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| Second-hand goods revisited |
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Contact: Paul Stacey
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Since we first discussed the GST treatment of second hand goods in GST Today , Issue 6, April 1999, there has been significant legislative change in this area. Some of the amending provisions rectify legislative oversights identified in our earlier article. Others are intended to ease the administrative burden imposed on second hand dealers by the original scheme. Others impose additional compliance obligations. All are discussed below.
Before commencing we refer subscribers to article [6.4] which explained the commercial difficulty Division 66 of the GST Act is intended to alleviate. That commercial difficulty remains. The article also explained the key features of the Division 66 deemed input tax credit scheme. Those key features also remain. We do not repeat that earlier discussion in this article.
Rectifying amendments
In [6.4] we noted that the Federal Government intended that the attribution rules should operate differently for the purchase of second hand goods for greater than $300 and those for $300 or less. It was intended that where the second hand goods dealer purchased trading stock for $300 or less it could claim the deemed input tax credit immediately. However, there was nothing in Division 66 to effect that intention. The Government has now enacted amending provisions to overcome that defect.
The Government has also amended the definition of secondhand goods to exclude "animals or plants". The need for the amendment arose from the manner in which Division 66 is drafted. That is, it is drafted by reference to "second hand goods" rather than "second hand dealers", the intended beneficiaries of the division.
Therefore, if the definition of second hand goods is too loosely drawn there may be unintended beneficiaries. This was the case with the old definition. For example, prior to this amendment a business purchasing livestock from an unregistered supplier could potentially claim deemed input tax credits on the purchase under Division 66.
Another potential abuse identified by the Government was the possibility of using Division 66 to reduce the net GST liability on capital sales. This could occur where a business purchased a capital asset from an unregistered entity which it then on-sold. That business could then claim deemed input tax credits under Division 66 to reduce its GST liability on the capital sale.
Again, this "risk" was a function of the way Division 66 is drafted. Section 66-5 makes the purchase of second hand goods a creditable acquisition, unless it falls within one of the exclusions. Whilst there is an exclusion for acquisitions which are not applied in making taxable supplies, there is no exclusion for acquisitions to be applied in making capital sales. However, under GST the distinction between capital and revenue sales generally does not exist. A capital sale may well be a taxable supply - hence the above scenario.
The Government therefore acted to reduce this risk by amending section 66-5 so that only acquisitions of second hand goods that will be used as trading stock will be creditable acquisitions.
However, the Government has also relaxed the requirement that the purchase of second hand goods occur after 30 June 2000. A second hand dealer will now be able to claim deemed input tax credits on trading stock which it purchased before 1 July 2000.
Compliance easing amendments
Division 66 will help second hand dealers. However, it will also impose an additional GST compliance burden. This additional burden is twofold.
- Second hand dealers must track goods acquired for more than $300. This is to ensure that their deemed input tax credits are claimed in the correct GST period, namely the period in which the goods are sold.
- Second hand dealers must apply two different deemed input tax credit attribution rules - an immediate and a deferred attribution rule. The immediate deemed input tax credit rule applies to goods acquired for $300 or less. The deferred deemed input tax credit rule applies, as noted above, to trading stock acquired for more than $300.
In order to ease this burden the Government has introduced two new measures:
- an option to use a single deferred deemed input tax credit attribution rule; and
- a pooling system for goods that are purchased in lots or for disassembling.
Single deferred attribution rule
The first measure removes the need for a second hand dealer to apply two different deemed input tax credit attribution rules. Instead, a dealer can opt to apply only one rule - the deferred input tax credit attribution rule. Under section 66-15 dealers can choose not to claim immediately the deemed input tax credit on purchases of less than $300. Instead they can choose to claim those deemed input tax credits when the goods are sold.
However, this measure does nothing to alleviate the need to track purchased goods in order to claim deemed input tax credits in the correct period. In fact, it makes that burden more onerous as dealers choosing this option will have to track:
- more rather than fewer goods; and
- goods which are harder to track due to their small ticket nature.
If the Government had been serious about reducing this compliance burden on dealers it would have allowed them to use the immediate rather than deferred attribution rule for all relevant purchases. This would have not only removed the need to use two attribution rules but would also have done away with the need to track the purchases - the latter being the more onerous burden.
The reason the Government didn't choose this other option is obvious. It would involve giving a cash flow advantage to dealers and an equal and opposite cash flow disadvantage to the Government. The Government may also have considered it against the spirit of section 11 of the A New Tax System (Commonwealth-State Financial Arrangements) Act . This provision requires any changes in the GST base to be consistent with, among other things, minimising compliance costs for taxpayers.
