Private ruling: Valuable metal supplies
Date of advice: 20 September 2018
Published: November 2018
Ruling period: From 1 July 20XX and periods following
Date scheme commenced: From 1 July 20XX

Ruling: Q1: Are you entitled to claim input tax credits under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for acquisitions of catalytic converters from non-registered sellers? | A1: No, you are not entitled to claim input tax credits for acquisitions of catalytic converters from non-registered sellers because you do not meet the record keeping requirements under section 66-17 of the GST Act.

Relevant facts and circumstances: 1. You operate a scrap metal business as a sole trader. 2. You neither export nor import goods. 3. You do not currently have a second-hand dealers’ licence. 4. You source the scrap from a combination of private and business operators, who may be registered or unregistered for GST. 5. None of the items you deal in are antiques or collectables. 6. You purchase generally the following categories of scrap items for resale to other scrap metal recyclers or processors on a ‘as is basis’ (i.e. you do not modify or change your scrap metal stock or directly extract any metals before sale): a. Car spare parts – mainly a car part called ’catalytic converter’. A catalytic converter is a device incorporated in the exhaust system of a motor vehicle, containing a catalyst for converting pollutant gases into less harmful ones. Upon the failure of this car part, the catalytic converter is recycled into scrap and the metals in these catalytic converters can be extracted. Different catalytic converters contain a combination of the following catalyst in various quantities. The value of scrap catalytic converters are 80%-95% attributable to the value of the below mentioned catalysts (metals): i. a. Platinum ii. b. Rhodium iii. c. Palladium b. Vehicle batteries – which contain lead c. Second-hand cars d. Copper. 7. You buy and sell all inventory for resale (not for any further modification or manufacture) in the ordinary course of your business. 8. You are registered for GST on quarterly cash basis. 9. None of the goods you buy and sell are divided for resale. 10. In each purchase transaction, the purchase value within each category above may or may not exceed $300 (individual units within each category or collectively within each category). 11. You may purchase items in above listed categories individually or in bulk. However, you may collect all items from various purchase transactions and then sell each category in bulk. 12. You have purchased items in the above-mentioned categories since the inception of your scrap metal business in July 20XX and have not claimed any input tax credits for acquisitions from non-registered sellers. 13. You stated you were not aware that a ‘scrap metal industry statement by supplier’ form is generally required to be maintained when purchasing from non-registered sellers. However, as an alternative you always issue a copy of a document (not a tax invoice) to non-registered sellers from whom you acquired the various second-hand items in the above categories. The document maintained by you and issued to non-registered sellers contains the following information: a. Name of the non-registered seller / supplier b. Address of the non-registered seller / supplier c. Date of transaction d. Description and quantity of the item being supplied to you by the non-registered seller/supplier e. Amount you paid f. Signature of the non-registered seller/supplier. 14. You do not extract any metal from scrap. You only sell scrap directly to other businesses and all sales are treated as taxable supplies. 15. Each catalytic converter contains an estimated amount of 1 gram of platinum but this is not necessarily exact as the condition of them varies from item to item. They also contain quantities of other metals which are not ‘valuable metals’. 16. You do not acquire the catalytic converters to use in manufacture.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 29-10; 38-385; 40-100; 66-5; 66-10; 66-15; 66-17; 195-1 | A New Tax System (Goods and Services Tax) Act 1999 Division 11

Reasons for decision: Summary: Division 66 of the GST Act allows input tax credits on the acquisition of second-hand goods from non-GST registered entities purchased for resale. To determine whether you are entitled to input tax credits for your acquisitions of the catalytic converters, it needs to establish whether the catalytic converters are second-hand goods or not. If they are, then whether the requirements set out in Division 66 for claiming ITCs are met. | Detailed Reasoning - Are catalytic converters in the current case second-hand goods?: As you are seeking advice to cover the tax periods in the previous four years and the GST Act was amended on 1 April 2017 to change the definition of ‘second-hand’ goods, your position must be examined with reference to both the previous and the current law. Under both positions, second-hand goods are generally goods that are not new or already used for something else. Here, the catalytic converters are being removed from the car in which they were originally installed because they are now of limited utility. This meets the ordinary meaning of the term ‘second-hand goods’. However the GST Act excludes certain things from being second-hand goods and in this respect the law has changed. | Detailed Reasoning - The pre 1 April 2017 GST Act amendment position: The previous definition stated: ‘Second-hand goods’ is defined in the GST Act section 195-1 to not include: (a) precious metal; or (b) goods to the extent that they consist of gold silver platinum or any substance which, if it were of the required fineness, would be precious metal; or (c) animals or plants It is accepted that catalytic converters are ‘goods’ as ordinarily defined. Before 1 April 2017, the catalytic converters would not be second-hand goods if they were precious metals, or to the extent they