As today’s businesses become increasingly globally connected, there is an obvious trend to engage at a global level. The drivers for engaging globally can be many and varied, including potentially discounted rates and greater control through the use of centralised procurement processes. However, often indirect taxes—such as goods and services tax (GST)—may not be given adequate consideration in the decision to engage at a global level, resulting in GST being blocked and potentially an unrecoverable cost.
Although supplies to customers outside Australia are generally GST-free, there are exceptions to this rule—most notably, when the supply is provided or required to be provided to another entity in Australia. As such, if an Australian supplier is engaged to make a supply to an Australian business, the supply is generally subject to Australian GST (unless it is specifically GST-free like certain food, or input taxed like financial supplies).
The GST position is not changed by the fact that a non-resident procurement business engaged the Australian supplier to make the supply. As non-Australian procurement businesses are not usually registered for Australian GST, this causes the GST charged by the supplier to be non-recoverable. By contrast, if the Australian business engaged the supplier directly, the GST may be recoverable in full.
Ideally, the best scenario is to obtain the benefits of central procurement without incurring any non-recoverable GST expense. This could be achieved by registering the non-resident procurement business; however, there are certain administrative burdens to be considered in registering a non-resident for GST.
Alternatively, it may be possible to enter into a global agreement that provides the framework and agreed rates for local engagement and billing, avoiding GST being blocked and potentially an unrecoverable cost.
Read an August 2015 report prepared by the KPMG member firm in Australia: GST – the hidden cost of global engagements
A recent goods and services tax (GST) ruling raises income tax and Division 6C implications—particularly to investors constructing properties for long-term hold under development lease arrangements. The ruling—GSTR 2015/2—concerns arrangements where a “developer” contracts with another party (for example, a government entity) to develop government land, and receives the freehold or a long-term lease of that land upon completion of the development. The ruling concludes that in these circumstances there are two supplies for GST purposes.
The two supplies are:
The ruling concludes that the GST invoices exchanged on completion of the development would be equivalent to the full market value of the building on completion.
The conclusion that the taxpayer is supplying development services appears to apply, regardless whether the taxpayer is, in truth, a developer holding an intention to sell the developed property or whether the taxpayer is an investor holding the asset for long term investment. The latter is a relatively common scenario. That is, taxpayer enters into an agreement with a government entity to lease land, the taxpayer develops land, the taxpayer then leases the land to the government and other tenants. If the taxpayer is required to issue an invoice to the government for the provision of development services equal to the value of the developed property, the taxpayer will need to assess:
Developers and owners need to give careful consideration to the income tax implications before issuing any invoices to comply with GSTR 2015/2.
Read an August 2015 report prepared by the KPMG member firm in Australia: GST Ruling 2015/2: GST tail wagging the income tax dog?
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