The Australian Taxation Office (ATO) has recently released a draft GST ruling (GSTR 2016/D1) (Draft Ruling) which is intended to assist foreign suppliers of digital and other intangible products to determine when they will be liable to Australian GST on supplies they make to Australian consumers.
In May 2015, the Federal Government announced its intention to extend the application of the GST to supplies of digital and intangible products made by foreign suppliers to “Australian consumers”.
Legislation to enact the new measures was passed in May 2016, with the changes coming into force on 1 July 2017. For a summary of these measures as they appeared in the original, revised Exposure Draft Bill and final Bill, please see our previous alerts which can be accessed here, here and here.
What is GSTR 2016/D1 about?
The new measures only affect supplies made to “Australian consumers”. GSTR 2016/D1 is directed at assisting suppliers to determine who is an Australian consumer for these purposes, and explains what steps suppliers should take to collect evidence to establish whether or not the recipient of a supply is an Australian consumer.
Who is an “Australian consumer”?
The definition of Australian consumer focuses, broadly, on both the residency of the recipient and whether or not they are registered for GST. Both requirements must be satisfied before an entity will be regarded as an Australian consumer.
- Residency requirement: the recipient must be an Australian resident for income tax purposes (with an exception for residents of external territories). If the recipient is not an Australian resident for income tax purposes, they will not be an Australian consumer for GST purposes.
- GST status: the recipient must not be registered for GST or, if the recipient is registered for GST, the recipient must not acquire the intangible product, solely or partly, for the purpose of an enterprise that the entity carries on. The effect of this requirement is that the measure only applies to supplies made to persons who are not entitled to an input tax credit for the acquisitions they make.
It will readily be appreciated that both requirements depend on factual matters which may not be within the actual knowledge of the supplier. To address this, the legislation contains provisions which allow a foreign supplier to treat a particular supply as not having been made to an Australian consumer (and therefore not subject to the new measures) if the supplier takes reasonable steps to obtain information about whether or not the recipient is an Australian consumer and the supplier reasonably believes that the recipient is not an Australian consumer.
The Draft Ruling sets out the ATO’s views on the types of information, business systems and processes the Commissioner would accept as providing a reasonable basis for forming a reasonable belief about whether a recipient is an Australian resident.
Based on the Draft Ruling, the ATO will accept that the residency requirement can be tested using either the “business systems” approach or “reasonable steps” approach.
“Business systems” approach
Where the supplier’s usual business systems and processes provide a reasonable basis for forming a reasonable belief that a recipient is not an Australian consumer, there is no need for the supplier to take any steps to obtain further information about the recipient beyond that which the supplier usually collects when making the supply or maintaining the commercial relationship.
To rely on this approach, the supplier needs to be able to demonstrate that their business systems provide a reasonable basis for forming a belief about the residency of the recipient. All of the information collected through a supplier’s usual business systems and processes should be considered to support the conclusion reached about a recipient’s residency status.
According to the Draft Ruling the types of information that the Commissioner will typically accept as supporting a conclusion about the residency of a recipient include the recipient’s billing address, mailing address, banking or credit card details, mobile phone country code, IP address and other representations and warranties provided by the recipient. It is not expected that a supplier’s usual business systems and processes would necessarily collect all of these types of information, nor is this intended to be an exhaustive list of the types of information that supplier’s may collect (and use) to establish the residency of a recipient.
While the Draft Ruling emphasises that no one factor is determinative of whether or not a supplier has a reasonable basis for forming a reasonable belief that a recipient does not meet the residency requirement, it does provide some guidance on the ATO’s views about the weighting to be given to different items of information, particularly in cases where the information that the supplier has about the recipient does not point consistently to one conclusion (i.e. some information points in favour of the recipient being an Australian resident and other information points towards non-residency). In that scenario, the ATO says that the supplier should consider the expected reliability of the different items of information, with more weighting to be given to the information that is “necessary for the commercial transaction to proceed”, as opposed to information that is provided only for the supplier’s compliance purposes.
