The government has announced substantive amendments to the Australian GST cross border rules with effect from 1 July 2012. These amendments are likely to be largely positive for businesses by reducing the numbers of non-residents in the GST system and limiting the circumstances where Australian suppliers need to charge GST to nonresidents. However, these benefits appear to be at the cost of some of the flexibility in the current rules and the proposed rules will likely create new areas of uncertainty for taxpayers. Clients will need to review their cross border arrangements in the light of the proposed changes.
The Federal government has announced a major overhaul of the Australian GST cross border rules. This is likely to impact on almost every inbound and outbound transaction. The changes are generally designed to find a balance between protecting the GST revenue and not imposing unnecessary costs and administration on non-residents.
The current GST cross border rules are overly complex. Non-residents making supplies to Australian customers often have a GST liability on those supplies, with the consequence that they need to register for GST, amend their contracts to allow them to collect GST from the customer and remit the GST in their GST returns, often with no revenue benefit to the government. Many such non-residents also fail to comply with their GST obligations because they are not aware of the current rules (which can lead to significant GST exposures). Further, Australian suppliers often need to charge GST to non-resident customers. While the non-resident can choose to register for GST to claim back the GST, many chose not to do so with the consequence that the GST is a real cost to the parties. The Australian Taxation Office's expansive interpretation of the rules has further compounded the problem.
The proposed reforms arise out of the Board of Taxation's report into the application of GST to cross border transactions (Board's report). The government has released the Board's report and indicated that it has accepted all of the Board's recommendations. The amendments are proposed to apply from 1 July 2012 and are subject to the agreement of the States and Territories.
Some of the interesting recommendations and comments in the Board's report are summarised below:
- The 'connected with Australia' rules (which are equivalent to the place of supply rules in other GST / VAT jurisdictions) primarily determine whether nonresidents are liable for GST on their arrangements. It is proposed that these rules will be amended to limit the circumstances where supplies of goods, services and intangibles by non-residents to registered Australian businesses are connected with Australia (and hence subject to GST). At the same time, the compulsory reverse charge provisions for Australian businesses will be expanded.
- It is proposed that the supply of goods between nonresidents that are leased to an Australian business will not be connected with Australia and hence not subject to GST. Combined with the proposals in the previous point, this will ensure that the non-resident seller and purchaser of the leased goods do not need to register for GST and account for GST solely because of the sale (as is the case under the current rules).
- While services provided by Australian businesses to non-residents are generally GST-free under the export provisions, there is currently an exemption to the GSTfree export rules such that supplies to non-residents that are provided to an entity in Australia are taxable. It is proposed to limit the exemption so that supplies made to a non-resident, but provided to a registered business in Australia or employee or office holder will be GST-free.
- These amendments are likely to go some way to reducing the numbers of non-residents that need to be in the GST system. However, the proposed rules are likely to create new problems, particularly in relation to the need under the proposed rules to identify whether customers and non-residents are carrying on a business. It remains to be seen whether the amending legislation or the ATO will provide safe harbours to simplify this issue.
- Under current rules, resident agents of non-residents generally have the GST liability on the non-resident's supplies and are entitled to claim GST credits on the non-resident's acquisitions. The rules currently only apply to common law agents. The Board's report recommends that the GST agency rules remain, however, they will be expanded to commission agents and the parties will now need to agree to apply the GST agency rules.
- Interestingly, there is no discussion in the report on voluntary reverse charge agreements, under which non-residents with a GST liability are able to agree with the customer that the customer will instead have the GST liability (and therefore allow the non-resident to remain outside the GST system). Presumably, the GST voluntary reverse charge provisions will be removed, given the proposed changes to the connected with Australia rules.
- The GST registration process for non-residents will be simplified and streamlined.
- The Board recommended against the introduction of a direct GST refund system.
- The Board considered that it was not administratively feasible to try to bring non-resident supplies of low value goods and services (such as software and music files downloaded over the internet) into the GST system at this time.
- There is no discussion in the report on whether there will be any transitional relief given to existing arrangements.
These proposals represent major changes to the GST cross border rules. Overall, they appear to solve some of the current problems associated with the GST cross border rules. In particular, they are likely to reduce the numbers of non-residents in the GST system (with the consequent cost and GST administration benefits) and limit the circumstances where Australian suppliers need to charge GST to non-residents. However, these benefits appear to be at the cost of some of the flexibility in the current rules (such as voluntary reverse charge agreements). We also envisage that the proposed rules will create new areas of uncertainty, such as the obligation to determine whether customers and non-residents are carrying on a business.
It will be important for both Australian and non-resident businesses to review their cross border arrangements in the light of the proposed changes. Any GST advice previously sought on cross border arrangements will need to be reviewed in the light of the proposed rules.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.
