Bills Digest No. 172  1999-2000Sales Tax (General) (Industrial Safety Equipment) Bill 2000


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

Sales Tax (General) (Industrial Safety Equipment) Bill 2000

Date Introduced: 11 May 2000

House: House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent

Purpose

The Bill forms part of a package of Bills that modify the sales tax exemption for industrial safety equipment to provide that only goods of a kind that are mainly used for industrial safety purposes will qualify for sales tax exemption. The Bill provides for that modification to the extent that it provides for taxation.

Background

This Bill, together with the Sales Tax (Excise) (Industrial Safety Equipment) Bill 2000 and the Sales Tax (Customs) (Industrial Safety Equipment) Bill 2000 ('the modification Bills'), are Bills which impose taxation.(1) Three separate Bills are required to satisfy section 55 of the Constitution, which in part provides:

'Laws imposing taxation, except laws imposing duties of customs or of excise, shall deal with one subject of taxation only; but laws imposing duties of customs shall deal with duties of customs only, and laws imposing duties of excise shall deal with duties of excise only.'

The Sales Tax Assessment Act 1992 ('the Assessment Act 1992') provides that sales tax is payable on any wholesale or retail sale by a person, whether or not that person is the manufacturer of the goods (section 16), unless an exemption applies (section 24).(2) The exemptions are set out in the Sales Tax (Exemptions and Classifications) Act 1992 ('the Exemptions Act 1992'). Item 20 of Schedule 1 of the Exemptions Act 1992 exempts industrial safety equipment from sales tax. It provides:

'Equipment of a kind ordinarily used in the course of industrial operations to protect persons engaged in those operations, including masks, respirators, shields, goggles, visors, helmets, belts and machine guards.'

Item 20 of Schedule 1 of the Exemptions Act 1992 replaced Item 113G of the Sales Tax (Exemptions and Classifications) Act 1935. Item 113G exempted industrial safety equipment 'of a kind used exclusively, or primarily and principally' to protect people. The Explanatory Memorandum stated that the change in terminology to 'of a kind ordinarily used' effected 'no substantive change'.(3)

However, in two recent cases the Federal Court has held that the phrase 'ordinarily used' is broader than 'exclusively, or primarily and principally used'. In Airovent Pty Ltd v Commission of Taxation,(4) Sackville J stated:

'This language ["ordinarily used"] differs from the predecessor to Item 20, namely Item 113G ... The dictionary meaning of "ordinarily" is "usually" or "in ordinary cases". Thus, on the face of it, Item 20 sets a different test from that laid down in Item 113G. Equipment of the relevant kind need only be usually or in ordinary cases used in the course of industrial operations to protect persons engaged in those operations. It is not necessary, in order that equipment come within Item 20 that it be of a kind that is used exclusively, or primarily and principally in the requisite manner.'

In that case, Sackville J held that roof mounted centrifugal exhaust fans used by McDonalds restaurants as part of a ventilation system to remove hot and contaminated air from the kitchens were sales tax exempt. He stated that the fans were equipment of a kind ordinarily used to 'protect workers engaged in industrial operations from threats to their health or well-being posed by heat stress, airborne contaminants and fire'. In NSW Cancer Council v Commission of Taxation,(5) Sackville J held that sunglasses manufactured by the Cancer Council which complied with Australian Standard 1067.1 for the reduction of sun glare were sales tax exempt, as they perform a protective function in relation to sun glare generally, including for outdoor workers. This interpretation was confirmed on appeal.(6)

Thus, the Federal Court has held that the change of terminology in the Exemptions Act 1992 from 'exclusively, primarily or principally' to 'ordinarily' effects a substantive change in the items which qualify for sales tax exemption, contrary to the intention of the then Labor government. The present Coalition government is concerned that as a result of these decisions:

'it is possible that a wide range of goods could now qualify for sales tax exemption as industrial safety equipment. Most of this equipment is only used to a minor extent by persons engaged in industrial operations. The equipment is mainly used outside industrial operations and does not have a primary purpose of protecting persons engaged in industrial operations.'(7)

In response to these decisions, the Government announced on 5 October 1999 that it would amend the sales tax exemption so that it only applied to goods of a kind that were 'mainly' used to protect persons engaged in industrial operations. This was intended to 'restore the sales tax law to the position that the Parliament always intended.'(8)

