Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 3 - Supplies of rights or options offshore
Outline of chapter
3.1 Schedule 3 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that the GST Act applies to the offshore supply of options or rights to goods, services and other things, where the goods, services and other things are connected with Australia.
Context of amendments
3.2 The policy intent of the goods and services tax (GST) legislation broadly is to tax private consumption of most goods, services and other things in Australia, including imports. However, a deficiency has been identified in the GST Act under which certain rights or options provided offshore are not subject to the GST, even when they are for goods, services and other things that will be consumed in Australia.
3.3 Where a resident entity supplies a right or option to goods, services or other things that are for consumption in Australia, the underlying supply will generally be subject to the GST. However, where the same supply is made overseas by a non-resident, no GST applies. This is because the supply is not 'connected with Australia'.
3.4 This outcome results in a competitive advantage for certain non-resident entities compared to their Australian counterparts. It is also inconsistent with the broad policy intent of the GST legislation, which is to tax private consumption of most goods, services and other things in Australia.
3.5 The main group of non-residents that are able to make supplies in these circumstances are non-resident tour operators. Typically, these operators acquire Australian package holidays from resident tour wholesalers and then on-supply them to tourists. If these supplies constitute supplies of rights or options to acquire things to be consumed in Australia they will not be connected with Australia as required under the GST Act. This is contrary to the policy intent that GST should be paid on supplies of Australian package holidays to both Australian residents and non-residents.
Summary of new law
3.6 Under the amendment, a supply that is made offshore will be 'connected with Australia' if it is a supply of a right or option to acquire something, the supply of which would be connected with Australia.
3.7 Amendments will also be made to the 'reverse charge' rules in Divisions 83 and 84 of the GST Act to ensure that their existing operation is maintained.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Offshore supplies of rights or options will be connected with Australia if the rights or options are to acquire something that would be connected with Australia. If all other requirements of section 9-5 of the GST Act are satisfied, these supplies will be taxable supplies and therefore subject to the GST. | The GST does not apply to supplies of rights or options to acquire goods, services or other things in Australia (other than real property) where the rights or options are created, granted, transferred or assigned outside Australia by a non-resident. This is because such supplies are not 'connected with Australia' and are therefore not subject to the GST. |
| These supplies will continue to be reverse charged under Division 84. | Division 84 makes certain supplies of things (other than goods or real property) that are not connected with Australia subject to the GST. The GST liability is reverse charged so that the recipient is responsible for the GST liability rather than the supplier. |
| Division 84 will apply in preference to Division 83 for these supplies. | Division 83 allows non-residents making supplies connected with Australia to enter into a voluntary agreement with the registered recipient (or a recipient that is required to be registered) to reverse charge the GST liability to the recipient. These provisions do not apply where a supply is not connected with Australia but is taxable under Division 84. |
Detailed explanation of new law
3.8 The meaning of 'connected with Australia' in subsection 9-25(5) of the GST Act is broadened to include supplies of rights or options to acquire something, the supply of which would be connected with Australia [Schedule 3, items 1 and 2, paragraph 9-25(5)(c)]. This amendment will ensure the supply of such rights or options will be subject to the GST if the other requirements of section 9-5 of the GST Act are met.
Example 3.1
Smart Travel is a non-resident tour operator based in Canada that is registered for the GST in Australia. Smart Travel acquires Australian package holidays on a GST inclusive basis from Oz Travel, a resident tour wholesaler in Sydney. The Australian package holidays are on-sold by Smart Travel to tourists wishing to travel to Australia as rights or options to acquire goods, services and other things in Australia. The supply of Australian holiday packages by Smart Travel to tourists are treated as connected with Australia under the GST Act even though Smart Travel issues or grants these rights or options in Canada. Smart Travel is registered for the GST in Australia and all other requirements of 'taxable supply' are satisfied under section 9-5 of the GST Act. Therefore, Smart Travel is making taxable supplies when it on-sells the Australian holiday packages to tourists and must remit GST in respect of the supply. However, it can also claim an input tax credit on the GST paid when the holiday packages are acquired from Oz Travel.
3.9 The amendment also operates to ensure that if a non-resident entity supplies the rights or options to another non-resident, then the second non-resident will also be subject to the GST on its subsequent sale of the rights or options if it meets the other requirements of section 9-5 of the GST Act.
