Updated as at 27/3/2001.

1. Overview

Australia imposes the following taxes relevant to e-commerce on the Internet:

(a) income tax;

(b) withholding tax on the payment of royalties and interest to foreign entities; and

(c) tax on supplies of goods and services that are connected with Australia.

See generally http://www.ato.gov.au and http://www.taxreform.ato.gov.au.

2. Income tax

(a) Overview

In Australia, the obligation to pay tax is based on:

* residence of the taxpayer;

* source of income; and

* the presence or absence of a permanent establishment (PE). (1)

The application of these factors to Internet transactions is difficult for the following reasons: (2)

* Internet transactions can be borderless and are often intangible (for example the purchase of IT services online);

* an enterprise may be able to change its place of business to a low tax jurisdiction merely by changing the location of a server; and

* the residence or PE status of a company may be difficult to ascertain where it carries on business in cyberspace or is managed and controlled in cyberspace.

The Australian Tax Office (ATO) is currently developing policy principles to deal with international Internet transactions. The concepts of residence, source and PE are likely to be modified or replaced by new taxation concepts in the near future. In all cases, the ATO will approach the taxation of e-commerce according to the following principles: (3)

* neutrality – between the treatment of businesses engaged in traditional physical commerce and those engaged in e-commerce, and between domestic and overseas enterprises;

* minimisation of costs of compliance and administration; and

* privacy – the legitimate privacy concerns of taxpayers will be protected.

(b) Residence

Subject to any applicable Double Tax Agreement (DTA) (see below), an entity (individual, company, corporate limited partnership and certain trustees) resident in Australia for income tax purposes (Resident Entity or RE) is required to pay income tax on its worldwide income irrespective of the source of the income. (4) For example: an RE who owns real property located in France is assessed in Australia on any rental income derived from the property (subject to certain qualifications) and liable to pay tax in Australia on any capital gain derived on the sale of the property (subject to certain qualifications).

An entity that is not an Australian resident for income tax purposes (Non-resident Entity or NRE) is only liable to pay tax in Australia on income that has its source in Australia. (5) For example: a Chinese resident who owns an investment property in Australia is subject to tax in Australia (subject to certain qualifications), on any rental income and any capital gain accruing on disposal.

A Resident Entity company is one:

* whose place of incorporation is in Australia; and

* has either its central management and control in Australia; or

* whose voting power is controlled by Australian resident shareholders. (6)

(c) Double Tax Agreements

Double tax agreements (DTAs) negotiated between Australia and other countries alter the domestic taxing rights of those countries. (7)

The character of the income (business profits, royalties, dividends, interest) and the residency of the taxpayer determine Australia’s taxing rights under a DTA. Under most modern DTAs negotiated by Australia, an NRE is only taxed in Australia on business profits derived from business carried on at a permanent establishment (PE) in Australia (see below).

(d) Source of income

The assessable income of an NRE includes income from all Australian sources. (8) Australian sourced income is generally subject to tax in Australia. Factors a court will consider in determining the source of income include the jurisdiction where: (9)

* the activities giving rise to income are performed;

* contracts are negotiated and entered into;

* payment is made; and

* the contract is performed.

The above common law source rules only apply to countries that have not entered into DTAs with Australia.

(e) Permanent establishment

A PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. (10) A PE measures the minimum level of physical presence a business must have in a jurisdiction before it is deemed to have used that economy’s resources to produce income and be required to contribute financially to that economy. (11)

The following tests determine whether an enterprise has a sufficient presence in a country to constitute a PE: (12)

* Assets test – are the assets maintained by an enterprise in the other treaty country sufficient to constitute a PE?

* Activity test – are the activities carried on by an enterprise in the other treaty country sufficient to establish a PE?

* Agency test – are the acts of an agent of an enterprise (attributed to the enterprise) sufficient to deem the enterprise as having a PE, even though the enterprise does not have a physical presence in the treaty country?

It is currently unclear whether a website can be a PE. In particular, whether:

* an Internet homepage stored on a server located outside the treaty country and accessed by treaty country customers constitutes a PE in the treaty country; and

* a server located within a treaty country, used by foreign enterprises for their homepage, constitutes a PE. (13)

In relation to the first point above, it is likely a homepage will not be a PE if it operates like an advertisement. Advertising is considered to be an activity that is auxiliary or preparatory in nature, and not considered a PE under most modern DTAs. A website is likely to be considered a PE if actively engaged in e-commerce, for example, taking orders for goods from customers.

