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)

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.


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