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 Guy Brandon, Partner, Tax Consulting Division, HLB Mann Judd, Perth

ABSTRACTMuch was made in the media about the new “Netflix” tax. Less so its arguable retrospectivity, or whether a foreign supplier is now carrying on an enterprise in the ‘indirect tax zone’ or ITZ. [Published also in The Tax Institute’s ‘Taxation in Australia‘ Journal – Volume 51(3), p126 – 2016.]


In this global digital world, Australian tax practitioners are, at all levels, increasingly dealing with international aspects of taxation for foreign clients that may have previously been the domain of the “big-end of town”. Recent changes have altered some of the fundamentals of the goods and services tax (GST), but there does not appear to have been the same level of commentary on the detail of the legislation. This may be due to the rationale as to why some of these changes have been effected.


Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 (the Bill) was enacted upon receiving royal assent on 5 May 2016. Of the three schedules to the Bill, two related to “modernising” the GST treatment of cross-border transactions (the other relating to farm management deposit reforms).

Schedule 1 was to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to GST in a similar way to equivalent supplies made by Australian entities.

Schedule 2 was to better target the way Australia’s GST rules apply to cross-border supplies that involve non-resident entities. The changes mean that certain supplies are no longer connected with the indirect tax zone (ITZ), or are GST-free.

This article is not to provide a detailed perspective on the Bill, but to draw attention to a couple of key issues.


The potential trap in Sch 2 is that it may make Sch 1 redundant for a foreign entity.

Under the provisions before 1 October 2016, the test for when an enterprise is carried on in the ITZ uses the income tax definition of “permanent establishment”. This definition focuses on the place at or through which a business is carried on by a person.(1)

However, on or after 1 October 2016, the test for when an enterprise is carried on in the ITZ is more closely aligned with Australia’s modern treaty practice in relation to permanent establishments. An enterprise is carried on in the ITZ where particular individuals carry on the enterprise of the entity in the ITZ through a fixed place, or through one or more places for more than 183 days in a 12-month period.

The problem

For those foreign entities that have been supplying digital products and other services into the ITZ and have not been previously subject to GST, as they have not been making a supply of anything other than goods or real property that is connected with the ITZ, as they did not satisfy the requirements due to the operation of s 9-25(5) and (6) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GSTA), and now only look to their liability under the “Netflix” tax without determining whether they will be making a supply connected with the ITZ by way of the introduction of s 9-27 GSTA(2) and its operation with s 9-25(5), they may not grasp that:

  • „the foreign entity may be required to be registered for GST(3) as they may now meet the registration turnover threshold;
  • „they may be required to be registered not just because they make inbound intangible consumer supplies,(4) they will not be allowed to opt to be a limited registration entity(5) (otherwise allowing for the foreign entity to avail itself of simplified administrative arrangements);
  • „they may now make taxable supplies not just to “Australian consumers”;
  • „therefore their GST liability may be greater than it would otherwise be;
  • „this will impact from 1 October 2016 (subject to the transitional provisions) not from 1 July 2017; and
  • „the “Netflix” tax is redundant as the supplies would be taxable supplies pursuant to s 9-25(5), even in the absence of the insertion of s 9-25(5)(d).


The transitional provisions are different for Sch 1 and 2.

Netflix tax

The amendments apply for the purposes of determining net amounts for tax periods commencing on or after 1 July 2017. As a result of this application rule, the explanatory memorandum to the Bill (EM) stated that entities only need to consider these amendments in respect of tax periods commencing from 1 July 2017, subject to the transitional provisions.

The amendments also include special transitional rules for periodic or progressive supplies that are attributable to a tax period commencing before 1 July 2017.

Under these rules, supplies made for a period or progressively over a period of time are treated as being supplied continuously over that period. To the extent the supply is taken to be made after 1 July 2017, the tax payable on that portion of the supply is included in the net amount for the first tax period commencing after 1 July 2017. As a result of this treatment, the proportion of such periodic or progressive supplies made after 1 July 2017 is subject to the changes introduced by these amendments.

