Overview

On 2 December 1998, the Government introduced legislation into Parliament to implement reforms to the Tax System. Among the most controversial changes was the introduction of a Goods and Services Tax (GST).

GST applied from 1 July 2000 under the new tax system. With its introduction, the Wholesale Sales Tax (WST) and a number of other State taxes were abolished and personal income tax reduced.

The legislation also provided transitional measures to prevent various problems which may arise from the introduction of the GST, such as double taxation and market disruptions.

Furthermore, transitional rules were introduced to deal with transactions which spanned the GST’s implementation date of 1 July 2000. The following is an outline of the main features of the GST system and the transitional arrangements.

GST – 10%

Since 1 July 2000, a broad-based GST is levied at 10% on the value of most supply or importation of goods and services consumed in Australia.

Registration for GST

Anyone who is carrying on an ‘enterprise’ may register for GST. An entity with an annual turnover of greater than $74,999 or $149,999 (in the case of non-profit organisations) must register for GST.

Those with turn-overs of less than these thresholds will not have to register but may do so if they wish. The term ‘enterprise’ has a wide meaning and includes a business, trade or profession, a lease in property, certain activities of gift deductible funds, religious institutions, charities and governments.

Registered entities will have to charge GST on their supplies (except to the extent that supplies are GST free or input taxed) and will be entitled to claim input tax credits on their business purchases.

The term ‘supply’ broadly means the sale of goods and services.

In respect of taxable importations, GST will be payable by the importer regardless of whether it is registered (or required to be registered) or not.

However, input tax credits on importations will only be available if the importer is registered for GST.

Accounting for GST

If an entity’s annual turnover is $2 million or less, it can use the cash basis of accounting (i.e. GST liability arises when consideration is received). The Tax Commissioner will have discretion to allow entities to operate on a cash basis even if they exceed the threshold.

Other entities must account for GST on the earliest of the following:

• the issue of an invoice; or
• the receipt of any consideration in connection with the supply.

Input Tax Credits

Registered entities will receive input tax credits for any GST paid on their business purchases, except to the extent that the purchases are used in making input taxed supplies.

The input tax credits are offset against any GST that a business collects on its taxable supplies.

The balance is referred to as the ‘net amount’. This net amount should be remitted to the ATO, or a refund should be claimed. This means businesses will effectively not pay any GST on their business purchases.

Input tax credits will not be allowed for goods and services that are for personal rather than business use.

Consumers are not entitled to claim input tax credits.

Calculating the GST

The rate of GST is 10%. The amount of GST on a taxable supply is the value of the taxable supply multiplied by l0%.

As displayed prices must include GST, it may be necessary to work out the amount of GST on goods and services acquired in order to ascertain the amount of input tax credits.

The value of a taxable supply is 10/11 of the price paid for the supply. Alternatively, to calculate the amount of GST paid, a tax fraction of 1/11 can be applied on the price.

Exemptions from GST

Certain supplies are exempt from GST. These include:

• GST free supplies;
• input taxed supplies

GST-free Supplies

GST free supplies are not subject to GST and input tax credits are allowed for GST paid on purchases used in making the GST free supplies.

The following supplies are GST free:

• exports of goods and services;
• sales to tourists taken out of Australia;
• international air and sea travel;
• domestic air travel purchased overseas by non-residents;
• medical and allied health services;
• residential and community care for the aged and the disabled;
• medical aids and appliances;
• medicines and drugs;
• all secondary and tertiary courses;
• childcare;
• religious services;
• charitable activities;
• water and sewerage supplies;
• supplies of enterprises as going concerns;
• duty free sales;
• supply of subdivided farm land;
• first supply of precious metals after refinement (but subsequent supplies will be input taxed);
• cars for use by disabled persons.

Input Taxed Supplies

Input taxed supplies will not be subject to GST. However, there are no entitlements to an input tax credit for any purchases to the extent that they are used in making the input taxed supplies.

The following supplies will be input taxed:

• financial supplies (although some financial supplies for which there is a readily identifiable charge or fee, such as investment advice, will be subject to GST);
• supply of residential premises other than from the sale of a new house;
• residential rents.
  

  Secondhand Goods

  In line with the treatment of new goods, the supply of second hand goods by a registered entity will be subject to GST, but not if the supply is of a private nature.

  Furthermore, the registered entity will be entitled to an input tax credit on the acquisition of second-hand goods, even where GST was not payable on the supply. This could happen if the registered entity buys goods from an unregistered person.

  This measure will only apply if the unregistered seller of the goods had paid GST on their acquisition and the registered buyer subsequently supplies those goods in a taxable supply.