consist of gold silver platinum or any substance which, if it were of the required fineness, would be precious metals. ‘Precious metal’ is defined to mean: (a) gold (in an investment form) of at least 99.5% fineness; or (b) silver (in an investment form) of at least 99.9% fineness; or (c) platinum (in an investment form) of at least 99% fineness; or (d) any other substance (in an investment form) specified in the regulations of a particular fineness specified in the regulations. In this case, the catalytic converters contain platinum at all relevant times. However, the platinum content is not ‘in an investment form’ as ‘ GSTR 2003/10 Goods and Services Tax: What is 'precious metal' for the purposes of GST? ’ sets out the first requirement that: To be the metal gold, silver or platinum, the item must have the character of the metal rather than the character of a thing made from the metal [per paragraph 11]. The catalytic converters you trade are not necessarily traded with reference to the spot price of platinum but rather what price the scrap market in catalytic converters is currently set. Further, ’investment form’ takes its ordinary meaning and: 19. Trade in the metals gold, silver and platinum that is undertaken by entities carrying on enterprises that principally acquire and supply metals is undertaken in the bullion market. The entities that trade in this market are the banks, bullion dealers, commodity brokers and stockbrokers that generally deal in gold, silver or platinum in that market. 20. What is an investment form takes its meaning in this context. We therefore consider that, in this context, the expression ‘in an investment form’ means the metal must be in a physical form that is capable of being traded on the international market for that metal by traders in that metal in that market. The relevant traders are therefore the banks, bullion dealers, commodity brokers and stockbrokers that generally deal in gold, silver or platinum in the bullion market. … 21. The form is only relevant to the extent that it facilitates trading in the metal. If the form of an article has physical characteristics other than what is necessary for trade in the metal, it is not in an investment form and does not have the character of the metal only. At the time you purchase catalytic converters in their original form, they will not be in an investment form as it does not meet the character of solely the metal itself and is not the state of the metal that would be expected to be traded by bankers and stock traders. It also does not correspond to the legislative context of precious metals in the GST Act in section 38-385 and section 40-100. Therefore, the catalytic converters are neither precious metals, nor goods that to the extent consist of gold silver platinum or any substance which, if it were of the required fineness, would be precious metals. As the final limb to the definition of second-hand goods excludes plants and animals and does not apply here, under the GST Act, the catalytic converters would meet the definition of ‘second-hand goods’ as defined before 1 April 2017. As a result, you may be entitled to input tax credits for your acquisitions of these second-hand goods under Division 66 provided the requirements set out in that Division are met. | Detailed Reasoning - Application of Division 66 of the GST Act: It is accepted that as you on sell the catalytic converters to other parties in the same condition you acquire them, they are held for sale or exchange and not for manufacture. This principle is considered in GSTD 2013/2 ‘Goods and services tax: when are second-hand goods acquired for the purpose of sale in the ordinary course of business under Division 66 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? ’. Valid tax invoices are not available where the catalytic converters are bought from someone who is not registered for GST. Subsection 29-10(3) of the GST Act requires you to hold a tax invoice to allow you to attribute the input tax credits to the extent that you provide payment. However section 66-17 of the GST Act applies to vary this outcome for acquisitions and adjustments. Section 66-17 states: (1) If you make a creditable acquisition of second-hand goods and the supply of the goods to you was not a taxable supply: (a) subsection 29-10(3) applies to the acquisition as if references to a tax invoice were references to a record you prepared that complies with this section; and (b) subsection 29-20(3) applies to an adjustment event relating to the acquisition as if references to an adjustment note were references to a record you prepared that complies with this section. (2) To comply with this section, the record must: (a) set out the name and address of the entity that supplied the goods to you; and (b) describe the goods (including their quantity); and (c) set out the date of, and the *consideration for, the acquisition. (2A) Subsection 29-10(3) does not apply to a creditable acquisition of second-hand goods if: (a) the supply to which the acquisition relates is not a taxable supply; and (b) the amount that would have been the value of the supply (if it had been a taxable supply) does not exceed $50, or such higher amount as the regulations made for the purposes of subsection 29-80(1) specify. (2B) Subsection 29-20(3) does not apply to a decreasing adjustment relating to a creditable acquisition of second-hand goods if: (a) the supply to which the acquisition relates is not a taxable supply; and (b) the amount of the adjustment does not exceed $50, or such higher amount as the regulations made for the purposes of subsection 29-80(2) specify. (3) This section has effect despite section 29-10 (which is about attributing the input tax credits for creditable acquisitions) and section 29-20 (which is about attributing decreasing adjustments). Subparagraph 66-17(1)(a) ensures you do not need a tax invoice but only if you create a record that complies with the section. The requirements