The Tax and Superannuation Laws Amendment (2016 Measures No 1) Bill 2016 was introduced into Parliament on 10 February 2016 to give effect (amongst other things) to the previously announced measure that reduces the GST duties of non-residents and gives ‘Australian-based business recipients’ more responsibility under the ‘reverse charge’ provisions in Div 84 (Schedule 2). These changes will take effect for working out ‘net amounts’ for tax periods starting (broadly) 1 quarterly tax period after the Bill gets Royal Assent.
[Section references are to the A New Tax System (Goods and Services Tax) Act 1999 (‘GST Act‘) unless otherwise stated.]
Schedule 2—GST treatment of cross-border transactions between businesses
Part 1—Cross-border supplies that are not connected with the indirect tax zone
Outline of chapter
2.1 Schedule 2 to this Bill amends the A New Tax System (Goods and Services) Tax Act 1999 (GST Act) to better target the way Australia’s goods and services tax (GST) rules apply to cross-border supplies that involve non-resident entities.
2.2 These changes mean that certain supplies are no longer connected with the indirect tax zone (ITZ), or are GST-free.
2.3 Unlike the changes in Schedule 1, which bring into the tax base supplies that are currently not taxed, the changes described in this Chapter do not alter the GST tax base. Instead, the amendments contained in Schedule 2 relieve non-resident suppliers of the obligation to account for GST on certain supplies. Where GST would have ultimately been payable on a supply affected by these changes, the GST obligations are shifted to Australian-based business recipients that are already registered for GST.
2.4 The amendments also reduce compliance costs for GST registered importers in calculating the value of taxable importations.
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Summary of new law
2.21 These changes improve the balance between ensuring Australia’s GST system does not unnecessarily draw in non-residents and maintaining the existing GST base by:
- updating the test for when an enterprise is carried on in the ITZ so that it is better aligned with key GST concepts; and
- relieving non-resident suppliers of the obligation to account for GST on certain supplies by:
- – shifting the responsibility for identifying and paying a GST liability to the recipient, where the recipient is registered for GST and carries on an enterprise in the ITZ;
- – switching off the GST liability for certain supplies between non-residents;
- – extending the GST-free rules to certain supplies made to non-residents; and
- – removing the GST registration requirements for non-residents that only make GST-free supplies through an enterprise carried on outside the ITZ.
2.22 The amendments also reduce compliance costs for GST-registered importers in calculating the value of taxable importations.
When Enterprises are carried on in the Indirect Tax Zone (‘ITZ’) [EM para 2.23 and following]
One of the ways in which a supply could be ‘connected to the ITZ’ (and thus made taxable) was for the supply to be made through an enterprise carried on in the ITZ (s9-25(5)(b)) which in turn was defined as the enterprise being carried on through a ‘permanent establishment’ as defined in the ITAA36 (s9-25(6)).
This is to be changed to a test in new s9-27 where the enterprise is carried on by individuals who are in the ITZ (eg. employees of the relevant entity) and the enterprise is carried on through a fixed place in the ITZ or through one or more places for more than 183 days in any 12 month period.
This is mainly to better align the connection to GST based concepts. [FJM summary]
Exceptions for certain cross-border supplies connected with the ITZ [EM para 2.47 and following]
These changes are about getting the ‘reverse charge’ rules in Div 84 to do more work (and relieve non-residents).
2.47 These amendments ensure that various supplies made by non-resident suppliers are not connected with the ITZ where imposing GST on those non-resident suppliers would result in no net gain to GST revenue.
2.48 To achieve this, the amendments apply as exceptions to the ‘connected with the ITZ’ rules in section 9-25. For simplicity, a supply that is covered by one of these exceptions is referred to as a supply that is ‘disconnected’.
2.49 For a supply to be disconnected, the following conditions about the supplier must be satisfied:
- the supplier must be a non-resident; and
- the supply must not be made through an enterprise that the supplier carries on in the ITZ.[Schedule 2, item 3, paragraphs 9-26(1)(a) and (b)]
2.50 While the conditions for the supplier apply irrespective of the type of supply, specific conditions for the recipient must be satisfied for different types of supplies. For some supplies, the recipient must be an ‘Australian-based business recipient’ of the supply, whereas for others the recipient must be a non-resident or a lessee of the goods supplied. [An ‘Australian-based business recipient’ must be registered for GST and carry on an enterprise in the ITZ – s9-26(2).]
2.51 Where a supply is disconnected because it is made to a recipient that is an Australian-based business recipient, the recipient is responsible for determining whether they have a GST liability in relation to the supply under the reverse charge rules in Division 84 (which is about ‘reverse charging’ the GST so it is payable by the recipient – to the extent net revenue would otherwise be lost to the Commonwealth).
Additionally, consideration for ‘disconnected’ supplies (under s9-26(1)) don’t count towards the turnover test used for GST registration purposes [EM par 2.82]
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