Are digital products taxable in Australia?

Digital products and services have become an important part of the Australian economy, with many nonresident businesses looking to sell into the Australian market. To operate legally, these businesses need to understand Australia's tax rules, especially the Goods and Services Tax (GST).

The GST is a value-added tax that applies to most goods and services sold in Australia, including digital products and services sold by nonresident businesses. The standard GST rate is 10% and nonresident businesses must register if their Australian sales exceed AUD 75,000 per year. For business-to-consumer sales, nonresident businesses must collect and remit GST on the full sales price. For business-to-business sales, GST is handled through a reverse charge mechanism where the Australian business accounts for the GST. Regardless of the customer type, nonresident digital businesses must comply with Australian GST law if they pass the registration threshold. Proper compliance ensures these businesses pay their fair share of tax on Australian sales.

Determining if your product is taxable in Australia

To determine whether GST applies to the sale of your digital product or service, there are three main factors to consider:

1. Customer's location: You need to identify the location of your customer, as tax regulations vary by country. Common pieces of evidence for customer location determination include billing address, customer account address, and credit card country.
2. Taxability of your product: Your digital product or service needs to qualify as a digital good or service for GST purposes. This typically means that it is delivered electronically over the Internet or an electronic network, is automated, relies on technology, and is not a physical good.
3. Customer’s tax registration status: If you sell to other businesses located in Australia, you should collect and validate their tax registration numbers (tax IDs). In Australia, sellers are not responsible for GST on B2B transactions with the proper documentation, and the responsibility of accounting for tax is transferred to the buyer through a reverse charge mechanism.

Getting GST compliant in Australia

To ensure compliance with GST regulations, here are the general steps that a nonresident company selling software or other digital products should take:

1. Collect customer addresses and tax IDs: Even if you are not registered for GST, collecting customer tax IDs can save you expenses in the future. This step can be taken right away for customers outside the US.
2. Understand your GST obligations: Determine where you have GST obligations by cross-checking customer locations and the product taxability and registration thresholds in each country. Each country has its own registration threshold, which triggers the requirement to register.
3. Monitor GST exposure and register in exposed jurisdictions: If your sales reach the registration threshold in Australia, you are required to register for tax purposes. Each country has its own processes for registration.
4. Apply GST where necessary: Identify transactions that require tax collection and apply the correct rates to those invoices. Though Australia utilizes the reverse charge mechanism for B2B transactions, you should still validate tax IDs for B2B transactions to confirm the customer’s status, but charge tax if a valid ID is not provided.
5. File GST returns, make payments, and keep records: Periodically file tax returns with the jurisdictions in which you sell, reporting the tax collected and remitted. Be prepared for foreign exchange conversions and cross-border payments in various currencies. Many countries also have a legal requirement to keep tax records for a certain period of time.

Risks of delaying compliance

Delaying tax compliance can expose your business to various risks:

• Audits: As tax legislation for digital goods is relatively new, audits for international sellers are increasing. Facing an audit for which you are not prepared can result in fees and penalties that can significantly impact your business.
• Paying out of pocket: Regardless of whether your customers pay tax, you are responsible for the tax on the sales you make. If you are audited or register late, you may have to pay the tax out of pocket, along with penalties and fees.
• Reputational risk: When expanding internationally, your compliance with tax rules may be questioned by potential business partners or customers. Failure to comply with tax regulations can harm your reputation and even lead to blocked business opportunities.

To learn more about tax rules and regulations for nonresident businesses around the world, explore Anrok’s VAT index for digital products.