nsw 9th annual tax forum€¦ · what are intangible supplies? the reforms will apply to supplies...

© Matthew Cridland, DLA Piper 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

NSW 9th Annual Tax Forum

GST Update

Written & Presented by:

Matthew Cridland

Head of GST & Customs, Australia

DLA Piper

NSW Division

2 - 3 June 2016

Sofitel Sydney Wentworth

Matthew Cridland GST Update

© Matthew Cridland, DLA Piper 2016 2

CONTENTS

1 Overview ......................................................................................................................................... 3

2 Netflix Tax ....................................................................................................................................... 4

3 Cross-border B2B Supplies .......................................................................................................... 8

4 Low Value Imports ....................................................................................................................... 18

5 Digital Currency ........................................................................................................................... 19

6 Cases Update - SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd ..................... 22

Matthew Cridland, DLA Piper GST Update


1 Overview

This paper is intended to provide a timely update on GST developments. During the past 12 months

most of the developments have involved legislative reforms, particularly with respect to cross-border

transactions. In contrast, there have been few cases, rulings or other administrative reforms of note.

This paper will cover, in high level, the following issues:

The Netflix Tax

Cross-border B2B supplies

Low Value Imports

Digital Currencies

Cases Update - SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd



2 Netflix Tax

Prior to the release of the Federal Budget in May 2015, the former Treasurer, Joe Hockey, announced

the GST would be extended to intangible supplies made by non-resident suppliers. This has been

widely referred to as the "Netflix Tax" (a term adopted in this paper), in reference to the fact that

Netflix does not currently pay GST on its streaming media services supplied to Australian customers.

The Tax and Superannuation Laws Amendment (2016 Measures No.1) Act 2016 recently received

Royal Assent ("Reform Act") and introduces these measures. The Netflix Tax will apply from 1 July

2017.

Current GST law

In high level terms, Australian GST usually only applies to supplies that are "connected with the

Indirect Tax Zone". The "Indirect Tax Zone" is defined to be "Australia", but excludes Australia's

external territories (for example, Christmas Island).

Generally speaking, intangible supplies made by non-resident suppliers will be "connected with the

Indirect Tax Zone" if:

the "thing" supplied is "done" in Australia (e.g. services are performed in Australia, or rights

are provided in Australia); or

the supply is made through an enterprise carried on in Australia (this may be relevant if

supplies are made through a non-resident's Permanent Establishment in Australia).

The Reforms

The Reform Act extends the "connected with the Indirect Tax Zone" tests to include supplies made to

a recipient who is an "Australian consumer".

The expression "Australian consumer" is defined as an entity that is a resident of Australia (excluding

Australia's external territories) and which is either:

not GST registered, or required to be GST registered; or

a registered entity which acquires the intangible supply for a purpose other than wholly or partly for carrying on the entity's enterprise.

Broadly speaking, the intention is to widen the GST net to capture inbound intangible supplies made

to:

individuals who are not GST registered; and

businesses which may be GST registered, but which have made an intangible supply for a wholly non-business purpose (this will likely be mostly relevant for sole traders and other small businesses conducted by individuals).



What are intangible supplies?

The reforms will apply to supplies of "anything other than goods or real property", which captures all

manner of intangible supplies. In this respect, the amendments will apply to:

Digital content (including games, software, e-books, music, etc).

Services that are performed remotely from outside of Australia (such as advertising or other services).

Contractual rights supplied from outside of Australia. This may capture both intellectual property rights and also rights to access software platforms as part of "software as a service" arrangements. It will also capture "things" such as insurance and digital currencies.

Who is liable to pay the tax?

GST is generally payable by the entity that makes a taxable supply. However, the amendments

instead provide that where an "inbound intangible consumer supply" is made through an "electronic

distribution platform", the GST is payable by the operator of the electronic distribution platform (and

not the supplier).

For these purposes, an "electronic distribution platform" may potentially include a website, internet

portal, gateway, store or marketplace through which supplies are made to Australian consumers via

means of electronic communication. For example, this may apply to software applications that are

sold by non-resident suppliers to Australian consumers through an online app store.

The Reform Act makes clear that an "electronic distribution platform" does not include:

a telecommunications carriage service; or

a service consisting of:

o providing access to a payment system; or

o processing payments; or

o providing vouchers the supply which are not taxable supplies (relevant for face value vouchers which are equivalent to money and not subject to GST when sold).

The Reform Act does provide for some circumstances in which the supplier, rather than the operator

of the electronic distribution platform, will be liable for the GST. This might occur where the identity of

the supplier is clear from an invoice that has been issued to the recipient and the operator has

minimal involvement (i.e. the operator is not involved in charging, authorising delivery or setting terms

and conditions for the supply).

It is also recognised that in some instances a supply may be made through multiple electronic

distribution platforms. Where that is the case, the intention is for only one of the operators to be liable

for GST on the supply. The Reform Act sets out rules to be applied for determining which operator is

liable (in most instances it will be the first operator to receive or authorise charging for the supply).

What are "inbound intangible consumer supplies"?

Broadly, this expression is defined in the Reform Act to be intangible supplies made to Australian

consumers, except where:

the intangible supply is "done" wholly in the Indirect Tax Zone; or



the supplier makes the supply through an enterprise that it carries on in Australia (for example, a non-resident supplier makes a supply through a Permanent Establishment that it has in Australia).

