Australian Treasurer Joe Hockey last week announced the existing GST exemption for low-value imports would be removed, starting 1 July, 2017. Non-resident companies will be expected to collect and remit the GST to the ATO. But will such a system work in practice?
The low-value threshold (which exempts imports costing less than A$1,000 from GST), has been on the government’s radar for a number of years. It is high by international standards, and apart from the forgone GST revenue, it gives an unfair pricing advantage to overseas retailers.
In 2011, the Productivity Commission said:
"There are strong in-principle grounds for the low value threshold (LVT) exemption for GST and duty on imported goods to be lowered significantly, to promote tax neutrality with domestic sales. However, the Government should not proceed to lower the LVT unless it can be demonstrated that it is cost effective to do so."
But the Productivity Commission also estimated it would cost $2 billion to collect the additional $600 million of additional tax revenue dropping the threshold would deliver. This cost estimate was based on the assumption that all parcels would be subject to the same GST collection method as currently applies to imports costing above $1,000. That is, each parcel would be individually processed by Customs and Border Protection, with the GST being collected from the Australian consumer before the parcel was released.
The Re:think tax discussion paper floated the idea that “there are alternative arrangements for collecting GST on low value goods that would not be as prohibitively expensive as current arrangements”.
Last week the states and territories unanimously agreed to a Commonwealth proposal to reduce the low-value threshold to nil, and to impose the requirement to collect and remit GST to the ATO on the overseas vendor.
With little concrete information available as to how such a system will be implemented and how it would be enforced, the proposal leaves more questions than answers.
According to the Treasurer’s press release:
“As goods would not be stopped at the border, administering a vendor registration model would have a relatively low cost.”
If goods are not stopped at the border, Customs and Border Protection are presuming that the overseas vendor has complied with the relevant GST requirements. However, the information currently required to be provided on an international mail declaration would provide no indication as to whether GST had been collected and remitted to the ATO. Even if the item did indicate whether GST had been collected, the various scenarios outlined below highlight the potential difficulties of an overseas vendor registration system.
Scenario 1: The overseas supplier is not required to be registered, meaning the imported good(s) are not subject to GST
Australian businesses are only required to register for GST if their annual turnover is greater than $75,000. Goods and services sold overseas are not included when calculating turnover for GST purposes. The Treasurer has indicated this would be the same for international businesses, with the figure that is relevant for GST turnover based on the value (in Australian dollars) of goods sold in the Australian market.
As not all overseas businesses will be required to register for GST, abolishing the low-value threshold will still not result in all imports being subject to GST. If an international parcel did indicate GST had not been collected, would an overseas supplier simply be able to note on the parcel that GST registration was not required? If so, how would customs determine the accuracy of that statement?
The Treasurer was unsure how many overseas businesses would be required to register, telling a journalist during a press conference, “There could be hundreds … there could be a very large number” and then “I’ll come back to you about the specific figures that we have, but we’re working to improve that data”.
Scenario 2: The overseas supplier is required to be registered based on turnover, but has not registered and has not collected GST
The Treasurer was vague when asked what would happen if an overseas company did not collect GST as required, stating “increasingly the global pressure is going to force them to respond”.
Again, it is unlikely Customs and Border Protection would know whether an overseas supplier was required to register for GST. And if an overseas supplier was unwilling to register for GST despite being over the turnover threshold, would they willingly acknowledge this? If it was acknowledged on the parcel that registration was required but had not occurred, would the ATO pursue the overseas company, or would Customs and Border Protection revert back to current collection procedures and require the Australian consumer to pay the outstanding GST?
The Low-Value Parcel Processing Taskforce has said that any GST obligations imposed on international suppliers directly would “likely be non-enforceable, and hence rely on voluntary cooperation by suppliers”. However, using current collection procedures would result in additional processing costs that are cost-prohibitive when applied to low-value parcels.
Scenario 3: The overseas supplier is registered, and has collected GST from the Australian consumer
Assuming the overseas supplier has registered for GST and has collected the necessary tax from the Australian consumer, there is still no guarantee that the GST would be correctly remitted to the ATO. But the cost of auditing such an entity would likely be prohibitive.
Difficult to measure, harder to enforce
One of the reasons for abolishing the low-value threshold is to ensure overseas businesses are competing on a level playing field with their Australian counterparts. But this will only occur if the system for collecting GST on imports can be adequately enforced.
The Commonwealth proposal to require overseas suppliers to collect and remit GST on low-value imports raises numerous questions as to enforcement, with comments made by the Treasurer indicating a significant level of voluntary compliance by overseas suppliers will be required.