held that a coupon used by a customer to purchase goods operated as a discount reducing the consideration for a supply whether the coupon was simply distributed by the supplier such as in a newspaper or was attached to other goods that the consumer purchased. Where the cost of the discount was borne by a wholesaler through charge back from the retailer, it was agreed by all the parties that this transaction was subject separately to VAT. Under the income tax in Australia, Ballarat Brewing Co Ltd v FCT [1951] HCA 35; (1951) 82 CLR 364 suggests that assessable income on the sale of trading stock will not include a discount even if there is some doubt about whether the discount will be allowed but the ATO in Ruling TR 96/20 treats this decision as only applying where the discount is a virtual certainty.

[98] For example in Cecil Brothers Pty Ltd v FCT (1964) 111 CLR 430; Isherwood & Dreyfus (1979) 9 ATR 473.

[99] The legislation goes further to remove completely any GST consequences for transactions between associates where they form part of a GST group. Sections 48–40(1) and 48–45(2) provide that no output tax liability and input tax credits arise on transactions that a company undertakes with ‘another member of the same GST group.’ Instead, input tax credits and output tax liabilities are intended to arise only on acquisitions from, and supplies to, non-group companies and any other entity. Grouping is discussed further below.

[100] The same applies even where the unregistered recipient is not an associate. The arm’s length rules in the income tax cover cases where the parties are independent but can obtain a tax advantage by adjusting the pricing of related transactions, Collis v FCT (1996) 33 ATR 438.

[101] In other words, the risk of a mistake is on the supplier. A recent example arose in New Zealand in Capital Enterprises v Stewart (1998) 18 NZTC 13870, (1999) 19 NZTC 15242 where the seller of a business mistakenly thought the transaction qualified as GST-free under the going concern rules (Division 38–J in Australia). The seller was required to account for GST and so received less than intended for the business while the purchaser got a bonus input tax credit. See also Pine v Commissioner of Inland Revenue (1998) 18 NZTC 13570; Case U5 (1999) 19 NZTC 9029.

[102] It will be different, however, if the firm swaps an asset for another owned by a private individual, as in the acquisition of a second hand car on a trade-in. In this case, the car dealer will be treated as receiving as consideration for its asset another on which it has paid 1/11th of the market price as GST and will have to account for 1/11th of the market value of the replacement as output tax. But the net result will not be zero tax as the scheme for second hand goods will not allow the acquirer an immediate input credit for the value of the car acquired.

[103] The general valuation rule of the income tax is the amount of money into which benefits in kind can be converted with the result that non-convertible benefits have an income tax value of nil, FCT v Cooke and Sherden [1980] FCA 37; (1980) 10 ATR 696 (taxpayers involved in business of selling soft drinks not taxable on value of holiday provided by their supplier). This rule has been reversed in specific contexts for income tax purposes, such as ss21A, 26(e) of ITAA 36, but not generally and so still applies to income from property, Dawson v Inland Revenue Commissioner (NZ) (1978) 8 ATR 605 (use of television provided to lenders to finance company not taxable).

[104] McLaurin v FCT [1961] HCA 9; (1961) 104 CLR 381 (farmer not taxable on lump sum compensation received from railway for causing damage to stock and to then non-taxable capital items such as fencing and buildings), Allsop v FCT [1965] HCA 48; (1965) 113 CLR 341 (trucker not taxable on lump sum compensation received for unlawful seizure of trucks and refund of tax deductible fees).

[105] Oddly the capital gains tax deals with the issue in ITAA 97 s116–40(2), but the problem remains in the income tax despite a recommendation of the Asprey Report in 1975, n3 above at 77, that the matter be dealt with by a simple amendment to the law.

[106] Compare Division 48 which deals with supplies and acquisitions between enterprises in the same registered group. It, however, provides that the supply and the acquisition from another group member is ‘treated as if it were not’ a taxable supply or a creditable acquisition (ss48– 40(2)(a), s48–45(2) GST Act). The effect is the same as a GST-free supply, but the nomenclature does not offend s9–30(1).

[107] Section 38–185, Table Item 1.

[108] Section 38–190. This simple test can give rise to difficult problems. See eg, Wilson & Horton Ltd v CIR (NZ) (1996) 1 NZLR 26 (where the sale to non-residents of advertising space in newspapers published in New Zealand was treated as exported).

