9 June 2009 - 14 September 2010
Further Reductions in GST Compliance Costs for Business
The Government will reduce compliance costs for businesses through a package of GST reform measures to help business owners spend less time wading through red tape.
"These measures will reduce the number of non-residents that need to be involved in the GST system and, protect the GST base," said the Assistant Treasurer, Senator Nick Sherry.
The key components of the plan are:
- restructuring the margin scheme provisions. These are currently a way of working out the GST payable when you sell property as part of your business. This will clarify and simplify the rules and ensure greater certainty for taxpayers on issues surrounding the use of valuations;
- significantly increasing the threshold above which businesses need to interact with the financial supply provisions from $50,000 to $150,000 of input tax credits delivering compliance savings for many more small businesses;
- introducing measures to protect the GST base by reducing opportunities for businesses to inappropriately take advantage of the reduced input tax credit concessions by bundling services; and
- allowing small businesses accounting for GST on a cash basis to claim input tax credits upfront in relation to hire purchase arrangements. This change will significantly assist those businesses that have been forced into higher cost chattel mortgages following the introduction of the GST.
These reforms are expected to have a small positive impact on GST revenue collections, which will benefit the States and Territories, but will result in a small reduction in Commonwealth income tax collections.
"Australian businesses showed great resilience during the global recession in keeping their doors open and people in work," said the Assistant Treasurer.
"These reforms are about delivering on the Rudd Government's commitment to making the day to day lives of businesses easier."
The reforms are the result of three reviews into specific aspects of the GST announced in the 2009-10 Budget following recommendations by the Board of Taxation's Review of the Legal Framework for the Administration of the GST.
Examinations of the margin scheme and financial supply provisions were undertaken by Treasury and a review of the application of GST to cross-border transactions was conducted by the Board of Taxation.
The Assistant Treasurer also released the Government response to the Board of Taxation review.
"I am pleased to be able to announce tonight that the Government has accepted the Board's recommendations on cross-border transactions," the Assistant Treasurer said.
"Taken together, the Board's recommendations will simplify the design of the GST cross-border rules."
"They will improve the balance between ensuring Australia's GST system does not unnecessarily draw in non‑residents and ensuring the existing GST tax base is maintained."
There will be no reduction in GST revenue as a result of implementing the package of measures. Instead, there is expected to be a very small positive impact on GST payable due to the financial services changes.
In relation to recommendation five the Government will be looking at approaches which do not impose an excessive compliance burden or revenue risk on Australian suppliers.
Further details concerning the Treasury reviews are attached and a copy of the Board's report can be found at www.taxboard.gov.au.
Agreement of the States and Territories will be required to implement some of these changes. Subject to this agreement, the package of GST reform measures will apply from 1 July 2012.
11 May 2010
Findings of Treasury's review of the GST margin scheme
The Government announced on 12 May 2009 that it had asked Treasury to review the operation of the GST margin scheme. The review resulted from a Board of Taxation recommendation in its Review of the Legal Framework for the Administration of the GST. The review examined the effectiveness and efficiency of the margin scheme in achieving its policy intention.
The Treasury invited the public to comment on whether the margin scheme was meeting its objectives and what improvements would streamline its application and further reduce compliance costs while maintaining the integrity of the GST. To facilitate discussion, the Treasury issued a consultation paper.
In response to the consultation paper Treasury received seven submissions and undertook additional consultation with selected parties. Both the consultation paper and all public submissions (six) are available from www.treasury.gov.au.
For the most part, while acknowledging that there were some difficulties with the current margin scheme regime, those directly impacted did not support wholesale changes in the absence of significant benefits. Submissions did not support restating the margin scheme in terms of a set of principles. While some did support a move to a notional input tax regime, they accepted that this may involve significant transitional costs. Most submissions favoured addressing some specific gaps or compliance difficulties that have arisen under the existing margin scheme.
The majority of industry's specific concerns relate to 'over-taxation' under the existing margin scheme rules. This covers both instances where too much tax is paid and instances where, although the right amount of tax may be paid overall, tax is borne by a registered entity without 'input tax relief' for a prolonged period of time. Proposals that have been raised by industry that fit within this category include that:
- A decreasing adjustment should be available to an entity that, broadly, does not apply the margin scheme to a supply of property that it acquired under the margin scheme.
