From 1 October 2016, new amendments have been made in relation to the GST Act to exclude some of the services provided in business-to-business (B2B) context from GST liabilities. In order to be exempted, the services provided will have to:
- Be supplied to a “non-resident”; and
- Who is not in the indirect tax zone when the supply is made; and
- The supply is neither a supply of work physically performed on goods situated in Australia or “directly connected with” real property in Australia; or
- The non-resident acquires the services in carrying on the non-resident’s enterprise, but is not registered or required to be registered for GST.
The services provided will cease to be GST-free if:
- It is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and
- The supply is provided, or the agreement requires it to be provided to another entity in Australia; and
- for a supply other than an * input taxed supply–none of the following applies:
(a) the other entity would be an * Australian-based business recipient of the supply, if the supply had been made to it;
(b) the other entity is an individual who is provided with the supply as an employee or * officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or
(c) the other entity is an individual who is provided with the supply as an employee or officer of the * recipient, and the recipient’s acquisition of the thing is solely for a * creditable purpose and is not a * non-deductible expense.
To put it simply, what this means is that service provided to a foreign entity, OR even its Australian subsidiary, INCLUDING most legal services would be GST-free supplies. We said “most” legal services, because the amendments do come with provisos. That is, the works must not be “directly connected with” real property in Australia.
According to GST Ruling 2003/7 at Paragraph 25 – “Legal services in acting for a purchaser or vendor in the conveyance of land are directly connected with that real property”. So unfortunately, many of the conveyance services or property development related legal services are not GST-free. This could potentially create some extra costs for purely non-resident business clients, but for local subsidiary registered for GST, it would only be a matter of cash flow that could be addressed.
However, if at the time of the provision of legal services, the identity of the real property cannot be ascertained, the services provided are not regarded as “directly connected with the real property. For example, if the advice is generic in nature, or establishing a trust that will subsequently hold real property. Where, for example, the winding up of a company involves real property, then those legal services in relation to the real property will not be GST-free.
These amendments form very interesting contrast with the so called “Netflix Tax”, which will come into force on 1 July 2017. The “Netflix Tax” is intending to expand the GST tax base to foreign entities that provide intangible digital products and services to Australian consumers. For example, e-book, streaming services, movies, music and of course, Netflix! The official reason for the change of law is to create a levelled playfield for the Australian local content creators, so that they do not lose out to their overseas competitor because of the tax difference.
In summary, the proposed tax reform seeks to encourage service exports of Australian businesses, whilst milk the overseas businesses for importing services. For businesses, good news, but for consumers, probably not.
Further readings:
- GST Ruling: GSTR 2003/7
- Treasury Explanatory Material on GST to Digital Products and Treatments to Cross-Border Transactions
- SMH: Treasurer Introduces Netflix Tax
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