[109] It is also not obvious whether the person could register and claim a refund of the input tax when it sells goods now outside Australia to another person also outside Australia. It is unlikely that those goods will now be sufficiently ‘connected with Australia’ to meet s9–25 but, interestingly, the test in s23–5 which requires a person to register has no connection to the idea of making of ‘taxable supplies,’ just that of ‘carrying on an enterprise’ and making ‘supplies’ in excess of the registration threshold in Division 188. Consequently, it would appear that every non-resident firm is obliged to register for Australia’s GST, although the system of mandatory registration for the local agents of non-residents in Division 57 does belie this! More importantly, the definitions of export for goods require that ‘the supplier exports them from Australia ...’ and (understandably) do not countenance goods already outside as being ‘exported.’ None of the provisions which define an export of goods matches the provision in s38–190 that a supply to a non-resident made outside Australia is an export. Consequently, even if a non-resident who moves its goods across a border can register, it still may not be able to ‘export’ them. Whether this matters is in turn not clear as the granting of input tax credits is not explicitly tied to the making of taxable or GST-free supplies.

[110] Compare Canada, which, unlike most other countries, treats the accommodation purchased in Canada by tourists as an export. This leads to long lines of passengers queuing for GST refunds at Toronto and Vancouver airports.

[111] Section 38–355, Table Item 1.

[112] Section 38–355, Table Item 3.

[113] Section 38–355, Table Item 4.

[114] Section 38–185, Table Item 7.

[115] ANTS Statement above n2 at 92, s68–5.

[116] Section 38–415.

[117] Section 38–355.

[118] Section 38–355, Table Items 6, 7.

[119] ANTS Statement, above n2 at 93.

[120] Medicare Levy Act 1986 (Cth) ss8B8G, Private Health Insurance Incentives Act 1997 (Cth).

[121] ITAA 36 s159P.

[122] Section 38–5.

[123] Section 38–10.

[124] Sections 38–25, 38–30, 38–35.

[125] Section 38–55.

[126] ANTS Statement, above n2 at 94.

[127] Parsons, above n40 at 462–469. ITAA 36 s82A contains a remnant of a previous concession which has caused considerable problems for the ATO in recent years, see Ruling TR 98/9.

[128] ANTS Statement, above n2 at 94.

[129] Ibid.

[130] Ibid.

[131] Parsons above n40 at 458–460; Esso Australia Ltd v FCT (1998) 40 ATR 76.

[132] ITAA 97 Division 50.

[133] ITAA 97 Division 30.

[134] ANTS Statement, above n2 at 95. No such unrelated business test applies for income tax purposes.

[135] Section 38–250(1).

[136] Section 38–250(2).

[137] Section 38–255.

[138] For problems that this provision could cause, see n101 above. Adjustments on such GST-free supplies are dealt with in Division 135. The condition about carrying on the enterprise until the day of the supply will raise contemporaneity type problems such as occurred in AGC (Advances) Pty Ltd v FCT [1975] HCA 7; (1975) 132 CLR 175 (finance company business in suspense entitled to deductions for bad debts after transfer of control and active trading recommenced).

[139] Supplementary Explanatory Memorandum, Amendments and Requests for Amendments to the A New Tax System (Goods and Services Tax) Bill (1998) at 13. Compare Pine v Commissioner of Inland Revenue, above n101, which shows some of the problems of the going concern rules in the farming context.

[140] Section 38–220.

[141] Section 38–285.

[142] Sections 38–290, 38–295.

[143] Section 38–385.

[144] ANTS Statement, above n2 at 80.

[145] Senator Meg Lees, Media Release 99/163 (http://www.democrats.org.au/media/1999/05/ 0294ml.htm).

[146] The process is begun in Further Supplementary Explanatory Memorandum, A New Tax System (Goods and Services Tax) Bill 1999 at 5–15. The Commissioner of Taxation gave a withering speech on this issue prior to the deal between the Democrats and the government, Carmody M, ‘Park Ranger’s Approach to the Tax Wilderness or Preparing for Tax Reform and the New Millennium’ (http://www.ato.gov.au/general/opening.htm). The packaging (or biscuit tin) problem, see above n28, is sought to be handled by s38–6.

[147] Division 40–D also treats as input taxed supplies of precious metals (other than the first supply which is GST-free under s38–385). As a result of the deal between the Democrats and the government, school tuckshops and canteens may choose to be input taxed under Division 40–E to lessen the compliance burden. This treatment is not available if anything other than food is supplied (such as pens and pencils), and does not apply to boarding schools’ meals provided to students as part of their board.

[148] ANTS Statement, above n2 at 96.

[149] Section 40–5(1).

[150] Section 40–5(2) Items 1–10.

[151] Id, items 12, 13.

[152] See eg, Becker v Finanzamt Munster-Innenstadt [1982] EUECJ R-8/81; [1982] CMLR 499 (dealing with the meaning of the negotiation of credit); and Donald Ford v C&E [1987] VATTR 130 (dealing with the activities of an insurance broker). Credit card schemes can present other difficulties – whether the company is a third party providing a financial supply to the customer, or is acting as a purchasing agent for the customer. Compare The Harpur Group Ltd [1994] BVC 841 and C&E v Diners Ltd [1989] 1 WLR 1196.

[153] Section 40–5(2), Item 11.

[154] ANTS Statement, above n2 at 96.

