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

Implementing the Goods and Services Tax


The purpose of this paper is to outline some of the important policy and design elements that arise in the recently enacted goods and services tax (GST).[1] The Australian GST, more commonly known in other countries by its European title of ‘value-added tax,’[2] displays the common elements of the dominant form of that tax, generally described as a consumption-type, invoice-based, credit-method value-added tax, terms which will be discussed below.

A second purpose of our paper is to make more evident the parallels between the GST design issues and the similar issues that arise under an income tax, and to draw out several lessons from these parallels. It will be suggested that in practice the income tax can probably be made to come as close or closer in many areas to its theoretical ideal as the GST, although this has often not occurred for failure to take legislative action to deal with glaring problems. Further, many of the design features explaining why the GST is generally regarded as a simpler and more buoyant and resilient tax in practice compared to the income tax can be replicated in the income tax. Unlike many other countries, we in Australia are moving away from, rather than towards replicating these features in the income tax. Equally, the way in which the government proposes to implement its GST misses significant opportunities for simplifying the tax base and the administration of the income tax.

The paper will proceed in these steps: section 1 will revisit some of the recent history that has led to the current legislation; section 2 will examine the theory of a GST and some of the principal concepts underlying its operation; section 3 will look in some detail at how these concepts have been translated into legislative form in the recent Act; section 4 will examine some special regimes created to deal with specific issues of implementation; section 5 will look at some compliance and administration issues surrounding the tax; section 6 will consider the transition from the wholesale sales tax (WST) to the GST; and section 7 will consider the interaction of the GST with Australia’s other principal taxes, the fringe benefits tax (FBT) and income tax.

1. A Brief History of Australia’s GST Proposals

The story of tax reform in Australia since 1985 has been one of sustained efforts to reform indirect taxation, particularly the wholesale sales tax, a process which has proved much more contentious than reforming the income tax. This prolonged battle to shift to a different form of consumption tax has been a dominant theme of recent Australian politics. Throughout the debate, three issues have predominated – whether to replace the WST which is necessarily limited to goods with a broadbased tax which can include services, whether any replacement tax should include food which is generally exempt from WST and what compensation measures were necessary to protect the less well-off.

It would be a mistake, however, to think that there was no pressure for reform of the system of indirect taxation prior to the upheavals that began in the mid- 1980s. One of the first significant calls for the reform of the WST came in 1975 with the release of the Full Report prepared by the Asprey Committee. Chapter 27 of the report recommended the abolition of the WST and its replacement with ‘a value-added tax covering a wide range of goods and services.’[3] The proposal included food, but in the first instance was designed to simply replace wholesale tax revenues so that compensation was mainly a transitional matter. Thereafter compensation would become an issue if a switch between income and consumption taxes was made as the Committee proposed. This recommendation was not acted upon, like many others in the Asprey Report, but the current Prime Minister as the Treasurer of the time, considered various proposals for indirect tax reform, including a GST between 1978 and 1982.[4]

The reform program that began in 1985 commenced with a review by Treasury of the available options which was published in a paper entitled Reform of the Australian Tax System, better known by its sub-title, the Draft White Paper.[5] The government released the Draft White Paper just before the Tax Summit held in Canberra in mid-1985. The Tax Summit was intended to be the forum at which an agreed plan for the reform of the Australian taxation system could be negotiated by representatives selected from various sectors of Australian society. The Draft White Paper recommended substantial broadening of the income tax base with the additional revenue being used to finance a reduction in marginal income tax rates, and a shift toward greater reliance upon a substantial consumption tax levied at the retail level. Food was to be included in the suggested retail sales tax (RST) and a whole chapter was devoted to a comprehensive compensation package for low income earners. The government’s preferred package, termed ‘Option C’ in the Draft White Paper, involved these two elements but the Tax Summit process proved to be less than successful and did not reach the consensus on this approach that the government had wanted. Three months after the Summit, in September 1985, the Treasurer released a statement, titled Reform of the Australian Taxation System, but it did not propose implementing Option C.[6] Instead it took the path of ‘Option A’, restructuring only the income tax by substantial base broadening measures to finance reductions in personal income tax rates.

The tax debate continued as a major public issue in the ensuing years, but was focused around the income tax until, on 21 November 1991, the then Opposition Leader, Dr John Hewson, announced the Liberal National Parties’ tax platform for the next election, including a proposal for a broad-based GST to commence on 1 October 1994 at a 15 per cent tax rate. Following sustained criticism of the tax platform and the GST in particular, a modified package, significantly excluding food from the GST, was released in December 1992.[7] The Opposition put forward an alternative vision of Australia’s tax system proposing changes as fundamental as those in the 1985 Draft White Paper. The package proposed replacing the WST with the GST, substantial reductions to personal income tax rates, and a once-only cash payment and targeted tax credits to compensate for the effects of the GST. Some existing indirect taxes such as payroll tax and the training guarantee levy would be abolished, and new tax concessions would be introduced for retirement and other savings. Broader consultation on the details of the GST and more sophisticated research were undertaken by the ‘GST Planning and Coordination Office’ – also known as the Cole Committee.[8] This Committee was set up by the Opposition Parties to prepare a comprehensive report on the detailed design of the new GST. Its report was never publicly released.

This vision was comprehensively rejected at the election when, as electoral folklore has it, ‘John Hewson lost the unlosable election.’ After the Labor Party’s success in the 1993 election, its next Budget in August 1993 immediately increased fuel excise and the rates of the WST, as well as withdrawing promised income tax cuts. Not surprisingly, the Coalition parties argued that the government had no electoral mandate for this action, and when the Labor government sought to enact the Budget measures, the Coalition threw the changes into doubt by allegations that the Taxation (Deficit Reduction) Bill 1993 (Cth) was not constitutional, for reasons concerned with the operation of s55 of the Constitution.

Despite its 1993 election loss and a subsequent promise by the then Opposition leader John Howard that the Liberal and National Parties would ‘never ever’ resurrect the GST, to the surprise of many, the reform of indirect taxation was revived by the Coalition parties as the dominant element of its platform for the 1998 election. The Prime Minister made a statement on 13 August 1997[9] announcing a review of the tax system which would form the basis of its tax policy for the next election, based around five principles – no increase in the overall tax burden, a major reduction in personal income tax, especially for families, a broadbased indirect tax to replace some or all of the existing indirect taxes, compensation for those deserving of special consideration, and the reform of Commonwealth State financial relations.

Within a year, the government’s ANTS Statement[10] released on 13 August 1998 recommended a 10 per cent broad-based GST, including food, to commence on 1 July 2000 with all revenue from the tax to be allocated to the states in return for the elimination of many state transaction taxes. The ANTS Statement also proposed substantial personal income tax cuts, while seeking to alleviate wide variations in effective tax rates arising from interaction of the income tax and social security, and business income tax and administrative reforms. The Labor Party’s tax policy for the election, A Fairer Tax System – With No GST (August 1998) was a platform that retained the WST, albeit with a few modifications. The re-election of the Coalition parties at the 1998 election meant that a GST in some form would be likely in Australia, but the exact dimensions of the tax would depend upon the outcome of the Senate’s processes. Both the Australian Democrats and the Labor Party had promised to oppose (in varying degrees) the introduction of the GST even if the Liberal and National Parties won the election.

The government had learned the need to avoid having to answer embarrassing and potentially dangerous questions on matters of detail during the heat of an election campaign – Dr Hewson’s notorious TV performance attempting to determine whether GST would be imposed on a birthday cake had made him, and his tax, look extremely foolish. Instead, the ANTS Statement provided basic details of a very broad-based GST but including special treatment of health and medical services, education, childcare, charitable activities, religious services, financial services and residential rents. The government promised that it would commission its own inquiry into ‘outstanding GST design issues’ after the election to help finalise questions of detail. On 27 October 1998, the Treasurer announced that the government would set up a Tax Consultative Committee chaired by David Vos, a partner in an accounting firm. It was required to report to the government by 13 November 1998. According to the Treasurer, this short time frame was set so that the drafting of the legislation could be completed and the Bills introduced into Parliament before Christmas. The Committee’s terms of reference required it to examine only a few aspects of the GST-free areas – the scope of the exemptions for health services, education, religious services, and the non-commercial activities of charities, and the transitional arrangements in relation to motor vehicles.

The Committee was required to ensure the tax system minimised any discrimination between private and public provision of goods and services in the GST-free areas, and also to ensure business and charitable organisations are treated on an equivalent basis where they provide similar goods and services on a commercial basis to consumers.[11] In relation to the health sector, the Committee’s report[12] identified the range of medical, hospital services, aged care, community care, medicines and medical appliances that should receive special treatment. In relation to education, the report identified the range of institutions, courses and services that should also receive special treatment. In relation to the commercial activities of charities, it recommended that supplies of donated goods and services for nominal value be treated as ‘non-commercial supplies.’ In relation to the transitional arrangements for motor vehicles, it generally supported the government’s proposed approach of reducing the WST rate prior to the commencement of GST, followed by special phasing-in arrangements during 2001 and 2002.

It also included a proposal for an ongoing committee to be set up to oversee the implementation of the GST and to deal with the inevitable ‘issues and anomalies.’ And it suggested that entities who provide GST-free goods and services should also be allowed to share in the government’s $500 million fund announced in the ANTS Statement to assist small and medium businesses meet the costs of transition to the GST. In December 1998, when introducing the package of GST Bills, the Treasurer said the government had ‘no difficulty in accepting the vast majority of the [Committee’s] recommendations.’

In the meantime, the debate over the GST continued in the Senate where the Australian Democrats and the Labor Party were insisting that the GST legislation be subject to scrutiny by various Senate Committees – the only forum where they could secure a majority. The politics were further complicated by Senators Colston and Harradine who held the balance of power in the Senate until 30 June 1999. After much wrangling, the Senate agreed on 25 November to the motion put by Senator Lees, the Leader of the Democrats for a wide-ranging inquiry into the government’s tax reform proposals to be undertaken by four Senate committees – a new committee to be known as the Senate Select Committee on A New Tax System, the Senate Community Affairs References Committee, the Senate Employment, Workplace Relations, Small Business and Education References Committee and the Senate Environment, Communications, Information Technology and the Arts References Committee. The four committees then solicited submissions to be made by 29 January 1999. The committees began hearings on 28 January 1999. All the committees were given various reporting dates with all required to be completed by 19 April 1999, the first sitting day after the 1999 Easter recess.

The first report which was tabled on 18 February 1999 set the tone for all the others.[13] It was concerned with the economic modelling of the effects of the GST and contained effectively four separate reports from the Australian Labor Party, the government senators, the Australian Democrats and the WA Greens. Labor found that the government’s claims on the economic effects of the GST were all wrong and the government senators that the claims were correct. The Democrats agreed with much of the claims but considered that the effect on low income earners was understated which could be solved by not taxing food, while the WA Greens were concerned. At the end of March 1999 there was a flurry of three reports. In the report of the Senate Environment, Communications, Information Technology and the Arts References Committee, all but the government senators found that the tax package would damage the environment.[14] For the Senate Community Affairs Reference Committee[15] and the Senate Employment, Workplace Relations, Small Business and Education References Committee,[16] the positions were similar with the Democrats suggesting changes to improve the treatment of health, charity, community and housing sectors and employment effects. The final report was tabled on the due date and contained more of the same.[17]

During this period, the media was full of the ‘great GST debate.’ At first, all the attention was on Senator Harradine whom the government sought to win over with a more generous compensation package for the less well-off. After he delivered his ‘I cannot’ speech on 14 May 1999, the government next commenced negotiations with the Australian Democrats. This signalled that food was out of the GST as the Democrats had always made their support for a GST conditional on this exclusion. The government had previously insisted at all stages that it would not negotiate on this point. The agreement announced on 28 May 1999 mainly paid for the removal of ‘basic food’ by reducing personal income tax cuts at the upper end. This gave the government just enough time to have the GST approved by the Parliament before the 30 June deadline that it had insisted on throughout the debate.

In the end, replacement of the WST which all major political, business and welfare groups in Australia had proposed at some point could only be bought in the political process with generous compensation to the less well-off and the exclusion of food. Before the tax is finally implemented, it will inevitably be subject to a constitutional challenge. Whether it will survive such a challenge in its current form is uncertain at this time.[18]

2. Design Issues in a GST

It was noted above that the dominant form of the GST is generally described by its common features – a consumption-type, invoice-based, credit-method valueadded tax.[19] Three types of invoice-based credit-method GSTs can be distinguished around the world. First, there is the multi-rate EU version which is encapsulated in the Sixth Directive and features many exemptions and special regimes. Secondly, there are the modified GSTs found in a number of developing countries which often stop short of the retail level and are levied on a limited base, partly for administrative reasons and partly because of the sales tax background out of which they grew. Thirdly, there is the single rate broad-based tax pioneered by New Zealand, and called GST (with some loss of precision) to distinguish it from the EU tax. It is the last that was embraced by the government. In the result as we have just seen, the result is midway between the EU and New Zealand versions.

The object of a GST, like most consumption tax systems, is to impose an indirect tax on domestic consumption at ad valorem rates. The key design features of the GST which make it different from the other forms of consumption tax, are that:

A. The GST Tax Base

The Australian GST is a multi-stage broad-based tax on most goods and services consumed in Australia. According to its European title at least, the tax is imposed on the ‘value-added’ by firms at each stage of production. According to Carl Shoup:

The value-added tax is imposed on the value that a business firm adds to the goods and services that it purchases from other firms. It adds value by processing or handling those purchased items with its own labour force and its own machinery, buildings and other capital goods. It then sells the resulting product to consumers or to other firms. The difference between the sales proceeds and the cost of the materials etc it has purchased from other firms is its value-added, which is the tax base of the value-added tax.[21]

This notion of the ‘value-added’ by individual firms becomes a tax on private consumption because it is the sum of the value-added by each firm that the consumer ultimately purchases and consumes.

The invoice credit-method is the means by which, it is hoped, the tax falls ultimately on final consumption and not on intermediate inputs. The basic mechanism is that tax is charged on supplies (sales and some other transactions) by a supplier of goods or services, whilst a tax credit, verified by a tax invoice, is claimed for tax charged on purchases by the supplier. The net tax payable is thus imposed on the ‘value-added’ by the supplier. In other words, tax is imposed on the sum of a firm’s taxable outputs minus its taxed inputs. This is equivalent to imposing tax on a firm’s profits plus its payroll (because GST is not levied on employees’ wages), provided that ‘profit’ is understood as being measured in pure cash flow terms. Since all acquisitions should be purchased at a tax-inclusive price, and tax is collected on all sales taxed, the two significant ‘untaxed’ items which make up the difference are profit and labour costs. In short, the tax base (T) is:

T = P + L + D – I

where P is the firm’s profit, L is the cost of its employee labour, D is the annual depreciation of its capital goods and I is the sum of its annual investments.

The operation of GST as a cash flow profit tax can be made by contrasting the position of a firm in a non-GST world, and in a post-GST world, the position of a registered and an unregistered supplier. Table 1 assumes the supplier to each of the firms will insist on a price of $100 after all taxes have been paid. In a no-tax world, it can do this by charging $100, but in a GST world, the registered supplier must charge $110 to both the registered and unregistered buyer, because it must remit $10 as output tax. For a registered buyer in a GST world, this $10 of input tax is then recoverable, but for the unregistered buyer it is a real cost. Assume the buyer too wishes to make a profit of $100 from its purchase and sale. In a non-GST world, it can do this by charging $200. If it is a registered firm in a post-GST world, it must charge $220 because it has an output tax liability of $20 on the sale, if it is to be left with a profit of $100. If it is an unregistered firm, it need charge only $210 on its sale to be left with a profit of $100. But if the unregistered firm is dealing with consumers and the registered firms are the price-makers in the market, it will be able to charge as much as them – $220. And because it does not have to remit output tax, it can keep the difference as profit. In other words, registered suppliers who sell at $220 lose 10 per cent of their profit in GST, while unregistered suppliers keep all of their profit. So far as the registered firm is concerned, the GST has operated as a 10 per cent tax on its profits.

Table 1:

No Tax
Price paid for goods
(including GST)
Refund of GST input tax
Sale price including GST
Output tax remitted

In theory at least, the tax base, the value-added by a business, could be measured by either an additive or by a subtractive process. An additive process would find value-added by adding the two principal elements of the tax base – the cash flow profit earned and wages paid by the firm. That is, it would look to the two constituent elements of the GST base and adds them to reach the measure of total value-added by each firm. This could be done from the firm’s existing accounting statements – its balance sheet and income statement. Instead, we, like most other countries, have used a subtractive method to find value-added – that is, subtracting from business outputs (ie, principally sales revenue) the taxed business inputs (ie, purchases) acquired by the firm, and effectively imposing GST on the net figure. These numbers are found not in the firm’s existing accounting statements but in its invoices rendered and received.

Although we have chosen a subtractive process using the invoice-based tax credit mechanism, we do so at a price. As will be shown below, financial services are typically left out of the GST base, usually because of alleged difficulties in measuring the value-added by financial institutions. The allegation needs to be qualified because it is possible to measure the value-added by a financial institution using an additive process – the bank’s profits plus payroll could be added to give its value-added. What is not possible is to put banks on an additive system, while the rest of the economy operates on a subtractive invoice-based tax credit system.

B. The Invoice-Based Tax Credit System

Before turning to analyse what goes into making a GST, we will briefly explain how the credit-method operates. By now, this is becoming familiar but there are some general guiding principles and some interesting implications to be derived from the discussion. An internationally standard jargon has grown up around the VAT/GST which is explained and sometimes used in this paper (‘exempt supply,’ ‘zero rating,’ ‘reverse charge’ and so on) but which Australia has, as is common these days, chosen to ignore – the tax equivalent of deciding to write all our laws in Romanian.

The invoice credit-method is to be contrasted to the ring-fencing method that is used in single stage taxes like the RST proposed in the 1985 Draft White Paper, and the current WST. Ring-fencing refers to the system whereby businesses are registered and are able to avoid the levy of tax by the production of their registration number. In the case of a RST, all businesses may produce their registration number for business purchases, while for the WST, businesses other than retailers are able to avoid levy of tax in this manner (although, of course in practice the system is much more complex than this).

The tax credit-method of the GST not only ensures that there is no cascading of tax, but also converts a single stage tax into a multi-stage one. In many countries the invoice credit GST came about more or less by accident as the tax credit mechanism was introduced to avoid tax on tax under turnover taxes (the GST is simply a turnover tax with the invoice credit-method added) or ring-fenced single stage taxes where the ring-fencing was unable to avoid cascading. If the Labor government had approached its exercise in reducing tax on business inputs under the WST by a tax credit rather than the exemption mechanism, Australia would have ended up with a modified GST, operative to the wholesale level. The operation of the invoice-based credit system is usually demonstrated by a simple numerical example, like that in Table 2 below, with three suppliers in a distribution chain (say a manufacturer, a wholesaler and a retailer). Supplier 1 supplies (sells) to supplier 2 for $100 before GST on which GST of $10 at a 10 per cent rate is charged. Assuming that the original supplier does not purchase inputs on which GST has been paid (which, even allowing that employee labour is untaxed, is more than a little improbable in the real world), there are no GST credits on the inputs used to make this supply, and so supplier 1 remits its net tax liability of $10. Supplier 2 then sells for $200 before GST and pays GST of $20 on the sale. Because supplier 2 purchased from supplier 1 and paid $110, including $10 of GST for these inputs, there is a credit of $10 allowed against the output tax liability, which leaves a net tax payable by supplier 2 of $10. Similarly, for supplier 3 selling at $300, the GST on the sale is $30 and there is a GST credit if $20 relating to the purchase of inputs from supplier 2. When supplier 3 sells to a consumer, the price of $330 will include $30 of GST but the consumer is unable to claim tax credits and effectively bears the $30 GST out of the total purchase price of $330.

Table 2:

Supplier 1
Supplier 2
Supplier 3
Sale price before tax
Sale price after tax
GST on sale
GST credit on inputs
Net tax payable

If this were all that the GST involved, it would be a relatively simple tax to operate, although requiring considerable record keeping by the suppliers. As with any tax, however, there are many complications.

C. Input Taxed and GST-Free Supplies

Two important sources of complexity arise from so-called input taxed supplies (referred to elsewhere in the world as exempt supplies) and GST-free supplies (usually referred to elsewhere as zero-rated supplies). The difference between these two concepts is fundamental.[22] They share the feature that no output tax is charged on making these supplies. They differ, however, in regard to the entitlement to claim credits for input tax. Input tax can be recovered for GST-free supplies, but not for input taxed supplies. The effect of input taxation is that a business purchaser is treated as if it is a consumer of the goods and services it acquires.

The rationale for treating different supplies as taxable, input taxed and GSTfree depends on the interplay of various policy and administrative arguments. The reasons for special treatment come in varying degrees from politics, technical difficulties, administrative convenience and basic design features. The political aspect arises for goods perceived as merit goods (or demerit goods) which, it is claimed, should be given special treatment. Common examples are the treatment of health, education and childcare, and the operations of charities. Food, books and clothing, especially children’s clothing, are usually viewed as raising similar issues.

The technical difficulties that are said to mandate special treatment arise for financial services because of the problem of identifying value and locating the ‘consumption’ element in many financial services. There is often bundling of multiple supplies and prices are often implicit in interest rates. This is the view taken in the ANTS Statement, which says that supplies of financial services are input taxed because:

[they are] structured in a way that makes it extremely difficult to subject them to GST. The international experience has been that it is difficult to identify and measure the value-added of many financial services on a transaction by transaction basis. However, there is no reason why private consumption of financial services should be tax-free.[23]

The arguments concerning administrative convenience can be seen at work in the treatment of small firms with an annual turnover below the registration threshold, and the treatment of residential accommodation. These are input taxed in an effort to remove many small and administratively-demanding firms from the range of taxpayers. The treatment of sales of business as a going concern is also an example of removing a nuisance supply from the tax base, although it is not input taxed, but rather is GST-free so that neither party need worry about any GST issues on the transaction. Finally, in relation to the design of the tax, because GST is intended to function as a tax on domestic consumption, all tax should be removed from exports (whether of goods or services) once they leave the jurisdiction. Indeed, one of the principal reasons advanced by the government for the GST was its impact on reducing the implicit WST in Australia’s exports.[24] Exports are said to require GST-free treatment because of the basic design goal of taxing only domestic consumption.

(i) Input Taxing

The operation of these variations to the normal GST treatment is usually demonstrated by a simple numerical example, like that in Table 3 below. Table 3 is a variation of Table 2 with supplier 2 making an input taxed supply.

Table 3:

Supplier 1
Supplier 2
Input Taxed
Supplier 3
Sale Price before tax
Sale Price after tax
GST on sale
GST credit on inputs
Net tax payable

* This is the $200 sale price from Table 1 plus the tax of $10 charged by supplier 1 to supplier 2. As supplier 2 gets no credit for the tax paid by supplier 1, the sale price increases by $10.

