Focus: GST on offshore services and intangible supplies
14 May 2015
In brief: GST is to be applied to the supply of services and other intangibles by non-residents to Australian consumers under legislation proposed to apply from 1 July 2017. This will include the supply of digital products and the supply of other services. The liability for GST on such supplies made through an electronic marketplace will be shifted from the supplier to the operator of the marketplace in certain circumstances. Partner Adrian Chek (view CV) and Senior Associate Jennee Chan report.
How does it affect you?
- A non-resident supplier of anything other than goods or real property to Australian consumers will be liable for GST on the supply (unless it is GST-free or input taxed). This will be the case even if the supply is made outside Australia or made through an enterprise that the supplier carries on outside Australia.
- An operator of an electronic distribution service (EDS), which allows entities to make supplies available to end-users by electronic communication, will be liable for GST on intangible supplies made through the EDS in certain circumstances.
- A supplier of intangible supplies made through an EDS would not be liable for GST on the supplies if the operator of the EDS is liable for the GST.
GST is generally payable on taxable supplies and taxable importations.
To be a 'taxable supply', the supply relevantly must be connected with Australia.1 The connection with Australia test depends on the nature of the supply. Where the thing supplied is something other than goods or real property (such as for example, services or other intangibles), the supply would be connected with Australia only if:
- the thing is done in Australia;
- the supplier makes the supply through an enterprise that the supplier carries on in Australia (broadly, a permanent establishment in Australia); or
- the thing supplied is a right or option to acquire something, the supply of which would be connected with Australia.
To be a 'taxable importation' there must relevantly be an importation of goods into Australia. An importation of things other than goods (such as digital products or services) would not be a taxable importation.
Under these current general rules, an intangible supply by a non-resident will often fall outside the GST net.
Special rules apply in certain circumstances to effectively deem an intangible supply not connected with Australia to be a taxable supply. These rules operate to impose the GST liability in respect of the supply on the recipient and are commonly referred to as the 'reverse charge' provisions. However, the reverse charge provisions only apply where the recipient is a GST-registered entity (or is required to be registered) and the acquisition is made for a purpose that is not a wholly creditable purpose. Broadly, this limits the application of the reverse charge provisions to taxpayers who make input taxed supplies (such as financial supplies).
Importantly, the reverse charge provisions do not apply to intangible supplies acquired by consumers who are not registered (or required to be registered) for GST, or where the supplies are not acquired for the purpose of carrying on an enterprise (such as an acquisition that is of a private or domestic nature).
Offshore supplies of services and intangibles to Australian consumers
The draft legislation extends the definition of 'connected with Australia' to include a supply of anything other than goods or real property where the recipient of the supply is an 'Australian consumer'. The proposed legislation will apply to supplies of digital products, such as streaming or downloading of movies, music, apps, games and e-books, as well as other services such as consultancy and professional services.
An 'Australian consumer' is:
- an Australian resident (within the meaning of the Income Tax Assessment Act 1936) who is not registered or required to be registered for GST; or
- an Australian resident who is registered or required to be registered, but who acquires the intangible supply other than for the purpose of an enterprise.
Broadly, the draft amendments will apply to things acquired for private or domestic consumption, and to things acquired in the course of carrying on an enterprise in circumstances where the entity is not registered or required to be registered for GST (perhaps because its turnover is less than the GST registration threshold).
The draft legislation proposes a safe harbour in relation to the need for suppliers to be satisfied as to whether a recipient is an Australian consumer. Relevantly, the supplier may treat the supply as having been made to a non-resident if they have taken reasonable steps to obtain information about whether or not the recipient is an Australian consumer and reasonably believes the recipient is not an Australian consumer. The ATO is expected to work with affected suppliers to develop an agreed understanding of what those reasonable steps should be.2
The proposed extension of the 'connected with Australia' test would appear to resolve the Government's concerns about GST leakage in a basic two party transaction. However, GST leakage might remain an issue in more complex tripartite arrangements where a non-resident supplier of intangible products might 'make' the supply to one entity, but 'provide' it to another entity.
In this regard, the Commissioner states in his GST public ruling on the meaning of 'supplies' that:3
You make an acquisition if you are the recipient of a supply. That is, the supply is made to you. In most transactions concerning GST the recipient of a supply is the entity that is also provided with that supply. In contrast, some supplies are made to the recipient, but provided to another entity. Arguably, such provisions are also supplies. However, these are not relevant because there is no contractual or reciprocal relationship between the supplier and the entity being provided with the supply.
Operators of electronic distribution services
In certain circumstances, the draft legislation proposes to impose the liability for GST under the amendments on the operator of electronic markets through which the digital products are sold. This recognises the rising use of electronic markets to sell digital products and services. Broadly speaking, such arrangements involve a market operator who effectively provides a distribution or facilitation service to the underlying supplier of products or services.