[155] Section 9–10.

[156] The Review of Business Taxation may lead to a redraft of the income tax along the same lines, A Platform for Consultation, above n38 at 43–44.

[157] See above n78; Park Commercial Developments plc v C&E [1990] 2 CMLR 746, which held that VAT on expenses relating to the issue of shares before the company started carrying on its property development business, the first supply of which occurred three years later, was not related to the carrying on of the economic activities of the company and available for credit. This kind of case would not be solved by the pre-incorporation provisions of the legislation; the decision seems doubtful, however, in the light of the cases referred to in n78 above.

[158] The parallel with the structure of s8–1 ITAA 97, is again striking. The cases on the personal v business border here are legion, just as in the income tax, with quite a fascinating line of cases all claiming input credits for racehorses on the basis that they were acquired for advertising the taxpayer’s principal business. See eg, Case N27 (1991) 13 NZTC 3229 (where the cost of the racehorse did give rise to input tax credits), Ashtree Holdings Ltd v C&E [1979] STC 818 (where the input tax credit was denied for the racehorse), Tallishire Ltd v C&E [1979] VATTR 180 (where the input tax credit was denied), and Denmor Investments Ltd v C&E [1981] VATTR 66 (where the input tax credit was allowed). The structure of the GST legislation also raises the same interpretation question as the income tax – is the private or domestic exception a true exclusion or simply a clarifying statement of the primary test, see Parsons, above n40 at 304– 307.

[159] ANTS Statement, above n2 at 148–149, compare Vann RJ, ‘Improving Tax Law Improvement: An International Perspective’ (1995) 12 Australian Tax Forum 193 at 238–241.

[160] Again, analogous with income tax is the notion of expenses incurred in order to earn exempt income. Here, the expense is incurred in order to make (one type of) tax-free supply.

[161] The income tax occasionally provides that deductions can be obtained even though they relate to exempt income, such as s23AI(2) of ITAA 36.

[162] See Coveney v CIR(NZ) [1995] 1 NZLR 90 (where the taxpayer purchased a farm with dwellings already constructed on it; under the New Zealand system, the input credits on these acquisitions could not be apportioned because a single item had been purchased for an unallocated price).

[163] Section 11–30.

[164] These are discussed in section 4 of the paper below.

[165] See OECD, Consumption Tax Trends (Paris: OECD, 1995) at 29. It notes that Austria, Finland, Mexico, Norway, Sweden and Turkey do not make exported financial supplies GST-free.

[166] Above n33 at 39.

[167] Parsons, above n40 at 481–490. Examples where apportionment is unclear are the hotel bill of a person on a business trip who is accompanied by their spouse and an airfare to a destination at which the traveller will engage partly in business and partly on a holiday. At some point apportionment ceases to be appropriate and an all or nothing approach needs to be applied. Some would suggest that the airfare example is of this kind. In other cases the method of apportionment will be controversial. In the hotel room example it is often argued that the single room rate should be allowed rather than half the double rate, though in the authors’ opinion the latter is correct. The problem income tax cases involve elevating form over substance.

[168] Section 11–30(2).

[169] A firm’s ‘annual turnover of financial supplies’ is defined in s195–1 but not in a way that answers this issue.

[170] This assumes that such a mixed business personal situation is appropriate for apportionment, compare above n167.

[171] Invoice is defined for these purposes in s195–1 as ‘a document notifying an obligation to make a payment.’ The meaning of these words was considered in New Zealand in Shell New Zealand Holding Co Ltd v CIR(NZ) [1994] 3 NZLR 276 (dealing with the treatment of imported goods).

[172] FCT v Australian Gas Light Co [1983] FCA 341; (1983) 15 ATR 105.

[173] Section 99–5.

[174] Nilsen Development Laboratories v FCT [1981] HCA 6; (1981) 144 CLR 616.

[175] Arthur Murray (NSW) Pty Ltd v FCT [1965] HCA 58; (1965) 114 CLR 314.

[176] Coles Myer Finance v FCT [1993] HCA 29; (1993) 176 CLR 640 (discounts on promissory notes incurred on issue of the notes but only deducted over the period of the note).

[177] Henderson v FCT [1970] HCA 62; (1970) 119 CLR 612 and Country Magazine v FCT [1968] HCA 27; (1968) 117 CLR 162.

[178] Above n3 at 81–90. The current tests to delineate cash from accrual accounting are found in Carden’s case [1938] HCA 69; (1938) 63 CLR 108; Henderson v FCT [1970] HCA 62; (1970) 119 CLR 612; FCT v Firstenberg [1977] VicRp 1; (1976) 6 ATR 297 and in Ruling TR 98/1.

[179] Taxation Administration Act 1953 (Cth) ss35, 36.

[180] Parsons, above n40 at 673–680. The CGT had a provision dealing with non receipt but not repayment prior to 1998 but the rewrite remedied this problem, ss116–45, 116 50 of ITAA 97.