Will the reforms apply to intangible supplies made to GST registered entities?

Generally speaking, and subject to the exception mentioned below, the reforms will not apply to

supplies made to GST registered entities. This reflects that most GST registered entities will be

entitled to full input tax credits (GST credits) for their acquisitions, negating any revenue benefit in

charging GST on supplies made to such recipients.

Entities which are not entitled to full input tax credits are generally required to account for GST on

inbound intangible supplies under existing special rules (the "reverse charge" rules).

An exception to the general proposition above will arise if an intangible supply is made to a GST

registered entity which does not make the acquisition wholly or partly in the course of carrying on its

enterprise. This is because GST registered entities which make such acquisitions will meet the

definition of an "Australian consumer".

For example, this may be relevant if an individual, who is a sole trader, is GST registered. Assume

the individual acquires some intangible supplies (such as downloads of games or streaming media

services) wholly for private purposes unrelated to the individual's business activities. In these

circumstances, a supply is being made to an "Australian consumer" (as defined in the current draft

legislation). Consequently GST may be applicable, albeit the individual is GST registered.

Will non-resident suppliers / platform operators caught by the reforms need to register for GST purposes?

Non-resident suppliers and platform operators which make supplies that are connected with the

Indirect Tax Zone, and which have a value in excess of the GST registration turnover threshold

(currently AUD $75,000 in a 12 month period), will be required to register for GST purposes.

It should be noted that where the operator of an electronic distribution platform is treated as having

made an "inbound intangible consumer supply", the value of that supply will count towards the

operator's GST registration turnover threshold.

As a practical matter, where a supplier makes inbound intangible consumer supplies through a GST

registered operator of an electronic distribution platform, GST will apply to all such supplies even if the

value of the supplier's own supplies which are connected with the Indirect Tax Zone do not exceed

AUD $75,000. This means all inbound intangible consumer supplies made by small businesses

through large GST registered operators of electronic distribution platforms will be subject to GST

(unless a specific GST exemption applies).

As a part of the reforms, non-resident suppliers which make inbound intangible consumer supplies

may elect to be a "limited registration entity". If this election is made, the entity:

will not be entitled to an Australian Business Number ("ABN"); and

will not be entitled to input tax credits (GST credits) for creditable acquisitions; and

must have quarterly tax periods.



The main advantage of electing to be a limited registration entity is that the registration application

process and GST reporting requirements will be considerably less than is required for an entity with a

full GST registration.

What happens if a supplier or platform operator cannot determine whether a recipient of a supply is an "Australian consumer"?

As a safe harbour, suppliers and operators will not be liable for GST under the reforms if they have

taken "all reasonable steps" to obtain information on whether a consumer is an "Australian consumer"

and, after doing so, reasonably believe the consumer is not an "Australian consumer".

The legislation includes provisions intended to make it clear that suppliers and platform operators can

rely on information obtained through their usual business systems and processes in forming their

reasonable belief.

Will Australian consumers avoid the additional GST cost on inbound intangible consumer supplies by denying their residency status?

The explanatory materials note that Australian consumers who engage in the conduct of making false

representations about their Australian residency status to defeat the amendments may commit an

offence under section 8U of the Taxation Administration Act. However, that provision is only likely to

be imposed for the most serious and deliberate false representations.

As an alternative to prosecuting Australian consumers for this offence, the reform measures will also

introduce new administrative penalties that may be imposed by the Australian Tax Office. The penalty

scale is as follows:

60 penalty units (currently AUD$10,800) if the statement is intentionally false and misleading

40 penalty units (currently AUD$7,200) if the statement was found to be reckless

20 penalty units (currently AUD$3,600) if the false or misleading statement resulted from a lack of reasonable care

What is the position if a supply is made to an Australian consumer, but the consumer is outside Australia when the supply is made?

As explained above, under the reform proposals, any intangible supply could be "connected with the

Indirect Tax Zone" if it is made to an Australian consumer. This would also capture intangible

supplies made to Australian consumers who are outside of Australia when the relevant supply is

made.

To ensure that Australian GST does not apply inappropriately, intangible supplies made to Australian

consumers outside of Australia will generally be "GST-free" supplies (i.e. not subject to GST).

Consistently, the GST registration threshold provisions will be amended so that supplies which are

connected with the Indirect Tax Zone under the amendments, but which are also GST-free, do not

count towards the AUD $75,000 registration threshold.

Are non-resident suppliers and platform operators required to issue tax invoices?

Tax invoices are not required for taxable supplies that are solely "inbound intangible consumer

supplies" (as defined - see above).



3 Cross-border B2B Supplies

Why does the Government want to keep more non-residents outside the Australian GST net?

In addition to introducing the Netflix Tax which will bring some non-resident suppliers into the GST net,

the Government also enacted (as a part of the same Reform Act) new measures that are intended to

keep non-resident suppliers out of the GST net if they are only engaged in B2B supplies (which are

generally revenue neutral). This particular measures apply from 1 October 2016.

There are a number of reasons why it is beneficial to keep non-residents outside the Australian GST

net, particularly if their involvement with the GST system is limited and predominantly revenue neutral.

These benefits include:

Reduced compliance costs for non-resident suppliers. Which may potentially translate

into cost reductions for Australian recipients.

