For most of 2015 the Commonwealth Treasury Department has been looking at how GST is applied to digital products and services supplied to Australian consumers. One tax expert has called for the review to go further, and look at consistent state-based rules on digital downloads.
While the phrase ‘GST on cross-border transactions’ might sound like it's an exercise in legal and accounting theory, the simple fact is that it will affect almost all Australians, one way or another. And the review is needed because, 15 years on, the GST system is failing to catch some commonly purchased items.
In its 2015 Federal Budget, the Australian Government announced its intention to apply Australia’s consumption tax – the goods and services tax – to imported digital products, with effect from 1 July 2017.
In other words, the aim is to change the current laws to make sure that GST is applied to digital downloads on products such as music and e-books, and to make sure the tax is applied equally whether they are provided by Australian or foreign suppliers.
Currently, if these products are bought from an overseas supplier they would not be subject to GST, while if they are bought from an Australian supplier they would be subject to GST.
New GST rules proposed
After a first round of submissions, the Treasury drafted some further rules, which were put out to industry experts for their further comments. One of those who responded with a detailed submission was Deakin Law School lecturer Dr Benjamin Hayward.
‘The government was interested in law reform in this area because, on the one hand there was a revenue gap – the government was missing out on GST – also there was not a level playing field between Australian businesses selling digital products and similar businesses based overseas,’ says Dr Hayward.
‘To use the jargon of the lawmakers, the tax should be 'technology neutral' – it shouldn’t matter if you buy the software on a CD or download from the website, or if you buy a physical CD; it shouldn't matter if you buy an e-book or a physical book,’ he says.
The government is therefore aiming to treat all of these businesses the same way and have GST apply equally. One part of its response is to even up the import versus locally supplied argument by making the location of the consumer the key to where the tax should be paid.
Dr Hayward agreed with that, but argues that there are some other legal incongruities beyond the GST that could also be tweaked at the same time. One of these is that The Treasury's proposed change involves defining digital downloads as ‘not being goods’, rather than being ‘goods’ – ‘goods’ are currently defined in the GST Act as being limited to tangible goods only.
He argues that this is not the most elegant way to go about reforming an important and growing part of the consumer economy. It would be better to bring the law up to the level of modern commerce and find a way to define these products as ‘goods’, Dr Hayward says.
‘My proposal also looked at another difficulty – the treatment of digital products under the various States' Sale of Goods legislation,’ he says. ‘Software and digital products is one area where these consumer protection laws – as with the GST rules - haven't kept up with the pace of technology.’
State-based rule changes needed
And as the states and territories are the beneficiaries of GST collections, he argues that they should be involved - especially as the Sale of Goods Acts are State Acts, enacted uniformly across Australia by all jurisdictions for national consistency.
‘If you downloaded digital products, you don't necessarily get the consumer protections under the law that you would get if you bought the same goods on a CD or if you bought a physical book, rather than an e-book.’
‘The various State and Territory governments should look at reforming their sale of goods law at the same time that the Federal government deals with reforming the GST rules.’
Dr Benjamin Hayward's submission is available for free download.