Australia has been hastening slowly to reduce the GST compliance burden on non-residents, and after 6 years of ‘deliberation’, the measures finally came into effect on 1 October 2016. Broadly, the changes transfer the GST obligations from some non-resident suppliers to the Australian GST-registered recipients (reverse charge provision), whilst other non-residents are removed from the Australian GST system altogether.
The changes target specific situations, and non-resident suppliers will need to ensure they satisfy the prescriptive requirements in order to take advantage of the reduced compliance. These changes are to be applauded, but there are some areas of uncertainly which will require careful consideration.
In some instances, it will be necessary to review existing systems arrangements, change the wording in business documents, and/or collect additional customer information (systems changes should be planned to incorporate the forthcoming B2C changes – see comment below.)
The 1 October changes
The changes are detailed, and seek to find a reasonable balance between protecting the integrity of the Australian GST base, but not unnecessarily ‘dragging in’ non-residents who have no net GST liabilities.
The detail in the changes require non–residents to be certain about their circumstances, and that they meet all the statutory tests for exclusion.
The Australian taxing nexus is removed for a supply made by a non-resident supplier where:
- The supplier does not make the supply through an ‘enterprise’ that the supplier carries on in Australia
- The supply is one of the following:
- An inbound intangible supply (i.e. not a supply of goods or real property) which is ‘done’ in Australia, and made to an Australian-based business recipient;
- An intangible supply (i.e. not a supply of goods or real property) which is done in Australia, and made to a non-resident in connection with an enterprise carried on outside Australia;
- A supply by way of transfer of ownership of leased goods made by a non-resident recipient in connection with an enterprise carried on outside Australia, and the lessee made an earlier taxable importation and continues to lease the goods on similar terms and conditions as before;
- Modifying an existing lease agreement between a non-resident lessor and a continuing Australian lessee.
Changes have also been made when goods are brought into Australia in conjunction with assembly or installation services. The supply of the goods and the supply of the services are deemed to be two separate supplies, with the Australian GST treatment to be determined separately, by reference to the circumstances of each separate supply.
Supplies physically provided to Australian customers, but legally made under subcontract to a non-resident, with payment coming from the non-resident, are now treated as a GST-free export supply of services, provided the actual recipient of the services is an ‘Australian-based business recipient’.
Another significant amendment relates to the provision of warranty services by an Australian resident made to a non-resident, in conjunction with an earlier supply of goods made by the non-resident, and to which the later warranty repairs apply. This supply is now a GST-free export supply made by the Australian resident.
Registration turnover threshold
The value of GST-free supplies made by a non-resident which are not made through an enterprise carried on by the non-resident in Australia, is now excluded in calculating the registration threshold. Many non-residents were required to register for Australian GST, even though they made only GST-free supplies, and had no net GST liability.
These non-residents can now consider surrendering their Australian GST registrations and exit the system, although consideration would need to be given to the cost/benefit, if there were material refunds of input tax credits made by the non-resident.
When a non-resident carries on an enterprise in Australia
A new definition has been introduced which includes concepts familiar in direct tax practice, but with a slightly different meaning for GST purposes. A non-resident will carry on an enterprise in Australia if:
- Certain people functions occur within Australia
There is a minimum physical and/or temporal connection with Australia.
The people functions must be performed in Australia by the non-resident individual (if appropriate); an employee or officer of a non-resident entity; or an agent (or employee) who has and habitually exercises authority to conclude contracts on behalf of the non-resident entity, and who is not an agent of independent status.
The physical Australian connection will be satisfied where the non-resident carries on its enterprise through an Australian fixed place; or has carried on the enterprise through one or more Australian places for more than 183 days (or intends to do so) within a twelve month period.
Non-residents will need to carefully consider their marketing and other arrangements in Australia, in determining whether they are able to demonstrate that they do not carry on their enterprise in Australia. The working arrangements with Australian subsidiaries, or Australian branches of associates, or Australian agency arrangements, will require particular attention.
On the agency point, it should be noted that the connection is phrased in the pre-BEPS language, which is deliberate as it narrows those circumstances in which a connection will exist.
As the new exceptions depend upon the non-resident being able to demonstrate that it does not make supplies through an enterprise it carries on in Australia, to satisfy this requirement is central to accessing relief under the new amendments.
Australian-based business recipient
Another important concept is the Australian-based business recipient. Where a non-resident makes a supply to such a recipient, it is the recipient who takes on the Australian GST obligations, and who must self-assess a potential reverse charge. An entity is an ‘Australian-based business recipient’ if:
- The entity is GST registered (note the absence of the usual alternative ‘or required to be registered’)
- The entity carries on its enterprise in Australia
- The entity's acquisition is in connection with its enterprise.
Non-resident supplies made through resident agent
Where the amendments apply, the Australian nexus will be removed and the non-resident will be relieved of GST reporting obligations for those supplies. But long-standing arrangements, by which some non-residents make and account for taxable supplies through Australian resident agents, can, at the option of the parties, continue in operation.
Non-residents should consider whether these new rules might apply to reduce their Australian GST obligations. (Pre 1 October 2016 arrangements are unaffected by these changes.)
Obtaining certain information (e.g. regarding the GST-status of Australian customers) should be considered, as well as appropriate changes to contract documentation, and other customer marketing collateral.
Forthcoming changes – in Australia
With effect from 1 July 2017, non-resident suppliers of ‘inbound intangible consumer supplies’ (ie B2C intangible supplies) made to Australian consumers, will become liable for Australian GST on the value of the supplies. This will require changes to systems, procedures and contractual documentation, as well as a marketing campaign to foreshadow and explain the changes, pricing arrangements, etc.
To read more about the B2C changes, click here: https://www.rsm.global/australia/insights/tax-insights/australian-gst-extended-tax-foreign-b2c-digital-supplies
New Zealand GST changes
New Zealand has introduced its own B2C (remote supply) GST regime, applicable to non-resident suppliers making supplies to New Zealand based recipients. That new regime commenced to apply to supplies made on and after 1 October 2016.
To read more about the New Zealand B2C changes, click here: https://www.rsm.global/newzealand/news/do-you-provide-remote-services-nz-residents