Reduced costs for the Australian Tax Office. The proof of identity requirements to register

non-resident entities are complex and time consuming for all concerned, including the

Australian Tax Office.

Reduced revenue risks from credit claims / cash refunds. Non-resident entities which are

GST registered are entitled to input tax credits, which can ultimately give rise to an

entitlement to cash refunds. While the ATO promptly processes refunds (subject to

verification reviews), the ATO’s collection and enforcement powers are limited in a practical

sense if the same non-resident entity later fails to remit GST on its taxable supplies.

Supplies by non-residents that are not connected with the indirect tax zone

One of the simplest ways to keep non-resident suppliers outside of the Australian GST net is to

reduce the circumstances in which their supplies are taken to be “connected with the indirect tax

zone”.

This is precisely the approach adopted in section 9-26, which is extracted in full below.

9-26 Supplies by non-residents that are not connected with the indirect tax zone

(1) A supply is not connected with the indirect tax zone if:

(a) the supplier is a *non-resident; and

(b) the supplier does not make the supply through an *enterprise that the supplier *carries on in the indirect tax zone; and

(c) the supply is covered by an item in this table:

Offshore supplies that are not connected with the indirect tax zone

Item Topic These supplies are not connected with the indirect tax

zone …

1 Inbound

intangible

supply

a supply of anything other than goods or *real property if:

(a) the thing is done in the indirect tax zone; and

(b) the *recipient is an *Australian-based business



Offshore supplies that are not connected with the indirect tax zone

Item Topic These supplies are not connected with the indirect tax

zone …

recipient of the supply.

2 Intangible

supply between

non-residents

a supply of anything other than goods or *real property if:

(a) the thing is done in the indirect tax zone; and

(b) the *recipient is a *non-resident that acquires the thing

supplied solely for the purpose of an *enterprise that

the recipient *carries on outside the indirect tax zone.

3 Supply between

non-residents

of leased goods

a supply by way of transfer of ownership of leased goods

if:

(a) the *recipient is a *non-resident that does not acquire

the thing supplied solely or partly for the purpose of an *enterprise that the recipient *carries on in the indirect

tax zone; and

(b) the lessee:

(i) made a *taxable importation of the goods before

the supply was made; and

(ii) continues to lease the goods on substantially

similar terms and conditions after the supply is

made.

4 Supply by way

of continued

lease of goods

from item 3

a supply made by way of lease if:

(a) the *recipient is the lessee referred to in paragraph (b)

of item 3 of this table; and

(b) the lease is the lease referred to in subparagraph (ii) of

that paragraph.

(2) An entity is an Australian-based business recipient of a supply made to the entity if:

(a) the entity is *registered; and

(b) an *enterprise of the entity is *carried on in the indirect tax zone; and

(c) the entity’s acquisition of the thing supplied is not solely of a private or domestic

nature.

Note: If a supply is not connected with the indirect tax zone, the Australian-based business recipient

may be subject to a reverse charge: see Subdivision 84-A.

(3) This section applies despite sections 9-25 (which is about when supplies are connected

with the indirect tax zone) and 85-5 (which is about telecommunication supplies).

The preconditions at the beginning of the section make it clear that the section is limited too supplies

that are made by a non-resident, and which are also not made through an enterprise that is carried on

in Australia.



Item 1 – in bound intangible supplies

Under the first item, inbound intangible supplies (i.e. supplies of anything other than goods or real

property) are not connected with the indirect zone, notwithstanding the supply may be “done” in the

indirect tax zone, if the recipient is an “Australian-based business recipient”.

For example, assume that a non-resident supplier is supplying intellectual property to an Australian

business under a license. Presently, if the license agreement is last executed in Australia, the supply

of the intellectual property would be connected with the indirect tax zone and hence may be taxable

and subject to GST.

Under Item 1 such a supply should not be connected with the indirect tax zone, albeit the license

agreement may be last executed in Australia, provided the recipient is an Australian-based business

recipient as defined in s9-26(2) extracted above.

Item 2 – Intangible supplies between non-residents

The second item is similar to the first, except that rather than the recipient being an Australian-based

business, the recipient must be a non-resident that acquires the thing supplied soley to carry on an

enterprise outside of Australia.

Item 3 – Supply between non-residents of leased goods

The third item is directed at transfers of ownership of leased assets between non-residents.

For example, assume that an non-resident entity has leased an aircraft to an Australian airline

operator. The Airline had been responsible for importing the aircraft into Australia.

Presently, the transfer of ownership of the aircraft would be connected with Australia and a taxable

supply if title is transferred while the aircraft is located in Australia.

Under the Reform Act, such transfers would not be subject to GST. This reflects that the transfer in

ownership of leased assets is ultimately revenue neutral (i.e. the purchaser is entitled to a full input

tax credit for any GST paid). The impact of the reform proposal is that the purchaser does not need to

register for GST merely to claim an input tax credit for the purchase of the leased asset.

Item 4 – Continued lease of goods covered by item 3

Under item 4, the continued lease of the asset referred to in Item 3 to the Australian recipient will also

not be connected with Australia.