Under the draft legislation, an operator of an 'electronic distribution service' through which supplies of 'inbound intangible consumer supplies' are made will, in certain circumstances, be treated for GST purposes as being the supplier of the products or services to consumers. This means that the 'operator' (noting that this term has not been defined) will be liable for the GST payable on supplies made through the EDS.
An EDS is a service (including a website, internet portal, gateway, store or marketplace) which allows entities to make supplies available to end users, where the supplies are made by electronic communication.
An 'inbound intangible consumer supply' is a supply of something other than goods or real property (ie services or other intangibles) to a recipient who is an Australian consumer, where the supply is not done in Australia or made through an enterprise that the supplier carries on in Australia. That is, it broadly covers those supplies that are intended to be made taxable under the extended 'connected with Australia' test, where the supplier is likely to be a non-resident who is not currently registered for GST.
The new provisions will mean the operator will bear the responsibility for determining the characterisation of the underlying supply; whether the underlying supply is done in Australia or made through an enterprise that the underlying supplier carries on in Australia; and whether the recipient is an Australian consumer. An operator will need to ensure that it obtains sufficient information from the supplier in order to determine if the operator has a GST liability for supplies made to Australian consumers by the supplier. An operator that is potentially liable for GST on the supply should consider obtaining appropriate warranties and indemnities from the supplier.
Notwithstanding the above, the operator would not be liable for GST on the supply (and the supplier will continue to be liable for GST) if all of the following conditions are satisfied:
- the invoice for the supply identifies the supply and the supplier;
- the contractual arrangements for both the supply and access to the EDS identifies the supplier as the supplier and as the entity responsible for paying GST; and
- the operator of the EDS does not authorise the charge to the recipient for the supply, does not authorise the delivery of the supply and does not set the terms and conditions under which the supply is made.
GST registration requirements
The proposed amendments mean that EDS operators, and non-resident suppliers of services and other intangibles to Australian consumers, will need to consider whether they are required to register for Australian GST, and remit GST in respect of their supplies.
A supplier is generally required to be registered for GST if it is carrying on an enterprise and its GST turnover is at least $75,000 (or $150,000 for non-profit bodies). The GST turnover is broadly calculated by reference to the value of supplies, other than supplies that are not connected with Australia.
The rules for determining GST turnover will be amended to ease the potential obligation of non-resident suppliers to register for Australian GST. The general rules relating to registration, tax periods and GST returns will also be modified for entities that make supplies that are connected with Australia because of the amendments. The scope of these rules is to be determined in consultation with affected taxpayers, although it is expected that most of the simplified administrative rules, to be set out in the regulations, will apply only to entities that elect to apply limited registration that would prevent them from being entitled to input tax credits.
Low value imported goods
GST is not payable on the importation of goods valued at $1,000 or less under the current 'low value threshold'. The proposed amendments discussed above do not impact of the current position relating to the importation of goods (including online purchases). While the Government indicated it may lower the $1,000 exemption threshold, specific measures have not been announced.
The exposure draft legislation is open for public consultation until 7 July 2015. Interested parties should consider making submissions on the draft legislation and draft explanatory material. The new provisions are currently proposed to affect supplies made on or after 1 July 2017.
In the meantime, parties who might be affected by the proposed amendments should:
- Consider the characterisation of supplies from a legal perspective, and from a practical business perspective. For example, is the thing supplied a right or option to acquire another thing (such as a right to acquire advertising services), or it is a supply of the thing (being the advertising service); and who is the recipient of the relevant supply? The characterisation of the supply may be relevant for determining whether it is connected with Australia such that it falls within the scope of the proposed amendments.
- Review existing supply agreements to determine whether they adequately deal with the GST exposure arising from the proposed amendments (for example, consider whether the supply agreements contain a GST 'gross up' clause that would allow any GST imposed on a supply to be passed on to the recipient).
- Consider whether contractual arrangements involving use of an EDS need to be amended in light of the proposed amendments, including to obtain appropriate counterparty warranties and indemnities.
- Consider whether the GST registration threshold might be satisfied, such that it would be necessary to register for Australian GST. Non-residents who would be required to register for GST might wish to consider appointing a resident agent to attend to GST compliance issues.
- Technically, the supply must be connected with the 'indirect tax zone'. However, for ease of discussion, we will refer to the indirect tax zone as Australia.
- 'Exposure Draft Explanatory Material to the Tax Laws Amendment' (Tax Integrity: GST and Digital Products) Bill 2015, paragraph 1.39.
- GSTR 2006/9: Supplies, paragraph 15.
- Adrian ChekPartner,
Ph: +61 2 9230 4800
- Jennee ChanSenior Tax Counsel,
Ph: +61 3 9613 8537
- Martin FryPartner, Practice Leader, Tax,
Ph: +61 3 9613 8610
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