The Australian Government has recently enacted Tax and Superannuation Laws Amendment (2016 Measures No. 1) Act 2016 (the Act).
Broadly, the Act removes certain cross border business to business transactions (B2B) from the GST net from 1 October 2016. This will relieve non-resident suppliers from the obligation to account for GST on certain supplies.
These changes will generally simplify the GST treatment of business to business cross border transactions. These measures broadly exclude supplies of good or real property and effectively apply to supply of services and intangibles.
The changes provides certainty of GST treatment to cross border transactions. Businesses involved in Australian cross-border trade should review their transactions to determine their correct GST treatment. Below is only a broad high level outline of the changes
What do these changes mean?
New PE rules for GST purposes
Supplies made by non-residents through a permanent establishment in the indirect tax zone (ITZ) will continue to be caught in the GST net. Broadly, ITZ means all land territories of Australia and the coastal seas but excluding external territories. The test of when an enterprise is carried in in the ITZ will be more closely aligned with Australia’s modern treaty practice in relation to permanent establishments.
Under the new rules, generally a non-resident’s enterprise will need to be based in Australia for more than 183 days in a 12-month period, and have a GST turnover of A$75,000 or more, to be required to register for GST. This could result in some entities being able to cancel their GST registration.
No GST on Australian businesses making supplies offshore
Under the previous rules, certain GST-free supplies made to non-residents lose their GST-free status because the supply is provided to another entity in the ITZ.
Under the new rules, supplies made in these scenarios will be GST free provided the recipient in the ITZ is a GST registered entity and the supply is not of a private or domestic nature. The new rules remove the burden of overseas businesses having to register for GST for the purpose of claiming input tax credits.
An example of a supply that may now be GST-free is when an Australian business makes a supply of training services to an overseas company, but provides those services to one of the company’s employees in Australia.
Supplies of warranty services to non-residents but provided to Australian warranty holders to be GST free
A non-resident supplier of goods to Australian consumers may engage an Australian repairer to provide the repair services under the non-resident’s warranty obligations.
Under the old rules, the local repairer must charge GST on the supply of repair services and on any goods used in the repairs even though the local repairer charges the non-resident supplier.
Under the new rules, the supply of repair services to a non-resident in relation to warranty obligation on goods will be GST-free.
Easier calculation methodology for imported goods
GST-registered importers can calculate the value of taxable importation for GST purposes without identifying the exact amount paid for:
- international transport
- loading or handling
- service costs for the transport.
Instead, the importer may now opt to use an uplift factor (currently 10%) of the customs value of the imported goods. This will ease administration.
Supplies of goods installed or assembled in Australia
Under the old rules, a supply of goods into the ITZ is connected with the ITZ if the supplier either imports the goods into the ITZ or installs or assembles the goods in the ITZ.
Under the new rules, a supply of goods into the ITZ is only connected with the ITZ if the supplier imports the goods. If the supply of the goods that are brought into the ITZ involves the supplier installing or assembling the goods in the ITZ, the part of the supply that involves the installation or assembly of the goods is treated as a separate supply and an apportionment may be necessary.
Relief for non-resident entities making inbound business to business supplies to Australia
Under the previous rules, supplies made by non-resident entities are subject to GST if the supply is done in the ITZ or the supply is made through an enterprise carried on in the ITZ.
Under the new provisions, the ‘connected with the ITZ’ rules have a much limited application where the recipient of the supply is a GST registered business. Generally this means that a larger range of supplies will be caught by the compulsory reverse charge provisions.
What other GST changes are there?
Separately, the Act also contains measures to extend the GST net to business to consumer transactions (B2C) involving the supply of intangibles such as digital products from 1 July 2017.
Accordingly, supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receive similar GST treatment whether they are supplied by a local or foreign supplier.
These types of supplies have largely escaped GST under the previous law.
Under these new rules, overseas suppliers will need to register and charge GST if they meet the $75,000 turnover threshold ($150,000 for non-profit entities).
If you would like to find out more about the Australian GST changes to cross-border supplies, you can contact Andrew Lam here.