Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 1 - Tax integrity: extending GST to digital products and other services imported by consumers
Outline of chapter
1.1 Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax (GST) in a similar way to equivalent supplies made by Australian entities.
1.2 All legislative references in this Chapter are to the GST Act, unless otherwise stated.
Context of amendments
Existing GST framework
1.3 GST is payable on taxable supplies and taxable importations.
1.4 Generally, for a supply to be a taxable supply, it must, among other things, be connected with the indirect tax zone (ITZ) (broadly, Australia, excluding those geographic areas where the GST does not apply, such as the external Territories). The supply must also not be GST-free or input taxed (see section 9-5).
1.5 Whether a supply is connected with the ITZ depends on the nature of the supply and the circumstances in which the supply is made. The circumstances in which a supply of anything, other than goods or real property, is connected with the ITZ include where:
- the thing is done in the ITZ (paragraph 9-25(5)(a));
- the supply is made through an enterprise that is carried on in the ITZ (paragraph 9-25(5)(b)); or
- neither of those situations apply and the supply is the supply of a right to acquire another thing and the supply of the other thing would be connected with the ITZ (paragraph 9-25(5)(c)).
1.6 The connected with the ITZ rules, in conjunction with the rules for GST-free exports and other provisions of the GST law, are generally intended to exclude supplies from GST where the supply is not consumed in Australia.
1.7 An importation is generally a taxable importation if it is an importation of goods that are entered for home consumption, provided the importation is not a non-taxable importation and other special rules do not apply.
1.8 Frequently, when an Australian resident obtains services or intangible property from a foreign entity there will be neither a taxable supply nor a taxable importation.
1.9 The importation of services or intangible property will never be a taxable importation as importations must be of goods, which the GST Act defines as 'any form of tangible personal property'.
1.10 Such an importation will also generally not be a taxable supply. For many such supplies of intangibles the location where the supply is performed can often be arbitrary. If the location of performance is not in Australia, a supply by a foreign entity will generally not be connected with the ITZ.
1.11 Special rules exist for supplies of things other than goods and real property to enterprises that are not taxable supplies under the general GST rules. Division 84 of the GST Act broadly provides that these supplies will be taxable supplies if they are acquired by an entity for the purposes of an enterprise carried on in the ITZ, but not solely for a creditable purpose and the entity is registered or required to be registered for GST. However, any GST payable on such a supply is 'reverse charged'; that is, it is payable by the recipient of the supply and not the supplier. This creates a broad symmetry with taxable importations where the GST is imposed on the importer that may not be the same entity as the supplier.
Intangible supplies to consumers
1.12 The effect of Division 84 is generally to ensure that entities that are registered or required to be registered for GST are in the same net GST position in respect of things acquired for their Australian activities from overseas as they are for those things acquired locally.
1.13 However, this rule does not apply to supplies acquired by entities that are not registered or required to be registered for GST. It also does not currently apply to supplies that are not acquired for the purpose of carrying on an enterprise. As a result, such services and intangibles obtained by consumers from foreign entities are not generally subject to GST.
1.14 At the time of the introduction of the GST it was not considered necessary to address this gap as there was only a very limited range of services available to consumers that were not performed in Australia or through an enterprise carried on in Australia.
1.15 This is now clearly not the case. With the growth in the use of the internet and e-commerce more generally, it is often no more difficult for Australian residents to obtain many types of services and items of intangible property from a foreign supplier than from a local supplier.
1.16 As a result, because GST does not apply to these supplies it both creates a significant integrity risk and places Australian suppliers at a tax disadvantage relative to foreign suppliers. This measure ensures the GST revenue base does not steadily erode over time through increasing use by Australian consumers of foreign suppliers to provide services and other intangible supplies.
1.17 The Organisation for Economic Co-operation and Development (OECD)/Group of Twenty Base Erosion and Profit Shifting Project on Addressing the Tax Challenges of the Digital Economy highlighted the impacts of the evolution of technology. It noted that technology has dramatically increased the ability of private consumers to shop online and the ability of businesses to sell to consumers around the world without the need to be present physically or otherwise in the consumer's country. It further noted that this often results in no GST being levied at all on these sales, with adverse effects on countries' GST revenues and on the level playing field between local and foreign vendors.
1.18 The OECD has published guidelines for the taxation of cross-border supplies of services and intangibles. The Guidelines concerning the place of taxation rules and collection mechanisms for business to consumer supplies were endorsed by the OECD Council on 1 October 2015, delivered to Group of Twenty Finance Ministers on 8 October 2015 and were endorsed by the third meeting of the OECD Global Forum on Value Added Tax (VAT) on 6 November 2015.
1.19 However, many countries have already acted to tax offshore supplies to their consumers, including Norway, Japan, Switzerland, Iceland, South Korea, South Africa and the member states of the European Union.
Other reforms to the GST treatment of cross-border transactions
1.20 These amendments are proceeding at the same time as other amendments to the GST system to address the greater involvement of foreign suppliers as well as other issues relating to cross-border transactions. Chapter 2 contains a detailed discussion of these amendments.
1.21 Following the announcement of this measure on 12 May 2015, eight weeks of public consultation was undertaken on exposure draft material, closing 7 June 2015. In the course of this consultation, a number of submissions were received from stakeholders and discussions were held with different stakeholder groups.
1.22 Stakeholders were largely supportive of the proposal, but identified a number of areas of the proposed legislation that could cause uncertainty or where a different approach could reduce compliance costs.
1.23 Following this feedback a number of changes were made to the draft to address these concerns and as well as other issues that were identified in the drafting process.
1.24 A further exposure draft and accompanying explanatory material was released on 7 October 2015, with submissions requested by 21 October 2015. Feedback on the changes was again largely positive and only a small number of remaining issues were identified. Further changes were made to address a number of these issues.
Summary of new law
1.25 Schedule 1 to this Bill amends the GST law to make all supplies of things other than goods or real property connected with the ITZ where they are made to an Australian consumer. An Australian consumer is broadly an Australian resident other than a business.
1.26 This change results in supplies of digital products, such as streaming or downloading of movies, music, apps, games and e-books as well as other services such as consultancy and professional services, receiving similar GST treatment whether they are supplied by a local or foreign supplier.
1.27 In some circumstances, responsibility for GST liability that arises under the amendments may be shifted from the supplier to the operator of an electronic distribution platform.
1.28 This occurs if the supply is made through such a platform, and the operator controls any of the key elements of the supply such as price, terms and conditions or delivery arrangements.
1.29 Operators and suppliers may also agree that the operator will assume liability for certain other supplies made through the electronic distribution platform.
1.30 Shifting responsibility for GST liability to operators of electronic distribution platforms minimises compliance costs as operators are generally better placed to comply. In addition, it ensures that services and other intangible supplies sourced in a similar manner are taxed in a similar way. These amendments are broadly modelled on similar rules for digital products or electronic services currently in operation in the European Union and Norway.
1.31 Finally, Schedule 1 also amends the GST law to make a number of changes to the administrative framework for supplies affected by these amendments. These changes include allowing entities making supplies that are only connected with the ITZ as a result of this measure to elect to become limited registration entities. Such entities cease to be entitled to input tax credits (ITCs), allowing the Commissioner of Taxation (Commissioner) to potentially simplify their registration and reporting arrangements.
Comparison of key features of new law and current law
|New law||Current law|
|Supplies of services and intangibles to Australian consumers|
|In addition to the operation of the current law, supplies of things other than goods or real property are also connected with the ITZ and therefore potentially subject to GST if the recipient of the supply:
Accordingly, supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receive similar GST treatment whether they are supplied by a local or foreign supplier.
Entities that are registered for GST and misrepresent their status as an Australian consumer in respect of a supply they acquire for wholly private purposes may be liable for GST in relation to the supply under an extension of the reverse charge rules currently in Division 84.
|Supplies of things other than goods or real property are only connected with the ITZ and therefore potentially subject to GST if:
|GST obligation imposed on electronic distribution platforms|
|In some circumstances, responsibility for GST liability that arises under the amendments may be shifted to the operator of an electronic distribution platform rather than the supplier.
This occurs if inbound intangible consumer supplies are made through an electronic distribution platform.
A supply is an inbound intangible consumer supply if, broadly, it is of something other than goods or real property and the supply is neither wholly done in Australia nor made through an enterprise carried on in the ITZ.
Responsibility for the GST liabilities may also be shifted to the operator for certain other supplies if the supplier and the relevant electronic distribution platform operator have agreed in writing this will occur.
However, this shift in responsibility for GST liability only applies if the electronic distribution platform controls at least one of the key elements of the supply. These include any of the following:
|Modified GST administrative arrangements|
|Entities that make at least one inbound intangible consumer supply may opt to be a limited registration entity when they register for GST.
A limited registration entity is not entitled to ITCs or to receive an Australian Business Number (ABN) and must have quarterly tax periods. However, the Commissioner is expected to significantly simplify the process of registration and reporting for these entities.
An entity that has elected to be a limited registration entity may apply to the Commissioner in the approved form to revoke this election, allowing the entity to claim ITCs prospectively and otherwise act as a 'full' registration entity.
An entity that revokes its election to become a limited registration entity may claim ITCs relating to its prior acquisitions while it was registered for GST, back to the start of the financial year before the financial year in which the revocation had effect.
An entity will also cease to be a limited registration entity if it ceases to be registered for GST.
Detailed explanation of new law
Offshore supplies of services and intangibles to Australian consumers
1.32 The amendments extend the scope of the GST to supplies of services and intangibles made by any supplier to an Australian consumer. [Schedule 1, item 1, paragraph 9-25(5)(d)]
1.33 Affected supplies include the streaming or downloading of movies, music, apps, games, e-books and other digital products as well as other services such as consultancy and professional services. As a result of the amendments, all of these supplies will receive similar GST treatment whether they are supplied by a local or foreign supplier.
1.34 An entity that is a recipient of a supply is an Australian consumer if:
- the entity is an Australian resident (but not an Australian resident solely because they are a resident of the external territories where GST does not apply); and
- either the entity:
- is not registered for GST; or
- is registered for GST and does not acquire the supply to any extent for the purpose of an enterprise it carries on.
[Schedule 1, item 3, subsection 9-25(7)]
1.35 Under the existing GST law, supplies of things other than goods or real property are connected with the ITZ (ie. the supply involves some action undertaken in or through the area of Australia in which GST applies) and therefore potentially subject to GST if:
- the things supplied are done in the ITZ;
- the supplies are made through an enterprise carried on by the supplier in the ITZ; or
- the supplies are of rights or options to acquire another thing that would be connected with the ITZ.
1.36 The amendments broaden the scope of the GST 'connected with the ITZ' rules consistent with reforms in a number of countries to extend the scope of their value added taxes to the growing volume of offshore intangible supplies made to consumers of those countries.
1.37 The scope of the supplies that are subject to GST as a result of these amendments is significantly affected by rules in Subdivision 38-E for GST-free exports and other supplies to be consumed outside the ITZ. This includes, in particular, section 38-190, which deals with supplies of things other than goods or real property. Among other things, this section makes supplies connected with property that is outside the ITZ and supplies for which the effective use or enjoyment occurs outside the ITZ GST-free.
1.38 While some supplies that are not consumed in Australia are connected with the ITZ as a result of these amendments, Subdivision 38-E ensures that these supplies will not be subject to GST as they are GST-free. The Commissioner has provided detailed guidance on the operation of section 38-190 in several rulings.
