Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 3 - Supplies involving non-residents
3.1 Schedule 3 to this Bill amends the GST Act in relation to the following areas:
- supplies made by non-residents where the non-resident does not carry on an enterprise in Australia;
- supplies of 'tooling' to non-residents;
- supplies of services to non-residents; and
- supplies to Australian residents not in Australia at the time of supply.
3.2 The amendments will:
- allow non-residents and Australian recipients to agree that the GST on certain taxable supplies will be 'reverse charged';
- allow the supply of 'tooling' to non-residents to be GST-free in certain circumstances;
- allow a wider range of services to non-residents to be GST-free; and
- ensure that a supply to an Australian resident is GST-free if the supply is provided to an entity outside Australia.
Supplies made by non-residents
3.3 Non-resident businesses make supplies that are connected with Australia requiring them to register and pay GST. In many cases the non-resident does not have a presence in Australia. Consultations with a number of industries have suggested that there are practical difficulties in non-residents providing the details required for registration, some of which may not be relevant or available to a non-resident entity in circumstances where there is no net GST revenue. The amendments to the GST Act will help to overcome some of these difficulties.
3.4 Item 12 adds new Division 83 dealing with non-residents making supplies connected with Australia. This new Division provides that in certain circumstances a non-resident and an Australian recipient can agree for the GST payable on a taxable supply made by the non-resident to be paid by the Australian recipient. This is also referred to as a 'reverse charge' on the supply.
3.5 The circumstances where new Division 83 can be applied are set out in new section 83-5 . These are:
- the supplier is a non-resident;
- the supplier does not make the supply through an enterprise that the supplier carries on in Australia;
- the recipient is registered or required to be registered; and
- the supplier and the recipient agree that the GST will be paid by the recipient.
3.6 The non-resident can be registered and still utilise these provisions as long as the supply is not made through an enterprise that the supplier carries on in Australia. However, the Division does not apply if the supply is covered by Division 84 (offshore supplies other than goods or real property) or the supply made by the non-resident is through a resident agent. [New subsection 83-5(2)]
3.7 The amount of the 'reverse charge' is 10% of the price of the supply [new subsection 83-20(1)] . As the non-resident will not be paying the GST, their price will not include GST. Tax invoices will not be required for the Australian recipient to claim an input tax credit in relation to the taxable supply [new section 83-35] . However, the normal rules regarding creditable acquisitions and timing of input tax credits will apply.
3.8 New sections 83-10 and 83-15 provide special rules in relation to recipients that are members of GST groups or joint ventures. These sections provide for the GST to be payable by the representative member or joint venture operator where appropriate. New section 83-25 ensures that a non-resident does not have to register if the only reason they are required to register is because of supplies covered by new Division 83 .
3.9 New section 83-30 provides that the Commissioner does not have to register the non-resident if the only reason they are required to be registered is because of supplies that are covered by new Division 83 . This does not affect the status of the non-resident being required to be registered for the purposes of section 9-5 (taxable supplies).
3.10 Item 13 adds new section 188-23 to make it clear that the supplies that are 'reverse charged' to the Australian recipient do not count towards their turnover threshold.
Supplies of tooling to non-residents
3.11 Australian manufacturers under certain arrangements supply plant and equipment to non-residents to be used exclusively in Australia to manufacture goods that will be exported. These supplies are not GST-free as the plant and equipment remains in Australia. If the non-resident is not able to obtain an ABN they will not be able to claim back the GST and this cost may ultimately be borne in the cost of goods to be exported.
3.12 New section 38-188 [item 6] provides that the supply of 'tooling' to a non-resident that is not registered or required to be registered, is GST-free if the 'tooling' is to be used in Australia solely to manufacture goods that will be exported.
3.13 The goods (or 'tooling') covered by this provision are jigs, patterns, templates, dies, punches and similar machine tools.
Supplies of services to non-residents
3.14 Australian businesses will also make supplies of things (other than goods or real property) to non-residents that have the following common features:
- the recipient is not an Australian resident;
- the recipient is not in Australia when the thing supplied is done; and
- the supply is directly connected with goods situated in Australia when the thing supplied is done, or with real property situated in Australia.
