Thinking | 16 October 2015
Talking Tax – Issue 8
This week we’re talking tax about…
Legislation and government policy
“Netflix” tax changes introduced in draft legislation
The Government has released the second exposure draft of the Tax Laws Amendment (GST treatment of Cross-Border Transactions) Bill 2015. The draft Bill proposes imposing GST on offshore intangible supplies to Australian customers from 1 July 2017, affecting Netflix and other similar providers of intangible supplies.
Intangible supplies specified in the Bill which would attract GST include not only streaming services but also games, software and consultancy and professional services performed offshore for customers in Australia.
Submissions can be made on the Bill and are due by 21 October 2015.
The main changes proposed include:
- Clarifying the same GST registration threshold applies for all residents and non-residents ($75,000, or $150,000 for non-profits);
- Changing the requirement for overseas suppliers from “all reasonable steps” to “reasonable steps”, where determining whether consumer is an Australian consumer;
- Clarifying the process for becoming or ceasing to be a limited registration entity; and
- Inclusion of transitional rules and clearer provision concerning application.
Schedule 1 of the draft Bill proposes amendment of the GST law in relation to supplies of things other than goods or real property connected with the indirect tax zone, where supply is made to an Australian consumer. The result being that supplies of digital products will attract similar GST treatment whether supplied locally or internationally. Schedule 2 of the draft Bill proposes amendment of GST rules concerning cross-border transactions, which would result in certain supplies no longer being connected with the indirect tax zone, or alternatively becoming GST free. The amendments propose to:
- Update tests for when an enterprise is carried on within the indirect tax zone; and
- Relieve non-resident suppliers of their obligation to account for GST through either shifting GST liability, switching off GST liability, extending GST free rules, or removing GST registration requirements.
Cross-border tax rulings: European Council approves transparency rules
The European Council has come to an agreement on a draft directive which will require member states to automatically exchange information on advance cross-border tax rulings and pricing arrangements. A tax ruling is an assurance tax authorities give to companies as to the manner in which tax will be dealt with in specific cases.
The European Commission will develop a secure central directory where exchanged information would be stored.
The directive will be adopted at an upcoming European Council meeting, with the new rules being applied from 1 January 2017.
Federal Parliament resumed Monday 12 October
Debate has this week resumed on a number of Bills in both the House of Representatives and the Senate. Some Bills which are listed on the draft legislation program for this week include:
House of Representatives:
- Statute Law Revision Bill (No 2) 2015 – proposes to correct technical errors, modernise language and repeal obsolete provisions in the 1936 and 1997 Acts, the Fringe Benefits Tax Assessment Act 1986 and the Trust Recoupment Tax Assessment Act 1985.
- Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 – introduces measures to fight tax avoidance and profit shifting schemes entered into by large multinational entities with a global income of $1 billion or more. The Bill introduces the multinational anti avoidance law (MAL), which will apply when a foreign entity derives income from making supplies to Australian customers, which is supported by an entity in Australia (which is commercially dependent on the foreign entity) and the income derived from the supply is then sent out of Australia.
- Tax and Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Bill 2015 – proposes that private companies should be exempt from having to public disclose information to the Commissioner.
- Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015, Foreign Acquisitions and Takeovers Fees Imposition Bill 2015, and the Register of Foreign Ownership of Agricultural Land Bill 2015 – transfers the responsibility for regulating foreign investment in real estate to the ATO and introduces civil penalties and stricter criminal penalties to ensure foreign investors do not profit from breaking the rules.
The Government responds to the OECD’s Final Report on the BEPS Action Plan
The Treasurer has said the BEPS Action Plan shows that Australia is “firmly on the right track” when it comes to ensuring that multinational companies pay the appropriate share of tax. He added that the measures already taken by the Australian Government aim to attack the heart of the multinational tax avoidance problem while still preserving Australia as an attracting and competitive place to do business.
The Treasurer outlined the steps Australia has taken to help make us a jurisdiction with some of the strongest tax integrity rules in the world, including:
- Introducing the Multinational Anti-Avoidance Law and County by Country (CbC) reporting;
- Doubling penalties for those who breach the rules through transfer pricing and profit shifting schemes; and
- Obtaining the in-principle agreement of Australian States and Territories to apply GST to digital products and services imported by Australians.