Australian consumer - residence
1.39 There are two key questions in determining if a supply is made to an Australian consumer and therefore connected with the ITZ as a result of these amendments. The first is whether the recipient is an 'Australian resident'. [Schedule 1, item 3, paragraph 9-25(7)(a)]
1.40 Australian resident is currently defined in the GST law by reference to the definition in the Income Tax Assessment Act 1936. Broadly, individuals are Australian residents if they usually reside in Australia, subject to specific statutory extensions. Similarly, a company is generally an Australian resident if the company is incorporated in Australia or if it is effectively owned or controlled by Australian residents. Determining the residency status of other types of entities for the purposes of the GST law is more complex. The Commissioner has also published guidance on how to determine the residency status of various types of entities, both in the context of the GST law and more generally.
1.41 However, for the purposes of these amendments, the normal scope of Australian resident is restricted. The amendments do not apply to extend GST to supplies to Australian residents that are Australian residents only because they reside in the external Territories of Australia. Given GST does not apply to supplies made in these Territories, it would be inappropriate for supplies made to residents of these areas to be subject to GST.
1.42 Supplies to entities that are not Australian residents are not supplies to Australian consumers and hence are not subject to GST as these supplies are not connected with the ITZ as a result of this measure. As identified by the OECD, for remote supplies of intangibles, it is often the place of usual residence of the consumer that is the best proxy for where the supply is consumed. In contrast, absent any other connection with Australia, supplies to non-residents have no link to Australia and should not be subject to GST.
Australian consumer - being a consumer
1.43 The second key question in determining if an entity is an Australian consumer is whether the entity is a 'consumer'. [Schedule 1, item 3, paragraph 9-25(7)(b)]
1.44 Broadly, in the framework of the Australian GST, an entity is generally treated as a final consumer if the entity is not entitled to an ITC in respect of their acquisition of the supply. To be entitled to an ITC, the entity must be registered for GST and the supply must be acquired to some extent for the purpose of an enterprise that the entity carries on.
1.45 Where a supply is made to an entity that is not a consumer in respect of that supply - ie. the entity acquires the supply in whole or part in the course of an enterprise and the entity is registered for GST - the supply is not connected with the ITZ as a result of these amendments.
1.46 Supplies made to entities entitled to ITCs may well be consumed in Australia. However, the use of supplies in the course of the operations of a registered enterprise is not final consumption and the net GST revenue impact from taxing such supplies is effectively nil.
1.47 In most cases, an entity that is registered for GST and acquires a supply in the course of an enterprise is entitled to an ITC equal to the amount of the GST on the supply. In those cases where the recipient would not be entitled to a full ITC for a supply, the reverse charge rules in Division 84 broadly ensure that the recipient must pay GST on the portion of the acquisition for which an ITC is not available.
1.48 Some amendments to the reverse charge rules are made in Schedule 2 to this Bill - see Chapter 2 of this explanatory memorandum.
Example 1.1: Offshore supply of streaming of video on demand
Global Movies, a non-resident carrying on an enterprise, supplies Fellini with video on demand services. The supply is not performed in Australia and Global Movies does not carry on an enterprise in Australia. Fellini is a resident of Australia and lives in Perth. Fellini does not carry on an enterprise and is not registered for GST.
The supply made by Global Movies is connected with the ITZ as a result of the amendments. This reflects the fact that:
- the supply is made to Fellini who is a resident of Australia (not being resident in an external territory); and
- Fellini is not registered for GST.
Example 1.2: Supplies to non-residents in Australia
Ruby, a non-resident individual, visits Australia for a short holiday in March 2018.
During her time in Australia, Ruby subscribes to an online music service operated by Global Music, a non-resident entity that does not carry on an enterprise in Australia. Under this subscription arrangement, Global Music supplies access to music over the internet and Ruby downloads a number of songs.
The supply made by Global Music to Ruby is not connected with the ITZ as a result of these amendments. Ruby is not an Australian resident and therefore cannot be an Australian consumer. It does not matter that Ruby was in Australia when she purchased the subscription, nor her location while she makes use of the subscription.
Example 1.3: Supplies made to entities that are registered
John, an individual resident in Australia, carries on business as a financial adviser in Australia as a sole trader and is registered for GST.
John purchases accounting software from Numbers Inc, a non-resident entity that does not carry on an enterprise in Australia. John intends to use this software partly to assist in his business but also partly for his own private and domestic purposes.
The supply of the software to John by Numbers Inc. is not connected with the ITZ as a result of these amendments. Even though John has acquired the software for a partly private purpose, because he is registered for GST and has acquired it at least partly for the purpose of an enterprise he carries on, he is not an Australian consumer in relation to the supply.
However, if the supply is not otherwise connected with the ITZ, John will be subject to the reverse charge rules in Division 84.
1.49 Special issues arise in relation to the definition of Australian consumer and gambling supplies.
1.50 The GST Act contains special rules for gambling supplies under Division 126. These rules provide, among other things, that the acquisition of something that is a gambling supply is not a creditable acquisition. This means that even entities that are registered for GST and acquire a supply in the course of their enterprise must bear the GST on the supply - in effect gambling supplies are treated as inherently private consumption.
1.51 This outcome is inconsistent with the premise of the definition of Australian consumer which assumes that entities that are registered for GST and acquire something wholly in the course of their enterprise are entitled to an ITC or subject to the reverse charge rules. As a result, without further change, gambling supplies by foreign suppliers would continue to not be connected with the ITZ in circumstances where equivalent supplies made by local suppliers would be subject to GST.
1.52 To address this issue, the amendments provide that gambling supplies are connected with the ITZ if they are made to an Australian resident (but not an entity that is an Australian resident solely because they are a resident of the external territories). This ensures that consistent GST treatment applies to all gambling supplies provided to Australian residents. [Schedule 1, item 26, section 126-27]
Suppliers and reasonable belief
Practical issues in determining Australian consumer status
1.53 In many cases where supplies are made to Australian consumers by foreign suppliers, the supplier may have only a limited capacity to investigate the residency and GST registration status of the recipient and must rely upon information provided by the customer.
1.54 This creates particular challenges for these suppliers when determining if supplies are taxable in this context. Residency, especially residence of individuals, is a nuanced and flexible concept that can take into account a very wide range of factors and considerations. Determining residence can be difficult even with full information about everything a taxpayer has done over a number of years.
1.55 To attempt to simplify the position for taxpayers (as well as due to other policy considerations), the definition of residence for individuals in the tax law includes a number of rules setting out when an individual is a resident of Australia without requiring the detailed consideration of the underlying definition (though in some cases these special rules themselves require detailed consideration). Requiring suppliers, in possession of much less information, to make a definitive judgment on this matter would not be realistic, as even the alternative tests require information that the supplier may find difficult to obtain.
What constitutes reasonable steps and reasonable belief
1.56 Recognising this, the amendments provide a safeguard for suppliers. If the entity that would be liable for GST in relation to a supply:
- takes reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer; and
- having taken these steps, reasonably believes that the recipient is not an Australian consumer;
then the entity may treat the supply as if it had been made to an entity that was not an Australian consumer even if this is later found not to have been the case. [Schedule 1, item 6, subsection 84-100(1)]
1.57 What steps are reasonable in gathering information and what information is sufficient to have a reasonable belief will depend on the context of the particular supply.
1.58 However, given sometimes only incomplete information will be reasonably available to suppliers, a supplier's belief about residence may well be based on limited facts it has been able to obtain after taking reasonable steps, such as addresses, contact numbers and statements about location. The fact that a supplier may only have access to limited information does not make their belief unreasonable.
1.59 In some circumstances, the process for making a supply may be largely automated and occur without human involvement. In initial consultation some concern was expressed about whether gathering this information through these ordinary business systems and processes would constitute taking reasonable steps.
1.60 To make clear that such supplies can also be covered by this safeguard, the amendments provide that if an entity:
- has business systems and processes which provide a reasonable basis for identifying if the recipient of a supply is an Australian consumer; and
- reasonably believes that the recipient is not an Australian consumer;
then the entity may treat the supply as if it had been made to an entity that was not an Australian consumer. This applies even if this is later found not to have been the case. [Schedule 1, item 6, subsection 84-100(2)]
1.61 For supplies made through an automated process such as a website, often the tax treatment to be applied occurs through this process. In this situation it is likely that no individual will be aware of the individual supplies (as they are made under the automated process) in order to specifically consider if the tax treatment applied is reasonable in the circumstances. This does not, however, prevent the supplier from reasonably believing that the recipient is not an Australian consumer. In these cases, the supplier's belief is based not on the information relating to the specific supply but on their knowledge about the system that takes into account this information.
1.62 Accordingly, the supplier may consider that its business systems and processes correctly identify if customers are Australian consumers based on the information that they obtain. In this case the supplier can reasonably believe that those supplies that are treated by their business systems as not being made to Australian consumers are not made to Australian consumers.
1.63 Combined, these safeguards ensure that in practice the law requires that suppliers need to pay GST where they act according to information collected by their business systems that identify their customers as Australian consumers, provided the information gathered by these processes is sufficient to provide a basis for a reasonable belief.
Example 1.4: Safeguards for suppliers
Nightingale Games, a non-resident that is registered for GST, develops and sells video games through its website.
On 22 October 2017, Nightingale Co supplies Peter, an Australian resident who is not registered for GST, with their latest game.
As an Australian resident who is not registered for GST, Peter is an Australian consumer and so this supply is connected with the ITZ as a result of these amendments.
However, Peter is a dual citizen of Australia and the United Kingdom. While he is not a resident of the UK, he is visiting family in London for a month at the time of making the purchase. He pays using a credit card from a UK bank and gives the address and phone number of his relatives as his contact information.
Nightingale Games has developed business processes to determine the residence of customers. Given the information these processes gather in relation to Peter, Nightingale Games reasonably believes he is not an Australian resident.
As a result, Nightingale Games may treat Peter as not being an Australian consumer when determining if its supply to him is connected with the ITZ.
1.64 It should be noted that the safeguards are also not solely relevant to liability. To the extent that the other GST outcome for the entity liable for the supply rests on whether it is made to an Australian consumer, this entity will also be protected.
1.65 For example, an entity could decide that it did not need to register as the result of a supply it treated as not being made to an Australian consumer not being a taxable supply and therefore not being included in its GST turnover. Its treatment of this supply, including its exclusion from GST turnover, would be potentially protected by the safeguards.
Limit to the scope of the safeguards
1.66 For either of the safeguards to apply, the supplier must have a reasonable belief that the recipient of a supply is not an Australian consumer, based on all of the information in its possession. If the information a supplier has obtained taking reasonable steps from its business systems indicates that a recipient is not an Australian consumer, but the supplier knows that the recipient is an Australian consumer, then the supplier cannot reasonably believe that the recipient is not an Australian consumer.
1.67 These safeguards also do not extend to entities in the opposite situation - entities that pay more GST than they are required because they wrongly treat an entity as an Australian consumer. Such entities do not require any special protection. Under Australian GST law, no penalties apply to suppliers that overpay GST.
1.68 The outcome under the GST law where excess GST has been paid is set out in Division 142. Generally, should the supplier reimburse their customer for any overpaid GST they have borne, the supplier is entitled to a refund for the excess GST they have paid. If the supplier does not reimburse their customer for any overpaid GST they have borne, the supplier is not entitled to a refund. This ensures that suppliers must pass on the benefit of any overpaid tax refunded by the Commissioner to the recipient and cannot obtain a windfall gain.
