Businesses selling goods either into or out of Australia need to consider the tax consequences of those arrangements, including goods and services tax (GST), income tax and withholding tax. The purpose of this article is to discuss some of the tax issues relevant to such businesses.
GST has been in place in Australia for approximately eight years. One of the more complex areas of GST is the application of the cross border rules, that is, when GST should be charged on inbound and outbound transactions involving Australia. Over the last few years, the Tax Office has issued nine public GST rulings, comprising some 800 pages of commentary, on the GST cross border rules.
The discussion below deals with arrangements where goods are sold cross border under various Incoterms (the standard trade definitions most commonly used in international contracts and published by the International Chamber of Commerce). This article does not deal with the GST consequences of more complex arrangements, for example, cross border lease arrangements.
Importations of goods
The GST implications for an overseas business importing goods into Australia depend to some extent on the Incoterms used between the parties.
Normally, where an overseas business supplies goods to an Australian customer under DDP (Delivered Duty Paid) or FIS (free into store) terms, the overseas business needs to register for GST. From a GST perspective, consideration needs to be given both to the importation of the goods and the sale of the goods.
In relation to the importation of the goods into Australia, the overseas business imports the goods (ie its name and Australian Business Number or ABN are listed on the customs entry) and it pays GST on the importation to Customs. Since it is registered for GST, it is entitled to claim back the GST paid on importation. The overseas business could also register for the deferred GST scheme, where an importer is able to defer paying GST on import until its next GST return, at which stage it is able to claim the GST credit on the importation.
The sale of the goods by the overseas business to the customer is taxable (ie subject to GST). This means the overseas business needs to recover GST from the customer (and make sure it can do so under its contractual terms), remit GST to the Tax Office in its GST returns and issue a tax invoice to the customer. The overseas business therefore needs to have the systems in place to account for GST.
In contrast, where the overseas business supplies goods to an Australian customer under FOB (Free on Board) or CIF (Cost, Insurance and Freight) terms, the overseas business can normally stay outside the GST system. In these circumstances, the customer imports the goods and deals with any GST on the importation. The sale of the goods are normally not subject to GST.
The above rules are relatively straightforward, but they do not always apply. Where the customer imports the goods into Australia, it is possible that the sale of the goods by the overseas business to the customer is subject to GST. This would be the case, for example, where the overseas business was required to install the goods in Australia.
Alternatives to registration
There are a number of alternatives available to overseas businesses that may allow them to remain outside the GST system. There are two main options available.
First, the overseas business could appoint a resident agent for the purpose of importing and selling the goods. In these circumstances, the resident agent and not the overseas business would be responsible for remitting GST on importation and sale.
Second, the overseas business and the customer can enter into what is known as a reverse charge agreement. Under this agreement, the customer and not the overseas business would be responsible for paying any GST on the sale of goods. The customer would generally be entitled to claim back the GST and consequently there would be no net effect for the customer. Such an agreement often allows the overseas business to remain outside the GST system.
Exports of goods
Generally, the export of goods from Australia is relatively straightforward. Exports are GST-free where certain requirements are met. Accordingly, where Australian businesses export goods to overseas businesses, there is generally no need to charge GST.
However, problems can arise where Australian businesses sell goods to overseas customers, and title and delivery occur in Australia (for example, under Ex-warehouse terms). In these circumstances, the Australian business often needs to charge GST to the overseas customer.
Complex GST issues arise on cross border transactions involving goods, and care needs to be taken to structure such arrangements to ensure there are no adverse GST consequences for the parties. It is recommended that businesses seek tax advice on their arrangements.
Sale of Goods
Overseas suppliers will only be subject to Australian income tax on their Australian sourced income. Ultimately, the determination of source is a question of fact and degree, and must be considered based on the individual terms and circumstances of each particular sale of goods arrangement entered into by suppliers with Australian customers.
The courts in Australia generally look at factors such as where the business is carried on, where the contract for sale is signed and where the goods are supplied. However, in general, for a sale of goods, the place where the contract for sale is signed is indicative of the source of income. So, if the contracts for the sale of goods are signed outside of Australia, the income derived by the supplier is likely to have no Australian source and thus would not be subject to Australian income tax.