The modification Bills restore the position prior to the enactment of the Exemptions Act 1992 by replacing 'ordinarily' with 'mainly'. The modification applies to all claims for sales tax credit made after 5 October 1999, the date the government's decision to amend the sales tax exemption was announced. It also applies retrospectively back to 1 January 1993, the date sales tax first became payable under the Assessment Act 1992. Indeed, the amendment is almost wholly retrospective in operation, as no sales tax will be payable on any sales which occur after the commencement of the A New Tax System (End of Sales Tax) Act 1999 on 1 July 2000.(9)

However, the amendment will not apply to all sales of industrial safety equipment made between 1 January 1993 and 5 October 1999. Claims for sales tax credit(10) made before 5 October 1999 will be accepted if the equipment would qualify for sales tax exemption on the 'ordinarily' but not the 'mainly' test, and the benefit of the sales tax exemption has been passed on to the end user of the goods. Alternatively, if sales tax has not been paid on dealings that occurred before 5 October 1999, no liability for sales tax (or penalties) will arise merely because the equipment satisfied the 'ordinarily' test but would not satisfy the 'mainly' test. These transitional provisions are provided for in the Sales Tax (Industrial Safety Equipment) (Transitional Provisions) Bill 2000.

This effectively preserves the status quo for dealings before 5 October 1999 - where sales tax has been paid already, no credit can be claimed in reliance on the Federal Court decisions. This will ensure that persons who have passed sales tax on to consumers do not obtain a windfall gain. The Explanatory Memorandum expresses the opinion that the majority of persons affected by Item 20 have dealt with the sales tax issue on the basis of Parliament's intention, not on the Federal Court's interpretation of 'ordinarily', paying sales tax in excess of $2 billion over the past 3 years.(11) Where sales tax has not been paid, or a credit has been obtained and the benefit passed on to end users of the equipment, taxpayers are not unfairly disadvantaged for having relied on this interpretation of the law. This Digest therefore should be read in conjunction with the Digest for the Sales Tax (Industrial Safety Equipment) (Transitional Provisions) Bill 2000.

Main Provisions

Clause 6 modifies Item 20 of Schedule 1 of the Exemptions Act 1992 by replacing 'ordinarily' with 'mainly'. 'Mainly' is already defined in subsection 3(2) of the Exemptions Act 1992, and means more than 50%. This modification applies retrospectively to sales from 1 January 1993, which is the first taxing day under the Assessment Act 1992.(12)

Clause 4 deems the Act to be included in the definition of 'sales tax amending Act' in section 129 of the Assessment Act 1992. Section 129 provides that a sales tax amending Act may not make a person liable to a sales tax penalty for any act or omission which occurred within 28 days after Royal Assent to the sales tax amending Act. The package of Bills will operate principally on conduct prior to 1 July 2000, thus almost certainly prior to Royal Assent to these Bills if passed. Thus, the effect of section 129 is that although persons may be retrospectively liable to sales tax, they will not be liable to pay a penalty or be convicted for an offence.

Concluding Comments

The Government contends that the majority of taxpayers have in fact interpreted the word 'ordinarily' in Item 20 of Schedule 1 as the Government intended (bearing the same meaning as 'exclusively, primarily or principally'), not as bearing its normal meaning ('commonly'). Thus, most taxpayers will not be affected by this retrospective amendment. The purpose of the amendment back to 1993 is to ensure that those who have already paid sales tax were legally liable for that tax, and are not now entitled to a windfall refund. Those who have conducted their affairs prior to 5 October 1999 on the basis of a normal meaning of 'ordinarily' will not be disadvantaged, so long as they have passed the benefit of any sales tax credit on to consumers.