1.69 If no reimbursement is made and the recipient is registered, holds a valid tax invoice and meets all of the other requirements of the GST law, including the special rules in Division 142, then the recipient may be entitled to an ITC in relation to their acquisition of the thing supplied if the acquisition was a creditable acquisition. However, if the supplier is a limited registration entity, they will not have an ABN and therefore will not be able to issue a valid tax invoice. Hence, ITCs will normally not be available for supplies an entity acquires from limited registration entities - see paragraphs 1.169 to 1.172.
1.70 Finally, the safeguards only apply for the purposes of the application of the GST law to the entity that is liable for the GST (generally the supplier, but also potentially other entities such as the operator of an electronic distribution platform that is treated as being the supplier) in respect of whether that supply is made to an entity that is not an Australian consumer. It does not change the actual character of the supply or the entity that is the recipient under GST law or provide a supplier with any protection in relation to related concepts. In applying the safeguard, it is not relevant if it would apply to some other entity in relation to the supply. If, for example, the supplier would not be liable for GST in relation to a supply as a result of the safeguard, an entity other than the supplier that was liable for the tax on the supply would still be required to pay this tax unless it independently satisfied the safeguard (for example, the operator of an electronic distribution platform).
Limits on when the safeguard for suppliers can apply
1.71 Likewise, the safeguards are not available in all circumstances. If a supplier believes that an entity is not an Australian consumer based on the entity being registered for GST, then this belief will not be reasonable for the purpose of the safeguard unless the supplier has both:
- obtained the recipient's Australian Business Number (ABN) or a similar identifier prescribed by the Commissioner by legislative instrument; and
- received from the other entity a declaration or other information indicating that the other entity is registered.
[Schedule 1, item 6, subsections 84-100(3) and (4)]
1.72 Unlike a belief about residence, which involves consideration of a broad concept, issues about registration and whether an acquisition is for the purpose of an enterprise the entity carries on involve concepts that are specific to the Australian GST system. In this circumstance, prescribing a minimum standard for the information suppliers are expected to obtain provides clarity for suppliers.
1.73 The Commissioner's power to prescribe acceptable alternative identifiers allows for other appropriate identification to be established in the unlikely but possible case where an Australian-resident entity is registered for GST but is not entitled to an ABN. The scope for the use of this power is expected to be very limited.
1.74 It is not necessary for a supplier to hold an ABN to treat an entity as not being an Australian consumer on the basis they are not a resident of the ITZ, even if the supplier also believes that they are registered for GST and acquire the thing supplied for the purpose of an enterprise they carry on.
Penalties for misrepresentations by customers
1.75 These safeguards for suppliers acknowledge the practical limits of what they can reasonably do in determining the residence of their customers in other countries that may acquire services from them by largely automated processes. In contrast, Australian resident customers will generally be aware of their place of residence and GST registration status, but may have some incentives to misrepresent this to avoid GST on acquisitions.
1.76 The tax law already contains penalties for Australian consumers that engage in conduct such as making false declarations of their place of residence to defeat the purposes of a taxation law. This is an offence under section 8U of the Taxation Administration Act 1953 (TAA 1953). Likewise, section 23 of the A New Tax System (Australian Business Number) Act 1999 creates criminal offences that apply to entities that make improper use of an ABN.
1.77 However, these offences are only imposed for the most serious and deliberate breaches concerning statements about residence and the use of an ABN respectively.
1.78 To provide an alternative remedy for the Commissioner to address misrepresentations about an entity's status as an Australian consumer, the amendments broaden the existing administrative penalties for making false or misleading statements (see subsection 284-75(4) in Schedule 1 to the TAA 1953). The wider penalty extends to statements made in relation to the entity's status as an Australian consumer. [Schedule 1, item 37, paragraph 284-75(4)(b) in Schedule 1 to the TAA 1953]
1.79 Australian consumers that make such false or misleading statements are potentially liable to an administrative penalty of up to:
- 60 penalty units (currently $10,800  ) if the statement was false or misleading as a result of the intentional disregard of a taxation law;
- 40 penalty units (currently $7,200) if the statement was false or misleading because of recklessness; and
- 20 penalty units (currently $3,600) if the false or misleading statement resulted from a failure to take reasonable care (see section 284-90 in Schedule 1 to the TAA 1953).
Extending the reverse charge
1.80 These amendments provide that an entity that is registered for GST but acquires something for a wholly private purpose is an Australian consumer in relation to the supply.
1.81 However, this type of Australian consumer may not be easily identifiable by suppliers. As the purpose of the acquisition may only be known to the recipient, the supplier will, in practice, need to rely upon the representations the recipient makes about its status.
1.82 This situation would create problematic incentives for the recipient. If the recipient were to represent itself as not being an Australian consumer by supplying its ABN and declaring itself to be registered for GST, the supplier may, in the absence of other information, reasonably believe the recipient is not an Australian consumer, resulting in the recipient receiving the supply without GST being applied.
1.83 The reverse charge rules deal with this issue by, broadly, imposing any liability for the supply on the recipient. The recipient has the required information about their own status as an Australian consumer, including their purpose in making the acquisition, and can be subject to the tax based on this status without any unfairness.
1.84 However, a general extension of the reverse charge rules to any acquisition by a registered entity for a wholly private purpose would not be appropriate. Requiring sole traders and other entities that may be registered for GST and make private purchases to account for GST under the reverse charge rules rather than being treated in the same way as any other consumer would be onerous and unnecessary.
1.85 Instead, these amendments extend the compulsory reverse charge rules so that they apply to supplies to the extent that the supply is only connected to the ITZ because it is supplied to an Australian consumer, provided:
- the GST law applies to the supplier as if the recipient is not an Australian consumer (see paragraphs 1.53 to 1.74); and
- the supplier has obtained the recipient's ABN and a declaration of other information from the recipient indicating that they are registered.
[Schedule 1, items 23 and 24, paragraph 84-5(1)(ba) and subsections 84-5(1A), (1B) and (1C)]
1.86 In essence, the extended reverse charge applies where an Australian business has made a wholly private or domestic acquisition but provided information representing that it is not an Australian consumer in respect of the supply, resulting in the supplier treating the supply as not being subject to GST.
1.87 The application of the reverse charge ensures that the supplies to registered recipients are still appropriately subject to GST even if, by accident or otherwise, the recipient may not have made their status as an Australian consumer clear.
1.88 The operation of this reverse charge rule will mean the supply is a taxable supply and the recipient, not the supplier, is liable for GST. In considering the liability of the recipient, the safeguard does not apply. While the safeguard is available to any entity liable for GST (rather than only suppliers), it can only apply in determining the status of another entity as an Australian consumer, not the taxpayer's own status. A safeguard is not needed or appropriate for the recipient as the recipient will have access to information about their own status in determining if they are an Australian consumer.
Example 1.5: Operation of the extended reverse charge
Leslie is an Australian-resident individual. She carries on a farming business as a sole trader and is registered for GST. In mid-2017, Leslie acquires a number of digital products. None of these supplies are made in the ITZ or through an enterprise carried on in the ITZ.
On 14 July 2017, Leslie acquires music from Online Music Co for a wholly private purpose, making her an Australian consumer in respect of this supply. She does not provide her ABN or declare that she is registered for GST in the course of this transaction and as a result the extended reverse charge cannot apply. Instead, Online Music Co determines Leslie is an Australian consumer and applies GST to the transaction in the same way as it does to other supplies to Australian consumers.
Later, on 3 August 2017, Leslie acquires software from Online Software Co, for a partly private purpose. As Leslie has acquired the supply partly for the purpose of her enterprise, she is not an Australian consumer in respect of this transaction and the supply is not connected with the ITZ as a result of these amendments. In this situation the existing normal reverse charge rules found in Division 84 will apply.
Finally, on 30 August 2017, Leslie acquires a movie from Online Movie Co for a wholly private purpose. In the course of this transaction, she provides Online Movie Co with her ABN and declares she is registered for GST.
Based on this information and the other information gathered by its business systems about Leslie, Online Movie Co determines she is most likely not an Australian consumer and, accordingly, does not apply GST. As Online Movie Co reasonably believes that Leslie is not an Australian consumer, its supply to her is treated for the purposes of Online Movie Co's tax liability as if it were not a taxable supply (but not for the purposes of the liability of any other entity, including Leslie).
As a result, this supply will be subject to the extended reverse charge. As discussed, to the extent that this may mean Leslie is obliged to pay tax, it is not relevant that the supply may be treated as not being taxable for the purposes of Online Music Co's GST liability - the supply is taxable and the protection Online Music Co receives only applies to its own liability.
It should also be noted that if Leslie had originally intended to acquire the movie partly or wholly for the purposes of her enterprise, but her purpose subsequently changed, she would have been subject to the reverse charge rules in Subdivision 84-A, including the rules for adjustments for changes in use that have been modified by the amendments discussed in paragraphs 2.143 to 2.150.
1.89 These amendments do not alter the general GST rules for registration for entities making supplies that are connected with the ITZ as a result of this measure. Consistent with all other entities, they are required to register for GST if the total of their GST turnover for a financial year meets or exceeds the GST turnover threshold of $75,000 ($150,000 for non-profit entities).
1.90 However, the amendments make a change to the rules for determining an enterprise's GST turnover.
1.91 The current rules for determining GST turnover generally exclude supplies of a right or option to acquire another taxable supply.
1.92 This exclusion may give rise to ambiguity in the context of intangible supplies to Australian consumers, as in some cases it might be arguable that the only supply made for consideration is the supply of a right, while the subsequent underlying supply is not made for consideration and is hence not subject to GST.
1.93 To remove any doubt about this outcome, the amendments modify the exclusion for supplies of rights so that a supply of a right or option to an Australian consumer is included in the GST turnover of the entity with the GST liability if the underlying supply is not a supply of goods or real property and the supply is not GST-free. [Schedule 1, items 7 and 8, paragraphs 188-15(3)(b) and 188-20(3)(b)]
1.94 Additionally, absent these amendments, an entity's GST turnover includes, among other things, the value of the GST-free supplies the entity makes that are connected with the ITZ.
1.95 While this is generally appropriate, as a result of these amendments there are a significant number of supplies made by foreign suppliers to Australian residents that are connected with the ITZ but which are used or enjoyed outside the ITZ and therefore GST-free. This would include, for example hairdressing services that an Australian resident might obtain whilst travelling overseas. The suppliers may have no involvement with the Australian GST system and in some situations may not be aware they are making a supply to an Australian resident.
1.96 Requiring such foreign suppliers to register where the only supplies they make that have a connection with Australia are provided to Australian residents when they are not in Australia and hence the supplies are GST-free is unnecessary. Further, it would impose undue compliance costs on any business dealing with an Australian where the supply is fully performed outside Australia.
1.97 There are also wider issues with the inclusion of GST-free supplies by non-residents in their GST registration turnover threshold. For more discussion of these issues, see Chapter 2.
1.98 Schedule 2 includes amendments that, broadly, ensure that GST-free supplies by non-residents are only included in their GST turnover if the supply is made through an enterprise the non-resident carries on in the ITZ (see paragraphs 2.180 to 2.184).
1.99 In addition to its wider scope, this amendment ensures that entities making supplies that are only connected with the ITZ because of these amendments do not need to register because of their GST-free supplies.
Example 1.6: Determining if an offshore supplier is required to register
Frisor GmbH is a large German hairdressing company that operates from premises in Munich. It is close to a number of hostels which are very popular with Australian tourists.
Because of this location, Frisor supplies hairdressing services to a large number of Australian residents holidaying in Germany, with the total value of the supplies made to Australian residents in the 2018-19 financial year exceeding AUD$80,000.