However, where the sale of goods is derived from a series of operations, then the source of the income may be determined by where those operations are carried out. Accordingly, if some of the activities for the sale of goods are carried out by the supplier in Australia, such as manufacture, storage or delivery, at least part of the income derived by the supplier may be properly regarded as having an Australian source.
Where the income has an Australian source, the supplier will generally recognise the income at the time that the supplier has a present right to receive an ascertainable amount, without being subject to any contingency. Ordinarily this will be the time that the supplier has delivered the goods and issued an invoice (if required) to the Australian customer, regardless of whether or not payment has been made by the Australian customer.
Tax treaty protection
Where an overseas supplier has earned Australian source income from a sale of goods arrangement, that income may be protected from Australian taxation if an applicable tax treaty or double tax agreement (DTA) is in force. A DTA is a treaty/agreement between Australia and another country for the avoidance of double taxation and fiscal evasion. Australia has currently concluded over 40 DTAs. A DTA will prevail where there are inconsistencies between the provisions of the DTA and Australia's domestic income tax law.
In particular, all of Australia's DTAs provide that the 'business profits' of a taxpayer that is a resident of one country will not be taxable in the other country unless the taxpayer carries on a business in that other country through a 'permanent establishment'. Accordingly, the income derived by an overseas supplier from a sale of goods to an Australian customer, will only be subject to Australian income tax if the supplier has a 'permanent establishment' in Australia, provided that the supplier is resident in a treaty country.
Each DTA is different. The relevant treaty must be examined for each sale of goods arrangement.
A 'permanent establishment' is generally defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. A permanent establishment is usually defined to specifically include any of (not an exhaustive list):
- A place of management.
- An office.
- A branch.
- A factory.
Furthermore, a supplier can be deemed to have a permanent establishment in Australia in certain circumstances, such as:
Where 'substantial equipment' is used in Australia by, for or under a contract with the supplier.
Where the supplier carries on a business in Australia through an agent (that is not of independent status) who has the authority to conclude contracts on behalf of the supplier and habitually does so. For example, where the supplier has an Australian resident employee or director who regularly executes sales agreements in Australia on behalf of the supplier.
However, an overseas supplier will usually not be deemed to have a permanent establishment in Australia merely due to carrying on certain activities that are preparatory or ancillary in nature, such as:
- Using facilities in Australia solely for the purpose of storage, display or delivery of its goods or merchandise.
- Maintaining a stock of goods in Australia solely for storage, display or delivery of its goods or merchandise.
- The maintenance of a fixed place of business for advertising or other ancillary activities.
Also, the existence of an Australian subsidiary of the supplier will not, of itself, constitute a permanent establishment of the supplier since the subsidiary is a separate legal entity from the supplier.
If a supplier has a 'permanent establishment' in Australia, the supplier will be subject to Australian taxation on all Australian sourced income it has derived through that permanent establishment. If a supplier does not have a permanent establishment in Australia, the income derived by the supplier from a sale of goods to Australian customers would generally be protected from Australian taxation.
It is noted that only suppliers that reside in a treaty country will be able to rely on treaty protection from Australian taxation for their Australian sourced income.
The Australian taxation implications for overseas suppliers for rental arrangements are similar to those for sale of good arrangements. That is, the supplier will only be subject to Australian taxation on any Australian sourced income. As above, the place where the contract for sale is signed will generally be indicative of the source of income, although the determination of source will ultimately be a question of fact and degree.
Also, as for a sale of goods, an overseas supplier may be able to rely on treaty protection from Australian taxation on its Australian rental income, provided that the supplier is resident in a treaty country and does not carry on a business in Australian via a 'permanent establishment'.
In addition to the above, there may be Australian withholding tax implications depending on the rental arrangement, whether there is a DTA in force or not, and if there is a DTA, the terms of the specific DTA.
Generally, there should be no stamp duty implications for cross border sales or leases of goods into Australia.
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