[181] HR Sinclair & Son Pty Ltd v FCT [1966] HCA 39; (1966) 114 CLR 537 (timber business which argued that state government royalties for removing timber were too high held taxable on ex gratia grant received from government), FCT v Rowe [1997] HCA 16; (1997) 187 CLR 266 (person whose conduct was investigated and cleared by inquiry held not taxable on ex gratia payment of legal expenses by government).

[182] Consider a variation on Zobory v FCT [1995] FCA 1226; (1995) 30 ATR 412: a person embezzles a large amount of money which is invested in commercial premises that the person rents out, paying output tax on the rent and claiming input tax credits for the purchase of the premises and other outgoings; the fraud is discovered and the premises are found to have been held on constructive trust since the time of the embezzlement for the person who was embezzled.

[183] The Review of Business Taxation, A Platform for Consultation, above n38 at 260–261 has raised the prospect of making the income tax more symmetrical. Although the 12 month rule is an improvement, there is still no alignment with financial accounting which allows provisions for bad debts which would be possible for income tax but not GST.

[184] Parsons, above n40 at 505–513. Under the income tax bad debt deductions are possible under the general deduction provision as well as the special bad debt rules, with the deduction being available when the debt ceases to exist. This position would not seem to apply to the GST.

[185] Section 129–20.

[186] Sections 129–5, 129–10; the original rule seems to be expressed back to front but the intention is clear, compare the similar rule in s11–30(2). The financial supply rules in this paragraph of the text only apply if no private or domestic use is involved.

[187] The allocation of this adjustment to the 30 June tax period is, according to the Explanatory Memorandum, done so as to ease the compliance burden of taxpayers. It is said that such a review would have to be done for the purposes of calculating depreciation. See above n33 at 144. 6.218. Division 129 provides for an adjustment if your actual use of a thing is different from your intended extent of creditable purpose. This is an adjustment for change in creditable purpose. Note that for income tax you must determine the extent to which your assets are used in carrying on a business or earning assessable income, such as working out business use of a motor vehicle. You do this every year for your income tax return. The adjustment in Division 129 is similar. There is, however, likely to be little conformity between the income tax and the GST systems. Business taxpayers do not need to differentiate between their sales income and their interest, dividends and so on in computing their income tax depreciation, but this is precisely what is required for the GST adjustment. Further, the use of the statutory formula method by most taxpayers for computing the personal versus business use of cars, obviates the need to make the kind of assessment that Division 129 requires.

[188] Sections 129–50, 129–55.

[189] Section 129–25.

[190] Section 42–170 of ITAA 97 reduces depreciation deductions year by year to the extent that the asset was not used for producing assessable income. In determining whether depreciable assets used in a foreign branch are subject to the exemption system of relieving international double taxation on disposal, account is taken of the use of the asset only for the current and previous year, even though depreciation deductions may have been allowed for tax purposes before that, s23AH(6) of ITAA 36.

[191] [1982] HCA 8; (1982) 150 CLR 355 (land acquired by company for access to beach shacks owned by shareholders came within income tax when the company was taken over by land developers, with market value cost at that time for calculating the profit subject to tax).

[192] There is a discussion about this issue in the judgment of Gibbs J in Curran v FCT [1974] HCA 46; (1974) 131 CLR 409 at 421. He attempts to discern whether an asset can be deemed to have a cost when it is ventured into a business. He observes: ‘The case may be compared with that of a trader who takes into his trading stock articles which he received by way of gift or under a bequest .... In such a case an account will not reveal the true result of the trading unless those articles are brought in at an appropriate value, eg, market selling value. If the account showed that the articles cost nothing, the result would be to increase the amount of the trader's profit or decrease the amount of his loss by the value of the gift or bequest and in effect to make the trader pay income tax on the gift or bequest. The only practicable way of reaching a true result in a case of that kind would be to bring the articles into the account at an appropriate value as though they had been purchased ...’ The High Court in overruling Curran’s case in John v FCT [1989] HCA 5; (1989) 166 CLR 417 left open the correctness of Gibbs J’s approach to gifts.

[193] See ITAA 97 (Cth), ss70–100, 70–110, 104–220.

[194] Section 129–40, steps 1 and 2.

[195] Id, step 4.

[196] Section 129–75.

[197] Section 129–40, step 1.

[198] [1955] 3 AII ER 493 (racehorse of breeding business moved to owner’s hobby of racing horses).

[199] Parsons, above n40 at 811–812.

[200] It is worth noting that there is some recognition of this problem in Division 66 which deals with second hand goods. As we shall see, the procedure in Division 66 deems a commercial buyer of second hand goods to be entitled to a deemed input credit of 1/11th of the amount paid for the goods. But, under s66–5(2)(e), the deemed credit does not arise where the commercial firm makes ‘a supply of the goods that is not a taxable supply.’ In other words, the credit is never created if the firm consumes the asset. The denial of the credit can work in practice because the deemed input credit for purchases of second hand goods does not arise in the case of acquisitions costing more than $300 until the period in which the goods are sold. See s66–15.

