The Treasury Laws Amendment (GST Integrity) Bill 2017 was introduced into and passed the Lower House, without amendment on 15.6.17. Its effect would be as follows.
- This Bill introduces a mandatory reverse charge for taxable supplies between suppliers and purchasers of gold, silver and platinum. This removes the opportunity for fraudulent input tax credit claims by the purchaser and for the supplier to avoid paying goods and services tax (GST) to the Commissioner of Taxation (Commissioner) by liquidating. These amendments also establish a framework for parties to voluntarily reverse charge their supplies of such precious metals whether or not they are required to under the GST law.
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The Bill also clarifies the GST law to ensure that entities cannot exploit the special tax treatment for second-hand goods to claim input tax credits by changing the form of a precious metal. This ensures that input tax credits cannot be claimed for acquisitions of valuable metals in situations inconsistent with the policy underpinning the second-hand goods rules.
[APH – Bills Digest; Bill; EM; FJM; LTN 111, 15/6/17]
Extract from the Explanatory Memorandum
1.5 The objective of the announced changes is to combat ‘missing trader’ and ‘second-hand goods’ schemes in the gold industry, which if left unaddressed would continue to present an integrity risk to the GST system. The changes were announced to apply from 1 April 2017 to remove the opportunity for those engaging in such activities to continue to exploit the GST law in the period between the date of announcement and the passage of legislation giving effect to the changes. The announced changes also apply to silver and platinum, so the schemes identified in the gold industry do not shift to those industries once the opportunities for exploiting the GST law in relation to gold are removed.
1.6 The schemes identified have involved entities altering gold such that it no longer meets the definition of a ‘precious metal’ under the GST Act. To meet the definition of a ‘precious metal’ in section 195-1, gold, silver, platinum and any other precious metal prescribed by regulation must be of a requisite level of fineness and be in an ‘investment form’.
1.7 ‘Investment form’ is not defined in the GST Act. However, the Commissioner considers that it means that the metal must:
- be in a physical form that is capable of being traded on the international market for that metal by traders such as banks, bullion dealers, commodity brokers and stockbrokers. This would include bars, wafers and bullion coins;
- bear some mark or characteristic on its face accepted by the market as identifying and guaranteeing its fineness and quality, for example, a hallmark. This would therefore exclude granules; and
- usually be traded at a price determined by reference to the spot price of the metal it contains (refer GST Ruling GSTR 2003/10).
1.8 The ‘form’ of gold and other metals can readily be changed without any sophisticated process. This may include defacing, scratching off hallmarks, melting, granulating, cutting or chopping the metal, such that it is no longer in ‘investment form’.
1.9 A supply of the altered metal would be treated as a taxable supply under the GST Act, whereas supplies of precious metals are input taxed under section 40-100 or GST-free under section 38-385 and are therefore not taxable supplies (refer section 9-5).
Missing trader schemes
1.10 Generally, when a taxable supply of goods is made, the purchaser (i.e. recipient of the goods) pays GST to the supplier of the goods and then later claims an input tax credit when lodging their business activity statement (BAS) with the Commissioner. The supplier typically receives the GST component as part of the sale price at the time of sale and is required to remit GST to the Commissioner later, when they lodge their BAS.
1.11 The missing trader schemes identified have involved taxable supplies of altered metal, where the supplier liquidates or otherwise goes missing without remitting the GST to the Commissioner. The purchaser of the altered metal then claims an input tax credit on the supply.
Second-hand goods schemes
1.12 The second-hand goods schemes identified have involved entities altering the ‘form’ of gold so that it arguably qualifies for the special GST treatment that applies to second-hand goods. The Commissioner’s view of the law is that these schemes are ineffective but the law has been amended to remove any doubt.
1.13 Prior to the amendments in this Bill, the definition of second-hand goods in section 195-1 explicitly excluded ‘precious metal’ and ‘goods to the extent that they consist of gold, silver, platinum, or any other substance which, if it were of the required fineness, would be precious metal’.
1.14 Altering the metal ensures it no longer meets the definition of a ‘precious metal’ and a view has been expressed that the altered metal is not otherwise excluded from being a second-hand good. However, the Commissioner takes the view that such altered metals are excluded from being second-hand goods (refer draft GST Determination GSTD 2017/D1).
1.15 The GST law allows entities to claim input tax credits for second-hand goods acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of their business, even though the supply of the goods to them was not a taxable supply. Broadly, this rule is designed to avoid cascading of GST, or GST being charged on GST, by allowing an input tax credit for any GST embedded in the price of second-hand goods that GST-registered entities acquire from unregistered entities.
1.16 As supplies of precious metals are [GST-free under s38-385 if it is the first supply after refining and is to a dealer, or is, otherwise input taxed under section 40-100], they would not be expected to carry any embedded GST. Allowing an input tax credit in such situations is not consistent with the policy underpinning the second-hand goods rules.
Summary of new law
1.17 These amendments create a new Division 86 ‘Valuable metals’ within the GST Act. This new Division deals with supplies of goods consisting wholly or partly of gold, silver or platinum. Division 86 provides that generally the GST on such taxable supplies is ‘reverse charged’, such that the recipient of the supply is liable for the GST on the supply in place of the supplier. These amendments also establish a framework for parties to voluntarily reverse charge their supplies of valuable metals, whether or not the mandatory reverse charge applies to the supply.
1.18 The Bill also amends the definition of second-hand goods in section 195-1 to clarify that generally, goods to the extent that they consist of gold, silver or platinum are not second-hand goods.
Key features of new law
Entity liable for GST on taxable supply of gold, silver or platinum (under the new Division 86)
Generally [under the new law], the GST on a taxable supply is payable by the recipient of the supply [as a ‘reverse charge’], and is not payable by the supplier, where the supply involves goods that consist wholly or partly of gold, silver or platinum.
However, under certain circumstances, the supplier continues to be liable for the GST payable on such taxable supplies. These circumstances include if:
- the market value of the supplied goods exceeds the market value of any valuable metal contained in the goods by ten per cent or more at the time of the supply, and the supplier and recipient have not agreed in writing to voluntarily reverse charge the supply; or
- the Commissioner has determined by legislative instrument that a reverse charge does not apply for the class of supply.
Definition of second-hand goods – exclusion
platinum or any other substance specified in regulations for the purposes of the definition of a precious metal.
This clarifies the definition to put it beyond doubt that in addition to the existing exclusions, the definition also excludes goods to the extent that they consist of gold, silver, platinum, or any other substance which, if it were in an investment form, would be precious metal.
Definition of second-hand goods – exceptions to exclusion
Although, the definition of second-hand goods, in the GST Act, generally excludes goods to the extent that they consist of gold, silver or platinum, there are exceptions to ensure a range of goods are not inappropriately excluded from being second-hand goods. Goods are not prevented from being second-hand goods where:
- the market value of the supplied goods exceeds the market value of any valuable metal contained in the goods by ten per cent or more at the time of the supply;
- the goods are collectables or antiques; or
- the Minister has determined, by legislative instrument, that the class of goods is not prevented from being second-hand goods.