** This treatment assumes a constant dollar mark-up: in normal business practice mark-ups are more commonly calculated by percentage of cost. If the mark-up is based on costs there is mark-up on tax, as well as tax on tax.

Under a GST, the tax effect of an input taxed supply is that no GST is payable on the sale price. An important corollary is that no GST credits are allowed for tax paid on inputs used to make input taxed supplies. This type of tax treatment has two possible tax outcomes depending on whether the supply is to the final consumer, or as in Table 3, to another business. Where a person is making an input taxed supply direct to the consumer, exemption confers an advantage on the supplier compared to a taxable supply – the after-tax sale price charged by supplier 2 in Table 3 is $210 compared to $220 in Table 2. Indeed as noted above, it might be as high as $220 if, for some reason, the supplies by price-setting firms are all taxable and have to occur at $200 + $20 of GST. Where the goods or services in question are almost invariably supplied to consumers and there are policy reasons for not levying tax on the supply of goods or services of that type, then exemption is often a useful device. It does not refund the tax at the earlier stages in the production and distribution process, and does not distort choices to the same extent as zero rating would compared to other closely related goods or services that do not enjoy the benefit of the favourable tax treatment.

On the other hand, input taxing operates to increase total taxation where the goods or services are then supplied to another business. Because no GST is charged on the sale by supplier 2, there is no input credit for supplier 3, and the tax of $10 paid by supplier 1 never effectively gets credited to any taxpayer. The result for supplier 3 is that tax at 10 per cent is paid not only on the $300 pre-tax sale price, but also on the $10 of GST previously paid by supplier 1 and invoiced to supplier 2. In other words, there is clearly tax on tax which the GST system generally is designed to prevent. This is one of the main arguments in favour of having few exemptions in the GST. Cascading of this kind occurs most noticeably with financial services which Australia, in common with virtually all other countries, proposed would be input taxed under the GST. As discussed below, the outcome is different in Australia as a partial input tax credit is allowed for financial services following the deal between the government and the Democrats. As financial services are supplied both to consumers and businesses, in revenue terms the over-taxation that results where the supply is to another business is offset by under-taxation where the supply is to consumers. Financial services are a ubiquitous problem in the GST as will be seen from the many special provisions dealing with them.

Whether input taxed supplies are made to consumers or businesses, there is an incentive created by the exemption for the input taxed taxpayer to acquire its inputs from a supplier that will not have to charge it GST. One way of achieving this would be for the exempt supplier to secure its goods or services for itself in-house, rather than to purchase them in the market place, to the extent that the result is to remove tax from those inputs. In other words, the supplier could hire employees to generate these inputs, rather than purchase them from external providers. Or if, eg, in Table 3, supplier 2 bought the business of supplier 1 and operated it as a branch or even as a separate company but as a member of the same GST group, then there would be no tax on the supply from supplier 1 to supplier 2 as they would be the same taxable person. The result would be that the sale price of supplier 2 to supplier 3 (or a consumer) would be $200 which produces a more favourable outcome in both cases. This incentive may have been quite strong for financial institutions in particular, but it is almost impossible to enact rules to remove the distortion, as there is no natural distinction between goods and services that exempt taxpayers could be expected to supply for themselves and those they could be expected to purchase. The partial credit compromise adopted in Australia is only a rough and ready measure to address the distortion. In cases of this kind, the broad general anti-avoidance rule included in the Australian legislation will need consideration.

A further example of the operation of the same incentive will be seen if we consider what happens if supplier 2 elects to purchase its inputs, particularly inputs of services, from abroad – that is, if supplier 1 is not a resident. Assuming that the country in which supplier 1 is resident refunds all tax on the exported service supplied to supplier 1 (and that supplier 1 is not sufficiently present within the jurisdiction to be liable to Australian tax itself – unlike goods, services are often not taxed on import), it does not have to charge output tax on the supply to supplier 2. Consequently, supplier 2 can buy for $100 and sell for $200. Supplier 3 will now not suffer the burdens referred to before.

Finally, in order to reverse these incentives to bring supplies in-house or seek them from abroad, firms that are predominantly suppliers to input taxed firms will often seek to be input taxed themselves. That is, input taxing can breed a desire for more segments of the economy to be input taxed, especially those industries whose business is closely tied to that of input taxed firms.[25] This incentive is shown in Table 4 below, which is Table 3 with the variation that supplier 1 has managed to convince the government that it should be input taxed as well:

Table 4:

Supplier 1
(Input Taxed
Supplier 2
(Input Taxed
Supplier 3
Sale price before tax
Sale price after tax
GST on sale
GST credit on inputs
Net tax payable

* This is the $200 sale price from Table 2 with no further tax charged by Supplier 1 to supplier 2, as supplier 1 is also making input taxed supplies.

The outcome shown in Table 4 is similar to Table 2 – the total tax paid reverts to $30 because supplier 1 has charged no output tax (and has borne no input tax on its acquisitions, given our assumption that it produces its supply with no taxed inputs) to cascade through to supplier 2 and supplier 3. In these circumstances, with all intermediate suppliers exempt from output tax, GST operates simply as a RST.

Input taxation is generally undesirable in a GST because of these likely outcomes and the government’s policy is to limit its scope strictly. Even after the deal with the Democrats, this result has been largely achieved.

(ii) GST-Free Treatment

By contrast, GST-free treatment (zero rating) means no tax is payable on the sale (as in the exemption case), but the supplier is entitled to claim tax credits on inputs and to insist on a refund of the input tax on its acquisitions. Table 5 deals with GST-free treatment of supplies made by supplier 2 by way of a further variation of Table 2.

Table 5:

Supplier 1
Supplier 2
Supplier 3
Sale Price before tax
Sale Price after tax
GST on sale
GST credit on inputs
Net tax payable

* As no tax is charged by supplier 2 on its sales and the input tax on its acquisitions is refunded, supplier 2 can sell for $200 before and after tax.

The effect on supplier 2 in Table 5 is that the sale price can remain at $200 because the $10 tax paid by supplier 1 is refunded to supplier 2. Supplier 3 is not disadvantaged in this case. It does not get any input tax credit; it pays output tax only on $300 and the sale price is the same as in Table 2. The only difference from Table 2 is that instead of a tax of $10 being paid by each supplier and then being credited at the next step in the chain, the tax paid by supplier 1 is refunded, supplier 2 pays no tax and therefore supplier 3 is left to pay the full $30 tax. The total tax is the same and supplier 3 recovers the tax from the purchaser. If we consider the GST-free supply (zero rating) by supplier 2 in the case of a supply to a consumer, there is a competitive advantage over suppliers of taxed goods and services (Table 2) and input taxed (exempt) goods and services (Table 3). Obviously these are distortions that generally should be avoided. Where the supply is to a business, the distortions disappear which may suggest that zero rating should, if possible, be confined to that context. It is not possible to characterise the Australian rules for GST-free treatment in this way although the GST-free treatment of the sale of a business as a going concern does fit the pattern.[26] Most categories of GST-free supplies fit into the merit category (food, health and education services, charitable and religious services), though in the case of health and education, competitive neutrality is also a justification as most such services are provided free by the government. GST-free treatment does not produce any incentive to bring activities in-house in the manner of exemption since the tax on inputs is refunded.

Instead, the major problems with GST-free treatment are the cost in revenue, the additional compliance costs and problems of cash flow. Obviously, the refund of tax where supplies to consumers are GST-free lowers the total revenue produced by the tax. The GST-free treatment also involves significant compliance costs to achieve a nil tax result for a firm making GST-free supplies. This is a matter of some importance for charities, hospitals, churches, educational institutions and so on, who will enjoy this treatment for the vast majority of their supplies. It would have been possible to stop the GST trail at the point of supply to the kindergarten/church/school – the supplier to the kindergarten would not have to charge output tax and would recover all input tax. This method would shift the compliance burden to the supplier. Instead, the Australian system treats that as a taxable supply, and will force the kindergarten to register in order to recover the tax on its inputs.[27]

Further, in addition to putting the kindergarten to this compliance cost, the system also requires the kindergarten to finance the cost of the GST on its purchases until it can recover the amount in its next GST return (assuming that it elects to register). As the next return may not be due for three months, financing the GST could be a significant additional cost where the kindergarten is buying a large capital item such as new premises. As the kindergarten may have few, if any, taxable supplies, and as, in the Australian system at least, it faces quite a high turnover of supplies before it is obliged to register, it may prefer not to register, and so avoid the compliance costs of the GST. Indeed, it will probably choose not to do so if the price of accounting services exceeds 1/11th of the (tax-inclusive) cost of its (non-labour) costs. In such a case, however, it will bear the GST. GST-free treatment can also lead to incentives for bundling of amounts of taxable supplies into GST-free supplies, in the hope that all the supply becomes GST-free.[28] Obvious examples will arise for universities which offer GST-free supplies (such as degree courses) which also entail the purchase of taxed items (such as books and stationery). A university which previously charged $10 000 for tuition and required students to buy books from an external bookshop for $1100 (including the GST of $100) will have an incentive to buy the books itself and charge students a single course registration fee of $11 049 (which entitles the student to tuition and books). The student is better off by $51. The university is able to recover the $100 in input tax on the books it purchased and need charge no output tax on them or the tuition, so that it is better off $49. And of course, after the bundling of books might come computers, study-tours (also known as ‘holidays’), motor vehicles and so on.

GST-free treatment too was therefore proposed to be relatively limited in its scope. After the deal with the Democrats, however, the GST-free treatment of food means that a large part of the tax base will be subject to this treatment.

(iii) Some Caveats

Before we leave these Tables, there are some important caveats to make because they can create misleading impressions. First, the tables may create the impression that each supplier must compute its GST liability by some process which involves tracking purchases into each sale, rather like trading stock accounting for income tax purposes. As we shall see, it is not necessary that any sales actually occur before the recovery of input credits can occur – there is no need to wait until the sales in line 1 of each of the tables occur before the taxpayer can recover the credit for input tax in line 4. Indeed, it is likely that firms that are increasing their inventory prior to (say) a Christmas buying rush, will have large refunds of GST for their purchases in September and October, followed by large GST payments when they makes those sales in November and December. They do not need to wait until the sales have occurred before they can recover the input credits for their purchases.

This leads to a second mistaken impression that can arise from these tables, a belief that through this process, the government collects the total GST in small portions paid by all the suppliers along the way – that in Table 2, the government collects $10 in tax from each of supplier 1, supplier 2 and supplier 3. If this were so, the GST would be quite a robust tax, with the potential to reduce the operation of the underground economy, which it is sometimes claimed as one of its virtues – but this is not the case. Instead, all of the tax is paid by the consumer, and at the time that the consumer buys the goods.[29] Looking again at Table 2, as soon as the government collects the output tax from supplier 1, it must pay the same amount to supplier 2. Until the items are sold to a consumer (or to an input taxed firm) the government’s only benefit is cash flow – to hold the tax for a period until it must remit it to the purchaser as an input tax credit. And indeed this cash flow can be negative for the government where (say) supplier 1 files its returns three-monthly and supplier 2 monthly – that is, the government has already refunded to supplier 2 the input tax which supplier 1 can retain for a further two months. Looking at the private-sector side, what is clear is that all the suppliers are forever out of pocket for the net tax of $10. Perhaps the simplest way to explain the point is to view the outcome as if the government had imposed a 10 per cent tax on each supplier’s cash flow profits, and then given the tax to the (registered) buyers of their goods.

Finally, something should be said about the ability of a GST to deal with evasion and the underground economy.[30] A moment’s thought will make it clear that the GST is potentially more prone, not less, to evasion than a WST or RST. The latter taxes involve only one cash flow of tax, and this cash flow is deferred until a single transaction occurs. Thus the usual form of evasion under a RST or WST is that the seller of goods will charge the tax to the buyer (or, where no tax is charged, simply leave the price at the tax-inclusive price) and not remit the tax (or the tax-equivalent amount) to the government. The GST on the other hand, involves two cash flows – the refund of input tax credits, as well as the charging of tax on sales. This makes GST vulnerable to a further kind of evasion – the claiming of input credits for tax on fictitious acquisitions.[31] The analogy with the income tax is evident – income tax taxpayers, like GST taxpayers, but unlike WST or RST taxpayers, can cheat by overstating their deductions as well as underreporting their sales income. And, again unlike the WST or RST, the GST puts this temptation in the face of every commercial firm and for every transaction they undertake (or do not undertake), not just a few.

Where the tax credits in a tax period exceed the GST on the taxable supply of goods and services in that period by a registered person, the excess tax credits give rise to a refund, and one which must be paid by the Australian Taxation Office (ATO) within 14 days of the taxpayer submitting its return. This refund system is particularly important in the case of capital goods if the integrity of the tax as a consumption-type is to be maintained, but equally, it is one of the major weak points from an administrative viewpoint. It assists fraudulent claims that are only detected after the horse, in the form of the refund, has bolted. New Zealand is said to have suffered in this way at the hands of a number of UK criminals in the early days of its GST. What is clear is that whatever level of compliance with the GST is achieved, is brought about through the skill and diligence of the tax administration in conducting the usual processes of audit, document checking and so on, aided (or perhaps hindered) by a mountain of additional paper created by the tax.

On the other hand, a claim is often made for the superiority of the GST over RST and WST, because each business will be looking over the shoulder of every other business to ensure that they pay their GST, so that a purchaser from the business can get GST credits on its inputs (often referred to as the ‘self-enforcing nature’ of the GST). Again these assertions depend very much on the assumptions about pricing, and parties to transactions that underlie them. A registered business will always prefer to purchase at the same price inclusive of GST from another registered business which charges output tax and provides an invoice rather than from a business which does not charge GST and does not provide an invoice. It is possible in this case that the supplier may not charge GST but provide a fictitious invoice for GST as just noticed. But such behaviour will be difficult to sustain over a long period for ordinary sales, if regular audits of on-going businesses are in place as is intended in Australia. This is why such fraud is likely to arise around large one-off transactions such as purchase of large capital items, since a single fraudulent invoice can generate a large tax refund, and in the early stage of implementation of the GST before audit coverage is fully in place. In this case it is more likely, however, that no actual transaction at all occurs, but a fraudulent invoice for a non-existent sale is used to claim a refund.

If the GST evading supplier discounts the GST-inclusive market price by the amount of the GST, the registered business purchaser will generally be indifferent. So too the ATO may not be overly concerned as the tax lost on this purchase will be made up for on the next sale in the chain. If, however, the GST evader is supplying to a consumer and not to another registered business, the evaded tax is lost forever. If the evader uses few taxed inputs (as is common in the services sector), there is little incentive to register to recover input tax. Hence the GST is as prone to evasion in household services (cleaning, plumbing, electrical, repairs etc) as other taxes. It may also lead to evaders specialising in this area and not making supplies to registered businesses, or alternatively charging tax on supplies to registered businesses but not households and seeking to allocate all input tax to the supplies to businesses.

A related claim often heard in Australia in the context of introducing a GST and switching the overall tax burden on individuals from income tax to GST, is that income tax evaders get taxed under the GST. The main category in mind is again providers of household services, and it is assumed that they are evading income tax and GST on their services. The argument is that when the evaders purchase groceries and other personal consumption items, they pay GST – their income gets taxed on consuming instead of on earning it. This claim is built on the less than plausible pricing assumption that the tax evaders do not increase their prices on the introduction of the GST when all other service providers in the economy do. Services are presently not generally taxed, so the introduction of the GST will generally increase market prices for GST-taxed services by the amount of tax. If the evaders do increase their black market prices in line with the general increase of market prices (though continuing to discount them relative to market prices by part of the income tax evaded), their increased income will compensate them for the GST now charged on their consumption so that they are no worse off.[32]

D. A Tax on Consumption, Not Business

It is said that GST is a tax on final domestic consumption and thus is ‘not a tax on business.’ This position is taken in the Explanatory Memorandum to the GST Bill and in the ANTS Statement. The reason given is twofold – a business enjoys a refund of input credits for the tax on the purchases it makes, and it recovers from the buyer the output tax that it must charge as part of the price it receives on making a supply.[33] The first proposition is correct, but the second need not be correct.

It was noted above that GST is a tax on untaxed business inputs – that is, a firm’s expenditure on labour plus its cash flow profit. One can think of a GST as a corporate profit tax with no deduction for wages and no capital/income dichotomy.[34] Given that this is the tax base, to say that the GST is not borne by business, is to say in other words that the income tax on corporate profits is not borne by the corporations that pay the tax. This proposition is clearly true in one sense – any tax on a corporation will ultimately be borne by the physical persons who deal with it, either its shareholders, workers or customers. But whereas the ultimate incidence of the corporate income tax is one of the great mysteries of modern public economics, the incidence of the GST is taken for granted.

Who bears the GST will depend upon how much of the tax can be shifted forward by the firms who must pay it. What will determine how much of the GST is shifted forward to consumers is the elasticities in the various markets for a firm’s outputs. If the firm cannot raise its price by the amount needed to recover the GST (even allowing for the abolition of WST), the burden of the tax will have to be absorbed by the firm, in the form of a reduction of its profits. In other words, the tax will, in the short run at least, be borne by the firm’s owners.

To see how this might come about, consider a resident firm that currently sells CDs at a retail price of $30. Assume also that the CD costs the firm $10, a price which includes, say, $2 WST. The firm makes a profit of $20 per CD ignoring other costs. After the introduction of the GST, the firm’s costs for purchases of CDs should decline to $8, assuming that the wholesaler passes on in full the removal of WST. To this price is added $0.80 GST, but this is immediately recovered from the government. If the firm still wants to make $20 profit per CD, it will need to sell the CD at a price of $28. But it will now have to charge $2.80 GST on the sale. The total price of the CD to retail consumers has now increased to $30.80. If there is high elasticity of demand for CDs, this price increase may reduce the volume of sales and the profitability of the firm, and there would likely be high elasticity of demand if there is a good quality, tax-free, substitute such as down-loading an electronic version of the same CD from a (foreign) music publisher’s website for a price of $25. So, if the local firm cannot sustain an increase in the price of its product, it will still have to sell the CD at $30 (GSTinclusive) and bear part of the GST itself. The GST will have become a real cost to the firm, reducing its profits from $20 per CD to $19.27,[35] and simply deeming the retail price always to include a reimbursement of the output tax does not reveal the full picture.

E. Relation of Income and Consumption Tax Bases

We have noted at a number of points above the relationship of value-added to profits (income) of a firm. Similar relationships can be observed on the side of the individual and we will note these briefly here as one of the major themes of the ensuing discussion is the close relationship of concepts used in the GST and the income tax. The comprehensive income (gain) of an individual is equivalent to consumption and change in wealth of the individual as income has to be consumed or saved. This explains the need to distinguish costs of earning income and consumption under an income tax, as the former are subtracted in determining income while the latter are not.[36]

Similarly, the consumption by an individual is equivalent to income less change in savings, and it would be possible to levy a consumption (expenditure) tax directly on individuals using this calculation. The main difference between consumption taxes levied on the producer side such as the GST, and a consumption tax levied directly on the individual, is that the latter can be subject to a progressive rate scale with respect to the individual whereas the former cannot. From the 1970s there has been an increasing focus on these kinds of relationships.[37] One part of the argument concerned the existing individual income tax which it was argued operated in many respects as a tax on consumption, since savings were in various ways excluded from the income tax base. Rather than having such a hybrid income-consumption base it was argued by some that the base should be moved fully to consumption (others equally argued for return to a purer form of income tax). Various arguments for the shift to a consumption base were made including its more favourable treatment of savings (which were and are in decline in many countries) and the lack of distortion in times of inflation compared to an income tax (recall the high inflation of the 1970s). Although the inflation argument is no longer heard, the claims about savings have featured in the GST debate in Australia and similar debates abroad.

Two main reform suggestions emerged. One was to replace the individual income tax with an individual expenditure tax and the other was to use a producer tax such as a VAT at a relatively high rate to tax consumption and to largely remove the individual income tax. In either variant, the proposed change is often linked with using other taxes to tax high wealth individuals such as an income tax or wealth tax limited to a small section of the population. In the event what has happened is a mixture of both variants. There has been a switch from the individual income tax to a VAT/GST in many countries, while the income tax itself has come to take on more of a hybrid nature by reducing tax on income from capital by various means. The introduction of the GST in Australia reflects the first of these trends. Whether the income tax will move in a similar direction is as yet an open question.[38]

3. Legal Issues in the Implementation of the GST

Our discussion now moves from the principal design features of a GST considered in the abstract, to an examination of the key features of the GST in Australia.[39] In a technical sense, the critical elements for the operation of GST are these – GST is levied on the making of every ‘taxable supply’ and ‘taxable importation.’ A taxable supply is one made for consideration, but does not include a ‘GST-free supply’ nor an ‘input taxed supply.’ A taxable supply can only be made by a person who is registered or required to be registered. This means, inter alia, that the person must conduct taxable activities, referred to in the Australian legislation as ‘an enterprise,’ with a turnover in excess of a de minimis threshold, by election to register. The tax is imposed on the ‘value’ of the taxable supply, meaning in practice, that 1/11th of the consideration received by a supplier will be regarded as being the GST on the supply. A tax credit for GST on inputs is available for ‘creditable acquisitions’ made in carrying on the enterprise, including the tax on outputs used to make GST-free supplies, but not for the tax on acquisitions used to make an input taxed supply. The tax owed for any ‘tax period’ is the ‘net amount’ of output tax minus the credits for input tax attributable to the period. The meaning of these defined terms will be discussed below.

In the first part of what follows, we shall focus on output tax – the concepts involved in the making of a ‘taxable supply’ and look substantively at what they mean for the base of the GST, taking up the limits of an enterprise and the drawing of the line between taxable (business) and private (consumption) activity. We will then turn to equivalent issues in the input tax credit area – the connection of acquisitions to the enterprise, the apportionment of input credits where acquisitions are put to mixed use, and adjustments to credits to catch internal consumption within the business. In section 4, we will turn to cases where special regimes are proposed, and investigate the reasons for them, including some issues raised by entities and international rules. Finally, we will look at some issues concerning the administration of the tax.