To illustrate, the Draft Ruling gives the example of a situation where a recipient provides an Australian mailing address but when asked (as part of completing an online order form) whether she is an Australian resident for income tax purposes, the recipient selects ‘no’. In that case, the Draft Ruling states that the supplier should treat the recipient as an Australian consumer, and charge GST accordingly. This is because the online declaration of residency is, according to the Draft Ruling, considered to be a less reliable indicator of residency than the mailing address provided. This example serves to highlight that the ATO will not be satisfied where suppliers attempt to rely solely on recipient declarations of non-residency, where other information provided to the supplier to complete the transaction points towards residency.
Assuming that the Draft Ruling is finalised in its current form (or near to it), suppliers wanting to avail themselves of the business systems approach will need to review the types of information that they routinely collect, and form a view about how they will use that information to determine the residency of their customers. Suppliers wanting to use the business systems approach should also consider documenting their approach to determining residency, to ensure that they are best positioned to be able to demonstrate to the ATO that the information is sufficient for the supplier to form reasonable belief about the residency of their customers. With the regime set to commence on 1 July 2017, suppliers who expect to be affected by the new measures should start to consider these issues sooner rather than later.
“Reasonable steps” approach
Suppliers who either cannot or do not wish to rely on the business systems approach will be required to take “reasonable steps” to obtain information that provides the supplier with a reasonable basis for forming a reasonable belief that a recipient is not an Australian consumer.
What amounts to “reasonable steps” will depend on the relationship and circumstances in which a supplier makes the supply to a recipient.
The reasonable steps test will not be satisfied where no steps are taken to determine residency and, importantly, this may require the supplier to take steps to obtain information beyond the minimum information a supplier needs about a recipient in order to make a supply. The Draft Ruling lists some relevant circumstances to consider in determining whether the steps taken are “reasonable”, which include:
- the level of interaction between supplier and recipient in making the supply or in maintaining the commercial relationship: the focus is on what steps are currently being taken to obtain information about the recipient’s residency and the level of difficulty and expense involved in taking additional steps. This informs whether the steps currently being taken are “reasonable”;
- the type of personal information a recipient will usually share (or be willing to share) in the context of the type of supplies being made: this indicates the limits on what information a supplier can reasonably expect the recipient to provide. As an example, the Commissioner believes that a recipient will typically share more personal information where there exists an interactive commercial relationship (as opposed to automated) and in cases where the supply is of a high value;
- the difficulty and costs (direct and indirect) associated with a supplier taking steps to determine whether a recipient is an Australian consumer: the reference to “indirect costs” picks up the costs attributable to lost sales which occur, or are likely to occur, as a result of asking for additional information (which might be phrased as the impact on the “ease of doing business” with the supplier); and
- the expected reliability of the information obtained.
Generally, an entity that is registered for GST will not be an Australian consumer regardless of whether or not they satisfy the residency requirement. However, where the recipient is registered for GST but does not make a particular acquisition for the purpose of their enterprise the recipient may still be an Australian consumer in respect of that acquisition.
A supplier will not be able to demonstrate that they have a “reasonable belief” that a recipient is not an Australian consumer on the basis that they are registered for GST unless:
- the recipient’s ABN has been disclosed to the supplier; and
- the recipient has provided a declaration or other information which indicates that they are registered for GST.
Note that the Commissioner expects a supplier to take reasonable steps to ensure that the ABN disclosed is valid and belongs to the recipient. This may require the supplier to verify the disclosed details against publically available information, such as the ABN LookUp website (http://abr.business.gov.au).
The Draft Ruling makes the point (correctly) that the fact an entity has an ABN is not, of itself, evidence that the entity is registered for GST (an entity may have an ABN without being registered for GST). The fact therefore that an entity quotes an ABN is not, by itself, evidence that the entity is not an Australian consumer. Some evidence of GST registration is also required, either by way of declaration from the recipient or some other information.
In cases where a particular recipient is registered for GST, the Draft Ruling provides no guidance on the factors a supplier should consider to determine whether that recipient makes the acquisition in furtherance of an enterprise being carried on. Suppliers may consider incorporating a declaration about the extent to which the recipient’s acquisition is creditable in the broader declaration they obtain to confirm whether or not the recipient is GST registered.
The deadline for public comment on the Draft Ruling is 17 February 2017.