The issue in the second point above is currently unresolved at an international level. One view believes a server taking and fulfilling orders may constitute a PE if it satisfies the time requirement implied in the concept of a fixed place of business.

Other unresolved issues (at an international level) concerning a PE in the digital context include: (14)

* how are profits allocated where website inputs or components are in multiple jurisdictions?

* can a website be a place of business?

* can a website be fixed, so as to satisfy the definition of a PE?

* can a database be a PE?

* can an Internet service provider (ISP) constitute a PE of a non-resident?

The OECD has attempted to clarify the meaning of PE in the context of computer equipment and websites. The mere operation of a website or the presence of computer equipment within a jurisdiction does not of itself create a PE, however: (15)

* computer equipment may constitute a PE even in the absence of personnel;

* a website cannot constitute a place of business, but a server or other computer equipment may;

* equipment will not constitute a PE unless its location is actually fixed for a sufficient period of time;

* an ISP normally will not create a PE by agency for an enterprise whose website it hosts and a website will not create a PE by agency for the enterprise who owns it; and

* the "preparatory or auxiliary" PE exception may prevent computer equipment from constituting a PE.

(f) Withholding tax and income characterisation

The character of income (whether arising from the supply of goods, provision of services, use of intangible property or disposal of an asset) determines whether or not withholding tax will apply to particular payments leaving a tax jurisdiction. This area is crucial to e-commerce entities delivering products over the Internet for payment. A payment may be characterised as:

* a royalty, subject to withholding tax; (16)

* income from the provision of goods or services, taxed fully or exempt from Australian tax under the source and PE rules; or

* assessable as a capital gain taxed concessionally or exempt from tax as the asset may not have the necessary connection with Australia. (17)

Example: an Australian magazine publisher sells magazines on the Internet. A customer pays a fee and may be entitled to view, download or print content to a computer or network. The sale of magazines in hard copy form would be assessable income of the magazine publisher in Australia. In the digital context, the following taxation consequences may arise:

* by viewing the online magazine, the customer creates a temporary electronic copy of the magazine but does not acquire any goods or any right to use the material. The income is therefore derived from the provision of a service;

* downloading the magazine (to hard disk or network for future printing or duplication) may constitute either the provision of a good or a right to reproduce the material. The fee income could be sales income subject to source or PE rules or royalty income subject to withholding tax at 30 percent (or 15 percent if a DTA applies), or a combination of both. (18)

The above example illustrates the difficulty in applying traditional income taxation characteristics to payments for digital products and delivery mediums. Transactions can be structured to avoid being characterised as royalties and fall instead within the business profits articles of DTAs. The transaction is then unlikely to be taxed in Australia as the Internet allows significant activities to be undertaken by non-residents without a PE being deemed to exist.

Taxation Ruling TR 93/12 treats the following as royalties:

* a payment for a licence to reproduce or modify software (that would otherwise constitute an infringement of copyright).

The Ruling excludes from royalties (for income tax purposes):

* payments for the granting of a licence which allows only such duplication of the program as is necessary to enable the operation of the software;

* payments in respect of the provision of services in the modification or creation of software; and

* proceeds from the sale of goods.

It is unclear to what extent this ruling is applicable to characterising income from the sale of digital products over the Internet. It is likely a payment for downloading a digital product (for example, music) is a royalty paid for the right to copy that product and subject to withholding tax. (19)

3. Controlled Foreign Corporations (CFC) Provisions

The CFC provisions attempt to capture taxation revenue derived from the operations of Australian controlled foreign corporations located in preferential tax regimes. A detailed analysis of the CFC provisions is beyond the scope of this fact sheet. (20)

In brief, income from the distribution of a digital product developed or substantially modified on servers operated by offshore companies located in a preferential tax jurisdiction and controlled by an Australian entity may escape the CFC provisions and general anti-avoidance provisions. The income may be assessed in the hands of the Australian controlled foreign entity at a lower tax rate (escaping taxation in Australia) provided it is not tainted royalty income and is not caught by the anti-avoidance provisions. Even if the income was treated as services income, it would only be caught under the CFC provisions to the extent the service is provided to Australian residents or non-resident PEs.