[201] Section 138–5(3).

[202] There are some rules of this kind in the depreciation area for income tax purposes.

[203] Section 115(b) requires, for an input credit to be recoverable, that the ‘supply of the thing to you is a taxable supply.’

[204] This system does not apply to the cost of improvements, presumably on the basis that the GST on these acquisitions will already have been recovered under the usual rules. It seems, therefore, that the cost (and GST) on improvements does not have to absorbed into the cost of the land when applying the margin scheme. It is equivalent to profit accounting under the income tax, above n40.

[205] See eg, Martin v FCT [1953] HCA 100; (1953) 90 CLR 470, Evans v FCT (1988) 19 ATR 922, Babka v FCT [1989] FCA 383; (1989) 20 ATR 1251 and Brajkovich v FCT (1989) 89 ATC 5227.

[206] Section 126–10. This provision was altered in the April amendments to include high roller rebates on losses in total monetary prizes, which attracted considerable media attention as a concession to the casinos. The addition seems, however, to accord with the principles underlying the margin method.

[207] This qualification is important because it confines the scheme to supplies of second-hand goods sold by consumers, and keeps out of the second-hand goods system all supplies of plant and equipment by registered firms to whom the input credit–output tax system can easily apply. The section also deals with arguments concerning whether goods leased by the registered person from an unregistered person can be treated as second hand.

[208] It is more than possible that the sale of the security for debt is itself an input taxed ‘financial supply’ because of s40–5, Item 3, but the existence of Division 105 seems to contradict this. The assumption underlying Division 105 is that a sale under the creditor’s power of sale will not be as agent of the debtor, which is the general position under mortgage type powers of sale and so will not be attributed to the debtor as principal.

[209] Of course, there are other complications that can arise depending on the nature of the asset which is the security. For example, s9–30(4) provides that the supply of an asset that was used solely in connection with making input taxed supplies, is itself an input taxed supply. The Note to the section gives as an example of this rule, the sale of a building where the building was used ‘solely to carry on an enterprise that only made supplies that are input taxed.’ Presumably, the sale of such an asset where it was held as security for a debt would also be an input taxed supply, if the input taxed debtor undertook the sale, though not perhaps if the lender made the sale.

[210] Section 105–5(3). The relationship to subs(1) is not as clear as it might be. That subsection only creates a taxable supply if a supply by the debtor would be a taxable supply. Subsection (3) assumes that all supplies by the creditor will be taxable supplies unless the financier can prove otherwise by the specified methods. As the burden of proof under the GST is on the taxpayer under the Taxation Administration Act 1953 (Cth) ss14ZZK and 14ZZO, the difference in expression should not make much difference to the taxpayer. There are machinery provisions for collecting GST from unregistered creditors in Division 105.

[211] Goods and Services Tax Act 1985 (NZ) ss5(2), 17.

[212] Most obviously in the CGT, s106–60 of ITAA 97.

[213] Above n33 at 158.

[214] Supplementary Explanatory Memorandum, above n139 at 22.

[215] ANTS Statement, above n2 at 49–50, A New Tax System (Fringe Benefits Reporting) Act 1999 (Cth).

[216] See ITAA 97, Division 118–B, the main residence exemption in the capital gains tax. The overall effect in terms of the tax theory discussion in section 2 of this paper is that owner occupied housing is taxed on a consumption basis, see Vann RJ, ‘Income as a Tax Base’ in Krever RE (ed), Australian Taxation: Principles and Practice (1987) at 75–78.

[217] In Fightback! Supplementary Paper 5, above n7 at 17–18 the exclusion of rental accommodation from the tax base would have been even larger because it proposed that the rental of commercial premises, as well as residential premises, should also be input taxed. However, an optional–taxing system was proposed for persons who carry on a business which includes the ownership of buildings, typically institutional investors, developers and similar businesses. This group were to be given the option of charging GST on the rental of the building, where the purchaser used the building in a business and agreed to the charge of tax. Because persons who conduct building ownership as part of their business are mainly involved in commercial as opposed to residential real estate, they would be renting to other registered persons. It would be in their interests to register so that they might pass on tax credits relating to their purchases to their tenants who are registered persons. This kind of optional taxing can give rise to its own problems as in C291/92 Finanzamt Uelezen v Armbrecht [1995] All ER (EC) 882.

[218] The sale would also be input taxed (that is, not trigger output tax for the vendor) under s9–30(4) where the building was used solely to provide input taxed residential accommodation by the landlord. There is an interesting question about the interplay between these two provisions given that they may apply to the same transaction but impose different requirements. Section 40–70 applies equivalent treatment to sales for long-term (50 years plus) leases.

