24 February 2011
Under s 81-5(1) of the GST Act, certain taxes, fees and charges imposed by the Commonwealth, States and Territories can be treated as the provision of “consideration” for a taxable supply unless specifically exempted under a Determination issued by the Treasurer under s 81-5(2).
The underlying principle behind the Determination was that commercial activities of government at all levels would be subject to GST, but non-commercial activities should be exempted. On this basis, the majority of taxes, fees and charges imposed by government were seen to relate to non-commercial activities, and so should be excluded from GST. Under the Intergovernmental Agreement on Federal Financial Relations, the various State, Territory and Federal governments agreed to the following set of principles to be applied when determining which Australian taxes, fees and charges would be exempted from GST:
On 11 January 2011, the Government released Exposure Draft legislation outlining a proposal to repeal and replace Div 81 of the GST Act with a “principles-based” model for exempting Australian taxes, fees and charges from GST rather than a six-monthly “shopping list” of exempt taxes, fees and charges in the Treasurer’s Determination.
The release of the Draft legislation followed the announcement made on 11 May 2010 as part of the 2010/11 Federal Budget. The Explanatory Memorandum accompanying the Exposure Draft suggests that the current law under Div 81 had become an administrative burden and had outrun its usefulness – understandable, given that the six-monthly Determination typically ran to almost 700 pages. What this means for government agencies is that self-assessment procedures must be put in place to ensure all their taxes, fees and charges are treated as exempt in accordance with the new principles rather than relying on the Treasurer’s list.
For government agencies and entities that regularly deal with them, the change will almost certainly lead to uncertainty regarding the GST treatment of various payments made to such agencies.
If the legislation is passed, then from 1 July 2011, the payment of any “tax (however described) imposed under an Australian law”, or the discharging of a liability to make such a payment, will not be treated as the provision of consideration to the government agency, unless the regulations provide otherwise. This effectively exempts any payment that can be seen as a “tax” from GST unless there is a specific regulation that treats it as consideration (back to the “shopping list”?)
Australian fees and charges are afforded a similar treatment, but only if they fall into the following categories:
Apart from these categories, government agencies will be required to self-assess the GST treatment of fees or charges in accordance with the principles outlined under the general GST rules in s 9-5 as well as Div 81.
Under s 9-5 of the GST Act, a supply will be a taxable supply if there is (inter alia) a “supply for consideration”. What is required therefore is firstly for the government agency to determine whether the payment is “consideration” – under the proposed amendments, the payment will not be treated as consideration unless specifically treated as such under the regulations.
Secondly, determine whether any “supply” has been made. Given the wide ranging nature of the definition of “supply” in s 9-10, this is perhaps the most troublesome step.
Finally, the government agency needs to determine whether the consideration has been provided in connection with, in response to, or for the inducement of that supply. This obviously requires an assessment of the connection between the payment on the one hand and the supply (if any) on the other.
The proposed amendments will affect every Commonwealth, State, Territory and local government department, agency or statutory corporation.
On the one hand, a move to self-assessment eliminates the need to regularly apply to have new taxes, fees or charges listed in the Determination, but on the other, there is a shift in the onus of determining the correct GST treatment of taxes, fees and charges onto the relevant government agencies.
It is therefore vital that government agencies review all revenue sources in the context of the new rules to determine whether (and to what extent) GST may apply to them. Some commentators for example believe that the proposed amendments appear to be narrower in scope than the principles that underlie the existing Determination - so it may be that some taxes, fees and charges may become subject to GST unless specific exemptions are sought or amendments made to the proposed drafting of the new Div 81. Government agencies should ensure that submissions are made in time to ensure that exemptions or amendments are put in place prior to finalising the legislation.
Even though the proposed amendments are set to apply from 1 July 2011, they will include a transitional period to ensure that taxes, fees and charges exempted under the current Determination will remain exempt until 1 July 2012, and will only need to be self-assessed under the new provisions after that date.
The decision in Hornsby Shire Council v FCT (2008) 71 ATR 442 illustrates the difficulty associated with classifying relatively common transactions, such as a compulsory acquisition of land.