Income for Australian residents who establish the appearance of an offshore Internet business to keep Internet income in low tax jurisdictions may be treated by the ATO as "tainted" income and taxed in Australia under the CFC provisions. Low tax jurisdictions are typically non DTA countries, although DTA countries may be tempted to offer tax incentives to Internet businesses and seek to protect those incentives.

For the purposes of determining whether a company is an Australian controlled foreign entity, the increasing use of the Internet to acquire shares or undertake controlling activities will make it increasingly difficult to trace shareholdings and levels of control.

4. Goods and Services Tax (GST) (21)

(a) Overview

GST is charged at the rate of 10 per cent on the supply of goods and services in Australia and on goods imported into Australia under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). A supply of anything other than goods or real property will be subject to GST if the supply is done in Australia or the supplier makes the supply through an enterprise that the supplier carries on in Australia (including a PE and an enterprise falling short of a PE).

A person makes a taxable supply if a supply is made for consideration, in the course or furtherance of an enterprise where the supply is connected with Australia and the person is (or required to be) registered for GST purposes. However a supply is not taxable to the extent that it is GST free or input taxed. (22) To prevent double taxation, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money. For example, Andre pays Beth A$100 for the supply of 100 francs. (23)

A supplier who has a liability to charge and remit GST is required to register for GST (including the issue of an Australian Business Number (ABN)). A business in Australia is required to register for GST if it carries on an enterprise and has an annual turnover of A$50,000 or more. Annual turnover includes the sum of all supplies made or likely to be made in a 12 month period other than supplies which are not subject to GST.

The GST is intended to be neutral for business and this is achieved by an input tax credit mechanism whereby the business is entitled to recover the GST that it has incurred in the course of business. The burden of GST falls on the end consumer of the goods and services who is not entitled to recover GST paid. Certain types of business (principally financial services and residential sale and letting) are also subject to restrictions on input tax recovery.

(b) Supply wholly within Australia

Generally, where the supplier and recipient are resident in Australia, a domestic Internet transaction is subject to a GST of 10% of the value of the supply excluding supplies which are "GST free" or "input taxed" (eg certain foods, financial services). The GST legislation does not differentiate between electronic and conventional business in relation to supplies occurring wholly within Australia.

(c) Supply to offshore recipient

A supply from a resident supplier to an offshore recipient will generally be GST-free. An Australian online supplier registered for GST must be able to determine the location of its recipients. This may be problematic in the case of supplying digital products or services over the Internet.

(d) Offshore supply to Australian resident

A supply from an offshore supplier to an Australian resident may be a:

* Supply of physical goods to business and private consumers: The Australian Customs Service levies GST on imports at the point of entry. Low value thresholds apply. The method of ordering (electronic, phone or mail) is generally irrelevant to the application of GST.

* Supply to business of services or intangible products: GST-registered businesses receiving supplies from off-shore are required to self-assess their GST liability if they are not entitled to full input tax credits on the supply.

* Supply to private consumers of services and intangible products: To date, no revenue authority has found a practical method for collecting consumption taxes on this category of supply and Australia’s GST does not currently seek to do so.

5. GST and the Internet

The following GST issues arise in relation to supplies on the Internet:

(a) Supplies of software and intangible products online: The supplier will be liable for GST if the supply is done in Australia or through an enterprise that the supplier carries on in Australia. (24) The issues discussed above in relation to PEs apply here although it should be recognised that the GST legislation uses a wider definition than income tax. Briefly, a software download may be a taxable supply for GST purposes depending on the location of the content download, the agreement relating to the supply (provisions and place of creation), the location of servers and the place of business or central management and control of the supplier. The authentication of location will become a vital part of the construction and enforcement of contracts in cyberspace.

(b) Internet sales do not escape GST: Although geographical boundaries disappear, Internet sales do not escape GST. A registered supplier must charge GST on transactions that would be classified as "taxable" under the GST Act.

(c) Prices displayed on a GST-inclusive basis: The Australian Competition and Consumer Commission (ACCC) require prices be displayed on a GST-inclusive basis, particularly where sales are made to end-users (non-registered individuals). Online suppliers often display pricing in one currency with a conversion rate being calculated internally at the time of sale. If such sales are subject to GST, the online supplier generally must display a price for GST-free supplies and a price for taxable supplies. The ACCC will monitor pricing under the GST up to July 2002.

