Exploring the tax issues of the online GST exemption threshold
This has caused concern among retailers that they are missing out on sales because people are sourcing and buying cheaper goods overseas and not paying GST on them, whereas the retailer in Australia has no choice but to pay GST.
Currently, there is a threshold level for low value imports below which the Government will not seek to collect import duty and GST. Online purchases valued at less than $1,000 imported into Australia (by private individuals or businesses) either by post or courier services do not attract GST or customs duty (eg. 10% for clothing, 5% for footwear). The only exceptions are for alcohol and tobacco on which import duty, GST and excise must be paid for all imports.
In February 2011, the Government asked the Productivity Commission to undertake an inquiry into the implications of globalisation for the retail industry and the appropriateness of current policy settings. Among other things, it was asked to examine the sustainability and appropriateness of the current indirect tax arrangements in this area.
The Commission has now released an Issues Paper on the Economic Structure and Performance of the Australian Retail Industry to assist people in preparing submissions to its inquiry.
The Terms of Reference direct the Commission to examine the sustainability and appropriateness of the current indirect tax arrangements, with particular reference to indirect taxes and duty on imported goods.
The Commission said it understood that the average value of parcels currently entering Australia and taking advantage of the low value threshold is less than $100, ie. substantially below the existing $1,000 threshold.
The Commission said some retailers and retailer groups had asserted that the internet has become a growing mechanism for smaller retailers they claim are abusing Australia's low value importation threshold by purchasing goods from overseas up to the value of $1,000 and then reselling them in Australia without paying GST and customs duties on the import of the products.
The Commission said there is nothing illegal about this practice, although some have alleged that the current regulations in this regard put larger local retailers at a competitive disadvantage. Some retailers also suggest that the low value threshold places them at a significant competitive disadvantage compared to international retailers selling directly to Australian consumers over the internet.
Other countries like New Zealand, Canada, Singapore, the UK and Hong Kong have lower value importation thresholds than Australia. For example, New Zealand does not collect GST and duties if the taxes would be less than NZ$60 (AUS$44) – approximately NZ$400 (AUS$292) in terms of the value of the goods.
While a lower threshold would subject more low value imports to GST and import duties, the Commission said the additional revenue collected would need to be considered against higher compliance costs for both Australian consumers and businesses and administration costs for the Government associated with the collection of the additional GST and duties.
The Commission noted that large companies that import products in bulk, including major retailers, often enjoy the benefits of significantly lower unit freight costs compared to an importer ordering one unit and getting delivery of this by post or express courier.
The incidence of the payment of GST for imported goods for most retailers is different to that applying to a very small importer who is not registered for GST but who later resells the imported goods. For a retailer registered for GST that purchases a product for resale from an importer or local agent, the importer will pay GST (and duty if applicable) on the import and the retailer will be able to claim the GST paid as an input tax credit. However, the retailer will have to collect GST on the final selling price of the product sold.
While the retailer's net cost of GST will only reflect the marked up component of the sale, the total GST collected will be 10% of the final selling price. In contrast, the smaller reseller who is not registered for GST and who resells a low value import on which neither duty or GST is collected, has an obvious cost advantage in this regard.
The Commission was of the view that, if the $1,000 threshold was lowered, not only would consumers and some businesses be subject to additional costs of GST, customs duty and import processing charges, they could also be subject to increased delays in receiving goods and might need to pay customs agents' fees to facilitate correct assessment and payment of the relevant import duties.
In 2009, a Board of Taxation review concluded that any lowering of the threshold would likely increase administrative costs for the Government as more goods were brought into the customs system in order to account for GST and duty, and the additional costs were likely to outweigh any benefits. Moreover, the Board said consumers (and businesses) would have to pay disproportionately high costs including GST, duty and administrative charges to have their goods released from Customs compared to the actual value of the goods if the threshold were reduced.
This GST issue, while only one of the issues the Productivity Commission is looking at, is likely to percolate along for awhile yet, especially while the Commission is conducting its inquiry.
At this stage, it looks as though the compliance cost argument might win out to prevent any reduction in the threshold, but we must await the Commission's final report.
Submissions on the Commission's inquiry are due by May 20, 2011 and the Commission is due to give its final report to the Government by early November 2011.
So, for the moment, the status quo remains and perhaps savvy SMEs would be well advised to make maximum use of internet selling where possible.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .
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