Contributed by Simone Bridges, Angela Cowan, Dixon Hearder, Amrit MacIntyre and Peter McMahon, Baker & McKenzie
Since 1 July 2017, an extraterritorial GST regime applies to the supply of digital products and services to an Australian consumer. We have outlined below key features of the new regime and practical issues to consider.
Refer to CCH Books – Australian Master GST Guide equips you with practical guidance on these major changes and more. You can also rely on new Australian Master Tax Guide 2017: Tax Year-End Edition as you navigate all other areas of tax law.
Who are impacted: offshore suppliers and operators of electronic distribution platforms
The new regime is aimed at foreign suppliers (referred to in this alert as merchants) who make supplies remotely to Australian consumers and do not make the supplies through an enterprise in Australia. Merchants making supplies to Australian consumers will be caught within the regime and are required to register for GST if their turnover exceeds $75,000.
Additionally, the new regime introduces specific rules for operators of “Electronic Distribution Platforms” (EDPs), where the EDP operator are treated as having made the digital supplies that are supplied by merchants through the EDP. In these circumstances, the GST liability falls on the EDP operator, rather than the merchant.
The EDP operator is required to include the value of the supplies made by merchants on its platform in calculating its GST turnover. As a consequence, where the value of supplies made through an EDP exceeds the threshold of $75,000, the EDP operator is required to pay the GST on the supplies made by third parties through its EDP.
Under the new rules, foreign merchants and EDP operators need to consider two factors when identifying whether they are supplying to an Australian consumer:
- the residency status of the recipient (customer location), and
- the GST registration status of the customer and the purpose of their acquisition (customer status).
The ATO has provided guidance on their expectations on identifying an Australian consumer. Importantly, merchants and EDP operators are expected to have certain evidence, or have taken reasonable steps to collect evidence, in establishing whether the supply is made to an Australian consumer or not.
Determining if you are making supplies to Australian consumers
The ATO ruling provides that a “business systems” or “reasonable steps” approach may be used to determine whether a recipient is an Australian consumer.
Several pieces of information may be used to assist in determining customer location, including profile address, billing address, and IP location. In determining customer location, the ATO considers that the European Union, New Zealand and Norway have comparable evidentiary requirements for determining customer residency, and have provided that a business system or process that satisfies extraterritorial VAT regime in those jurisdictions will generally satisfy the new Australian regime as well.
Regardless of the approach taken by the merchant or EDP operator in determining customer location, it must also be satisfied of customer status. If the GST registration status is relied on by a supplier for a basis to not charge GST (ie because the customer is an Australian based business), the supplier will only be protected from penalties where they collect a recipient’s Australian Business Number (ABN) and a declaration or information from the recipient regarding GST registration status.
Transitional arrangements are also in place for supplies that began prior to 1 July 2017. Where a supply is made over a period of time, that supply is deemed to be made continuously and uniformly throughout that period and the merchant or EDP operator is liable for GST on the portion of the supply deemed to occur after 1 July 2017.
It is therefore important for entities subject to the regime to be aware of their GST obligations for supplies spanning the transitional period so they can ensure that a reasonable approach is taken in order to determine the GST liability during this period. For supplies commencing after 1 July 2017, it may be prudent for an entity to review its pricing disclosures and terms and conditions to ensuring appropriate GST disclosure and recovery is addressed.
Registering for GST under a simplified reporting regime
If you are a foreign merchant or EDP operator caught by the new regime, a simplified GST registration option is made available by the ATO. Registration is available via an online portal, and importantly, does not require an entity to prove their identity — a significant reduction in administrative burden from the existing registration process. Under a simplified GST registration, a merchant or EDP operator cannot issue tax invoices nor claim input GST credits, and must lodge and pay GST returns quarterly.
Penalties for failure to register for GST
We note that penalties for a failure to lodge a GST return (and other tax statements/returns) on time have been significantly increased for significant global entities (SGE). An SGE is any entity, if that entity is a global parent entity with annual global income of $1b or more, or part of a consolidated group where global group income is $1b or more.
From 1 July 2017, a failure to lodge the required GST return within 28 days of the due date leads to a penalty of $105,000 for an SGE, with a potential penalty of up to $525,000 where that GST return is not lodged within 112 days of the due date.
Due to this significant increases in penalties, it is critical that merchants and EDP operators are aware of their potential GST liabilities under the new extraterritorial regime (including with respect to supplies under the transitional rules) to ensure compliance with the new law.
Other updates: GST and low value goods
The Treasury Laws Amendment (GST Low Value Goods) Bill 2017 has been passed by the parliament. Notably, amendments to the Bill provided that the “go live” date of the law will be postponed until 1 July 2018 (rather than the originally proposed date of 1 July 2017).
The changes will create a GST liability on non-resident suppliers, EDPs and redeliverers for supplies of low value goods (ie goods under $1,000) made to consumers.
The definition of “consumer” mirrors the definition of “Australian consumer” above in relation to the digital changes and similar “safe harbour” provisions allow suppliers, EDPs and redeliverers to not charge GST on B2B supplies. That is, where a non-resident supplier, EDP or redeliverer makes a determination that customer is not a “consumer” and does not remit GST, they must have a reasonable basis for this determination, and similarly where relying on the GST registration as evidence, must have the ABN and declaration or information from the recipient for the belief to be reasonable.
We note that the changes do not apply to supplies of goods that exceed $1,000. These supplies will still be considered “taxable importations” and GST will be payable by the recipient of the supply.