(d) Reciprocal advertising agreements between websites: these agreements represent a form of barter transaction (you can advertise on my website if I can advertise on yours). A barter arrangement will be subject to GST if the underlying supplies are taxable. Where both parties are registered for GST, the issue will be one of valuation and invoicing.

(e) Royalties received for sales made through linked-partner websites: Royalty revenue may trigger a GST liability depending on the location of the revenue recipient.

(f) Other incidental revenue earned by companies operating over the Internet: Various incidental revenues may arise from e-commerce conducted on the Internet. A detailed coverage is beyond the scope of this fact sheet, however, online business should be aware of the possible GST implications of such transactions. The supplier of the service (generally the entity earning the revenue) will be liable to remit GST if GST is applicable to the transaction.

(g) Invoicing: The supplier has no legal obligation to issue a "tax invoice" (a legal document defined in the GST Act) unless the recipient requests one. Generally, only recipients registered for GST purposes would request a tax invoice to claim an input tax credit. Suppliers dealing only with end-users should consider whether a manual tax invoicing system is preferable to an expensive electronic version if their customers rarely request or need a tax invoice. The ATO states electronic tax invoices will suffice for GST purposes if they contain the statutory required information and are "readily accessible and easily convertible into English". (25)

This above discussion is intended to provide a brief and general introduction to GST and e-commerce. It does not cover GST provisions on: Grouping, importation, financial transactions, pricing, Business Activity Statements, PAYG withholding tax or the interaction between Fringe Benefits Tax and GST.

7. GST Compliance Checklist

(a) Apply for an ABN.

(b) For importers of goods, apply for Importation GST Deferral Scheme.

(c) Determine if business revenue streams are taxable, GST-free or input taxed supplies, including geographical locations of customers.

(d) Ensure a valid tax invoice is received from suppliers.

(e) Pricing of goods and services should comply with ACCC Pricing Guidelines at http://www.accc.gov.au

(f) Consider potential GST liability for barter and other non-cash transactions.

(g) Contracts entered into prior to 1 July 2000 (GST start date) may still give rise to a GST liability.

(h) Issue valid tax invoices in compliance with GST regulations when required by customers and ensure accounting software is GST compliant.



Other relevant Fact Sheets:

Sources of Law
Income Tax Assessment Act 1997 (Cth)
A New Tax System (Goods and Services Tax) Act 1999 (Cth)
International Agreements Act 1953 (Cth)
Taxation Administration Act 1953 (Cth)

End Notes
1. D Fischer ‘Electronic Commerce and International Taxation’ in Going Digital 2000: Legal Issues for E-Commerce, Software and the Internet (2000)
2. See generally Australian Taxation Office Tax and the Internet First Report(1997); Second Report (1999)
3. Ibid
(4) Income Tax Assessment Act 1997 (Cth) sections 6-5(4), 6-10(5) , 9-1
5. ITAA sections 6-5(4), 6-10(5)
6. ITAA 1997 section 6(1)
7. International Agreements Act 1953 (Cth) section 4(3)
8. ITAA 1997 sections 6-54., 6-10(5)
9. Nathan v FCT (1918) 25 CLR 183
10. OECD Model Income Tax Convention art 5
11. D Fischer p 234
12. OECD Model Income Tax Convention
13. Ibid p 235
14. Ibid
15. OECD Working Party No 1 on Tax Conventions and Related Questions, 1999
16. ITAA 1936, Part III, Div 11A
17. ITAA 1997 Pt 3-1, Div 136
18. D Fischer p 237
19. The Taxation Laws Amendment (Software Depreciation) Act 1999 (Cth) defines "software" to include the cost of establishing a website. This may help indicate the Australian approach to the income characterisation and taxation of digital products.
20. See generally Australian Taxation Office Tax and the Internet First Report 1997 p 47
21. See generally K Benedict ‘Cyber-taxation: How to prepare for the GST Online’ (2000) Charter 54
22. GST Act section 9-5
23.GST Act section 9-10
24.GST Act section 9-25(5), (6)
25. Taxation Administration Act 1953 section 70