Many readers would be aware that Australia has operated a "de minimis" threshold to liability for customs duty and GST so that consignments with a customs value below $1,000 were free from GST and customs duty and were also subject to a more limited reporting regime, often by way of "Self – Assessed Clearance Declaration" or, as it is more widely known a "SAC".
This practice was consistent to international conventions that such "low value" transactions should not be subject to unnecessary intervention or cost, especially when so many of the transactions were undertaken by individual consumers. This practice was reflected in many FTAs were transactions below a prescribed "de minimis level" did not require the use of a certificate of origin or other declaration even where preferential rates under the FTA were being claimed.
In Australia, the original "de minimis" level was consignments with a customs value below $250 which was subsequently increased to $1,000.
Pressure to change our de minimis level
However, for a number of years, concerns had been raised on this practice
- Australian retailers had complained that overseas vendors of goods enjoyed an unreasonable advantage over local businesses in that they did not pay for premises or staff here, did not pay associated business costs and were able to sell goods to Australian customers without GST on imports for consignments under $1,000 while Australian retailers were liable for all of those costs and were obliged to recover and remit GST on all sales.
- At the same time that Australian retailers were expressing their concerns on the disadvantage to their businesses, others were becoming concerned that the combination of the increase in purchases below the "de minimis" threshold and the ability for them to be conducted through e – commerce with more limited viability in Australia was a significant risk to the integrity of the GST system.
- The Australian Border Force (ABF) and other border agencies were concerned on "abuses" of the regime including deliberate under – declaring of the value of goods so that they came under the threshold – or their use for goods which should be accompanied by permits.
As the quantum of goods purchased overseas through e-commerce platforms increased, the concerns of those affected increased as did the pressure to charge GST on all imports. Even so, there were still a number of objections raised to the proposed removal of the threshold. These objections included suggestions that the real harm to Australian retailers was due to reasons other than the $1,000 threshold, that the change would be inconsistent to overseas practice (which is raising not eliminating such de minimis thresholds) and that the cost to implement, administer and recover the GST on low value transactions would far exceed the revenue recovered or other benefits from removing the threshold. Certainly a number of reports confirmed that the costs far exceeded benefits.
The previous response to the increased pressure to remove the threshold from Government was that while the issue was under review on a regular basis there would be no movement until the overall cost and damage of the threshold exceeded the costs of removing the threshold.
Government move on the change
The pressure on Government and the perceived damage from the retention of the threshold at $1,000 must have reached critical mass in the run – up to the last Federal Budget delivered in May 2016. As reported in my update at that time, the government announced its intention to amend the GST law so that the GST is payable on certain supplies of low value goods that are purchased by consumers and brought into Australia. However the announced reforms went beyond that simple proposition and we have been awaiting details on what was being proposed and how it would be effected.
First sight of the details of the change
That detail was finally delivered on 4 November 2016 when the Treasury released exposure draft legislation (the Exposure Draft Bill) and associated explanatory material that would amend the GST law to give effect to the Budget decision to apply GST to low value goods imported by consumers. According to paragraph 1.1 of the Exposure Draft Explanatory Materials
"The amendments make supplies of goods valued at $1,000 or less at the time of sale connected with Australia (known as the Indirect Tax Zone or ITZ) if the goods that are supplied are brought to the ITZ with the assistance of the supplier. This ensures that such supplies are subject to GST, consistent with equivalent supplies made within Australia".
This will mean that from 1 July 2017, the law will require overseas vendors, electronic distribution platforms and goods forwarders to account for GST on sales of low value goods to consumers in Australia if they have GST turnover of $75,000 or more.
According to paragraph 1.16 of the Explanatory Materials
1.16 The reforms:
- make supplies of goods valued at $1,000 or less at the time of supply connected with the ITZ if the goods are, broadly, purchased by consumers and are brought to the ITZ with the assistance of the supplier;
- treat the operators of electronic distribution platforms as the suppliers of low value goods if the goods are purchased by consumers and brought to the ITZ through the platform;
- allow non-resident suppliers of low value goods that become connected with the ITZ because of these amendments to elect to be limited registration entities; and
- prevent double taxation by making importations of goods non-taxable importations if the supply of the goods is a taxable supply as a result of these amendments.
Some preliminary observations
So, there is now some detail on how the change is to be effected and without diminishing the need for full review of the changes and their consequences, the following preliminary observations can be made
- Treasury should be commended for the release of the Exposure Draft Bill and Explanatory Materials together with some preliminary Q & A together with the ability to make submissions (by 2 December). This can be contrasted to approaches to regulation adopted by other agencies when the first view of the regulation is often after the Bills have entered Parliament.
- It would be interesting to see the modelling on costs compared to benefits relating to the changes. Previously it was estimated that the financial costs alone would far exceed financial receipts in implementing the changes – let alone the additional administrative costs.
- The change will put Australia at odds with many major trading partners who are looking to increase their "de minimis" levels as opposed to reducing or eliminating them. It would also appear to be a move that is inconsistent to the push towards opening trade and trade facilitation.
- It may upset some of our counterparties to our FTAs who could see this as a regressive step and one inconsistent to the "no new import duties and taxes" themes behind our FTAs
- At the moment, many of our FTAs allow for imports at less than $1,000 to claim preferential treatment without CoOs or DoOs on the basis that no tax or duty was payable – will this now change that GST is payable on these transactions?
- It will significantly increase compliance and regulatory costs for those operating "electronic distribution platforms" who bring the goods to Australia through the platform as they will be required to charge and remit the GST on the transaction and register in our GST system
- It will also significantly increase compliance and regulatory changes for the express carriers bringing goods to Australia and for the reporting of the goods – they won't be able to nominate the Australian purchaser as the importer (presumably) and will need to secure authorities from the overseas suppliers themselves (presumably) to do the reporting and will probably need to complete forms different to SACs?
- It will place a premium on being the first to incorporate the necessary changes into their supply chains from ordering through transport to satisfaction of an order and then reporting the transaction and remitting the correct amounts of GST. Of course all of these changes will attract the prospect of penalties for failure to comply – deliberately or inadvertently.
- I would also think that various advisers may be coming up with new models to try and minimise or eliminate the impact of the changes!
Submissions and further developments
There will no doubt need to be additional materials released to address the practical aspects of the changes. No doubt there will also be changes to the exposure draft material.
As always I will be pleased to keep you informed of developments and would be delighted to assist with submissions and advice on these changes. As we say – "if pain persists, see your lawyer".