House of Representatives

Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ABARES Australian Bureau of Agricultural and Resources Economics and Sciences
ABN Australian Business Number
ADI Authorised Deposit-taking Institution
ATO Australian Taxation Office
Board Board of Taxation
Commissioner Commissioner of Taxation
FMD farm management deposit
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax) Act 1999
Intangibles things other than goods or real property
ISP internet service provider
ITAA 1997 Income Tax Assessment Act 1997
ITC input tax credit
ITZ indirect tax zone
OECD Organisation for Economic Co-operation and Development
TAA 1953 Taxation Administration Act 1953
VAT value added tax
White Paper Agricultural Competitiveness White Paper

General outline and financial impact

GST Treatment of Cross-Border Transactions

Schedules 1 and 2 to this Bill each contain measures that modernise Australia's goods and services tax (GST) system.

Australia's GST system has been in place for 15 years. Over this time there have been a number of significant changes in Australia and the world.

One of the most notable of these changes has been the growth in cross-border supplies of services and other intangibles. When the GST was introduced in 2000, such transactions were relatively unusual, especially for consumers. However, cross-border supplies now form a large and growing part of Australian consumption.

The growing importance of these types of transactions has highlighted that the GST system was designed with a focus on Australian-based, rather than cross-border supplies.

In the context of cross-border supplies where consumption is of a private or domestic nature, the GST often does not apply to supplies made by non-residents to consumers in Australia. Given the increase in cross-border transactions and the growth of the digital economy, this treatment has led to a growing area of consumption being out of scope of the GST. This harms the integrity of the GST tax base and can disadvantage local suppliers.

At the same time, the GST system is also often not well adapted to the circumstances of foreign suppliers in respect of their dealings with Australian-based businesses. In many cases supplies between such entities result in little or no final GST being payable. As a result, the current GST settings can impose unnecessary obligations and compliance costs on foreign suppliers.

Schedules 1 and 2 each contain measures that modernise the GST to address these challenges.

·
The amendments made by Schedule 1 update the GST law to ensure that GST applies consistently to all supplies of digital products and other imported services made to Australian consumers.
·
The amendments in Schedule 2 make a number of changes to the GST law to minimise compliance costs for non-resident suppliers while maintaining the integrity of the GST base.

Extending GST to digital products and other imported services

Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities.

Date of effect: The measure applies in determining net amounts for tax periods starting on or after 1 July 2017.

For supplies made over a period spanning this date, the amendments apply to that portion of the supply made after 1 July 2017.

Proposal announced: The measure was announced by the Treasurer on 12 May 2015 in the 2015-16 Budget.

Financial impact: The measure is estimated to result in a gain to GST revenue of $350 million over the forward estimates period:

2015-16 2016-17 2017-18 2018-19
- - $150m $200m

- Nil

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.190 to 1.198.

Compliance cost impact: This measure imposes some transitional and ongoing compliance costs upon foreign suppliers and electronic distribution platforms for supplies of digital products and other imported services made to Australian consumers.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will impact non-resident businesses that supply Australian consumers with digital products or other services.

Main points:

·
Currently, the supply of digital products and other services by non-residents is often not subject to GST.
·
This measure seeks to ensure that foreign vendors must remit GST on the supply of digital products and other services to Australian consumers.
·
It is anticipated in the order of 100 non-resident entities will register for and remit GST, through either a simplified or full registration regime, as a result of this measure. These businesses will face transitional costs associated with learning about and implementing the change in obligations, as well as ongoing reporting and compliance obligations.
·
The impact of this measure on affected non-resident businesses is mitigated as many non-resident suppliers may already apply a consumption tax to supplies to consumers in other OECD jurisdictions and are familiar with how this operates.
·
Two periods of consultation were conducted on draft legislation for this measure, in addition to regular engagement with resident and non-resident stakeholder businesses, and law and accounting professionals in this area. Response to the proposed option was largely positive. Changes were made to the draft legislation to address concerns raised in consultation.

GST treatment of cross-border transactions between businesses

Schedule 2 to this Bill amends the A New Tax System (Goods and Services) Tax Act 1999 to better target the way Australia's goods and services tax rules apply to cross-border supplies that involve non-resident entities.

Date of effect: The measure applies to taxable supplies in determining net amounts for tax periods that commence from the second quarterly tax period starting after Schedule 2 receives Royal Assent.

Proposal announced: The measure was originally announced by the former Government in the 2010-11 Budget following recommendations that were made by the Board of Taxation. The Government announced on 14 December 2013 it would proceed with the measure.

Financial impact: The measure is estimated to have an ongoing unquantifiable impact on GST revenue over the forward estimates period:

2015-16 2016-17 2017-18 2018-19
- * * *

- Nil

* Unquantifiable

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.237 to 2.242.

Compliance cost impact: This measure imposes some transitional compliance costs on affected non-resident entities and affected business customers that carry on an enterprise in the indirect tax zone.

Farm management deposit reforms

Schedule 3 to this Bill reforms the income tax treatment of farm management deposits (FMDs) by:

·
increasing the maximum amount that can be held in FMDs by a primary producer to $800,000;
·
allowing primary producers experiencing severe drought conditions to withdraw an amount that has been held in an FMD for less than 12 months, without affecting the income tax treatment of the FMD in the earlier income year; and
·
allowing amounts held in an FMD to offset a loan or other debt (ie. as a result of the arrangement a lower amount of interest is charged on the loan than would otherwise be the case) relating to the FMD owner's primary production business.

Date of effect: The amendments made by Schedule 3 apply to income years commencing on or after 1 July 2016.

Proposal announced: The changes to the tax treatment of FMDs were announced in the Agricultural Competitiveness White Paper released on 4 July 2015.

Financial impact: The cost to revenue of the measures over the forward estimates period is estimated to be $10 million comprising:

Raising the Cap

2015-16 2016-17 2017-18 2018-19
- - -$10m -$10m
Loan Offsets
2015-16 2016-17 2017-18 2018-19
- - $5m $5m
Early Access
2015-16 2016-17 2017-18 2018-19
- .. .. ..

- Nil

..Not zero, but rounded to zero.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.70 to 3.75.

Compliance cost impact: The measures have a small transitional compliance cost.

Summary of regulation impact statement

Regulation impact on business

Impact: Moderate.

Main points:

·
The measures impose some transitional compliance costs as primary producers and their advisers become familiar with the changes.
·
Financial institutions that seek to offer products to enable FMDs to be offset against loans will need to revise their systems to facilitate the offset arrangements and calculation of interest.

Primary producers and their advisers will need to monitor FMD offset arrangements on an ongoing basis to ensure that an administrative penalty does not apply and obtain the necessary evidence of rainfall conditions for early withdrawals due to severe drought conditions.

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.

Consultation

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:

·
is an Australian resident (but not solely because they are a resident of one of Australia's external territories);
·
is not registered for GST; and
·
if registered for GST, the recipient does not make the acquisition to any extent for the purpose of an enterprise they carry on.

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:

·
done in the ITZ;
·
made through an enterprise carried on in the ITZ; or
·
the thing supplied is a right or option to acquire something, the supply of which would be connected with the ITZ.

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:

·
authorising billing;
·
authorising delivery of the supply; or
·
setting the terms and conditions under which the supply is made.

Not applicable.
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.

Not applicable.

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.

Gambling supplies

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

Administrative penalties

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[1]) 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.

Registration requirements

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.

Financial supplies

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.

Limited registration

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)]

Consequential amendments

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

Application rule

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.

Transitional provisions

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.

Overview

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.

Conclusion

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.

International developments

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.

Overview

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.

GST Registration

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

Benefits

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.

Costs

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
Agency $0.60 $ $ $0.60
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.

Overview

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

Benefits

1.258 This model would achieve the policy objectives with no additional compliance costs for non-resident businesses or domestic businesses.

Costs

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
Agency $ $ $ $76.12
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.

Overview

1.267 This option would involve not making any change to the current GST legislation.

Benefits and Costs

Benefits

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.

Costs

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

Restore neutrality

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.

Other issues

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.

8. Evaluation

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.

Chapter 2 - GST treatment of cross-border transactions between businesses

Outline of chapter

2.1 Schedule 2 to this Bill amends the A New Tax System (Goods and Services) Tax Act 1999 (GST Act) to better target the way Australia's goods and services tax (GST) rules apply to cross-border supplies that involve non-resident entities.

2.2 These changes mean that certain supplies are no longer connected with the indirect tax zone (ITZ), or are GST-free.

2.3 Unlike the changes in Schedule 1, which bring into the tax base supplies that are currently not taxed, the changes described in this Chapter do not alter the GST tax base. Instead, the amendments contained in Schedule 2 relieve non-resident suppliers of the obligation to account for GST on certain supplies. Where GST would have ultimately been payable on a supply affected by these changes, the GST obligations are shifted to Australian-based business recipients that are already registered for GST.

2.4 The amendments also reduce compliance costs for GST registered importers in calculating the value of taxable importations.

2.5 All legislative references in this Chapter are to the GST Act, unless otherwise stated.

Context of amendments

Application of existing GST law to supplies by non-resident entities

2.6 Consistent with most value added tax systems in the world, Australia applies the destination principle in imposing GST on cross-border supplies. This principle states that GST on cross-border supplies should only be levied in Australia when consumption of the thing supplied occurs in the ITZ. The GST is a multistage tax with input tax credits (ITCs) generally available to businesses to prevent cascading of GST through each stage of production and to ensure that the incidence of the GST falls upon private consumption in the ITZ.

2.7 Currently, for a non-resident supplier to be subject to Australian GST in respect of a supply, the following conditions in the GST Act must be satisfied:

·
the supplier must be registered for GST or required to be registered;
·
the supply must be connected with the ITZ; and
·
the supply must not be GST-free (such as a supply that is consumed outside the ITZ) or input taxed.

2.8 In certain circumstances, a supply that is not connected with the ITZ can still be a taxable supply. An example of such a supply is one that is made to a business recipient that is registered for GST, or required to be registered. In such cases, the supply can be 'reverse charged' (meaning that the recipient rather than the supplier is responsible for the GST on the supply) if it is acquired for the purpose of an enterprise the recipient carries on in the ITZ, but is not acquired solely for a creditable purpose. The reverse charge rules do not apply to a supply of a thing that is acquired by a recipient solely for a creditable purpose because in such cases there is no net GST to be collected (as any GST payable is fully offset by ITCs).

GST Registration

2.9 Non-resident suppliers are required to register for GST if their projected or current turnover is greater than the registration turnover threshold. The value of supplies connected with the ITZ counts towards this threshold, even if those supplies are GST-free. Because GST-free supplies are included in this way, non-resident suppliers that only make GST-free supplies can be required to register for GST despite having no GST liability.

2.10 Conversely, non-resident suppliers with a turnover that is lower than the threshold may still have an incentive to register for GST to claim ITCs for GST that they have been charged on acquisitions related to carrying on their enterprise.

2.11 Registering for GST can be a costly and time consuming process for non-resident suppliers that do not have a substantial presence in Australia. These amendments reduce the circumstances in which a non-resident supplier is drawn into the GST system to ensure that the GST system does not unnecessarily impact on non-resident suppliers dealing with Australian enterprises.

Connected with the ITZ

2.12 Section 9-25 sets out the circumstances in which a supply is connected with the ITZ.

2.13 Supplies of goods may be connected with the ITZ in a number of ways, including where the goods are:

·
delivered or made available in the ITZ; or
·
brought to the ITZ and installed or assembled by the non-resident supplier (whether directly or through a sub-contractor).

2.14 Supplies of things other than goods or real property (intangibles) are connected with the ITZ if they are done in the ITZ or are made through an enterprise carried on in the ITZ.

2.15 The broad application of the 'connected' rules can result in non-resident entities being subject to GST in respect of their business-to-business transactions, even where those transactions do not result in a net gain to GST revenue.

The Board of Taxation review

2.16 On 11 May 2010, the Board of Taxation (Board) released its report on the application of Australia's GST to cross-border transactions. In its report, the Board noted that:

·
Australia's GST system is overly inclusive of non-residents which can place unnecessary compliance costs on non-residents and can lead to embedded taxation for Australian businesses; and
·
there are significant compliance costs faced by non-residents that seek to register in Australia's GST system.

2.17 The Board made a number of recommendations for addressing these issues. The former Government accepted the Board's recommendations as part of the 2010-11 Budget, and announced further changes to the Board's recommendations as part of the 2012-13 Budget. These changes included narrowing the meaning of 'carrying on an enterprise in the ITZ' so that it only applies to entities with a significant presence in Australia.

2.18 In December 2013, the Government announced that it would proceed with the following recommendations (Recommendations 1 to 5, 6, 9 and 12), as amended in the 2012-13 Budget:

·
limiting the scope of the connected with the ITZ provisions for certain supplies by non-residents where the supplies are made to entities with a business presence in Australia that are registered for GST (Recommendations 1 and 2, although the scope of Recommendation 2 was narrowed in the 2012-13 Budget announcements);
·
limiting the scope of the connected with the ITZ provisions for certain supplies between non-residents of goods that are not acquired for the purpose of an Australian enterprise (Recommendation 3);
·
allowing supplies made to a non-resident but provided to registered businesses (or to their employees or office holders) in the ITZ to be GST-free (Recommendation 5);
·
allowing supplies of warranty services made to non-residents but provided to Australian warranty holders to be GST-free (Recommendation 6);
·
removing the requirement for non-residents to register if they only make GST-free supplies (Recommendation 9); and
·
introducing an alternative option for calculating transport and insurance costs included in the value of taxable importations (Recommendation 12).

2.19 These amendments implement the Government's December 2013 announcement to proceed with these recommendations.

Consultation

2.20 An exposure draft and accompanying explanatory material was released for this measure on 7 October 2015, with submissions closing on 21 October 2015. Feedback on the changes was largely positive and a relatively small number of issues were identified. Various changes were made to address a number of these issues.

Summary of new law

2.21 These changes improve the balance between ensuring Australia's GST system does not unnecessarily draw in non-residents and maintaining the existing GST base by:

·
updating the test for when an enterprise is carried on in the ITZ so that it is better aligned with key GST concepts; and
·
relieving non-resident suppliers of the obligation to account for GST on certain supplies by:

-
shifting the responsibility for identifying and paying a GST liability to the recipient, where the recipient is registered for GST and carries on an enterprise in the ITZ;
-
switching off the GST liability for certain supplies between non-residents;
-
extending the GST-free rules to certain supplies made to non-residents; and
-
removing the GST registration requirements for non-residents that only make GST-free supplies through an enterprise carried on outside the ITZ.

2.22 The amendments also reduce compliance costs for GST-registered importers in calculating the value of taxable importations.

Comparison of key features of new law and current law

New law Current law
Test for carrying on an enterprise in the ITZ
The test for when an enterprise is carried on in the ITZ is more closely aligned with Australia's modern treaty practice in relation to permanent establishments.

An enterprise is carried on in the ITZ where particular individuals carry on the enterprise of the entity in the ITZ through a fixed place, or through one or more places for more than 183 days in a 12 month period.

The test for when an enterprise is carried on in the ITZ uses the income tax definition of permanent establishment. This definition focusses on the place at or through which a business is carried on by a person.
Scope of connected with the ITZ: business-to-business supplies
The connected with the ITZ rules have more limited application to supplies between businesses.

The more limited application results in the compulsory reverse charge provisions applying to a greater range of supplies.

GST-registered entities are responsible for any GST on supplies of intangibles that are done in the ITZ that are made to them by non-resident suppliers.

The connected with the ITZ rules have broad application, particularly for things that are done in the ITZ.

The compulsory reverse charge provisions have limited application due to the breadth of the connected with the ITZ rules.

Non-resident suppliers are generally responsible for GST payable on supplies of intangibles that are done in the ITZ.

Scope of connected with the ITZ: supplies of goods installed or assembled
A supply of goods that involves the goods being brought into the ITZ is only connected with the ITZ if the supplier imports the goods.

If a supply of goods that are brought into the ITZ involves the supplier installing or assembling the goods in the ITZ, the part of the supply that involves the installation or assembly of the goods is treated as a separate supply of a thing done in the ITZ.

A supply of goods that involves the goods being brought into the ITZ is connected with the ITZ if the supplier either imports the goods into the ITZ, or installs or assembles the goods in the ITZ.

The installation or assembly component of a supply that is connected with the ITZ may be treated as part of a single supply of the goods.

GST-free treatment of supplies to non-resident recipients
The GST-free treatment of supplies made to non-resident entities is maintained for certain supplies that are made to non-resident recipients but provided to particular entities in the ITZ. Certain GST-free supplies made to a non-resident may lose their GST-free status if the supply is provided to another entity in the ITZ.
Registration of non-resident suppliers only making GST-free supplies
Non-resident suppliers are not required to register for GST if the only supplies they make are GST-free, and made through an enterprise they carry on outside the ITZ. Non-resident suppliers may be required to register for GST if they make supplies connected with the ITZ, irrespective of whether all their supplies are GST-free.
Value of taxable importations
In calculating the value of taxable importations, an uplift factor may be applied to the customs value of goods as an alternative to calculating the actual transport, insurance and ancillary costs. The actual transport, insurance and ancillary costs must be included in calculating the value of taxable importations.

Detailed explanation of new law

When enterprises are carried on in the ITZ

2.23 The existing test for when an enterprise is carried on in the ITZ uses the income tax definition of 'permanent establishment' in subsection 6(1) of the Income Tax Assessment Act 1936.

2.24 These amendments update this test to better align it with concepts that are fundamental to the GST law. While the new test moves away from using the definition of permanent establishment to ascertain when an enterprise is carried on, it is still based on some of the factors that are relevant in determining when a permanent establishment exists for income tax purposes.

2.25 Under the revised test, an enterprise of an entity is carried on in the ITZ if:

·
the enterprise of the entity is carried on by particular individuals who are in the ITZ, and any of the following apply:

-
the enterprise is carried on through a fixed place in the ITZ;
-
the enterprise has been carried on through one or more places in the ITZ for more than 183 days in a 12 month period; or
-
the entity intends to carry on the enterprise through one or more places in the ITZ for more than 183 days in a 12 month period.

[Schedule 2, items 3 and 15, subsection 9-27(1) and section 195-1 (definition of 'carried on in the indirect tax zone')]

2.26 The terms 'enterprise' and 'ITZ' are core concepts in the GST law, and are defined in section 9-20 and section 195-1, respectively.

2.27 The revised test can be distinguished from the approach in the income tax definition of 'permanent establishment' which applies to a 'business' that is carried on through a 'place'. In particular, the use of the term 'enterprise' better aligns the underlying components of the carrying on an enterprise test with the intended scope of the test.

2.28 The combination of the 'fixed place' and '183 day' rules is consistent with Australia's current tax treaty approach for permanent establishments. In the context of Australia's tax treaties, the concept of a 'fixed place' is used as the primary principle for determining when a permanent establishment exists. The 183 day rule in Australia's tax treaties applies separately to deem an entity to have a permanent establishment where it undertakes business activities for more than 183 days.