  The amount of the credit is the lesser of 1/11 of the consideration for the acquisition or the amount of the GST payable on the subsequent taxable supply of second-hand goods.

  Taxable Period

  The taxable period is the time period for which a registered entity will be required to lodge its return and remit GST to the ATO.

  The taxable periods will either be quarterly (i.e. every three months ending 31 March, 30 June, 30 September and 31 December) or monthly (the calendar months of the year.)

  Entities with annual turnovers exceeding $20 million must use the monthly periods. Other entities may use the quarterly periods, but can choose to remit monthly if they wish.

  A registered entity must lodge a GST return for each tax period. The return and payment must be given to the ATO on or before the 2lst day of the month following the end of the tax period for which the return relates. Returns lodged through a tax agent e.g. Morris Cohen Glen & Co, will have additional days to lodge.

  In the case of a refund, the ATO is required to make payment within 14 days of an entity lodging its return.

  A registered entity must provide a return for a tax period even if it has not made any taxable supplies that are attributable to the tax period or the net amount for the period is nil.

  Special GST Credits for Trading Stock

  When the GST commenced on 1 July 2000, businesses holding trading stock on which Whole-sale Sales Tax (WST) had been paid were allowed a special GST credit, equal to the WST paid on these stocks, to be offset against their GST liability.

  To claim this special GST credit, the business must have been registered as at 1 July 2000 and the claim must have been made before 22 January 2001.

  This transitional measure does not apply to stock held for the purposes of manufacture, stock of second-hand goods, goods held for hire, business consumables, goods held for non-business use and stocks of alcoholic beverages.

  Transactions Spanning 1 July 2000

  Transitional rules were introduced to deal with contracts and agreements entered into before the implementation of the GST (i.e. 1 July 2000), if these involved the supply of anything on or after 1 July 2000.

  How the GST impacted on these contracts or agreements was dependent on whether:

  • the contract or agreement is reviewable or non-reviewable;
  • it is with a buyer who would be entitled to full input tax credits.

  A contract is non-reviewable where the consideration or price paid for the supply is fixed or is to be calculated according to some specified formula and cannot be varied by either party to the agreement.

  The following is a summary on how some of the transitional rules apply to contracts entered into in a number of different circumstances.

  Non-reviewable contract entered into before the date of Royal Assent of the GST legislation and the buyer is entitled to full input tax credit.

  Supplies under the contract from l July 2000 and up to 1 July 2005 are free of GST.

  Supplies under the contract from 1 July 2005 are subject to GST.

  Non-reviewable contract entered into after the date of Royal Assent of the GST legislation and the buyer is entitled to full input tax credit.

  Supplies under the contract after 1 July 2000 are subject to GST.

  Non-reviewable contract entered into before 2 December 1998 (i.e. the introduction date of the GST legislation into Parliament) and the buyer is not entitled to full input tax credit.

  Supplies under the contract from 1 July 2000 and up to 1 July 2005 are GST free.

  Supplies under the contract from 1 July 2005 are subject to GST.

  Reviewable contract entered into before 2 December 1998 and the buyer is not entitled to full input tax credit.

  Supplies under the contract from 1 July 2000 and up to the first opportunity for review or 1 July 2005, whichever is earlier, are GST free.

  Supplies after the earlier of the first opportunity for review or l July 2005 are subject to GST.

  Non-reviewable contract entered into after 2 December 1998 and the buyer is not entitled to full input tax credit.

  Supplies under the contract from 1 July 2000 are subject to GST.

  Reviewable contract entered into after 2 December 1998 and the buyer is not entitled to full input tax credit.

  Supplies under the contract from l July 2000 are subject to GST.

  If a construction contract spanned the start date of 1 July 2000, the part completed before 1 July 2000 would not have GST applied to it.

  The legislation contains special valuation rules for determining what proportion of the contract is subject to GST.

  Non-reviewable contract where payment is made in full before 2 December 1998.

  Supplies under the contract are GST free regardless of when the supplies are made and whether the buyer is entitled to full input tax credits or not.

  Reviewable contract entered into before the date of Roya1 Assent of the GST legislation and the buyer is entitled to full input tax credit.

  Supplies under the contract from 1 July 2000 and up to the first opportunity for review or 1 July 2005, whichever is earlier, are GST free.

  Supplies after the earlier of the first opportunity for review or I July 2005 are subject to GST.

  Reviewable contract entered into after the date of Royal Assent of the GST legislation and the buyer is entitled to full input tax credit.

  Supplies under the contract from 1 July 2000 are subject to GST.

  Important: This is not advice. Clients should not act solely on the basis of the material contained in this bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.