[219] Above n3 at 68.

[220] There is a difficult line drawing exercise between what is effectively someone’s home and shortterm stays away from home. Division 87 seeks to make the distinction more refined. If commercial accommodation is provided in commercial residential premises that are predominantly for long-term (28 days or more) accommodation, the taxable value is reduced by 50 per cent for an individual using it as long-term accommodation. This reduction seeks in a rough and ready way to separate the accommodation element and the other services usually involved (servicing of the accommodation, furniture, phone line etc). If the accommodation is predominantly short-term but a person in fact stays for 28 days or more – those eccentrics who live in hotels – the 50 per cent reduction applies from the 28th day.

[221] Again, the input taxing proposal in In Fightback! Supplementary Paper 5, above n7 at 17–18 was much more extensive. All persons engaged in the construction industry would not have been required to register and pay tax on the sale, repair etc. of buildings (the construction contracts would, however, have been subject to GST). Sales of existing buildings were also to be exempt. The Opposition had stated that this policy would apply to residential buildings and probably commercial buildings. If sales of commercial buildings were exempt then the optional taxation of commercial rents described above n217 would not amount to much as the major source of input tax credits would be denied (that is, building costs).

[222] See Cnossen S, ‘VAT Treatment of Immovable Property’ in Thuronyi V, above n19 at 231. The states will retain substantial transfer duties in relation to real estate after tax reform which may be regarded as proxies for GST on transfer of residential real estate.

[223] It is not universally agreed that the spread is the appropriate measure of the bank's value-added as well.

[224] For example, the interest paid adjustment used in relation to foreign income and associated practices, House of Representatives Standing Committee on Finance and Public Administration, Tax Payers or Tax Players? (Canberra: AGPS, 1989) at 17–41.

[225] See Poddar S & English M, ‘Taxation of Financial Services Under a Value-Added Tax: Applying the Cash-Flow Approach’ (1997) 50 National Tax J 89; Bradford D, ‘Treatment of Financial Services Under Income and Consumption Taxes’ in Aaron H & Gale W (eds), Economic Effects of Fundamental Tax Reform (1996) at 437–164; Schenk A & Oldman O, ‘Analysis of the Tax Treatment of Financial Services Under a Consumption-Style VAT: A Report of the American Bar Association Section of Taxation Committee on Value Added Tax’ (1990) 44 Tax Lawyer 181. Further details on financial supplies which will lead to regulations were released on 17 August (http://www.treasury.gov.au/publications/).

[226] Section 9–30(3) provides that GST-free treatment will prevail over input taxed treatment. Financial supplies made to persons who are not in Australia at the time of supply can be GSTfree under s38–190 Table Items 2 and 3.

[227] There are currently two international projects aimed at trying to solve the problem of the exemption of financial services, one being undertaken by the OECD and the other by the EU.

[228] Gambling presents some parallels here. It is proposed that gambling will be taxable, which departs from the Fightback! proposal above n7 at 66, which exempted gambling, presumably on the basis of the difficulty of taxing it effectively. Most European countries exempt gambling from their VAT and levy turnover taxes instead which can be viewed as a proxy for the GST. The major difference with financial services is that gambling is essentially a consumption activity, that is, it does not give rise to input tax for other businesses. Hence the concerns with tax on tax do not arise though the other problems of exemption are present. It is noteworthy in Australia that the income tax has also more or less given up on gambling.

[229] See Review of Business Taxation, A Platform for Consultation above n38 at 141–212.

[230] Division 48.

[231] Division 51.

[232] Division 54.

[233] Although the Review of Business Taxation, A Platform for Consultation, above n38 at 531–609 develops grouping proposals for income tax, these will go nowhere near as far as the GST. Being based on the notion of an ‘enterprise’ the GST carries this through in a largely logical way by registering enterprises, whatever the exact legal constructs involved.

[234] See Division 184, definition of ‘entity’, Taxation Administration Act 1953 1953 (Cth) s50. There is very little more expressly to explain how the GST operates for these entitles in the GST Act, unlike the income tax where there are detailed rules. The income tax rules are largely concerned with tracing the income through to partners and beneficiaries.

[235] Section 48–5.

[236] A separate grouping regime is provided in s48–10(2) for companies which are non-profit bodies. They can form GST groups without being commonly owned, provided all the other members of the group or proposed GST group are also non-profit bodies belonging to the same non-profit association. The remaining requirements in s48–10(1) about residence, accounting, and so on still apply to them.

[237] Division 48–C. These rules will try to deal with some of the planning that occurs in the UK under a similar regime. See eg, C&E v Thorn Material Supplies [1998] UKHL 23; [1998] 1 WLR 1106.

[238] Section 48–60.

[239] Section 48–40(1).

[240] Section 48–45(1).

[241] Section 48–50.

