New measures dubbed the Netflix Tax will bring within Australia’s GST net supplies of anything other than goods or real property made by non-resident suppliers to Australian consumers. These measures are designed as an integrity measure to protect the Australian GST base in today’s digital economy.
Other changes will exclude a broader range of cross border business to business transactions from Australia’s GST net and will be a welcome change for many resident and non-resident businesses that operate across the Australian border.
Both sets of measures will impact international businesses that trade with Australian customers.
The Netflix Tax
In 2015 the Government announced that it would impose GST on inbound intangible supplies made by overseas suppliers to Australian consumers. The measures have been dubbed the Netflix tax as the Government’s announcement coincided with the launch of Netflix in Australia.
While the measures originally focused on the supply of digital download products to Australian consumers, the legislation as drafted extends more broadly to supplies of anything other than goods or real property to Australian consumers. It will therefore capture supplies of services as well as other intangibles made by offshore businesses into Australia.
An Australian consumer is defined as an Australian tax resident who is not registered for GST purposes or, if registered, does not acquire the thing for the purpose of an enterprise they carry on. Supplies made to Australian businesses (B2B transactions) will fall outside the scope of the new rules.
A key challenge for non-resident suppliers will be to determine the status of their Australian customers. They will need to understand whether their customers in Australia are making acquisitions for the purpose of an enterprise they carry on here. The new measures require the supplier to take reasonable steps to ascertain the status of the recipient. We expect that in most (but not all) cases this should be apparent from the nature of the supplies being made and the target market for those supplies.
While the new rules will apply to a wide range of services and other intangibles, it is expected that digital downloads will comprise the majority of transactions that will be caught.
Digital downloads and Electronic Distribution Platforms
Given the large number of suppliers of digital products that could be making supplies to Australian consumers, the proposed changes include special rules that will apply where digital products are supplied via an electronic distribution platform.
Where an electronic distribution platform is used to make supplies to Australian consumers, the operator of the electronic distribution platform will be deemed to be the supplier and to be liable for the GST rather than the actual supplier of the digital product.
In some cases, a supply may involve multiple electronic distribution platforms. Where a supply is made through multiple electronic distribution platforms, in the absence of an agreement between the parties the supplier will be deemed to be the first platform operator to either:
(a) receive or authorise charging consideration for the supply; or
(b) authorise delivery of the supply.
In certain circumstances, a platform operator can agree with the supplier that the supplier will be liable for the GST.
Limited GST registration rules
Suppliers who are caught by these new provisions can elect to be treated as limited registration entities. Limited registration entities will have a lesser compliance burden than standard GST registered entities.
Limited registration entities will be required to lodge their GST returns on a quarterly basis and will not be entitled to claim input tax credits in respect of any GST that is included in the costs they incur in Australia. In practice, on the basis that the overseas supplier will not have a presence in Australia, we expect that there will be minimal costs incurred that would otherwise give rise to an input tax credit entitlement.
The Netflix Tax changes are due to commence with effect from 1 July 2017.
Other changes to the GST treatment of cross border transactions
The Government has also introduced measures which are designed to remove a broader range to cross border B2B transactions from Australia’s GST net. These changes were first mooted following a review of the administration of the GST regime in 2008. In 2013 the Government announced that it would enact changes to the cross border rules following the review. As such, these measures have been a long time in the making. Nevertheless, they are a welcome move for businesses involved in international inbound and outbound transactions.
There are two broad aspects to these measures:
- Non-resident suppliers that do not have a permanent establishment (“PE”) in Australia can more easily stay outside the GST net.
- Australian entities transacting with non-resident entities will be relieved of GST on a broader range of transactions.
Relief for non-resident entities making inbound supplies
Under Australia's current GST rules supplies made by non-resident entities are caught within the GST net if:
- the supply is done in the Indirect Tax Zone (essentially done in Australia); or
- the supply is made through an enterprise carried on in the Indirect Tax Zone. The enterprise test is linked to whether the non-resident supplier has a PE in Australia.
