Low Value Goods and Digital Products: the New Black

The following article appeared in the February edition of ‘The Taxpayer’ by Tax & Superannuation Australia. Unfortunately I cannot upload a PDF or link to the article so the unformated text below will have to suffice. Please contact me if you would like to discuss anything in this article.

Simon Dorevitch reviews important changes to GST and cross-border transactions

 

  1. Taxing the internet shopper

When the GST Act and Regulations were drafted in 1999, e-commerce was in its infancy – it was not fully envisaged that people would prefer to shop from the comfort of their mobile devices rather than visiting a bricks and mortar shop! Over the years, however, Australian internet sales have grown rapidly and are now in excess of $20 billion per annum.

This has caused dismay from Australian businesses who have increasingly complained about an unequal playing field, since Australian consumers are often able to avoid incurring GST on their internet purchases from non-resident businesses. Online video-on-demand provider, Netflix is a prime example where a subscription to their services is currently not subject to GST under existing laws.

In response to these concerns, the government has introduced amendments that extend GST to supplies of digital products, certain services and low value goods imported by consumers.

As a result of these amendments, Australian consumers will soon find themselves paying 10% more for many online purchases. In addition, many overseas suppliers will be required to register and pay GST, though in some cases the GST liability may be shifted to an electronic distribution platform or goods forwarder. To ease the administrative burden, the Commissioner will permit some foreign businesses affected by the amendments to hold a limited GST registration.

 

  1. Existing GST framework

By way of background, GST is payable on “taxable supplies” and “taxable importations”.

Taxable supplies

For a supply to be taxable it must, among other things, be connected with Australia.[1]

In the context of physical goods brought to Australia, a supply is connected with Australia if the supplier either imports the goods or installs or assembles them in Australia. Therefore, if the consumer imports the goods, the supply will generally not be connected with Australia and will not be a taxable supply.

In the context of supplies other than physical goods or real property (e.g. digital products and other services), a supply is connected with Australia if:

  • The thing is done in Australia;
  • The supply is made through an enterprise that is carried on in Australia; or
  • The supply is the supply of a right to acquire another thing that is connected with Australia.

If the location of performance is not in Australia, a supply by a foreign entity will generally not be connected with Australia and will not be a taxable supply.

Taxable importations

For an importation to be taxable it must be of tangible personal property. Therefore, an importation of digital products or services is not a taxable importation as these are not tangible goods. Furthermore, GST regulations specify that an importation of low-value tangible goods (i.e. those with a customs value of $1,000 or less) is a non-taxable importation and therefore no GST is payable.

 

  1. Applying GST to Digital Products and Other Services

Amendments to the GST Act[2], which take effect from 1 July 2017, extend the scope of the GST to digital products and other services imported by Australian consumers.

The media have dubbed the amendments the ‘Netflix tax’ and have focused on their application to digital products such as streaming or downloading of movies, music, apps, games and e-books. However, what may be missed is that the amendments apply equally to supplies of services such as consultancy and professional (e.g. architectural, legal or educational) services.

Australian consumer

As a result of the amendments, a supply of digital products and other services will be connected with Australia (and therefore potentially a taxable supply) if the recipient of the supply is an ‘Australian consumer’.

An Australian consumer, in relation to a supply, is an Australian resident (as defined for income tax purposes) who is not entitled to an input tax credit (ITC) in respect of the acquisition. To be entitled to an ITC, a consumer must be registered for GST and the supply must be acquired to some extent for an enterprise they carry on. The amendments are therefore intended to capture private consumption only.

Example: [3]

Global Movies supplies Fellini with video on demand services. The supply is not performed in Australia and Global Movies does not carry on an enterprise in Australia.

Fellini is a resident of Australia, does not carry on an enterprise and is not registered for GST. The supply by Global Movies is connected with Australia as a result of the amendments.

Had Fellini not been a resident of Australia, the supply would not have been connected to Australia, even if he was in Australia when the supply was made.

