The cross border business to business (“B2B”) changes will be welcomed by businesses involved in international inbound and outbound transactions as they are designed to remove a broader range of cross border B2B transactions from Australia’s GST net. The measures mainly apply to supplies of things other than of goods or real property. This broadly encompasses supplies of services and intangibles though in certain limited circumstances they also apply to supplies of goods.
The impact of these measures is twofold, as follows:
- Australian entities transacting with non-resident entities will be relieved of GST on a broader range of transactions; and
- Non-resident suppliers that do not have a permanent establishment (“PE”) in Australia can more easily stay outside the GST net.
Relief for Australian entities making outbound supplies
Under the pre 1 October 2016 GST rules, where a supply is contractually made to an overseas entity but is actually provided to a recipient in Australia, the supply will be 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.
From 1 October 2016, supplies made in these circumstances will be GST-free provided the Australian recipient of the supply is a GST registered entity and the supply is not of a private or domestic nature. The GST-free status will also apply if the supply is provided to an employee or officer of the Australian based business recipient. The GST-free status will not apply if the acquisition is a non-deductible expense.
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.
The measure will impose a greater obligation on the Australian supplier to satisfy themselves that the Australian recipient of the supply is GST registered.
Repairs to satisfy non-resident entity warranty obligations
Non-resident suppliers of goods to Australian customers may engage local Australian repairers to undertake their warranty obligations in respect of the goods situated in Australia. In these circumstances, the local repairer is faced with a GST liability on the supply of the repair services and any goods used in the repairs despite the fact that they charge the non-resident for the warranty services. The non-resident entity would need to register for GST purposes in Australia to obtain a refund of the GST cost included in the price paid for the repairs.
From 1 October 2016 the new measures will make these supplies to the non-resident entity GST-free provided the repairs are supplied to meet warranty obligations relating to the goods.
This will alleviate the need for the non-resident to register for GST in order to obtain a refund of the GST incurred.
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 from 1 October 2016 whereby an importer who is an Australian business taxpayer 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.
Reverse charge considerations for Australian recipients
While a greater range of supplies made by non-resident entities should be removed from Australia’s GST net, a broader range of Australian resident recipients may be faced with a compulsory reverse charge GST liability in respect of such acquisitions. This will be the case if the acquisition is not made for a fully creditable purpose.
Relief for non-resident entities making inbound supplies
Under Australia's current (pre 1 October 2016) GST rules, supplies made by non-resident entities are caught within the GST net if:
- the supply is done in the indirect tax zone (i.e. done in Australia); or
- the supply is made through an enterprise carried on in the indirect tax zone. This test is linked to whether the non-resident supplier has a PE in Australia. The application of the existing PE test for GST purposes is often at odds with existing PE rules for income tax purposes.
Under the new provisions, a non-resident entity making specified types of supplies in Australia will no longer have Australian GST obligations where the recipient of a supply is a GST registered business recipient. The non-resident entity will still have a GST liability if the supply is made through “an enterprise the supplier carries on in the indirect tax zone”, essentially a PE in Australia.
Providing the supply is not made through a PE, the following supplies will no longer be caught within the Australian GST net even though the supply may be “done” in Australia:
- A supply made by a non-resident to an Australian based business recipient of the supply;
- A supply made by a non-resident to another non-resident for the purpose of an enterprise carried on outside Australia;
- The transfer of ownership of goods from a non-resident entity to another non-resident entity where the goods are leased to an Australian lessee who imported them and are situated in Australia at the time of the transfer; or
- The renewal of a lease of goods by a non-resident lessor to an Australian recipient lessee (who imported them) on similar terms and conditions.
If the recipient of the supply is a private consumer, a GST liability will continue to apply to the non-resident supplier.
New PE rules for GST
As noted above, supplies made by non-residents through “an enterprise the supplier carries on in the indirect tax zone” (i.e. a PE) will continue to be caught in the GST net. The new provisions include a revised definition of what constitutes “an enterprise carried on in the indirect tax zone” for GST purposes. These changes are designed to bring the GST rules more closely into line with the income tax definition of a PE.
Under the new rules, supplies made by an individual, an employee or officer of a company or an agent (but not a broker, commission or other independent agent) will be made through a PE if:
1. They are made through a fixed place;
2. They have been made through one or more places for more than 183 days in a 12 month period; or
3. It is intended that supplies will be made though one or more places for more than 183 days in a 12 month period.
Non-resident entities intending to undertake activities in Australia will need to consider whether they will have a fixed place in Australia or what the length of their stay in Australia will be in order to ascertain whether they will have GST obligations in Australia.
Installation and assembly of goods in Australia by a non-resident
A non-resident entity that installs or assembles in Australia goods that it has supplied to its Australian customer 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 consisting of the supply of the goods and the supply of the installation services. Under the new GST rules the supply of the services may fall outside the GST net if the tests above are satisfied.
The supply of the goods may continue to be a taxable supply if imported by the non-resident supplier. However, if the goods are imported by the Australian recipient, GST will only be payable by the Australian recipient at the time of importation.
Where goods are supplied and installed by a non-resident supplier for a single all-inclusive price and the non-resident supplier is the importer into Australia, it may be necessary to apportion the price between the value of the installation services and the value of the goods.
Review transactions and arrangements
With the start date of 1 October 2016, now is the time for entities that are involved in cross border transactions to review their transactions and make an assessment of how the impending changes may impact their existing GST position.