05 November 2004
Changes have now been formally proposed by Commonwealth Treasury to the way in which long-term fixed price contracts will become subject to GST. While this is good news for suppliers under affected contracts, the proposed provisions may result in additional non-recoverable costs for recipients. Submissions on the impact of the proposed provisions should be lodged with Treasury by 12 November.
Background
One of the transitional measures that was included in the A New Tax System (Goods and Services Tax) Transition Act 1999 ("GST Transition Act") was relief afforded to certain long-term fixed price contracts. This transitional relief enabled suppliers to treat supplies made under eligible long-term contracts as "GST-free" until the earlier of a review opportunity or 1 July 2005.
Although many of the affected contracts will have been terminated or will have had a review opportunity, a significant number of long-term contracts are still in place and are eligible for GST-free treatment. This is particularly common in finely tuned structures such as securitisations, power purchase agreements and leases.
Under the current terms of the GST Transition Act, suppliers will become liable to remit GST on supplies made under affected contracts from 1 July 2005, whether or not they are able to recover that liability from the recipient of that supply. If the supplier is unable to pass on this cost to the recipient, the supplier would suffer a reduction in its margin equal to 1/11th of the consideration provided for those supplies.
The fact that there has been no change to the consideration provided for the supplies does not prevent the recipient from claiming an input tax credit. As such, where the recipient can claim an input tax credit for its acquisitions from the supplier, the recipient would obtain a net reduction in its cost of acquiring those supplies of 1/11th.
Proposed changes
The proposed changes provide a process for negotiation between the supplier and the recipient to increase the amount payable by the recipient by the net cost to the supplier of the imposition of GST. Although the Treasury's proposal encourages suppliers to apply an increase of less than 10% (taking into account the savings at the time GST was introduced), it may be that most of these savings would have already been factored into pricing.
If the recipient rejects the supplier's requested increase, a process of formal negotiation and independent arbitration will be entered into. The recipient does not need to agree to any increase, even the arbitrated figure.
However, if the recipient does not agree to any increase, the new provisions will make the recipient liable for GST on the taxable supplies made by the supplier. That is, the recipient will include the GST payable on the supply in the recipient's Business Activity Statement. Of course, this does not prevent the recipient from claiming an input tax credit, under the ordinary provisions of the GST Act.
In short, the proposed provisions are good for suppliers who would otherwise have been unable to pass the cost of GST on to their recipient. However, if a recipient is unable to claim input tax credits, the proposed changes will result in an additional, non-recoverable cost.
Planning
Firstly, suppliers and recipients must identify contracts that are currently eligible for GST-free treatment. Once identified, advice should be sought about the best way to manage those contracts leading up to 1 July 2005 and the best way to manage the negotiation process.
Submissions
The proposed legislation is only in the form of an exposure draft. There is an opportunity to comment before 12 November 2004.
We can advise on the detail of the proposals and provide assistance in identifying the key aspects of these proposals for your organisation. If you would like further information or would like to discuss preparation of a submission to Commonwealth Treasury, please contact us.