Reasonable belief safeguard

It may not always be practical for a supplier to determine if the recipient of a supply is an Australian consumer. Recognising this, the amendments provide a safeguard; if the entity that would be liable for GST takes reasonable steps to establish whether the recipient of a supply is an Australian consumer and, having taken these steps, reasonably believes that the recipient is not an Australian consumer, they may treat the supply as if it had been made to an entity that was not an Australian consumer.

Example:[4]

Peter, an Australian resident who is not registered for GST, orders a videogame online from a non-resident supplier while visiting family in London. He pays using a credit card from a UK bank and gives the address and phone number of his relatives as contact information. The supplier reasonably believes that Peter is a not an Australian resident and may therefore treat him as not being an Australian consumer and the supply as not connected with Australia.

In some circumstances, the process for making a supply may be largely automated. Such supplies may also be covered by this safeguard if the business systems and processes provide a reasonable basis for identifying if the recipient is an Australian consumer.

Penalties for misrepresentations by customers and extending the reverse charge provisions

Australian consumers may have incentives to avoid GST by misrepresenting their status. To address this, the amendments broaden the existing administrative penalties for making false or misleading statements.

Furthermore, the amendments extend the compulsory reverse charge rules so that they apply where an Australian business has made a wholly private or domestic acquisition but has made representations that it is not an Australian consumer in respect of the supply. The operation of this reverse charge rule will mean the supply is a taxable supply and the recipient, not the supplier, is liable for GST.

Example:[5]

Leslie, an Australian resident registered for GST, acquires a movie from Online Movie Co (OMC) for a wholly private purpose. She is therefore an Australian consumer in relation to the supply. However, Leslie provides OMCS with her Australian Business Number (ABN) and declares that she is registered for GST. Accordingly, OMC does not charge GST. Under the extended reverse charge provisions, Leslie is obliged to pay the GST.

Electronic Distribution Platforms

Consumers may purchase digital products and services via an electronic distribution platform (EDP). The Apple App Store is an example of an EDP, Amazon is another.

The operators of EDPs are often better resourced and therefore better placed to comply with Australia’s GST laws. On this basis, where supplies are made through an EDP and are connected with Australia under these amendments, responsibility for the GST liability is generally shifted from the supplier to the operator of the EDP. In other circumstances the supplier and operator of the EDP may agree that the operator will be liable for GST on the supply.

Registration and Limited Registration

Supplies that are connected with Australia because they are made to an Australian consumer will generally count towards the GST registration threshold of $75,000. However, these supplies may also be GST free because they are used or enjoyed outside Australia.

It would be unnecessary for foreign suppliers to register for GST if the only supplies they make that are connected to Australia is also GST-free. Therefore, the amendments ensure such supplies are only included in GST turnover if the supply is made through an enterprise carried on in Australia.

Some entities that are required to register under these amendments will not have any other connection with Australia. These entities will have no claim to ITCs and will therefore not need to claim GST refunds.

To ease the administrative burden on such entities, the Commissioner will allow them to opt to be a ‘limited registration entity’. Such entities will only be required to provide minimal information when registering for GST and lodging business activity statements. Limited registration entitles are not entitled to claim ITCs or to have an ABN. They will report quarterly.

 

  1. Applying GST to Low Value Imported Goods

The government has also released draft legislation[6] to amend the GST Act to ensure that GST is payable on certain supplies of low value goods that are purchased by consumers and imported into Australia. This amendment again is intended to level the playing field between local and overseas businesses.

The changes, if passed, will also apply from 1 July 2017.

Supplies of low value goods that are connected with Australia

As a result of the amendments, a supply of goods will be connected with Australia if:

  • The supply involves the goods being brought to Australia with the assistance of the supplier;
  • The goods are low value goods; and
  • The recipient acquires the supply as a consumer.

Bringing goods to Australia with the assistance of the supplier

The supplier provides assistance where it makes arrangements with third parties for the transport of the goods or facilitates the consumer making such arrangements. However, if a supplier merely makes the goods available for collection or provides contact information to unrelated transport companies it will not be providing such assistance.

Low value goods

Broadly, a low value good is tangible personal property that has a customs value of $1,000 or less at the time of supply.