One focus that will emerge by proceeding in this fashion will be the similarity of the issues raised by the GST to those raised by the income tax. Indeed, this is hardly surprising, because as we noted above, the GST is in large part a tax on business profits measured in a cash-flow manner, and with wages in the tax base. And, even more than the tax base, the output tax/input credit mechanism is strikingly similar to the assessable income/deduction method used for computing taxable income.[40]

A. Taxable Supplies

The liability to charge output tax arises on the making of taxable supplies.[41] The notion of ‘taxable supply’ is built up from five concepts – supply, consideration, enterprise, connection with Australia and registration.[42] Section 9–5 provides:

You make a taxable supply if,

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with Australia; and

(d) you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

(i) Supply

The critical event for GST output tax purposes is the making of a supply. This term is expanded upon, not defined, as ‘any form of supply whatsoever.’[43] The term will obviously include sales of goods and services but will also extend to many other transactions which result in a taxpayer receiving money or property. Indeed, the receipt of money will likely come to be treated as a surrogate for the notion of supply, just as a cash flow often seems to be viewed as a surrogate for ‘income.’ Examples of ‘supply’ in other jurisdictions have included sponsorships received by local councils,[44] the ‘sale’ of stolen cars,45 the furnishing of drinks (which they already owned) to members of a private Club,[46] granting membership of an unincorporated association which gave the member access to other services,[47] the conversion of one currency into another,[48] but not the activities of a marketing development authority for growers in the industry.[49]

The notion of supply is then more usefully amplified in s9–10(2) ‘without limiting subs (1)’ to include a supply of goods or services, the provision of advice or information, the grant, assignment or surrender of real property or an interest in real property, the creation, grant, transfer, assignment or surrender of any right, the supply of a financial service, and the entry into, or release from, an obligation ‘to do anything, or to refrain from an act, or to tolerate an act or situation’. These provisions will deal with some of the more unusual forms of ‘supply,’ and have obviously been framed with the difficulties which have arisen with regard to income tax and capital gains tax in mind.[50] Nevertheless, one can easily imagine that difficult problems of statutory interpretation will still arise from unusual transactions – involuntary transactions (such as the loss or destruction of insured assets and compulsory acquisitions), the creation of limited interests in goods or real estate (such as chattel bailments, operating leases, finance leases, hire purchase and instalment sales), the creation of security interests (such as pledges, mortgages of old system real estate or by deposit of title deeds), one-sided transactions (that is, where an asset disappears without being acquired by anyone else), ‘self-supplies’ (the removal of business assets from the business, or their use by the owners of the business, without triggering a ‘supply’ to another person), and transactions where there is consideration without ‘supply’ (such as sponsorships, government bounties and subsidies).[51]

There is no concept of ‘goods and services’ at this point in the legislation, despite the title of the legislation. Indeed, it was always intended that the scope of the legislation would extend at least to transactions in real estate and much beyond. As it turns out, the notion of ‘taxable supply’ in the Act is all-encompassing. Consequently, it might seem that in most cases in the law, it will make no difference whether a transaction constitutes a supply of goods or services or something else. This impression would be misleading. In a few places (most notably the provisions dealing with imports and exports, the transitional rules, and the rules dealing with real estate developments), the GST Act differentiates supplies according to whether they are supplies of goods, services or real property.

(ii) Enterprise

A second requirement to trigger output tax is that the supply be made by a person or firm engaged in commercial activities. This idea is referred to in the GST Act as ‘an enterprise.’[52] This concept of ‘enterprise’ is central to a GST – it is the mechanism for keeping out of the GST system consumers and employees, it triggers the obligation to register, it triggers the liability to output tax, and it is central to the entitlement to credit for input tax.

Broadly speaking, an ‘enterprise’ is defined as any activity conducted in the form of a business. It will also include isolated commercial activities ‘in the form of an adventure or concern in the nature of trade.’[53] It includes activities carried out by charities, religious institutions and government bodies.[54] Leasing property ‘on a regular or continuous basis’ is also defined to be an ‘enterprise.’ Certain acts are deemed not to be an enterprise – principally the provision of labour as an employee, and non-commercial activities conducted by individuals, either alone or jointly.[55]

For an income tax lawyer, a number of the concepts referred to above will have a very familiar ring. The income tax tests of what constitutes a ‘business’ or ‘a profit-making scheme or undertaking’ are similar to those which are raised by the GST requirement of ‘an enterprise.’ There are also several interesting departures in the way that the GST will treat loss-making activities, the definition of noncommercial activities and isolated transactions by individuals, all of which have presented difficulties for the income tax.

The first GST test incorporates the income tax test and definition of a ‘business.’[56] The Australian income tax case law on the meaning of ‘business’ emphasises the existence of a profit making purpose, repetition and regularity, the conduct of activities using business-like methods, the volume of activity and the existence of a significant commercial purpose.[57] But the income tax law cases are not likely to be sufficient for GST as they exclude the regular receipt of passive income such as rental income (which will be a principal source of GST revenue) and gains from investment activities. Consequently the income tax notion is then elaborated.

One of these elaborations is in the treatment of a ‘profit motive’ when considering the activities of individuals. Non-commercial activities are described in two ways in the Act. One is an exclusion for ‘a private recreational pursuit or hobby’ and the other is for activities conducted ‘by an individual (other than a trustee of a charitable fund), or a partnership (all the members of which are individuals), without a reasonable expectation of profit or gain’.[58] Supplies made by individuals and partnerships not engaged in commercial activities do not give rise to output tax. So, the sale of the family home, car, boat, or caravan, or the garage sale will not, ordinarily, trigger a liability for output tax.[59] What is being referred to here are things like home-grown vegetables which are sold over the back fence or owning racehorses etc. The line-drawing around what is a hobby will probably be as difficult as the business test under the income tax. The great difference is that the GST has a threshold for registration as a business which might have defined away many of the line drawing problems, a matter we will return to later.

It is common to omit reference to making profits in overseas VATs and given the general difficulties our courts have experienced with the concept under the income tax, the omission should be welcomed. Indeed, there is a lot to be said for a similar approach to be used in the income tax, given the predilection of various courts for allowing very small scale activities to be classified as a business for income tax purposes and to give rise to tax losses.[60] The threshold is not a perfect solution, however, as the option to register for the GST under the threshold will give rise to the equivalent activity – claims for GST credits in excess of output tax for what are essentially consumption activities, limited principally by the cost of the accounting services needed to comply with the GST filing and remittance requirements.

A serious question remains about the inclusion of charities, religious institutions, non-profit associations and clubs, all of which may lack a profit motive but for different reasons. These organisations are all within the notion of ‘enterprise’ although at a later stage some activities of these organisations may be excluded where they are of a particular character, or are provided for inadequate consideration.[61] While this inclusion is possibly desirable from an administrative and compliance perspective, it may be doubted whether these organisations are really ‘value-adding.’[62]

Secondly, the treatment of isolated commercial ventures has given income tax lawyers problems for many years. The reference in s9–20(1)(b) to ‘an adventure or concern in the nature of trade’ has obvious resonances for income tax lawyers.[63]

This is, in part, a different problem from the hobbies of private individuals because the courts have wrestled for many years with the income tax treatment of one-off transactions (ultimately unsuccessfully) even for taxpayers who are otherwise fully engaged in commercial activities.[64] Indeed, one reason for the introduction of the CGT probably was to resolve the dilemma that was experienced in the area (apart from the more substantial reasons of bringing the income tax base into line with the gain concept of income). The one-off transaction with business characteristics will now often be caught under the Income Tax Assessment Acts, and it is the intention of the reference to ‘an adventure in the nature of trade’ that it be caught under the GST, but again only where the gain (value-added) involved is sufficiently substantial. Unfortunately, the threshold for delineating the suppliers whose value-added is to be within the tax base is measured by reference not to the value-added, but to gross supplies – a computation which is less than ideal as a means of selecting the target.

Other difficult ‘enterprise’ questions are not so easily resolved under the proposed GST. The business/investment border which has plagued the income tax[65] There will be problems with the activities of holding companies and the trustees of superannuation funds.

One consequence of the requirement of an ‘enterprise’ is that services provided by employees in return for wages will not be taxable supplies under the GST. Employees can be excluded in several ways. In Australia, employees are viewed as not being engaged in an enterprise.[67] Thus, employers receive no input credit for this input to their business profits. They will however, receive credit for acquisitions of labour from independent contractors who will be regarded as having an enterprise. The exclusion of employees will raise all of the problems evident in the income tax and the ongoing attempt to draw a meaningful distinction between employees and independent contractors. One previous attempt by the Labor government in 1995 to make the distinction legislatively failed, and the current proposals in the ANTS Statement attempt to solve the issue by removing the principal consequence that makes it necessary to draw the distinction – that is, the time of remittance of tax.[68] One small measure for GST is that it has been considered necessary to deem every taxi driver to have an enterprise[69] which will solve the problems, for the driver at least, evident in the DeLuxe Red & Yellow Cabs Co-op decision[70] though it will do little to solve the bigger issue. The employee-contractor distinction will remain for the GST where it will have some ongoing significance both for output tax and the recovery of input credits – employees will not be entitled to input tax credits for their acquisitions, even those which are deductible under the income tax.[71]

(iii) Course or Furtherance of an Enterprise Being Carried On

A third requirement for a taxable supply is that the supply be made ‘in the course or furtherance’ of an enterprise that the taxpayer ‘carries on.’ This elaboration of the notion of taxable supply expresses two connective functions – connecting individual supplies to the taxpayer’s enterprise rather than some other activity, and connecting the supply to that enterprise at a particular time. In income tax, this connective concept would typically be expressed as a transaction within the scope and ordinary course of the taxpayer’s business,[72] although the Explanatory Memorandum says that the GST test expresses a broader concept than the notion used for income tax purposes.[73]

There will be demarcation issues, particularly for unincorporated businesses, where it will be necessary to allocate some supplies (and acquisitions) to the taxpayer’s enterprise and others to the taxpayer’s private consumption. The connective test tries to discern whether a particular supply made by a registered taxpayer (usually an individual) is better connected to the taxpayer’s enterprise or to the taxpayer’s personal activities.[74] This kind of problem will only arise where a person is registered in respect of some taxable activity. A typical example would be the problem of a speculative builder who constructs a building, uses it or plans to use it as a principal residence and then sells it.[75]

A more important aspect of the same problem concerns acquisitions and sales of fixed assets. While under the income tax, there is a great deal of law about the circumstances in which these assets will and will not be regarded as within the scope of the taxpayer’s business (ie, on revenue or capital account), it is clear that for GST purposes, assets such as land, buildings and machinery are regarded as being supplied in the course or furtherance of the taxpayer’s enterprise.[76] To put it another way, there is no revenue-capital distinction in the GST, which is often regarded as one of its advantages over the income tax.

Another common issue between the GST and the income tax will arise where there is self consumption of the goods or services of the business by its proprietors or employees. A taxpayer will have claimed input tax credits on assets acquired for the purpose of the business and must, therefore, at least reverse the transaction when the asset is withdrawn from the business for the personal consumption of the owner of the business. In some cases, this will occur through a separate supply because the business (ie, the corporation) and its owners (ie, the shareholders) are separate persons at law. In others, where the business is unincorporated, there will be no ‘supply’ as such – simply the appropriation of an asset by its owner from one use to another. In other countries, such a transaction is usually dealt with by deeming a ‘self-supply.’ In Australia, it will be dealt with by the reversal of the initial input credit, an outcome which in theoretical and practical terms is less than ideal – this is discussed further below.[77] Where the asset has been withdrawn from the business to provide a fringe benefit to an employee a plethora of unresolved issues arise. The government has indicated that it will use the fringe benefits tax rate (FBT) to incorporate the GST on the provision of employee benefits. Beyond this, it suffices here to say that the issues of interaction between the FBT and GST are so complicated that they deserve their own separate analysis below. Finally, there are similar contemporaneity issues arising from the commencement of a business or the closing down of the business.[78] A supply must be made in the course or furtherance of an enterprise that the taxpayer ‘carries on’, not one that has ceased or which has yet to commence.[79] Typically, such transactions would not be regarded as being within the scope of the business for income tax and the same problem arises for GST. Interestingly, however, in the case of pre-incorporation contracts, there are provisions that will attribute preincorporation input credits to the company once established, a rule which is needed because of the likelihood that the promoter will not be registered but the company will be – in other words, the promoter will be supplier 2 in Table 3.[80] The income tax has a set of incomplete rules to deal with these kinds of cases. The GST rules have been drafted to deal with the cases more adequately. Such approaches could well be used as a model to fix the defects in the income tax rules.[81]

(iv) Registration

One requirement for triggering output tax seems to arise from the registration system. All GSTs share a requirement for firms to register, and the requirement of registration serves two purposes in the GST – it ensures that private sales occurring outside commercial activities do not give rise to output tax, and it also ensures that consumers cannot recover the input tax charged when they acquired the items they consumed. Registration is another feature of the GST that shows its continental European heritage where documents and seals and stamps serve important functions in creating reality. Australia’s income tax (though this is not universal) has lived reasonably happily with a system under which the derivation of income triggers the obligation to pay income tax, not the derivation of income by a registered firm. Unlike the income tax, however, in order to minimise the compliance costs of small business, a registration threshold is usually adopted for GST.

While registration might appear necessary in order to trigger a liability to output tax, in fact the drafting of the Act makes it amply clear that a liability to remit tax arises where the firm is registered or is ‘required to be registered.’[82] In Australia, any firm that conducts an enterprise, will be required to register if its total supplies (not just taxable supplies) reaches $50000 per annum.[83] Non-profit societies, clubs and associations will only need to register if their total sales (including membership fees, but not donations) will reach $100000 per annum.[84] We will return to look at registration more fully in the discussion of tax administration in section 5 of this paper.

(v) Consideration

Finally, a taxable supply requires consideration. Section 9-15(1) states that consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

The Act contains some special rules dealing with consideration. Section 9–15(3) deals with consideration for two-step acquisitions using rights or options to address the questions that will arise where the option fee might or might not be credited toward the price, and where the option might or might not be exercised. A security deposit is not treated as consideration when paid, principally to reverse another provision that would otherwise trigger all of the GST due on the supply by an accrual-based supplier, not just the GST due on the amount of the deposit.[85] Finally, s81–5 deems the payment of a tax to be consideration for a supply made by the government or quasi-governmental agency levying the tax.[86] The income tax suggests that there will be a series of legal problems arising out of the consideration requirement. One problem will be connecting the consideration to supplies of goods and services – is consideration received in respect of a supply or something else?[87] In the United Kingdom VAT there must be a direct link between the supply and the consideration for a payment to be ‘consideration.’ In the Apple and Pear Council case,[88] the Court concluded that a statutory levy on growers was not consideration for a taxable supply because the levy was imposed without reference to any benefits flowing to growers from the activities of the council.

Another instance of this problem will arise from government bounties and subsidies.[89] In the case of these amounts, it might be difficult to find any supply to which the amount of the subsidy is related. Of course, if the payment from government is structured to arise on each occasion that the firm makes its supplies to a customer, there may be a sufficient connection. But if the government makes an undissected lump sum subvention, the amount may not be consideration for the supply. Obvious areas where this will be an issue will be where an organisation like a theatre company supplies its outputs at a commercial loss, but is sustained by government grants. If the organisation’s subsidy is not consideration for its supplies to its patrons, it will benefit from the GST – it will be in the interesting position of receiving its annual subsidy and a refund of all its input credits, but having to charge output tax only on the revenue from ticket sales. Indeed, if it is a ‘gift-deductible’ company, it will have an incentive to drop its prices below a level which is ‘50 per cent of the GST-inclusive market value of the supply’ so that it need not charge output tax on anything while still receiving input tax credits on its purchases.[90]

A second group of problems will arise with payments to and from third parties made in connection with a supply if the income tax law in this area is any guide,[91] eg, in the Professional Footballers’ Association case[92] the Court concluded that the ticket price charged to guests at the Association’s annual awards dinner was consideration (provided by the guests) for the trophies supplied by the Association to the winners. Section 9–20(2) provides that the consideration need not be provided by the recipient of the supply, but there is no express provision to render irrelevant whether the amount was paid to the maker of the supply.[93]

A third issue is the treatment of gifts. Section 9–15(2) provides that ‘it does not matter whether the payment, act or forbearance was voluntary.’ Section 9–15(3) provides that ‘a payment made as a gift to a non-profit body’ is not consideration. These provisions would seem to suggest that making a ‘gift’ (in the sense of a voluntary payment) could be viewed as consideration for a supply. While at first sight this proposition is surprising, the income tax again provides a context. In some income tax cases, describing a transaction as a gift means that the transaction is a private or personal affair and not part of a business (in GST terms there is no supply in course or furtherance of an enterprise).[94] In other cases a gift may be a business receipt and hence income, but for GST purposes it may be difficult to connect the gift to a supply – the case of government subsidies discussed above being a possible case in point. In yet other cases a gift may be both a business receipt and clearly connected to a supply.[95]

The ANTS Statement says that ‘where goods are given away (eg, tasting samples in a winery) no sale has occurred and there will be no GST paid.’[96] While the ANTS Statement seems to regard this as an example of a transaction that is not a supply, the transaction is better viewed as not being a taxable supply because no consideration is paid for this supply. This is dealing with a different situation from that just considered. Here the supply is the gift and the issue involved is whether there can be actual or deemed consideration for the gift under the GST, whereas in the preceding discussion the question is whether a gift can be consideration for a supply of something else. The question of consideration for gifts is taken up below in the discussion of tranfer pricing and in relation to adjustments.

Fourthly, there will be interesting questions about finding the consideration where there are actual or potential discounts or rebates to the price. If the discount or rebate is given at the time of the supply, the consideration would be the discounted price.[97] Different issues will arise where the consideration changes during a transaction, whether by agreement or otherwise. Common examples will be volume discounts, loyalty rebates, refunds and late payment charges which are supplements to the price. Division 19 refers to these adjustments to the price as ‘adjustment events’ which trigger adjustments to input tax credits or increase output tax. Division 21 deals with bad debts – amounts unpaid in relation to a supply. These provisions are discussed further below.

A fifth set of problems arise under an income tax where the consideration for a supply cannot be relied upon because of some relationship between the parties or because one is outside the domestic tax jurisdiction. In an income tax context, this is the problem of domestic or international transfer pricing.[98] In a domestic context, these problems are less significant under a GST. Division 72 which deals with transactions between associates takes the view that, provided the recipient is entitled to a full input credit for the acquisition, it makes no difference whether the supply occurs between associates at market value. The reason is obvious – as all of the tax is ultimately assumed to be borne by the consumer, and at the time that the consumer buys the goods, transactions between associated enterprises are principally tax tracing points. It is only if the related firm would not be entitled to a full input credit for its acquisition that there is a potential revenue loss from a sale at under-value.[99]

Indeed, the GST also removes pricing problems in many international contexts (in so far as customs duties survive the GST). If goods are imported output tax is triggered on the importation. If the goods are imported for a taxable resale or for incorporation in a further taxable supply, the importer will ordinarily be entitled to a full input tax credit for the same amount as the output tax. Again, changing the price at which the import is recorded will have no net GST effect. The main effect of the tax on importation is on imports by consumers. This is made even clearer in Division 84 which imposes an output tax on the importation of services but only in certain limited cases. This Division is expressed only to apply where the importer would not be entitled to a full input credit for the imported service, had it acquired the service domestically. Again the net GST is the same as in the case of imported goods, but in this instance without troubling the importer to charge itself GST and then claim a refund of the same amount. Imports of services by consumers are not caught by Division 84 which is limited to recipients that are registered or required to be registered. In regard to exports, the supplier will be entitled to recover all the input tax credits for the acquisition of its supplies associated with making exports, whatever the price paid for them and, as no output tax is charged on the export of its product, the amount at which those exports are made makes no difference for GST purposes.

But the GST mechanism will not always leave associates indifferent to the price for goods and services passing between them. The major obvious problem, which has been addressed in Divisions 72 and 84, arises where an acquirer would not be entitled to an input credit, either because it is not registered for GST or because it will use the acquisition to make input-taxed supplies. But there will be pricing issues which are not solved by these rules where supplies involve composite elements which are taxed differently. For example, a supplier who supplies one component which is GST-free and another which is taxable, will likely find it advantageous to price the combined elements in a way which favours the GST-free component where the associate is not registered.[100] The cash flows associated with the remittance of input tax and the recovery of output tax may induce associated businesses to trigger losses (ie, buy at $100 and gift to associate) in a firm which files monthly, but leave profits in a firm which need file only quarterly. And, it is not clear how the associate rules will apply where a margin scheme such as for second hand goods, rather than the input credit-output tax system, is used by the supplier.

(vi) Value of the Taxable Supply

The notion of consideration turns up again in the definition of the value of a supply, which is a critical element to the tax base because s9–70 states that the GST payable is ‘10 per cent of the value of the taxable supply.’ The value of a supply is then defined in s9–75 as 10/11ths of the ‘price.’ The price is then defined by reference to the ‘consideration.’ The consideration, where it is expressed in money, is defined in s9–75 as the amount of the money ‘without any discount for the amount of GST ... payable on the supply.’ So the relationship between these two ideas is:

value of supply + tax payable on the supply = consideration

In other words, the consideration is always tax inclusive with the result that, even if GST is not explicitly charged by the supplier, the amount of tax can always be recovered by the ATO because it was deemed to be included in the price received.[101]

Where the consideration is not expressed in money, eg, where there is a barter transaction, things become more interesting. Here, the formula in s9–75 treats the consideration as ‘the GST-inclusive market value of that consideration.’ In other words, a firm that swaps one asset for a replacement owned by another registered firm will be treated as receiving as consideration for its asset another on which it has paid 1/11th of the market price as GST. Moreover, it will have to account for 1/11th of the market value of its (former) asset as output tax. All things being equal, the net result should be zero tax. This is identical treatment to selling the item for cash (of which 1/11th would be output tax) and immediately applying the total received including the output tax to buy another asset (of which 1/11th should be immediately recoverable as input tax).[102] By using the market value concept, the GST at least avoids the valuation problems that have bedeviled the income tax over many years.[103] The income tax could adopt this simple GST expedient rather than the current convolutions.

The division between consideration provided as money and consideration provided other than in money may itself be an interesting question. Obvious parallels arise in the capital gains tax where assets are sold for amounts which are not easily allocated between these two poles. Valuation and quantification problems, similar to those arising under an income tax, will arise where either the value of the supply or the consideration is an indeterminate amount at the time of the supply. Taxation Ruling TR 93/15 adopts the interesting position that, for the capital gains tax, a seller who sells for an amount which is a lump sum and an amount that is indeterminate and unascertainable sells for money alone, while the buyer acquires for money and property. It remains to be seen what variation the GST rule will provide.

Section 9–80 provides an apportionment rule for the case where a supply is partly a taxable supply and partly a GST-free or input taxed supply based on relative values, but no rule for the case where consideration partly relates to a supply and partly to something else. The income tax position is that apportionment is only possible in limited cases and that none of the consideration is income when a non-apportionable payment relates partly to income related items and partly to non-income items.[104] A court may not be so perverse as to reach the same conclusion for the GST, but it is a simple matter to put the issue beyond doubt in the legislation.[105]

The interaction with other taxes will also be an issue. The value of a supply may include other taxes levied on the supply, such as excises and stamp duties. The general principle overseas is that GST is levied on the value of the supply including those other taxes.

B. Non-taxable Supplies

Although the Australian GST will have a very broad base, nevertheless some supplies will not trigger an obligation to pay output tax. Two types of supplies will not trigger output tax – supplies which are input taxed and supplies which are GST-free. They share the feature that no output tax is charged on making these supplies but, as has been noted above, differ in regard to the entitlement to claim credits for input tax. Input tax can be recovered for GST-free supplies, but not for input taxed supplies. The effect of input taxation is that a business purchaser is treated as a consumer of the goods and services it acquires.