- An entity that acquires property after 1 July 2000 should, if it is not registered or required to be registered for GST at the time of its acquisition, be able to use the value of the property as at the date it becomes registered or required to be registered as its 'cost base' for margin scheme purposes.
- A decreasing adjustment should be available if an entity sells property at a loss (that is, if its margin is negative).
- Special relief should be available for partitioning. Partitioning, which although raised as an issue in one submission because it gives rise to complexities in accounting, is also an issue because it requires GST to be brought to account sooner that it otherwise would have to be in cases where the acquiring entity wishes to preserve its entitlement to use the margin scheme. The acquiring entity would have to 'carry' the GST payable under the margin scheme until such time as it on-sells the property (at which point input tax relief is effectively built into the calculation of its margin).
- Special relief should be available for tax law partnerships and any other scenarios where an entity may not have a cost base or may have a cost base that is lower than it should be.
Additionally, industry has previously raised carrying costs as a significant issue.
Other than over-taxation, industry's other concerns related primarily to:
- system complexity, which forms part of the reason for some submissions supporting consideration of a (theoretically) simpler upfront notional input tax credit regime; and
- the subjectivity of valuations and the likelihood that this will lead to disputes.
The Government canvassed a range of options aimed at achieving the desired policy outcomes underlying the existing margin scheme in a simpler and more efficient way, including replacing the existing scheme with a set of principles (not supported by any submissions) and considering completely new approaches to delivering similar policy outcomes (again, not supported by most submissions). There was a general consensus from submissions that specific concerns with the margin scheme could be addressed through further amendments to the existing legislative framework.
It is the Government's view that in order to address industry's concerns within the existing legislative framework, additional rules would be required to, amongst other things, provide for decreasing adjustments in certain instances, new valuations dates and, potentially, new methods for working out cost bases in certain scenarios. Each of these rules is likely to increase complexity for taxpayers, tax practitioners and the Australian Taxation Office (ATO). They would involve significant additional revenue costs.
The current policy contains a number of trade-offs where what might appear to be the desirable policy outcome in relation to the amount of tax collected is foregone in favour of simplicity and integrity considerations. Addressing these 'gaps' would not necessarily lead to a more effective regime but rather an unwinding of existing trade-offs, for example such that the objective of collecting the 'right amount' of tax in the relevant instances is placed ahead of simplicity and integrity considerations.
In weighing up these factors it was decided that the costs and risks to revenue integrity associated with addressing these gaps would outweigh the potential benefits, result in more rather than less complex legislation and place additional information needs on taxpayers which may be commercially difficult to obtain.
However, the Government has agreed to the following changes which will clarify the law and simplify compliance and reduce the potential for disputes between taxpayers and the ATO:
- restructuring the margin scheme provisions to give prominence to the main principles with exceptions set out separately and insert objects clauses for the key provisions so that the intention is clear; and
- implementing a minor technical amendment, effective from 1 July 2012, to remove an anomaly to allow an approved valuation of the land to be used for the purposes of calculating the margin on subdivided land.
In relation to margin scheme valuations, it is important that taxpayers have certainty in the application of the tax law. The ATO has made significant changes to its approach following issues raised by taxpayers and in response to the Inspector-General of Taxation's Review of the Tax Office's administration of GST audits for large taxpayers (July 2008). These measures will reduce the current uncertainty for taxpayers.
Changes to the interaction of tax law partnerships with the margin scheme rules are being addressed as part of the Government's earlier response to the Board of Taxation's recommendation on the administration of the GST.
The Government will consult further with interested parties on implementing the changes proposed above.
Findings of Treasury's review of the financial supply provisions
The Government announced on 12 May 2009 that it had asked Treasury to review the application of the GST to financial supplies. The review flows from a Board of Taxation recommendation in its Review of the Legal Framework for the Administration of the GST.
This financial supplies review was designed to explore opportunities to simplify the operation of the legislation and reduce compliance and administrative costs whilst retaining the existing policy intent.
Treasury invited the public to comment on how this could be achieved while maintaining the integrity of the existing GST. To facilitate discussion, Treasury issued a consultation paper on 12 May 2009.
As noted in Treasury's paper, the GST generally aims to tax final private consumption in Australia. Consistent with this principle, consumption of intermediation services and other benefits provided in the making of financial supplies should be taxed. However, for various policy and/or administrative reasons, exceptions exist. The GST treatment of financial supplies is an exception and similar special treatment is a general feature of Value Added Tax (VAT) systems around the world.