This reflects that as the lessee had imported the asset, the original supply by way of lease was

unlikely to have been connected with Australia. This reform obviates the need for the purchaser to

register for GST merely to account for GST on the lease of the asset, recognising that the Australian

recipient would either be entitled to a full input tax credit or, alternatively, bore a GST cost on the

original taxable importation of the asset.

What is an Australian-based business?

Section 9-26(2) (extracted above) sets out the requirements for a business to be considered

“Australian-based”.



It is not necessary for the entity to be resident in Australia. However, it is also not sufficient for the

entity to merely GST registered in Australia. The entity must carry on an enterprise in the indirect tax

zone, and the acquisition of the thing supplied must not be solely for a private and domestic purpose.

When is an enterprise carried on in the indirect tax zone?

The definition of an Australian-based business inevitably leads on to a question as to when an

enterprise is carried on in Australia. This is addressed in section 9-27 of the GST Act which is

extracted below.

9-27 When enterprises are carried on in the indirect tax zone

(1) An *enterprise of an entity is carried on in the indirect tax zone if:

(a) the enterprise is *carried on by one or more individuals covered by subsection (3)

who are in the indirect tax zone; and

(b) any of the following applies:

(i) the enterprise is carried on through a fixed place in the indirect tax zone;

(ii) the enterprise has been carried on through one or more places in the indirect

tax zone for more than 183 days in a 12 month period;

(iii) the entity intends to carry on the enterprise through one or more places in the

indirect tax zone for more than 183 days in a 12 month period.

(2) It does not matter whether:

(a) the entity has exclusive use of a place; or

(b) the entity owns, leases or has any other claim or interest in relation to a place.

(3) This subsection covers the following individuals:

(a) if the entity is an individual—that individual;

(b) an employee or *officer of the entity;

(c) an individual who is, or is employed by, an agent of the entity that:

(i) has, and habitually exercises, authority to conclude contracts on behalf of the

entity; and

(ii) is not a broker, general commission agent or other agent of independent

status that is acting in the ordinary course of the agent’s business as such an

agent.

This new section essentially incorporates tests that are similar to those used to determine whether an

entity has a permanent establishment in Australia for corporate tax purposes.

In the author’s view, this is a useful new concept and test in the context of determining whether a

supplier has itself made a supply that is connected with Australia. As outlined above, one of the two

preconditions for section 9-26(1) to apply is that the supply must not have been made through an

enterprise that the supplier carries on in Australia.

However, in the author’s view, it is unfortunate that this concept has also been used in the definition of

“Australian-based business”. The effect is that supplier’s will need to form their own view on whether

the recipient carries on an enterprise in Australia, which is a fact dependent issue. It would be

preferable if the supplier’s enquiry instead ended once it was determined that the recipient is a GST

registered entity in Australia (which can usually, but not always, be readily determined through a

search of the Australian Business Register if the recipient has provided its ABN).



As a practical matter, suppliers may need to ensure that they obtain statements (and ideally

warranties and indemnities) from recipients of supplies that they intend to treat as being out-of-scope

under Item 1.

Installation and maintenance services

When goods are imported into Australia, the non-resident supplier may need to provide some initial

installation or assembly services to enable the goods to be used by the recipient.

If the relevant goods have been imported by the recipient, the non-resident supplier of the goods will

not make a taxable supply in relation to the goods themselves.

However, presently, the supply of installation or assembly services would be connected with the

indirect tax zone if those services are performed in Australia. Depending on the value of the services

supplied, this may cause the recipient to need to register for GST in Australia to account for GST on

those services.

Section 9-25(6) seeks to address this issue by breaking out the supply of services from the supply of

the goods. The separate supply of services may then potentially be out-of-scope of Australian GST if

Item 1 in s9-26(1) applies in respect of those services.

Section 9-25(6) is extracted below.

Supplies of goods involving installation or assembly services

(6) If a supply of goods (other than a *luxury car) (the actual supply) involves the goods

being brought to the indirect tax zone and the installation or assembly of the goods in the

indirect tax zone, then the actual supply is to be treated as if it were 2 separate supplies

in the following way:

(a) the part of the actual supply that involves the installation or assembly of the goods

in the indirect tax zone is to be treated as if it were a separate supply of a thing

done in the indirect tax zone;

(b) the remainder of the actual supply is to be treated as if it were a separate supply of

goods involving the goods being brought to the indirect tax zone but not involving

the installation or assembly of the goods.

Note 1: The paragraph (a) supply is connected with the indirect tax zone (see paragraph (5)(a)), unless

item 1 or 2 of the table in section 9-26 applies.

Note 2: The paragraph (b) supply may be a taxable supply (see subsection (3)), or there may be a taxable

importation of the goods: see Division 13.

Note 3: For the price of the separate supplies, see subsection 9-75(4).

Further to Note 3, the Reform Act also contains a new section 9-75(4) which will assist in determining

the price for the supply of the services. This will be relevant if the supply is not out-of-scope under

Item 1 in s9-26(1) and it becomes necessary to determine whether the GST registration threshold has

been exceeded and to calculate any applicable GST.

Section 9-75(4) is extracted below.

(4) Despite subsection (1), if a supply of goods (the actual supply) is to be treated as

separate supplies because of subsection 9-25(6), then the price of each such separate



supply is so much of the price of the actual supply, worked out under subsection (1), as

reasonably represents the price of the separate supply.

