Private ruling: GST and supply of goods to travellers under the sealed bag method
Published: April 2014

Ruling: Q1: Has the entity made an underpayment of GST and WET? | A1: Yes.

Relevant facts and circumstances: The entity is an Australian resident and has been registered for GST for many years. The entity lodges monthly activity statements and accounts for GST on a non-cash basis. The entity is a retailer of general and duty free goods. The entity makes sales under the sealed bag rules contained in Schedule 5 of the A New Tax System (Goods and Services Tax) Regulations 1999 (The Regulations ). For certain sales made by the entity, the purchaser does not surrender the sealed package to the entity at the point of departure and the entity is unable to retrieve the barrier tax invoice, examine the sealed package, validate or reconcile the barrier copy of an invoice against its copy of the invoice.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 19 | A New Tax System (Goods and Services Tax) Act 1999 subsection 38-185(1) | A New Tax System (Goods and Services Tax) Act 1999 section 195-1 | A New Tax System (Goods and Services Tax) Regulations 1999 Regulation 38-185.01 | A New Tax System (Goods and Services Tax) Regulations 1999 Schedule 5

Reasons for decision: Summary: The entity has made an underpayment of GST where it has supplied goods under the sealed bag method but the supply does not meet all the requirements of the Sealed Bag Rules set out in table 1 in Schedule 5 to the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). In this situation the supply becomes a taxable supply as it does not meet all the requirements of item 7 in the table in subsection 38-185(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Further, the entity, at the time of the dealing, has made an under payment of wine tax and is liable to pay wine tax on the supplies that involve supply of wine and do not meet the requirements of item 7 in the table in subsection 38-185(1) of the GST Act. | Detailed Reasoning - GST: Section 38-185 of the GST Act sets out supplies of goods which are GST-free exports. Item 7 in the table in subsection 38-185(1) of the GST Act (item 7) states: | Detailed Reasoning - These supplies are GST-free …: 7 Goods exported by travellers as accompanied baggage a supply of goods to a *relevant traveller, but only if: (a) the supply is made in accordance with the rules specified in the regulations; and (b) the goods are exported as accompanied baggage of the relevant traveller. The term relevant traveller is defined in section 195-1 of the GST Act which states in part: (a) in relation to goods that are exported - has the same meaning as in section 96A of the Customs Act 1901 ; … Section 96A of the Customs Act 1901 defines a relevant traveller as a person: (a) who intends to make an international flight, whether as a passenger on, or as a pilot or member of the crew of, an aircraft; or (b) who intends to make an international voyage, whether as a passenger on, or as the master or a member of the crew of, a ship. Regulation 38-185.01 of the GST Regulations states: For item 7 of subsection 38-185(1) of the Act, the rules set out in Schedule 5 are specified in relation to the supply of goods to a relevant traveller. As stated above, item 7 provides that a supply of goods to a relevant traveller is GST-free, but only if the supply meets the requirements in paragraph (a) and paragraph (b) of item 7. Paragraph (a) of item 7 requires that the supply is made in accordance with the rules specified in the GST Regulations. Table 1 in Schedule 5 to the GST Regulations sets out the Sealed Bag Rules. In particular SB Rules 7 to 12 state: | Detailed Reasoning - Time when the requirements of the rule must be satisfied: SB Rule 7 Invoice to be retrieved at the point of surrender of goods before the Customs barrier If, before the purchaser presents himself or herself to Customs as departing Australia, the purchaser surrenders the sealed package to the carrier with whom the purchaser is to travel, the seller must retrieve the barrier copy of the invoice at the point of surrender of the package At the time when the purchaser surrenders the sealed package SB Rule 8 Invoice to be retrieved when beyond the Customs barrier If the sealed package is carried beyond the Customs barrier by the purchaser in his or her own possession, the purchaser must then surrender the sealed package to the seller and the seller must retrieve the barrier copy of the invoice After the purchaser presents himself or herself to Customs as departing Australia and before departing on the flight or voyage SB Rule 9 Sealed package to be examined The seller must examine the sealed package when dealing with it under SB rule 7 or 8 to ascertain whether it: (a) remains sealed; or (b) has been tampered with Immediately before the barrier copy of the invoice is retrieved under SB rule 7 or 8 SB Rule 10 Tampering or other discrepancy in respect of sealed package is to be notified the seller must notify the Commissioner as soon as is practicable, in the approved form, if the seller becomes aware that: (a) a package is no longer sealed, or has otherwise been tampered with; or (b) the goods enclosed in the package are not the goods described in the customer copy of the invoice or the barrier copy of the invoice, as the case may be The form in which notification is to be given SB Rule 11 Retrieved invoices must be validated The seller must validate a retrieved barrier copy of an invoice: (a) as soon as practicable; and (b) by the approved method The method by which a retrieved barrier copy of an invoice is to be validated SB Rule 12 Invoices must be matched The seller must reconcile the