When dealing with international transactions and working with contractors (whether domestic or overseas), it's crucial for Australian businesses to understand the details of Goods and Services Tax (GST) and Pay-As-You-Go (PAYG) withholding rules.
Here, we'll explore the key points to consider regarding GST on offshore purchases and the PAYG withholding obligations for contractors, both Australian and international.
GST on Offshore Purchases
Under the reverse charge rules, you are required to pay GST to the Australian Taxation Office (ATO) on purchases from offshore businesses if all the following conditions are met:
- You are registered or required to be registered for GST.
- You would not have been entitled to claim a full GST credit if you had been charged GST.
- You import services or digital products.
- The imported services or digital products are not GST-free or input taxed.
Example: If your business imports goods from overseas and each purchase is less than $1,000, the reverse charge rules may not apply. This is because the goods are considered low value imported goods, and the GST liability is typically handled by the supplier. Thus, you can process the purchases as normal, without claiming any GST input tax credits (ITC).
PAYG Withholding for Contractors
When outsourcing to independent contractors, it is essential to understand the PAYG withholding requirements, especially when the contractor does not have an Australian Business Number (ABN).
Australian Contractor Without an ABN
If the contractor does not have an ABN, your client is required to withhold 47% of the payment under the PAYG withholding rules, unless the contractor provides a completed statement by a supplier form indicating that they are not required to have an ABN (e.g., they are conducting a hobby or are not carrying on an enterprise).
Non-Australian Contractor
When dealing with a non-Australian contractor, the ABN requirement does not apply. Instead, you should consider whether the payment is subject to any withholding tax under Australian tax law. This will depend on the following factors:
- Whether the services provided are connected with Australia.
- The nature of the services and whether they fall under any specific withholding tax obligations.
If the services are performed entirely outside Australia, withholding tax may not apply. However, if the services are somehow connected with Australia, your client may need to withhold tax at the applicable rate.
Example: Your Australian company, SydneyWeb Pty Ltd, hires a graphic designer named Don, who is based in Canada. Don does not have an Australian Business Number (ABN) and is tasked with creating a new logo for your website.
Applying the rules:
- Is Don's work connected with Australia? Yes, because he's creating a logo for an Australian company.
- Is Don performing his work in Australia? No, he's working entirely from Canada.
Outcome: Since Don is based in Canada and does all his work there, the ABN requirement doesn't apply. However, because his work is connected to your Australian business, you need to consider whether any withholding tax applies. In this case, you may not need to withhold tax because Don's services are performed outside Australia.
If Don were an Australian contractor without an ABN, you would need to withhold 47% of the payment unless he provided a statement indicating that he’s not required to have an ABN.
Disclaimer: The material and contents provided in this blog are general guide and informative in nature only. They are not intended to be seen as legal and tax advice. If expert assistance is required, you should seek your own advice for any legal, tax or investment issues raised in your affairs.