The Assistant Treasurer has issued a discussion paper on the design and implementation details of proposed change to GST as it affects cross border transactions. These proposals will hopefully overcomes with some of the problems that arise in relation to dealings with non residents. It will also mean changes to the arrangements that some entities may have in relation to their current dealings with non residents. The changes are to apply from 1 July 2012. The proposed changes are:

Limiting the application of the “connected with Australia” provisions for the supplies by a non-resident of services and intangibles

The law will be amended so that supplies of services and intangibles by a non resident that are done in Australia will not be connected with Australia if the supply is made to a business that has a presence in Australia that is registered for GST and the non resident supplier has no business presence in Australia or the non resident supplier has a business presence in Australia but does not use that business presence in making the supply.

This will mean that GST registered entities with a presence in Australia will be responsible for the GST consequences of supplies of services and intangibles made to them by non residents who do not carry on an enterprise in Australia (or have one and do not use it).

This may be achieved through ensuring that the “reverse charging” provisions apply to the supply which will mean that the recipient of the supply will be responsible for accounting for the GST.

As the law currently stands, if a supply by a non resident entity operating outside Australia is connected with Australia, then in general terms, the non resident supplier will be liable for any GST payable on the supply where the supplier exceeds the GST registration turnover threshold unless the non resident supplier and the Australian recipient agree to “reverse charge” in which case the recipient of the supply will account for the GST on the taxable supply or the non resident makes the supply through a resident agent in which case the resident agent will account for the GST.

Limiting the application of the “connected with Australia provisions for the supply of goods by a non resident

The law will be amended so that supplies of goods by a non resident will not be connected with Australia if the supply is made to a business that has a presence in Australia that is registered for GST and the non resident supplier has no business presence in Australia or the non resident supplier has a business presence in Australia but does not use that business presence in making the supply.

Similar to the first proposal this will mean that GST registered entities with a presence in Australia will be responsible for the GST consequences of supplies of goods made to them by non residents who do not have an enterprise carried on in Australia.

It is proposed that this will be achieved through compulsory reverse charging.

Limiting the application of the “connected with Australia” provisions for certain supplies of goods within Australia between non residents

The law will be amended so that supplies of goods that are already located in Australia between non residents who carry on their enterprise outside Australia will not be connected with Australia if the non resident recipient of the supply continues the underlying lease of those goods to a business that has a presence in Australia that is registered for GST.

This will mean that a GST registered enterprise with a presence in Australia will be the entity responsible for the GST consequences of a supply of goods that continue to be leased to that enterprise where the supply is between non resident lessors who carry on their enterprise outside Australia and the goods are delivered, or made available in Australia.

Expanding the existing compulsory reverse charge provisions to include goods

This is connected with the second and third proposal. At present, the reverse charging provisions do not apply to an offshore supply of goods that are not connected with Australia.

This proposal will mean that GST registered recipients with a presence in Australia will be responsible for the GST consequences of supplies of goods made to them by non residents who do not have an enterprise carried on in Australia and do not make supplies connected with Australia.

However this proposal will not affect supplies of goods that have never been connected with Australia being goods that are delivered, or made available, outside Australia, to the recipient of the supply or imported into Australia by the recipient except in circumstances where the supplier has agreed to install or assemble the goods in Australia.

Allow supplies made to a non resident but provided to a registered business in Australia or employee or office holder to be GST free

The law will be amended so that a supply of services or intangibles that is made to a non resident will be GST free in circumstances where the supply is provided to a registered business in Australia, an employee or office holder of a registered business in Australia who is acting in that capacity or an employee or office holder of an unregistered non resident business who is acting in that capacity and the acquisition by that non resident is for a fully creditable purpose.

The reason for this is that It should be unnecessary for non residents to register for GST in Australia and claim an input tax credit on their acquisitions when the supply made to them in respect of that acquisition would have been GST free but for the fact that the supply is provided, or required to be provided to another entity in Australia and that other entity is registered for GST.

Allow supplies of warranty services made to a non resident but provided to an Australian warranty holder to be GST free

The law will be amended so that the supply of warranty services (including replacement parts) to an unregistered non resident warrantor will be GST free if the goods were supplied under a warranty agreement and either the goods were subject to GST either as a taxable supply or a taxable importation or the goods were GST free or not subject to GST.

This will mean that the supply of repair services (including parts) made to a non resident, who is outside Australia and is not registered or required to be registered that would be GST free but for the fact that the repair service is provided to another entity in Australia, will now remain GST free if the non resident is acquiring these services to meet their obligations under a warranty agreement.

Expanding the non resident agency provisions so that they apply more broadly than to common law agency relationships

The non resident agency provisions allow GST to be accounted for by the resident agent rather than the non resident. However these provisions do not apply to an agent who does not have authority to conclude contracts on behalf of the non-resident.

Therefore it is proposed that the law be amended so that an Australian resident agent acting for a non resident but who cannot conclude contracts for the non resident, will be treated the same as a common law agent for GST purposes. However in order for this to apply, the non resident entity must not have a GST PE in Australia, the resident agent and the non resident must agree in writing to be treated as being in a “principal and agent relationship” for the purposes of the nonresident agency provisions in the GST Act and the resident agent will have the same common law protection that is available to an agent in similar circumstances.

Removing the requirement for non resident registration under the agency provisions

The Government considers it unnecessary to require non residents that meet the registration threshold to register for GST, if they are only acting through a resident agent under the resident agency provisions of the GST Act. A change to the registration requirements for non residents, together with the expansion of the GST agency provisions above will reduce the number of non residents that need to be drawn into the GST system, while maintaining the integrity of the GST tax base.

This will mean that a non resident entity that is required to be registered for GST and makes all its taxable supplies through one or more resident agents will not have to register for GST.

For all other purposes, the non resident will be treated as if they were required to be registered for GST. A supply made through an agent will be treated for all other purposes of the GST law as a taxable supply if it would have been a taxable supply if the non resident entity for whom the agent acts, would have been registered or required to be registered but for this proposed change.

In addition, a non resident entity that is required to be registered for GST and makes all its creditable acquisitions and creditable importations through one or more resident agents will not have to register for GST.

For all other purposes, the non resident will be treated as if they were required to be registered for GST. An acquisition or importation made through an agent will be treated for all other purposes of the GST law as a creditable acquisition or creditable importation if it would have been a creditable acquisition or creditable importation if the non resident entity for whom the agent acts, would have been registered or required to be registered but for this proposal.

For this to apply the non resident entity must also make all its taxable supplies and taxable importations through resident agents.

Removing the requirement for non residents to register if they only make GST free supplies

The law will be amended so that non residents making only GST free supplies will not be required to register for GST notwithstanding that its GST free supplies exceed the GST registration turnover threshold. However, to the extent that the non resident also makes other supplies that are not GST free, then the GST free supplies will count towards determining the GST registration threshold.

Options for calculating the transport and insurance cost to include in the value of taxable importations should be introduced

Under this proposal, for the purposes of calculating the value of a taxable importation for GST purposes, GST registered importers will be able to calculate the transport and insurance costs as the actual amount paid or payable, or alternatively, use an uplifted percentage of the customs value of the goods imported. The uplifted percentage will be 10%.

However where the imported goods are subject to LCT or WET, and this amount is payable at the border, the uplifted percentage option cannot be used for these goods.