Yesterday the Commissioner issued Draft GST Determination GSTD 2013/D2 “Goods and service tax: What are second-hand goods and when are they acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of business under Division 66 of the GST Act”.

The  views in the draft determination  can be summarised as follows:

• “goods” are any form of tangible personal property. However, fixtures are not goods as they form part of the real property to which they are affixed.
• The term “second-hand” takes its ordinary meaning and requires a commonsense approach. Goods are second hand if they have been previously used or are not new. Goods do not become second-hand simply because they were sold by manufacturer or a distributor before being retailed.
• The provisions will be satisfied where an entity acquires second-hand goods in the business of buying and selling second-hand goods. An interview that carries on business involving the leasing and selling of second-hand goods will satisfy the provisions. In this context, second-hand goods will not be acquired for the purposes of sale or exchange in the ordinary course of business simply because there is an intention that the goods will ultimately be sold after they are no longer required.

In the third.point, the Commissioner seeks to apply the reasoning of the Federal Court in Lease Plan Australia Limited v Commissioner of Taxation [2009] FCA 1309 where the Court found that the taxpayer acquired vehicles for the purpose of leasing and selling those vehicles. In that case, the contractual arrangements expressly provided for the sale of the vehicles at the end of the lease. Applying this decision, the Commissioner  considers that the section will be satisfied in the following circumstances:

• the entity acquires second-hand goods in the ordinary course of its business:
• the contractual arrangements under which the second-hand goods were acquired and leased contemplate that the entity will lease the goods back to the vendors for a defined term and then sell the goods at conclusion of the lease term:
• the contractual arrangements provide that proceeds from selling the second-hand goods will be compared with a residual value agreed upon commencement of the arrangements, in order to determine the extent of any indemnity payable by the lessee, or, entitlement of the lessee to participate in profits from the sale of the goods.

The Commissioner seeks to make a distinction  with the position where second-hand goods are  acquired by an entity for use in its enterprise and those goods are ultimately sold when they are no longer required. In those circumstances, the goods are not acquired in the ordinary course of a business of selling goods. That view does not appear controversial. However, the Commissioner appears to   require that the intention to sell the goods be expressly included in the contractual arrangements. In my view, there may be cases where the contractual arrangements do not expressly provide for the sale of goods, but the intention to sell the goods as part of the ordinary course of business is nevertheless evidenced by the way the business is conducted. Support for this view  is found in the following observations of the Federal Court in Leaseplan (at [39]) (emphasis added):

“Leaving aside the legal characterisation of the composite “sale and lease back” of the vehicles,  the evidence establishes that the Leaseplan’s  business purpose in acquiring the vehicles was to lease them and to sell them at the end of the lease. So was necessary to provide the forecasted financial returns to the Leaseplan’s  business, either by returning the anticipated proceeds of sale or to trigger the lessee’s top-up obligations. I accept that the whole transaction was a composite operation, where the disposal of the vehicles for forecasted valuable consideration was  integral to Leaseplan’s business.

The question therefore, is whether the evidence establishes  the requisite business purpose of the entity. The terms of the contractual arrangements will certainly assist in providing that evidence, but in my view the scope of the enquiry should not be limited to the terms of the contract. It should be open to have regard to all of the surrounding circumstances to establish the purpose of the entity in acquiring the goods.