[242] See ss48–60(1), 48–40(1)(b), 48–45(1)(b).

[243] Section 48–40(2) provides that, ‘a supply that a company makes to another member of the same GST group is treated as if it were not a taxable supply.’

[244] Section 48–45(2) provides that, ‘an acquisition that a company makes from another member of the same GST group is treated as if it were not a creditable acquisition.’

[245] The Explanatory Memorandum, above n33 at 104 gives this example of the intended outcome of s48–55: 6.10 As the GST group is effectively a single entity the adjustment provisions apply to the group as a whole. The representative member is responsible for any adjustments – s48–50. The change in creditable purpose provisions of Division 129 apply to the GST group as a whole. For example, one company acquires something from outside the GST group and uses it to make taxable supplies to entities outside of the group. It was acquired solely for a creditable purpose. The representative member is entitled to and receives a full input tax credit in relation to the acquisition. However, later the thing is supplied to another company within the GST group, and that second company uses the thing to make input taxed supplies. The change in creditable purpose provisions apply. The representative member makes an adjustment under Division 129.

[246] Review of Business Taxation, A Platform for Consultation, above n38 at 643–645, 707–709 contains options to deal with the income tax problems. The April amendments dealt with GST problems involving foreign branches of residents involving financial supplies, Supplementary Explanatory Memorandum, above n139 at 10–11.

[247] Review of Business Taxation, A Platform for Consultation above n38 at 327–629 considers in detail the income taxation of entities.

[248] Part III Division 13, Parts X and XI of ITAA 36 which constitute a significant proportion of the income tax legislation.

[249] For audit purposes, the exporter will be required to have proof that the goods have been exported which will typically be evidenced by Customs Service documents, although GST refunds will come from the ATO.

[250] Section 13–20.

[251] Section 13–5 contains no parallel to s9–5(d).

[252] Division 15.

[253] Section 42–15.

[254] Sections 38–185, 38–415.

[255] Section 84–5.

[256] See eg, ADV Ltd v Queen [1997] Tax Court of Canada LEXIS 3456 (where a taxpayer argued the selling of goods to Canadians by mail order from the US meant that it was not making supplies in Canada and was thus not obliged to charge output tax and, incidentally, that its customers were the ones who were exposed to any customs duty or GST on the import of the goods).

[257] Unlike the income tax which is levied on a residence and source basis, the destination principle means that there will not generally be effective levy of GST by two countries. Hence the problem of double taxation is not systemic to the GST. Double taxation will, however, arise where countries use different rules for what is regarded as an export or import of services with the possibility also of double exemption. This is equivalent in income tax terms to double taxation arising from inconsistent source rules being applied to the same income; current tax treaties on income tax do not always deal successfully with such source problems.

[258] See Taxation Administration Act 1953 (Cth) Part VI and Parts IV-VII of ITAA 36.

[259] An exception to this position occurs in s144–5 of the GST Bill which requires all persons who provide taxi travel to register, whether or not their annual turnover exceeds the threshold, above n69. Taken literally the provisions require every firm in the world above the threshold to register, see above n109 but at least they are generally relieved from filing returns if their net amound for a tax period is zero, s57–40(a).

[260] Sections 23–15, 25–1.

[261] Section 23–10.

[262] Regulation Impact Statement for the Introduction of a Goods and Services Tax (Canberra: AGPS, 1998) at 5.

[263] Australian Taxation Office, Taxation Statistics 1995–96 (Canberra: AGPS, 1998) at 75.

[264] A New Tax System (Australian Business Number) Act 1999 (Cth). This system will not, however, replace the privacy protected Tax File Number (‘TFN’) system currently used for income tax purposes, though often an ABN will be able to be quoted in future in lieu of a TFN.

[265] Tait 1988, above n19 at 108–140.

[266] It is not obvious why the test in s95 (‘in the course or furtherance of’ the enterprise) could not have been used here for better coordination.

[267] Section 188–25; presumably the considerable learning in the income tax of what is a capital asset will be utilised for this purpose.

[268] This contrasts with the original Fightback! Supplementary paper No 5, above n7 at 8. Under Fightback!, the tax period in the normal case would have been two months, with special rules whereby small businesses (annual taxable supplies less than $250000) could elect to pay the tax on a six month basis. Large businesses (annual turnover exceeding $24 million) would have had a one month tax period, also available to other taxpayers by election.

[269] As will appear below, it is generally necessary for the acquirer to hold a tax invoice if it is to claim the refund for the input tax on its acquisition. See s2910(3). A tax invoice is subject to manner and form conditions in s29–70 if it is to be valid. For the supplier, however, the output tax liability can be triggered by the issue of an invoice which is defined in s195–1 simply as ‘a document notifying an obligation to make a payment’.

[270] Sections 3125(2) and 188–10(3)(a) define ‘electronic lodgement threshold’.