As is, the Government has enacted a provision which is largely a meaningless gesture. This should be weighed against the extension of the Division 66 deemed input tax credit provisions to trading stock acquired before 1 July 2000. That will be of significant benefit to second hand dealers.
Pooled system
In [6.4] we gave the example of Peter, a second hand dealer who purchased 300 books in a single lot for $1,500. Under Division 66 he has to calculate the deemed input tax credits attributable to each book on a pro-rata basis and then track each book so that its related deemed input tax credit can be claimed in the GST period in which the book was sold. The pooling system enacted in Subdivision 66-B will partially end this administrative nightmare.
Under the pooling system Peter will not have a GST liability on the sale of any of the books until the total input tax credit on the purchase of the book lot is exhausted. The pooling system does away with the need to match deemed input tax credits against a GST liability on an individual basis. It uses a global accounting method under which a single deemed input tax credit is calculated when the lot is purchased. For example, Peter's purchase of 300 books would result in a single deemed input tax credit of $136.36, rather than a deemed input tax credit of 45 cents attributable to each book.
However, the pooling system only does away with the need to match input tax credits to GST liabilities on an item by item basis. It does not do away with the need to track the individual items. This must still be done. This will be necessary in order to determine when the "total subdivision 66-B credit amount" is exhausted. Until that time each of the individual sales is deemed not to be a taxable supply. But once that point is reached sales, or part sales, thereafter revert to being normal taxable supplies.
If in Peter's case he sold each of the books for $7.50 he would have no GST liability on the first 200 books he sells ($7.50/11 x 200 = $136.36). Thereafter, he will have a GST liability of 68 cents on each of the remaining 100 books when they are sold.
Should Peter buy further second hand books by the lot further deemed input tax credits are added to the pool.
Example
Assume Peter purchases a further 100 books for $500 before any of the first lot of 300 books have been sold. A further deemed input tax credit of $45.45 will be added to the "subdivision 66-B credit amount". The "total subdivision 66-B credit amount" will now be $181.81 ($136.36 + $45.45). All of the books are resold for $7.50 each. No GST liability will arise on these sales until the first 300 books are sold. Thereafter, a GST liability of 68 cents will arise on the sale of each of the remaining 100 books.
Given the pooling system it will not be necessary to identify from which lot the remaining books came from. Nor would that position change if the books were sold for different prices. For example, if at that time there were instead 85 books remaining, of which 60 had a sale price of $7.50 and 20 with a sale price of $8.50, all that would change is that the GST liability on the remaining books would be 68 and 77 cents respectively.
In order for a dealer to utilise the pooling system it must acquire second hand goods where it is reasonable to expect that the goods will be divided before being sold in two or more separate supplies. As noted it will apply where goods are bought in lots, for example, at an auction. It will apply where a single good is acquired with a view to being dismantled, for example, a used car purchased by a motor wrecker. And it will apply where the goods were acquired and held as trading stock before 1 July 2000.
It will not apply, however, where goods are acquired in a single itemised lot where a price is ascribed to each item and no further dismantling will occur. Nor does it apply where the usual exclusions to the operation of Division 66 exist, for example, if the dealer imported the goods. Further, the ATO can determine that a specified type of second hand goods will or will not be eligible for pooling. However, where a second hand dealer sells goods subject to the Subdivision 66-B pooling system this will not affect the position of the purchaser. Just because sales subject to the pooling system are deemed not to be taxable supplies does not mean that they will not be creditable acquisitions. The purchaser will still be entitled to claim input tax credits, if otherwise entitled to do so.
Additional compliance obligations
The final amendment enacted by the Government is to introduce an additional record keeping requirement for second hand dealers. This is broadly equivalent in concept to recipient created tax invoices (RCTIs) - see articles [11.2] and [13.3] of GST Today. RCTIs are a reversal of the usual rule that the supplier issues the tax invoice. While, in this case no tax invoice is issued, it is similarly the recipient of the supply, the dealer, that issues the document.
The document in question is a record that sets out:
- the name and address of the entity that supplied the goods;
- a description of the goods and their quantity;
- the date on which the goods were purchased; and
- their cost.
This record must be retained by the dealer. It is likely that most dealers would routinely keep this information and that this additional requirement will not be a burden. This requirement applies regardless of whether or not the goods are in a pooled scheme.
Subsequent legislative and regulatory changes may have impacted upon the subject matter of this article.
Paul Stacey
BA LLB ACA
Technical Editor - GSToday
ATP - GST
April 2000
March, 2001
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