At para 1.189 of the EM, it states that

“[t]hese rules ensure that there is no scope for entities to avoid GST on inbound intangible consumer supplies by entering into long-term supply arrangements before the amendments come into effect”.

The problem

And this is the issue. There are timing and practical aspects at play here. From a timing perspective, there are already long-term supply arrangements that span 1 July 2017 having been in place before the date of royal assent of the Bill, before the Bill was introduced, before the 2015-16 Budget was announced, even before it was commented on by the then Treasurer Joe Hockey (9 April 2015). Even for those supply arrangements that were entered into post Mr Hockey’s comments, the history of successive governments show that not all comments, or Bills for that matter, are ultimately enacted as is and entities are hesitant (understandably) to implement change in the absence of enacted legislation.

When the GST commenced from 1 July 2000, there were transitional provisions in place (having regard to the current circumstances, where the recipient of the supply would not receive a full input tax credit(6)) where a written agreement specifically identified a supply and identified the consideration in money, or a way of working out the consideration in money, for the supply; and the agreement was made before the 2 December 1998.

The supply would have been GST-free to the extent that it was made before the earlier of 2 December 1998 and, if a review opportunity arises on or after 2 December 1998, when that opportunity arose.

In the present situation, 2 December 1998 would equate to 10 February 2016 (being the date the Bill was introduced into the House of Representatives).

Even within this Bill (though only relating to Sch 2), there are provisions that prevent amendments from applying to a supply made by an entity that is registered for GST, or required to be registered, if a written agreement that was entered into before Sch 2 received royal assent (effectively 1 October 2016), it specifically identifies:

  • „the supply; and
  • „the consideration in money for the supply; or
  • „a way of working out the consideration in money.

However, the transitional rule does not apply to supplies in relation to which:

  • „a review opportunity arises after the time the amendments apply; or
  • „for which the supplier and recipient agree (in writing) that the amendments should apply to the supply from a specified time.

In the absence of these “extended” transitional provisions, the foreign entities may inadvertently be “out of pocket”. In the digital world, there appears to be a movement towards “much reduced value/much higher quantity” transactions. This causes an issue for the foreign entity where their agreements have not been drafted for potential “catch-all GST clauses” that are common in Australian contracts. More so, even if the contracts have such a clause, the cost involved in pursuing such low transactions is likely to be uncommercial. The main issue is that there may be hundreds, if not thousands or more, transactions which may be uncommercial to chase but together sum to a material amount of GST to be paid in the foreign entity’s first tax period after 1 July 2017.

Notwithstanding the premise for the introduction of the new provisions, for the purposes of fairness (and consistency with precedence), why were there not transitional provisions in place for long-term supply arrangements made prior to 10 February 2016 not being subject to GST until the earlier of 1 July 2021,(7) and if a review opportunity arises on or after 10 February 2016, when that opportunity arises? Furthermore, with the “much reduced value/much higher quantity” transactions with consideration being paid in full at commencement, this should be extended to where all of the consideration was paid before 10 February 2016, the supply should not be subject to GST to the extent it is made on or after 1 July 2021, but before a review opportunity has arisen.(8)

The question is whether this will be reviewed, and amended, prior to the lodgment of the first activity statement after 1 July 2017.


Flowchart 1 has been included to provide guidance in determining the GST implications for foreign entities supplying digital products and other imported services (not being connected with the ITZ) and how to deal with supplies spanning 1 July 2017. Some of the questions in the flowchart could be worded in a manner more reflective of the entity making the supply so long as they have a similar affect.


For those practitioners (and their clients) that are dealing with these matters, it is critical that the following is completed, if not already done so (always in collaboration with solicitors where legal advice is required), ASAP:

  • „determine whether they will be making a supply connected with the ITZ by way of the introduction of s 9-27 GSTA and its operation with s 9-25(5);
  • „change the necessary processes/website(s) to be able to determine whether the entity is liable for GST and, where appropriate (legally and commercially), change the pricing structure so that GST is charged to the Australian consumer;
  • „review supplies already made that span 1 July 2017 and whether they have been made to “Australian consumers”;
  • „if they have, and no GST has been levied, review the agreements to determine whether the requisite GST can be charged;
  • „if so, or if not and taking the view “nothing ventured, nothing gained”, go to the customer to try and charge the GST; and
  • „if the GST is not able to be received, (or the foreign entity chooses not to increase their prices for commercial reasons) then make the necessary funding decisions to be able to pay the GST liability at the end of the client’s first tax period after 1 July 2017.

