Australia: GST on digital products and new cross-border rules: A fresh new season or just more reruns?

Last Updated: 21 October 2015
Article by Kelvin Ng and Luke Furness

Most Read Contributor in Australia, August 2016

Key Points:

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.

Previously...

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.

As we outlined at the time of the Budget in May:

  • 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".

Transitional rules

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".

You might also be interested in...

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.