These supplies are not supplies of goods or real property and are not obtained by the Australian resident customers in the course of enterprises that are registered for GST.
Accordingly, these supplies are connected with the ITZ as a result of these amendments. However, there is no practical impact for Frisor. This is because the supplies of hairdressing services in Germany are GST-free, as they are made to recipients that are outside Australia at the time of the supply and the effective use or enjoyment of the supply is outside Australia (see item 3 in subsection 38-190(1)).
In addition, the amendments ensure that these GST-free supplies do not count towards Frisor's GST registration threshold. Therefore Frisor does not need to register for GST as a result of these supplies.
GST obligation imposed on electronic distribution platforms
Electronic distribution platforms
1.100 One of the key features in the use of the internet by consumers to buy goods and services has been the emergence of a number of large electronic markets and stores. In many cases, the operators of these platforms allow other entities to make supplies through the store or market to consumers, in effect providing distribution services to these suppliers.
1.101 Generally, in such cases the platform operator - the entity supplying access to the platform- has most of the information about the recipients of supplies. Additionally, the operators are generally much larger and better resourced entities than most of the entities making supplies through the platform. They also generally have significant influence over the terms of sales made using their platforms and either manage or closely regulate the payment process.
1.102 Given this, where a supply that is connected with the ITZ as a result of these amendments is made through such an electronic distribution platform, compliance and administration can be simplified if liability for GST rests on the platform operator rather than the supplier.
1.103 On this basis, this Schedule shifts responsibility for the GST liability from a supplier to the operator of an electronic distribution platform for supplies that are made through the electronic distribution platform they operate that are only connected with the ITZ because the recipient is an Australian consumer (referred to as an inbound intangible consumer supplies). [Schedule 1, item 6, subsection 84-55(1)]
1.104 The Schedule also allows entities that are the operator of an electronic distribution platform to agree with their suppliers to shift the GST liability for other supplies made by the supplier through the platform to the electronic distribution platform operator. [Schedule 1, item 6, section 84-60]
1.105 However, in both cases the shift in liability does not occur if the platform operator does not control any of the key elements of the supply and the liability of the supplier is made clear in the related documents. [Schedule 1, item 6, subsection 84-55(4)]
1.106 A platform operator has no control of any of the key elements of the supply if they are not involved in authorising payment for or delivery of the supply, nor in setting the terms and conditions under which the supply is made. [Schedule 1, item 6, paragraph 84-55(4)(c)]
1.107 For the liability of the supplier to be clear, it is necessary that a document issued to the recipient identifies the supply as being made by the supplier and the supplier and platform operator have agreed in writing that the supplier is responsible for the payment of GST on supplies. [Schedule 1, item 6, paragraphs 84-55(a) and (b)]
1.108 The amendments do not apply to supplies unless they are either inbound intangible consumer supplies or supplies for which the supplier and the operator of the electronic distribution platform have agreed in writing that the operator should be liable for GST.
Requirements to be an electronic distribution platform
1.109 To be an electronic distribution platform, a platform must be operated by means of electronic communication within the meaning of the Electronic Transactions Act 1999 (broadly the communication of information by means of electro-magnetic energy). This means that it includes platforms operating over the internet and potentially by other forms of electronic communication such as telephone, but not a physical store or one operated by mail. [Schedule 1, item 6, paragraph 84-70(1)(b)]
1.110 The platform must also allow entities to use the platform to make supplies available to customers. This requirement is not satisfied by services that merely create awareness of possible supplies (such as advertising) or provide access to a communications medium (such as internet access). Such services are not sufficiently involved in making the supply available. Similarly, payment systems and processing services also do not satisfy this requirement on their own, as such services are again not involved in making the supply available. [Schedule 1, item 6, paragraph 84-70(1)(a)]
1.111 Finally, to be an electronic distribution platform, the supplies made through the platform must be made by means of electronic communication. Electronic communication allows for supplies to be made in such a way that the nature of the supply is standardised and the information about the supply retained. Where supplies are made by other means, the nature of the supply is much more likely to vary and the availability of information to be more limited, making it appropriate for liability to remain with the supplier. [Schedule 1, item 6, paragraph 84-70(1)(c)]
1.112 It should be noted that it is not necessary that a supply be delivered through the platform itself for the platform to be an electronic distribution platform and the supply to be subject to these rules. For example, if all of the arrangements for a supply are settled through an electronic distribution platform, but part of the thing supplied is delivered through an email from the supplier to the recipient, this delivery still occurs by electronic communication and the supply is made through the platform.
1.113 During consultation stakeholders sought clarification about how these rules might apply to entities that make supplies that may be used by suppliers or recipients when making or arranging for supplies, such as internet service providers.
1.114 These types of services are not within the scope of electronic distribution platforms. However, for the avoidance of doubt, the amendments specifically identify several types of services that on their own are not electronic distribution platforms. These excluded services include:
- carriage services, such as those provided by internet service providers (ISPs) and telecommunications companies;
- access to payment systems or payment processing services; and
- supplies of vouchers which are not taxable supplies as a result of section 100-5.
[Schedule 1, item 6, subsection 84-70(2)]
1.115 The amendments provide that the supply of these services is not sufficient to be the operation of an electronic distribution platform on their own (or in conjunction with another excluded service). The fact that an entity operates a carriage service does not mean that it is not operating an electronic distribution platform in respect of other services it may supply. For example, an ISP would not be operating an electronic distribution platform when providing its ISP services, but could be operating an electronic distribution platform when operating an online platform through which its customers can download media content from vendors.
Requirements to be inbound intangible consumer supplies
1.116 A supply is an inbound intangible consumer supply if it is a supply of anything other than goods or real property that is not done wholly in the ITZ or made through an enterprise the supplier carries on in the ITZ. [Schedule 1, item 6, section 84-65]
1.117 As a result, supplies made by Australian resident enterprises will rarely be inbound intangible consumer supplies as they are generally either done in Australia or made through an enterprise carried on in Australia. For these supplies, the Australian supplier is liable to GST under the existing GST rules subject to the special rules that apply to supplies covered by an agreement between the supplier and the operator of the electronic distribution platform (see paragraphs 1.120 to 1.125).
1.118 This ensures that these amendments do not affect existing arrangements where GST already applies appropriately unless the relevant parties agree.
1.119 The rules treating the operator as making the inbound intangible consumer supply do not apply when determining if the supply is made through an enterprise carried on in Australia for the purposes of working out if the supply is an inbound intangible consumer supply. This avoids circularity in the application of the provision. [Schedule 1, item 6, subsection 84-65(2)]
Application of these rules to other supplies
1.120 A supply that is not an inbound intangible consumer supply can still be subject to the platform rules if:
- it is made through an electronic distribution platform;
- the operator and the supplier have agreed in writing that the operator will be liable for the GST on the supply;
- the operator is registered for GST; and
- the supply is not an ineligible supply.
[Schedule 1, item 6, subsection 84-60(1)]
1.121 This rule allows suppliers and operators to jointly agree for the rules to apply more widely where this is more convenient or commercially desirable for the parties. In some cases, this agreement may occur through, for example, the standard terms and conditions that the operator of an electronic distribution platform requires suppliers to accept before making use of the platform.
1.122 As this rule is intended to supplement the broader electronic distribution platform rules, it does not allow the transfer of liability to entities that operates an electronic distribution platform that do not have existing obligations under these rules because they are not registered for GST.
1.123 The rule also does not apply to ineligible supplies. Ineligible supplies are supplies that are:
- input taxed or GST-free; or
- not supplies that the operator would be liable for despite the supplies being made through the electronic distribution platform.
[Schedule 1, item 6, subsection 84-60(2)]
1.124 Transferring liability for supplies that are GST-free or input taxed is problematic as no liability exists to transfer. Further, it would also result in a number of complexities (particularly relating to input taxed supplies). As a result, such supplies are excluded from these rules. As, in any event, no GST liability arises when these supplies are made, this does not result in any change in the GST position for operators of electronic distribution platforms.
1.125 Similarly, it would also be problematic if operators and suppliers could make an agreement to bring supplies within the electronic distribution platform rules in cases where the operator would not be liable for GST on the supplies (for example, where another operator would be liable for the GST). Consequentially, such supplies are also excluded from these rules.
Electronic distribution platform rules and Division 153-B
1.126 This extension of the electronic distribution platform rules means that the rules can potentially apply to supplies between principals and intermediaries to which Subdivision 153-B could also apply. As both Subdivision 153-B and these amendments change the entity that is liable for GST on a supply, there would be a conflict if both were to apply to the same supply.
1.127 To prevent this issue from arising, the amendments provide that to the extent that a supply is the subject of an agreement to which these amendments apply, Subdivision 153-B cannot apply in relation to that supply. [Schedule 1, items 27 and 28, subsections 153-55(4A) and 153-55(3A)]
Consequences for supplies made through an electronic distribution platform
1.128 For inbound intangible consumer supplies and other eligible supplies made through an electronic distribution platform:
- the operator of an electronic distribution platform is treated as the supplier;
- the supply is treated as having been made through an enterprise the operator carries on; and
- the supply is treated as having been made for the same consideration for which the supply was made by the actual supplier.
[Schedule 1, item 6, subsection 84-55(1)]
1.129 In the case of supplies for which an operator is liable that are not inbound intangible consumer supplies, the enterprise through which the supplies are taken to be made is also taken to be the enterprise in the course of which the operator provides access to the electronic distribution platform. [Schedule 1, item 6, subsection 84-60(3)]
1.130 Inbound intangible consumer supplies are by definition connected with the ITZ as a result of these amendments because they must be made to an Australian consumer. However, other supplies made through an electronic distribution platform may not be made to an Australian consumer. For such supplies, it is necessary to consider the other elements of the connected with the ITZ test, including whether the supply is made through an enterprise carried on in the ITZ.
1.131 These amendments ensure that in this situation it is not necessary for the operator to investigate where the enterprise of the supplier is carried on. Instead, if the electronic distribution platform is operated as part of an enterprise that is not carried on in the ITZ, all supplies for which the operator is liable are considered to be made through the non-resident enterprise of the operator. Similarly, if the electronic distribution platform is operated as part of an enterprise that is carried on in the ITZ, all of the supplies made through the platform will be considered to be connected with the ITZ.
1.132 The recipient of supplies that are considered to be made through the non-resident enterprise of the operator may be potentially subject to a reverse charge if:
- the supply is not connected with the ITZ;
- the recipient would not be entitled to a full ITC in respect of the acquisition of the thing supplied; and
- the other requirements for the reverse charge to apply are satisfied.
1.133 As a result of being treated as making the supply, the operator is liable for the GST payable on the supply and the supply is included in their GST turnover for all purposes, including whether they are required to register for GST. The operator is also entitled to or liable for any adjustments that arise in relation to the supply.
1.134 Further, as the operator is treated as the supplier, all of the provisions of the GST Act that would apply to the supplier generally now apply to the electronic distribution platform in respect of the supply. This means that, for example, if the operator has undertaken reasonable steps to determine if the recipient of the supply is an Australian consumer and reasonably believes they are not an Australian consumer, then the GST law provides the operator with the same protection as it provides to suppliers (see paragraphs 1.53 to 1.74 for more details on the safeguard for suppliers).
1.135 The amendments do not modify the general GST registration rules as they apply to operators of electronic distribution services. Consistent with these rules, operators are required to register if their GST turnover for a financial year (including both their own supplies and those supplies they are treated as having made) reaches or exceeds $75,000 (or $150,000 for non-profit entities).