Example 3.2
Assume the same facts as for Example 3.1 and that Smart Travel (Canada) on-supplies the Australian package holidays on a GST inclusive basis to Smart Travel (UK). This entity on-sells the rights or options to tourists wishing to travel to Australia. The supply of the holiday packages is connected with Australia under the GST Act. Assuming that Smart Travel (UK) is registered or required to be registered for the GST in Australia and all other requirements of 'taxable supply' are satisfied under section 9-5 of the GST Act, Smart Travel (UK) is making taxable supplies when it on-sells the Australian holiday packages to tourists. It must remit the GST in respect of the supply, however it also can claim an input tax credit on the GST paid when the holiday packages were acquired from Smart Travel (Canada).
Intangible supplies from offshore - reverse charge
3.10 Division 84 makes certain offshore supplies of things (other than goods or real property) taxable supplies, even though the supplies are not connected with Australia. If a supply is taxable, the GST liability is reverse charged to the recipient and the supplier does not have any GST liability.
3.11 The policy intent of this Division is to ensure that there will be GST imposed on supplies of things, other than goods or real property, that could be made from outside Australia if the thing is going to be used in Australia other than solely for a creditable purpose. That is, if the thing is going to be used, solely or partly, for a private purpose or for making input taxed supplies. The reverse charge mechanism overcomes the difficulties that may arise in seeking to collect the GST from an offshore supplier.
3.12 Because Division 84 requires that the supplies must not be connected with Australia, any broadening in the meaning of 'connected with Australia' for supplies of things, other than goods or real property, could potentially result in Division 84 having a correspondingly narrower operation. This is not desirable because it would reduce the circumstances in which supplies are reversed charged under the GST Act.
3.13 To prevent this outcome, this Bill will replace subsection 84-5(1) so that supplies connected with Australia because of paragraph 9-25(5)(c) will continue to be reverse charged. [Schedule 3, items 7 and 8, subsections 84-5(1) and (2)]
3.14 Ordinarily, the GST on a supply that is a taxable supply under section 9-5 is payable by the entity making the supply. In contrast, the GST is payable by the recipient of a supply where the supply is taxable under section 84-5. However, there may be cases where a supply is a taxable supply under section 9-5 as a result of the amendment to the meaning of 'connected with Australia', and also under section 84-5. New subsection 84-10(3) removes any doubt in these cases that the GST is payable by the recipient of the supply and not by the supplier of the supply. [Schedule 3, item 9, subsection 84-10(3)]
3.15 The Guide Material to Division 84 is replaced so that it more accurately reflects the operation of the Division. [Schedule 3, item 5]
Supplies by non-residents that are connected with Australia - voluntary agreements
3.16 Division 83 allows a non-resident supplier and their registered (or required to be registered) recipient to enter into a voluntary agreement whereby the recipient can account for the GST that would otherwise be payable by the non-resident supplier. This Division resolves some practical compliance issues for non-residents with no presence in Australia.
3.17 Division 83 only applies to a supply that is 'connected with Australia'. As the amendment to subsection 9-25(5) will widen the meaning of 'connected with Australia', it may potentially broaden the operation of Division 83. A number of these supplies will continue to be reverse charged under the expanded Division 84 and would have otherwise been eligible to be also reverse charged under Division 83. However, Division 83 is not intended to apply where Division 84 imposes a reverse charge.
3.18 To prevent this outcome, this Bill amends Division 83 to ensure that where Division 84 applies, Division 83 will not have application. [Schedule 3, item 4, paragraph 83-5(2)(a)]
3.19 Paragraph 83-5(1)(c) is also amended to ensure that Division 83 only applies to recipient entities that carry on an enterprise in Australia. The amendment reflects that enterprises should also be carrying on an enterprise in Australia and therefore have an Australian presence before entering into voluntary reverse charge agreements. [Schedule 3, item 3, paragraph 83-5(1)(c)]
Consequential amendments
3.20 The definition of 'full input tax credit' is also amended to reflect that a supply may be taxable under both sections 9-5 and 84-5 of the GST Act. [Schedule 3, items 10 to 16, subsection 84-13(1) - paragraph (a) of the definition of 'full input tax credit', section 129-70 - paragraph (b) of the definition of 'full input tax credit', section 129-75 - paragraph (b) of the definition of 'full input tax credit', subsection 132-5(2) - paragraph (b) of the definition of 'full input tax credit']
Application and transitional provisions
3.21 These amendments apply to supplies made on or after the day on which this Bill is introduced into the Parliament. [Schedule 3, item 17]