Collect GST on low value Imports

I think they should ensure GST is payable on ALL imported goods and services where there would be a tax on those goods and services if they were locally produced. This includes the current exemption for goods under $1000.

Proposal

• The exemption from GST of imported goods and services under $1000 should be abolished.
• All financial institutions that facilitate payments from Australian bank accounts for goods and services from international sources will be required to charge GST on that payment if the payment is to an international merchant NOT registered for GST in Australia and forward this GST to the Australian Taxation Office.

Background

In Australia, all goods and services except for a few exempt items (e.g. some food) that are sold are subject to a Goods and Services Tax (GST) of 10%. This includes all goods and services paid for by business or consumers. The tax collected is then required to be forwarded to the Australian Tax Office (ATO) on a regular basis.

There is currently an exemption from the GST for imported goods under the value of $1000 prescribed under item 26 of schedule 4 of the Customs Tariff Act 1995.  As a result of this law, local producers of goods and services are disadvantaged as they are paying tax when international competitors are not. This reduces competitiveness of local businesses by at least 10% and results in the following problems:

• A significant reduction in the GST collected by the Government. No numbers have been sourced, but it would be expected that this would be tens of millions of dollars and growing.
• Closure of local businesses. This issue is one of several factors that has resulted in retailers closing down in recent years, in particular for consumer goods such as clothing and electrical. 
• Lack of investment in local businesses.

These problems reduce economic activity, negatively impacting national income via reductions in employment and profitability of operators.

How has this happened?

The significant increase in the ability to purchase goods via the internet and the number of people connected has significantly increased the quantity of low value imports in just a small period of time. The use of financial instruments to easily pay for consumer goods underpins this trend.

The associated low cost of transporting goods and virtually zero cost of transporting services has also made the international importers of low value goods competitive when previously they may not have been.

It has also been argued in 2011 when the issue was hotly contested by large retailers that the high cost of administration of a scheme to tax low value imports would be greater than the revenue collected, however this discussion outlines how it could in fact be a low cost option.

How would it work?

It is assumed that the vast majority international payments for goods and services are either made through Visa, Mastercard, or increasingly through wallets such as Paypal.

The payment request would have to include either an ABN or identifying information that made it easy to match to an ABN, which could then be searched in the Australian Government's ABN lookup system.

Either the acquiring bank (bank of the card holder) OR the card network (e.g. Visa or MasterCard) would be required to add a check against the merchant for whether they are registered for GST. The easiest way of doing this is for Visa and MasterCard to perform the checks and provide the information as to whether the merchant is GST registered in the message sent to the bank for processing.

Wallets such as Paypal would also be required to be facilitate this rule. Movement of funds from banks to wallets where the GST checking mechanism was not in place would incur the 10% fee on any transfer to that wallet. This would ensure that wallets would be incentivised to participate.

The GST would then be forwarded by the institution to the Government.

How does this affect the Customer?

If the merchant was not GST registered then the institution would be required to charge an additional fee against the transaction of 10% of its value. This could appear as a separate item in the bank statement of the consumer, in a similar way to how banks charge a currency conversion fee for international transactions, or the amount of the transaction would be increased. Initially this may in fact be the easiest method of implementation.

How is the payment system affected?

The current way that a credit card is processed via the MasterCard or Visa network is outlined below. Each entity replies with a request of either success or failed. If success, a request is made to the next entity in the flow.

There are two key changes to this process:

• The Payment network will be required (for Australian Card Issuers and international Merchants Only) to check the merchant is GST registered. They could potentially do this using something similar to the Government's ABN lookup capabilities, or other means to be determined (see section below).
• Requests from international non-GST registered merchants will have an additional charge added by the MasterCard or Visa network when sent to the Card Issuer for processing. Ideally the card issuer would be able to identify (using information sent by the Payment Network) whether a payment had the 10% charge added and could inform customers of this.

International GST Registered Register

An online Australian Government Register of GST registered international companies that is highly scalable and available is required. This is expected to be low in cost to administer, which will be done by the ATO.

The Payment Network would request from this register to determine whether an international merchant is GST registered. If there is no response within a reasonable period (e.g. 2 seconds) then the merchant should be assumed to be registered and no additional charge should be requested. In this way the incentive should be on the Australian Government to ensure the register works effectively.

What will it cost?

The introduction of an open register of merchants registered for GST should be very straightforward for the ATO to create and administer. Without knowing all of the details, given limited security is required because the information is public, this is unlikely to cost much at all in terms of the time taken to develop the software and process the requests.

With respect to the cost to Payment Networks such as Visa and MasterCard, it is not known the complexity of the system, however these networks do have a series of rule based mechanisms used as part of card validation. In this way they should be able to already identify where an Australian card is being used for an international merchant, so the associated checking mechanisms via request to the new register and appropriate action should be relatively straightforward. It is expected the cost would be a tiny fraction of the total value of these types of transactions and therefore easily absorbed by the organisation and/or its partners (Australian financial institutions).

Ongoing Review

A continual review of new payment systems that facilitate international payments should be performed annually by the ATO.  Rather than providing a complex blanket rule for all operators, it is considered more appropriate to make a low-cost relatively straightforward change to the system that impacts 99% of transactions and deal with the exceptions as appropriate.