Prices on some goods currently subject to the 32% Sales Tax will fall 21 days after the date of Royal Assent (when the Governor-General signs off on the legislation).

31/5/2000 When businesses must register for GST

1/7/2000 Proposed start date for GST

GST is a 10% tax on the value of goods and services supplied and includes:

• rental, hire and lease payments
• commissions, royalties and licence fees
• sales by registered second-hand dealers

The supplier pays GST and should reflect it in prices charged - but ultimately, the final consumer bears the GST burden.

GST is payable at each processing or manufacturing stage from the supply of raw materials (business inputs) to the supply of the finished product or service at the retail level.

No GST collected on these supplies:

GST free supplies (Best Position)

These businesses will be paying GST to its suppliers but can claim Input Tax Credits.

• basic food
• sale of a going-concern (ie. a business)
• childcare, health-care, medical services and medical/public health products
• education (adult learning and training)
• exports - goods physically exported or services consumed overseas
• religious services (GST on marriage celebrants but not at Church !)
• non-commercial activities of charitable organisations
• Lifesaving and first aid courses provided by non-profit organisations
• local government rates and water and sewerage charges
• supplies through inwards duty free shops

Input Taxed Supplies (Worst Position):

These businesses will be paying GST to its suppliers but cannot claim Input Tax Credits.

• financial supplies (fees associated with lending and borrowing money, creating and keeping savings and cheque accounts, issuing shares, life insurance and superannuation etc.)
• residential rent
• sale of residential property (but sale of new properties and commercial properties subject to GST)

Although GST will apply only from 1 July 2000, some business dealings entered into beforehand will need to factor in the impact of GST.

Businesses must incorporate the effects of GST into their prices - you cannot add 10% after the supply (unless contract with your customer allows for this).

This is important for Input Taxed Supplies because you cannot claim back GST paid on business inputs - therefore, businesses need to review their pricing structure to recover the GST costs.

Any adjustments to prices to include the 10% GST must also factor in your entitlement to Input Tax Credits.

Australian Competition and Consumer Commission (ACCC) will be the consumer watchdog to ensure the net profit margin do not increase ($10m fine for companies and $0.5m for individuals).

2. Start-up Costs

• Businesses will need to:
• change accounting processes and systems
• update invoice and other stationery
• train and hire extra staff to do all GST paperwork
• upgrade computers and cash registers

Review All Contracts

To allow for:

ability to change prices because of GST and Input Tax Credits

"look and see" type clause - an agreement to meet and reprice the deal to take into account the broader economic effects of GST (eg. CPI, interest rates, wages)

4. Registration

Compulsory for Enterprises engaging in Taxable Activities with total annual sales > $50,000.

Non-profit associations must register if total sales (including membership fees) > $100,000.

But you cannot claim credit for GST paid on business inputs unless you are registered.

Therefore, small businesses with turnover < $50,000 may still want to register.

5. Lodgment of returns and payment

Registered businesses will be Tax Collectors!

If annual sales > $20m, you must submit GST returns and remit GST to ATO monthly.

Otherwise, every 3 months but you can choose to do so every month.

6. Documentation Requirements

Businesses only need to display GST inclusive prices (not the price "plus" 10%).

Tax Invoices are required if supplying goods or services to another business - to show the amount of GST included in the price which will be claimed back as an Input Tax Credit.

7. Cashflow Management

GST needs to be paid by the 21^st of the next month if lodging monthly.

If annual turnover < $500,000, you can account for GST on a cash basis - this is easier to manage as you only pay GST when you get paid by the customer.

If turnover > $500,000, you have to account for GST on an accruals basis - you pay GST when you issue an invoice for supplies (not when you get paid by the customer).

You get to use GST money until you send it to the ATO on the 21^st of the next month.

Only GST inclusive prices to be displayed.

Dilemma - buy now or after 1 July 2000?

Prices will fall most significantly on items currently subject to the 32% Sales Tax.