1.136 These operator rules are largely consistent with the models applied in the European Union and Norway, within the constraints of the different indirect tax frameworks. This is intended to limit any compliance cost impact on suppliers and operators as they already need to comply with similar rules when making supplies to consumers in these countries.
1.137 Both Australian residents and non-residents can be the operator of an electronic distribution platform. If a non-resident entity is the operator of an electronic distribution platform for GST purposes this does not, by itself, have any impact on determining whether the entity has a permanent establishment in Australia for the purposes of the income tax law. This reflects that the permanent establishment definition in the income tax law considers a number of criteria, none of which are linked to the entity being treated as making supplies to Australian consumers for the purposes of the GST law.
Example 1.7: Electronic distribution platform liable for supply by an app developer
App Inspirations, an app developer based in Iceland, contracts with Zoe Distribution Service, which is based in Ireland, for the worldwide distribution of its gaming app via Zoe's internet site. Under the terms of the contract, Zoe Distribution Service collects payment from consumers via its internet web site, arranges delivery of App Inspirations' applications to consumers and requires App Inspirations to include certain key terms and conditions when making its supplies.
Zoe Distribution Service as the operator of the electronic distribution platform distributes some of App Inspiration's apps to Australian consumers. As Zoe Distribution Service has a GST turnover in excess of $75,000 and is registered for GST, it is liable to GST on the distribution of App Inspirations' apps to Australian consumers.
Supplies made through multiple electronic distribution platforms
1.138 In some cases, a supply may be made through multiple electronic distribution platforms. In this case it is not intended that all of the operators become liable for the GST on the supply.
1.139 Instead, the amendments provide that where there is more than one operator that is potentially liable in respect of the supply, the operators may agree in writing which operator will be treated as making the supply and liable to pay GST. [Schedule 1, item 6, paragraph 84-55(2)(a)]
1.140 In the event there is not agreement between the operators, the amendments prescribe default rules. Generally, it will be the first operator to authorise a charge or receive any of the consideration for the supply that is treated as making the supply. If none of the operators meet this requirement, it is the first operator to authorise the delivery of the supply that is liable. [Schedule 1, item 6, paragraph 84-55(2)(c)]
1.141 The Commissioner may also, by legislative instrument, prescribe additional rules to override or supplement these default rules. This ensures that appropriate arrangements can be put in place should industry and the ATO identify situations that are not resolved under the proposed default rules. [Schedule 1, item 6, paragraphs 84-55(2)(b) and subsection 84-55(3)]
1.142 Any default rules that the Commissioner may prescribe operate only in the absence of an agreement between operators about liability. Such rules do not apply where the operators have agreed to a specific outcome.
1.143 An important qualification to these rules is that they only assign liability amongst potentially liable operators. If an operator is not potentially liable because they have met the requirements relating to documentation and have no control over any of the key elements involved in the making of the supply, as discussed in paragraphs 1.105 to 1.107, then they are not taken into account when determining which operator is liable for the purpose of these rules.
Changes to the GST law for inbound intangible consumer supplies
1.144 In consultation, a number of parties identified that the extended scope of GST would have implications for a number of concessions in the GST law.
1.145 A number of concessions operate by reference to the nature of the entity making a particular supply or supplies. Sometimes concessions of this sort define the entity by reference to Australian regulatory requirements or status.
1.146 The use of these requirements in GST concessions does not give rise to any issues for entities operating in Australia, as these entities are generally subject to the relevant regulation when making the supply. However, non-resident entities may not be subject to the relevant rules. While none of these requirements is tied to nationality or residence, in practice non-residents rarely seek to comply with the regulatory requirements of jurisdictions in which they do not operate.
1.147 For example, the supply of an interest in a bank account is only an input taxed financial supply if, broadly, it is provided by an authorised deposit-taking institution (ADI). This limit is in place because the supply of a bank account in Australia by an entity other than an ADI or other entity authorised by State and Territory law is illegal. However, a foreign bank may supply a foreign bank account to an Australian resident without this being contrary to any law. A foreign bank may become an ADI, but in practice has little reason to do so if it does not intend to carry on a banking business in Australia.
1.148 Generally this policy outcome, under which GST may apply to certain imported services even where similar domestic supplies are generally GST-free or receive some other concession, is considered acceptable. The various concessions provided under the GST law have intentionally been linked to the supplier meeting relevant standards - there is no reason to revisit the existing legislative and policy arrangements in relation to GST concessions in the context of these amendments.
1.149 There are, however, two areas where specific changes apply.
International trade law obligations
1.150 First, as outlined, it is not considered that any of the concessions in the GST law are currently linked to residence or nationality - instead they are defined consistently for all entities.
1.151 However, this measure potentially affects a range of supplies by foreign suppliers to Australian consumers. Given this breadth of application, as a matter of prudence, the amendments include provisions to allow any international trade law issues to be resolved.
1.152 Specifically, the amendments include a power for the Treasurer to determine by way of legislative determination that a particular supply or class of such supplies that is only taxable as a result of these amendments is GST-free or input taxed. This power may only be exercised if the Treasurer is advised in writing by the Foreign Minister that the current treatment of the supply or class of supply is contrary to Australia's international trade law obligations and the Treasurer is satisfied that a supply made by a comparable Australian resident entity would receive the same treatment. [Schedule 1, items 4 and 5, sections 38-610 and 40-180]
1.153 There are strict conditions on when and how this legislative power delegated to the Treasurer can be exercised. The exercise of the power is tied to Australia's international legal obligations and the treatment received by similar supplies made by equivalent Australian residents. Further, any determination made would be subject to parliamentary scrutiny through the disallowance process.
1.154 Secondly, unlike many other concessions in the GST law, the input taxed treatment of financial supplies is not a result of any policy decision to assist individuals consuming these supplies. Rather, financial supplies are input taxed because there are difficulties in working out the consideration for certain financial supplies in order to apply GST - specifically the value of the use of the capital held by the entity.
1.155 In the context of these amendments, this means that even though in theory it would be acceptable if certain supplies by non-residents were to become taxable, the difficulty of determining the consideration make this impractical.
1.156 Most supplies in the current list of financial supplies are not defined by specific Australian regulatory requirements. As a result, no practical issues generally arise for suppliers operating outside Australia. However, there are two types of financial supply that are defined by reference to specific Australian regulatory concepts:
- the supply of an interest in a bank account, which under the GST law must be supplied by an ADI or an entity licensed to conduct banking business under a State and Territory law; and
- the supply of an interest in a superannuation fund, which under the GST law only includes interests in regulated superannuation funds, approved deposit funds, pooled superannuation trusts and public sector superannuation schemes.
1.157 To address these concerns, the Government is considering seeking amendments to extend the definition of 'financial supply' in the A New Tax System (Goods and Services Tax) Regulations 1999.
Modified administrative arrangements
1.158 Inbound intangible consumer supplies are linked to Australia in a different way to most supplies that are connected with the ITZ under other provisions of the GST law. In some cases that would mean that the present GST administrative arrangements would not give rise to an appropriate outcome. To address this, these amendments include a number of minor changes to administrative arrangements.
Tax invoices and ITCs
1.159 Unlike most other types of taxable supplies, inbound intangible consumer supplies by definition cannot be made to an entity that is entitled to an ITC in relation to the acquisition of the supply.
1.160 Further, the types of entities making inbound intangible consumer supplies often have only a limited connection with the Australian tax system.
1.161 This would give rise to two concerns. The first, raised in consultation by a number of stakeholders, is that entities making inbound intangible consumer supplies may face significant costs in setting up systems to issue tax invoices and adjustment notes for inbound intangible consumer supplies. These costs would arise even though the recipients of these supplies are consumers that are not entitled to ITCs and so do not need tax invoices or adjustment notes to claim or adjust ITC entitlements. Subsection 29-70(2) and paragraph 29-75(2)(a) make issuing a tax invoice or adjustment note within 28 days of a request by the recipient of a supply generally mandatory, whatever the nature of the recipient.
1.162 To avoid these unnecessary costs for suppliers, the amendments provide that the supplier is not obliged to provide a tax invoice or adjustment note at the request of the recipient. [Schedule 1, item 6, section 84-50]
1.163 In some cases a supplier may not make a supply to an Australian consumer, but the supplier will be entitled to treat it as being made to an Australian consumer as a result of the safeguard. In this case, consistent with the general operation of the safeguard provisions, the supplier is not required to issue a tax invoice or adjustment note.
1.164 Currently, the Commissioner requires most entities that are registered for GST to complete a monthly or quarterly business activity statement, providing the Commissioner with information about the activities of the entity. Likewise, the Commissioner requires entities seeking to register for GST to provide a considerable amount of information to verify their identity and their entitlement to be registered, which can pose particular challenges for non-residents.
1.165 A significant factor underlying current compliance arrangements for GST is the risk to the Commonwealth presented by unauthorised ITC and GST refund claims. The current administrative arrangements adopted by the Commissioner seek to address these risks, such as by, for example, requiring entities to include detailed information on their GST returns.
1.166 However, entities that are only required to be registered because they make inbound intangible consumer supplies are likely to have a more remote link with Australia than other entities that are required to be registered for GST. In many cases, while such entities may make supplies to Australian residents, they will otherwise have nothing to do with Australia and have no ITCs.
1.167 Given these entities may not undertake activities for which they need to claim GST refunds, in practice there is little need for them to provide the same level of information when registering and providing periodic GST returns.
1.168 To allow the Commissioner to provide simplified administrative arrangements for this class of entities, the amendments allow entities to opt to be a limited registration entity. [Schedule 1, item 6, section 84-140]
1.169 Limited registration entities:
- are not entitled to ITCs;
- are not entitled to have an ABN;
- do not have their registration recorded on the Australian Business Register;
- must have a quarterly tax period; and
- may not elect to pay GST by instalments.
[Schedule 1, items 6, 9 and 30 to 32, sections 84-145, 84-150 and 84-155, paragraphs 162-5(f) and 162-30(1)(d) and subsection 162-30(6) of the GST Act and subsection 8(3) of the A New Tax System (Australian Business Number) Act 1999]
1.170 As limited registration entities do not have an ABN, they cannot issue valid tax invoices as they are not able to meet the requirement to include information about their ABN (see subparagraph 29-70(1)(c)(i)). As the GST law generally requires that entities hold a tax invoice at the time they seek to claim any ITCs for a creditable acquisition, this means that recipients of supplies from limited registration entities are generally not able to obtain ITCs.
1.171 This outcome reduces compliance risks associated with allowing entities access to ITCs based on the payment of tax by non-resident entities whose only connection with Australia is making supplies to Australian residents. Allowing recipients access to ITCs for supplies made by entities with limited engagement with the Australian tax system creates the potential for active fraud in addition to simple non-payment of taxes.
1.172 Instead, the inability to issue tax invoices removes much of the risk of the manipulation of the GST system to create fraudulent ITCs. In doing so, it reduces the need for the ATO to undertake detailed examination of non-residents seeking to register for GST and entities claiming refunds.
1.173 This requirement to hold a tax invoice does not apply to supplies that are valued at no more than $75 ($82.50 including GST) (see section 29-80 of the GST Act and regulations 29-80.01 and 29-80.02 of the A New Tax System (Goods and Services Tax) Regulations 1999). The Commissioner may also treat a particular document as a tax invoice where it would not otherwise be a tax invoice.