The special treatment exists largely because the invoice‑credit model has technical problems in taxing such supplies. In the absence of being able to tax the value added of a financial transaction the GST adopts a 'second best' approach of denying credit for GST on the inputs into the financial supply, hence financial supplies are input taxed.
Input taxation, however, is inefficient, resulting in tax cascading and adds complexities which increase compliance and administrative costs.
A limited number of exceptions to the general rule of input taxing financial supplies have been included in Australia's GST law to address some of the inefficiencies that arise from input taxation. They aim to reduce complexity for small businesses and those businesses that make only a small proportion of financial supplies. For these taxpayers, the circumstances in which they must deal with the complex financial supply provisions have been limited.
- Taxpayers may be able to claim reduced input tax credits (RITCs) of 75 per cent for a number of acquisitions even when these acquisitions are related to financial supplies. The items for which RITCs are available are set out in the GST Regulations. They include services that financial institutions typically outsource.
- Entities that only make a small proportion or dollar amount of acquisitions related to financial supplies are excluded from the complexities of the input taxed financial supply regime by the financial acquisitions threshold (FAT).
- An exception also exists for businesses from the denial of input tax credits related to the supply of a borrowing where the borrowing is used to facilitate taxable or GST-free activities.
In response to that consultation paper Treasury received sixteen submissions and undertook additional consultation with selected parties. Both the consultation paper and all public submissions (fourteen) are available from www.treasury.gov.au.
There was a clear consensus in both the submissions received and subsequent consultations that affected taxpayers did not favour significant reform to the existing legislative framework for financial supplies. Submissions suggested that, after almost ten years of operation, the current legislation and its general application is generally well understood and compliance with the law is being maintained at an acceptable cost. It was thought that significant changes to the legislative framework could lead to uncertainty, confusion, distortions and an increase in compliance costs, particularly associated with any transition to a new legislative structure.
Submissions focussed instead on identifying specific concerns with the financial supply provisions, including:
- clarifying and simplifying the operation of the GST in a number of situations;
- the operation of the financial acquisitions threshold (FAT); and
- the range of acquisitions that are eligible for a reduced input tax credit (RITC).
In terms of the RITC rate, there was general support for keeping a single rate as submissions suggested multiple rates would increase complexity and add to administrative and compliance costs. While there were some mixed views on the rate, most submissions suggested keeping the current rate of 75 per cent, describing it as 'adequate'. Finally, submissions suggested incorporating the policy intent into the provisions in order to assist with interpretation, as well as moving the financial supply provisions out of the regulations and into the principal GST Act.
The underlying policy in the treatment of financial services is to input tax supplies where the consideration cannot be readily determined and to apply similar treatment to other equivalent or incidental services to maintain competitive neutrality.
The Government has agreed to maintain the current architecture of the financial supply provisions, but it will make the following changes which will clarify the operation of the legislation and reduce compliance and administrative costs, particularly for many small businesses.
- The financial acquisitions threshold (FAT) input tax credit test will be increased from $50,000 to $150,000, enabling many more small businesses to avoid being caught up in the financial supply regime. This is the first increase in this threshold since the GST was introduced 10 years ago.
- The treatment of hire purchase agreements will be simplified by removing the need to apply different GST treatments to different parts of the one supply. By treating the whole supply as taxable, taxpayers will no longer have to account for part of the supply as taxable and the other part as input taxed.
- The attribution rules for hire purchase arrangements will be made the same for both cash and non-cash GST taxpayers. This change should significantly advantage small businesses operating on a cash basis that have been forced into higher cost chattel mortgages following the introduction of the GST.
- The current special rules for borrowings will be amended to exclude bank deposit accounts.
- The range of expenses qualifying for a reduced input tax credit (RITC) will be expanded to:
- include acquisitions related to supplies of life insurance by superannuation funds to their members;
- clarify that RITCs are available for lenders' mortgage reinsurance as well as lenders' mortgage insurance; and
- add a new item covering transactional fraud monitoring services.
- The current reduced input tax credit (RITC) rate of 75 per cent will be retained.
- The provisions allowing a RITC for trustee and responsible entity services will be amended to protect the GST base by preventing these provisions being used to allow RITCs for all acquisitions.
- A technical amendment will be made to clarify the language and relationship between various concepts (guarantees and indemnities).
The Government will consult further with interested parties on implementing these changes. It is anticipated that these measures will take effect from 1 July 2012.