Enterprise carried on by individuals in the ITZ

2.29 For an enterprise of an entity to be carried on in the ITZ, the enterprise must be carried on by an individual who is the entity, or who is an employee, officer, or a dependent agent of the entity. [Schedule 2, item 3, paragraph 9-27(1)(a) and subsection 9-27(3)]

2.30 This requirement ensures that the locations of any individuals who actually undertake the activities of an entity are the primary focus of the test. Where the entity is an individual (ie a sole trader), their activities are relevant in determining whether and where an enterprise is carried on. Irrespective of the type of entity, the activities of an individual who is an employee, officer or dependent agent of the entity are also taken into consideration.

2.31 The terms 'employee' and 'agent' are not defined in the GST law and take their ordinary meaning, whereas the term 'officer' is defined by reference to the definition in the Corporations Act 2001.

2.32 The scope of agents considered in the revised test is limited to those agents that have, and habitually exercise authority to conclude contracts on behalf of the entity, but are not a broker, general commission or independent agent. [Schedule 2, item 3, paragraph 9-27(3)(c)]

2.33 This approach is consistent with the type of agents that are relevant in determining whether an entity has a permanent establishment under the current law, and in the permanent establishment articles in Australia's tax treaties. However, for GST purposes the phrase 'substantially negotiates' (which is used in recent Australian tax treaties about the role of agents) has not been used. As such, the analysis of whether an agent causes a non-resident to carry on an enterprise in the ITZ focusses on the authority of an agent, and their exercise of that authority, to conclude contracts on the non-resident's behalf.

Enterprise carried on through a fixed place

2.34 An enterprise of an entity that is carried on by the individuals described above is an enterprise that 'is carried on in the ITZ' if the individuals carry on the enterprise through a 'fixed place' in the ITZ. [Schedule 2, item 3, paragraph 9-27(1)(a) and subparagraph 9-27(1)(b)(i)]

2.35 Although the term 'fixed place' is not defined for the purposes of the GST law, the term has been used to align the revised enterprise test with the internationally accepted interpretation of that term that has been adopted in the permanent establishment articles in Australia's tax treaties.

2.36 Consistent with that approach, for the purposes of the GST law, the term 'fixed' requires there to be a stable or continual connection between the enterprise of the entity and the place. While the term 'fixed' is not intended to require a connection between an enterprise and a place that is 'everlasting or forever', it does require a connection that is more than merely temporary or transitory in nature.

Enterprise carried on for more than 183 days

2.37 In addition to the 'fixed place' limb of the revised enterprise test, an enterprise of an entity that is carried on by the individuals described above is an enterprise that 'is carried on in the ITZ' if the enterprise has been carried on, or it is intended that it be carried on, through one or more places in the ITZ for more than 183 days in a 12 month period. [Schedule 2, item 3, subparagraphs 9-27(1)(b)(ii) and (iii)]

2.38 There are two parts to the 183 day rule - the first relates to activities in the ITZ that have been carried on, and the second part relates to activities that are intended to be carried on.

2.39 The reference to '183 days in a 12 month period' means that the days over which the enterprise is carried on do not need to be consecutive. Although the 183 day rule applies where an enterprise is carried on through a single place continuously over a period of more than 183 days, it also applies where an enterprise is carried on through different places on a continuous or intermittent basis throughout any 12 month period.

2.40 To determine if an enterprise of an entity has been carried on for more than 183 days in the ITZ, the enterprise of the entity must have been carried on through one or more 'places' in the ITZ. In contrast to the 'fixed place' rule, the 183 day rule does not require any such places to be 'fixed'.

2.41 In practice, the 183 day rule means that an evaluation of whether a place is a 'fixed place' is only required where an enterprise is carried on in the ITZ for 183 days or less, because enterprises that are carried on for more than 183 days in the ITZ satisfy the 183 day rule.

2.42 This approach reflects that the 183 day rule is primarily focussed on whether an entity has a substantial presence in the ITZ over a period of time. As a result, any place that is used in carrying on an enterprise is counted towards the 183 day threshold, irrespective of whether the connection that the entity has (or the relevant individuals have) with those places is fixed or temporary in nature.

2.43 To the extent that the 183 day rule relates to enterprises that have been carried on in the ITZ, it applies on a prospective basis. Leaving aside intended activities, an entity that has carried on an enterprise in the ITZ through one or more places in the ITZ for 184 days will not be subject to the 183 day rule for the first 183 days. That is, the entity will commence carrying on an enterprise in the ITZ from the start of the 184th day. This approach preserves the position that an entity adopts in relation to the activities it undertakes in the ITZ at the time those activities are undertaken and is consistent with the obligation for entities to determine their GST liability on a 'real time' basis as transactions occur.

2.44 However, if at a particular time an entity intends that it will undertake those activities over a period that would exceed 183 days, the entity carries on an enterprise in the ITZ from that time because of the part of the 183 day rule that relates to intended activities.

Exclusive use not required

2.45 In determining whether an enterprise is carried on through a particular place, the place does not need to be exclusively used by the entity for carrying on the enterprise, nor does the entity need to own, lease or have any other claim or interest in relation to the place. [Schedule 2, item 3, subsection 9-27(2)]

2.46 This additional rule clarifies that the question about whether an enterprise is carried on through a particular place for the purposes of the fixed place and 183 day rules does not rely on things like ownership or formal rights. Instead, the focus of each rule is about the nature of the use of a particular place, or an intention to utilise the place on an ongoing basis.

Example 2.1: 183 day rule - enterprise carried on in the ITZ


Jo Co is a computer service provider and a resident of Japan. It successfully tenders to train the employees of Smith Corp, a company resident in Australia, in a new computer system. To undertake the training, Jo Co sends four of its employees to Australia for seven months. Smith Corp provides Jo Co's employees with a room in one of its Sydney offices for that time.

In working out whether it carries on an enterprise in the ITZ, Jo Co determines that its intention about its employees carrying on its enterprise through the Sydney office satisfies the 'intention' limb of the 183 day test. As such, Jo Co carries on its enterprise in the ITZ for the entire time that its employees are in Australia for the purposes of the GST law.

Example 2.2: 183 day rule - effect of intentions


Following on from the above example, assume Jo Co's original intention about its employees being based at the office of Smith Co changed after two months (for example, if it was decided that they would only stay for five months instead of the original seven, and would not remain in the ITZ after those five months). In these circumstances the 183 day rule would apply to Jo Co for the first two months during which it was intended that its employees would carry on an enterprise for more than 183 days. The rule would not apply to the final three months after Jo Co's intention changed.

If the intention had always been that the employees would only be based at the office of Smith Co for five months and would not be present in the ITZ after that period elapsed, the 183 day rule would not apply for any part of the period.

Alternatively, if Jo Co had originally intended that its employees would be based at the office of Smith Co for five months but during that period decided to extend their stay to more than 183 days, the 183 day rule would apply from the time its intentions about its employees being present for longer than 183 days occurred. If it was not intended that the employees be present for longer than 183 days until the time the 183 day threshold was reached, Jo Co would be taken to be carrying on an enterprise from the 184th day on the basis that it had carried on an enterprise in the ITZ through a place for more than 183 days.

Exceptions for certain cross-border supplies connected with the ITZ

2.47 These amendments ensure that various supplies made by non-resident suppliers are not connected with the ITZ where imposing GST on those non-resident suppliers would result in no net gain to GST revenue.

2.48 To achieve this, the amendments apply as exceptions to the connected with the ITZ rules in section 9-25. For simplicity, a supply that is covered by one of these exceptions is referred to as a supply that is 'disconnected'.

2.49 For a supply to be disconnected, the following conditions about the supplier must be satisfied:

·
the supplier must be a non-resident; and
·
the supply must not be made through an enterprise that the supplier carries on in the ITZ.

[Schedule 2, item 3, paragraphs 9-26(1)(a) and (b)]

2.50 While the conditions for the supplier apply irrespective of the type of supply, specific conditions for the recipient must be satisfied for different types of supplies. For some supplies, the recipient must be an 'Australian-based business recipient' of the supply, whereas for others the recipient must be a non-resident or a lessee of the goods supplied.

2.51 Where a supply is disconnected because it is made to a recipient that is an Australian-based business recipient, the recipient is responsible for determining whether they have a GST liability in relation to the supply under the reverse charge rules in Division 84.

2.52 The term 'non-resident' and the test for when an enterprise is carried on in the ITZ are defined by the GST Act. The existing definition of 'non-resident' is unaffected by these amendments.

2.53 However, the changes explained above about when an enterprise is carried on in the ITZ are relevant for determining if a non-resident carries on an enterprise in the ITZ, and whether a recipient is an 'Australian-based business recipient' of a supply.

Telecommunication supplies

2.54 These changes take priority over the existing special rules about when a telecommunication supply is connected with the ITZ. [Schedule 2, items 3 and 13, subsections 9-26(3) and 85-5(3)]

2.55 Prioritising these amendments over the telecommunication supply rules in Division 84 results in supplies of intangibles that are disconnected as a result of these amendments remaining disconnected even if the telecommunications rules would otherwise apply. This ensures that such supplies can be subject to the compulsory reverse charge provisions in Division 84, and reverse charged to the recipient of the supply where the intangibles are acquired for a purpose that is partly creditable.

Non-resident suppliers

2.56 For a supply to be disconnected, the supplier must be a non-resident, and the supply must not be made through an enterprise the supplier carries on in the ITZ. [Schedule 2, item 3, paragraphs 9-26(1)(a) and (b)]

2.57 The enterprise requirement relates to individual supplies. A supply can therefore satisfy the requirement even if the non-resident supplier carries on an enterprise in the ITZ provided the supply in question is not made through the enterprise it carries on in the ITZ. This could occur where the non-resident supplier carried on separate enterprises in the ITZ and overseas but makes the supply solely through their overseas enterprise.

2.58 Where the non-resident supplier makes a supply through an enterprise they carry on in the ITZ, the supplier has a sufficient presence in Australia in respect of that supply to account for their GST obligations in the same way as other entities that are based in Australia. In such circumstances, the exceptions to the connected with the ITZ rules introduced by these amendments do not apply to the supply.

Entities that are an 'Australian-based business recipient' of a supply

2.59 For certain supplies to be disconnected, the recipient of the supply must be an 'Australian-based business recipient' of the supply. [Schedule 2, item 3, table item 1 in subsection 9-26(1)]

2.60 In the case of business-to-business supplies, the supplier is generally liable for GST on a taxable supply that is connected with the ITZ and the recipient is usually entitled to ITCs to the extent that the thing supplied is acquired for a creditable purpose. This multi-stage collection and credit mechanism ensures that the incidence of the GST does not fall on businesses unless a supply is input taxed, or the thing that is supplied is acquired for a non-business purpose or for making input taxed supplies. However, in a number of situations the recipient of a business-to-business supply is not entitled to full ITCs and as a result the GST payable is not fully offset. In such cases, the recipient bears the economic cost of GST included in the price payable for the supply to the extent that the GST is not creditable.

2.61 In the absence of other rules, disconnecting a supply that is not fully creditable would mean that a liability to GST that was otherwise ultimately payable would be removed (because the supply would no longer be taxable). Requiring the recipient to be an Australian-based business recipient of the supply in order for it to be disconnected ensures that the reverse charge rules in Division 84 can be applied to the supply so that the recipient becomes responsible for any GST that is ultimately payable.

Operation of reverse charge rules

2.62 In broad terms, Division 84 applies to supplies of anything other than goods and real property that are not connected with the ITZ, and that are acquired:

·
by a recipient that is registered or required to be registered;
·
solely or partly for the purpose of an enterprise carried on by the recipient in the ITZ; and
·
not solely for a creditable purpose.

2.63 Where Division 84 applies to such a supply, the supply becomes a taxable supply and any GST on the supply is payable by the recipient.

2.64 Where a supply is disconnected because it is made to an entity that is an Australian-based business recipient of the supply, that entity is responsible for determining if they have a GST liability in relation to the supply under the reverse charge rules in Division 84.

2.65 Although a particular supply that is excluded from the connected with the ITZ rules as a result of these amendments may be subject to Division 84, it is not necessarily the case that Division 84 requires that the supply be reverse charged. If the acquisition is fully creditable in the recipient's hands, Division 84 does not apply. This reflects that there is no need to collect GST through a reverse charge where the GST revenue from the reverse charge is fully offset by an equivalent ITC claimed by the recipient.

2.66 To ensure that Division 84 is capable of being applied to a supply that is disconnected as a result of these amendments, the definition of 'Australian-based business recipient' reflects certain elements in Division 84 that must be satisfied in order for it to apply to a supply.

2.67 It should be noted that Division 83 also contains reverse charge rules that may apply to a supply between a non-resident supplier and a recipient that is registered or required to be registered. These rules apply to taxable supplies if the supplier and recipient agree that the GST on the supply should be payable by the recipient.

2.68 As a consequence of these amendments, the range of supplies that Division 83 can be applied to is reduced. This is because supplies that were previously connected with the ITZ are no longer taxable in the hands of the supplier and as such there is no need to apply Division 83 to reverse charge the recipient for those supplies. However, to the extent that the supplies are disconnected because they are made to a recipient that is an Australian-based business recipient of the supply (which is a requirement for supplies of intangibles that are done in the ITZ), the recipient is required to consider whether Division 84 applies to them in respect of those supplies.

Meaning of 'Australian-based business recipient'

2.69 The term 'Australian-based business recipient' describes the relationship that a recipient has with a particular supply. In order for an entity to be an 'Australian-based business recipient' of a supply that is made to it:

·
the entity must be registered;
·
an enterprise of the entity must be carried on in the ITZ; and
·
the entity's acquisition of the thing supplied or provided must not solely be of a private or domestic nature.

[Schedule 2, items 3 and 14, subsection 9-26(2) and definition of 'Australian-based business recipient' in section 195-1]

2.70 Although the first two requirements are about the entity generally, the third requirement relates to the purpose for which the entity acquired the thing that is supplied. As such, an entity that satisfies the first two requirements can be an Australian-based business recipient of one supply, but not another.

2.71 The inclusion of the phrase 'Australian-based' in the definition does not describe the residency status or nationality of a particular entity. Rather, it is used in a more general sense to explain that an entity covered by the definition has a substantial presence in Australia (for example, because of the enterprise it carries on in the ITZ). Disconnecting supplies made to such entities is appropriate because they are better placed to account for any GST on the disconnected supplies given that they are already required to interact with Australia's GST system.

2.72 It should also be noted that although the ordinary meaning of the phrase 'Australian-based business recipient' is relatively broad, it does not follow that a supply made by a non-resident to any business that has an Australian presence is covered by these amendments. The recipient is required to satisfy the specific legislative requirements for being an 'Australian-based business recipient' for the purposes of the GST law.

2.73 A non-resident supplier should consider their business agreement with a recipient to determine if the recipient is an Australian-based business recipient of a supply. Entities that do not disclose that they are a GST-registered enterprise that carries on an enterprise in the ITZ are likely to be treated as acquiring services as an end consumer by a non-resident supplier. In such cases, the supply continues to be connected with the ITZ.

Enterprise in ITZ

2.74 The requirement that an Australian-based business recipient carry on an enterprise in the ITZ ensures that the recipient has a substantive presence in the ITZ.

Registration

2.75 The registration requirement for Australian-based business recipients is more limited in scope than the 'registered or required to be registered' condition in Division 84.

2.76 However, the 'required to be registered' condition is appropriate in the context of the Division 84 because that Division imposes a liability on supplies that would otherwise not be taxable. Where an entity is required to be registered, but is not registered, the liability to GST imposed on them by Division 84 is still imposed on the recipient.

2.77 Notwithstanding the interaction between the proposed changes and the reverse charge mechanism in Division 84, these changes to the connected with the ITZ rules are concessional from the perspective of the supplier. The more limited registration requirement for the recipient imposed by these amendments (that is, that the recipient must actually be registered) is appropriate in this context, because it means that a supplier is only relieved of their GST obligations for a supply that is made to an entity that is already engaged in the GST system concerning its own obligations. It also reflects that in practice a non-resident supplier is not generally in a position to determine if an entity that is not registered for GST is required to be registered.

Acquisition not private or domestic

2.78 The restriction in the definition of Australian-based business recipient that the acquisition of the thing supplied is 'not solely of a private or domestic nature' is aligned with the requirement in Division 84 that the thing supplied be acquired by a recipient 'solely or partly' for a purpose of an enterprise the recipient carries on. This restriction ensures that suppliers continue to bear responsibility for supplies made to entities that are solely private or domestic in nature and is consistent with the principle that GST applies to final private consumption.

2.79 Where an acquisition is solely of a private or domestic nature, the recipient of the supply is not able to claim ITCs in relation to the supply if GST is payable by the supplier. Moreover, because the supply would not satisfy the purpose test in the reverse charge rules in Division 84, if it were disconnected as a result of the proposed amendments it would not be able to be reverse charged to the recipient.

2.80 The requirement that the supply not be solely private or domestic in nature therefore ensures that the supply cannot be disconnected if ITCs would not be claimable because of the private nature of the acquisition resulting in the supply being outside of the scope of Division 84.

Supplies that are disconnected

2.81 A supply can be connected with the ITZ if it is a supply of goods brought to or located in the ITZ, or a supply of intangibles that are 'done' in the ITZ.

2.82 Supplies of things that are connected with the ITZ count towards a non-resident supplier's registration threshold even where ITCs are claimed by the recipient for all of the GST charged on the supply. As a consequence, non-resident suppliers may be required to register and account for GST even where there is no net gain to revenue from the GST on the supplies they make.

2.83 These amendments result in particular supplies being disconnected from the ITZ. For each of these types of supplies, the conditions explained above about the supplier must be satisfied (that is, the supplier must be a non-resident and the supply must not be made through an enterprise that the supplier carries on in the ITZ).

2.84 Specific conditions also apply to the different supplies covered by these amendments which can be divided into the following categories:

·
supplies of intangibles that are done in the ITZ; and
·
supplies of leased goods.

[Schedule 2, item 3, table items 1 to 4 in subsection 9-26(1)]

2.85 The exceptions to the general 'connected' rules for these supplies ensure that a non-resident supplier is not unnecessarily drawn into the GST system where there is no GST ultimately payable on the supply, or where the recipient is better placed to account for any GST liability.

Supplies of intangibles done in the ITZ

2.86 Supplies of things that are not goods or real property are generally referred to as supplies of 'intangibles', and include things such as services and digital products.

2.87 Ordinarily, a supply of an intangible that is done in the ITZ is connected with the ITZ. These amendments are designed to relieve non-resident suppliers of the obligation to account for GST where no GST is ultimately payable on the supply, or where it is more appropriate for the recipient to identify and pay the GST liability.

2.88 To ensure this outcome applies, supplies of intangibles that are done in the ITZ may be disconnected where the recipient of the supply is:

·
an Australian-based business recipient of the supply; or
·
a non-resident that acquires the supply solely for the purposes of an enterprise it carries on outside of the ITZ.