(i) GST-free Supplies – Division 38

The GST Act makes several groups of supplies GST-free. They are all listed in Division 38 of the GST Act. Indeed, s9–30(1) would appear to insist on this location by stating that ‘a supply is GST-free if it is GST-free under Division 38.’ One GST-free supply is expressed in another part of the Act in s9–30(3) which treats any supply that is both input taxed and GST-free as being exclusively GSTfree. [106]

Exports: Exports of goods and services are GST-free consistent with the destination principle of the GST. Goods are treated as exported where they are to be physically removed from Australia by the supplier within 60 days of the supply.107 Services will be regarded as exported where the services relate directly to work done on land or goods situated outside Australia, where the services are provided to a non-resident who is outside Australia at the time of supply, or where the services are provided to a person who is outside Australia and the service is used or enjoyed outside Australia.[108]

The way that the system operates in the case of exports is less than intuitive. Although the mantra that ‘exports are GST-free’ is generally correct, it is misleading in that GST-free treatment does not arise on the movement of goods across a border per se. Rather, each item in the tables in sections 38–185 and 38– 190 requires ‘a supply ...’ An owner who removes their goods from Australia may not be entitled to claim a refund of input tax, other than through the tourist refund scheme discussed below.[109]

As a matter of GST policy, it is often not clear to what extent goods and services associated with tourists should be viewed as being ‘exported.’ In order to address these matters, tourists are dealt with by a series of specific provisions in the Act. In the case of inbound tourism, goods and services consumed by tourists in Australia (meals, accommodation and so on) are not treated as exports but as taxable supplies.[110] Travel to and from Australia is treated as an export.[111] The domestic legs of inbound tourism often present problems and so the Act provides that the fares for domestic air travel will be treated as exported if they are purchased overseas by non-residents.[112] A different rule applies for ship voyages – for these trips, no GST-free treatment is afforded to the internal legs of sea voyages unless part of travel to or from Australia.[113] In the case of departing tourists, goods taken out of the jurisdiction as accompanied baggage by tourists and Australian residents going overseas will be treated as exported – the exporter will be able to recover at the point of departure the GST charged on the purchase.[114] According to the ANTS Statement, the GST can be recovered only where it exceeds $300 and was paid to a single business within 28 days of departure – in other words, the tourist made a purchase (or perhaps several purchases) at a single store of over $3300. These conditions do not appear in the Act but are likely be included in the foreshadowed regulations.[115] If the goods are subsequently re-imported to Australia, GST will be payable on the goods at that time, although where the goods are purchased through an ‘inbound’ duty-free store, and within duty-free limits, they can be imported GST-free.[116]

International transport services not associated with tourism will typically be GST-free.[117] For this purpose, international transport services are defined to include the transport of goods from a place inside Australia to a place outside Australia, or from a place outside Australia to a place inside Australia. It also includes the transport of goods between two places inside Australia where the internal leg is ‘an integral part of the supply of transporting the goods to or from Australia’ and the internal transport is provided by the supplier who transports the goods on the international legs. This exemption will extend to ancillary services such as loading and unloading, insurance of the goods and arranging the transport.[118]

Before leaving exports, it is worth mentioning the concept of non-taxable importations to complete the picture with regard to tourists. The two main heads of GST are the making of taxable supplies (ie, usually sales) and the making of taxable importations (ie, usually purchases). Our discussion so far has focused on taxable supplies, but in the case of tourism the full picture cannot be understood without reference to Division 42 and the concept of non-taxable importations. These provisions render certain imports of goods exempt from import GST and thus have much the same effect as the GST-free treatment of exports. For example, they exempt from the import head of GST a tourist who brings into Australia goods that they have purchased within their duty-free allowance. The provision thus leaves the person indifferent, at least so far as Australia’s GST is concerned, between buying their perfume and alcohol at a duty free store in Heathrow airport and carrying it through Australia (a non-taxable importation), or buying it in Australia and carrying out (an export). We will return to look at international transactions more generally in section 4 below.

Health and medical care. Health and medical services are often made GST-free, usually because they are viewed as ‘merit goods’. These services will in many cases also be GST-free in Australia, although according to the ANTS Statement, the reason Australia will treat them in this fashion, apparently, has to do with ensuring competitive neutrality, rather than addressing poverty concerns or merit goods arguments. It states:

The health sector in Australia has significant government involvement through direct subsidy and regulation. Many health services are provided to patients free of any direct charge or by means of a co-payment that is a fraction of the total cost of providing the service.

Applying taxes to health care would place the private health sector, with its heavier reliance on direct fees, at a competitive disadvantage with the public health system. For this reason, most medical and hospital care services and health insurance will be GST-free. The cost of providing health care and insurance will fall as a result of the government’s indirect tax reforms as input taxes will be systematically removed from the sector.[119]

The same policy driver is evident in the income tax under the present government. On the basis that the current free health care system is unsustainable in its present form, the government has introduced a number of measures aimed at increasing private provision while recognising that public provision will remain central to the system. Hence the medicare levy has been increased from 1.5 to 2.5 per cent of taxable income for wealthy individuals who do not have private insurance and a cash incentive administered through private health funds has been introduced in relation to the cost of private insurance.[120]

Defining the range of services which will be GST-free (and then sustaining that definition through the ensuing litigation) is usually the most difficult part of the process. In order to defuse the latent political issues involved in this process during the time between the release of the ANTS Statement and the 1998 election, the government allocated part of the responsibility for this task to the Tax Consultative Committee discussed above. One of the results of the deal between the government and the Australian Democrats is the expansion of this category to include alternative styles of health care. Equity has also been a concern for the Democrats which has led to some broadening of the GST-free categories. The equity concern also underlies the income tax rebate for annual health expenditures above $1250.[121]

Divisions 38-B and 38–P contain the provisions concerning the range of health and medical services that are GST-free. The major groups of supplies are as follows:

Education is another merit good that is often made GST-free, and many forms of education will be GST-free in Australia. Again, according to the ANTS Statement, the reason why Australia will treat education in this fashion has more to do with ensuring competitive neutrality than the encouragement of education. It states:
Like health and medical care, education receives significant government assistance. Public primary and secondary education is provided free of charge and significant assistance is given to private schools and tertiary and vocational education. Applying the GST to education would discriminate against private providers.[126]

It is noteworthy that the income tax does not provide any significant tax concessions for education. The main issue has been whether a person is entitled to a deduction for education expenses, that is, the business consumption borderline.[127] Again, there are problematic distinctions that have to be drawn under the GST to separate the merit good of education from consumption – the same University will often offer a course as ‘adult education’ or for the award of an undergraduate degree where the course involves a six week study tour to Italy to examine the best collections of early Renaissance artists. The task of specifying the range of institutions and courses that would qualify for GST-free treatment was allocated to the Tax Consultative Committee.

The range of courses and institutions which are GST-free is stipulated in Division 38–C. It makes GST-free ‘an education course’ and the supply of ‘administrative services directly related to the supply of such a course’ (s38–85). An education course was originally defined in s195–1 as pre-school, primary, secondary, tertiary, masters or doctoral courses, special education courses, English language courses for overseas students, and professional and trade courses. The ANTS Statement said that ‘courses that do not lead to a recognised degree, diploma, or certificate, such as business training (eg, team development, writing skills etc) will be taxable.’[128] As a result of the agreement with the Democrats, adult and community education, first aid and life saving courses were added to the list. Excursion and field trips ‘directly related to the curriculum of an education course’ which are not ‘predominantly recreational’ are also exempt, but supplies of accommodation and food while on the trip can be taxable (s38–90). Course materials can also be supplied GST-free (s38–95). The provision of accommodation at primary, secondary and special education boarding schools is also GST-free (s38–105) but not food provided there even after the agreement with the Democrats (s38–3(1)(a)).

Section 38–100 sets out, ‘to avoid doubt’, a range of supplies related to education that are not to be GST-free. These include supplies of goods other than course materials. The ANTS Statement gave as examples ‘goods (such as computers and books) and services sold or leased to students by any educational institution will be taxable in the normal way. However, goods loaned to students free of charge will not be taxed.’

It is rarely a requirement in these provisions that, in order to be GST-free, any goods or services supplied with an educational course must be provided by the supplier of the course – the school, University or whatever. This is curious given the ANTS Statement that ‘additional activities that would normally be taxed will not become GST-free simply because a school acts as a purchasing agent.’[129]

Childcare. Three kinds of childcare will be GST-free in Australia. Section 38–140 says that a supply of child care within the meaning of the Childcare Rebate Act 1993 (Cth) by a supplier registered under that Act will be GST-free. Section 38– 145 makes GST-free the supply of child care at an eligible child care centre by an operator who enjoys fee relief under s12A of the Child Care Act 1972 (Cth). Section 38–150 makes GST-free the supply of child care by a supplier who is eligible for Commonwealth funding for providing family day care, occasional care, outside school hours care, vacation care or ‘any other type of care determined in writing by that Minister.’

According to the ANTS Statement, the rationale for this treatment is because childcare often includes an educational component and ‘Other forms of childcare, such as that provided by baby sitters, play centres, holiday camps, sporting and craft programmes will be taxable. However, many of these providers will be below the small business threshold ($50000 for businesses and $100000 per year for a non-profit organisation) and will not be required to charge GST.’[130] Perhaps also, the local baby-sitter will not have an ‘enterprise’ and so could not make taxable supplies.

No convincing reason is articulated for this GST treatment, though certainly equity and efficiency arguments can be mounted for well targeted public childcare expenditures. Childcare has been a battleground under the income tax and fringe benefits tax for a number of years[131] but singularly little tax or broader social policy coherence has emerged.

Activities of Charities. Charitable organisations present difficulties for both income tax and GST purposes. Governments generally do not want to discourage their charitable activities, nor the philanthropy that keeps them operating, and so governments typically offer income tax exemptions for the profits from their investments[132] and tax-deductibility for donations to encourage individuals and firms to support their works.[133] But charities can also seek to supplement the revenue available for their works by conducting commercial activities, with the added advantage of the tax exemption for their profits. This can be viewed as undesirable by the government, even where all the profits of the commercial activities are applied for the charitable objects of the organisation. The ANTS Statement took the view that charities should be subject to GST (albeit with a higher registration threshold) where they undertake commercial activities in competition with commercial firms. It stated:

Charities, public benevolent institutions, community groups and religious organisations operate differently from businesses. They often do not charge for the goods and services they supply, or impose only a nominal charge. Much of their funding and inputs are provided as donations.

Their charitable activities will be GST-free. Non-commercial supplies of goods or services by them will also be GST-free.

To avoid unfair competition with business, the commercial activities of these bodies will be taxable. Memberships of registered organisations (eg, local sporting clubs) will be taxable, but donations (which are not payments in return for services) will not be taxable.[134]

There are thus two policies which the GST Act needs to enact: the inclusion of the commercial activities of charities in the usual output tax and input tax systems; and the removal of input tax from their non-commercial/charitable activities. In the GST Act, the steps needed to accomplish this outcome begin with s9– 20(1) which includes as an ‘enterprise’, an activity, or series of activities, done ....

(d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by Subdivision 30-B of the ITAA 97 and to which deductible gifts can be made; or

(e) by a charitable institution or by a trustee of a charitable fund; or

(f) by a religious institution ... .

In order to bring these organisations into the net to impose output tax, it would also be necessary to find that they made their supplies ‘for consideration’ (s9–5(a)). Where a charity gives away its goods and services for no consideration, it would not be making taxable supplies. That position has the consequence that no output tax would be charged on making pure gifts. But it is not sufficient to ensure that input tax can be recovered on any items that the charity had to purchase in order to make its supplies. In New Zealand, according to folklore at least, charities typically ‘charge’ their customers a peppercorn for supplying goods and services (which is of course never recovered) in order to ensure that the charity can recover the input tax on any acquisitions they had to purchase in order to deliver the service.

If we assume for this discussion that the activities of charities would meet all the elements necessary to trigger the liability to output tax, the Act then offers GST-free treatment in Subdivision 38–G for the ‘non-commercial activities’ of these enterprises. The provisions state that a supply is GST-free if it is supplied by a charitable institution, the trustee of a charitable fund or a ‘gift-deductible entity’. The original provisions then rendered the supply GST-free if (i) the supply is made for consideration which is less than 50 per cent of the GST-inclusive market value,[135] (ii) the supply is made for consideration which is less than 50 per cent of the supplier’s cost to acquire it,[136] or (iii) the supply is of donated goods (unless they have been processed so as to lose their original character).[137]

The government’s April amendments made the treatment of charities etc more generous in three ways. First, they extended the donated goods provision to include goods received from another similar body under a supply that was GSTfree under the same provisions. Secondly, they added another GST-free category for charitable raffles and bingo (Subdivision 38–H). Thirdly, they gave charities etc access to the cash basis method of accounting discussed below without any threshold (s29–40(2)). Sensitivities still remained and so the government agreed with the Democrats to assist charities in complying with the GST and to consult further on the issue before the GST commenced on 1 July 2000.

Supply of a business as a going concern. One important supply that is commonly treated as GST-free in other countries is the sale of a business as a going concern. As has already been noted, the reason for removing tax from this supply is primarily administrative and taxpayer convenience. The supply of all the assets of a business would trigger output tax on the value of the business for the vendor, which might create cash-flow problems if the sale involves credit. Moreover, the entire amount would then have to be refunded to (a registered) purchaser in its first post-acquisition return. In order to remove these lumpy transactions from the system, they are usually rendered GST-free.

Section 38-325 treats ‘the supply of a going concern’ as GST-free where the recipient of the supply is registered or required to be registered and both parties agree in writing that the supply is of a going concern. Subsection (2) defines ‘the supply of a going concern’ to be a supply under an arrangement by which the supplier supplies all of the things necessary for the continued operation of the enterprise and will carry on the enterprise until the supply.[138]

The income tax does not contain a similar global provision for easing compliance and cash flow burdens on transfer of a business. Instead there are a host of provisions which influence the structure of sales of businesses. Typically, the seller retains the trade debts of the business in order to preserve possible bad debt write-offs and the consideration is allocated over the assets of the business on an agreed basis. The objective of this allocation in the typical case is to preserve the status quo for trading stock and depreciable assets, and in a small business to allocate as much as reasonably possible of the consideration to goodwill in order to attract maximum benefit from the CGT exclusion of half of the gain on goodwill. In some cases, rollovers may be available. The impact of income tax could be simplified if a coherent regime were introduced for transfer of businesses. In any event the income tax structuring of such transactions will now have to take account of the GST situation, especially to avoid any steps which may prejudice the GST-free treatment.

Certain supplies of land. Two Subdivisions deal with particular supplies of real estate and deem them to be GST-free. The first provision is not unusual — it deals with supplies of vacant land by government. The second is very odd and, until someone can make matters clearer, is perhaps best understood as one means of giving effect to the promise by the government that there would be ‘no GST on the sale of the family farm.’ Primary production in Australia, as in many other countries, is very sensitive politically and so receives special treatment under the income tax – and now under the GST. Farmers argue here as elsewhere that this treatment is not special in the sense that it simply caters for the particular conditions of farmers – averaging for lumpy income etc.

Section 38-445 makes GST-free the first supply after 1 July 2000 by the Commonwealth, a State or a Territory government of land on which there are no improvements. This provision only applies if the supply is of a freehold interest in the land or a long-term lease. Any subsequent supplies of the land – eg, a second long term lease, or a resale after a resumption – are potentially within the GST system.

Section 38-475 provides a special regime for the subdivision of farm land. The section provides that the supply of ‘potential residential land’ is GST-free. Section 195–1 defines potential residential land to mean ‘land that it is permissible to use for residential purposes, but that does not contain any residential premises.’ The two requirements for GST-free treatment are that the land supplied has been subdivided from land on which the supplier carried on a farming business for at least five years, and the supply is made to an associate either without consideration, or for less than market value (including GST). Thus, a supply of such land to a developer at market value will not be GST-free but a supply to a relative or family company with an element of gift will be.

The April amendments added a related GST-free supply in s38–480 for which at least some rationale is supplied. A supply of land is GST-free if the supplier has carried on a farming business on the land for five years and the recipient of the supply intends to carry on farming business on the land. The idea is to allow the break up of farms the same treatment as supplies of going concerns even though the original farming business is discontinued and replaced by several new farming businesses.[139]

Other GST-Free supplies. The remaining provisions of Division 38 render GSTfree a range of other supplies – services supplied by a religious institution that are integral to the practice of that religion;[140] supplies of water, except if supplied in a container;[141] supplies of sewerage services;[142] and the first supply of a precious metal after its refining.[143]

Food, clothing, books and other merit goods. Under the original GST Bill, food, clothing and books (other than course materials) were to be subject to GST. According to the ANTS Statement taxing food and clothing is desirable:

[T]his will contribute to the simplicity of the system. There will be no need to develop complex rules to differentiate basic food from takeaways or restaurant meals. Excluding food and clothing from GST would deliver much larger dollar benefits to high income earners than low income earners.[144]

The key part of the agreement between the Australian Democrats and the government was the GST-free treatment of food. The Democrats also fought for GST-free books but instead accepted book bounties and author grants. Clothing has not been such a contentious issue in Australia but other merit goods featured on the Democrats list such as the Arts for which a process has been put in place to assess the impact of GST and to redress adverse effects through grants.[145]

The exemption of food is achieved by Subdivision 38–A along with Schedules 1 and 2. A supply of food is GST-free unless it is for eating on the premises, hot takeaway food, prepared food, confectionery, savoury snacks, certain bakery products, ice-cream, biscuits and beverages (excluding milk products or substitutes, tea or coffee or substitutes, fruit or vegetable juice, infants or invalids drinks, and water). Food does not include live animals, raw grains, sugar cane or plants under cultivation. The usual tedious and on-going line drawing processes will be necessary in applying the definition.[146]

(ii) Input taxed supplies – Division 40

There are two main types of supplies that will be input taxed (or exempt, to use the internationally recognised term), financial supplies and residential rent.[147] According to the ANTS Statement:

this approach has been chosen where it is technically difficult to impose GST on the sale of particular services, but it is not appropriate to allow the sale to be GST-free[148]

Where a supply is input taxed, the purchaser is charged tax on inputs used to make the supply but cannot recover the input tax paid on the acquisition. So any subsequent supply involving those inputs is made with taxed inputs, but the subsequent supply is not itself charged with output tax. This is the same treatment as that given to an end-consumer of the supplies. The supplies that are input taxed are listed in Division 40. Section 9-30(2) provides that ‘a supply is input taxed if it is input taxed under Division 40.’ In this section we discuss the details of the definitions of input taxed supplies. The broader policy issues are canvassed under the heading Special Tax Base Regimes.

Financial supplies. Supplies of financial services are treated as input taxed.[149] The term used in the legislation is ‘financial supplies.’ By far the largest legal problem that presents itself is one of classification – together with the definition of food the classification of financial supplies is likely to be the biggest compliance area of the GST. Common examples of supplies of financial services are making loans, operating accounts, transactions with debt and equity securities and interests in such securities, interests in superannuation funds and life insurance.[150] Also included as supplies of financial services are supplies ‘directly in connection with’ the supply of a financial service by the same supplier and ‘arranging a supply’ of a financial service.[151] But supplies of ‘advice’ in relation to financial supplies are taxable in the usual manner. This tension between arranging and advising is a constant source of problems in other countries. [152]In order to obviate some of these problems, s40–5(3) provides that the supply of legal services by a legal practitioner, the supply of accounting services by an accountant and the management of tax affairs by a registered tax agent are not taxable. Also excluded from being financial services are the supply of general insurance, safe custody services and payroll services.

But the provisions in s40–5 contain more than a few oddities. Transactions with unit trusts and superannuation funds are made input taxed, but nothing is said about transactions with interests in, or the management of, other forms of fixed and discretionary trust. The provisions dealing with debt instruments exclude transactions where ‘the security is a lease, licence or other similar arrangement in respect of real property.’ It is odd to imagine that a lease is conceived of as being of the same genus as ‘a security for a debt.’ Moreover, does this provision imply that ‘a licence or other similar arrangement’ in respect of goods is also an input taxed supply? If so, the treatment of chattel leasing seems odd. Hire purchase is treated as giving rise to an input taxed supply of the provision of credit ‘but only if (a) the credit is provided for a separate charge; and (b) the separate charge is disclosed to the recipient of the goods.’[153] These strict conditions are not important if all chattel bailments are treated as debt securities. Finally, the provisions do not address much of the world of new financial instruments. The ‘transfer or assignment of a futures contract through a futures exchange’ is treated as input taxed, but transactions involving commodity options, gold loans, swaps and so on apparantly are not.

Exports of financial services, however, are made GST-free. This is accomplished by s9–30(3) which provides a tie-breaker rule where a supply is both input taxed and GST-free. The tie is resolved in favour of the export so that all input tax is recovered and no output tax is charged on the export.

The input taxing of financial supplies was qualified by amendments flowing from the agreement between the Democrats and the government. As discussed in Section 2, input taxing creates a bias for financiers to source as much of their activity in-house as possible to reduce GST on inputs whereas the general direction in business is to outsource many services. Under Division 70 regulations may specify that acquisitions relating to the making of financial supplies are entitled to a reduced input tax credit. The regulations will specify the types of acquisitions which are commonly outsourced and the percentage by which the input tax credit will be reduced for each type (the percentage being set to produce as far as possible the same overall outcome for the financier of insourcing and outsourcing). The benefit will accrue most to small financial institutions like credit unions which outsource a large range of their activities.

Residential accommodation. Supplies of residential accommodation are also input taxed. According to the ANTS Statement, this treatment is ‘to ensure comparable treatment for renters with owner-occupiers.’[154] Owner-occupiers will pay tax on the inputs to their accommodation, and so will tenants by virtue of the fact that their landlord will acquire its inputs subject to tax.

Section 40–35 treats the supply, by way of short term lease or licence, of residential premises ‘to be used predominantly for residential accommodation’ as input taxed. Sections 40–65 and 40–70 respectively treat the sale or long term lease of existing residential premises to be used predominantly for residential accommodation as input taxed. Section 195–1 defines residential premises as ‘land or a building occupied or intended to be occupied as a residence, and includes a floating home.’

These provisions have an inbuilt exclusion of the supply of residential premises to the extent that they are ‘commercial residential premises’ or ‘new residential premises.’ ‘New residential premises’ are defined in s195–1 to mean ‘residential premises that have not previously been sold as residential premises and have not previously been the subject of a long-term lease.’ ‘Commercial residential premises’ are also defined. This definition covers inter alia premises that are a hotel, motel, hostel, boarding house, caravan park or camping ground. In its April amendments the government gave suppliers of long term accommodation in commercial premises the option of a special regime discussed below or input taxing under ss40–35(b) and 87–25.

C. Credit for Input Tax

The mechanism that is used to prevent cascading of output tax is the credit for input tax. That is, a credit against the tax on outputs is provided for the amount of tax paid (or payable) by the firm to acquire the inputs that it will use to generate its taxable outputs. The input tax credit thus reduces the amount of output tax that has to be remitted and is refundable where the amount of input credit exceeds the amount of output tax. Firms will commonly have refunds where they are building up inventory, buying expensive capital goods or engaged in making exports or other GST-free supplies. The credit is only available to registered firms.

