The arrival of Netflix in Australia highlighted the GST base erosion caused by global digital commerce. Increasing international digital consumption combined with an absence of GST on services and digital products imported by Australian consumers has created tax omissions too great to ignore. As a result, Australia has introduced an extension of the GST system dubbed the ‘Netflix tax’.
The Netflix tax counterbalances disadvantages faced by local suppliers who are required to charge their customers GST by subjecting offshore services and intangibles to GST as well. Such legislation is familiar to the EU, South Korea and Japan, among other countries.
An estimated one hundred new entities will be required to register for Australian GST based on the amended legislation. Businesses may face transitional costs in complying with their new obligations. However, the amendments offer a ‘limited registration status’ option for foreign businesses exclusively supplying services or intangibles to mitigate these costs.
What’s being taxed?
The definition of ‘services and intangibles’ is very broad. It covers anything other than ‘goods or real property’, such as streamed or downloaded movies, music, apps, digital data storage, software, games, e-books, intellectual rights or a right or option to acquire something. Consultancy, accountancy, legal, financial, insurance, telecommunication and professional services are also included.
For Australian consumers, the legislation will most likely result in price increases of 10% on inbound digital products and services such as these that were not previously subject to GST. The Netflix tax will apply to pre-existing as well as new contracts from 1 July 2017, but whether businesses can pass this cost on to the consumer may depend on the terms of the contract.
Is my business caught by the legislation?
The Netflix tax will apply to your business if:
- You are not an Australian business
- You supply services or intangible digital products
- The recipient of the service is an Australian consumer
- The recipient uses your services in Australia.
Foreign entities are required to be registered for GST if their GST turnover exceeds $75,000. These entities should note that the introduction of the amendments will entail that any supplies of services or intangible products will be included in their turnover, which may then exceed the threshold.
Electronic Distribution Platform exemption
A foreign supplier will not be liable for GST if their product is supplied through an Electronic Distribution Platform (EDP), such as the App Store or Google Play. The Netflix tax mandatorily shifts GST liability from the supplier to the EDP operator if the EDP controls any of the key elements of the supply such as price, terms and conditions, or delivery.
Are your customers legally considered to be ‘Australian consumers’?
The legislative definition of an Australian consumer is an Australian resident who is either:
- Not registered for GST or
- Registered for GST but the acquisition of the supply is wholly outside of their enterprise.
Penalties for misidentifying a consumer
Foreign suppliers may positively identify a consumer based on their residential status, or negatively identify them based on the provision of both an ABN and declaration indicating GST registration. If suppliers misapply GST after taking such reasonable steps to identify a customer’s consumer status, they will not be penalised.
Should an affected business opt for ‘limited registration status’?
The benefits of the status include quarterly rather than monthly tax periods, streamlined procedures and fewer details required on GST returns. However, this option disentitles businesses to input tax credits, having an ABN, being entered in the Australian Business Register, issuing tax invoices and paying GST by instalments. Foreign businesses should bear in mind that they may still fully register as normal if they wish, and that this status may be revoked at any time.
In some instances GST is reversecharged to the recipient rather than the supplier. The rationale for the reverse-charge is based on preventing misrepresentation – to ensure GST revenue is not lost where businesses make purchases for private purposes. GST will be payable by the recipient if:
- The supply is of inbound services on intangibles and
- The purchase is made for the purpose of carrying out business in Australia and
- The recipient is required to be registered for GST.
If you think your business may be affected by the new legislation or you want to prepare for its introduction, please contact your local Accru advisor for advice.