Read our update on the BEPS Final Report here.
Taxpayer-1 & Taxpayer-2 and FCT  AATA 737 – GST – accountant husband and spouse not carrying on an enterprise; ITCs denied
In this AAT case, the Taxpayers owned horses in two partnerships. Partnership 1 conducted a business of providing laser instruments for use in equine medicine. Partnership 2 was intended to operate as an equine hospital and recovery centre. Both partnerships were registered for GST.
Between 2007 and 2009 the Commissioner conducted 3 audits of the GST activity of the taxpayers, resulting in various reductions of ITCs claimed by Partnership 2. The issue was whether the taxpayers were carrying on an enterprise for GST purposes.
During the second audit, the Commissioner found $5,105 of the ITCs claimed for the month of April 2007 were unsubstantiated, and such amounts were consequently reduced by $3,966. The Commissioner further imposed a tax shortfall penalty of 50% for recklessness, increased by 20% under section 284-220 of Sch 1 to the Tax Administration Act. Then, during the third audit, the Commissioner cancelled GST registration of Partnership 2.
The AAT agreed with and confirmed the penalty imposed by the Commissioner, finding Partnership 2 was not carrying on an enterprise for GST purposes, and therefore not entitled to the ITCs claimed in April 2007. The AAT found the following:
- The lack of a business plan for Partnership 2 indicated no intention of making a profit, therefore did not indicate a business/enterprise. Furthermore, there was no evidence demonstrating activities were organised in a businesslike manner, and no repetition or regularity.
- While small scale operations could be considered enterprises, in this instance the ratio of sales ($10,467) to losses ($4,945,225) overwhelmingly indicated the venture was not an enterprise.
- The arena built – which was claimed to be built for horses undergoing treatment – was actually constructed to facilitate a personal hobby of the taxpayer’s daughter.
ATO data matching – eBay sellers
The ATO will be collecting data from eBay, in relation to any goods or services sold for $10,000 or more during the 2014/15 financial year. Information requested will include names, addresses, contact information, and the number and value of transactions processed for each online account, for the purpose of ensuring taxpayers are meeting their tax obligations. The ATO will be matching this information against records relating to between 15,000 and 25,000 individuals.
TD 2015/19 – Assessability of retiring partner’s interest in partnership income
The ATO has issued TD 2015/19 which says income received by a retiring partner, representing that person’s individual partnership net income, is assessable under section 92 of the 1936 Act. This is so even if the partner retires before the end of the income year, or if the payment is received in a later income year.
Before this Tax Determination, the ATO treated these receipts under the CGT rules. The new Determination says an amount received representing an individual interest in partnership net income might also be capital proceeds from a CGT event; however any capital gain would be reduced to the extent that it is assessable under other provisions.
GSTD 2015/2 – Sea voyage to a destination outside the indirect tax zone a GST free supply
The ATO has also issued GSTD 2015/2, which considers the meaning of the phrase “destination outside the indirect tax zone” in section 38-355(1) of the GST Act. Under that section, supplies which relate to the international transport of persons and goods are GST free.
The Determination says that a “destination outside the indirect tax zone” is a specific physical location outside of Australia where a ship stops, which could include:
- a harbour, port or safe anchorage;
- a location where passengers can disembark; or
- a reef or an island where passengers can stop to watch wildlife from a ship.
The physical location will not qualify as a “destination outside the indirect tax zone” unless the location is objectively significant to the passenger when the transport was purchased, having regard to all the facts and circumstances. The ATO says a destination will be “objectively significant” if the passenger agreed to go there, the location appears on their itinerary or the passenger disembarks at that location.
Consultation on country-by-country reporting
The ATO is seeking expressions of interest from people who want to be involved in the consultation process about implementation of country by country (CbC) reporting. CbC reporting was introduced to Parliament on 16 September 2015 and was recommended in the OECD’s final report on the BEPS Action Plan.
Large multinationals headquartered in Australia with over $1 billion in global annual income and Australian resident subsidiaries of large multinationals which are headquartered offshore will be required to provide the ATO with an annual statement, to allow the Commissioner to undertake transfer pricing risk assessments.