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20 April 2010

GST: New rules for supplies of international transport and insurance

The GST treatment of supplies relating to international transport is set to change from 1 July 2010.

The GST treatment of supplies relating to international transport is set to change from 1 July 2010.

Treasury has released an exposure draft of the proposed legislation, which followed a consultation period in 2009. If the legislation is passed in its current form, the proposed implementation date of 1 July 2010 will require businesses to quickly come to terms with the new rules.

The new laws will affect whether GST must be paid on the Australian leg of supplies of international transport. While designed to simplify GST accounting for transport contractors, businesses will face transitional issues as their systems and processes need to be amended to meet the new requirements.

Outbound goods

For exported goods, the current laws create a number of compliance problems. Australian transport contractors, where they act as subcontractors for international transport contractors, can only make a GST-free supply for the domestic transport of the goods in certain circumstances. There were a number of practical problems applying the current law.

  • The Australian transport contractor had to know that the freight it carried was destined for export if it did not want to charge GST. This created significant compliance issues for transport contractors carrying mixed loads. It also pushed the risk of correctly accounting for GST onto the Australian contractor, who could not be expected to know, without making inquiries, whether the goods were destined for export.
  • If the Australian transport contractor could not establish whether it had to charge GST – or did not want to assume the GST risk – it would have to issue a GST-inclusive tax invoice and GST would become embedded as a cost, which could potentially be passed back to the Australian exporter.
  • There was also an inequity in the GST treatment for postal goods, which are GST-free from the time they are posted, compared to goods transported by air or sea, which were susceptible to embedded GST costs.

The amendments to the GST law attempt to fix these problems in two ways.

First, the proposed laws extend the GST-free treatment so that this now includes the leg in which the goods are transported to the place of containerisation. This means that the transport from the exporter’s premises to the place of containerisation could also qualify as GST-free. This aligns the GST position for exports by air or sea with exports by post.

The second strand of the proposed new laws ensures that supplies “provided” to an entity in Australia, which would normally be taxable, are still GST-free if those supplies are for the international transport of goods, including the Australian leg of that transport.

Inbound goods

For imported goods, an international transport contractor is currently liable to pay GST for the movement of goods within Australia. This includes the transport on the Australian side of the port or airport as part of an international transport contract. Before the Australian port or airport, the supplies of transport will not attract GST. The result of the current law is that non-resident international transport contractors may be required to register for GST in Australia.

To compound the problem, if the international transport contractor subcontracts the domestic leg of the services to an Australian transport contractor, such as where the goods are imported under delivered duty unpaid (DDU) or delivered duty paid (DDP) terms, the Australian transport contractor will have to charge GST on its supply to the international transport contractor.

If the international transport contractor is not registered for GST, the GST amount becomes a cost to its business. This cost may be embedded in the price of the international transport services, without allowing Australian businesses the relief that would ordinarily come in the form of input tax credits.

The new law ensures that the supply of international transport does not attract GST for the transport of the goods up until they reach their point of delivery in Australia. This alleviates the obligation for the international transport contractor to register for GST.

The new law also provides that an Australian subcontractor does not have to charge GST to the entity that imports the goods into Australia.

To preserve the revenue base, the GST has been moved to the imported goods. Under the new laws, the cost of the domestic transport will be included in the value of the imported goods, which forms the tax base (along with other costs) on which GST is levied on imported goods. The importer will account for GST and, depending on its circumstances, may be entitled to claim a corresponding input tax credit.

Goods imported under DDU and DDP terms will now have the domestic transport component included in the value of the taxable importation. The domestic transport of goods supplied under other terms of trade, such as carriage insurance and freight (CIF) or free on board (FOB), will be a separate supply made by the Australian transport contractor to the importer. Such supplies would be taxable in the same manner as any other supply of domestic transport.

What you need to do

On the whole, the proposed amendments are good news for Australian transport contractors. The comments above are directed to supplies of transport, but also extend to insurance for the transport of the goods.

Businesses will need to ensure that their systems change to meet the new GST-free provisions and that imported goods are correctly valued at the time of importation. The extension of the GST-free provisions will not apply to all contracts or arrangements and it is important that businesses monitor their GST accounting to ensure that they comply with the new rules.

Please contact Fletch Heinemann on 07 3231 2443 if you would like to discuss.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.

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