ATO ID 2003/9: GST and supply of reconditioned second-hand goods divided before sale
Date of decision: 13 December 2002
Business line: Indirect Tax

Issue
Is the entity, a second-hand goods dealer, making a supply that is not a taxable supply in accordance with section 66-45 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells one of the divided parts of second-hand goods that it divided and reconditioned prior to sale?

Decision
Yes, the entity is making a supply that is not a taxable supply in accordance with section 66-45 of the GST Act when it sells one of the divided parts of second-hand goods that it divided and reconditioned prior to sale.

Facts
The entity is a second-hand goods dealer. The entity purchased second-hand goods for $770. The consideration for the goods was not itemised. The supply of the goods to the entity was neither a taxable nor GST-free supply. The entity did not import the goods. The entity divided the second-hand-goods into several parts and reconditioned each part (restored them to a good and satisfactory condition). The second-hand goods are of a kind that it is reasonable to expect the entity to divide before supplying them. The entity is now selling one of the divided parts of the second-hand goods for $440. The supply of this divided part of the second-hand goods would normally be a taxable supply. Prior to purchasing the second-hand goods, the entity's total Subdivision 66-B credit amount and total Subdivision 66-B GST amount were zero. The entity keeps records regarding its acquisition of second-hand goods that satisfy the requirements in section 66-55 of the GST Act. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: Subdivision 66-B of the GST Act sets out special rules for second-hand goods that are divided prior to re-supply. Under section 66-45 of the GST Act, a supply is not a taxable supply if: The first requirement in section 66-45 of the GST Act is that Subdivision 66-B must apply to the entity's acquisition of second-hand goods; that is that the acquisition must meet the requirements of subsection 66-40(1) but is not excluded under subsection 66-40(2). Subsection 66-40(1) of the GST Act provides that Subdivision 66-B of the GST Act applies to an acquisition of second-hand goods if: The entity purchased the second-hand goods for the purpose of sale in its second-hand good business. The entity then divided the second-hand-goods into several parts and reconditioned each part. 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 divided parts by the entity merely restored the second-hand goods to a good and satisfactory condition; it did not alter the second-hand goods into something different. Therefore, the entity did not acquire the second-hand goods for manufacture. Further, the consideration for the entity's acquisition was greater than $300, the goods are of such a kind that it is reasonable to expect that they would be divided and the entity is selling the divided parts separately. Therefore, the requirements of subsection 66-40(1) of the GST Act are met. However, subsection 66-40(2) of the GST Act provides that Subdivision 66-B of the GST Act does not apply to the acquisition if: The consideration for the goods was not itemised and 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 divided the goods prior to selling them and the subsequent sale of the divided part would normally be a taxable supply. Accordingly, the exclusions in subsection 66-40(2) of the GST Act do not apply to exclude the application of Subdivision 66-B of the GST Act to the entity's acquisition of the goods. Therefore, the first requirement in section 66-45 of the GST Act is satisfied. The second requirement in section 66-45 of the GST Act provides that the entity's Subdivision 66-B credit amount is more that the entity's total Subdivision 66-B GST amount. These terms are defined in section 66-65 of the GST Act. The total Subdivision 66-B credit amount is the sum of the amounts of the input tax credits to which an entity would have been entitled, for all its acquisitions of second-hand goods to which this Subdivision applied, if this Subdivision had not applied to them. If the entity had been entitled to an input tax credit for the acquisition of second-hand goods the amount of its input tax credit would be $70 (1/11th of $770 purchase price). As such, the entity's total Subdivision 66-B credit amount is $70. The total Subdivision 66-B GST amount is the sum of: Prior to purchasing the second-hand goods, the entity's total Subdivision 66-B GST amount was zero. As this is the first sale of part of the second-hand goods the entity's total Subdivision 66-B GST amount is still zero. Therefore, the entity's total Subdivision 66-B credit amount ($70) is more than the entity's total Subdivision 66-B GST amount ($0) and the second requirement in section 66-45 of the GST Act is satisfied. The last requirement in section 66-45 of the GST Act is that the amount of GST that would have been payable on the entity's supply of the goods (if the supply was a taxable supply) must be less than or equal to the difference between the total Subdivision 66-B credit amount and the total Subdivision 66-B GST amount. The amount of GST that would have been payable on the entity's supply is $40 (sale price of $440 x 1/11). This is less than the difference between the entity's total Subdivision 66-B credit amount and the total Subdivision 66-B GST amount ($70 - $0). Therefore, the third requirement in section 66-45 of the GST Act is satisfied. As all the requirements in section 66-45 of the GST Act are met, the entity is making a supply that is not a taxable supply when it sells part of second-hand goods that it divided and reconditioned prior to sale.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 Subdivision 66-B subsection 66-40(1) paragraph 66-40(1)(a) subsection 66-40(2) section 66-45 section 66-50 section 66-55 section 66-65
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 2003/8
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 Taxable supply