ATO ID 2003/8: GST and creditable acquisition of second hand goods that are reconditioned and sold
Date of decision: 13 December 2002
Business line: Indirect Tax

Issue
Is the entity, a second-hand goods dealer, making a creditable acquisition of second-hand goods under section 66-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it acquires second-hand goods that are then reconditioned and sold?

Decision
Yes, the entity is making a creditable acquisition of second-hand goods under section 66-5 of the GST Act when it acquires second-hand goods that are then reconditioned and sold.

Facts
The entity is a second-hand goods dealer. The entity purchased second-hand goods. The supply of the goods to the entity was neither a taxable nor GST-free supply. The entity provided consideration for this supply. The entity did not import the goods. The entity then reconditioned the second-hand goods (restored them to a good and satisfactory condition) prior to selling them. This sale was a taxable supply. The entity did not divide the goods prior to selling them. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: Division 66 of the GST Act allows an entity, in some circumstances, to claim an input tax credit for an acquisition of second-hand goods even though the supply to the entity was not a taxable supply. Subsection 66-5(1) of the GST Act provides that when an entity acquires second-hand goods for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business, the fact that the supply to the entity is not a taxable supply does not stop the acquisition being a creditable acquisition. The entity purchased the second-hand goods for the purpose of sale in its second-hand goods business. However, the entity reconditioned the second-hand goods prior to selling them. Therefore, it is necessary to consider whether the reconditioning of the goods by the entity amounts to manufacture. Goods and Services Tax Ruling GSTR 2000/8 outlines the meaning of 'not for manufacture'. Paragraph 80 of GSTR 2000/8 provides that the word 'manufacture' must be given its ordinary meaning. The Macquarie Dictionary (1997) defines 'manufacture' to mean 'to make or produce by hand or machinery, esp on a large scale; to make in any manner; to work (material) into form for use....' Further, paragraph 81 of GSTR 2000/8 provides that: 'Whether goods you acquired or imported are held for manufacture depends upon whether a different thing has been produced. If the work done is more than a repair renovation or modification of old material and changes the goods into something of a different character, there has been a manufacture of goods (see FC of T v. Jack Zinader Pty Ltd (1949) ATD 46; (1949) 78 CLR 336 and FC of T v. Jax Tyres Pty Ltd 85 ATC 4001; (1985) 5 FCR 257).' The reconditioning of the goods by the entity merely restored the goods to a good and satisfactory condition; it did not alter the goods into something different. Therefore, the entity did not acquire the goods for the purpose of manufacture and the requirements in subsection 66-5(1) of the GST Act are met. However, subsection 66-5(2) of the GST Act provides that subsection 66-5(1) of the GST Act does not apply where: The supply of the goods to the entity was neither a taxable nor GST-free supply. The entity did not import the goods. The supply of the goods to the entity was not a supply by way of hire as the entity purchased the goods. The entity did not divide the goods prior to selling them and the subsequent sale of the goods was a taxable supply. Accordingly, the exclusions in subsection 66-5(2) of the GST Act do not apply to exclude the application of subsection 66-5(1) of the GST Act. Therefore, the entity is making a creditable acquisition of second-hand goods under section 66-5 of the GST Act when it acquires second-hand goods that are then reconditioned and sold.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 11-5 paragraph 11-5(a) paragraph 11-5(c) paragraph 11-5(d) section 11-20 Division 66 section 66-5 subsection 66-5(1) subsection 66-5(2) section 66-10
Case references: FC of T v Jack Zinader Pty Ltd (1949) 9 ATD 46 (1949) 78 CLR 336
Related public rulings and determinations: GSTR 2000/8
Related ATO interpretative decisions: ATO ID 2002/8 | ATO ID 2003/9
Other references: The Macquarie Dictionary 1997, 3rd edn, The Macquarie Library Pty Ltd, New South Wales
Subject references: Goods & services tax GST second hand goods GST supplies & acquisitions Creditable acquisition