[Schedule 2, item 3, table items 1 and 2 in subsection 9-26(1)]

2.89 In addition to the requirements for the recipient, the requirements explained above about the supplier must also be satisfied (that is, the supplier must be a non-resident that does not make the supply through an enterprise it carries on in the ITZ). [Schedule 2, item 3, paragraphs 9-26(1)(a) and (b)]

2.90 For the reasons explained above, disconnecting a supply made to an Australian-based business recipient of the supply ensures that the recipient can be reverse charged where they would not have been entitled to full ITCs if the supplier had charged GST. [Schedule 2, item 3, table item 1 in subsection 9-26(1)]

2.91 Disconnecting a supply made to a non-resident recipient that acquires the thing supplied solely for the purposes of an enterprise it carries on outside the ITZ means that ITCs would have been fully claimable by the recipient if the supplier had charged them GST. If a non-resident recipient's acquisition of the intangible was solely of a private or domestic nature, they would not be entitled to ITCs in relation to the GST charged on the supply. Schedule 2, item 3, table item 2 in subsection 9-26(1)]

2.92 Restricting the exception for non-resident recipients carrying on an enterprise outside the ITZ to supplies that would have been fully offset is appropriate because, unlike supplies to Australian-based business recipients, there is no reverse charge mechanism to collect the GST from non-resident recipients that acquire supplies made through an overseas enterprise.

2.93 As with the enterprise requirement for non-resident suppliers, the requirement that a non-resident recipient must acquire the thing supplied solely for the purpose of an enterprise carried on outside the ITZ is applied separately to each individual supply. A non-resident recipient can satisfy this requirement for a particular supply, even if the non-resident recipient also carries on an enterprise in the ITZ.

2.94 It should also be noted that the two exceptions apply separately (that is, each can apply where the recipient is a non-resident). The first exception applies where the recipient is a non-resident that is also an Australian-based business recipient (and is therefore subject to Division 84). The second exception therefore should be considered when the non-resident recipient is not an Australian-based business recipient but carries on an enterprise. [Schedule 2, item 3, table items 1 & 2 in subsection 9-26(1)]

2.95 The following examples explain the way supplies of intangibles are treated as a result of being disconnected (note, the diagrams are numbered to align with the examples that they are relevant to).

Diagram 2.3A: Intangible supply to an Australian-based business recipient - table item 1 in subsection 9-26(1)

Diagram 2.3A: Intangible supply to an Australian-based business recipient - table item 1 in subsection 9-26(1)

Diagram 2.3B: Intangible supply to an Australian-based business recipient - table item 1 in subsection 9-26(1)

Diagram 2.3B: Intangible supply to an Australian-based business recipient - table item 1 in subsection 9-26(1)

Example 2.3: Intangible supplies to an Australian-based business recipient - table item 1 in subsection 9-26(1)


Drum Co (a non-resident) enters into an agreement with Beach Co to supply call centre services. Beach Co is an Australian-based business recipient for the supply. These services provide support to Beach Co's employees in relation to their use of a software package that Beach Co utilises in carrying on its enterprise in the ITZ.

None of the supplies that Drum Co makes are through an enterprise it carries on in the ITZ. The services are performed in the ITZ by Bec Corp - an Australian based subcontractor that is engaged by Drum Co (note, for simplicity Bec Corp is not shown in the above diagram). Bec Corp is not an employee, officer or an agent of Drum Co, and as such the services undertaken by Bec Corp do not cause Drum Co to have an enterprise that is carried on in the ITZ.

The projected annual turnover of the services performed in the ITZ by Bec Corp is $80,000.[2]

Under the current law, the services that Drum Co supplies through Bec Corp would be connected with the ITZ because they are done in the ITZ. The projected value of the services exceeds Drum Co's GST registration threshold, and Drum Co is therefore required to be registered and to account for the GST that is payable. Beach Co must obtain a tax invoice from Drum Co in relation to the services it acquires to claim any ITCs to which it is entitled.

As a result of these amendments, the supplies that Drum Co makes through Bec Corp are no longer connected with the ITZ. The supplies done in the ITZ (because they are physically performed by Bec Corp) satisfy the conditions for being disconnected because Drum Co is a non-resident supplier, the supply is not made through an enterprise it carries on in the ITZ, and Beach Co is an Australian-based business recipient of the supply.

Drum Co is not required to pay GST on the supplies, or include them in its GST registration threshold.

As Drum Co does not charge any GST on the supplies it makes, Beach Co is not entitled to any ITCs. If the services that Beach Co acquires are solely obtained for a creditable purpose, the reverse charge provisions in Division 84 will not apply and no GST will be payable on the supply. This overall revenue neutral outcome is the same as would have been the case if Drum Co had been required to charge GST on the supply because Beach Co would have been entitled to ITCs equal to the GST charged.

In contrast, if the acquisition of the services by Beach Co is not solely for a creditable purpose, the supply will be a taxable supply because of Division 84 and GST will be payable by Beach Co ('reverse charged'). This reverse charge is necessary because the GST that would have been payable if the supplies were connected with the ITZ would not have been fully offset by ITCs. The same outcome is maintained by reverse charging the GST to Beach Co, which is then able to claim ITCs to the extent the supply was acquired for a creditable purpose.

Diagram 2.4: Intangible supplies to a non-resident recipient - table item 2 in subsection 9-26(1)

Diagram 2.4: Intangible supplies to a non-resident recipient - table item 2 in subsection 9-26(1)

Example 2.4: Intangible supplies to a non-resident recipient - table item 2 in subsection 9-26(1)


P-Bo Co enters into an agreement with Big Nel Ltd to acquire services. Big Nel Ltd supplies the services to the employees of P-Bo Co through Indy K, an independent sub-contractor that performs the services in the ITZ.

P-Bo Co and Big Nel Ltd are both non-residents. Neither P-Bo Co nor Big Nel Ltd supply or acquire the service through an enterprise that they carry on in the ITZ.

The supply between Big Nel Ltd and P-Bo Co is not connected with the ITZ because it is supplied by a non-resident to another non-resident, neither of which carry on an enterprise in the ITZ, and the non-resident recipient acquired the services solely for the purpose of an enterprise it carries on outside the ITZ.

Supply of leased goods made available in the ITZ

2.96 Ordinarily, a supply of goods that is delivered or made available in the ITZ is connected with the ITZ. This is the case even where the supply is made between two non-residents, neither of which makes the supply or acquisition in the course of an enterprise they carry on in the ITZ.

2.97 These amendments provide two exceptions to the connected rules for supplies that involve a transfer of ownership of goods that are subject to a lease.

Supply by transfer of ownership of leased goods

2.98 The first exception for leased goods relates to a supply of goods subject to a lease involving a transfer of ownership from one non-resident lessor to a new non-resident lessor. A supply of this kind is disconnected if:

·
the non-resident recipient (the new lessor) does not acquire the goods to any extent for the purpose of an enterprise they carry on in the ITZ;
·
the goods were leased to an entity (the lessee) that made a taxable importation of the goods before the transfer of ownership occurred; and
·
after the supply is made, the goods continue to be leased to the lessee on substantially similar terms and conditions to those that operated under the lease before the transfer of ownership occurred.

[Schedule 2, item 3, table item 3 in subsection 9-26(1)]

2.99 If particular goods continue to be leased on substantially similar terms and conditions, the arrangements that originally applied to the goods are effectively continued. Provided the lessee paid GST on the goods when they were imported, it is appropriate to disregard the transfer of ownership between the two non-residents. The requirement that the goods were subject to a taxable importation by the lessee ensures that an appropriate amount of GST was collected when the goods were imported into the ITZ.

2.100 The requirement that the goods continue to be leased on 'substantially similar' terms and conditions ensures that the rights and obligations under the lessee's lease with the new owner of the goods are consistent with those that operated under the original lease. However, it is not necessary for the terms and conditions under the new lease to be the same or identical as it is expected that some variations will be required to account for the fact that the lessor of the goods has changed.

2.101 To the extent that the acquisition of the goods by the non-resident recipient (the new lessor) was done in the course of an enterprise carried on outside of the ITZ (which would ordinarily be the case, given that the goods are leased to another entity), the recipient would currently be able to claim ITCs in relation to the supply. Accordingly, there is no net GST foregone from disconnecting the supply as a result of this amendment.

2.102 As with the other supplies covered by these amendments, the requirements about the supplier must also be satisfied for this exception to apply - that is, the supplier must be a non-resident that does not make the supply through an enterprise it carries on in the ITZ. [Schedule 2, item 3, paragraphs 9-26(1)(a) and (b)]

2.103 Preventing a supply being disconnected if the non-resident supplies the goods through an enterprise it carries on in the ITZ is appropriate because in those circumstances the supplier has a sufficient presence in the ITZ to justify maintaining their GST obligations for the supply.

2.104 For similar reasons, the exception does not apply if the non-resident recipient acquires the goods to any extent through an enterprise carried on in the ITZ. However, in those circumstances it is open to the non-resident supplier and registered recipient to utilise the voluntary reverse charge provisions in Division 83.

Example 2.5: Supply between non-residents of asset leased in the ITZ


Singapore Co leases an aircraft to North Australia Travel Co for 10 years. Upon the lease being entered into, the aircraft was made available in Singapore to North Australia Travel Co and North Australia Travel Co imported the aircraft into the ITZ.

Five years into the 10 year lease, Singapore Co decides to sell the aircraft, subject to the lease, to Indonesia Co. North Australia Travel Co continues to lease the aircraft from Indonesia Co on substantially similar terms and conditions as were in their lease with Singapore Co.

Despite the aircraft being made available to Indonesian Co in the ITZ, the supply between Singapore Co and Indonesia Co is not connected with the ITZ.

Supply by way of new lease

2.105 Building on the circumstances explained above in relation to the transfer of ownership between the two non-residents of goods that are subject to a lease, the new lease arrangements that are entered into between the non-resident that acquired ownership of the goods and the entity that continues to lease the goods constitutes a new supply by way of a lease.

2.106 These amendments disconnect such supplies where the lessee of the goods (that is also the recipient of the supply by way of lease) satisfies the conditions about them (as the lessee) that were required to disconnect the original supply between the two non-residents. As such, a supply of goods by way of a lease between a non-resident and a lessee is disconnected if:

·
the goods were leased to an entity that made a taxable importation of the goods before the transfer of ownership occurred; and
·
the goods continue to be leased to the entity that made the taxable importation on substantially similar terms and conditions to those that operated under the lease before the transfer of ownership occurred.

[Schedule 2, item 3, table item 4 in subsection 9-26(1)]

2.107 As with the exception for the supply of leased goods between non-residents, this exception requires that the goods were leased before the transfer of ownership occurred, and continue to be subject to terms and conditions that are substantially similar to those that applied under the original lease.

2.108 Disconnecting these supplies ensures that GST is not imposed again on the supply between the new owner of the goods and the lessee as a result of the change of ownership. This outcome is appropriate because the goods have already been subject to GST as a result of the lessee importing them into the ITZ.

Supplies of installed or assembled goods are not connected with the ITZ

2.109 In addition to the supplies that are disconnected (that is, supplies that are initially connected under the core rules, but then subject to an exception to those rules), these amendments narrow the scope of the connected with the ITZ rule in its application to supplies of goods brought into the ITZ if the goods are installed or assembled by the supplier.

2.110 The amendments also make other changes to the way such supplies are treated to allow the services component of such a supply of goods to continue to be taxed, or disconnected as a result of the amendments that are explained above.

Operation of the existing law

2.111 Under the current law, a supply of goods is connected with the ITZ if the supplier either imports the goods into the ITZ, or installs or assembles the goods in the ITZ. Depending on the way that the supply is characterised, the supply of services can be part of the supply of goods.

2.112 In calculating the amount of GST that applies on a taxable supply of goods of this kind (that is, one that also involves them being assembled or installed in the ITZ), the value of the assembly or installation service is embedded in the value of the goods supplied.

2.113 An importer must also pay GST on a taxable importation. A taxable importation is made where goods that are imported into the ITZ are 'entered for home consumption'. 'Entry for home consumption' is a concept used in the customs law and generally means that particular imported goods have passed out of customs control. The amount of GST payable on a taxable importation is ten per cent of the value of the taxable importation, a concept calculated by reference to the customs value of the goods. The value of the taxable importation does not include the value of any assembly or installation services.

2.114 The liability for GST on taxable importations applies separately to any liability imposed on the supplier as result of the goods being connected with the ITZ. Where a supplier imports goods into the ITZ, they are required to account for both GST liabilities (that is, the GST payable on the taxable importation and taxable supply). To the extent that the acquisition of the goods by the recipient is a creditable acquisition, the recipient of the goods is entitled to offsetting ITCs. Similarly, the importer is entitled to ITCs to the extent that the taxable importation is a creditable importation.

2.115 Where imported goods are not imported by the supplier (for example, because they are imported by the recipient), but the supplier installs or assembles the goods in the ITZ, the supplier is only required to pay GST on the supply.

2.116 In many cases, supplies of imported goods to business recipients that involve assembly or installation services are fully creditable acquisitions. In these circumstances, the recipient is entitled to full ITCs for the GST on both the supply and importation.

Installation and assembly does not connect a supply with the ITZ

2.117 These amendments reduce the scope of supplies that are connected with the ITZ by removing the rule that connects a supply of goods that are brought into the ITZ and installed or assembled by the supplier. [Schedule 2, item 1, subsection 9-25(3)]

2.118 A supply of goods brought into the ITZ continues to be connected with the ITZ if the supplier imports the goods. Because the importation limb of the existing test is retained, a supply is no longer connected with the ITZ if the supplier installs or assembles the goods, but does not import the goods into the ITZ.

2.119 These amendments relieve suppliers of their obligations to account for GST. Retaining the connected status for goods that are imported by a supplier is consistent with this objective because a supplier that is the importer of the goods is also liable for the taxable importation of the goods. Such suppliers must already register for GST to claim an offsetting ITC on a creditable importation.

2.120 Where goods brought into the ITZ are not imported by the supplier, the amount of GST that is payable on the goods is collected solely through the GST importation rules.

Treatment of supplies of goods involving installation and assembly

2.121 In conjunction with the changes to the connected with the ITZ rules, these amendments include an additional rule to ensure that GST continues to be payable on the part of a supply of goods brought to the ITZ that relates to the installation or assembly of those goods. This rule is required because the value of the taxable importation does not include any installation or assembly services.

2.122 As such, the part of a supply of goods that involves the installation or assembly of the goods is treated, for the purposes of the GST law, as if it were two separate supplies. The characterisation of these supplies is as follows:

·
the part of the supply that involves the installation or assembly of the goods is treated as if it were a separate supply of a thing done in the ITZ; and
·
the remainder of the supply is treated as if it were a separate supply of goods involving the goods being brought to the ITZ, but not involving the installation or assembly of the goods.

[Schedule 2, item 2, subsection 9-25(6)]

2.123 First removing the value of the installation and assembly services from the actual supply, and then treating the remainder of the supply as a separate supply of the goods ensures that the total price of the two deemed supplies is equal to the price of the actual supply.

2.124 Because a separate supply of intangibles is treated as a supply of a thing that is done in the ITZ, in the first instance such supplies will be connected with the ITZ. However, the amendments about disconnecting certain supplies may apply to the separate supply of intangibles.

2.125 Although the actual supply of the goods involved them being installed or assembled by the supplier, the installation or assembly services are disregarded for the purposes of identifying the separate supply of goods. Despite this, any other characteristics that relate to the goods continue to be relevant in determining if the goods are connected with the ITZ - for example, if the supplier also imported the goods, the supply of goods continues to be a taxable supply despite the fact that installation and assembly is no longer relevant for the connected rules.

2.126 The amendments include an additional rule to make it clear that the prices of each of the separate supplies is so much of the price of the actual supply that reasonably represents the price of each of the deemed supplies. [Schedule 2, item 4, subsection 9-75(4)]

2.127 The requirement that the price of each of the supplies be determined on a reasonable basis is designed to provide taxpayers with appropriate flexibility in accounting for the way the price of the original supply is to be split between the two supplies, while having regard to matters that are relevant to this process.

2.128 As the GST treatment of each of the separate supplies relies on factors that are relevant to each supply, in certain circumstances the separate supplies will be treated differently. For example, the separate supply of goods might not be a taxable supply because it is not connected with the ITZ, while the supply of intangibles is a taxable supply because it is connected with the ITZ.

2.129 The price of a supply includes any GST payable in relation to the supply. Therefore, depending on the way the separate supplies are to be treated, the original price must be set in a way that takes account of whether GST is payable on the separate supplies, and any GST that is included in that price factored into the price of the separated supplies when those prices are being determined on a reasonable basis. In practice, this process should follow the same procedure that would apply to two supplies that are made at the same time.

2.130 The treatment of the two supplies that are split in this way is explained in further detail below.

Separate supply of goods

2.131 A supply of goods that is brought into the ITZ and installed or assembled, but not imported, by a supplier is not connected with the ITZ. The supply of goods is treated as having a price that is equal to the actual supply, less the amount that reasonably represents the supply of the installation or assembly services. [Schedule 2, items 1, 2 and 4, subsection 9-25(3), paragraph 9-25(6)(b) and subsection 9-75(4)]

2.132 No amount of GST is included in the price of the supply of goods as the supplier does not have to pay GST on the goods component of the supply or include it in determining if they are required to register for GST as this supply is no longer connected with the ITZ.

2.133 However, the goods are still subject to GST as a taxable importation made by the entity that imported them. The importer is entitled to ITCs if the importation is a creditable importation, to the extent that the goods are imported for a creditable purpose.

2.134 If goods are instead imported by the supplier, the separate supply of goods is connected with the ITZ because of the original importation limb of the connected rule for goods that are brought into the ITZ.

Separate supply of installation or assembly services

2.135 The part of the actual supply of goods brought into the ITZ that involves the installation or assembly of the goods in the ITZ is treated as a separate supply of a thing done in the ITZ. The price of this separate supply is the part of the price of the actual supply that reasonably represents the supply of the installation or assembly services. [Schedule 2, items 1, 2 and 4, subsection 9-25(3), paragraph 9-25(6)(a) and subsection 9-75(4)]

2.136 The starting point for such supplies is that they are connected with the ITZ because they are a supply of a thing that is done in the ITZ.

2.137 Unless this supply is disconnected as a result of the other amendments introduced by Schedule 2, the supplier is required to include GST in the price of the supply and include its value in their GST turnover threshold for the purposes of determining whether they are required to register for GST.

2.138 However, despite the supply of the installation or assembly services first being connected with the ITZ (because they are a thing that is done in the ITZ), the supply may be disconnected in the circumstances that are explained above. Broadly, these circumstances are where:

·
the supplier is a non-resident that does not make the supply through an enterprise it carries on in the ITZ; and
·
the recipient of the supply of the thing that is done in the ITZ is either:

-
an Australian-based business recipient of the supply; or
-
a non-resident that acquires the thing supplied solely for the purpose of an enterprise it carries on outside the ITZ.

