Commonwealth Numbered Regulations - Explanatory Statements

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A NEW TAX SYSTEM (GOODS AND SERVICES TAX) AMENDMENT REGULATIONS 2004 (NO. 1) 2004 NO. 218

Section 177-15 of the A New Tax System (Goods and Services Tax) Act 1999 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The A New Tax System (Goods and Services Tax) Regulations 1999 (the Principal Regulations) is amended to ensure that the supply of membership in a barter scheme is not treated as a type of input taxed financial supply. The Principal Regulations is also amended to ensure the supply of membership in a barter scheme is not treated as a financial supply where membership is provided in the form of some other type of financial supply.

The amendments remove paragraph (k) from item 10, paragraph (c) of subregulation 40-5.09(3) and also add new subregulation 40-5:09(5) into the Principle Regulations to ensure the supply of membership in a barter scheme is not treated as a financial supply.

Generally, most supplies of goods and services are subject to goods and services tax (GST). However, financial supplies or investments in such things as bank accounts, loans, company shares, life insurance, managed investment schemes and other financial securities are not subject to GST. Similarly, an entity that makes a supply of membership in a barter scheme is currently treated as making a financial supply that is not subject to GST.

The initial policy rationale for the treatment of the supply of membership in barter schemes as a financial supply was based on the view that barter schemes exhibit the general characteristics of managed investment schemes. Under the Principal Regulations the supply of an interest in a managed investment scheme is treated as the supply of a financial security. However, the actual operation of barter schemes is different from that of general managed investment schemes or other types of financial securities. Barter schemes do not offer an investment product, nor do they access membership funds for the purposes of investment at-risk.

Barter schemes allow participants to obtain goods and services for consideration that is in kind rather than by use of more traditional payment methods, such as cash or credit cards. Entities wishing to participate in a barter scheme may become a member of the scheme through payment of a fee to the scheme operator. The fee is consideration for the acquisition of membership in the scheme.

The acquisition of membership in a barter scheme by the member provides the member with participation rights in the scheme, including rights relating to trading in goods and services. Participation rights in a barter scheme do not involve rights to an income stream which is characteristic of membership in more traditional types of managed investment schemes.

The amendment to the Principal Regulations will ensure that the supply of membership in a barter scheme is not treated as an input taxed financial supply either in its own right or where it is provided in the form of some other type of financial supply. Consequently, where the supply of an interest in a scheme is a taxable supply, GST will be required to be remitted on the supply and the supplier will be entitled to claim input tax credits for acquisitions that relate to making the supply. Entities acquiring membership in a trade scheme will generally be able to claim input tax credits for the acquisition of the membership.

The Act specifies no conditions that need to be met before the power to make the Regulations may be exercised.

The Regulations are taken to have commenced from their notification in the Gazette. Details of the Regulations are as follows:

Regulation 1 provides for the title of the Regulations.

Regulation 2 provides that the Regulations commence on gazettal.

Regulation 3, Schedule 1, item l, amends the Principal Regulations to omit paragraph (k), which concerns barter schemes, from item 10, paragraph (c) of the table in subregulation 40-5.09(3).

Regulation 3, Schedule 1, item 2 adds new subregulation 40-5.09(5) into the Principal Regulations to exclude from item 10 of the table in subregulation 40-5.09(3), a security in relation to which an entity is given a right to participate in a barter scheme.

Background

Barter schemes allow participants to obtain goods and services for consideration that is in kind, rather than by use of more traditional payment methods, such as cash or credit cards. Entities wishing to participate in a barter scheme may become a member of the scheme through payment of a fee to the scheme operator. The fee is consideration for the acquisition of membership in the scheme.

Under the A New Tax System (Goods and Service Tax) Regulations 1999 (GST Regulations) the supply of membership in a barter scheme is treated as a separate class of security that is input taxed as a financial supply. The treatment of the supply as a security for goods and services tax (GST) purposes has created interpretative difficulties for industry participants. As a result, it is understood that some scheme suppliers have treated the supply of an interest in a scheme as an input taxed financial supply, while others have treated the supply as a taxable supply.

Policy objective

The objective of the measure is to clarify the GST treatment of an interest in, or under, a barter scheme and thereby enable easier and more consistent compliance with the law.

Implementation options

The only option available for consideration is to amend the GST Regulations to ensure the supply of membership in a barter scheme is not treated as a financial supply in its own right. Further, the supply will not be treated as a financial supply where membership rights are supplied in the form of another type of financial supply. No further implementation options were considered to be appropriate.

Analysis of costs/benefits

Impact group identification

The industry consists of approximately 20 barter schemes with over 50,000 businesses, including small businesses, participating in the schemes. The industry is dominated by several larger to medium sized operators with the remainder being relatively small operators. This measure is expected to impact on only a few barter scheme suppliers and the members of those schemes.

Benefits for business

The change in the GST treatment of membership in a barter scheme from being an input taxed financial supply will permit operators that make taxable supplies of such interests to claim input tax credits (ITCs) for acquisitions that relate to making of those supplies. Similarly, members of the schemes will be entitled to claim ITCs where the acquisition of the interest is a creditable acquisition.

Benefits for Government

The measure delivers benefits to Government by ensuring that the GST treatment of a supply of membership in a barter scheme is no longer treated as a financial supply irrespective of the character of the scheme, thus removing potential interpretational difficulties and lessening the likelihood of disputes that may arise between the ATO and scheme participants.

Compliance costs

Based on available information, it is understood that there are a number of scheme operators who have treated the supply of membership in their scheme as an input taxed supply. These operators and their members will need to make changes to their administrative and reporting functions to account for the change in the law. For instance, this may mean reclassifying within their accounts the GST treatment in respect of the supply or acquisition of an interest in a barter scheme. This may also include minor changes in the processes relevant to the completion of the entity's Business Activity Statements. While the financial impact on scheme operators and their members has not been quantified, it is not expected to be significant, as most of them are already accounting for other taxable supplies and creditable acquisitions under the GST system.

Cost involved in amending past assessments

Due to the difficulties that have arisen in determining what constitutes an interest in a scheme, the Commissioner of Taxation will need to determine on an individual case basis the application of the current law to past transactions. Therefore, it is not known whether there would be any additional costs involved in the process.

Revenue costs

The amendment is expected to result in a cost to forward GST revenue of $2 million for each fiscal year from 2004-05. The cost to revenue reflects the amount of ITCs for acquisitions that relate to the making of supplies of interest in barter schemes that would have been denied to suppliers if the supplies had remained input taxed supplies.

Consultation

A written submission was made by a major supplier and some members of a representative group of barter scheme operators were contacted for comment in respect of the matter. They indicated support for the change in the law to better reflect the true character of barter schemes.

Conclusion and Recommended Option

This option was selected because it will reduce compliance costs by alleviating interpretational difficulties that have arisen from the current GST treatment of membership in a barter scheme as a separate class of security that is an input taxed financial supply. In addition, this option involves minimal financial impact together with minor accounting and reporting changes for industry participants.