A New Tax System (Goods and Services Tax Transition) Act 1999

The Transition Act primarily affects entities that were carrying on enterprises before, on or shortly after 1 July 2000. This includes:

• Retailers, wholesalers and manufacturers that held trading stock or had paid sales tax on goods or motor vehicles.
• Parties to written contracts entered before Royal Assent that specifically identify supplies and fix consideration (s 13).
• Lessors and lessees of motor vehicles under operating leases entered before 2 December 1998 (s 19A).
• Construction contractors with pre-1 July 2000 agreements for buildings or civil engineering works (s 19).
• Insurers, insureds and claimants where the insured event occurred before 1 July 2000 (s 22).
• Operators of gambling businesses and issuers of vouchers.
• Suppliers of acupuncture, naturopathy or herbal medicine services before 1 July 2003 (s 21).
• Recipients of supplies under old contracts who may become liable to pay GST directly after 1 July 2005 (s 15C).
• Entities that deregister while holding pre-GST assessable goods (s 17(3)).
• Commonwealth entities that are “untaxable” for the purposes of the review-opportunity and life-membership rules (ss 13(4A), 14(5)).

Because the rules interact with registration status, the Act also affects entities that registered early under s 9 or that later deregistered. Professional advisers (lawyers, accountants, tax agents) who must advise on attribution, special credits, arbitrated offers and ongoing s 13 contracts remain affected more than two decades later when legacy contracts surface in due diligence or disputes.

Suppliers have the right to treat supplies under s 13 as GST-free until the first review opportunity or 1 July 2005 (subject to the recipient’s full input tax credit position). They may make an arbitrated offer under s 15J and, if accepted or if the recipient elects to pay GST, are relieved of GST liability (s 15C(1)). Suppliers of construction projects may limit GST to the margin over pre-GST incorporated value (s 19(3)). Lessors meeting s 19A criteria are entitled to a special credit equal to 1/11th of the first post-GST sale price.

Recipients of supplies covered by Division 2 of Part 3 may elect to pay the GST themselves (s 15C(1)(c)(i)), gaining the corresponding input tax credit. They may reject an initial offer and force arbitration, or simply do nothing and be taken to have failed to accept the final offer after the 21-day period (s 15M). Recipients who are not registered or required to be registered still obtain tax periods and must lodge returns for recipient-paid GST (s 15E). They enjoy decreasing adjustments for bad debts written off by the supplier (s 15G(3)).

All entities may choose to apply the s 6A midnight rule, choose input-taxed treatment for qualifying coin-operated devices (s 24C), and apply to the Commissioner for rounding determinations (s 24B(5)). Entities holding pre-GST stock have a deemed taxable supply if they apply it privately or deregister (s 17), but also obtain input tax credits under modified Division 66 rules for qualifying second-hand goods (s 18).

The Commissioner may determine registration start dates before 1 July 2000 (s 9(1)), issue rulings on the extent rights are expected to be exercised after 1 July 2000 (s 11(2)), and specify valuation methods for construction contracts (s 19(4)).

The Transition Act itself contains no standalone offence or penalty provisions. Instead it feeds into the GST Act and Taxation Administration Act 1953 (TAA). Failure to account for GST on a supply that s 7(1) treats as made on or after 1 July 2000 attracts the general shortfall interest charge and, where reckless or intentional, administrative penalties under Division 284 of Schedule 1 to the TAA. Recipient-paid GST under s 15C is “GST on the supply” for the purposes of s 9-40 of the GST Act; non-payment therefore engages the same penalty regime.

Incorrect claims for special credits (s 19A) or input tax credits under modified s 18 are subject to Division 20 penalties. Failure to issue an adjustment note is excused where GST is payable by the recipient (s 15H), but the supplier must still respond to requests for information. The Commissioner’s power to make reviewable GST transitional decisions (refusal of rounding determinations, certain valuations) is subject to objection and review rights under Subdivision 110-F of Schedule 1 to the TAA.

The Transition Act is expressly “to be read in conjunction with the GST law and the sales tax law” (s 4). It amends or repeals provisions in the listed A New Tax System Acts via its Schedules (s 3). It imports definitions from the GST Act (s 5(2)) and the Income Tax Assessment Act 1997 for hire-purchase, motor vehicle and trading stock (s 5(3) table).

It interacts with Division 29 (GST Act) attribution rules (see notes to ss 10, 19(3)), Division 66 second-hand goods (modified by s 18), Division 78 insurance (carved out by s 22), Division 100 vouchers (extended by s 24A), and the global GST amount calculation in s 126-10 for gambling (modified by s 24(2)).

For income tax, the special credits under ss 19A and 18(1A) are treated as input tax credits attributable to a tax period of choice, affecting timing of GST adjustments that flow through to assessable income or deductions. State and Territory taxes that were amended to remove reference to sales tax interact via the “New Tax System changes” definition in s 15L(3).

Compulsory third-party schemes specified in regulations are denied input tax credits for pre-1 July 2003 periods (s 23), preserving the policy that such schemes were outside the GST net during the initial transition.

The Transition Act has not been substantively amended since the early 2000s, but its provisions continue to be referenced in later GST amendments. The most significant post-1999 changes were the 2005 amendments that inserted Division 2 of Part 3 to deal with the expiry of the s 13 GST-free period. These were required because many long-term contracts had been drafted without GST in contemplation; simply letting the GST-free treatment expire would have produced windfall gains or losses. The arbitration mechanism was introduced to balance supplier cost recovery against recipient protection from unilateral price increases.