1.174 As a result of these restrictions, the Commissioner will be able to require only minimal information from these entities when they register for GST and provide GST returns. While it is not expected that limited registration is likely to be adopted by many entities that are currently registered for GST, it is more useful for entities that are only required to be registered because of these amendments and that do not expect to have any ITC entitlements.
1.175 An entity may become a limited registration entity by applying to the Commissioner in the approved form if they have made or expect to make at least one inbound intangible consumer supply, whether or not they are currently registered for GST. This election applies from the start of the tax period nominated in the election. [Schedule 1, item 6, subsections 84-140(2) and (3)]
1.176 It is expected that the Commissioner will combine the approved form for electing to be a limited registration entity with the approved form for applying to be registered for GST. This will allow entities to adopt limited registration at the time when they register for GST in a single simplified process.
1.177 Given limited registration is intended as a convenience for entities, it is also intended to be flexible and easy to exit should an entity's circumstances change. An entity that is a limited registration entity may, at any time, apply to the Commissioner in the approved form to cease to be a limited registration entity while remaining registered for GST. [Schedule 1, item 6, subsection 84-140(5)]
1.178 It is expected that the Commissioner will require information on this approved form equivalent to that required for normal registration. An entity that ceases to be a limited registration entity and remains registered for GST must meet the reporting and other administrative requirements for full registration entities from the time that its limited registration status ceases. The entity's registration will also be included in the Australian Business Register and, if it is eligible, it may elect to have a tax period that is not a quarterly tax period or choose to pay GST by instalments.
1.179 Further, it is not intended that an entity would be permanently disadvantaged if the entity elects for limited registration and their circumstances change. The amendments provide that an entity that has revoked its election to be a limited registration entity can claim ITCs for acquisitions made from the start of the financial year before the financial year in which they revoked their election (provided the entity was otherwise entitled to ITCs for those acquisitions). This ensures that entities that choose to become a limited registration entity can reverse this decision within a reasonable period without having lost any entitlement to ITCs. [Schedule 1, item 6, subsections 84-140(3) and (5)]
1.180 An entity will also cease to be a limited registration entity if it ceases to be registered for GST. Entities that cease to be a limited registration entity in this way are not entitled to ITCs for the period in which they were a limited registration entity. Entities that are in the process of being deregistered may not revoke their election to be a limited registration entity. [Schedule 1, item 6, paragraph 84-140(3)(b) and subsection 84-140(6)]
1.181 If an entity ceases to be registered for GST before its election to become a limited registration entity would have effect, then it never becomes a limited registration entity. [Schedule 1, item 6, subsection 84-140(4)]
1.182 Schedule 1 also makes a number of consequential amendments to the GST law, including guide material, to reflect the substantive amendments. [Schedule 1, items 2, 6, 10 to 22, 25, 29 and 33 to 36, the note to subsection 9-25(2), sections 84-45, 84-95 and 84-135, note 2 to section 13-1, table item 4 in section 25-49, table item 1C in section 25-99, table items 1AB and 1AC in section 27-99, table item 4A in section 29-99, subparagraph 48-40(2)(a)(i), subsection 48-45(3), paragraphs 58-10(2)(b) and 83-5(2)(a), the heading to Subdivision 84-A, sections 84-1, 84-5 and 84-14, paragraph 162(1)(e) and section 195-1]
Application and transitional provisions
1.183 The amendments apply for the purposes of determining net amounts for tax periods commencing on or after 1 July 2017. [Schedule 1, item 38]
1.184 As a result of this application rule, entities only need to consider these amendments in respect of tax periods commencing from 1 July 2017. Subject to the transitional rules, entities do not need to identify when a supply is made, which is consistent with the general approach taken in the GST law. Consistent with general rules about tax periods, the start of an entity's tax period is based on local time where the entity carries on business rather than Australian Eastern Standard Time.
1.185 The amendments also include special transitional rules for periodic or progressive supplies that are attributable to a tax period commencing before 1 July 2017, similar to those that applied when the GST was introduced. [Schedule 1, item 39]
1.186 Under these rules, supplies made for a period or progressively over a period of time are treated as being supplied continuously over that period. To the extent the supply is taken to be made after 1 July 2017, the tax payable on that portion of the supply is included in the net amount for the first tax period commencing after 1 July 2017. As a result of this treatment, the proportion of such periodic or progressive supplies made after 1 July 2017 is subject to the changes introduced by these amendments. [Schedule 1,subitem 39(1)]
1.187 If these transitional rules apply to a supply, they also apply consistently to the acquisition of the thing supplied. [Schedule 1, subitem 39(3)]
1.188 This transitional rule does not apply to the supply of a warranty, if the value of the warranty was included in the price of the supply to which it relates and to supplies that are already taxable under the existing law, including supplies taxable under the existing rules for periodic and progressive supplies in Division 156. [Schedule 1, subitems 39(2) and (4)]
1.189 These rules ensure that there is no scope for entities to avoid GST on inbound intangible consumer supplies by entering into long-term supply arrangements before the amendments come into effect.
Example 1.8: Operation of transitional rules
On 1 April 2017, Michael, an Australian consumer, subscribes to Library Online, a service that allows subscribers free access to a range of electronic publications, for a period of 2 years. He is invoiced for and pays the full cost of the subscription at that time.
The supply of services and intellectual property by Library Online on 1 April 2017 is attributable to a tax period that commenced before 1 July 2017. Under the basic application rule, these amendments would not apply to this supply.
However, the supply of access to Library Online over two years is a periodic supply and subject to the transitional rule. As a result, to the extent the period of the subscription extends after 30 June 2017, that proportion of the tax on the supply is attributable and subject to GST in the first tax period commencing after 1 July 2017.
In this case, twenty one out of the twenty four months of the term of the subscription fall on or after 1 July 2017, so the amendments apply to that portion (7/8ths) of the value of the supply.
Separately on 1 June 2017, Michael retained Library Online research service to track down and scan a rare book for him. Again, he is invoiced for and pays the full cost of the subscription at that time.
It takes Library Online some time to find the book, and Michael does not receive the electronic copy of the book he has requested until 5 September 2017.
Despite the time when the electronic copy of the book is finally provided to Michael, the amendments made by this Schedule do not apply to these supplies. Any tax payable on the supply would be attributable to a net amount for a tax period commencing before 1 July 2017 and the supply is not periodic or progressive so the transitional rule is not relevant.
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Tax integrity: extending GST to digital products and other services imported by consumers
1.190 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
1.191 Schedule 1 to this Bill amends the goods and services tax (GST) law to make all supplies of things other than goods or real property connected with the indirect tax zone (ITZ) where they are made to an Australian consumer. An Australian consumer is broadly an Australian resident that is not engaged in an enterprise.
1.192 This change results in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services, receiving similar GST treatment whether they are supplied by a local or foreign supplier.
1.193 In some circumstances, responsibility for GST liability that arises under the amendments (or where the supplier and operator agree) may be shifted from the supplier to the operator of an electronic distribution platform.
1.194 This occurs where the supply is made through such a platform, and the operator controls any of the key elements of the supply such as price, terms and conditions or delivery arrangements.
1.195 Shifting responsibility for GST liability to operators of electronic distribution platforms minimises compliance costs as operators are generally better placed to comply. In addition, it ensures that digital goods and services sourced in a similar manner are taxed in a similar way. These amendments are broadly modelled on similar rules currently in operation in the European Union and Norway.
1.196 Finally, Schedule 1 also amends the GST law to make a number of changes to the administrative framework for supplies affected by these amendments. These changes include allowing entities making supplies that are only connected with the ITZ as a result of this measure to elect to become limited registration entities. Such entities cease to be entitled to input tax credits which allows the Commissioner of Taxation to simplify their registration and reporting arrangements.
Human rights implications
1.197 This schedule does not engage with any of the applicable rights or freedoms. The amendments are broadly an integrity measure that ensures consumption by Australian resident consumers of digital products and services is subject to comparable rates of taxation, regardless of where the supplier resides.
1.198 This Schedule is compatible with human rights as it does not raise any human rights issues.
REGULATION IMPACT STATEMENT
1. What is the Problem
Background of the Goods and Service Tax
1.199 The goods and services tax (GST) was introduced in 2000 and is Australia's primary tax on final consumption.
1.200 At the time of introduction, it replaced a range of narrow-based and inefficient taxes, such as the wholesale sales tax, financial institution duties and various kinds of stamp duties. These taxes had become very complex and distortive, often with a multitude of tax rates.
1.201 By comparison, a broad-based consumption tax like the GST is more efficient. In addition, the GST applies at a uniform rate to a broad range of goods and services. By taxing most goods and services in the same way and at the same rate, the GST reduces the complexity and distortions that arise when consumption items are taxed differently.
1.202 The GST applies to most types of goods and services. However, a significant portion of consumption is excluded by design, such as fresh food, financial services, health and education. The reasons for these exclusions vary.
What is the problem with digital products and services and the GST?
1.203 Digital products and services imported by consumers in Australia from non-resident businesses are another example of a supply which is generally excluded from the GST. This is due to the way the original GST legislation was drafted, and is not an intentional design feature.
1.204 At the time the GST legislation was drafted (1999), the size and growth of the internet and digital economy was not anticipated. Over time, growth in this sector has bought to light the significant tax integrity risks associated with the digital economy. As a matter of tax principle, these transactions should be captured by GST; however due to the current wording of the legislation, are not.
1.205 These inequities in the application of the GST cause two problems: firstly, it poses a significant tax integrity risk, negatively affecting the GST revenue base; and secondly, it may create a competitive tax disadvantage for Australian suppliers.
What types of imported products and services are not currently attracting the GST, and will be covered by this measure?
1.206 Examples of digital products and services imported by consumers that may not currently attract GST include: consultancy, accountancy and legal services; financial and insurance services; telecommunication and broadcasting services; online supplies of software and software maintenance; online supplies of digital content (movies, TV shows, music, e-books etc.), digital data storage; and online gaming.
The tax integrity issue
1.207 The Organisation for Economic Co-operation and Development (OECD) preliminary report on Tax Challenges of the Digital Economy, which was prepared in the context of the work on Action 1 of the Base Erosion and Profit Shifting Action Plan, concluded that 'The collection of Value Added Tax (VAT) in business-to-consumer transactions is a pressing issue that needs to be addressed urgently to protect tax revenue and to level the playing field between foreign suppliers relative to domestic suppliers'.
1.208 The OECD, as part of developing its guidelines on the issue, outlined that it is a fundamental principle of value added taxes, such as the GST, that tax on cross-border supplies is ultimately levied only in the taxing jurisdiction where the final consumption occurs, thereby maintaining neutrality within the VAT system as it applies to international trade.
1.209 To this end, the OECD has recommended that in relation to the treatment of most cross-border business-to-consumer supplies that non-resident suppliers be required to register and remit the VAT/GST in the jurisdiction in which the consumer usually resides.
1.210 At present, such business-to-consumer transactions are generally not taxed in Australia, which means that similar supplies consumed in Australia but supplied by non-resident businesses potentially receive a different tax treatment (in comparison with resident business), creating tax non neutrality.
1.211 The revenue raised by the GST is provided to the states and territories (less costs for administration and certain penalties). Given this, the current treatment for digital products and services results in forgone revenue for the states and territories, affecting their ability to provide essential government services.
The market distortion issue
1.212 Non-resident businesses that sell digital products and services in Australia generally do not need to collect and remit GST on their Australian sales, while domestic Australian businesses do. This creates a tax disadvantage for Australian businesses, as they are competing with non-resident businesses who are not adding the GST to their sales. This may be creating a market distortion in consumer choice.
