The “Netflix” Tax

One of the most technically interesting tax changes announced in the Federal Budget in May 2015 was the proposed imposition of goods and services (GST) at 10% on offshore intangible supplies to Australian consumers, termed the “Netflix tax”, so called after the announcement by Netflix in November 2014 that it proposed to enter the Australian market with its online movie streaming service by March 2015.

The Government announced the implementation of “integrity measures” (which included the Netflix tax) in April 2015. The integrity measures proposed by the Government were in relation to what was emerging as an OECD (Organisation for Economic Co-Ordination and Development) consensus, that GST should be charged at the source of the revenue, so a supplier providing intangible services into Australia, wherever the supplier is located should be subject to Australian GST on those services.

The Tax Laws Amendment (Tax Integrity: GST and Digital Products) Exposure Draft Bill 2015 (Exposure Draft Bill) proposes to extend the scope of GST to supplies of things other than goods or real property (ie intangibles) from offshore which are made to Australian consumers. It is intended that the legislation will take effect from 1 July 2017.

The amendments are consistent with the reforms in a number of other countries (including Norway, Japan and the member states of the European Union) to extend the scope of their value added taxes to the growing area of offshore intangible supplies to consumers in those countries.

Summary of current law

Under the current GST law, GST is payable on taxable supplies and taxable importations.

A taxable importation is an importation of goods that are entered to Australia for consumption within Australia, provided the importation is not specified to be a non-taxable importation.

Generally, for a supply to be a taxable supply it must, among other things, be connected with the Australian “indirect tax zone” (ie, supplies made or done in Australia or good delivered within Australia).

The current GST law also ensures that entities that are registered or required to be registered for GST are in the same net GST position in respect of intangibles acquired for their Australian activities from overseas as they are for things acquired locally. This is known as the “reverse charge” rule. However, this rule does not extend to entities that are not registered or required to be registered for GST (ie consumers).

The issue that was identified by the Australian Government with the operation of these rules was that the importation of services or intangible property by consumers would never be a taxable importation (as importations must be of goods) and will often also not be a taxable supply under the current “connected” rules and would not be subject to the “reverse charge” rule.

The implementation of a “Netflix tax” is intended to ensure the GST revenue base does not steadily erode over time through the increasing use of foreign digital supplies by Australian consumers and that local suppliers are not at a tax disadvantage relative to overseas suppliers

The Netflix tax

The effect of the Exposure Draft Bill is that all supplies of “inbound intangible consumer supplies” made to “Australian consumers” will be considered to be “connected” with Australia, and subject to GST, regardless of whether the supplier is an Australian resident or non-resident. This change will result in supplies of digital products , such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and advisory services (such as brokering), receiving equivalent GST treatment whether they are supplied by a local supplier or a foreign supplier.

A supply is an “inbound intangible consumer supply” if it is a supply of anything other than goods or real property that is not done wholly in the Australian indirect tax zone or made through an enterprise the supplier carries on in the Australian indirect tax zone.

An “Australian consumer” is an Australian resident (other than an entity that is an Australian resident solely because the definition of Australia in the Income Tax Assessment Act 1997 includes the external Territories) that:

  • is not registered or required to be registered; or
  • if the entity is registered or required to be registered – the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise that the entity carries on.

Importantly, no GST liability arises under the amendments if the recipient acquires the supply as a business rather than as a final consumer.

The amendments also make changes to the rules for determining an enterprise’s GST turnover, which determines whether registration for GST is required. Usually, an entity’s GST turnover includes, among other things, the value of the GST-free supplies the entity makes that are connected with the Australian indirect tax zone. However, this would mean that the making of a significant number of supplies by overseas suppliers to Australian residents which would now be connected with the indirect tax zone, used and enjoyed outside the indirect tax zone and therefore GST-free, would require GST registration of the suppliers. The Explanatory Memorandum uses the example of hairdressing services that an Australian resident might obtain while travelling overseas. The suppliers may have no involvement with the Australian GST system, and in some, if not most instances, will be unaware they are making a supply to an Australian resident. Therefore, requiring these entities to register for GST purely on the basis that the supply falls within the new law would create significant compliance costs for no benefit. As a result, the amendments exclude GST-free supplies from GST turnover if they are connected with the Australian indirect tax zone only as a result of these amendments.

Electronic distribution service

In some circumstances, the GST liability is shifted from the supplier to the operator of an “electronic distribution service” through which the supplies of inbound intangible consumer supplies are made. This will occur if the operator of the electronic distribution service controls any of the key elements of the supply.

A service is an “electronic distribution service” if the service allows entities to make supplies available to end-users and the service is delivered by means of electronic communication and the supplies are to be made by means of electronic communication.

The responsibility for the GST liability shifts from a supplier to the operator of an electronic distribution service for supplies that are inbound intangible consumer supplies made through the electronic distribution service they operate unless all of the following are met:

  • an invoice issued in relation to the supply identifies the supply and identifies the supplier as the supplier of the supply;
  • the supplier is identified as the supplier of the supply, and as the entity responsible for paying GST, in contractual arrangements for making the supply and the provision of access to the electronic distribution service;
  • the operator of the electronic distribution service does not authorise the charge to the recipient for the supply and does not authorise delivery of the supply and does not set terms and conditions under which the supply is made.

The shift in GST liability to the operator of an electronic distribution service is proposed given that, generally, the operator of an electronic distribution service will be a much larger and better resourced entity than most of the entities making the supplies. The operator of the electronic distribution service will also have significant influence over the terms of sale made using the electronic distribution service and either manage or closely regulate the payment process. Further, often the operator of the electronic distribution service will have more information about the recipient of the supply, compared with the suppliers.

Modification of regulations

The Exposure Draft Bill also proposes the making of regulations to modify particular GST rules (for example, registration turnover, tax periods and GST returns) in order to accommodate the new rules for intangibles and to minimise compliance costs of non-resident suppliers. The Explanatory Memorandum to the Exposure Draft Bill states that the form of regulations will need to be determined in consultation with members of the industry.

WORDS: 1,352

Geoffrey Mann

Geoffrey Mann

Email: [email protected]
Tel: +61 3 9679 3366

Geoff advises on indirect tax with particular emphasis on goods and services tax, stamp duty, land tax and human resources taxes (for example, fringe benefit tax, payroll tax, workers' compensation premiums, superannuation guarantee charge and PAYG).
Geoff's tax experience spans over twenty years. He has advised on a wide range of transactions and issues.

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About Geoffrey Mann

Email: [email protected]
Tel: +61 3 9679 3366
Geoff advises on indirect tax with particular emphasis on goods and services tax, stamp duty, land tax and human resources taxes (for example, fringe benefit tax, payroll tax, workers' compensation premiums, superannuation guarantee charge and PAYG).
Geoff's tax experience spans over twenty years. He has advised on a wide range of transactions and issues.