The similarity to the notion of the deduction under the income tax is obvious. And like the deduction, we shall see that it is necessary to identify acquisitions which are relevant to the conduct of the enterprise from those which are not – the latter being essentially personal consumption. Further, there is also a need to deny input credits for acquisitions that will be used to make (one type of) tax-exempt supply, just as the income tax denies deductions for expenses incurred to earn exempt income. Extensive apportionment of input tax credits will be necessary just as for income tax deductions. But unlike the income tax, there is no need in the GST for the troublesome capital/income dichotomy.

In the Australian GST legislation, the credit for tax paid on inputs arises in s7-1(2) which states that ‘entitlements to input tax credits arise on creditable acquisitions and creditable importations.’ The reduction of the output tax liability by the amount of input tax incurred occurs in s7-5 which provides that ‘amounts of GST and amounts of input tax credits are set off against each other to produce a net amount for a tax period ...’

The central test to enjoy the credit for input tax is the creditable acquisition. This is defined in s11-5. It provides that a creditable acquisition arises where a taxpayer acquires anything for consideration, ‘solely or partly for a creditable purpose’ and the supply to the taxpayer was a taxable supply. It is also necessary that the taxpayer is registered or required to be registered in order to be able to claim the credit.

The first element to this test is the idea of an acquisition. Section 11-10 contains an elaboration, though not a definition, of the notion of acquisition. It parallels the similar provision dealing with supplies[155] and states that ‘an acquisition is any form of acquisition whatsoever.’ Subsection (2) then goes on to add, without limiting subs(1), the acquisition of goods and services; the receipt of advice or information; the acceptance of a grant, assignment or surrender of real property; the acceptance of a grant, transfer, assignment or surrender of any right; and the acquisition of a financial supply; and the acquisition of a right to require another person to do something, to refrain from an act, or to tolerate an act or situation.

The amount of credit for input tax is linked directly by s11–25 to ‘the GST payable on the supply of the thing acquired.’

It was noted above that GST is heavily reliant upon documents. This can be seen in s29–10(3). It provides where a taxpayer does not hold a tax invoice in respect of a creditable acquisition, the input tax credit is ‘attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice.’ There is a power in the Commissioner to dispense with this requirement ‘in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply.’ But the basic rule remains, no document, no credit.

The second element of the idea of a ‘creditable acquisition’ is that the taxpayer acquires for a ‘creditable purpose.’ Section 11–15(1) says that ‘[y]ou acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.’ This test connects the inputs, for the recovery of input tax credits, to the taxpayer’s enterprise. A more usual way of expressing the connection test is to entitle the taxpayer to credit for acquisitions made in order to make taxable supplies. These two ways of connecting an acquisition to something are analogous to the second and first limbs of s8–1 of ITAA 97 (s51(1) of ITAA 36). The GST Act expresses a test which seeks a connection between the acquisition and the enterprise, rather than any individual supply. This has potentially important consequences in that input tax credits can be obtained even where no taxable supplies occur, assuming that one of the negative tests below is not applicable. In this regard there is a significant distinction between the second limb of the income tax deduction provision which refers to ‘carrying on a business for the purpose of gaining or producing your assessable income’ and the GST input tax credit provisions which refers simply to ‘carrying on your enterprise.’[156]

Nevertheless, the element of ‘carrying on’ resurrects the kind of contemporaneity problems discussed above in relation to making of supplies. They now also arise for making acquisitions where the business has yet to commence or has ceased operations.[157] Special rules are, however, provided in Division 60 to make acquisitions prior to the incorporation of a company creditable. The notion of the ‘creditable purpose’ serves two functions in the GST regime. One is to distinguish acquisitions that are to be used for personal consumption from those that are to be used as inputs to business supplies. This is accomplished through two provisions. Section 11–15(1) requires the taxpayer to acquire ‘in carrying on your enterprise’ and s11–15(2)(b) then confirms that a taxpayer does not acquire for a creditable purpose to the extent that ‘the acquisition is of a private or domestic nature.’[158] The idea is supplemented in s69-5 which provides that an acquisition is not a creditable acquisition to the extent that it is a ‘non-deductible expense’ – ie, expenses listed in the section that are not deductible for income tax purposes. Non-deductible expenses under income tax (eg, meals and entertainment expenses) typically involve a significant element of personal consumption. The relevant income tax provisions referred to can be generally regarded as providing clear if arbitary rules for some doubtful cases.

Hopefully the GST jurisprudence for the business private borderline in Australia will develop in line with the income tax. Most of the income tax cases in this area concern employees. One of the great advantages of the GST from this viewpoint is that the general exclusion of employees from the definition of enterprise will greatly reduce the number of disputes. Although great simplification of the income tax could be achieved through elimination or standardisation of employee deductions, the government has shied away from this course, presumably because of the perceived political problems with it.[159]

The second function is to deny credits for acquisitions that will be used to make input taxed supplies. Unlike an acquisition for personal consumption, a taxpayer who acquires an asset to make an input taxed supply will satisfy the requirement in s11–15(1) that the taxpayer acquires ‘in carrying on your enterprise.’

Consequently s11–15(2)(a) provides that a taxpayer does not acquire for a creditable purpose to the extent that the acquisition relates to making supplies that will be input taxed.[160] This is a real exception to the entitlement to an input credit (unlike the income tax deduction reference to exempt income). Although it has parallels to the positive connection test in the first limb of the income tax deductibility test by connecting the inputs to individual (input taxed) output, the negative way it is expressed means that no actual connection has to be made to taxable supplies to get input tax credits. Notice that no similar rule exists for acquisitions used to make GST-free supplies – it is intended that input tax be recoverable on these supplies.[161]

An apportionment test is introduced here. It is based on a taxpayer’s purpose in acquisition.[162] Subsequent provisions allow for pro-rating of the input tax credit.[163] We will return to apportionment shortly.

An important requirement for a creditable acquisition is stipulated in s11–5(b). It requires that ‘the supply of the thing to you is a taxable supply.’ This means that a firm will only be able to claim input tax credits where the supplier has met all of the requirements for making a taxable supply. The supplier will have to make something that meets the description of a supply, have an enterprise with which the supply is connected, be registered, the supply will have to be connected with Australia and so on. This requirement will not be met, and the acquiring firm will not be entitled to recover input tax credits, where it procures its inputs from, eg, small firms that elect not to register because their turnover is under the turnover threshold, a firm that is making an input-taxed supply, individuals making supplies of second-hand goods, firms that make supplies by way of free samples, and firms that are not resident and are making supplies from offshore.

Without some remedy, these cases can create problems for the GST. The first three situations involve potential cascading of tax – the individual or firm making the current supply has previously paid tax on its inputs and even though no additional tax will be charged on the current supply, when the registered firm acquires the inputs it does not enjoy a ‘flow-through’ credit for the underlying tax. When the registered firm then resupplies, it is not relieved from charging tax on that supply. Ultimately the end-consumer will have to pay tax on tax. Special rules are needed to deal with these situations.[164]

The fourth situation is not a problem because there is no underlying tax that ought to be credited to the purchaser. Rather, the supplier will have enjoyed the benefit of the input credit on any acquisitions, and should not have triggered output tax on the gratuitous supply. For this situation, the requirement that the acquisition occur under a taxable supply is appropriate.

The fifth situation is more interesting but again is probably not viewed as a problem. Here, there is no underlying domestic tax paid earlier in the chain that ought to be credited to the purchaser. But there may be implicit tax on the export if the foreign country does not fully zero-rate all exports, eg, some countries do not zero-rate exports of input-taxed supplies.[165] In such a case, the supplier will have paid the tax on its outputs, but who ends up bearing the tax will likely depend upon the extent of price competition in the particular market. It may be that the seller will have to absorb the amount of tax in order to meet the competition from other suppliers. In such a case, the decision not to recognise foreign tax paid as reducing local tax makes sense. But even if the tax could be fully shifted forward to the local buyer, countries understandably do not like the idea of refunding to locals taxes paid to foreign governments.

The final two tests in s11–15 that must be met in order to generate a creditable acquisition are consideration and registration. Registration has already been discussed in relation to making taxable supplies and need not be considered again here.

(i) Third party payments

Consideration is subject to a rule which raises the issue of third party payments on the credit side. Section 11-30(1) provides that an acquisition is only partly creditable if the taxpayer provides, or is liable to provide, only part of the consideration for the acquisition. Section 11–30(3) will allow to the taxpayer an input credit based on the amount of consideration that it provides. The Explanatory Memorandum gives as an example the case where a consultant does work which requires travel for clients on the basis that the client pays for half the airfares and the consultant pays for the other half.[166] Putting aside the question of why anyone would enter into such an odd arrangement, it is said that the result is that the consultant gets a credit for one half of the output tax on the airfare and the client a credit for one half under this rule about payment of consideration.

The precise basis on which the airfare is purchased in the example is not spelt out. Normally the consultant would purchase the airfare and then charge it out to the client either as a disbursement or as part of the fee for the consultant’s work. In either event, the consultant should charge output tax on the amount charged to the client which is referable to the airfare and claim an input tax credit for the GST on the airfare. If the consultant adopts the practice of including half the airfare as a disbursement and half in the fee, the result should not be any different. If the client actually contracts directly with and pays to the airline for half the airfare and the consultant for the other half, it is not clear what the precise acquisition by the client is despite the width of s11–10 defining acquisition. If the consultant is regarded as contracting as agent for the client as to the half airfare, the problem of what is the acquisition by the client remains and the agency rules in Division 153 which are discussed below come into play.

A further oddity arises from the terminology ‘provide, or are liable to provide’ in s11–30. Perhaps the explanation is a reference to the methods of accounting in the GST: cash (provide) and accruals (liable to provide). If the consultant contracts for the airfare but half is paid by the client, does this mean that the consultant gets a credit for the whole airfare on the basis of the liability and the client for half on the basis of payment? It would be much better for the credit to follow the acquisition rather than the actual payment (with appropriate constructive payment rules), or at least for the operation of the consideration provision to be spelt out more clearly. It was noted above that the third party payment case is also not dealt with clearly on the supply side.

(ii) Apportionment of Input Tax Credits

The concept of ‘creditable acquisition’ has no apportionment idea – an acquisition is a (completely) creditable acquisition if ‘you acquire anything solely or partly for a creditable purpose.’ Apportionment enters the recovery of input tax in the definition of creditable purpose. Section 11–15(1) provides that the taxpayer acquires ‘for a creditable purpose to the extent that you acquire it in carrying on your enterprise.’ [Emphasis added]. Section 11-30(1)(a) provides that an ‘acquisition that you make is partly creditable if it is a creditable acquisition [and] you make the acquisition only partly for a creditable purpose.’ Section 11–25 provides ‘the amount of the input tax credit is reduced if the acquisition is only partly creditable.’

Section 11–30(3) gives the appearance of offering a mathematical formula that will ineluctably dictate the proportion of the input credit that can be recovered in such circumstances. It states that the amount of the input tax credit on an acquisition that is partly creditable is simply the full input credit multiplied by the extent of the taxpayer’s creditable purpose multiplied by the extent of consideration.

When a taxpayer acquires a single asset that it intends to use both in carrying on the enterprise and for private consumption, this rule will come into play. For example, an individual taxpayer who purchases a two-storey building intending to use the first storey as a shop and the second storey as a dwelling, will be obliged to apportion the input tax credit. The same issue will arise for a taxpayer who purchases a car that will be used both for commuting and for deliveries. In both cases a pro-rating of the input credit will have to be made in the GST return in which the credit is claimed.

What s11–30(3) seems to offer is a simple means of making this apportionment. However, the formula includes the term ‘extent of creditable purpose.’ This is defined as ‘the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition.’ In other words, it is based on the elusive concept of purpose. Nothing seems to have been added to the simpler wording of the income tax deduction test which just relies on the ‘extent to which’ terminology. Hence the law on income tax may well be held to be applicable. While this will provide suitable guidance in many cases, it will leave many questions unanswered and may if some of the perverse income tax interpretations of the past are translated to the GST create problems.[167] In practice, it is likely that many of these kinds of apportionments will, as under the income tax, be based on more concrete measures that will provide the evidence of the taxpayer’s expected usage or of the relevance of the input to the taxpayer’s operations – floor space, number of staff, expected kilometres, proportion of total revenue, proportion of total costs, proportion of profits, or other measures.

A similar pro-rating is expressed for input taxed supplies. Section 11–15(2)(a) provides that a taxpayer does not acquire for a creditable purpose ‘to the extent that the acquisition relates to making supplies that would be input taxed.’ [emphasis added]. For example, a taxpayer who purchases a two-storey building intending to lease the first storey to a residential tenant and to use the second storey as an office, will be obliged to apportion the input tax credit. There will be a simple pro-rating of the input credit that will have to be made in the GST return in which the credit is claimed.

There is a special de minimis rule for acquisitions associated with one form of input taxed supply – a financial supply. No apportionment is necessary where a taxpayer makes an acquisition in relation to making financial supplies and the annual turnover of financial supplies is less than both $50000 and 5 per cent of total annual turnover.[168] There are interesting questions about how this test will operate. First, it is clear that it is cumulative – the value of the financial supply must be less than both figures. Secondly, it is not altogether clear what the thresholds refer to in the case of financial supplies.[169] Does it mean, eg, the gross amount of all loans made by a firm during a year, or simply the amount of interest it receives on making those loans?

It is important to remember that the test is to be administered on an input-byinput basis. No apportionment will arise where discrete acquisitions can be identified. So, where the phone bill separately identifies individual calls, there is no apportionment issue on call charges if each call has a single purpose. But where there is a single acquisition that will be applied indiscriminately, apportionment is necessary.

The apportionment rule is combined in s11–30 with the consideration rule that has been discussed above. In a case where the two issues are raised the operation of the section is less than clear. Suppose in a variation of the example discussed under the previous heading the consultant is travelling to another city partly to do work for a client and partly for a holiday and agrees that the client will pay half the airfare while the consultant pays half. Putting aside the difficulties discussed above of how such split payments occur, can it be argued that the client gets a credit for the GST attributable to its share (being wholly for a business purpose) and the consultant a credit for half of the GST attributable to the rest of the airfare on the basis of the mixed business personal nature of the trip, ie, credit for three quarters of the GST on the ticket in total?[170] Mixing third party payment issues into an apportionment provision does not seem wise.

D. Timing Rules

A GST needs timing rules for determining when supplies and acquisitions occur just as does an income tax for the derivation of income and the incurring of deductions. These kinds of rules are obviously critical in relation to assigning supplies and acquisitions to a period (including for the transition in the absence of other overriding rules), but they also serve two other purposes. One is to fix a value for the purposes of the valuation rules and another is to locate goods at a particular time for the purposes of the jurisdiction to tax. Just as there is little conformity between financial and income tax accounting, it is likely that there will be large divergences between the GST and income tax timing rules — income will precede and lag behind supplies; and deductions will precede and succeed acquisitions.

Curiously, there are no timing rules for determining when a supply or acquisition has occurred, or for allocating supplies and acquisitions to particular periods. Instead, the Act treats this as a matter simply of allocating the tax consequences of supplies and acquisitions to particular periods, without defining when those underlying events occurred. The Act proposes two accounting systems, similar to the cash and accruals accounting familiar to income tax lawyers. Section 29–40 allows firms with an annual turnover under $500 000 to adopt cash accounting. Generally other firms must employ the other form of accounting.

The meaning of these two systems is differentiated in ss29–5, 29–10 and 29–20. Under s29–5(1), the output tax (for a firm not accounting on the cash basis) on making a supply will be allocated to the earlier of the period when the firm issues an invoice in relation to the supply, or the period when it receives any of the consideration for the supply.[171] Section 29–10(1) attributes the input tax credit to the earlier of the period when the firm provides any of the consideration for the acquisition or in which the invoice is issued.

For firms accounting on a cash basis, the output tax payable on making a supply is attributed to the period in which the firm receives the consideration (which need not be in the form of cash). Similarly, the input credit is allocated to the period in which the firm provides the consideration for an acquisition. Of course, both regimes are then subjected to the requirement that the taxpayer hold a tax invoice, a document which is clearly different from a mere invoice, in order to claim the input tax credit.

But this sleight of hand of attributing input tax credits and output tax, rather than supplies and acquisitions, to periods may yet prove to be a difficulty. The provisions which do the allocation refer to ‘the GST payable by you on a taxable supply ...’ or to ‘the input credit to which you are entitled for a creditable acquisition.’ Determining when that event has occurred will be a matter of some finesse, although some of the problems evident in the income tax may be solved. Thus, the kind of problems evident in the AGL case[172] will be eliminated — the Commissioner cannot impose output tax on gas which has been consumed by households but is as yet unbilled.

The generosity to this supplier is offset to some extent by the treatment of credit sales and instalment sales. The supplier who sells on credit terms and is not operating on cash accounting is taxable when an invoice is issued, which presumably includes an invoice that stipulates a future date for payment. For a seller who agrees to payment by instalments, the seller is taxable when ‘any of the consideration is received for the supply,’ and while deposits are deemed not to be consideration until they are applied in reduction of the price,[173] instalment payment regimes will create obvious problems for the supplier who is required to remit output tax on the full contract price. For buyers, the kind of deduction issues that arise from making provisions for future expenses such as annual or long service leave, evident eg, in the James Flood and Nilsen Development Laboratories cases,[174] will be rendered irrelevant where they involve employees, and in many other cases such as repairs under warranty will be effectively resolved against the taxpayer by the documentation requirements.

As with the income tax, special rules have been provided for long term contracts — the kind of problems evident for the series of dancing lessons in the Arthur Murray case.[175] Division 156 allocates the output tax and input credits in a progressive manner over the life of the long term contract. Section 156–5 provides:

(1) The GST payable by you on a taxable supply that is made:

(a) on a progressive or periodic basis; and

(b) for consideration that is to be provided on a progressive or periodic basis; is attributable to one or more tax periods as if each progressive or periodic component of the supply were a separate supply.’

So, in the case of a construction contract, rather than the overall construction project being treated as a single supply which would trigger all of the output tax on the first progress payment, each progress payment is treated as made in respect of a separate supply and attracts tax at the time of the progress payment on the amount of the progress payment. In this way, in the usual case, GST will be payable progressively over the course of the construction. This rule will presumably also apply to other long term supplies such as leasing of premises and chattel bailments. And these rules apply for both the supplier and the acquirer, creating a statutory Coles Myer Finance[176] system for purchases. Some mention should also be made of Division 159 which provides statutory rules for correctly translating a taxpayer’s accounts from and to cash basis accounting which contrasts with the lack of adjustments under the income tax.[177]

In providing a numerical basis for allocating taxpayers between the accounting systems, providing rules to allow relatively painless changes between the systems, and in stating expressly the meaning and consequence of each system, the GST will often be clearer than the income tax. Once again, in the income tax, the judges have been left to cover the ground and have often experienced difficulties. There is no reason why the income tax rules could not be improved by adopting a statutory allocation option and a statutory regime similar to that above (which was indeed suggested by the Asprey Committee).[178] This would ensure that the GST does not require businesses to keep three sets of books, financial accounts, income tax accounts and GST accounts. It would be even better if the GST and income tax were aligned to a greater extent with financial accounting.

E. Adjustments to Output Tax and Input Credits

The GST requires rules for cases where events turn out to be different than expected at the outset. The amount paid for a supply may turn out to be different from the original price or the supply may be cancelled. More importantly, the omission of any capital/income dichotomy means that the GST is particularly susceptible to miscalculation and abuse. The problem comes about because a taxpayer is entitled to recover the full input credit (or the full proportion based on the assessment of its creditable purpose) in the first return after it has made the acquisition. If the taxpayer subsequently changes its mind on how it will use the asset, or if the initial purpose is not implemented as proposed, there will be problems unless there is a regime to adjust the tax on an ongoing basis. In addition to these partial changes, there are also complete changes that can occur when a consumption asset enters a firm, or when a firm’s asset is removed completely for private consumption. In short, there are three potential change of use problems – (i) an asset that was acquired for private consumption is later committed into an enterprise; (ii) an asset that was acquired in connection with an enterprise is removed for private consumption, either during the operation of the enterprise or on its winding up; and

(iii) an asset that was acquired for part-use in connection with an enterprise is used to a greater or lesser extent than was estimated when it was acquired.

The Australian GST has adopted a comprehensive regime of adjustment events to deal with cases of such kinds. In a number of respects, this regime goes beyond what is found in other countries’ GST systems. Where a taxpayer changes completely or in part the use of an asset, or there is a variation to the price paid, GST adjustments occur as laid down in Divisions 19, 21 102, 129, 132 and 138. Under s29–20 for adjustment events of an accruals basis taxpayer, the whole of the adjustment is allocated to the tax period in which the taxpayer becomes aware of the event. For adjustment events of a cash basis taxpayer, the adjustment is allocated to the tax period in which the relevant cash flows occur. As with output and input tax, it is the amount of the adjustment, rather than the adjustment event, which is attributed to particular tax periods. These adjustment provisions can be understood as dealing with problems that will arise at three different points of time.

(i) Initial Adjustments: Terminating a Sale, and Changes to the Price Paid or Received

Divisions 19, 21 and 102 arise from the supply or acquisition of an asset and deal with the effect of cancellations of a sale, or variations to the agreed price or the non-payment of the price — the provisions are intended to correct for any divergence between the amounts promised and paid. They need to be examined where there are discounts for early payment or penalties for late payment, where volume rebates are offered, goods are returned to the supplier and the price refunded, or a price adjustment occurs to take account of the goods or services not meeting specified requirements. The rules apply for both the supplier to reduce (or increase) its output tax, and for the acquirer to reduce (or increase) its input credit. In this kind of a case there will not be a recalculation of the original taxable value. Rather, there will be deemed to be an adjustment for both the supplier and acquirer in accordance with the general approach of making adjustments in later tax periods rather than in the original tax period so as not disrupt the operation of the tax credit mechanism by continued recalculations. The adjustment mechanism also overcomes problems that the four year limitation period could create if it were necessary to adjust the original transaction.[179]

Division 19 applies where a supply or acquisition is ‘cancelled,’ the consideration is changed or the type of supply changes, eg, where a GST-free supply becomes a taxable supply by virtue of subsequent events. The example given in the Act is of an exported good that does not leave Australia within the 60 day limit. This provision will neutralise the effect of the input credit or output tax for events such as returns of goods and, rather than reverse the prior tax event in the return for the prior period, creates new tax consequences at a later time. Division 102 is a special provision applicable to the cancellation of a lay-by sale. It seems to take the view that the adjustment arising from the cancellation of a layby sale will negate entirely the tax consequences of the prior supply and so, instead, imposes output tax on the amount which the supplier is entitled to retain or recover consequent upon the cancellation.

