GST – Changes to treatment of precious metals
Acting on historical and ongoing concerns, the ATO has sought to improve the integrity of the GST system through technical changes to the GST Act to crack down on GST fraud in the precious metals industry.
This will be achieved through the following changes:
- Imposition of a reverse charge mechanism
- The amendment to the definition of second-hand goods.
The changes to the GST law were initially announced on 31 March 2017 and confirmed in Tuesday’s Budget. However, these changes will apply retrospectively from 1 April 2017.
The scheme – reason for change
The scheme is a form of ‘carousel fraud’, which operated in the following manner:
- A GST non-registered seller would remove the ‘hallmark’ guaranteeing the fineness of the metal or add impurities to it
- The GST non-registered seller would then sell the metal without GST to a GST registered entity
- The GST registered buyer would subsequently claim an input tax credit under the second-hand goods provisions from the ATO on the basis that the metals were not ‘precious metals’ as they were not ‘in an investment form’
- The metal was then refined and sold by the buyer as a GST-free supply to an unregistered seller and the loop would continue.
This resulted in revenue lost by the Government through input tax credit claims with no GST being remitted on sales. There were also cases where taxable sales of scrap metal were being made with no GST being subsequently remitted to the ATO.
Under the proposed changes, where both the supplier and recipient are registered (or required to be registered) for GST, the purchaser will be responsible for reporting and paying the GST amount to the ATO.
The GST remitted under the reverse charging mechanism will then offset any input tax credits that the buyer could recover, thereby eliminating any GST benefit.
Second-hand goods - definition
The definition of ‘second-hand goods’ has been amended to clarify gold, silver or platinum ‘not in investment form’ is not a second-hand good. This will remove any input tax credit entitlement for acquirers of out of scope supplies of precious metals.
Fraud undermines the system and results in losses to taxpayers. Therefore, this is a welcome change to promote the integrity of the GST system. After initial costs surrounding enforcement have been fully quantified and procedures cemented, it is envisaged that ATO resources will be free for reallocation to other taxation issues.