In May 2015, the Government released draft legislation to extend the application of the GST to supplies of digital and other intangible products by foreign suppliers to Australian consumers. Our Alert on the original Exposure Draft Bill can be accessed here. Following consultation on the draft legislation, a revised Exposure Draft Bill has now been released.
The revised Exposure Draft Bill now also includes a previously announced measure which is designed to keep non-residents out of the Australian GST system.
Supplies of intangibles from offshore – what has changed?
Following consultation on the original Exposure Draft bill, several changes have been made.
Although the implementation date of 1 July 2017 has not changed, transitional rules have now been included in the revised Exposure Draft Bill. The transitional rules are similar to the transitional rules which were put in place when GST was first introduced. Under the proposed transitional rules:
- If an agreement for an inbound intangible consumer supply was entered into before 7.00 pm Australian Eastern Standard Time on 12 May 2015, then the changes will not apply to supplies made under the agreement before 1 July 2019 unless a review opportunity occurs earlier.
- If the service was fully prepaid before 7.00 pm Australian Eastern Standard Time on 12 May 2015, the changes will not apply on or after 1 July 2019 until a review opportunity occurs.
Changes to statutory defence
One of the main measures in the original Exposure Draft Bill was to make a supply of intangibles from offshore potentially subject to GST where the recipient is an “Australian consumer”.
Due to the potential difficulties faced by an offshore supplier of intangibles in determining whether they are making a supply to an Australian consumer, the original Exposure Draft Bill provided a “statutory defence” for the supplier if they took “all” reasonable steps to establish whether the recipient is an Australian consumer. If “all” reasonable steps are taken then the supplier would be relieved from any GST liability on the supply of an intangible if it later turned out that the recipient was in fact an Australian consumer.
In the revised Exposure Draft Bill, the statutory defence has been modified so that now, only reasonable steps need to be taken in order to determine whether the recipient is an Australian consumer. Removing the word “all” effectively expands the defence. The statutory defence has also been expanded to enable a supplier to rely on its usual business systems and processes to make a decision about whether or not a recipient is an Australian consumer. One of the concerns raised during consultation on the original Exposure Draft Bill was that suppliers would not be able to rely on existing business systems and processes to make a decision about whether a recipient was an Australian consumer. The expansion of the statutory defence addresses those concerns.
Under the changes, if a supplier forms the view that the recipient is not an Australian consumer because the recipient is registered for GST, the supplier will need to:
- obtain the Australian Business Number of the recipient or other identifying information required by the Australian Taxation Office; and
- obtain a declaration or other information from the recipient indicating that the recipient is registered for GST.
These requirements are likely to have an impact on the drafting of cross border supply agreements involving intangibles. It is likely that suppliers will start to require representations and warranties to be given about the GST registration status of the recipient in order give the supplier comfort that it will not have a GST liability under the new provisions.
Change to definition of “Australian consumer”
The definition of “Australian consumer” has been modified as well. In the original Exposure Draft bill the definition required the supplier to consider whether the recipient of the supply was “required to be registered” for GST. This would have been difficult for suppliers to make a judgement about. An entity becomes “required to register” for GST when its turnover exceeds $75,000 per annum. If this test had remained in the legislation it would have led to the impractical situation of requiring suppliers to make enquiries of the recipient about its level of turnover. The modified definition of Australian consumer removes this requirement.
Electronic distribution platforms
As outlined in the original Exposure Draft Bill, the liability for GST on a supply of an intangible to an “Australian consumer” is to be imposed on an "operator of an “electronic distribution service”. In the revised Exposure Draft Bill this is now referred to as an “electronic distribution platform”. The revised Exposure Draft Bill also makes it clear that a service which provides a payment system, a communications system (such as the telephone network) or most kinds of vouchers will not be treated as an “electronic distribution platform”.