If multiple goods are supplied and each is individually below $1,000 but the total is above the threshold, the supply is a supply of low value goods unless it would be unreasonable to treat each good as a separate supply (for example the supply of 100 floor tiles). A supply that involves both low value and other goods is treated as two or more separate supplies.

Acquired as a consumer

A recipient, who may not be the person to whom the goods are delivered, is a consumer in relation to a supply if they are not entitled to an ITCs for the acquisition.

A business can confirm that a recipient is not a consumer by requesting their ABN and a declaration that they do not acquire the goods for an enterprise they carry on in Australia. Unlike the amendments relating to digital products and other services, there is no requirement that the consumer be an Australian resident.

Example:[7]

Wei, a resident of Hong Kong purchases artwork valued at $700 in Vietnam and arranges for the seller to deliver it to his niece in Australia. The supply is connected with Australia, despite the fact that Wei is not a resident and outside of Australia when the purchase is made.

Supplies not connected with Australia

A supply that satisfies each of these three requirements will not be connected to Australia if the supplier reasonably believes that the goods will be imported as a taxable importation and the goods are imported as a taxable importation. If the supplier’s reasonable belief turns out to be incorrect, they will include the additional GST payable on their next Business Activity Statement and no penalties will apply.

Electronic distribution platforms

Where low value goods are supplied through an EDP, the GST liability will generally shift from the supplier to the operator of the platform. This is consistent with the EDP rules applying to cross-border supplies of digital products and other services – discussed above.

Goods forwarders

Goods forwarders may help arrange a purchase, take delivery of the goods and/or arrange for their pick-up, make storage arrangements and deliver, or arrange delivery of the goods to the consumer.

In contrast, entities that merely deliver goods to Australia are not treated as goods forwarders. If a supply to a consumer involves goods being delivered outside of Australia and brought to Australia with the assistance of a goods forwarder, then the supply will be connected with Australia and the goods forwarder will generally be treated as the supplier.

Example:

Sam is an Australian resident who is not registered for GST. Sam purchases a hockey stick valued at $300 from a US store. Sam instructs the store to send his purchase to a mail forwarding service (MailMe). MailMe then sends the hockey stick to Australia and delivers it to Sam. MailMe, and not the US store, is treated as making the supply and will need to register if it has a GST turnover of $75,000 or more.

Limited Registration

The amendments allow non-resident suppliers (including operators of EDPs treated as suppliers) and non-resident goods forwarders of low value goods to be limited registration entities

Simon Dorevitch is Senior Tax Consultant

A&A Tax Legal Consulting

 

As always I would like to remind readers that

  1. The article does not constitute advice and is not intended to be comprehensive. While I have attempted to ensure the accuracy of the article I do not give any assurances. Please seek your own professional advice.
  2. The views in the article are mine alone and do not necessarily represent those of my employer or Tax  & Superannuation Australia

 

[1] The GST Act now refers to the “Indirect Tax Zone” rather than Australia. However, for simplicity, this article will continue use the term Australia.

[2] Tax and Superannuation Laws Amendment (2016 Measures No .1) Bill 2016

[3] Example 1.1 from Explanatory Memorandum to Tax and Superannuation Laws Amendment (2016 Measures No .1) Bill 2016

[4] Example 1.4 from Explanatory Memorandum to Tax and Superannuation Laws Amendment (2016 Measures No .1) Bill 2016

[5] Example 1.5 from Explanatory Memorandum to Tax and Superannuation Laws Amendment (2016 Measures No .1) Bill 2016

[6] Treasury Laws Amendment (2017 Measures No. 1) Bill 2017

[7] Example 1.5 from Explanatory Memorandum to Treasury Laws Amendment (2017 Measures No. 1) Bill 2017

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The Employee Share Scheme rules have changed. Should you be taking advantage of the new concessions?

Recruiting and retaining high-quality staff is essential to the success of almost any business. Research suggests that companies in which employees have an ownership interest are more productive than those that do not. In this article I ask – do the new employee share scheme rules provide an opportunity for the savvy employer?

Background

An ESS is a scheme under which shares, stapled securities or rights (e.g. options) to acquire them (ESS interests) in a company are provided to an employee or their associate in relation to the employee’s employment. If these ESS interests are provided at a discount to market value the discount is taxable in the hands of the employee.