Reverse Charging for supplies between associates

If additional supplies are out-of-scope of Australian GST as a result of the provisions in section 9-

26(1), there will be new and additional circumstances in which recipients will need to consider whether

the compulsory reverse charge provisions in Division 84 of the GST Act may apply to their

acquisitions.

To address concerns that Division 84 did not apply adequately to supplies between associated

entities for nil or inadequate consideration, a number of amendments have been introduced into both

Division 72 and Division 84 of the GST Act. These are extracted below.

Subsection 72-5(2)

Repeal the subsection, substitute:

(2) This section has effect despite paragraphs 9-5(a) and 84-5(1)(d) (which would otherwise

require a taxable supply to be for consideration).

At the end of section 72-10

Add:

(3) This section does not apply to a supply that is a *taxable supply because of section 84-5

(which is about offshore supplies other than goods or real property).

At the end of section 72-70

Add:

(4) This section does not apply to a supply that is a *taxable supply because of section 84-5

(which is about offshore supplies other than goods or real property).

Paragraph 84-5(1)(c)

Repeal the paragraph, substitute:

(c) the *recipient of the supply acquires the thing supplied solely or partly for the

purpose of an *enterprise that the recipient *carries on in the indirect tax zone; and

(ca) the recipient of the supply does not acquire the thing supplied solely for a *creditable purpose; and

Subsection 84-13(1) (definition of extent of consideration)

Repeal the definition, substitute:

extent of consideration is:

(a) if the *recipient is the supplier’s *associate and the supply is without *consideration—100%; or

(b) in any other case—the extent to which you provide, or are liable to provide, the

consideration for the acquisition, expressed as a percentage of the total

consideration for the acquisition.

Subsection 84-13(2)

Repeal the subsection, substitute:



(2) This section has effect despite:

(a) sections 11-25 and 11-30 (which are about the amount of input tax credits for

creditable acquisitions); and

(b) section 72-45 (which is about the amount of input tax credits on an acquisition

from an associate without consideration).

After section 84-15

Insert:

84-20 The price of taxable supplies of offshore intangibles without, or for inadequate,

consideration

(1) The price of a supply that is a *taxable supply because of section 84-5 is the *GST

inclusive market value of the supply, if:

(a) the supply is from the *recipient’s *associate; and

(b) the supply is:

(i) without *consideration; or

(ii) for consideration that is less than the GST inclusive market value.

Note: A supply to an associate without consideration may be a taxable supply, see section 72-5.

(2) This section has effect despite section 9-75 (which is about the price of taxable supplies).

84-25 Tax periods for supplies from associates that are not connected with the indirect tax

zone

(1) This section applies if a supply that is a *taxable supply because of section 84-5 is:

(a) a supply from the *recipient’s *associate without *consideration; and

(b) not *connected with the indirect tax zone.

Note: If the supply is connected with the indirect tax zone, see sections 72-15 and 72-50 for the tax

periods.

(2) The tax period to which the GST on the supply, and the input tax credit on the

acquisition, is attributable is the tax period in which the thing supplied starts to be done.

(3) This section has effect despite:

(a) sections 29-5 and 72-15 (about attributing GST to tax periods); and

(b) sections 29-10 and 72-50 (about attributing input tax credits to tax periods).

84-30 Adjustments for acquisitions made solely for a creditable purpose

(1) This section applies to an acquisition that relates to a supply if the supply would be a *taxable supply under section 84-5 if paragraph 84-5(1)(ca) were disregarded.

(2) For the purpose of working out whether there is an *adjustment for the acquisition, and

the amount of that adjustment, disregard paragraph 84-5(1)(ca).

Note: As a result, the adjustment (including the full input tax credit referred to in sections 129-70 and

129-75) is worked out assuming the supply is taxable and the acquisition fully creditable.

At the end of subsection 85-5(3)

Add “, but is subject to section 9-26 (which is about when supplies are not connected with the

indirect tax zone)”.



Expanded scope of GST-free supplies

As noted above, one way to keep non-residents outside the Australian GST net is to increase the

range of supplies that are made by non-residents which are connected with the indirect tax zone.

A second way to keep non-residents outside of the GST net is to increase the range of supplies that

are made to non-residents by Australian based suppliers which are GST-free. As the supplies are

GST-free, it obviates the need for non-residents to register for GST in Australia for the purpose of

claiming input tax credits.

Warranty services and related goods

One of the circumstances in which non-residents are presently required to register for GST in

Australia to claim input tax credits is where the non-resident is the recipient of repair services

performed on goods located in Australia to satisfy a warranty claim. The supply of the warranty itself

may not be connected with the indirect tax zone, and consequently the non-resident supplier may not

be required to register for GST in relation to the supply of the warranty.

For example, assume that a non-resident car manufacturer has provided a warranty to purchasers of

its new vehicles in Australia. Under the warranty, the manufacturer may be required to pay for repair

services that are performed at auto garages in Australia. Such services may presently be taxable

supplies and it would be necessary for the non-resident supplier to register for GST in order to claim

input tax credits (note that the services would not be GST-free under item 2 in s38-190(1) of the GST

Act, as the services relate to work performed on goods in Australia).

To address this, section 38-191 provides that certain repair services supplied to non-residents will be

GST-free. The section also provides that the supply of goods used in the repair and maintenance

services are also GST-free. The new section is extracted below.

