Background

Some contracts and agreements for the supply of goods, services and any other thing span the implementation date for the Goods and Services Tax (GST). As a general principle GST would apply to anything invoiced or paid for after the implementation date - 1 July 2000. However, during the transition to GST, applying this rule could lead to some businesses avoiding paying GST (and Wholesale Sales Tax) by paying, or invoicing, for goods and services before 1 July 2000.

To protect tax revenue and to ensure a level playing field for all businesses and consumers, the Government has introduced some transitional rules. These rules are for contracts and agreements entered into before the implementation of the GST, where these involve the supply of anything on or after 1 July 2000.

You should be aware that contracts or agreements which you have entered into before 1 July 2000 and which involve the supply of anything after that date may give rise to GST obligations.

How the GST will impact on these contracts or agreements will depend on whether:

• the contract or agreement is reviewable or non-reviewable
• it is with a buyer who would be entitled to full input tax credits
• it involves the supply of goods or real property or services.

Contracts involving construction or a periodic or progressive supply that span 1 July 2000 give rise to some valuation considerations and these are discussed further on in this Fact Sheet.

What are non-reviewable or reviewable contracts?

A non-reviewable contract is one where the consideration or price paid for the supply is fixed or is to be calculated according to some specified formula and cannot be varied or reviewed by either party to the agreement. It may contain specific provisions which mean that the contracted price does not include GST.

If you supplied something under a non-reviewable contract after 1 July 2000, you may have to pay the GST on the supply but you would be unable to pass it onto the buyer in your price.

A reviewable contract is one that allows reviews of the price of anything supplied under the contract.

Supplies made under a non-reviewable contract

The transitional rules applying to supplies you make, under a non-reviewable contract entered into before 1 July 2000, depend upon whether or not the buyer would be entitled to a full input tax credit for them and whether they are goods or real property or services.

Scenario 1
Non-reviewable contract or agreement and the buyer would be entitled to a full input tax credit

If you have entered into a non-reviewable contract before 8 July 1999, the date of Royal Assent of the A New Tax System (Goods and Services Tax Transition) Act 1999, and the buyer of the supplies under that contract would be entitled to a full input tax credit for them under the GST, then supplies under that contract that take place after 1 July 2000 and up to 1 July 2005 will be GST-free. Any supplies made under this contract after this date will be subject to GST. If you enter into the contract after 8 July 1999 all supplies made after 1 July 2000 will be subject to GST.

Scenario 2

Non-reviewable contract and the buyer would not be entitled to a full input tax credit

Generally, private consumers, entities supplying a range of input taxed financial services, and providers of residential rental accommodation are not entitled to full input tax credits for things supplied to them.

If you enter into a non-reviewable contract before 2 December 1998 and the buyer is not entitled to a full input tax credit, supplies made under that contract or agreement after 1 July 2000 and up to 1 July 2005 will be GST-free. If you enter into a non-reviewable contract after 2 December 1998 all supplies made after 1 July 2000 will be subject to GST.

Scenario 3

Non-reviewable contract, but all payment is made before 2 December 1998

Where the buyer of supplies under a non-reviewable contract has paid for the supplies in full before 2 December 1998, those supplies will all be GST-free, even if supplied after 1 July 2005 (whether the buyer is entitled to a full input tax credit for those supplies or not).

Supplies made under a reviewable contract

Similar to non-reviewable contracts or agreements, the GST implications for supplies made after 1 July 2000 for reviewable contracts or agreements depend upon whether or not the buyer is entitled to a full input tax credit for the supplies acquired. The GST treatment is canvassed in the two scenarios below.

Scenario 4

Reviewable contract and the buyer would be entitled to a full input tax credit

Supplies you make after 1 July 2000 under a reviewable contract entered into after 8 July 1999, the date of Royal Assent of the A New Tax System (Goods and Services Tax Transition) Act 1999, will be subject to GST.

Supplies you make after 1 July 2000, under contracts you enter into before 8 July 1999, the date of Royal Assent of the A New Tax System (Goods and Services Tax Transition) Act 1999, (including any supplies to be made under existing contracts), will be GST-free until the first opportunity to review the price for any supplies before 1 July 2005.

All supplies are subject to GST after a review opportunity or after 1 July 2005, whichever is the earlier.

Scenario 5

Reviewable contract and the buyer would not be entitled to a full input tax credit

Supplies you make after 1 July 2000 under a reviewable contract entered into before 2 December 1998 will be GST-free until the first opportunity to review the price for any supplies before 1 July 2005. After a review opportunity and after 1 July 2005, all supplies are subject to GST.

Any supplies you make after 1 July 2000 under a contract entered into after 2 December 1998 with a buyer not entitled to a full input tax credit will be subject to GST.

* The flow chart at the end of this fact sheet will help you to follow this process.

How do you know whether the buyer would be registered for GST after 1 July 2000?

As outlined above, the GST treatment that applies to anything supplied after 1 July 2000 under a contract you have entered into before implementation of the GST, depends upon whether the buyer is entitled to a full input tax credit for those supplies.

