Australia And The Digital Economy.
Legal News & Analysis - Asia Pacific - Australia - Tax
1 November, 2019
Consistent with other jurisdictions taking action, Australia has chosen to take a unilateral approach in respect of GST and the digital economy. As of 1 July 2017, Australia’s GST law has been broadened to capture supplies of intangible items from foreign suppliers to Australian "non-business" consumers. These provisions are wide-reaching, and impact foreign suppliers of online digital content (e.g. movies, television shows, apps and music) and advisory and professional services (e.g. brokering, legal and financial advisory services) who make supplies to Australian based consumers and who otherwise have no business connection with Australia.
The GST law was also amended with effect from 1 July 2017 to impose GST on supplies of low value goods (i.e. goods with a value of less than A$1,000) from foreign suppliers to Australian consumers. Under these amendments, foreign suppliers (or deemed suppliers) of low value goods to Australian consumers may be required to register for, collect and remit GST on supplies of low value goods to Australian consumers.
Australia was one of the first jurisdictions to implement GST regimes which target foreign supplies of online digital content and supplies of low value goods from foreign suppliers to Australian consumers. Similar to other jurisdictions, a key driver of the introduction of these regimes was the perceived need to protect tax revenue and Australian domestic businesses from unfair competition.
The introduction of these amendments has raised a number of practical complexities and issues, in particular, the need for foreign suppliers or deemed suppliers who meet the annual registration turnover threshold of A$75,000 or more to now register for Australian GST with the Australian Taxation Office (ATO).
Impact on foreign suppliers
Foreign suppliers of intangible items and low value goods to Australian consumers will need to determine whether they will be subject to the new provisions and, if so, take steps to register for Australian GST.
Foreign suppliers will also need to review and monitor their business systems and processes to ensure that they are capable of complying with the new information requirements.
The reach of Australian GST on inbound supplies has expanded considerably under the new measures introduced on 1 July 2017. There are two relevant aspects to the changes:
- foreign suppliers making supplies of intangible items (basically, anything other than real property or goods) to Australian "non-business" consumers may be required to register for, collect and remit Australian GST of 10% in respect of those supplies;
- the supply of low value goods (i.e. where the value of the goods is less than A$1,000) from a foreign supplier (or deemed supplier) to Australian consumers will also attract GST payable by the supplier.
Inbound supplies of intangibles
In the past inbound supplies of things other than real property or goods generally only attracted Australian GST where the supplier made the supply through a business they carried on in Australia. This means, for example, a customer in Australia could have downloaded digital products from a supplier outside Australia without the supplier needing to register and remit any Australian GST.
Under the new provisions, GST now applies if all of the following requirements are met, even where the supplier has no presence in Australia:
- the customer is an Australian resident; and
- the customer is not registered for Australian GST; or
- if registered, the customer does not acquire the thing supplied for the purpose of a business they carry on (Australian consumers); and
- the supplier makes or expects to make supplies to Australian consumers with a value of approximately A$75,000 or more in any rolling 12 month period (which means that the supplier is required to register for Australian GST).
Responsibility for the GST liability may be shifted to the operator of an electronic distribution platform (EDP) if the supply is made though an EDP and the operator controls any of the key elements of the supply, such as price, terms and conditions or delivery arrangements. Operators and suppliers may also agree in writing that the operator will assume liability.
The complexities for foreign suppliers in applying these rules are obvious. Here are a few common questions and some guidance:
How do suppliers identify whether the customer is an Australian resident?
The supplier can treat a supply as not made to an Australian consumer if the supplier has obtained particular evidentiary requirements, and reasonably believes that the customer is not an Australian consumer. The ATO has sought to provide guidance on what steps a foreign supplier should take to establish whether a customer is an Australian resident in a public ruling (Goods and services tax: making cross-border supplies to Australia consumers GSTR 2017/1). In particular, the ATO accepts that a supplier can satisfy the residency test relying on information gathered through existing business systems (such as address or credit card details) where these provide a reasonable basis for believing the customer is not a resident of Australia.
How do suppliers know if their customer is registered for Australian GST?
The ATO’s view is that a supplier can only rely on this exception where the customer has disclosed an Australian Business Number (ABN) and provided a declaration or other information that indicates that they are registered for GST. An ABN alone is not sufficient as a customer can have an ABN and not be registered for GST.
Suppliers can check a customer’s ABN and whether they are registered for Australian GST on the Australian Business public register on the ATO website. However, the ATO view suggests that a supplier cannot rely on this information alone.
If the customer is registered for Australian GST, how do suppliers know if they will use the thing supplied in connection with their business?
GSTR 2017/1 does not provide guidance in relation to this test, other than to note that it would be unusual for a GST registered entity to make an acquisition for a purpose other than the enterprise carried on by it. Where the items supplied could be used for private or domestic purposes, a foreign supplier could consider seeking this information as part of the declaration referred to above.
If a foreign supplier becomes liable to register and pay GST, what is involved?
Foreign suppliers can either register for GST under the normal rules (requiring monthly, quarterly or annual lodgements) or can elect to adopt a simplified reporting method with a limited registration.
Under a limited registration (which can be revoked by the supplier at any time), foreign suppliers are not entitled to claim back Australian GST on their acquisitions by way of input tax credits, are not entitled to an ABN, do not have their details recorded on the Australian Business public ABN register and must lodge quarterly returns. No tax invoices or adjustment notes are required to be issued by foreign suppliers with only limited registration.
Can suppliers recover their GST liability on top of the price they charge to the customer?
