International companies that sell games, apps, music, movies and books or provide streaming services and other forms of digital media to Australian consumers may soon be subject to the Australian goods and services tax (GST) as a result of the Australian Government’s proposals to introduce legislation that will change the way GST is applied to online purchases.
In a press conference conducted by the Australian Federal Treasurer, Joe Hockey, in Canberra on 9 April 20151, the Treasurer indicated that tax “integrity measures” would be announced in the next federal budget to be delivered tomorrow (12 May 2015). This would seek to generate “billions” in extra revenue for Australia and help in ensuring a level playing field in the market for online sales (when taking into account the market held by Australia companies when compared to their overseas competitors).
Two measures that are likely to have a significant impact on all overseas companies who provide goods and services online to Australians are proposals to:
- extend the application of GST to intangibles and online goods purchased by Australians from overseas; and
- lower the GST threshold from AUD $1,000 to a lesser amount, or potentially, the removal of the threshold altogether.
Current treatment of GST in Australia
Currently, the general rule is that a supplier is liable to pay GST on the supply of a good or service if that supply is “connected with Australia.” Supplies of goods are “connected with Australia” if the goods are delivered, installed or otherwise made available in Australia.
There is currently an exemption from the requirement to pay GST for imports of goods which have a value of less than AUD $1,000 (the GST Threshold) where the goods are imported by the buyer for their own use. This includes using the goods for personal or domestic purposes, as well as for the purpose of selling, leasing or hiring the goods orusing the goods as trading stock. (This therefore includes suppliers who import goods for use in their business.) The principle behind the exemption is that the costs of enforcing the obligation to pay GST on low value goods would exceed any revenue recovered.
The supply of things other than goods in Australia is also subject to GST if the supply is considered to be connected with Australia. This includes the supply of “intangibles” such as digital media, computer games, apps, software, music and movies. It also includes the supply of services such as gambling and financial services. The supply of “things” other than goods will be considered to be connected with Australia if “the thing is done in Australia” or if the supply is made through a permanent establishment in Australia.
Further, the recipient of a good or service which is not “connected with Australia”, may still, be liable to pay GST if that recipient is registered, or is required to be registered, for GST in Australia and would not be otherwise entitled to a full input tax credit.
However, GST is not charged currently on intangibles acquired by Australian residents from overseas suppliers if the supplier does not conduct an enterprise in Australia. That is because the supplies by overseas companies are not connected sufficiently to Australia for GST purposes. This means that, under the existing law, GST is not payable on online downloads and digital media purchases of things such as apps, games, music and films from overseas suppliers.
What are the proposed changes?
The “Netflix” tax
One of the key changes proposed is the proposal to extend the application of GST to online goods, in particular, “intangible” products such as digital media downloads. This will require overseas companies providing intangibles into Australia to charge GST on those products.
As indicated in Mr. Hockey’s Press Conference, the drive behind the Australian Government’s proposal is to ensure that GST is charged “at the source”2 so that “a business, wherever it is located, pays tax in the jurisdiction where it earns the income.”3
This proposal has been termed the “Netflix tax” due to the proposal being an apparent response to statements by online media streaming company Netflix that they were providing a more cost-effective (and cheaper) service that its Australian-based competitors on the basis that GST would not be charged. It has been reported that they would not be collecting GST in Australia4, as there were no local rules which required companies not based in Australia to collect GST on digital purchases.5
This proposal has been championed by local retailers for a number of years. It was considered by the Productivity Commission in its November 2011 investigation and report on the Economic Structure and Performance of the Australian Retail Industry (the Report6). The Report refers to the Australia Treasury estimate that in 2010- 2011, the importation of intangibles (such as software, music and games) resulted in approximately $1 billion of GST revenue being foregone due to GST not being collected in Australia on intangible goods and services purchased by consumers from overseas suppliers.7
If the proposal is accepted, it is likely that 10% would be added to the purchase price of everyday consumer digital media purchases made with suppliers located outside Australia including in respect of purchases made relating to the download of apps, games, songs, movies and media streaming services.