[271] Section 3510.

[272] Section 355(1).

[273] ANTS Statement, above n2 at 133–146, A New Tax System (Taxation Laws Amendment) Bill (No 1) 1999. Although there are a number of apparently unintended results from this Bill as currently drafted, see n71 above, it represents a breathtaking reform of tax collection which to date has not attracted the limelight in view of the other major tax reforms underway.

[274] Section 29–10(3).

[275] Section 29–70(2).

[276] The faith of the (tax) bureaucrat in formal documentation nonetheless remains strong. The Australian substantiation rules for certain deductible expenses originally were drawn in part from the log books required of public sector chauffeurs. Over time as the injustice of the rules was highlighted, the formal requirements have been watered down, revealing the real problem of how to deal with employee expenses, see Vann, above n159 at 238. The authors are also reminded of their experiences in various former Eastern bloc countries where tax auditing consisted of ensuring that an official of the necessary rank had signed the purchase requisition, without any check of whether the money had actually been spent on the item recorded in the firm’s records.

[277] Section 29–70(1).

[278] Above n33 at 178.

[279] One other interesting omission is that there is no provision in the Act which requires displayed prices to be GST-inclusive, despite the government’s insistence during the election campaign that displayed prices would be GST-inclusive. However, strong and controversial powers have been given to the Australian Competition and Consumer Commission to ensure that businesses do not use the introduction of the GST as a convenient opportunity to gouge consumers, A New Tax System (Trade Practices Amendment) Act 1999 (Cth), which also conveniently will keep the lid on the immediate inflationary impact of the GST.

[280] ANTS Statement, above n2 at 150, Review of Business Taxation, A Platform for Consultation, n38 above at 515–527.

[281] Section 165–5(1)(c)(ii). The original bill referred to ‘a’ principal effect but this was changed to ‘the’ principal effect in the April amendments.

[282] Section 165–10(1).

[283] Section 165–10(3).

[284] Section 165–15.

[285] Press Release Nat 99/42 (http://www.ato.gov.au/general/whatsnew/whatsnew.htm).

[286] A supply of a right (such as a book of entry tickets) between 2 December 1998 and 30 June 2000 falls within GST if the right is exercised on or after 1 July 2000 (s11); progressive or periodic supplies spanning implementation of GST such as a lease are subject to GST to the extent supplied after implementation (s12); a right for life such as a life membership spanning implementation is all supplied on or after 1 July 2000 (s14); and a construction project is valued at 1 July 2000 and only additional value is subject to GST (s19).

[287] The operation of the provision can further vary for particular kinds of supply, see Transition Act ss14, 15, 19.

[288] Tait 1988, above n19 at 185–186.

[289] Goods and Services Tax Act 1985 (NZ) s85; the normal rule is found in s78.

[290] Capital goods receive quite variable treatment on transition around the world, Tait 1988, above n19 at 182–185.

[291] Above n12 at 77–104.

[292] There is also a wine equalisation tax in recognition of the fact that wine was subject to a high rate of WST rather than excise like other alcoholic beverages.

[293] Review of Business Taxation, A Strong Foundation, above n38 at 100–101.

[294] One might assume that stock valued at market selling value might be viewed as carried at a GST–inclusive price, but as the eventual sale price collected will be treated as net of GST output tax, such a view would be odd.

[295] If the GST is passed onto a registered firm under Division 111 by reimburement from the firm, the individual will not get a deduction and the position of the firm should depend on the rules in the preceding paragraphs.

[296] Section 109C(1) ITAA 36 provides that a private company which ‘pays an amount’ to a shareholder may be taken to be paying a dividend to the shareholder. Subsection (3)(c) provides that a payment includes a transfer of property and subs(4) values the amount of the payment as the difference between the actual payment by the shareholder and the market value of the property transferred.

[297] Sections 104–75 and 104–80 ITAA 97 can be triggered by the action of appropriating trust assets exclusively for particular beneficiaries.

[298] Fortunately, the dividend cannot be franked so that the interaction with the imputation system can be ignored. See definition in s160APA ITAA 36 of ‘frankable dividend’ paragraph (h).

[299] The reason for the doubt arises primarily from the income tax issue about the treatment in the company’s books of the asset being transferred. For example, if the asset was inventory costing $100, it is not clear that the company would lose its deduction for the cost of the inventory when it ceased to be ‘on hand’ at the end of the year of income. Such a conclusion ought to follow where the dividend was frankable, but given that a deemed dividend is not frankable, permitting the deduction to survive does serve as a surrogate means of removing the double taxation of dividends. Could the supply be regarded as for no consideration and so not subject to GST? Compare Archibald Howie Pty Ltd v Commr of Stamp Duties (NSW) [1948] HCA 28; (1948) 77 CLR 143 (distribution in specie held to be for consideration for stamp duty purposes).

[300] Above n2 at 91.

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