3.15 These supplies are not GST-free because of their connection with goods or real property in Australia. In many cases the non-resident cannot access input tax credits because of the current operation of the ABN registration process.
3.16 Item 9 amends item 3 in the table in subsection 38-190(1) in relation to the meaning of the term 'directly connected with goods'. The test is changed to 'work physically performed on goods' to clarify the intended scope of the term.
3.17 Item 8 also incorporates the change to the meaning of 'directly connected with goods' in the substituted item 2 in the table in subsection 38-190(1). This will clarify the scope of services that are GST-free where the supply is being made to a non-resident recipient who is not in Australia when the thing supplied is done.
3.18 Item 2 in the table in subsection 38-190(1) has the same effect as the current item with the exception of the change from 'directly connected with goods' to 'work physically performed on goods'. In addition, item 2 now provides further tests where a supply is not GST-free because of the connection with goods or real property in Australia.
3.19 The further tests in item 2 provide that a supply (other than goods or real property) to a non-resident who is not in Australia when the thing supplied is done is GST-free where:
- the non-resident is not registered or required to be registered; and
- the non-resident acquires the thing in carrying on their enterprise.
3.20 The limitation in subsection 38-190(3) still affects the scope of item 2. Therefore, even if the requirements of item 2 are met, a supply will not be GST-free where the supply is provided to another entity in Australia.
3.21 This change effectively recognises that these supplies are being made to non-residents who would otherwise be entitled to claim input tax credits. However, under the current operation of the ABN registration process, these non-residents cannot register to access these input tax credits. This amendment provides an alternative to allowing these non-residents to register only for the purpose of claiming input tax credits.
3.22 The amendment potentially affects a range of services that would be provided to non-residents not in Australia at the time of supply that would be GST-free except for their connection with goods or real property situated in Australia. The range of services that may now be GST-free includes testing and certification of goods, warranty services, research and development, market research, advertising and consultancy services.
The requirement that non-residents are not registered or required to be registered
3.23 The amendments in relation to the supply of 'tooling' and also to item 2 in subsection 38-190(1) have a requirement that the non-resident is not registered and not required to be registered. The Australian supplier will need to be satisfied that this is the case before they can treat a supply as GST-free. The requirement for an Australian supplier to determine whether a non-resident is registered will not be as difficult as determining whether the non-resident is required to be registered.
3.24 While a statement to this effect from the non-resident is not required in the legislation, in some cases it may be appropriate for the Australian supplier to obtain some notification to the effect that the non-resident is not registered and also that they do not make supplies connected with Australia. The Australian supplier needs to be reasonably satisfied that the non-resident they are dealing with is not registered or required to be registered. A statement or knowledge to the effect that the non-resident does not make supplies connected with Australia will generally be sufficient for the Australian supplier to be satisfied that the non-resident is not required to be registered.
Supplies to Australian residents outside Australia
3.25 Supplies that are made to a recipient in Australia but where the supply is performed outside Australia are currently not GST-free because the recipient is both in Australia and overseas at the time of supply. However, if the recipient is an individual, they can be outside Australia when the thing is done and the supply can be GST-free. There is therefore an inconsistency in the legislation depending whether the entity is an individual or a company. In both circumstances, the supply is made outside Australia and the effective use and enjoyment of the supply is outside Australia.
3.26 Subsection 38-190(3) ensures that GST is payable in the reverse situation (i.e. the recipient is overseas but the supply is provided to another entity in Australia).
3.27 Item 11 adds new subsection 38-190(4) and provides that for the purposes of item 3 in the table in subsection 38-190(1) a supply will be taken to be made to a resident who is not in Australia when the thing supplied is done if the supply is provided to another entity outside Australia. Some examples of the types of supplies covered are:
- a supply of mobile telephone roaming to an Australian business with an employee overseas; and
- a supply to an Australian business of a training course to be conducted overseas.
