In May 2015, the Australian Federal Government announced in its federal budget its proposal to introduce legislation that will change the way Australia’s goods and services tax (GST) is applied to online purchases and transactions. Two measures that are likely to have a significant impact on all overseas companies who provide goods and services online to Australians are the proposals to:
- extend the application of GST to intangibles and online goods and services purchased by Australians from overseas; and
- remove the exemption from the requirement to pay GST for imports of goods which have a value of less than AUD $1,000 (the GST Threshold).
For further information about the background to each of these proposals, please see Addisons’ Focus Paper “ They’re charging how much for a digital game or song? – Australian Government proposes to extend application of GST to overseas online digital media”
Draft legislation – what are the proposed changes?
The “Netflix tax”
On 21 August 2015, the former Australian Treasurer, Mr. Joe Hockey, announced the proposal to extend the application of GST to supplies of overseas goods and services into the Australian market, including digital products and services (the Netflix tax). This has been raised and was agreed to unanimously by all of the treasurers1 as at a tax summit attended that day by each of the Federal, State and Territory treasurers.
In effect, the Netflix tax will extend the application of GST to “intangible” products and services, such as digital products (for example, computer games, mobile/tablet apps, music, movies and software) and digital services (for example, video on demand or video streaming services).
Proposed draft amending legislation has been released and has been subject to two rounds of public consultation and submissions. The second round of consultation, which opened on 7 October 20152, focused on the Australian Government’s proposals to extend GST to digital products and other online or digital services imported by Australian consumers from overseas suppliers and aimed to provide more detail as to how the Netflix tax will operate in practice.3
For example, the revised draft bill provides that only companies which sell more than $75,000 worth of goods and services into Australia would need to register their products for GST collection with the Australian Tax Office (the ATO) and comply with various GST reporting requirements.
The draft bill also proposes to introduce a “vendor registration model” as a method for collecting GST. If passed by the Australian parliament, this amendment would place the obligation for registering and collecting GST on the operators of “electronic distribution services” or electronic marketplaces and storefronts, such as Amazon, Apple, Google and eBay, rather than the direct supplier or product vendor of the good or services (for example, the developer of a mobile/tablet game or app).
The second period of consultation closed on 21 October 2015. Addisons will be monitoring the further proposals or amendments to the draft legislation.
Lowering the GST Threshold
Currently, under Australia’s taxation laws, overseas supplies of goods under a GST Threshold value of AUD $1,000 are exempt from the application of GST. This means that no GST is required to be paid by overseas suppliers on sale transactions to Australian customers if the supply is less than the $1,000 GST Threshold amount.
Initially, the proposal appeared to have the effect that the GST Threshold would be lowered to $20. However, in his press conference following the tax summit in August 2015, Mr. Hockey announced that the GST Threshold would be removed altogether.4
Therefore, if the draft legislation is passed by the Australian parliament, the GST Threshold of $1,000 will be abolished so that there is a “zero threshold” for GST: GST will apply to all goods and services purchased online, including both tangible goods purchased online (e.g. cosmetics) and intangible goods and services purchased online (such as the digital goods and services discussed above).
How will these new requirements be enforced?
The extra-territorial nature of these laws raises concerns as to the levels of compliance that will be achieved since it will require compliance by companies based entirely overseas. For example, it is unclear how registration requirements can be enforced against overseas businesses, which in some cases may have no physical presence in Australia.
It is understood that the efforts that would need to be taken by Australian authorities to achieve compliance would be difficult, complex and expensive. However, Mr. Hockey indicated in his August 2015 press conference that forging agreements with overseas regulators as well as “global pressure” may be factors that will assist in enforcing compliance by overseas companies. The former Treasurer went so far as to suggest that “we are going to have taxation officials travel around the world visiting these companies asking them to register for GST purposes.”5
However, no such agreements have yet been entered into nor has the form that these agreements may take been discussed. Also, no further clarity has been provided by the Australian Government as to how it proposes to monitor and enforce compliance with the new GST laws (on the basis that these proposals become law).
What does this mean for the offshore online gambling sector?
The proposed changes will impact a range of overseas companies providing goods and services to Australian residents. This includes, for example, developers and providers of online casino-style games and apps that are based outside Australia. This includes overseas providers of traditional online gambling services such as online wagering operators and providers of sports betting services to Australian residents.
If the proposed changes are passed, this may require significant changes to the Australian operations and business of online gambling providers. 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. As a result, 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 arise due to increased prices of goods and services.
What happens next?
At this stage, only draft legislation has been published. While the draft bill has been released and has been the subject of two rounds of public consultation, no formal bills have been tabled in parliament yet.
Further, given the recent change of Australia’s Prime Minister (and the considerable change in roles of a number of Federal Ministers, including the Federal Treasurer), it is unclear whether priority will continue to be given to the review of Australia’s taxation laws and, in particular, the proposals to amend the provisions relating to the application of GST.
However, it is the intention of the Australian Government that, if any legislative changes are passed, they will come into force on or before 1 July 2017. Also, recently, Australia’s new Prime Minister, Malcolm Turnbull, has indicated that tax reform is still “at the centre of our efforts”.6