Chapter 2 Analysis of the Bill
The only stakeholder to raise concerns about the Bill was the Institute
of Chartered Accountants in Australia (ICAA). The ICAA’s submission covered the
amendments of the GST treatment of hire purchase (Schedule 3(3)) and the
reversal of the Full Federal Court decision in Gloxinia Investments. These
issues are discussed below.
Schedule 3(3) – the GST treatment of hire purchase
Division 156 of the A New Tax System (Goods and Services Tax) Act
1999 covers supplies and acquisitions made on a progressive or periodic
basis. This currently covers hire purchase arrangements. Section 156-25
provides that the Division does not apply if a taxpayer accounts on a cash
The Bill seeks to insert section 156-23 into the Act, stating that
Division 156 does not apply to hire purchase. It also seeks to insert Division
158 to specifically cover hire purchase, stating that taxpayers who account on
a cash basis are treated as not accounting on a cash basis for the purposes of
the Act and regulations for these agreements. The implication is that cash
accounting taxpayers will be able to obtain input tax credits up front from the
interaction of this new Division with other provisions in the tax law.
However, the ICAA expressed concern about the provisions because they
implement the policy intent through other provisions in the tax law, rather
than by explicit statement. For example, the ATO has
issued a ruling of its interpretation of the general attribution rules that a taxpayer
who accounts for GST on an accruals basis can claim input tax credits up front
for hire purchase. However, the Institute has
stated that this interpretation is open to question:
... there seems to be a doubt, just on the basis of the law
that we have, as to whether this is the supply of credit as well as the supply
of goods, in which case there would be two supplies being made for different
prices. In the institute's view, the operation of the general rule about when
the GST on those two supplies is payable is open to question. It depends when
the part of the consideration is paid for each of the parts of the supplies.
The Institute also raised the question of how GST for hire purchase
would interact with the luxury car tax, in particular whether the GST-inclusive
price of the supply of credit would inadvertently increase the value of a car
for the purposes of luxury car tax:
When we get to the luxury car tax and the credit limitation
issue we have to work out for the purpose of luxury car tax, and for the
limitation on input tax credits for luxury cars, what the price of the car is.
It takes us back to the question of whether this is a supply or two supplies.
Without something clear in the law to say that, it seems to me, as a matter of
the legal form of a contract, the price of the car is the 60 monthly payments,
including the interest component, which would mean the luxury car tax could be
As the Institute noted in the hearing, this depends on whether hire
purchase is treated as one or two supplies, in the former case a supply of
goods by way of hire, or in the latter case a supply of goods and a supply of
credit. Although this relates to the regulations, rather than the Bill, it warrants
discussion due to the coverage it received in the hearing and its relevance to
the GST treatment of hire purchase generally.
In response to the Institute’s position that the interpretation of the
GST law in relation to hire purchase is uncertain, Treasury responded that the
ATO is satisfied with its approach. Treasury also stated that the sorts of
changes that the Institute have been canvassing are wide ranging, yet the
industry feedback in the Treasury’s Review of the GST financial supply
provisions favoured refinement over fundamental reform. Further, the bodies
representing the hire purchase and equipment leasing industries fully support
the provisions at an operational level:
... the sorts of changes that Mr Evans is seeking probably go
to the fundamental core of our GST, and the government is probably not in a
position to have a complete, wholesale revision of our existing GST law. I do
not think it is simply a matter of a couple of words in the legislation to deal
with that issue.
Secondly, my advice is: the commissioner is comfortable
administering the law as it is. He believes he has the necessary backing, in
the combination of the legislation and the regulations, to deal with his
existing interpretation and, as I said, to date that has not been challenged in
the courts. As I have said before, the other people at the operational level,
who are issuing and dealing with taxpayers and providing hire purchase
agreements, fully support the legislation as it currently stands.