of the section are set out in subsection 66-17(2) of the GST Act. The record is not required where you acquire a catalytic converter for $75 or less per subsection 66-17(2A). However, in the record keeping discussion below, you still need to satisfy yourself that the unregistered trader in the transaction is in fact unregistered. | Detailed Reasoning - Record keeping for transactions greater than $75:: Section 66-17(2) sets out the record keeping requirements. These are: (a) set out the name and address of the entity that supplied the goods to you; and (b) describe the goods (including their quantity); and (c) set out the date of, and the consideration for, the acquisition. In the information you provided you stated that you do not use the ‘Scrap metal industry statement by a supplier’ form but you collect the following information when you acquire a catalytic converter from an unregistered vendor: a. Name of the non-registered seller / supplier b. Address of the non-registered seller / supplier c. Date of transaction d. Description and quantity of the item being supplied to you by the non-registered seller/supplier e. Amount you paid f. Signature of the non-registered seller/supplier. The only field on the statement relevant to you that you do not collect is the proof of identity of the supplier. This is not explicitly stated in subsection 66-17(2) as a requirement. However, it is a common law requirement following the matter of VCF and Commissioner of Taxation [2008] AATA 731 (VCF). In VCF, the scrap dealer made what are termed ‘door sales’ whereby customers would walk in and sell miscellaneous items of scrap metal often for cash. They prepared records called ‘purchase documents’. The details collected were: ● the name and address of the door trader, ● the type, ● quantity (weight) of scrap metal, ● the date, ● price the applicant paid for the scrap and ● occasionally, the vehicle registration number of the seller. Crucially, the evidence given by the managing director of the company showed that ‘no confirmation of identity was required by reference to a driver’s licence, there was no evidence that checking was part of the system’ (per paragraph 12 of the judgement). When a sample of the door trades was tested by the ATO a significant number of trades were found to be made under a false identity or information. Even with vehicle registration recorded, the results showed that a deregistered vehicle was used by eight differently named people which suggested that one person was trading scrap under 8 false identities. Ultimately the Tribunal decided that it was not sufficient for the scrap purchaser to merely collect the information set out under subsection 66-17(2). In paragraph 39 Deputy President McDonald decided that: The requirement in s 66-17 assumes the provision of accurate identity information. There is little point to s 66-17 if the information provided transpires to be false. The section is designed to provide relief to purchasers of scrap metal from the sale to them by those not engaged in business. It is not intended to extend that relief to those who engage in the sale as part of their business activity . In order to qualify for the benefit the scrap metal purchaser must comply with the requirement of obtaining identity information. The obtaining of the benefit carries with it the concomitant duty to provide the identity details of the door trader [emphasis added].The reason is obvious. It is to ensure purchasers who conduct transactions arising in the course of the conducting of a business are not participating in tax avoidance. Clearly not every piece of information will be accurately recorded and mistakes are bound to occur. In the instant case the evidence, arising from the audit, establishes to the satisfaction of the Tribunal, that more than mere clerical error was involved in the provision of the information to the applicant. Given that you are not currently collecting identity information and using that information to satisfy yourself that the information provided is correct, you will not be able to claim input tax credits for past transactions under Division 66. | Detailed Reasoning - The post 1 April 2017 amendment position: ‘Second-hand goods’ is currently defined in section 195-1 of the GST Act to not include: (a) goods (except incidental valuable metal goods) to the extent that they consist of *valuable metal; or (b) (Repealed by No 76 of 2017) (c) animals or plants As ‘incidental valuable metal goods’ are excluded from the definition setting out what is not second-hand goods, if catalytic converters are ‘incidental valuable metal goods’, they will be second-hand goods for GST purposes. ‘Incidental valuable metal goods’ means goods: (a) acquired for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business; and (b) that consist wholly or partly of valuable metal; and (c) in relation to which any of the following applies: (i) the goods are collectables or antiques, and the goods are not *precious metals; (ii) at the time of the acquisition, the market value of the goods exceeds the valuable metal threshold; (iii) the goods are in a class determined by the Minister, by legislative instrument, for the purposes of this subparagraph. The catalytic converters were purchased for sale or exchange, so paragraph (a) is met. Paragraph (b) requires an assessment whether the catalytic converters consist partially or wholly of a ‘valuable metal’. ‘Valuable metal’ is defined to mean: (a) gold, silver or platinum; or (b) any other substance specified for the purposes of paragraph (d) of the definition of precious metal in this section. The catalytic converters meet the definition of ‘valuable metal’ as they contain platinum so we must consider paragraph (c) of the definition of ‘incidental valuable metal goods’, which requires only one of its three subparagraphs to be satisfied in order to be considered ‘incidental valuable metal goods’. | Detailed Reasoning - Subparagraph(c)(i) the