As the use of the cloud to provide digital products and services has grown, so too has the interest of governments in taxing cloud-based transactions. The difficulty for governments, such as Australia’s, is that the cloud infrastructure is largely located overseas and their ability to enforce compliance by overseas suppliers is limited.
Nonetheless, from 1 July 2017, the GST law applies to foreign residents who supply digital products and services remotely to Australian consumers. We will refer to these suppliers as “foreign retailers”.
Who is affected?
The new law applies to foreign retailers of all digital products, such as streaming or downloading of software, movies, music, apps, e-books as well as other services such as training and consulting services supplied from overseas to Australian consumers.
The new rules will also apply to Australian re-sellers of digital products and services, if they are not already subject to GST.
The new law introduces specific rules for operators of electronic distribution platforms (EDPs), such as Amazon, who are treated as having made the digital supplies that are made through their platform. In these circumstances, Amazon (or other EDP operator) will be subject to GST rather than the foreign retailer.
An “Australian consumer” is an entity (e.g. individual, body corporate, partnership, trust) that is:
(a) an Australian resident; and
(b) either not registered for GST, or is registered for GST but does not make the acquisition solely or partly for the purposes of an enterprise (i.e. their business).
Accordingly, an Australian enterprise that acquires digital products or services only partly for business purposes will not be an “Australian consumer”. In these circumstances, the special “reverse charge” rules will require the customer (rather than the retailer or EDP) to pay the GST.
Determining whether customers are Australian consumers
There are two steps in determining whether a customer is an Australian consumer.
The first step involves forming a “reasonable belief” as to whether the recipient of the supply is an Australian resident. Based on a recent ATO ruling (GSTR 2017/1), a “business systems” or “reasonable steps” approach can be used to form such a belief.
The business systems approach involves relying on information gathered from the supplier’s usual business systems and processes, such as the recipient’s billing and mailing addresses, banking or credit card details, mobile phone SIM or landline country code, IP address and representations made by the recipient.
Where the supplier’s usual business systems and processes do not collect such information, the reasonable steps approach to gathering information may be necessary. What is reasonable will depend on the circumstances. An example given in GSTR 2017/1 is of an online personal assistant service taking reasonable steps by asking a customer for his country of residence, his credit card number, billing address and what types of administration services he is likely to need.
If a supplier forms a reasonable belief that the recipient is not an Australian resident, that is the end of the matter. On the other hand, if the supplier forms a belief that the recipient is an Australian resident, they may conclude that the recipient also satisfies the consumer element of “Australian consumer”. Alternatively, the supplier may form a reasonable belief that the recipient does not satisfy the consumer element. The law provides that a supplier can only form a reasonable belief that a recipient is not a consumer if the recipient has provided their Australian Business Number (ABN) and a declaration or information that indicates they are registered for GST. According to GSTR 2017/1, the retailer should take reasonable steps to ensure the ABN is valid and belongs to the recipient, such as using the online ABN Lookup tool.
A supplier is only required to pay GST if they are required to register for GST. Foreign retailers (and EDP operators) are only required to register for GST if they make supplies to Australian consumers of at least $75,000 per year. In other words, if they make supplies of less than this amount, they do not need to pay GST on their supplies to Australian customers.
If they are registered and make supplies of less than $20m per year, GST returns must be lodged quarterly. If they make supplies of at least $20m per year, monthly returns must be lodged.
However, foreign suppliers can elect into a “limited registration” regime that requires less information when registering for GST and lodging returns. Limited registration entities are required to lodge GST returns quarterly (even if they make supplies of $20m per year), but are not entitled to input tax credits or an ABN.
Whether or not they elect for limited registration, foreign suppliers are not required to issue a tax invoice (or adjustment note) for supplies of digital products and services to Australian consumers.
Penalties for non-compliance
Generally speaking, the penalties for non-compliance with the GST law apply equally to Australian and foreign suppliers. This includes a penalty of 75% of the outstanding GST if a supplier fails to lodge a GST return on time (or 150% for a “significant global entity”).
A person who fails to lodge a GST return on time also commits an offence, which is punishable by fine and/or imprisonment for a period of up to 12 months.
In practice, however, the ability of the Australia Taxation Office (ATO) to enforce Australia’s tax laws against foreign residents who have no assets in Australia is severely limited. This means that the new rules are, in a sense, voluntary, particularly for smaller retailers whose GST liability is likely to be too insignificant to warrant ATO scrutiny.