The Government recently introduced a Bill which has significant GST implications for non-Australian businesses interacting with the Australian economy. The changes are grouped in two categories.
First, the GST tax base will be broadened so that remotely delivered digital supplies (‘inbound intangible consumer supplies’) will become subject to Australian GST from 1 July 2017.
Second, several changes are proposed to overcome some GST ‘black hole’ situations and to minimise GST compliance costs for non-residents.
This Tax Insight addresses the first issue; the second group of changes will be summarised in a subsequent note.
Inbound intangible consumer supplies (IICS)
The GST base will be expanded so that digital supplies, delivered to ‘Australian consumers’ from locations outside Australia (i.e. B2C supplies), will be subject to Australian GST. This measure has been forthcoming for some time, and has been colloquially referred to as ‘the Netflix tax’.
This amendment is characterised as an integrity measure; i.e. it aims to support the integrity of the GST system and to stop erosion of the GST tax base. This is happening as more supplies are delivered from outside Australia, without attracting a GST liability.
As an ‘integrity measure’ it seems this change does not require the agreement of all Australian Governments. (Of course, that agreement has probably been given in substance, as no Government is arguing against the extension of the GST tax base.)
Once implemented, the Australian GST system will be consistent with the OECD’s International VAT/GST guidelines, and will reflect the ‘destination principle’, i.e. taxation in the jurisdiction where consumption occurs. Australia is following Europe, Norway, Japan, amongst others, in taxing remotely delivered digital supplies.
What will be taxed?
The amendments will bring the following types of supplies within the Australian GST net: foreign delivered movie streaming or downloading services; music; apps; games; e-books; and other digital products; as well as other services such as consultancy and professional services.
Extended nexus – Australian consumer
Digital supplies will only be subject to Australian GST where the supply is made to an ‘Australian consumer’. This is someone (individual or an entity) who is not registered for GST in Australia, or if GST-registered, the supply is of a personal nature and is not connected with the GST – registered enterprise.
The Australian nexus been extended - a supply made from outside Australia to an ‘Australian consumer’ will constitute a new taxable ‘connection with Australia’.
Remote digital supplies made to Australian GST-registered persons will not be caught by these new rules. The existing reverse charge rules will continue to apply, with the GST-registered Australian recipient responsible for any potential Australian GST liability.
Who is liable to account for the GST?
Where the digital supplies are made through an electronic distribution platform (EDP), then the operator of the EDP will be deemed the supplier, and will have to attend to the Australian GST obligations, specifically paying the GST to the ATO and collecting the same amount from the Australian consumer.
An EDP operator will always be the deemed supplier if the operator does any of the following:
- Authorises the charge to the customer;
- Authorises the delivery to the customer; or
- Sets the terms and conditions under which the supply is made.
The operator would generally be an Australian business, GST registered, and capable of accounting for the GST. But the operator could be a non-Australian entity.
Where the EDP operator does not do any of the three matters above, it is possible to agree with the foreign supplier (actual supplier) that the actual supplier will be responsible for discharging the Australian GST obligations.
Where a non-Australian supplier is responsible for the Australian GST obligations in making IICS to Australian consumers, there will be a new limited registration regime introduced. It will be easier for the non-resident (a Limited Registration Entity – LRE) to register in Australia for GST purposes.
Under the LRE regime - Business Activity Statements can only be lodged on a quarterly basis; no input tax credits are permitted; no ABN will be issued; and tax invoices are not required.
The limited registration regime is elective; if the non-resident wants to claim input tax credits, or to obtain an ABN, it can stay with the standard registration process.
The new rules will apply for supplies made on and after 1 July 2017.
Where there has been a supply of a prepaid service which spans the 1 July 2017 start date, the value which relates to the post 1 July 2017 period will be subject to GST.
Non-resident suppliers of digital services have over a year before the new rules come into effect. In that time they should:
- Identify affected digital supplies;
- Determine whether they or an EDP operator will be the supplier;
- Register for Australian GST purposes if necessary;
- Take ‘reasonable steps’ to determine whether Australian recipients are ‘Australian consumers’ as defined, or not;
- Review and update all commercial, contractual and advertising material to reflect the forthcoming changes.
For further information, please contact your regular RSM tax adviser.