1.213 An example of this is subscriptions to news websites. If an Australian consumer subscribed to a news website operated by an Australian business, providing the supplier had a turnover of greater than $75,000, GST would be charged on the price of the subscription. Generally, if the same consumer subscribed to a news website operated by a non-resident, no GST would be charged.
How common are downloads of digital products and services?
1.214 This is difficult to measure, as there is no single gatekeeper for downloading and households and businesses are not required to report this information to any authority.
How much GST is Australia missing out on?
1.215 As part of consultation on this measure, scoping for potential numbers of registrants to the system provided some guidance on potential revenue. As a result of this scoping, it is estimated that around $350 million will be collected over the forward estimates, assuming a 1 July 2017 start date. This represents a small proportion of overall GST revenue (less than 1 per cent).
2. Why is government action needed
1.216 Government action is recommended to achieve tax neutrality between resident and non-resident suppliers in relation the sale of digital goods and services. Australian businesses are at a tax disadvantage as they are required to charge GST on their digital sales (when they are registered for GST), whereas non-residents are not, regardless of their business turnover. Australian business have stated that this is affecting consumer choices, and they are missing out on sales as Australians are choosing to buy from non-residents to avoid paying the GST.
1.217 Internationally, the G20 and the OECD have been working together, alongside other stakeholders, to address weaknesses in the current taxation laws that create opportunities for base erosion and profit shifting. Action 1 of the base erosion and profit shifting action plan deals with the tax challenges of the digital economy, including the difficulties of collecting value added taxes (such as the GST) on cross border sales in the digital economy.
1.218 The OECD's final report on Addressing the Tax Challenges of the Digital Economy was released on 5 October 2015. It recommended that, for the collection of GST on imported digital products and services, countries should 'consider the introduction of the collection mechanisms included in the International VAT/GST Guidelines'.
1.219 These Guidelines recommended that GST on digital products and services should be 'ultimately levied only in the taxing jurisdiction where the final consumption occurs'.
1.220 Many countries have already acted to tax imported digital products, or announced their intention to do so, including Japan, New Zealand and the member states of the European Union.
3. What policy options are being considered
Option 1: Apply GST to digital products and services imported by Australian consumers using a vendor registration model:
1.221 Under this option, overseas vendors will be required to register for, collect and remit GST on the digital products and services they sell to Australian consumers. This is the model proposed in the 2015 16 Budget measure.
Option 2: Apply GST to digital products and services imported by Australian consumers using a consumer compliance model:
1.222 Under this option, consumers would be required to identify digital products and services they import and remit any applicable GST. This is an alternative model of applying GST to digital products and services.
Option 3: No change:
1.223 Under this option, no legislative changes would be made. The GST would not be collected on digital supplies by non-residents to Australian consumers, maintaining an inequity between resident and non-resident suppliers of digital supplies.
1.224 Australia would also be foregoing GST revenue on these sales.
1.225 Options 1 and 2 require legislative amendments, in addition to consultation, policy development, legislative design and for taxpayers to become aware of the changes. It is proposed that under either option, the amendments would apply prospectively from 1 July 2017. Option 3 would not require legislative amendment.
4. What is the likely net benefit of each option?
Option 1: a vendor registration model
Apply GST to digital products and services imported by Australian consumers using a vendor registration model.
1.226 The collection of the GST on digital products and services using a vendor registration model involves the overseas online vendor collecting the GST from the Australian consumer at the point of sale. The overseas vendor then remits the collected GST to the Australian Taxation Office (ATO) on a periodic basis (likely to be quarterly or monthly, in line with requirements for domestic businesses).
1.227 This model is different from the current system for collecting the GST on imported goods above $1,000 value, where the goods are stopped at the border and the relevant taxes and duties are collected upon importation. The nature of imported digital products and services means they are unable to be captured by the model for imported goods, as they are not physical in nature and cannot be identified, or held, at the border.
1.228 The vendor registration model has a proposed registration threshold for overseas vendors of $75,000 of Australian turnover. This means that only overseas vendors selling more than $75,000 of supplies to Australian customers are required register. Registration is available for vendors under this threshold, however it is not compulsory. This aligns the overseas vendor registration threshold with the existing threshold for domestic businesses.
Example A: Imported supply of streaming of video on demand - consumer
Global Workshop, an overseas vendor with an Australian turnover greater than $75,000, supplies Philip, who lives in Perth, with digitally downloaded video editing software. Under the vendor registration model, Global Workshop would therefore be required to register for, collect and remit GST on Philip's purchase.
Identifying Australian residents in the sale process
1.229 Overseas vendors are able to identify Australian based consumers using business data they naturally collect as part of a normal business sale. This may include postal or residential address, credit card number (which have specific numbers to identify the country of origin), internet protocol address, previous sales history with the client, and at times, email address. During consultation on the design of this model, Treasury worked with stakeholders to ensure that they were able to isolate residency based on data they already collect. This also keeps compliance costs down for the vendor.
Electronic distribution platforms
1.230 An electronic distribution platform exists where vendors make supplies to customers through an electronic marketplace or store operated by another entity.
1.231 Under the proposed option, electronic distribution platform operators rather than individual vendors will be responsible for any Australian GST on supplies to Australian consumers made through the electronic distribution platform, unless the electronic distribution platform operator has no influence over the substance of the supply. Electronic distribution platform operators may also agree with vendors to be responsible for GST on other supplies made through the platform. Where the electronic distribution platform operator is not liable for a supply made through the electronic distribution platform, liability for registration for GST in Australia and the collection of GST will rest with the vendor.
1.232 In general, it is anticipated that electronic distribution platform operators will often be larger and better resourced than most of the vendors making supplies through the platform. The electronic distribution platform operator will also have significant influence over the terms of sales made using their platforms and either manage or closely regulate the payment process. Given this, compliance and administration would be simplified if liability for GST rested on the platform operator rather than the vendor.
Example B: Electronic distribution platform liable for supply by an application (app) developer
Madison, an app developer based in Ireland, makes use of TouristApp, a Canada-based electronic distribution platform operator (that is registered for GST in Australia), for the worldwide distribution of an app she has developed on 'Architecture in Dublin; what to see for the tourist'. Under the terms of the distribution agreement, TouristApp collects payment from customers via its platform, arranges delivery of Madison's app to customers and requires Madison to agree to certain key terms and conditions when selling the app with TouristApp.
When a customer, resident of Australia, purchases Madison's app through TouristApp, TouristApp is liable for GST on the sale, which it must remit to the ATO. Madison does not need to account for Australian GST on the sale, as TouristApp have collected and remitted the GST on the sale as the electronic distribution platform operator.
1.233 Non-resident business will have the choice of two registration options.
1.234 Simplified or limited registration, which enables a streamlined registration process (limited information required) with the ATO. Under this regime, businesses remit GST to the ATO but will not be entitled to Input Tax Credits (ITC) on supplies purchased in Australia to which the GST has applied. An Australian Business Number (ABN) will not be issued.
1.235 Full registration where the business will be able to claim ITCs and be issued with an ABN. This process would be very similar to that of an Australian based business.
Compliance and enforcement
1.236 The ATO will be responsible for administering the measure, and will be provided with $1.7 million over the forward estimates for this administration.
1.237 The ATO have an action plan in place to market these law changes to non-resident businesses. International experience indicates that larger entities will voluntarily comply. Compliance will also be encouraged or achieved by:
- International collaboration being considered under the draft OECD guidelines.
- A simplified registration and remittance system.
- The use of electronic systems similar to those in place in other countries to lodge GST returns electronically.
- Activating international treaties that cover exchange of information and debt collection with foreign jurisdictions in the area of GST.
- Penalising recipient consumers who misrepresent themselves as businesses to avoid GST.
- Applying existing compliance approaches to overseas based businesses which may include the Commissioner registering suppliers and also issuing default assessments.
1.238 The ATO already collect amounts from non-resident businesses for income tax and GST. This measure will broaden the existing program of international compliance.
Broader support for the vendor registration model
1.239 As outlined earlier, the OECD recommend that suppliers of digital services should be required to remit consumption tax to the jurisdiction in which the final consumer usually resides.
1.240 Many developed economies have, or are developing, models to apply their domestic consumption taxes to digital imports and services. This includes the European Union, South Africa, Japan, Korea and New Zealand. As an example, a similar model is currently used by the European Union to collect VAT on digital products and services sold to European consumers.
1.241 Taxing the supplier is also the preferred model for collecting GST on imports of low value physical goods by Australian consumers, as announced following the 21 August 2015 Council on Federal Financial Relations meeting.
1.242 This model can accommodate transactions that involve an off-shore third party or agent.
Benefits and Costs
1.243 This option would impose negligible compliance costs on Australian consumers.
1.244 Australian consumers would be charged GST on imported digital products and services. While this will result in a change in price, there will not be any compliance costs imposed on consumers as a result of this change.
1.245 There would be negligible costs to the consumer in the event they needed to seek a refund from the supplier for the purchase, as generally speaking this would be as part of refunding the entire purchase price, which would include the GST component.
1.246 The vendor registration model would also impose no additional compliance burden on Australian businesses.
1.247 This model is expected to raise $350 million in GST over the forward estimates, assuming a 1 July 2017 start date.
1.248 Consultation with stakeholders outlined that many non-resident vendors already have the software systems required to collect a VAT/GST, as most on-line retailers operate in many jurisdictions and their software is built to accommodate this. In addition, their tax or accounting areas are experienced with vendor registration systems for VAT/GST as the Australian system will operate similarly to other jurisdiction's vendor registration systems.
1.249 In consultation on the draft legislation, feedback was incorporated from multinational stakeholders regarding systems they currently use and how the mechanics of an EPD operate. Changes were made that ensure that the requirements of the Australian legislation are not onerous and utilise current information technology system parameters, when possible.
1.250 Many non-resident or multinational organisations may have software systems in place to account for Australian GST, as they already collect GST for other products.
1.251 As a result of the above two points, compliance costs for some non-resident vendors will be more limited.
1.252 In relation to small non-resident vendors, the $75,000 registration threshold acts to remove small suppliers from the operation of the changes.
1.253 It is anticipated that non-resident business would require time and effort for implementation and would incur ongoing compliance costs. The estimated costs are outlined below. These have been tested and agreed with stakeholders. They assume approximately 100 non-resident businesses are required to comply with the measure:
1.254 The costs to business of implementing vendor registration are estimated at around $1.82 million, with ongoing costs of around $420,000 per annum (equivalent to a change in regulatory burden of $602,000 when measured on an annualised basis).
Table 1: Regulatory burden and cost offset estimate table - Vendor Registration
|Average annual regulatory costs (from business as usual)|
|Change in costs ($ million)||Business||Community organisations||Individuals||Total change in costs|
|Total, by sector||$0.60||$||$||$0.60|
|Cost offset ($ million)||Business||Community organisations||Individuals||Total, by source|
Are all new costs offset?
[ ✓ ] Yes, costs are offset ¨ No, costs are not offset ¨ Deregulatory - no offsets required
|Total (Change in costs - Cost offset) ($million) = $0|
Offsets will be found for 2016 from the Treasury Portfolio.
Option 2: a consumer compliance model
Apply GST to digital products and services imported by Australian consumers using a consumer compliance model.
1.255 This option would require individual Australian consumers to collect and remit the GST to the ATO, instead of overseas vendors.
