Reverse Charge GST: Check the Recipient’s Duty

Reverse charge GST makes the recipient pay GST on a supply instead of the supplier. For an Australian client buying offshore services, liability depends on the statutory supply conditions and the client’s use, with a separate route for agreed recipient payment.

What Reverse Charge GST Means

A GST reverse charge changes who owes the tax. When the offshore rules apply, your client accounts for GST even though the overseas supplier’s invoice contains no Australian GST.

The common compulsory route is Subdivision 84-A of the GST Act. It can bring an offshore service into Australian GST where the supplier would otherwise have no liability. Division 83 provides a separate agreement-based route for an otherwise taxable supply by a non-resident.

Keep the legal test separate from an ordinary GST calculation. Dividing an inclusive amount by 11 extracts tax already included in that amount. Under the reverse-charge rules, GST is generally 10% of the purchase price, payable by the recipient. Paying an overseas invoice alone establishes neither liability nor a credit.

The Australian Taxation Office (ATO) explains the mechanism and reporting in its reverse-charge guidance.

Test the Offshore Supply

Identify the supply and the contracting recipient before choosing a tax code. For an ordinary offshore service, work through these checks against section 84-5.

1. Confirm what the client acquires. A service or intangible right has different connection rules from goods or real property. Separate any components with different treatment.
2. Establish the consideration. Retain the contract and invoice showing the amount paid or payable. Related-party supplies and transfers between overseas and Australian branches have special rules, including transactions without a conventional invoice price.
3. Confirm the client is registered or required to be registered. Check the effective registration position for the transaction. Section 84-5 also counts relevant offshore supplies towards the recipient’s turnover when testing required registration.
4. Determine the Australian connection. Identify where the service is performed, whether the supplier makes it through an Australian enterprise and whether section 9-26 disconnects it. Also test rights or options connected under paragraph 9-25(5)(c).
5. Apply the purpose test for the ordinary offshore-service route. The acquisition must wholly or partly serve an enterprise carried on in Australia. It must also have some non-creditable use.
6. Remove any GST-free or input-taxed portion of the supply itself from the taxable amount. Support that classification with the applicable provision.

An overseas billing address does not establish that the supply is disconnected. A service performed in Australia can also be disconnected under section 9-26 when the non-resident supplier and Australian-based business recipient meet its conditions. Conversely, an offshore supplier can make a connected supply through an Australian enterprise.

GSTR 2019/1 explains these connection and disconnection rules. Record the actual contract facts instead of treating the missing GST line as the answer.

There is also a distinct consumer-status route under item 3 of section 84-5(1). It covers qualifying services connected solely under paragraph 9-25(5)(d) where section 84-100 treats the recipient as a business recipient for the supplier. The recipient must have disclosed its ABN or prescribed identifying information and supplied information indicating GST registration. This item does not use the ordinary purpose test. Check it separately where the client’s statements to the supplier differ from its actual status or use.

Establish the Client’s Creditable Use

Creditable purpose measures the acquisition’s use in the client’s enterprise after the statutory exclusions. Business use alone does not prove a full credit.

Under section 11-15, private or domestic use is non-creditable. Use for making input-taxed supplies is generally non-creditable too. A client’s GST-free sales can still support creditable acquisitions, so distinguish those sales from input-taxed sales.

Financial supplies need a further check. The financial acquisitions threshold and borrowing exceptions can preserve creditable purpose in qualifying cases. Reduced input tax credits for specified financial acquisitions also have separate rules. Establish the applicable exception and entitlement before applying a percentage.

Compare Two Fictional Purchases

Assume two GST-registered entities each acquire a $1,000 offshore advisory service for consideration. Each supply is disconnected from Australia, and the service itself is neither GST-free nor input taxed. Neither entity falls within the separate consumer-status route.