Minor technical amendments have clarified that recipient-paid GST does not affect input tax credit entitlement (s 15C(6)) and that bad-debt adjustments operate on the recipient (s 15G). The coin-operated device rule (s 24C) and rounding determinations (s 24B) were temporary measures that sunsetted; their inclusion illustrates how the original 1999 Act anticipated practical compliance difficulties that later proved short-lived.

No further substantive expansion of scope has occurred because the transitional problems have largely worked their way through the economy. Residual litigation and advice work now centre on legacy s 13 contracts and special credits.

Because the Transition Act was designed to be self-executing and to minimise disputes, reported cases are relatively few. The leading authorities concern the meaning of “review opportunity” in s 13(5). Courts have held that a contractual clause permitting a general price review does not automatically constitute a review opportunity unless it can be exercised “because of the imposition of GST” or takes GST into account (Interpreting the phrase in light of the statutory text and the explanatory memorandum). The distinction between a change “provided for in the agreement” (which prevents the supply losing GST-free status under s 13(4B)) and a post-contractual variation has also been litigated.

The arbitration provisions in ss 15J–15M have generated satellite disputes about the independence of assessors and the permissible scope of “New Tax System changes”. Administrative Appeals Tribunal decisions have emphasised that the assessor’s determination must be confined to cost impacts and cannot include profit margins or competitive factors.

Controversy also surrounded the s 19 construction-margin rule. Some contractors argued that “value of all work and materials permanently incorporated” should include overheads and preliminaries; the Commissioner’s determinations under s 19(4) generally rejected that view, leading to objections that were largely upheld on the basis that only direct incorporation counts.

The special credit in s 19A for leased motor vehicles produced disputes about what constitutes an “operating lease” and whether the vehicle had in fact “been the subject of sales tax”. Most of these settled before hearing once the Commissioner issued private rulings.

Overall, the Transition Act has been remarkably successful in limiting litigation; most controversies have been resolved administratively through the Commissioner’s power to make written rulings (s 11(2)) and determinations (s 19(4), s 24B).

Most practitioners still trip over three subtle points.

First, the interaction between s 11 (rights exercisable after 1 July 2000) and s 12 (progressive supplies) is not intuitive. A supply of a right that is also a progressive supply is governed exclusively by s 12; s 11(1A)(a) expressly carves it out. Many software licence and intellectual-property agreements straddle both rules and require careful apportionment.

Second, the recipient-paid GST election under s 15C(1)(c)(i) is irrevocable (s 15C(7)) and shifts the entire compliance burden (returns, attributions, bad-debt adjustments) to the recipient even if the recipient is not otherwise registered (s 15E). Clients who casually “elect to pay the GST” often fail to appreciate they must now run a parallel GST system for that contract.

Third, the s 13(4B) “change” rule is wider than it first appears. Any post-commencement alteration to the method by which consideration is worked out (not merely the dollar amount) can cause the supply to lose GST-free status from the date the change takes effect. Many price-escalation clauses that reference CPI or another index have been amended over the years; each amendment must be stress-tested against the s 13(4D) definition of “change”.

Another perennial trap is the narrow window for the s 19 construction valuation: it must be completed “in a manner specified by the Commissioner” and by the end of the first tax period after 1 July 2000 (or later day allowed). Late valuations are fatal; the entire supply then becomes fully taxable.

Finally, the s 6A transition-trading-period election must be made consciously. Once chosen, it rewrites references throughout Part 4 and ss 12, 24 and 24A. Many midnight traders simply assumed their normal closing time would apply, only to discover that the election required formal notification and consistent application across all supplies.

Compliance begins with a contract audit. Identify every written agreement made before Royal Assent that specifically identifies a supply and fixes consideration. For each, determine:

1. Whether a review opportunity has arisen (s 13(5)).
2. The recipient’s input tax credit entitlement (full or partial).
3. Whether any post-commencement change to the consideration method has occurred (s 13(4B)).

For contracts still GST-free, maintain records showing the extent of supply made before the review opportunity or 1 July 2005. If the contract will extend beyond that date, prepare an arbitrated-offer pack (initial offer, application to arbitrator, assessor’s report, final offer) well before 1 July 2005 or the review opportunity.

For stock on hand at 1 July 2000, maintain perpetual inventory records that prove the goods were held exclusively for sale, had borne sales tax where relevant, and had not been used for any other purpose. When goods are applied to private use or the entity deregisters, account for the deemed taxable supply at market value in the relevant tax period.

Construction contractors should obtain the Commissioner’s specified valuation methodology before the first tax period ends and have the valuation signed off by a quantity surveyor or engineer. Retain the valuation as a primary record for the life of the contract.

Entities claiming the s 19A motor-vehicle special credit must retain evidence of the pre-2 December 1998 purchase, the operating-lease documentation, sales-tax payment and that the post-2000 sale is the first sale. The credit can be attributed to any single tax period; choose the period that best matches cash flow or audit cycles.

For recipient-paid GST contracts, the recipient must register (if not already), open dedicated tax periods, issue its own BAS for that supply, and monitor supplier bad-debt write-offs to claim decreasing adjustments. The supplier must still keep records but is relieved of tax-invoice and adjustment-note obligations (s 15H).

Maintain a transition register that records for each legacy contract: date made, Royal Assent status, review-opportunity triggers, GST-free end date, election status under ss 6A/24C, special credits claimed, and valuation dates. Review the register annually or on any contract variation.

Finally, obtain private rulings on any ambiguous review opportunity or valuation issue. The Transition Act’s complexity is front-loaded; once the register is complete and rulings obtained, ongoing compliance is largely mechanical attribution and record retention.