Treasury’s comment that the amendments have industry support were
corroborated by the industry itself. The Australian Finance Council and the
Australian Equipment Lessors Association stated in their submission:
The equipment finance industry was delighted when in the
2010-11 Budget the Government announced its intention to amend the financial
supply provisions of the GST law, allowing full input tax credits upfront for
businesses accounting on a cash basis when they enter into hire purchase
This is a significant tax reform measure. It will address the
adverse consequences of the current tax treatment of hire purchase, which has
created a tax inefficiency which has driven taxpayers to other finance
products. As such, this amendment enhances the integrity of Australia’s GST
In relation to the question of whether there will be one or two supplies
under hire purchase and whether the supply of credit would increase the value
of a car for the luxury car tax, Treasury stated in evidence that this was a
matter for the regulations, in particular that:
... we will attempt to address some of the uncertainty that
the ICAA are raising in the context of the regulations, where we can give more
emphasis to the separate supply nature of the provisions.
On 13 January 2012, the Government released exposure draft regulations
amending the A New Tax System (Goods and Services Tax) Amendment Regulations
2012. Items 2 and 3 in the draft regulations provide that hire purchase
arrangements will not be financial supplies, so both components of a hire
purchase transaction will be fully taxable and administratively easier for
operators. Making hire purchase
transactions fully taxable for GST does not increase the tax burden for
operators because the transactions are business to business and they receive
input tax credits for the amounts involved. In relation to the luxury car tax,
the Explanatory Memorandum to the draft regulations features an example of how
the new provisions will operate. It states that the GST-inclusive price of the
supply of the car is not included in calculations for the luxury car tax.
The committee is confident that the Bill will deliver its policy intent
in relation to hire purchase. The ATO has taken the view that its
interpretation of the GST for hire purchase is supported by the legislation and
there has been no court challenge to date on this point. Further, the recently
released Explanatory Memorandum on the draft regulations make clear that there
will be no inadvertent consequences with the luxury car tax. Schedule 3(3) can
proceed as drafted.
Schedule 4: GST on new residential premises
ICAA expressed its support for the overall intention of the amendments,
which was to restore the general state of the law following the outcome of the Gloxinia
Investment case. However, ICAA qualified this support by setting out
several reservations. Firstly, ICAA was concerned by the Bill’s very specific focus.
In their submission, they referred to the fact that previous amendments to the
GST have tended to be narrowly prescriptive and required subsequent amendment.
In the ICAA’s own words at the hearing:
Our view comes from an acceptance of the stated policy and
the policy reiterated in Gloxinia that the sale of newly constructed premises
should be subject to full GST when they go into consumption. We accept that it
appears that the proposed response to the deficiency highlighted in Gloxinia
only addresses the Gloxinia situation, yet it is still stated that the policy
intention is that newly constructed residential premises will be subject to
full tax. If the policy is that that will only apply in the circumstances of
Gloxinia, then we could have no complaint with these amendments.
Secondly, the ICAA were concerned that the Explanatory Memorandum of the
Bill had introduced other matters that would also have broader implications for
the administration of the law. In particular the Explanatory Memorandum stated
that the treatment of barter transactions between developers and Crown agencies
granting long-term leases would be taxable and creditable (for example, in
infrastructure projects). This had not been announced in the press release of
27 January 2011. The ICAA advised the
committee that the treatment of ‘barter transaction within the Explanatory Memorandum
is inconsistent with the way the commissioner had administered law until he
withdrew the law in 2008 and was not a matter that was addressed in the press
release of 27 January’.
In their testimony before the committee, the Treasury advised that
schedule 4 of the Bill was solely intended to address the specific facts of Gloxinia
Investments. They acknowledged that
the circumstances in the Gloxinia Investment case were only one example
where the GST may not be applicable. They also acknowledged that the amendments
in the Bill might not necessarily address a range of other circumstances where
GST should be applied in line with the policy intent. Treasury representatives
explained their position as follows:
The purpose of the amendments is to restore the intended
policy outcome concerning new residential premises that arises from the
decision of the full Federal Court in Gloxinia ... We believe that they are
fairly widely supported by stakeholders in the form that they have been
contained ... Treasury considered a broader principled change in response to
the Gloxinia decision. We put that out for public consultation in the Treasury
discussion paper released earlier in the year. Most submissions did not support
the broader approach that the institute has proposed ... Treasury did not feel
satisfied that the wider approach would address the issue without having a
wider change of policy and potential revenue implications.