goods are collectables or antiques, and the goods are not precious metals: The first limb is antiques and collectables. You have stated you do not deal in these so this limb is not applicable in this case. | Detailed Reasoning - Subparagraph(c)(ii) at the time of the acquisition, the market value of the goods exceeds the valuable metal threshold: The second limb requires that at the time of acquisition of the catalytic converters, their market value as catalytic converters exceeds the ‘valuable metal threshold’. ‘Valuable metal threshold’ is a defined term. In section 195-1 it states valuable metal threshold has the meaning given by section 86-10 of the GST Act. Section 86-10 is extensively defined but for the purposes of dealing with your current supplies, if the value of the goods exceeds the intrinsic value of any constituent valuable metals by a threshold amount of at least 10%, this highlights the good should properly be characterised as consisting of the value-added product, rather than the constituent metal. An example of an incidental valuable metal supply is where a catalytic converter is supplied to you for $150, containing platinum worth $33 based on the market value of the metal quantity. If this is the case, it is an incidental valuable metal supply because the value of the good exceeds its metal content value by more than 10 percent (100% x (150 – 33)/33) = 354.54 percent. Using the example above, when the supply of the catalytic converter was only $15 with a market value of platinum of $33, the value of the good does not exceed the market value of the metal by 10 percent as the value of the good is below the market value of the metal. Presumably the cost of acquiring catalytic converters varies and if it exceeds the valuable metal threshold you may still be able to apply 195-1 (c)(iii) below. | Detailed Reasoning - Subparagraph(c)(iii) the goods are in a class determined by the Minister, by legislative instrument, for the purposes of this subparagraph: Currently, you do not meet the requirements of the third limb for reasons discussed below. Your future supplies could be ‘incidental valuable metals’ where you adopt the changes set out below to meet the requirements in the event that they do not meet the requirements set out in subparagraph (c)(ii) of the definition.. The consequence of meeting the ‘incidental valuable metal requirement’ is that you will be acquiring second-hand goods and you are entitled to apply the input tax credit concessions allowed in Division 66 of the GST Act. For the purpose of subparagraph (c)(iii) in the definition, the Minister has made a legislative determination A New Tax System (Goods and Services Tax) (Incidental Valuable Metal Goods) Determination 2017 (No. 1) (the Determination) to determine that a particular class of goods will be incidental valuable metal goods if all of the criteria are met. Section 6 of the Determination sets out the requirements for goods to be determined incidental valuable metal goods where all of the conditions are met: (1) This section determines, for the purposes of subparagraph (c)(iii) of the definition of incidental valuable metal goods in section 195-1 of the Act, a class of goods that consists of items, each of which meets these conditions: (a) an entity (the dealer) acquires the item, from an entity that is not registered, for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business; (b) the item consists wholly or partly of valuable metal; (c) the physical characteristics of the valuable metal in the item have been substantially transformed by means of a manufacturing process, or by skilled craftsmanship, that was undertaken to produce the item; (d) the item is commercially distinct from the valuable metal in it; (e) the dealer supplies the item to an Australian consumer; (f) at the time of the supply to the Australian consumer, the dealer holds a date-stamped photograph of the item, which allows the physical characteristics of the item to be clearly identified at that time; (g) throughout the period starting when the dealer acquires the item and ending when the dealer supplies the item to the Australian consumer, the dealer: (i) is registered; and (ii) is licensed as a second-hand goods dealer in every State or Territory in Australia in which the supplier carries on a business of dealing in second-hand goods; and (iii) satisfies the record keeping obligations under subsections 29-10(3) and 29-20(3) of the Act, as modified by section 66-17 of the Act to the extent the entity is required to comply with those obligations. In order for each catalytic converter sold to be an incidental precious metal, the conditions in subsections 1(a) to 1(g) must be met. Subparagraphs 1(a) to (d) have been dealt with in the pre law change position – they are all met. You advised that you are not making any export supplies so your sales are to an Australian consumer, thereby satisfying subsection 1(e). At the time you make the sale you do not hold a date-stamped photograph of the item, which allows the physical characteristics of the item to be clearly identified at that time. Subsection 1(f) is not met. Subsection 1(g) is also not met as you do not hold a second-hand goods dealer licence in every state that you operate and you do not satisfy the record keeping requirements set out in subparagraph 1(g)(iii). For acquisitions where the catalytic converter is not an incidental valuable metal under either the second or third limb of the definition, you must treat the value of the valuable metal (the platinum) as not second-hand goods, but a partial input tax credit may be available in the apportionment of the value of the goods that are not platinum. For example where a catalytic converter is purchased for $15, if the value of the metal was $5, one third of the acquisition is not second-hand goods and will be valuable metal and two thirds will be second-hand goods where all other requirements including record keeping are met.