Transactions involving nominations

(Clauses 149 and 151)

Summary of proposed amendment

The Goods and Services Tax Act 1985 is to be amended to repeal the rule that deems a supply to be made to the nominee when the contractual purchaser and the nominee have a different registration status.

Application date

The amendment will apply from 1 April 2011.

Key features

When a supply of goods or services is made to a person nominated by a contractual purchaser, section 60B of the GST Act determines whether the supply is treated as being made to the contractual purchaser or the nominated person.

The proposed amendment will repeal section 60(5) which states that when the contractual purchaser and the nominated person have a different GST registration status, the supply must be treated as made between the supplier and the nominated person.

A “savings” provision will be introduced to protect taxpayers who may have already claimed input tax deductions in reliance on section 60(5).

Background

The Taxation (GST and Remedial Matters) Act 2010 enacted a number of changes to the Goods and Services Tax Act 1985, including clarification of the GST treatment of transactions that involve nominations. The nomination rules adopt an “economic substance” approach so that the GST consequences of a transaction involving a nomination (such as the entitlement to an input tax deduction) reflect the commercial reality of the transaction. The new rules apply from 1 April 2011.

Nominee transactions ordinarily involve a purchaser nominating another person (a nominee) to receive the goods or services in question and/or settle the transaction. Under the new default “economic substance” nomination rule, a single GST supply is deemed to exist between the supplier and the person who provides the consideration relating to the supply. Depending on the facts, the latter could be either the contractual purchaser or the nominee.

To prevent “phoenix” fraud, the 2010 Act also introduced rules that require supplies of land to be zero-rated in certain circumstances. To ensure that the new zero-rating of land rules (which were also enacted in the 2010 Act) could not be bypassed by parties using nominations, the default “economic substance” rule was modified in respect of transactions that involve land to deem a supply as always occurring between the supplier and the nominee.

As a result of an oversight, a similar supplementary rule also applies to transactions that do not involve land when the contractual purchaser and the nominee have a different registration status. Application of the rule in these situations may give rise to inappropriate GST outcomes, such as the denial of input tax deductions to the contractual purchaser. For this reason, the legislation should be amended to ensure that the default “economic substance” approach applies without the modifying provision to all transactions that do not involve land.

Minor drafting changes

The following changes are being made to correct minor errors in the GST ACT:

• Section 21A(c) is being amended to also refer to section 21(2)(d).
• The reference to “principal purpose” in section 20A(2) is being deleted.
• A cross-reference in section 21H(1) is being amended to refer to “21 to 21H”.