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.
In Australia, the obligation to pay tax is based on:
(a) residence of the taxpayer;
(b) source of income; and
(c) the presence or absence of a permanent establishment (PE).(1)
2. 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.(2)
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.(3)
A Resident Entity company is one:
(a) whose place of incorporation is in Australia; and
(b) has either its central management and control in Australia; or
(c) whose voting power is controlled by Australian resident shareholders.(4)
Double Tax Agreements
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, a NRE is only taxed in Australia on business profits derived from business carried on at a permanent establishment (PE) in Australia (see below).
3. Source of income
The assessable income of a NRE includes income from all Australian sources.(5) Factors a court will consider in determining the source of income (where a DTA des not apply) include the jurisdiction where:(6)
(a) the activities giving rise to income are performed;
(b) contracts are negotiated and entered into;
(c) payment is made; and
(d) the contract is performed.
4. Permanent establishment
A PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on.(7)
The following tests determine whether an enterprise has a sufficient presence in a country to constitute a PE:(8)
(a) Assets test - are the assets maintained by an enterprise in the other treaty country sufficient to constitute a PE?
(b) Activity test - are the activities carried on by an enterprise in the other treaty country sufficient to establish a PE?
(c) 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.
An Internet homepage stored on a server located outside the treaty country and accessed by treaty country customers will not constitute a PE in the treaty country 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.
It is unresolved at an international level whether a server located within a treaty country used by foreign enterprises for their homepage constitutes a PE.(9) 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:(10)
(a) how are profits allocated where website inputs or components are in multiple jurisdictions?
(b) can a website be a place of business?
(c) can a website be fixed, so as to satisfy the definition of a PE?
(d) can a database be a PE?
(e) can an Internet service provider (ISP) constitute a PE of a non-resident?
The mere operation of a website or the presence of computer equipment within a jurisdiction does not itself create a PE, however:(11)
(a) computer equipment may constitute a PE even in the absence of personnel;
(b) a website cannot constitute a place of business, but a server or other computer equipment may;
(c) equipment will not constitute a PE unless its location is actually fixed for a sufficient period of time;
(d) 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
(e) the "preparatory or auxiliary" PE exception may prevent computer equipment from constituting a PE.
5. 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) a royalty, subject to withholding tax;(12)
(b) income from the provision of goods or services, taxed fully or exempt from Australian tax under the source and PE rules; or
(c) assessable as a capital gain taxed concessionally or exempt from tax as the asset may not have the necessary connection with Australia.(13)
Transactions can be structured to avoid being characterised as royalties and fall instead within the business profits articles of DTAs.
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.(14)
6. Goods and Services Tax (GST)(15)
(a) General
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 failing 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.(16)
(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. Supply to offshore recipient
(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.
7. GST and the Internet
The following GST issues arise in relation to supplies on the Internet:
(a) Supplies of software and intangible products online
Supplier will be liable for GST if the supply is done in Australia or through an enterprise that the supplier carries on in Australia.(17) 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.
(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 to 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.
(d) Reciprocal advertising agreements between websites
Represents 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.
(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. 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.
Other relevant Articles on this site:
Other relevant Fact Sheets:
Jurisdiction
Online Contracts
Taxation
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. Income Tax Assessment Act 1997 (Cth) sections 6-5(4), 6-10(5), 9-1
3. Income Tax Assessment Act 1997 (Cth) sections 6-5(4), 6-10(5)
4. Income Tax Assessment Act 1997 (Cth) section (6)1
5. Income Tax Assessment Act 1997 (Cth) sections 6-5(4), 6-10(5)
6. Nathan v FCT (1918) 25 CLR 183
7. OECD Model Income Tax Convention art 5
8. OECD Model Income Tax Convention
9. Ibid p235
10. Ibid
11. OECD Working Party No 1 on Tax Conventions and Related Questions, 1999
12. Income Tax Assessment Act 1997 (Cth) sections 1936 Part III, Div 11A
13. Income Tax Assessment Act 1997 (Cth) sections Pt3-1, Div 136
14. The Taxation Laws Amendment (Software Depreciation) Act 1999 (Cth) (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.
15. See generally K Benedict "Cyber-taxation: How to prepare for the GST Online" (2000) Charter 54
16. GST Act section 9-5
17. GST Act section 9-25(5),(6)