Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP)
General outline and financial impact
GST Treatment of Cross-Border Transactions
Schedules 1 and 2 to this Bill each contain measures that modernise Australia's goods and services tax (GST) system.
Australia's GST system has been in place for 15 years. Over this time there have been a number of significant changes in Australia and the world.
One of the most notable of these changes has been the growth in cross-border supplies of services and other intangibles. When the GST was introduced in 2000, such transactions were relatively unusual, especially for consumers. However, cross-border supplies now form a large and growing part of Australian consumption.
The growing importance of these types of transactions has highlighted that the GST system was designed with a focus on Australian-based, rather than cross-border supplies.
In the context of cross-border supplies where consumption is of a private or domestic nature, the GST often does not apply to supplies made by non-residents to consumers in Australia. Given the increase in cross-border transactions and the growth of the digital economy, this treatment has led to a growing area of consumption being out of scope of the GST. This harms the integrity of the GST tax base and can disadvantage local suppliers.
At the same time, the GST system is also often not well adapted to the circumstances of foreign suppliers in respect of their dealings with Australian-based businesses. In many cases supplies between such entities result in little or no final GST being payable. As a result, the current GST settings can impose unnecessary obligations and compliance costs on foreign suppliers.
Schedules 1 and 2 each contain measures that modernise the GST to address these challenges.
- The amendments made by Schedule 1 update the GST law to ensure that GST applies consistently to all supplies of digital products and other imported services made to Australian consumers.
- The amendments in Schedule 2 make a number of changes to the GST law to minimise compliance costs for non-resident suppliers while maintaining the integrity of the GST base.
Extending GST to digital products and other imported services
Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities.
Date of effect: The measure applies in determining net amounts for tax periods starting on or after 1 July 2017.
For supplies made over a period spanning this date, the amendments apply to that portion of the supply made after 1 July 2017.
Proposal announced: The measure was announced by the Treasurer on 12 May 2015 in the 2015-16 Budget.
Financial impact: The measure is estimated to result in a gain to GST revenue of $350 million over the forward estimates period:
Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.190 to 1.198.
Compliance cost impact: This measure imposes some transitional and ongoing compliance costs upon foreign suppliers and electronic distribution platforms for supplies of digital products and other imported services made to Australian consumers.
Summary of regulation impact statement
Regulation impact on business
Impact: This measure will impact non-resident businesses that supply Australian consumers with digital products or other services.
- Currently, the supply of digital products and other services by non-residents is often not subject to GST.
- This measure seeks to ensure that foreign vendors must remit GST on the supply of digital products and other services to Australian consumers.
- It is anticipated in the order of 100 non-resident entities will register for and remit GST, through either a simplified or full registration regime, as a result of this measure. These businesses will face transitional costs associated with learning about and implementing the change in obligations, as well as ongoing reporting and compliance obligations.
- The impact of this measure on affected non-resident businesses is mitigated as many non-resident suppliers may already apply a consumption tax to supplies to consumers in other OECD jurisdictions and are familiar with how this operates.
- Two periods of consultation were conducted on draft legislation for this measure, in addition to regular engagement with resident and non-resident stakeholder businesses, and law and accounting professionals in this area. Response to the proposed option was largely positive. Changes were made to the draft legislation to address concerns raised in consultation.
GST treatment of cross-border transactions between businesses
Schedule 2 to this Bill amends the A New Tax System (Goods and Services) Tax Act 1999 to better target the way Australia's goods and services tax rules apply to cross-border supplies that involve non-resident entities.
Date of effect: The measure applies to taxable supplies in determining net amounts for tax periods that commence from the second quarterly tax period starting after Schedule 2 receives Royal Assent.
Proposal announced: The measure was originally announced by the former Government in the 2010-11 Budget following recommendations that were made by the Board of Taxation. The Government announced on 14 December 2013 it would proceed with the measure.
Financial impact: The measure is estimated to have an ongoing unquantifiable impact on GST revenue over the forward estimates period:
Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.237 to 2.242.
Compliance cost impact: This measure imposes some transitional compliance costs on affected non-resident entities and affected business customers that carry on an enterprise in the indirect tax zone.
Farm management deposit reforms
Schedule 3 to this Bill reforms the income tax treatment of farm management deposits (FMDs) by:
- increasing the maximum amount that can be held in FMDs by a primary producer to $800,000;
- allowing primary producers experiencing severe drought conditions to withdraw an amount that has been held in an FMD for less than 12 months, without affecting the income tax treatment of the FMD in the earlier income year; and
- allowing amounts held in an FMD to offset a loan or other debt (ie. as a result of the arrangement a lower amount of interest is charged on the loan than would otherwise be the case) relating to the FMD owner's primary production business.
Date of effect: The amendments made by Schedule 3 apply to income years commencing on or after 1 July 2016.
Proposal announced: The changes to the tax treatment of FMDs were announced in the Agricultural Competitiveness White Paper released on 4 July 2015.
Financial impact: The cost to revenue of the measures over the forward estimates period is estimated to be $10 million comprising:
Raising the Cap
..Not zero, but rounded to zero.
Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.70 to 3.75.
Compliance cost impact: The measures have a small transitional compliance cost.
Summary of regulation impact statement
Regulation impact on business
- The measures impose some transitional compliance costs as primary producers and their advisers become familiar with the changes.
- Financial institutions that seek to offer products to enable FMDs to be offset against loans will need to revise their systems to facilitate the offset arrangements and calculation of interest.
Primary producers and their advisers will need to monitor FMD offset arrangements on an ongoing basis to ensure that an administrative penalty does not apply and obtain the necessary evidence of rainfall conditions for early withdrawals due to severe drought conditions.