Services will go up not necessarily by 10% due to the benefits of Input Tax Credits and abolition of other taxes.

To reduce market disruption caused by consumers delaying purchases, items currently subject to the 32% Sales Tax will be reduced to 22% from 21 days after the date of Royal Assent:

You cannot simply avoid GST by invoicing or paying prior to 1 July 2000 for supply after this date.

Contracts entered into prior to 1 July 2000 which involve the supply of goods or services after that date may give rise to GST.

This depends on:

whether contract is reviewable or non-reviewable

whether the buyer is entitled to claim credit for GST on inputs

whether it is the supply of goods or real property services (vs. service maintenance contract for example)

Various permutations and scenarios:

GST free

GST free until the first opportunity to review the contract

GST free until 1 July 2005

GST in full

These transitional measures are designed to target consumers and businesses taking undue advantage of, or being unduly disadvantaged by, the introduction of GST.

Refer Flow-Chart (ATO GST Fact Sheet 3).

1. Insured Events Before 1 July 2000

If you have a car accident before 1 July 2000 and your claim is settled by the Insurer after 1 July 2000, GST is not payable on the settlement by the Insurer.

But the Insurer cannot claim back any Input Tax Credits in relation to the settlement (can only do so for claims made after 1 July 2000). Therefore, premiums will go up to cover the cost to the Insurer.

2. Life Memberships

If fully paid prior to 2 December 1998, GST free.

If partly-paid, GST free until first review period or 1 July 2005 - thereafter, all payments subject to GST.

General principle is that GST applies to all goods delivered and all services performed after 1 July 2000.

1. Pre-Purchase Concert Tickets

If you pay for tickets to a concert in May 2000 and the performance is in September 2000, the ticket seller has to pay GST and will need to factor this into the prices.

The ticket seller can also claim Input Tax Credits on expenses and this should also be factored into the prices - therefore, not just a simple 10% increase (beware of ACCC).

If the ticket seller doesn’t factor GST into the prices than tough luck - no recourse back to the buyers unless the contract provides for this.

2. Pre-paid magazine subscriptions

If subscription paid after 2 December 1998, GST applicable on value of publications received after 1 July 2000.

No GST if sale by unregistered persons (garage sale will be GST free !!).

GST payable if you are a registered second-hand dealer.

Prices on new cars will fall as the current Sales Tax (45% for luxury cars and 22% for other cars) is much higher than 10% GST.

Motor Vehicles includes 4WD’s.

But there will be a Luxury Car Tax (LCT) of 25% for the value above the depreciation limit (currently $55,134 and indexed annually) to soften the fall in prices on these luxury cars.

Businesses can claim back GST on new cars (but not on the LCT component) - therefore, incentive to delay purchases until after 1 July 2000.

NO GST on sale of:

• land by private owner
• owner-occupied family home
• residential property held for minimum 5 years

GST payable on sale of:

• commercial land and property
• residential property held for less than 5 years
• new houses by builder/developer

2 systems of paying GST:

• Pay GST on sale price and claim Input Tax Credits
• Pay GST on gross margin (sale price less purchase price or value as at 1 July 2000) but cannot claim Input Tax Credits

Residential rents not subject to GST but you cannot claim Input Tax Credits.

Commercial rents subject to GST but you can claim Input Tax Credits.

GST free:

provided by medical practitioner or are commonly used health services as listed by the Government - hospital accommodation, dental, optometry, physio, chiropractor and Occupational Therapist etc

appropriately qualified naturopaths, acupuncturists and herbalists for 3 years pending national registration scheme

prescription drugs, drug sold under advice of a Pharmacist and other more common medicines such as Panadol and aspirin

public health goods such as sunscreens and follate supplements

private health insurance premiums

Recognised courses delivered by recognised educational institutions (pre-school - tertiary) will be GST free.

Adult learning and training courses likely to develop employment-related skills.