Rights connected with Australia
3.28 Subsection 38-190(2) is designed to ensure that the supply of a right in Australia to a non-resident is not GST-free if the right will ultimately be redeemed in Australia. This provision is appropriate where the ultimate supply for which the right is effectively consideration, is or would otherwise be, a taxable supply. However, where the right is redeemed for a GST-free supply (e.g. financial supplies made to non-residents), the result is inconsistent (e.g. financial supplies to non-residents would be input taxed rather than GST-free).
3.29 Item 10 amends subsection 38-190(2) to make it clear that the provision does not apply where the supply underlying the right would be GST-free.
3.30 The Government's policy objective is to ensure that services provided to businesses overseas should not be subject to GST in the same way that exported goods are GST-free. In addition, the Government wants to ensure it does not unnecessarily draw non-residents into the GST system.
3.31 There are 4 situations where this policy objective has not been achieved.
3.32 First, there are situations where non-residents will make supplies connected with Australia but in many cases will not carry on an enterprise in Australia or have a presence in Australia. This will make it difficult for the non-resident to comply with the Australian GST laws or the ATO to enforce the law.
3.33 Second, some Australian manufacturers have contracts with non-residents to manufacture goods to be exported. A feature of these arrangements can be that the manufacturing plant (referred to as 'tooling') is supplied to the non-resident but remains in Australia and is used to manufacture the goods for export. Such a supply is not GST-free as the plant and equipment is not exported.
3.34 Third, there are some circumstances where the goods needed to provide exported services are located in Australia, which results in the service being subject to GST.
3.35 Fourth, there are situations where supplies can be made outside Australia, but because the recipient is technically in Australia when the supply takes place, the supply is taxable. An example is where a company is located in Australia, but a supply is made to one of its employees outside Australia - strictly speaking the supply is made to the company, which is in Australia.
3.36 To achieve the Government's objective in relation to the situations noted above, the appropriate options are to either extend the GST-free provisions or provide more flexibility for overseas entities to register for GST and claim input tax credits. There is also an option for the first measure to allow the non-resident supplier and the Australian recipient to utilise a 'reverse charge' rule. A 'reverse charge' rule is only appropriate for the first option, given this is the only option dealing with supplies being made in Australia.
Assessment of impacts
3.37 These measures impact both Australian businesses making supplies to entities overseas and the overseas entities themselves. The Government does not have reliable estimates of the number of businesses affected by these measures, but it is advised that in relation to the third circumstance there are at least 12,000 overseas recipients of services that would, in the absence of any legislative change, need to register in order to claim input tax credits.
Costs and benefits
3.38 Extending the GST-free provisions will keep the overseas entities out of the GST system. This will have compliance benefits for them as they will not need to become part of the Australian GST and keep records and lodge returns consistent with the system. It will also be less costly for administrators as they may otherwise, if no change is made, need to examine and possibly audit a wider range of transactions occurring outside Australia.
3.39 On the other hand, allowing overseas entities to register will ensure the supplies are made effectively GST-free as the overseas entity will be able to claim input tax credits, but it will also result in a net increase in compliance costs because, as noted above, they will need to keep appropriate records and lodge GST returns consistent with the requirements of the GST.
3.40 Neither option has a revenue impact.
3.41 The 'reverse charge' rule for the first circumstance is appropriate, given that it deals with a supply that is actually made to Australian businesses (and so would usually be eligible for an input tax credit). In such a case, the compliance costs benefits of forcing the overseas entity to register simply to collect and remit GST is not justified, given that all GST remittances can be made by the Australian company.
3.42 Consultation occurred with a range of stakeholders, particularly those in the resources industry.
Conclusion and recommended option
3.43 The Government proposes to extend GST-free treatment to deal with the last 3 situations.
3.44 That is, the Government proposes to allow the supply of 'tooling' to be GST-free in certain circumstances, allow a wider range of services to be GST-free and will ensure that a supply to an Australian resident is GST-free if the supply is provided to an entity outside Australia.
3.45 To cover the first situation, the Government proposes to allow non-residents and Australian recipients to agree that the GST on certain taxable supplies will be subject to a 'reverse charge' rule so that the Australian resident can account for the GST. Similar to the other situations, this will allow the non-resident to remain outside the GST system.