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Lecture 10

Lecture 10 - GST Introduction

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LECTURE 10 – GST: INTRODUCTION What is Goods and Services Tax?  GST is an indirect, broad based consumption tax. o Indirect = levied on the supply of goods or services rather than directly on income o Consumption tax = tax is ultimately born by the final customer o A broad based tax applies generally to all types of transactions made by all types of taxpayers with limited exceptions.  GST applies to the supply of most goods, services and anything else, including importations, consumed in Australia after 1 July 2000. o GST is payable on taxable supplies and taxable importations. o Certain supplies of goods and services are GST-free.  GST is currently levied at 10%. o Under this Act, the rate cannot be altered without approval from all the States and Territories. o Both Houses of the Commonwealth Parliament must also consent to a change in the rate. o Commonwealth administered tax but the money goes to the state governments  Final consumers do not get a CR for GST  If you add no value to an item, there is no GST payable Rational Behind Introduction  GST is perceived as a ‘good tax’ because: o It applies to a board base of transactions (compared to wholesales sales tax); o It only has only a limited number of exemptions; and o It is economically efficient as it has one flat rate o Easy to administer as one single flat rate (10%)  There are high compliance costs associated with GST Format Of GST Act  The GST legislation is contained in A New Tax System (Goods and Services Tax) Act 1999 – (the ‘GST Act’).  Other sources of legislation relevant to GST include o A New Tax System (Goods and Services Tax) Regulations 1999 – (the ‘GST Regulations’) o Taxation Administration Act 1953 – (the ‘TAA’) which contains some provisions relating to GST. GST: GENERAL ASPECTS Definitions  Only the “net amount” of GST is required to be paid to the ATO. o The net amount is calculated by setting off GST liability against input tax credit entitlements (ss 7-5 and 17-5).  If the GST liability > the input tax credit entitlements, then the taxpayer will need to pay the ATO the difference.  If, liability < entitlements, then the difference will be refunded by the ATO to the taxpayer.  There are some entities who will always be in a refund position ie. Medical practice will pay GST on their acquisitions but not on their supplies  An entity’s ‘GST’ is the sum of all of the GST liability on the taxable supplies/importations that are attributable to the relevant tax period.  ‘Input tax credits’ is the sum of all input tax credit entitlements for the creditable acquisitions or importation for the GST registered entity that are attributable to the relevant tax period. o GST in what you have purchased GST Reimbursement Mechanisms  There are two reimbursement mechanisms operating under the GST system. One operates for suppliers and the other for recipients: o Supplier–seeksreimbursementfrom therecipient byincluding GSTinthe purchase price o Recipient–seeks reimbursementfrom theATO.  A GST registered enterthise that makes a taxable supply is liable to pay GST in resthct of that taxable supply. The GST liability is 1/11 of the GST inclusive ‘price’ paid for the taxable supply (i.e. 1/11 of $11).  The ‘value’ is the thT exclusive amount that you receive for making a taxable supply (i.e. $10). The ‘value’ is equivalent to 10/11 of the GST inclusive ‘price’ paid for the taxable supply. GST = amount x 10% OR price x 1/11 VALUE = price x 10/11 GST and Pricing  GST Act does not givea statutory right to recover GST from their customers, as there is no provision under the GST Act to increase the price to take into account the GST liability of a taxable supply. o Instead any right for recovery must be included in the agreement reached between the supplier and its customers.  GST is 10% of the value of a taxable supply. You therefore need to work out the value of a supply before you can calculatethe GST.(S9-70) o If the price (say $11) for something being sold already includes the GST, then that price is quoted as the “GST inclusive” (which is normal retail practice). The GST component of a GST inclusive price is calculated as 1/11 of that price (i.e., 1/11 of $11 = $1) o If the price is quoted without taking GST into consideration – called the “GST exclusive” price, then the GST component of the price is 10% of that price. SUPPLIES Types of Supplies The various types of supplies made under the GST system are: 1. Non-taxable supplies;  The GST law does not apply to these supplies. They are generally supplies that are; o MadebeforetheGST lawbecameenforceable(i.e.,1 July2000), o Gifts, o Suppliesmadeby entitiesthatare notrequiredto beregisteredor o Suppliesthat haveno connectionwithAustralia(i.e.,asupplymade by2Japanese livinginJapan). 