The A New Tax System (Goods and Services Tax) Act 1999 specifically addresses the circumstances where full input tax credits can be claimed. In general full input tax credits are only available where you are registered for GST. Generally, you are required to register your business if you are carrying on an enterprise and your annual turnover meets the registration turnover thresholds set out in the Act (although you can choose to register even if you fall below the threshold and you satisfy the registration requirements). Refer to the fact sheet GST transitional arrangements - key GST concepts.

Full input tax credits are not available to private consumers, suppliers of input taxed supplies of certain financial services, or for residential premises predominantly for residential rental accommodation.

Why is it important for a business to know whether the buyer would be registered for GST?

The transitional rules are aimed at preventing consumers and businesses from taking undue advantage of, or being unduly disadvantaged by, the change to The New Tax System.

Where the buyer is entitled to full input tax credit for any GST paid on supplies purchased after 1 July 2000 the incentive to bring forward sales is significantly reduced.

On the other hand, if the buyer cannot claim the GST back on those supplies after 1 July 2000, there is a much greater incentive to bring forward purchases to escape GST.

Construction contracts

The general principles outlined above for contracts spanning the implementation date also apply to construction contracts.

However, the transitional rules provide for special rules for valuing what proportion of the contract (if any) would be subject to GST. In the absence of such rules, the entire value of the contract may be subject to GST even though some of the work had already been undertaken before implementation of the GST.

These valuation rules apply to construction contracts involving goods or real property supplied in the construction, major reconstruction, manufacture or extension of a building or civil engineering work and the completed project is made available to the recipient on or after 1 July 2000.

If you choose to use the special rules, a valuation will need to be undertaken at the start of 1 July 2000 of all the work and materials permanently incorporated on the site in accordance with the agreement.

If your records make the value of the supplies clear, that is a sufficient record for these purposes. If not, the Commissioner of Taxation would accept a valuation by an independent, registered valuer or quantity surveyor.

Contracts involving periodic or progressive supplies

Supplies made under contracts or agreements that provide for a supply to be made for a period, or progressively over a period that spans 1 July 2000, are taken to be made continuously and uniformly throughout the period. The value of the supply made after 1 July 2000 will be subject to GST.

For example, if a photocopier service contract was for twelve months spanning the implementation date, supplies made in the period after implementation would be subject to GST. Generally, the value of the supplies would be pro rated over the period of the contract. This would be irrespective of whether all, some or none of the services occurred during a period.

These special arrangements do not apply to construction contracts whether or not they are contracts involving periodic or progressive supplies - these contracts have their own special valuation rules (see above).

Mixed supplies

Where the supply consists both of a service and goods (for example, in the course of servicing the photocopier some parts are replaced) the supply is broken down into the supply of the service and the supply of the parts. The treatment outlined above would be applied to each of the supplies separately. The service component would be pro rated but only the value of parts supplied after 1 July 2000 would be subject to GST.

Insured events before 1 July 2000

Insurance arrangements can span the date of implementation of the GST. For example, an insurance claim can be made for an event which occurred before 1 July 2000 but settlement may not occur until after 1 July 2000. Under these circumstances, generally the insurance company will not be able to claim an input tax credit for any settlement for an event that occurred before 1 July 2000.

Life memberships

Life membership of a GST-registered club or association or any other body that you have fully paid prior to 2 December 1998 will be GST-free. That means that even though the benefits associated with the life membership extend beyond 1 July 2000 the life membership agreement is GST-free.

Where you have not made full payment for a life membership entered into before 2 December 1998 then any payments you make in respect of that contract will be GST-free until a review opportunity or 1 July 2005, whichever is the earlier. Payments made after this date will be subject to GST.

However, if the life membership is taken out after 2 December 1998, then all membership fees will be subject to GST even where they relate to services provided before 1 July 2000.

If the membership was not for life, but for example, three years, then this would be treated according to the principles applying for reviewable or non-reviewable contracts outlined above. The value of any taxable portion would be based on the rules for continuous supply.

Pre-paid funerals

The question of a GST on pre-paid funerals only arises where the funeral is on or after 1 July 2000.

If you have entered into a contract before 2 December 1998 for a funeral, then any payments you have made or will make will be GST-free until the earlier of:

• an opportunity for review of the price arises before 1 July 2005, or
• 1 July 2005.

If you enter into a contract after 2 December 1998 for a funeral, all of the amount paid is subject to GST (unless the funeral is before 1 July 2000).

Other rights

Where a right, for example an option on a lease, is granted after 2 December 1998 and prior to 1 July 2000 it is subject to GST to the extent that it is exercised after 1 July 2000. However, this is not the case where:

• the supply is GST-free under a contract that is non-reviewable, or
• the supply is a pre-paid funeral.

Supplies made under a contract that spans the implementation date of the GST

This flow chart summarises the GST treatment that is to be given to contracts entered into before 1st July 2000 involving supplies after this date.