This systematic approach of the GST stands in stark contrast to the income tax where such reversal of transactions is piecemeal and incomplete.[180] Yet the kinds of cases which have arisen under the income tax are likely to test the adjustment mechanisms. Will there be an adjustment event where there is an ex gratia payment from the other party or from a third party which has the effect of reversing a previous transaction?[181] Do the adjustment events amount to a claim of right doctrine for GST purposes?[182]

Division 21 on bad debts provides adjustments for accruals basis taxpayers to reverse both sides of transactions when a debt is written off or has been due for 12 months or more, and recoveries of such amounts. The analogy is with the deduction under s25–35 of ITAA 97 for the supplier, and with the reduction of tax attributes under the debt forgiveness provisions of Schedule 2C of ITAA 36 for the acquirer. The GST has two improvements over the income tax; first, the adjustment is symmetrical; secondly, the 12 month rule means that taxpayers do not have to prove that the debt is bad at the end of that period.[183] The similarity of language with the income tax does raise the prospect, however, that some of the problems of that law may become part of the GST, eg, the requirement that there be an existing debt when write off occurs and the inability of a transferee of the debt to utilise the provision (meaning that the GST will reinforce the bias against transfer of trade debtors with a business).[184]

(ii) Ongoing Adjustments

A second series of adjustments, provided in Division 129, will arise during the period of usage of an asset. The provisions require ongoing verifications that the asset is being put to a creditable use in the same proportions originally envisaged when it was acquired. If not, adjustments are made to the input credit originally allowed to the purchaser on its acquisition, again in the later period. The mechanism is complex but, reduced to its basics, requires the user of an asset to verify and re-adjust the extent of creditable usage once in the case of an item costing $50 000 or less, five times for an asset costing between $50 000 and $500 000, and 10 times for an item costing $500 000 and above.[185] As a result of amendments in April this rule applies to cases involving acquisitions that relate to financial supplies. The rule for other cases is varied to two adjustments for an item costing $5000 or less, and five for an item costing between $5000 and $500000. The ATO can reduce the number of periods for specified classes of acquisitions if record keeping requirements would otherwise be too onerous. The original Bill also contained a de minimis rule excluding adjustments in relation to financial supplies for cases where annual financial supplies are less than the lower of $50000 or 5 per cent of annual turnover. This survives in the Act with a broader rule added to exclude from adjustment any acquisition for $10000 or less that relates to financial supplies, or $1000 or less in other cases.[186]

The first review is made in the tax period ending on the 30 June that occurs at least one year after the asset was acquired – in other words, for an item acquired on 22 July 2000, the adjustment period is the period ending 30 June 2002 (in effect, all but two years).[187] The initial credit was based on a taxpayer’s creditable purpose, ie, the proposed usage, but the Division 129 adjustment to the input credit is done with hindsight and is based on how the asset was ‘applied.’[188] An adjustment to the input tax credit (originally allowed in the return for period in which 22 July 2000 occurred) is then made in the subsequent tax period if it is the case that during the prior 23 months the asset was applied in a different manner. These reviews continue each year for the number of occurrences required, and review the application of the asset over the entire period since its acquisition, not simply the period since the last review. The reviews stop once the item acquired is lost, stolen or destroyed, or is disposed of but in a manner that does not amount to a taxable supply.[189] In such cases, one final review and adjustment is then made. In many overseas countries, input tax credits for capital expenses in this kind of case are in effect depreciated with the actual use year by year determining the amount of input tax credit allowed in that year. This reflects the approach in current income tax depreciation rules, rather than the look back GST adjustment system that Australia has adopted. There are some examples of look back rules in the current income tax.[190] Though done for practical reasons, from a theoretical viewpoint as discussed in section 2 above, depreciating input tax credits in effect turns the GST into an income type, not consumption-type tax. The Australian system is truer to the consumption tax.

We mentioned above that the income tax has had some difficulty in dealing with adjusting tax effects for changes to the character of an asset – eg, assets which move from the private into the income tax world, without a formal sale occurring at the same time. A common example of the income tax problem would be the land in Whitfords Beach[191] or a car bequeathed to a car dealer who then puts it on the lot.[192] The rewrite of the income tax legislation has attempted to address this matter in new provisions which prescribe the income tax consequences for assets which change their character from CGT asset to trading stock (although the provisions do not dictate when or how this happens).[193] The GST would face a similar difficulty creating an input tax credit for assets that move into the enterprise of a taxpayer without being ‘acquired’ at that time. Division 129 may well have addressed this question of change of character, perhaps inadvertently, and provided the movement of the asset happens sufficiently soon after its acquisition. Section 129–5(1) provides that the adjustment events provided for in Division 129 can occur ‘even if ... [the acquisition] was not a creditable acquisition’. In other words, where no input tax credit was originally allowed to the purchaser. If these provisions do apply, that is, the taxpayer is still within the adjustment period for the asset, based on its initial cost – the provisions allow the taxpayer an input tax credit (or impose an output tax liability) based on the difference between the ‘actual application’ of the item and the ‘intended or former’ application.[194] Since, in the case of an asset moving into the GST realm, the ‘actual application’ will be greater than the ‘intended application’, the taxpayer will have a ‘decreasing adjustment’,[195] which is based on the full input credit to which the taxpayer would have been entitled ‘if the [original] acquisition ... had been solely for a creditable purpose.’[196] It may not be the case, however, that the decreasing adjustment will be the full amount of the input tax paid by the taxpayer when the item was originally acquired, as the definition of ‘actual application’ looks to the ‘the extent ... to which you have applied the thing acquired ... for a creditable purpose during the period of time starting when you acquired ... the thing and ending at the end of the adjustment period.’[197] This may be construed as requiring some time or value-based apportionment which reflects the decline in value or consumption of the asset before its migration into the GST world.

Division 129 may be less adequate to deal with the change of character that occurs in the reverse situation, when assets move out of the tax system into private consumption, again without a sale or other disposal. This issue was displayed in the income tax case, Sharkey (Inspector of Taxes) v Wernher[198] where the issue concerned the movement of an item of inventory without a formal sale. It was argued that the provisions of s36 of the ITAA 36, now re-enacted as s70–90 of the ITAA 97, dealt exhaustively with the issue for trading stock by ignoring the movement of the asset and instead triggering a gain when the asset that had been trading stock was eventually dealt with outside the ordinary course of the business for which it was acquired.[199] Section 129–25 will require the requisite 1, 2, 5 or 10 adjustments to continue, at least until the asset is disposed of, lost, stolen or destroyed, or expires. This raises a few possibilities. Again, if the appropriation occurs after the expiry of the adjustment period, Division 129 has no impact and, without a taxable supply, there is no reversal of the input tax credit. The change of character is effectively ignored at this stage. If the appropriation of the asset for personal use or consumption occurs within the adjustment period, and assuming that none of these terms (disposed of, lost, stolen or destroyed) describes the act of appropriating an asset, the annual review of the asset’s use will continue for the remainder of the adjustment period. The first is likely to trigger an increasing adjustment and the amount of the input tax credit initially allowed is offset. If these words do describe the act of the taxpayer, eg, a grocer who takes foodstuffs off the shelves and consumes them, it appears again that the one remaining adjustment that will occur after the appropriation will reverse the input credit.

Finally, before leaving these adjustment mechanisms, it is worth pausing to remember that these systems all suppose that the acquirer was subject to the usual input credit – output tax system on its acquisition. We will see below that, for some transactions, there is no actual input tax credit in play because a variation on the normal system has been introduced. Either a deemed credit is created, or else the GST is imposed on a net profit arising from the transaction. Where a profit-based system operates, the kind of adjustment events that are proposed by these provisions will become extremely difficult to operate because the computation which is triggered by them in (say) s129–70 is based on adjusting the ‘full input tax credit’ and that in turn is based around ‘the input credit to which you would have been entitled for acquiring ... the thing.’ Where a margin system applies, no such number exists. This might prove less difficult where a deemed credit mechanism has been used.[200]

(iii) Terminal Adjustments

The third set of adjustments can be thought of as terminal adjustments. Many such adjustments occur under Division 129 as already noted. If the asset is disposed of by way of sale in a manner that triggers a taxable supply, Division 132 instead operates to require one final adjustment in cases involving financial supplies. Alternatively, if without selling its assets, an enterprise ceases to be registered either because it is permanently winding up, or because it is no longer entitled to be registered, a final adjustment occurs under Division 138. This Division 138 adjustment adds back the amount of the input credit allowed on the acquisition of the remaining assets. Interestingly, the Division 138 adjustment is limited to cancellation occurring in the adjustment periods provided in Division 129, so that a firm which ceases to be registered with few assets still subject to ongoing reviews, will have nothing to fear from this Division.[201]

4. Special Tax Base Regimes

The prior section of this paper laid out the main provisions in the recently introduced GST Act which express the tax base – the circumstances which trigger an obligation to remit output tax; the circumstances where no output tax need be charged, the entitlement of firms to tax credits for the input tax on their acquisitions, and the impact of variations to price or expected usage. Before we move on to consider the administration of the GST, there are a few special regimes that deserve to be noted. In addition, there are a few policy issues originally examined in section 2 which will be revisited here to show how the conflicting policy choices have been resolved.

A. Consumers as Suppliers

One problem for a GST which does not arise under the income tax occurs where goods enter consumption and then re-enter production via a consumer. Second hand goods are a classic example, but the same problem also arises for acquisitions of residential real estate, cancelled lay-by sales, re-usable containers and gambling.

The problem arises in this way. Where new goods leave the income tax net and later re-enter it as second hand goods there is generally no need to have regard to the earlier period.[202] Under the GST, however, if the earlier period is ignored, then so is the tax that was levied when the goods were purchased by a consumer and which is still embodied in the second hand purchase price paid by the dealer. On general principles, the purchase of second hand goods would not usually give rise to a tax credit for a registered person (such as a second-hand dealer) even one who intends to resell the goods. The problem is that the dealer will generally have purchased the goods second-hand goods from an unregistered person (a consumer) and not through a taxable supply.[203] Dealers in second hand goods (cars are the main goods in question) would thus be put at a competitive disadvantage with dealers in new goods because the latter but not the former would have input credits available to them for the cost of their acquisitions. The second hand dealers are in a similar position to supplier 3 in Table 3 compared to Table 2.

There are two ways to deal with this problem. One would be to tax the registered person on its profit under a margin scheme. This is the system that is used for supplies of ‘second-hand land’ in Division 75. A supplier who has acquired land will be allowed to use the margin scheme unless it ‘acquired the freehold interest ... through a taxable supply on which the GST was worked out without applying the margin scheme.’ In other words, the margin scheme is available for a firm that acquired from a private individual. The margin scheme imposes output tax on 1/11th of the supplier’s ‘margin’ which, once the transition process is complete, will approximate the taxpayer’s profit from acquiring and selling the land.[204]

The person who acquires the land is not entitled to an input tax credit for the GST paid under the margin scheme so that the scheme is likely only to be used for purchases from and on sale to consumers (unregistered persons). Gambling provides another instance of the same issue and a similar mechanism, but in this case with even more obvious resemblance to the income tax. The gaming operator needs some mechanism for recognising the prizes paid as reducing its profit, so that it avoids having to remit as its ‘net amount’ its output tax unreduced by one very important expense. Ordinarily, a consumer’s winnings would not be viewed as giving rise to creditable acquisition by the operator (although it must be queried whether professional gamblers may yet create for the GST exactly the same problems they have created for the income tax).[205] Consequently, Division 126 divides the business transactions of an operator into two groups, its gambling supplies and the rest of its business. In respect of its other supplies and acquisitions, the GST operates in the usual input credit-output tax manner. In respect of its gambling supplies, it pays tax on its ‘global GST amount’ which is defined as 1/11th of the total amounts wagered minus total monetary prizes.[206] In other words, it pays tax on its cash flow net profit from gambling. If prizes exceed wagers in the current period so that the operator has a loss, that is, its global GST amount is negative, s126–10 sets the operator’s global GST amount at zero and allows the loss to be carried forward to the next period. We wonder whether in due course we will have rules designed to prevent trafficking in these losses such as for the income tax. Generally the refundability of input tax credits means that the trafficking in losses problem of the income tax does not exist for the GST. Instead the GST has the problem of manipulation of input tax credits.

An alternative to margin schemes is to provide a deemed input tax credit to the registered person based on the purchase price of the goods where the supplier is a consumer. Division 66 proposes such a deemed credit system for dealers in second hand goods where they acquire their goods in a transaction that is not a taxable supply.[207] At a 10 per cent tax rate, the deemed credit will be 1/11th of the price paid to the householder for the second hand goods. Division 66 insists (where Division 75 need only imply) that the amount of the deemed credit is not recognised until the period in which the goods are sold. This mechanism will not operate properly in every case, eg, where the second hand goods have risen in price above their original sale price, but this defect is shared by the alternative mechanism of taxing on the dealer’s margin. A similar deemed credit is given in Division 93 where a firm acquires returnable containers in transactions that are not taxable supplies. Again, the amount of the credit is 1/11th of the consideration provided for acquiring the container, subject, for some unexplained reason, to a limit of the amount of refund that is mandatory under State law. Taxpayers in states without such schemes will not be able to utilise the Division which seems at first sight to be a disadvantage, but the definition of returnable container in s93– 5(2) combined with s66–20 means that Division 66 can be used in such states. So the provisions work to the detriment of a taxpayer in a state with such a scheme if the taxpayer wishes to pay more than the state set amount payable for returns (eg, to lift the return rate).

It is noteworthy in these various special schemes, that attempts are made to reconcile them with other provisions of the GST applicable to normally taxed supplies. Attribution rules are provided and in some cases bad debt rules. It seems likely, however, that the reconciliation is not complete so that there may be tax planning opportunities arising under such schemes. The associate rules in Division 72 are not able to be applied to the immediately succeeding Division 75 on ‘second hand’ land.

B. Indeterminate and Proxy Suppliers

A variation of the ‘consumer-as-supplier’ problem arises in dealing with general insurance claims, sales in satisfaction of a debt and agency type situations. These transactions require special regimes because of the potential for creating a mismatch between registered and unregistered parties.

Unlike most other countries with a GST, Australia has chosen to treat general insurance as a taxable supply (in other places it is commonly a financial supply). Making the GST operate satisfactorily for general insurance is not an easy matter. Consider the position of a general insurer which insures both consumers and businesses. The treatment of general insurance under the GST will operate, so far as the insurer is concerned, on the basis that GST is charged on premiums charged, as taxable supplies. This means that registered businesses which insure assets used in their enterprises to make taxable supplies will be entitled to an input credit for the GST on the premium. Consumers and unregistered businesses will not be entitled to a credit. In relation to the payment of claims, the insurer will need to be treated as making a creditable acquisition for the amount paid out to the insured on the settlement of claims. This is necessary to ensure that the insurer is taxed on its profit from the insurance business, not the gross premiums received. If the insured is registered, there is likely to be a taxable supply as ordinarily defined. But there will be at least three circumstances where the insured will not be making a taxable supply – if the insured is a consumer; if the insured is an unregistered enterprise; and if the insured is registered but is insuring an asset that it uses to make input taxed supplies. The insurer should, however, be entitled to an input credit for paying these claims, just as for other claims. Consequently, it is necessary to invent a fictional output tax in order to generate the input credit to which the insurer is entitled. This is provided in s78–5. As originally drafted Division 78 on insurance was found to be defective and was entirely replaced in the April amendments which enlarged the Division from two to seven pages in order to fully track the consequences of the fiction (including payment of GST by firms which have ceased to be registered). There is on-going debate about the treatment of insurance under the GST so we will not pursue the topic further here.

The second example is sales in satisfaction of a debt. Here the issue arises from the problem of the surrogate supplier. It is likely that a financial institution which was the creditor would have to be registered in view of the way the registration threshold is calculated. If that is so, all of its supplies of assets that it has come to hold as security for a debt, would be taxable supplies by virtue of its registration and the connection of the sales with its enterprise.[208] That would be so, where the customer both was and was not registered for GST. And the reverse too might be the case. If a loan is made by a member of the family and security is taken for the loan, it might be a private individual who is selling the security, and no output tax would arise whether the borrower was or was not registered.[209] Consequently, Division 105 provides that the security-holder always makes a taxable supply where, had the debtor made the supply, it would have been a taxable supply. This position holds whether or not the creditor is registered, or the supply is in the course or furtherance of an enterprise. It is possible, however, for the creditor to be relieved from this obligation to charge output tax if the debtor gives written notice to the creditor that the supply would not be a taxable supply if the debtor made the supply itself, or if the creditor has reasonable grounds to believe that this would be the case.[210]

This treatment is contrary to that found in many other countries where the creditor is in effect deemed to be the agent of the debtor in making the supply with special collection provisions.[211] Such treatment fits more neatly with the general treatment of surrogates dealt with below and is the way in which the income tax generally operates.[212] One consequence of the difference in the Australian provisions may be that the ATO in effect avoids being ranked along with other creditors of the debtor in the event of liquidation or bankruptcy.

The mortgagee sale is one example of agency type cases, even though there is no agency in strict legal terms. Many other similar cases are dealt with in the legislation falling essentially into four groups. The first group is found in Part 4–1 which provides for special forms of registration under which one company represents a number of other companies for GST purposes, or a branch or agent is registered. The second group is agents strictly so called for which there are some special rules but a general assumption that normal agency principles apply with the result that the principal is the person making or acquiring supplies. The third group are cases where there is no agency in fact but the GST treatment is effectively assimilated to agency. Finally, there are cases where the legislation says virtually nothing and assumes that the issue is solved by general legal principles (such as partnerships and trusts). The second and third issues are discussed here. The other issues are discussed under the Treatment of Entities heading below.

For agency the Explanatory Memorandum makes clear that the legislation assumes that the supply is by the principal.[213] While this is workable for normal agency situations where the agent has actual authority to contract and the existence of a principal is disclosed, there may be problems where the agent only has ostensible authority and binds the principal by estoppel, or the principal is undisclosed. Division 153 proceeds on this assumption and simply deals with documentation requirements in an agency situation (either the agent or principal can hold the invoice for input tax credits for the principal, and only one invoice can be issued by the principal or agent). There are special registration rules for agents of non-residents in Division 57 which are referred to below.

The quasi agency treatment of Division 111 is available for employees, company officers, partners and agents. In many cases all of these categories may be agents under general law but the intention is that the Division will apply to those cases where there is no binding of the principal by the agent.[214] Taking the case of employment, the purpose is to allow the GST charged on a supply to the employee incurred in carrying out employment duties to be passed through to the employer which can then claim it as an input tax credit. The mechanism for achieving this result is by the employer reimbursing the employee for the expense and obtaining the invoice received by the employee. The input tax credit will not pass through where the employee is entitled to a credit (which is unlikely with employees but more likely with agents and partners). The amount of the credit is 1/11th of the reimbursement though this will be adjusted downwards where the purpose of the acquisition was mixed and the fringe benefits tax is not applicable, ie, for nonemployee cases.

This Division was added in the April amendments to ensure that the accident of the way in which business related purchases are made does not block off the input tax credit. Whether this Division or the agency provisions are operating will matter in some cases, eg, as to who must hold invoices, but it will not always be easy to determine whether it is a true agency case or not. In the employment context, the Division may provide a backdoor solution to the employment related expense problems under the income tax. It will create a significant incentive for employees to have all their deductible expenses reimbursed by their employer because otherwise the GST will fall on the employee as an unregistered consumer and not give rise to an input credit. To the extent of the reimbursement, employees will not be claiming deductions. Salary packaging will remain alive and well under the GST, despite reforms elsewhere that reduce the benefits of packaging.[215] The cases being dealt with here by and large do not arise under the income tax. They are an artefact of the registration requirement of the GST and the need to get input tax credits through to businesses even though an unregistered person is involved.

C. Residential and Other Buildings

It is implicit in the earlier discussion that self supplies, eg, eating one’s own home grown vegetables, will not be caught by the GST because there will be no supply in this case. We are used to debating this problem under the income tax, mainly with regard to the imputed income derived from owner-occupied housing. The treatment of housing and other buildings under the GST is such a significant topic that it deserves discussion in its own right.

Where a person occupies a building, a supply of that occupancy right is made to the person by the owner of the building, and where a person sells a building a supply is made of the ownership. Where the owner and occupier are one and the same (the usual case being the owner-occupied home), it is simply not feasible to levy income tax on the occupancy right, and it is not politically acceptable to levy capital gains tax on the sale.[216] This outcome is replicated under the GST for the occupancy right, and follows from the way in which taxable supply is defined implicitly to exclude self supplies. In regard to the sale of ownership of residential accommodation, it follows from what has been said above that the sale of the family home will not be caught by the GST because of the way one-off large transactions are treated, ie, no registration is required for such transactions as they do not amount to an enterprise. To that extent the GST will mirror the income tax treatment for owner-occupiers.

At this point the income tax draws the line. Rent from and gains on housing and other residential buildings that are not owner-occupied are taxable. But, in common with many other countries, the proposed Australian treatment of residential housing under the GST will project the exclusion of the owner occupied home to a broader scope.[217] That is, supplies of occupancy rights to residential accommodation by landlords will be excluded from GST: s40–35 provides that the supply of residential premises to a tenant in the form of a lease, hire or licence is an input taxed supply. Further, the sale of residential accommodation is also excluded from the tax base: s40–65 provides that the sale of real property is input taxed to the extent that it is residential premises to be used predominantly for residential accommodation.[218] The expansion of the owner-occupier exclusion to these transactions is presumably to prevent discrimination against tenants. A similar proposal relating to private tenants made by the Asprey Committee for the income tax in 1975 has been studiously ignored.[219]

The apparent blanket exclusion for leases and sales of residential accommodation is, however, subject to a few exceptions. One exception relates to accommodation provided by hotels, guesthouses, caravan parks and the like. This is excluded from input taxing through the definition of ‘commercial residential premises.’[220] And special GST rules also apply to the sale (as opposed to the rental) of new residential buildings. The sale by a registered person of a new residential building, whether for residential use or business use, will be a taxable supply.[221]

The rationale for this system – that the first sale of residential accommodation is taxed – is sometimes said to be that the sale of residential buildings should be taxable as a means of taxing the imputed rent the building earns on a capitalised basis (that is, the sale price represents the net present capitalised value of future rent and so the levy of GST on the sale is a proxy tax for GST on the imputed rent). Effectively only the first sale is taxed as the owner thereafter in the case of residences will not be registered – recall that residential rent is an exempt supply. Those who have long lamented the income tax treatment of owner occupied housing will probably welcome the levy of the GST more uniformly across the different parts of the housing/building market. Others who regard the current income tax position as desirable will probably criticise the operation of the GST in this area. The treatment of real estate is one of the most complex areas of the GST and one which shows the greatest variability of treatment around the world.[222] It is difficult to devise a fully satisfactory solution even without the complications of political compromises.

