ap_gst03

To get the GST legislation through a senate it did not control, the Government was required, by the Democrats political party, to free some classes of supplies from the imposition of GST. The Democrats Party which held the balance of power, sought to protect the interests of the poorer members of society in the face of the imposition of a tax which, unlike income tax, is not progressive in its rating structure.

However admirable the intentions of the Democrats, their actions will result in making the legislation more complicated for the businesses which will have to understand and comply with its provisions. Exclusions will also open up illogical discrepancies in the treatment of similar supplies, and provide employment opportunities for those gifted in the art of devising avoidance schemes.

GST Free Supplies: Food

Food for human consumption is GST-free except where explicitly specified as taxable.

Food is defined to mean (Section 38-4):

food for human consumption (whether or not requiring processing or treatment);

ingredients for food for human consumption;

beverages;

ingredients for beverages;

goods to be mixed with or added to food for human consumption

condiments,

spices,

seasonings,

sweetening agents or flavourings);

fats and oils marketed for culinary purposes; or

any combination of the above.

The definition of food excludes:

live animals (except for crustaceans and molluscs);

unprocessed and untreated grains, cereal or sugar cane; and

plants under cultivation (ie. herbs in a pot, vegetables growing in the ground).

However, supplies of fresh fruit and vegetables already harvested by a primary producer will be GST-free if the produce is identified as food (or ingredients) for human consumption at the time of supply.

Grains etc which have been treated or processed will be subject to GST. For example, grains etc subject to a cleansing treatment will be subject to GST. Herbs when sold in bunches and not as part of a living plant will be GST-free.

Food is taxable if:

it is consumed on the premises or the grounds surrounding those premises in which it is supplied (ie. cafes, restaurants, food courts, football grounds); or

it is hot food for consumption away from those premises; or

it is listed in Schedule 1. This Schedule includes:

What's in Schedule 1?

Prepared food (including pizzas, quiches, hamburgers, hotdogs, sandwiches, platters of food and food marketed as prepared meals);

Confectionery (including lollies, chocolates, muesli or health food bars, popcorn, chrystallised fruit);

Savoury snacks (including potato chips, processed seeds or nuts, caviar);

Bakery products (including cakes, cheesecakes, muffins, pavlovas, pastries, scones,doughnuts, croissants, pies (meat, vegetable or fruit), sausage rolls, pastries and bread with a sweet filling or coating. HOWEVER Bread, including savoury bread is GST-free;

Ice-cream foods (including ice-creams cakes, frozen yoghurt, soft serves, flavoured ice blocks); and

Biscuits (including cookies, pretzels, crackers, wafers and cones).

Combinations of GST-free food and taxable food (eg. a snack-pack containing cheese and biscuits) will be taxable. However, where a mix of individually packaged goods is packed and sold together (eg. in a hamper), there may need to be an apportionment of the GST that is payable in respect of the individual items.

How will the packaging containing the food be treated?

Packaging for food will be treated in an identical manner as the contents for GST purposes.

Therefore, packaging for GST-free food will also be GST-free, provided that the packaging for the supply of the food is both normal and necessary.

For example, if a plastic container is used to market cereal when it would normally be marketed in a cardboard box, the plastic container will not be GST-free, it will be taxable, because the plastic container is not normal and necessary for packaging cereal.

Beverages

Supply of beverages and ingredients for beverages, are GST-free only if:

it is listed in Schedule 2; and

it is for human consumption and it is

not supplied for consumption the premises from which it is supplied;

not supplied hot; or

not of a kind specified in the regulations.

What's in Schedule 2 ?

Schedule 2 of the legislation specifies the following items as GST-free:

milk (including milk, skim milk, buttermilk, powdered milk and milk products that consist 95% of milk. Flavoured milk is taxable);

soy milk and rice milk;

tea, coffee and malt extracts;

dry preparations used to flavour milk;

fruit and vegetable juice (that consist at least 90% juice content);

beverages, and ingredients for beverages, for infants and invalids; and

non-carbonated bottled natural water.

Only food that is GST-free under Subdivision 38-A will be GST-free when supplied as part of a supply of GST-free education.

GST Free Supplies: Health

Other health services will be GST-free if they are provided by health practitioners listed in the table in section 38-10.

There is no general exemption concession, as currently exists under the sales tax provisions, for institutions such as public hospitals. Only specifically defined supplies by these and other health service providers are GST-free.

goods and services that will be GST-free:

certain medical services (for example, a visit to your local doctor);

other health services (such as optical, physiotherapy and pharmacy);

hospital treatment irrespective of whether or not it is private or public;

residential and community care, specialist disability services, home care services and other health goods as determined by the Minister;

specified medical aids and appliances (these are listed in Schedule 1 to the Act);

certain drugs and medical preparations; and

private health insurance and ambulance subscriptions.