[Schedule 2, item 3, paragraphs 9-26(1)(a) and (b), and table items 1 and 2 in subsection 9-26(1)]

2.139 For supplies that are disconnected, the supplier does not have to pay GST on the installation or assembly component of the original supply, or include the value of those services in their GST turnover threshold in determining if they are required to register for GST.

2.140 It may be possible for the recipient to be a non-resident that acquires the services solely for the purpose of an enterprise carried on outside the ITZ. In practice it is unlikely that such recipients would have goods that are brought into the ITZ and installed or assembled by the supplier in the ITZ but acquired for the purpose of an enterprise that is carried on outside the ITZ.

2.141 The more likely scenario in which such supplies will be disconnected is where the recipient is an Australian-based business recipient of the supply.

2.142 If a supply is disconnected because the recipient is an Australian-based business recipient, the recipient must consider if their acquisition of the installation or assembly component of the supply is subject to a reverse charge because of Division 84. Division 84 only applies where the separate supply of installation or assembly services is not acquired solely for a creditable purpose.

Example 2.6: Supply of goods brought to the ITZ that are installed or assembled - no GST payable by the supplier


Classic K Co enters into an agreement with Busy Bells Ltd to supply them with mining equipment. Under the agreement, Busy Bells Ltd is responsible for importing the equipment and Classic K Co is responsible for assembling the equipment after it is imported.

Busy Bells Ltd is an Australian-based business recipient for the supply. Classic K Co is a non-resident, and does not make the supply of goods through an enterprise that it carries on in the ITZ (although the assembly services are expected to take approximately one month to complete, they are not sufficient to cause Classic K Co to carry on an enterprise in the ITZ).

As a result of these amendments, the supply is treated as two supplies - one being a separate supply of goods brought to the ITZ (the mining equipment) and the other being a separate supply of a thing done in the ITZ (the assembly services). In working out the price of the original supply, Classic K Co must have regard to whether it is required to pay GST on the two separate supplies.

Because Classic K Co does not import the goods, the separate supply of goods is not connected with the ITZ and is not a taxable supply. As such, Classic K Co does not include any GST in the price of the original supply for the part that relates to the separate supply of goods.

Despite being 'done' in the ITZ, the separate supply of services is excluded from being connected with the ITZ (that is, it is 'disconnected') because it is a supply that is made to an Australian-based business recipient. Classic K Co does not include any GST in the price of the original supply that relates to the separate supply of services.

Classic K Co is not required to pay GST on the original supply, or include it in its GST registration threshold. Although Busy Bells Ltd makes a taxable importation of the goods, it is entitled to ITCs to the extent that the importation is a creditable importation.

To the extent that its acquisition of the separate supply of services is not for a creditable purpose, Busy Bells Ltd is required to pay GST on the separate supply of services through a reverse charge under Division 84. Provided that Busy Bell Ltd acquires the services solely for a creditable purpose, the reverse charge provisions in Division 84 do not apply and no GST is payable by Busy Bells Ltd on the separate supply of services.

Example 2.7: Supply of goods brought to the ITZ that are installed or assembled - GST payable by the supplier


Following on from the above example, assume that Busy Bells Ltd is an Australian resident but is not registered for GST and is therefore not an 'Australian-based business recipient' in relation to the supply.

The separate supply of goods continues not to be connected with the ITZ because they are imported by Busy Bells Ltd, and Classic K Co does not include any GST in the price of the original supply for the part that relates to the separate supply of goods.

However, the separate supply of services is connected with the ITZ as it is a supply of a thing that is 'done' in the ITZ, and it is not made to an Australian-based business recipient or a non-resident that acquires the services solely for the purpose of an enterprise that is carried on outside the ITZ. The separate supply of services is a taxable supply, and Classic K Co includes the amount of GST payable on that supply in the price of the original supply.

Adjustments through the compulsory reverse charge rules in Division 84

2.143 The GST law contains a number of rules that apply where adjustments to previously declared GST or ITCs are required. Such adjustments may be necessary if supplies are cancelled after they have been subject to GST, goods are returned, there is a change in consideration, or a change in GST status occurs. These adjustment events are taken into account in a later tax period generally when the supplier becomes aware of the event, and have the effect of reducing or increasing an entity's GST liability.

2.144 These amendments modify the way that the adjustment rules apply to certain supplies that are subject to the compulsory reverse charge rules in Division 84.

2.145 In broad terms, Division 84 applies to supplies of intangibles that are not connected with the ITZ, and that are acquired:

·
by a recipient that is registered or required to be registered;
·
solely or partly for the purpose of an enterprise carried on by the recipient in the ITZ; and
·
other than solely for a creditable purpose.

2.146 Where Division 84 applies to such a supply, the supply becomes a taxable supply, and any GST on the supply is payable by the recipient.

2.147 Under the current law, a supply that is acquired solely for a creditable purpose is not a taxable supply that is subject to a reverse charge. This outcome is generally appropriate because the recipient would have been entitled to full ITCs for any GST payable by them on the acquisition.

2.148 However, if the relevant supply had been a taxable supply, there are certain circumstances in the GST Act that can give rise to an adjustment event. For example, a change in the recipient's creditable purpose under Division 129 generally requires an adjustment to an entity's ITC entitlement.

2.149 These amendments ensure that for the purpose of working out if there is an adjustment because of any adjustment provisions in the GST Act, a supply is treated as a taxable supply by Division 84, despite the fact that the acquisition by the recipient was originally for a creditable purpose. [Schedule 2, item 12, section 84-30]

2.150 The existing requirements in Division 84 about the recipient's enterprise and creditable purpose are currently contained in the same legislative provision. To ensure Division 84 can also apply to a recipient that initially acquired a thing solely for a creditable purpose, these amendments split the enterprise and creditable purpose requirements into two separate provisions so that they apply independently. The overall effect of these requirements is unchanged in the broader context of Division 84. [Schedule 2, item 9, paragraphs 84-5(1)(c) and (ca)]

Extensions to GST-free rules

2.151 These amendments also extend the GST-free rules to reduce the GST embedded in supplies made to non-residents, and in doing so reduce the need for non-residents to register for GST to claim ITCs.

Supplies of intangibles for consumption outside the ITZ

2.152 Currently, supplies of intangibles that are made to non-residents that are not in the ITZ when the thing supplied is done (for example, when a service is performed), are generally GST-free because of table item 2 in subsection 38-190(1) (referred to subsequently as item 2).

2.153 However, there is an exception to item 2 in subsection 38-190(3) which applies to a supply that is provided, or required to be provided, to another entity in the ITZ.

2.154 These amendments preserve the exception in item 2 to make a supply GST-free where the supplier is satisfied that the entity in the ITZ to which the supply has been provided:

·
would have been an Australian-based business recipient of the supply if the supply had been made to it;
·
is an individual in their capacity as an employee or officer of an entity that would have been an Australian-based business recipient of the supply if the supply had been made to it; or
·
is an individual in their capacity as an employee or officer of the recipient, provided the recipient's acquisition of the thing supplied is solely for a creditable purpose and is not a non-deductible expense.

[Schedule 2, item 19, paragraph 38-190(3)(c)]

2.155 The amendments do not preserve the GST-free treatment in item 2 for a supply that would, apart from subsection 9-30(3), be an input taxed supply. Where a supply of this kind would otherwise be input taxed, a non-resident recipient of the supply would not acquire a taxable supply, and therefore has no incentive to register for GST to claim ITCs on the supply. Additionally, the supplier of an input taxed supply should not have greater access to ITCs. If these input taxed supplies were GST-free, Division 11 would entitle the supplier to ITCs on any acquisitions required in making that supply.

2.156 In practical terms, these changes require a supplier to determine that the recipient or providee satisfies the requirements that are relevant to them. Although it is expected that in many cases the supplier would obtain the information required to make this determination through negotiating the terms of the supply (for example, in the agreement specifying that particular services be provided to an employee of the recipient or another entity), the supplier may need to obtain additional information to determine that a particular supply is GST-free.

Entities that would have been Australian-based business recipients

2.157 The amendments preserve the GST-free treatment of supplies made to a non-resident recipient that are provided in the ITZ to an entity that would have been an Australian-based business recipient of the supply if the supply had been made to it. [Schedule 2, item 19, subparagraph 38-190(3)(c)(i)]

2.158 The removal of the limitations on item 2 to supplies made to an entity that 'would have been' an Australian-based business recipient of the supply if it had been made to it utilises the tests and considerations that are ordinarily relevant in working out if an entity is an Australian-based business recipient of a supply. As explained above, an entity is an Australian-based business recipient for a supply made to it if the entity carries on an enterprise in the ITZ, is registered for GST, and the acquisition of the thing supplied is not solely of a private or domestic nature. This definition is limited to entities to which a supply is made and reflects that the reverse charge rules in Division 84 apply to a recipient, and not a separate entity to which a supply is provided. The test for whether the entity to which the supply is provided would have been an Australian-based business recipient of the supply if the supply had been made to it operates as an accurate proxy that the original supplier can apply in determining whether the supply it makes to a non-resident is GST-free.

2.159 The provision of the thing that is supplied to another entity results in a separate supply between the non-resident (the recipient of the original supply) and the other entity (the recipient of the separate supply). A separate supply of this kind can be reverse charged to the recipient because of the exceptions to the connected with the ITZ rules outlined above (an example of when this reverse charge would apply is where the thing was acquired by an Australian-based business recipient for a purpose that was partly private in nature).

2.160 Because the non-resident recipient of the original supply is not required to pay GST for the on-supply, the GST's multi-staged collection and credit mechanism is also suspended for the original supply to the non-resident to relieve them of the need to claim ITCs for that earlier supply.

Employee or officer of an entity that would have been an Australian-based business recipient

2.161 The amendments also preserve the GST-free treatment of supplies made to a non-resident that are provided to an individual in their capacity as an employee or officer of an entity that would have been an Australian-based business recipient of a supply if the supply had been made to it. [Schedule 2, item 19, subparagraph 38-190(3)(c)(ii)]

2.162 As with supplies that are provided directly to an entity that would have been an Australian-based recipient of a supply, this extension of the GST-free rules is based on the fact that providing the thing that is supplied to another entity results in a separate supply between the non-resident and the other entity. However, this particular change ensures that the same outcome occurs where the thing that is supplied under the original supply is provided to an employee or officer of the entity, rather than to it directly.

2.163 An employee or officer of such an entity is provided with a supply in their capacity as an employee or officer if the supply was provided to them:

·
in the performance of their duties; or
·
as part of their remuneration.

2.164 However a supply that is acquired directly by an employee or officer does not satisfy the conditions necessary for the supply to retain its GST-free status. Such supplies are outside the scope of item 2 because they are made to a recipient that was in the ITZ. These amendments do not impact upon the basic requirements for item 2 to apply - they simply preserve the application of item 2 in particular circumstances.

Supply provided to employee or officer of the non-resident recipient

2.165 Under the existing law a supply that is provided to the non-resident's employee who is in the ITZ is not a GST-free supply because of subsection 38-190(3). An example of such a supply is the acquisition by the non-resident of training services if the employee is provided the training in the ITZ. In these circumstances, the non-resident employer must register for GST to recover the GST as an ITC if the acquisition was a creditable acquisition. Where the non-resident would not otherwise have to register for GST, this can impose an unnecessary compliance burden on what is essentially a revenue neutral transaction.

2.166 The amendments preserve the GST-free treatment of supplies to non-resident recipients outside of the ITZ where:

·
the non-resident recipient is not registered for GST;
·
the providee is an employee or officer of the recipient, and
·
the recipient's acquisition of the thing is both solely for a creditable purpose and is not a 'non-deductible expense'. [Schedule 2, item 19, subparagraph 38-190(3)(c)(iii)]

2.167 As with the amendment for supplies provided to an officer or employee of an entity that would have been an Australian-based business recipient of a supply, these changes do not apply where an employee of a non-resident (rather than the non-resident employer) directly acquires something in the ITZ, as such a supply is outside the scope of item 2.

2.168 Supplies listed in Division 69 (about non-deductible expenses) are generally not creditable acquisitions for non-resident employers. Expenses listed in Division 69 include entertainment expenses that could be paid to the employees of a non-resident as part of their remuneration package. The requirement that a supply be solely for a creditable purpose and not a non-deductible expense ensures that GST-free treatment is not extended to acquisitions of supplies listed in Division 69 which would otherwise be denied ITCs.

Supplies of repair or similar services for goods under warranty

Operation of current law

2.169 Under the current law, non-resident warrantors can be drawn into Australia's GST system to recover GST on the cost of repairs under warranty. This imposes a significant compliance burden on these non-residents where they are not registered or required to be registered for GST.

2.170 An example of a supply of this kind is one that involves a non-resident manufacturer that, under its warranty, is required to repair a defect in goods it supplied to a recipient in the ITZ. If the non-resident manufacturer has no presence in the ITZ through which it can make the necessary repairs, the goods must be either sent offshore to be repaired, or be repaired in the ITZ by another entity on behalf of the manufacturer. If the non-resident manufacturer engages a GST registered entity in the ITZ to undertake the repairs, the repairer makes a taxable supply of repair services to the non-resident manufacturer.

2.171 Provided the non-resident manufacturer is not in the ITZ when the repair services are done, the manufacturer is not registered or required to be registered, and the manufacturer acquires the services in carrying on its enterprise, the supply of the repair service would be within the scope of the GST-free rules in table item 2 in subsection 38-190(1). However, the repair services are unlikely to qualify as GST-free because of the limitation to that item in subsection 38-190(3). This limitation is likely to apply in these circumstances because the repair services are provided to the entity that purchased the goods from the manufacturer.

2.172 As such supplies cannot be GST-free, non-resident manufacturers in the above circumstances will generally be entitled to ITCs for the acquisition of the warranty services because those services are acquired in the course of carrying on an enterprise. However, to obtain such ITCs, a non-resident manufacturer would need to register for GST and lodge a business activity statement to claim the refund.

2.173 Additionally, any replacement parts, including a full replacement of the goods that are supplied in accordance with the provision of a warranty, are not GST-free if the goods remain within the ITZ.

GST-free treatment preserved for repair services provided under warranty

2.174 To prevent non-residents in the above circumstances from being drawn into Australia's GST system, these amendments ensure that a supply of a repair, renovation, modification or treatment of goods is GST-free. [Schedule 2, item 20, subsection 38-191(1)]

2.175 For such supplies to be GST-free:

·
the non-resident recipient must not be in the ITZ when the thing supplied is done;
·
the non-resident recipient of the service must be neither registered nor required to be registered;
·
the non-resident recipient must acquire the service supplied in carrying on its enterprise;
·
the service must be done to meet the non-resident's obligations under a warranty relating to the goods; and
·
the warranty must have either been sold as part of a package with the supply of goods (such that the consideration for the warranty was included in the consideration for the supply of goods), or been a taxable supply separate from the supply of the goods.

[Schedule 2, item 20, subsection 38-191(1)]

2.176 The requirements that the non-resident recipient of the service is not in the ITZ when the thing supplied is done, is not registered or required to be registered, and acquires the service supplied in carrying on an enterprise are consistent with the requirements for a supply being GST-free because of paragraph (b) of item 2 of the table in subsection 38-190(1). [Schedule 2, item 20, paragraph 38-191(1)(a)]

2.177 These requirements ensure that the GST-free treatment provided by these amendments only applies to entities that are not already engaged with Australia's GST system, but that would be entitled to ITCs for the services acquired if they were to register.

2.178 The requirements in relation to the warranty services ensure that the GST-free treatment provided by these amendments is restricted to services that are acquired by a non-resident in fulfilling their warranty obligations.

2.179 These amendments also extend GST-free treatment to goods that are part of warranty services that are made GST-free because of these amendments. For a supply of such goods to be GST-free, the goods must form part of the goods being repaired, or be goods that become unusable or worthless as a result of being used as part of the repair services. [Schedule 2, item 20, subsection 38-191(2)]

Amendments to GST registration thresholds

2.180 Under the current law, non-resident suppliers are required to register for GST if their projected or current turnover is greater than the GST registration turnover threshold. The value of supplies connected with the ITZ count towards this threshold, even if those supplies are GST-free. As such, non-resident suppliers that only make GST-free supplies but have a turnover that is greater than the turnover threshold are required to register for GST, despite having no GST liability.

2.181 These amendments change the calculation of the current and projected GST turnover tests for non-resident suppliers.

2.182 The amendments ensure that GST-free supplies made by a non-resident supplier are not counted towards these turnover tests where the supply is not made through an enterprise the non-resident carries on in the ITZ. [Schedule 2, item 21, paragraphs 188-15(3)(d) and 188-20(3)(d)]

2.183 The amendment reflects that GST-free supplies by non-residents made through an enterprise carried on outside the ITZ should not by themselves result in the suppliers being required to register for GST.

2.184 Where a non-resident supplier makes the supply through an enterprise it carries on in the ITZ, the supplier has a sufficient presence in the ITZ and should have its GST turnover calculated in the same way as any other GST-registered domestic entity.

Calculation of the value of the taxable importation

2.185 The amendments also reduce compliance costs for GST-registered importers by providing an alternative option to calculate their transport, insurance and ancillary costs for importations.

2.186 These changes mean that in calculating the value of a taxable importation, GST-registered importers are no longer required to identify the exact amount paid or payable for the following costs:

·
international transport of the imported goods to their place of consignment in Australia;
·
insurance costs for that transport; and
·
any costs for loading or handling during the international transport or service costs for facilitating that transport.

[Schedule 2, item 22, subsection 13-20(4) and paragraph 13-20(5)(a)]

2.187 Instead, the GST-registered importer may use a percentage of the customs value of the imported goods as a proxy for these costs when calculating the value of their taxable importation. This percentage is currently ten per cent but may be set at a different percentage if prescribed by regulation. [Schedule 2, item 22, subsection 13-20(4) and paragraph 13-20(5)(a)]

2.188 The amendments do not apply to taxable importations where the local entry of the goods is a taxable dealing in relation to wine, or the importation of the goods is a taxable importation of a luxury car. [Schedule 2, item 22, paragraphs 13-20(5)(b) and (c)]

2.189 The exceptions for importations of wine and luxury cars are required because the changes in calculation method are not intended to apply to importations of goods that are not covered by the general rules.

2.190 To facilitate these exceptions, these amendments remove the existing reference to 'wine (within the meaning of the Wine Tax Act)' and insert definitions of 'taxable importation of a luxury car' and 'taxable dealing' and 'wine' into the Dictionary. [Schedule 2, items 23 and 24, subparagraph 38-185(3)(f)(ii), subparagraph 38-185(4)(f)(ii) and definition of 'taxable dealing', 'taxable importation of a luxury car' and 'wine' in section 195-1]

Example 2.8: Value of taxable importations


Butcher Importers, a GST-registered importer, imports equipment into Australia. The customs value of the equipment is $125,000. At the time of the importation, Butcher Importers is uncertain of the total transport, insurance and ancillary costs as those invoices have not yet been received.

Butcher Importers chooses to use the percentage proxy option. Assuming that no percentage has been prescribed, the relevant uplift percentage is 10 percent. Therefore, Butcher Importers includes $12,500 rather than the actual transport, insurance and any additional loading, handling and facilitation costs in calculating the value of the taxable importation.