Relief for supplies made in Australia by non-residents
In broad terms, where a non-resident entity makes a supply in Australia, unless the supply is made through a PE in Australia, the new rules will relieve the non-resident entity of any Australian GST obligations in the following circumstances:
- A non-resident makes the supply to an Australian based business recipient of the supply;
- A non-resident makes the supply to another non-resident for the purpose of an enterprise carried on outside Australia;
- Ownership of goods that are leased to an Australian lessee is transferred to another non-resident entity; or
- A non-resident lessor of goods effectively renews a lease to an Australian recipient lessee on similar terms and conditions.
Accordingly, where the recipient of a supply is a business recipient, supplies will no longer be caught within the GST net. If however the recipient is a private consumer, the connection test will be satisfied so that a GST liability will continue to apply to the non-resident supplier.
Clarifying the PE test
Supplies made by non-residents through a PE in Australia will continue to be caught for GST purposes. However, in order to help non-residents determine whether they are caught by the PE rules, the proposed changes will align the PE test for GST purposes more closely with the PE tests that exist in relation to Australia's income tax double tax agreements.
Broadly, a non-resident entity will be deemed to have a PE in Australia for GST purposes if the non-resident’s enterprise is carried on through a fixed place in Australia, or through one or more places in Australia for more than 183 days in a 12 month period. If the enterprise is carried on by an individual, the test applies to the individual. If the enterprise is carried on by another entity such as a company, the test applies to any employee or officer of that entity or to an agent who has authority to conclude contracts and is not an independent agent.
Installation and assembly of goods in Australia
A non-resident entity that installs or assembles in Australia goods that it has supplied is currently faced with a GST liability on both the supply of the goods and installation services even where the goods are imported directly by the customer.
The two elements of the supply will in future be treated as separate supplies so that GST will only apply to the installation and assembly services undertaken in Australia.
Relief for Australian entities making outbound supplies
The second element of the changes is designed to remove GST from supplies made by Australian suppliers to overseas entities in circumstances where the supply is provided to an Australian based business recipient.
Under the current GST rules, where a supply is contractually made to an overseas entity but is actually provided to a recipient in Australia, the supply is subject to GST. An example is where an overseas entity engages an Australian supplier to provide services to an Australian subsidiary of the overseas entity. Under the new measures, provided the Australian recipient of the supply is a GST registered business, the supply by the Australian service provider will be GST-free.
This is a welcome measure as it will remove the GST burden from overseas businesses that currently need to register for GST purposes in Australia for the sole purpose of claiming a refund of GST included on charges from Australian suppliers.
Repairs under warranty
Non-resident suppliers of goods to Australian customers may engage local Australian repairers to undertake their warranty obligations in respect of the goods. The local repairer is currently faced with a GST liability on the supply of the repair services despite the fact that they charge the non-resident for the warranty services. The new measures will in future make these supplies GST-free.
Taxable importations – simplification of taxable value rules
Goods imported into Australia are subject to GST at the point of importation. GST is payable on the sum of the customs value of the goods plus any applicable customs duty plus international freight and insurance. To assist with the calculation of the taxable value for GST purposes, a simplification measure is being introduced whereby an importer can apply a 10% mark-up on the customs value and duty to arrive at the taxable value for importation purposes. This eliminates the need to determine the exact amount of international freight and insurance that may apply to a particular shipment.
This simplification measure is not available to importations made by private consumers. Consistent with most of the changes, the new rules that apply to importations are designed to help streamline the administration of GST for Australian business taxpayers.
The legislation contains transitional rules designed to ensure that transactions are only caught by the new rules from their commencement date.
The cross border relief measures will apply with effect from the beginning of the second quarterly tax period that commences after the legislation is passed by the Australian Parliament and receives Royal Assent. Accordingly, if the legislation receives Royal Assent in March, the new rules will apply with effect from 1 July 2016. If Royal Assent is not received until April, the date of effect will be 1 September 2016.