The provision of goods supplied in the course of a medical service which are GST-free will also be treated as being GST-free. However, the provision of health services in relation to cosmetic surgery will not be GST-free.

Professional services by naturopaths, acupuncturists and herbalists will also be treated as GST-free. However, GST-free status will only be allowed after 1 July 2003, if the service is recognised under a State law or a national registration scheme.

What is the GST treatment of health insurance?

Private health insurance will be GST-free. Therefore, the private health insurance provider will not be required to pay GST on their supplies, (ie. their premiums). The insurance provider will also be entitled to claim input tax credits for GST included in the price of acquisitions.

GST Free Supplies: Education

(Subdivision 38-C)

The supply of an education course is GST-free. The definition in section 195-1 lists the types of courses which are GST-free. These are:

all recognised pre-school and primary school courses;

special education courses for children with disabilities;

courses covered under a determination of education courses by the Education Minister. This covers most accredited secondary and tertiary courses, such as English as a second language, TAFE courses, certain vocational and training courses etc;

Masters and doctoral courses;

certain adult and community education courses as determined by the Education Minister;

first aid and life saving courses run by non-profit bodies; and

professional or trade courses where they are an essential prerequisite to employment in a trade, profession or occupation (but not a course for a qualification which may be required by a particular employer or group of employers, for example, a fork lift drivers licence).

It should be noted that the GST treatment of these courses does not depend on how the qualification is subsequently used. The course will be GST-free provided all the conditions are satisfied.

Example of courses which are not GST-free will include

hobby or personal development and recreational courses,

courses undertaken to keep abreast of developments in a professional field and

short occupational courses to maintain skills (ie. spreadsheet training).

private tuition However, in many cases the tutor may not be registered for GST and so, would not charge GST for the tuition.

Are goods and services provided in delivering the course GST-free (Section 38-85)?

Yes. The supply of an education course includes the provision of the educational facilities and the administrative services required to deliver the course.

It also covers the provision of

text books,

computers etc for students to use while undertaking a course.

All materials necessary for the educational course are GST-free even if there is an associated fee for the provision of the goods (eg. an arts supplies levy).

Does this mean a student can lease a computer through the school GST-free? (Section 38-100)?

No. Goods sold, leased or hired to students are not GST-free unless they are course materials.

What about school excursions? (Section 38-90)?

School excursions which are related to the school curriculum for secondary students or below are GST-free except for the food component (note that the food may be GST-free under

Subdivision 38-A). For higher educational students, the excursion is also GST-free except for the food and accommodation components.

However, an excursion that is predominantly recreational in nature (eg. an interstate school trip to watch a rugby match) will not be GST-free.

How will accommodation at a boarding school be treated? (Section 38-105)?

Accommodation for primary, secondary and special schools, and accommodation provided by a hostel (for students from remote or rural areas) will be GST-free, excluding any food component.

Accommodation for tertiary students will be input taxed as would be the case for residential rental accommodation for students living off campus.

GST Free Supplies: Child care

(Subdivision 38-D)

Generally, child care is GST-free where provided at a facility that receives government funding, or

If the child care provider is a registered carer for the purposes of the Childcare Rebate.

In the latter case, it is immaterial if the recipient of the supply is eligible for the childcare rebate.

The respective definitions refer to the Child Care Rebate Act 1973 and the Child Care Act 1972.

Other child care falling outside these definitions may still be GST-free if certain criteria are met.

Subsection 38-150 lists the types of child care as:

family day care;

occasional care;

outside school hours care;

vacation care; or

any other type of care determined in writing by the Child Care Minister.

What about the provision of toys and food?

Child care includes the provision of all goods and services that are directly related to the child care.

Section 38-155 requires that the following conditions are met:

the supply must be directly related to the supply of child care;

the supply of that child care must be GST-free under another provision of this subdivision; and

the supply must be supplied by, or on behalf of, the supplier of the child care.

For example, the supply of things such as food, electricity, bed linen and nappy washing services, in the circumstances outlined above, would be GST-free. In addition, the GST-free treatment may include toys or any other goods or services supplied as a normal part of child care.

GST Free Supplies: Exports

(Subdivision 38-E)

The consumption of goods and other things outside Australia is generally GST-free.

Subsection 38-185(1) lists the classes of goods and the conditions under which those goods will be GST-free as exports.

These include:

exports of goods generally (Item 1);

export of goods paid by instalment (Item 2);

export of aircraft or ships (Item 3);

export of aircraft or ships paid by instalments (Item 4);

exports of goods that are to be consumed on international flights or voyages (Item 5);

goods used in the repair of goods to be exported (Item 6); and

goods exported by overseas travellers (Item 7).

For situations involving overseas travellers (Item 7), details of the treatment for GST purposes are to be included in regulations which have yet to be made.

