Taxing digital products and low value goods
There have been some important developments for GST and cross-border transactions regarding taxing digital products and low value goods. Simon Dorevitch, Senior Tax Consultant at A&A Tax Legal Consulting, reviews the changes.
When the GST Act and Regulations were drafted in 1999, e-commerce was in its infancy – it was not fully envisaged that people would prefer to shop from the comfort of their computer, and now even their mobile devices, rather than visiting a bricks and mortar shop. Over the years however, Australian internet sales have grown rapidly and are now in excess of $20 billion a year.
This has caused dismay from Australian businesses that have increasingly complained about an unequal playing field, since Australian consumers are often able to avoid incurring GST on their internet purchases from non-resident businesses. Online video-on-demand provider Netflix is a prime example where a subscription to its services is not subject to GST under existing laws.
In response to these concerns, the government has introduced amendments that extend GST to supplies of digital products, certain services and low value goods imported by consumers.
As a result of these amendments, Australian consumers will soon find themselves paying 10% more for many online purchases. In addition, many overseas suppliers will be required to register and pay GST, though in some cases the GST liability may be shifted to an electronic distribution platform or goods forwarder. To ease the administrative burden, the ATO will permit some foreign businesses affected by the amendments to hold a limited GST registration.
EXISTING GST FRAMEWORK
By way of background, GST is payable on “taxable supplies” and “taxable importations”.
For a supply to be taxable it must, among other things, be connected with Australia. (The GST Act now refers to the “indirect tax zone” rather than Australia. However, for simplicity, we will continue use the term Australia here.)
In the context of physical goods brought to Australia, a supply is connected with Australia if the supplier either imports the goods or installs or assembles them in Australia. Therefore, if the consumer imports the goods, the supply will generally not be connected with Australia and will not be a taxable supply.
In the context of supplies other than physical goods or real property (for example, digital products and other services), a supply is connected with Australia if:
- the thing is done in Australia
- the supply is made through an enterprise that is carried on in Australia, or
- the supply is the supply of a right to acquire another thing that is connected with Australia.
If the location of performance is not in Australia, a supply by a foreign entity will generally not be connected with Australia and will not be a taxable supply.
For an importation to be taxable it must be of tangible personal property. Therefore, an importation of digital products or services is not a taxable importation as these are not tangible goods. Furthermore, GST regulations specify that an importation of low-value tangible goods (that is, those with a customs value of $1,000 or less) is a non-taxable importation and therefore no GST is payable (however this is set to change from 1 July 2018, more below).
APPLYING GST TO DIGITAL PRODUCTS & OTHER SERVICES
Amendments to the GST Act1, which took effect from 1 July 2017, extend the scope of the GST to digital products and other services imported by Australian consumers.
At the time, the media dubbed the amendments the “Netflix tax” and focused on its application to digital products such as streaming or downloading of movies, music, apps, games and e-books. However, what was missed is that the amendments applied equally to supplies of services such as consultancy and professional service (for example, architectural, legal or educational services).
As a result of the amendments, a supply of digital products and other services will be connected with Australia (and therefore potentially a taxable supply) if the recipient of the supply is an “Australian consumer”.
An Australian consumer, in relation to a supply, is an Australian resident (as defined for income tax purposes) who is not entitled to an input tax credit (ITC) in respect of the acquisition.
To be entitled to an ITC, a consumer must be registered for GST and the supply must be acquired to some extent for an enterprise they carry on. The amendments are therefore intended to capture private consumption only.
Example:2 Global Movies supplies Fred Fellini with video on demand services. The supply is not performed in Australia and Global Movies does not carry on an enterprise in Australia. Fred Fellini is a resident of Australia, does not carry on an enterprise and is not registered for GST. The supply by Global Movies is connected with Australia as a result of the amendments. Had Fred Fellini not been a resident of Australia, the supply would not have been connected to Australia, even if he was in Australia when the supply was made.
Reasonable belief safeguard
It may not always be practical for a supplier to determine if the recipient of a supply is an Australian consumer. Recognising this, the amendments provide a safeguard; if the entity that would be liable for GST takes reasonable steps to establish whether the recipient of a supply is an Australian consumer and, having taken these steps, reasonably believes that the recipient is not an Australian consumer, they may treat the supply as if it had been made to an entity that was not an Australian consumer.
Example:3 Peter, an Australian resident who is not registered for GST, orders a video game online from a non-resident supplier while visiting family in London. He pays using a credit card from a UK bank and gives the address and phone number of his relatives as contact information. The supplier reasonably believes that Peter is a not an Australian resident and may therefore treat him as not being an Australian consumer and the supply as not connected with Australia.
In some circumstances, the process for making a supply may be largely automated. Such supplies may also be covered by this safeguard if the business systems and processes provide a reasonable basis for identifying if the recipient is an Australian consumer.
Penalties for misrepresentations by customers and extending the reverse charge provisions
Australian consumers may have incentives to avoid GST by misrepresenting their status. To address this, the amendments broaden the existing administrative penalties for making false or misleading statements.
Furthermore, the amendments extend the compulsory reverse charge rules so that they apply where an Australian business has made a wholly private or domestic acquisition but has made representations that it is not an Australian consumer in respect of the supply. The operation of this reverse charge rule will mean the supply is a taxable supply and the recipient, not the supplier, is liable for GST.
Example:4 Leslie, an Australian resident registered for GST, acquires a movie from Online Movie Co (OMC) for a wholly private purpose. She is therefore an Australian consumer in relation to the supply. However, Leslie provides OMC with her Australian Business Number (ABN) and declares that she is registered for GST. Accordingly, OMC does not charge GST. Under the extended reverse charge provisions, Leslie is obliged to pay the GST.
Electronic distribution platforms
Consumers may purchase digital products and services via an electronic distribution platform (EDP). The Apple App Store is an example of an EDP, and Amazon is another.
The operators of EDPs are often better resourced and therefore better placed to comply with Australia’s GST laws. On this basis, where supplies are made through an EDP and are connected with Australia under these amendments, responsibility for the GST liability is generally shifted from the supplier to the operator of the EDP. In other circumstances the supplier and operator of the EDP may agree that the operator will be liable for GST on the supply.
Registration and limited registration
Supplies that are connected with Australia because they are made to an Australian consumer will generally count towards the GST registration threshold of $75,000. However, these supplies may also be GST free because they are used or enjoyed outside Australia.
It would be unnecessary for foreign suppliers to register for GST if the only supplies they make that are connected to Australia are also GST-free. Therefore, the amendments ensure such supplies are only included in GST turnover if the supply is made through an enterprise carried on in Australia.
Some entities that are required to register under these amendments will not have any other connection with Australia. These entities will have no claim to ITCs and will therefore not need to claim GST refunds.
To ease the administrative burden on such entities, the ATO will allow them to opt to be a “limited registration entity”. Such entities will only be required to provide minimal information when registering for GST and lodging business activity statements. Limited registration entitles are not entitled to claim ITCs or to have an ABN. They will report quarterly.
1: Tax and Superannuation Laws Amendment (2016 Measures No .1) Bill 2016.
2: Example 1.1 from Explanatory Memorandum to Tax and Superannuation Laws Amendment (2016 Measures No .1) Bill 2016.
3: Example 1.4 from Explanatory Memorandum to Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016.
4: Example 1.5 from Explanatory Memorandum to Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016.
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