Presentation from 2016 National Convention

1. TAX ISSUES FOR
DIGITAL BUSINESS
Joanne Dunne, Partner
MinterEllison

2. Outline of session
 Case study: including an introduction to Fitzroy from a
Melburnian
 Issues for an Australian based retail small business, with
Australian customers, moving to have a digital presence
̶ Legal / other issues to consider
̶ Tax issuesTax issues
 Issues when the Australian business grows internationally
̶ Legal / other issues to consider
̶ Tax issues
̶ OECD issues – potential future change to PE concept
 Bitcoins
̶ ATO approach
̶ Some comparatives
̶ The blockchain

3. Case study
Meet Paul and Jane from It’s the New
Black Ltd – head office: Fitzroy,
Melbourne

4. An Introduction to Fitzroy

5. Case study
 Meet Brian Block – ITNB’s IT guy, as he looked day 1
when he joined the company

6. Case study
 Brian Block following his grooming and fashion makeover
(Fitzroy-style) by Paul and Jane

7. Case study: ITNB’s goes digital
in Australia
It’s the New Black
LtdSupply of
clothing and
advisory
services
Hosting
services
Aus based interstate
customers
Aus based servers
and website hosting
company

8. Case study: ITNB goes digital in
Australia
 ITNB aggregate turnover = $1.7 million
 Australian based servers and hosting of website,
Australian customers, Australian designer gear, inventory
with Australian stores
 Software adaptations made to off-the-shelf software; App
developmentdevelopment
 Broadcast rights of overseas fashion shows via a live
stream – payments to Paris and London fashion week
companies
 Advisory fees, website access fees, commission from
designers
 Website design by Australian company in return for a fee

9. Legal/other issues to consider
when going digital
 Structuring
 Website hosting options
 IP law – domain names, protection of IP, ensuring no
infringement
 Consumer law issues
 Terms and Conditions – including for tax related reasons
 Security and privacy law issues
 Cyber insurance
 SPAM
 Advertising and social media policy
 Employees – if a start-up digital business, how to reward

10. Tax issues
 ITNB = small business as aggregate turnover is less than
$2 million
 Income from fees
 Deductions: Website establishment costs
̶ New business structure – capital limitation?
̶ Hosting fees, domain name re-registrationg g
̶ Depreciating assets –TR 93/12; Australian Copyright
Council December 2014 Information Sheet
 Section 328-180 ITAA 1997
 Subdivision 328-D
 Division 40 – software development pool
 In-house software and R&D
̶ CGT assets (small business concessions)
̶ Section 40-880 – Private Ruling 1011958172383 – design
fees, legal costs

11. Tax issues - continued
 Off-the-shelf software and computer hardware –
deductions, depreciation
 Innovations to software and App development
̶ R&D offset – evidence needed – “new
algorithms/methodologies”, progressive experimental
process
̶ “In-house software” depreciating asset? (same points as
before)
 Payments for live streaming – section 26-25, Royalties?
Seven Network case (on appeal 2016)
 GST
 Tax record keeping and website functionality: TR 2005/9

12. Case study: ITNB’s digital
business goes global
It’s the New Black
Ltd
Australia100%
ITNB Singapore
Ltd
Singapore

13. Legal/other issues to consider
when going global
 Appropriate country to operate from
 Structuring – local tax, regulatory issues of each entity
option, separate entity needed?
 Local law issues – eg privacy, SPAM, security, consumer
laws
 Funding Funding
 Staffing – will Australian staff go to the new location to set
up on the ground? Tax issues
 Website functionality – will the new entity have its own
website, or will it be a link to the Australian company
website? Website hosting?
 For the case study – ability to access inventory, customer
base and residence of potential customers

14. Case study: ITNB’s digital
business goes global
It’s the New Black
Ltd
Australia100%
Aus based
customers
Supply of Aus
Inventory;
ebsite
ITNB Singapore
Ltd
Singapore
Asian based
customers
website
functionality
Website hosting

