This article was written by Stuart Courtney and Katrina Parkyn.
Changes at a glance
On 4 November 2016, the Government released exposure draft legislation to impose GST on the sale of imported goods with a value of less than $1,000.
The main purpose of the changes is to ensure that low value goods imported by Australian consumers are subject to the same GST treatment as goods sourced from Australian suppliers.
If enacted, the changes will commence on 1 July 2017 and will complement the changes to the GST treatment of supplies of intangible products by foreign suppliers (colloquially referred to as the “Netflix tax”) which will also commence on the same day. Our publications on the “Netflix tax” can be found here and here.
Who is affected?
Under the current system, overseas retailers are generally able to sell goods to Australian consumers without GST applying where the value of the goods concerned is less than $1,000
The proposed changes will result in the importation of low value goods (less than $1,000) being subject to Australian GST. The compliance burden of the changes will most affect overseas retailers selling to Australian consumers, but will also have an impact on freight forwarders and operators of electronic distribution platforms used to facilitate supplies to Australian consumers.
It is reasonable to expect that the changes will also affect the price at which overseas retailers are willing to sell to Australian consumers.
The proposed treatment of supplies of low value goods
One of the requirements for GST to be payable on a supply is that the supply is “connected with the indirect tax zone” (i.e. connected with Australia). This is because:
- where goods are brought into Australia, the supplier is not liable to pay GST on the supply provided that the supplier is not the importer of the goods; and
- where the value of the goods is less than $1,000 no import entry is required under the customs legislation and, as a result, the importation is not subject to GST.
Under the changes, a supply of goods will be treated as being “connected with the indirect tax zone” where:
- the supply involves the goods being brought into Australia with the assistance of the supplier;
- the goods are “low value goods”; and
- the purchaser of the goods is a consumer.
Supplies which are connected with the “indirect tax zone” under this new rule will need to be taken into account in determining whether the supplier’s turnover for GST purposes is equal to or greater than $75,000 annually. If the overseas supplier meets or exceeds the $75,000 threshold, the supplier will need to register for GST and pay GST to the Australian Taxation Office on its sales. The overseas supplier would also need to adjust its pricing to reflect the impact of GST.
When does a supplier assist in bringing goods into Australia?
According to the Explanatory Memorandum, the situations in which a supplier ‘assists in bringing goods into Australia’ will include the supplier delivering goods into Australia and the supplier procuring, arranging or facilitating the delivery of the goods into Australia. This includes making transport arrangements with third parties or providing assistance to the purchaser in relation to transport arrangements (e.g. arranging special delivery terms for customers).
What are low value goods?
Goods are low value goods if their value for customs duty purposes is less than $1,000. The $1,000 threshold is tested at the time when the consideration for the supply was first agreed. If the consideration is in a foreign currency and due to foreign exchange fluctuations after the price was agreed, the customs value of the goods (in Australian dollars) increases to, say, $1,050, the goods will still be low value goods.
Special rules also apply to deal with the situation where a single consignment of goods involves goods which are low value goods and goods which are not low value goods. For, example, where a suit with a price of $1,500 is shipped with a pair of shoes which have a price of $500, the supply will generally be treated as though it were a separate supply of the suit, which would not be low value goods and a separate supply of the shoes, which would be a supply of low value goods. Where there is a single supply of a number of low value goods, these will also generally be treated as separate supplies of low value goods.
In these scenarios, supplies will not be treated separately if doing so would be unreasonable. For example, a consignment of staples where the combined value of the staples is more than $1,000 is unlikely to be treated as low value goods, even though, individually the staples are worth less than $1,000.
When is a purchaser a consumer?
The new rules only apply where the recipient of the supply is either not registered for GST or, if registered for GST, the purchaser does not make the purchase for the purpose of an enterprise which the recipient carries on in Australia. This is a slightly broader test than the test which applies under the so-called “Netflix tax” (i.e. the imposition of GST on the supply of “inbound intangible consumer supplies”) where there is an additional requirement that the recipient of the supply be an Australian resident for income tax purposes. The rules in relation to low value goods will not have this requirement. Since these rules deal with goods, there is a sufficient connection to Australia if the goods are brought to Australia (even by a non-resident).
Impact on freight forwarders and operators of electronic distribution platforms
The changes will also have an impact on operators of electronic distribution platforms and on freight forwarders.
Where goods are delivered to Australia by a freight forwarder as result of an arrangement with the purchaser, the freight forwarder will be treated as making the supply for GST purposes.
If the freight forwarder meets or exceed the $75,000 per annum threshold, they will therefore be required to register for GST and pay GST to the Australian Taxation Office.
Where a freight forwarder is liable to pay GST due to this provision, the freight forwarder will need to collect information from the supplier about the transaction such as the total consideration for the supply in order to be able to acquit its GST liability. Freight forwarders will also need to ensure that the arrangements they have with the recipient of the supply enable the freight forwarder to recover GST from the recipient of the supply, either directly, or more likely, through the supplier.
Operators of electronic distribution platforms
Going forward, the operator of an “electronic distribution platform” will generally be liable for GST on supplies of low value goods made through an electronic distribution platform, even if the operator of the platform is not the supplier of the goods.
The concept of an “electronic distribution platform” was introduced as part of changes to the GST treatment of supplies of intangible products by foreign suppliers. An “electronic distribution platform” is a service (including a website, internet portal, website or market place) where:
- the service allows supplies to be made to end-users;
- the service is delivered by means of electronic communication; and
- the supplies are to be made by electronic communication.
The requirement that an electronic distribution platform make supplies by way of electronic communication will not apply where the supply is the supply of low value goods.
Where a supply is made through an electronic distribution platform, the operator of the platform is generally treated as being the supplier and therefore liable to pay the GST, unless certain requirements are met (in which case the liability falls on the supplier).
If a supply involves a freight forwarder and the operator of an electronic distribution platform, the GST liability will fall on the operator of the electronic distribution platform rather than on the freight forwarder.
Rewritten and expanded reverse charge rule
As part of these changes, the reverse charge rules in Division 84 of the A New Tax System (Goods and Services Tax Act 1999 (Cth) (GST Act) are completely rewritten.
The reverse charge rules in Division 84 of the GST Act will also be expanded to impose a reverse charge on low value goods which are supplied to GST registered businesses where a full input tax credit is not available.
Changes to the GST treatment of international transport
Currently, the international transport of goods is a GST-free supply.
Where a taxable importation of goods is made, the cost of transport is included in the value of the goods for the purposes of calculating GST on the taxable importation. In that way GST is effectively imposed on the value of the international transport service. However for low value goods, under the current system, there is no taxable importation.
Although the changes are not in the draft legislation which has been released, the Government has announced that it intends to amend the GST legislation to make the international transport of low value goods subject to GST. This is to prevent a situation where the supply of the low value goods is subject to GST but the services of transporting the goods to Australia is not subject to GST.
King & Wood Mallesons will continue to monitor the progress of this legislation closely and provide further analysis following the release of any updates or clarifications from the Government. Please contact a member of the King & Wood Mallesons team if you would like further information or would like to discuss how these changes might affect your business.