38-191 Supplies relating to the repair etc. of goods under warranty

(1) A supply of anything other than goods or *real property is GST-free if:

(a) the *recipient is a *non-resident who:

(i) is not in the indirect tax zone when the thing supplied is done; and

(ii) acquires the thing in *carrying on the recipient’s *enterprise, but is not *registered or *required to be registered; and

(b) the supply is constituted by the repair, renovation, modification or treatment of

goods; and

(c) the repair, renovation, modification or treatment is done in order to meet the

recipient’s obligations under a warranty relating to the goods; and

(d) either:

(i) *consideration for the warranty was included in the consideration for the

supply of the goods; or

(ii) the supply of the warranty was a separate *taxable supply to the supply of the

goods.

(2) A supply of goods is GST-free if:

(a) it is made in the course of a supply that is GST-free under subsection (1), and to the

same *recipient; and

(b) either:



(i) the goods are attached to, or become part of, the goods to which the warranty

relates; or

(ii) the goods become unusable or worthless as a direct result of being used to

repair, renovate, modify or treat the goods to which the warranty relates.

Other exported services

Other exported intangible supplies may be GST-free presently under the items listed in the table in

s38-190(1) of the GST Act.

One of the principal exemption items used is Item 2. Under that item, supplies of things other than

goods or real property will be GST-free if:

The supply is made to a non-resident.

The non-resident is not present in Australia in respect of the supply.

The supply is not directly related to real property in Australia, or work performed on goods in

Australia.

OR – if the supply is related to real property or goods in Australia, the non-resident is not GST

registered, or required to be GST registered.

However, this GST-free exemption is lost under the provisions in section 38-190(3) of the GST Act if

the non-resident directs that the intangible supplies be provided to another entity (such as a customer,

agent or subsidiary) that is present in Australia.

Under the Reform Act, section 38-190(3) is further limited, so that it does not apply where the entity to

which the relevant intangible supply is provided in Australia is an Australian based business (or

certain qualifying individuals). The new provisions are extracted below.

At the end of subsection 38-190(3)

Add:

; and (c) for a supply other than an *input taxed supply—none of the following applies:

(i) the other entity would be an *Australian-based business recipient of the

supply, if the supply had been made to it;

(ii) the other entity is an individual who is provided with the supply as an

employee or *officer of an entity that would be an Australian-based business

recipient of the supply, if the supply had been made to it; or

(iii) the other entity is an individual who is provided with the supply as an

employee or officer of the *recipient, and the recipient’s acquisition of the

thing is solely for a *creditable purpose and is not a *non-deductible expense.

It is clear from the EM that accompanies the Reform Act that there is an assumption that the non-

resident entity which makes the GST-free acquisition will make a supply of the same thing to the entity

in Australia to whom the supply has been provided. This is addressed in paragraph 2.159 of the EM

which provides as follows:



“2.159 The provision of the thing that is supplied to another entity results in a separate supply

between the non-resident (the recipient of the original supply) and the other entity (the

recipient of the separate supply). A separate supply of this kind can be reverse charged to the

recipient because of the exceptions to the connected with the ITZ rules outlined above… .” (Emphasis

added)

Interestingly, the Reform Act does not contain any provisions which deem the non-resident to make

the separate supply referred to in the paragraph above. While there will be many instances where

there is clearly a separate supply, in the author’s view, this will not necessarily be the case in all

circumstances, meaning that the reverse charge provisions in Division 84 of the GST Act do not

necessarily apply where the Australian-based business has been provided with something in Australia

which it will use for a non-creditable purpose.



4 Low Value Imports

Generally speaking, GST does not presently apply where low value goods are imported into Australia

via parcel. The current low value goods threshold is AUD$1,000. There are some exceptions to this

general rule (for example, the threshold doesn't apply where the goods imported are alcohol or

tobacco).

This threshold is particularly relevant where goods are purchased online and shipped to Australia via

a parcel delivery service.

The Government announced in the Federal Budget released on 3 May 2016 that this threshold will be

reduced to nil and a "vendor registration" model introduced.

Many Australian retailers consider the current threshold creates an uneven playing field. This is

because GST registered retailers which sells the same goods in Australia are liable for GST,

regardless of the value of the goods being sold. In contrast, suppliers (including both non-resident

and Australian suppliers) who sell goods from Australia with a value of less than AUD$1,000 are not

subject to this tax.

Some State and Territory Governments have also expressed concerns that the current threshold is

eroding the GST base, as the volume of goods that Australians purchase online from overseas is

continuing to increase.

So that parcels do not need to be stopped and assessed by Customs, the Government is proposing

that the supplier of the goods will be liable for the GST (i.e. vendor registration). This will presumably

only apply to goods that have a value less than AUD$1,000. Under current law, the GST on taxable

importations that have a value exceeding AUD$1,000 is payable by the importer (which may be a

different entity to the supplier).

At the time of writing, no consultation draft legislation or explanatory materials have been released.

Consequently, it is unclear whether the reforms will apply to all relevant supplies of goods (including

supplies made to businesses), or whether the reforms will only apply to supplies made to Australian

consumers.

