GST is payable on taxable supplies and taxable importations. In some cases, one transaction can constitute both a taxable supply and a taxable importation.
Input tax credits can be claimed for creditable acquisitions and creditable importations.
To avoid an unwanted GST cost, importers and their advisers need to be careful that their supply chain allows for both input tax credits to be claimed on the creditable importation and for the GST cost of the taxable supply to be passed on to the buyer.
A practical example
Haibo Canada is based in Labrador, Canada. Haibo Canada sells expensive dog beds to consumers around the world, including Australia.
To assist with the importation of the goods and after-sales support, Haibo Canada contracts with a local subsidiary, Haibo Australia.
Haibo Australia works with customs brokers to import the goods into Australia. Haibo Canada is named as the ‘owner’ of the goods on the import declaration.
When is an importation a ‘taxable importation’?
An importation is a ‘taxable importation’ if:
- good are imported;
- the goods are entered for home consumption – as defined in the Customs Act 1901; and
- the importation is not excluded from being taxable because it is a ‘non-taxable importation’.
The entity that is named as the ‘owner’ of the goods on the import declaration is liable to pay the GST on the taxable importation. ‘Owner’ is broadly defined in the Customs Act 1901. This means that, based on the case law, the ‘owner’ for customs purposes may not be the legal owner or the entity that ‘imports the goods’.
In the example above, Haibo Canada imports the goods and is also named as the ‘owner’ on the import declaration. It is liable for the GST on the taxable importation.
When is an importation a ‘creditable importation’?
Claiming input tax credits for a ‘creditable importation’ is not as straightforward.
An entity makes a ‘creditable importation’ where:
- it imports the goods for a creditable purpose;
- the importation is a taxable importation; and
- it is registered or required to be registered for GST.
‘Creditable purpose’ means as part of carrying on an enterprise, but not for making input taxed supplies or for private or domestic purposes.
However, only the entity that ‘imports’ the goods can claim an input tax credit. Importantly, this may not be the entity listed as the ‘owner’ on the import declaration and therefore the entity that paid the GST on the taxable importation. In GSTR 2003/15, the Commissioner states:
49. The entity that imports goods within the meaning of Division 15, in the context of a taxable importation under Division 13, is the entity that:
(a) causes the goods to be brought to Australia for application to its own purposes after importation, whether by way of supply, use, or otherwise; and (b) completes the customs formalities for the entry of the goods for home consumption.
50. The entity that causes goods to be brought to Australia is identified by looking to the purpose for which the goods are brought here. The entity whose purpose it is to apply the goods by way of supply, use or other application to its purposes after importation is the entity that causes the goods to be brought to Australia.
In our example, Haibo Canada has caused the goods to be brought to Australia for its own purposes – completing its sale contract with the Australian consumer. Haibo Canada is also named as the ‘owner’ on the import declaration. Haibo Canada has a ‘creditable purpose’ and will therefore make a creditable importation provided it is registered for GST.
However, if Haibo Australia was named as the ‘owner’ on the import declaration, there is a disconnect between the entity that caused the goods to be brought to Australia (Haibo Canada) and the entity that entered the goods for home consumption (Haibo Australia). This disconnect, if discovered early enough, can be managed by a properly drafted agency agreement. However, any agency agreement needs to consider whether it causes Haibo Canada to acquire a permanent establishment (for income tax purposes) or enterprise (for GST purposes) in Australia.
Can Haibo Australia act as a resident agent?
The GST legislation has a special regime for ‘resident agents’.
In broad terms, where a non-resident makes a taxable supply or taxable importation ‘through’ a resident agent:
- the resident agent is liable for the GST rather than the non-resident;
- the resident agent is entitled to input tax credits rather than the non-resident;
- the resident agent is required to be registered if the non-resident is required to be registered; and
- a non-resident is not required to lodge BASs if its only supplies are made through a resident agent.
The rules for a resident agent to claim input tax credits for a creditable importation are also not straightforward. To claim input tax credits on a creditable importation:
- the non-resident must ‘import the goods’ – based on the Commissioner’s public ruling, this means ‘causes the goods to be brought to Australia for application to its own purposes after importation, whether by way of supply, use, or otherwise’;
- the non-resident must import the goods in carrying on its enterprise, and not for any private or domestic purpose, or for making input taxed supplies;
- the non-resident must obviously be a non-resident, and also not carry on an enterprise in Australia – which can be a risk under certain agency relationships;
- the resident agent must have authority to clear the goods through customs on the non resident’s behalf;
- the resident agent must enter its name as the ‘owner’ on the import declaration; and
- the non-resident must be registered or required to be registered for GST.
While required to be registered, the non-resident will not be required to lodge BASs if it makes no taxable importations or taxable supplies other than through its resident agent.
The ATO will expect evidence of the agency agreement between the non-resident and the resident agent. In drafting that agency agreement, the resident agent should not have an authority that inadvertently causes the non-resident to start carrying on an enterprise in Australia.
Ensuring there is no unexpected GST cost
To reduce the risk of an unexpected GST cost:
- the contracts and import declarations need to align so that there is a creditable importation – either for the non-resident or resident agent but so the entitlement to input tax credits does not fall down the cracks between the two; and
- if there is a taxable supply, as well as a taxable importation, the GST cost needs to be dealt with by either an effective GST gross-up clause or factored into the price of the goods.