We are starting to pay the price for a short-sighted approach to our GST legislation when it was written in 1999. The Australian GST was simply an existing value added tax with some minor variations. No attempt was made to take account of the emerging e-commerce or cross border economies. That short sightedness is now coming home to roost.
The problems were well known at the time. See, for example “OECD, Electronic Commerce: The Challenges to Tax Authorities and Taxpayers” published in 1997.
Two recent GST issues have exposed the weakness in our system. In order to try to overcome them, the government has proposed changes that are badly designed legislative quick-fixes that attack the very basis of the GST. Under these proposed changes, it is no longer the seller who will be responsible for collecting and remitting GST on sales that it makes, but the responsibility of buyers and facilitators.
How these two very different issues will be resolved is yet to be seen.
How the GST works
The GST (or any VAT) works in the same simple way; that is part of its appeal. The ATO website describes the GST as follows.
Generally, businesses and other organisations registered for GST will:
- include GST in the price they charge for their goods and services
- claim credits for the GST included in the price of goods and services they buy for their business.
As a GST-registered business, you need to issue tax invoices to your customers, collect GST and send it to us with your business activity statement (BAS).
The leading judgement of Hill J in HP Mercantile Pty Limited v Commissioner of Taxation [2005] FCAFC 126 refers to the design of the Australian GST as a value added tax with the universal international feature of seeking simplicity to avoid cascading of tax by including only businesses in the GST net.
“The genius of a system of value added taxation, of which the GST is an example, is that while tax is generally payable at each stage of commercial dealings (“supplies”) with goods, services or other “things”, there is allowed to an entity which acquires those goods, services or other things as a result of a taxable supply made to it, a credit for the tax borne by that entity by reference to the output tax payable as a result of the taxable supply. That credit, known as an input tax credit, will be available, generally speaking, so long as the acquirer and the supply to it (assuming it was a “taxable supply”) satisfied certain conditions, the most important of which, for present purposes, is that the acquirer make the acquisition in the course of carrying on an enterprise and thus, not as a consumer. The system of input tax credits thus ensures that while GST is a multi-stage tax, there will ordinarily be no cascading of tax. It ensures also that the tax will be payable, by each supplier in a chain, only upon the value added by that supplier.”
Two recent proposed changes strike at the very heart of the ”simple” GST system.
The first is a potential extension of those with a GST liability (currently the sellers) to those that are essentially facilitators.
The new “low value imports” draft legislation is a version of a “vendor registration” model. While GST liability usually rests with the seller, the proposed new tax extends liability to the electronic platforms, such as eBay and Etsy, who simply provide the platform for buyers and sellers to connect, but never hold or own the goods themselves.
The second deals with so-called “reverse charges”, which shifts the onus of remitting GST from the seller to the buyer. While the concept is not new, the proposal outlined in the 2017 Budget to require purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the ATO as part of settlement extends the reach significantly.
Making the Facilitator liable
Under the provisions of the Treasury Laws Amendment (GST Low Value Goods) Bill 2017, electronic distribution platforms will be treated as suppliers, and liable for GST on all the sales that pass through the platform. This is a quantum leap from making the seller liable to GST. eBay and Etsy in particular expressed disquiet to the recent Senate Standing Committees on Economics that they will be liable for GST on goods which they have never owned, held, tracked or traded. They liken it to a landlord or a shopping centre being liable for GST on goods sold by tenants.
Etsy made the point that:
“Etsy does not own, store, produce or warehouse these goods in any way. We provide a platform to connect sellers and buyers, but each Etsy seller individually can adopt their own Etsy shop policies. They fully control their own product pricing. They are fully responsible for the delivery of that product. Etsy does not hold, ship or deliver any of our sellers’ goods…Our business model does not currently support, nor was it ever built to support, the collection of GST.”
Despite this real change in the way the GST operates, the Senate Standing Committees on Economics concluded:
2.76 The committee accepts that the role of electronic distribution platforms is different from that of sellers. However, it believes that the bill represents a pragmatic solution to a difficult problem. It notes that the platforms have been able to make arrangements for a variety of situations in other countries.