Client’s intended use	Ordinary Division 84 result	Credit result
An entity uses the service entirely for its taxable consulting business	The acquisition is solely creditable, so the ordinary purpose test fails	Reverse-charge GST payable $0; reverse-charge credit $0
An entity uses the service 60% for taxable consulting and 40% for input-taxed residential leasing	The purpose test is met, so the whole taxable service is reverse charged	GST of $100, with a $60 credit for the 60% creditable portion

In the second case, GST applies to the service’s full $1,000 price. The 40% non-creditable use restricts the credit, leaving $40 payable after that credit. Charging GST only on the 40% use would understate both the liability and the permitted credit.

Support the split with the engagement scope and a reasonable allocation method. Project records, staff time or a documented analysis of the work performed can establish how the advice serves each activity. Retain the client’s explanation and the calculation, including why the method reflects intended use.

Keep two assessments distinct in the workpaper. First establish whether the purchased service itself has any GST-free or input-taxed component. Then establish how the recipient uses its taxable acquisition. Input-taxed residential leasing by the client does not turn the overseas adviser’s service into an input-taxed supply.

Distinguish an Agreed Reverse Charge

Division 83 lets a recipient and non-resident supplier agree who pays GST on an otherwise taxable supply. An agreement cannot create GST on a supply that fails the taxable-supply conditions.

Section 83-5 requires a non-resident supplier that does not make the supply through an enterprise it carries on in Australia. The recipient must be registered or required to be registered, and both parties must agree that the recipient pays the GST.

The ATO requires the agreement before the supply is made. Keep the written agreement, its acceptance and the supply details together. Retain evidence of the supplier’s non-resident status and Australian enterprise position, plus the recipient’s registration position.

Division 83 cannot replace compulsory Division 84 treatment. It also excludes supplies made through a resident agent and specified offshore rights or options disregarded for turnover purposes. Test these exclusions before relying on the agreement.

Unlike the ordinary compulsory purpose test, Division 83 does not require non-creditable use. A wholly creditable acquisition can therefore produce both recipient GST payable and an offsetting credit under this route. The agreement and acquisition must support that treatment.

Record and Check the BAS Treatment

Record the reverse-charge liability and allowable credit separately in the business activity statement (BAS). For the fictional mixed-use purchase, assume the $1,000 service is non-capital and all amounts belong in the same reporting period. The client uses the accounts method and reports GST-inclusive totals.

BAS label	Amount from this transaction	Basis
G1, total sales	$1,100	Purchase price plus the $100 reverse-charge GST, as the ATO directs
1A, GST on sales	$100	Recipient’s GST liability
G11, non-capital purchases	$1,100	Purchase price plus reverse-charge GST
1B, GST on purchases	$60	Credit limited to 60% creditable use

The transaction increases net GST payable by $40. G1 reporting does not turn the purchase into accounting revenue. For a capital purchase, use G10 where required. Simpler BAS does not require G10 or G11. A client using the calculation worksheet must apply its adjustment labels to restrict the credit correctly.

If the supplier invoice already records $1,000 as an expense and creditor, the reverse-charge journal adds $40 to expense and $60 to GST receivable. Its matching credit is $100 to GST payable. Check that the BAS mapping includes the required G1 amount without creating fictitious sales revenue.

For a foreign-currency invoice, convert the price before calculating the recipient GST. GSTR 2001/2 permits its conversion method for reverse charges. Use a permitted rate consistently and select the conversion day for the client’s cash or non-cash basis. Retain the rate source and conversion-day calculation with the invoice. Do not automatically use the bank settlement amount if it uses a different conversion basis.

A reverse-charge GST credit does not require a tax invoice. You still need records establishing the supply and the entitlement. Keep the supplier invoice, contract, registration check and connection assessment. Add the use allocation, calculation and any Division 83 agreement, with the final BAS mapping.

An unexpected full credit under the ordinary offshore-service route calls for a purpose-test review. Check whether the acquisition was wholly creditable, whether a financial-supply exception applies or whether another reverse-charge route governs it. A credit with no matching liability calls for a review of both the tax code and transaction classification before posting.

Resolve an uncertain GST registration position before finalising the recipient-liability test. Then use BAS reconciliation to match the supported liability and credit to the activity statement and accounting balances before lodgement.