There are no doubt numerous issues that will arise due to the introduction of the A New Tax System (Goods and Services Tax) Act 1999, relating to e-commerce and the Internet. A few that have already arisen are international sales and purchases and barter agreements.
Australian businesses buying and selling (both e-tailing and B2B) on the Internet are required to pay the GST on taxable supplies that they make. The major exception to this rule is that goods or services to be consumed overseas may not attract the GST, as they are exports. In this case, an e-tail sale is much the same as a retail sale.
However, the difficulty that arises for many e-tailers is identifying where the good or service is consumed. The supplier of the good or service has an obligation to discover whether the supply is consumed outside Australia. The problem would not arise in a situation where an ongoing relationship had been established with a customer and therefore information as to the consumption of the product could be obtained. Similarly, this problem could be avoided in large commercial transactions through standard commercial investigations.
Where the problem is most evident is with one-off or infrequent purchases made for small amounts. In recognition of the difficulty in this area, the Australian Taxation Office has published a draft paper incorporating a guide for "low value supplies".
A "low value supply" is deemed to be a supply for a total of less than $1000. To establish that a supply is for consumption outside Australia, the supplier should obtain a declaration from the recipient about their residential status, physical location and use of the supply as well as the full address of the recipient. It is noted at this point, that in order to comply with privacy laws, the use to which the information is to be put must be disclosed to the customer.
It is therefore necessary to have these lines of inquiry incorporated into fields on your order page on your Web site, and or to make them a term of your conditions of sales.
As a rule, in order for a supply to be deemed GST free, the recipient must declare that they are not in Australia and will not be making use of the supply in Australia AND provide an overseas address. If both conditions are not satisfied, GST must be imposed.
International purchases, being purchases made by Australian companies or individuals over the Internet from overseas companies, for practical reasons will often fall outside the GST net. This is because it is extremely difficult to collect tax from overseas companies who have no presence in Australia. Moreover, the importation of goods in small shipments is notoriously difficult to tax. Examples of goods likely to be affected include books, compact discs and software.
This does raise a potential problem for Australian-based suppliers, whether Internet based or not. If the international supplier can supply goods and/or services GST free, it places Australian suppliers at a competitive disadvantage. Obviously this may be partially offset by advantages such as lower delivery time and costs, however with as e-commerce continues to evolve this is a consideration to be mindful of.
It is common for many Internet-related services to be performed in exchange for a service in return, each party trading on the expertise of the other, where no monetary consideration is ever provided. An example of these arrangements is banner swap advertising arrangements whereby each site advertises on each other's site free of charge. Another example is arrangements whereby a Web designer will design a Web page in exchange for Web server space.
While in both these examples there has been not actual exchange of money, a GST liability will still accrue where the good or service is provided in Australia. The ATO has determined that in both parties' case they are supplying a service or good for consideration being the GST-inclusive market value of the supply.
These are only two examples of problems associated with the clash between e-commerce and the GST. There will be many more, which will more than likely end up before the Courts. I hope to be able to address these problems in future issues.
With thanks to Jeremy Eisman, paralegal, Barker Gosling.
The material contained in this article is no more than general comment. Readers should not act on the basis of this material without professional advice relating to their particular circumstances.
Mark Addison is IT partner at legal firm Barker Gosling. Contact him at firstname.lastname@example.org