In relation to barter supply and projects sponsored by Crown agencies,
Treasury explained that the treatment of barter transactions had been carefully
considered, following liaison with the Property Council of Australia. The
inclusion of barter transactions in the Explanatory Memorandum was intended to
ensure the clarity regarding the implications of the amendment for such
Treasury also acknowledged that there was a risk that the Bill might not
prevent future litigation, but this needed to be understood within the correct
context. The GST remains a new tax compared with older taxes such as the income
tax. Therefore the law is less settled and litigation does occur. As Treasury
advised the Committee at the hearing:
The GST is a relatively new law, having been in place for 11
years, compared with our income tax, which has been a much more settled system.
In recent years we have had many cases coming before the courts to test that
new law, so it is certainly possible that there will be additional matters that
will arise in the future with new areas of the law. Those certainly cannot be
The committee expects that Schedule 4 will ensure that taxpayers in the
same circumstances as in Gloxinia Investments will pay GST on new
residential premises in line with the policy intent. The proposal in the Bill has
been subject to thorough consultation. The alternative proposed by ICAA, namely
more fundamental reform, was rejected by stakeholders and potentially had wider
revenue implications. The Bill contains a practical solution and it has the
The Bill has a number of components, some of which received express
endorsement in submissions. The provisions on the electronic portability form
create a system whereby super fund members will be able to electronically
request the consolidation of their super through the ATO. This will assist
individuals who are reunited with their superannuation funds in consolidating the
Many of the provisions for CGT and business restructures are beneficial
to taxpayers. For example, under current law, taxpayers can obtain a CGT
roll-over for a capital gain or loss that arises from their interest in a
company or trust because of the demerger of an entity from the group of which
the company or trust is the head entity. However, this is not available where
the head entity is a corporation sole or complying superannuation entity.
Schedule 2(2) of the Bill makes this roll-over available for these types of
The GST and hire purchase amendments remove a tax-induced distortion
between chattel mortgage and hire purchase. Under current law, chattel mortgage
is more attractive because the GST input tax credits are up front for small
businesses that use cash accounting for GST, whereas they are only available on
a payment basis under hire purchase. Small businesses now rarely use hire
purchase for this reason, despite its other advantages over chattel mortgage.
The Bill also reduces compliance costs for small business by increasing
the financial acquisitions threshold from $50,000 to $150,000. If a small
business makes financial acquisitions below this amount, then it is outside the
financial supply regime and can claim input tax credits for its financial
supplies. Increasing this threshold takes more small businesses outside the
financial supply regime and allows more businesses to claim input tax credits
on their financial supplies.
The amendments for GST and new residential premises will reverse the
effect of the court case Gloxinia Investments, which found that, where a
particular combination of strata titles and leases were involved, newly
constructed residential premises were not subject to GST. The Bill will
re-affirm the policy intent that newly constructed homes should be subject to
GST. They will also protect the revenue that funds Government services that
assist the whole community. The Bill overall comprises measures that are important
refinements to the tax system.
The ICAA was the only stakeholder to raise concerns about the Bill.
These were the provisions to enable businesses acquiring assets through hire
purchase to obtain their GST input tax credits up front and the provisions to
reverse the effect of the recent court decision of Gloxinia Investments.
The ICAA’s concerns related to whether the provisions would implement the
policy intent, rather than the policy itself.
Despite the ICAA’s comments, there are several reasons why the
provisions in the Bill are the best available solution. For example, in
relation to hire purchase, the ATO believes it has sufficient legislative basis
for its interpretation and there have been no court actions disputing them.
Further, in consultations in the review of GST and financial supply,
stakeholders rejected the more fundamental reforms of the GST implied by ICAA’s
submission. Finally, the equipment finance industry itself is ‘delighted’ with
In relation to GST for new residential premises, the ICAA has again
suggested a wider reform than that supported in consultations. Treasury has
noted that there is a risk of further court action in this area if the Bill
proceeds, but this is part of bedding down what is still a relatively new tax.
After scrutinising Treasury and the ICAA, and noting the many positive measures
in the Bill, the committee is of the view that it should proceed unamended.
||That the House pass the Tax Laws Amendment (2011 Measures No. 9) Bill 2011 as proposed.
Julie Owens, MP
7 February 2012