GST and Digital Downloads – the so-called ‘Netflix tax’

This is the first of what could be many Assessments on the newly proposed GST on digital downloads. It is important to realise the significance of this issue, particularly as the proposed law pre-empts the outcome of the Tax White Paper process by broadening the GST base.

In the lead up to the 2015 Federal Budget there was plenty of press given to two critical tax issues: combatting multinational tax avoidance (the so-called ‘Google Tax’) and closing the loophole of digital downloads, commonly referred to as the ‘Netflix tax’. In this article we look at the latter.

Given the hype surrounding the need to introduce a ‘Netflix tax’, you would have assumed there was some urgency in applying such a tax. Apparently not so – the Budget announcement released an Exposure Draft of the proposed legislation (comments to be made by 7 July 2015), but the proposed commencement date is 1 July 2017. Entities making supplies targeted by this new law (such as Netflix) will continue to escape the GST net for supplies made over the next 2-and-a-bit years. Hardly urgent – but given the nature of the proposed new law and its potential breadth of application, some breathing space to sort out what is covered and how collection will occur should be welcomed by those affected.


The GST regime as introduced was not intended to catch the importation of services (whether by digital download or otherwise) by consumers. Only a ‘reverse charge rule’ exists to ensure that Australian entities registered for GST that ordinarily may not be entitled to claim full ITCs (e.g. financial institutions), did not gain an advantage by sourcing services from overseas.

The Exposure Draft is titled Tax Laws Amendment (Tax Integrity: GST and Digital Products) Bill 2015.

The Explanatory Memorandum to the Exposure Draft states:

  • the importation of services and intangibles obtained by consumers from foreign residents are not generally subject to GST (under the current law); and
  • at the time the GST was introduced it was not considered necessary to tax such supplies.

However, the growth of e-commerce and use of the internet means that Australian consumers can just as easily acquire services from a non-resident supplier or Australian supplier.

The proposed changes are described as protecting Australian suppliers and preserving the integrity of the GST regime by ensuring the GST revenue base does not erode over time through increased presence of foreign suppliers. This measure is a clear broadening of the GST base.

What is caught?

We were always going to be interested in the mechanism proposed to apply the GST to such transactions.

The proposed changes are heavy on newly defined terms such as ‘Australian consumer’, ‘electronic distribution service’, ‘inbound intangible consumer supply’ and ‘electronic communication’. It also appears to have replaced the existing test of ‘connected with Australia’ with ‘connected with the indirect tax zone’.

The proposed law taxes an ‘inbound intangible consumer supply’ made to an ‘Australian consumer’ in the indirect tax zone through an ‘electronic distribution service’ via an ‘electronic communication’.

Translated into ordinary language, this could be read as: an imported supply (other than goods or real property – e.g. services) made to an Australian consumer (e.g. individual or entity not registered for Australian GST) in Australia via electronic means (e.g. via a website, internet portal, gateway, store or marketplace).

In simple terms using Netflix as an example, where an Australian consumer pays Netflix to download or stream a movie via the internet, the supply will be subject to Australian GST.

Who is liable for the tax?

While a supplier is ordinarily held responsible for GST, liability under the proposed laws transfers to the ‘electronic distribution service’, or market operator, where they are substantively or integrally involved in the supply to the Australian consumer. ‘Substantively involved’ includes being involved in authorising payment or delivery, or setting the terms and condition for making the supply. This reflects that the ‘electronic distribution service’ typically has greater knowledge about their customer base, are larger in scale and generally are better able to comply with regulatory requirements in the countries in which their distribution services are available.

Again, by way of example, if an e-book is acquired from a US author/publisher but the only way to download it is via the a US website, and the terms and conditions of sale are set by the US website operator, then the GST liability would appear to rest with the website operator instead of the US author/publisher.

Broadening the Scope of the GST?

So does this proposed new law broaden the scope of the GST? Yes it does.

The current GST regime does not extend to the importation of ‘services’. As referred to above, the ‘reverse charge’ rule only has limited application and even then only applies where a GST-registered entity imports ‘services’ in circumstances where it would not otherwise be entitled to a full GST credit.

The proposed rules intend to catch supplies made from overseas to Australian consumers. The proposed rules will bring into the Australian GST net offshore entities. The potential reach of the rules is broad indeed (the EM even uses an example of a hairdressing business in Germany providing haircuts to Australian backpackers as potentially being caught in the first instance, but only being excluded via amendments to the GST turnover rules).

Further, the scope of what is caught is not limited to the importation of digital products such as streaming or downloading of movies, music, apps, games, e-books. The proposed changes also extend to supplies including consultancy and professional services. This is due to the definition of ‘offshore intangible consumer supply’ – which in reality is any supply other than a supply of goods or real property. In other words, all imported supplies.

A couple of points are worth noting here. Firstly, that it could open up different tax treatment simply based on how the supply is delivered. For example, legal advice provided via an email would potentially be caught, whereas the same advice sent via the mail (not in electronic form) seems to be excluded. Secondly, as currently drafted the proposed law could extend to a broad range of supplies made from offshore entities direct to Australian consumers, such as online betting.


Urgent changes? It appears not given the start date of supplies made after 1 July 2017.

Broadening the scope of GST? Absolutely.

We look forward to seeking how this law progresses through Parliament, and certainly look forward to the debate on the future of GST via the Tax White Paper process.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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