The Federal Treasurer, Joe Hockey, commented at a Press Conference and Q&A session following the Council of Federal Financial Relations Meeting in Canberra on 9 April 2015 that the States & Territories have agreed in principle to extend the GST to cover intangible supplies made by non-residents from outside Australia. While details have yet to be confirmed, such reform could see GST extended to cover the following:
- Digital content (games, software, movies, e-books, etc)
- Services performed remotely for customers in Australia
- Contractual rights granted from outside Australia. This could potentially include intellectual property rights or the right to access software platforms as a part of "Software as a Service" arrangements.
The changes have been labelled an "integrity measure". Such reform would represent the largest change to the GST base since the tax was introduced 15 years ago. Mr Hockey stated that the measures "could represent billions".
One trigger for these measures was the recent high profile launch of Netflix subscription services in Australia. Netflix, which provides entertainment content from outside Australia, is not charging GST. Local competitors (Quickflix, Stan, Presto, Foxtel) all charge GST.
What does this mean for non-resident suppliers?
- Non-residents that make intangible supplies to customers in Australia should anticipate that their supplies will be subject to GST, potentially from some time later this year.
- In business to business ("B2B") contracts, non-residents should quote their prices on a GST exclusive basis and include GST "gross up" clauses. Such clauses allow GST to be passed on as additional cost to Australian customers, if required. Note that GST exclusive pricing can only be used in B2B contracts.
- In contracts with retail consumers it is generally necessary to display a single price that includes any applicable GST, so as to comply with Australian consumer laws. However, such contracts could include provisions that allow for price adjustments (ideally with a minimum of notice).
- In B2B contracts, non-residents may also want to include "reverse charge" provisions which would require an Australian business customer to pay the tax on a non-resident's behalf.
How does a "reverse charge" work?
Provided that certain conditions are met, a non-resident supplier can agree with a GST registered business customer for any GST liability to be reverse charged and paid by the customer.
If the customer is entitled to a full input tax credit (GST credit) for its acquisition, the reverse charged GST liability and offsetting credits should net out to nil in the same GST return (meaning there is no cash flow cost for the customer).
Some customers may not have the necessary systems in place to reverse charge GST and hence may not agree to such an arrangement.
Any reverse charge arrangements should be recorded in writing. This may be covered in supply contracts or other terms and conditions agreed with Australian customers.
Will there be transitional arrangements?
It may be the case that transitional measures will be included as part of the reforms, so that pre-existing long-term supply contracts are not impacted. This will be particularly relevant for long-term agreements which do not include GST gross up clauses or price adjustment provisions.
At this time it is not clear whether there will be transitional arrangements or how those might operate.