GST: Online purchases – What will be caught and when?
Tax Alert - September 2015
GST and online purchases of goods and services has been a topic attracting much commentary lately around the world as the importance of this often “untaxed” area of commerce increases. In New Zealand, the Minister of Revenue released a discussion document entitled “GST: Cross-border services, intangibles and goods” on 18th August 2015. The discussion document focuses on the collection of GST on “remote” services – services and intangibles (including digital downloads) supplied remotely by an offshore supplier to New Zealand-resident consumers. GST on the purchases of goods online from overseas is briefly considered in the discussion document, but while the issue is mentioned, it is seen by Inland Revenue as a “phase 2” issue, with services being the area that will have GST changes made first.
However, in addition to this, there have also been some very interesting developments in relation to the importation of goods into Australia. These developments have significant impact on the potential future landscape surrounding imports into New Zealand.
No specific implementation dates are included in the discussion document, but Inland Revenue is likely to want the changes for GST and imported services to take effect from some time in 2016. We consider that such a timeframe may be ambitious, particularly when suppliers’ own internal development lead time is considered. Instead we consider thought should be given to a July 2017 timeframe to align any New Zealand changes with Australia’s own start dates in this area.
Changes to GST on “remote” services for New Zealand
The proposed new rules for GST on imported services for New Zealand will operate as follows:
- “Remote” services supplied to New Zealand-resident consumers will be treated as being performed in New Zealand and subject to GST.
- A wide definition of “services” is proposed, which will include both digital services (downloads etc.) and more traditional services (such as consultancy and advice).
- Offshore suppliers will be required to register and return GST if their supplies of services to New Zealand-resident consumers exceed a given threshold in a 12-month period. The threshold has not been set yet, but values of $10,000 per annum and $60,000 per annum are discussed.
- As electronic marketplaces such as online app stores are generally in a better position to register and return GST on supplies compared with the underlying supplier, they may be required to register for GST instead of the principal supplier registering.
- It is the preference of the Minister of Revenue that these proposals will only apply to business-to-consumer transactions, and not business-to-business transactions.
- Significant fines, of up to $50,000, would apply to New Zealand resident consumers that represent to an overseas services supplier that they are a business.
Submissions on the discussion document can be made until 25 September 2015.
As noted earlier, in some circumstances an electronic marketplace may be treated as the supplier and be required to register for GST. This will be in situations where customers would normally consider the marketplace to be the supplier, and this is reflected in the contractual arrangements between the parties. This is a significant change from the normal manner in which GST operates, as the GST rules will be ignoring the legal structure of the agent / principal relationships of the parties. However it is closely following the approach that Australia is to adopt from July 2017 for services imported by Australian consumers. This is a pragmatic response to the issue of many small international suppliers operating through a central market place.
Several different options for offshore suppliers to register for New Zealand GST are being considered. These include the existing domestic registration system, a pay-only registration system, or a regional system involving only having to register for GST in one jurisdiction out of a group, similar to how the European Union operates.
The Deloitte View
Overall we consider the discussion document is drafted in a pragmatic way that provides for a number of different options and is at least asking the right questions in this difficult area. Once the parameters have been pinned down, we will have a clearer picture of any likely hurdles to implementation, and there may be many.
The challenge will be to ensure that the final form of the GST legislation is able to work in an efficient and effective manner in the real world. This needs to be in a manner that allows for the collection of GST, without needlessly imposing costs or delays on New Zealand consumers or foreign suppliers, and importantly does not lead to some foreign businesses deciding not to supply to the New Zealand market if we become too difficult to deal with.
Based on international experience we would expect the large established international suppliers of services to agree to register for GST and to collect GST on sales to New Zealand consumers. However smaller suppliers may take longer to comply, if they comply at all. Given that realistically there is a low chance of non-resident suppliers who only have a small volume of sales into New Zealand complying, we strongly recommend that the GST registration threshold be set in line with the domestic registration of $60,000 per annum. Countries that have set their registration threshold for imported services too low are experiencing significant practical compliance issues and we understand some are considering raising their GST registration threshold levels.
Recent Australian developments
In their budget announcements earlier in the year, Australia announced changes to require non-resident suppliers of services into Australia to register for GST from 1 July 2017, in a manner that is broadly similar to the New Zealand approach discussed above. There are some differences in the detail, but the broad thrust of the changes is consistent.
In late August it was announced that from July 2017 the Australian GST threshold for imported goods will be reduced to zero (down from $1,000) for any non-resident supplier who sells over AUD$75,000 of goods into Australia. These large non-resident suppliers will be required to register for GST and charge GST at source (i.e. when the Australian consumer orders the goods they will be charged GST).
For all non-Australian suppliers who make less than this threshold limit, business will continue as usual. That is, the AUD $1,000 per shipment GST threshold will still remain in place, so it is somewhat misleading to think of the Australian changes as simply a reduction in the GST threshold from $1,000 to zero. However we view the proposal as a very pragmatic approach. It is essentially targeted at the very big suppliers who supply millions of dollars’ worth of goods into Australia, rather than companies that may be just above or below the AUD$75,000 threshold level. Australia will continue to have many goods purchased online arriving without GST being charged on them, provided the individual parcels are under AUD$1,000. However the “80/20 rule” may well apply here and the proposal is a pragmatic attempt to collect some additional GST that is currently not being caught, without imposing a system that will have compliance costs for the parties that exceed the GST collected.
Australian treasury officials have acknowledged that this is the strongly preferred option, although more work is needed to work through the proposals. New Zealand officials will be watching developments very closely and we consider that they should seriously consider the Australian approach. If an equivalent approach was adopted in New Zealand, then we would expect non-residents who are supplying more than NZD$60,000 worth of goods per annum into New Zealand to be required to register for New Zealand GST. We would also expect them to be required to charge New Zealand GST at source online to New Zealand consumers, regardless of the value of the individual parcel. However, there would be no change to the current GST/duty threshold of $60 (i.e. $400 of goods if no duty) for smaller suppliers.
While this approach of only forcing non-resident suppliers of online purchased goods to register if their online sales into a country are over the domestic GST registration threshold is lacking a certain degree of consistency at a policy level, it is brutally pragmatic and that may be what is needed as a first phase for GST and online commerce. It allows for the large non-residents supplying online goods into New Zealand to be brought within the New Zealand GST net, while potentially not imposing overly excessive additional costs on the New Zealand postal, courier and customs systems.
It will also be interesting to see what the possibility is of some form of joint GST registration approach for both Australia and New Zealand for non-resident suppliers. If New Zealand does go down that route, then we would have to expect a start date of 1 July 2017 for these changes, as it is unlikely that Australia would change their timing to suit us.
In terms of the suppliers playing ball and registering for GST, we do need to be realistic and accept that it is more likely that they would comply for both Australia and New Zealand, than just for New Zealand.
There are likely to be significant further developments in the details of these various proposals for online purchases of goods and services before they come into force. Businesses directly impacted by these changes, either in New Zealand, Australia or the wider international context, will need to consider how they will react to the various changes, some of which may come into force with relatively little notice.
September 2015 Tax Alert contents
- Tax Alert September 2015
- GST: Online purchases – What will be caught and when?
- Resident land withholding tax proposals announced and a new acronym to learn
- Draft legislation provides detail on bright-line test for residential land sales
- Inland Revenue clarifies “clarifying legislation” on acquisition date of land
- Business Transformation and the rise of tax pooling
- Deloitte Integration Report 2015: Useful insights for CFOs and tax professionals when considering your M&A strategy
- Commissioner has dropped the mileage rate