Reverse charge rules for supplies for no consideration or insufficient consideration between associates

2.191 These amendments also clarify the treatment of supplies of intangibles that are made between associates for no or insufficient consideration. Currently, section 72-5 ensures that a supply without consideration that is made between associates can still be a taxable supply despite the requirements in paragraph 9-5(a) (which otherwise requires a taxable supply to be for consideration). However, the existing rule does not explicitly remove the need for consideration to be provided for a supply to be a taxable supply through the reverse charge rules in Division 84.

2.192 As a result of these amendments, a supply without consideration that is made between associates can also be a taxable supply because of the reverse charge rules in Division 84. [Schedule 2, item 6, subsection 72-5(2)]

2.193 A supply without consideration that is made between associates is not automatically reverse charged. With the exception of the condition about consideration the supply must still satisfy the requirements for being a taxable supply in section 84-5.

2.194 Broadly, these conditions are that the thing supplied is an intangible, and the supply of that intangible is:

·
not connected with the ITZ; or
·
connected with the ITZ because of paragraph 9-25(5)(c) or, subject to the conditions outlined in Chapter 1 under the extended reverse charge rules, paragraph 9-25(5)(d) (see paragraphs 1.80 to 1.88): and

the recipient of the supply:

·
acquires the thing supplied for the purpose of an enterprise it carries on in the ITZ;
·
does not acquire the thing supplied solely for a creditable purpose; and
·
is registered or required to be registered.

2.195 Subject to these conditions, a supply is a taxable supply that is reverse charged to the recipient if it is acquired from a supplier that is an associate and no consideration is provided for the supply.

Price of reverse charged supplies for no or insufficient consideration

2.196 In conjunction with the removal of the consideration requirement for supplies between associates, additional rules are also included to ensure that an appropriate price is set for supplies between associates for the purposes of Division 84.

2.197 The price setting rules introduced by these amendments apply to supplies for no consideration, and to supplies for which insufficient consideration is provided. In contrast to supplies for no consideration, supplies for insufficient consideration do not require a special rule to make them taxable supplies under Division 84 because the consideration requirement in that Division is satisfied irrespective of the amount of consideration.

2.198 Where a supply for no consideration is a taxable supply that is reverse charged to the recipient, the price of the supply is the GST inclusive market value of the supply. Similarly, if the consideration for a supply between associates is less than its GST inclusive market value, the price of the supply is its GST inclusive market value. [Schedule 2, item 12, subsection 84-20(1)]

2.199 In the context of Division 84, the price of a supply is relevant in calculating the amount of GST payable by a recipient that is reverse charged for a supply (specifically, subsection 84-12(1) provides that the GST on a reverse charged supply is 10 per cent of the price of the supply).

2.200 Setting the price of such supplies as the GST inclusive market value of the supply means that the GST payable on the supply by the recipient is the same as would have been payable had the supplier and recipient dealt with one another on an arm's length basis.

2.201 The use of GST inclusive market value means that the price of the supply is not discounted to remove GST. Such discounting should only be done where an amount of GST is included in the market value that is identified - in the case of supplies that are subject to Division 84, it is expected that GST will not be included in the market value of the supply because the supplier makes a supply through an enterprise it does not carry on in the ITZ, and (in most cases) the supply is not connected with the ITZ.

2.202 The price setting rules introduced by these amendments take priority over the general rules about price that are contained in section 9-75. [Schedule 2, item 12, subsection 84-20(2)]

2.203 This prioritisation ensures that that the general rules about price in Division 9 do not override the specific rules introduced by these amendments for a cross-border supply between associates that are made for no consideration, or for insufficient consideration.

2.204 Similarly, the rules in Division 72 that set the value of supplies for no consideration, and for insufficient consideration, do not apply to supplies that are taxable supplies because of Division 84. [Schedule 2, items 7 and 8, subsections 72-10(3) and 72-70(4)]

2.205 While the value setting rules in Division 72 perform a similar role to the price setting rules introduced by these amendments, those rules are relevant to supplies for which the supplier is liable for GST. Because Division 84 relies on the price of a supply, the value determined in Division 72 is not appropriate for supplies that are reverse charged to a recipient.

Determining the amount of ITCs for supplies for no consideration

2.206 Division 84 also provides rules for determining the amount of ITCs for a creditable acquisition that relates to taxable supplies that are reverse charged to the recipient. These rules are contained in section 84-13, which sets out a formula for determining the amount of ITCs to which a recipient is entitled. This formula has three components - the amount of the 'full ITC', the 'extent of creditable purpose', and the 'extent of consideration'.

2.207 The 'full ITC' component of the formula sets the maximum amount of ITCs to which a recipient may be entitled. This amount is multiplied by the extent of creditable purpose and the extent of consideration (which are both presented as a percentage). Where the extent of creditable purpose and extent of consideration are both 100 per cent, the recipient is entitled to the full ITC.

2.208 The extent of consideration is essentially the extent to which the recipient provided, or was liable to provide, consideration for an acquisition. Ordinarily, the recipient of a supply for no consideration has an 'extent of consideration' of nil. Although this does not present any issues for supplies that are not taxable supplies (because no GST is paid on those supplies and the ITC rules only apply to taxable supplies), the extent of consideration calculation does not achieve the correct outcome for supplies for no consideration between associates that are taxable supplies because of these amendments.

2.209 To address this, the 'extent of consideration' component of the ITC formula in subsection 84-13(2) is 100 per cent if the recipient of a supply is the supplier's associate, and the supply is without consideration. [Schedule 2, item 10, subsection 84-13(1) (definition of 'extent of consideration')]

2.210 This approach means that the extent of consideration determines the proportion of full ITCs to which a recipient is entitled. Treating the extent of consideration as 100 per cent is appropriate because the recipient is responsible for the entire amount of the GST liability that arises as a result of these amendments.

2.211 An equivalent rule in not included for supplies for insufficient consideration because in those cases the actual consideration that was provided can still be used to determine the extent of consideration. The extent of consideration will be 100 per cent under the existing rule in subsection 84-13(1) if the amount paid by the recipient equals the total consideration payable for the acquisition.

2.212 These amendments also clarify that the ITC calculation rules in Division 84 take priority over the ITC calculation rules in Division 72. [Schedule 2, item 11, subsection 84-13(2)]

2.213 The existing rules already ensure that they apply despite sections 11-25 and 11-30 (which are about the amount of ITCs for creditable acquisitions). While those rules apply generally, Division 84 is currently silent on the ITC calculation rules in Division 72. These amendments clarify that the rules specific to Division 84 take priority over the Division 72 rules.

Tax period for supplies for no consideration

2.214 These amendments also make changes to Division 84 to clarify that the GST payable on supplies between associates that are reverse charged for no consideration is attributable to the tax period in which the supply starts to be done. Similarly, the ITC on the corresponding acquisition is attributable to the same period. [Schedule 2, item 12, subsections 84-25(1) and (2)]

2.215 To the extent that the new rules in Division 84 apply, they take priority over the rules in Division 29 and Division 72. [Schedule 2, item 12, subsection 84-25(3)]

2.216 The general rules in Division 29 use the time from which consideration for a supply is provided to determine the tax period to which GST on a supply and the ITCs on the acquisition of the supply are attributable. Where a taxable supply is for no consideration, there are issues with determining the tax period to which the GST payable on the supply is attributable (similar issues arise for the ITCs on the acquisition).

2.217 Although Division 72 contains rules for determining tax periods for the GST on taxable supplies for no consideration (and the ITCs on the acquisition of such supplies), those rules focus on when a supply first became connected with the ITZ. Because of this focus on a supply being connected with the ITZ, there are issues with applying the Division 72 rules to supplies that are reverse charged through Division 84 that are not connected with the ITZ. The specific tax period rule introduced by these amendments addresses the current uncertainty about the tax period to which GST on a taxable supply that is reverse charged is attributable.

2.218 To avoid ambiguity about which rules apply in determining the tax period to which GST and ITCs are attributable where they arise because of Division 84, the amendments introduce rules that prioritise the application of Division 84 over Division 29 and Division 72.

Example 2.9: Supply to an associate for no consideration that is subject to a reverse charge


Woods Corp and Dawson Ltd are members of a multinational group -Woods Corp is a non-resident that does not carry on an enterprise in the ITZ, while Dawson Ltd carries on an enterprise in the ITZ and is registered for GST.

Woods Corp supplies Dawson Ltd with services that are not connected with the ITZ and Dawson Ltd does not provide any consideration in exchange for those services. Dawson Ltd acquires the services for only a partly creditable purpose. The services have a GST inclusive market value of $20,000. The market value does not include any GST due to these factual circumstances (i.e. the supply is not connected with the ITZ).

As a result of these amendments, the fact that Dawson Ltd did not provide consideration for the services does not prevent the supply from being a taxable supply under section 84-5. Provided the supply satisfies the other conditions in section 84-5, the supply will be reverse charged to Dawson Ltd.

Assuming Dawson Ltd is reverse charged for the supply, the price of the supply is its GST inclusive market value (being $20,000), and the amount of GST on the supply that Dawson Ltd is required to pay is $2,000 (being 10 per cent of the price of the supply). The GST on the supply is attributable to the tax period in which Woods Corp began to provide the services.

Dawson Ltd is also entitled to ITCs under Division 84 for its acquisition of the services provided by Woods Corp. In working out the amount of ITCs that it is able to claim, Dawson Ltd is treated as having an extent of consideration equal to 100 per cent. As such, Dawson Ltd's extent of creditable purpose will determine the proportion of its full ITC that it can claim (the full ITC being $2,000). As with the GST on the supply, any ICT to which Dawson Ltd is entitled is attributable to the tax period in which Woods Corp began to provide the services.

Application of Division 72 preserved

2.219 Given the uncertainty regarding the interaction of the associate provisions and the reverse charge provisions in the current law, it is arguable that the GST law already applies in a way that is consistent with these clarifying amendments.

2.220 A savings rule is also introduced by these amendments to ensure that specific changes introduced to clarify the treatment of supplies between associates that are reverse charged cannot be used as evidence that the application of the law prior to the amendments was not consistent with the amendments. [Schedule 2, item 26]

Interactions between reverse charge provisions and resident agent provisions

2.221 The amendments also make changes to the resident agent provisions.

2.222 Under the current law, if a non-resident supplier makes a supply through a resident agent, the resident agent is liable to collect and remit the GST on behalf of the supplier. However, the resident agent rules do not interact appropriately with the existing 'reverse charge' provisions. This is because the GST on a supply that is reverse charged is payable by the recipient of the supply (rather than the supplier) while at the same time the resident agent is liable for GST on the supply because of the resident agent rules.

2.223 These amendments prevent this double taxation from arising by modifying the resident agent provisions so that they do not apply if the non-resident would not have been liable to pay GST on the supply. [Schedule 2, item 5, paragraph 57-5(3)(a)]

2.224 For supplies that are not connected with the ITZ, the non-resident is not liable for GST and the agency provisions no longer apply. However, the supply may be a taxable supply because of the reverse charge rules in Division 84. In such instances, the recipient of the supply remains liable for GST on the supply and the resident agent is not liable.

2.225 In addition, these amendments ensure that the resident agent rules do not apply to supplies that a non-resident supplier makes through an enterprise they carry on in the ITZ. [Schedule 2, item 5, paragraph 57-5(3)(b)]

2.226 The resident agent rules are designed to make Australian agents liable for the GST on supplies that are made through them by non-residents. The rationale for making the agent liable is that they are better placed to deal with any GST liability than a non-resident that would generally not be expected to have a presence in Australia.

2.227 The reason for limiting the resident agent rules to supplies that are not made through an enterprise carried on by the supplier in the ITZ is that if supplies are made through an enterprise carried on in the ITZ, the supplier has a sufficient business presence in Australia to justify them continuing to be responsible for the GST on the supply.

Other amendments

2.228 Minor consequential changes are also made to account for the changes introduced by these amendments. These consequential changes amend:

·
the note at the end of the definition of connected with the ITZ;
·
the dictionary to insert the definition of 'Australian-based business recipient' and to expand the legislative references in the definition of 'price'; and
·
the heading of Subdivision 38-E (about exports and other cross-border supplies) to reflect the scope of the amendments.

[Schedule 2, items 14 and 16 to 18]

Application and transitional provisions

Application

2.229 The amendments in Schedule 2 apply in working out net amounts for tax periods that commence from the second quarterly tax period that starts after the Schedule receives Royal Assent. [Schedule 2, item 25]

2.230 The focus on net amounts for a particular tax period ensures that, subject to the transitional rule, entities are not required to identify when a particular supply is made.

2.231 Because the amendments in Schedule 2 are designed to reduce overall compliance costs and improve the overall efficiency of Australia's GST system, it is desirable that they apply as soon as is practicable. However, because the amendments result in substantial changes for the way businesses account for cross-border supplies, applying the amendments from the second quarterly tax period following Royal Assent provides taxpayers with an appropriate amount of lead time to make the necessary adjustments to account for the changes.

Transitional rule

2.232 A transitional rule is included in these amendments which prevents them from applying to a supply made by an entity that is registered for GST, or required to be registered, if a written agreement that was entered into before Schedule 2 received Royal Assent specifically identifies:

·
the supply; and

-
the consideration in money for the supply; or
-
a way of working out the consideration in money.

[Schedule 2, subitem 27(1)]

2.233 The transitional rule is only relevant for supplies that were entered into before the amendments received Royal Assent. Some supplies of this kind may have been negotiated on the basis of the GST law that operated before these amendments applied - where such supplies specified the amount of consideration that would be payable for a supply, the amendments do not apply to the supply.

2.234 The restriction of the transitional rule to supplies made by entities that are registered or required to be registered ensures that the transitional rule only targets supplies that are made by entities that already interact with Australia's GST system. If a supplier is not registered or required to be registered, a supply that they make is already not taxable.

2.235 However, the transitional rule does not apply to supplies in relation to which:

·
a review opportunity arises after the time the amendments apply; or
·
for which the supplier and recipient agree (in writing) that the amendments should apply to the supply from a specified time.

[Schedule 2, subitem 27(2)]

2.236 These exceptions to the transitional rule allow suppliers and recipients to renegotiate the terms of a supply that was agreed to before the amendments received Royal Assent, and reflect the fact that the changes are broadly beneficial in reducing overall compliance obligations. A supplier and recipient that agree that the amendments should apply to a supply can do so on either a prospective or retrospective basis.

Example 2.10: Operation of transitional rule


On 1 December 2015, Lauren Corp and Lydia Ltd enter into an agreement. Under this agreement, Lauren Corp is to provide Lydia Ltd with training services that are to be performed over a 12 month period. As part of the agreement, Lauren Corp and Lydia Ltd agree that Lydia Ltd will pay $11,000 per month for services. This amount includes GST.

Lauren Corp is a non-resident that is registered for GST but that does not carry on an enterprise in the ITZ. Lydia Ltd satisfies the conditions for being an Australian-based business recipient of the supply (although at the time the agreement is entered into, that definition does not exist under the GST law).

Assume these amendments receive Royal Assent on 31 March 2016. Following Royal Assent, the first quarterly tax period commences on 1 April 2016. The amendments introduced by Schedule 2 therefore apply to Lydia Ltd from 1 July 2016 (being the start of the second quarterly tax period that begins on or after Schedule 2 received Royal Assent).

Although the services that Lydia Ltd acquires from Lauren Corp from 1 July 2016 would otherwise be subject to the changes introduced by Schedule 2, the changes do not apply to those services because the agreement between Lauren Corp and Lydia Ltd was entered into before Schedule 2 received Royal Assent. Irrespective of whether the supply of services would be disconnected as a result of these amendments, Lauren Corp continues to be liable for GST on the supply it makes.

However, if a review opportunity were to arise on or after 31 March 2016 (being the day Schedule 2 received Royal Assent), the amendments would apply from the time of that review opportunity.

Similarly, if Lauren Corp and Lydia Ltd entered into a written agreement that the amendments should apply (for example, from 1 October 2016), and assuming that the supply was 'disconnected' as a result of these amendments from that time, then Lydia Ltd would pay Lauren Corp $10,000 a month for the remaining months that it acquires the services. Lydia Ltd would also have a GST liability of $1,000 for the supply under the reverse charge rules in Division 84, and would be entitled to ITCs to the extent its acquisition of the services is for a creditable purpose.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

GST treatment of cross-border transactions between businesses

2.237 Schedule 2 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.

Overview

2.238 Schedule 2 to this Bill amends the A New Tax System (Goods and Services) Tax Act 1999 to better target the way Australia's goods and services tax (GST) rules apply to cross-border supplies that are made by non-resident entities.

2.239 These changes mean that certain supplies are no longer connected with the indirect tax zone, or are GST-free. Although the changes relieve certain non-residents suppliers of their obligation to account for GST, they do not alter the GST tax base. This is because the liability for any GST that would have ultimately been payable on a supply is shifted to an Australian based recipient that is already registered for GST.

2.240 The amendments also reduce compliance costs for GST registered importers in calculating the value of taxable importations.

Human rights implications

2.241 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.242 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 3 - Farm management deposit reforms

Outline of chapter

3.1 Schedule 3 to this Bill reforms the income tax treatment of farm management deposits (FMDs) by:

·
increasing the maximum amount that can be held in FMDs by a primary producer to $800,000;
·
allowing primary producers experiencing severe drought conditions to withdraw an amount held in an FMD within 12 months of its deposit in the income year following deposit without affecting the income tax treatment of the FMD in the earlier income year; and
·
allowing amounts held in an FMD to offset a loan or other debt (ie. as a result of the arrangement a lower amount of interest is charged on the loan than would otherwise be the case) relating to the FMD owner's primary production business.

3.2 All legislative references in this Chapter are to the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise stated.

Context of amendments

3.3 The Government released the Agricultural Competitiveness White Paper on 4 July 2015. The paper contains a number of policies to strengthen the agricultural sector including:

·
improving the tax system for the agricultural sector; and
·
strengthening the Government's approach to drought and risk management to facilitate more effective risk management by primary producers.

3.4 FMDs assist Australian primary producers to manage risks from fluctuations in primary production income over income years that are common in the agricultural sector. FMDs allow primary producers, in effect, to carry over income from years of good cash flow and to draw on that income in years of reduced cash flow in response to adverse economic events and seasonal fluctuations that affect their primary production business, smoothing their income tax liabilities.

3.5 The FMD rules in Division 393 achieves this outcome by enabling primary producers (with a limited amount of non-primary production income) to generally claim a deduction in an income year for the amount deposited into FMDs in that income year.

3.6 When an FMD is withdrawn, the amount previously deducted is included in the primary producer's assessable income in the income year of withdrawal. This, in effect, allows eligible primary producers to defer the payment of the income tax on these amounts until they are withdrawn.

Summary of new law

3.7 Schedule 3 makes changes to the FMD framework in the income tax law to make FMDs more flexible by increasing the amount that may be held in FMDs, allowing early withdrawal of FMDs in severe drought conditions and enabling FMDs to be used in loan offset arrangements.

