Draft Law Companion Guide LCG 2016/D1 

The Commissioner of Taxation has published draft Law Companion Guide LCG 2016/D1 which describes how the Commissioner proposes to apply the law in the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 when it comes into effect. This Bill was introduced into the House of Representatives on 10 February 2016 and includes proposed amendments to the Goods and Services Tax (GST) in relation to certain ‘cross-border transactions’.

As noted in LCG 2016/D1, the provisions in the Bill change how GST applies to cross-border supplies involving non-resident entities. The changes are divided into two parts namely business-toconsumer supplies in Schedule 1, and business-tobusiness (B2B) supplies in Schedule 2.

Specifically:

  • Schedule 1 amends the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to GST in a similar way to equivalent supplies made by Australian entities. Under the changes, all supplies of things that are not the supply of goods or real property will be taken to be connected with the ‘indirect tax zone’ (ITZ) as defined in section 9-25 of the GST Act where the supplies are made to an ‘Australian consumer’. An Australian consumer is broadly, an Australian resident other than a business. This change will result in supplies of digital products to Australian consumers, such as streaming or downloading of movies, music, ‘apps’, games and e-books, as well as the supply of other services such as consultancy and professional services, receiving similar GST treatment whether they are supplied by a local or foreign supplier

Under these new arrangements, in some circumstances, responsibility for GST liability that arises under the amendments may be shifted from the supplier to the operator of an electronic distribution platform. This occurs if the supply is made through such a platform, 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 that the operator will assume liability for certain other supplies made through the electronic distribution platform. These amendments are broadly modelled on similar rules for digital products or electronic services currently in operation in the European Union and Norway. 

Schedule 1 also amends the GST law to make a number of changes to the administrative framework for supplies affected by these amendments. These changes include allowing entities making supplies that are only connected with the ITZ as a result of this measure to elect to become limited registration entities. Such entities cease to be entitled to input tax credits (ITCs), allowing the Commissioner to potentially simplify their registration and reporting arrangements.  

Subject to transitional rules, Schedule 1 applies in working out ‘net amounts’ for tax periods starting on or after 1 July 2017.

  • Schedule 2 makes other cross-border supplies between businesses GST-free or no longer connected with Australia. This means that the non-resident supplier will not need to account for GST on those supplies, and the obligation to account for GST on these supplies may instead fall to the recipient. 

Schedule 2 also replaces the previous test in the GST Act for when an enterprise of an entity is carried on in Australia by repealing subsection 9-25(6) and inserting section 9-27 into the GST Act. Under the test in proposed section 9-27, an enterprise of an entity will be taken to be carried on in the indirect tax zone (a GST enterprise presence in Australia) if the enterprise is carried on by one or more specified individuals that are in Australia, and either:

  • the enterprise is carried on through a fixed place in Australia,
  • the enterprise has been carried on through one or more places in Australia for more than 183 days in a 12 month period, or
  • the entity intends to carry on the enterprise through one or more places in Australia for more than 183 days in a 12 month period.

Subject to transitional rules, Schedule 2 applies in working out net amounts for tax periods starting on or after the first day of the second quarterly tax period starting on or after PwC Page 5 the commencement date of the Bill. The Bill will commence on the first of the following dates occurring after Royal Assent: 1 January, 1 March, 1 June or 1 September. For example, if the Bill received Royal Assent on 27 March 2016, the Bill will commence on 1 June 2016 and the amendment to the test would apply in working out net amounts for tax periods starting on or after 1 October 2016.

Where the non-resident entity has a GST enterprise presence in Australia, consequences to the non-resident include that the supplies that the entity makes through that enterprise presence will be connected with Australia for the purposes of GST such that the entity may be required to register for GST if the registration threshold is reached. There may be other consequences including that acquisitions that the entity makes from a non-resident entity without a GST enterprise presence in Australia may be subject to ‘reverse charge’ under section 84-5 of the GST Act. LCD 2016/D1 includes the Commissioner’s views on the following questions and provides illustrative examples: 

  • Which individuals can carry on an enterprise in Australia?
  • When is an enterprise carried on in a fixed place?
  • When is an enterprise carried on for more than 183 days in a 12 month period?
  • When is an enterprise intended to be carried on for more than 183 days in a 12 month period?

LCD 2016/D1 also provides the Commissioner’s views on other aspects of the changes.