There is still a lot to be played out in this area, I suspect. While Australia is one of the “early adopters” in this area, the Committee has recommended that implementation be delayed until 1 July 2018.
There is also a lot of work being undertaken at the OECD level. Any conclusions at that level will likely be considered in Australia.
Making the Buyer liable
The existing reverse charge provisions make certain GST-registered businesses liable for GST on some imported intangibles.
For example, when an Australian business procures services from a local supplier, GST is chargeable and the local supplier must account for output GST on the taxable service rendered. However, if the exact same services are acquired from an overseas supplier, the GST-registered recipient may be liable to account for output GST on the service consumed locally. This is known as the “reverse charge”, where the liability to account for output GST shifts from the non-resident supplier to the GST-registered recipient. Examples of such imported services can include the acquisition of intangible rights, intellectual property and software licences from an overseas supplier.
This was the thin of the wedge with the GST “reverse charge” mechanism currently being extended to GST registered buyers of valuable metals in an attempt to overcome fraudulent activities in this area. I suspect it will merely add a level of complexity to those law-abiding businesses currently not involved in fraudulent activities but do little to stop those who want to rort the system.
Of more concern are imposition of proposed GST “reverse charge” provisions on Mums and Dads.
Changes proposed in the 2017 Budget potentially extend this “reverse charge” responsibility to all of us, even those not registered for GST or even carrying on a business. The proposal outlined in the 2017 Budget will require all purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the ATO as part of settlement.
As well as a fundamental shift in the way that a GST operates and a threat to its simplicity, there are a number of issues that arise from this change. Unlike existing “reverse charge” provisions, it will bring everyday people into the GST net as they will be the ones responsible for remitting the GST. It also raises a number of issues that require a good knowledge of the GST legislation.
- How will everyday buyers know when they have the responsibility for the GST?
- How will buyers know whether or not the seller has a GST liability, especially if they are buying land?
- How do they know how much GST is included in the amount, as the seller may have calculated the GST liability using the margin scheme?
- Even if they do use a conveyancing service to complete their purchase, how is the amount remitted, and how is the amount matched with the seller’s liability?
- Who will be liable if the GST remitted is incorrect?
- The cost to purchasers of conveyancing will likely rise as lawyers and accountants sign off on possible GST issues.
About half of all GST cases that come before the courts relate to property matters. One can only see this increasing as those with no GST knowledge and no other exposure to GST are brought within the GST net.
The other issue with this proposed change is that it is driven by seeming ATO inability to track taxpayers who are rorting the system. Rather than fix their own internal problems, they pass the responsibility to innocent and unwary consumers.
Apparently, fraudulent property developers are ripping off the GST system to the tune of more than $1.6 billion (yes, billion!!) over the forward estimates period.
What this suggests is that developers are currently registering for GST, claiming input tax credits when they undertake residential construction and property developments, but not remitting GST on the sale. If the ATO knows about this and can estimate that such a large amount of revenue is being effectively fraudulently pocketed, surely there is compliance work they can do to recover the amounts and stop the rorting.
It also seems to me that, if somebody is going to rip off the ATO, I can’t see any reason why they wouldn’t give misinformation to Mum and Dad buyers, who have to remit the GST.
Conclusion
So it seems that pragmatism once again trumps good tax design.
It is easier to make us all GST collectors than for ATO auditors to track down fraudulent property developers.
It is also easier to get the electronic distribution platforms to collect GST from a myriad of small sellers (many of whom would not otherwise have a GST liability), than to keep integrity in the system. All in the name of keeping bricks and mortar retailers happy. Anecdotal evidence would suggest that a 10% increase in on-line prices will not change Australian on-line shopping habits.
Could these changes escalate dangerous GST precedents? If ATO advice to the Government says other areas of the GST law are difficult to police and result in loss to the revenue, could we see similar measures announced in the future?
Tony Ince, Mostyn Consulting 