In these circumstances, although the modification Bills operate almost entirely retrospectively, they are unlikely to detrimentally affect taxpayers in terms of imposing additional tax burdens on them. They do, however, treat persons in like circumstances differently on the basis of whether the taxpayer or the taxpayer's advisers adopted a natural meaning of 'ordinarily' or the narrower meaning intended by Parliament.(13)

The imposition of liability in respect of all dealings after 5 October 1999 is an example of what has been called "legislating by press release", a common practice in the area of taxation and revenue. It is not uncommon for the Government to announce a proposed measure and its intention that the measure will commence from the date of the announcement.(14) The Senate usually permits this practice, so long as the Bill is introduced within 6 months from the date of the announcement. The modification Bills, which were introduced just over 7 months after 5 October 1999, are slightly outside this time limit.(15)

Although the modification Bills will substantially restore the pre-1992 position in relation to sales tax exemption of industrial safety equipment, this amendment would not have altered the result in the Airovent case. This is because Sackville J found on the evidence that the exhaust fans were an integral part of the workplace ventilation system, and the principal reason for installing workplace ventilation systems is to protect workers. Thus, even on the 'mainly' test, the exhaust fans would have been sales tax exempt. The result in the NSW Cancer Council case may, however, well have been different if the 'mainly' test had been in operation.

Endnotes

  1. On one view, the Bills impose taxation, in that certain sales of industrial safety equipment which were formerly exempt from sales tax will now be subject to sales tax. On another view, as the Bills merely reflect Parliament's original intention, they do not alter any taxation liabilities. Out of caution, the Bills have been treated as though they do impose taxation.

  2. Due to section 55 of the Constitution, the tax is actually imposed by the Sales Tax Imposition (General) Act 1992, Sales Tax Imposition (Excise) Act 1992 and the Sales Tax Imposition (Customs) Act 1992.

  3. Explanatory Memorandum to the Sales Tax (Exemptions and Classifications) Act 1992,
    p. 105.

  4. [1998] FCA 935 (7 August 1998).

  5. [1999] FCA 411 (14 April 1999).

  6. Commissioner of Taxation v New South Wales Cancer Council [1999] FCA 1146 (20 August 1999) (Hill, Lindgren and Emmett JJ).

  7. The Hon Peter Slipper, Parliamentary Secretary to the Minister for Finance and Administration, Speech on the Second Reading of the Sales Tax (Customs) Industrial Safety Equipment) Bill 2000, House of Representatives, Hansard, p. 15429.

  8. The Hon Rod Kemp, Assistant Treasurer, Press Release no. 47, 5 October 1999.

  9. That Act commences immediately after, but on the same day as, the commencement of the A New Tax System (Goods and Services Tax) Act 1999 on 1 July 2000.

  10. A person may claim a tax credit for sales tax paid under section 51 of the Sales Tax Assessment Act 1992 in a wide variety of situations. These situations are set out in Tables 3 and 3A in Schedule 1 of the Sales Tax Assessment Act 1992 and include where tax has been paid despite an entitlement to an exemption (CR2A). A sales tax credit is only payable to the extent the taxpayer has borne the tax and not passed it on to the purchaser.

  11. Explanatory Memorandum to the Sales Tax (Excise) (Industrial Safety Equipment) Bill 2000, Sales Tax (Customs) (Industrial Safety Equipment) Bill 2000, Sales Tax (General) (Industrial Safety Equipment) Bill 2000, Sales Tax (Industrial Safety Equipment) (Transitional Provisions) Bill 2000, p. 5.

  12. Section 5 of the Sales Tax Assessment Act 1992 defines 'first taxing day' as the first day of the fourth month after the month of the year in which the Act receives the Royal Assent. Royal Assent was given on 30 September 1992.

  13. It is relatively common and uncontroversial to pass retrospective laws which make only technical amendments or which are for the benefit of those affected. However, in general, retrospective legislation should not be passed which has a detrimental effect on people: see Senate Standing Committee for the Scrutiny of Bills, The Work of the Committee during the 38th Parliament May 1996-August 1998 (June 1999) p. 10.

  14. This practice has been criticised as treating Executive announcement of proposals, rather than the enactment of legislation by Parliament, as the creation of law: see Senate Standing Committee for the Scrutiny of Bills, The Work of the Committee during the 38th Parliament May 1996-August 1998 (June 1999) pp. 21-22.

  15. In the past, the Senate has called on the Government to explain delays, including a delay of 8 weeks beyond the 6 month time period in the case of the Taxation Laws Amendment Bill (No 2) 1997: Senate Standing Committee for the Scrutiny of Bills, The Work of the Committee during the 38th Parliament May 1996-August 1998 (June 1999) p. 23.

Contact Officer and Copyright Details

Katrine Del Villar
30 May 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 2000

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Published by the Department of the Parliamentary Library, 2000.

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