D. Difficult to Tax Goods and Services – Financial Services

Financial services (including life insurance) will be input taxed on the basis that they are very difficult to tax effectively. This exemption will be achieved, not by exempting persons engaged in the finance industry from GST entirely, but by a transaction-based exemption. The result will be that for most financiers, part of their activities will be exempt while part will be taxable. Conversely nonfinanciers will often make financial supplies, a case which may be overlooked in practice but means that virtually all taxpayers at some stage will be involved in apportioning input tax credits because of financial supplies unless the de minimis rule in s11–30(2) applies. As was noted above, the input taxed categories include operating accounts, dealing in currencies, dealing in cheques, bills of exchange and similar instruments, transactions with deposit and current accounts, the granting, negotiation and management of credit and credit guarantees. Activities outside these categories are likely to be safe deposit and similar services, financial advice charged for on a fee paying basis, debt collection and factoring.

It was noted above in section 2 that, while it is generally accepted that the taxation of financial services is impractical, it is important to realise that this is not because the value-added by financiers is difficult to determine, given that valueadded is equivalent to (cash-flow) profits plus payroll. Rather, the problem arises from the invoice credit-method of levying the GST. For example, in the case of banks, the charge for many services is contained in the bank’s spread of interest rates on loans and borrowings and it is virtually impossible to relate the general spread to particular transactions into which the bank enters (and its overall spread changes second by second).[223] Hence the only way in which input GST could be invoiced on by the banks to its customers would be on some artificial apportionment basis with an incentive to load the input tax onto business borrowers. Experience with apportionment for banks in the income tax area[224] suggests extreme caution in entering into any arrangement for the GST, and until an internationally agreed method is found it is better for any country adopting a GST to leave the problem alone.[225]

Special rules will apply in the international area to prevent Australian financial institutions being put at a competitive disadvantage in international capital markets. These markets are GST-free markets just as they are income tax free markets and while this is a state that might be deplored, particularly as regards the income tax, it is not something that can be overcome without the kind of concerted international action which shows no sign of occurring. Thus, although the supply of financial services within Australia will be input taxed, an export of such services is GST-free and therefore free of Australian tax.[226] Not surprisingly the combined zero rating/exemption regime attracts tax planning. Off-shore financing ends up being cheaper than local financing and thus we already find, eg, that a UK subsidiary of an Australian company will put its excess funds on deposit with a US branch of a UK bank rather than a UK branch. Similar distortions will undoubtedly occur in Australia.

Overseas experience suggests that the exemption of financial services creates a significant element of tax on tax within the system, as well as the distortions just noted, and is the source of much of the tax planning and avoidance activities as banks, in particular, try to recover or minimise their exposure to input credits in various ways.[227] One novelty in Australia is Division 70 which was referred to above and seeks to deal with the bias to insourcing that input taxing creates. Australia might have considered the alternative of GST-free treatment for financial supplies, without confronting the issue of invoicing the tax. The international zero rating of such supplies will increasingly overtake the domestic input tax option in any event. Proxy taxes such as Financial Institutions Duty and/or Bank Account Debits Tax, which are to abolished under tax reform, might have been a more effective way of taxing financial services rather than creating the various distortions that the proposed input taxing regime increasingly is causing around the world.[228]

A retreat to GST-free treatment would however represent giving up entirely on the taxation of financial services. This is to be compared with the income tax where, despite considerable difficulties with financial services, the direction has been to improve the tax regime rather than to abandon it (other than in the international area).[229] In this area the GST must be regarded as decidedly inferior to the income tax.

E. Treatment of Entities

Corporate groups which are commonly owned will be able to register as one person with the result that intra-group supplies of goods or services will not attract GST.[230] Joint ventures will also be able to qualify for similar treatment.[231] Conversely, it will be possible for branches or divisions of a single company to register separately.[232] These proposals are very permissive but are to be commended for recognising corporate groups and business units unlike the income tax which is still very primitive in this area.[233] Businesses carried on by partnerships and trusts will register as such with liability for GST shared by the partners and imposed on the trustees.[234] The possibility of grouping for trust and partnerships was created by the April amendments.

Grouping is not mandatory for all members of a corporate group, so that a taxpayer must apply to be recognised by the Commissioner as a member of a group.[235] The requirements to be a member of a GST group are stated in s48–10. The section originally required – only companies could be grouped; all the group companies must share 90 per cent common-ownership; the company must be registered; the company must be an Australian resident; the company must adopt the same tax period as all other members and account for GST on the same basis as all other members; and it cannot be a member of another GST group.[236] While the possibility of partnerships and trusts being members of a group has been created, the way in which this will occur has been left to regulations. Further rules exist to deal with entering and leaving a GST group.[237]

As a general proposition, it can be said that companies which elect to register as a single GST group are intended to be treated as a single entity. How far one can take this general statement of intention is a matter that will no doubt cause much confusion. Specific provisions of the Act dictate that one company (the representative member) furnishes the GST return for the group,[238] and is entitled to receive all the input tax credits of the group,[240] records all the adjustment events of the group,[241] and the obligations of members other than the representative member are correspondingly extinguished, apart from payment of tax.[242] Transactions between members of the group are excluded from GST. They do not create a liability to output tax,[243] nor are they creditable acquisitions.[244] Liability for the GST payable by the GST group is joint and several under the Taxation Administration Act 1953 (Cth) s51. Similar rules exist for companies involved in a joint venture.

At a more general level, s48–55 provides that:

Despite sections 48–45 [which concerns input credits] and 48–50 [which concerns adjustment events], a GST group is treated as a single entity, and not as a number of entities corresponding to the members of the GST group, for the purposes of working out:

(a) the amounts of any input tax credits to which the representative member is entitled; and

(b) whether the representative member has any adjustments; and

(c) the amounts of any such adjustments.

The interesting question that this provision raises is its effect on the GST position of the external transactions undertaken by individual members.[245] Consider two examples using two associated companies – Finance and Operating – which are the only members of a GST group. Assume that inputs are acquired by Finance and used by it to make financial supplies to Operating, which in turn uses those supplies to make taxable supplies to firms outside the group. If Finance and Operating were ungrouped, Finance would get no refund of the input tax on its acquisitions (like supplier 2 in Table 3) and Operating would have to charge output tax on its supplies with implicit cascading (as for supplier 3 in Table 3). If they are grouped, the apparent intention of s48–55 is that the representative member (who may of course be Finance) will now become entitled to input credits because Finance acquired its inputs for the purpose of making taxable supplies, albeit by Operating. The cascading evident in Table 3 has been eliminated.

Now assume that the inputs are acquired by Operating and used by it to make what would be taxable supplies to Finance, which in turn uses those supplies to make input taxed supplies to firms outside the group. If these firms are ungrouped, Operating will be entitled to recover its input credits on making the supplies to Finance and will have to charge output tax (like supplier 1 in Table 3) and Finance will get no refund of the input tax, nor have to charge output tax to its customers (it will continue to be in the position of supplier 2 in Table 3). If they are grouped, it seems that the representative member will get no input credits for the acquisitions of Operating as they are acquired to make Finance’s input taxed supplies. Of course, how this tracing is to be done with millions of inputs entering corporate groups at various points and disappearing as supplies at other points will be astoundingly complex.

The position of branches and resident agents acting for non-residents (Divisions 54 and 57) creates the reverse type of issue. It is necessary to cancel the GST effects for the rest of the entity of which the branch is part or the non-resident and attribute them to the branch or agent, but to maintain the liability for the GST in the most administratively collectable form. The income tax has significant difficulty in coping with branches of non-residents. Again the approach of the GST is an improvement.[246]

The taxation of entities under the income tax is a very complex area of law because of the need to reconcile taxation of the entity with taxation of its owners whom it is assumed bear any income tax levied on the entity.[247] By contrast taxation of entities under the GST is much simpler and more flexible because the purpose is to collect tax on the full value of supplies ultimately to consumers whom it is assumed bear the GST through adding the GST to the price of supplies. As already noted in section 2 these incidence assumptions are questionable, but they form the foundations of the income and value-added taxation of entities.

F. International Transactions Generally

We have looked briefly above at some of the rules which establish the GST-free treatment of exports. This section discusses international transactions more generally. International transactions are among the most complex areas of the income tax as the Controlled Foreign Company and Foreign Investment Fund rules testify, not to mention transfer pricing.[248] The relative simplicity of the GST is in sharp contrast, although it is likely that problems will emerge in the services area. It has already been noted that the GST will operate on the so-called ‘destination principle’, that is, tax is only payable when the goods or services are consumed in Australia. Division 38–E (which was discussed above) is intended to ensure that when goods or services are exported for consumption in other countries, any GST paid with respect to the goods or services exported prior to the time of export is refunded. Even though the tax is refunded, there are obvious cash-flow implications for the exporter depending on how quickly the refund occurs. It is possible that regular exporters will elect to file monthly to ensure that the GST system does not involve them in serious cash-flow problems.[249]

GST is levied on an import of goods (ie, purchases rather than sales) where a person enters goods for home consumption. The head of tax in Division 13 is quite specifically limited to imports of ‘goods.’ Two important exceptions are created – one for non-taxable imports and another for imports of goods that would not be taxable supplies if they had been supplied rather than imported – eg, some imported medical appliances. In the case of the GST levied on imports of goods, the GST will be payable on ‘the value of the taxable importation,’ defined as the value determined for Customs purposes, including transport and insurance, plus the amount of customs duty.[250] GST will generally be required to be paid before the goods are released from Customs. Where the importer is not a registered person, the tax operates as a final levy – this head of GST does not require registration to trigger the charge to tax.[251] If the importer is a registered person and will use the import for making taxable supplies, the importer can claim an immediate tax credit for the tax paid on the import.[252] Individual duty-free allowances will not be subject to GST.[253] Foreign tourists will be able to buy free of GST through the duty free store system or where the goods are exported by the supplier.[254]

The import of services is a more difficult issue to handle administratively for a number of reasons. First, it is much more difficult to define what is an import of services as compared to goods where the definition can be expressed in terms of physical movement. Secondly, there is usually no border control in respect of services, so that it is not possible to tie the tax position to the Customs Service. So far as collection of GST on the import of services is concerned, output tax is levied under Division 84 through a device typically referred to as a reverse charge – that is, where a buyer charges itself output tax on its acquisitions. Tax is only levied on the acquirer where services are imported by a person who is registered or required to be registered and would not be entitled to a full input credit on acquiring the item.[255] Where services are imported by a registered person for the purpose of making taxable supplies, there is no need to levy tax on the import as the levy would simply give rise to an immediate tax credit. By not levying tax on the import, there is no tax credit to offset against tax on the supply of goods or services by the importer and the import of services is effectively taxed at that stage. This does not of course apply where the importer is an unregistered person. Exports of goods and services, including international transport, have been discussed above in section 3 and need not be considered again here.

The international supply of services is a rapidly expanding area where there will be inevitable difficulties in the application of the GST.[256] It is likely that gaps and double taxation will occur as countries increasingly extend their VATs into the services area and services become more predominant in international trade. Hence double tax treaties of the kind found in the income tax area may become necessary to deal with the problems although there is no sign of this trend yet apart from the negotiations in Europe arising from the abolition of internal borders – it should be noted that these do not form a basis for double tax treaties as they are for a different purpose, a free market, rather than removing double taxation or gaps in taxation.[257] Similarly there may be need for jurisdiction enforcing tax rules to the extent that advantage is taken of the zero rating of exports by shifting mobile transactions offshore.

5. Administration and Compliance Aspects of the GST

By and large the same kinds of powers and procedures characterise the GST as the income tax.[258] This section of the paper considers some of the aspects of the GST that distinguish its administration from that of the income tax as well as the degree of administrative integration that has been achieved with the income tax.

A. Registration and Thresholds

We have already mentioned that registration is invariably required for GST systems to ensure that private sales occurring outside commercial activities do not give rise to output tax, and that consumers cannot recover the input tax charged when they acquired the items they consume. In this essential respect the GST is different from the income tax. Registration is mandatory for firms with sufficient turnover, the threshold serving as a means of minimising the compliance costs of small business. In Australia, any firm that conducts an enterprise, will be required to register if its total supplies (not just taxable supplies) exceeds $50 000 per annum.[259] Non-profit societies, clubs and associations will only need to register if their total sales (including membership fees, but not donations) exceeds $100 000 per annum.[260] Where the value of annual turnover is less than the threshold, the person is not required to register, but has the option of registration, provided they are carrying on, or propose to carry on, an enterprise.[261]

An unregistered firm is treated by the GST in the same manner as a consumer or as an input taxed supplier – it purchases at tax-inclusive prices, but charges no output tax on its supplies. If the unregistered firm is a retailer, it is in fact the current WST system so far as the retailer is concerned. A small business that sells primarily to consumers will probably be inclined not to register, as it will be able to set its price at the same price charged by price-setting registered firms (such as supplier 2 in Table 2). Unlike those suppliers, the unregistered firm will be able to retain the GST-equivalent amount that is implicit in its price, but is not actually GST (as in Table 1). For a small business which does not register but supplies goods or services to other registered persons, the result is the same as where the supply is an input taxed supply (see supplier 2 in Table 3). Consequently, a small business could be expected to register where it supplies goods and services to other registered persons in order that those other persons can claim tax credits on their inputs. Hence, it is principally small retailers dealing with consumers, and firms dealing with other input-taxed suppliers, who will end up not being registered.

Because of the broad coverage of the GST and the relatively low threshold in the small business area, there will be many registered persons – the Regulation Impact Statement that accompanied the GST Bill estimates that there will be about 1.6 million registered taxpayers.[262] This broad coverage compares very unfavourably with the 80 000 persons registered for WST, with 86 per cent of all WST paid by just 4 per cent of taxpayers[263] – but it has been used as an opportunity to introduce a business identification number system called the Australian Business Number (‘ABN’) which will become the unique means of publicly identifying businesses in Australia in future for all dealings with the federal government.[264]

It was mentioned above that the GST threshold should serve to eliminate some of the line-drawing problems that arise in defining when a taxpayer is carrying on a sufficiently commercial activity. It is a feature of distinction of the GST from the EU VAT that the threshold handles many issues that give rise to special regimes in Europe such as farmers and forfait taxation of small business.[265] That potential may, however, be reduced given the manner in which the turnover threshold is drawn in the Australian legislation. Division 188, which prescribes the tests for determining whether a taxpayer meets a threshold, looks to a taxpayer’s ‘current annual turnover’ and to its ‘projected annual turnover.’ The test for ‘current annual turnover’ examines the value of supplies made in the 11 preceding months and the current month (unless the ATO is satisfied that the projected annual turnover is below the threshold). The test for determining a taxpayer’s ‘projected annual turnover’ looks to the value of supplies made in the current month and likely to be made in the next 11 months. In each case, there are exclusions from this computation for supplies that are input-taxed, not for consideration or are not made ‘in connection with’ the taxpayer’s enterprise.[266] In measuring ‘projected annual turnover’ only, there is a further exclusion for ‘lumpy’ supplies – the transfer of ‘ownership of a capital asset’ and transactions which are ‘solely’ the result of ‘ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.’[267]

There are three issues here that bear some thought. First, in both cases, the tests look just to a taxpayer’s outputs, not its purchases, nor to its overall profitability, which should be the real measure of a small firm. The sale of one machine is considered sufficient to require registration if its price exceeds $50 000; the fact that the firm may have profits for the year of only $20 000 is not considered relevant. If the purpose of the threshold is to keep small firms out of the GST system, the test is less than adequate for this task. Next, the turnover test ignores the fact that this is a lumpy supply in applying the ‘current annual turnover’ test. The firm is required to register unless it seeks, and secures, the ATO’s dispensation from registration.

Finally, the expression of the tests reduces their ability to exclude private individuals from the system. Consider a private individual who sells two vintage cars during a year for $30 000 and $25 000. Under s9–5, these will be taxable supplies if made in the course or furtherance of an enterprise and where the seller is required to be registered. Section 23–5 requires the seller to be registered if he or she possesses an enterprise and the annual turnover exceeds the registration threshold. Section 188–15 defines the ‘current annual turnover’ as the sum of the value of all supplies (not just taxable supplies) made during the month and the preceding 11 months but excludes ‘supplies that are not made in connection with an enterprise.’ The question will thus end-up revolving around the notion of ‘enterprise’ and the threshold will offer little assistance on whether this seller is really engaging in sufficiently commercial transactions to be within the GST system. The apparent monetary threshold turns out not to be significant; what is significant, is the notion of ‘enterprise’ and all the law on isolated instances of profit-making ventures, together with the ATO’s effective discretion not to require registration where the projected annual turnover (which disregards lumpy transactions) is below the threshold.

B. Payments of GST and Income Tax

Registered persons will pay tax or claim refunds either quarterly (on 21 October, 21 January, 21 April and 21 July) or monthly (within 21 days of the end of the month), depending on their sales volume. Those with total supplies less than $20 million per annum may operate under a quarterly taxable period (but may opt for a monthly period), while larger businesses must remit on a monthly basis.[268] It can be expected that there will be tax planning around the timing of the cash flow of the GST remittances. GST involves four cash-flows – the payment of the price for an acquisition, the recovery of the input tax chargeable on that acquisition, the collection of the price of supplies and the remittance of the output tax owing on the supplies. For acquisitions, firms operating on accruals based accounting will derive cash flow advantages from acquiring on credit terms, as they are able to recover the input tax from the government once they hold a tax invoice, which may before they are obliged to remit the GST-inclusive price to the supplier.[269] Of course, the offsetting output tax liability that the supplier might appear to have generated by issuing the tax invoice is only significant if it too is an accrual basis taxpayer, and only if it remits tax monthly. For supplies, all remitters, but particularly quarterly remitters, will derive cash flow benefits from selling for cash and holding the tax for up to 3 months before forwarding it to the ATO.

Large businesses (who must remit monthly) will lodge their GST returns and make payments electronically.[270] The Australian Taxation Office will pay all refunds directly to bank accounts[271] and interest will be payable where refunds are not paid within 14 days.[272]

Payment of tax is one area where the government has taken full advantage of synergies between GST and the income tax. Several income tax payment regimes are to be reduced effectively to two, a withholding regime for employees, other service providers, and business and investment income in certain circumstances, plus an instalment regime for income of taxpayers other than those whose services income is fully subject to withholding. Together these regimes are called the Pay As You Go or PAYG system.[273]

Rather than running the instalment regime off the prior year’s income as presently occurs, in future it will run off GST turnover for GST registered taxpayers with the ratio of previous year’s income tax (reduced by certain amounts subject to withholding) to turnover applied to current turnover. This will make the instalment payment of income tax truly current and remove the present timing advantages compared to employees withholding. Where withholding applies to certain services situations, payees will be removed from the GST system.

Withholding will also be used for payments made by an enterprise where an ABN number is not quoted to the enterprise. In addition, GST, instalment income and a number of other tax payment obligations will generally be paid together under one form called a Business Activity Statement.

C. Documentation

The foundation of the tax credit procedure is the tax invoice, and virtually every supply will require the issue of a tax invoice by the supplier to the purchaser. This insistence on documents is the most obvious piece of evidence of the heritage of this tax in Continental Europe, where documents create reality, rather than evidence it, in the mind of the bureaucrat at least. The ability of a purchaser to claim an input credit for its acquisitions is specifically made to depend upon the holding of a ‘tax invoice.’[274] No amount of tangible reliable evidence of payment will suffice. Where a supplier fails to provide such a document, the purchaser can insist that it be created and provided within 28 days of a formal request.[275] The insistence on documents was originally taken to extremes. Consider the position of a supplier who wishes to reverse the input tax paid on a supply where the purchaser has not paid the price and the supplier now wants to write off the debt as bad. Section 29–75(1) requires the supplier to generate an adjustment note identifying that it is reversing the supply. Section 29–75(2) required the supplier to give the adjustment note to the delinquent within 28 days after deciding to write off the debt, thus informing the recalcitrant payer that it presumably has its own adjustment event to record, and in the same stroke, confirming that the creditor has effectively given up ever seeing any of its money. Fortunately the silliness of this measure was realised and it was withdrawn in the April amendments.[276]

Under the present Act, the tax invoice will be required to contain the name of the supplier, the ABN registration number of the supplier (which provides links to the income tax as discussed under the previous heading), and the price for the supply.[277] Further information which is usual elsewhere such as date of issue, the name and address of the purchaser, a description of the things supplied, the quantity or volume supplied, and the amount of output tax charged on the supply are not required. Nor is there a requirement that the words ‘tax invoice’ appear. Instead, the Explanatory Memorandum accompanying the Bill hints that these matters will all be imposed as requirements in later regulations.[278] The omission of a requirement that the tax invoice separately identify the amount of GST charged is odd, given that (i) in the case of mixed supplies, it will often be difficult for a purchaser to correctly reconstruct the proportion of an undissected total price which is the GST charged by the vendor, and (ii) the amount of the purchaser’s input tax credit is the amount of output tax charged by the supplier, not a presumed amount.[279]

This is an area where the Act clearly expects further elaboration to be made in regulations. Based on overseas experience, in the case of some retailers such as supermarkets, there is likely to be a simplified tax invoice simply containing the name and registration number of the supplier, together with the tax inclusive price of the goods. For transactions involving very small amounts in circumstances where the issue of invoices will create practical problems, no invoice is likely to be required but a registered person purchasing the goods or services will be required to create records to validate a tax credit. A de minimis exemption already exists in s29–80 which eliminates the invoice requirement for acquisitions costing less than $50.

Except in those few transactions where no tax invoice is required to be supplied, a registered person will not be able to claim a tax credit for GST on its inputs unless it receives and retains a ‘tax invoice’ in accordance with the rules set out above. Whilst the obtaining of an invoice will be a necessary condition for the claim on a tax credit, it will not be sufficient. The registered person who purchases goods and services will still be required to show, presumably through the usual forms of proof, that those goods or services satisfy the conditions for an input tax credit. Similar documentary evidence requirements are imposed for the other events under the legislation which affect GST liability, such as adjustments.

D. General Anti-avoidance Rule

One argument often made for the GST which we have tested above in section 2 is that it is relatively proof against tax evasion. The same kind of considerations arise concerning GST avoidance. The ordinary run of supplier in a production and distribution chain has little incentive to avoid GST as the tax is likely to be picked up at the next stage. This argument does not apply, however, at the final retail stage or for input tax on input taxed supplies and we have indicated at various stages the kind of tax planning/avoidance that the GST may encourage.

Whatever the merit of these arguments, the government has included a broad anti-avoidance rule in the GST legislation based on the income tax rule but with various ‘improvements.’ We do not propose a general discussion of the GST rule but note the differences which may be harbingers of changes on the income tax front.[280] The GST rule includes ‘the’ principal effect to obtain a tax benefit test[281] in addition to the sole or dominant purpose test. The obvious idea is that it will not be necessary to make decisions about the intent of the parties even on an objective basis (what the facts suggest rather than what the parties say) if the main outcome of a scheme is a tax benefit. Tax benefit is defined in terms of tax payable[282] rather than in income tax equivalent terms of output tax being less or an input tax credit being greater as a result of the scheme. Hence any factors which may impact on tax payable are covered. The definition also covers the case where the parties to the scheme may argue that in the absence of the scheme they would have done nothing rather than enter into an alternative transaction.[283] The factors to be taken into account in making this assessment receive some broadening, especially in relation to considering the purpose or effect of a part of a scheme as opposed to the whole scheme.[284]

It is now over 18 years since the current income tax anti-avoidance rule was introduced and still the cases, rulings and other interpretive material on the provision amount to a trickle, though a flood is regularly threatened by the ATO. It remains to be seen whether the increased scope of the GST rule will provide a greater dampener on avoidance activity. In our view, what is needed is more active but commercially sensitive use of current rules rather than new rules. The GST will be as strong as the general monitoring, audit and taxpayer assistance resources put into it.

