A draft determination released by the Commissioner of Taxation on the 22 February 2017 titled ‘Goods and services tax: what is excluded from being second-hand goods by paragraph (b) of the definition of that term in Division 195 of the A New Tax System (Goods and Services Tax) Act 1999’ has proposed changes that may affect second-hand dealers and pawnbrokers in the jewellery industry.
This determination has been drafted by the Australia Taxation Office (ATO) in response to tax scheme fraud involving precious metals (being gold, silver and platinum) . Until recently, goods containing precious metals bought from a private individual by a second-hand dealer or pawnbroker enabled a GST credit under a long term accepted interpretation of the definition of “second hand goods”.
The draft determination proposes a change in the technical interpretation of that definition. Goods containing precious metals bought by a second-hand dealer for the spot price of the metal content will no longer be defined as “second-hand goods” and not eligible for GST credits.
The draft determination asserts that the ATO view of the law is as follows:
- If the price for the acquisition from an unregistered entity is based on the spot-price of its precious metal content then it is not a GST creditable acquisition as it does not qualify as “second-hand goods”.
- If the price for the acquisition from an unregistered entity is not based on the prevailing spot price of its precious metal content then it does not have the character of the relevant precious metal. Examples of goods whose value is substantially higher than the intrinsic value of the precious metal content include antiques, collectable coins, some jewellery and prestigious watches. Such goods are not excluded from the definition of “second-hand goods” and GST credits can be claimed for 1/11th of the purchase price.
The change of ATO's view means that some businesses will no longer be able to claim GST credits on purchases, from private individuals, of goods containing precious metals. For some purchases, businesses will need to apportion the value of purchases between the precious metal content and the other components (such as gemstones) and only claim GST credits in respect of the other components. Second-hand dealers will now have to consider, prior to purchase, if an item or part of an item will be eligible for a GST credit.
The ATO will apply the new GST treatment from the start of the first tax period commencing after the date of issue of the final determination. However, if the Commissioner considers that a taxpayer has been involved in fraud, evasion, and tax avoidance schemes, then this determination will apply before the date of issue.
Stephen Baxter of Indirectax.net is able to assist businesses who want to understand and apply the new rules. He can assist those businesses whose GST credits are already under review or have been challenged by the ATO. He can be contacted on (02) 9221 2888 or via email on email@example.com.
The JAA would also like your feedback if you see this issue might cause a serious erosion of your margins and want collective action to be taken. Please email firstname.lastname@example.org with your feedback.