No, unless the GST has been included in the price charged, or there is a contractual right to recover GST from the customer under the relevant terms and conditions, the supplier will need to absorb this cost. Australian consumer law also requires that suppliers display a GST-inclusive price. Suppliers who may be affected by these rules should check their standard terms and conditions and revise price lists as appropriate.
What supplies do these provisions apply to?
The provisions apply to all supplies made on or after 1 July 2017 (including the component of a periodic supply that occurs on or after 1 July 2017), regardless of whether the supplier can recover the GST from Australian customers.
Inbound supply of goods
With the removal of the low threshold value of A$1,000, in Australia, GST also now applies to the importation of goods which are brought into Australia with the assistance of a supplier (or deemed supplier), effective 1 July 2018. Australia is one of the first jurisdictions to legislate to make platforms liable for the collection of GST in respect of goods, as recognised in a key publication released by the OECD, "The Role of Digital Platforms in the Collection of VAT/GST on Online Sales", presented at the Global Forum on VAT in March 2019.
Where these provisions apply, it is the supplier (or deemed supplier) who is liable to register and remit GST to the ATO. Operators of EDPs and re-deliverers will be deemed suppliers. To address the potential for double taxation, where the supplier (or deemed supplier) reasonably believes that GST will apply to the supply under the existing taxable importation rules, no GST will be payable by them.
In most cases the A$1,000 threshold is determined based on customs value, and on the basis of the value of each individual item in a single consignment. For example, if a consignment includes six items with a customs value of A$200 each, the low value threshold will apply even though the total customs value of the consignment exceeds A$1,000. Where any individual item in a consignment has a customs value in excess of A$1,000, it will be treated as a separate supply of that item and the new rules will not apply (so that GST will be payable at the border on importation by the party entering the item for home consumption).
Affected suppliers will need to be able to distinguish these 2 categories of supplies.
As for the inbound supply of intangibles:
- the liability only arises where the supply is to an Australian consumer;
- suppliers can reasonably rely upon information provided by the customer to form a reasonable belief that the customer is not an Australian consumer; and
- the supplier (or deemed supplier) will only need to register and remit GST if they make or anticipate making supplies to which the new rules apply with a value of A$75,000 or more on an annualised basis.
While the supplier (or deemed supplier) is also relieved from the obligation to issue tax invoices, they must notify the customer in the approved form of the amount of Australian GST (if any) that is payable in relation to the supply.
"Reverse charge" on offshore supplies
Generally, GST will be "reverse charged" to the recipient of a taxable supply which takes place outside Australia if certain conditions are satisfied, including:
- if the supplier is a non-resident; and
- the supplier does not make the supply through an enterprise that the supplier carries on in Australia; and
- the recipient is registered or required to be registered; and
- the supplier and the recipient agree that the GST on the supply be payable by the recipient.
Where GST is "reverse charged" the recipient of the supply, rather than the supplier, is liable to the GST payable.
From 1 July 2018, the reverse charge provisions also apply to low value goods. The reverse charge rules will apply to low value goods if the following conditions are satisfied:
- the supply is for consideration; and
- the supply is a supply of low value goods; and
- the supply is not connected with Australia; and
- the recipient of the supply satisfies the purpose test i.e. the recipient of the supply acquires the low value goods supplied solely or partly for the purpose of an enterprise that the recipient carries on in Australia and the recipient does not acquire the thing supplied solely for a creditable purpose; and
- the importation of the low value goods is not a taxable importation in respect of which the recipient is liable to pay GST; and
- the recipient is registered or required to be registered for GST.
The way forward for Australia
GST and the digital economy
While the introduction of these amendments has raised numerous practical complexities, overall the implementation of these measures has been declared by the Australian Government to be a success in Australia.
The ATO announced on 4 July 2019 that revenue collected from the GST on low value goods measure has exceeded expectations with the ATO collecting over AUD$81m of GST within the first quarter, outstripping forecasts by AUD$70m. Within the first nine months of introduction, as at 1 May 2019, the ATO has collected AUD$250m in GST, outstripping forecasts by AUD$180m in total.
The ATO has also reported that since the introduction of the GST on low value goods measure, over 1,000 overseas businesses have registered for GST, which the ATO has stated includes all the known major suppliers and international platforms. While it has been argued that the introduction of this measure may be burdensome for small overseas businesses who may be required to register for GST in Australia, the ATO has maintained that small independent operators have not been largely affected. This is because businesses are only required to register for GST in Australia if they meet the relevant GST turnover threshold.
The ATO has claimed that the Australian approach is increasingly recognised internationally by bodies such as the OECD and the World Customs Organization as the model to follow. In light of the success of the introduction of these measures, in particular the success of GST on low value goods in Australia, the Australian Government has not announced any intention to amend the existing regimes.
Taxation and the digital economy
While Australia has taken a unilateral approach in respect of GST and the digital economy, it would be interesting to see the Australian Government's response if the OECD were to introduce reforms to taxation of digital services, and to what extent Australia would participate in such an initiative.
On 20 March 2019, the Australian Government announced that following a consultation process, it had decided not to implement any interim measures, such as a digital services tax, and would continue to focus on pursuing a long-term consensus solution at the OECD by continuing to engage with the OECD's multilateral process.
The Australian Government noted that this decision was influenced by various key stakeholders who raised significant concerns about the potential impact of the introduction of an Australian interim measure across a wide range of Australian businesses and consumers, including:
- discouraging innovation and competition;
- adversely affecting start-ups and low margin businesses; and
- the potential for double taxation.
To date, it appears that France's decision to implement a digital services tax has not impacted this position.
For further information, please contact:
Barbara Phair, Partner, Ashurst