GST payable on hobby or personal enrichment type courses.

Tuition fees provided by college, TAFE or Uni will be GST free.

Private Tuition subject to GST.

Student accommodation at boarding schools and rural student hostels are GST free.

Financial services are Input Taxed Supplies (no GST on value of services provided but no Input Tax Credits - the worst position).

Lending and borrowing or dealings with money

dealings with savings, cheque and deposit account transactions

dealings with debt securities

dealings with equity securities

dealings with unit trusts

dealings with futures contracts

dealings with options and warrants

underwriting of transactions

dealings with interests or rights under superannuation funds (including management)

provision, transfer or assignment of life insurance policies

provision of credit under certain hire purchase agreements (covered by Credit Contracts Act 1981)

supplies incidental to the above areas

arranging or agreeing to make a supply covered by any of the above areas

Incidental Supplies - Example

If a Bank pays for an external valuation of a house for loan assessment purposes and charges the client for the cost:

GST is payable on the valuation services provided

the on-charge to the client is a Financial Services supply (incidental to lending money) and will not be subject to GST

the Bank cannot claim an Input Taxed Credit for the GST paid on the valuation service provided

the Bank will have to recover its GST cost by increasing the on-charge to the client

Arranging Financial Supplies

The arranger services provided will be a Financial Service supply (no GST payable but no Input Tax Credits allowable):

brokerage commissions - does not include statutory levies (eg. stamp duty) which the broker passes on to the client

the service of introducing clients to a person effecting the transactions

bringing together sellers/issuers and purchasers/investors

carrying out or co-ordinating the necessary negotiations essential to the conclusion of the deal

instructing, or organising and co-ordinating the work of, other parties (eg. lawyers and accountants)

carrying out the necessary consultations with appropriate regulatory authorities

acting as the central point of contact and execution between parties intending to effect a transaction in securities and their advisers

What are not Financial Services:

The provision of these services will be subject to full GST with allowable Input Tax Credits:

dealings with general insurance

advisory services

accounting and legal services

tax agents services

safe custody services

payroll services

Uncertainty of Scope of Definition

Definitions are very technical and may generate disputes with the ATO.

Hot Issues:

Arranging vs. Advising

Incidental supplies

Life Insurance vs. General Insurance

Split or bundled Insurance contracts (eg. Death, Trauma and Total Permanent Disability policies)

What Happens With Mixed Supplies?

Most financial service providers supply a mix of services that fit inside and outside of the strict definition of Financial Services:

Practical problems arise when:

valuing the provision of Financial Services which are GST-free and those other services which are subject to full GST

identifying the business inputs that are used solely for the provision of Financial Services (for which no Input Tax Credits are allowable) and other services (for which Input Tax Credits are allowable)

apportioning the business inputs that relate to the provision of Financial Services and other services

Apportioning Input Tax Credits

Input Tax Credits are not allowable where it relates to the provision of Financial Services.

No guidance in legislation or Explanatory Memorandum on method of apportionment.

Possible methods of apportionment:

• floor space
• direct salaries
• revenues received

But there is a de minimus rule where you do not need to apportion where the annual turnover of Financial Supplies is less than $50,000 or 5% of all annual turnover.

Must distinguish between taxable (eg. advice) , input taxed (Financial Services) and GST-free (eg. services to overseas client) transactions

Must capture all GST on inputs and attribute them directly to the categories of supplies or apportion them between the categories

Must account for mixed supplies and apportion the Input Tax Credits properly

Must quarantine supplies within the GST Group (which are GST free)

Must evaluate and monitor method of apportionment - may involve tracking annual usage of inputs in which a credit has been claimed for up to 10 years (if valued > $500,000).

What Happens to Overseas Outsourcing

GST applies to the imported supply (eg. IT outsourcing) on a reverse charge basis.

The Australian recipient of overseas services will have to deduct 1/11^th of the fees and remit this to the ATO.