Regulatory Roundup – May 2019

When are digital products ‘connected with Australia’ for GST purposes?

With the purchase of digital products such as the streaming or downloading of movies, apps, and e-books and so on becoming exponentially more popular, it is timely to examine the recently-introduced law that applies GST to digital products and services imported by Australian consumers.

Effective 1 July 2017, GST now applies to digital products and other services imported by Australian consumers. Affected supplies that are caught by the new law include not only the streaming or downloading of movies, music, apps, games, e-books, online supplies of software, digital trade journal/magazine subscriptions and other digital products, but also offshore services such as website design, publishing services, consultancy and professional services (such as legal advice, architectural services and so on).

Australian consumer
The concept of an “Australian consumer” is central to the new law. GST will only apply where the supply is imported by an “Australian consumer”. This requires that both of the following conditions are met:

– the recipient is an Australian resident for tax purposes, and

– either the recipient is not registered for GST or, if they are registered, the recipient does not acquire the supply for use in their business. Therefore, if the recipient is an Australian resident and makes the acquisition solely or even partly for business purposes, GST will not apply.

Safeguards for suppliers
In many cases, the foreign supplier may have only a limited ability to assess the residency and GST registration status of the recipient (in determining whether they are an Australian consumer). To overcome this, safeguards are built into the legislation that provide that the non-resident supplier can treat the supply as non-taxable where:

– they have taken reasonable steps to obtain information regarding whether the recipient is an Australian consumer, and

– having taken these steps, reasonably believe that the recipient is not an Australian consumer.

These safeguards apply (meaning no GST is required to be charged) even where it is later found that the supply is indeed taxable.

On the other hand, where the non-resident supplier believes the recipient is registered for GST (and is therefore not an Australian consumer) then they may treat the supply as GST-free but only where the recipient has provided to them:

– their ABN, and

– a declaration or other information that the recipient is registered for GST (this declaration can be in any form including verbal).

Simplified registration
In acknowledgement of the compliance challenges faced under the new law, the ATO has designed a simplified/limited electronic GST registration and payment process for non-resident businesses who make or intend to make sales of imported services or imported digital products to Australian consumers.

This fully secure online platform allows businesses to register, lodge and pay the Australian GST online, manage account details, as well as authorising others to access their account.

To register and use this platform non-resident businesses:

– are not required to prove their identity

– use an ATO reference number instead of an ABN

– cannot claim GST credits for acquisitions made in the course of making a taxable supply

– cannot issue tax Invoices or adjustment notes

– must lodge GST returns and pay GST quarterly

– can pay electronically via SWIFT bank transfer or credit card.

Alternatively, non-resident businesses can register for GST in the standard way. If this option is adopted these businesses will require an ABN, can claim GST credits, must issue tax invoices (unless the supply is less than $82.50 (including GST)), and must complete activity statements to report and remit GST to the ATO.

Takeaway points

– Affected non-resident suppliers need to ensure compliance with GST registration requirements and consider whether to apply for simplified or standard registration

– Despite the safeguards built into the new rules, non-resident suppliers face a significant burden in determining the whether customers are an ‘Australian consumer’. This may require them to upgrade their systems

– To avoid GST being charged, GST-registered recipients need provide their ABN and advise of their GST registration status at the time of purchase.

Changes to the residency rules, but will they last?

The 2019 full Federal Court decision in Harding v Commissioner of Taxation may make it easier for expatriates to prove that they are non-residents for tax purposes. By doing so, only their Australian-sourced income has to be declared on their tax return (not their worldwide income).

The Full Federal Court ruled that a taxpayer, Mr Glenn Harding, was not an Australian resident for tax purposes. This overturned an earlier decision of the Federal Court (single judge) which held that the taxpayer – who was an Australian citizen living outside Australia for a few years, and who had established a home overseas – remained a tax resident as his overseas accommodation (a rented, fully-furnished apartment) was not considered sufficiently permanent.

From 1990 until 2006, Harding had worked in the Middle East. His wife and small children relocated to Australia in 2004, with Harding joining them two years later. He stayed and worked in Australia until 2009 when he took up a position in Bahrain, Saudi Arabia, on a substantially increased salary.

For Harding, an additional benefit of working in Saudi Arabia was that his income would not be taxed. Upon arriving in Bahrain, he rented fully furnished two-bedroom apartments. During the course of living there, he did not make any substantial domestic acquisitions to use in these apartments.

The plan was that his wife and children would join him in 2011 when one of this children was due to finish middle school, at which point Harding would purchase a larger Bahrain property in which to live. However in 2011 his wife decided to remain in Australia, and the couple separated shortly after.

The question was whether Harding was a non-resident of Australia for tax purposes in the 2011 income year. That is:

  1. Whether he resided in Australia in 2011 (the “resides” test). This is the primary residency test. Some of the factors used to assess this test include the amount of time an individual was physically present in Australia, the intention and purpose of their presence in Australia, family and business/employment ties to Australia, maintenance and location of assets, and any social arrangements in Australia.
  2. Whether his domicile was in Australia. Under this subsidiary test, you are a resident of Australia if your domicile is in Australia, unless the Tax Commissioner is satisfied that your “permanent place of abode” is outside Australia.

To the first question, the Full Federal Court ruled that Harding did not reside in Australia. This is despite him maintaining ownership of the family home, bank accounts, his superannuation fund — all of them maintained in Australia. Indeed, in the year that was in question, he even made a substantial property investment.

To the second question, the Full Federal Court ruled that despite not having a permanent style of accommodation (such as a long-term lease, or ownership of a property in which he was living), Harding had nonetheless established that his permanent place of abode was in Bahrain.

The budget’s boost to instant asset write-off is now law

Federal Budget night announced an increase in the instant asset threshold, and also an extension of which businesses could access the measure. Now the Treasury Laws Amendment (Increasing and Extending the Instant Asset Write-Off) Bill 2019 has achieved Royal Assent. (And it did so on 6 April, so you can make claims, albeit with some caveats below.)

The instant asset write-off threshold increased from $25,000 to $30,000 from Budget night to 30 June 2020.

One complication (although, really it’s not that complicated) is that there will be relevant dates or periods that will have different thresholds applying. Practitioners will need to be aware of three different thresholds that could apply over one financial year (2018-19). The ATO table below is a handy reference:

The threshold applies on a per asset basis. As a result, eligible businesses can instantly write off multiple assets costing less than $30,000 that are first used, or installed ready for use, from Budget night to 30 June 2020.

The instant asset write off has also been expanded to apply to both “small businesses” (those with an aggregated annual turnover of less than $10 million) and medium sized businesses (an aggregated annual turnover of $10 million or more, but less than $50 million).

Note also…
The ATO points out that the entire cost of the asset must be less than the instant asset write-off threshold, irrespective of any trade-in amount. Whether the threshold is GST exclusive or inclusive will depend on your client’s GST status. For further information about GST ramifications, see this ATO web page.

In working out the amount you can claim, you must subtract any private use proportion. The balance (that is the proportion used in earning assessable income) is generally the taxable purpose proportion. While only the taxable purpose proportion is deductible, the ATO says the entire cost of the asset must be less than the threshold.

Note that if you later sell or dispose of an asset for which you have claimed an instant asset write-off, you will need to include the taxable purpose proportion of the amount received for the asset in your assessable income.

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