Consistent with the reforms that have been outlined in respect of the Netflix Tax, it seems likely that

where the goods are sold via an online market place, the operator of the online market will be liable

for any applicable GST. This should reduce the number of non-residents required to register for GST

as a result of the reforms, while also enhancing enforcement and collection prospects.



5 Digital Currency

On 21 March 2016 the Treasurer, Scott Morrison, released the Government's statement on "Backing

Australian FinTech" ("the FinTech Statement") . The FinTech Statement sets out priority issues

facing Australia's FinTech Industry and the Government's response to each. One of the key priorities

is the removal of GST from digital currency transactions to avoid "double tax". The issue is addressed

in the FinTech Statement in two paragraphs which read as follows:

The Government recognises that the current treatment of digital currency under GST law means

that consumers are ‘double taxed’ when using digital currency to buy anything already subject to

GST. The Government is committed to addressing the ‘double taxation’ of digital currencies and

will work with the industry on legislative options to reform the law relating to GST as it is

applied to digital currencies.

Currently, there are more than 600 digital currencies available, with different protocols for

transaction processing and confirmation, and with different approaches to the growth in the

supply of digital currency units. Removing the ‘double taxation’ treatment for GST on digital

currencies and applying adequate anti-money laundering and counter-terrorism financing rules

may facilitate further developments or use in the future.

Subsequently, on the night of the Federal Budget (3 May 2016), Treasurer released a Consultation

Paper calling for submissions on how best to reform the GST Act to deal with digital currencies.

When does "double tax" arise?

The comment in the FinTech Statement that 'consumers are "double taxed"' is not completely

accurate. Rather, it is GST registered business that may potentially be double taxed on supplies that

are made within Australia.

For example, assume that one bitcoin (the currency symbol for bitcoin is "BTC") is valued at

AU$300. RetailCo, a GST registered business, is selling coffee machines for a price of either AU$300

or 1 BTC. RetailCo has recently sold a coffee machine to a consumer for 1 BTC. This sale triggers a

GST liability for RetailCo of $27.27 in the usual fashion (being 1/11th of the GST inclusive market

value of the 1 BTC received).

RetailCo then needs to decide what it will do with the 1 BTC it has received. RetailCo could either

exchange the 1 BTC for Australian currency, or it could use the 1 BTC to acquire goods and services

from another merchant that accepts bitcoin. Either way, if RetailCo supplies the 1 BTC in Australia, it

will make a taxable supply and it will have a second GST liability for $27.27.

This second GST liability would not have arisen if RetailCo had accepted Australian currency (or for

that matter foreign currency) instead of the 1 BTC.

As a practical matter, RetailCo is most likely to exchange the 1 BTC for Australian currency. Some

bitcoin payment processors will acquire all bitcoins received by their merchant customers, so that the



merchants always ultimately receive Australian currency for their sales (albeit the merchant's

customers may have paid for goods or services using bitcoin).

For consumers, the main issue is whether they are prepared to pay GST to acquire a bitcoin from a

GST registered business in Australia (such as a bitcoin exchange operator who sells as

principal). For example, would a consumer pay AU$300, plus GST of AU$30, to purchase 1 BTC in

Australia. The answer for sophisticated consumers would be "no".

GST and cross-border supplies of digital currency - Impact of the Netflix Tax

Presently, GST does not apply to most cross-border supplies of bitcoin. Under current GST law, a

supply of bitcoin by a non-resident supplier from outside of Australia will not generally be "connected

with the indirect tax zone" (i.e. is not connected with Australia) and hence does not attract GST.

Conversely, a supply of bitcoin by a GST registered business in Australia to an entity outside of

Australia (as either a payment or as part of an exchange transaction) will generally be a GST-free

export supply.

This has resulted in Australian bitcoin exchange operators modifying their businesses so that either:

they have relocated to outside of Australia and hence are not liable for GST on sales of

bitcoin to Australian customers; or

they merely act as an agent / broker for a third party (generally a non-resident) who is not

liable for GST on any bitcoin sales. In this later scenario, GST still applies if the exchange

operator separately charges Australian customers for the agency / brokerage services.

The current rules also mean that Australian GST registered businesses that need to exchange

bitcoins are likely to do so by selling to a non-resident that is outside of Australia (being either an

exchange that is operated by a non-resident outside Australia, or via an Australian exchange which is

merely an agent / broker for a non-resident purchaser).

While the above are currently viable options for overcoming the incidence of Australian GST on

domestic bitcoin supply transactions, it needs to be borne in mind that the "Netflix Tax" is intended to

commence in Australia on 1 July 2017. The Netflix Tax is the extension of GST to inbound intangible

supplies which are made by non-resident suppliers from outside of Australia to "Australian

consumers". In the absence of any GST reforms for digital currencies, the Netflix Tax will apply to

inbound supplies of bitcoin and other digital currencies which are made to "Australian consumers" (i.e.

Australian resident individuals and business entities which are not GST registered) from 1 July 2017.

Reform considerations for the Government and the FinTech Industry

While the Government's GST pronouncements in the FinTech Statement (and the issues identified in

the Treasury Consultation Paper) are a highly positive development for the FinTech Industry, there is

still much work to be done. Specifically, the following issues will need to be considered and

addressed:

The reform measures should ideally be introduced before 1 July 2017 (or at least apply with

effect from that date, if not earlier). This will ensure that the Netflix Tax does not apply to

inbound bitcoin or other digital currency supplies from 1 July 2017. Amendments to the GST



Act often take considerable time, particularly if the consent of all eight States and Territories is

required for a change to the GST base. Industry consultation can add further delays. These

timing issues are compounded in a Federal election year.