1.256 Australian consumers would pay the GST on their annual tax return. This would involve the consumer; identifying the digital products and services they imported during the financial year, determining which products and services GST should have been applied to, calculating their GST liability for the year, completing a new part of their annual tax return (which would require them to report and remit the requisite GST), and storing these records for the relevant length of time.
1.257 Australian businesses that purchase digital products and services from an overseas vendor for business purposes would not be required to remit any GST on their purchase. This would ensure that the GST remains a tax on final private consumption, consistent with the domestic GST system (such as through the provision of input tax credits to registered businesses).
Example C: Imported supply of streaming of video on demand - consumer
Global Workshop, an overseas vendor, supplies Philip, who lives in Perth, with digitally downloaded video editing software. Philip does not carry on an enterprise and is not registered for GST purposes. Under the consumer compliance model, Philip would have to record his purchase of the video editing software, determine if it should have been GST exempt, account for it and any other digital products or services purchased on his income tax return, and then keep the record of his purchase for the minimum record keeping period.
Example D: Imported supply of streaming of video on demand - business
Similar to the previous example, Global Workshop, an overseas vendor, supplies Philip, who lives in Perth, with digitally downloaded video editing software. However, Philip uses the video editing software in his business and is registered for GST purposes. Under the consumer compliance model, Philip would not have to record his purchase of the video editing software in his next tax return, but would have to keep the record of his purchase for the minimum record keeping period.
Benefits and Costs
1.258 This model would achieve the policy objectives with no additional compliance costs for non-resident businesses or domestic businesses.
1.259 This model would involve extensive compliance costs for Australian consumers.
1.260 A consumer compliance model would be very difficult to administer. The ATO would be required to make considerable changes to the annual individual tax return process. These changes to the tax system and the method of completing annual tax returns would involve a large education and guidance campaign, as well as considerable amounts of advice from the ATO.
1.261 There would also be significant record keeping requirements placed on individual taxpayers, as they will need to keep receipts or invoices for each purchase of a digital product or service, in order to account for it at the end of the financial year.
1.262 As not all imports of digital products and services would be taxable supplies (for example, financial supplies) consumers would be required to distinguish between taxable and non-taxable supplies to calculate their GST payable.
1.263 Given the difficulties involved in administration, the ATO would need a considerable amount of additional resources to implement the consumer compliance model, make changes to annual tax returns, advise and educate Australian consumers on their obligations under the new system, and ensure compliance by the millions of affected Australian consumers.
1.264 This model would have an estimated compliance cost of around $174 million for individual taxpayers in Australia. This is based on 1.5 million Australian residents importing digital products or services from non-residents to which the GST would apply. This is the cost for education and implementation, and includes the cost to the individual's time of completing the additional information on the annual income tax return. The number of Australian residents making downloads is a conservative estimate. This is important as a greater number of users would only increase the compliance cost for this option, which is already significantly greater than Option 1. These estimates have been tested and agreed with stakeholders.
1.265 The costs to individuals of implementing a consumer compliance model are estimated at around $108 million, with ongoing costs of around $65 million per annum (equivalent to a change in regulatory burden of $76 million when measured on an annualised basis).
1.266 Models such as this are not recommended by the OECD in relation to the application of GST on digital goods and services.
Table 2: Regulatory burden and cost offset estimate table - Consumer collection model
|Average annual regulatory costs (from business as usual)|
|Change in costs ($ million)||Business||Community organisations||Individuals||Total change in costs|
|Total, by sector||$||$||$76.12||$76.12|
|Cost offset ($ million)||Business||Community organisations||Individuals||Total, by source|
Are all new costs offset?
[ ✓ ] Yes, costs are offset ¨ No, costs are not offset ¨ Deregulatory - no offsets required
|Total (Change in costs - Cost offset) ($million) = $0|
Offsets will be found for 2016 from the Treasury Portfolio.
Option 3: No change
No change is made to the current GST legislation. Digital products and other services supplied by non-resident businesses continue to be GST-free.
1.267 This option would involve not making any change to the current GST legislation.
Benefits and Costs
1.268 Non-resident business would not have to change their systems and collect GST on digital products and services.
1.269 Australian resident individuals would not be required to account for the GST on digital products and services on their income tax return.
1.270 There would be no financial impact on non-resident business or consumers in Australia.
1.271 Australian business would continue to be at a tax disadvantage in comparison to non-resident business in relation to the sale of digital products and services.
1.272 The Australian Government would continue not to collect the GST on the sale of digital products and services, which is revenue foregone for the States and Territories.
1.273 No regulatory burden and cost offset estimate table has been provided for this option as there is no change to current administrative arrangements.
5. Who was consulted about these options and how did this occur
1.274 Treasury has undertaken significant consultation on two versions of draft legislation and explanatory materials for the introduction of a vendor registration model. The first consultation was conducted from 12 May to 7 July 2015, and the second round of consultation was conducted from 7 October to 21 October 2015. This is a combined total of 10 weeks consultation.
1.275 Treasury received 16 formal submissions in the first round of consultation and 10 formal submissions in the second round of consultation. These were from resident and non-resident business, accounting firms, academics and peak bodies associated with accounting and business.
1.276 In addition, Treasury engaged in targeted consultations with its New Zealand and South African counterparts, the OECD Business and Industry Advisory Committee (including representatives from a number of large overseas based telecommunications and software companies), domestic business, and tax and accounting professional bodies that operate internationally with clients potentially affected by this measure.
1.277 Consultation sessions were held via phone conference and in face to face settings. One-on-one feedback was also obtained.
1.278 Feedback was generally positive with stakeholders supporting the design of the measure and its consistency with the European Union model.
1.279 Overseas vendors were generally very supportive of the design of the vendor registration model and the synergies that the design has given the existing similar obligations with other jurisdictions, particularly the European Union.
1.280 Domestic business have stated that they are pleased the Government is acting to level the playing field on the sale of digital goods and services between domestic and international business.
1.281 Industry groups have also endorsed the measure, given it levels the playing field between domestic and non-resident suppliers.
1.282 In both rounds of consultation, the draft legislation and explanatory memorandum was released publicly on the Treasury website. No submissions were received from consumers or consumer groups, however they did have the opportunity to make a submission at any time during the consultation period. In general, community sentiment seems to be divided on the benefits of expanding the GST to cover additional items compared to other means of raising additional revenue. This is an ongoing commentary which relates to general broadening of the GST base, beyond the scope of these proposed changes.
Stakeholders views on compliance costs
1.283 Views on compliance costs were discussed and agreed with stakeholders during the consultation phase, and also after the consultation phase was finalised.
1.284 During consultation, many non-resident businesses (or their advisors) stated that they had pre-existing software in place that had the capability to be updated to account for GST sales to Australia.
1.285 While they appreciated that some upfront investment will be required, they have been expecting this change from both Australia and other jurisdictions. The European Union has already made this change, and many multinationals operate in that market so adapting to applying the GST/VAT to products they sell is not considered to be a new concept.
1.286 The costs involved in adapting their systems to account for Australian GST was not considered to be prohibitive. Many multinationals are expecting to make similar changes when other jurisdictions update their GST/VAT law.
1.287 No submissions received suggested implementing the consumer compliance model (option 2).
1.288 No submissions received suggested retaining the current system (option 3).
6. What is the best option from those considered
1.289 The best option available is Option 1, to apply GST to digital products and services imported by Australian consumers using a vendor registration model.
1.290 A key advantage of this model is that it imposes nil to negligible compliance costs on Australian businesses and consumers.
1.291 At the same time, the vendor registration model also imposes only limited compliance burdens on overseas vendors.
1.292 Importantly, the vendor registration model is consistent with the way a number of other countries have implemented similar regimes overseas, and is consistent with OECD guidelines.
1.293 The alternative of applying a consumer collection model requires Australian consumers to pay GST on the digital products and services they import. This is not considered viable due to associated difficulties with the system and the significant compliance costs it would impose on millions of Australian consumers.
1.294 The option to retain the status quo would maintain the current system of tax inequity between resident and non-resident business, and result in revenue forgone.
Potential impacts on competition
1.295 This proposal will restore neutrality with respect to the value added taxation of services and intangibles provided by domestic and foreign businesses. This will benefit domestic businesses, that are already subject to GST, and remove the advantage for foreign businesses, that will no longer receive comparatively beneficial tax treatment. This will remove any distortion of consumer choices in favour of foreign suppliers caused by the current differential GST treatment.
1.296 This option achieves the policy objective by providing a more level playing field between domestic and overseas suppliers of digital products and services. It will mean that GST will no longer be a factor when domestic consumers decide which business to shop with when purchasing digital products and services. Furthermore it maintains the intended operation of the GST as a broad-based Australian consumption tax with limited exemptions.
1.297 It is important to note, however, that there will still remain a number of other factors affecting the international competitiveness of domestic businesses. The Productivity Commission reached a similar conclusion in relation to low value goods in their report Economic Structure and Performance of the Australian Retail Industry. In this report the Commission outlined that the avoidance of payment of GST is not the main factor affecting competitiveness of Australian retailers.
Considerations in relation to foreign business and trade
1.298 During consultation with non-resident business, logistical issues were discussed such as the information the non-resident vendor is required to collect from the consumer, and how this could utilise currently collected information. Changes were made to the second iteration of the draft legislation to incorporate suggestions from stakeholders on this issue. These changes, along with the simplified registration system, have been designed to make the end to end process easier for non-resident business and negate any concerns that non-residents may exit the Australian market due to difficulties complying with our legislation.
1.299 It is important to note that non-resident small business (with an Australian turnover of less than $75,000) will not be required to register, and that larger business will often already have software in place to manage GST/VAT collection and remittance in another jurisdiction.
Double taxation from other value added taxes
1.300 The risk of double taxation is low as under the destination principle, vendors generally tax according to the destination of the item, rather than the origin of the item.
Businesses relocating as a tax avoidance mechanism
1.301 The risk of a business relocating to avoid remitting Australian taxes is low in relation to this measure, as the tax applies only to supplies to consumers and applies based on the residence of the consumer - the residence of the supplier is generally irrelevant. More generally, if a business relocates to another country to avoid remitting tax, the reasons are broader.
7. How will the chosen option be implemented
1.302 Legislation would be required to implement Option 1, the vendor registration model. The proposed start date is 1 July 2017.
1.303 It is intended that overseas vendors would have approximately one year between the passage of legislation and the start date of the measure to ensure that non-resident businesses have an adequate amount of time to learn and understand their requirements, as well as implement appropriate business system updates.
1.304 The ATO would be responsible for administering the system. The ATO are experienced in implementing such tax reforms and educating and guiding taxpayers about their new tax obligations. The ATO will be provided with $800,000 of capital expenditure and $700,000 of expenses in 2016-17 and $100,000 of expenses in both 2017-18 and 2018-19.
Enforcing and monitoring compliance
1.305 There are a number of steps the ATO has already undertaken, and can undertake as required to enforce and monitor compliance with the measure. These are outlined under Option 1.
1.306 As noted earlier, the changes are proposed to start from 1 July 2017. This will allow time for non-resident business to understand the changes, update their software systems, register and seek assistance from the ATO if required.
1.307 Post-implementation, the ATO will monitor collections of digital supplies from non-resident suppliers, and inform the Government in the event that the legislation is not working as intended.
1.308 In this event, the Government could consider what amendments could be made to the legislation to increase compliance with the overall intent of the policy of applying GST to digital products and services.
1.309 More broadly, the Government has announced that the GST threshold for low value goods will be reduced. This will provide synergies with the digital products and other services legislation, in terms of implementation, compliance, enforcement and evaluation.