The Federal Government moved forward with a number of GST changes last week, passing legislation and separately proposing new measures as part of the 2016-17 Federal Budget. The majority of the changes will affect cross-border supplies in the digital economy. This Legal Alert is a summary of the changes.
GST to be imposed on digital products and services sold by offshore vendors to Australian consumers
The Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 was passed by both Houses of Parliament on 4 May 2015 and quickly received Royal Assent on 5 May 2016. The Bill amends A New Tax System (Goods and Services Tax) Act 1999 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. The new rules will apply to supplies that are attributable to tax periods starting on or after 1 July 2017. Click here to read our previous alert on this change.
Changes to cross-border GST supplies
The Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 also contained the long awaited amendments arising out of the 2010 Board of Taxation Review. Unlike the changes to digital supplies referred to above, the changes offer some relief for foreign suppliers by reducing the scope for non-resident suppliers being unnecessarily brought within Australia's GST system. The changes will come into effect during the second quarterly tax period starting after the Bill as passed receives Royal Assent (being 1 October 2016):
- New test for carrying on an enterprise in the Australian Indirect Tax Zone (ITZ)
There will be a new test for when an enterprise is carried on in the ITZ. An enterprise will be carried on in the ITZ, where particular individuals carry on the enterprise of the entity in the ITZ, including through a fixed place, or through one or more places for more than 183 days in a 12 month period. The test is more closely aligned with Australia’s modern treaty practice in relation to permanent establishments.
- Reduced scope of the connection with the ITZ rules in a business-to-business context
The GST nexus rules will have a more limited application. The intention is to ensure that various supplies made by non-resident suppliers are not connected with the ITZ, where imposing GST on those non-resident suppliers would result in no net gain to GST revenue. In this respect, certain supplies will be disconnected if the supplier is a non-resident, and the supply is not made through an enterprise carried on in the ITZ.
Ordinarily, a supply of an intangible that is done in the ITZ is connected with the ITZ. The amendments are designed to relieve non-resident suppliers of the obligation to account for GST, where no GST is ultimately payable on the supply, or where it is more appropriate for the recipient to identify and pay the GST liability. The amendments achieve this by introducing a new rule, treating intangibles that are done in the ITZ as disconnected where the recipient of the supply is (1) an Australian-based business recipient of the supply or (2) a non-resident that acquires the supply solely for the purposes of an enterprise it carries on outside of the ITZ.
Where a supply is disconnected, because it is made to a recipient that is an Australian-based business recipient, the recipient is responsible for determining whether they have a GST liability in relation to the supply under the compulsory reverse charge rules.
For non-resident supplier's already registered for GST, there is a transitional rule, which can apply to exclude the application of the new rules (meaning that the non-resident supplier will still account for the GST consequences). The transitional rule may apply if there is a written agreement that was entered into before the amendments receive Royal Assent (i.e. before 5 May 2016) and the agreement identifies the supply and the consideration in money for the supply or a way of working out the consideration in money. However, this transitional rule does not apply to supplies in relation to which a review opportunity arises after the time the amendments apply; or for which the supplier and recipient agree in writing that the amendments should apply to the supply from a specified time.
For new contracts entered into after the amendments received Royal Assent, the rules will make the supplies disconnected and reverse charge applying.
- Reduced scope of the connection with the ITZ rules: supplies of goods installed or assembled
The amendments reduce the scope of supplies that are connected with the ITZ by removing the rule that connects a supply of goods that are brought into the ITZ and installed or assembled by the supplier.
- Registration of non-resident suppliers only making GST-free supplies
Non-resident suppliers will not be required to register for GST if the only supplies they make are GST-free, and made through an enterprise they carry on outside the ITZ.
- Value of taxable importations - uplift will apply
In calculating the value of taxable importations, an uplift factor can be applied to the customs value of goods as an alternative to calculating the actual transport, insurance and ancillary costs. This amendment is welcomed as it is expected to reduce compliance costs for importers having to calculate the actual costs of such items.
2016-17 Federal Budget measures
GST to be imposed on the importation of low value goods
As part of the Federal Budget, the Australian Government announced that GST will be extended to low value goods imported by consumers from 1 July 2017. The intent of this measure is that low value goods imported by consumers will face the same tax regime as goods that are sourced domestically. Overseas suppliers that have an Australian turnover of A$75,000 or more will be required to register for, collect and remit GST (at the rate of 10%) for low value goods supplied to consumers in Australia, using a vendor registration model. No draft legislation has been released. We expect that industry will await with anticipation the release of any draft legislation.
GST and the treatment of digital crypto currency
The Australian Government also released the discussion paper: GST treatment of digital currency on changing the GST treatment of digital currencies. To date, the GST characterisation of digital currencies has meant that it is not treated currency / money. Instead, digital currency (such as Bitcoin) is considered a form of intangible property and GST may be payable on its supply. This treatment results in transactions where consumers use Bitcoin to pay for other goods and services in effect bearing GST twice – once with the embedded GST borne on the acquisition of the Bitcoin and once again on its use in exchange for other goods and services subject to the GST.
The policy outcome that the Australian Government is seeking to achieve is to address this double taxation of digital currencies by ensuring the supply of digital currency is no longer a taxable supply. Closing date for submissions on the discussion paper is on 3 June 2016.
Click here to read our previous alert on the 2016-17 Federal Budget.