Arriving at a suitable definition of "digital currency" may be difficult, yet will be critical to the

success of any GST reform measures. As noted in the FinTech Statement, there are more

than 600 digital currencies presently available and the reforms should not be limited solely to

bitcoin. However, the Government will not want to broaden any new GST exemption to all

things that can be transferred digitally and which may potentially be used as a substitute for

fiat currency. For example, it is unlikely the Government would intend for transferrable reward

/ frequent flyer points to be viewed as a "digital currency".

If bitcoin and other digital currency is treated consistently with foreign currency (fiat currency),

then digital currency sales made by GST registered businesses within Australia will be

"financial supplies" and "input taxed". This means that GST won't apply to the sale of the

digital currency. However, a GST registered business that has made an input taxed supply

may not be entitled to full input tax credits (GST credits) for GST incurred on expenses that

relate (directly or indirectly) to making such supplies. The availability of full credits may

depend on factors such as whether the "financial acquisitions threshold" has been

exceeded. If the threshold is exceed, full input tax credits may not be available for rent,

electricity, computer equipment, internet and telecommunication services, advertising

services, etc that are acquired in connection with digital currency sales in Australia. This

would introduce significant additional GST complexity and compliance costs for bitcoin

exchange operators and other GST registered businesses which supply bitcoins in

Australia. It may also result in "GST leakage" on acquisitions that do not qualify for a full input

tax credit. These GST costs may mean that digital currency exchange operators will continue

to have an incentive to relocate or to continue conducting their businesses from outside of

Australia.

Alternatively, the GST law could be amended so that sales of digital currency within Australia

are GST-free supplies (rather than input taxed). This would also mean that GST does not

apply to sales of digital currency, but it would ensure that full input tax credits remain available

for GST incurred on related acquisitions. A potential problem with later this approach is that it

would arguably provide digital currency exchange operators with a GST benefit (i.e. access to

full input tax credits) that is not currently available to traditional foreign currency exchange

operators.



6 Cases Update - SAMM Property Holdings Pty

Ltd v Shaye Properties Pty Ltd

In the matter of SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2016] NSWSC 362

(attached), Stevenson J ordered a contract for the sale of land be rectified to add GST to the

purchase price.

Background

The Vendor (Shaye Properties) sold its vacant industrial property in Wetherill Park by way of public

auction in August 2015. The Purchaser (SAMM Property) bid $3.325 million.

Contracts were executed and exchanged post auction in the draft form circulated prior to

auction. The contract stated on the front page that the sale was a taxable supply (i.e. GST applied to

the sale). The contract also included the standard NSW printed clauses (clause 13.2) stating that the

price "normally" includes GST. In this context "normally" means that GST is included in the price,

unless there are any overriding special conditions. There were no GST related special conditions

attached to the contract.

Issues in dispute

The Purchaser argued the price was $3.325 million inclusive of GST, meaning the Vendor had to

fund its GST liability from that amount. 1/11th of the price would be lost as GST and the Vendor

would only retain $3,022,727.27 in net terms.

The Vendor argued that, notwithstanding the terms of the Contract, its intention was that the price

was $3.325 million plus GST. On this basis the Purchaser must pay the Vendor an additional

$332,500 on account of GST. Net of GST, the Vendor would retain the full $3.325 million price.

On what basis was the auction conducted (i.e. GST inclusive or GST exclusive)?

The most crucial evidence was provided by the Auctioneer. He stated that he had announced at the

beginning of the auction words to the effect that the sale would be a taxable supply and that GST

would be payable by the successful purchaser. The Auctioneer also confirmed that this was the basis

on which the auction had been conducted in an e-mail to the Vendor only a few days after the auction

occurred. Stevenson J accepted that e-mail as contemporaneous evidence as to what had occurred

at the auction.

Other important evidence was the fact that the Vendor had signed a letter prior to the auction stating

that the reserve price was $3.5 million, plus GST. This reserve price was later reduced and amended

on the letter to be $3.35 million. Stevenson J accepted evidence from the Vendor's agent that this

letter had been shown to the Purchaser's agent during final price negotiations and clearly disclosed

the price to be "plus GST".



Decision

Having accepted the evidence outlined above, Stevenson J ordered that the contract be rectified so

that the "sale price would be $3.325 million plus GST".

Takeaways lessons

In relation to NSW contracts, for sales of anything other than residential premises:

o clause 13 of the standard clauses should (in the author's view) always be deleted and a GST special condition inserted; and

o the purchase price should always be expressed to be "plus GST", not GST inclusive (this should be made clear in the special conditions).

In other jurisdictions, the standard contract provisions relating to GST might be acceptable,

but should nonetheless be reviewed and amended as required. In the author's view, NSW

has the worst standard clauses.

In the event of a dispute, having clear contemporaneous written evidence confirming the

parties intentions with respect to GST can be critical. Clients should be asked to consider

GST and to provide clear written instructions. Alternatively, if we need to make GST related

assumptions as a matter progresses, we should ask the client confirm our understanding and

instructions in writing.

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