15. Tax issues
 ITNB attributed income – ITNB Singapore Ltd as a CFC
̶ Singapore not a listed country
̶ Active income test
̶ Potential for tainted services income (any Australian
customers), tainted sales income (how is Australian
inventory accessed), tainted royalty income (royalties from
t ?)customers?)
̶ Difference if CFC resident in a listed country
 Is ITNB Singapore Ltd Australian tax resident?
̶ Control of voting power in Australia or central management
and control
̶ and carrying on a business in Australia

16. Tax issues (continued)
 Factors to consider when determining where a digital
business like ITNB Singapore Ltd is ‘carrying on a
business’
̶ Website is not a place of business per se
̶ Place where contracts made
̶ Place of payment or where goods are deliveredp y g
̶ Place where assets are located –eg goods, bank accounts
̶ Place where profits arise
̶ Nature of activities undertaken in Australia
̶ Place of server (to some degree)
̶ Where customer support is provided from, whether there
are agents/representatives in Australia
 Sensible to have governance / management / business
protocols: but note Bywater Investments case (2015)

17. Tax issues (continued)
 ITNB Singapore Ltd – source and nature of income
̶ The double tax treaty
̶ Source – importance of terms and conditions
̶ Royalties vs business profits: Tech Mahindra case (on
appeal 2016)
̶ Section 6C ITAA 1936
 Permanent establishment
̶ Current law – ‘the cloud’, section 6(1) ITAA 1936 definition
̶ Multinational anti-avoidance law
̶ OECD: potential future change to permanent
establishment concept
 Proposals in BEPS 1
 Proposals in BEPS 7
 BEPS 15 – multilateral instrument by December 2016

18. Tax issues (continued)
 Transfer pricing
 Royalties paid by ITNB Singapore Ltd to ITNB (?) and
withholding tax
 GST
̶ “Netflix” proposals from 1 July 2017
International VAT/GST changes̶ International VAT/GST changes

19. Bitcoins
 ATO view: not money or currency or foreign currency
 CGT asset
̶ Assuming not for personal use, gains subject to CGT or
assessable as business/ordinary income
 GST
Not ‘money’̶ Not money
̶ Barter transaction - $A value received to be returned for
GST purposes
̶ When bitcoin converted – additional GST arises

20. Bitcoin GST example
 Example:
̶ ITNB sells dress for $1650 inclusive of GST – it accepts
bitcoin from its customer
̶ ITNB returns $150 GST (ie 1/11 x $1650)
̶ ITNB then converts the bitcoin to A$ and receives
$1633.50, paying a 1% commission
̶ GST liability is $148.50 (ie 1/11 x $1633.50) (less the input
credit for the commission)
̶ Total GST liability from accepting bitcoin = $298.50
̶ If cash was paid – total GST liability = $150
 Senate Report (2015)
 International comparatives
 Blockchain – what it means

21. Top 5 tax tips for a digital
business
 Get the Terms and Conditions right – eg where are
contracts made/concluded can be critical to determining
issues such as source, and where business is being
carried on
 Hosting arrangements need to be carefully considered to
determine issues such as whether there is a permanent
t bli h t i ti l j i di itestablishment in a particular jurisdiciton
 Ensure that you are aware of the nature of income or
unexpected results can arise – consider the contractual
arrangements carefully
 If a digital business is going to operate extra-territorially
consider the CFC issues, transfer pricing issues
 Keep aware of law/Tax Treaty changes – eg those
pending to GST, VAT/GST changes globally and the
BEPS project

22. Questions

23. Thank you
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24. © Dunne, MinterEllison 2016
Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax
Institute did not review the contents of this presentation and does not have any view as to its accuracy The material andInstitute did not review the contents of this presentation and does not have any view as to its accuracy. The material and
opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries
in making any decisions concerning their own interests.