2. Taxable supplies – required to pay GST  A GST liability will be triggered on a taxable supply.  The supplier of a taxable supply is liable to pay GST, but is also entitled to claim credits for the GST included in the price of things acquired to make the taxable supplies (called “input tax credits”).  Where goods and services are taxable supplies: o Thesupplierisliableto pay GST. o However, the supplier is able to claim credits for the GST included in the price of things acquired to makethesupplies. 3. Taxable importations; (there is a system of deferral in place)  Taxable importations will trigger a GST liability unless they are exempted as non-taxable importations (these circumstances are limited).  Generally, the “importer” of these supplies is the party liable to remit GST to the ATO (and not the overseas supplier). o If the importer is registered for GST, it will be entitled to claim a corresponding input tax credit. 4. Non-taxable importations;  GST does not apply to these supplies eg gifts or supplies with no connection to Australia. 5. GST-free supplies;  No GST is payable by the supplier on these supplies – medical, education and fresh food  However, the supplier is entitled to claim input tax credits on the business inputs that relate to the supply. o This last feature of GST-free supplies is what distinguishes it from “non-taxable supplies”.  S 38-185 provides that export of goods is a GST-free supply. 6. Input taxed supplies; and  Input taxed supplies do not trigger GST. o However, the supplier is not entitled to claim input tax credits for the GST included in the price of things acquired to make the supplies (unlike GST-free supplies).  Inputtaxingeffectivelymovesthetaxingpoint backonelevelcomparedto GSTFreewherethere is effectively no GSTcollectedby the ATO. 7. A combination of the above. When is a supply a taxable supply? Requirementsthatmust bemetforataxablesupply tobe inexistence: (S9-5) 1. There is a taxable supply 2. The supply must be for consideration; 3. The supplier must be registered or required to be registered for GST; 4. The supply must be made in the course or furtherance of an enterprise carried on by the supplier; 5. The supply must be connected with Australia; and 6. The supply must not be GST Free or Input taxed. (SCREAN) What is a supply?  Supply include not only goods and services, but also the provision of advice and the creation of rights. It does not matter whether it is lawful or not to make the supply. o However, ‘supply’ does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money EG. Purchasing something from a coin store Goods and Services  S 195-1 defines “goods” to mean “any form of tangible personal property”. o Tangible property is property that you can touch such as chattels that has a physical existence. o Intellectual property such as “copyright” is not tangible property because you can’t touch it. o Personal property does not include “real property” which is defined in s 195-1 to essentially mean (amonGST other things) land (including any annexed building) and any interest or right over land.  Theterm“services” is not definedandshouldthereforetakeonitsordinarymeaning. Supply  The term “supply” is defined very widely under s 9-10 to mean “any form of supply whatsoever.” This includes (besides the supply of goods and services): o Provisionofadviceorinformation; o Thegrant, assignmentorsurrenderofrealpropertyofrealproperty; o A creation, grant,transfer, assignmentorsurrenderofany right; o A financialsupply; o An entryinto,orreleasefrom,anobligation:  To do anything;or  To refrainfrom anact; or o Totolerateanactorsituation; or o Anycombinationoftheabove.  Examples of supplies of things other than goods and services: o Thesaleofvacantland(supplyofreal property); o Thesaleofahouse(supplyofrealproperty); o Thegrantofarightto usean easement(supplyofrealproperty); o The act of abstaining from trading in an area (the creation of a right, or the entry into an obligation to refrain from anact); o Thereleaseofa personfrom anobligationthey oweyou(releasefrom anobligationto refrain from an act); o Thetolerationofconstructionworksoutsideyourbusiness(theentryinto anobligationto tolerateanact); o The relocation of your business premises at the request of someone else (the entry into an obligation to do anything) Who Makes a Supply  S 9-5 says that “YOU” make a taxable supply. S 195-1 defines “you” to be “entities” generally. “Entities” is defined in s 184-1 to include: o An individual; o A body corporate(i.e.,any artificiallegalentityhavingaseparatelegalpersonalitysuchasacompany); o A corporationsole(corporationconsistingof1natural person); o A body politic(i.e.,thecrown intherightofthecommonwealthorstate/territory); o A partnership(i.e.,anassociationof personsjointly carryingona businesswithaviewto profit); o Anyotherunincorporated associationorbody ofpersons (i.e.,any otherassociationorgroupingofpersons) o A trust; o A superfund.  