Guy Brandon, CTA
Tax Consulting Partner
HLB Mann Judd


1 Refer “Comparison of key features of new law and current law” in ch 2 of the explanatory memorandum to the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016.

2 Also refer to LCG 2016/1.

3 Pursuant to Div 23 GSTA.

4 Ss 195-1 and 84-65 GSTA.

5 Ss 195-1 and 84-140 GSTA.

6 S 13(4) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) (GSTTA).

7 Being the equivalent date to 1 July 2005 in s 13(2)(a) GSTTA.

8 Being the equivalent to s 13(3).

“YES” “NO” Question(s) to be asked(eg on the web page) Example (if increasing to take into account GST)/notes

2 year service currently $229.80

Step 1 Is the entity receiving the supply an “Australian Resident”? Go to Step 1A STOP – NO GST “Are you a resident for Australian tax purposes?” “What is your physical address (not a Post Office Box or similar)?” If either the customer ticks/states “Yes” to either of these two (2) questions, then subject to Step 1A, the customer will be assumed to be treated as an Australian resident.
Step 1A Is the entity a resident of one of the following?

– Christmas Island

– Cocos (Keeling) Islands

– Territory of Ashmore and Cartier Islands

– Norfolk Island

– Heard Island, or

– McDonald Islands.


Step 2

“Are you a resident of one of the


– Christmas Island

– Cocos (Keeling) Islands

– Territory of Ashmore and Cartier Islands

– Norfolk Island

– Heard Island, or

– McDonald Islands.”

If either the customer ticks/states “Yes” to any of these, regardless of Step 1, the customer will not be treated as an Australian resident.
Step 2 Is the entity

registered for GST?

Go to

Step 3

Go to

Step 4

“Do you have an Australian Business Number (ABN)?” “If Yes, what is that number?

” ## ### ### ### ”

“Do you declare that you are registered for Goods & Services Tax (GST) in Australia?”

Step 3 Is the entity acquiring the thing supplied solely or partially for the purpose of an enterprise that the entity carries on? STOP –


Go to

Step 4

“Do you declare that you are acquiring this supply solely or partially for the purpose of the enterprise you are carrying on?”
The customer will be treated as an “Australian Consumer” if it gets to Step 4.
Step 4 Is the supply “GST-free”? STOP –


Go to

Step 5

To be a GST-free supply made by the foreign entity, the supply:

(a) is made to a * recipient who is not in the indirect tax zone when the thing supplied is done; and

(b) the effective use or enjoyment of which takes place outside the indirect tax zone;

This includes a supply:

(a) under an agreement entered into, whether directly or indirectly, with an Australian resident; and

(b) the supply is provided, or the agreement requires it to be provided, to another entity outside the indirect tax zone.

Practically, it would be difficult to determine whether there would be any GST-free supplies.

Step 5 Is the supply “Input Taxed”? STOP –


Go to Step 6
Step 6 Is the supply made on or after 1 July 2017? Go to

Step 7

Go to

Step 8

Step 7 Calculate Full GST STOP – calculate FULL GST Change of price to: $229.80 + ($229.80 x 10%) = $252.78

GST Liability: 1/11 of $252.78 = $22.98

Balance: $252.78 – $22.98 = $229.80

Step 8 Is the period of supply finishing before 1 July 2017? STOP –


Go to

Step 9

Step 9 Calculate partial GST STOP – calculate PARTIAL GST Based on days:

supply made on 1 July 2016 for 2 years

$229.80 + ($229.80 x 365/729 x 10%) = $241.31

GST Liability: $229.80 x 365/729 x 10% = $11.51

Balance: $241.31 – $11.51 = $229.80

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