As things stand in Australia, imports valued at less than $1,000 are currently exempt from the country’s 10% goods and services tax (GST). But late last month, federal treasurer Joe Hockey announced a plan to remove that exemption by July 1, 2017.
Consumers and retailers around the country will be affected by this change, including those who buy and sell bikes and other cycling equipment.
For years, local bike shop owners have argued that overseas-based online retailers like Wiggle and Chain Reaction Cycles have had an unfair advantage — the ability to sell most of their items into Australia without GST, ensuring lower prices than are possible in store. Some Australian online retailers have even moved offshore, to ensure they don’t have to pay GST.
So what impact will this change to GST legislation have on the cycling retail industry? And how will consumers be affected?
Levelling the playing field
Peter Bourke is the general manager of Bicycle Industries Australia, the industry peak body representing the needs of local importers, sellers and retailers. We asked Mr Bourke whether the proposed change to Australia’s GST law is likely to be the game-changer the local industry has been calling for.
“It’s certainly part of the process [but] it isn’t a silver bullet,” Bourke told CyclingTips. “Ten percent is not the difference in pricing between Australia and overseas. But it will contribute and allow retailers to compete on a more level playing field.
“There’s other factors that come into play as well. Australians have to pay for quarantine, customs, duties, Australian standards — when you purchase items from offshore, we need to make sure that those costs are enforced and paid by the offshore retailer as well.”
As Peter Bourke explains, the cost of labour in Australia also works against local retailers.
“One of the challenges with doing business in Australia is that … we’re in a global market and we’ll never be competing on a 100% level playing field,” Bourke said. “[In] the UK, US, etc. the cost of doing business will never be the same. Minimum wages in the US are half what they are in Australia.
“You’ll always have a higher cost of doing business in Australia. The mark-up required to break even, let alone make money in Australia is higher than in offshore locations. There’s work to be done to be more competitive, but it’s a fact of life that Australia will always be more expensive.”
Voluntary registration
The Australian government doesn’t have any control over offshore retailers and it doesn’t know whether those retailers have a high-enough turnover to register for GST. This poses a problem for the government but as Joe Hockey explained at the announcement press conference, there is a plan in place.
“What it effectively means is that we’re going to have to have taxation officials travel around the world, visiting these companies and asking them to register for GST purposes should they be selling into the Australian market goods or services greater than $75,000 Australian of value.”
Peter Bourke from Bicycle Industries Australia believes the offshore retailers are likely to comply voluntarily.
“Are they going to jeopardise their business in Australia for what’s a really small item for them? I believe it’s realistic that they’ll comply,” Peter Bourke told CyclingTips. “Even though our government has no power over them, they could impose a system that’s very laborious for these companies which hurts them long-term. They’ll obviously be looking at the long-term picture as well.”
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So how are the online retailers themselves reacting to the proposed changes to the GST? And will they play ball? We spoke to Adam Johnson, General Manager of Wiggle Australia, to find out.
“We know that this is a sensitive topic and we can relate to the feelings of parity and equity that the industry wants,” Johnson told CyclingTips. “At the end of the day this is a government decision. If the government changes the rules, we’ll play by the rules.
“Our business was never a tax arbitrage. Aussies found us in the UK.”
Currently, if you buy from Wiggle in Australia, you won’t get charged GST even though they have a subsidiary and employees here. You also don’t get charged GST if you buy from Chain Reaction Cycles (who doesn’t have a subsidiary in Australia). But if you buy from Australian-based BikeBug, for example, you will get charged GST.
The impact on consumers
One of the first things that many Australian consumers will assume is that removing the GST exemption will cost them more; that the likes of Wiggle and Chain Reaction will obviously increase their prices by 10% to cover the cost of GST.
Adam Johnson of Wiggle Australia told CyclingTips that higher prices for consumers are a “certainty” but that “Ultimately, if you put prices up people will buy less”.
It remains to be seen if a price rise of 10% on online goods will be enough to curb sales. It could also spur local retailers to also raise their prices to relieve the pressure they’re facing.
According to Peter Bourke, consumers need to consider the positives of paying tax for products they buy online.
“The benefit is the tax … is the money that’s used to pay for bicycle infrastructure, whether that’s bike paths, lights, etc,” Bourke said. “Any government-funded infrastructure is coming from your general tax revenue, and this revenue is being lost overseas right now. That also covers schools, education and everything else.”
Potential opportunities
While the removal of Australia’s GST-free threshold could be seen as a negative for online retailers, some might also be able to benefit in unexpected ways.
“Because of GST, there’s a lot of things we [Wiggle] haven’t done here in Australia,” Adam Johnson told CyclingTips. “You could say that it’s been a barrier of entry for us. Now we can look at all sorts of things that we couldn’t before.”
At the moment it doesn’t make sense for brands like Wiggle to stock goods in Australia because of the price discrepancy the GST would create between its online store and any retail stores.
“Things like having stock here — we could bring our bike brands here in containers and hit the bike market.
“If you look at our proposition in the UK, the delivery, the returns, service opportunities…become a lot easier when we don’t have a restriction of where goods can be at any one time. It will clearly affect our price differential.”
“We’re comfortable with the benefits of our model, and really that’s one of scale. We have global buying for a global business, rather than for one single market. With that scale we can also run much better ranges – size, color, model – that even distributors sometimes can’t do here because they just don’t have the volume in the market,” Johnson said.
“On balance, there are lots of things that the proposed GST law opens the door for us to do here.”
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Elsewhere in the world…
While Australia is getting rid of its GST-free threshold, the US is going in the opposite direction. Earlier this year a bill was introduced to the Senate proposing that the duty-free threshold be raised from $200 to $800 to allow more low-value items be imported into the US with fewer administrative requirements. The bill would also encourage trade with other nations so that they would similarly increase their tax-free exemption levels for US exports.
Adam Johnson from Wiggle Australia argued that increasing the GST threshold in the US is of benefit to Australian brands who are trying to export their goods there.
“There are some great Aussie brands here. We support some of these Australian brands [on Wiggle] and ultimately these things affect them as well. If we get a situation where each country puts their tax-free threshold … to $0 … it’s a barrier to entry for exporters here, and ultimately consumers are going to pay more money.”
Where to from here?
While the decision to remove Australia’s GST-free threshold came after agreement between the federal treasurer and his state and territory counterparts, the course of Australian politics could yet prevent the reform from being introduced.
“The challenge for us is that we could have another government in place by July, 2017. If that’s the case, we’ll have to start again,” Peter Bourke said. “If Labour comes into play, then it’s up to them whether or not they want to make a decision to go forward with this or not.
“In effect, the Liberals have given themselves a get out of jail card because this change would take place after the next election.”
It remains to be seen whether the changes will come into effect on July 1, 2017 as planned, but if they do, they’re sure to change things up considerably.