6. Transitional Rules for Implementing a GST

The process of transition to the GST requires special provisions, many of which are contained in a separate Transition Act (A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth)). Five areas where special rules are needed are – the registration process, rules for allocating supplies and acquisitions before and after the commencement of the tax, the treatment of transactions already in train when the GST commences, the treatment of the WST implicit in items already held when the GST commences, and the termination of the WST. Other transitional rules exist to obviate some of the consequential behavioural adjustments that consumers and businesses will likely employ. The Transaction Act was much amended during the passage of the GST package. We probably have not yet seen the end of transitional fixes. With respect to registration, the mechanism for compulsory registration of existing businesses is set out in Division 23. Section 9 of the Transition Act permits the ATO to start the registration process when it wishes but there is no requirement to register before 1 June 1999 (ie registration becomes compulsory 30 days before the GST starts). The ATO has announced that registration will commence in November 1999.[285] Section 7 of the Transition Act provides that GST is only payable on supply or importation ‘to the extent that it is made on or after 1 July 2000.’ Further an input credit only arises for acquisition made on or after 1 July 2000. The rules which allocate supplies and acquisitions before and after that date are contained primarily in the Transition Act. These special transitional time of supply rules determine when the supply or importation occurs only for the Transition Act – it is important to note that these rules apply where there is a discrepancy between time of supply under normal rules and under transitional rules. This is provided in s10 of the Transition Act which states that any invoice issued or consideration received prior to 1 July is to be treated as if issued or received after that date – thus negating the time of supply rules that are generally prescribed in Division 29 of the GST Act. The transitional time of supply rules in s6 of the Transition Act state that a supply or acquisition of goods occurs when goods are removed, made available to the recipient if they are not removed, or when it becomes certain that supply of the goods has occurred (eg, for goods sold on approval). A supply or acquisition of real property occurs when the real property is made available to the recipient. A supply or acquisition of ‘services’ occurs when the services are performed. And any other supply occurs when the thing is performed or done. Different rules are provided for second hand-goods, insurance and gambling. Second-hand goods acquired prior to 1 July 2000 are subject to Division 66 only if they are held for sale or exchange ‘in the ordinary course of business’ on 1 July (s18 Transition Act). The settlement of insurance claims after 1 July 2000 only creates a taxable supply and input tax credit if the insured events occur after 1 July; if the time of the insured event occurring is not known, the date of claim is used (s22). Gambling transition under s24 turns on when the gambling event occurs rather than when the wager is taken or money paid out.

It is necessary to have special rules for transactions which are in progress at the time of commencement of the GST. Further rules exist for contracts which span the commencement date of the GST. These rules are contained in ss11–15, 19 of the Transition Act. These start generally with the proposition that the part supplied from 1 July 2000 is subject to GST.[286] However, s13 then provides an exception if there is a written agreement which specifically identifies a supply and the consideration, and was entered into prior to 8 July 1999, the date of Royal Assent. The exception in general terms is that supplies will be GST-free until such time as the parties have had a chance to review the price to take into account the imposition of GST, but with a final sunset to the transition process of 1 July 2005.

The details of the exception vary depending on the precise situation. So, if a supply is made under an agreement entered into before the date of Royal Assent to the Transition Act, and all of the consideration for the supply had already been paid by 2 December 1998 (the date of tabling of the legislation in the House of Representatives), all supplies made after 1 July 2000, including supplies on or after 1 July 2005, will be GST-free unless there is a review opportunity (which is unlikely given that all of the consideration has already been paid!).

For contracts with payments occurring after 2 December 1998, a distinction is made depending on whether the buyer is entitled or is not entitled to a full input tax credit on making the acquisition. Where the buyer would be entitled to a full credit on acquiring the item, then supplies made after 1 July 2000 are GST-free until the earlier of the first review opportunity after the date of Royal Assent or 1 July 2005. If the agreement is not made until after the date of Royal Assent, all supplies made under the contract are fully taxable – it is assumed the parties were aware of the GST consequences of their arrangement.

For supplies to buyers who are not entitled to a full input credit on their acquisition, supplies made under an agreement will be GST-free only if the contract was entered before 2 December 1998 – in other words no further contracts could be made with such a person that will enjoy GST-free treatment once the Treasurer stood up in Parliament. If such a contract was on foot, supplies made after 1 July 2000 will be GST-free until the earlier of the first review opportunity after 2 December 1998 or 1 July 2005. Any supplies made to customers who are not entitled to a full input credit under agreements made after 2 December are taxable in full.[287]

Where a contract is made before the commencement date but the supply occurs after the commencement, it would have been possible to insist that the supplier would be subject to GST but also entitled to add the tax to the contract price where it is not already incorporated in the contract price. This is normal international practice.[288] Instead, the rules treat the supply as GST-free until the parties have had a chance to review the price to take the GST into account. By making the supply GST-free, the supplier is not prejudiced by the additional cost of input tax on its acquisitions, given that it is not able to pass on a GST cost to its own buyer. The Australian solution adopts a secondary rule from the New Zealand transition[289] and places a fixed sunset on the rule. Apart from its obvious and impractical complexity, this approach will have severe impacts in relation to commercial leases in Australia for which no justification has yet been forthcoming.

Obvious questions arise from these rules – when is there a ‘written agreement’, when is a supply ‘specifically identified’ and when is the consideration ‘identified’? The law on the meaning of written agreement will no doubt draw heavily on the stamp duty law concerning written offers and oral acceptances. The difficulties with finding that a supply is ‘specifically identified’ will come from contract variations which do not amount to novations, making extensions to the term of existing supply contracts, ongoing ‘terms of trade’ arrangements, add-ons and variations to existing orders. The consideration for a supply will presumably be ‘identified’ if it is a fixed amount or calculable by reference to a specific formula, but not if it is a price to be agreed, or arbitrated, or can be varied by one party, or is otherwise yet to be set.

The other question that will arise concerns the term ‘review opportunity.’ This is the time that terminates the GST-free treatment for the supplier and so is a matter of critical importance to it, given that there is no rule in the GST which allows a supplier to recover GST to which it is liable, but which it forgot or otherwise failed to charge the customer. The idea behind a review opportunity is that there is a chance for the parties to review the price to take the GST into account. A review opportunity is defined in the Transition Act s13(5) as,

‘an opportunity that arises under the agreement:

(a) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to change the consideration directly or indirectly because of the imposition of GST; or

(b) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct a general review, negotiation or alteration of the consideration.’

It is important to note that it seems not to be relevant whether the opportunity that presented itself to the parties was taken – it is sufficient that it occurred. It is also important to note that it is not necessary for a review opportunity to occur after 1 July 2000 – it is sufficient that one has occurred after either 2 December 1998 or the date of Royal Assent to the Transition Act. Problems with the meaning of ‘review opportunity’ will likely arise from rental review clauses in leases and other price variation clauses, unless those clauses adjust in a mechanical way without the opportunity for the parties to interfere.

Where WST has been charged before the commencement of the GST on a sale which feeds into the production and distribution process, there will be an element of tax on tax if the GST is applied to a later sale without any credit for the WST. It was therefore necessary to offer an input credit for WST previously paid. The credit is provided in s15 of the Transition Act. It provides that an input credit is deemed to arise for a firm that is registered by 1 July 2000, if it has on hand on 1 July 2000 goods that it acquired or imported and held for the purpose of sale (not hire) or exchange ‘in the ordinary course of business.’ The provision excludes from credit the WST implicit on goods that were held for use in manufacture or were consumable supplies, and most second hand goods. So the WST implicit in capital goods cannot be recovered.[290] The amount of credit is ‘the amount of sales tax you have borne’ – a computation which may be impossible to perform. The firm must claim its credit in one return lodged by 21 January 2001 and separately identify this input credit in its return.

The section authorises the Commissioner to make a Ruling to suggest how this process is to be done. It is likely that the Ruling will require that a registered person claiming credit for wholesale sales tax holds an invoice indicating tax paid or from which tax can be traced, as well as making a thorough stocktake at the time of commencement of the GST. Because of the difficulty of tracing WST in the production and distribution process after the transaction on which the tax is paid, any credit for the tax is likely to eliminate only part of the tax on tax problem. Finally, rules exist for the termination of WST. No sales tax is payable on an assessable dealing made on or after 1 July 2000. A supply occurring after 1 July in pursuance of an assessable dealing commencing before 1 July, is treated as occurring before 1 July 2000.

But the termination of WST involves more problems than these rules can solve. It was indicated above the tax changes will induce behavioural modifications in consumers and businesses aware of the effects of GST. For example, goods taxed at 32 per cent under WST (albeit on a wholesale price), will from 1 July 2000 in many cases be subject to GST at 10 per cent (on the retail price). These goods include TVs, cameras, radios and VCRs. Consequently, consumers might be expected to delay their purchases of such goods until after GST commences. Consequently, the Transition Act reduced the 32 per cent rate to 22 per cent from 29 July 1999.

A more elaborate regime has been introduced to deal with cars. The motor vehicle industry claims that it will face particular pressures over the next 3 years because of the change from WST to GST. Not only will consumers delay their purchases until after the commencement of GST, businesses would likely also cease purchasing any cars because any WST implicit in them will not be refunded at 1 July 2000, unless the cars are inventory. Consequently, s20 of the Transition Act proposes to deny firms any input credits on the purchase of motor vehicles made in the first year of operation of the GST, and allow only 50 per cent of the input credit to be recovered on the purchase of motor vehicles made in the second year of operation. Such a system effectively prolongs the agony of the WST system. As an additional measure, a new ‘luxury car tax’ is imposed by A New Tax System (Luxury Car Tax) Act 1999 (Cth) to reduce the substantial benefit after the transition was complete of the reduction of the WST in luxury car prices from the reduction of the 45 per cent WST rate to a GST rate of 10 per cent. The new tax is levied as an excise at the rate of 25 per cent and commences at a price of $60 000 (including GST). The Vos Committee which was required to look at the proposals for cars, concluded it lacked sufficient information to confirm or deny some of the worse predictions made by the industry of the damage that this system could do its sales,[291] and so the treatment currently survives.[292]

The GST transition in Australia is both more complex and less fair than the usual approach in the income tax and the GST in other countries. Although Australia overuses the approach of legislation by press release in the income tax,[293] at least the change generally is only applied to transactions entered into after the announcement, especially where the pricing of transactions is dependent on the tax treatment and transactions are long lived (such as depreciable assets).

7. Interaction of GST, Income Tax and FBT

The operation of the GST will raise a series of new issues for the operation of the fringe benefits tax and the income tax. While no legislation has yet been introduced to deal with these complications, the problems are reasonably clear and some predictions can be made about the way in which at least some of them will likely be solved.

A. Income tax and GST

For business taxpayers, other than financial institutions, which are registered for GST, the usual rule is that GST is simply ignored for the computation of the taxable income of business taxpayers. Australia will likely follow this system. New Zealand provides examples of the rules that will be needed.

For example, in dealing with trading stock, sED 4(1) of the Income Tax Act 1994 (NZ) says a taxpayer’s assessable income does not include any output tax collected on sales, nor any refunds of input tax made by the Commissioner. Similarly, sED 4(2) provides that no deduction is allowed for input tax paid on acquisitions, nor payments of output tax made to the Commissioner.

Consequently, if a registered taxpayer buys inventory for $50 plus $5 of GST, its income tax deduction for stock is only $50, and presumably the value of stock on hand at the end of the year is $50, assuming the stock is valued at cost.[294] And when the trader sells the item of trading stock for $100 and charges GST of $10, the amount of income is $100, not $110.

In respect of depreciable assets, sED 4(4) of the NZ Act provides that the cost of a depreciable asset for depreciation purposes is reduced by the input tax charged on purchase. Consequently, if a registered taxpayer buys a depreciable asset for $100 000 plus $10000 GST ‘cost’ for depreciation is $100000. Section ED 4(6)(a) provides that for computing any balancing charge on a subsequent sale, the proceeds of sale excludes the GST chargeable on the sale.

For capital assets, there is no general rule in New Zealand because it has no generally applicable capital gains tax regime. But the general position should be the same – that is, any GST paid on the acquisition of an asset is not an incidental cost of acquisition and so does not enter the cost base of the asset for CGT purposes. And any GST charged on the disposal of the asset does not form part of the capital proceeds.

The income tax position of financial institutions will become more complicated because of the GST. For a taxpayer who buys an asset which will be used exclusively to make input taxed supplies, the GST operates as an excise that it cannot pass on explicitly. Consequently, the GST is a real cost for the business and should be included in the cost of its purchases of consumable supplies, added to the cost for assets for depreciation purposes, and added to the cost of the assets for CGT purposes. Many financial institutions will be buying assets that will be used for making both input taxed supplies on the one hand, and taxable and GSTfree supplies on the other. Where a taxpayer is registered but the item is for mixed use of this kind, the input tax should be partly included and recognised in computing assessable income as a cost associated with the particular kind of asset, and in part excluded. The apportionment would presumably be based on the same kind of tests used for the recovery of the firm’s input tax credit. How this can be fitted with the adjustments process in the GST for change of use will be interesting to see.

For private individuals who are unregistered for GST, again the GST is a cost that should be recognised. Presumably employee deductions for income tax will be based on a GST-inclusive amount.[295] GST on purchases of capital assets would be included as an incidental cost of acquisition. A private person who buys a CGT asset for $100 plus GST of $10 should have cost base of $110. If the person sells the asset for $120 and is not obliged to charge GST on the sale, capital gain is $10. If the person sells the asset for $95, the capital loss should be $15.

Moving beyond these cases, there will be interesting issues about other forms of income provided in transactions which can amount to taxable supplies. For example, assets distributed in specie by a private company may be deemed to be dividends paid by the company,[296] and assets distributed by a trustee to beneficiaries can trigger amounts which are capital gains to the beneficiary.[297] For the shareholder recipient of these assets, the amount of income that will have to be reported ought presumably to be grossed up by the amount of GST that the recipient would have had to pay to acquire the (now after-GST) asset. In other words, an asset with a value of $100 distributed by a company would be deemed to be a dividend of $110.[298] For the provider, these transactions will presumably trigger output tax as a taxable supply where the company or trustee is registered. Indeed, it is likely the company will have claimed credit for input tax on acquiring the asset and so there is a need to impose output tax on the distribution. It is not entirely clear how the GST liability of the payer on making this supply should be treated for income tax purposes, but if the shareholder will report $110 as income, the output GST of $10 should probably be treated as part of the dividend for the company as well.[299] We will spare the reader a consideration of the position of distributions by companies and trustees that are not registered.

B. GST and FBT

The difficulties of the income tax/GST interaction pale into insignificance compared to the diabolical problems that will arise from the interaction of the GST and FBT (with some income tax mixed in).

The ANTS Statement contained two cryptic comments about the interaction of GST and FBT.[300] First, it was said that an input tax credit would be allowed for firms making taxable supplies which are fringe benefits. Second, it was said that the FBT rate would be adjusted to ensure that there would be no advantage for firms in providing fringe benefits rather than salary. But beyond this meagre guidance, the waters become very murky because of the many possible permutations and combinations that need to be examined and resolved if these two propositions are to hold true: (i) the employer might be registered or unregistered for GST; (ii) the employer might be subject to FBT in full, a public benevolent institution which enjoys a rebate of FBT or exempt from FBT; (iii) the particular fringe benefit being provided might be taxable in full, an exempt benefit, one which enjoys the otherwise deductible rules, be accompanied by a recipient’s contribution or enjoy a concessional value; (iv) the employer might be making a taxable supply, an input taxed supply, or a GST-free supply; and (v) the acquisition of the item provided might have been a creditable acquisition or not a creditable acquisition. Clearly, resolving these difficulties will be very complex.

Modelling how the system for fringe benefits would operate in the most straightforward cases is simple enough, if the only goal were to recreate equivalence for the employee. The provision of the fringe benefit would give rise to two tax charges for the employer: (i) GST on the value of benefit (unless it was an input taxed or GST-free supply); and (ii) FBT on the GST-inclusive value of the benefit. So far as the employee is concerned, such a system would be neutral between cash salary and fringe benefits as proposed by the ANTS Statement and is demonstrated in Table 6. Table 6 assumes that the employee would have had to expend $110 in after-income-tax salary to acquire the asset – that is, the employee is to be put in the same position as if it had bought the asset with a GST-exclusive value of $100.

Table 6:

GST Taxable Supply
Provision of finge benefit
Provision of salary
Value of
(including GST)
Cash salary
Employee’s tax
Employee’s tax
(assuming 48.5% rate)
Value of benefit
After-tax salary

If the benefit provided to the employee was actually a GST-free supply (say the provision of accommodation for an employee who is stationed abroad), the computation is slightly different. This is shown in Table 7

Table 7:

GST-free Supply
Provision of finge benefit
Provision of salary
Value of benefit
assuming no output
Cash salary
Employee’s income tax
Employee’s tax
assuming 48.5% rate)
Value of benefit
After-tax salary

These outcomes will make the employee indifferent to a benefit or salary, but the employer’s position is not so clear, even for the most straightforward case. And making the employer indifferent is even more difficult if the employer adds value to the item acquired before it is provided as a fringe benefit to the employee. The

ANTS Statement tells us only that the employer will be entitled to recover the input tax on assets acquired to provide fringe benefits (provided, one assumes, the supplies would otherwise be taxable supplies or GST-free). The position of the employer making a taxable supply is shown in Table 8. The Table assumes that the employer does not add value to the item acquired, so that its input credit and output tax match exactly. It also ignores for income tax purposes both the recovery of the input tax credit and the imposition of output tax on the supply to the employee.

Table 8:

Provision of fringe benefit
Provision of salary
Cost of fringe benefit
assuming input tax
Cash salary
Taxable value of fringe
benefit (ie, GST-inclusive
value + gross-up at FBT
rate on GST-inclusive

FBT on taxable value (ie,
line 2 x FBT rate)

Value of income tax
deduction for benefit + FBT
(ie, (line 1 + line 3) x 36%)
Value of income tax
deduction for salary
Cost to employer (ie, line 1
+ Line 3 – line 4)
Cost to employer

The difference between the two columns is $6.40. This difference arises from the cash flows associated with the GST, neither of which are evident in the income tax and FBT computations that the Table shows. When paying salary, the employer must pay $213.59 as salary to keep the employee indifferent, as shown in Table 6. But if the employer provides a fringe benefit that the employee would have had to expend $110.00 to acquire, the employer is out of pocket by only $203.59, after paying both the FBT and the cost of the benefit, once the input tax on the acquisition of the asset is recovered from the government (lines 1 and 3 in Table 8). The employer’s income tax deduction at line 4 is based on the FBT and the cost of acquiring the benefit, but ignores the recovered GST input tax, which is appropriate. The output tax of $10 that the employer would have to remit on paying the fringe benefit does not appear as an additional element in the tax deductions of the employer at line 4 because of the assumption that output tax does not enter the income tax computation of a registered firm. Yet this $10 is a real cost to the employer which needs to be recognised if the positions are to be equilibrated. If the cash flow associated with the GST output tax is added to this transaction for the computation of the employer’s income tax liability, that is, the employer is given an income tax deduction for the amount of output GST, its total deductions at line 4 rise to $76.89 – ie, (100 + 103.59 + 10) x 36 per cent.

The close link between the FBT and income tax also needs to be borne in mind. Firms will not get GST input tax credits for entertainment expenses which are not income tax deductible (GST Act Division 69). Entertainment is, however, deductible if provided to employees and subject to fringe benefits tax (ITAA 97 Division 32). In determining how much entertainment is subject to FBT and how much non-deductible a number of methods are provided which can produce varying amounts and are subject to election by the employer when preparing the FBT return (Fringe Benefits Tax Assessment Act 1986 (Cth) Part III Division 8A). Hence the employer is going to be in difficulty knowing its income tax, FBT and GST position until this election is made possibly many months after its GST and income tax returns are due for early periods in the FBT year (April to June). The further permutations and combinations suggested above are best left for others to pursue.

8. Conclusion

We trust that, from this review, it will be seen that the GST offers many points of comparison with the income tax and contrary to the expectations of many, not to mention the propaganda of its more ardent supporters, raises exactly the same or analogous problems. It follows that the GST is not inherently simple, in contrast to the inherently complex income tax. Rather both taxes involve some necessary elements of complexity but can be simpler and more synergistic if a conscious effort at coordination is made.

In the areas of one-off transactions outside the business area and financial services, the GST must be judged as less successful than the income tax in accessing the theoretical tax base, while it has advantages in the areas of entities and international transactions. On the other hand many of the rules proposed for the GST could with advantage be adapted to the income tax to bring to an end longstanding but eminently solvable problems.

The great benefit of the GST is that it is collected indirectly through the business sector (and mainly from large business) so that compliance problems for non-business taxpayers are ignored. This is its great advantage over the income tax. It is a feature, however, that could be produced in the income tax – in fact it is replicated in the FBT. So far there is little sign of such a move. Despite some apparent similarities with the income tax, the administration of the GST will be geared much more than the income tax to the elimination of employees from the system, compliance problems of small business and the smooth and timely rather than lumpy and late collection of tax from all businesses. The one area where the potential synergy has been thoroughly exploited is in improving collection of the income tax.

Although the income tax has been moved to a version of self assessment, compliance costs and risks especially in the employee and small business area have been increased in recent times especially by the substantiation rules, despite much proclamation of taxpayer assistance in these areas. Much greater simplification could be obtained by removing the bulk of employees from the income tax return system. This could be achieved by broad but simple withholding in the business sector, a small exemption for investment income to remove the need to report small amounts of interest or dividends (or optional reporting below a certain limit to handle imputation and withholding credits as has occurred with the Pooled Development Fund amendments), a standard deduction for employees related to income levels (with possibly a fixed dollar cap and substantiation only over the limit) or alternatively the removal of employee deductions.

Successive governments have so far failed to simplify the income tax system as increasing amounts of legislation are passed each year. Whether the impact of the ‘big-picture’ projects such as the Tax Law Improvement Project and the Review of Business Taxation will be positive is not yet clear. The GST presents an opportunity to achieve some income tax simplification through adopting some of the tax base tests and administrative procedures evident in the GST. And tax reform offers the chance of getting Australia’s act together across the tax system. So far the report card is mixed.

[*] 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 ( 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 ( index.htm).
[16] Senate Employment, Workplace Relations, Small Business and Education References Committee, Inquiry into the GST and A New Tax System ( 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 (
[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 ( 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’ ( 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 (
[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 (
[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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