retrieved barrier copy of an invoice against the seller's copy of the invoice, by an approved method Methods of reconciling a retrieved barrier copy of an invoice against the seller's copy of the invoice It was submitted for the entity that where the purchaser does not surrender the sealed package to the entity at the point of departure, the entity is unable to retrieve the barrier tax invoice, examine the sealed package and validate or reconcile the barrier copy of an invoice against its copy of the invoice. Further, where the purchaser fails to surrender the package to the entity for examination after the Customs barrier, the entity has done all the things that it is required to do under the GST Regulations and the absence of a retrieved barrier copy of an invoice does not prevent the relevant sale from having been made in accordance with the requirements of the GST Regulations as the obligations under certain Sealed Bag Rules only exist where there is a retrieved invoice. It was also submitted that a signed declaration that the entity collects from the purchaser and a copy of the relevant purchaser's ticket is sufficient evidence that the relevant goods have been exported from Australia as part of the accompanied baggage of the purchaser. We disagree with the above submissions, as this analysis suggests that the entire invoice retrieval process prescribed under the Sealed Bag Rules is unnecessary; that is once a duty free sale is made, in store checks are sufficient to make the sale a GST-free export. Clearly this is not the case as if this were the case, SB Rules 7 to 12 would have no utility and would be redundant. The Sealed Bag Rules specified in the GST Regulations are very prescriptive and unless fully complied with, the supply does not satisfy item 7. The Sealed Bag Rules require the suppliers who want to make sealed bag sales to participate in a system for verifying that the traveller has taken the goods out of Australia as part of their accompanied baggage. Where the purchaser does not surrender the sealed package to the entity beyond the Customs barrier for the docket to be plucked, the entity cannot meet its obligations under SB Rules 8, 9, 11 and 12. In this situation it is not possible to verify that the goods have been taken out of Australia as accompanied baggage of the relevant traveller as there is no proof of export. Without this verification, the supply of the goods does not meet the requirements of the Sealed Bag Rules set out in table 1 in Schedule 5 to the GST Regulations. Therefore the supply is not GST-free under item 7. Where the entity treats a supply of goods to a purchaser as a GST-free supply but is subsequently unable to fulfil all of its obligations under the Sealed Bag Rules for any reason, there is an adjustment event under paragraph 19-10(1)(c) of the GST Act as the supply of the goods to the purchaser becomes a taxable supply. Subsection 19-10(1) of the GST Act states: (1) An adjustment event is any event which has the effect of: (a) cancelling a supply or acquisition; or (b) changing the *consideration for a supply or acquisition; or (c) causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition. Example: If goods that are supplied for export are not exported within the time provided in section 38-185, the supply is likely to become a taxable supply after originally being a supply that was GST-free. Accordingly, the entity has made an underpayment of GST and has an increasing adjustment under Division 19 of the GST in relation to the supplies that it has treated as GST-free in its activity statements where those supplies do not meet all the requirements of item 7. | Detailed Reasoning - WET: Under section 5-5 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act) wine tax is imposed on assessable dealings with wine, unless an exemption applies. Further, assessable dealings (other than a customs dealing) will only be taxable if the entity which has the dealing is registered or is required to be registered for GST. Paragraph 7-5(a) of the WET Act provides that an assessable dealing is not taxable and therefore not subject to wine tax if the dealing is a supply that is GST-free (other than because of Subdivision 38-D (child care) of the GST Act). As stated earlier, where the supply of the goods does not meet all the requirements of the Sealed Bag Rules the supply is not GST-free. Therefore, the exemption in section 7-5 of the WET Act does not apply and the dealing is a taxable dealing and subject to wine tax. The entity, at the time of the dealing, has made an under payment of wine tax and is liable to pay wine tax on the supplies that involve supply of wine and do not meet the requirements of item 7. | Detailed Reasoning - Voluntary disclosure: Generally where a taxpayer makes a voluntary disclosure unrelated to any notified compliance activity or statement by the Commissioner requesting voluntary disclosures about a scheme or transaction, an administrative penalty is not applied. However, in the first instance, the Commissioner requires that information provided in voluntary disclosures be provided in an approved form and contain certain information including the relevant accounting period(s) and the amount of each adjustment required. Refer to our website, ato.gov.au for further information on making a voluntary disclosure

Submissions made in the ruling request: In the request for the private ruling it was submitted that: | • Where the purchaser does not surrender the sealed package to the entity at the point of departure, the entity is unable to retrieve the barrier tax invoice, examine the sealed package, validate or reconcile the barrier copy of an invoice against its copy of the invoice.