GST collection method for low value transactions passes test

16 November 2017

Those within the customs and international trade industry have been following ongoing narration on the imposition of the Goods and Services Tax (GST) on low-value transactions (LVT) closely.

One of the outcomes of the passage of the legislation in Australian Parliament was to defer commencement until 1 July 2018. The other outcome was the referral of the legislation to the Productivity Commission (PC) to consider whether the ‘vendor registration’ model (VRM) proposed for the collection of GST was the appropriate model or whether another model, such as the ‘distribution’ model would be better suited, taking into account the intent to make the measures as effective as possible by collecting as much of the intended revenue (levelling the playing field for Australian industry), while not creating an unreasonable level of complexity in its imposition.

I have previously written at length about the progress of these measures in the following articles:

I have also delivered webinars for the Custom Brokers and Forwarders Council of Australia, New Zealand Trade and Enterprise and DHL – much of the detail on the technical provisions and implementation can be found at those sources.

However, the main focus of the PC review went to the issue of the VRM and whether an alternative model better served the intent of the provisions. The PC process included issuing a discussion paper, interested parties making submissions and several days of public hearings attended by many of those parties directly interested in the implementation issue. Going through that process, a clear divide arose between those opposing the VRM (such as those operating electronic distribution platforms and representing SME vendors) and those opposing a switch to a ‘distribution’ model or a ‘transporter’ model, which would have shifted the obligation for charging and remitting the GST to those delivering and distributing the goods (such as the express air carriers and Australia Post). Both parties made compelling submissions pointing to the weaknesses of each model and how the ‘other’ model minimised adverse consequences. They are worth review from theoretical and policy perspectives, especially the Amazon proposal on an ‘adjusted’ distribution model which many thought may have tipped the balance towards such a model.

The PC released its report to Government on 31 October and it was then released to the public on 9 November 2017. Copies of a summary of the review and its recommendations and the full review can be found here. Some of the important highlights are as follows:

  • The Australian Parliament recently legislated to apply the GST to low value imported goods from July 2018, using a streamlined collection model that places the responsibility for assessing, collecting and remitting the tax on foreign suppliers.
  • Given the decision to collect GST on low value imported goods, the legislated model is the most feasible among the imperfect alternatives at this time. Implementing the legislated model:
    • should go some way to improving tax neutrality between imported and domestically retailed low value goods
    • will bring partial rates of GST collection (due mainly to exemptions for small suppliers, as well as significant compliance challenges), but the revenue obtained is likely to significantly outweigh the administrative and compliance costs
    • should avoid major disruption for consumers when importing goods, although some electronic distribution platforms have warned they may disable foreign vendors from selling to consumers in Australia.
  • Among the alternatives, ‘transporter-based’ collection models that require the delivery agent to collect GST could capture more revenue, but their feasibility is hampered by paper-based declaration processes still used for international mail, and the difficulties for Australia Post to negotiate agreements with myriad other postal services. They would also impose high administrative and compliance costs, and some would cause inconvenience for consumers.
  • ‘Purchaser’ and ‘financial intermediary’ collection models, using advanced technological solutions to minimise high compliance and enforcement costs, have also been proposed. However, their efficacy is untested and their lack of readiness for deployment by mid-2018 make them unsuitable at this time.
  • There is an in-principle case to contemplate delaying implementation of the legislated model, to provide more time for technological changes to play out, to learn from the experiences of other nations and to avoid ‘first mover’ risks.
  • Nonetheless, the Commission considers there is insufficient basis to recommend delaying the implementation schedule, given the Australian Parliament’s decision to apply the GST to low value imported goods. Waiting for better alternatives will not necessarily prove fruitful. Nor would implementation now preclude change later.
  • The Commission has identified some prospective improvements to the design of the legislated model and enforcement strategy, although it has not been in a position to adequately evaluate these options. If the legislated model does not perform broadly as expected, these options should be considered as part of a future review.
  • The legislated model and the suitability of alternatives should be reviewed five years from commencement, or sooner if triggered by evidence of unduly low compliance, unintended impacts on consumers or adverse trade policy responses.

It’s largely what I thought may happen on balance – the ‘distribution’ model may raise more money (in theory), but not enough to outweigh the inconvenience of changing the current model. The five year review affords a window for reflection, although past experience would suggest that a significant change away from the VRM after that time is unlikely.

So, the attention now turns to the ‘implementation piece’ as to how practices, procedures and documentation will need to be changed to ensure that the GST is collected and remitted in the most efficient way to minimise the disruption to this busy part of the supply chain. Just as important will be guidance from the ATO and the ABF as to the ‘compliance approach’ they will adopt and what level of strict compliance will be expected and the extent to which there may be intervention in the supply chain and the use of infringement notices or other penalties.

We will keep you informed of developments and, as always, if pain persists, consult your trade lawyer!