3.8 The reforms:

·
increase the maximum amount that can be held in FMDs by primary producers to $800,000;
·
allow primary producers experiencing severe drought conditions to withdraw an amount held in an FMD within 12 months of deposit in the income year following deposit without affecting the income tax treatment of the FMD in the earlier income year; and
·
allow amounts held in an FMD to offset (ie. reduce the interest charged on) a loan or other debt relating to the FMD owner's primary production business.

Comparison of key features of new law and current law

New law Current law
Increase in FMD cap
The maximum amount that can be held by an individual primary producer in FMDs at any time is $800,000. The maximum amount that can be held by an individual primary producer in FMDs at any time is $400,000.
Consequences of early withdrawal of FMDs because of severe drought
An amount withdrawn from an FMD within 12 months of its deposit does not cease to have been an FMD if part of the land used in carrying on the FMD owner's primary production business meets the prescribed rainfall conditions for the prescribed period.

Accordingly, generally if an amount of an FMD is withdrawn within 12 months of its deposit and it meets the conditions set out below then:

·
the FMD owner remains entitled to the deduction for the deposit; and
·
the amount must generally be included in the assessable income of the FMD owner in the income year the withdrawal occurs.

An amount withdrawn from an FMD is generally treated as never having been an FMD if the amount held in the FMD is withdrawn within 12 months of its deposit.

Accordingly, the FMD owner is required to amend their previous year's income tax assessment to remove the deduction claimed for the amount of the deposit.

Rainfall conditions for early withdrawal
The default rainfall conditions and the period over which the conditions must exist are set out below.

The qualifying primary production business must demonstrate that any part of the land of the business has experienced a rainfall deficiency for at least six consecutive months. The deficiency must be equivalent to or worse (ie. lower) than five per cent of average rainfall (one in twenty year event) for that six month period based on the most recently available publicly released data from the Bureau of Meteorology at the time of the withdrawal.

Further the land must have been used in carrying on the primary production business and the deposit held for the prescribed period.

However, the regulations may prescribe alternative periods or conditions to replace the default rainfall period and conditions.

Not applicable.
Use of FMDs with qualifying primary production loan offset accounts
The agreement for the making of an FMD can allow the linking of an FMD to a loan or other debt of the FMD owner or their partnership (a loan offset arrangement) to enable the amount of interest charged on that loan or other debt to be less than what it would otherwise be if:

·
the FMD owner is carrying on a primary production business; and
·
the loan is used wholly for the purpose of that business.

To the extent that an FMD loan offset arrangement results in a lower amount of interest being charged on a loan or other debt used other than for the purposes of a primary production business of the FMD owner or a partnership in which they are a partner, then an administrative penalty is payable. The administrative penalty equals 200 per cent of the amount of interest that would otherwise have been charged on the portion of the loan used for the non-qualifying purpose.

The agreement for the making of an FMD must not allow the FMD to be used for a loan offset arrangement.

The use of an FMD in a loan offset arrangement results in the deposit being treated as if it was never an FMD.

Tax consequences of FMD offset arrangements
For the avoidance of doubt, these amendments clarify that if an amount of interest charged on a loan or other debt is less than what it would otherwise be as a result of an individual entering into a qualifying FMD loan offset arrangement, then any income derived by that individual is neither assessable income nor exempt income. The amendments also clarify that any corresponding deduction is limited to the actual amount charged.

To the extent that an FMD offset arrangement is non-qualifying (ie. an administrative penalty applies), the treatment of interest income and deductions depends on the application of the general income tax law to the arrangement.

The treatment of interest income and deductions depends on the application of the general income tax law to the arrangement.

Detailed explanation of new law

3.9 Schedule 3 makes a number of reforms to the income tax treatment of FMDs.

Increase in FMD cap

3.10 Schedule 3 increases the maximum amount that an individual primary producer can hold in FMDs at any time from $400,000 to $800,000. This enhances the capacity of the FMD framework to assist primary producers to manage seasonal fluctuations in cash flow, including extended periods of positive or negative cash flow. [Schedule 3, item 8, table item 10, section 393-35]

Example 3.1: Higher contribution to FMDs


Sebastien holds $400,000 in FMDs on 30 June 2016 and continues to meet all eligibility requirements concerning the FMDs. He experiences strong growth in his primary production business, with sale prices for his produce increasing.

Sebastien deposits $200,000 in an FMD in both the 2016-17 income year and the 2017-18 income year. Following the second deposit, Sebastien has reached the $800,000 cap on amounts he can deposit to an FMD. Any further amount contributed will not be an FMD under subsection 393-30(3) and will not qualify for a deduction under section 393-5.

Consequences of early withdrawal of FMDs because of severe drought

3.11 Schedule 3 allows a primary producer to gain early access to an amount held in an FMD without losing the taxation benefit from the deposit if they carry on a qualifying primary production business on land that satisfies a rainfall deficiency test for the period prescribed by regulations. If no period is prescribed then the test must be met for a period of six consecutive months. Early access to an FMD enables an amount held in an FMD to be withdrawn within 12 months of making the deposit without affecting any deduction for the amount deposited in the previous income year.

3.12 Schedule 3 is designed to assist primary producers to support themselves in times of severe drought by providing them with early access without losing any taxation benefit in these circumstances. Early access in times of severe drought has not been available since the repeal of the exceptional circumstances provisions in Commonwealth legislation (eg. the former subsection 393-40(3) which was repealed in 2014). Like the exceptional circumstances provisions, Schedule 3 allows an eligible primary producer to access amounts deposited within 12 months without affecting the tax concession. However, unlike the exceptional circumstances provisions, it does so without the need for a Government agency to make a determination whether or not primary producers in an area qualify. The rainfall deficiency test restores the ability of primary producers subject to severe drought to access amounts recently deposited to FMDs with an objective test that can be applied using publicly available information.

3.13 The amendments are intended to allow primary producers to deposit amounts into FMDs with confidence, knowing that if they experience a severe drought and need to access the funds in the next income year but within 12 months they will not lose access to a previously claimed tax deduction if they satisfy the relevant criteria.

Qualifying primary production businesses for early withdrawal

3.14 The owner of an FMD can carry on a primary production business through a variety of structures. These structures include as a sole trader, in partnership, with the owner being a partner, or through a trust, with the owner being either a beneficiary that is presently entitled to some or all of the net income of the trust or a unit holder in a fixed trust under section 393-25.

3.15 However, early access to amounts deposited by an individual as an FMD is only available for some classes of primary production businesses as defined in section 995-1. [Schedule 3, item 12, paragraphs 393-40(3)(a) and (b)]

3.16 These qualifying classes of primary production businesses are businesses that:

·
cultivate or propagate plants, fungi or their products or parts (eg. vegetable cropping, plant propagation, mushroom farming);
·
maintain animals for sale or the sale of their bodily products or offspring (eg. cattle farming, sheep farming including wool production, farming of aquatic animals such as fish, crustaceans and molluscs);
·
produce dairy products from raw material produced by the primary producer (eg. dairy farmers); or
·
plant or tend trees in a plantation or forest for logging (eg. tree cultivation for logging).

[Schedule 3, item 12, paragraphs 393-40(3)(a) and (b)]

3.17 The above classes of primary production businesses are those that would be likely to be directly affected by severe drought.

3.18 In contrast, early access to FMDs does not extend to an FMD owner that only carries on one or more of the following primary production businesses:

·
commercial fishing, pearling and related activities (other than farming of aquatic animals);
·
felling of trees; or
·
transporting trees that the transporter logged for milling or processing or to a place for transport to a mill or processing plant.

3.19 These classes of primary production business are excluded because drought conditions do not directly impact on these activities. FMD owners only engaged in these activities are unlikely to need early access in times of severe drought.

3.20 If an FMD owner carries on both qualifying and non-qualifying primary production businesses, they can access the early withdrawal concession for severe drought if they meet the rainfall deficiency test for land they use in carrying on their qualifying primary production business.

Rainfall deficiency test

Period to which test applies

3.21 The rainfall deficiency test that must be met by a primary producer to benefit from the early access concession requires that rainfall has not exceeded a prescribed level in the prescribed period leading up to the FMD withdrawal. That is, it imposes a maximum threshold on rainfall that has been experienced for a minimum period prior to withdrawal. [Schedule 3, item 12, subparagraph 393-40(3)(b)(i) and paragraph 393-40(3AA)(a)]

3.22 If no time period or rainfall threshold is prescribed by regulations then the amendments provide that the rainfall deficiency condition will be satisfied for a withdrawal if the Bureau of Meteorology rainfall data for the most recent six consecutive months for which records are publicly available preceding withdrawal is within the lowest five per cent of recorded rainfall for those months of the year. [Schedule 3, item 12, subparagraph 393-40(3)(b)(ii) and paragraph 393-40(3AA)(b)]

3.23 This test uses the most recent six months for which rainfall information is publicly available from the Bureau of Meteorology at the time of withdrawal of the FMD amount, rather than just the most recent six months, to avoid restricting the time in which withdrawals can be made due to delays in the public availability of data. This Bureau of Meteorology data is collected monthly and published by the Australian Bureau of Agricultural and Resource Economics and Sciences on an online tool.

Land subject to rainfall deficiency test

3.24 The rainfall deficiency test for early FMD withdrawal must also be satisfied in relation to land on which the qualifying primary production business is being carried on by the FMD owner. The rainfall deficiency test only needs to be satisfied in relation to any part of the land. It can, for example, be just one part of a number of parcels of land from which the business is carried on. Alternatively if there is more than one qualifying primary production business, then any part of the land used in carrying on one or more of those businesses can satisfy the rainfall test.

3.25 The land must have been used in carrying on the primary production business for at least the six month period covered by the most recent rainfall data (or such other period as prescribed) and still be used in that business at the time of withdrawal for the concession to be available. This reflects that the rainfall test must be met for a minimum of six months (or such other prescribed period) for which data is publicly available immediately preceding the withdrawal of the FMD amount. [Schedule 3, items 2, 10 to 13, paragraph 393-15(2)(ca), note 1 to subsection 393-40(1), note 1 to subsection 393-40(2), subsection 393-40(3) and subsection 393-40(4)]

Timing of when the FMD was made

3.26 Finally, for an FMD owner to be eligible to withdraw an amount of an FMD early as a result of these amendments, the amount withdrawn must have been held for at least the six month period covered by the most recent rainfall data that has been released publicly by the Bureau of Meteorology.

3.27 This requirement ensures that the concession is not available for amounts held for only part of the six month period in which severe drought has been experienced.

Consequences of early access for severe drought

3.28 If an amount is deposited in an income year and withdrawn within 12 months because of severe drought in the following income year then:

·
entitlement to any deduction for making the deposit remains;
·
an amount must generally be included in the assessable income of the FMD owner in the income year when the withdrawal occurs; and
·
any subsequent deposit in the income year of the withdrawal cannot be treated as an FMD.

3.29 The only circumstance in which a withdrawal of an FMD amount in a later income year would not result in the amount of the withdrawn FMD being included in assessable income is if the FMD did not qualify, to some extent, as a deduction in the earlier income year (to the extent that it did not qualify). This can occur as a result of the existing operation of subsection 393-5(2) to the extent the amount of the FMDs made in an income year exceeded the primary production business income of the taxpayer in the year of the deposit.

3.30 In addition, the concession provided by these amendments is only relevant to the extent that the deposit and withdrawal occur in different income years and within a 12 month period. If the deposit and withdrawal occur in the same income year, then the amount of the withdrawal generally is assessable income in the year of withdrawal and will fully offset the amount of deduction for the deposit in the same income year.

Example 3.2: FMD deduction retained for prior year deposit when withdrawn due to severe drought


Jerome owns a 50 hectare cattle farm that he has operated for a number of years as a sole trader. He also owns and runs a sheep farm with his brother across the border in another state. He deposited $200,000 to an FMD on 20 June 2017 and was entitled to a deduction for this amount.

To obtain early access without losing the taxation benefits, Jerome must demonstrate that some part of either of the areas of land from which he carries on the cattle and sheep farms has been subject to severe drought conditions according to the most recently available 6-monthly rainfall data. If he can demonstrate this it will allow him to withdraw the amount after 30 June 2017, but on or before 20 June 2018, without affecting the deduction claimed for making the FMD in the 2016-17 income year.

Jerome obtains evidence from the Australian Bureau of Agricultural and Resource Economics and Science's online tool in late April 2018 that shows the 6-monthly rainfall received on his sheep farm was in the 0-5 per cent range for the most recently available data covering a consecutive period of six months. This is the period of October 2017 to March 2018 inclusive. New monthly data is released in the middle of the following month for the previous month.

As rainfall for the most recent publicly available data period of six months is five per cent or less of average rainfall for this period, Jerome can access the early FMD withdrawal concession.

As a result, there is no change in the entitlement to the $200,000 deduction claimed in the 2016-17 income year. Jerome must include an amount of $200,000 in his assessable income in the 2017-18 income year (consistent with the normal rules for the withdrawal of an amount from a FMD).

Note that should Jerome wish to withdraw the amount after 20 June 2018, he could do so freely, as the restrictions on withdrawal of FMDs only apply for the first year following the deposit of the FMD amount.

Example 3.3: Early withdrawal of FMD in the same income year


Eloise carries on a primary production business of cereal cropping in a marginal rainfall area in Australia. On 21 July 2017, she makes a $200,000 deposit to an FMD as a result of a record farm crop that has been harvested in the last season. Her primary production income exceeds $200,000 and she therefore is entitled to claim a deduction for the full amount of the deposit. However, from November 2017 rainfall conditions changed significantly and she only planted a small cereal crop. Due to the severe drought none of the crop can be harvested.

As a result of the severe drought, Eloise is forced in May 2018 to withdraw all of the FMD deposit that was made in July 2017 to provide her with cash flow for her business. Even if Eloise can demonstrate that she meets the rainfall conditions to qualify for the early withdrawal concession for severe drought, there is no benefit from qualifying for the early access concession. This is because the FMD amount withdrawn does not give rise to a net deduction because it was deposited and also withdrawn in the same income year. Accordingly, Eloise does not seek to obtain rainfall data in these circumstances.

FMD offset against loans or other debts

3.31 Schedule 3 also amends the conditions that must be included in the agreement to establish an FMD to allow an FMD owner and a financial institution to agree to link an FMD to a loan or other debt of the FMD owner (or a partnership in which the FMD owner is a partner) under a qualifying loan offset arrangement. Under such an arrangement, the amount of interest charged on the loan or other debt may be less than what it would otherwise be and there may be no entitlement or a reduced entitlement to earn interest on the FMD. [Schedule 3, item 9, section 393-37]

3.32 However, to ensure that an administrative penalty does not apply, the loan or other debt being offset must relate wholly to a primary production business carried on by the FMD owner either directly as a sole trader or through a partnership. [Schedule 3, items 4 and 9, subsection 393-25(3) and section 393-37]

3.33 Accordingly, a loan or other debt of an individual that is carrying on a primary production business as a sole trader must generally be in the individual's name or their trading name and the individual must also own an FMD for an eligible offset arrangement to apply. However, a loan or other debt of a primary production business carried on by an FMD owner through a partnership can be in the joint names of the partners, partnership name or the name of any single partner provided the amount has been borrowed for the purposes of the primary production business partnership.

3.34 If a loan that is offset against a FMD relates partly to a primary production business carried on by the FMD owner or a partnership of which they are a partner and partly for another purpose or activity, then the administrative penalty applies in respect of the proportion of the loan relating to the other purpose or activity.

3.35 The concession provided by these amendments does not extend to loans held by companies, trusts or a person who is not the FMD owner. If FMDs are allowed to offset loans to such entities it would be expensive and complex to administer for financial institutions and could pose taxation integrity risks. However, the fact that a company or trust is a partner in a partnership that carries on a primary production business does not prevent another partner in the partnership who is an individual from using amounts they hold in an FMD to offset the loans or other debts of the partnership.

3.36 The amendments enable financial institutions to offer financial products that allow their primary producer clients to enter into such qualifying loan offset arrangements. This allows capital held in FMDs to be used more flexibly and can assist primary producers to reduce their funding costs.

3.37 The amendments remove the prohibition on FMDs being used in offset arrangements. They do not prescribe any particular types of loan offset arrangements that are permissible - rather they allow any sort of offset arrangement involving FMDs (subject to other legal requirements, tax and other commercial considerations and the operation of an administrative penalty that applies to non-qualifying use by FMD owners) to be entered into. [Schedule 3, item 5, subsection 393-30(2)]

3.38 Accordingly, there is no restriction on the type of loan or other debt that an FMD can be offset against, provided the loan or debt is solely for a qualifying purpose (ie. used wholly for a primary production business) and not relating to a loan of a trust or other third party entity (except a partnership through which the FMD owner carries on a primary production business). Loans can include secured or unsecured loans, loans with redraw facilities, bank overdrafts and lines of credit.

3.39 Similarly, there is no restriction on exactly how a loan offset arrangement may result in interest being reduced. For example, loan offset arrangements may involve the offsetting of interest that would otherwise be payable on the FMD to reduce the amount of interest charged on a loan or other debt. Alternatively, such arrangements might involve the setting off of the FMD balance against the loan account or debt balance for interest calculation purposes.

3.40 Two or more separate FMDs held by an individual could be offset against a single loan or other debt or against two or more separate loans or debts held by the individual for their primary production business or loans or debts of a partnership in which the individual is treated as carrying on a primary production business.

3.41 In addition, these amendments do not limit the existing scope of taxpayers to enter into loan offset arrangements in relation to deposits that are not FMDs.

Administrative penalty

3.42 To ensure that the FMD tax concession is appropriately targeted, an administrative penalty is imposed if an FMD is applied to reduce interest on a non-qualifying loan, including loans relating to non-primary production business or private loans of the FMD owner or their partnership. [Schedule 3, item 14, section 288-115 in Schedule 1 to the Taxation Administration Act 1953]

3.43 Generally, an amount is treated as never having been an FMD where it does not meet the requirements that must be included in the deposit agreement for it to be an FMD. However, under Schedule 3, the requirement is relaxed for a breach of the loan offset requirement. Instead of ceasing to have ever been an FMD, an administrative penalty applies to the extent the relevant loan or loans are used for non-qualifying purposes. This approach simplifies compliance where a loan that is offset against an FMD is partly non-qualifying. Treating the whole amount as never having been an FMD would be overly punitive, while keeping track of the amounts in an account that qualified as FMDs and the amounts that ceased to have been an FMD would be overly complex. The administrative penalty provides an appropriate deterrent whilst ensuring minor breaches are not disproportionately penalised. [Schedule 3, items 5, 7 and 9, subsection 393-30(2), table item 8 in section 393-35 and section 393-37]

3.44 The amount of the administrative penalty is equal to 200 per cent of the amount by which interest has been reduced on the portion of the loan used for non-qualifying purposes. The effect of the penalty is to remove any benefit from using an FMD loan offset for a non-qualifying purpose while also imposing an additional cost to act as a deterrent to taxpayers to enter into such arrangements and recovering the time-value of any benefit the taxpayer may have obtained through non-compliance. [Schedule 3, item 14, section 288-115 in Schedule 1 to the Taxation Administration Act 1953]

3.45 This administrative penalty applies in any situation in which an FMD is offset against a loan or other debt which is used, to any extent, for a non-qualifying purpose. This reflects that regardless of the relevant amount of the FMD in comparison with the amount of the loan or other debt, any non-qualifying use of the loan or debt results in a benefit to which the administrative penalty should apply.