Recently the laws surrounding the taxation of ESS interests have changed. These changes apply to ESS interests acquired on or after 1 July 2015. The intention of the new law is to make employee share schemes easier, cheaper and more attractive and by doing so;

  • Facilitate better alignment of interests between employers and their employees, thereby leading to more productive relationships, higher productivity and reduced staff turnover.
  • Allow Australian businesses to be more competitive in recruiting and retaining talented employees in the international labour market and
  • Stimulate the growth of start-ups (which are often cash-strapped)

As an employer, now is a good time to consider whether an employee share scheme should be part of your organisation’s remuneration mix.

The previous state of play (i.e. prior to 1 July 2015)

The default position is that the discount is assessable in full in the year that the ESS interests are granted. However, if conditions are met, one of two concessions may be available;

  • A $1,000 reduction or
  • Deferral of the taxing point.

In my experience schemes that defer the taxing point are typically the most attractive and so the remaining of the article will focus on them. Deferral will be available when all of the following apply;

  • The employee has a genuine risk of losing the interests (e.g. by failing to meet performance criteria or being required to continue employment for a certain period)
  • The scheme is made broadly available – i.e. it is available to at least 75% of Australian employees with at least three years of service
  • After acquiring the ESS interest the employee does not hold an interest in the company of more than 5%.

Note that the second requirement only applies to shares and therefore employers who wish to target key personnel are advised to issue rights (i.e. options), rather than shares.

Where such conditions are met no tax will be payable until the earliest of one of the following times;

  • When the employee ceases employment
  • When the risk of forfeiture has been removed and there are no genuine restrictions on the disposal or exercise of the interest and
  • Seven years after acquisition

What has changed?

The new legislation introduces a number of significant changes;

  • The maximum period of deferral has been extended to fifteen years
  • In the case of rights the deferred taxing point is extended, from when the right can be exercised, to when it is actually exercised
  • The maximum level of ownership has been increased to 10%
  • Access to deferred taxation will be available in a broader range of situations
  • The circumstances where employees are entitled to a refund of tax previously paid on forfeited ESS interests has been broadened
  • New valuation rules have been introduced

The additional concessions for ‘start-ups’

The new rules also introduce further concessions for small start-up companies. Both ‘small’ and ‘start-up’ are defined very broadly and many employers will qualify. Under the concession an employee does not need to include a discount on ESS interests in their assessable income if certain conditions, beyond the general conditions that apply to all ESS concessions, are satisfied;

  • The employer must be an Australian company, it, and all companies in the group, must have been incorporated for less than ten years, it must not be listed on an exchange and the combined turnover of the group must not exceed $50m.
  • The employee must hold the interests for three years or until they cease employment
  • If the scheme relates to rights, the exercise price (i.e. strike price) must be at least equal to the market value of the share at the grant date and
  • If the scheme relates to shares, it must be made broadly available (see above) and the discount cannot be more than 15%

For capital gains tax purposes shares are deemed to have been acquired for their market value and rights for the employee’s cost of acquiring them. Furthermore, the exercise price of rights will form part of the cost base of the resulting shares. When a resulting share has been sold the tax on any gain can be halved if the rights were acquired more than 12 months earlier.

New valuation rules

Calculating the assessable discount requires the employer to determine the market value of the company, possibly at multiple points in time during the year. In the case of unlisted companies this can place a prohibitive administrative burden on the employer.

The regulations to the 97 Act contain safe harbour valuation methodologies. However, these are highly complex and, having not been updated since the 1990s, are based on outdated estimates.

New valuation methodologies have recently been issued by the Commissioner. It is expected that these will be simpler and will result in the value of most options being lower than the previous regulations.

Example

Employer Pty Ltd was established on 1 July 2007. On 1 July 2015 it was not listed, had a turnover of $40m and was not part of a corporate group.

At this time Employer granted, for no consideration, 10,000 options to Bob, an important employee. In three years time, if Bob continues to work for Employer, he may exercise the options for $2 each, being the market value of a share in Employer at 1 July 2015.