Where a supply involves several “electronic distribution platforms”, generally speaking, the “electronic distribution platform” which first receives payment for the supply will have the GST liability. There is an option for the operator of that “electronic distribution platform” to enter into an agreement with the operator of another “electronic distribution platform” under which the GST liability is imposed on that other operator. This is designed to give the operators of the various “electronic distribution platforms” the flexibility to choose which entity will have the GST liability if the application of the usual rule would result in an uncommercial outcome.
Reforms to the scope of GST
The problems with the current law
Under the current GST legislation, a supply of services is generally subject to GST in Australia if the service is performed in Australia. Where the service provider is a non-resident, the supply can still be subject to GST, even if the non-resident does not have a place of business in Australia. The non-resident supplier would generally have an obligation to register for GST in Australia if the supplier has income of $75,000 per annum or more. This means that, for example, sales of equipment located in Australia, such as aircraft, can trigger GST compliance obligations for non-residents, including the requirement to register for GST.
Under the proposed reforms, supplies made by non-residents will no longer be subject to GST in certain scenarios. In some cases the GST will instead be payable by the recipient of the supply under the so-called “reverse charge” provisions, which shift the GST liability from the supplier to the recipient.
- The key aspects of the reforms are: Services provided by a non-resident to an Australian recipient - Where a service is performed in Australian by a non-resident, the non-resident will no longer have to pay GST on the supply if the recipient is registered for GST and carries on business in Australia. Depending on the status of the Australian recipient, it may have to pay the GST instead under the “reverse charge” provisions.
- Services provided by a non-resident to another non-resident - If a non-resident supplies a service in Australia to another non-resident solely for the purposes of an enterprise which the non-resident carries on outside of Australia, then the non-resident supplier will no longer have to pay GST. In this scenario, the recipient of the supply (also being a non-resident) would not have a liability to GST under the “reverse charge” provisions
- Installation or assembly of goods in Australia - Under the current legislation, if a supplier of goods installs or assembles goods in Australia, this makes the supply of goods subject to GST. Under the proposed reforms, where the supplier installs or assembles the goods but does not import them, then the supplier will no longer be liable to pay GST on the supply. The importer of the goods will still be liable to pay any GST payable on importation. If the terms of sale provide for the supplier to install or assemble the goods in Australia then this will be deemed for GST purposes to be a separate service. In relation to that separate service, the supplier will not be subject to GST if the recipient is registered for GST and carries on a business in Australia. Depending on the status of the recipient, it may instead be liable to pay GST on that service under the “reverse charge” provisions.
- Leasing of goods by a non-resident to another non-resident - Where a non-resident lessor of goods sells the leased goods to another non-resident who does not carry on an enterprise in Australia, the supplier will no longer be liable to pay GST. In order for this to apply, the lessee needs to have made a taxable importation of the goods before the transfer of ownership and needs to continue to lease the goods on the same terms and conditions afterwards. The non-resident lessor will also not have to pay GST on the rent payable under the lease, even if the equipment was in Australia when the lease was entered into. This reform will be particularly welcomed by the aviation finance industry as it will generally make aircraft financings less complex from a GST perspective especially when refinancing an aircraft which is already on lease in Australia.
Although these changes are designed to lessen the impact of GST on non-residents, Australian enterprises, especially financial institutions and other enterprises which have limited input tax recovery need to be aware that these changes expand the operation of the “reverse charge” provisions.
The Government has invited submissions on whether these changes should take effect on 1 July 2017 or on some other date.
Changes to the test for when an enterprise is carried on in Australia
The reforms introduce a new test for when an enterprise is carried on in Australia.
Going forward, an enterprise will be regarded as carried on in Australia if it is carried on by a director, officer, employee or an agent which has authority to enter into contracts. Where a broker, general commission agent or agent of independent status acting in the ordinary course of the agent’s business is carrying on the enterprise in Australia this will not, of itself, result in the principal being regarded as carrying on an enterprise in Australia.
Additionally, the test will not be satisfied unless the enterprise is carried on through a fixed place of business in Australia or be carried on in Australia for more than 183 days in a 12 month period.
The consultation period on the revised Exposure Draft Bill closes on 21 October 2015.