If you are not an “entity” as defined under s 184-1, then you will not fall within the GST regime and will not be liableforanyGSTasyouwillnotbeabletomake ataxablesupply. Consideration Definition  According to S 9-15, the term ‘consideration’ is defined widely and includes payments, any act or forbearance in connections with the supply. o Accordingly, it covers barter transactions (i.e. where property or services are traded for other property or services) and does not necessarily require the payment of cash. Non-monetary consideration  GST is calculated on both the monetary and non-monetary components of the consideration paid for a supply. If you pay for something by non-monetary means, you will need to find the market value (in monetary terms) of that thing before you can calculate the GST. (S 9-75)  Examples of non-monetary payments: o ABCPty Ltd agreesto cleanCDE’spremiseseachweek,if CDEPtyagreesto do ABC’sgardening. o A coffee shop agrees to give free weekly lunches to B’s staff, in exchange for B providing fresh daily bread tothecoffeeshop. o A fishing business provides fresh fish to a butcher in consideration for the provision of meat from the butcher.  Non-monetary payments will therefore trigger a “barter” exchange. As discussed above, there are 2 supplies happening in a barter transaction, with each supply potentially incurring GST Nexus  The consideration must relate to, or be “in connection” with the supply in question. Pro Bono work  Work provided for no charge (i.e., pro bono) is not subject to GST as there is NO consideration Consideration Paid by Third Parties  Consideration does not need to be paid by the recipient. It can pass to the supplier from a third, unrelated party (S 9-15(2)). Government Taxes, Fees and Charges  S 81-5 also states that the payment of any Australian tax, fee, charge etc that is specified in a written determination by the Treasurer is not the provision of consideration (and can therefore not be a taxable supply). GST Registration Basic Registration Rules  An entity will only be liable to pay GST on a taxable supply it makes if it is (s 23-5): o registered for GST; or o required to be registered for GST  Therefore, whether an enterprise is registered for GST (or required to be) is critical in determining whether the supply will be subject to GST.  An entity must be registered for GST if: o the entity carries on an ‘enterprise’; and o The entity’s ‘annual turnover’ meets the ‘registration turnover threshold’.  If an entity does not meet the above requirements, then an entity may register for gst if (s 23-10): o The entity carries on an enterprise; or o The entity intends to carry on an enterprise from a particular date.  An entity cannot be registered for gst if it does not “carry on an enterprise”. Registration Turnover Threshold  If an entity’s annual turnover is $75,000 >, it will be required to register for GST (s 23-10 & s 23-15(1)).  If the entity is a non-profit body, then the registration turnover threshold is $150,000 (s 23-15(2) and Regulations). Determination of GST Turnover  Broadly, an entity’s GST turnover is either its current turnover (s188-15) or its projected turnover (s188-20).  Current GST turnover is defined as the GST- exclusive value of all the supplies made or likely to be made in the 12 months to the end of the current month (s188-15).  The following amounts are excluded from the determination of GST turnover: o Input taxed supplies (s188-15(1)(a)) o Supplies for Nil consideration unless they are supplies to associates that are not registered or the associate acquires the thing supplied otherwise than for a creditable purpose (s188-15(1)(b)) o Supplies that are not made in connection with an enterprise (s 188-15(1)(c)) o Supplies that are not connected with Australia (s 188-15(3) o Payment of money or supply by an insurer in settlement of a claim under an insurance policy (s 188-22)  Projected GST turnover is defined as the GST- exclusive value of all supplies that an entity has made or is likely to make during the current month and the following 11 months (s 188-20). Carrying on an Enterprise Definition  The term enterprise is defined widely to include an activity (or series of activiti(s 9-20) (1): o In the form of a business (defined in s 195-1 GST Act as any profession, trade, employment, vocation or calling, but does not include occupation as an employee); o In the form of an adventure or concern in the nature