The relevant items in the legislation should be carefully read to identify the conditions which must be met in order for the export to be GST-free.

How to establish that something is exported?

There is no definition of export contained within the legislation which establishes a precise time when goods have been exported. Records should be kept to show that the timing requirements for exports to be GST-free, have been met.

The records might include:

airway bills;

bills of loading

evidence from the Australian Customs Service that goods were exported; or

evidence from the customs authority in country of destination that the goods have arrived.

What about the supply of things other than goods? (Section 38-190)?

Like the export of goods, section 38-190 lists the types of supplies, other than goods or real property, which are GST-free. Some of these supplies are taxable if the supply is connected with Australia.

It is essential that entities become familiar with the types of things covered within this list.

For instance, under Item 2, a supply will be GST-free if made to a non-resident who is not in Australia when the supply is made and the supply is not directly connected with goods or real

property situated in Australia when the supply is made. Take the situation where a tax agent provides advice to an overseas resident on the application of Australian taxation law. If the recipient of the advice is overseas when the advice is provided, the supply will be GST-free.

GST Free Supplies: Religious services

(Subdivision 38-F)

A supply of religious services is GST-free if that service is:

supplied by a religious institution; and

integral to the practice of that religion.

A civil wedding service would not meet the above criteria and so would not be GST-free.

The supply of a rabbi’s services at a Bar Mitzvah would be GST-free because it is integral to the practice of Judaism.

GST Free Supplies: Non-commercial activities of charities (Subdivision 38-G)

Subdivision 38-G ensures that non-commercial supplies made by

charitable institutions,

trustees of charitable funds and gift-deductible entities

are GST-free. The ATO maintains a register of gift deductible funds. Commercial activities of these charitable entities will be taxable to ensure charities do not have a competitive advantage over other organisations.

Non-commercial supplies are supplies made by the charitable entity

for nominal consideration and

supplies of donated second-hand goods.

What is nominal consideration?

Nominal consideration means

The consideration for a supply is less than 50% of the tax inclusive market value of the supply, or,

the consideration is less than 50% of the consideration

provided to acquire the thing supplied.

For example, a charitable or religious institution hires out a hall for $500. The market value for a comparable hall is $1100. As the hire is at less than 50 per cent of the market value the supply is GST-free.

What about the sale of donated goods?

The sale of donated goods by charitable institutions, trustees of charitable funds and gift deductible entities will be GST-free. If the goods are dealt with in such a way that they lose their original character, the supply will not be GST-free.

For example, if donated clothing is cut up and sold as rags, it has been transformed from its original character and will be subject to GST.

What if a business donates goods to a charity?

If the goods were purchased by a registered business for donation, no input tax credit for the GST included in the price is available, as the goods were not purchased for a creditable purpose (for the purpose of the business).

If the business donates goods that had previously been acquired for use in the business there is no requirement to make an adjustment to any previously claimed input tax credits for a change of creditable purpose (section 129-45).

For example, Beryl is a baker. She donates bread that is unsold at the end of the days trading to a charity. If she had used the bread for private purposes she would have an adjustment to her entitlement to input tax credits for a change in creditable purpose. Section 129-45 means that Beryl does not have to make any adjustment. Beryl will remain entitled to the input tax credits for her acquisitions used in making the bread.

Raffles and bingo conducted by charitable institutions (Subdivision 38-H)

Supplies of raffles and bingo by charitable institutions, trustees of charitable funds or gift deductible entities (excluding lotteries), that do not contravene a State or Territory law will be GST-free.

GST Free Supplies:Water and sewerage

(Subdivision 38-I)

The supply of water and sewerage will be GST-free whether supplied by Government or by the private sector.

However, where the water is supplied in, or is transferred into, a container of less than 100 litres it will not be GST-free. Note that the supply of non carbonated water is a GST-free supply .

Any fees charged for emptying of a septic tank will also be treated as being GST-free.

For example, Rob is connected to town water which is supplied to him through water mains. Rob pays water rates for the supply of the water. The supply of this water is GST-free. Rob, however, does not like drinking tap water so he installs a water cooler in his kitchen.

The Pure Water company supplies Rob with 20 litre containers of water to fill his cooler. The supply of this water is taxable.

GST Free Supplies: Supplies of a going concern (Subdivision 38-J)

The supply of a going concern is GST-free. This overcomes the need for a purchaser to use additional funds to cover the GST in the purchase price when the entity would also be entitled to claim an input tax credit on the purchase.

For a supply of a going concern to be GST-free it must meet all the following conditions:

the supply is for consideration;

the recipient is registered or required to be registered; and

the two parties have agreed in writing that the supply is of a going concern.

What is a supply of a going concern?

