International
Reverse charge
The reverse charge shifts the responsibility to pay GST from an overseas supplier to the Australian recipient, but only in limited situations where the purchase is not wholly for a creditable purpose.
Normally the seller collects GST from the buyer and passes it to the ATO. The reverse charge flips this around. In certain cross-border situations, the Australian buyer becomes liable to pay the GST directly, because the overseas seller has no GST registration here and no practical way of being made to account for it. The buyer reports the amount in their own Business Activity Statement.
The rule most small businesses meet applies to imported services and other intangibles. It only applies where three things line up: the supply is made by a non-resident from outside Australia and is connected with Australia, the recipient is registered for GST, and the recipient does not acquire the thing wholly for a creditable purpose. In that case the recipient pays GST on the part that is not creditable, as though it had made a taxable supply of that amount to itself.
In practice this means most ordinary GST-registered businesses will never pay reverse charge GST. A plumber registered for GST who buys an overseas subscription solely for taxable business use has a reverse charge liability that would be cancelled by an equal credit, so the law removes the need to report either. The charge bites mostly on businesses with input-taxed sales, such as financial institutions and residential property investors, and on registered businesses that use an overseas purchase partly for private or non-business purposes.
Non-registered individuals and businesses are outside the reverse charge. They simply bear any GST the supplier chooses or is required to charge. Be careful not to confuse the Australian rule with the way some overseas jurisdictions use the same term for ordinary domestic business-to-business transactions, because the two work quite differently.
A typical misunderstanding is thinking the reverse charge makes buying from overseas more expensive than buying locally. In most cases it does not change the economic result at all, because the GST is both paid and claimed. Another error is forgetting to apportion. If the purchase is used partly for private purposes, the private share is what drives the amount payable.
To work out your position, identify the supplier's location, whether the supply is connected with Australia, and your own mix of taxable and input-taxed activity. Record the calculation and keep the supplier's invoice. Any amount payable is included in the GST payable on your BAS for the period. Because the rules turn on facts, treat this as general information and confirm your treatment with the ATO or a registered tax professional.
Worked example
A registered residential property investor with a small commercial unit pays an overseas consultant $3,000 (GST-exclusive) for advice used 50% for taxable commercial rent and 50% for input-taxed residential rent. The reverse charge applies to the non-creditable half. GST on the whole supply is $3,000 x 10% = $300. Reverse charge payable on the non-creditable half is $300 x 50% = $150.
Practical tips
- Do not assume the reverse charge applies just because a supplier is overseas. It usually only matters when your purchase is not wholly for a creditable purpose.
- If you do owe reverse charge GST, report it in the same BAS period as the acquisition and keep a working showing how you apportioned the use.
- If you are unsure whether you acquire something wholly for a creditable purpose, ask your BAS agent or accountant before the BAS is lodged.