The area of e-commerce is rapidly expanding as businesses look for ways to sell their products beyond the borders of their domestic market via avenues such as the internet. The issue of whether GST is payable on internet sales is fraught with risk given the complex mechanics of working through the GST legislation and the Commissioner of Taxation’s public tax rulings. This is made worse by the general misconception that only sales to domestic customers are subject to GST.
Although the general notion is that GST does not apply to goods and services that are not consumed in Australia, the onus is on the provider of the goods and services (referred to in the GST legislation as “the supplier”) to ensure that a number of requirements, some of which are onerous, are satisfied. If the supplier incorrectly assumes that GST does not apply, it will not be able to recover the GST cost from the overseas customer and will be out of pocket for the GST liability.
Export of Goods
In order to attract the GST exemption, the supplier must export the goods from Australia before, or within 60 days after the earlier of the receipt of any of the consideration, or the provision of an invoice. Where the goods are paid for by instalments, the goods must be exported before, or within 60 days after the earlier of receiving any of the final instalment or the provision of an invoice. It should be noted that the invoice does not have to satisfy the requirements for a tax invoice for the purposes of triggering the 60 day period. The Commissioner generally accepts that the requirement is met if possession is handed over or delivery is made within the 60 day period provided that the supplier has completed all other actions necessary for the exportation of the goods.
Further, the supplier must be the effective “sender” of the goods, that is, it must either contract with an international carrier for the overseas transportation of the goods or be responsible for delivering the goods to a ship or aircraft operator that has been engaged by another party to transport the goods overseas.
The export loses its GST-free basis if it is not made within the 60 day time period or if the supplier re-imports the goods back into Australia.
Export of Services or Rights
The requirements which are required to be satisfied in relation to exports of things other than goods or real property are complex and technical in nature.
The supply has to fit within one of the categories as set out in the GST legislation. In broad terms, these relate to a supply made to a non resident who is not in Australia when the thing supplied is done and a supply made to a recipient who is not in Australia when the thing supplied is done and the effective use and enjoyment of which takes place outside Australia.
The task of determining whether the requirements for obtaining the GST exemption are met is not simple and by no means straightforward. The supplier cannot assume that the GST exemption applies simply because the supplier provides an overseas address. Instead, it has to ascertain whether the recipient is a non resident for income tax purposes. Even if this hurdle is overcome, it has to determine whether the recipient was in Australia when the services are provided. The test for determining whether a non resident company is present in Australia requires knowledge of whether the company carries on business or conducts its activities in Australia at or through a fixed and definite place of its own for a sufficiently substantial period of time or through an agent at a fixed and definite place for a sufficiently substantial period of time.
The Australian Taxation Office (“ATO”) considers it would be reasonable for a supplier to conclude that a non resident company is in Australia if the company is registered with ASIC or the company has a permanent establishment in Australia for income tax purposes.
Whilst it may be a simple task for the supplier to find out whether the recipient is registered with ASIC by performing a search on the National Names Index on ASIC’s website, it will be difficult for the supplier to ascertain whether the recipient company has a permanent establishment in Australia for tax purposes.
The ATO has cautioned that even if a company is not registered with ASIC and does not have a permanent establishment in Australia, it may still be in Australia on application of the test as set out above.
Risks
The ATO has acknowledged that at the present time there is no failsafe method for determining whether the supply is for consumption outside Australia when a supply is made via the internet. Where a supplier has long established arrangements with a recipient, the supplier may have evidence of the residence of a recipient and this evidence should be used to determine whether supplies made are for consumption outside Australia.
For lower value transactions, typically less than $1,000, the ATO considers that in order for the transaction to be considered a GST-free supply, the recipient must provide a declaration that it is not in Australia and will not be making use of the supply in Australia and an overseas address. If both conditions are not satisfied, the supplier will have a GST liability.
If the ATO subsequently determines that the supplier is incorrect in characterising the supplies as being GST-free, the supplier will lose about 9% of the consideration received for the supply and may also be liable for penalties imposed by the ATO. It will be difficult, if not impossible, for the supplier to then recover these costs from the overseas recipient.
Therefore, it is imperative for a supplier to ensure that proper procedures are in place to obtain all necessary information from the overseas recipient in order to satisfy itself that the supply will be GST-free. If in doubt, or if this information is not forthcoming from the recipient, it would be prudent to assume that there is a risk that the supply will not be GST-free and factor this into the contract with the recipient.
For further information or advice please contact Tom May