17 November 2004
Mr Raphael Cicchini
Manager
GST Policy Unit
The Treasury
Canberra ACT 2600
Dear Raphael
Long term non-reviewable contracts
It is understood from discussions with Treasury representatives that the alternative approach of allowing long term non-reviewable contracts to remain GST-free beyond 30 June 2005 until there was a review opportunity (if any) is not a viable option on revenue grounds. It is understood that this was the approach that was adopted in New Zealand generally based on the proposition that the recipient would claim any GST paid by a supplier as an input tax credit. Had the alternative approach been available, it would have minimised the administrative costs that are likely to be incurred by the parties under the current proposal.
If supplies are not to remain GST-free, the amendments have the effect of ensuring that the GST payable on supplies on and after 1 July 2005 is not borne as a cost by suppliers while at the same time giving a windfall gain to recipients.
The amendments are cumbersome and, if a recipient does not volunteer to adjust the terms of a contract price to allow recovery of GST by a supplier or does not volunteer to pay GST on the supplies under the recipient arrangements, are likely to become protracted.
It is understood that the further alternative of legislatively amending all existing long term non-reviewable contracts to insert a GST recovery clause was also found not to be a viable option.
It is strange that the GST payment by the recipient will be a payment pursuant to the A New Tax System (Goods and Services Tax Transition) Act 1999 (the GST Transition Act) under new taxing Acts that will apply to the GST Transition Act. This has the result that the provisions of Divisions 11 and 29 are not automatically attracted to the payments of GST made by the recipients. There must be some doubt in the circumstances whether proposed section 15C(6) can give a recipient an input tax credit entitlement for GST paid by the recipient. For the avoidance of doubt it might be necessary to make amendments to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that GST is defined to include GST paid under the GST Transition Act and that an input tax credit is available for GST paid under the GST Transition Act.
Similarly, it might be necessary to make amendments to the GST Act to ensure that GST payable under the GST Transition Act forms part of the net amount of a taxpayer.
Section 15H(1) seems to leave a supplier with an option to issue a tax invoice for a supply where GST is paid by the recipient. It would seem more appropriate if a supplier was barred from issuing a tax invoice for a supply in these circumstances.
The requirement that an arbitrated offer make allowance for the impact of the savings attributable to the introduction of the new tax system is likely to create practical difficulties. The ACCC concedes that most if not all of the measurable savings occurred in the 2000/2001 financial year. The ACCC released guidelines that suppliers who had CPI clauses in contracts could not apply the full CPI increase for 2000/2001 but could only a factor that excluded the effect of the introduction of GST. It is questionable whether suppliers who followed these guidelines have any measurable savings that are attributable to the introduction of the new tax system. It should also be borne in mind that the ACCC savings guidelines allowed the recognition of increased costs associated with the introduction of the new tax system. These costs would include the direct coast of GST administration, BAS preparation, responding to ATO queries and GST reviews conducted for taxpayers. To include a requirement that an arbitrated offer take account of savings from the introduction of the new tax system seems to add an opportunity for dispute between the parties that could prolong the process and lead to what might not be the best result.
Though perhaps not strictly relevant for present purposes, it is considered that there must be broad public notification of these changes after they become law. A supply under a long term non-reviewable contract becomes a taxable supply on and from 1 July 2005. The supplier will have a GST liability on that supply (either recovered by agreement from a recipient or borne as a cost) unless the arbitration process is followed. The impacts of the proposed amendments must be publicised as they are and not merely promoted as a concession that will relieve suppliers from a liability that will arise as the law currently stands.
If you have any queries on the above, please contact either Ken Claughton (+61 3 9289 9999) or myself (+61 3 9606 9771).
Yours sincerely,
Garry Addison FCPA
Senior Tax Adviser
CPA Australia