A supply of a going concern is a supply under an agreement which:

the supplier supplies to the recipient all the things that are necessary for the continued operation of an enterprise; and

the supplier carries on, or will carry on, the enterprise until the date of the supply.

Is it possible for the sale of part of an enterprise to be a sale of a going concern?

Yes. Part of an enterprise can be supplied as a going concern provided that what is sold is capable of separate operation. For example, a large farm may be subdivided into a number of smaller farms and sold off. These supplies would be treated as GST-free provided each of the farms can operate separately.

An entity will, however, need to make an adjustment for GST for any private or input taxed use of the going concern (see Division 135).

GST Free Supplies:Transport

(Subdivision 38-K)

Section 38-355 lists certain transport and related services which are GST-free under specific conditions.

The conditions are:

travel to, from or outside Australia by any means not involving domestic travel (Item 1);

transport of passengers on domestic legs of international flights and domestic air travel of non-residents where ticket purchased outside Australia (Items 2 and 3);

transport of passengers on domestic legs of international sea voyages (Item 4);

transport, loading, or handling of goods within Australia (Item 5);

insurance and arranging of insurance for transport which are GST-free under items 1 to 5 above (Items 6 and 7).

For example, the purchase of an airfare for the domestic leg of an international flight will be GST-free (Item 2). Travel by any other mode for the domestic leg will not be GST-free.

GST Free Supplies:First supply of precious metals (Subdivision 38-L)

The first supply by a refiner after refining will be GST-free if:

the recipient of the supply is a dealer in precious metals; and

the recipient acquires the precious metal for investment purposes.

The rationale behind making these supplies GST-free is the fact that prices of precious metals, like gold, are internationally fixed. Therefore, dealers would not be able to pass on the GST charged on supplies of precious metals.

The definition of precious metals is limited to

gold,

silver or

platinum

which is pure enough to be traded on international markets. This definition will exclude the majority of jewellery items as these are made from alloys which will fall under the required purity levels.

GST Free Supplies:Supplies through inwards duty free shops (Subdivision 38-M)

Supplies of airport shop goods through an inwards duty free shop are GST-free if:

the goods are imported or excisable goods; and

the supply is made to a relevant traveller (‘relevant traveller’ is defined in section 195-1 with reference to the Customs Act 1901).

Goods such as perfume, spirits and tobacco purchased by a person who has arrived on an international flight, whether as a passenger or crew, are therefore GST-free.

GST Free Supplies: Grants of freehold and similar interests by governments

(Subdivision 38-N)

The first supply of unimproved land after 1 July 2000 by

the Commonwealth,

a State, or

a Territory

will be GST-free.

The supply of unimproved land means the supply of

a freehold interest in land or

the supply of a long term lease of the land where the land has not been improved.

The subsequent supply of such land is not GST-free.

GST Free Supplies: Farm land

(Subdivision 38-O)

Subdivided for residential purposes:

The supply of subdivided farm land is GST-free where certain conditions are met.

Essentially the subdivision of farm land to enable a son or daughter to build and live on that land would generally be

GST-free.

The conditions which must be met are:

the subdivided land is from land on which the supplier has carried on a farming business for at least 5 years; and

the land is supplied to an associate for nil consideration or consideration that is less than the GST inclusive market value.

If the land was provided at market value the normal GST rules would apply.

Subdivided for farming:

Farms are often sold in pieces. The process of sale often involves the sale of stock and machinery at clearing sales, followed by the sale of the land and buildings. This would not qualify as a sale of a going concern and will not be GST-free under Division 38-H. However, the supply of the farm land and buildings will generally be GST-free where the following conditions are met:

the supplier has carried on a farming business on the land for at least 5 years before the supply; and

the recipient intends to operate a farming business on the farm land.

If the recipient acquires the farm land under a GST-free transaction and then changes the use of the land away from farming, the recipient will have to make an adjustment under Division-135.

GST Free Supplies:Cars for disabled people (Subdivision 38-P)

While there is a large range of aids and appliances for people with disabilities which qualify as GST-free (Section 38-45), the list is limited to goods which are designed for use by people with an illness or disability and are not of a kind ordinarily used in the wider community. Therefore, motor vehicles are not included in that list.

Subdivision 38-P makes provision for cars for disabled people to be GST-free under certain conditions. The provisions apply to disabled veterans (section 38-505) and other disabled people

(section 38-510). The conditions are:

the car is required for personal transportation - in the case of persons who are not veterans, the transport must be to or from gainful employment; and

the person intends to use the car for that purpose during all the period from when the person acquires the car to the earliest of:

two years after acquisition;

the time the car becomes incapable of use for the purpose acquired; or

a time the Commissioner considers appropriate.

Only the value of the car below the car depreciation limit will be GST-free. The value of the car for these purposes does not include the value of modifications made to the car to enable it to be used by the disabled person.