Lowering the GST Threshold
The Australian Government is also proposing to either reduce the amount of the current GST Threshold or remove the GST Threshold altogether. The proposal again follows the recommendations of the Productivity Commission in its November 2011 Report.
In its Report, the Productivity Commission noted that a move to lower the GST Threshold has strong support in principle, for example, to promote tax neutrality with sales by domestic suppliers. The Report indicates that the current GST Threshold gives overseas retailers and suppliers an unfair competitive advantage when selling low value goods to Australian customers and businesses as, in contrast to purchases from Australian domestic retailers, GST is not charged and accordingly, the price of the overseas goods and services are cheaper (and therefore more favourable) for Australian consumers. The proposal to reduce the GST Threshold therefore aims to reduce this competitive disadvantage faced by domestic retailers.8
What does this mean for the online social games and online gambling industries?
These changes will place additional pressure on overseas companies providing goods and services to Australian residents and may require significant changes to the operation of their Australian businesses. This includes, for example, developers and providers based outside Australia who provide online social games and casino- style games and apps, as well as traditional online gambling services including sports betting and wagering operators to Australian residents.
For example, if obligations are introduced which require international companies to apply and charge GST on the services supplied to Australian residents, international companies are likely to be required to comply with additional financial recording obligations and to register for GST in Australia and lodge tax returns to the Australian Tax Office.
Australian resident consumers are also likely to be charged an increase in the price of their online and digital media purchases to the extent that overseas companies charge GST and seek to pass that charge onto Australian consumers. That is, online businesses may increase the price of their games, apps, software and other digital media products and services by the standard GST rate of 10%.
This may have further consequences for online businesses, for example, the need to consider and implement alternative marketing strategies to combat the myriad of consumer complaints that are likely to arise from increases in prices of their products.
But one question not asked, and perhaps assumed, by the Australian authorities, is the extent of compliance that would take place by overseas suppliers. Although there is no doubt that any law would seek to have extra-territorial effect to any person, wherever located, providing services to Australians, there must be considerable doubt as to the level of compliance that would occur. After all, it is already understood that the efforts that would need to be taken by Australian authorities to achieve compliance would be difficult, complex and expensive. Also, for those services being supplied where doubt exists as to their legality under Australian law, why would compliance occur necessarily in respect of Australian taxation obligations?
What happens next?
The Australian Treasurer indicated in his Press Conference that he and his state treasurer counterparts have agreed in principle to extend GST to online digital media products provided by overseas companies and that he has “offered to work as quickly as possible…to introduce legislation to address that in relation to intangibles.”9
However, it is unclear at this stage, what compliance arrangements would be in put in place and to what extent changes to the GST legislation will result in additional or alternative GST obligations for overseas companies who provide online digital media products. It is also unclear how the new rules could be enforced against overseas suppliers which have no connection with Australia, other than providing their products to Australian residents. Further, the collection systems that will be put in place to allow for the efficient recovery of GST have not yet been disclosed or detailed.
The GST proposals were expected to be discussed in a meeting of the Council of Australian Governments (or COAG), the intergovernmental forum which consists of the Prime Minister, the State Premiers and the Chief Minsters of the Territories, held on 17 April 2015. While tax reforms and the issue of GST distribution to the States and Territories were discussed briefly at the COAG Meeting, the extensive proposals to change the GST legislation in respect of overseas online digital media were not discussed.10
On May 7 2015, it was confirmed by Assistant Treasurer Josh Frydenberg that the Federal Government will push ahead with its proposal to extend the application of GST to intangibles including digital media (such as digital games, apps, e-books, music, video and software) and streaming services such as Netflix, with the new GST rules and proposed amendments to Australian tax legislation to be featured in the Australian Government’s budget announcement to take place tomorrow (12 May 2015).11 The new GST rules and proposed amendments are likely to fuel considerable debate.
The Assistant Treasurer also confirmed that, following the budget, the Federal Government will continue discussions with the state treasurers to extend the application of GST to low value transactions by lowering the GST threshold, as discussed above.