8 March 2010 - Draft legislation on GST and cross border transport supplies – submission lodged 
 
The Institute has lodged a submission with Treasury on the exposure draft legislation and exposure draft explanatory memorandum in relation to GST and cross border transport supplies. 
 
The measures in the draft legislation are intended to reduce the involvement of non-residents in the Australian GST system, improve consistency in the GST treatment of postal and non-postal containerised goods, and assist domestic sub-contracted transport suppliers with GST compliance. 
 
The Institute’s submission on the ED raises the following key points, which are broadly consistent with the International Transport industry’s views and recommendations:

• The amendment to the definition of “place of consignment” for inbound transport should be expressed as: “the final destination in Australia, as required under the contract or arrangement for the international transportation of the goods”, so that it operates by reference to the contractual terms.
 

• In addition to “loading and handling”, the further associated service of “customs clearance” should be included as GST-free, being a necessary part of the international transport process. To simplify the drafting, the associated services of “loading, handling and customs clearance” should be included under a stand-alone item (new item 8) in proposed ss38-355(1). Further consequential amendments should also be made, in particular:
  • the value of taxable importation (VoTI) should be amended to include loading, handling and customs clearance charges covered by new item 8; and
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  • the definition of “international transport” should be amended to remove all reference to “loading and handling”.
   
  
• The amendments should apply from 1 July 2000, the date from which the Commissioner contends that the relevant supplies were taxable, so as to ensure that significant GST primary tax and compliance burdens do not become a cost to Australian businesses.

• Schedule 1 – GST groups and GST joint ventures (including Indirect Tax Sharing Agreements)  
  
• Schedule 2 – Rulings  
  
• Schedule 3 – Tax invoices

• The Institute supports the following initiatives:
   
  
  • allowing the formation and variation of GST groups to occur by agreement between the parties with notification to the Commissioner rather than only at the approval of the Commissioner as is presently the case;  
    
  • allowing grouping on any day rather than at the end of tax period; and  
    
  • introducing clean exit rules to avoid commercial uncertainty surrounding GST (Wine Equalisation Tax and Luxury Car Tax) obligations in the acquisition of companies that have a history of being members of other groups;
 
however, we offer a number of recommended changes to the ED to improve the certainty and clarity of the operation of the proposed amendments. 
 

• The Institute supports the adoption of a broader rulings regime and the Institute’s earlier submissions are to that effect, however the proposed measures relating to the transition to the new regime and its application to transaction taxes, such as GST, have a number of shortcomings that need to be addressed.  
  
• The Institute welcomes the proposed amendment to replace the current prescriptive tax invoice requirements with a more flexible approach. In particular, we welcome proposals to:
   
  
  • outline the critical information to be conveyed in the relevant document(s); and  
    
  • allow a collection of documents to together constitute a tax invoice;
 
and we make suggestions on a number of further amendments to remove any ambiguity between the law and the regulations.

• Allowing entities to self-assess their eligibility to form, alter or revoke a GST group or joint venture and to do so at any time during a tax period;
 

• Introducing clear exit rules for entities leaving GST groups or joint ventures;
 

• Expanding the income tax rulings system to include indirect taxes; and
 

• Reforming the tax invoices rules.

1. Schedule 1 – Attribution of input tax credits (ITCs); and
 

2. Schedule 2 – Adjustments for third party payment

• Clarifying the input tax credit attribution rules; and
 

• Introducing GST adjustments for third party payments.

• The entire adjustment regime should be collapsed into a single division based on the refined objectives and principle  
  
• The monthly or quarterly BAS lodgments might be recast as 'instalments' for the annual assessment in the same way as PAYG instalments operate for income tax purposes
 

• Registered entities be permitted to nominate another entity or person to account for GST or claim input tax credits on their behalf where to do so enhances the simplicity and purpose of collection of the tax
 

• The Institute maintains its established view that all trusts, regardless of whether or not they are bare trusts, should be treated in the same manner, however, if the proposal proceeds as planned, greater clarity be given to the issue of agency as well as greater clarity to which trusts are impacted and which are not. It is suggested that this may be a narrow class of circumstances that the taxpayer may effectively elect out where applicable.
 

• The Taxation Administration Act 1953 (TAA) provisions should be recast to ensure that the TAA contains an exclusive code under which refunds can be claimed without reference to the running balance account provisions
 

• The Institute supports the principle that non-profit sub-entities access the same concessions as the parent.
 