On 1 July 2018, with the value of Employer’s shares being $5 each, Bob does in fact exercise all of his options. Immediately afterwards he sells the shares. Effectively, Bob has made a gain of $30,000 but he will not be taxed on this gain under the employee share scheme rules. Instead he will make a capital gain of $15,000, being half of $50,000 proceeds less an exercise price of $20,000.

Conclusion

Recent changes have made issuing ESS interests to employees more attractive, particularly for options. I would encourage all employers to consider if an employee share scheme is consistent with their overall business strategy and their strategy for retaining and recruiting key staff. If so it may be a good idea to include them in your remuneration mix.

Of course not all employee share schemes are created equal and, if you are considering implementing an employee share scheme, I recommend you contact a professional adviser for assistance in formulating the ideal scheme for your business.

Disclaimer

This post is intended to be a broad overview for information purposes only. It does not constitute advice. I urge you to seek professional advice that is tailored to your personal circumstances.

ESS

The ATO and Uber – Putting the Tax into Taxi?

Uber, and ride-sourcing services like it, have taken Australia and the world by storm. It is not surprising that the ATO wants their cut of revenue. In fact, the ATO has recently launched a ‘data-matching’ program to identify Uber drivers who haven’t complied with their tax obligations. Therefore, while some drivers may think that they can ‘drive away with no more to pay’ this is unfortunately not the case. Uber and other ride-sourcing drivers have GST and income tax obligations they must consider.

GST

The ATO’s position is that Uber drivers are providing ‘taxi travel’ services. This means that, if their activities are done ‘in the form of a business’, they will need to register for GST, regardless of the amount of income they earn. This puts Uber drivers in a different position to, say, Airbnb hosts who must only register for GST if their income exceeds $75,000. Only those Uber drivers who operate very infrequently or in a non-commercial manner may escape this requirement to register.

From 1 August 2015 driver’s must:

  • Apply for an Australian Business Number (ABN). On the application driver’s should choose category 46239 ‘Road Passenger Transport’ and describe their business as ‘ride-sourcing’. Note that if a driver is already registered for an ABN as a sole-trader (for example if they are an IT contractor) they should use the same ABN for their ride-sourcing activities.
  • Register for GST and
  • Lodge Business Activity Statements (BAS)

It is also strongly advisable that drivers maintain a logbook and keep records to substantiate their income and expenses.

GST must be collected on the full fare, before any Commissions are deducted. For example if the fare was $55 and Uber took $11 the driver would need to pay $5 GST.

However, credits can also be claimed to reduce the net GST payable. These credits must be reduced for any private portion of the costs incurred. For example, if a driver uses their vehicle 10% for rise-sourcing and 90% for private purposes and incurs $110 for fuel, they could only claim $1 of the $10 GST paid.

Finally, drivers must provide passengers with a tax invoice for all fares over $82.50 if requested (note that Uber may do this on the driver’s behalf)

Income Tax

The income earned from Uber, exclusive of any GST paid, is assessable and must be reported in the driver’s tax return. Uber drivers should set aside some of the money they earn to ensure that they have enough left over to pay tax at the end of the year. Uber will not do this on their behalf (nor will they pay superannuation to drivers).

Expenses incurred will be deductible but must be reduced by any private portion. Deductible costs may include commission’s paid, fuel, registration, insurance, repairs and maintenance, cleaning, mobile phone costs and parking.

What’s Next?

Uber has indicated that they will continue to fight the ATO and will take their case to the Federal Court. However, I am not optimistic about their chances of success. If I were their adviser I would be telling them that their case is weak and that the ATO are interpreting the law correctly. Their money would perhaps be better spent on convincing the government to either change the definition of taxi travel in the GST Act or repealing the requirement, in s 144-5, for suppliers of taxi travel to register, regardless of their turnover. Time will tell.

In conclusion, Uber is proving to be a nightmare for the taxi industry but with good preparation and record-keeping it doesn’t have to be a tax or administrative nightmare for its growing number of drivers.

Is the ATO correct? Is Uber? Should the law be changed? Let me know what you think.

Uber