of trade; o On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; o By the trustee of a fund that is covered by, or by an authority or institution that is covered by Subdivision 30-B of ITAA1997; o By a charitable institution or by a trustee of a charitable fund; o By a religious institution; OR o By the Commonwealth, a State or a Territory, or a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory. Isolated Transactions  Isolatedtransactionscanconstituteanenterprise. o Thesaleofthefamilyhomeandotherprivateassetsarenotcommercialinnatureinorderto constitutean enterprise(eveniftheitemsaresoldataprofit). Characteristics of an Enterprise  In determiningwhetheranactivity isanenterpriseforthe purposesofthe GSTAct,look forthefollowing indicators (theseare notexhaustiveorconclusiveandareextracted from theCommissioner’srulinginTR97/11): o A significant commercial activity; o The activity is organised and carried on o Purpose and intention of taxpayer in a business like manner and engaging in the activity systematically – records are kept; o An intention to make a profit; o The size and scale of the activity; o The activity is or will be profitable o Not a hobby, recreation or sporting o Repetition and regularity of activity, activity; o The activity is carried on in a similar o A business plan exists; manner to that of the ordinary trade; o Commercial sales of product; and o Taxpayer has knowledge and skill. Connected with Australia (s9-25) Supply of Goods  A supplymusthavesomesortofconnectionwith AustraliaforGSTto betriggered.  Different“connection” rulesapplyforthesupply of differentthings: o Goods supplied wholly “within” Australia: Supplies of goods are connected to Australia if the goods are delivered, or made available, in Australia. o Goods supplied “from” Australia: If goods are removed from Australia, then they have sufficient connection with Australia. o Goods supplied “to” Australia: The supply of these goods will be connected if the supplier either: o Imports them; or o Installs or assembles them in Australia. The Real Supply of Property  There is connection if the real property or the land to which the real property relates is in Australia.  Examples of supplies of real property that are connected to Australia: (GSTR 2000/31) o The sale of land situated in Australia; o The grant, assignment or surrender of any interest in or right over land in Australia – eg a lease of land; or o A personal right to call for or be granted any interest or right over land in Australia; o A license to occupy land in Australia; or o Any other contractual right exercisable over or in relation to land in Australia. Supplies of Anything Else  Therewillbeconnectionifeither(s9-25(5)): o The thing is “done” in Australia; or o The supplier makes the supply through a permanent establishment that it has in Australia  “Thing” = anything that can be supplied or imported. Examples are a service, advice, information or a right. (s 195-1)  “Done” can mean performed, executed, completed, finished etc. (GSTR 2000/31)  If the thing being supplied is a service, the supply of that service is typically done where the service is performed. CREDITABLE ACQUISITIONS What is a creditable acquisition? An entity makesacreditable acquisition if: (S11-5) 1. The entity acquires anything (solely or partly) for a creditable purpose; 2. The supply of the thing to the entity is a taxable supply; 3. The entity provides (or liable to provide) consideration for the supply, and 4. The entity is gst registered. o Alloftheseelementsmustbesatisfiedbeforean inputtaxcreditentitlementarises. Meaning of Acquisition (S11-10)  An acquisitionisdefinedtomeanany form ofacquisition whatsoever o An acquisition of goods; o An acquisition of a right to require o An acquisition of services; another person: o A receipt of advice or information; o To do anything; or o An acceptance of a grant, assignment or o To refrain from an act; or surrender of *real property; o To tolerate an act or situation; o An acceptance of a grant , transfer, o Any combination of any 2 or more of assignment or surrender of any right; the matters referred to in the above o An acquisition of something the supply items of which is a *financial supply; Requirement to be Registered  Even if an entity is carrying on an enterprise, the entity cannot claim input tax credits if it is not GST registered (or required to be). Consideration for the Acquisition  To be entitled to an input tax credit, the business must have provided consideration (or be liable to). o Accordingly, if an entity is not the entity that provided (or was liable to provide) the consideration, then it is not entitled to claim an input tax credit.  A third person may p
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