3.46 To avoid the application of an administrative penalty where an amount is borrowed for mixed purposes, separate loans for qualifying and non-qualifying purposes (if any) need to be maintained and an FMD offset can only be applied against the loan or loans used for a qualifying purpose.

3.47 The administrative penalty is imposed subject to the provisions in Subdivision 298-B in Schedule 1 to the Taxation Administration Act 1953 that apply to existing administrative penalties. As a result, among other things:

·
the Commissioner must give written notice of the penalty and the due date for payment;
·
the Commissioner may remit the penalty in whole or part (and the taxpayer may appeal this decision); and
·
the general interest charge applies to the penalty.

3.48 Financial institutions that offer loan offset arrangements against FMDs are not expected to monitor the activities of customers to identify if an administrative penalty applies, beyond complying with their existing reporting obligations in relation to FMDs. The Commissioner will undertake appropriate compliance activity and apply the penalty where a breach is identified.

3.49 The Commissioner would be expected to take into account all relevant factors in deciding whether or not to remit the administrative penalty in whole or part, which would include factors such as:

·
if the taxpayer has acted deliberately or recklessly;
·
how quickly the taxpayer addressed their non-compliance once they became aware of it;
·
if the breach was minor in nature and unintended; and
·
if the taxpayer had otherwise been fully compliant with the tax law.

3.50 Accordingly, the promptness with which FMD owners with loan offset arrangements identify, rectify and report any breaches is an important factor that the Commissioner takes into account in deciding whether or not to remit the administrative penalty in whole or part.

Example 3.4: Breach of FMD offset arrangement


Lydia is a sole trader that carries on a primary production business. Lydia borrows $100,000 for her primary production business. While the loan is otherwise used for the purposes of her primary production business operated as a sole trader, she also increased the loan in September 2017 by $50,000 to buy shares in a mining company (interest is deductible as the shares are held to derive dividends).

Lydia has $150,000 held in an FMD as at 31 January 2018. On 31 January 2018, she enters into a loan offset product offered by her bank. The product allows the linking of the FMD to the loan, such that the balance in the FMD notionally reduces the balance of her loan, with interest being charged on the reduced loan amount.

Accordingly, on 31 January 2018, the balance of the loan of $150,000 is offset against the $150,000 FMD under the FMD offset arrangement, resulting in no interest being payable as the full value of the loan that is offset.

The full amount of the loan is repaid on 30 June 2018 by Lydia with the proceeds of the sale of a property. Lydia does not disclose the breach to the Commissioner in which the FMD is offset against a loan used only partly for her primary production business.

Without the amount held in the FMD being offset against the loan, interest of $9,000 would have otherwise been charged on the $150,000 loan. Given that a portion of the loan (($50,000 / $150,000) or one-third) was used for a non-qualifying purpose, an administrative penalty must be paid on the reduction in interest of $3,000 (one third of $9,000) that would otherwise have been charged on that non-qualifying portion of the loan.

Accordingly, the Commissioner provides a written notice to Lydia that she is subject to an administrative penalty of $6,000 (200 per cent of the $3,000 of interest that would have been charged on the portion of the loan used for a non-qualifying purpose). This penalty is calculated in relation to the period from 31 January 2018 when the breach first occurred until the loan was repaid on 30 June 2018. As the Commissioner considers that the breach was intentional, the Commissioner does not remit any of the penalty.

Lydia can object to the Commissioner's decision not to remit any of the administrative penalty.

3.51 A loan offset may be made against an FMD despite it not having been held for 12 months at the time the offset arrangement occurs. If the FMD is later withdrawn within 12 months and is treated as never having been a FMD, then no administrative penalty can apply. This is because the administrative penalty only applies in relation to offsets that are made against FMDs.

Clarification of tax outcomes

3.52 The Commissioner's existing view on the tax treatment of certain loan account offset arrangements is set out in Taxation Ruling TR 93/6. The application of the tax law to these arrangements can be complicated and depends on the circumstances of the arrangement. Additionally, the scope of this ruling is limited.

3.53 To avoid any doubt about the outcomes for those products to which these amendments apply, the amendments provide that any income derived by the FMD owner or partnership of which the FMD owner is a partner from having a lower amount of interest charged on a loan than what it would otherwise be from entering into a FMD loan offset arrangement is treated as being neither assessable nor exempt income. The amendments also clarify for the avoidance of any doubt that any corresponding deduction is limited to the actual amount charged. [Schedule 3, item 3, section 393-17]

3.54 The amendments do not affect the potential application by the Commissioner of the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936.

3.55 The general income tax law continues to apply to non-qualifying loan offset arrangements, such as a loan offset arrangement where an FMD is offset against a loan held by a trust or against a portion of a loan used for a non-qualifying purpose. Depending on the circumstances of such arrangements, they may not be effective for income tax purposes.

Table 3.1 : Summary of implication of use of FMD for offsets

Entities types for offsets Offset of loans of FMD owner (whether solely or in partnership) Offset of loans of other entities (trust, company or *third party) - non-qualifying loan offsets
FMD deduction and interest treatment Administrative penalty Tax outcome Administrative penalty Tax outcome
Loan used solely for primary production business of FMD owner No penalty applies. Amendments apply to clarify that the FMD loan offset arrangement is effective for income tax purposes. Administrative penalty applies equal to 200 per cent of total FMD interest offset. General income tax law applies.
Loan used (whole or part) for private or non-primary production business use of FMD owner Administrative penalty applies equal to 200 per cent of the amount of interest that would otherwise have been charged on the portion of the loan used for private or non-primary production purposes. General income tax law applies. Administrative penalty applies equal to 200 per cent of total FMD interest offset.

General income tax law applies.

* In this context, a partnership in which the FMD owner is a partner is not a third party.

Minor and consequential amendments

3.56 Schedule 3 makes a number of consequential amendments to the income tax law, including guide material to reflect the changes made to the tax treatment of FMDs. [Schedule 3, items 1, 2, 6, 10, 11 and 13, section 393-1, paragraph 393-15(2)(ca), note at the end of section 393-30, note 1 at the end of subsections 393-40(1) and (2) and subsection 393-40(4)]

3.57 Part 2 of Schedule 3 makes a minor technical amendment to clarify the interaction between the small business tax offset in Subdivision 328-F and the FMD rules as well as other similar rules. This change ensures that the small business tax offset operates as originally intended. The amendment ensures that an individual is also entitled to the offset if their assessable income for an income year includes an amount that relates to the small business activities of a partnership or trust, but that is not included in the net income of the partnership or trust.

3.58 An amount counts towards an individual's total net small business income if it:

·
only forms part of the individual's assessable income because they are a partner or beneficiary of a partnership or trust which is a small business entity for that income year;
·
is not included in the partnership's or trust's net income for any income year; and
·
would have been included in the partnership's or trust's net small business income for any income year had the amount been included in its assessable income.

[Schedule 3, item 19, paragraph 328-355(c)]

3.59 The effect of the amendment is to clarify that an amount of an individual's assessable income also qualifies for a small business income tax offset if it:

·
has the necessary connection to a small business entity;
·
does not give rise to a tax offset more than once for the same amount of income; and
·
is of the same character as other types of income to which the small business income tax offset applies.

3.60 The requirement that the amount would not have formed part of the individual's assessable income if they had not been a partner or beneficiary of the small business entity requires that there be a connection between the individual's status as a partner or beneficiary, and the inclusion of the amount in their assessable income. This is designed to be flexible enough to allow for the direct and indirect consequences of an individual being a partner or beneficiary.

3.61 An example of a direct consequence is a recoupment of a partnership deduction that is assessed to the individual partner. In contrast, a more indirect consequence is where the amount of an FMD repayment is included in the individual's assessable income. The amount would not have been included in the individual's assessable income if the original FMD deposit had not been made, and that deposit was only able to be made because the individual was a partner or beneficiary of a partnership or trust that carried on a primary production business (more specifically, individuals are treated as carrying on the primary production business of the relevant partnership or trust because of subsections 393-25(2) to (6)).

3.62 There are many instances where an amount is precluded from being included in the assessable income of a partnership or trust (for example, the repayment of an FMD is directly included in the assessable income of an individual, rather than through the net income of the trust or partnership). However, the amendment tests the character of an amount had it formed part of the net small business income of the partnership or trust despite the fact that an amount was not (or could not be) included in the partnership's or trust's assessable income.

3.63 The amendment also makes a change to the existing rule that reduces amounts included in an individual's total net small business income that relate to their share of a small business entity's net small business income. The existing rule reduces the individual's share of net small business income by any deductions attributable to that share to which the individual is personally entitled.

3.64 This rule is extended to deductions that are attributable to amounts that are covered by this amendment. Where an individual has an amount included in their total net small business income as a result of this amendment, the amount is reduced by any deductions attributable to the amount to which the individual is entitled. [Schedule 3, item 20, paragraph 328-360(1)(b)]

3.65 Consistent with the existing deduction rule in the definition of net small business income, a further change is also made to the deduction rule in the definition of total net small business income to clarify that a component amount is not reduced below zero where it is less than the deductions attributable to it. This approach ensures that, as intended, the total net small business income cannot be a negative amount, and that deductions that are specific to a particular amount do not offset other amounts included in an individual's total net small business income. [Schedule 3, item 20, paragraph 328-360(1)(b)]

3.66 The amendment also makes a number of changes to the provisions about the share of a small business entity's net small business income that is included in an individual's assessable income. These changes do not affect the operation of those provisions, but are required to facilitate the additional rules introduced by this amendment. In this respect, the existing rules for calculating an individual's total net small business income that relate to a share of a small business entity's net small business income is extended to also cover amounts that would not have been included in an individual's assessable income if they had not been a partner or beneficiary. Although this rule applies separately to individual amounts, it can be applied multiple times if an individual has more than one such amount. [Schedule 3, items 16 to 18, 20 and 21, paragraph 328-350(b), section 328-350, subsection 328-360(1) (definition of 'your total net small business income for the income year')]

Application and transitional provisions

3.67 The amendments in Part 1 of Schedule 3 apply to the 2016-17 income year and later income years. [Schedule 3, item 15]

3.68 The technical amendment in Part 2 of Schedule 3 applies to assessments for the 2015-16 income year and later income years to ensure it applies from the same time as the small business income tax offset first applied. [Schedule 3, item 22]

3.69 Although the technical amendment in Part 2 of Schedule 3 applies retrospectively, it is wholly beneficial for affected taxpayers. This is because it ensures that affected taxpayers are entitled to a larger amount of small business income tax offset than would apply without the amendment. This is consistent with the intended scope of the small business income tax offset.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Farm management deposit reforms

3.70 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.

Overview

3.71 Schedule 3 makes changes to the FM taxation framework in the income tax law to make FMDs more flexible by increasing the amount that may be held in FMDs to $800,000, allowing early withdrawal of FMDs within 12 months in the following financial year in severe drought conditions and enabling FMDs to be used in loan offset arrangements.

3.72 It also makes a minor technical amendment to clarify the interaction between the small business tax offset and the FMD rules as well as other similar rules.

Human rights implications

3.73 This Schedule does not engage any of the applicable rights or freedoms.

3.74 While the minor technical amendment in relation to the small business tax offset is retrospective, its only effect is to clarify the law for the benefit of affected taxpayers.

Conclusion

3.75 This Schedule is compatible with human rights as it does not raise any human rights issues.

REGULATION IMPACT STATEMENT

Background

3.76 The Government announced changes to Farm Management Deposits (FMDs) in the Agricultural Competitiveness White Paper (White Paper) released on 4 July 2015.

3.77 FMDs are a risk management tool to help primary producers deal with uneven income between years, particularly during times of downturn and uneven and unpredictable changes in income. Uncertainty frequently occurs as a result of weather variations, natural disasters and changing market conditions.

3.78 FMDs increase the self-reliance of Australian primary producers by helping them manage their financial risk and meet their business costs in lower income years through cash reserves set aside in higher income years. FMDs provide a benefit to primary producers because they allow untaxed business income to be set aside for a future year. Income deposited is tax deductible in the year the deposit is made, and included in assessable income in the year it is withdrawn.

3.79 Prior to release of the White Paper, and in the context of an approvals process managed by a taskforce within the Department of Prime Minister and Cabinet, a short form regulation impact statement was prepared and regulatory costs were agreed with the Office of Best Practice Regulation.

3.80 This RIS is being prepared for and assessed by the Office of Best Practice Regulation prior to introduction of the legislation to Parliament (the final decision point).

3.81 The changes to FMDs aim to improve their value to farmers and make them more flexible. The changes, which include doubling the amount that can be held in FMDs, re-introducing early access provisions for farmers in severe drought and allowing FMDs to offset primary production business loans will apply from 1 July 2016.

1. The problem

3.82 The objective of the FMD scheme is to encourage primary producers to improve their resilience by building up cash reserves that can be drawn on in times of downturn or difficulty.

3.83 Around 35,000 primary producers own around 45,000 FMD accounts holding approximately $4 billion[3]. There are an estimated 330,000 primary producers in Australia, so approximately 10 per cent of primary producers in Australia currently hold FMDs.

3.84 While primary producers derive a number of benefits from FMDs, feedback from stakeholders as part of the White Paper consultation process identified a number of restrictions currently imposed on the use of FMDs that impair the effectiveness of FMDs in assisting primary producers to build up sufficient cash reserves to deal with uneven and unpredictable changes in income. In particular, concerns were raised about restrictions on how soon an FMD can be withdrawn, restrictions on using FMDs as a loan offset and restrictions on the total amount that may be deposited.

3.85 The current cap of $400,000 has not been updated since 2006-07 and has not been indexed to reflect changes in the consumer price index. Feedback from stakeholders in consultation found that since the time of the last update, the costs and scale of farming businesses have all increased substantially. This means $400,000 may no longer serve as an adequate reserve during low income years, compromising the resilience of primary producers. Enabling primary producers to put more in FMDs would better meet the objective of encouraging primary producers to improve their resilience by building up additional cash reserves.

3.86 Since the cessation of exceptional circumstances in 2014, farmers who withdraw their FMDs before 12 months have passed because of severe drought will lose their tax concession. There was some concern that this may discourage those farmers susceptible to drought to put aside deposits, if they fear they may need to withdraw them within 12 months. This would reduce the cash reserves set aside by primary producers, having a negative impact on their self-reliance. The 12 month holding rule in this instance may also act as a disincentive for farmers in drought to access their FMDs in times of difficulty, contrary to the objective of the FMD scheme, as they will lose the tax concession on a deposit withdrawn within 12 months of being made.

3.87 Stakeholders questioned the rationale for provisions that currently prevent FMDs being used as loan offsets. Allowing FMDs to be used as an interest loan offset could help primary producers reduce overall debt and improve cash flow. This means the provisions currently preventing FMDs being used as loan offsets may work against the overarching objectives of the FMD scheme.

3.88 Given the size of the agricultural sector (the value of farm production was $51 billion in 2013-14)[4] and its contribution to the Australian economy and export market (currently making up 2 to 3 per cent of GDP[5] and 15 per cent of the export market), the broader public have an interest in ensuring the sector remains sustainable and steps are taken to manage rising levels of rural debt (in the decade to 2013-14, the RBA estimates rural debt rose to $64 billion)[6].

2. Case for government action/Objection of reform

3.89 Agriculture is a significant employer, particularly in regional areas. Around 270,000 people are employed in the sector with a further 223,000 in food, beverage and tobacco manufacturing[7]. The numbers employed in agriculture and its production levels demonstrate that broader use of FMDs and greater contributions could further support the sector's sustainability with benefits for the broader economy. A case for Government action therefore exists, to encourage primary producers to improve their resilience by building up cash reserves that can be drawn on in times of downturn or difficulty, particularly as drought and ongoing changes in weather patterns will be continuing challenges.

3.90 FMDs were introduced in 1999 replacing the former income equalization scheme which applied to enable primary producers to even out the effect of fluctuating incomes.

3.91 The rules and regulations concerning FMDs are contained in the Income Tax Assessment Act 1997.

3.92 Government action is required to amend the law and re-introduce early access, allow FMDs to be used as loan offsets and increase the maximum deposit limit. While there is a case for Government action and the changes will go toward the objective of encouraging primary producers to build up cash reserves to be drawn upon in difficult times, there are likely to be some limits to the effectiveness of Government action. Re-introducing early access, while consistent with the Government's objective of ensuring FMDs are available to be drawn upon in low income years, is likely to be beneficial to a small number of primary producers, who are affected by drought and have made a deposit in the last twelve months. Government action in removing the restriction on FMDs being used as loan offsets will have practical effect for primary producers if financial institutions assess they are commercially viable products to offer to primary producers. The effectiveness of the increase in the cap will be constrained by the number of primary producers that have the financial capacity to put aside amounts over $400,000.

3. Policy options

Option One: Early access provisions

3.93 One option would be to provide primary producers with greater flexibility to access deposits within 12 months without losing the tax concession. This option would allow primary producers who are affected by severe drought to access FMDs within the 12 month period where a deposit has been made in one income year and the amount is withdrawn in the following income year, without losing the concessional tax treatment in the year of deposit.

3.94 This would mirror the previous exceptional circumstances which allowed primary producers to gain early access to FMDs. Up until 1 July 2014 primary producers could gain early access to their FMDs without losing the concessional tax treatment where the Minister for Agriculture, advised by the National Rural Advisory Council, made a declaration of exceptional circumstances. Early access was also allowed where natural disaster relief and recover arrangements applied. As a result of wider changes to income support for farmers, exceptional circumstances declarations are no longer made. This proposal aims to restore concessional treatment for primary producers experiencing severe drought.

Option Two: Allow FMDs to be used as Loan Offset Accounts

3.95 This option would allow FMDs to be used as loan offset accounts to maximise the benefit farmers can receive from their account. If banks offer this product, primary producers would have more flexibility in how they obtain the return on their FMDs. This may improve the value primary producers receive from these accounts and improve their cash flow. Allowing FMDs to be used as loan offset accounts may also encourage competition in the products offered by FMD providers. Primary producers would only be able to use FMDs as a loan offset for business loans, otherwise the proposal could lead to a disproportionate tax advantage for primary producers.

Option Three: Increase the cap to $800,000

3.96 This option would increase the cap on FMD holdings from $400,000 to $800,000 to enable primary producers to better manage uneven income and become more self-reliant. The option would allow farmers who have the capacity to make larger deposits, providing them with more funds to draw upon in low income years.

