Earlier this month, Treasurer Scott Morrison introduced draft laws to Parliament to apply the Goods and Services Tax (GST) on digital goods, such as eBooks, apps, games, movies and books purchased by Australians from overseas vendors. The so-called “Netflix tax”, seeking to level the playing field between overseas businesses and their Australian counterparts, will generate $350 million in estimated revenue over four years. Tax experts concluded that the absence of GST on digital goods and services has been increasingly untenable, and GST must be applied to overseas vendors to raise revenue.
How will the Netflix tax work?
The legislation (The Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016) sets out the requirements for overseas businesses to collect and later remit GST on all products and goods purchased by Australian consumers. This move is in line with Organisation for Economic Co-operation and Development (OECD) guidelines, which currently requires consumption of goods be taxed in the destination country of imported digital goods and services. The OECD recognised that $240 billion is lost in revenue globally from profit shifting and lost tax. The draft legislation requires overseas companies that sell more than AUD$75,000 worth of goods annually to Australian consumers to register their products for GST.
The scheme is expected to cost $1.5 million to establish within the Australian Taxation Office and is planned to commence July 2017. It is forecasted to generate an additional $150 million in its first year of operation and $200 million in its second year from Australian consumers. The States and Territories will receive the revenue from the GST raised. The move will not affect international companies already collecting tax from Australians, such as Apple iTunes and Spotify. It will target big players such as Netflix, Amazon, Kobo, Tidal, and Adobe.
Minimum Tax Threshold
The second proposed measure for debate will be to remove the exemption from the requirement for overseas companies to pay GST for goods valued less than $1,000. Currently, overseas suppliers are exempt from applying the GST to goods under $1,000. In August 2015, former Australian Treasurer, Joe Hockey, announced the GST threshold would be removed altogether. So, all intangible goods will have GST applied to it, regardless of the value.
How international companies and suppliers will implement the tax is still to be determined. The Bill has called for overseas companies to take ‘reasonable steps’ to ascertain whether buyers are from Australia, such as a .com.au email address or from an Australian issued credit card. However, both of these can easily be circumvented with gift cards and generic email addresses. Tax experts have admitted that drafting the legislation will be easy and “the challenge will be collecting the cash.” In addition to passing the Bill, there must be a unanimous agreement of the States and Territories before enactment of legislation.
If you are selling intangible or virtual goods or provide consultancy and professional services for customers in Australia, the upcoming tax changes may affect you. Get in touch with our commercial lawyers to determine whether these GST reforms will affect your business.