Overseas suppliers that supply or intend to enter the Australian market must plan for these new rules by updating their business systems and ensuring that customer contracts address GST.
A second exposure draft of the Tax Laws Amendment (GST Treatment of Cross-border Transactions) Bill 2015 clarifies new rules imposing GST on digital products and other intangibles supplied from overseas from 1 July 2017. In addition, the draft introduces long-awaited changes to the "connected with Australia" and other cross-border transaction GST rules.
In the May 2015 Federal Budget, the then Treasurer introduced draft legislation that would raise significant GST revenue from overseas digital content providers and "level the playing field" for businesses operating in Australia. Clearly, the targets of these new measures are the offshore operators of music and video streaming services not already paying GST on the supplies they are making to Australian consumers.
- the new rules impose GST on "inbound intangible consumer supplies" made to "Australian consumers" from 1 July 2017;
- the concept of "inbound intangible consumer supplies" is extremely broad ? encompassing not only digital downloads and streaming services, but potentially any service offered through a website or portal;
- to collect the GST, responsibility for the GST liability would in most cases be shifted to the "operator" of the "electronic distribution service" (eg. online store or portal), instead of the entity making the underlying supply (eg. the app developer); and
- these concepts would be the subject of further focus during the consultation phase which closed on 7 July 2015.
What's new in Season 2?
The Government released a second exposure draft of the legislation on 7 October 2015 for a further round of consultation, which closes on 21 October 2015.
The second draft seeks to clarify the operation of the new rules, and incorporates feedback received during the initial consultation phase.
Key developments in the second draft of the legislation are set out below.
Reduced scope of "inbound intangible consumer supplies"
Certain intangible supplies have been carved out:
- the Treasurer may determine classes of intangible supplies are input taxed or GST-free (eg. health and education supplies),. However, the Treasurer can only exercise this power if the Foreign Minister advises in writing that taxable treatment is contrary to Australia's international trade obligations;
- an interest in a "bank account" supplied by a foreign entity or an interest in a foreign superannuation fund will be input taxed "financial supplies".
"Electronic distribution platform" (EDP) and the "operator"
Formerly "electronic distribution service", the second draft clarifies the scope of an EDP and provides rules to identify the "operator" liable for GST. Services which of themselves will generally be excluded include:
- carriage services (eg. ISPs);
- services providing access to payment systems or payment processing services;
- supplies of vouchers which are not taxable supplies under GST voucher provisions.
Generally, the first "operator" of an EDP that receives or authorises the charging of consideration for the supply will be liable. Otherwise, the first "operator" that authorises delivery of the supply will be liable. "Operators" may agree amongst themselves as to who will bear the GST liability.
"Reasonable steps" to identify "Australian consumers"
The draft clarifies the requirement for an overseas supplier to take "reasonable steps" to identify whether a supply is being made to an "Australian consumer" in response to concerns that the steps may be too onerous or costly. In particular:
- reliance on data from usual business systems is now generally sufficient; and
- where applicable, the overseas supplier should collect the customer's ABN or a declaration from the customer that it is registered for GST.
Limited registration regime and other compliance issues
The first draft of the legislation introduced a limited GST registration regime with simplified reporting obligations, but no entitlement to input tax credits. The second draft has now clarified that "limited registration entities":
- will have quarterly reporting periods.
- will be able to revoke their election and to register under the existing GST rules (eg. to enable claiming of input tax credits).
Further, tax invoices will not need to be issued for "inbound intangible consumer supplies".
Most periodic or progressive supplies spanning the period before and after the start date will be apportioned, with only the portion of such supplies made on or after 1 July 2017 caught under the new rules. Generally, subject to certain conditions, supplies made under an agreement entered into before the announcement of the new rules (7.30pm on 12 May 2015) will be not subject to the new rules.
Spin-off: amendments to the "connected with Australia" and other cross-border transaction rules
The new draft legislation also introduces long-awaited changes:
- to the "connected with Australia" rules (noting that "Australia" is now awkwardly referred to as the "indirect tax zone" in the GST law), which were considered to be overly inclusive of non-residents; and
- enabling certain cross-border supplies to be GST-free.
Broadly, the policy objective of these changes is to reduce the number of non-resident entities involved in cross-border, business-to-business transactions being (perhaps inadvertently) drawn into the Australian GST regime. The changes include:
- clarifying the test for when an enterprise is carried on in the indirect tax zone to be more consistent with the practice relating to "permanent establishments" under tax treaties;
- "disconnecting" certain supplies by non-residents from the indirect tax zone (and thereby relying more on the GST "reverse charge" in Division 84 of the GST Act), such as:
- intangible supplies in the indirect tax zone where the recipient is registered for GST; and
- supplies of goods installed or assembled where the recipient is registered for GST and the supplier does not import the goods into the indirect tax zone.
- allowing intangible supplies made to a non-resident but provided to another entity in Australia that is registered for GST (or their employees or officers), to remain GST-free;
- allowing supplies of warranty services to a non-resident warrantor/manufacturer, but provided to an Australian warranty holder, to be GST-free.
This season's finale
Because the suppliers to be subject to the expansion of the GST on digital content will be offshore, the amendments will essentially rely on voluntary compliance. Similar developments overseas and the global scrutiny of business tax practices would, however, suggest that most suppliers will comply.
Assuming this holds true, overseas suppliers that supply or intend to enter the Australian market must plan for these new rules by updating their business systems and ensuring that customer contracts address GST.
Given the rate at which the digital economy evolves, it remains to be seen whether the new rules are sufficiently flexible to futureproof the GST law. As such, businesses should participate in the conversation not only during consultation, but after the changes are implemented.
Finally, it will be interesting to see whether the new rules will achieve its other objective of levelling the playing field for Australian businesses. For everyone else wondering if Season 5 of House of Cards might cost a little bit more in 2017 due to GST, in the words of Frank Underwood, "you might very well think that, we couldn't possibly comment".
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.