Option Four: Status Quo

3.97 This option makes no changes to the current system. Department of Agriculture statistics show FMD holdings are generally highest in good years and lower in bad years, suggesting farmers are able to successfully use the accounts as an income smoothing tool to increase self-reliance and prepare for downturns.

4. Cost benefit analysis of each option/Impact analysis

Option One: Early access provisions

3.98 Early access provisions in times of drought were raised by a small number of individual stakeholders during consultation on the Agricultural Competitiveness Green Paper.

3.99 A small proportion of primary producers, around 70 per year, are likely to benefit from re-introduction of the exceptional circumstances early access provisions, as it would allow them to withdraw their deposit early without losing the concessional tax treatment. Such early access may assist a primary producer to recover from financial hardship stemming from drought and would allow them to rely on their own money, rather than relying on grants or loans. However, the proposal does not overcome any disadvantage a primary producer accessing their funds early may face from their financial institution, because all FMDs are currently offered as 12 month deposits.

3.100 The option would also reduce compliance costs for eligible primary producers who have already submitted their tax returns. Usually, a primary producer who withdraws an FMD earlier than 12 months after its deposit no longer receives a deduction in the year the deposit is made, which requires them to amend their assessment if they have already lodged their tax return. Primary producers eligible for early access would not need to amend an assessment as the deduction claimed in the year of deposit would still stand.

3.101 The option would have a limited impact on the budget as only a small number of primary producers would be affected and could only defer the tax liability by one income year. The proposal is estimated to have a negligible cost to revenue over the forward estimates period.

3.102 Primary producers would readily be able to determine whether they are eligible for early access using the Australian Bureau of Agricultural and Resources Economics and Sciences (ABARES) monitor tool. This was determined in consultation with stakeholders. Feedback from targeted consultations indicated primary producers preferred the guidelines to be clear and objective. Clear and objective guidelines increase certainty and minimise the risk of an Australian Taxation Office (ATO) audit for primary producers that want to comply with the law because no subjective criteria would apply. The rainfall monitor is consistent with the eligibility criteria used for other drought assistance measures administered by the Department of Agriculture. Using the one tool should minimise compliance costs for primary producers, although it is possible state governments will use different tools and eligibility criteria to measure drought which may increase the regulatory burden on farmers.

3.103 There may be some initial education costs for primary producers following introduction of the provisions. Interested primary producers would also need to determine whether they are eligible for the exception through the rainfall deficiency test. The test considers the rainfall recorded in the most recent six months publicly available at time of withdrawal. Where rainfall is within the lowest five per cent of recorded rainfall for those six consecutive months, the primary producer would be eligible for early access.

3.104 The option has estimated average annual compliance costs of $109. This reflects the education costs for primary producers and the regulatory saving to primary producers who no longer need to amend their assessments.

Table 3.2 : Regulatory burden and cost offset estimate table

Average annual regulatory costs (from business as usual)
Change in costs ($) Business Community Organisations Individuals Total change in cost
Total, by sector $109 - - $109
Cost offset ($) Business Community organisations Individuals Total, by source
Agency -$109 - - -$109
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 Two: Allow FMDs to be used as Loan Offset Accounts

3.105 During consultation, which followed release of the Agricultural Green paper, stakeholders argued lifting the restriction on using FMDs as loan offset accounts would mean primary producers could also use their FMDs to reduce interest paid on debt and improve cash flow. If financial institutions offer the product, this proposal may result in better outcomes for farmers.

3.106 The option is estimated to have a gain to revenue of $10 million over the forward estimates period. The proposal is expected to reduce the amount of interest primary producers pay on business debt, which would reduce the tax deductions they can claim.

3.107 Farmers may incur compliance costs in setting up loan offset arrangements against their FMDs. Further, many farmers have loans that relate to both their farm business and personal assets. These farmers may wish to use FMDs to offset their loans and would need to separate these mixed loan accounts, incurring some costs in doing so.

3.108 Financial institutions that offer the product would face costs in developing systems to allow FMDs to be used as loan offsets.

3.109 Based on the costs to banks in developing systems and the costs incurred by primary producers in switching FMDs from interest bearing to loan offset accounts, this proposal is estimated to have average annual compliance costs of $853,723.

Table 3.3 Regulatory burden and cost offset estimate table

Average annual regulatory costs (from business as usual)
Change in costs ($) Business Community Organisations Individuals Total change in cost
Total, by sector $853,723 - - $853,723
Cost offset ($) Business Community organisations Individuals Total, by source
Agency -$853,723 - - -$853,723
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 Three: Increase the cap to $800,000

3.110 The option would assist primary producers who are able to set aside amounts in excess of $400,000 in FMDs to better manage fluctuations in cash flows.

3.111 This option may have a small effect on banks which may receive additional FMDs as a result of the proposal.

3.112 The option is estimated to have a cost to revenue of $20 million over the forward estimates period.

3.113 The option is not anticipated to have any further regulatory impact than what is already in place. We understand there are only some primary producers who would need to learn of the change to the limit as not many have holdings approaching $400,000. Further, we expect primary producers would spend an insignificant amount of time learning of the changes as they would be communicated with existing ATO materials.

Option Four: Status Quo

3.114 An advantage of maintaining the status quo would be that no additional compliance costs would be imposed on primary producers.

3.115 A disadvantage is that it would not reduce requests for government assistance for primary producers in times of drought.

5. Consultation

3.116 Consultation was undertaken on the various options as part of the development of the White Paper which included the release of an Issues Paper on 6 February 2014 and a Green Paper on 20 October 2014. More than 1,000 submissions were received from stakeholders across rural, regional and metropolitan areas, encompassing farmers, industry associations, researchers, finance sector representatives, supply chain participants, and State and Territory governments.

3.117 Further consultation occurred in November/December 2015 on the exposure draft and explanatory materials. Targeted consultation on the early access and loan offset options were also conducted in September 2015.

Early Access

3.118 All stakeholders were supportive of including an option to allow early access in times of drought. The targeted consultations sought to ascertain what circumstances could be relied on to effectively identify primary producers suffering severe drought while imposing low compliance costs on primary producers and minimising administrative complexity. Stakeholders supported a tool that would provide certainty to primary producers in determining whether they were eligible for early access. Based on these consultations and discussions with the Department of Agriculture and the ATO the method for determining eligibility would be based on whether a primary producer had experienced rainfall within the lowest 5 per cent of rainfall for that land in the 6 months prior to withdrawal based on information available on the ABARE's website.

3.119 During consultation on the exposure draft and explanatory materials some organisations indicated they would have preferred a mechanism that provided greater flexibility for access, particularly to allow for early access within 6 months of deposit. Providing greater flexibility of access would have reduced certainty as to eligibility. Six months is an appropriate test period for establishing circumstances of drought. The drought period should not cover the period when the deposit was made because early access is intended to support a primary producer that is subject to circumstances they could not have anticipated at the time of deposit. It is not intended to provide a tax deferral mechanism for primary producers that decided to deposit funds into an FMD when they knew they would require early access.

Loan offset

3.120 Many submissions supported allowing FMDs to be used as loan offset accounts. However, financial institutions were concerned with the policy and highlighted complexities and compliance costs that would be imposed on them from making the change. Financial institutions were not clear on whether they would offer FMDs as a loan offset. There was also some confusion with how the provisions would operate.

3.121 Financial institutions indicated there would be significant complexities and costs for them if they were to allow an FMD owner to offset a loan held by another entity. On that basis the legislation only allows FMDs to offset loans held by individuals and partnerships, and not trusts and companies.

3.122 Financial institutions will not need to offer FMDs as loan offset accounts and so the change allows financial institutions and primary producers to determine what arrangements are most suitable for them. The legislation will not require financial institutions to undertake any additional monitoring if they offer the product. Changes have been made to the draft legislation and explanatory materials to provide greater certainty as to how the loan offset provisions will operate.

Increase the cap

3.123 All submissions received were supportive of the option to increase the cap.

6. Option Selection

3.124 Options one, two and three are all likely to deliver a net benefit by increasing primary producers' resilience because they are all likely to increase the amount primary producers set aside and can draw on in downturns. This is supported by the feedback received during consultations on the White Paper.

3.125 Changes to FMDs will result in some increased compliance costs for primary producers and financial institutions and increased administration costs for the ATO, whereas option four (status quo) will not. However, these compliance costs will only be incurred by those that choose to utilise the additional flexibility of FMDs.

3.126 The early access change is likely to increase amounts deposited into FMDs, because primary producers will know when they decide to deposit funds they will not face adverse tax consequences if they need to withdraw the funds early as a result of drought.

3.127 It is appropriate that financial institutions and primary producers be given the option to use FMDs as a loan offset account as these arrangements may be more beneficial for primary producers than current arrangements allow. Where financial institutions offer to use FMDs as a loan offset account for primary production business debt, primary producers will be more likely to put aside amounts into FMDs rather than using income to pay off debt. This will increase primary producers' resilience in the event of a downturn. To the extent the change results in a net reduction in interest repayments, the change will mean primary producers will have more money to support themselves in the event of a downturn. The changes are also expected to have a small positive impact on the Budget.

3.128 Increasing the cap from $400,000 to $800,000 takes into account rising farm business costs and inflation. While the proposal to increase the cap would have some cost to the Budget, it would increase amounts put aside in FMDs for use in a downturn, and would thereby increase the resilience of primary producers. The change is overwhelmingly supported by stakeholders.

3.129 The fourth option (the status quo) would not increase the resilience of primary producers and was not supported.

7. Implementation/Evaluation

3.130 The Treasury has been engaging with industry stakeholders affected by the policy change, as well as the Department of Agriculture and the ATO throughout the process, in order to work out implementation details and ensure that the three proposals are effectively implemented. The proposals will come into effect on 1 July 2016.

3.131 Doubling the deposit limit to $800,000 is straightforward and has broad based stakeholder support.

3.132 Early access in times of drought will be relatively simple for the primary producers to determine eligibility and for the ATO to enforce compliance. The rainfall monitor is similar to tools used for determining eligibility to other drought concessions reducing implementation risks.

3.133 Financial institutions have indicated it may take some time for them to develop the systems required to offer FMD loan offsets. This means primary producers are unlikely to benefit from the changes immediately. Earlier introduction of legislation may have allowed financial institutions to offer FMD loan offsets sooner. However, earlier introduction would not have allowed for more considered development and consultation on the proposal.

3.134 Treasury, the Department of Agriculture and the ATO will continue to engage to examine whether the changes are meeting their objectives and the FMD provisions remain appropriate and up to date.

Index

Schedule 1: Tax integrity: extending GST to digital products and other services imported by consumers

Bill reference Paragraph number
Item 1, paragraph 9-25(5)(d) 1.32
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 1.182
Item 3, paragraph 9-25(7)(a) 1.39
Item 3, paragraph 9-25(7)(b) 1.43
Item 3, subsection 9-25(7) 1.34
Items 4 and 5, sections 38-610 and 40-180 1.152
Item 6, subsections 84-100(3) and (4) 1.71
Item 6, subsection 84-55(1) 1.103
Item 6, section 84-60 1.104
Item 6, subsection 84-55(4) 1.105
Item 6, paragraph 84-55(4)(c) 1.106
Item 6, paragraphs 84-55(a) and (b) 1.107
Item 6, paragraph 84-70(1)(b) 1.109
Item 6, paragraph 84-70(1)(a) 1.110
Item 6, paragraph 84-70(1)(c) 1.111
Item 6, subsection 84-70(2) 1.114
Item 6, section 84-65 1.116
Item 6, subsection 84-65(2) 1.119
Item 6, subsection 84-60(1) 1.120
Item 6, subsection 84-60(2) 1.123
Item 6, subsection 84-55(1) 1.128
Item 6, subsection 84-60(3) 1.129
Item 6, paragraph 84-55(2)(a) 1.139
Item 6, paragraph 84-55(2)(c) 1.140
Item 6, paragraphs 84-55(2)(b) and subsection 84-55(3) 1.141
Item 6, subsection 84-100(1) 1.56
Item 6, section 84-50 1.162
Item 6, section 84-140 1.168
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 1.169
Item 6, subsections 84-140(2) and (3) 1.175
Item 6, subsection 84-140(5) 1.177
Item 6, subsections 84-140(3) and (5) 1.179
Item 6, paragraph 84-140(3)(b) and subsection 84-140(6) 1.180
Item 6, subsection 84-140(4) 1.181
Item 6, subsection 84-100(2) 1.60
Items 7 and 8, paragraphs 188-15(3)(b) and 188-20(3)(b) 1.93
Items 23 and 24, paragraph 84-5(1)(ba) and subsections 84-5(1A), (1B) and (1C) 1.85
Item 26, section 126-27 1.52
Items 27 and 28, subsections 153-55(4A) and 153-55(3A) 1.127
Item 37, paragraph 284-75(4)(b) in Schedule 1 to the TAA 1953 1.78
Item 38 1.183
Item 39 1.185
Subitem 39(1) 1.186
Subitem 39(3) 1.187
Subitems 39(2) and (4) 1.188

Schedule 2: GST treatment of cross border transactions between businesses

Bill reference Paragraph number
Item 1, subsection 9-25(3) 2.117
Items 1, 2 and 4, subsection 9-25(3), paragraph 9-25(6)(b) and subsection 9-75(4) 2.131
Items 1, 2 and 4, subsection 9-25(3), paragraph 9-25(6)(a) and subsection 9-75(4) 2.135
Item 2, subsection 9-25(6) 2.122
Item 3, subparagraphs 9-27(1)(b)(ii) and (iii) 2.37
Item 3, subsection 9-27(2) 2.45
Item 3, paragraphs 9-26(1)(a) and (b) 2.49, 2.56, 2.102
Items 3 and 13, subsections 9-26(3) and 85-5(3) 2.54
Item 3, table item 1 in subsection 9-26(1) 2.59
Items 3 and 14, subsection 9-26(2) and definition of 'Australian-based business recipient' in section 195-1 2.69
Item 3, table items 1 to 4 in subsection 9-26(1) 2.84
Item 3, table items 1 and 2 in subsection 9-26(1) 2.88
Item 3, paragraphs 9-26(1)(a) and (b) 2.89
Item 3, table item 1 in subsection 9-26(1) 2.90
Item 3, table items 1 & 2 in subsection 9-26(1) 2.94
Item 3, table item 3 in subsection 9-26(1) 2.98
Item 3, table item 4 in subsection 9-26(1) 2.106
Items 3 and 15, subsection 9-27(1) and section 195-1 (definition of 'carried on in the indirect tax zone') 2.25
Item 3, paragraph 9-27(1)(a) and subsection 9-27(3) 2.29
Item 3, paragraph 9-27(3)(c) 2.32
Item 3, paragraph 9-27(1)(a) and subparagraph 9-27(1)(b)(i) 2.34
Item 3, paragraphs 9-26(1)(a) and (b), and table items 1 and 2 in subsection 9-26(1) 2.138
Item 4, subsection 9-75(4) 2.126
Item 5, paragraph 57-5(3)(a) 2.223
Item 5, paragraph 57-5(3)(b) 2.225
Item 6, subsection 72-5(2) 2.192
Items 7 and 8, subsections 72-10(3) and 72-70(4) 2.204
Item 9, paragraphs 84-5(1)(c) and (ca) 2.150
Item 10, subsection 84-13(1) (definition of 'extent of consideration') 2.209
Item 11, subsection 84-13(2) 2.212
Item 12, subsection 84-20(2) 2.202
Item 12, subsections 84-25(1) and (2) 2.214
Item 12, subsection 84-25(3) 2.215
Item 12, section 84-30 2.149
Item 12, subsection 84-20(1) 2.198
Items 14 and 16 to 18 2.228
Item 19, subparagraph 38-190(3)(c)(iii) 2.166
Item 19, paragraph 38-190(3)(c) 2.154
Item 19, subparagraph 38-190(3)(c)(i) 2.157
Item 19, subparagraph 38-190(3)(c)(ii) 2.161
Item 20, subsection 38-191(2) 2.179
Item 20, subsection 38-191(1) 2.174, 2.175
Item 20, paragraph 38-191(1)(a) 2.176
Item 21, paragraphs 188-15(3)(d) and 188-20(3)(d) 2.182
Item 22, paragraphs 13-20(5)(b) and (c) 2.188
Item 22, subsection 13-20(4) and paragraph 13-20(5)(a) 2.186
Item 22, subsection 13-20(4) and paragraph 13-20(5)(a) 2.187
Items 23 and 24, subparagraph 38-185(3)(f)(ii), subparagraph 38-185(4)(f)(ii) and definition of 'taxable dealing', 'taxable importation of a luxury car' and 'wine' in section 195-1 2.190
Item 25 2.229
Item 26 2.220
Subitem 27(1) 2.232
Subitem 27(2) 2.235

Schedule 3: Farm management deposits

Bill reference Paragraph number
Items 1, 2, 6, 10, 11 and 13, section 393-1, paragraph 393-15(2)(ca), note at the end of section 393-30, note 1 at the end of subsections 393-40(1) and (2) and subsection 393-40(4) 3.56
Items 2, 10 to 13, paragraph 393-15(2)(ca), note 1 to subsection 393-40(1), note 1 to subsection 393-40(2), subsection 393-40(3) and subsection 393-40(4) 3.25
Item 3, section 393-17 3.53
Items 4 and 9, subsection 393-25(3) and section 393-37 3.32
Item 5, subsection 393-30(2) 3.37
Items 5, 7 and 9, subsection 393-30(2), table item 8 in section 393-35 and section 393-37 3.43
Item 8, table item 10, section 393-35 3.10
Item 9, section 393-37 3.31
Item 12, subparagraph 393-40(3)(b)(ii) and paragraph 393-40(3AA)(b) 3.22
Item 12, paragraphs 393-40(3)(a) and (b) 3.15
Item 12, paragraphs 393-40(3)(a) and (b) 3.16
Item 12, subparagraph 393-40(3)(b)(i) and paragraph 393-40(3AA)(a) 3.21
Item 14, section 288-115 in Schedule 1 to the Taxation Administration Act 1953 3.42
Item 14, section 288-115 in Schedule 1 to the Taxation Administration Act 1953 3.44
Item 15 3.67
Items 16 to 18, 20 and 21, paragraph 328-350(b), section 328-350, subsection 328-360(1) (definition of 'your total net small business income for the income year') 3.66
Item 19, paragraph 328-355(c) 3.58
Item 20, paragraph 328-360(1)(b) 3.64
Item 20, paragraph 328-360(1)(b) 3.65
Item 22 3.68


All monetary amounts referred to in this chapter are expressed in Australian dollars unless otherwise indicated.


All monetary amounts referred to in the Chapter are expressed in Australian dollars unless otherwise indicated.


Department of Agriculture- Farm Management Deposit Statistics - December 2015 quarter.


ABARES 2015a Agricultural commodities: June quarter, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra.


2014, Agricultural commodity statistics 2014, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra, December.


RBA 2014, Rural debt by lender, statistics table D9, Reserve Bank of Australia, Sydney, December.


Commonwealth of Australia 2015a, Agriculture portfolio: deregulation annual report 2014, Department of Agriculture, Canberra.


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