• An adjustment to output tax and input tax credit arise where an incorrect classification of the taxable status of a supply has occurred and the wrongly collected GST is refunded to the recipient and where there is no return of the GST to the customer, the Commissioner be empowered to restrict the refund of overpaid GST in circumstances where it is appropriate. The exercise of the discretion to refuse a refund should be a reviewable decision.

• Limiting claims for input tax credits and fuel tax credits to four years
 

• Introducing a bulky goods export refund scheme for Australian External Territory residents
 

• Expanding the GST rules for transactions undertaken by agents
 

• Clarifying how the GST law applies to offshore gambling transactions
 

• Clarifying the Commissioner's power to recover overpaid refunds
 

• Clarifying the interaction of the GST associate provisions
 

• Increasing the adjustment note threshold.

• The Institute recommends that at some point in the future there is a need for a more comprehensive review of the GST treatment of financial services to determine whether the existing structure promotes efficiency and enhances Australia's international competitiveness
 

• Fundamentally, the Institute is of the view that input taxation should not be a feature of the GST treatment of financial services in Australia. Accordingly, the Institute's submission supporting limited reform of the existing regime should be read with this overarching qualification in mind  
  
• Broadly, the Institute supports amendments to the existing law to reflect the underlying policy of a narrow scope of input taxation of financial intermediation services including the reduced input tax credit (RITC) regime
 

• In addition to the structural and interpretative suggestions the Institute believes that there are a number of specific aspects of the law requiring amendments to overcome anomalies and inconsistencies
 

• In response to certain questions posed in the consultation paper, the Institute does not support:
• The replacement of the existing provisions with legislation based purely on 'principles based drafting'; or
 

• The taxation of explicit fees and commissions along the lines of the South African VAT legislation
 

• The Institute supports the RITC policy and the mechanism of a single rate RITC to achieve the underlying policy objective
• It is worth pointing out that since the introduction of the GST regime in July 2000, significant investments have been made by businesses in establishing and maintaining compliance systems and in determining the pricing of products based on the interpretation of the current financial supplies legislative framework. Therefore, any decision by the Government to introduce major structural changes, may bring with it a considerable transition cost for businesses which would need to be carefully balanced against longer-term benefits of such changes.

• The current margin scheme does not achieve its intended policy objectives in a number of important respects as it is complex, inflexible, and heavily reliant on "approved valuations", resulting in on-going uncertainty for taxpayers, compliance difficulties, and cascading GST.
 

• Retention of the current margin scheme approach and seeking to amend the law is not likely to resolve many of the fundamental challenges posed by the margin scheme, nor will it deliver the desired level of certainty for taxpayers and advisors.
 

• The Institute's preferred approach is to replace the margin scheme with a notional input tax credit, similar to the existing New Zealand model, available at the time land is first introduced into the GST system, subject to specific integrity rules on quantum and timing.
 

• Appropriate specific rules would need to be included to ensure the integrity of the revenue base is maintained for both 'associate' and arm's length transactions through the use of "market value" cost base rules. Carefully designed transitional rules to address all relevant scenarios would also be required to ensure a smooth implementation of the notional input tax credit.

• removing the complexity and room for dispute around valuations;
 

• allowing greater flexibility in the margin scheme mechanism to prevent cascading of GST for integrated/mixed use developments; and
 

• including additional "market value" cost base rules to tax only the value added by registered entities.

• Implementation of the recommendations of the Board of Taxation's review of the legal framework for the administration of the GST (the Implementation paper); and
 

• GST and Cross-Border Transport Supplies (the Cross-border paper).

• The Government has asked the Board of Taxation to undertake a review of the application of the GST to cross-border transactions to simplify the GST law and reduce the number of non-residents brought into the GST system. The Board is to report to the Government by 28 February 2010. No consultation paper has been released on this review as yet. A Cross-border transport supplies discussion paper, outlining the proposed amendment of the GST law relating to the domestic transport of imported and exported goods has been released and is on Treasury's website. Closing date for submissions on this discussion paper is Wednesday 17 June 2009.
 

• Treasury is also undertaking reviews of the GST margin scheme and the application of GST to financial supplies. These reviews are designed to simplify the operation of the legislation and reduce both compliance and administrative costs whilst retaining the existing policy intent. Refer to the Margin scheme consultation paper and the Financial supplies consultation paper on Treasury's website. Closing date for submissions on both of these consultation papers is Friday 31 July 2009.