Exposure draft legislation to extend the application of the GST to supplies of intangible products by foreign suppliers to Australian consumers has been released for consultation. While there has been considerable focus on the proposed expansion of the GST regime to cover supplies of “digital products”, the changes will also impact on supplies of other intangibles (such as services) by foreign suppliers to Australian consumers
The current GST treatment of supplies of intangibles
Under the current GST law, for a supply of something other than goods or real property (ie, digital products and services) to attract GST, the supply must, among other things, beconnected with Australia.
The “connected with Australia” test, in conjunction with the rules for GST free exports and other provisions of the GST law, operates so that supplies of intangible items (ie, things other than real property or goods) by foreign suppliers to Australian consumers are not subject to GST.
While special rules already exist which can, in some circumstances, operate to “reverse charge” GST on supplies of services and other intangibles made by foreign suppliers (which simply means that the statutory liability for GST is imposed on the Australian recipient, rather than the foreign supplier), these rules only apply to supplies made to Australian entities that are registered or required to be registered for GST. They do not apply to supplies made to Australian consumers generally.
As a result, such services and intangibles obtained by Australian consumers from foreign suppliers are not generally subject to GST. The Federal Government has made it clear that it sees this as a “gap” which places Australian suppliers at a tax disadvantage relative to foreign suppliers. The proposed amendments seek to address this.
The proposed position: supply of digital and other intangibles a “taxable supply”
The Tax Laws Amendment (Tax Integrity: GST and Digital Products) Bill 2015 (Cth) (Bill) proposes to extend the “connected with Australia” test to all supplies of intangible items made by foreign suppliers to an “Australian consumer”. Broadly, the amendments seek to impose GST on intangibles acquired for private or domestic consumption by Australian residents, and intangibles acquired by entities that are not registered or required to be registered for GST.
The amendments do not impact on the GST treatment of supplies made to recipients who are registered or required to be registered who make acquisitions in the course of carrying on their enterprise (including recipients liable under the existing reverse charge regime).
Information gathering obligations
The amendments apply to supplies made to Australian consumers. Foreign suppliers will be obliged to take “reasonable steps” to determine whether a recipient is an Australian consumer. If a foreign supplier reasonably believes that the recipient of a supply is not an Australian consumer, the foreign supplier may treat the supply as if it had been made to a non-resident.
What constitutes the taking of “reasonable steps” will depend on the context of the particular supply. The ATO is expected to issue guidance on point in consultation with affected suppliers.
Simplified administrative scheme for affected suppliers – but there’s a catch!
The Bill will potentially require a wide range of foreign suppliers to register for GST in Australia.
Recognising this, the Bill allows for regulations to be introduced that simplify certain administrative provisions for suppliers affected by the new laws (ie, the provisions relating to who is required to be registered, or who may be registered; registration; tax periods; and GST returns).
The Bill also proposes a special simplified registration regime with significantly reduced reporting and remittance arrangements. Only those entities that elect to take part before the end of the first tax period in which the entity makes (or intends to make) an “inbound intangible consumer supply” will be able to benefit from the simplified regime. In what is described as an effort to “minimise compliance costs”, it is intended that those entities who elect to take part will not be entitled to input tax credits for that financial year.
Supply of other intangibles – how far does it go?
While there has been considerable focus on the proposed expansion of the GST regime to cover supplies of “digital products” (ie, streaming or downloading of movies, music, etc.), the changes will also impact on supplies of other intangibles which would currently be excluded from GST.
The ATO has provided detailed guidance on the “connected with Australia” test under current law. GST ruling 2000/31 contains several examples of the existing GST treatment of supplies of intangible products by foreign suppliers.
It is interesting to consider how the proposed amendments will impact on those example scenarios.
Consider, for example, the supply of a right to use software (an intangible). Under the current law, this supply will be “connected with Australia” if the supply of the right occurs in Australia. The ATO takes the view that a supply of rights is made in the place where the agreement under which those rights are supplied is made. GST will only apply where the agreement is made in Australia, even where the rights granted under the agreement are used in Australia by an Australian consumer.
Consider the following scenario:
- An agreement for the right to use certain computer software is made outside of Australia between “TechCo” (a foreign company that does not carry on an enterprise in Australia) and an Australian resident.
- The right to use the software is acquired for private or domestic use by that Australian resident.
- The software is used by that Australian resident in Australia.
Under the current GST law this supply is not connected with Australia and therefore not subject to GST. However, under the proposed amendments, this supply would satisfy the expanded connected with Australia test.
The same issues arise for a supply of professional services made by a foreign supplier to an Australian consumer.
- “AdviceCo” is a UK company that provides immigration consultancy services.
- AdviceCo prepares and provides immigration advice to an Australian resident for his/her private use.
- AdviceCo has no permanent establishment in Australia and prepares the advice in its UK offices.
- The Australian resident receives the advice via email in Australia.
Under the current law, the supply of services by AdviceCo would not be connected with Australia because the service is not performed in Australia and the supplier does not provide the service through an enterprise which it carries on in Australia. However, under the proposed amendments, such a supply would again satisfy the expanded connected with Australia test.
These are simple examples of scenarios which may, as a result of the amendments, attract a GST liability. What is clear is that considerably more “supplies” may be caught under the new GST provisions than may have been initially expected. Foreign entities that would normally not be required to register for GST may, as a result of the changes, satisfy registration thresholds. Parties who might be affected by the proposed amendments should review their existing supply agreements to determine their GST exposure.
The next steps going forward
The reforms proposed under the Bill are intended to take effect 1 July 2017. The Bill is open for public consultation until 7 July 2015.